Caesar’s wife

March 30, 2009

Caesar’s wife had to be above suspicion.

 Smith’s husband is below contempt.


Was it enough for the wife to say she’d been mortified by her husband’s behaviour?   Was it enough for the husband to express sorrow for the embarrassment he’d caused his wife?   Of course not!   We aren’t concerned with the emotions of a dysfunctional couple, but with their embezzlement.  We want the details; in particular, we want to know whether it was accidental or deliberate.

The man should have said he was sorry for the injury his actions had caused the taxpayer, not for the discomfiture they’d caused the woman.  And he should have told us whether the misappropriation was a one-off lapse or a regular occurrence.  Did the household routinely charge its private expenditures to the public purse?   That he didn’t say anything along these lines, that the members of the Press to whom he spoke outside his house chose not to ask the relevant questions, means that the issue is not yet closed.

The rest of his statement was similarly ambivalent.  It continued: “I can fully understand why people might be angry and offended by this.”  Interesting use of language!  Why “might be” rather than “are”?   Does he suppose that some people might not be angry, might not be offended?   Where has he been for the last few years?  

The Bourbons were finished when they displayed an open contempt for the worker.  Permitting the rich and indolent aristocrat to steal from the poor and industrious peasant was a recipe for disaster.  It did for the monarchy in France; it’ll do for New Labour in Britain.

It transpires that, in claiming the reimbursement of expenses, an MP signs a piece of paper stating that the goods and services for which the claim is being made were incurred wholly in pursuit of official duties.  The Home Secretary acknowledges that the adult videos did not qualify in this regard, but excuses herself by saying that she signed the document without reading it.  Really?   What other papers does she sign without reading them?  

How common is this lack of due diligence?   Was Lord Myners too busy watching Blue Peter to read the stuff relating to Sir Fred’s pension?   Were Brown and Darling too taken up with the Tele­tubbies’ adventures to look at the economics data in the years leading up to the crash?

And what of the Civil Servants who pay the claims?   They must have noticed that some are obviously fraudulent, but, for the last ten years or so, have chosen to say nothing!   Why?   What deal has been done with them?   The questions go on and on!

There are rumours that a whole raft of dubious claims has been assembled and will be leaked slowly to the Press over the next several months.  It is said that Members from all Parties will be shown to have been making unjustified claims over a protracted period.  If that’s the case, Brown has to act immediately. 

His proposal to have an inquiry after the next Election won’t do.  The river must be diverted and the stables cleaned immediately.  MPs’ salaries should be cut, their expenses eliminated.  A handful at least ought to serve time in a detention centre.  Possibly overseas?   A suitable case for rendition?



The Last of the Stewarts

March 30, 2009

James II was eventually rejected by the Tories.

 Might Cameron suffer the same fate?   


If the Conservative Party were to follow up its expulsion of Stuart Wheeler (the spread-betting millionaire) with an attempt to rid itself of all Europe-sceptics, its membership would shrink to negligible proportions.  The findings of the opinion surveys vary, but there is agreement that a huge majority of the UK’s population, 70% perhaps, views the EU negatively.  Amongst Conservative supporters, that figure rises to 80% and, amongst those not supported by the State nor employed by it, to over 90%.

John Major ignored this arithmetic, trying to force down the throats of his supporters a settlement of the European issue of which they disapproved, and condemned his Party to a decade in the wilderness in consequence.  Is Campbell to go down the same road?   It’s looking that way.  His appointment of Clarke was a worrying sign; his decision to tell the majority what to think another.

The Conservatives are going to win the next election—Brown has made certain of that.  But what happens afterwards is a matter for speculation.  Campbell may find things fairly difficult; he may discover that a huge majority is difficult to control; on points of principle, almost impossible.  The Opposition in Parliament may not be sitting meekly on the benches in front of him, but baying for blood on those behind him!  

The forthcoming Federal Elections will test public opinion.  Who’ll get the support of the UK’s voters?   The namby-pamby Europhiliacs?   Or the bold Eurosceptics?




Economics News : 27 March

March 27, 2009

All along o’ dirtiness, all along o’ mess,

All along o’ doin’ things rather-more-or-less,

Kipling, referring to “The ’Eathen,” perhaps also to “The Regulator.”


It’s difficult to hold bankers responsible for the damage they cause.

