Monday, June 18, 2012

David Cameron sees 'near perpetual stagnation'

The Guardian reports that Britain's Prime Minister David Cameron thinks the Eurozone crisis could continue for years with the result being 'near perpetual stagnation' in the UK economy.

Regular readers know that economic stagnation is a direct result of Mr. Cameron, his predecessor's and the EU and US policymakers' choice to pursue the Japanese model for handling a bank solvency led financial crisis.

Under the Japanese model, policy is based on perpetuating the lie that banks have positive book capital levels.  As a result, the excess debt in the financial system becomes a burden on the real economy.  

A burden that effectively ends growth.  The burden puts the real economy on a path towards economic contraction as capital that the real economy generates is not reinvested in more growth, but rather used to support the excess debt.

Mr. Cameron and the other policymakers have it within their power to avoid near perpetual stagnation.  They simply have to abandon the Japanese model and adopt the Swedish model with ultra transparency.

Under the Swedish model, the banks absorb all the losses on the excesses in the financial system today. Subsequently, they rebuild their book capital levels by retaining 100% of pre-banker bonus earnings.

The Institute of International Finance published a report which indicated that Spanish banks could generate enough capital over the next four years to cover all the losses that exist in the Spanish financial system today.

When the banks absorb the losses, the burden of the excess debt is lifted from the real economy, growth resumes and near perpetual stagnation is ended.
The eurozone crisis could continue for years, forcing Britain to look outside a stagnant euro area for fresh export markets and economic salvation in the emerging economies, David Cameron has said. 
His gloomy assessment of "near perpetual stagnation" came as pressure continued on Spanish bond yields and stock markets reacted coolly to the narrow Greek vote to back pro-bailout parties in Sunday's elections. 
Speaking to reporters accompanying him to the G20 summit in Los Cabos, Mexico, the prime minister said: "It may be that the eurozone crisis is going to continue for some time, in which case the UK must do all it can to put its own house in order and link up with the fastest growing parts of the world."

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