Damned Statistics

June 29, 2009

If nobody believes them anyway,

it doesn’t matter that politicians lie.


 Apologies to Nick Diamos’ Observations on Anthropology



Is Gordon Brown completely shameless?   Did his promise of openness and transparency, made only a few weeks ago, mean absolutely nothing?   Was it intended merely to stay the hand of the approaching executioner?   Was it a cynical and deliberate falsehood?

Time perhaps will tell.  But appearances are bad.  The decision to publish MPs’ expenses heavily redacted and to hold the Iraq inquiry in private were body blows.  So is the announcement that the Treasury is to abandon this year’s Spending Review.  It had been scheduled for the autumn, but will now be delayed until after the general election.  Why?

The obvious interpretation is that the Government does not wish to own to any spending cuts.  It prefers to preserve the illusion that last year’s grotesquely expensive operation to bail out delinquent banks will pay for itself.  It would like to promote the idea that the economy is going to recover briskly enough to generate the taxes to close the fiscal gap without having to resort to spending cuts.   

The proposition is not absolutely impossible:  economies do sometimes do strange things; they do occasionally surprise on the upside.  But if the authors of the plan were honourable, they’d be prepared to present the numbers openly.  That they aren’t speaks volumes about their motives.

Do Brown and Darling hope the subterfuge will fool the public?   Do they imagine the duplicity will allay voters’ suspicions?   Maybe, but it’s more likely they’ll be exaggerated.  It’d be different if Ministers had acted with propriety in the past.  But they didn’t.  And consequently they’ll not be given the benefit of the doubt now.

It’s more likely that the public would support plans to reduce the size of the public sector.  Over the last ten years, it has had resources showered on it.  Workers in the Health, Education and Transport sectors have been mollycoddled generously; those in the Civil Service and Local Authorities have been feted luxuriously.  Their private sector counterparts, on the other hand, the ones who create the wealth that politicians spend, have had a very hard time of it.  Time perhaps to reverse the process.

The electorate may think it appropriate that public sector workers also begin now to feel the lash of unemployment; the straightened circumstances of falling real incomes.  And what about pensions?   Who in his right mind thinks the one group should be entitled to generous defined benefits and the other to parsimonious defined contributions?   

If Brown were to consult representative focus groups, he might be greatly surprised.  It’s likely they’d tell him that his public sector policies were one of the main reasons for his unpopularity.  In such circumstances, would he reverse them?   Of course not.  He knows that he’s right and everybody else is wrong!





Economics News : 26 June

June 27, 2009

Putting Pigs in charge of Animal Farm was disastrous,

Similarly, Scottish Bankers in charge of Money.


All creatures are created equal . . .

Britain’s steelmakers have made many mistakes in recent years; likewise its bankers.  Both are now in trouble; both ought to be headed for oblivion.  But there’s a difference:  Ministers have chosen to condemn the one and condone the other.  Steel is to be left to its own devices; banking to be lavishly supported by the taxpayer.  The contrast in treatment was illustrated last week when two thousand of Corus’s workers were made redundant, while one of RBS’s, its new CEO, signed on for a publicly-financed hand-out of £200,000 a week!

. . . but some more equal than others!

Is the Prime Minister embarrassed by the asymmetry?   Is he worried that his moral compass might be pointing in the wrong direction?   Possibly.  He knows that, politically, he’s goofed again.  But he consoles himself with the thought that, economically, financial services offer the country a better long term prospect than manufacturing. 

Apparently, bankers fall into the second category.

He calculates that there’s little point in helping the country’s steel sector.  It stands almost no chance of becoming internationally competitive in the foreseeable future; an investment of public funds would consequently yield unsatisfactory returns.  The country’s financial services, on the other hand, have enormous potential.  If the status quo ante could be restored, the benefit to employment and tax generation would be huge.

Their area of special expertise, their Usp . . .

The fallacy in the argument is the presumption that banking and financial services are one and the same thing; that fund management and actuarial consultancy, currency trading and stock broking are synonymous with banking.  What rot!   How could the Government be taken in by so specious a proposition?

. . . is conning brainless politicians!

Did its members not notice that, though banks exist in every country, financial services are concentrated in a tiny minority?   France and Germany have good banks, but bad financial services.  The UK and US score poorly on the one front, but are world leaders on the other. 