If a toddler is allowed to play in the sitting room, he has to be expected to do some damage.  And, afterwards, whether the mishap be great or small, the blame for it should be levelled less at the little creature than at the adults whose job it was to super­vise him.  It’s much the same with the infant banker.  Young Freddie Goodwin should have been restricted to the scul­lery.  There, it wouldn’t have mattered so much if he’d he knocked over the paint pots and spilled the water.  His parents, had they been responsible, had they recognised the risks pos­ed by the combination of gaucheness and pigment, would have taken steps to mini­mise the threat.    

To do so would assume they knew what they were doing.

After the event, moreover, once the deed has been done, the room wrecked, it’s best that the adults take charge.  One parent might remove the little chap from ground zero, while the other starts the clean-up pro­cess.  It’s not a good idea to ask the toddler himself to put things right.  He might agree to do so, but the chances are he’ll ex­acerbate the problem—in trying to clean the carpets, he’ll spoil the sofas and cur­tains as well. 

The blame has instead to be levelled at the grown-ups.

But what if the parents are not to be trusted?   What if they should be delinquent?  their judgment clouded by inadequate education?  their minds befuddled by substance abuse?   In such cir­cum­stances, it wouldn’t be suf­ficient to send the young banker to the naughty chair.  His parents would have additionally to under­go thera­py.  Does that imply that key figures in the Bank of England, the Treasury and the FSA be sent to detox farms?   If so, who should be given the job of tidying the sit­ting room?   Somebody, presu­mab­ly, with a relatively high IQ and comparatively few psycho­logi­cal defects!  No easy task in early twenty-first century Britain.

The Bank, the Treasury and the FSA are the principal culprits.

But Gordon Brown doesn’t see things in this way.  He’s asked those who cre­ated the problem to make recommendations about solving it!   And he’s let it be known that there are certain proposals that he’ll view more favourably than others.  It’s a technique he’s used to great prescriptive effect in the past. 

Brown disagrees; he’s going after hedge funds and tax havens!

What’s on his agenda?   Hedge funds and tax havens.  Though neither played any part in causing the current crisis, the Prime Minister is going to try to inhibit the activities of each.  Will he suc­ceed?   Probably not.  He’s lost his authority.  He’ll stay in office until an election is called, but he’ll not be able to change much.

He’ll probably fail; he’s become a figure of fun.

Last week, the Governor of the Bank told him that there was no more capacity to raise public ex­pen­diture, and the point was emphasised the following day by the gilt market’s failure to absorb a new tranche of debt.  It was made even more plainly by Daniel Hannan’s speech from the floor of the European Parliament.  In a blistering attack (totally unreported by the Europhiliac BBC), Han­nan spoke for the hitherto silent majority in claiming that the Brown administration was duplicitous and incompetent, venal and spendthrift.

How will the G20 conference go?   

Badly.  The poor Prime Minister knows he’s finished, but doesn’t know how to withdraw.  Instead, he con­tinues on his world tour, humiliated at every turn.  He’ll shortly host the G20 summit in Lon­don, and it’ll be a disaster.  There’ll be no agreement because Europe and much of Asia are un­con­vinced (cor­rect­ly so) of the virtues of fiscal stimulus.  Nor will there be any substantive commit­ment to es­chew protectionism because most countries are already hatching plans to subvert free trade.      

Disagreement amongst politicians; protest from voters.

Will London see street protest?   Possibly.  Public feeling is running much higher than Ministers and bureaucrats appreciate.  They were taken aback by the raid on the banker’s home.  Had they been closer to the people, they wouldn’t have been. 

Meanwhile, Parliamentary sleaze just gets worse.

They may be similarly surprised by voters’ reactions to Ministerial ex­pense claims.  Tony McNulty and Jacqui Smith (to name but two) have been caught with a hand in the till.  And the shameless creatures, instead of ad­mit­ting their misbehaviour, have tried to justify it.  We did noth­ing wrong, they claimed.  It was within the rules.  Yes; rules that they wrote for their own benefit.  Doesn’t that make the morality of their actions worse, rather than better?

Green shoots in the US?   Don’t hold your breath.

There’s not much good news.  But the US economy does appear to be contracting less quickly in the spring than it was in the winter.  And the markets have taken heart.  A single swallow?   Yes, but one is better than none.


No Poet Ever Interpreted . . .

March 23, 2009

No poet ever interpreted nature,

as freely as politicians interpret truth.   

