Economics News : 25 June
June 25, 2010
Money is always around, but those in whose pockets it resides change from time to time.
Gertrude Stein—in Britain, in recent years, the public sector has had a good run; time for a change!
The coalition partners are now fiscal conservatives.
George Osborne’s first Budget was aimed principally at reducing Britain’s borrowing requirement. The argument that it was premature to do so was discounted. The Chancellor thought that a yawning deficit would do more to undermine activity than excessive spending to sustain it.
Not by inclination, but by fear of replicating Greece!
Greece had demonstrated the actual problem; Spain, Portugal and Ireland the potential risks. It was the intention of the new Government not to fall into trap that had ensnared them. The economy would be rebalanced over the course of the next Parliament. To this end, resources would be taken from the public sector (where they’d yield very little) and made available to the private sector (where they’d be likely to produce much more).
Public spending will be cut; public employees sacked.
It was not just a question of finance; it was one more importantly of labour. There’d be no more recruitment into the public sector; there’d be dismissals instead. Pay levels would be frozen for a while. And, belatedly, very belatedly, the scandalous indulgence of public sector pensions would be tackled.
Will there be riots in the streets? Very unlikely.
In Greece and Spain, such measures had provoked civil unrest. Would they do so in the UK? Probably not. In the one, democracy had been abandoned, in the other respected. In the EZ, changes in policy had been imposed by external dictat. In Britain, by internal consensus. In the former, the will of the national government had been ignored. In the latter, effected.
The only tax that’ll yield significant extra revenue is Vat.
On taxation, the Chancellor mostly kept things as they had been. He did, however, hike GCT sharply (a concession to left-leaning Libs) and he did increase VAT substantially (the lure of extra revenue being irresistible). He may come to regret the latter change. It seems to be relatively easy to defraud the authorities of the duty that’s owed to them. Accordingly, now that the yield from doing so is much higher than it used to be, it’s possible the problem’ll become more widespread.
Will the strategy work?
Will the Budget achieve its goals? Will the economy be rebalanced, and public finances concurrently improved? The jury is out. Changes in taxation and spending are of minor significance in relation to variations in the growth of GDP. It’s the latter the Chancellor has to worry about not the former.
Only if GDP holds up.
If growth should be reasonably brisk, tax collections would rise and benefits transfers subside. In such circumstances, the deficit would shrink regardless (almost) of any fiscal adjustments that had been made. Similarly, if the economy were to collapse (as Greece’s threatens to), the deficit would soar, and nothing the finance ministry had done, neither the spending cuts nor the tax hikes, would make much difference!
The Chancellor must eliminate impediments to growth.
In 1815, in the immediate aftermath of the Napoleonic wars, Britain’s fiscal deficit amounted to about 25% of its GDP. But the red ink disappeared rapidly in the next few years. And taxes weren’t raised; on the contrary, they were reduced. How so? Public spending was cut (as soldiers were demobilised) and business activity soared (as Continental ports, which Napoleon had closed to British shipping, were re-opened).
Not easily done when the banks are in trouble again.
So, what are the prospects for the economy in the next year or so? Not very good: the clearing banks are still in a parlous state, it transpires. In a report published last week, the BOE drew attention to their loan books. The huge transfusion of taxpayer support hadn’t resolved the problem: delinquency remained widespread. Too much money had gone into featherbedding executives, too little into rebuilding balance sheets.
Their capacity for misjudgment seems unlimited.
And the European crisis hasn’t helped. Predictably enough, the Scottish banks were found to have had huge exposure to all the worst risks. And the losses resulting from their incompetence have now been transferred to the English taxpayer. Brown and Darling have a lot for which to answer!
And is the US economy coming off the rails?
Perhaps most worryingly of all, Bernanke is fretting about the outlook for the US economy. He’s looked at recent numbers, he’s analysed business cycle data, and he’s concluded that the economy might revert to unsatisfactorily slow growth next year, very possibly dip back into recession. If so, there’d not be much he could do. Like Custer, when he’d run out of ammunition, the end would be as inglorious as it was inevitable.
If Bernanke’s worried, so ought we to be.
