Economics News : 31 July

July 31, 2009

Editorial writers aim to sell newspapers,

rather than inform readers.


Being right is a bonus, but only valuable if the paper is viable.





Is it a single real swallow or several imaginary ones?

Judging by the tone of media reports, the world economy is on the mend.  We’re told repeatedly that, though things were pretty grim in the twelve months to mid-2009, they’re decidedly better now.  And it’s presumed, admittedly more by extrapolation than logic, that they’ll be back to something close to normal in 2010.

In other words, does the recovery have legs?

Wishful thinking or reasoned analysis?   Probably the former.  Although some numbers are stronger, most are merely less weak.  And such improvement as there has been is largely the result of inventory stabilisation—the liquidation that began last autumn having run its course by early summer.  It’s the underlying trends, those relating to final sales, that are giving rise to anxiety:  in America, Europe and Japan, they’re continuing to disappoint. 

Final sales are unimpressive.

Retail sales, for instance, are universally and chronically weak:  employment levels are falling and wages moderating.  Corporate investment, meanwhile, is in freefall:  companies have too much capacity, not too little.  It’s only public expenditure that’s rising, and that, possibly, for not much longer.  Voters are getting increasingly restive:  they recognise that it’s they who’ll have eventually to pick up the tab.

Public spending isn’t popular.

In the States, Obama’s healthcare plans are now suffering the same fate as Clinton’s were sixteen years ago.  The public may approve the theoretical principles, but not the practical implications.  The one, as soon as he recognised the psephological repercussions of his proposals, hurriedly dropped them.  Will the other?   Possibly.

A year from now, it’ll be falling.

In the UK, the picture is essentially the same.  It’s the bureaucrats, though, not the ministers, who are preparing plans to cut public expenditure.  The former recognise (even if the latter don’t) that there’ll be a protracted period of austerity following next year’s election.  Budgets for education, transport, defence and health (politicians’ denials notwithstanding) will be cut to the bone.

The recovery, therefore, looks fragile.

So what, realistically, are the world economy’s prospects?   Not good.  It’s likely there’ll be another two or three quarters of mild improvement, and then a resumption of deterioration.  Inflation will stay low, going negative in many countries.  Credit policy will remain accommodative, but overall borrowing will be subdued:  those who can afford a loan won’t want one; and those who want one won’t be able to afford it!

That’s why money policy will stay expansive.

Fiscal policy will tighten:  taxation rising painfully and expenditure falling severely.  The Keynesian experiment will be seen once again to have been an expensive failure.  Sadly, by then, the cabal who implemented it, a fortiori the clique who benefitted from it, will be long gone—beyond the reach of the law, but not necessarily beyond the censure of scribblers!

And that’s why equity valuations are soaring.

So why are equity markets on a roll?   Because the current environment is perfect for them!   They don’t like rapid growth because that means that credit might shortly be restricted.  They much prefer dull activity, so long as it’s associated with reasonably buoyant corporate profits.  Is that a sustainable proposition?   Yes, but it requires the wage earner to take the strain:  labour must accept a diminished share of the pie in order that capital take an augmented one.

Profits rising at the expense of wages.

And that’s precisely what’s happening.  In the US, it’s employment that is being cut back.  In Japan, it’s pay levels.  But the effect is the same in both:  inflation that’s low (or negative); interest rates that are negligible (and likely to stay so); profits that are rising slowly (but sustainably). 

The indices will keep appreciating.

The consequences for valuations are sizeable.  Currently, most markets trade on multiples in the low teens.  Actuarially, they deserve something closer to 25!   Things are changing, though.  Analysts are becoming bullish; investors are looking for higher beta (usually, equity in preference to fixed income or property). 

Commodity producers trailing.

And which geographical locations are likely to perform best in these circumstances?   Not commodity producers, of course.  They’ve had their run.  They’ll not have another for several years. 

Tokyo and Geneva look good.

Industrial countries are to be preferred—so long as they’re competitive but not so competitive as to risk protectionism.  Most EU members are vulnerable on the one front; China possibly on the other.  Japan may be the safest of the majors; Switzerland the most attractive of the minors. 

The DC pension deserves it—and more.

In any event, it’s reasonably good news for the pensioner.  He’s suffered agonies in consequence of the pitiless Brown and his gang of bullies.  He deserves some respite.  With luck, he’ll get some:  equity valuations rising more than 10% in the remainder of 2009; a further 25% in 2010.