Last year, bankers stumbled drunkenly into the cesspit.   

The current crisis was caused by incompetent bankers moving into areas they didn’t understand.  It was their ineptitude in mortgage lending, proprietary trading, hedge funds and derivatives that sparked the collapse.  If Brown had had any analytical ability, he’d have happily sent the malefactors to their doom.  And he’d have initiated legislation that would ban them in future from engaging in activities for which they were intellectually and psychologically ill-equipped.

This year, cleansed by taxpayers, they smell of roses.

If that had been done, there’d have been more bankers losing their jobs and fewer steelers.  And there’d have been no need to pay the CEOs of the rump of the country’s banking operations high salaries.  There’d be long queues of applicants for any vacancies that arose.  The market would set the rate for the job:  arguably comparable to that of a manager of a third division football club. 

For their own safety, and that of their clients, . . . 

And if the Chancellor hadn’t spent public money so foolishly on the banks, he’d have been able to do a variety of sensible things.  He’d have been able to reduce income tax, for instance.  Or he’d have been able to help pension funds by restoring to them the monies stolen by his predecessor.

. . . they ought to be heavily regulated.

Will the alternates do any better when it’s their turn next year?   Worryingly, the answer seems to be No.  The Tories also subscribe to the proposition that bankers are valuable creatures, deserving of taxpayer subsidy.  It’s unlikely, therefore, that helpful regulation will be forthcoming in the next few years.

The risk is that other . . .

The risk is that the authorities, increasingly dirigiste, will go along with the nonsenses emanating from Brussels.  The Commission’s intention has always been the destruction of the City of London.  The project has been given new momentum recently. 

. . . financial services will be instead.

And we shouldn’t look to the FSA for help:  it’s no St. George.  It’s more likely to devour the maiden than protect her.  Interviewed on television recently, Turner sided with the dragon.  He grinned a lot, but objected very little to the Commission’s poisonous proposals.  He’s probably more anxious to deflect charges that he was asleep on watch last year than look after London’s interests.

Brussels is the monster that needs to be doctored.

The good news is that the economy is improving.  It’s probably only a cyclical revival and things might go horribly wrong two and a half years hence.  But, for the moment, GDP is quickening and inflation moderating.  Outside banking and the public sector, wages are stalling.  Prices will shortly be falling.  Unsurprisingly, security valuations (bonds and equities alike) are encouraged.



Economics Viewpoints : 24 June

June 25, 2009

There are few more impressive sights in the world

 than a Scotsman on the make.


James M. Barrie


Bailing out the Scottish banks was not just bad economics, but bad politics as well.  If Brown and Darling hadn’t panicked last autumn, things might have been very different.  If, better still, they’d thought things through in 2007, when credit strains first appeared, it’s not merely the public finances that would be in better shape now, but their own poll ratings as well.

Schumpeter should have been their guide.  Early in the twentieth century, he’d made the obvious point that failures had to fail if successes were to succeed.  Preserving the former amounted to handicapping the latter.  It wasn’t just Lloyds, Barclays and HSBC that had had their status undermined by condoning Scottish incompetence, but the whole of the rest of the economy.  Industrialists and retailers had been consigned to bankruptcy; consumers and pensioners condemned to penury.  And what for?   To preserve the inflated living standards of a bunch of Northern rascals.

It had been a political decision.  Brown and Darling calculated that the psephological advantage north of the border would outweigh the disadvantage south of it.  They were wrong!   Even before the fiscal cost of the operation had become apparent, it was clear that the political one was insupportable.  Scottish voters wanted real jobs, not pretend ones.  They wanted Edinburgh to be a sustainable financial centre not one that depended on the generosity of the English taxpayer.

South of the border, disenchantment with the Government kept on rising.  Last week, when the compensation package of RBS’s new CEO was announced, it reached new highs.  An annual salary of £10 millions?   Plus all the usual benefits?   Predictably, the criticism was intense.

“But he’s a brilliant banker,” said the Government spokesman, “and institutional shareholders have approved the deal.”  That buttered no parsnips, of course.  The first defence was oxymoronic; the second raised a hugely contentious issue in corporate governance.  Were institutional shareholders principals or agents?   And, if the latter, should they be allowed to vote?  