How will security valuations fare in conditions of widespread economics retrenchment? They may hold up surprisingly well. If pay settlements (especially public sector ones) take a disproportionate share of the pain, inflation will be low and profits satisfactory. Set that in the context of easy money and the indices are likely to advance.
Economics Views : 23 June
June 25, 2010
The State Pension is a Giant Ponzi Scheme
Bernard Madoff’s misbehavior was mild in comparison with that of most Finance Ministers’..
Few politicians will do today what they can put off until tomorrow.
Britain’s public sector pensions have been a problem for decades. Successive Governments have acknowledged the frailty privately, but not publicly. Each has recognised the need for reform, but none, until recently, has judged the political cost to be worth the fiscal benefit.
They rarely initiate reform; they merely respond to crises.
Why the change now? Greece’s humiliation! It’s had a salutary effect on finance ministers around the world. They’ve all become conservative bean-counters. And tacking the monstrous cost of pension provision is no longer being avoided, therefore.
Better late, though, than never.
The Lib-Cons in Britain are part of the process. They regard confrontation with public sector unions as a small price to pay for fiscal salvation. Indeed, a (minor) clash, demonstrating their determination to deal with budgetary excess, would be almost welcomed!
DB is dead; long live DC.
Exactly what they’ll propose isn’t clear. But the broad outlines of any new arrangement are likely to be determined more by arithmetic than negotiation. If costs are to be reduced in the short term and if they’re to stay manageable in the long term, it’s probably going to be necessary to abandon DB in favour of DC (except possibly for those on the lowest incomes). Additionally, the retirement age will have to rise sharply (arguably from 60 to 70!).
So many opportunities missed over such a long period!
If such measures had been adopted in the seventies or eighties, Britain’s performance in the interim would have been better and its prospects for the future enhanced. The budget today would be balanced and private sector pension schemes viable. It was one of the few misjudgments of Thatcher that she didn’t tackle the issue; one of the many of Blair and Brown.
There’s a parallel with Iraq and Afghanistan.
A second of the historic misjudgments of Britain’s politicians was also in the news last week. General Stanley McChrystal, Commander-in-Chief of US forces in Afghanistan, was sacked by Obama. Cameron took the opportunity to reaffirm his commitment to the war!!!
Cameron must think again.
Really? Did he think the conflict reduced the threat of terrorism? Did he think it mended fences and created consensus? Apparently, albeit incredibly, he did.
Before the economics environment becomes too gloomy.
The economics news, meanwhile, has continued to be fairly dull. There’s been growth in most places, but it’s been moderate rather than brisk, and decelerating rather than accelerating. The risk is that the trend will continue: the cycle turning sour in the second half of 2011; a new setback occurring in 2012.
Japan is temporarily all right.
Amongst the “old world” brigade, Japan’s figures haven’t been too bad: exports strong enough to offset sagging domestic sales. But will the former maintain their momentum? Will China, the principal market of Japanese goods, retain its appetite for them?
The US is keeping its head above water.
The US has wobbled a little: the data less strong than they were three months ago. And there’s a growing consensus that the economy’s problems aren’t over. Obama’s watching his poll ratings slip, fearful that he’ll lose control of congress in the coming elections.
But Europe isn’t!
Europe is much worse: growth pedestrian and finances mired. Understandably, tempers have been fraying. Each EU country thinks its prospects are being prejudiced by the selfishness of others! A crisis is building and its denouement is unlikely to be anodyne.
The Swiss Chamber of Commerce
June 23, 2010
The British-Swiss Chamber of Commerce – 11th June 2010, Geneva: Great British Breakfast with R. Nightingale
GREAT BRITISH BREAKFAST WITH THE GENEVA CHAPTER
Hotel Bristol, 11th June 2010
Guest of Honour: Roger Nightingale
Outspoken, animated, wise and full of fervour, Roger Nightingale regaled his audience with criticism of central bankers and censure of the outgoing British Government’s fiscal and regulatory strategy. His analysis of our economic problems and solutions for now and the future was brilliant.
He was of the view that it was usually financial impropriety which led central banks to do things which do not help the economy; and in the current economic mess we are in it would be an act “verging on lunacy” for central banks to raise interest rates.
