Out of the Frying Pan….

January 31, 2009

The Icelandic Government, desperate to contain the financial chaos into which its predecessor had delivered the country, is reported to be close to applying for membership of the Emu!   Sure­ly things can’t be that bad.  To want to get out of the current mess is understandable.  But to opt for a policy that risks making matters worse is daft.

Reykjavik should recall that European Monetary Union has wrought devastation throughout most of its member States.  Formidable economies ten years ago, they are now shambolic:  growth having gone from brisk to pedestrian; pricing from competitive to uncompetitive; technology from cutting edge to trailing edge.  It’s not even as if the region has stayed financially orthodox.  Germany might be substantially unborrowed, its external accounts in surplus, but Spain and Portugal, Greece and Ire­land are not:  they’re in as big a mess as Iceland.  Does anybody suppose that the balm that didn’t work for the EZ’s outliers would nevertheless have done so for Iceland?

Or is it that the country thinks that Europe’s small fry, so long as they are members of the Club, will be bailed out by the big boys?   It’s a bit of a gamble, though.  What if a new country were to join, to surrender its democratic right to make decisions, to lay supine before the Brussels Beast, only to find that there were no hand-outs on offer?   What a misjudgement?   What future for such a Government?


30 January 2009

January 30, 2009


The art of progress is to preserve order amid change,

and change amid order.

Alfred North Whitehead


The economics news is grim.

Last week brought more bad news for the British economy:  bankruptcies surging and re­dun­dancies soaring.  It wasn’t banks that were failing, though.  It was shops and factories.  Hardly sur­prising, of course:  there had been a huge transfer of resources from the latter to the for­mer.  The one was being in­dulg­ed, the other scourged. 

Though not for bankers.

The general public was unnerved.  Support for the government tumbled.  In an opinion sur­vey, a majority voiced doubts about the advisability of the bank bail-out programme; a large mino­ri­ty thought it had made matters worse.   Everybody was horrified by the revelation that ex­ecu­tives in failed banks had paid themselves bonuses financed by the taxpayer.

It’s politicians who are taking most blame.

In Iceland, in somewhat similar circumstances, the government had eventually fallen.  The scale of the collapse, starting in the financial sector and spreading later to the rest of the economy, had been over­whelm­ing.  Minis­ters were blamed for the problem and, though they resisted to the last, had fi­nally to submit to the judgment of the people.

Gordon Brown must be worried.

Might the same fate befall Gordon Brown’s administration?   Yes, but probably not in the im­medi­ate future.  The Opposition sees no political advantage in ousting the incumbents in the short term.  Better that they be associated for as long as possible with economics failure.  When the alternates finally assume office, a year or so hence, they’ll look all the better by comparison.

The IMF might cheer him up, though.

What, meanwhile, was anybody to make of the IMF’s latest musings?   Its forecast that Britain’s re­cession would be the “worst in the west” was splashed over the headlines.  Doubtless the revelation had a tem­porarily negative impact on sentiment, but, given the Fund’s track record in these matters, it might be thought more a matter for comfort than distress. 

The Fund is a useful counter-indicator.

Like most forecasting organisations, the Fund waits until something has happened before saying it’s going to.  Three months ago, it barely foresaw a problem; twelve months ago, it was fret­ting not about recession, but inflation!   Hopeless.  Another taxpayer financed waste of space.  Let’s hope that in the more difficult times that lie ahead, its budget will be eliminated.   

Are equities stabilising?

Securities markets are very volatile still, but generally trendless.  Is it possible that the base for a rally is now being built?   Yes.  Although many companies will fail and others post disappointing results, the chances are that most will generate enough income to justify current share prices.  The safety of the government bond might gra­du­ally be sur­rendered therefore for the reward of the equity.

Shades of the thirties?

It’s what happened in the thirties.  Though there was no significant recovery in the economy, the securities markets did improve.  The collapse in equity valuations had been fast and furious, but it ended early in 1933.  Thereafter, real returns (boosted by generous dividends and negative infla­tion) rose impressively. 

What’s to do about pensions?

Something of the same sort is going to be necessary to bail out pension schemes.  Their current de­fi­cits are huge.  Raising the pen­sionable age, especially for the public sector, will help.  So will eli­minating the DB model.  But neither will be sufficient.   Nor will it be sensible to ask work­ers, their incomes squeezed severely, to in­crease savings. 

Rising corporate profits will help.

Instead, it has to be higher investment income that, almost unseen, deals with the pensions black hole.  If corporate profitability rises sufficiently, if dividends grow strongly in real terms, it’s pos­sible that, five or ten years hence, so long as the regulators have contained their enthusiasm for ex­pensive nonsenses, there may be light at the end of the tunnel. 

