Economics News : 28 August

August 28, 2009

The politician’s a failure if he’s blamed

 for disasters caused by others.


Apologies to Carl Stengel:  was he thinking of the First Lord of the Treasury?


The PM seems not to be able to handle bad news.

It’s not been a good week for Gordon Brown.  Economics developments (that he couldn’t affect) were bad; political decisions (that he could) even worse.   Unsurprisingly, his electoral support fell.  He’d run out of ideas, but didn’t know how to quit with dignity.

He fluffed Lockerbie, for instance.  He lacks credibility.

Newspaper headlines concentrated on the release of the man convicted of the Lockerbie bombing.  There was lots of emotion, but very little logic.  Nobody came out of the process looking good:  not the Scottish Justice Minister, who seemed surprised that his decision had caused a furore; not US politicians, who failed to see any parallel between Gaddafi’s treatment of Al Qaeda and theirs of the IRA; not the direful PM himself, ensconced in his Scottish bunker, who thought silence a substitute for insight.

Too many reprobates have been too close for comfort.

There was widespread suspicion of duplicity.  People speculated on the nature of the deal that had been done.  Had Al Megrahi been released to prevent an inquiry that would embarrass intelligence services, or to secure supplies of Libyan oil?   Some saw Mandelson’s putative involvement in the negotiations as confirmation of misbehaviour.  Others thought Salmond’s continual references to “due process” camouflage for complicity. 

Quis custodiet ipsos custodes?

Not many asked how it had come about that a bunch of indifferently qualified medics were in a position to subvert the judgment of a court of law.  When had ill-health become justification for judicial review?   Was it the result of a “parliamentary statute” or “established precedent”?   If the latter, shouldn’t competent legislatures review the matter? 

The goal was open, but Brown shot wide!

Brown had had a golden opportunity to appear intelligent.  Without criticising MacAskill or Gaddafi, he could have played the Statesman.  He could have spoken of the need to protect the will of the people from the input of gullible (or corruptible) advisers. 

He was agonising about the economics numbers.

He didn’t because he was probably focusing on the economy.  Sadly, at a time when the rest of the world looked as if it were pulling itself (perhaps temporarily) out of recession, Britain appeared to be descending ever deeper into the mire.  Its GDP numbers were revised downwards; its capital spending to shockingly low levels. 

His fiscal policy is in tatters.

It was difficult not to conclude that Brown’s response to the crisis had failed.  The huge increase in public expenditure hadn’t encouraged the private sector, but discouraged it.  Belatedly and grudgingly, he acknowledged his error.  He began to plan a reversal of policy.  Too late, of course:  it’d offend radicals a lot, but only please conservatives a little. 

It’s made worse by EU membership.

More bad news came when it was announced that there was to be a 60% increase in Britain’s contribution to the EU budget.  Did the PM think that good value?   Did he question Blair’s earlier surrender of the rebate?   Did he propose that Brussels act to limit waste and corruption?   Did he think a referendum on continued membership of the Union a good idea?     

And worse still by military encumbrances.

What about Afghanistan?   The war was being lost.  But Brown was unable to act:  he couldn’t withdraw for fear of offending the Americans; nor commit additional resources for fear of causing more death.  If he weren’t careful, he’d end up Lyndon Johnson to Blair’s Kennedy; the man who inherited the war being blamed more than the one who started it!

The final straw:  bankers!   They’ve embarrassed him in the past.

The final muddle into which he blundered related to bankers’ bonuses.  Of course they were a scandal, but one largely of his making.  It was he who’d wanted to bail out bad banks.  It was he who’d channelled countless billions of taxpayers’ funds into them.  The intention had been that they would use the revenues to help out desperate companies and hard-pressed house buyers.  He’d been too unworldly, though, to realise that, once they’d got the money, the bankers would keep it for themselves.

And’ll do so again in the future.

So what’s his solution now?   That the regulators (the one bunch of City n’er-do-wells less trusted and less competent than bankers themselves) supervise levels of emoluments!   To many observers who’d thought themselves inured to the PM’s lack of judgment that will seem an elaborate joke in bad taste!