Economics Viewpoints : 29 July

July 29, 2009

You cannot slander commercial banks;

 They are worse than words can paint them.


Apologies to Charles Haddon Spurgeon.



The taxpayer-financed bailout of the failed Scottish banks was a disaster from its very inception.  Huge sums of money were drawn from viable parts of the economy to support organisations that had surrendered, because of chronic incompetence, the right to exist.  The logic of Schumpeter was thereby denigrated; the sophistry of Balogh commended.

It was difficult to imagine things getting worse.  But last week they did.  John Kingman, CEO of UK Financial Investments—the company in which the taxpayer-owned assets of RBS, Lloyds, Northern Rock etc were lodged—resigned.  It was reported that he’d be joining an investment bank.  The assumption was that he’d been recruited to exploit his contacts in the civil service and commercial banks.   

Had he done anything useful while he’d been at UKFI?   Oh yes; he’d appointed Stephen Hester to head the RBS operation and he’d approved the £10m per annum compensation package!  Asked whether he thought the cost might be a tad high, he defended his judgment call:  Hester, he said, coining the memorable oxymoron was a “brilliant banker.” 

So what happens now?   Sadly, more delay and more expense.  The fear is that Whitehall will be ripped off by Kingman’s new employers.  If, when the media spotlight was shining most brightly on banking debility, Treasury Mandarins were taken in so comprehensively by rapacious head-hunters, what excesses of fiscal debauchery might street-wise investment bankers not be able to inflict on them in the future?  

And who’ll be in a position to protect the chronically abused taxpayer?   No point in looking to politicians for help.  The Browns and Darlings of this world are clearly out of their depth.  They didn’t see the problem coming.  They were clueless when it struck.  And they’re shell-shocked now. 

Nor do the Tories offer much hope.  If they’ve any financial competence in their ranks, they’re hiding it fairly well.  Asked recently if they thought last year’s bailout was sensible, they said: Yes!   Asked if they’d continue it when they assumed office next year, again they said: Yes!  

The fact of the matter is that the public authorities are not very good with money.  It’d be best, therefore, if they were to be kept as far away from it as possible.  It was always insane to transfer resources from non-banks to banks in order that the latter could lend them back to the former.  Anybody who thought otherwise—the entirety, it seems, of Whitehall and Westminster—was daft.  The pity of it was that the public didn’t say so, nor the press.

The action plan now?   We discourage children and halfwits from playing with fire; we ought similarly to dissuade politicians and bureaucrats from playing with money.  Kingman should never have been appointed to a job which demanded financial expertise and psychological maturity.  And he should be banned now from moving to an investment bank.  As with other classes of offenders, it’d be undesirable to put him in a position to continue to abuse those who’ve already suffered so much at his hands.



It’s not their money

July 27, 2009

Budgets must be balanced and arrogant officials controlled.

Otherwise the nation will go bankrupt.


Cicero, then or now?


Appearing on the Andrew Marr show on Sunday, David Cameron seemed reluctant to talk about his plans to resolve the country’s fiscal mess.  He was happy enough to make bland assertions to the effect that NHS spending and Overseas Aid would be sacrosanct.  He was keen to let it be known that his administration would be less wasteful than Brown’s.  But he was careful to put no meat on the bone, to provide no details. 

How was that to be interpreted?   That he didn’t know where the cuts should be made?   Or that he wasn’t prepared to say?   If the former, he opens himself to the charge of incompetence.  If the latter, to hypocrisy (all that guff about openness and transparency not amounting to a row of beans).

The reality is straightforward.  The savings have to be made in labour costs, particularly those relating to pensions.  The first thing that Cameron must do is raise the retirement age for civil servants and local authority workers, and scrap DB benefits.  The second is to freeze salaries (and promotions) for five years.  The third is to reduce the head count by 20%.

The next target:  Higher Education.  It’s been a disaster under Labour.  Most Universities are not fit for purpose.  A quarter of them should be closed immediately; another quarter within five years.

The Middle Eastern Wars are expensive and counterproductive.  They’re not lessening the risks of terrorism, but increasing them.  They’ve got to be stopped and, if possible, the degenerates who started them put on trial.

