The West’s bloated public sector is the mother of all economic bubbles and it’s about to pop, argues Clem Chambers, CEO of leading stocks and shares site ADVFN.com. and the author of investment titles such as “101 Ways to Pick Stock Market Winners”.
The combined, bloated, socialised governments of the West cannot stand any more hot air.
Euro dominoes are falling in slow motion. Spain is set to push Italy, which will topple onto France. Down the line is the US, and further along the way, Japan.
Few ever recognise a bubble until it bursts. This ‘invisibility’ is particularly strong when said bubble is acting in the interests of the selectively blind.
Stock bubbles, credit bubbles, property price bubbles – we’ve seen them all go ‘pop’. But few noted the hot air was reaching a critical level until it was too late – why, when the bubbles were bringing wealth or perceived wealth to so many.
As we watch the euro crisis continue on, certain things become clear. Firstly, we are dealing with vast amounts of money, sums that didn’t even exist in the late part of the last century.
Government is the culprit responsible for conjuring up these vast sums of what is now revealed to be insurmountable, unsustainable debt. It seems inconceivable now that the situation will resolve itself without great changes taking place.
Does anyone think such debts can be repaid? Will it be only Greece that refuses to honour them? The titanic scale of, and speed by which, debts are being piled up, combined with the lack of any hint of real recovery suggest a broken system.
While there is talk of austerity, none of the major governments are getting budgets back into anything resembling control: not the USA, nor the UK, not Japan, not France. Germany is the sole exception.
As Spain teeters on the brink, it’s the public sector system facing catastrophic meltdown. In Greece, too, the sector is imploding.
Like nationalised industries before them, developed countries are badly run. Their losses are translating into insolvency and default.
When the hard resources ran out, the public sector simply turned to the revenue-generating confidence trick of easy credit and property price inflation to fund itself.
Now the public sector finds itself bloated; gorged; doomed.
While fighting tooth and nail to survive, this system simply cannot continue. The private sector is too small to support the public. A new balance must be reached, where the private sector can fairly support a public sector cut to size.
Ways to keep the status quo will be grasped at by some countries, yet maintaining the status quo will ultimately involve nations becoming permanently poorer, further drained by government spending.
However much you like the public sector, it does not produce wealth. It consumes wealth. The public sector is on the liability side of the balance sheet.
In economics, there are only assets or liabilities. An economy needs to balance these to remain solvent.
Clearly, most of the West’s liability-to-asset ratio is far too high, and the situation has remained so for too long. A new balance must be created. Governments with strong governance and benign institutions will rebalance the public with the private and thus return to growth and prosperity.
The rebalancing need not be too dramatic. A switch from public sector to private essentially amounts to a consumer or redistributor of wealth becoming a producer of wealth. As such, it is a double win.
While governments continue to dither however, economics is working on its own schedule. As such, a new storm is brewing.
As the world economy heads into a second wave of depression, China and the other BRIC nations are descending into recession. With this, a new wave of economic problems will hit.
This new period will likely ‘break the back’ of the current economic system of the West.
The big state, weak private sector, mixed economy model as we know it will collapse. Something new will step into the void. Hopefully it won’t be for the worse.