Economics News : 30 July
July 30, 2010
The Economy is a Giant Mechanism,
But one operated by Pygmies.
Honoré de Balzac—most of the time it works very well, but not always!
The recovery is proving not to be self-reinforcing.
The global economy seemed to continue to lose momentum during the early summer. Earlier this week, it was Japan’s turn to issue disappointing numbers. June’s unemployment was reported to be up, and its industrial production down.
Japan reported a worrying deceleration this week.
That shouldn’t have been so much of a surprise. The world’s appetite for industrial goods hasn’t been strong for some time. And, recently, it might have been dulled even further by public sector austerity. Set that in the context of intense competition from other suppliers, and it was only to be expected that Japan would suffer a hiccup.
Its unemployment, for so long camouflaged, . . .
As for unemployment, it’s almost miraculous that the figure could have stayed so low for so long. It’s a tribute to the social conscience of Unions on the one hand, Employers on the other, that the limited supply of work has been divided so equitably amongst the labour force. Officially, the unemployment rate may be just 5%; but, effectively, it’s 25%. It’s covert, rather than overt; it’s hidden inside the company, rather than exposed at the labour exchange.
. . . may be revealing itself.
Hitherto, Japan has remained fairly competitive by requiring its workers to take annual pay cuts. That’s compensated for the excess payrolls. But it may no longer be doing so. Negative inflation has put upward pressure on the exchange rate. And, even worse, it’s lifted real interest rates.
If so, the denouement . . .
Domestic sales are falling and exports faltering; public outlays are being cut. Predictably, personal sentiment is poor. Those consumers with enough money to lift spending prefer to raise savings instead. The Government and Central Bank are worried. They see no end to the problem.
. . . will be uncomfortable.
They fret that a large company might eventually sack a third or more of its workforce. Doing so, it’s likely that consumer psychology would be shot to pieces. The bottom line: the economy in full-scale depression!
Europe is also struggling.
Much of Europe is similarly placed. Countries that are finding life in the EuroZone a little difficult at the moment are in a Catch 22 situation: damned if they stay, and damned if they don’t. Greece, for example, faces five years of grinding austerity (GDP falling at an annual rate of 3% per annum say) if it should try to accommodate its costs to the euro; and, if it should acknowledge reality and throw in the towel, painful devaluation (60% perhaps) accompanied by an inability to borrow in international debt markets for a generation!
So, albeit less so, is America
Nor is the US immune. Its numbers imply growth, but of a decelerating rather than an accelerating nature. Employment is barely rising; real wages likewise. Most people, reacting to the mistakes they believe they made in the past, are inclined to save rather than spend. Bernanke acknowledges that things aren’t going as planned. Obama acknowledges that he’ll be slaughtered in forthcoming congressional elections.
And China as well.
Nor, of course, is China. The anxiety is that momentum, already slowing, will continue to do so in the face of official attempts to invigorate demand. Rightly so. Beijing may have shot its bolt. It’s possible that renewed public spending and looser credit controls will fail to compensate for lack of appetite amongst consumers and businessmen.
By luck, not judgment, Britain may survive better than most.
By comparison, but only by comparison, Britain appears to be reasonably well placed. It’s free from the stifling effects of membership of the EZ (though not of those of the EU). And the economy is relatively lightly exposed to sectors currently suffering the most stressful competition (lower value added industrial goods). Relative to the old industrial brigade, its recent performance has been above median; it may continue to be so for a while.
Will the Prime Minister?
There’s always a downside, of course. Cameron said a number of peculiar things on his trip to the States in a previous week. And he did so again this week on his trip to India. He seems to want to flatter his hosts and not to care whom he insults in the process.
Did he really study politics and history?
To accuse Pakistan of “looking both ways” in relation to terrorism is a criticism that might more aptly be applied to Britain and America. It’s not politicians, but history, that decides which of those fighting the status quo are the good guys and which the bad. Prime Ministers, making snap judgments, are nearly always wrong.
Markets’ll do better than economies.
Stock markets are wobbling. It’s the disappointing economics news that’s unnerving investors. But it won’t last. Valuations will shortly rise again.
Global Demand Stumbles in Early Summer
July 29, 2010
From an article published in The Daily Post, 28 July 2010
In the last month, economies nearly everywhere have reported a perceptible loss of momentum. Statistics published as far apart as the US and the EZ, Japan and China, have been a little below par. Growth in late spring and early summer was still brisk, but it wasn’t, as the consensus had forecast, strengthening and broadening. It seemed, on the contrary, to be faltering and narrowing!