The EU is another expensive nonsense.  Britain makes huge payments into the system, but gets nothing out of it.  A debate would be sensible; a referendum essential.  Withdrawal would be the likely result. 

Will Cameron do any of these things?   On television, he didn’t mention public sector pensions!!!   He seemed to say that he thought he had a moral duty to continue the wars, not end them!!!   And, most outrageously of all, he has all but told us that he’s willing to let the Irish decide whether the Brits should be allowed to voice an opinion on Europe!!!



Economics News : 24 July

July 24, 2009


There is no way of keeping profits up,

But by keeping wages down.


David Ricardo, as true now as at the beginning of the nineteenth century.

Economies may not be sprouting many green shoots . . .


Equity markets are on a roll.  In Europe, America and Asia, they’ve been rising strongly for several weeks.  Currently, they’re establishing new highs for the year. 

. . . but equity markets are.

What’s caused the enthusiasm?   Excellent results, for the most part.  Companies reporting on their trading activities in the recent past have declared better than expected profits—albeit allied to worse than expected sales.  Unsurprisingly, investors have been impressed.  They’ve welcome the rise in margins.  They’ve recognised that, if 2010 were to bring an economics recovery, the accompanying profits advance would be extraordinarily strong!

Governments are claiming success!!!

Politicians and central bankers have smiled nervously at these developments.  They’ve claimed (not wholly convincingly) that what’s happening now in finance will soon be replicated in employment.  In that event, of course, they’d be able to claim that the fiscal and monetary policies implemented in the last twelve months were justified!

Probably prematurely.

They may be disappointed.  It’s possible that profits will stay strong, but wages weak; consumption anaemic, but capital spending not compensatingly robust; corporate balance sheets healthy, but personal ones ailing.  If so, economics conditions might barely stabilise, and the (psephological) status of Ministers continue to decline.

Profits are rising at the expense of wages!

There is particular vulnerability in relation to the official treatment of commercial bankers.  Why, it’ll be asked in many countries, were these money-lending miscreants, instigators of all our woe, helped with taxpayer funds?   Why should their incompetence be condoned when that of others is censured?   How are voters going to react to the announcement of astronomic banking profits and huge executive bonuses?   Will taxpayers be happy to pick up the losses but not be allowed to share in the gains?

The UK has a particular problem.

These issues may be particularly pertinent in the UK.  There, the banks misbehaved outrageously but were supported unconscionably.  Brown claims his actions were proportionate, though he’s unsure of his ground.  Likewise Cameron.  It’s an issue that needs hard thinking.

Surgery is necessary.

The country would benefit from having another Keith Joseph.  If the system’s financial fabric is to be repaired, if the fraying is to be halted, a willingness to adopt radical proposals would be useful.  Margaret Thatcher was.  She questioned instinctive Tory loyalties.  Will Cameron?

Bankers must be muzzled.

The obvious starting point is the acknowledgement that banks have become too big.  The failure of any one of them threatens systemic disruption.  The solution is obvious:  banks have to be cut down to size.  And not by simple sub-division:  no one wants merely to replace maxi-disasters with mini-ones; what’s required instead is something that prevents bankers doing themselves and others any more harm. 

Constrained from anything other than clearing cheques.

The answer is that they be excluded from activities for which they’re unqualified, intellectually and psychologically.  They oughtn’t to be allowed to dabble in fund management, investment banking, estate agency, derivatives, proprietary trading, etc.   Simple money transmission is their speciality.  They must stick to it.

The world must be made safe for the taxpayer.

They’ll squeal that, in such an event, they’ll be set at a competitive disadvantage relative to their rivals elsewhere in the world.  On the contrary:  once customers know that their money is safe, no longer at risk from toxic executives, banks will benefit from a competitive advantage!   Money will pour in!

And the City of London unleashed again.

And the City of London will benefit as well.  With no bankers to sully their name, the status of currency traders and fund managers, brokers and accountants will soar.  No longer handicapped, London will dominate, as never before, the financial services world.

Will Tories rethink their prejudices?

Perhaps the Norwich North by-election result will shake up members of the Tory hierarchy.  They won the seat, but unconvincingly.  Given the expenses scandal, given the horrific GDP numbers, there should have been a landslide. 

Will pensioners have their day in the sun?

