New Indicators to Point the Wrong Way

21 02 2011

Another weekend, another blabfest.

G20 finance ministers met in Paris.  It seems they’ve agreed to hold another blabfest in April in some other fancy hotel in a fancy city.

Meanwhile, according to The Guardian, just 1992.5 kilometres away:

“Libya is defying international condemnation of a bloody crackdown that saw troops and mercenaries shooting unarmed demonstrators as the crisis spread to Tripoli and the death toll rose to more than 200.”

At the same time we noted:

“The [US] Senate on Tuesday voted to extend for 90 days the legal life of three post-Sept. 11 terrorism-fighting measures, including the use of roving wiretaps, that are set to expire at the end of the month.”

In the Middle East individuals are dying in the streets as they try to fight against despotic rulers.  In the West individuals are told their rights must be infringed in order to protect their freedom!

It’s a funny old world.

Not that the West will worry too much about what’s happening in Libya.  As long as the trouble stays within its borders.  As The Guardian also notes:

“Libya, once treated as a pariah, has been embraced by western countries hungry for oil and lucrative investment opportunities since Gaddafi abandoned his support for terrorism, but there has been very little easing of domestic repression.”

But, the G20 had more important things to consider.

The finance ministers and central bankers needed to figure out how to prevent the next economic nightmare.

It looks as though they’ve just about got it nailed down… if you believe this communiqué that is:

“While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.”


Simply put it means the G20 is doing its darnedest to look as though it’s doing something.  To look as though it can do something.

Having blabbed on for months about developing indicators that will help signal a potential economic meltdown, it seems they’ve finally settled on the bunch of statistics they’ll use.

Trouble is, how are these supposed indicators going to work?  What will be the benchmarks?  What level of debt is good, bad and just fine?

A recent report in The Washington Times stated:

“President Obama projects that the gross federal debt will top $15 trillion this year, officially equalling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years’ time.”

We wonder where that will show up on the new G20 indicators – good, bad or just fine.

And what about American personal debt levels, which according to the US Debt Clock now stands at USD$16.2 trillion.  Although a survey by the Federal Reserve Bank of New York claims it’s really just a paltry USD$11.4 trillion.

Is that good, bad or just fine?

At the other end of the scale is Australia.  The Australian Office of Financial Management (AOFM) – the government’s money managers – states total Australian government bonds on issue are $180.5 billion.

That’s just a fraction of US debt.  So we’d have to think that’s good.  In fact it’s roughly 1% the size of US government debt.  So we’re OK.

Australia should be able to pass through the G20 financial body scanner clean as a whistle.


Oops!  What was that?

“Can you remove your belt, shoes and pants sir, you seem to have a personal debt problem secreted somewhere.”

Ah yes, Australian private debt.  The Reserve Bank of Australia (RBA) tells us that residential and personal debt totals $1.107 trillion…

Or, to put it another way, $49,064 per Australian citizen.  If you compare that to US personal debt levels, there’s not so much of a difference.  Personal debt per US citizen is $52,093.

So where’s that going to show up on these fancy new indicators?  Good, bad or just fine?

But back to public sector debt levels.  The following chart includes the debt levels of the four European members of the G20 – Italy, Germany, France and the UK:

These levels are already above the maximum determined by the two-decade old Maastricht Treaty.  Exceeding the treaty is supposed to result in a fine for the EU member country.

In that case maybe they won’t worry about public sector debt levels after all.  No, much better to look at private sector debt where Germany, France and Italy appear to be much better off in comparison:

These are older numbers (2008).  But it shows you if Australia was on this chart, it would be on the left-hand side with the highest level of private sector debt as a proportion of GDP.

No wonder they’re waiting until April to decide how these supposed indicators will work.  And we haven’t even looked at government budget deficits and savings rates, and all the other mumbo-jumbo the G20 says will act as a warning sign to the next crisis.

As we’ve shown before, the more the policymakers claim they’re working to prevent another crisis, the greater the chances another one will occur.

It’s the meddling what does it.  The very idea that twenty nations – actually more than that when you consider the European Union representation on the G20 – can set aside their own agenda and objectively agree on independent indicators is ludicrous to start with.

I mean, let’s even play along and say that high public debt levels are a sign of a future crisis.  Can we really imagine the US, Italian, French, German and UK government’s agreeing to any level below their current levels of public debt?

Of course not.  It would be an admission of guilt.

By the same token, could we expect the Australian government to agree that personal debt above – for example – 70% of GDP is bad for an economy?  Again, of course not.  Not when it’s currently at 100% of GDP.

No, the blabbing will continue.  The pointy-headed finance ministers will strut around telling you everything is being fixed… that everything is under control.

Meanwhile, as they play with their new indicators they’re trying to hide away the two indicators that show the true state of the global economy and where it’s heading – interest rates and inflation.

Having fiddled with both of them for short-term political gain even they must realise the current financial system is broke.  But rather than admit it, they prefer to create another diversion.

They hope by the time the next crisis hits they’ll be out of office and living off a state pension.

Of course if things go really wrong, they may need to call in a favour from one of the despotic dictators they’ve helped prop-up for years.  Perhaps that’s why Western leaders have been so slow to criticise the Arab rulers.

After all, one day Obama, Gillard, Rudd and Cameron may need to give Gaddafi and his pals a call and ask him if he’s got a spare room available!


Kris Sayce
for Money Morning Australia




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