Further reaction to the European “shock and awe” stabilisation package this time from Marc Ostwald of Monument Securities who says there are lots of unresolved issues.
Perhaps the most important, he says, is encapsulated in a 1950s German saying: “Wer soll das bezahlen?”, which in English roughly translates to “Who is going to pay for this”?
And that’s a very good question:
This is just another extension of transferring risk onto the public sector/govts/international agencies at a very large long-term cost. It should be added that this is not just a question for the Eurozone, or for the currently government-less UK, but across the heavily indebted countries of the world (yes that means you, Uncle Sam). In other words this is just another example of a short-term, leveraged solution, that merely adds to the burden of future problems.
A short term leveraged solution – that’s bound to get other commentators, such as RBS’s Bob Janjauh, foaming at the mouth.
Longer term, Ostwald says the costs of this bail out will be severe for the developing world.
In conjunction with a), working off this exponential rise in the debt burden of the developed world will take even longer, impairing the long-term growth potential of all these economies.
If, and the jury is still very much out on this subject, the developing world (primarily Asia and LatAm) has a sufficient internal growth dynamic, i.e. trade between these countries can continue to rise rapidly, thus replacing the slide in demand from the developed world, and continue to foster the very gradual improvement in living standards in the most populous parts of the world, then demand for primary, raw and food materials will continue to exercise upward pressure on prices, making a revaluation of the developing world currencies ever more inevitable, and by extension a devaluation of developed world currencies, with the inevitable conclusion that inflation pressures in the latter will rise.
(By the way this is precisely how inflation is possible in a ‘depression’ like economic environment).
Stagflation. Great!
Related links:
The dead wolf bounce – FT Alphaville
Towards a United States of Europe – FT Alphaville