The only good news is that the securities markets are rising.  A triumph of hope over experience?   No; it’s sound logic.  Things are going to get better.  The public sector will be disciplined and the bankers emasculated.  Equities will soar, gilts advance and property stabilise.  More importantly, downtrodden pensioners, long forgotten, will fare better.  And not before time.




Economics Viewpoints : 22 July

July 22, 2009

What cannot be changed has to be endured!

Zeno’s stoicism may be intellectually coherent, but it’s psychologically unsatisfactory.


Demonstrating a less than wholehearted commitment to openness and transparency, the Brownian Government delayed the release of details of public sector borrowings (historic and forecast) until the last day of the Parliamentary session.  As a result, the PM hadn’t to face critical questions in the House; just in the Country and the Press.  Was the benefit worth the subterfuge?   No; people have lost interest in Cabinet incompetence; they take it for granted. 

The country knows that the Treasury is hopeless.  Everything it touches turns to dust.  And it knows also that there’s no chance of near-term respite.  Ministers have no intention of leaving office before they’re forced to.  In the meantime, the economy will deteriorate and debt mushroom;

The hope is that a new administration will be cleverer or (preferably) luckier.  What’s required is a 20% cut in public spending.  Interestingly, senior Civil Servants (turkeys savouring Christmas) are said to be working on such a plan.

The first steps would be easy, and wildly popular.  A freeze on pay and recruitment in the public sector, and a higher retirement age (70 say) for workers there; a comprehensive cull of regulatory authorities, quangos and special advisers; and a discontinuation of unconscionably generous taxpayer-funded DB pensions.  Education, Health and Transport, bottomless pits of waste in the past ten years, would come in for special scrutiny.  Higher Education would be savaged—75% of “pretend” Universities being shut. 

The benefit to the economy would be substantial.  Debt would be contained and taxation kept at reasonable levels.  More importantly, displaced public sector workers would get proper jobs—ones which created resources rather than consumed them.

On a slightly longer term basis, there’d be huge savings to be made by ending hostilities in the Middle East.  The exercise has been ruinously expensive on the one hand, morally illegitimate on the other.  And there’d be similar benefits to be gained from a withdrawal from the EU.   More democracy, less mendacity and less expense!

Might any of this happen?   No.  The Tories will get elected, but will faff around for a year or so thereafter.  In opposition, they’ve been spineless about the public sector, the wars, the EU and even MPs’ expenses.  Will they be any better in power?   Of course not.

The good news, and there’s very little of it, is that the securities markets are rising.  Rates of inflation are likely to stay low for years, and interest rates likewise.  Moreover, corporate profits will advance—the result of cost containment rather than sales momentum.  That might be bad for the economy and the authorities who promised a speedy return to happier times, but it’ll be good for asset valuations and hard-hit pensioners.

If equity indices rise 15% in the remainder of 2009, and 25% in 2010, DC pensioners will get a sizeable boost to their retirement incomes.  If, additionally, they work for an extra year or so, they’ll be almost back to the position they had prior to Brown’s raid on their schemes in his first budget




Peter’s Principle

July 20, 2009

Success is the ability to go from one failure to another,

 with no loss of enthusiasm.


Sir Winston Churchill, referring to politicians or central bankers?



We all say stupid things occasionally.  Most of us are fortunate in not having our inanities recorded for posterity.  The world doesn’t chuckle, repeatedly therefore, at our bêtisisms.   That’s not the case for senior politicians, high government officials and football superstars.  Their indiscretions often achieve widespread currency, sometimes immortality.  Football players are a special case, of course:  nearly everything they say is banal.

But when Brown makes an ass of himself on U-tube, when Obama throws a girly pitch at the opening of the baseball season, millions of people want to watch, to inhale heady draughts of Schadenfreude.  Many of them will store the clip on their PCs so that their children might be amused in years to come.  As a rule, it’s the mal mot of the pompously self-opinionated that is thought most delightful.

Trichet gave us one to relish a couple of days ago.  “Pulling out of the slump,” he said, “is primarily a matter of confidence, not solvency.”   “To promote recovery what we need to do is strengthen sentiment,” he added.

So it transpires that Trichet is a closet psychologist.  He’d demonstrated long ago he wasn’t a straight economist.  Now, it seems, he thinks stability or volatility in the EZ economy is less the consequence of the money policies implemented by the ECB’s Governor in Frankfurt than of the animal spirits of consumers in Toulouse or businessmen in Stuttgart.

