February 1, 2011 Mervyn King is Britain’s chief central banker and a key figure in the global financial system. Last week, after surprising reports surfaced that the British economy had once again contracted in the 4th quarter of last year, King delivered a stern, sobering message to his country: - “In 2011, real wages are likely to be no higher than they were in 2005… One has to go back to the 1920s to find a time when real wages fell over a period of six years.” - “The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy.” - “The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.” - Furthermore, inflation may rise “to somewhere between four per cent and five per cent over the next few months.” - “The idea that the MPC could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking.” - “[U]npleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal.” - “I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis.” To summarize, one of the world’s leading central bankers has looked his country in the eye and admitted that he is completely powerless to prevent the inevitable decline in living standards that will result from years of reckless behavior. It’s amazing that someone in his position would be so terse, so direct in his appraisal of the situation; by nature of their positions, central bankers are serial liars who must continually deceive the public in order to set expectations and carry out their agenda. King’s statement may be a sign that England is finally on its last leg. Fiscally, the country is in a similar situation as the US and Europe– in debt up to its eyeballs, hemorrhaging cash, and quickly losing the confidence of the international community. Unlike Europe, the US, and even Japan to a degree, England lacks reserve currency status in any measure that matters… so without a line of foreigners to buy its debt regardless of the fundamentals, the UK has been forced into its day of reckoning before the others. Meanwhile, Europe and the US continue to spin unjustified confidence; Angela Merkel and Nicolas Sarkozy have pinkie-sworn that they will not let the euro fail, and Barack Obama’s State of the Union address provided a temporary ‘feel-good’ blip that the government is going to fix everything. People should not be fooled, however, into thinking that the US, Europe, Japan (and those nations which depend heavily upon them) will fare any better than England. Because of its place in the global pecking order, England has less control over its financial destiny and has had to face the music first, but it will not be the only member of the Western hierarchy to fall. Europe is in a desperate situation to continue bailing out bankrupt members of the eurozone even though the price tag will soon become larger than the monetary union can possibly bear, all while stimulus pressures and strained pension programs create challenges even for the ‘healthy’ euro nations. Meanwhile in the US, the government plans to continue running trillion dollar deficits for the next several years with no end in sight to runaway spending, not even considering the upcoming carnage that will occur when cities and states start to go bust, or social security runs out of money. Japan is probably in the worst shape of all, simultaneously suffering both a fiscal and demographic crisis. Japan’s debt, well over 100% of its GDP, has already been downgraded by the rating agency monkeys, and its population is slowly disappearing due to low birth rates and inhospitable immigration policy. The best case that these countries can hope for is to suffer the same fate as England: a significant reduction in standard of living. There is an opportunity now, however, for everyone to assess their basic vulnerabilities and take steps to mitigate what may lie ahead. This may include seeking work overseas, expanding a business to broader services in new markets, moving assets to safer jurisdictions, reducing system dependency, etc.A STERN WARNING FROM A CENTRAL BANKER
La Serena, Pacific Coast, Chile
Saturday, 5 February 2011
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