The exception was the UK. Its second quarter GDP number was decidedly upbeat—a 4½% per annum advance on that in the previous period. Why the discrepancy? And will it last? No one knows. It depends principally on what caused it?
Was it a consequence of sterling’s depreciation during 2009? A corollary of the country’s relatively small industrial sector? Or, more prosaically, a reflection of the data’s having been under-recorded in earlier periods? Only time will tell.
The most likely scenario, though, (the one conforming to standard business cycle chronology) is that activity continues to rise, but at progressively slower rates, until autumn 2011. That’s when the cycle is due to peak. Thereafter, things may get more difficult. There’ll be pain in 2012 and it’ll get worse in 2013.
Some degree of discomfort is inevitable. The balance sheets of the personal and public sectors have been severely distorted in recent years. An adjustment needs to be made. Spending has to be cut and saving raised. A minimum of 5% of GDP has to be reallocated, possibly as much as 8%. And it’ll not be done quickly. It’ll take a minimum of five years, possibly ten.
The Coalition Government has initiated the process. It hopes that a revival in the private sector will coincide with cuts in public sector appropriations. To this end, it’ll probably propose that the labour market become more flexible. Long term, that’d work wonders; short term, it’d be more likely to provoke unrest.
The irony is that the private corporate sector, banking excepted, is fairly well placed. Its net revenues are satisfactory, its spending contained and its borrowings low. Equities are probably undervalued, therefore. They’ll likely make good progress in the next twelve months.
Economics Views : 28 July
July 28, 2010
Advertising a bank’s service
is the alternative to improving it.
Will Rogers; if there were less of the one, there might be more of the other; applicable also to stress tests!
Brussels has always played mind games.
As a PR exercise, Europe’s “stress tests” did what they were designed to do. They gave the banks a (generally) clean bill of health. And they boosted stock market valuations. Excellent, said the Brussels’ spinners; the fundamentals are deemed to be satisfactory and sentiment to be improving!
Its priority isn’t the reality of banking security, . . .
Whether the rest of us should consequently sleep more easily in our beds is another matter. What would the tests have found if they’d been conducted a couple of years ago, immediately prior to the crisis? Would they have revealed the banks vulnerabilities? Or would they have missed them?
. . . but the perception of it.
That’s the crucial test. That’s what we need to know. And that’s what we’ve not been told. Why not? Because, very probably, the tests would have failed to spot the banks’ weaknesses!
Excessive regulation has curtailed credit.
The reality is that, in a liquidity squeeze, all financial operators become vulnerable. If banks were required to have reserves large enough to withstand moderately severe crises, they’d not be able to lend to their customers. They’d cease to be banks.
Banks are no longer fit for purpose.
That’s what’s happened in the last couple of years. Politicians and regulators, belatedly slamming shut the stable door, have created the worst of all worlds. A banking community that’s over-paid, but under-worked; staffed by asbo-bearing hooligans who’re expensive to police, but contribute nothing to society.
Even the politicians are noticing.
Vince Cable has noticed the anomaly. He drew attention to it last week, but didn’t ascribe it to the regulatory environment. And what’s his solution? To create more competition? To break up and sell off the delinquent Scottish banks (the ones that should never have been saved)?
But their cures, as usual, are worse than the disease!
No. He proposes linking the amounts bankers lend to the bonuses they’re paid! Is it any surprise that electoral support for the LibDems is plunging? His suggestion, if it were to be implemented, and if bankers were to act on it, would take us back to 2006—to loans being extended regardless of borrowers’ creditworthiness!
The American economy is slowing.
Meanwhile, on the global economics front, the numbers are mostly continuing to lose momentum. Last week, US consumer confidence was reported to have fallen again in July. It currently stands at its lowest level since February.
There, too, credit is the problem.
The problem in the States, as here, is that credit is declining. The Fed’s efforts notwithstanding, personal debt has fallen for eighteen out of the last twenty months. People are not prepared to borrow, nor banks to lend.
The party’s over; the tidying up’s begun.
Personal balance sheets are being recast. Ultimately, that’s healthy; but, immediately, it’s debilitating. So how long will the adjustment take? A couple of years, at least; five, more likely; ten, possibly.
No country will buck the trend.
And it’s a phenomenon that’ll affect the whole world. China won’t be immune. Nor will the commodity producers. On the contrary, high beta is a double-edged sword: outperformance in booms is matched by underperformance in busts.
Equity valuations might nevertheless advance.