Fortunately, market indices are rising!    

The one consolation:  security valuations are rising.  Investors know that they haven’t long to wait for blessed release; their only anxiety, that Tweddledum be no better than Tweddledee!   Even so, the FTSE at 5000 at year-end is a good bet; at 6000 twelve months later, a reasonable prospect.  




Economics Views : 26 August

August 28, 2009

Decisions are made by those who’ve got the time,

and presume the talent.


 Apologies to Scott Adams—Governments, Companies, Churches etc.


Politicians think the problem’s solved.

Central Bankers gathered in Jackson Hole last week for their annual review of the state of the world economy.  Their deliberations were more cautious than optimistic.  The immediate crisis had passed, they concluded, but the longer term debility was likely to persist. 

Central Bankers aren’t so sure.

Savage declines in GDP, mostly inventory-driven, were over.  Growth had resumed.  But the extent of the latter in relation to the former was disappointingly modest.  Unemployment was going to blight the world for a protracted period.

GDP isn’t falling any longer, or banks failing . . .

Commercial banks had survived the turmoil remarkably well.  But that was unsurprising, given the elaborate life-support systems.  The cost to the rest of the community was cripplingly high, of course—industrialists and retailers ruined, consumers and pensioners impoverished—but financial melt-down had been prevented.  Whether the sacrifice, wholeheartedly recommended by the authorities, had been worthwhile was not yet known.  History would decide.

. . . but unemployment is set to soar.

The immediate future was reasonably satisfactory.  In the third and fourth quarters, activity in most countries would rise.  But not by enough to stabilise employment.  On the contrary, job losses would accelerate alarmingly.  That would undermine consumer spending and justify more redundancies.  A vicious circle would develop.  Activity would slow again; it might decline. 

The authorities are understandably nervous.

This was a scenario that frightened Central Bankers and Governments.  Setbacks that were short and sharp were bearable; that that were long and dull might not be.  If the latter were to occur, the authorities would open themselves to censure.  At the height of the crisis, they’d claimed competence.  They’d said they knew what they were doing and the general public, desperate for reassurance, had believed them.

Will the public also become sceptical in months to come?

But what if it turned out that their remedies had failed?   What if, like the Emperor’s New Clothes, the therapies had been, not just invisible, but non-existent?   Hans Christian Andersen hadn’t detailed the punishment visited on the tailors, but it’s likely that it would have been severe.  People hate to have their gullibility exposed.  They turn on those who tricked them.

Will the three-card tricksters be rewarded or punished?

Is there to be a parallel with the Economy’s New Remedies?   Will a little ragamuffin point out next year that Ministers and Central Bankers are intellectually naked?   If deemed guilty, will they be retired on huge pensions, or soundly thrashed?  

In any event, interest rates look set to stay low . . .

What’s fairly certain is that interest rates will stay low.  Talk of the need to raise them to forestall quickening inflation was based on the forecast of a return to “normal” growth.  No chance!   The risk instead is that prices fall and real interest rates rise.  Louring in the middle distance is the possibility of a rerun of the thirties!

. . . Civil Servants to be dismissed . . .

The good news is that the public sector will shortly come under scrutiny.  It’s enjoyed unfair privilege in recent years.  Not for much longer, though.  In the next year or so, the bureaucrats will be asked to share some, perhaps a good deal, of the burden. 

. . . and, best of all, equities to appreciate.

The other good news is that equity markets are rising.  Companies’ sales might be dull, but their profits aren’t (wages instead are taking the hit).  And that, set in the context of accommodative money, spells progressively higher valuations.


Economics News : 21 August

August 21, 2009

Physician, heal thyself.

Luke 4:23; if the NHS is so marvelous, performing miracles previously in Capernaum, why not here and now?



Nature or nurture?   Are Brown and Cameron politically similar . . .  

Cameron and Brown have much in common:  Scottish ancestry on the one hand; a willingness to subvert logic to emotion on the other.  Both men, characteristically, are supporters of the wars in the Middle East.  And both are defenders of the National Health Service.

. . . because of their common DNA, their shared environment . . .