It’s an interesting hypothesis, but not one that yields obvious practical implications.  Credit can be varied, albeit imperfectly, by altering interest rates and banking regulations.  But how is psychology to be influenced?   Will people become optimistic because politicians, central bankers or functionaries tell them to?   Hmph.

Does Trichet really believe this stuff?   If so, why did he become a central banker?   It’s as if an atheist had accepted the role of Archbishop of Canterbury.  Not on, really.  

Or is the man preparing his defence in advance?   Realising he’s made a mess of the job, is he stating his case before being brought to court?   It didn’t matter, M’lud, that I mis-analysed the state of the economy.  It wouldn’t have helped if I’d seen things more clearly and cut rates more quickly.  Activity doesn’t depend upon credit policy, but upon sentiment!  It wasn’t my fault, but somebody else’s!

Quel juriste!


The EU is slowing not quickening!

July 20, 2009

If men are wolves to men,

 central bankers must be wolves to economies.


The Assyrian coming down like the wolf on the fold?


The EU recorded an increased trade surplus in June, imports having fallen more quickly than exports.  A further sign of improving economics activity, claimed many analysts.  Bloomberg concurred; so did the Commission and the ECB.

Probably not so.  Although an improved trade surplus would, other things being equal, imply heightened GDP, it’s exceedingly unlikely that ceteris were paribus.  External trade is not statistically independent of the domestic economy, but a faithful refection of it.  The relationship between imports and aggregate demand is reliably constant:  the higher the one, the higher the other.

It’s almost certain that the EU’s trade position improved last month because its internal demand was weak.  The surplus should be seen as an indicator of continued debility, not of resumed vitality.  Indeed, the anxiety is that industry in Europe seems not to have shared the resilience that occurred elsewhere.  If it had, if inventories had rebounded as they had in Japan and Singapore, imports of raw materials would have been rather stronger, the trade balance somewhat weaker.

There are excellent reasons not to let gloom become too pervasive, but it does no good constantly to draw attention to non-existent green shoots.  Before long the public will cease to pay attention to contrived optimism.  The message will be ignored merely because it is the Commission or the ECB (serial economics mis-analysers both) delivering it.  

The little boy, who cried “loup!” when none was there, was first ignored, and then thrashed by the villagers; the little énarque, who cries “rebondissement” in similarly inappropriate circumstances, deserves to be treated in much the same way.


Good guys do worse things than bad ones!

July 20, 2009

It’s difficult to keep a sense of irony,

when avoidable errors are so common.



If humour is the hygiene of the mind, it has to be acknowledged it’s sometimes a painful enema.


Robert McNamara, US defence Secretary from 1961 to 1967, died at the beginning of July.  In many respects, he’d been the instigator and architect of the Vietnamese war.  In 1964, he’d told the President, the American people and the world at large that there was no doubt that North Vietnam’s patrol boats had fired on US destroyers.  That was, in his eyes and those of the President, a sufficient casus belli.  Hostilities were consequently commenced and the rest is history.  Sixty thousand youngsters from America (and its allies) died.  So did a couple of million Vietnamese.

After the event, it turned out that the “incident” had been illusory:  the Americans, firing at their own radar shadows, had thought themselves under attack.  There’d been no patrol boats involved.  Whether McNamara knew that at the time is not known.  What is certain is that he’d been keen to halt the spread of communism, and thought that armed confrontation might be the way to do so.

Decades later, we’re back to where we started.  The wars against Iraq (and possibly that against Afghanistan) were also the result of misinterpreted intelligence.  And it’s an open question as to whether the WMD error was deliberate or accidental.  What is clear is that, even after it was known that there’d been no hardware threat, there was no reversal of policy. 

And just as the Vietnamese war went on after its authors, Kennedy and McNamara, had departed the scene, so the latest armed adventures have continued after their equivalents, Bush and Rumsfeld, left office.  It is, it seems, easy to declare war; much more difficult to acknowledge that it was wrong to do so.  For politicians (and perhaps for many of the rest of us), it’s more important to preserve image than lives.

One more parallel relating to the duration of hostilities:  they continue even though it’s clear that the confrontation is proving politically counterproductive.  Before Kennedy had gone, it was fairly clear that the war was not only unwinnable, but was proving politically counter-productive.  Far from limiting the spread of communism, it was encouraging it. 