Security valuations, though, will probably continue to advance. Interest rates will be kept low and investor liquidity plentiful. Set in the context of profits that bulge as wages are squeezed, equity valuations can be expected to climb. A year hence, the indices may well have moved into all time highs!
Economics News : 23 July
July 23, 2010
Fate punishes those displaying contempt for authority;
it does so by making an authority of them as well.
Albert Einstein: it happened to him, to Galileo and Newton; it might happen also to Hungary’s Prime Minister.
The little boy who cried “wolf” when there was no danger . . .
Those who are economical with the truth often gain a short-term advantage, but usually sustain a longer-term disadvantage. Their credibility is easily destroyed, but not easily rebuilt. The Blairs and Mandelsons and Campbells demonstrate the phenomenon. These days, even if they were to be honest, they’d not be believed.
. . . wasn’t believed when there was.
The European Commission has a similar problem. For years, it disdained public opinion, bullying elected Governments and rigging referendums. It won all of its skirmishes, but, in doing so, may have set itself up to lose the war. Suddenly, it needs credibility.
The EU has much the same problem.
It’s about to release the results of the “stress tests” conducted on member banks. It worries that, if Europe’s economy isn’t to slip back into recession, investors and depositors must have confidence in the financial system. To that end, it’s important that the people trust the Commission to have conducted the tests honestly and rigorously. Hmph!
It wants people to trust it now . . .
It’s a lose-lose situation. If too many banks “fail” the test, it’ll be thought that Europe is doomed, and confidence will evaporate. If too many “pass,” it’ll be claimed that the tests lacked rigour, and confidence will evaporate. Catch 22!
. . . despite its having previously abused their trust.
Characteristically, the Commission has been secretive about the details of the tests. It hasn’t told analysts the rationale on which they’re based. But it’s likely that the emphasis will have been on balance sheet considerations. That’s not unimportant. Economics growth, however, is more important still.
The “stress test” may be ill-conceived: economics vitality being more important than balance sheet rectitude.
The irony is that the regulators might, by demanding banking “prudence” that undermines growth, weaken the system rather than strengthen it. It may be no coincidence that, when the crisis struck, activity in Europe suffered more than that elsewhere in the world. The fact that its consumers had not over-borrowed was no consequence; the fact that its corporations were boringly well-financed was also irrelevant. The recession was steeper and the recovery shallower.
The Commission and ECB have an unimpressive track record.
Initially, the European authorities, full of Schadenfreude, claimed that their banks were safer than those overseas. Not so, apparently. Today, global anxieties centre on the EZ. And not just the usual suspects; Germany too is under the microscope. Its Landesbanken are said to be more at risk than most!
But who dares say so? Who’ll risk the auto-da-fe? Only Hungary!!!
Not many politicians, let alone central bankers, have been prepared to question the wisdom of the monetary authorities. In Europe, free thinking is frowned on, and heresy punished severely. Thus far, only a few brave souls have dared offer any defiance, most notably those in Hungary. They point out that the Emperor is naked, intellectually as well as sartorially! He has been for a long time. What he says doesn’t make any sense. It’ll be interesting to see how the country fares in the next few years. Probably rather well.
Thankfully, security valuations are rising again.
The markets meanwhile are recovering fairly strongly. They softened when it was first appreciated that economics activity might be slowing. But the down draught didn’t last. Investors gradually recovered their nerve. They recognised the positive side to the story: it implied that liquidity would be kept plentiful and interest rates low.
Profits are improving in the face of economics fragility.
Meanwhile, corporate profits have continued to rise fairly strongly. Although sales are sluggish, margins are strengthening. How come? Because the downwards pressure on wages is greater than that on prices (the bargaining position of the employee falling relative to that of the employer). It’s been most noticeable hitherto in the private sector, but it’s likely to be replicated soon, possibly in seismic proportions, in the public sector.
Fear and greed; hope and despair.
The bottom line, in any event, is low inflation and strengthening dividends: a combination that investors find actuarially attractive. Though paranoid about safety, they’re desperate for income. As a result, they switch back and forth between equities and government bonds as they reassess the relative impact of the two factors. Currently, they’re more impressed with profits than scared by banks.
They alternate. Currently, bulls are in charge.
The optimism won’t last forever, but it may see the indices back to their year highs. The danger period for the economy (and for the banks therefore) is not the immediate future, but 2012. That’s when activity will be in trouble and finances most stretched. It’s also when politicians can be expected to be at their most dangerous. In the interim, valuations are more likely to rise than fall.