Michael A. McKay
Chairman, Geneva Chapter
Economics News : 18 June
June 18, 2010
Supply-siders might be making a comeback.
Japan has tried many things to revive its economy. Finally, almost in desperation, it seems to be opting for supply side policies.
Prime Minister Kan would like to . . .
The last couple of decades have not been good ones for the Japanese economy. In comparison with the rest of the developed world, recessions have been quite severe and recoveries fairly mild. The Kan administration is worried that the syndrome might persist for some time to come. It frets that the immediate future will bring decelerating growth, and the more distant future a return to contraction.
. . . reverse many of the policies of his predecessors.
Its response has been to examine the potential for a supply-side experiment. It wants the economy to be more flexible—not stuck in sunset sectors but evolving into sunrise ones. It wants, in particular, to reverse the FDI trend. It would like to see companies, domestic and foreign, choosing Japan as the location for their investment.
He’d like to be radical in pursuing growth.
It’ll not be an easy task. But an obvious starting point is corporate taxation. In Japan, the impost is set at a rate that’s good deal higher than the world average, and about twice as high as that in the fastest growing parts of Asia. Tokyo’s Finance Ministry is looking at a plan to reverse the differential.
Aiming for higher FDI.
How would the fiscal books be balanced? Perhaps they wouldn’t have to be. It was suspected that Europeans were wrong to link yawning deficits with currency weakness, but, if they were right, so much the better. A softening yen would add to the attractions of investment in Japan.
Lower corporate taxes are to be coupled with less regulation.
If a trimming of the deficit were thought necessary, lower public spending would be the preferred option. Alternatively, higher indirect taxes might be levied on the consumer. There’d be no need to worry about inflation, of course. Retail prices were currently retreating; a reversal of the trend would be welcomed!
Britain’s Government is doing the opposite.
Sadly, this is not the philosophy being adopted by the Cameron-Clegg coalition in Britain. Though the country’s economics renaissance in the seventies and eighties was built on FDI, the Lib-Cons seem unimpressed. Instead, they’re following the discredited European prescription. They focus on deficit reduction and aren’t bothered if the higher taxation they implement discourages investment!
It intends to exacerbate taxation and intensify regulation.
Similarly, their attitude to regulation is counter-productive. They don’t fight the mindless strictures emanating from Brussels, but implement them faithfully. They seem not to have noticed, or not to care, that London is no longer a magnet for the finance sector. They equate the valuable parts of the City with the worthless ones: fund management with commercial banking!
The recent reaction to the Commission was worrying.
Last week, Cameron boasted that he’d scaled down the Commission’s demand to review the British Budget. Had he only moderated the requirement? Had he made any concession at all? Had he not rejected the proposal out of hand? Sadly, it looked as if the current British Prime Minister, like his predecessors, was no match for the Brussels Bureaucrat: the former once again outmanoeuvred by the latter!
Especially in the context of a duller global economy.
The economics news, meanwhile, has been mildly worrying. GDP growth is continuing, but probably slowing. Everywhere, it seems, sentiment is in retreat. Things were going wrong and there was no confidence in the ability of politicians to put them right.
The US is looking less good. Likewise the PRC.
In the States, for instance, there were further signs that the labour market was stalling. Jobless claims had stopped falling several weeks ago and might now be rising. If so, consumer spending would soon lose momentum (real pay rises being negligible and personal credit barely rising).
In which case, commodity producers . . .
In China too, there was a degree of anxiety. Beijing was reluctant to keep monetary conditions too expansive for fear of fuelling a house price bubble. And it was concerned about its fiscal policies. Higher public spending had temporarily lifted activity, but only temporarily. As the programmes came to an end, it was looking as if activity and employment would lose momentum. The forecasts for 2011 were only satisfactory; those for 2012 potentially unsatisfactory.
. . . might go pear-shaped.
Commodity producers were also nervous. Australia and Brazil had grown exuberantly in recent years, but problems were mounting. Despite high raw material prices, external deficits were large. If the former were to soften, the latter might go critical. Growth not just slowing, but crashing!
Stock price valuations are the one consolation.
There wasn’t much good news except, slightly ironically, in the securities markets. Credit in most countries was going to remain expansive for several years. And corporate profits would continue to hold up fairly well. That was a very satisfactory combination. So long as the politicians stayed away, the indices would creep ahead.