Each probably realises that his position in these areas is an electoral liability.  But neither can see a way of disentangling himself.  Sins of the past are thus visited on the future.  The continuation of a manifestly unsatisfactory policy is preferred to the initiation of a potentially better one.

. . . or their comparably limited imagination?

It’s likely that both men are confusing their personal interest with the public one.  Experience of the NHS’s oases of excellence has blinded them to its deserts of mediocrity.  Their children were well served by the system; they consequently feel an obligation to finance it; and they see nothing self-serving in the imposition of a policy that requires taxpayers do so.  

What explains the devotion of each to the NHS?

Last week, it emerged that the NHS’s workers were amongst the unhealthiest in the country.  The numbers calling in sick (10.7 days a year per employee) were significantly higher than in the rest of the public sector (9.7), and hugely higher than that in the private sector (6.4).   Why?    Because the health workers were genuinely ill?   Or because the “sickie” had become an accepted indulgence?   

Why so eloquent on its strengths, so reticent on its vices?

The latter, of course.  There’s an unwritten clause in the public sector worker’s contract that says he may take, unquestioned, a sizeable number of days of extra paid leave.  Just as the MP was allowed to claim expenses without having incurred any, so the NHS worker was permitted to take sick leave without being ill.  Morally indefensible, both were perks that the rest of us paid for.

The “sickie” culture is regrettable.

Did either political leader respond to the revelation?   No; each seemed to think it a small price to pay for the NHS’s other merits.  Perhaps so.  But neither of them had to pay the price; taxpayers picked up the bill.  Little wonder the Westminster elite inspired more disenchantment than enthusiasm.  Little wonder that those in the private sector who created the wealth distrusted those in the public sector who spent it.

The defined benefits pension inexcusable.

There was another public sector perk, similarly unconscionable, that infuriated the taxpayer.  It was the DB pension.  Significantly, neither Brown nor Cameron acknowledged the arrangement to be an anomaly.  Was that because they lacked the cerebral equipment to do the analysis?   Because they saw no political advantage in raising the issue?   Or because their Parliamentarian chums were also beneficiaries of the arrangement?   

Both should be banned.

No matter; their silence spoke volumes.  It indicted them and the system they supported.  If the NHS were to last, things had to change; if its virtues were to be preserved, its vices had to be eliminated.  

The economics revival, meanwhile, looks unconvincing.

On the global economics front, last week’s news continued to be slightly worrying.  The inventory-based revival in activity seemed not to be spreading to other elements of demand.  Retail sales and business investment were seriously weak.  And public spending, though strong in recent quarters, risked losing momentum later in 2009:  electoral support for fiscal stimulus was falling sharply.      

Jobs are likely to be the main problem.

Labour markets, meanwhile, continued to deteriorate.  Employment in the private sectors of the old developed world looked as if it might sink 5% in the next twelve months.  The slippage in public sectors would slower to begin, but faster and deeper once it had.   Would emerging countries fare better?   Not if protectionism took hold.  Would it?   Probably.

Inflation, though, is set to be negative in most of the world.

The inflation numbers were also disconcerting.  More than half the world (by GDP and population) was reporting that consumer prices had fallen in the last twelve months; and that the rate of decline was steepening.  That was good for the consumer because his wages bought more, but bad for him because the real cost of credit had become unaffordable.

That implies penal real interest rates.

For the industrialist, the situation was similar, but worse.  While the CPI was falling by 1 to 2% per annum, the PPI was crashing by 5 to 10%.  Niggardly banks offered credit to small and medium sized businesses at 7%.  That was close to 15% in real terms.  Unsurprisingly, many had had to close down.

Good for profitability, though, and share prices!

The good news was that surviving companies would have relied on funds generated internally rather than externally.  They would have lifted profitability so as to be free of the loathed banker and rascally bureaucrat.  That was going to work wonders for share prices.  The rally, in other words, looked set to continue.




Economics Views : 19 August

August 19, 2009

And if the blind lead the blind,

both shall fall into the ditch.


Matthew 15:14, Pharisees or Politicians?


Things that happen to others . . .