Apologies to Giraudoux


Brown and Obama have seriously misjudged the public mood.  They seemed to think that the econo­mics crisis would distract voter attention from executive misbehaviour.  Unsurprisingly, it didn’t.  On the contrary, plebeian pain intensified the disapproval of patrician greed. 

When a company has been saved from bankruptcy by the provision of taxpayer money, what can jus­tify its officers pay­ing themselves huge bonuses and awarding themselves gigantic pensions?   What, more importantly, can justify Government Ministers not having stopped the practice?   Were the latter incompetent?   Or party to the malpractice?   Had they become so used to claiming dubious expenses them­selves that they saw nothing wrong with others doing so?

On a television programme, Obama tried to make a joke of the issue.  Coughing and spluttering, he said he was “choked” by the attitude of corporate executives.  Not choked enough, though, to do any­thing about it!   It was left to Congress to act.  And why was the President sidelined?   Because, said his spokesman, he was concentrating on big issues, not distractions!   Another own goal.

Brown comes out of the affair in no better shape.  He rushed through a bank bail-out programme; he claimed that it was wise to spend public funds in this way.  He and his team have therefore to answer for the mis­ap­pro­pri­ation.  Where was Lord Myners when the dirty deeds were being done?   Asleep at the wheel?   Where Lord Mandelson?   Where that over-promoted, newly-knighted, Permanent Sec­re­tary to the Treasury?   Not looking after the interests of the taxpayer, that’s certain enough.

In this country, it was left to the Press to ask the embarrassing questions.  The Tories were nowhere to be seen.  Skulking in a parallel universe, perhaps.  They, like Government Ministers, have been conned by bankers into believing that criticism of corrupt practices is tantamount to dismantling the City!   No point, mutter Elder Statesmen into their port at the Carlton, in throwing out the baby with the bath water.   

They should talk to real people; examine their own assumptions; question those of the lobbyists.  The reality is that banks are not an important part of the “City.”  It is fund managers and brok­ers, hedge funds and actuaries, accountants and law­yers that are the key components. 

The com­merci­al banks muscled their way into this community, using share­holder funds to buy a piece of the action.  That they managed the assets they acquired so poorly (being owned by a bank was synonymous with sub-par performance) speaks volumes.  Of course, the ninnies failed. 

What was wrong was trying to preserve them.  It was an act in defiance of Schumpeter:  failures have to be allowed to quit the scene in order that winners be free to grow.  Putting RBS and HBOS on life sup­port systems prevented Lloyds and Barclays and HSBC from getting the resources (labour, capital, de­posits, etc.) that they deserved.  It was an act of monumental stupidity.  It is one that will blight the taxpayer for years to come, possibly decades.

Will heads roll?   Sadly, only those of the bit-players.  It is said that, in the States, Geithner will go fairly shortly, and some of the guys in the Press Office might do so as well.  But the principal miscreant, Paulson, is set to enjoy his fortune undisturbed by the accusation that, like Cardinal Wolsey, his loyalties were misdirected. 

In Britain, it’s difficult to identify one single malefactor.  Brown and Darling seem the equivalents of Bush:  gullible patsies.  Not able to understand what was going on, they were possibly innocent of the harm they caused.  That defence doesn’t wash for King and Macpherson; neither can claim, despite occasional evidence to the contrary, to be intellec­tu­al­ly sub-normal.  Myners and Mandel­son and Tur­ner:  guilty as charged.  But, such is the disarray within the country’s legal system, they’ll not take the drop!


Economics News : 20 March

March 20, 2009

Felix qui potuit rerum cognoscere causas

Virgil, referring to Lucretius, not to politicians, of course; nor, despite the motto, to LSE graduates



Est annus horribilis. 

There’s no longer any uncertainty about how severe the economics downturn will be; just about how long it’ll last.  It’s known that it’s going to be the steepest for a century, but not yet whether it’ll span a matter of months or quarters, years or decades.  That said, the perverse in­ter­action of employ­ment and senti­ment, of asset valuations and monetary mismanagement, has raised the pros­pect of the worst of all worlds:  a setback that is both steep and protracted.

Much more horribilis than people imagine!

Economists and politicians are resolutely upbeat.  Most think the worst will be over by autumn.  Many fear that, despair giving way to euphoria, inflation will re-emerge as a serious threat.  The trouble is that such people have been profoundly wrong for years.  A year ago, they saw no pos­sibility of economics weakness; six months ago, a barely perceptible deceleration.   They are, in other words, a counter-indicator:  their optimism justifying other people’s pessimism!

