A guest post from Jerome Booth, Head of Research, Ashmore Investment Management Limited
The International Nemesis Fund (INF) announced today that economists in their research department have discovered a cure for the financial crisis which has been stalking Heavily Indebted Developed Countries (HIDCs), which includes the US and a number of Western European countries, since the fall of Lehman in 2008. A senior source in the Fund said: ‘Basically the problem with debt is that those with too much of it do not have the money to repay, but if we lend them more money then they will.’ The INF has long been at the forefront of innovative financial solutions to the world’s most complex macro-economic and psychological problems. The new facility is to be called the INF Debt Extension New International Arrangements to Lend (DENIAL). The idea is that a country under an INF DENIAL programme will be able to suspend crisis conditions indefinitely.
The new approach has been designed following extensive analysis of prior crises and outcomes. One market participant observed: "The concept is brilliant. We all know that these countries are going to default or inflate their debt away but this DENIAL programme enables us to engage in double-think and achieves all the major goals that policy-makers are currently focussing on: the need to blame others for previous policy errors, the need to rob people of their savings without them noticing, and the need to avoid the stigma of actually defaulting."
But the potential recipients in HIDC countries have been cautious. Unlike their near namesakes the Heavily Indebted Poor Countries (HIPC) they are not used to being pushed around and having solutions imposed on them which erode contracts and property rights, keep them excluded from capital markets, and dependent on aid. A spokesman from the ECD, the European Central Denial authority, said: "It is our job to print money recklessly and erode savings, not the INF’s, and this facility is not really new. We will work with our partners at the INF, but we thought of the idea first with our Long Term Denial Operations, LTDOs."
There have also been some concerns in banking circles as to the willingness of investors to continue buying government securities if HIDC currencies are to be debased through massive monetary emissions. However, a spokesperson for the new Buy A Bond for European Liberty III (BABEL III) initiative said: "It is important that somebody buys European sovereign bonds. Our strategy has been to designate them as by definition ‘risk free’. Everything else is highly risky. Then we regulate large investors, compelling them to buy ‘risk free’ bonds. That is indeed a major motivation behind accelerated implementation of BABEL III and, for that matter, INSOLVENCY II."
A spokesperson from the European Pensions Association confirmed that their institutional membership would indeed be happy to buy more government bonds, because they are ‘risk free’, though with a caveat: "If they go down in value and we lose most of our investment, and our retiring pensioners can no longer buy bread to feed themselves, this may generate some negative PR. Pensioners may need educating that a pension is there to provide them with a certain number of Euros, not a certain amount of bread. It is up to them how to budget their expenditure. Our members, colleagues in the consultancy industry, and academics have researched the issue in detail in recent years, and one of the significant conclusions coming out of this academic work is that pensioners can instead eat cake."
Dr. F. Gump, the INF’s Head of Strategy and Economic Analysis said: "Life is like a box of chocolates. You never know what you’re gonna get … as a result we tend to eat them all at once, but then get sick. Previously we have been trying to convince people not to do this, but we are fighting human nature here. The new DENIAL strategy instead is about training people to eat whole boxes of chocolates, packaging and all, without throwing up. It requires patience and practice but the initial results are encouraging."
This document is issued by Ashmore Investment Management Limited (Ashmore), 61 Aldwych, London WC2B 4AE, which is authorised and regulated by the Financial Services Authority. This document does not constitute and may not be relied upon as constituting any form of investment advice or inducement to invest and prospective investors are advised to ensure that they obtain appropriate independent professional advice before making any investment in any fund. The information and any opinions contained in this document have been compiled in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Save to the extent (if any) that exclusion of liability is prohibited by any applicable law or regulation, Ashmore, its officers, employees, representatives and agents expressly advise that they shall not be liable in any respect whatsoever for any loss or damage, whether direct, indirect, consequential or otherwise however arising (whether in negligence or otherwise) out of or in connection with the contents of or any omissions from this document.