I believe that all government …

May 29, 2009

I believe that all government is inept,

and that trying to improve it is largely a waste of time.

H. L. Mencken—particularly when using our money to effect their ends!


The world is characterised these days by excess supply.  Too much stuff is being produced and not enough being bought.  The motor industry is just one example of the phenomenon, and not necessarily the worst.

The solution is to raise sales or to cut capacity.   The former has been tried and hasn’t worked very well.  Lower interest rates and an expensive scrappage scheme have barely influenced the movement of cars from the forecourts.  So it’s inevitable that the latter will have now to be implemented.  But which companies should be downsized, and in which countries?

Logic (and Schumpeter) say that it is the least efficient of the producers which ought to shut up shop.  But politicians have little time and no respect for such authority.  They prefer to buy the answer they want—especially if they can use other people’s money.

Hence the unedifying spectacle today of German Finance Minister, Peer Steinbruck, and British Business Secretary, Lord Mordor, dipping into our pockets to effect an outcome that’s unlikely to stick.  The basic principle should be that any business sector that requires a subsidy to make it viable isn’t worth having.

We don’t want the horrific banks that we’ve been saddled with.  And we don’t want a bunch of equally feckless car makers.  Pull the plug on both.  Hand the money back to the taxpayer.  Let him choose which should live and which die.  His decisions won’t always be right.  But they’ll be a great deal better than those of the politicians!




Economics News : 29 May

May 29, 2009

To discover new landscapes,

you need new eyes.


Apologies to Marcel Proust, visual perception is limited by cerebral prejudice.


In economics, the wish is often father to the forecast.

In late spring and early summer, the world economy was still deteriorating, but at a markedly slower pace than previously.  Put in quasi-mathematical terminology, the first differential of GDP was awful, but the second was excellent.  Forecasters, lacking arithmetical competence, made light of fine distinctions of this sort.  Things were getting better, they said.  A full scale recovery was imminent.   

Drowning men clutch at straws; economists at second differentials.

Was their euphoria justified?   Probably not.  The improvement in the data had been largely a function of the turnaround in inventories.  The steep decline in production at the end of 2008 and the beginning of 2009 was a consequence of industry’s urgent need to raise liquidity at a time when pusillanimous bankers were cutting their loan books.  The shallower decline more recently had been the result of spent-out consumers tightening their belts. 

In reality, though one constraint has gone, a second remains.

One negative had possibly run its course, but the other probably hadn’t:  inventories were no longer being savaged, but the outlook for retailing remained bleak.  It wasn’t the greedy lender who was inhibiting activity, but the penurious spender.  Credit was available to those who could afford it, but pay settlements were falling and unemployment was rising.  In much of the world, supply and demand had been brought close to equilibrium:  stability was restored, but it was stability at a very depressed level. 

The performance of emergers is, as usual, high beta and lagged!

And what was to be made of the apparent collapse in activity in much of the developing world.  It had been fashionable last year to suppose that Emerging countries would consistently fare better than Emerged ones.  Nonsense, of course; and they haven’t.  But the extent of their recent debility has nevertheless taken analysts by surprise.  

Will China and India buck the trend?

Estonia and Latvia make the point in Eastern Europe; Brazil and Mexico in Latin America; Hong Kong, Singapore and Korea in Asia.  The numbers in each have been devastating.  And the chances are that China and India will shortly repeat the message. 

Extremely unlikely.  The numbers are going to surprise on the downside.

For the moment, official sources in Beijing and Delhi stick to the fiction that activity is strong, but nobody pays much attention.  Data relating to imports and tax collections tell a different story—and one that’s not pretty.  Growth at the end of last year seems to have been negligible and, early this year, modestly negative.  What worries the establishment, of course, is the risk of social dissent.  Reform is popular when it yields rising living standards.  When it doesn’t, there is a threat of Reaction, possibly of Revolution!

There’ll be political implications; some of them profound.

Governments have to ask themselves whether they are facing recession or depression.  Whether their economies’ debility will last for a couple of years or a couple of decades.  Whether there will be psephological repercussions for just one election, or for many.  In public, understandably, they presume recession.  But in private?   Do they agonise about the alternative?   Do they regret their earlier insouciance?   Almost certainly!

And the corporate landscape will change.

