Black Tuesday

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The economic crisis could be decided by German fears of hyper inflation and an inability of US political parties to act in the national interest.

The global economy hovers on the brink.

BSD

Firetrench Directory

Turmoil continues in the financial markets because investors remain nervous as the Euro crisis continues to spiral out of control and the US Federal Government is locked in conflict that could see the US default for the first time in history.

Economists argue about how bad the US economic situation really is.

In the short term it is a basket case. President Obama is determined to borrow heavily and raise taxes massively, but even his own supporters are growing increasingly worried by this approach and Republicans are demanding significant public spending cuts in return for agreeing to increased borrowing to cover the immediate debt repayments that the US Federal Government must make to avoid being in default.

In the medium term the US is in for a bumpy ride if it avoids default because of the massive debts run up by a profligate Obama. However, the US economy has proved resilient in the past when crisis threatens. A default would send massive shock waves through the global markets. To avoid this, more money must be borrowed and public spending must be reigned in, causing misery for millions until the economy can be returned to growth.

In the long term the US should be able to achieve a strong recovery, BUT ONLY if it can avoid a short term default.

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Hussein Obama has presided over US decline

The pessimists point out that much has changed for the US. The withdrawl from manned space launches is symbolic of the contraction of US power under the presidency of Hussein Obama. US manufacturing has shown signs of continuing decline and the US now accepts that it will be eclipsed by other countries. Where the Great Depression saw the US bounce back and become far more powerful, this time round it does not seem that it can profit from a new European war. The huge expansion of US production to keep Britain supplied with war materials to fight for freedom from German domination was one factor that ensured a strong economic recovery and the ability to displace Britain as a first rate world power.

The Euro Zone is in a much greater danger and has almost as large a capacity to turn the global economy upside down. The markets are deeply worried because Spain and Italy are facing increasing interest rates on their borrowings and those rates are close to the point where Greece, Portugal and Ireland had to seek emergency loans from the IMF and EU member states. At the same time the weakest Euro Zone members, Greece, Portugal and Ireland seem close to requiring significant new injections of IMF and EU funds.

The two enormous problems are:- can the new funds be secured for the weakest countries and can money be found to bail out Spain and Italy?

The old wisdom was that money had to be found, but the weakest countries demonstrate the difficulty in turning a bailout into a recovery. All the evidence suggests that the first Euro Zone victims are not receiving enough money to turn around their economies, but even the funds already received are an unsustainable overhead that will take decades to repay and may never be repaid. Spain and Italy just add an overwhelming new burden on Europe and Britain has already run out of patience with the incompetent and greedy Euro Zone countries.

The British problem is that the US and the EU together account for more than half of British export markets, on some calculations 78%, and a failure in either market would damage British hopes of recovery, demanding further public spending cuts.

The British Government is being forced to consider how to form a new relationship with the rest of Europe. One option under serious consideration is to encourage the Euro Zone countries to stop playing at a single currency and a Federal Europe by immediately forming a real single economy where the composite debt can be considered by the IMF and where all Euro Zone members are forced to act as one and cut public spending. This option is counter to German ideas of just cutting away the weakest members and making them adopt their own national currencies again. This means that default by Spain, Italy, Portugal, Greece and Ireland would be virtually guaranteed, but the German taxpayer would be best protected. These are the two most credible options but they both terrify the financial markets. Unfortunately, the US and Europe have wasted four precious years in hoping to paper over the problems and time has just about run out.

Whatever happens, the only question is:- how many people will find their lives turned upside down?

Editor

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