Well the story explains a little of the real numbers. As we must all have – at a minimum – suspected by now, governments have a habit of reporting nmumbers in the best possible light. With inflation we have RPI, RPIX, ‘Core’ rates and more. Over time, the subtle changes in methods of calculations make these numbers meaningless to most of us. This post by Greg Hunter suggests that US inflation – if calculated using the same method as in 1980, it wouldn’t be 2.7% but 9.7%.

Well it is the same with US jobless numbers. As you will see from the story, and from Greg Hunter’s post, the real number is likely to be much higher. The BBC thinks more like 17%, while Hunter (via shadowstats.com) thinks 21.9%.

(It is worth pointing out that while some statistics may change in the level of their importance, when they were first invented, it was with a reason. That reason was to measure something. It seems reasonable to presume that they were invented to measure that thing as accurately as possible. Therefore, most changes probably reduce the ability of the numbers to measure accurately. So when something is compared to the (for example) 1980 method, that method is probably a much purer reflection of the underlying number. End of rant.)

It is numbers like this that will ensure that public sector debt is stubbornly difficult to reduce and that this will be a very long recession.

There are two factors that make such statistics really meaningful. Firstly, we all know just how important the US economy is to the global economy. The longer and deeper this recession lasts for America, the longer and deeper it will be for all of us. This will not be easy to shift.

Secondly, there are many developed nations that ‘massage’ their economic statistics like this. If I happened to speak several languages and read several different nations major newspapers each day, I could probably quote similar situations in many European nations. But I don’t so I can’t. But there have certainly been changes to the way numbers are calculated in the UK.

How we – and I include government – are meant to deal with the debts of the world and this economic crisis if we don’t really understand how bad the problem is, I have no idea. Confronting the problem is the first step in dealing with it. But still, around 2 years in, we are unable to see the real numbers. It seems that we are still hiding behind lies and statistics.

Why?

Dubai.

All this time, we have been witnessing the economic miracle that is / was Dubai in awe and respect. But hey, it seems that they have built their massive towers not on sand but on debt! Sand might be unsafe, but debts are worse. And we thought they were all bazillionaires in the UAE…

Earlier in the year, we learnt about the end of the Dubai property boom as prices plummeted. Various stories are becoming ‘legend’ about expats leaving their Mercedes at the airport as they fly out to avoid their debts. Now we find that the Dubai government is in serious hock and pulling global stock markets down.

Will the sheiks be leaving their Maseratis at the private runway when they leave? That’ll be the place to go car hunting.

With so many banking stocks already in trouble – even after positive recent results – there seems to be no visible route for a genuine recovery in the financial sector. One thing that seems ever more clear, if major banks have been proved wrong about lending to Dubai – the home of global extravagance it would seem – then it is easy to imagine that there are many more loans in deep trouble.

It certainly proves the ability of the financial services and banking industries to spray money around. From NINJA loans in the USA to sovereign governments in the Middle East, they were certainly equal opportunity lenders.

What never ceases to amaze me, is the level of debts that seemingly wealthy individuals, corporations and nations have. Is there anyone or anything left in this world that isn’t up to his / her / their necks in debt? Would that man, woman or organisation please stand up? (‘Cos the rest of us need a loan…)

When you read about countries like Dubai and Latvia struggling or going under ( Puerto Rico went bankrupt earlier in the year ), it doesn’t need a big stretch of the imagination to forsee bigger nations next.

This isn’t a domino effect for nothing you know…

For sure, it will take time before a genuinely large government goes under. Perhaps I should start a ‘debt pool’ in a similar vain to Dirty Harry in The Dead Pool to see who can pick a ‘winner’. Of course, finding a politician willing to fall on his or her sword over their handling of the recession / depression / financial crisis really is the needle in the haystack.

The last few days have been a great example of just how mixed up things really are – and how little basic ecnomic knowledge there seems to be in this government and the UK media.

It is worth pointing out that the articles linked to below are all from the BBC. This is in no way an attempt to single out the Beeb in any way. Simply, the BBC has very reliable reporting and does not alter or remove web pages – this means that they can be linked to without needing to change broken links a few weeks later. The criticism is aimed at the politicos…

The UK started the week with an increase in the currency rates as notes from the MPC meeting suggest that Quantitative Easing will not be extended in the short-term. This was taken as a bullish sign that the economy is recovering. Phew!! Everything will be ok…

On Wednesday, Alistair Darling tells us that more borrowing by the government is the best way to help the economy. This is despite news in September that suggested that the real cost of the bailout is already in the region of 95% of GDP. Scary.

He backs up this statement with the soothing news that “it will mean the bills we face as a country will be lower”. The natural conclusion to that must be that he presumes that Britain will either be forced in an aggressive inflationary environment, or default on these loans. Neither seems like a good option.