Economics Views 21 July
July 23, 2010
Monetary failure should reinvigorate us;
inspiring renewed action, not depression.
Easily said: Central Bankers have learned nothing from the Fed’s failure in 1929, nor the BOJ’s in 1989. Will they ever?
Economics growth has been disappointing for several months.
The authorities—political and monetary—are worried. They’d expected 2009’s anaemic economics recovery to broaden and strengthen as 2010 progressed. It hasn’t. Recent data have been a little disappointing. Perhaps it’s nothing, just a statistical hiccup. Perhaps, on the other hand, it’s the start of something serious.
Another recession can’t be ruled out.
In the States, earlier this week, Fed Chairman Bernanke was deliberately circumspect. He didn’t say that the economy was heading for another downturn, but didn’t rule it out either. Instead, he spoke cryptically of uncertainties and ambiguities!
The Americans are frantic, and so are the Chinese.
In China, concurrently, there was still the pretence that everything was going to plan. Premier Wen implied that a “soft landing” was being successfully achieved. The slower pace of growth in the early summer, he said, was to be welcomed: it would allow the country to redeploy its resources more efficiently. A new surge in activity might be the result!!!
The Europeans, meanwhile, are almost inured to failure.
In Europe, Governor Trichet has stopped trying to fool investors. He no longer affects to believe that the EZ economy has been performing satisfactorily. Some parts of it are acknowledged already to be in recession; others are expected shortly to follow. For him, and his unelected collaborators in the Commission, survival constitutes success!
Might the pesky banks collapse again?
It’s the banks that are the focus of anxiety. Whether they flourish or flounder depends more, it’s being belatedly appreciated, on the health of their customers than on that of their balance sheets. That means that the bailout in 2008, the transfer of huge sums of money from the former to the latter, was a mistake. It did more harm than good.
If so, what would be done?
If there should be another recession, if delinquent banks were to teeter again, it’s unlikely the mistake would be repeated. So how would the authorities react? Is there anything they could do? Not a lot. They’d be restricted to quantitative easing (and asset liquidation).
In any event, the general public would be furious.
In such circumstances, Central Bankers would have a lot for which to answer. Incumbent Governments likewise. Both would be unpopular, but it’s the latter that would more easily dismissed. Not many would survive an election.
Incumbent Governments, where elected, would be dismissed.
In the States, Obama’s ratings have plunged. The Democrats are set to suffer severely in this year’s congressional polls. And, if the recession should occur on schedule in 2012, they’d be wiped out in the general election.
Obama in the States; Kan in Japan.
Japan’s newly elected Government has sustained an even faster fall from grace. Recent elections to the Upper House have dealt it a painful defeat. The DPJ-led coalition no longer commands a majority there. It’s a lame duck already; its days are probably numbered.
Merkel and Sarkozy in Europe.
It’s much the same in Europe. Merkel and Sarkozy are headed for an early bath. Their performance has been dire. But, irritatingly, they lack humility; let alone remedy. Shades of 1789? Time for another revolution?
Likewise Cameron in Britain.
Nor is Cameron immune. Thus far, it’s Clegg whose stock has taken the hit. But it’ll not last. The Tory is headed for a fall. In New York, he played his cards badly. The assertion that the Brits were the junior partner in the Second World War alliance may have been intended to flatter his hosts, but it’ll have infuriated his countrymen.
Asset markets, though, perhaps perversely, might rise.
And the markets? They’re vulnerable, but will probably hold up better than the economy. Or the politicians. Government bonds will be chosen for safety; equities for yield.
Economics News : 16 July
July 16, 2010
I am returning this paper to you because someone’s scrawled gibberish all over it and put your name at the top.
Is that what the Mandarin wrote on Vince Cable’s paper on how to deal with the cost of undergraduate fees?
It’s not just in the west that economies are slowing.
Noting the modest deceleration in China’s GDP in the last few months, global investors have grown rather nervous. They fear there’s worse to come. Probably rightly so. Beijing has landed itself in the classic excess-supply endgame. It’s Catch-22: tighter monetary policies risk an economics setback; looser ones, an asset bubble.
Is economics vitality going to be consistent with financial stability?
Other countries have faced similar dilemmas in the past. Washington had to deal with one in the late twenties, Tokyo with something comparable in the late eighties. Both vacillated for a while, but, in the end, plumped for austerity. They’d hoped to steer a middle course. Instead, they were bounced from one extreme to the other. The result: initially, a severe financial bubble; subsequently, a severe economics downturn!
