February 28, 2009

The first estimate of fourth quarter GDP in the States always looked a little high.  Employment was reported to have slumped in the period, implying therefore a rapid advance in productivity.  That wasn’t impossible, but it was more likely that there would be a revision:  activity down, or jobs up.  In the event, it was GDP that was changed, largely because of a lower estimate of inventories.

Even so, America’s figures aren’t at all bad in comparison with those of Western Europe and Eastern Asia.  And it’ll probably continue thus.  The industrial giants will get slaughtered initially, and the commodity producers subsequently.  How the financial services specialists fit into this chronology isn’t known.  But the States, in 2009, will have less than usual to worry about from competition from Britain (where governmental incompetence and bank­ing misjudgement have worked a toxic brew of magic).

America’s cycle is due to hit bottom in mid-summer.  What’s less clear is how strong the subsequent recovery will be.  The fear is that it’ll be “mathematical,” rather than “substantive.”  There’ll be a slowing in the rate of decline, not a genuine advance!   If so, social pressures are going to get worse.   Obama will have to be another Roosevelt.  He won’t be able to cure the problem; his task will be to make it seem tolerable to the people!


Timeo duces et opiniones ferentes

February 27, 2009

Lloyds bank was viable before the authorities got hold of it.  If it hadn’t been “persuaded” to take over the awful HBOS, it would be impressively strong in comparison with its peers:  share price reasonably resilient; job prospects favourable.  In­stead, it is part of the walking dead; hopelessly handicapped by Scottish misjudgement on the one hand, the clammy grasp of the Treasury on the other.


How could the board of Lloyds have allowed itself to embark upon such a daft course of action?   Brown, Darling and Macpherson—the principal culprits—have demonstrated serial misjudgement over a protracted period.  Why didn’t the Chairman, knowing this, just say “No”?   Why didn’t the shareholders rebel?


Let’s hope the lesson’s been learned.  The next time the “terrible trio” has a cunning plan, let’s hope they are told what to do with it.  There may still be more than a year before the next election; it may seem even longer if the quality of economics and business nous stays so low!


Economics News : 27 February

February 27, 2009

Those whom the gods wish to destroy,

They first make mad.

They’re not doing too bad a job on Nuncle Gordon.



King Lear found his world turned upside down.

When a society rewards criminals and punishes victims, it endorses mis­behav­iour.  It shouldn’t be sur­prised if, in such circumstances, standards slip.  The UK demon­strates the phenomenon fairly elo­quently.  Fifty years ago, the country was enviably law-abiding; to­day, regrettably dysfunctional. 

The fault was his:  naiveté coupled with vanity.

The process may have started when legislators, with the best of intentions, tried to be even-handed in the treatment of abuser and abused, but it’s ended in chaos.  These days, the pendulum having swung so far, the guilty seem to be excused and the innocent blamed.  Ironically, it’s been MP’s, supposed­ly guar­dians of the unfortunate, who were complicit in the offense.  Honourable Members abuse tax­pay­ers with creative expenses claims and insult voters with cor­rupt legislative drafting; worst of all, Minis­ters violate combatants by winking at rendition!  

It caused him to see good in bad, and bad in good.

Hardly surprising that bankers, against so dubious a moral background in Westminster’s Corridors of Power, have been permitted to mistreat customers and shareholders.   Fi­nan­cial rape and pillage have gone uncriticised by regulator and press alike:  the cries of those on whom bankers have preyed un­heard, their losses unrecompensed.  But the really disgraceful aspect of the affair is that, when the ob­noxious crea­tures finally got themselves into trouble, the toady establishment (Govern­ment, Trea­s­ury, Bank of Eng­land, et alia) rushed to bail them out with yet more of their victims’ mon­ey!   Unconscionable!

A parallel with today’s Britain?

Last week, on the day that RBS announced the biggest loss in British corporate history, it emerged that ex-Chairman Goodwin, the man who’d caused virtually all of the damage, would retire on an annual pen­sion of £650,000!   And what did Government Ministers think?   Chancellor Darling is reported to have raised an eyebrow; Prime Minister Brown to have frowned a frown.  It was left to Governor King, peering lopsidedly through his spectacles, to deliver the coup de grace:  the Chief Ex­ecutive, he muttered, might consider his position.