Wouldn’t it be better in law (and more justifiable in morality) for RBS to have sought approval for the CEO’s salary from those who genuinely owned the company?   And what would Unit Holders and Pension Fund Members have said?   What would have been the opinion of Taxpayers?   Not much doubt on that front:  they would have demanded that the plug be pulled, that the life-support system be turned off.  They would have recommended that pesky bankers be awarded salaries in line with their limited abilities; that, if they thought they could do better elsewhere, they should be free to try; that the whole community would benefit if they were to get proper jobs.

They would have said, in other words, that a distinction had to be made between the banking system and the rest of the financial services sector.  The former was trivial and the latter complex.  The contribution to the economy of banks was worryingly negative; that of fund managers and brokers, actuaries and financial lawyers, hugely positive. Salaries ought to reflect the differences.




Economics News : 19 June

June 19, 2009

Is English Gordon Brown’s first language?

A couple of weeks ago, when the Prime Minister was fighting for his political life, he promised to turn over a new leaf.  He said that the future, if it were left in his hands, would be characterised by openness and transparency.  His remarks were welcomed by friend and foe alike.

Was something lost in the translation . . .

But, once again, he’s failed to deliver.  Since then, he’s announced that the long-awaited inquiry into the Iraq war would be conducted in private.  And he’s released details of MPs’ expenses censored by a sea of black ink.  Is the man completely out of touch?   Did he not realise that his actions would be deemed not to live up to his words?   Did he not foresee the public reaction?   

. . . when he used terms like openness and transparency?

It’s possible the public spending debate will cause him similar grief.  Everyone knows that the fiscal situation is appalling and that a period of austerity lies ahead.  So why doesn’t he trust the electorate with an honest discussion of the options?   Why doesn’t he admit that the decision to save the banks was a disastrous mistake, but that, so long as the plug remains unpulled, there isn’t enough resource to continue with high levels of expenditure in other areas.

Iraq and MPs’ expenses have caused problems.  Public spending too?

He could score “brownie points” by inviting opinions on which programmes might be abandoned and which maintained.  Is the continued fighting of illegitimate wars in the Middle East a top priority, for instance?   Does the feather-bedding of corrupt EU officials represent value for money?   The questions are easily posed and the public might have some interesting insights to make.

Fortunately, the economy is stirring.

The economy, meanwhile, is no longer in a tailspin.  Most of the recently published statistics show slower rates of decline; some hint at a return to modest growth.  But what is not known is whether the change is cyclical or secular; temporary or permanent.  It’s not until late 2011, when the cycle will be due to turn down again, that we’ll get an indication.   

But will there be an employment follow through?

Much will depend on what has happened to employment in the meantime.  If there has been a huge shakeout, if the jobless percentages are 5% or so higher than at present, it’s unlikely that the economy will be resilient.  Consumer sentiment will be plumbing the depths, and pension funds dead in the water.

And how bad will be the pensions mess?

The superannuation issue is one that has been kicked into the long grass by pusillanimous politicians for decades.  Everybody knew it was explosive and everybody preferred not to be around when it was detonated.  That option is unlikely to be available if the economy doesn’t recover strongly.

Utterly horrible.

Instead, dozens of failing funds will overwhelm the PPF and the Government.  There’ll be old age penury and a backlash that’ll make the fuss over MPs’ expenses pale into insignificance.  What’ll Ministers do?   Initially, they’ll juggle the numbers and prevaricate.  They’ll tax one man to pay another’s pension.  But that’ll just weaken the economy still further.

The backlash will destroy those associated with it.

In the final analysis, if the superannuated are to have a moderately dignified sunset, there’ll have to be huge compensatory cuts in public expenditure.  The 10% savings that are being spoken about at the moment will be insufficient to square the circle.  And where will the axe fall most heavily?   On the loathsome Civil Servant and hateful Local Authority worker, of course.  The first thing to go will be his DB pension; then it’ll be pay cuts; and then job cuts.

Labour might be replaced as the alternate.

Brown and Darling hope that the surge in public spending they’ve enacted will lift GDP sufficiently to bail them out—politically as well as economically.  On the contrary, it’ll bury them.  In years to come, as taxpayers are struggling with the stifling national debt, they’ll be continuously reminded of the bogeymen who caused the problem.  Not for a generation will Labour be returned to office.

But will wet Tories be any better?