Meanwhile, the NIESR – an economic think tank – is suggesting that retirement ages need to be increased to age 70 or taxes will need to rise by 7% to cover the high debt levels. These tough measures are the kinds of stories that have been dominating UK news for some weeks as the Conservative Party tries to make itself seem capable of high office next year. It seems increasingly safe to presume that Mr Darling doesn’t read the daily newspapers too often himself.

That newspaper avoidance might be for the best as George Osborne lays into him for his econominc plans laying in tatters as it is announced that the ‘green shoots’ of recovery have turned into a further economic downturn by the end of the week.

With all that, I’d like to remind readers of my own recent prognostication that this isn’t a short recession, but instead there is very likely to be much worse to come in my post 2016: The End Of This Recession. See how positive I am???

On that note, I’d like t leave you with a musical accompanyment – Land Of Confusion by Genesis.

Across most of the coroporate world, earnings are collapsing, banks still are reluctant to lend and firms are heading towards bankruptcy. In the personal world, people are still being made redundant, debts need to be paid and homes are being repossessed. In the government world, bailouts are still happening, social security and unemployment claims are rising whilst tax revenues must be falling.

It is on this last point that I wish to focus.

If there are less people in jobs, there is less tax revenue coming in and more unemployment payments going out. So far, so obvious. In time, this must cause a squeeze of the public purse strings – everywhere. On top of this, the public accounts are groaning under the weight of significant borrowings during the boom years (I know…) and now very significant extra borrowings from the first bailout year.

This means that in time, and it is only a matter of time, there must be the equivalent of a public sector recession. The day will come – and it is approaching quickly – when ‘the state’ will be unable to step in and help. There will be no more Middle East or Far East governments willing or able to purchase our government bonds and the game will really be up.

When this happens, governments will have no choice but to hit the general public with the double whammy of tax rises and significant inflation. It probably will not be enough to raise taxes or inflate the debt away. We will need to go through both. This will of course be accompanied by high interest rates. All of this debt will need to be squeezed out of the economy somehow.

For now, governments are still spending as if they have the money, which many clearly do not have. They need to recognise that the money is not arriving as a first step.

If this is all possible and likely, then the public sector recession will prolong the recession faced in the wider economy. It will, of course, start later.

My own personal guess is that we have another two or perhaps three years before any public sector slowdown starts to bite. That is 2011 or 2012. But then there will be a period of real depression while the capsized public sector tries to right itself.

What might that take? Four or perhaps five years? Using my recession-ready-reckoner (a term I ought to get copyright for) we are looking at between 2015 and 2017. So I’ll play it safe and suggest 2016.

That isn’t what the politicians are saying, is it?

What this all means is that we all ought to be managing our finances as if we may never see the good times again and that things are going to get much worse before they get any better.

But I’m no expert – I could be right or wrong. What do you think?

Poor Lithuania…

This story explains that the Lithuanian economy has falled by a thumping 22.4% in the second quarter. And we all thought that the 17% drop in activity in Latvia was huge!

If this isn’t an alert for the IMF that more funds will soon be required, I don’t know what is.

The real problem is that under such conditions, how do you tell what will help to end this slump? We all know that economic problems in one country can easily spread across the border since neighbouring nations are generally significant trading partners. This is one reason why South Africa has been so loathe to interfere in Zimbabwe for so long – the fear that the economic disaster could be transferred.

With Latvia and Lithuania in such economic retreat, we are left to fear that Poland will be pulled much lower. Let us hope not.

In 2007, Canadian journalist Naomi Klein published “The Shock Doctrine: The Rise Of Disaster Capitalism”. In this extraordinary book, Klein argues that the influence of Milton Friedman and his ‘Chicago School’ economics has had a profound and terrifying impact in many parts of the world.

Her theory is based on lots of research and interviews with some very well placed people.

As she puts it, shock therapy uses a combination of drugs and electricity to create a ‘blank slate’ on the minds of mental patients. The economic equivalent is Friedman’s shock therapy for entire nations! The aim is to create an economic ‘blank slate’.

An economic blank slate involves forcing through a swathe of free market legislation to open the economy to global competition. This is done in return for IMF and World Bank loans.

It would be reasonable to say that the evidence put forward by Klein does not paint a pretty picture. Examples from Chile, Argentina, Russia, Poland, South Africa and more describe legislative changes made without the knowledge of national lawmakers, massive loans that are near impossible to repay and terrifying human rights abuses that are required to keep a revolting population in line.

In short, she does not at any point suggest that economic shock therapy is successful…

Personally, having read the book I was left with a number of impressions. Firstly, I was horrified to read just what is involved in torture – that was not nice. Secondly, I was appaled at some of the seemingly ridiculous decisions made to open economies that were clearly not in a position to be opened. Lastly, I came to the conclusion that should I ever hear the words ’shock’ and ‘therapy’ used in the news about a country in which I was in, that I would pack and leave within the month before all hell broke loose.