Is Goodwin one of the hateful sisters?

Strong words!   Will Goodwin, shaking in his shoes, take the money or had it back to those from whom he liberated it?   Will he demonstrate remorse, contributing not just his pension but all his other assets?   Will he seek forgiveness from those who’ve lost so much at his hand?   Not willingly:  leopards don’t change their spots.  Once a beast, always a beast.

What will be his fate?

He’ll hope that the news headlines will shortly find some other issue on which to focus.  The public is fickle.  It will soon forget him once some other disaster comes to the fore.  And there’ll probably be many. 

Will he be forgotten in the misery of recession?

The world economy, for instance, is looking exceedingly grim.  Activity in the first quarter of 2009 may have been falling at an annual rate of 10%.  That’s going to lead to huge increases in unemploy­ment, presaging further losses in consumption, activity and jobs.  The downwards spiral is operating viciously, and there’ll be no relief until the autumn at the earliest.

Economies seem to be in transition . . .

Amazingly, given the incompetence of its authorities and the greed of its bankers, Britain seems to be doing less badly than much of the rest of the world.  Amongst the majors, it is industrial the gi­ants, Japan and Ger­many, that are suf­fering most acutely.  And, amongst the emergers, China is looking particularly vulnerable.

. . . the strong turned weak; the weak strong!

Everywhere, inflation is plunging.  In most countries, the annualised rate over the last three months is deeply negative.  Deflation is upon us.  And real interest rates have shot up to penal levels.  Little wonder that borrowings are falling and savings rising. 

Interest rates are to be cut to zero.  Too late!

Most central bankers now realise the danger.  It’s too late to correct the problem, of course, but most are wil­ling nevertheless to cut interest rates, and to do so aggressively.  Only Governor Trichet, de­termined to go down spectacularly with his ship, talks still of the need for caution!  of the risk of fu­ture inflation!   Only Commissioner Alumnia, the waves lapping at his feet, frets about European co-ordination!  thinks the priority is a need for stricter regulation!   Thank Goodness there’s a Channel between us and them.

Securities markets are stabilising, though.

The one good piece of news is that the securities markets are holding their own.  Government bonds are strong, and equities are building a base.  The pensions outlook, therefore, is a little less bad than it might have been.  What the bankers and the politicians have done to destroy people’s retirement incomes might be partially offset by improving markets!


Economics Viewpoints : 25 February

February 25, 2009

 To err is human, but it’s overdoing it,

when the eraser wears out ahead of the pencil.

Alexander Pope?   Referring to Brown, or Scots in general?


Bailing out RBS and HBOS was a huge mistake.  The economy was bad enough beforehand, but much worse afterwards:  transferring hundreds of billions of pounds of taxes from non-banks to banks did more harm to the former than good to the latter.  Instead of banks having to close down, it was retailers and manufac­turers that were made to suffer.  Instead of bankers being squeezed, it was consum­ers and pensioners that were impoverished.

Brown and Darling, King and Macpherson probably now appreciate the extent of their misjudg­ment.  But they daren’t reverse policy.  That would, they think, damage their image.  Some image!   Instead, they plough on:  pouring good money after bad. 

Is there any end in sight?   No.  Every month, the banker reveals more bad debts.  Every month, therefore, the taxpayer is required to cough up extra funds.   The bottom line is insufficient finance to support the rest of the economy.  Unsurprisingly, every month, another part of it crumbles. 

Last week, a van company went under because it couldn’t raise money.  A short while earlier, RTZ had to sell prime assets to the Chinese because of a failure to launch a rights issue.  This week, the Post Office found itself starved of cash (Lord Mandelson cheerfully recommending the disposal of its assets to his euro-chums).

For Labour, it isn’t just an economics nightmare; it’s a political one as well.  Newspapers are full of stories about bankers using taxpayers’ funds to finance their bonuses.  And the authorities seem to be powerless to stop the abuse.  They wag their fingers at the miscreants and claim they’ll end the practice, but to no great effect.  A couple of days later, it transpires that the bonuses are still to be paid—but in bonds rather than cash.  The mes­sage:  bankers are duplicitously creative; ministers incompetently gullible.