How different might the world be after a generation of disappointing progress?   How many major corporations would have gone to the wall in the meantime?   Lots!   General Motors was the largest automobile manufacturer in the world for a hundred years, but seems now to be on its last legs.  It’s possible that an unrecognisable rump of the old behemoth will survive for a while longer, but it’s more likely that the whole thing will disappear.  

The only fixed star:  hateful lawyers.

It’ll not be alone.  Whole swathes of manufacturers and banks, media companies and software houses will accompany it.  Untroubled by a sequence of recessions, they’ll be extinguished in a flash by a single depression.  It’s those that can most easily organise cartels that’ll find life most comfortable.  Sadly, therefore, lawyers (who turn protectionism into an art form) look set to be with us for a few more millennia.

Which countries will be promoted to the Premier League?   

And will the “Who’s Who?” of nation states be much changed?   It wasn’t by the thirties.  The commodity producers took a sizeable hit—Argentina ruined and Australia disadvantaged—but most of the rest survived with their rankings little altered.  Was that because of the war?   If there’d been no conflict, or if its outcome had been different, would things have been as recognisable?

Which demoted to the Championship?

The curse of living in interesting times!   Happily, securities markets are appreciating.  Progress may be erratic, but it’s likely to be sustained.  A surge in the second half of 2009; more modest advances thereafter.  The pensioner deserves a break!



Economics Fiction

May 28, 2009

Many who laugh at science fiction

listen respectfully to economists!


Kelvin Throop III; people believe what they want to believe; evidence is irrelevant.


Forecasters are still worried about the outlook for inflation.  They note a rapid growth in money supply (coupled with a concurrent surge in public sector borrowing) and presume that prices are set to soar.  How curious!

Haven’t they noticed the absence of correlation between credit availability and inflation during the last twenty-five years?   Do they think we’ve reverted to the status quo ante?   And, if so, why?   What’s changed?   Increased public borrowing?   Hmph.  That’s an admittedly unhelpful factor, but its influence is likely to be as nothing in comparison with that stemming from lower commodity prices and higher unemployment.

The reality is that superfluous money sparks higher inflation only when the catalyst of excess demand is also present.  At the moment, it isn’t:  far from it.  And it’s unlikely to return for quite a while.  Accordingly, inflation is going to remain muted in the near term, possibly embarrassingly negative!

Commodity prices may shortly resume their decline.  It’s likely that the bounce recorded in the last few months reflects the activities of speculators more than industrialists.  And stale bulls, when dumping their positions, cause valuations to tumble.

The key to the process, though, is general economics activity—employment in particular.  What is clear is that, everywhere in the world, Europe and Japan most obviously, the workforce has not been cut in line with activity.  The disconnect can’t last forever.  And, if the correction were to occur in the next twelve months, employment would fall by something in the region of 5%!

That would devastate personal sentiment and consumer spending.  The concurrent cyclical recovery, borne of inventory stabilisation, would be overwhelmed.  GDP would sag, and wage settlements plummet.

In Japan, the “going rate” is already negative.  In the UK, including bonus, it’s zero.  And in the US, post the GM debacle, it may well become negative.  Just about everywhere in the developed world, therefore (the EZ only excepted), unit labour costs are going to decline.

In the private sector, the process is well advanced; within six months, it’ll be discernible in the public sector as well.  Civil Servants and Municipal Employees, cosseted in the past, will have to contend with the real world.  No pay rise, a higher retirement age, and a less generous pension!

The bottom line is that inflation will fall during the remainder of 2009, and will be modestly negative in 2010.  In 2011 and 2012, the decline is more likely to steepen than reverse.  Far from interest rates rising, therefore, they will, where they can, carry on falling!




Economics Viewpoints : 27 May

May 27, 2009

All you need in this life is ignorance and confidence;

then success, though not sure, is probable.


Apologies to Mark Twain, advice to second-rate MPs?




How is the prestige of Parliament to be restored?   It’s a question that’s exercising the minds of a good many politicians.  Characteristically, though, the suggestions coming from Westminster’s insiders have addressed symptoms rather than causes.  The concern seems to have been more to camouflage MPs’ misbehaviour than remedy it. 