The “world order” is in flux.

Over this period, the world’s political and financial “who’s who” is going to be changed beyond recog­nition.  No elected government will survive the verdict of the people.  And quite a few un­elected ones will also fall by the wayside.  Bush has gone already; others will shortly follow. 

The old passing the baton to the young.

The old investment banks have all but disappeared—no longer trusted.  They’ll be replaced by names not yet dreamt of.  There’s a similar fate awaiting most commercial banks.  They’re all tarnished in the public eye:  some thought to be merely in­com­pe­tent; others duplicitous.  They’ll suffer a slow death, strangled by public intervention. 

But who are the latter?  

Where will the world’s new centre of gravity lie?   Probably in Asia.  But not necessarily.  In peri­ods of austerity, political ructions are sometimes sufficient to disturb what had previously been thought to be economics imperatives!



Salmond gets his timing wrong

January 29, 2009

Financial affairs in Scotland are proving tricky.  The Nationalists and their allies cannot persuade Parliament to pass the 2009 Budget.  What will they do?  Call for new elections or try to work with last year’s package.

Neither option is attractive.  The latter would open them to the accusation that they are all talk and no action. The former would risk their being dismissed.

Six months ago, they might have relished a new poll.  Returned with an increased majority (as they would have been), they could have pressed for full independence (enthusiastically supported by most of the English). No longer.

The failure of the Scottish banks and the collapse of the oil price mean that the country faces penury.  The Scots know it.  They’ll vote for Union in preference to Poverty.  In an election in the next few months, Labour would become the largest party again and the Conservatives might also do fairly well.

The northern burden will not be shed for a while longer, therefore.  Curses!


Aegrescit medendo

January 27, 2009

The BBC claims that it can’t screen the Gaza appeal.  To do so, it says, would set at risk its reputation for impartiality.  Really?   What reputation?

Surely the executives there must realise that, by not screening it, it also opens itself to the accusation of bias.  It’s the classic dilemma:  damned if you do and damned if you don’t.  And the solution is the classic one too:  faced with a difficult choice, opt for the lesser of the two evils.

Presumably that’s what the BBC’s Fat Controller has done.  He’s thought things through, and his judgment is that harm is minimised by doing nothing.  The man should apply for a post in Gordon Brown’s Cabinet!


It’s the bankers what gets the pleasure . . .

January 27, 2009

Over the weekend, Steelmaker Corus announced 3,500 job losses, 2,500 of them in the UK.  Was that a surprise?   Of course not.  It was the inevitable consequence of official policy.  The stated objective might have been economics stimulus, but the genuine consequence was the enrichment bank­ers and impoverishment of non-bankers.

The surprise is only that any Government should wish to behave so perversely:  why take from the poor to give to the rich?  why punish the innocent and reward the guilty?   In earlier years, such a proposal would have caused Parliamentary outrage.  Sadly, no longer.  Members seem to be too interested in collecting their own expenses (and fees) to bother with constituents’ hardships.

The steel maker will no doubt ask the Treasury for help.  Just as the car makers did.  But who will pay up?   Who can afford to?   Two categories only:  bankers and bureaucrats.  Let them be squeezed.  Let their pips squeak.

Fat chance.  They’re the only groups that support Brown.  He daren’t abandon them.  He will stay in alliance with them until election day, hoping that something will turn up!   Though the rest of us—industrialists, retailers, consumers and pensioners—fall like flies, there’ll be no respite.

Public Sector Misbehaviour

January 26, 2009

There’s a Greek proverb that says it’s prudent to secure a private income before practising virtue:  a recommendation to which New Labour’s appointed Lords appear enthusiastically to subscribe.  Cor­rup­tion in high places has been a feature of all societies at all times.  But things do seem to have got worse than normal in Britain in recent years.

The (alleged) misbehaviour of the Peers is only the latest example of a phenomenon that runs the length and breadth of the public sector.  Westminster and Whitehall are bad, but Local Au­tho­ri­ties, Police and Quangos are probably worse.  Is there a solution?   Not in the short term!   The bag guys have to be weeded out and replaced by good ones.  But since there are so many of the former, so few of the lat­ter, amelioration may take decades rather than years.  The Blairs have a lot for which to answer!

One of the obvious corollaries of bureaucratic and legislative sleaze is that it’s not possible to trust those who are appointed to administer public spending.  Since late last year, the Government has au­thorised huge disbursements in an attempt to boost economics activity.  But there is a risk that much of the money will end up in the pockets of malefactors.