What everybody will admit in retrospect, though only a few said at the time, is that bad banks ought to be required to close.  It’s the Schumpeter thesis:  in order to sustain growth, deadwood has periodically to be cut back; suckers routinely discarded.  Protecting failures merely institutionalises ineffici­ency.  It’s what communist states did, and it’s what probably caused their demise.

The exact details of the liquidation procedure can (and should) be varied, but not the central principle.  The treatment of “depositors” and “open positions” might be generous or harsh (a matter of judgment), but the goal of closure has to be the ultimate objective.  If cli­ents and counterparties should wish to sue, they must be free to do so—the defendants in such actions being those who took the risks (share­holders and executives), not those ignorant of them (taxpayers)!  

Junior employees should be made redundant, their pensions rights largely intact.  But senior ones ought to be required to sacrifice their retirement incomes to creditors, and they ought to remain liable for restitution (no statute of limitations) for the rest of their lives!   As the Prime Minister said, “No rewards for failure.”  Not for Scottish bankers, nor Scottish politicians!

Trichet: I will restore confidence

February 21, 2009

In a speech to the European-American Press Club in Paris on Friday morning Jean-Claude Trichet, President of the ECB, said that restoring confidence was his top priority.

“Improving confidence is one of the necessary conditions to overcome present woes.  The European Central Bank and its Governing Council will do everything possible to preserve, enhance and strengthen confidence.  More than ever, our institution has to be an anchor of stability; an anchor of confidence, therefore, in these uncharted and turbulent waters. ”

Is the man serious?   Does he believe economics vitality is a function of confidence?   Is a respectable rate of progress in GDP merely a confidence trick?   Is the reality of price, design and quality unimportant in comparison with people’s perceptions of these things?   What drivel!

If Europe were to produce stuff that was competitively-priced, technologically-advanced and aesthetically-pleasing, sales would boom and confidence recover of its own accord.  The man should focus on the real world and let politicians (and other three-card-tricksters) deal with perceptions!

Or is he admitting that a genuine amelioration in the EZ’s economics circumstances is beyond him, and that he intends instead to try to make people happier with their miserable lot?   Quel défaitisme!

Reprehensible Rewards

February 20, 2009

The issue of bankers’ bonuses has been making headlines recently.  It’s one that infuriates the taxpaying general public, and rightly so.  Nobody objects to bonuses that reflect success, just to ones that disguise failure.  The reward is justified if the money has been earned by effort; it’s not if it’s been conned by subterfuge!

The government knows it’s handled the situation badly, but isn’t sure how to rectify the mistake.  It breathes fire and brimstone, but nobody is impressed.  In reality, Ministers acknowledge that, even if they were to opt for nationalisation, the wretched bankers would still find ways of paying themselves bonuses out of their ill-gotten subsidies.

The problem would not have occurred, of course, but for the ill-conceived rescue plan.  The Scottish banks would have quit the scene and their shareholders and creditors would have been responsible for installing a degree of discipline in pay packages.  The English banks, meanwhile, would have been so overwhelmed with job applications from their failed Northern counterparts they’d have been able to cut salaries, never mind bonuses!

The bail-out was for Brown a seminal moment.  The instant when multitudes of minor misjudgments were crystallised into a single major miscalculation.  The decision will come back time and again to haunt him.  And it’ll inhibit the performance of the British economy for at least ten years.


Economics News : 20 February

February 20, 2009

When a man blames others for his failures,
It's probably right also to credit them with his successes.
Howard Newton, referring to which Prime Minister? 




Bubbles are inflated slowly, but burst quickly. 

Ever thus.Financial crises have a long gestation period.  It takes a decade or more of easy credit and persistent asset price appreciation to grow a substantial problem.  It takes that long to convince even the most gullible investor that he is a genius, even the most credulous banker that he is a whizz-kid.  But, once the conditions have been met, human psychology being much the same everywhere, the phenomenon is universal:  initially, the euphoria of the bubble; subsequently the despondency of the crash.