Alan Johnson, demonstrating the trend, has suggested fixed terms and proportional representation!   Is he serious?   Does he suppose that gimmicks of this sort would change the behaviour patterns of MPs, rendering them suddenly honourable?   Of course not.  It’s a diversionary tactic.  The man just wants to get the media spotlight off MPs’ expenses and on to something else.  Anything else.

Additionally, he has a personal agenda.  He wants to be the new leader of the Labour Party.  He knows that Gordon Brown is shortly to be dumped and wishes, without appearing to be overtly disloyal, to position himself as the front-running successor.  To this end, he adopts the tried-and-tested guise of “Elder Statesman.”   He makes big picture speeches, commenting on the general rather than the particular.

No matter how banal his proposals, he thinks the publicity they generate will be valuable in the coming contest.  And if, albeit improbably, his remarks should accord him a veneer of cerebral virtuosity, a hint that there is something beneath the haircut, so much the better.  But was his choice of constitutional affairs a wise one?

If the argument is that MPs have become corrupt because Parliament has insufficient power and the Executive too much, it’s going to be impossible to ignore the malign influence of Europe!   At least domestic Ministers are elected by the people.  Their authority is validated by the ballot box.  That of Commissioners isn’t!  

Can Alan Johnson be the Champion of Parliament without being the Enemy of Brussels?   Where was he, incidentally, when his Prime Minister was reneging on the promise to hold a referendum on the European Constitution?   Did he rebuke Cabinet colleagues for their faithlessness?   If not, why not?  

It may be that Johnson has miscalculated; that the issues he raises will do him more harm than good!   Likewise, of course, Cameron.  The latter may be asked to account for his only half-hearted commitment to reforming Brussels.  To his ambivalence about the Commission’s lack of accountability.   Westminster may have a mote in its eye, but there’s a beam in that of Brussels!  

The economics news, meanwhile, is getting slightly less bad.  Within a few months, a cyclical recovery is going to begin.  Whether unemployment will fall and living standards improve is another matter.  The auguries are not good.  As things currently stand, the extra GDP will be allocated exclusively to undeserving banks; there’ll be nothing left over for deserving people!

Securities markets will improve, however.  Inflation will be negative, interest rates negligible and profits reasonably stable.  An excellent recipe for equities and a favourable one for bonds.  The latter may provide investors with 15% annualised rates of return; the former with ones of 25%.




Economics News : 22 May

May 22, 2009

If at first you don’t succeed,

failure may be your style.

Quentin Crisp, referring to Actors or Chancellors?


Good judgment comes from experience . . .

 “It’ll be over by Christmas,” said Alistair Darling.  He was talking of the current recession, but his words were eerily reminiscent of an earlier period in Britain’s history.  At the beginning of the First World War, in autumn 1914, the Generals had confidently made the same prediction.  They then, of course, were wrong.  Likewise now, probably, the Chancellor.

. . . and experience comes from bad judgment.

How much do we know of Mr Darling’s judgment in the past?   Quite a lot, and none of it very comforting.  He hadn’t disapproved of Gordon Brown’s decision to sell the country’s gold holdings at spectacularly low prices in 2002.  Nor had he queried the decision to launch a raid on funded pension schemes in 1997. 

The Chancellor’s had a lot of the latter.

Those, of course, were his salad days.  Did his judgment improve subsequently?   Sadly not.  In 2007, when the housing finance sector in the US was creaking under the burden of sustained malpractice, he saw no need to investigate the possibility of comparable strains having developed in the UK.  Accordingly, when the Northern Rock debacle struck in the following autumn, he was wholly unprepared; he was the proverbial rabbit caught in the headlights of the oncoming car!

And his calls have got worse, not better!

Things thereafter went from bad to worse.  His monumental error of judgment occurred in 2008 when he decided to bail out RBS and HBOS.  Ignoring the strictures of Schumpeter, he transferred countless billions of pounds from the viable to the non-viable!   In doing so, he impoverished the innocent and enriched the guilty; punished the wholesome and rewarded the loathsome! 

Is he a counter-indicator?

Now, he tells us that things are looking better; that the economy will be on the mend within a few months.  He’ll be right, of course, if the debility is merely recession; but hopelessly wrong if it’s depression.  The former is a function of the 5½ year business cycle and its durability is necessarily therefore moderate.  Not so the latter.  It is driven by considerably longer term (Kondratieff-type) considerations.  It lasts for decades.

