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Thinking the unthinkable

The name Terry Smith probably doesn’t mean anything to you, despite the fact that he is one of the biggest fans of David Cameron’s decision to walk away from a new European Union treaty designed to control member states’ budgets.

Smith’s company Tullett Prebon is one of the largest of the small number of inter-dealer money brokers in the world, acting as an intermediary between investment and commercial banks. As the global financial system grew in importance and influence, companies such as his developed into key nerve centres, becoming sensitive to every change in its fortunes, and making a packet at every turn.

The financial services industry makes up about 10% of the UK’s country’s gross domestic product and accounts for 11% of its total tax receipts. Financial services employ more than 1 million people in the UK. The industry wields enormous power throughout the world from its London base, and Tullett Prebon plays a key role.

Smith famously pooh-poohed those who claimed Britain had cut itself adrift from the rest of Europe and was marooned in mid-Atlantic following Cameron’s veto. He compared Britain's isolation from the EU to "someone who refused to join the Titanic before it sailed" as "there is nothing that guarantees that the euro will survive at all".

His analysis is widely echoed. New York University professor Nouriel – Dr Doom – Roubini, agrees. "With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun,” the man who predicted the 2008 crash wrote in a recent assessment.

Back to Mr Smith because he tells it how it really is. He speaks with brutish confidence derived from success, having made a pile of money playing the markets. He says that Cameron shouldn’t try pushing for growth because he can’t have any effect on it. 

And he’s right. Capitalism is following its own logic. Capital’s need for investment funds to support growth created the insane deregulated excesses of a globalising financial system which blew up in 2007/8. Subsequent “unconventional” measures of credit creation led to the debt tsunami now engulfing the world. 

You can read about it in Tullett Prebon’s recent research paper cheeringly called “Thinking the unthinkable, might there be no way out for Britain? Project Armageddon – the final report”. 

The report explains in detail the mammoth size of Britain’s total debts which, it says, are “unsupportable” without “sustained economic growth”, of which there is no prospect because the economy is not “aligned” to achieve it. The Coalition’s spending cuts are ridiculed as somewhat inadequate, while its policies will have no impact on growth.

His views are borne out by today’s UK unemployment figures, showing a rise of 128,000 in the three months to October to 2.64 million, the highest level since 1994. Youth unemployment rose to 1.027 million, the highest since records began in 1992, beating the previous record set only last month.

“Courtesy of massive and unsustainable public borrowing, the British public has been shielded thus far from the pain of recession. This exercise in damage limitation was necessarily-time limited.” Much deeper spending cuts and further sharp falls in living standards is what Tullet Prebon have in mind as the basis for a “return to growth”.

But Britain’s crisis wasn’t the result of “fiscal and economic mismanagement” by Blair and Brown, as the report would have it. The phenomenal growth of the finance sector – and the UK’s dependence on it – was the essential lever needed to sustain corporate profits for as along as was possible. Every country in the world has become subsumed by debt mountains that were the result.

Neither Smith nor anyone else has any confidence that the weak agreement by 25 or so European countries will result in decisive action to reduce their sovereign debts, which has wrecked the euro.

Jean-Michel Six, Chief economist at credit rating agency Standard and Poor’s, attack dog for the capital markets, said on Monday: "There is probably yet another shock required before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term."

With European governments in disarray, include the ConDem coalition, Six could be accused of whistling in the dark. As the Tullett Prebon report indicates, “what comes next is going to be unpleasant”. Stopping capitalism going down that road will revolve around a struggle for power over the economy in which people’s assemblies will have to play a decisive role. 

Gerry Gold
Economics editor
14 December 2011

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