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Demand 'Stimulus' Has Not Worked - It's Time To Tell The Truth About Debt

Via EmileWoolfWrites.co.uk,

Telling The Truth About Debt

Last month I referred to the recent opinion of George Bompas QC that IFRS accounting criteria do not meet the statutory obligation for UK and EU financial statements to give a true and fair view. I also noted that IFRS 9, the latest attempt of standard-setters to endow loan-loss provisioning with a requisite degree of prudence and objectivity, hardly improves matters because it allows management to assess, subjectively, the probable loss on impaired loans over the following 12 months.

 

And not just banks: sub-prime lender Cattles Plc was pushed into administration with huge irrecoverable losses in its loan portfolio that were not reflected in its accounts under IFRS accounting rules. Its claim on behalf of unpaid creditors against auditor PwC has now been settled on confidential terms.

 

A multi-million pound compensation claim has been brought against former directors of Lloyds TSB (now Lloyds Banking Group) by more than 6,000 former shareholders, alleging that the HBOS loan book was vastly overvalued when Lloyds took it over in 2009 – again due to flawed accounting that failed to provide for losses. This issue will not go away until the rules require lifetime provisioning at a loan’s inception.

A case study in economic disintegration

Debt management is the order of the day at all levels. Bankers have to lend money in order to make money – even in Greece, where most self-employed business people live on credit and spend a high proportion of their income on debt servicing.

But since basic lending criteria are stymied by untrustworthy credit data, tax evasion being the norm, Greek banks have had to devise their own “correction” model for estimating real (rather than reported) income.

Greece is a case-study in economic disintegration. Its government is even considering enforced use of credit cards, just to be able to trace the money. Yet co-operating with officialdom is impossible when government itself is perceived to be corrupt, officials demanding bribes before performing any ordinary duty. Even tax enforcement officials have a “bribe schedule” which shows the size of bribe required to get a tax liability reduced.

It is no wonder that the digital currency Bitcoin has become so popular in Greece: its embedded characteristic of absolute anonymity is a charter for money launderers and tax evaders.

The Greek breakdown sounds a clear warning of the inescapable consequences when (a) legal tender laws compel traders to adopt a currency susceptible to debasement by bureaucrats holding the money-printing levers; (b) purposeless regulation drives enterprise into an administrative straitjacket; and (c) penal tax levels are arbitrarily assessed and collected.

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Demand stimulus has not worked

Repeated dosages of quantitative easing to kick-start economic recovery have proved totally ineffective everywhere. Yet central bankers are talking about doing it again – in larger amounts. Vast billions of counterfeit do nothing for the wider economy. The beneficiaries are those in financial sectors who get their hands on the new money before its ink is dry, and cannot wait to blow it – extravagant cars, yachts, private planes, and (quoting Prospero) all thosecloud-capp’d towers andgorgeous palaces” – not to mention stock value bubbles in those sectors.

Benighted economics gurus will try anything before they recognise that production – not demand – holds the key: with low taxes, low regulation, sound money and free trade, who would need demand stimulus?

The obsession with spending rather than saving has led governments everywhere to suppress interest rates to near zero. Under this destructive economic model governments are the worst offenders. In their craze to spend cheap money they allocate resources blindly into projects of dubious viability, for which there was no public demand in the first place. Result: huge taxpayer-borne losses.

Empty EU-funded three-lane motorways with exorbitant toll-charges; state-of-art airports that no airline flies to; China’s disintegrating “Ghost” cities, erected in the desert at unimaginable cost, providing no observable benefit beyond advancing the careers of bureaucrats boasting that they are on track for the next five-year plan.

All of it, warns Prospero, “shall dissolve and, like this insubstantial pageant faded, leave not a rack behind.”