Does his prediction of amelioration imply deterioration?

Nobody knows which applies at the moment—least of all the Chancellor.  And things will not be much clearer by Christmas:  in its early stages, a cyclical recovery looks much like a secular one.  The testing period will be the second half of 2011.  We’ll know then whether the recovery, if there’s been one, has legs or not.

No matter.  In a few months, he’ll be retired.

Alistair Darling won’t be bothered in either event.  He’ll be long gone.  Even if he retains his seat in Parliament, he’ll no longer be Chancellor.  The Labour Party will have been dismissed.  It may be a generation before the electorate dares experiment again.

Protected by an indexed pension from the economics ravages he’s caused.

News that Standard and Poor’s analysts were about to downgraded Britain’s credit rating was a final blow for the hapless Chancellor.  No matter that S&P’s judgments in these matters are unreliable.  The fact that an unfavourable assessment had been made was bound to reflect poorly on the financial markets.  Interest rates duly rose, making the Government’s already difficult funding problem somewhat worse.

Will Osborne do any better?

What will the Tories do when they take over next year?   That’s not clear.  They’ve been wimpishly indecisive in their public statements thus far.  But the hope has to be that they take an axe to public spending:  that they quickly sell off publicly owned assets (those of the banks in particular), and reduce the establishment of the Civil Service and Local Authorities by 5% a year during their first term.

Will he act or faff?

On the international front, there’s room for huge savings.  The Middle Eastern wars should be ended immediately (they raise the threat of terrorism rather than reduce it).  And the relationship with Europe should be renegotiated; if necessary abandoned.  Hopefully, Cameron will live up to his half-promise to hold a referendum on the Constitution.

It’s difficult to be optimistic

Even taking such drastic steps, public finances will be slow to return to equilibrium.  Unless there should be a resumption of reasonably brisk growth, tax revenues will disappoint.  It’ll certainly be five years, possibly ten, before the fiscal nightmare created by Brown and Darling fades from the memory.

Except perhaps in relation to the markets.

The good news is that the securities markets will hold up fairly well.  S&P notwithstanding, the indices are on a rising trend.  Inflation is falling and interest rates are drifting down.  Meanwhile, corporate profits (more because of softening wages than firming sales) will be satisfactory.  It’s a recipe for appreciation.  Prospective pensioners can thank the Laws of Finance, not those of Parliament.




Economics Viewpoints : 20 May

May 22, 2009

The place where optimism most flourishes

is the lunatic asylum.

Havelock Ellis, Sexual Psychology or Banking Bravado?

A week is a long time in economics forecasting; a month, almost an eternity.  In mid-April, the consensus was despondent; in mid-May, euphoric.  The change may have been partly a reflection of volatility in economics data, but it was more one of immaturity in forecasting psychology!

Too much wishful thinking and not enough dispassionate analysis.   Those who’d not anticipated the economics downturn wished to minimise its significance.  A powerful recovery in the second half of 2009 would have allowed the prior phase of weakness to be seen as an almost irrelevant blip.  That would have helped restore the self-respect of the establishment forecaster.  Hence, the eagerness (arguably, the bias) with which he greeted the clutch of stronger numbers.

The respite for the poor forecaster is likely, however, to prove only temporary.  The latest figures suggest, not recovery, but retrenchment.  Housing in the States, far from strengthening, seems still to be weakening.  And employment, worldwide, is quickening its rate of decline. 

There will be a recovery of sorts in the next eighteen months, but it’s likely to be cyclical rather than secular.  It’ll be driven by inventory correction, reinforced by fixed investment acceleration, but the chances are it’ll be anaemic.  And, more to the point, a couple of years hence, when the cycle turns down again, the maintenance of still soft secular trends will generate renewed pain, possibly intensified devastation.   

That being the case, what might sensibly be done in the meantime?   Easy:  a thorough-going reorganisation of the economy aimed at facilitating its survival in a period of persistent adversity.  The knee-jerk reaction of politicians thus far has been unhelpful.  It’s made no sense, for instance, to transfer resources from the productive private sector to the unproductive public one.  A reversal is called for. 