Jobs disappearing and living standards plunging.

To the dispassionate analyst, GDP in much of the world looks set to fall precipitously in the first half of 2009—at double digit annualised rates!   And the driving force may no longer be an in­suf­ficiency of credit, but an inadequacy of paid employment.  As joblessness soars, those without pay cheques will spend less involuntarily; those who still have them voluntarily. 

The one feeding off, and reinforcing, the other.

Given the decline in GDP at the end of last year, employment may now be falling at ¼% per month.  What will that do to consumption?   to GDP?   and to prospective employment?   It’ll be a vicious circle.  And not one that’s likely to end soon!

Ever sector will be hurt; even, eventually, the bureaucracy!

The debility was initially associated with the finance and housing sec­tors.  But it’s already spread into the broader economy.  Only the wretched public sector has thus far been spared.  Not for much longer, though.  With taxation collapsing, spendthrift public authorities will have shortly to be disciplined.

Governments have made things worse, of course.

Fiscal expansion, the preferred response of many governments, is a busted flush—doing more harm than good.  To take resources from one part of the eco­no­my and give them to another is a zero-sum activity.  It relieves the latter, but only at the expense of the former.  Bailing out the banks, for in­stance, merely condemned to oblivion the industrialists and re­tailers; im­pover­ish­ing in the process count­less consumers and pensioners. 

The worker, his taxes likely to soar, has been crippled.

In the final analysis, moreover, it’ll be the taxpayer who foots the bill.  The Browns and Darlings, Kings and Macphersons will be long gone.  They’ll be sunning themselves, far from the madding crowd, cocooned from harsh reality by their index-linked, DB pensions.

Come back Cromwell, our Chief of Men.

The public sector borrowing requirement has risen to 11% of GDP!   By whose authority?   In the seventeenth century, under the pesky Stuarts, it was argued that there should be no taxation without representation.  Have the people been represented recently?   Has their Parliament been consulted?   Isn’t it time once again to stand up to the Scottish autocrats!   Another 1688?   Another 1649 perhaps?

The cyclical upturn may be anaemic; the prelude to a new downturn.

Though the near term outlook is exceedingly grim, there may be an element of relief in the medi­um term.  If the economy peaked in late autumn 2006, it’ll likely trough in mid 2009.  A true or false dawn?   Possibly the latter:  the risk is that the recovery will be mathematical rather than substan­tial.  The weakness will diminish, but not disappear.  And it’ll give way, half a cycle later, in early 2012, to a new and virulent contraction!

Commodity producers will suffer; possibly China also.

Which countries will be worst hit?   Those that grew most strongly in the prior phase.  The com­mo­dity producers are obviously vulnerable.  Brazil demonstrated the potential in the fourth quar­ter; South Africa will shortly repeat the message.  Worst hit, if protectionism should take hold, may be China. 

And, as usual, the Europeans also.

The Schadenfreude of Europeans will once again prove premature.  Instead of performing more strongly than the anglo-saxons, they’ll probably continue to trail:  domestic demand limited by Commission-mandated inefficiencies; foreign sales constrained by ECB-enforced currency over-valuation.

Politicians?   Frustrate their knavish tricks!

Politics will be transformed.  It’ll be out with the old and in with the new.  Whether the new will be any better than the old remains to be seen.  There’ll be a focus on blame!   Who was responsible for the disaster?   Who asleep on watch?   Incumbent politicians will deservedly get the bullet; cen­tral bankers too; regulators hopefully; the public sector generally!





Good for Nothing

March 16, 2009

He that is good for making excuses,

is seldom good for anything else.

Franklin, referring to politicians, of course!





Treasury Ministers and Central Bankers gathered in England last week to discuss the state of their economies.  The task they’d set themselves was the re-activation of demand!   Presumably, they felt that those who’d created the problem were the best equipped to remedy it. 

Sadly, their competence proved to be no greater after the crisis than it had been before it.  Previously, they’d ignored signs of impending debility, raising interest rates in the face of a cyclical slowdown super-imposed on a secular one.  Now, the crash having happened, all they could do was try once again the hopeless therapies that had failed in the West in the thirties and in Japan in the eighties.