Where the US leads, the rest of the world often follows.  In politics and sociology, America’s “guiding” influence seems strong; in economics and finance, stronger still.   Developments in the last few years illustrate the point.

. . . usually happen first to Americans.

It was the US that was the first to report mortgage finance problems; the first to acknowledge commercial banking strains; and the first to register industrial debility.  The rest of the world initially thought itself immune from these calamities.  Drooling Schadenfreude, Europeans and Asians argued that, since their authorities hadn’t misbehaved in the prior period, their banks were safe, their economies sound.

Rogue banking and inventory liquidation, for instance.

They were wrong.  Restraint in public spending and prudence in credit availability proved no protection.  Japan and Germany were devastated.  Eastern European countries, despite taking their lead from Brussels (arguably because of doing so) were blown out of the water.

Also, greenish shoots!

It was also the US that was the first to record signs of economics resilience.  In the late spring, retail sales started to fall less quickly, housing activity to stabilise, leading indicators to creep ahead.  Once again, it was the Americans who were setting the trend.  Within a month or two, data from the rest of the world confirmed the change of direction.  The numbers began either to improve (or to deteriorate less rapidly).  

But is there now more weakness ahead?

So what is to be made of the slightly disappointing returns from America in the last couple of weeks?   Are they the prelude to comparable upsets from the rest of the world in months to come?   Are we headed for another near term relapse?   Probably. 

Probably.  It’s inventories again!

Fundamental trends are set by final sales.  Inventory considerations are hugely significant in the short term, but only in the short term.  There was a devastating phase of liquidation when banks refused to lend to industry at the end of last year.  But it was bound eventually to run out of steam.  And, in the second quarter, it did.  

The cycle has turned.

Similarly, the subsequent inventory rebuild was always likely to be a minor influence.  Perhaps it has been.  Perhaps the softer US data are saying that inventories are back in equilibrium; that final sales are the dominant factor again.  Ouch!

Autos are a case in point.What’s the outlook, for instance, for the motor sector?   Not good!  The “cash for clunkers” programme has given the industry near-term relief, but probably at the cost of longer-term pain.  The incentives will have brought some of next year’s sales into this year.  In 2010, therefore, unless the economy is back in full recovery mode, things will be very difficult; worse than if the programme hadn’t been introduced!

Europe, sclerotic and expensive, will also suffer.

It’ll be interesting to see if the Europeans suffer a similar fate.  Unimaginatively, they copied the Americans.  They couldn’t resist interfering in the market.  Will they too find that their actions have made things worse, not better?   

Hubris is fraught with danger.

If activity should lose traction during the third quarter, what will Ministers and Central Bankers say?   Their earlier claims that they’d dealt with the crisis will come back to haunt them.  But only, of course, for as long as they stay in office!



Attack the enemy, not the ally

August 17, 2009

Loyalty to petrified opinion never yet broke a chain,

 nor freed a human soul.


Mark Twain—applicable to religion, philosophy and politics


David Cameron is playing a dangerous game.  His anxiety to win floating voters is causing him to lose core supporters.  He’ll be triumphant at the next election.  But not because the electorate loves him or his policies; just because it hates the alternatives more.

Europe has been a major problem for him.  The Tory rank and file are persistently antagonistic.  His ambivalence (arguably his duplicity) about the Constitution risks casting him as another Heath—a man whom traditional Tories loath almost as they do Blair.

The NHS is also a minefield:  voters as a whole being ambivalent, the Tory faithful sceptical.  Cameron’s decision to defend the status quo looks ill-judged.  To go further, to ignore the shortcomings of the Service, offering it unconditional support and limitless funds, may be seen as a deliberate provocation. 

John Major won an election, but found thereafter that he couldn’t dictate to backbenchers.  And, at that time, there was no charismatic alternate.  Cameron, in similar circumstances, might not be so fortunate.  There’ll be Boris Johnson and David Hannan waiting in the wings.  



Economics News : 14 August

August 14, 2009

One swallow doth not a summer make;

nor one blip an economics recovery.





Apologies to Ben Kepes


An anaemic, inventory-based, revival . . .