Communism was given a raison d’être by war (cold in the USSR, hot in Vietnam); it was destroyed by peace.  The latter underlined the incompetence and corruption that the former had hidden.  Moscow and Hanoi collapsed shortly after hostilities ended.

The picture is not dissimilar in the Middle East today.  It’s abundantly clear that the wars in Iraq and Afghanistan cannot be “won.”  It’s equally clear that the prosecution of hostilities is fostering (“justifying” and “glorifying”) Islamic terrorism elsewhere. 

If the Americans in the sixties had wanted to lengthen the political lifespan of communism, they could hardly have done better than declare illegitimate war against Vietnam.  If, in the current decade, they’d wanted to enhance the recruitment of suicide bombers, illegitimate war was the way to go.  

To some extent, the Americans must be forgiven their misjudgements.  They are young and naïve.  They know no history.  They’ve not experienced much religious persecution and don’t know the (generally divisive) effects it has on society.  Regrettably, they seem to be rather slow learners.

 There can be no such indulgence afforded to the Brits, though.  They are older and wiser.  They have the experience.  Blair must have been a monster, therefore, to let his country be sucked into the mire.  Brown, as bad, to finance the lunacy when he was Chancellor, and not to call a halt to them when he became Prime Minister.

Let’s hope we’re spared the final irony of public honours being awarded to the monsters.  After the Vietnamese dust had settled, McNamara was not censured, but awarded the prestigious role of World Bank Chairman.  Will Bush and Rumsfeld, Blair and Brown, be treated with similar respect?   Sadly, the answer may be yes.  Plus ça change.




Economics News : 17 Jul

July 19, 2009

Corporate profits are growing strongly.

The corporate earnings season kicked off briskly last week.  A raft of companies reported their second (calendar) quarter results, and most were well ahead of analysts’ cautious estimates.  But it looked as if the advances were driven more by cost containment than sales progression.  Indeed, real activity (nearly everywhere in the world) continued to be subdued. 

It’s because costs are falling faster than prices.

The reduction in costs had been most obvious in interest rates and commodity prices.  But there were significant parallels also on the labour front:  pay settlements slowing and employment numbers falling.  Each of these softening trends, moreover—labour on the one hand, raw materials on the other—looked set to continue for several more months.

The trend will continue for some time.

Much, of course, would depend on the shape of the economy’s cyclical recovery.  If activity were to disappoint, if lower interest rates and higher public spending were to fail to fire up private sector enthusiasm, speculators’ bull positions in metals and energy would be unwound.  Prices then might slide another 25%.

Driven by speculators on the one hand, unemployment on the other.

Labour costs would be subject to similar forces.  Currently, there was huge over-manning in most parts of the world.  Employers were gambling on a resurgence that would be both powerful and immediate.   If, instead, it turned out to be anaemic and delayed, layoffs would start in earnest.  Employment would be cut at anything up to ½% a month, and real wages would be squeezed correspondingly.

Do higher profits imply economics recovery?

Many investors (and most politicians) were quick to cite the profits improvements as evidence of economics recovery.  Whether their error in doing so was deliberate or accidental is not known.  It’s possible, though, they’ll regret their intervention.  The general public is already rather suspicious of government and big business.  It’s widely thought that they’re more concerned with their own interests than those of the community.

No.  But they add to popular disenchantment.

That impression was strengthened in the aftermath last week of profits announcements from two large US banks.  Both produced sparkling results and both now want to pay their senior executives huge bonuses.  Will they be allowed to do so?  

Bankers are thoroughly distrusted.

Weren’t these the organisations which, only a few months ago, were said to be teetering on the edge of the abyss?   Weren’t these the ones that had in consequence to be supported by public funds?   Weren’t industrialists and retailers driven into bankruptcy, workers and pensioners into penury, to save these same rascals?

But they seem not to appreciate it.

Do the bankers feel any shame?   The government officials any guilt?   Apparently not.  The newspapers covered the numbers fully.  But didn’t have to interpose a single mea culpa.

Government officials similarly.