Will the alternates be any better?   Very little, sadly.  They are saying more sensible things about public spending (the bar has been set very low), but not about Europe.  For weeks, Hague was prevaricating.  Now Clarke has come out of the closet.  He’s said that, if the Irish are persuaded to approve the Constitution before a Tory administration takes office, there’ll be no renegotiation!

Probably not!

Really?   Are these guys as out of touch with the public as Brown?   Did they not notice what happened in the European elections?   There’ll have to be another reckoning.  


Economics Viewpoints : 17 June

June 17, 2009

Hope springs eternal in the human breast,

Man never is, but always to be, blessed.


Pope, of economies too.


Led by Brazil, Russia, India and China, a bloc of “emerging” economics powers held their first formal summit in Yekaterinburg last week.  The meeting had two objectives.  To help its members negotiate a path through the current financial turmoil and to demand for them more clout in world affairs.

There was an underlying presumption amongst the delegates that the future lay with the “developing” community.  Time was about to be called on the old guard.  The sustained superiority of the economies of the new demanded a changed world order.

We’ve been here before.  Brazil has been the “coming” country for a couple of hundred years.  Over that period, it’s always been forecast to deliver great things, but never has.  Russia similarly:  always the expectant bridesmaid never the consummated bride.  China and India as well.  They’ve have good runs from time to time, but not managed to keep them going.

Will it be different this time?   The odds are against it.  But it mostly depends on the developed world.  If the current crisis should turn into depression, and if that should provoke protectionism, the outlook would be very bleak.  Developing countries would have nowhere to sell their goods.  Competitiveness would, ironically, be a disadvantage.

So what is happening in the majors?   The jury is still out.  There is some relief on the inventory front, but final demand is far from robust.  Japan illustrates the ambivalence.  Its industrial production rose briskly in the spring after an horrific decline in the winter.  But retail sales and exports are not strong enough to justify expectations of continuing progress.  It’s more likely that activity will consolidate at a low level

The central problem is an imbalance between supply and demand.  Consumers don’t want to buy as much as companies want to produce.  There’s an excess of labour, therefore.  In most countries, that leads to unemployment and even lower consumption.  In Japan, it prompts pay cuts.  But the effect is the same:  the worker lacks the income (as well as the inclination) to spend freely.

In the EZ, the problem is exacerbated by an over-valued currency.  For a decade or more, that allowed a number of member countries to borrow cheaply and invest profitably.  No longer.  The party is over.  There is now financial chaos.  Unless the world economy recovers briskly, there’ll be defaults.

Will the ECB relent?   Will Trichet encourage a resuscitatingly large devaluation?   Possibly.  But there’ll be a price to pay.  Inflation will pick up significantly and Germany, the paymaster, will be irritated.  Will she, like Achilles in an earlier period, sulk in her tent and refuse to participate?

And what of America?   As so often in the past, she looks the best of the bunch.  But sustained recovery is unlikely.  Accordingly, the BRIC countries may have to wait a while longer before they inherit the earth.  Investors oughtn’t to be encouraged to hold their breath.  In the next year or so, valuations may rise everywhere, but the best combination of risk and reward is going to be in the emerged rather than the emerging world.


Economics News : 12 June

June 12, 2009

A moment’s insight may be worth

 a lifetime’s experience.


Oliver Wendell Holmes—the economist might benefit from more of the former and less of the latter.


The economist’s idea of forecasting is to wait until something has happened . . .

Economists have many fine qualities, but the ability to anticipate events is not one of them.  A year ago, the overwhelming majority had foreseen nothing untoward on the horizon.  Six months earlier, they’d thought inflation a greater threat to stability than recession.  Non-economists are no better, of course.  But there is a difference:  the one group recognizes its incompetence; the other doesn’t.

. . . and then say it’s going to.

The demonstration is that, in the aftermath of the calamity that has recently afflicted global activity, very few professional economists have fallen on their swords.  Arguably, almost all should have.  Central Bankers, for instance.  Did those who’d raised interest rates in 2006 and 2007, in the face of mounting indications of cyclical and secular slowdown, think they’d done a good job?   Did they account themselves insightful?   Did they sleep well at night?   

His lack of foresight recently makes him risible.

And what about their opposite numbers in Treasury Departments and Regulatory Authorities?   Why hadn’t they been more alive to the possibility of financial impropriety?   For more than a decade prior to the crisis, money supply had been growing much more quickly than current price GDP.  How so?   What was happening to the extra liquidity?   Was it disappearing into an economics black hole?   Or being used improperly?   Why had there been no intellectual curiosity?

