Monday, 3 October 2011

Protectionism Beckons as Leaders Push World into Depression

THE SUNDAY TELEGRAPH: The world savings rate has surpassed its modern-era high of 24pc. This is the killer in the global system. It is why we are at imminent risk of tipping into a second, deeper leg of intractable depression.

The International Monetary Fund (IMF) expects the savings mountain to rise yet further next year as the governments of Europe, Britain, and the US tighten belts, in unison, by up to 2pc of GDP.

This is double the intensity of the last big synchronized squeeze in 1980.

They will do so before the private sector is ready to grasp the baton, and without stimulus from the trade surplus states (Germany, China, Japan) to offset the contraction in demand.

Put another way, there is a chronic lack of consumption in the world. "This probably comes as a surprise to most people, gorged on propaganda about excessive debt and the need for retrenchment," said Charles Dumas from Lombard Street Research.

The inevitable outcome of one-sided austerity polices in the Anglo-sphere and Club Med is a self-feeding downward slide for the whole global system, a variant of 1930s debt-deflation. "Excess savers refuse to acknowledge that if world savings are demonstrably too high, healthy recovery depends on the surplus countries saving less," he said.

Mr Dumas said China's "grotesque and destructive" policies of over-investment (50pc of GDP) and under-consumption (36pc of GDP) are unprecedented in history, but at least China's currency advantage is being eroded by wage inflation.

His full wrath is reserved for the "fallacious and malignant policies" of Angela Merkel and Wolfgang Schauble [sic] in Germany. They are enforcing a Gold Standard outcome on the whole eurozone. "Suffused with self-righteousness, they insist that the imbalances must be put right only by deficit-country deflation." » | Ambrose Evans-Pritchard, International Business Editor | Sunday, October 02, 2011