Understandably, the taxpayer in the US feels conned.  Likewise his opposite number in the UK.  In both countries, bankers, though not clever enough to spot the investment scams that lost their shareholders countless billions, were sufficiently skilled to persuade politicians that economics recovery depended upon a prosperous banking sector.  To this end, non-bankers had to give money to bankers in order that the latter might lend it back to the former!!! 

Are they fools or knaves?

Did nobody in government comment on the absurdity of the proposal?   If the objective had been to help the non-bankers, why not leave the money with them?   Was the objective then not to help the good guys, but the bad?   Very possibly.  When the bankers got hold of the money, they didn’t lend it.  Too risky, they said.  They kept it for themselves. 

They show no remorse, no contrition.

And was there any criticism from the authorities?   Did central banks acknowledge that the policy had been ill-conceived?   Did ministers or regulators?   No.  They all looked the other way.  They all hoped that economics resurgence would moderate the anger of the people and allow official incompetence to continue unchecked.

Electorates will eventually have their say.

That’s an unlikely scenario.  There’ll be lots of changes.  Incumbent governments will be replaced by their alternates (good) and regulation will be stepped up (bad).  It’s unlikely, of course, that Tweedledum will be any better or worse than Tweedledee.  But increased regulation is always harmful—employing potentially valuable members of society in pointless activity prevents their doing something worthwhile.

But security prices are set to rise!

The good news, and there’s not much of it, is that asset valuations will rise.  Bonds will appreciate because inflation is headed into negative territory virtually everywhere.  And equities will follow suit because profits are going to be quite strong.  There may be a rise of 15% left in the indices in the remainder of 2009; as much as 25% in 2010.



Economics Viewpoints : 15 Jul

July 19, 2009

From the perspective of personal liberty,

banking institutions are more dangerous than standing armies.


Thomas Jefferson, (attributed)  Who’d disagree?


The surprise is not so much that global inflation has been falling in recent months as that the consensus was surprised by its dong so.  What had forecasters expected?   That commodity prices plunging by 40% since end-2007 would have had no effect?   That GDP and retail sales declining by between 3 and 7% in the last twelve months would have left the pricing power of retailers unscathed?   That swathes of excess labour (between 5 and 10% in most countries) would have caused pay settlements not to moderate?

Apparently, that’s exactly what many of them did think!   Almost to a man, they’d forecast a powerful economics recovery in the second half of 2009 and a significant acceleration in inflation in 2010.  Almost to a man, therefore, they’d advised investment clients to steer clear of Government bonds.  The combined impact, they calculated, of the fiscal stimulus and the monetary accommodation would spell financial disaster.  By mid-2010, the authorities would be hiking interest rates to restore equilibrium.  In such circumstances, bonds would be spurned; government bonds, handicapped by record issuance, would be the least favoured asset class of all!!!

The strategists got it wrong because of the errors of their economist colleagues.   Real activity did not rebound strongly.  There was an inventory-based revival in GDP in the second quarter, and the public sector’s spending did surge, but the private sector’s final sales were compensatingly weak.

And they’re likely to continue to disappoint.  The reason:  ironically, it’s the outlook for inflation.  Every time prices retreat, real interest rates rise.  Already, the consumer and industrialist are confronted with a cost of credit that discourages spending.  And things will get worse in the months that lie ahead.

In the last six months, consumer prices in North America, Western Europe and Developed Asia have all be been falling at something between 2 and 4% per annum.  That means that the real interest rate the consumer is charged is well into double digits.  Who can afford such an expense when wages are barely rising?   Only the pampered civil servant and the loathed banker—both of them supported by taxpayer financed handouts!

It’s worse for the industrialist.  Producer prices have typically been falling by between 5 and 10% per annum.  Using this number to calculate the corporate sector’s real cost of credit yields a number well into the teens.  Whose cash flow is fat enough to afford such elevated rates?   Only those that are protected from market forces:  state monopolies and banks most obviously.

No surprise, therefore, that consumption has been flat and investment soft.  And who would seriously expect a change in trend in the near term?   Deterioration looks more likely than amelioration.  When inventories have been re-stabilised, business activity will subside.  And when excess labour is dismissed from offices and factories, personal activity will follow suit.

Later, of course, there’ll be a public sector reckoning.  But that’ll just add to the economy’s near term anaemia.  Good for government bonds, though; and not at all disastrous for equities.



Next Page »

Contact Roger

Send Roger an email using our contact form.

TV Appearances

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