Sunday, April 19, 2009

Lloyd's outlook for the '09-'10 financial year

OK. I'm going out on a limb and playing forecaster, soothsayer or seer. Always a dangerous business and I've often been wrong before, not usually in matters of substance but commonly in the timing. However I think now is the time to stop pussyfooting around and call it as I see it, because it's easy enough to criticise the events of the day but you can't make any plans on that basis.

It is becoming apparent that the collapse of the US economy is immanent. It may be a matter of months, or it may take until early next year, but it will most likely be triggered (surprise!) by volatility in the price of oil. It could also be triggered by widespread social unrest which will erupt in any case when large numbers of people finally realise that their descent into destitution is being engineered by the cabal of Wall Street insiders and big banks who have seized control of the White House and corrupted the legislature in order to pillage any remaining financial assets. It seems very likely political collapse will follow financial collapse.

Our situation in Australia will be the same in principle, although differing in rapidity of onset and in the constituency of the pillagers. Volatility of oil prices will bring on the collapse of Qantas, causing the Federal government to rush in with billions in bailout funds which will be wasted trying to sustain the unsustainable. The coal industry will make arrangements to have what amounts to an automatic debit from the bank account of every citizen. You will pay thousands of dollars of the cost of each locally made hoon's V-8 in your taxes (even if they're not economically or literally literate enough to appreciate it). Billions will be spent on roads which will never be maintained, on buildings which will never be occupied, on studies of absurd technologies which will never be implemented.

By the end of the financial year '09-'10 I expect the financial tsunami will have reached our shores and the current mood of Australian exceptionalism (a kind of American Exceptionalism Lite) will have been badly shaken and will be beginning to fade. People will be frightened and unemployment will increase rapidly amidst a tidal wave of business collapses both large and small. International trade will most likely collapse almost completely as well for a time next year, because the international reserve and trading currency, the US dollar, will suddenly become Monopoly money and it will take some time for other sufficiently trustworthy exchange arrangements to be made. Of course now is the time our government should be striking bilateral barter deals with oil-producing nations to safeguard our energy supplies but that is too much to expect I suppose.

There will be no political consensus as to what actions to take by the end of the next financial year because there will be no social consensus as to the realities confronting us as citizens and as a nation. Into this intellectual and political vacuum will rush many crazy ideas and personalities. The worst hate filled xenophobes, anti-environmental fascists and other familiar scaly monsters of the Howard years, plus some novel variations, will rise up frothing at the mouth. Various powerful interests, sensing that the economic ship is finally sinking, will try to grab whatever they can, much as is now happening in the USA. This is when the subsidy and rent seekers will be in fullest cry.

Deflation, which will manifest as a steady and remorseless fall in property prices, stockmarket values and wages will be the dominant economic fact of life and all but the crustiest of die-hards (and fools like Peter Costello) will have stopped talking about the risk of inflation. Of course inflation will most likely come back ferociously (and Weimar-like) as a debt-strapped government decides to print money as a way of dealing with it's obligations, but that's a bit further off in the future, perhaps a further two years away.

What actions can we take to protect ourselves? Watch this space. And in the meantime, read The Automatic Earth's advice in How to Build a Lifeboat.

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