Bankers have already got their hands on some of the loot.  The dopey duo (Prime Minister Brown and Chancellor Darling) have been particularly spendthrift in bailing out failed Scot­tish banks.  But, while credit availability plumbs new lows, the rascally bankers who caused the problem in the first place have paid themselves huge bonuses!

Ministers may wring their hands and grind their teeth, but it’s obvious that they’re not com­pe­tent to supervise affairs.  They rushed into the purchase without having thought matters through; they had no exit stra­te­gy; and no way of monitoring the lunatics who were allowed to deploy the assets.  It’s Iraq revisited!

Not until after the next election is there any possibility of amelioration; not until then might the Au­gean Stables be cleansed.  But who’ll tackle so demanding a job?   Where in the current system find we find a new Heracles?   Not in Cameron; he’s too sympathetic to the serial misbehavers; there’s a risk he’s be­come inured to the stench.

23 January 2009

January 23, 2009

Nothing to look backward to with pride,

Nothing to look forward to with hope.

Robert Frost, referring to Bankers or Regulators?

The bail-out was a failure:  banks not saved; non-banks sacrificed.

It’s gradually dawning on a British public, still shell-shocked by the economy’s apparently sudden slide into re­ces­sion, that the au­tho­rities’ attempts to boost acti­vi­ty, far from improving the outlook, may actually have made it worse.  The huge fiscal transfer seems to have been a disaster:  not ren­der­ing banks viable, but sending swathes of non-banks into oblivion.  Shortly, the Govern­ment will have to decide whether to go on, or go back; trusting to their original judgment and committing more tax­payers’ money to the black hole, or pulling the plug and leaving matters to the markets.

Another of Brown’s misjudgements.

Almost certainly, they’ll press ahead.  To do otherwise would require them to admit they’d made a mis­take.  Im­possible!   And most of the Establishment will back them.  The Parliamentary Op­po­si­tion is clueless, and determined to stay so; the Press faffs around, but says nothing; the Economics frater­nity, scared it might draw attention to its forecasting failures, hides silently and pusil­la­ni­mously behind the Treasury’s skirts.

It ranks with his decision to sell the gold.

A re-run of the Charge of the Light Brigade?   The parallels are apt.  The only thing that might have saved the cavalry then was insurrection in the ranks; and likewise now.  Might Labour backbenchers, realising the game is up, call a halt to the madness?  

Will backbenchers, for their longer term advantage, throw him to the wolves?

Possibly, but more for reasons of politics than economics.  Party members will know they’re bound to lose the next election and, the more it’s delayed, the worse being the condition of the economy, the larg­er will be the Tory majority.  It’s the subsequent election that’s in play.  What’s important, from the perspective of the Labour strategist, is to get the Tories in office as soon as possible, and identified therefore with economics failure (not an impossible task given their stated policies).  To this end, young backbenchers would have to re­volt, demonstrate a lack of confidence in Brown, and precipi­tate a poll!  

No; they won’t be able to turn their backs on taxpayer handouts.

Dream on!   They won’t do so because they know that that way unemployment lies.  Nobody in the private sector will match the remuneration package they’ve voted for themselves (salary, expenses and pension).  And there’ll be too much competition (from their sometime) colleagues for cosy do-nothing Quan­go appointments.  Better, they’ll conclude, to spin out the Parliamentary scam for as long as possible.

Will the UK fare worse than others?   Probably not.

Their hope will be that, by comparison with the rest of the world, things will not seem so bad in the UK.  They may have a point.  Recent data from Asia and Europe have been horrific—industry suf­fer­ing more than services.  The Schadenfreude that used to characterise remarks from Brussels and Beijing, Frankfurt and Tokyo, is newly absent.  Low levels of consumer and public debt seem not to have immunised economies from depression.  High interest rates and strong currencies have made things worse.  There is genuine panic now in corridors of power all round the world. 

A tidal wave of liquidity is shortly to be created.

What’s to be done?   Quantitative easing is the new proposal.  Central banks will deliberately expand money supply by buying up corporate bonds, mortgages, possibly equities.  That’ll lift the valu­­a­tions of these assets and put extra li­qui­dity into the hands of banks and investors.  The hope is that if the procedure is conducted sufficiently boldly, sentiment in the private sec­tor will rally and its spending pick up.

It may not help the economy but it will lift valuations.

The proposition has more going for it than the bank bail-out plan, but success isn’t assur­ed.  Human psy­cho­lo­gy is a funny thing.  Once people become truly depressed, official action may do more harm than good.  Quantitative easing might only persuade businessmen that the economy, worse than pre­viously imagined, ought to be avoided at all costs!

Even equities will appreciate.