Civil Service numbers should be cut severely; Local Authority establishments likewise.  Salary structures, moreover, should be made to reflect the balance between contributions to society and burdens placed upon it.  In this context, the case for an immediate cessation of defined benefits pensions would be unanswerable.  Similarly, a sharp increase in the normal retirement age:  68 for the private sector, 70 for the public sector. 

Elsewhere, the activities of commercial bankers should be reined in:  new regulations introduced to restrict them to areas matching their intellectual and operational competence.  Money transmission mechanisms might be allowed, but investment banking, fund management, proprietary trading, etc, (anything in other words requiring judgment) banned.   Never again should the lunatic asylums be emptied; never again should maniacs, unsupervised, be allowed to run our banks.    

Will that happen?   Not a chance.  Gordon Brown won’t reverse his earlier policies because that would be to acknowledge that they were wrong:  something he finds impossible.  Nor will David Cameron when, inevitably, he is elected.  The Conservatives are frighteningly unimaginative.  They prefer to stick with the old policy they know to be wrong than switch to the new one that they concede might be right!   The new guys will be more honest than the old ones, but, in relation to Europe and Economics, not greatly different.


Economics News : 15 May

May 15, 2009

Nothing can exceed the vanity of our existence,

but the folly of our pursuits.

Oliver Goldsmith, referring to Politics, or Economics or Finance?


People enjoy hunting witches, and tormenting those that are caught.

For a while, stories about the incompetence and venality of bankers had been driven from the front pages of our newspapers by reports of the incompetence and venality of Parliamentarians.  A temporary respite only.  At the end of last week, a Committee of the latter reporting into the affairs of the former found damning evidence of personal greed and corporate irresponsibility.

Especially when they’ve been blighting the crops and souring the milk.

Lord Myners came in for particular criticism.  He had, he said, been too busy to read the relevant papers!   It probably wouldn’t have made much difference had he been less busy.  He demonstrated in subsequent testimony that he understood little of the economics crisis provoked by the banks, nothing of the role played by his chums on their boards.  Ineptitude coupled with naïvety.  He was not the sort of person who should have been appointed City Minister.

The Lords Myners and Turner have much for which to answer.

Lord Turner was also criticised.  Another of Tony Blair’s favourites, he was judged complacent and ineffective before the crisis; complacent and ineffective afterwards.  Like Myners, he saw no defect in himself or the system.  Asked about the future of the financial services sector, he said that it’d be good to have lots more regulation!  

Not as much, though, as Black Knight, Goodwin.

And the reprobates who’d previously run the banks?   What was to be their fate?   Nothing worse, apparently, than exclusion from the R&A.  No financial penalty, no official censure.  They were to keep their ill-gotten millions and even their “honours.”  Brown’s assertion that there should be no reward for failure proved to be as empty as most of the other promises he’d made.

By comparison, appalling economics numbers are a relief.

Meanwhile, the economics data, though mixed, were awful.  All that could be said in their favour was that, in the US, the UK and Japan, they were marginally little less awful than they had been.  In much of the rest of the world, on the other hand, the plunge seemed still to be quickening. 

Difficult not to be cheered by Europe’s tribulations.

Europe was the most obvious problem area.  Its Central Bank was determined to keep credit tight and currency high.  Its Commission, meanwhile, favoured fiscal orthodoxy and social scleroticism.  Little wonder that the region’s economics numbers were dire.

Those for emergers lie mostly ahead.

It was the developing world’s numbers, though, that raised most eyebrows.  A year ago, the consensus had been optimistic.  The Emergers, they said, China in the van, would survive with a degree of composure.  They’d be all the stronger for having had their mettle tested!

Their progress is usually lagged and high beta!

Such nonsense!   The outlook for China and India, for Latin America and Eastern Europe, is not at all good.  They’d been substantial beneficiaries, in the growth phase, of Foreign Direct Investment.  Typically, a third of their gross investment had been financed by overseas corporations.  No longer.  The figure has dipped almost to zero.

Eastern Europe is demonstrating the phenomenon.

Employment prospects are being undermined and consumption is following suit.  Concurrently, exports have collapsed.  Governments are suffering huge declines in tax revenues and are having (China temporarily excepted) to reduce their spending accordingly.

