Here is a thought....

Markets were down sharply yesterday to continue the recent downdraft. Spain was in the business news with attention paid to recent increases in interest rates on government debt. The bond investors are dissatisfied with the prospects of a bankrupt Spanish government. But overnight Spain's leader re-iterated his commitment to austerity measures. Meaning he is amenable to reducing the government spending and debt. This means putting more load on the poorer people in that country. Poor people who have come to depend on their governments in recent years are going to pay the price as they usually do. The rich get richer and the poor get poorer. But if we CUT the taxes that the rich pay they say they will create more jobs. Well, in this country the taxes on the rich were cut dramatically nearly ten years ago. Where are the jobs? Oh, its the "uncertainty" now. When things like this pesky president are gone, then the rich will get about creating jobs. Yea! The fact is that business will not create jobs until they can see a clear chance of making a profit. They don't put people to work out of the goodness of their hearts. And since the poor and working class have less money than ever I don't know who business would sell products to. Except Apple of course, who seem to have found a gold mine in worthless gadgets to sell the public. So we can play video games while we sit on our arses. Oh, we can get our e-mail at all times too. So those of us that ARE working can never leave our work. We can do our work 24 hours a day. Very productive. I wonder just what percentage of these devices that AAPL sells actually contribute to productivity. Mostly I see people sending cute pictures to each other while they are supposed to be being productive.
But I digress.

We have seen Ireland, Iceland, Greece, Spain and Portugal mentioned as candidates for impending government bankruptcy. The first three have "worked things out". Meaning they have taken measures to allay the fears of those holding their debt. In Icelands case the people of that tiny country actually told the debt holders to shove it. But the rest of them are following the script and putting additional taxes on the people to give to the bankers holding the debt.
Over the last decades business has benefitted from the economic stimulus of low interest rates and govenment debt spending. I think of a successful business as a seine the catches some of the money that is flowing by. The net is cleaned and the profits are pocketed. Over the decades the amount of "pocketed" money has only grown. This is the money that is put in a safe place. And the safe place has been the bond markets. And this is in part why interest rates have remained low even as economies were going strong. And this huge pool of money that is "chasing yield" is why the derivitive instruments that contributed to the real estate bubbles were created. And why money was lent to sub-prime lenders that should have never been permitted to get in debt. This money is trying to find a safe place, and creating problems in the process.
But increasingly it is becoming apparent that the size of government debt is on an unsustainable path without economies that continue to grow. And "big money" wants to make sure they get their money back. And money is what buys elections. Hence the movement to cut "discretionary" spending and "entitlement" spending by governments around the world. And the movement to raise taxes, particularly on the little people. Since much of the debt of the small countries in Europe is owned by large holders who are not from those countries, taxes are being raised on business in those countries despite the objections of some of the richer citizens of those countries. It is a foregone conclusion that those economies are in for a long slow period of time. This slowdown makes it more difficult for the other countries in the world that do business with them to sell things to them, and so slows to some degree all world economies. And this puts additional strain on governments around the world. But slower government spending reduces the amount of money that is being created and spent in an economy, so the circle is self-reinforcing: less money circulating in an economy means less money to be made by business, less money that people have to spend. This is all a continuation of the cycle that started back in 2007 when the property markets stalled. The debt and money markets take a long time to adjust since money keeps looking for a safe place and going from one set of assets to another. Losing a little each time.
And in my mind it all comes back to the availability of energy. I believe the break in the property markets was precipitated by energy prices. As I remember oil was hitting $140 a barrel back then and the bond market was set to go through a floor, interest rates were starting to rise. Energy is the driver of economic activity. High energy prices are the tax that slows things down, not the taxes that governments collect and spend. And the prospect of slower growth or non-existant growth is what makes the banks reluctant to lend. Particularly with interest rates low. The risk of non-payment is too high for the return ON the money. So big money seeks the safety of government debt, but that safety is fast fading.

Yet we all are fixated on the government debt. But we can't raise taxes on those with the incomes or those who hold all the money because they have bought the conversation with their lobbying moneys. We could balance our governments books by raising taxes and cutting spending on some of the largest outlays. The government spends the money it collects. That money is re-circulated into the economy. To be caught in the net again. The gains in GDP of this country over the last 30 years have been through the creation of debt. And that debt created money has been reloaned. Now it is coming time to stop creating debt due to a lack of growth in the world economy. Yes, some countries have been growing, but at the expense of growth in others. China will have a hard time growing if the U.S. doesn't grow, etc...

And why do we expect "growth". We expect growth because that is the only way a debt-based system can function. Debt creation is money creation. Debt must be re-paid plus interest. Growth in an economy is needed. And economy grows by increased economic activity. Economic activity is activity by people. Economic activity happens when people drive and shop and make things. And all of those are driven by hydrocarbon useage. The rapid rise in world living standards and economic activity is directly correlated with the useage of hydrocarbon fuels. Starting with coal in the 18th century and oil in the 20th century. Each was more economic to use than the former. What is next? Natural gas will play a role. It is plentiful now with the new methods of recovery. But it is not as convenient as oil. It is not as amenable to transportation. And that will pose problems for consumer economies. And to the extent it is used in manufacturing it will create pricing problems and oversupply.
And finally. The specter of inflation has been held over the markets for how many years now? Inflation is needed for people to get out from under their debt. Yet money is created by the creation of debt. And debt depends on growth. And cheap energy is neccessary for growth. Therefore, counter-intuitively, high oil prices are deflationary. Initially they were inflationary, but that was as governments had the leeway to create debt/money. Now we are tired of all the debt. The tax of energy has taken the risk taking impulse out of the consumer.
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