From the perspective of the investor, though, the outlook is likely to get better rather than worse.  A company’s transition to low (or negative) growth is painful, but once achieved, is usually fairly com­fortable.  Cartels (often with the implicit approval of the authorities) make it so.  It is labour not ca­pi­tal that makes the greater sacrifice.  Set in the context of negligible inflation and very low (govern­ment) bond yields, equity prices will advance.  Initially the progress will be driven by excess liquidi­ty, but subsequently it’ll be justified by improving profitability. 

Small consolation for the pensioner.

Pension valuations will make hesitant advances.  Let’s hope that’ll be some consolation to the work­ers whose livelihoods will have been sacrificed to worthless bankers at the behest of delinquent poli­ticians.  Never again will thunder stentorian editorials.  Fat chance!  



Labour Market Returns

January 22, 2009

Employment is a key economics statistic.  It reflects both the recent past and the near future.  It is a lagged indicator of production (companies lay off workers a few months after their orders and sales decline), but also a leading indicator of consumption (people are obliged to tighten their belts after los­ing their jobs).

In this context, the US’s “initial jobless claims” published today are worryingly high.  They corro­bo­rate the steep decline in activity in the third and fourth quarters of last year, but presage also de­bility to come in consumption in the first half of this year. Putting some numbers on the data, it’s likely that GDP in the fourth quarter of 2008 was falling at an annual rate of 5%, and that the decline will be of the order of 6% in the first of 2009.  Activity will im­prove later in the year, but not necessarily by enough to return growth to zero.

Industry versus Finance

January 22, 2009

Korea’s fourth quarter GDP numbers corroborate the message delivered earlier by other Asian coun­tries:  that, since autumn, the recession has been focused on industry rather than finance.  Inexplicab­ly, though, the extent of the collapse is being ig­nored by politi­ci­ans and economists alike.  Is that be­cause they can’t do the sums, or because they don’t want to acknowledge the answers?

Taking the published data at face value, the an­nu­alised decline in industrial out­put between quarters three and four seems to have varied between 25% and 40%!   This is no ordinary crisis.  If re­trench­ment should continue for a few more quarters, there would be a degree of corporate collapse and per­sonal bank­ruptcy that’d make the thirties look trivial by comparison.

Thus far, reports from Europe’s industrial champion, Germany, have been less awful.  But for much longer?   If the im­balance be­tween supply and demand is as extreme as the Asian re­turns suggest, it can be only a matter of time before the FDR—technically advanced, but un­com­pe­ti­tively priced—also succumbs.

In Britain, meanwhile, there ought to be more questions directed at the authorities.  If things in in­dustry are much tougher than those in finance, why should resources be taken from the former and given to the latter?   Isn’t it time to help the needy rather than the greedy?

Sharing the Pain

January 22, 2009

In times of economics hardship, the potential for social and political disruption is increased.  To avoid revolution, a country should do its best to spread the pain fairly equitably.  Argentina, in the thirties, didn’t and, perhaps as a result, was changed radically; Japan, in the nine­ties, did and, ar­gu­ably as a consequence, was little altered.

And the UK now?   It’s not handling the situation too well.  Private sector workers are taking all the lumps, while their public sector counterparts (and bankers) are getting all the gravy.  The in­equity is heightened by the perception that the cause of the economics problem can be laid wholly at the door of the latter.  If Gordon Brown and the Treasury hadn’t been so spendthrift, the Bank of England so ill-informed, and commercial banks so greedy, the crisis would have been much less severe.

But who in the list of the reprobates has lost his job or suffered significant discomfort?   Amongst politicians and bureaucrats, nobody.  Amongst bankers, very few.  The private sector worker gets an extraordinarily bad deal:  he is not only asked to produce all the resources in the good times, but is additionally expected to go without them in the bad.

Understandably, there is anger.  It manifested itself last week in relation to MPs’ expenses.  And, today, even after the U-turn, there is seething discontent.  If the true extent of the wastage should become apparent in the months that lie ahead (and there’ll probably be rearguard action to muddy the waters), there’ll be demands for radical change.

To assuage the discontent, it may be necessary to see the odd banker take the drop.  Is it appropriate, it’ll be asked, for the Goodwins of this world, those who created such havoc for the rest of us, to continue to enjoy the spoils of their ill-gotten gains?   Ask the industrial worker newly laid off; ask the shop assistant recently made redundant.

If Brown were to execute the views of the people, he’d halve the salaries of MPs (reducing their number by a quarter); he’d cut the income of Civil Servants by 20% (reducing their numbers by three quarters, and lifting their retirement age to 70); and he’d incarcerate all the banks’ top executives!





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