Those in the B-of-E were bad; those in the Treasury and FSA shocking.

If an investigation had been launched, the misbehaviour of the mortgage lenders might have been discovered and remedial action taken.  In the event, nothing was done.  Even after the sub-prime crisis had broken in the US in January 2007, the complacency of the rest of the world was largely unshattered.  Officials in London and Frankfurt, Tokyo and Canberra, couldn’t conceive of comparable misbehaviour at home.  They had to wait until their own crises struck before, in panic-mode, they acted.  And what did they do?   Mindlessly, because they could think of nothing else, they bailed-out the banks!

Why waste money subsidising malefactors?     

Why?   What made them think banks important?   Why were industrialists and retailers, consumers and pensioners, sacrificed to preserve the scallywags who’d been instrumental in causing the problem?   And why did the rest of us let those who’d demonstrated nothing but ineptitude for years beforehand take the helm?   

Why let those who don’t know where they’re going steer the boat?

We knew, for instance, that Mervyn King lacked judgment.  He’d been one of the 350 infamous economists who’d criticized Margaret Thatcher’s policies shortly after she’d become Prime Minister.  We knew that Gordon Brown was similarly incapacitated.  He’d disposed of the country’s gold at the lowest possible price; he’d raided the private sector pension funds; and, unthinkingly, financed two disastrous Middle Eastern wars!   

By not objecting, the rest of us were complicit.

Did we suppose that these underperformers would suddenly become saviours?   And what was their plan anyway?   To take resources from A, and give them to B, in order that B could lend back to A!   What ineffable genius!   Why did anybody take it seriously?  

We approved the punishment of the innocent.

Its implementation helped the banks, of course, but only by harming the rest of the economy.  How long would it be before both recovered?   A matter of months or quarters; years or decades?   Economists and politicians, a little self-servingly, said the cure would be quick; realists feared that it might be slow.

How long before equilibrium is re-established?

In effect, the question was trivial:  was it recession we were facing, or depression?   Was the current debility the weak phase of a single business cycle, or would it straddle several of them?   Nobody knew, least of all those who did most of the talking.

Will it be months or decades?

As it happened, we were quite familiar with recessions, much less so with depressions.  The one was the common cold of the economics world; the other, the plague.  The first was annoying, but rarely fatal to those affected.  The second was devastating, often terminal, blighting the lives even of those who survived it.

Charlatans say the one . . .

The majority of economists assess the current debility as recession.  So it’s probably not.  They reckon the slower rate of decline seen in recent data items will soon turn into unambiguous growth, and that, by early next year, activity will be back to normal.  They fear that inflation, a corollary of the still rapid growth in liquidity, will become a problem shortly thereafter.

. . . realists the other.

The sceptical minority says the parallels with previous depressions are alarmingly close.  They say it’ll take a decade at least, possibly a generation, to re-establish equilibrium.  In the meantime, the chances of inflation are negligible.  






Economics Viewpoints: 10 June

June 11, 2009

If Brown doesn’t want to be thought a lame duck,

 He oughtn’t to quack, waddle and prevaricate like one.


Anas clauda est.


The European Election results were much as expected.  Labour fared badly, but the Tories only moderately well.  And there was no agreement on whether it was economics debility, MPs’ expenses, or European interference that had caused the lion’s share of the disenchantment.  Self-servingly, some politicians argued the result justified an immediate general election; others that it didn’t.

The bottom-line, in any event, was that there’d not be one.  A lame-duck Prime Minister would survive, but do nothing.  There’d be no possibility of new legislation (good), and none either of significant spending cuts (bad).  Gordon Brown seemed already to have decided that he’d pass the time musing irrelevantly about constitutional change!

Significantly, his administration had chosen to ignore the plight of the motor industry.  The van maker LDV was allowed to slide, almost unremarked, into bankruptcy.  And Vauxhall was well on its way to a comparable oblivion.  Too much money had been used earlier to save villainous banks; none now could be found to provide a helping hand for virtuous manufacturers. 

Curiously, the Government was not censured for its actions.  On the contrary, the status of the Business Secretary, the man principally responsible for setting the priorities, seemed to rise.  Though unelected, and indelibly tainted by past misdemeanours, he was treated respectfully by colleagues, opposition and press!

