Onlookers shouldn’t be surprised by the erupting global financial mess enveloping Europe, the US and now China. The so-called recovery of 2009-2010 was never really a recovery, but rather an orgy of government-funded speculation that fooled some, and enriched others (namely bankers and speculators).

The situation was best explained by Bill Bonner, who wrote last week in the Daily Reckoning that:

“Remember how desperate officialdom was to ‘prevent a catastrophic collapse?’ in Europe and America. The European banks bailed out their speculators. Then the governments bailed out their banks. Then, they bailed out the countries that had bailed out their banks.

“In America, the government bailed out the banks … the insurance companies … the automakers … About the only industry that wasn’t bailed out was the financial publishing industry. Guess we didn’t send them enough campaign contributions …

“Then, the Europeans and the Americans bailed out each other.

“And they’re still bailing. The US is running a budget deficit so large that we’ve lost track of it …was it $1.5 trillion? $1.8 trillion?

“And the Europeans are preparing another big bailout for Greece … Italy … and who knows who else.”

Your correspondent is constantly surprised at the ability for humans to ignore the obvious and, instead, focus on non-existent positives. The foolhardy belief that things will somehow be all right, when clearly, they won’t.

To summarise: the US is running a crippling deficit, needing to either borrow money from its trading partners, or print money, simply to pay its mounting bills. Europe, which decided a decade ago to join a bunch of completely disparate sovereign states in one monetary union, is now realising that their economic union was a disastrous folly. A system that involves hard-working German taxpayers paying Greek public servants to retire at 55 is not one that is likely to last.

Meanwhile, the world’s banker, China, is struggling with problems of its own. Its facade of economic growth has been created through world-record stimulus, designed to ensure its massive populace remains employed and the rest of the world continues to buy its output. But facades can’t remain forever. China has recorded three consecutive months of manufacturing contraction, while the Shanghai sharemarket has slumped by 15% in the past two months. All this is against the backdrop of increasing inflation, and an ever-growing real estate bubble.

The world’s politicians have spent two years kicking the proverbial can down the road. But the can finally appears to have broken, un-kickable, while the world’s investors and speculators keenly await the last gasp efforts of unelected central bankers, who show little grasp of history, and have protected speculators over savers, the rich over the voiceless.

As for Australia — the miracle economy, led by the Finance Minister of the Year — well, we continue to hang by a thread. Dependant on China for to keep our deficit in check (through the sale of iron ore and coal) and a property bubble to preserve “wealth”. Meanwhile, Australian corporates continue to struggle, with the Australian Financial Review this morning reporting that eight miners and banks earned 99% of the profits of Australia’s top 50 companies.

While the higher prevailing level of interest rates, and relatively low public debt allow Australia a small degree of comfort, a collapsing China and crashing property market may soon see Australia in a far worse predicament.

Peter Fray

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