Friday, March 4, 2011

Is the Global Economy's Life Support Failing? (FT Alphaville)

The global economy is critically ill

It’s a SocGen double header on FT Alphaville this Friday morning.
You’ve had the apprentice (Dylan Grice) and now it’s time for the Dark Sith Lord (Albert Edwards).
The global economy is critically ill. The fact that it has just risen from its sick-bed to perform a frenetic Irish jig is more a function of the financial morphine and steroids that have been pumped into its emaciated body than any miracle cure. You don’t have to be Dr Doom to expect the patient to collapse back into a deep coma after the stimulus has worn off.
One reason, says Edwards, is that the $111bn rise in US wage income over the past six months has been almost entirely eaten up in higher food and energy outlays. (This contrasts with last year, when real wages grew robustly).
Over the longer term, he’s worried about the off balance sheet liabilities of the US and UK governments.
Our oft repeated refrain that it is not the on-balance sheet public sector debt of around 100% of GDP that deems governments to be insolvent, but the off-balance sheet liabilities of an additional 300%-400% of GDP that are totally impossible to fund. Governments will have to default in some shape or form and part of that process will be inflation. But you cannot inflate away some of these liabilities.

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