ANALYSIS, Global — The world, especially the English-speaking world, is engaged in a delusion of massive proportions.

UK is wrapped up in the City, banking and finance wealth, and astronomic property prices.

USA has been having debt-filled economic growth, a large portion of which is a war-income bubble from Iraq and Oil deals.

Australia has been riding a China-driven resource boom.

And that’s the tip of the iceberg. Each of these, and thousands of other forces have led to the extension of an economic boom that should have concluded by now.

Meanwhile consumers are spending like no tomorrow, debt levels are at highs not seen since the last global depression of 1930s, and the economic system is looking shaky.

The boom is booming because it’s booming. Fundamentals are somewhere else.

It’s a mass delusion. The bottom line?

A very bumpy global economy in 2008, worsening into 2011.

Most likely a severe economic shock event. See my specific 2008 predictions here.

Possibly, in the very worst case, an economic depression in the next 3 years, is an outside chance. There are disturbing similarities with the late 1920s, even down to the US Presidential politics.

Here’s Why…. In Short….

USA-led Economic Recession Coming

Economics of the Roaring 20s

In the 1920s, Harding was President of the USA, declaring “America open for business.” The devout Coolidge followed, yet like Bush, his grip of economic fundamentals was poor. He was followed by wunderkind Herbert Hoover. Who, despite his smarts, couldn’t fix it.

In the late 20s, professional head of the Reserve Ben Strong died, leaving in much the way the equally well-regarded Greenspan recently did.

Credit was a major concern, debt piled up, and the same reassurances were given about “credit used to buy assets” as in 2007, but if the assets are over-valued it hardly matters.

And now like before, the financial deals are so complex no-one understands them.

The fundamentals of the 1920s boom was built on mechanization-based productivity gains for the USA, boosted by receiving income and expertise from the war. The 1950s boom was built by economic returns from WWII, rebuilding Europe and Jewish/German expertise from Europe.

Economics of the Nihilist Noughties

Now the war in Iraq is actually providing massive transfer of wealth from the US public, especially the poor and middle class who pay most tax, to the private sector. The so-called military industrial complex are earning massive revenues, and executives receiving mind-boggling salaries. But where’s the productivity in broader terms?

Property market debt is at record highs. In Australia, house prices have gone up 200% in 2 years in the 2000s, and over a longer window have risen 400% in some cities. This is for the same asset. Although houses have now slumped except at the ‘high-end’.

Personally, I have seen various economic models, as used by banks and financial institutions. Some of the underlying deals are very complex, and based on logic that those who designed it can’t explain. The logic just ‘is’.

The logic seems to be that it will keep going up, because nobody remembers when it didn’t.

Further, all developed countries have transferred the means of production to China. China has become the factory of the world.

In fact, China and Japan hold the docket on massive amounts of the debt the USA owes. Australia also is deep in China, although manages to sell China a lot of resources.

And the UK is based on Iraq, and a strong EU, partly tied into the strength of China, Japan and Germany.

The troubling aspect of all this is the inexperience of the financial sector, and the inability of people to explain the complexity of the deals, of which the US Credit-Crunch is an example. It is effecting banks in Europe now.

Economic Growth is Productivity Growth

The fundamentals of the economic boom has been built on USA technology-led productivity increases in the 1990s. The Internet and PC led productivity revolution expanded into the 2000s.

In 2000s this has rubbed of on many other English-speaking countries, and some states within the broader European Union.

But the USA and UK have already had their gains. And Australia cannot achieve productivity improvements when it is running out of infrastructure, thanks to John Howard’s approach to economics.

What about Web 2.0?

But Web 2.0 isn’t necessarily the same national productivity boon. It’s incremental.

Web 2.0 will create some new business models. Web 2.0 is a useful tool, but a powerful social tool. It also favors some markets, and not others, in our analysis.

Web 2.0 is not as distinct and sizable a productivity leap as Web 1.0, PC, MS Office and the Internet. Mainframe to PC with internet was a massive productivity leap that underwrote the recent economic boom.

And the valuations of many US tech companies are now disconnected from the fundamentals, as they were in the dot-com era (which I predicted the end of one month prior).

Economic growth ultimately derives from relative productivity improvements. In a country this means improved productivity in those economic sectors within which it competes. And the USA, is not creating internal productivity gains largely due to the priorities of the current US government. Like Harding?

Where is that going to come from now?

The gains from technology are factored into the price of US, UK and Australia stocks. And the China boom is factored in. All the possible upsides are factored into prices.

But in my experience, the technology is not delivering other economic productivity gains in the USA and UK. A PC/Mac with Microsoft Office and an internet connection is really, good enough for an employee. iPods are not productivity tools to compare with the invention of the internet itself.

Web 2.0 will deliver societal change, it will deliver aspects of a better society, and other big outcomes. Web 2.0 will have some effect on productivity gains, but it has a more important role to play in other aspects of global business than mere economics.

But the reality is the US, UK, Australia, fundamentals don’t support the valuations. And nearly all assets are over-priced.

And whether it’s 2008, 2009, 2010 it’s a reversal. And due to the size of the delusion it’s likely to be a massive reversal.

There are still global short-term opportunities which we have identified, even in the face of an economic shock, but they are not in the USA, UK or Australia.

Take care

Christopher