Posted by: Martin | May 15, 2010

Well, Western World, that was a nice 500 year streak

Global macroeconomics

I have been looking at a recent working paper from the Bank for International Settlements, and well, it’s pretty alarming stuff.  They are essentially saying that even with  significant budget cuts practically all large Western countries plus Japan have debts that will spiral out of control.

The red dotted lines below are the base scenario, meaning governments continue spending in line with current levels and to meet future projected expenditures.

The green dotted lines below are debt projections including an improvement of the budget with one percentage point of GDP per year for five years, in line with planned budget cuts in countries such as the UK and the US.

The blue dotted lines are debt projections with the budget improvements of the green lines, plus freezing age-related spending at 2011 levels, ie making pensioners very angry (and poor).

 

Source: BIS Working Paper No 300, p 10

The only possible outcomes appear to be:

(1) Drastic budget cuts which are politically difficult as they are never popular.
(2) Inflation by means of the central banks printing money (or rather creating it electronically)
(3) Debt restructuring/default which means a sudden crash, forcing budget cuts and causing bank and other corporate bankruptcies, loss of jobs and reduction of gdp, but also a chance to start over, and arguably better than high levels of inflation in the long run.

It looks like politicians do everything to avoid (3) as was seen by the recent very large eurozone bailout package. The package means the less weak euro countries saving the weakest ones, and can be seen as an “all in”.  Now, unless the bailout package breaks up,  the eurozone as a whole is going to crash or work it out with budget cuts and/or inflation.

I’d say the most likely outcome for the eurozone and the other concerned countries is a combination of (1) and (2), but (3) can’t be ruled out as one single failed bond auction in a country too big to be bailed out, can trigger a swift default (which would be deflationary).

Even if (3) is avoided, it’s still a question how big budget cuts politicians manage to do and how much inflation we will get.  Either way, it isn’t looking too bright.

Safe countries

The only developed countries I see, that have pretty good fiscal discipline and will only be affected indirectly by the problems of the other countries are:

  • Norway (thanks to the North Sea oil and gas,  Norway’s balance sheet is rock solid – don’t think they have any net debt)
  • Sweden
  • Denmark (The currency is pegged to the euro though)
  • Switzerland
  • Singapore
  • Canada
  • Australia
  • New Zealand
  • and maybe South Korea , Taiwan and Chile

Of these, the European ones and Canada will take quite heavy indirect hits from their troubled neighbours. So well, the place to head for, if one wants to live in a developed country and reduce the impact of the coming crisis would be Singapore, or possibly Sydney. I think Singapore is in a stronger position than Australia and New Zealand, although all these three countries will be heavily affected by a potential bursting of what seems to be a real estate bubble in China.

The Impact on the Ivory Coast

Anyhow, what does this mean for the Ivory Coast? Assuming inflation, budget cuts and recession/depression in the US and Europe and some nasty stuff in Japan I see the following happening in Abidjan:

  • reduced remittances from the Ivorian diaspora
  • a weakened euro increasing Ivory Coast’s competitiveness and deceasing the risk of a cfa franc devaluation. But with currency turmoil, it’s hard to predict how the cfa franc will fare.
  • imported inflation
  • reduced oil price in real terms
  • food becoming less affordable
  • France reducing its military presence, and generally losing influence
  • prices of Cocoa and Coffee could hold up along with other agricultural products (if investor Jim Rogers is right)
  • reduction of US/European foreign aid and investments (the latter having a bigger impact than the former)
  • real estate should hold up pretty well being a hard asset, and if Nicholas Nassim Taleb is to be believed agricultural land is the place to be invested
  • reduced potential for tourism and if tourism picks up, there will be more chinese/asian and less european tourists in the mix  (still a majority of european ones though)
  • all in all bad, but not as bad on a relative basis as Europe, unless violent conflict is made possible by the reduction of foreign military presence or other hard-to-predict crisis related factors
About these ads

Responses

  1. [...] if Ferguson is right, it would mean that the default/restructuring case from the Well, Western World post is more likely than inflation (or spending cuts, which are deflationary).  And that in turn [...]

  2. [...] have a quite pessimistic outlook for the economy in the western world. With a high and increasing debt-load and an aging population [...]

  3. [...] might be reading too much zerohedge and papers by the Bank for International Settlements (ok, I’ve read precisely one), but I’m thinking that the western world has experienced [...]

  4. [...] I think, less severely than in Europe. I wrote about potential effects for the Ivory Coast in the Well, Western World that was a nice 500 year streak [...]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: