24 December, 2008

December 24, 2008


A wad some power the giftie gie us

To see oursel’s as others see us.

Robert Burns

The BoE admits error, but shows no remorse.

In a BBC interview earlier this week, Sir John Gieve, Deputy Governor of the Bank of England, ad­mitted that he and his colleagues had comprehensively mis-analysed the economy in the years prior to the eruption of the financial crisis. He used weasel words, hoping probably to lessen his share of the blame, but his acknowledgement of overwhelming errors of judgment was clear enough; so too was his recognition of calamitous policy responses. The surprise was that he seemed not to think the in­competence worthy of wholesale resignations. Nor, apparently, did the representative of the serial misbehaver who was interviewing him.


No public servant, elected or otherwise, ever does.

These days, nobody in the public sector seems to be able to commit a misdemeanour gross enough to require him to stand down. High officers in the Metropolitan Police Force demonstrate the point. Mis­conduct there is no longer a check on advancement, more a spur to it. Ian Blair’s failings—in­ep­ti­tude, inefficiency, bias et al.—did nothing to inhibit his career. Doubtless Bob Quick hopes a similar litany of flaws might be similarly helpful.


Policemen, once exemplary, are now recidivist.

The latter, in an outburst of seething frustration, accused the Tory Party of corruption. Could he sub­stantiate the charge? No. He made it because he was embarrassed at having his wife’s car business publicised in a newspaper. Rightly so. People tend to be suspicious that an influential public servant might direct public business for private gain. To limit the embarrassment, it is ne­ces­sary to avoid en­tanglements as far as possible, and to be scrupulously transparent about those that cannot be avoided. Blair failed heroically; likewise, seemingly, Quick.


Bob Quick is another Ian Blair.

But the real problem is that the Assistant Commissioner has demonstrated a compelling lack of dis­cretion; he’s shown himself to be more oik than mandarin; more retarded Jude Goody than cerebral Sir Humphrey. Does he have any sort of future? Can somebody who has dug himself into such a hole continue to in­vestigate the Damian Green affair? Amazingly, Bob Quick seems to think so. A demonstration of the poor chap’s poor judgment! O tempora, o mores!


The Home Office, as bad as ever!

Nor does the Home Secretary come out of the mess smelling of roses. She says the matter is closed; that the policeman should be allowed to continue to do his job. Really? Is she comparably indulgent of other transgressors? No; she’s remorseless in pursuit of those merely suspected of terrorism, but tolerant of those demonstrably guilty of bias.


Clean out the rubbish; cut back the deadwood.

Should we, the public, be relaxed about declining standards in public service? Of course not. That way wholesale corruption lies. What’s needed is a clean sweep; in the Met as much as in the MPC; the dismissal of those who can’t, and their replacement by of those who can. By preference, senior policemen should be moderately intelligent, know something of the law, and be capable of containing their an­ger. The job description for central bankers is going to have to be similarly demanding: an above-average IQ and a rudimentary knowledge of economics; perhaps also a willingness occasional­ly (as in the old days) to have lunch with outsiders.


Economies, meanwhile, are grim; emergers worse than emerged.

The world economy, meanwhile, continues to deteriorate. And it’s not just the tired old has-been’s in Western Europe and Northern America that are finding things tough. So are the aspiring-to-be’s in Asia and elsewhere. Indeed, it is the emerging lot that looks set to fare worse than the emerged: high beta is not attractive in a bear market. Last week, China’s economics numbers crashed earthwards and raw material prices followed suit. Latin America, Africa and the oil-producing Middle East are already stretched and the tensions have only just begun. Canada and Australasia, though less depen­dent on commodities, will also be put through the ringer.


Britain’s retailers are surviving; manufacturers aren’t.

At home in Britain, the consumer is still fairly lively despite the dead-hand of the banker doing his best to stifle the market for credit. And the decision to devalue sterling has helped by attracting lots of European tourists. The bottom line, in any event, is that the retail sector is just about surviving the early stages of depression. What’s left of manufacturing is doing less well, however: competition in­tense and funds to finance modernisation non-existent.


Pensioners sacrificed again.

Pity most of all, though, the poor pensioner. Robbed by the Treasury and abused by the Regulator, he is expected nevertheless to suffer in silence. If Darling and Brown had money to disperse, it is the pen­sioner who should have been helped. He wasn’t! It was the loathsome banker who got all the goodies. How unfair!



17 December 2008

December 17, 2008

Real interest rates have risen alarmingly in recent months.

Official interest rates may have tumbled in nominal terms recent months, but head­line inflation has fal­len much more quickly still.   The details vary slightly from country to country, but everywhere the picture is broadly the same.  As a consequence, the real cost of credit has soared and the agony of bor­rowers intensified.

Unsurprisingly, activity is retreating.

In Britain in the fourth quarter of the year, for instance, the annualised rate of decline of consumer prices is likely to have been 5%.  Even for the Treasury, therefore, the real cost of borrowing may have been as high as 8%.  For the consumer or industrialist, it will have been extortionate:  between 15% and 25%!   Hardly sur­prising, there­fore, that sentiment has remained dull, that activity has re­mained subdued.

The authorities are powerless to prevent implosion. 

And there is little the authorities can do to ameliorate the situation.  Once inflation goes significantly negative, economies are condemned to financial austerity.  Successful demand manage­ment requires that such a situation not be allowed to arise.  Central bankers should have been alive to the dangers.  Sadly, they weren’t.  Their decisions to raise interest rates into the cyclical slow­down in 2007 and early 2008 were crass; on a par with those of the Fed in 1929/30, with the BoJ in 1989/90!

The process will be continued . . .

Might there be some relief in the second half of 2009 if, by then, commodity prices have stabilised?   Pos­sibly, but the danger is that moderating pay settlements will keep the negative momentum going.  The bargaining position of labour was hardly strong at the peak of the cycle in 2006.  Today, with unemployment soaring, and con­sumer prices retreating, it’s very weak.  The chances are, therefore, that wages will be under sub­stantial pressure in the forthcoming pay round.

. . . as pay settlements are squeezed.

Private sector employers will argue the need for competitiveness and their employees might, albeit reluctantly, concede the case for concessions.  In such circumstances, settlements next year could be very modest.  Unit labour costs may decline and partially compensate therefore for steadier com­mo­dity prices.  The bottom line is that countries will be locked into negative rates of in­fla­tion, not just for the immediate future, for a protracted period thereafter.

Devaluation helps.

Britain looks set to suffer less on this front that many other countries.  The BoE’s skilful depreciation of ster­ling in the last couple of months has been very helpful.  Who says that Governor King is not up to the job?   His virtuoso depiction of an out-of-touch central banker has been absolutely convincing.

But probably only temporarily.

But the currency depreciation is unlikely to be sustainable.  At some stage, flatteringly, other coun­tries will seek to copy the UK.  Indeed, within a couple of years, competitive devaluations may have become the norm.  Like­wise, possibly, competitive protectionism.

Pensioners, public sector excepted, will be squeezed.

Much of the pensions sector, meanwhile, will be devastated.   DC schemes will find themselves with inadequate funds; their retirees with inadequate incomes.  DB schemes, on the other hand, will fail because of their eccentric response (or lack of it) to negative inflation.  Most state that, in the event consumer prices retreating, there will be no reduction in benefits.  In other words, huge swathes of public sector retirees are headed for a real pay boost!   The un­con­sci­on­a­bly generous provision is set to become even more unconscionably generous.


The private sector will not be amused.

At a time when the economy is in crisis, when living standards elsewhere are being squeezed savage­ly, is it appropriate that one element, characterised by general fecklessness, be hugely rewarded?   Of course not.   How is the electorate likely to react to such a provision?   Angrily.  And how is the gov­ern­ment likely to res­pond to the anger?   Pusillanimously.


Brown, the architect of our disaster, will be blamed.

Politics, in other words, are going to become more fraught.  Brown’s honeymoon, in the early stages of the crisis, is coming to an end.  Increasingly, he’ll be seen, not at the man who’ll solve the coun­try’s prob­lems, but as the one who caused them.  He’ll retreat into a bunker mentality.  The rest of us will have to count the days until an election provides the possibility of deliverance.


Cometh the hour?

Will the alternates be any better?   Probably not.  Cameron and Osborne are very ambivalent about the public sector.  And Grayling positively supine about their pensions.  We have in the Tory Party lots of Heaths, when what’s needed is one Thatcher. 

Buy long gilts.

The single piece of good news is that security prices will bounce.  Gilts roaring ahead, and equi­ties advancing cautiously.  The only asset to continue to soften will be property.



10 December 2008

December 10, 2008

Brown’s misunderstanding of fiscal affairs ranks with Bush’s of military matters.

German politicians tend to think before they speak; rarely indulging in open criticism of counterparts elsewhere in the world. But that means that their censure, when it does occur, is all the more telling. Only two examples to the contrary come readily to mind: six years ago, George Bush’s foreign policy was assessed as ill-advised; last week, Gordon Brown’s fiscal policy was rated similarly.

German insults are rare but stinging.

That came as a bit of a shock to the Scot. He’d been labouring under the delusion that he’d saved the world; that, by transferring huge sums of money from one sector of the economy to another, he was producing a net benefit. He thought that something could be created from nothing: like a credulous child, he saw fiscal policy as a conjuror’s hat, capable of yielding unlimited numbers of fluffy rabbits.

They’re apt, though: Brown is making things worse not better.

Not so Peer Steinbrück. The German Finance Minister recognised (admittedly very belatedly) that the world economy was in a mess. He acknowledged that a severe downturn was unavoidable, but was anxious not to make matters worse by knee-jerk intervention. A mindless spending binge of the sort recommended by amateur prestidigitators would be counterproductive: involving politicians and bureaucrats, it would make business more expensive and less responsive.

Republican Senators agree: nobody wants auto-makers to behave like bankers.

The US Senate came, circuitously, to much the same conclusion. Legislators were reluctant to transfer taxpayers’ resources to the motor industry; its performance in the past having been unimpressive, and its prospects in the future uninspiring. Survival might be possible, but only if sacrifices were to be made by managers and workers. Let them do so: it shouldn’t be the rest of the community that financed executive jets and over-generous wages.

Will prudence be catching? Not in the UK!

Might this attitude begin to take hold in the UK? Not for a long time. The Government is more concerned with politics than economics, with voter perception than business reality. Doing something is thought to be better than doing nothing: no matter that the policy chosen might be counterproductive! Sadly, the Opposition concurs. It too is more concerned with poll ratings than logic. It too is indulgent about fiscal impropriety.

GDP is collapsing.

And how is the economy? Dreadful! The consensus, though continuously marking down its forecasts, is still substantially behind the curve. Until the autumn, it was only housing and finance that were in retreat. No longer. In the fourth quarter, the malaise became more general. GDP is probably plunging, therefore. In the US, EU and Japan, annualised declines may be running between 4% and 6%.

 And retail prices retreating.

Inflation, unsurprisingly, has gone negative. The process was initiated by falling commodity prices. But, in the months that lie ahead, moderating wages will become a significantly reinforcing factor. By year end, pay cuts will have become the norm in banking; they’ll be quite common in steel and motors. And by next spring, retail prices will not merely be seen to be falling, but will be thought likely to continue doing so for a protracted period.

Buy government bonds for capital gain.

There are obvious implications for Government securities. They’ll soar. At current yields, analysts anticipate only temporary respite on the inflation front. When they realise it’s to be lasting, yields will fall sharply: to 3% in countries with delinquent fiscal policies; to 1½% in those with responsible ones.

Equities for income.

And equities? They’ll probably also appreciate—though less exuberantly. Because labour will take the principal hit (via either wages or unemployment), profits will hold up moderately well. Ordinary shares will yield more than Treasuries and will be purchased by those looking for income. Exuberance is unlikely, but a significant recovery is not to be ruled out.

Be wary of pensions liabilities.

The pensions sector, however, will be in turmoil. Private DB schemes will find themselves in deep trouble and will presumably seek assistance from Governments. If money could be found to bail out guilty bankers, why not innocent pensioners?

Identify the principal culprit; and don’t let him wreak more havoc!

It’ll be argued that the problem was caused by the Prime Minister when, as Chancellor, he mounted a £5bns a year raid on private sector schemes. It’s incumbent on him, it’ll be suggested, to put matters right now. And while he is about it, he might deal with the travesty of the public sector’s deal. Why should those who create national wealth treated so much worse than those who fritter it away? Will the Tories help? Or look the other way? Given their recent behaviour, probably the latter!

3 December 2008

December 3, 2008

When policemen are perceived to be politically prejudiced, society is in trouble.

It’s not just the Home Office that’s unfit for purpose; it’s the public sector as a whole.  Depart­ments take it in turn to demonstrate their ineptitude.  Last week, it fell to the Metro­po­litan Po­lice to do so.  And with what virtuosity!   At a time when violent crime was soaring, when the Jean Charles de Menezes inquest was showing them in the worst possible light, senior officers chose to prosecute political ven­det­ta.  It’s difficult to understand the men­ta­lity of those in­volv­ed, but it looks as if the infection in­tro­duc­ed into the force by Sir Ian Blair lives on long after his departure. 


Nobody ever thought Speaker Martin unbiased.

What was the role of the Home Secretary in the affair?   What that of the Speaker?   Was nei­th­er told anything by the police?   Did neither ask anything?   If, like three little monkeys, they saw, heard and said nothing, there is an implication of incompetence; otherwise, of dupli­ci­ty.  In either case, resignation might be appropriate.


It’s all part of the deterioration in public sector standards.

There’s going to be more bad news coming on the public sector front.  Banks were bad enough before the injection of taxpayers’ money; they’ll be much worse afterwards.  In the past, there was a degree of market discipline; in future, there’ll be none.  De­cisions will have to be referred to bureaucrats and ministers.  Accordingly, the potential for cor­ruption will be enor­mous:  loans being grant­ed on the basis of political correctness rather than financial viability.  And, making matters worse, at the cen­tre of the mess, the serial misbehaver, Peter Man­del­son!


Banks will be dragged even further down, therefore.

What a terrible mistake it was to launch the bank rescue!   How much better it would have been to allow the delinquents to depart the scene; transferring their resources to those more capable of em­ploying them productively.  The consequence of the government’s standing in the way of the market, of its encouraging resource misallocation, will be costly:  economics re­cov­ery slow­er; demand less vig­or­ous. 


Public spending needs to be reduced, not increased!

What the authorities should have done, if they’d wanted to improve the prospects for the eco­no­my, is constrain the public sector.  Swathes of Civil Servants and Local Authority workers should have been dis­miss­ed; Government Advisers instructed to get proper jobs; Bank of Eng­land economists re­train­ed; and, most importantly of all, the retirement age for this pampered sector raised to 75. 


It’s much the same in the US.

In the States, the problems are comparable.  Bailing out the banks has led to other inadequate companies demanding similar assistance.  Currently, it is the car makers, next week it may be law­yers or restaurateurs.  And which taxpayer supplies the wherewithal?   The wage earner!   Hardly surpris­ing, therefore, that consumption is weak.


Depression is louring.

And it’s going to get weaker.  Thus far, we’ve had lay-offs in the banking and construction sec­tors, but resilience elsewhere.  In the months ahead, that’ll change.  All the indications are that joblessness will surge.  In that event, house prices, already in retreat by virtue of banking mal­practice, will quicken their descent as a consequence of repossessions. 


It’s going to be even worse in Europe.

In Europe, things have been relatively calm in recent weeks.  But there’s not much chance of that lasting.  Activity is poised to fall exceedingly sharply.  When it does so, politics will be­come fraught.  And the ECB, arguably the least competent of the world’s central banks, will find life tricky.


The silver lining is the likely removal of Commissarial Despots.

How will it balance the requirement for monetary easing and devaluation from some coun­tries with demands for continued vigilance and austerity from others?   Compromise is impossible; polarisation inevitable.  It’ll probably mean the end of the single currency, possibly of the EU as a whole.  So the picture isn’t wholly bad.


Asia is vulnerable to protectionism.

Asia, home of the world’s most efficient economies, might also suffer severely.  If the US and EU should resort to pro­tec­tion­ism, competitiveness will be of no avail.  In the thirties, it was the best economies that suffered most.  And a similar pattern should not be discounted now.  That politicians keep stressing their commitment to free trade is, therefore, a little worrying.  Sanc­ti­monious denials of their intention to engage in the manoeuvre often precede a U-turn.


Gilts for the immediate future; equities for later.

And how will the markets behave?   Diversely.  Government bonds have taken a long time to acknowledge the environment in which they’re operating.  But they seem, in recent weeks, to have worked things out.  Long dated issues are up 25% already and may rise another 50% be­fore next summer.  Equities, by contrast, are unloved:  good value, and likely to stay so.



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