Despite all the help given to banks, they’re still a drag on activity!
June 16, 2010
You can’t establish security on borrowed money.
William J. H. Boetcker—who could ever have thought otherwise?
Our environment is troubled.
Is the world a safe place these days? Economies resilient, democracies se¬cure and finances strong? No, on the contrary, everything’s going hay¬wire. Activity seems to be stalling, governments to be ignoring their elec¬torates and investors to be trashing public sector debt.
Everything’s gone awry
It’s all happened rather suddenly. Until a few weeks ago, most people be¬liev¬ed conditions to be improving. That was the line from politicians, jour¬nalists and bankers. The recovery may be slow, they said, but it’ll be sure!
It was the prescient investors who first spotted the problems.
Investors initially concurred. They don’t any longer. Now, they fear several banks are in trouble again. If so, there’s not much the authorities will be able to do to calm nerves. Another bailout is not likely to be tried. And why not? Be¬cause investors don’t trust Government paper!
Initially in banks’ balance sheets and subsequently in governments’ finances.
Greece demonstrates the syndrome. If the country were to try to issue euro-denominated debt, it’d have to pay a premium interest rate. That’d add an additional burden to the already overstretched economy. It would collapse under the weight of its own costs. There’d be no escape!
Greece illustrates the phe¬no¬menon; fiscally, an example of the living dead.
In effect, therefore, Germany has to borrow on behalf of Greece. Can it af¬ford to do so? Barely. What it certainly can’t do is extend comparable gen¬erosity to other EuroZone countries. Even the Federal Republic’s debt is be¬ing scorned, therefore. Even its banks are being scrutinised.
Others seem to be queueing up to repeat the exercise.
In order to save themselves from financial humiliation, the Governments of many countries have hastened to cut their public spending. Those in Italy, Spain, Portugal and Ireland have sanctioned draconian austerity programmes. None, though, has thought it necessary to seek the prior approval of voters! All were elected on platforms diametrically opposed to those they’re now im¬plementing. Does this give rise to guilt? Or even self-doubt? Apparently not.
Will cuts in public spending prevent disaster?
What concerns the politicians is whether the measures will work. They want to know whether lower public spending will contain the risk of meltdown? Who knows? But it’s unlikely to do much in the short term.
Unlikely
The old problem was that the banks were nursing sizeable private sector loss¬es. The new one is that they’re having to deal additionally with sizeable pub¬lic sector ones! Can they handle both? Probably not.
And what if banks, like do¬mi¬noes, should start to tumble?
If small banks start to stumble, what will the authorities do? Try to save them, thereby setting at risk the commitment to lower borrowing? Or let them fail, thereby risking systemic collapse?
Cameron and Clegg might soon be posed the question.
It’s a dilemma that might shortly be presented to the British authorities. What will the dynamic duo in Westminster make of things? The country benefits from not having been in thrall to the euro in the past, but that may be small comfort to it in the future. Clegg finds the idea of currency en¬slavement attractive, and Cameron is ambivalent about it!
Romantics both, they’re clue- less about the real world.
The economics outlook is also very uncertain. In the past, it’s been financial services that have saved the country. But they’re unlikely to do so for a while. Fund managers, brokers, actuaries, accountants, etc. (the good bits of the City) are being tarred with the same brush as bankers (the bad bit). The Government seems determined to shoot itself, and the rest of us, in the foot!
Economics Views : 16 June
June 16, 2010
Where Law ends, Tyranny begins.
Pitt, the Elder. But politicians are usually the first to ignore the precept.
The Law may be a dopey ass . . .
It’s a feature of civilised societies that issues of guilt and innocence are decided by due process, not lynch mobs. Does the US qualify? Not recently. Its handling of the oil spillage in the Gulf of Mexico has been positively barbaric.
. . . but that’s preferable to a mad dog.
The case against BP has been prosecuted by politicians on the hustings, not lawyers in the courts. And who can condone the role of the media, baying for blood rather than justice? Television’s anchormen have modelled themselves, not on Plato’s philosopher-kings, but Robespierre’s tricoteuses!