Emerging economies (and markets) are characterised by high betas.

The current crisis appeared for a while to be different.  It seemed only to be afflicting developed countries.  Data relating to the emerging world were robust.  Perhaps unsurprisingly, therefore, a number of politicians in China and India, Brazil and Russia were quick to congratulate themselves on their management skills.  Because local financial systems were immunised from the failings of those in major money centres, they said, local economics growth rates would be undiminished!  

They rise rapidly; fall similarly.

Such hubris is no longer evident.  Developing economies have come off the rails, their finances in chaos.  Last week, it was the turn of the Eastern Europeans to hit the buffers.  The symptom was currency instability, but the malaise was economics failure caused by an insufficiency of credit.

Will Generous Germany . . .

And what was the immediate reaction of these countries?   To ask for help from the EU!   In order to survive in their current form, they needed huge fiscal transfers.  Would the EU oblige?   According to the German Finance Minister, it had to!

. . . get out the cheque book again?

Germany has substantial experience of operations of this sort.  It had been the principal paymaster of the EU since inception.  Additionally, it had provided generous support to West Berlin in the sixties and seventies, to the Eastern Länder in the eighties and nineties. 

Let’s hope not.

Was it going to do so again?   Was it in a position to bail out the old Warsaw Pact countries?   Certainly not.  The country was exhausted; its transfers to others inhibiting its own investment.  Growth rates in the last couple of decades had been pedestrian; they’d be much lower still if it were to add an extra burden to its already depleted Exchequer.

Europe needs downsizing.

The realists argued, therefore, that it was time to shelve the political ambitions of Europe’s federalists, to return the community to its core rationale:  an economics club.  The ECB and the Parliament had to be abandoned, the Commission disciplined.  Taxes needed to be reduced, regulation lightened.  That would give the EU the possibility of survival, its businesses the potential to prosper.

It needs to rediscover economics logic.

Would it happen?   Not until the crisis had become much deeper.  Knee-jerk politicians accepted the status quo.  The abominable Brown was relaxed about unelected bureaucrats in Brussels writing regulation and unaccountable judges in The Hague writing law.  Not until electorates rebelled would their supposed representatives respond.  Not until unemployment rates climbed well into double digit territory would the insanity pass.

The slump meanwhile is gathering momentum.

There might not be long to wait.  Recent economics numbers had been dreadful.  The collapse in GDP in the fourth quarter of last year was numbing, and the indications were that things would be no better in the first quarter of the current year. 

The abyss beckons.

Two of the most reliable indicators were imports and tax returns.  They used to rise faithfully in response to strong activity and fall just as dependably in response to weakness.  And what were they saying at the moment?   That the annualised rates of decline in early 2009 were going to be much larger than those at the end of 2008.  Significantly, the worst number might well come from China!

There might be years of contraction.

If that were to be true, the implications for unemployment would be devastating.  Because lay-offs were so restrained at the end of last year, they’d have to be doubly severe in the months ahead.  That would mean consumer spending and sentiment staying horribly depressed for many more months.  The cycle would probably bottom in the autumn, but the recovery thereafter would be very anaemic:  activity not necessarily advancing, perhaps just falling less quickly!  

Time, in Britain, to recast pensions!

There is very little good news.  One snippet, though, is that the government says it’s to reassess public sector pensions—possibly with a view to eliminating the unconscionably expensive DB arrangements currently in place.  Another is that corporate profits are holding up reasonably well.  Good news for most private sector workers on DC schemes.




European Monetary Disunion

February 18, 2009

The euro has ceased to be a single currency!   The range of yields on government bonds in the EMU is too large:  the pretence of unity shattered.  Securities markets that were once covertly sceptical of convergence are now overtly dismissive of it. 

The situation is reminiscent of the death throes of the Argentine peso’s relationship with the dollar.  Though parity was maintained throughout the experiment, the interest rate differential required to hold it there became progressively more onerous.  Eventually, it proved insupportable.  The Argentine economy, unable to operate under the strain, collapsed—taking with it the government that had introduced the wretched scheme.