As usual, the communiqué issued at the end of the meeting was meaningless—a tissue of clichés, inadequately camouflaging a lack of consensus.  The anglo-saxons, represented by Darling and Geithner, wanted simply to lift public spending.  And to do so without telling taxpayers that they’d eventually have to pick up the tab.  Using the printing presses to finance the spending, it’d be possible, they thought, to trick people into believing there wouldn’t be a reckoning!  

The German Finance Minister, Steinbrueck, was less contemptuous of his countrymen.  He argued that mindless spending policies would fail, especially if the issue of toxic banking assets hadn’t first been resolved.  A number of other attendees concurred.  But the evidence didn’t support their argument:  countries with “strong” banks hadn’t been immune from economics collapse; on the contrary, they seemed, thus far, to have suffered most.

And what was to be done with the banks?   Could anybody devise a plan that helped the institutions themselves, but not the hateful creatures who ran them?   The UK and US had demonstrated comprehensive failure on this front.  Their ill-thought out rescue plans had punished the innocent and rewarded the guilty.  Industrialists and retailers were failing, consumers and pensioners being impoverished, but bloated bankers were pocketing huge bonuses and grotesque pensions. 

It had been a disaster economically, and no less catastrophic politically.  The poll ratings of incumbents in Britain, tired and unmandated, were understandably low; those of their opposite numbers in the States, newly installed and bushy-tailed, surprisingly low.  Did others in the G20 wish to go down the same path?   Of course not.

The one thing that nearly all the officials subscribed to was the need for tighter controls on banks.  It was agreed that regulators ought in the future to be more intrusive.  Had they been so in the past, it was claimed unanimously, the collapse would have been less serious.  Really?   What’s the evidence?   Have economics and financial problems been less serious in countries in which the regulator has been more demanding?   

Certainly not!    Amongst the majors, it’s Germany and Japan, models of regulatory interference, that have taken the biggest hits.  The rigid attitudes of the authorities in these countries certainly stopped innovation, but did nothing apparently to protect the community.

Never mind the evidence, say the politicians.  We want revenge.  Let’s destroy hedge funds and tax havens.  They’re not guilty, but a witch hunt would go down well with electorates that want to see blood spilt.  And, more importantly, the process might distract attention from those who ought to be punished!




If nothing else works . . .

March 13, 2009

If nothing else works, a pig-headed unwillingness

 to look facts in the face will see us through.



Lord Mandelson has acknowledged that the Post Office’s mail delivery system is worryingly inefficient and its pensions provision cripplingly expensive.  What’s needed, he’s concluded, is a cunning plan that will resolve both issues at a stroke.  And, like the Blackadder character he aspires to be, the Business Secretary has convinced himself he’s found one!

He’ll deal with the Post Office’s low level of productivity by bringing in outside expertise.  A good private sector administrator will lift output and reduce employment.  That’ll tend to lower the longer-term cost of pensions.  The short-term imbalance will be resolved by recourse to public fi­nance.  And where will this finance come from?   From the proceeds of the sale of a pro­portion of the Post Office to the external administrator!

It’s a neat solution; just the sort of thing that might be expected to appeal to a three-card-trickster.  The difficulty, though, is going to be to get it agreed by other interested parties.  Thus far, his Lord­ship hasn’t achieved much success.  Unions are opposed and so are taxpayers.  Predictably, the Secretary has adopted bully-boy tactics.  It’s the only way, he’s been quoted as saying, of preserving the pension scheme’s defined benefits and keeping public expenditure under control. 

Outrageous, say Post Office workers.  Ownership of the Mails is a secondary issue, an irrelevance.  The preservation of the pension scheme in its existing form is a sine qua non. 

Taxpayers are also proving truculent.  They agree with the first half of the workers’ position, but not the second.  They too think ownership is a distraction; the urgent requirement is a discontinuation of an unconscionably costly pension programme.

So what will be the outcome?   We ought all to be worried.  Politicians are chronically incompetent, hopelessly wasteful of public finances.  Look at the confounded mess Brown and Darling made of the bank bailout.  Hundreds of billions of pounds expended and cui bono?   Only the odious bankers!  

And have the clots who perpetrated the crime apologised for their failings?   No; they act as if they thought they’d done a good job.  The answer is not to trust them in future, not to let them anywhere near our money.  Their judgments are consistently flawed and their morals persistently poor. 

Let’s close down the Post Office, abandon DB, and start again from scratch.  And, most importantly, let’s not have any half-baked politicians touting their half-baked business solutions.  Logic must be the watchword; not gobbledegook!