Why is Obama barking?
Does the President, a law student first at Chicago and then Harvard, see nothing amiss? Or does he just not care? Does he think that, with mid-term elections approaching, natural justice can be sacrificed to political expediency? Probably. His poll ratings are not good; he risks being a one-term wonder. It’s essential, he thinks, to be seen to empathise with voters in the Gulf.
Political advantage is a two-edged sword.
The problem is that precedent is set by bad practice as much as by good. If one company can be destroyed by political venality, so can another. Should the circumstances surrounding the Bhopal disaster be resurrected, for instance? Should Dow Chemical, the owner of the Union Carbide inheritance, be pilloried by the Indian media? Bankrupted to boost the electoral standing of local politicians?
It could easily be turned against the US.
And what of Goldman Sachs? Its behaviour in Britain in 2007 might be deemed to have been worse than BP’s in the Gulf in 2010; its consequences graver; its executives’ motivations more culpable. Should British politicians pre-judge the issue? Should Surrey County Council demand $20 bns in an escrow account in advance of a trial? Hmph!
The economy, unperturbed, marches to a cyclical beat.
The economics news, meanwhile, is not good. The recovery, anaemic hitherto, seems now to be fading. Americans are scaling down their estimates for the current year and so, of course, are Europeans. The Japanese haven’t done so officially, but the decision by the BOJ to extend the monetary stimulus speaks volumes about expectations.
Activity everywhere is slowing.
In China too, supposedly an unstoppable behemoth, all is not as the authorities would have it. Last year’s fiscal stimulus was successful in bringing forward a number of projects and boosting the demand for labour. But the future is not so rosy. There had been a hope that activity by now would be self-sustaining: it isn’t.
Including China’s.
Can more projects be devised? The fiscal circle squared and pay claims stabilised? Possibly not. Indeed, there’s a risk that activity fall sharply, property valuations crash and unemployment soar. Beijing’s understandably worried.
And Britain’s.
Britain hasn’t been immune to the trend. The GDP numbers for last year will probably be lifted again, but the forecasts for the next few may be lowered. Chancellor Osborne is having to redo his sums. He’s said to be considering swingeing tax hikes to keep the deficit under control.
Will Osborne demonstrate imagination? Probably not.
Wrong decision! He should cut spending and taxation. He should aim for growth and ignore debt. Foreign direct investment is the key. If re-stimulated, the deficit will resolve itself; if not, it’ll deteriorate anyway. Security valuations will probably creep ahead in any event. But the advances would be more sustainable if the economy were sounder.
Economics News : 11 June
June 11, 2010
They say that risk goes hand in hand with opportunity,
let’s hope so.
There’s lots of the one. How much of the other?
American labour markets reported a hiccup last month.
Is the US economics recovery on track? Perhaps not. Last week’s labour market data disappointed. The headline number for May’s non-farm payrolls was strong enough, but most of the improvement was attributable to the Government’s hiring of temporary Census workers. Private sector recruitment was negligible.
White noise or the start of something significant?
Was this a blip or the start of a new trend? Nobody knew, but it was certainly ammunition for those predisposed to be bearish. The personal sector, they said, was in no condition to develop the recovery. Pay rises were modest, credit was over-extended and sentiment declining. Could the corporate sector sustain growth on its own? Certainly not. Capital spending would respond principally to sales: if the latter faltered, the former would decline.
Politicians there are panicking.
Incumbent politicians were quick to recognize the vulnerability of the economy and therefore of their own tenure. They sought to empathise with the consumer-voter. Obama, his poll ratings under pressure, demonstrated the phenomenon. His reaction to the oil spillage in the Gulf was more manufactured than genuine. He wanted to demonstrate solidarity with hard-pressed voters. Logic was the first casualty of his rantings; and BP the obvious target.
Obama more than most.
Likewise Iran. Did he really want to behave there as had his predecessor in Iraq and Afghanistan? Of course not. But he didn’t dare be sensible. He didn’t dare acknowledge the risks of an aggressive foreign policy. He was riding a tiger and afraid to dismount.
Europeans are no better.