Sadly, the two may find co-existence difficult.
Might China fare any better? If they had to choose, which of the outcomes would the authorities in Beijing try harder to avoid? Economics softness, almost certainly. The country doesn’t have a fully operational social security system. If activity were to stall and unemployment rise, there’d probably be political dissent, possibly regime change.
Near term, money will gush.
For a while, therefore, it’s likely that Beijing’s money taps will be opened wide again. It’s possible the process has already started. Perhaps it’s that which has been lifting asset prices in the last couple of weeks!
The long term’s trickier.
Could monetary excess hold economics depression indefinitely at bay? Nobody knows. Nobody’s tried to do so. China might, if it were to conduct the experiment now, provide the rest of us with valuable insights. The country might become a monetary affairs ground breaker!
And the absolute killer is protectionism.
But there’s another problem looming, and one that Beijing would be almost powerless to influence: protectionism. What if the US and EU, despairing of success on a level playing-field, should decide therefore to tilt it? China would suffer severely, but it’d pass its debility, albeit dampened a little, first to the commodity producers and then to the developed world. Within a couple of years, whatever the credit environment, activity would be retreating.
Meanwhile, back in the UK, the politics is uninspiring.
In Britain, the coalition partners have no time to think about such matters. They’re too busy with the trivial to consider the fundamental. They ponder the merits of alternative voting systems (the obscurer the better). And they devise cumbersome banking regulations (by preference, ones that are not just irrelevant, but unenforceable as well).
The LibDems are not used to thinking. It shows.
Their latest foray relates to the process by which students finance their sojourn at university. Business Secretary Cable has an avuncular turn of phrase which appeals to press and public alike. He steers a middle course between smarminess and aggressiveness. Excellent. But none of that should deafen us to the drivel he talks.
The Business Secretary’s ideas on university fees are slightly embarrassing.
He’s proposing a “graduate” tax. It sounds different, but it’s really only a repayable-loan by another name. In the one case, the funds would be collected by the Inland Revenue; in the other, at present, by the Student Loan Company. The latter certainly fails to recover all the monies it lends. So would the former.
Does he really want to use taxpayer funds to subsidise overseas economies?
What would happen, for instance, to the graduate who goes overseas to work? Would he still liable to pay? If so, how would it be enforced? If not, it’d amount to a subsidy paid to foreign economies! In either event, it’d be a mess.
He must go back to the drawing board.
While the student contribution is limited to £3,000 a year, while it’s merely a “top-up” to the sum paid by the taxpayer, the problem is containable. But, if the intention ultimately is to charge the student the full sum, about £25,000 a year, it will become much more pressing. There’ll be a need for a sensible solution, not another of Cable’s hare-brained schemes.
The problem is that there are too many second-rate universities.
If the man had thought things through, he’d have realised that the reason for there being so high a demand for undergraduate places is that they’re so underpriced. If the cost to the student were £75,000 plus interest, the demand would probably halve (only about 50% of graduates earn enough over their lifetime to justify the expense).
Thankfully, markets will probably rise in any event.
And the securities markets? They’ll keep rising for another year. Slow economics growth will squeeze wages and that’ll induce companies to keep inflation under control and central bankers to retain negligible interest rates. Set in the context of improving profits (look at recent results), that makes equities good value. Thus far, investors have been slow to take advantage. They won’t be forever.
Economics Views : 14 July
July 16, 2010
Those who can, do; those who can’t, teach.
Was it the case that the Chair of Ofsted used to teach in school, but that now she has no class?
Regulators profit from their own incompetence.
Regulatory agencies are an expensive indulgence; they cost a fortune but don’t prevent malpractice. The surprise is that society puts up with them. Gullibly, it accepts the argument that their failures are the consequence of insufficient resources. And it gives them more!
Quangos have been quick to follow suit.
The message isn’t lost on other elements of the public sector. Quangos might have come late to the party, but they’ve made up for it since. These days, they gorge voraciously on the body fiscal. They’ve learned that failure, so long as it’s spun appropriately, is rewarded rather than censured!
Ofsted demonstrates the phenomenon.
State education demonstrates the phenomenon. Nobody doubts that it’s in a mess. Nobody’s fooled by the dumbed-down examinations that produce superficially improving results. It’s recognised that teachers themselves are ill-educated. They’re in no position, therefore, to help the children entrusted to their care.
It’s as neanderthal today as was the NUM in the seventies.