Economics News: 13 March

March 13, 2009

The incompetent, with nothing to do,

will still make a mess of it!

Boies, referring to the bureaucrat?


Why did communism fail?

In the private sector, an executive who is incompetent tends not to last very long.  If he’s the manager of a football club, he goes quite quickly; if the chairman of a large quoted company, rather more slowly.  But the fact that there is closure, the fact that termination does occur, implies a degree of accountability.  The system works:  those whose role it is to monitor performance (usually the owners) recognise inadequacy and take action to end it.

Because of public sector mentality!

Not so in the public sector.  Ineptitude, however crass, seems not to be punishable.  The problem may be that the owners (the taxpayers) aren’t ever asked their opinion.  And the elected representatives who, by default, assume the monitoring role are reluctant to accuse others of a failing of which they so obviously guilty themselves. 

Central bankers demonstrate the phenomenon.

Take the example of the central banks.  Their track record recently (the Fed arguably excepted) has been abysmal.  For the last ten years, they’ve comprehensively mis-analysed cyclical and secular trends.  In 2007 and 2008, when both were weak, the one reinforcing the other, the hapless creatures raised interest rates!  

They made grotesque errors of judgment . . .

Now they seem to have provoked, not just recession, but depression.  If so, like their counterparts in 1929/30, they’ll have condemned their economies to fragility for a decade or more; their countrymen to impecuniosity for a generation.  But has any of them fallen on his sword?   Has any shown remorse?   Has any elected monitor required a resignation?   Of course not.  The whole of the public sector is characterised by complicity and complacency.  There’s a mutual agreed pact to turn a blind eye to each other’s shortcomings.

. . . but haven’t been disciplined.

It’s the private sector that bears the cost.  Trichet is possibly the world’s worst central banker, but he’s barely been criticised—within the EZ or without.  Why not?   Has no one noticed the private sector’s sufferings?   In the last few days, figures for French and German industrial production have revealed the enormity of the devastation wrought by the man’s incompetence.  Output in the two countries in January was reported to have fallen by 3 and 7% in comparison with the previous month; by 15 and 20% in comparison with that twelve months earlier!  

The EZ is suffering . . .

Is this going to be the low point?   Will things get better from here onwards?   Very unlikely.  The next phase of weakness will be driven by unemployment.  Hitherto, neither Germany nor France has laid off significant numbers of workers.  In both, therefore, employment may now be 4 or 5% higher than required.  If a corrective process should shortly begin, jobless totals rising by a quarter of a million per month, the impact on consumption and tax revenues would be negative;  activity lurching downwards in response!

. . . in consequence of Trichet’s failings.

And Trichet is the chap who, just six months ago, was refusing to cut interest rates for fear of provoking exuberance and inflation.  He’s the man, moreover, who declined to lower rates last month because he saw no need for precipitate action.  Has he admitted his error?   Has he offered to resign?   Ne me fais pas rigoler.

And China may be going the same way.

It’s not only Europe that is looking suddenly vulnerable.  In China too, confidence has given way to doubts.  Things became difficult at the end of last year (GDP flat in comparison with the third period?) and they’re promising to be much worse in 2009.  Premier Wen, at his recent Press briefing, alluded to the issue.  He said the country had plenty of ammunition to reactivate demand—implying that it was probably going to be needed. 

Don’t rule out social unrest.

It’s the outlook for the labour market that’ll most worry the authorities.  Unemployment could start to rise by 2 millions a month.  Does the country have the administrative infrastructure to deal with such a development?   Might personal financial distress get severe enough to cause disturbances?   Nobody knows, but everybody is scared.

It may be better after incumbent ministers have gone to the great tearoom in the sky.

In Britain, the outlook is less awful.  Activity is sinking at a slower pace than that in much of the rest of the world.  The public sector may be bloated and feckless, but the private one (banking apart) seems reasonably efficient.  If the one could be cut back and the other taxed more lightly, the prospects would be almost satisfactory.  The changes will happen at some stage, but probably not until after the next election.  Let’s have it soon!


Economics Viewpoints : 11 March

March 11, 2009

What goes up, also comes down;

and the faster the rise, the faster the fall.

Isaac Newton or Shirley Bassey?




While commodity prices were rising, the Brazilian economy looked good.  Personal incomes were boosted, corporate profits flattered.  External trade accounts ran surpluses, domes­tic fiscal balances likewise.  But the favourable developments all rest­ed on elevat­ed raw materi­al prices.  As soon as the industrial world faltered, as soon as commo­dity prices slipped, the good news was bound to end.