The world economy is proceeding much as expected.  Industrial production slumped while the inventory liquidation was in progress, but rebounded moderately when it was ended. Nearly everywhere, therefore, GDP numbers in the second quarter were less bad than those in the previous three.  In Asia, there was a resumption of growth in Japan and Korea; likewise in Europe in Germany and France.  

. . . appears to be occurring on schedule.

But nowhere, it seems, was there any improvement in final sales.  Consumption continued to fall modestly and business investment sharply.  The press made much of the better GDP numbers, but the central banks were generally cautious.  They knew that the recovery in inventories would boost activity for only a few months.  If there were to be a sustained revival, it would have to be driven by other elements of demand, principally consumption.

But consumption is weak and likely to become weaker yet.

Sadly, the prospects for personal spending were not good.  Unemployment was casting a long and debilitating shadow.  High already, it looked set to rise much further.  It was estimated that, while world GDP had fallen about 6%, employment had declined less than 1%.  The disconnect couldn’t last.  In the next twelve months, there was likely to be a huge increase in joblessness.  Disposable income would fall and consumption follow suit. 

It’s the end of the beginning of the crisis, not the beginning of the end of it.

In Britain, Governor King acknowledged the long-term difficulties facing the UK economy—and, by implication, the analytical errors he’d made in the past.  He let it be known that he’d try to lift spending appetites with protractedly easier credit, but noted that his efforts might be frustrated by the commercial banks.  Why lend to bad risks, they were bound to ask themselves.  Better to take cheap money from one part of the public sector and lend back expensively to another.  A round-tripping exercise that was as profitable as it was riskless.  It’d rebuild balance sheets on the one hand, bonuses on the other!

Interest rates will stay low and public spending be cut.

The fiscal authorities might also be in the process of rethinking their strategy.  Mindless spending was proving not just economically ineffective, but politically unpopular as well. Unsurprisingly so.  To take money from one group (taxpayers) and give it to another (public sector departments) amounted to a zero-sum operation:  the benefit to the one being matched by the detriment to the other.  Its net effect was merely to impoverish the wealth creator at the expense of the wealth consumer.  There was little doubt, therefore, that furiously high levels of public spending would shortly be discontinued; most probably after next year’s election.  

The bad news is that regulators will be given extra powers.

What, though, was to be done about the banks?   What would Cameron’s Tories do after taking office?   Would the bailout programme be reversed?   Sadly no.  Worse yet, regulators would be asked to do expensively and ineptly what markets would have done cheaply and competently.  An enlarged FSA, supervised by the Governor, would tell bankers how much they could reward those of their employees who’d rendered industry bankrupt and pensioners destitute.  Hallelujah:  one set of dozos in pursuit of another!

Markets will rally nevertheless.

The outlook for the economy may not be favourable, but that for the securities market is.  Inflation is going to fall significantly further.  And not just for a few months, but for a protracted period.  The environment is one in which pay settlements, already moderate, will become negligible.  Set that in the context of renewed softness in commodity prices, coupled with stability (or strength) in sterling, and the bottom line will be declining consumer prices.  By early next year, the twelve month rate of change will be negative; a year later it might be dangerously fast.

Inflation low; profits strong.

Corporate profits, meanwhile, will be strengthening.  Modest pay rises and sizeable layoffs will redistribute GDP from labour to capital.  The latter will be accorded a rising share of what will, arguably, be a shrinking pie.

Taxation just bearable.

Taxation may be a temporarily constraining influence.  But probably only temporarily.  The fiscal deficit is huge and will have to be reduced.  But the likelihood is that spending, rather than taxation, will bear the brunt of the burden.

Equities and bonds will both rally.

Accordingly, the recent rally is thought likely to persist.  Long dated government yields will fall by 25 bps in the remainder of 2009; a further 50 bps in 2010.  Equities will fare better still:  12½% this year; 25% next.  Prospective pensioners may breathe slightly more easily!



Lies, damned lies, and political obfuscation

August 12, 2009

The political consequences of consciously

telling untruths are very serious.

Jack Straw — there has to be a pretence of unconsciousness. 