Governments understand this, so do local authorities. But both refuse to act. The public sector knows how to look after its own! Zenna Atkins, Chairman of Ofsted, demonstrated the technique earlier this week. It was desirable, she claimed, that there be a proportion of bad teachers in schools: it helped prepare children for later life. How? By teaching them to cope with numbskulls! Regulators and Quangoists?
Margaret Thatcher was a match for the one. Michael Gove for the other?
How is Michael Gove going to react? He’s known to be looking for budgetary savings in his Department. So he’ll probably downsize Ofsted. If radical, he’ll abandon it altogether. He ought to. It’s failed its mandate. It’s switched from promoting the interests of the consumer (the child) to defending those of the supplier (the educationalist). It’s become a trades union.
The FSA is similarly counter-productive.
The same analysis applies to virtually every other quango and regulator. Who could defend the FSA, for instance? Did it spot the vulnerabilities of the banks before the recent crisis? Has it panned them for their abuses since? Did it suspect Nick Leeson of fraud in the nineties or Robert Maxwell in the eighties? Is it worth its budget? Of course not.
Its enforced demise might promote economics renaissance.
The public sector is riddled with non-jobs—possibly 5% of the economy’s total. If they were eliminated, the fiscal deficit would be halved. If real jobs were substituted in their place, the deficit would have disappeared by 2012. It’d not be impossible, in such circumstances, though not particularly likely either, that the economy enter upon a virtuous circle of tax cuts and growth.
More likely, though, there’ll be another recession in 2012.
The immediate future, however, is grim. The world’s major economies are slowing perceptibly and Britain’s is matching them. The numbers coming recently from America, Europe, Japan and China all hint at deceleration. There’s no immediate danger of double-dip, but the second half of next year looks set to be difficult.
Only security prices will advance.
Equities may hold up reasonably well, though. It’s wages that’ll take most of the strain. Downwards pressure on them will generate persistently low (possibly negative) inflation and that will justify persistently negligible interest rates. Set all this in the context of slightly stronger profits (themselves the consequence of the squeeze on wages), and investors may feel inclined to bid up valuations.
Economics News : 9 July
July 9, 2010
Nothing left on the balance sheet’s right-hand-side,
nor anything right on its left-hand-side.
That was the mess into which the banks had got themselves. It’s the mess out of which the rest of us are having to pay to extract them.
When in office, the previous Fed Chairman analysed data skilfully.
In a television interview last week, Alan Greenspan was asked his interpretation of the spate of soft economics data that had been published in June. The numbers appeared to reflect reality, he said. Activity in the States and many other parts of the world had slackened significantly in the early summer. But it wasn’t yet clear whether the deceleration would turn out to be ephemeral or protracted.
He still does. Much turns on how economies respond to the banking mess.
The big unknown was how economies would deal (or not deal) with the longer term implications of the banking failure. At the height of the crisis, fearing systemic collapse, the authorities had transferred huge sums of money to the banks. They’d done so by sleight of hand. It wasn’t real spending, they suggested, just a temporary loan. It wouldn’t ever have to be repaid; not at any rate by the taxpayer!
Paying down the debt is going to be a hard slog.
Untrue, of course. The bailiff has been knocking at the door for some time already. In Europe, in Greece most obviously, he’s demonstrated what he can do to those who can’t, or won’t, pay. And the reaction elsewhere? Panic! Countries that have been somewhat similarly reckless in the past have been keen to demonstrate extreme fiscal orthodoxy in the future. Over the next five years, if the schedules are to be believed, many countries will be seeking to cut public spending (and raise gross savings) by 5% of GDP.
The pace of activity will probably weaken.
And what effect will that have on their economies? Nobody’s certain, but the probabilities are generally negative. Perhaps the early effects of America’s extra saving were making themselves felt in the data published last month. Greenspan didn’t say that. But he did note that the customary route out of recession wasn’t being followed this time.
Is that what’s been holding back the US recently?
Though credit had been expansive and interest rates low, there was no exuberance in consumer spending. Production was growing only moderately, therefore; and so was employment. The self-reinforcing mechanism that usually transformed initially mild upturns into subsequently strong booms was being blocked. Every time the wage-earner got additional income, he had to use it to pay off his own debt (or, more likely, that of his bank).
Will it do something similar (or worse) in the UK?
In Britain, where the size of the banking bailout was bigger, the constraint on activity has been stronger. Likewise, the change in attitude of the Cameron-Clegg combo. Where previously they’d favoured tree-hugging indulgence, they now opt for bean-counting austerity.
Spending cuts in the demi-paradise look set to be sizeable.