The world economy, meanwhile, disappointed again.  In the US, the pace of decline might have slowed a little, but, in Asia and Europe, it hadn’t.  Japan and Germany seemed to be particularly fragile.  Neither yet had cut employment in line with output.  Each had hoped that activity would turn up in a way that obviated the need to do so.  It hadn’t.  In the months that lay ahead, therefore, there was a risk of huge numbers of lay-offs.  What would that do to sentiment and spending?   It wasn’t impossible that there’d be a quickening in the downwards momentum!

In China and India, moreover, there were lots of ambiguities.  Governments said (and most analysts believed) that growth had been robust.  The latest GDP data were supportive.  But a number of other statistics weren’t.  Imports, for instance, were reported to have been exceedingly weak—falling by an annualised 20% in one case; by 30% in the other. 

Was it possible that both sets of numbers were accurate?   Could GDP have been rising briskly without inducing a correspondingly higher requirement for imports of raw materials, capital equipment and consumer goods?   Of course not.   The data were inconsistent:  one set was wrong.  It was probably GDP—in which case, China and India were already in recession!

And what was to be made of the financial markets?   Why, everywhere, were medium-dated Government bonds declining in value?   Was it the outlook for the real economy that was frightening investors, or that for fiscal deficits?   Probably, the latter—in which case, Treasuries had better start cutting their spending.  The risk otherwise would be a private sector decline that overwhelmed the public sector advance:  a recipe sustained weakness!



Economics Viewpoints : 3 June

June 8, 2009

Everything is relative; change alone endures.

Leon Trotsky; politics or economics, it’s all the same.


There was bad news for the remnants of Britain’s motor industry last week.  LDV, the troubled van-maker was shot back into administration, putting 6,000 jobs at risk.  Its putative saviour, Weststar, a Malaysian aviation company, had pulled out of rescue talks.


The company had asked the British Government for £45 million, but the request was turned down.  The risks were deemed to be too high.   Ministers, newly conscious of fiduciary duties, were reluctant to treat taxpayers’ funds in a cavalier fashion.


Really?   Countless billions had been expended on worthless Scottish banks.  Numberless millions had been lavished on MPs’ creative expenses claims.  But the well had finally run dry.  There was nothing left in the pot to help those who genuinely worked for their living!


It was much the same story at Vauxhall.  The operation was to be dismembered and abandoned.  Obama had helped the American parent, Merkel had supported the German subsidiary, but Brown would ignore the British one.  Business Secretary Mandelson pretended that something was to be done, but, as usual, he was only pretending.


The British public was beyond anger:  protest was pointless.  There was an inevitability about the authorities’ ineptitude.  Nothing could be changed; the process had to be allowed to run its course.  If there was to be revenge, it’d be exacted through the ballot box.  In the forthcoming elections, the incumbents would be slaughtered.  And, if there was to be justice, the miscreants would not get their pay-offs, nor indeed their pensions!


The surprise was that the UK economy seemed to be performing better than those of most of the rest of the world.  In Europe, for instance, things were truly awful.  The region was characterised by scleroticism and inefficiency, uncompetitiveness and bureaucracy.  Its economies hadn’t made much progress when others had boomed; the former would be dreadful now that the latter were contracting.


And the US was also in trouble.  The new President’s honeymoon was over, and the financial markets didn’t like what they saw.  Long bond yields were rising and the dollar was falling.  Tax revenues were inadequate.  Was borrowing to be raised?   Taxes lifted?   Or borrowings escalated?  


And the Emerging world was no better.  Governments might be whistling to keep up their spirits, but the numbers didn’t justify their optimism.  Economies were able to produce stuff, but couldn’t find a market into which to sell it. 


By comparison, the deficiencies of the Government and the Central Bankers and the Regulators notwithstanding, conditions in the UK seemed not to be too excruciatingly bad.  Retail sales were stable; the current account deficit only moderate; and unemployment relatively low.   Admittedly, the fiscal deficit was bad, but that might be tackled by the new administration. 


London’s financial markets, meanwhile, were upbeat:  equities were strong and sterling newly resurgent.  The favourable perception wouldn’t last, of course.  A day of reckoning would shortly come.  But, for the moment, a pale sun was shining and a chill wind abating.