This opens up a potentially worrying situation though. The usual rules of engagement for Chicago School economics would require an overhaul of the Latvian economy and legislation. This would almost certainly create a conflict between money lenders and the European Union.

It would also force up the prices of everyday living expenses for the Latvian people – probably as the Lat is devalued. All in all, the outlook would not be good.

My own accountant is owner of a small operation. His company comprises 8 people in total and is based in a residential house. He is 36 and purchased the firm a few years ago from it’s founder – in total the company has been trading for a couple of decades.

He explained to me that so far his firm has only been involved in 2 bankruptcies. Both related to the residential property (building and development) sector. As he explained it, both were relatively young guys that had seen nothing but money over the last few years and had expanded significantly on the back of borrowed money. They had expanded quickly and then also borrowed heavily for their own residential property. As the property market started to “pop”, they had a mass of liabilities backing falling asset prices. Ouch!

In essence, this is exactly what the press has been describing for some months now.

The firm has a number of other property related clients, but these are older and more established. Having seen such cycles before, they had taken steps to secure their borrowings for longer periods, they have cash balances to see them through (some) bad times, and have generally taken less risks.

Whether they are able to survive long-term, who can say, this recession could be a very long one. But for now at least, they are in much better shape.

My accountant – as you might imagine – also has to go and give bad news to companies. For some of those firms that he prepares monthly accounts for, he has had to deliver bad news. The news takes the form of, “shed some staff or you will go under”, and must be very hard to give. Ultimately, whether the firms follow the advice or not is up to them.

He has been seeing that just about every type of business is being impacted by this recession. If it turns into a depression – as it may well do – then it will be difficult to imagine firms that will escape untouched.

He is trying to convince companies to scale down to the new lower business levels quickly to ensure that as and when a recover comes – and a recovery will come – they are on the start line, still trading, and ready to go again in the next cycle.

He did, however, also mention a number of individuals that are taking this downturn as an opportunity to “cash-out” and retire. They are of a certain age – in their fifties – and may simply not want to be involved next time around. If that is the case, they are thinking, “Why bother?” and are looking to retire completely.

Making way for the next generation of business owners and entrepreneurs is the natural order of capitalism. Like nature, things grow vigorously but will one day wither and die.

It seems that this slowdown is forcing some of these organisations out. One must presume that if this is how the small business world is impacted, then big business must be near identical.

This interview is well worth watching for his brief discussion about finance. Note that most politicians discuss the recession and how we may be out of it in 2010. Instead, Paul Krugman calls it the “Mother of all recessions” and possibly “Great Depression 2″. That is a big step ahead of the current rhetoric and from someone that ought to know what he talking about (unlike many politicians…).

Just try and keep count – how many times does he use the word depression in this interview?

Why did he mention this so much? Just remember that in yesterdays post I mentioned that I was able to help set the questions…

This is one of the problems with a global recession, it is very hard to guess what is actually at risk. It could be everything, or it could be nothing.

Either way, the impact of too much borrowed money is clear for all to see. First the Icelandic banks over borrowed their entire economy – and that takes real talent! – and not the Americas are hit.

This CNN.com story details what is actually happening and the actually small scale of the problem, relatively speaking. US and UK banks and financial firms are losing tens of billions of dollars and pounds, whilst the Puerto Rican deficit is only around $3 billion.

Ok, so $3 billion is still $3 billion – but it isn’t on the same scale as some hedge funds!

Will someone charge in to help them out? It will be interesting to see who wants to buy a strategic stake in another economy for a knock-down price.

But I guess if you want to see smaller government, this is one way of going about it…

shows just what a mess the banking sector is in. The sad thing is that the list of 250 banks ‘in trouble’ is only in the USA. When I clicked on the link, I was rather hoping that it was a global list. Perhaps it was less hope and more blind optimism. Whatever.

However, you look at it, this is a real threat to the global economy. If it were 250 banks in trouble worldwide, it would still be a threat to the global economy – just a smaller one!

What amazes me about this sort of news is the lack of impact it seems to be having on the world’s major stock exchanges. I know, I know. Markets have been violently volatile and there have been some monster falls. But still, if the entire banking system were to go under – especially in our uber connected financial world – most markets would cease trading and further trillions of dollars would be lost.

And these are the banks in trouble now. Sure, we have all heard about the credit crunch and NINJA loans. But when the recession starts to bite on every single family in America, which it seems to be starting to do, then many more mortgages, loans and credit cards will be heading for default.

If the banks are in trouble now, just wait 6 months to see what trouble really looks like!

It would be a scenario that no government, central bank or globe-trotting Nicolas Sarkozy could solve – or even help.

So are we living in a dream land? Are stock markets unaware of the real risks? Or is it actually priced in already?

Who can say, but now is not a good time to be an investor. Or a saver. Or a taxpayer. Or anyone with any real financial means.