Maxing out: time to put the credit card away

With more gloomy data and markets in freefall, it is time to take stock and maybe put that credit card away.

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Panic on the trading floor
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Simon Miller
On 23 September 2011 15:18

I am a big fan of the Arthurian legends and have read various interpretations over the years.

However, there is always that time when the proud King is going to be betrayed and he is going to go into his last battle and although you know that it is going to happen, there is nothing you, the reader, can do to stop it from happening.

The global economy appears like this at the moment. Like the slow-motion of a car crash, we can only look on in horror as the world approaches the buffers.

David Cameron made a telling point to the Canadian parliament this week when he pointed out that this is not an ordinary cyclical recession. Too right it’s not, mainly because we never really left the last one. Since 2008 we have been limping along, hoping that our numbers come up and we can head to the uplands.

Despite the self-congratulations of policy makers two years ago, we are back where we started where the money markets are beginning to shut themselves down to banks with heavy sovereign debt burdens, global growth is stagnating and even China seems to have reached its peak in terms of economic activity.

We are, in the words of the World Bank’s chief Robert Zoellick, in the danger zone.

But what are we going to do?

Cameron told the Canadian parliament that “it’s a debt crisis”. And debt is a problem.

In Canada, the politicians hit the debt problem during the boom times and so led to the state of the nation today where they have a more than ample war chest to offset the hazards that are on the horizon.

Essentially, Canada paid off its credit card and stuck it in a drawer and has vowed not to take it out unless absolutely necessary.

In Greece, the debate is whether to borrow even more money to service the credit card whilst being given a diet of broth and hard labour or to declare bankruptcy and start again with creditors impatiently waiting for it to earn enough money to begin to pay back its debt – if it pays it back at all.

Here in the UK we are in a half-way house where we know that we should be paying back the debt but our family keeps demanding new shoes so we pay a little back, spend a little more and hope to inherit some money.

America? Well, America appears to be magicking up new credit cards whenever it hits its limit.

Let me make it clear to you – if you run up a credit card, max it to the hilt, do you keep spending and hang with the repayments bill or do you cut back on your spending and try and clear the debt?

Many complain that we must spend our way out of recession but if we just keep driving up that credit card, eventually, like some European banks are finding out, the credit will stop and where will we be then?

Now, there is a risk that we will be forced into some speculative spending. But instead of some Roosevelt public spending plan, why not a tax cut? If we are going to have to use that credit card again to stimulate the economy, put that stimulus into the producers. Yes there is a risk that people will just hoard the bonus but that is what the banks did with the bailouts and at least the money will be with the private individual rather than a further expansion of the state.

On an aside, I quite liked the idea of instead of bailing out the banks, we should have just given each taxpayer £300,000 to put towards a house. Mad, but amusing and possibly effective at the same time.

At least for the moment, we in the UK are not getting more credit cards. Quantitative easing (QE) is only effective in a short spell. The QE program that the Americans embarked on has had zero effect on its economic problems and may indeed have exacerbated them with doses of inflation and unemployment.

To me, the idea of QE being an effective way of managing your way out of debt is about as useful as giving a drunk a shot of whisky so they can make it to the next pub.

There is a further problem to contend with in our current situation. Uncertainty.

The markets are marking themselves to the situation at hand which is one of sheer uncertainty. We are unsure of what the eurozone is actually going to do next. With briefings and counter-briefings flying all over the place, the markets reflect this, hence the volatility.

Whichever decisions the eurozone makes, it will have to be clear and unambiguous. Whichever way they go, the markets will act in the appropriate manner but at the moment the markets are just unsure about whether Germany is going to take away Greece’s credit card or pay it off.

Simon Miller is the Editor of Financial Risks Today

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