The surprise was that expectations remained so high for so long.  Last week, though, things changed; optimism evaporated.  The announcement that GDP in the fourth quarter had collapsed (falling at an annualised rate of 14% in comparison with the third) caused perceptions of Brazil to turn on a sixpence:  what was previously seen as one of the world’s best performing economies came to be viewed as one of the worst.

Russia and the Middle Eastern oil producers had undergone a similar reassessment a few months ago.  New Zealand and Canada had not been immune to the downgrading process.  Only Australia still got star billing.  Would that last?   Almost certainly not.  Activity might have held up reasonably well in the fourth quarter, but was likely to be hit severely in the current one.

The reality is that commodity producers are “high beta” economies.  They always have been and always will be.  They grow more quickly than the average on the way up, but, compensatingly, contract more sharply on the way down.  Their medium term outlook—a geared version of that of the industrial world’s—is therefore grim. 

Many will see double digit percentage declines in GDP in 2009.  Most will see their finances devastated.  Some, faute de mieux, will default on obligations.

The IMF and World Bank don’t have the resources to help more than a handful of them and, ar­guably, lack the competence to lend even the limited resources they do have.  If the third world’s commodity producers are to be helped, therefore, it’ll be on a bilateral basis, by commodity importers.  China might be active; possibly Korea and Taiwan as well.  That will irritate Americans and Europeans; it’ll raise political tensions; it may lead to talk of protectionism—but it’ll happen anyway.

The good news (there’s not been much of it recently) is that security prices have recovered some of their recent losses.  Markets reacted well to announcements that Central Banks were about to begin “quantitative easing.”  In London, the B-of-E was said to be ready to buy up gilts using newly printed bank notes to do so.  Unsurprisingly, valuations rose.  Govern­ment securities themselves shot ahead in anticipation of official buy­ing and equities followed suit in expectation of diverted private sector money.

Will any of the optimism spread to the real economy?   Proba­bly not.  The loathsome banks will exploit (the almost guaranteed) market conditions to raise profits and rebuild reserves.  But they won’t engage in the (altogether too risky) business of lending to people or businesses!   Increasingly, therefore, voters will realise that the bank bail-out plan was a huge confidence trick!   Hundreds of billions of pounds of taxpayers’ money expended by the Treasury to no good effect!




Ex nihilo, nihil

March 9, 2009

The attempt to save the Scottish banks has failed.  Worse, it has undermined those in England.  One has gone down and another is looking seriously weakened!   What is not clear is why the Lloyds board ever agreed to assume responsibility for HBOS.  Who was supposed to have done the due diligence?   Whose was the responsibility for shareholders and employees?   The questions are numerous; the answers few. 

It looks as if everybody was in panic-mode last autumn.  No serious thought was given to the economy’s problems; just a mad rush to do something, anything, before customers began to withdraw money.  A run on the banks would have been bad, of course.  But who’s to know whether it would have been worse than the mess we have now?  

Not the Prime Minister.  He takes credit for things that go well, but denies responsibility for those that go wrong.  His judgment is flawed—in politics as much as economics.  His recent trip to America, and before that to Europe, didn’t play very well with voters at home.   It smacks of jollies with the boys (at taxpayer expense) when the taxpayer himself is having a hard time of it.

That goes for fiscal policy in general.  It’s not just delusional banking extravagance that is proving to be ineffective at best, counterproductive at worst, but the whole rationale.  Redistribution is not augmentation.  To take resources from A and give them to B does not increase the total in the system.  Perhaps it is better that they be left with the one rather than the other.  But who is to judge?   Not Brown nor Darling, King nor Macpherson—serial underperformers all!

Public spending is the area from which resources have to be taken.  It’s had seven years of feast and it’s about to suffer seven of famine.  Will Brown bite the bullet, or leave it to his successor?   Probably the latter. 

The potential for savings is enormous—savings that would be able to finance a politically popular redistribution in favour of workers.  Expenditure on the Civil Service and Local Authorities, for instance, might be cut by 20%; the cost of public sector pensions by 40%; of supporting the EU by 60%; and of fighting immoral wars by 100%.  As a start, as a payment on account, let the Prime Minister boost his approval ratings by halving MP’s salaries and eliminating their shameless expense accounts!



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