Americans aren’t alone in pursuing policies long after it’s clear they’re not working. Europeans do so as well. The Commission, ECB and Strasbourg Parliament are all disasters. The policies that led to their creation ought to be reversed. Will they be? Ne me fais pas rigoler.
Their policy recommendations have been bizarre for years.
Europe isn’t pulling together; it’s pulling apart. The single currency and the constitution, foisted on unwilling peoples by sneaky bureaucrats, emphasise differences not similarities. Germans have no sympathy for delinquent members of the EuroZone; nor the latter for the former. As a bunch of free-trading but sovereign states, the EU might have prospered. In its current form, in thrall to dirigisme, it won’t.
The orient’s economy is currently strong, but will it last?
Asia is currently growing briskly. But it’s not certain that the trend will last. If the EU stays dull and the US loses momentum, Asia’s exports are bound to soften. That’ll hurt employment and probably dent consumption, therefore. What will be the overall impact on Asian economies? How high are the “betas” of their GDP’s? Possibly, like those of their stock prices, very high indeed!
The demand for raw materials may also prove ephemeral.
Commodity producers are likely to be at risk in these circumstances. Prices have weakened a little in recent weeks, and will probably continue to do so. But the chances of a rout seem to be low. They held up in 2007/8 and they likely do so again at the low point of the next cycle.
Britain is not well placed. The coalition inspires no confidence.
It’ll not be a pleasant environment in which Britain has to operate; its economics being tough and its politics strained. How will the Coalition fare? It may grow in stature as time goes by, but the initial indications aren’t encouraging. Cameron appears not to appreciate the magnitude of the task he’s set himself. His promise to maintain front-line services (whatever they are) demonstrates a regrettable degree of complacency. As for Clegg, he’s concerned only with changing Parliament’s voting rules. His objective, he argues, is fairness: it’ll be achieved, he continues self-servingly, if his Party, the least popular of the majors, is permanently in office!
Markets will be all right . . .
How will the securities markets fare? They’ll probably hold up fairly well. A lot will depend on the Central Banks, though. In most countries, their mandate refers only to inflation; in a few, to inflation and growth jointly. That being the case, it has to be presumed that interest rates will be kept low and credit availability expansive.
. . . so long as central bankers stay on-piste.
It’ll be only if the Bankers suffer one of their (admittedly recurring) bouts of delirium and neglect their mandates that investors would need to worry. If, for instance, as in 2006/7, they fret that credit is being mis-used and seek remedy through higher interest rates, we’ll all have to duck. The consequence might be depression!
Economics Views : 9 June
June 9, 2010
The extremes of Farce and Tragedy
have much in common.
Events in Greece illustrate the point.
Europe’s economy has been a disappointment for twenty years.
In a recent poll of global investors, 77% of respondents reported terminal disenchantment with Greece. The country, they said, would either default on its borrowings or leave the Euro bloc. It might do both.
It stumbles from crisis to crisis.
Why so low a figure? What did the other 23% expect? That the world economy would boom? That a newly competitive Greece would surge ahead and generate sufficient tax revenue to pay off the debts? Of course not.
Its policymakers never learning from past mistakes.
Even those in the 23% minority knew the Greek play was over (baissez le rideau, la farce est jouée). But they hadn’t yet brought themselves to acknowledge it. Their earlier analyses had been wrong; their earlier investment strategy ill-conceived. Accommodating themselves to the new reality would take some time.
It isn’t just Greece. It’s most of the rest as well.
And it wasn’t just Greece’s financial credibility that’d been wrecked. That of much of the rest of Europe was under review. All of the EZ’s members had agreed to the lunacy of the single currency. All had sacrificed productivity and competitiveness in the process. Hadn’t they realised they’d gone into a cul-de-sac? That, if things went wrong, they’d be trapped? That, with no way out, they’d be shot to pieces?
Fiscal orthodoxy won’t help in the near term.
Severe cuts in public expenditure won’t (in the short term) remedy the situation. They’ll serve only to publicise the seriousness of the problem. And, if they provoke labour disputes, output will be disrupted. Unit costs will rise! Tax collections fall!
But it may later on.
Longer term, though, lower public spending might be a boon. If currencies could be sensibly re-jigged in the meantime, the ECB disbanded, and the Commission disciplined, the outlook would be much improved. Four years hence, in summer 2014, with a new economics upturn beginning, it’s possible that Europe would prosper once again.