Will that happen to Europe?   Will the burden of higher interest rates on economies that can least afford to pay them cause economics devastation?   Will the resulting chaos consign an incompetent ECB and a loathsome Commission to the dustbin of history?   Hopefully so. 

European administrators are usually slow to see which way the wind is blowing.  But, on this occasion, rather uncharacteristically, perceiving calamity to be louring on the horizon, they are actively trying to forestall it.  The problem is that they don’t know what to do:  the prescriptions of one lobby recommending what another condemns!

Should, for instance, the fiscal environment of “at risk” countries be tightened or loosened?   Those who are appointed (Commissions and Central Bankers) tend to go one way; those who are elected (National Parliamentarians), the other.  Will thesis and antithesis eventually result in synthesis?   If so, exactly how would the opposites meld, and how the euro cookie crumble?Ironically, fiscal policy might be irrelevant to the final outcome:  the same doomed denouement resulting from either option.  Imposing austerity on economically inadequate countries would be bound to induce social distress, and might evoke demands for UDI.  But an accommodative policy, financed by transfers from others in the Community, would fare no better if the help came with too many strings!   Suppose, for instance, the Commission demanded the power to veto future budgets of recipient countries!   Might not those with democratic pretensions (admittedly a minority) regard so demanding a therapy as worse than the admittedly debilitating disease?  

Pensions Equality

February 17, 2009

If there’s one good thing to have come out of the current recession, it is the decision to review public sector pensions.  Brown’s judgment may be hopelessly flawed in most respects, but he has realised that the private sector worker, the one who creates the wealth that pays the bills, sees the current situation as being grossly unfair.  The installation of a level playing field is an urgent requirement.

There is a lot of anger.  The principal target at the moment may be bankers, but it’s likely shortly to be turned also against government officials.  The two groups have, between them, all but destroyed the economy.  Neither, though, shows any remorse!   Bankers demand (taxpayer-financed) bonuses; and government ministers fiddle their (taxpayer-financed) expenses. 

What’s to be done?   What about putting pensions provision in the public sector on an even footing with that in the private one?  Would that assuage some of the anger?   It might.  But has Brown the bottle to take on the challenge?   In the past, he’s always been too scared. 

There are lots of risks.  There’ll be strikes and disruption, for instance.  But that’ll not do very much damage:  in periods of economics weakness, when the demand is low, the threat to withhold labour is undaunting. 

The bigger risk to Brown is that he’ll open Pandora’s Box, reveal all the nasties inside, but not be able to deal with them.  As a result, he may heighten voter anger rather than lower it.  Perhaps the episode will come to be seen as another of his misjudgements!

This crown of thorns?

February 16, 2009

Last autumn, when taxpayers’ funds were first raided to rescue the failed Scottish banks, the electorate was told that the money was being invested wisely.  Stock was being acquired at very favourable prices; within a few years, it would be resold at a sizeable profit.  The Permanent Secretary who’d devised the scheme was a genius; the Politicians who’d approved it, visionaries.

Not so, apparently.  The losses incurred were much larger than had been supposed.  Those who rushed through the bail-out hadn’t done their sums.  Nobody had conducted an independent investigation of the debts.  Not the wretched Treasury Official, nor the hapless Regulator; not the clueless Chancellor, nor the bumptious Prime Minister.  Naïve clots all of them!

They told us they had to act quickly to save the economy.  In reality their negligent haste served only to make matters worse.  They were out-of-their-depth; they were conned by a bunch of amateurs.  Resources were taken away from areas in which they could generate a return and allocated to those in which they couldn’t.

Commentators who warned against the madness last autumn were told they didn’t understand the importance of banks to a modern economy.  In reality it was the authorities who didn’t understand.  It was the latter who have now to be seen as being as guilty as the bankers.

When voters come to realise how badly they’ve been led, there will be huge anger.  Labour might not be re-elected for a generation.  But the sadness is that the Tories are no better.  In closed-doors sessions recently, Tweddledum has shown himself as daft as Tweddledee.  Cameron’s boys approve of the bank bail-out.  They’d have done the same thing themselves.

Lord help us!


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