They spent six months agonising about footlingly unimportant cuts that added up to an irrelevant £6bns. And then, almost overnight, slashed multiples of tens of billions of pounds from pensions and (maybe) Health. Higher Education is probably the next target; and rightly so.
Education, probably not excluded.
Half the country’s Universities (possibly two thirds) provide neither the taxpayer nor the graduate with value for money. The former pays an extortionate bill, but gets only what the sixth-former provided twenty years ago. The latter is saddled with £25,000 of debt and no job to help him pay it off. It was a vanity to open second-tier Universities in the past. It will be a kindness to put them out of their misery in the future.
The squeeze in the year after next is going to be particularly bad.
At the moment, the business cycle is still in its growth phase. It troughed at the end of 2008 and isn’t due to peak until autumn 2011. The two years thereafter might be very difficult. If, by then, public spending cuts are in full swing, but the private sector is still cautious, another downturn will be on the cards. It’ll not be a double-dip, so much as two recessions separated by a barely perceptible recovery.
But inflation and interest rates . . .
Inflation will be low, of course; possibly negative. Pay settlements will have been the driving force. In the public sector, in particular, there’ll be enforced flexibility: no rises for several years; possibly significant cuts! And commodity prices may also fall. Corroboratingly, the consensus forecaster, a usually reliable counter-indicator, is still looking for increases!
. . . will be negligible, and . . .
That’ll allow the authorities to keep interest rates at negligible levels. The only rationale for raising them will be evidence that commercial banks were getting up to their sub-prime mischief again. And, even then, there’ll be other methods of disciplining the miscreants.
…security valuations rising.
The markets? They’ll rise. The last few sessions demonstrate the potential. Valuations are low. Given half a chance, the indices will break into new ground.
Economics Views : 7 July
July 7, 2010
Public Relations is the process that transforms
the partially true into the wholly false.
Edgar Shoaff—credit isn’t provided well by commercial bankers, nor regulated adequately by central bankers! Quis ergo custodiet custodes?
Who’d have thought, just two years after financial meltdown, that . . .
How susceptible is public opinion to corporate PR? Nobody knows, but the banks are keen to find out. They’re trying to rehabilitate themselves, to improve their image, to draw a veil over their past misdemeanours. To this end, they’re running a set of saccharine-loaded television commercials. In environments of nauseating jollity and optimism, loan officers are presented as insightful women, not blundering men; their customers as willing partners, not as hapless victims.
. . . commercial bankers would dare show their faces in public . . .
Will the ploy work? Will history be rewritten? Banks forgiven? Possibly. In recent weeks, when the coalition has been announcing huge cuts in public spending, there’s been lots of criticism of politicians, but virtually none of banks. Nobody’s said that, but for the delinquents being bailed out a couple of years ago, there’d be sufficient money in the Exchequer now to maintain public spending at something approaching its prior levels.
. . . let alone pretend to be “good guys”?
Anger ought not to be levelled at the politicians who’ve had to balance the books, but at the creatures whose errors made the process necessary. Who precisely? The boards of directors of RBS and HBOS as initiators of the catastrophe; the court of directors of the B-of-E as intensifiers of it—the one handicapped by an insufficiency of intellect, the other by a surfeit of arrogance.
They oughtn’t to get away with it.
It was an explosive mixture. When ignited, it burned long and hot. The rest of us have been disfigured. So it’s a little irritating to see both sets of malefactors luxuriating still in taxpayer financed splendour. When belts everywhere else are being tightened, an element of contrition wouldn’t go amiss; a degree of physical and psychological discomfort wouldn’t be unwelcome.
Nor should Central Bankers escape censure.
Governor King could, for instance, make it clear at his next Press Conference that the decision to use taxpayer funds to bail out the Scottish banks was made by a tiny group of the B-of-E’s officials (none of them elected of course, none of them sackable by the public therefore). It was that decision, more than any of those of spendthrift Ministers running Health and Education and Transport, which necessitated recent public spending cuts. Can it be justified?
They are largely responsible for the fiscal mess.
It wouldn’t butter many parsnips to say, as he has done in private in the past, that the judgment was right because the economics and financial outlook would otherwise have been even worse. He’d be asked how he knew. He’d surely not answer that his forecasts told him so! That’d just provoke howls of derision.
Heads should roll, salaries be cut, pensions slashed.
The Bank’s forecasts aren’t worth the ink they’re written with. If they had been any good, the crisis might have been anticipated. But they weren’t and it wasn’t. So why trust the Governor’s analysis of the aftermath of an event when his assessment of its beforemath was so faulty?
