Monday, December 12, 2011

The Distractions of Europe

There are some big moving pieces shaping life and thought in Britain today. Prime Minister David Cameron taking the nuclear option to the EU. The governments junior coalition partners poor reaction to it. Though no-one is surprised the Conservatives and Liberal Democrats disagree on Europe. The question is, as the gravitational mass of the Euro crisis increases, can the coalition sideline the issue and still work together?

Some are amazed that Cameron used the veto. It's a threat, you're not really supposed to use it. He couldn't sign a new treaty without an uncomfortable referendum and leaving a large chunk of his backbenchers furious. The public is mostly favourable that, finally, a British leader is willing to stand up to Europe. The protection of the City of London didn't seem the issue to me and if it was I am shocked that we'd otherwise so easily had over sovereignty regarding the national budget.

The EU summit, where the weapon was wielded, went on to produce another plan to fix the eurozone crisis. Sadly, it is there to fix the next crisis and does little if nothing to address the current problems. The politicians have been shielded by the central bankers move on November 30th to bring extra US dollar liquidity into the transatlantic financial system. It's only today that the effect has worn off and the markets have taken a big tumble again.

And as much fun as the geopolitics are, there is outright refusal to address the real problem. The financial system. Richard Koo rightly points out the absurdity of having near zero interest rates and instead of borrowing cheaply, paying down debt is the order of the day. We work to a fractional reserve banking system. That means money paid back is money destroyed. It has to be replaced with fresh borrowing to keep us treading water. And in order to grow it has to be replaced with greater borrowing than what is repaid.

We can't pay down debt and have growth unless existing wealth is put to work. If we're not going to fix this unoptimised system and won't accept a write down on debt then I only see one path to generating the growth that'll turn the economy around. The existing wealth of the elite and cash rich corporations needs to be put to use on new/small enterprise, where innovation will be most significant and the next major companies will be born from.

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