Gordon Brown’s Ministers have decided that there is no need to investigate allegations of the intelligence services’ involvement in torture.  The implication is that they think there’s no case to be answered, that no misbehaviour occurred.  It would be very convenient if the presumption were justified.

Their initial position regarding MPs’ expenses, it may be recalled, was much the same.  It was only when The Telegraph published the sordid facts, when the extent of the mendacity and impropriety of Honourable Members became apparent, that Ministers changed their tune.  Would we benefit from a comparable leak now?   Of course we would.  Ministers are not reliable; not trustworthy.

Interestingly, the Government’s line has been corroborated by Sir John Scarlett, Chief of MI6.  Speaking on BBC Radio, he assured the world that Britain’s Security Services had not engaged in torture, nor been complicit in it.  Did his intervention add to the credibility of the Government, or detract from it?   

Probably the latter.  His track record in these matters is not good.  He was the author of the document, alleging Iraq to have weapons of mass destruction, that launched the country into a disastrous Middle Eastern engagement.  He was wrong, of course; there were no weapons of the sort he wrote about.  But what is not known is whether his errors were deliberate or accidental.

It’s understandable that Sir John would wish there to be no inquiry.  A review of the facts would be bound to find him either incompetent or duplicitous.  It would be bound to find his knighthood (he was plain John Scarlett when he wrote his fairy tale) undeserved.  It would be bound to ask why the man who had been the author of so many deaths (thousands on one side, hundreds of thousands on the other) hadn’t been sacked.

What was Prime Minister Blair thinking of?   Why had Scarlett been first promoted, and then honoured?   Was there a deal between the two of them?   Do they share a similar disdain for morality?   The suspicions will not be allayed until there is a proper inquiry.  Indeed, the longer the delay, the greater the presumption of guilt.



Economics Viewpoints : 12 August

August 12, 2009

It has been said that man is a rational animal.

Really?   What’s the evidence?


Bertrand Russell—the reality is that people depend more on faith than logic.



Inflation has been falling for almost three decades.  But most economists, disdaining the data, have consistently forecast an imminent upturn.  In doing so, they allowed conviction to take precedence over evidence; black magic to be preferred to scientific method!

A variety of excuses was used to justify their pessimism.  At some times, it was labour shortages that caused them to fret; at others, soaring commodity prices; currently, of course, it’s excessive liquidity.  When two or three are gathered together, the conversation turns almost always to “exit strategies”!   How, they ask, will central banks avoid the higher inflation that their excessively loose monetary policies are stoking up?   When will interest rates have to be raised?  

There’s a reluctance to acknowledge that prices are not just moderating, but, in many parts of the world, falling.  In the US, Japan, China and Germany, for instance, consumer inflation has already gone negative.  There’s an even greater unwillingness to concede that most of the rest of the world will follow suit within six months.

The process is being driven by pay settlements.  They didn’t quicken significantly at the peak of the cycle.  So it’s unsurprising that they’ve slowed sharply at the trough.  And the chances are that the weakness will continue.  Labour supply is burgeoning; labour demand dwindling.  One way or another, pay increases will become negligible.  The only uncertainty is how much unemployment will have to rise beforehand. 

In Japan, unions have anticipated the problem.  They’ve accepted pay cuts to forestall heightened unemployment.  In Europe, it’s more likely that unions, intransigent to the last, will only acknowledge the poverty of their bargaining position after jobless totals have risen into the stratosphere.

In either event, though, personal incomes will be sacrificed and negative inflation will be the eventual result.  Countries with persistently strong currencies, Japan most obviously, will compensate with correspondingly steep declines in wages and prices.  Recidivist devaluers, mostly the anglo-saxons these days, might get away with modestly positive inflation.

As usual, therefore, economists have misanalysed the problem.  The threat is posed, not by prices that are rising, but by those that are falling.  And what’s exercising central banks’ policy committees at the moment is, not how to unwind the credit stimulus, but how to make it more effective.  

There’s no hiding the disappointment with the results of the monetary experiment so far.  The extra liquidity has been used to boost banks’ balance sheets rather than facilitate activity.  Equity prices have risen, but employment hasn’t.  House prices have stabilised, but housing starts have fallen.  