They should share the consequences . . .
The economics are grim and are likely to stay so; miserable here and elsewhere. The next setback is due to occur in autumn 2011. It might be severe.
. . . of the mess they created.
Security markets have been weak, but probably unjustifiably so. Interest rates and inflation will stay low, corporate profits fairly strong: a favourable combination for valuations.
Economics News : 2 July
July 2, 2010
A pension takes resources from the worker,
and allocates them to the non-worker.
It’s an admirable principle, but the indulgence of the latter depends on the consent of the former. And, currently, in the public-private trade-off, there is none.
How are the mighty fallen.
Fifty years ago, the BBC was bold and imaginative. It was a technological colossus and an innovative broadcaster; it was a trusted reporter of news and a popular provider of entertainment. For decades, it set the standard by which others were judged.
Few used to be mightier than the BBC . . .
Why it lost its pre-eminence isn’t clear. But there’s no doubting the decline. Its technology stagnated and its programming languished. Its coverage of sports became less comprehensive and that of news less authoritative. By the beginning of the new millennium, it was unloved and unwatched.
. . . and few have fallen further.
What a surprise then that the corporation demonstrated last week a renewed ability to think logically and radically about an important issue. Which issue? Pensions provision. It had resolutely ignored the problem for decades. Though the actuarial deficit had soared, nobody fussed. The luvvies had always assumed that the licence fee would be raised by whatever was necessary to pay them their gilded superannuation benefits.
But a change may be in the offing.
What a shock it must have been when the BBC was told that the taxpayer could no longer be called on to bail it out. The total amount of support was to be set, and executives would have to choose how to use it. Not easy: more on one thing would mean less on another. What were to be its priorities?
It’s possible the iniquity of public sector pensions . . .
Unsurprisingly, those who looked at the numbers recommended that cuts occur in pensions benefits. Their cost was extortionate. Savings there would protect large numbers of employees and lots of inflated salaries as well.
. . . is about to be tackled.
The initial reaction from workers and unions was shocked, but muted. Outrage was affected rather than genuine. There was talk of industrial action, but it wasn’t taken seriously. Everybody knew that the tired old diet of ancient repeats and banal reality shows wouldn’t be missed. It was even possible that a blackout would be welcomed; not inconceivable that the corporation fade unnoticed into oblivion.
Not before time.
But the consequences of the BBC’s new pensions thinking will not be lost on the rest of the public sector. It may well set the standard that others, willingly or otherwise, follow. Excellent. Let a deal be done with civil servants and local authority workers, with doctors and teachers, police officers and firemen. Let logic finally prevail and costs become transparent.
The sums involved are huge.
The savings would be immense. Multiples of tens of billions! At a stroke, the fiscal environment would become manageable. The deficit wouldn’t just be halved during the life of the Parliament; it would, if economics growth were moderately satisfactory, be all but eliminated!
But there’s less good news on the economics front.
But will activity be satisfactory? There’s the rub. The indications are not looking good. Numbers released in Europe and America in recent weeks have been distinctly disappointing. The business cycle may already have entered a phase of moderating growth. If so, 2011 is likely to be a year of pedestrian progress, and 2012 one of potential decline.
The pesky banks are still a drag on activity.
Nobody knows how severe conditions might become. But there’s an anxiety that any downturn will be exacerbated by new banking failures. The countless billions of taxpayer funds given to delinquent lenders seem not to have restored them to health. They’re a sickly as ever. The EU is still the focus of the frailty. But it’s not a localised malaise. The sickness extends not just to the usual recidivists but to the previously blameless as well!
And storm clouds may be gathering over China!
Nor is China any longer being seen as immune to the problems afflicting the rest of the world. There are some who doubt the strength of the figures published in the last year or so. And others who fret that protectionist policies will devastate China’s economy in the next decade—much as Argentina’s was destroyed in the thirties!
Investors are downgrading their expectations.
It’s been the belated realisation of the risks that we’re running that has sent equity valuations tumbling in recent weeks (happy-clappy investors having previously taken their line from happy-clappy central bankers). The latter, now in retreat, are causing the former to panic—their positions being unwound in mid-flight.
But it may be less bad for equities than they fear.
It’s not all bad news, though. Profits may hold up fairly well (wages suffering disproportionately). And interest rates are likely to stay at negligible levels (the authorities realising they have to fight depression not inflation). The bottom line may be indices that continue to creep ahead, erratically but perhaps significantly.