Between the News of the World shutting down, and some dreadful US employment figures yesterday, there were plenty of stories vying for attention this week.
Yet Europe’s debt crisis remained centre stage. Downgrades by ratings agency Moody’s helped to keep Portugal in the headlines, and as we mentioned a few weeks ago, Italy is now coming under suspicion.
European leaders aren’t happy. They reckon that the ‘big three’ rating agencies have too much influence and are unfairly targeting Europe. That’s a little bit rich.
EU leaders (and everyone else), rightly criticised the ratings agencies for being too relaxed in the run-up to the sub-prime crisis. The politicians can’t complain now that the agencies are doing their job properly. And the plan for an EU-funded ratings agency is a joke – nobody would trust it.
Moreover the European Central Bank is also to blame for higher borrowing costs, says my colleague David Stevenson in Friday’s Money Morning. This week the ECB pushed up its official interest rate to 1.5% from 1.25%.
That’s going to make life difficult for the millions of homeowners in the likes of Greece, Portugal and Ireland whose mortgages are linked to the ECB rate. And more overstretched borrowers is the last thing those countries needed.
• Besides, Moody’s isn’t just singling out Europe. It is also worried about China, says John Stepek in Wednesday’s Money Morning. “In all the excitement about Greece” people are forgetting that “China’s banking system is riddled with loans made on optimistic assumptions that could turn bad very easily”.
When the financial crisis hit in 2008, China ordered its banks to lend huge amounts of money to keep the economy going. Most of it went to local governments who, by some estimates, now owe about $2 trillion. That pushes China’s total debt-to-GDP ratio to around 70-80% – the “same ballpark as the US or the UK”.
Now it looks like a lot of those loans will go bad. The investments they paid for can barely repay the interest, never mind the principle. China’s government can probably afford to bail out the bad loans but it would make an economic slowdown more likely.
• A Chinese slowdown would come as a surprise for most people, blogs our editor-in-chief Merryn Somerset Webb. “There is a general view among global investors that the Chinese authorities are really good at economics.”
But this notion that China is becoming a “self-sustaining capitalist economy” is an illusion. Indeed, since the late ’80s, the Chinese government has been steadily taking back control of the economy. The Chinese now have “an extreme kind of state corporatism“.
Merryn notes that of China’s 1,400 listed firms less than 50 are genuinely privately owned. Instead the country’s wealth remains in the hands of “often corrupt, badly managed, and unprofitable” state-owned enterprises. These companies get a disproportionate amount of capital and stimulus money.
By doing this, the government hopes to maintain “the growth and support of the urban middle class the CCP needs to survive”. Trouble is, it can’t last forever. “Even as the elites have grown in China over the last 20 years, absolute poverty has risen. China has gone from being Asia’s most equal country to being its most unequal in a generation.”
That’s bad news for social cohesion, and all the more reason why China’s leaders fear “revolution at home” more than anything else.
• Of course, democracy isn’t perfect either. Merryn’s blog post on this topic, pointing out that modern democracy had just resulted in politicians bribing us voters with our own hard-earned cash, with the result that we’re pretty much bankrupt, drew a lot of comment last week.
“Very interesting,” noted Martin. “It reminds me of an article I read a few months ago in which the author argued that nations cannot embrace democracy, globalisation and economic sovereignty at the same time, although most Western nations have been trying to do that for the last two decades or more.
“Thus the UK has democracy, and embraces globalisation, but has lost economic sovereignty (it has little control over inflation or employment). On the other hand China lacks democracy but has economic control (via for instance its recent vast infrastructure boom and long-running exchange rate control) while at the same time it embraces globalisation. In other words, we cannot have it all, although Western politicians would have us believe we can.”
LeRenard argues that, “the problem is not that democracy has failed, but the fact that it has never really been tried and applied. The same goes for Christianity or Communism. What they all have in common is that they are ideologies that have all failed because they have all been subverted by one power group or another.
“At the moment we suffer from a lack of true democracy. The make up of parliament bears no relation to votes polled and we are ruled by minority parties. There are also the powerful lobbies and business interests which have effectively hijacked our political process… We need real democracy, not the sham that is being dished up for public consumption by a discredited and self-serving elite.”
Have your say here.
• With all this government debt littered across Europe, Asia and America, we need to brace ourselves for sovereign default, reckons Dominic Frisby in Thursday’s Money Morning. After all, indebted governments might “be able to put it off for a few more months but it is coming”.
It won’t be pretty. But it is “incredibly bullish” for gold and silver. And right now, we are “in the buy zone”, says Dominic. One reason is that it’s summer and that is almost always a good time to buy precious metals. In the last ten years (apart from 2007-2008) the “simple strategy of accumulating over the summer and off-loading early the following year” has worked.
The charts also look good. Silver, having dived from $50 an ounce, has repeatedly tested the $33 mark. But this vital resistance level has held and now silver looks set to rebound, says Dominic. It could hit $50 “before year-end – or perhaps even sooner than that”.
Meanwhile gold miners look “as cheap as they have ever been” compared to the metal they produce. That makes now look the right time for bargain hunting. And Dominic has picked out what he deems are “the five most exciting gold stocks in the world today” in his latest Gold Report. To order a copy, click here.
• One of the main drivers for gold has been the weakness of paper money. Governments around the world have been determined to push the value of their currencies down to boost the competitiveness of their exports. And so far America seems to have won the ‘currency war’. It turned on the printing presses to an unprecedented degree and succeeded in ‘trashing the dollar’.
That’s pushed the dollar down – but could it be heading for a recovery? My colleague David Stevenson thinks so: he looks at how it will affect your investment portfolio in this week’s cover story. Subscribers can read it here: The return of the dollar. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)
• Another topic that’s been drawing lots of comment is the row over public sector pensions. My colleague Tim Bennett gives his take and also manages to explain the difference between the pensions the public sector tend to get and the pensions most private sector workers are stuck with, all in 15 minutes. Watch it now, then have your say on what’s already becoming a heated little discussion, in the comments below the video.
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