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Beware false profits

It is probably long overdue, but now is a pertinent time to issue an extensive Profits Warning for the West. This is because:

– Stock market valuations are fictitiously high

– Corporate profits are based on sham accounts (Zerohedge)

– The indebtedness of the average person in almost every developed country is excessive and unsustainable

– Government debt is ballooning

At the heart of this cross-sector malady is the fact that the Western banking sector is leveraged beyond comprehension. In the UK the combined balance sheet of private banks is 4.5 times GDP. Is this necessary and is it healthy?

During Britain’s post-war boom years of the ‘50s and ‘60s, it was never more than about half of GDP. So, no, it isn’t necessary.

As for the healthiness of this, well, anyone can look profitable in the short-run if they raid the cookie jar. So, the profit and loss accounts of each of these sectors may look fine. But has anyone studied the balance sheets? Yet this is where the real disease manifests.

To only focus on the P&L account assumes that all of the entities within each of these sectors can sustain themselves as a going concern. But it is increasingly clear that to maintain the fiction, ever more desperate acts of raiding the balance sheet needs to take place. In the UK, not only has public debt climbed higher and higher (a large proportion in recent years as a direct consequence of trying to maintain the fiction of bank solvency), but state assets have been sold off too.

If you are selling off the family silver whilst still running up enormous debts, then something is seriously wrong. This is not cry for public sector austerity. Far from it. Austerity is merely collective punishment of the already unsuspecting victims.

This is a warning that all we take for granted, in terms of our personal solvency, our employer’s solvency and that of our Government’s, as well as the stock market valuation, our savings themselves and even the value of our money, is a fiction.

The longer we maintain the fiction of false profits, the harder the fall.

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