Economics News : 5 June

June 8, 2009

Politicians, when they’ve exercised power too long,

lose all sense of judgment.

The Latvian PM is a good example; Gordon Brown, an even better one.


The financial crisis isn’t over:  it’s moving from developed economies to developing ones.

The Latvian Prime Minister, speaking on television last week after the failure of a Government bond issue, tried to calm the anxieties of international investors.  He acknowledged that the country was in the midst of an economics crisis, but denied that there would be a change of strategy.  He was determined that the country join the EuroZone.  To this end, the first priority would be a reduction in the size of the fiscal deficit.  Currently in excess of 12% of GDP, it would be cut to 3%.

And it’s getting more virulent in the process.

No easy task.  GDP was already falling precipitously.  Slashing public expenditure and hiking taxation would (at least temporarily) make things worse.  But, said the PM, it was a price worth paying.  Long term viability would compensate for near term pain.

Latvia, handicapped by official intransigence, won’t survive in its current form.

Really?   Was he sure that he’d get the viability he craved?   Did he think the EZ scored well on that front?   Did he suppose that the ECB’s policies had promoted competitiveness in Germany or Italy, Spain or Ireland?   Did he judge companies in the EZ to be more innovative than those in the US?   Did he think workers in the one less vulnerable to unemployment than those in the other?

It should be adopting an Anglo-Saxon model, not a European one.

The reality, of course, is that Europe performs less well than the Anglo-Saxon world on just about every criterion.  So why does the Latvian PM nevertheless want to join the EZ?   Probably because he thinks membership is the best route to sizeable subsidies from the Commission.  He may be right.  The German Chancellor will approve of Latvia’s commitment to fiscal orthodoxy.  A cheque may already be in the post.

It’s unlikely that even German largesse will be able to bail it out.

Will that be enough to hold the line?   Probably not.  Latvia is seriously uncompetitive.  At current exchange rates, it may need prices to fall 10% relative to Germany’s, 40% relative to America’s, to re-establish external equilibrium.  How can that be accomplished?   Only by a savage economics setback.  The PM may think the price one that’s worth paying, but the electorate probably won’t.  It’ll let its views be known at the next poll!

Things are not much better in the rest of Eastern Europe.

Things are much the same in the rest of Eastern Europe.  From Baltics to Balkans, the picture is one of crisis and disarray.  It needn’t have been thus.  If central bankers had been better economists and politicians better democrats, priorities in the past would have been different and problems at the moment less severe. 

And Germany itself, the European icon, is failing.

Will the Eastern Europeans learn from their mistakes?   Will they choose their role models in the future more carefully?   Probably not.  It’ll take more than a single financial shock to change prejudices.  It might require years of grinding debility before scales fall from eyes.

Does the Federal Chancellor recognise the problem?

Interestingly, Angela Merkel, herself an Eastern European, has not yet begun to see the world as it is.  In a departure from the usual protocols last week, she criticised the ECB for being too monetarily lax, too sympathetic to the Fed and B-of-E.  It’ll all end in tears, she said.  Aggressively expansive credit policies are the problem, not the solution; they’ll exacerbate the imbalances in the longer term, even if they lessen them initially. 

No.  She blames the US, the UK.  Even the ECB!

She has a point.  But the Realpolitik of the issue is that a problem delayed is one half-solved.  If the crisis can be put off until the excess supply has run its course, the threat of depression will evaporate.  In the meantime, the ECB (and the Fed and B-of-E) will discreetly note that the performance of Germany’s economy in the recent past has been disastrous—and that it was no less appalling in the thirties.  Difficult to argue therefore that Berlin’s authorities were over-imbued with insight on either occasion!

By comparison, Britain’s attractions are rising.

In Britain in recent sessions, sterling has been strong and the securities markets enthused.  Why?   Because the probability of Gordon Brown’s early demise keeps rising.  Members of the Cabinet may be reluctant to tell him to go, but the electorate is less squeamish. 

There’ll be a surge of enthusiasm when Brown goes.

In the Municipal and Federal elections, Labour will be humiliated.  It’ll no longer be possible for the Prime Minister to say he’s getting on with the task set him by the electorate.  It’ll be clear that the electorate has quite different plans for him.  It’ll want him to go.  Reluctantly, but inevitably, he’ll do so.



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TV Appearances

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