An unmitigated disaster:  it must cut the ties to the ECB.

Last week, Latvia reported a first quarter setback in GDP of 18% (55% at an annual rate).  Why so bad?   Because the prior growth had been financed by borrowed money, which had dried up at the same time that FDI had.  And, to make matters worse, the authorities had been attempting to link the currency to the euro!!!

LatAm will fare less badly.

Are others going to fare as badly?   No.  But some will come close.  As always, Latin America is vulnerable.  The region isn’t as dependent on commodities as it used to be, and its fiscal affairs are in relatively good shape these days.  But that won’t prevent the slide.

But China and India will disappoint.

It’s heavyweights China and India that are the major cause for concern.  Hitherto, governments and analysts have conspired to present a picture of economics health, of immunity from the malaise afflicting others.  Not for much longer.  When first quarter GDP numbers are released, when researchers calculate seasonally adjusted estimates, the pretence will be difficult to maintain.

Equities here will get better; politics here can’t get worse.

The good news is that in a number of old developed countries, Britain, for instance, the news will continue to get less bad.  And their stock market indices, London’s, for instance, will continue their hesitant advance.  Politics will help.  If Labour should be slaughtered in Local Authority and Federal European elections (UKIP being the big winner), a new and better epoch might have dawned.







Economics Viewpoints : 13 May

May 13, 2009

Those whose opinions have proved most wrong in the past

Are rarely persuaded to keep silent in the future.  

Human psychology subscribes to the random walk thesis; it thinks history bunk.


Economics data published last week were significantly ahead of consensus expectations—for the most part, less bad, but, in one or two cases, genuinely better.  Unsurprisingly, the numbers inspired a degree of optimism.  Commentators who’d been blind to signs of impending downturn two years ago now claimed to see persuasive evidence of recovery. 

That there’s to be a measure of relief is not in doubt.  The economics cycle marches to a regular beat:  the last peak (defined by GDP relative to its moving average) occurred towards the close of 2006; the next trough (defined similarly) is due in the middle of 2009.  What is not known, though, is whether the revival will be strong or weak; nor whether the secular trend will be affected.

Economists typically confuse developments in these areas.  In the mid-thirties in the US and UK, a cyclical upturn was interpreted as implying the end of depression.  And in Japan in the last eighteen years, there’ve been three separate occasions when near-term strength sparked talk of longer-term equilibrium. 

All proved to be false dawns.  A couple of years afterwards, the metronomic cycle turned and reinforced the still weak secular trend.  Economies were devastated and psychologies shattered; the disappointment of hardship being emphasised by prior expectation of happier days.

Will the same pattern occur this time?   Possibly.  It would certainly be sensible to guard against the eventuality.  It would be wise, for instance, for the monetary authorities to think in terms of a renewed loosening of conditions in late 2011.  And it would be prudent, additionally, for the fiscal authorities to use the next couple of years to get their affairs in order; reducing penalties imposed on wealth producers, lowering rewards accorded to wealth consumers.

A realistic prospect?   Certainly not.  Incumbent politicians are trying merely to survive day-to-day.  They have no time, no inclination either, to think about the next decade.  Those who were elected some time ago (bound to be held responsible for the economics downturn) know they’ll be out of office by then; they’ll have to console themselves with their over-generous pensions!

In Britain, the feeling of a need to replace Tweddledum with Tweddledee is palpable.  Labour’s Cabinet, like the condemned and unpardoned on death row, are dead men walking.  But who’ll replace them?   The Tories, with their Blair look-alike leader, are still front-runners, but may no longer be shoo-ins. 

Most of the public sees though the expenses charade.  Cameron and Brown weren’t shocked by the revelations.  They’ve known about them for years.  Likewise the top echelons of the Civil Service, those of HMRC (irrefutably complicit in the scam) and most of the media.  Expenses were the mechanism to give backbenchers enough money to keep them compliant.  The surprise was perhaps that MPs proved so cheap!

The good news is that markets, despite the shenanigans, are performing well.  That’s good for the private sector worker who has to finance his own superannuation arrangements.  May he get his just desserts; the loathsome politician likewise.


Medio tutissimus ibis

May 13, 2009

Economics is often driven, not by absolutes,

but by differences between expectation and outturn.