Britain is somewhat similarly placed.
Britain’s situation is not dissimilar. It already enjoys currency flexibility, but is as handicapped as the rest of Europe by the Commission’s mindless strictures. The country’s politics, moreover, are messy. The new coalition knows it has to cut public spending severely, but is moving very slowly. It’s more concerned with popularity than efficiency, with perception than reality.
Does the PM really want to know what people think of public spending?
Cameron says he can’t decide where to cut. The general public must make recommendations, he pleads. Really? Would he listen if they did? The people would almost certainly tell him, as a first priority, to stop the wars in the Middle East and, as a second, to reduce payments to the EU. At home, they’d like to see public sector pensions reviewed: defined benefits scrapped and retirement ages raised. At the social level, the people would doubtless focus on handouts to the feckless: take a job, they’d recommend, or take a cut.
They’d be a good deal more ruthless than him!
The forthcoming Budget will be revealing. But, significantly, the markets are already gloomy. Investors are guessing that taxes will be raised too much and spending cut too little. Equity valuations will drift, therefore; they’ll possibly fall steeply. It’s noted that the economics recovery here and overseas is faltering; that the financial crisis is not yet over. The danger is that both get a good deal worse before they get better!
Economics News : 4 June
June 4, 2010
Central Bankers should avoid exercising judgment at all times.
But on two occasions in particular: when they’ve analysed the issues and when they haven’t.
The crisis is not over.
Europe’s debt problem may be intensifying. Analysts are certainly worried about it. They fear the therapies implemented by Governments and Central Banks have been ineffective. They claim the negatives haven’t been remedied, just reallocated. Peter has been robbed to repay Paul (the one saved and the other impoverished), but the central objective hasn’t been achieved. The prospect of a return to economics equilibrium seems more distant than ever!
It may only be beginning.
When the crisis first broke, a couple of years ago, there was a presumption that the risks related only to commercial banks. There was no chance, it was thought, of contagion spreading to the rest of the economy. The authorities reacted accordingly.
It’s always a mistake to save banks.
They organised a huge bailout. They thought the rest of the community could afford to support the banks. And, to this end, they engineered an unconscionably large transfer of taxpayers’ funds. They did so in secret, of course, not bothering to get the approval of voters, nor even that of legislators.
It’s lunacy to save bad ones.
Their analysis was wrong. The commercial banks were a fairly unimportant part of the economy, and the rest of the community could ill-afford to bailout good guys, let alone delinquents. Sadly, those who made the mistakes—senior officials in Finance Ministries and Central Banks—are still there. The risk is that they’ll repeat their errors in the weeks and months that lie ahead.
Greece has lots of past, but not much future.
Greece’s fate is sealed. It cannot live within the EuroZone. Nobody will lend to it. The conjunction of an overvalued currency and penal interest rates ensures, moreover, that its economics activity will remain subdued. The country depends on others, principally Germany, for its daily bread.
And Ireland?
Is Ireland viable? The optimists point to its willingness to adapt. It has cut public spending sharply and has engineered sizeable reductions in pay rates. The country will shortly be competitive again, it is said. Net exports will boom and foreign direct investment soar.
It’s brave. But wise?
Perhaps. But there are a number of uncertainties. How long is it going to take for Ireland to recover its old competitiveness? Might it be three years, possibly four? In either event, the near future will be characterised by high real interest rates. To what extent, will they offset the buoyancy postulated elsewhere? Will the drag on consumption and investment be greater or smaller than the boost from the external sector?
The near term won’t be easy.
Who knows? But it’s not a done deal. Nor can it be presumed that the rest of the world returns to significant growth. Banks in the commodity producing world also have problems. Likewise a few Governments. They’ll not be serious problems so long as commodity prices stay high. But what if oil and metal and grain prices should tumble? Easy: there’d be several more Europes!
Likewise, possibly, Chindia.
Much the same thinking can be applied to China and India. They are fine while rapid growth lasts. But not if it doesn’t. If there should be a spate of protectionism, for instance, how well would either survive?
Protectionism is a slayer of heroes.
Look at Argentina in the thirties! It was the most efficient grain and beef producer in the world (it was in agriculture then what China is in manufacturing today). It enjoyed unending boom prior to protectionism; unending slump afterwards. The risks, in other words, are high.
Cut taxes, not spending.
What should be done? It may be that nothing is possible; it may be that it’s already too late. But, if the authorities were to want to maximise their chances of salvation, they’d act radically. They’d not worry too much about debt, but focus on growth. They’d not cut public spending in order to reduce bond sales, but to reduce taxation.
The Brits are going in the other direction!
Does any Government go along with the argument? Very few. In Washington, the proposition gets a partially sympathetic hearing. But, in London, it’s rejected out of hand. Cameron and Clegg are more concerned with “fairness” than “effectiveness.” They think that the poor man who loses his job will console himself with the thought that the rich man is paying more CGT (or avoiding it at a higher rate)!
Markets will respond.
There is a possibility of depression. We don’t know how high it is. But the authorities are not doing much to reduce the risk. Investors ought therefore to be a little cautious. Financial markets will be all right. But there’ll be phases of softness.
Economics Views : 2 June
June 3, 2010
Bureaucracy defends the status quo long after
the quo has lost its status.
Laurence J. Peter—that’s why power has to be retained in the hands of elected officials.
An improvement in the economy of the US has . . .
The economies of America and Europe have diverged sharply in the last year or so. As a result, the behaviour in the one appears almost the mirror image of that in the other. In the US, growth has been moderately brisk and inflation decelerating. In the EZ, growth negligibly slow, but inflation accelerating.
. . . coincided with a deterioration in that of the EZ.
In fiscal and monetary affairs, the differences have been even starker. They’ve verged on the satisfactory in the one case; plunged into the abysmal in the other. A virtuous circle operating in America; a vicious one in Europe.
America’s looking serene; Europe distressed.
In Washington, a conjunction of buoyant tax revenues and circumspect spending cuts has caused borrowing to fall encouragingly. Not so in Brussels. There, taxes have sagged to the extent that even draconian spending programmes have been insufficient to contain borrowing.
The dollar has been favoured; the euro spurned.
Investors have responded predictably: dumping the euro in favour of the dollar. That’s had an impact on monetary conditions, of course: liquidity plentiful in the one region and scarce in the other. In the States, credit has been readily available to both the public and the private sectors. In Europe, there’s been no confidence in the creditworthiness of either; there’s been minimal credit advanced, therefore.
Bernanke respected; Trichet disrespected.
When Bernanke makes a speech, the markets pay attention. When Trichet does so, they don’t. The man at the Fed thinks the economy is the major consideration, the currency a relatively minor one. He’s sometimes prepared to let the latter fall so as to lift the former. The man at the ECB sees things differently: currency as the principal issue, activity and employment as subsidiary ones. He’s usually willing to sacrifice the latter on the altar of the former.
The problem may be Europe’s excessive regulation.
How galling it must have been for Trichet when global investors treated his darling with disdain. But it’s not an unusual for foreign exchange dealers to develop a sense of irony! The strongest currencies are not those associated with the strictest central banks, but with the best economies. If output is efficient and competitive, the exchange rate rises; if sclerotic and over-regulated, it falls.
But there’ll be no respite on that front for some time to come.
To lift the euro, Trichet ought to recommend that 50% of the Brussels’ Establishment be dismissed; that at least 90% of the Commission’s regulation be annulled; that the Strasbourg Parliament be shuttered. But he’s not serious. He thinks the way forward is more compliance. He thinks that, if there were fewer hedge funds in London, his errors of judgment would be less obvious!
Trichet thinks there ought to be more, not less!
He seems also to support the proposition that unelected officials in Brussels and Frankfurt be given the power to veto the spending plans of elected national governments! Was that always the plan? To provoke a crisis so as to justify the elimination of democratic principles across the region? Political Union by dictat?
And the terrible twins in London? Will they save us? Hmph.
It’ll be interesting to see the reaction of Cameron and Clegg. Interesting as well to see if Clarke stays supportive of Europe in the face of the provocation. What of the stock markets, though? They’ll continue to soften; London being deemed a part of the Euro-mire.