In China, the one is still very high, the other only moderately so; the recession, when it comes, will be severe.



The Chinese authorities have been busy applying fiscal stimulus to their economy.  Taxes have been reduced and public spending increased.  For the moment, the plan is meeting with a degree of success.  Though exports have crashed, investment has surged.

Will the progress continue?   Will it become self-feeding?   Probably not.  The extra investment is almost certainly “borrowed” from the future.  It’s expenditure that has been brought forward to take advantage of favourable tax circumstances.  The corollary is that, a couple of quarters hence, spending will be compensatingly lower.  Growth in the one period will have been faster; in the other, slower.

The simple fact is that fiscal policy doesn’t work.  It transfers activity within sectors, or with periods.  But the underlying trend remains stubbornly intact.  China’s cycle (measured by GDP relative to trend) has been softening for a couple of years, and has probably another six months further to go.  Thereafter, there’ll be a pickup, but not necessarily a robust one. 

If the authorities were really to want to get GDP motoring, they’d try to boost consumption.  As it happens, they have—and failed.  Unsurprisingly so.  Workers know that activity is stalling:  they see the consequences in the reduced purchasing power of their pay packets and in the heightened unemployment of their colleagues. 

This, they say, is not the time to spend, but to save.  Absolutely right.  They’ll not spend freely again until they perceive job security to be high.  That’ll be twelve months or so into the upturn, eighteen months or more from now.

And if the cyclical revival is muted, the industrialists who invested so heavily in the first quarter will be peeved.  Cash is king in the slowdown.  Cheap assets might have been acquired.  If the recovery is anaemic, moreover, and the earlier investment proves to have been excessive, there’ll be a greater reluctance to conform next time to the wishes of the authorities.

Relative to the rest of the world, China’s economy will continue to perform well.  But will it live up to past performance, or to future expectations?   Possibly not.




France about to stumble?

May 12, 2009

For what do we live, but to make sport for our neighbours,

 and laugh at them in our turn?

Jane Austen, referring to the French?



For much of the last nine months, President Sarkozy has been anxious to draw attention to the French economy’s relatively strength.  While Germany and Japan have had to contend with huge setbacks on the industrial front, America and Britain with devastating debt overload, and Raw Materials Producers with seismic shifts in terms of trade, France has seemed almost trouble free:  her Ship of State rocked, but not sunken.

Quelle surprise!    Many had thought the Gallic model, uncompetitive and uninnovative, would be more than averagely vulnerable.   So what had happened?   Who’d worked the miracle?   Could it have been the dynamic President?   He probably thought so.  Modesty forbad his taking the credit openly, but he was delighted when others hinted that he was responsible!  

Overnight, he became the Lawson of the last decade; the Brown of the early part of this one.  The man who believed his own PR.  The one who interpreted good luck as good judgment.  Hmph!   The trouble is that luck cannot be relied on; it sometimes runs out.  It certainly did for Messrs Lawson and Brown.  Humiliating them in the process.

Is a similar denouement in store for Sarkozy?   It all depends on the economy.  And that depends substantially on competitiveness.  Can the French defend their markets?   Can they do so, not just against other members of the EU, but also against Americans, Japanese, Australians and Chinese?

Has the success hitherto been dependent on product and geography?   Luxury rather than hi-tech?   Developed market rather than developing?   If so, will the circumstances that inspired the success persist or not?   The questions are easy, but the answers aren’t.

Investors are wary.  They take the view that Germany will increase its industrial hegemony inside Europe, that the Americans and Australians will dominate in bulk agriculturals.  Where is France’s niche to be?   Fine wines and cheeses, silk scarves and foie gras may not be sufficient.  

April’s industrial production numbers were disappointing.  How will the first quarter’s GDP number be greeted?   There’s room for substantial movement in financial markets in either event.  Good numbers will confound the pessimists; bad ones the optimists.  

The dispassionate observer is probably in the latter group.  He suspects a wrinkle in the data may have boosted perceptions of activity.  He thinks the euro is impossibly high and labour flexibility tiresomely low.  Ireland and Eastern Europe demonstrate the consequences of uncompetitiveness.  It may be France’s fate in months to come.




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TV Appearances

See Roger on CNBC here. He discusses Greece's problem of being uncompetitive.