Unsurprisingly so.  Real interest rates are high and getting higher.  The causes are twofold:  banking avarice on the one hand; falling inflation on the other.  Currently, the cost of credit to a businessman or consumer is exorbitant.  

Commercial loan activity is falling; GDP is wavering.  Once the inventory correction has run its course, retrenchment may once again become the order of the day.  This is not going to be a jobless economics recovery; it’s going to be a jobless stock market rally.





Economics News : 7 August

August 7, 2009

The trouble with bad is it might get worse.

Apologies to Bruce Cockburn—referring to the economy, stupid.



The B-of-E is worried about the economy.

Reviewing the prospects for the British economy last week, the Bank of England said it would increase the extent of “quantitative easing.”  Previously, it’d planned to buy up £125bns of privately held assets; now it thought £175bns more appropriate.  Why the change?   Because its assessment of the outlook had worsened.

Its therapies aren’t working:  dosages are therefore to be increased.

The setback in the last twelve months had been steeper than originally judged; the revival in the next twelve would be shallower.  Thus far, lower interest rates had had a negligible impact on activity; higher public spending, none at all.  The green shoots perceived by professional illusionists (in government and banking) would turn out to be false dawns.  They were largely a reflection of the inventory cycle:  the savage liquidation in the nine months to early June; the dead-cat bounce since then.  It was final sales that would determine the shape of any recovery.  And the outlook there was not good. 

Arguably, it’s the commercial banks that are the problem.

There was no shortage of liquidity in the banking system, but there was an intense shortage in small and medium sized companies.  That was why inventories had collapsed.  It was the only way the companies could raise funds.  The commercial banks had failed the innovative part of the corporate sector then, and it was continuing to do so now.  

They’re making too much round tripping . . .

Why?   Because they could make much more money, much more safely, by lending to H. M. Treasury and the Local Authorities.  Banks were able to secure funds from one part of the public sector at negligible rates and pass them on to other parts of it at sharply higher rates!   It was round tripping on an heroic scale.  It was extraordinarily costly to the taxpayer, but produced no benefit to the economy.  At no stage did the funds come into contact with those who created wealth; only with those who consumed it.

. . . to fulfil their primary function.

Not true, claimed the authorities.  Funds had passed to the corporate sector.  The bond market had revived.  For FTSE 100 companies, admittedly, it had.  Many of them were able to raise significant sums.  And what had they done with them?   Paid off their overdrafts.  And the banks, in many cases, had used the monies thus returned to them to buy the bonds!  More round tripping.  More bunce for the bankers.  But no benefit to economics activity.

The Bank hopes that higher asset prices will ease the strains.

The Bank of England sees the problem, but doesn’t know how to resolve it.  The liquidity, it concedes, is bound to be used initially to re-jig balance sheets.  Subsequently, it’ll boost asset values.  The hope is that, later still, it’ll fire up spending.  Maybe.  But it’s going to be a long and embarrassing wait.

In housing, similarly.

The story is much the same in the residential property market.  Lower interest rates have stabilised house prices, but not housing starts.  The Bank’s policy has helped middle-aged home owners, but not the building sector.  Nor has it done anything for the young would-be house buyer.  His application for funds (like that of the medium-sized company) is rejected by the bank.  Too risky.   

Such problems go unnoticed in Europe.

If the Bank of England’s problems are tricky, those of the ECB are trickier still.  The German economy, savaged in the phase of inventory liquidation, is bouncing back correspondingly briskly now.  But final sales look as bleak as ever.  GDP might grow for a couple of quarters, but will falter again thereafter.  If consumption and investment don’t revive, the spectre of a thirties-style depression will loom again.

Trichet, a modern-day Bourbon, recommends that peasants eat cake.

And Germany is the strongest of the EZ countries.  Its matchless technical virtuosity allows it to survive the euro’s severe over-valuation.  Not so the others.  They will find conditions exceedingly difficult in the next twelve months.  They need a sizeable devaluation, but the ECB seems determined not to give them one.  Eastern Europe, the Baltics in particular, may consequently disappear in a puff of smoke.  Will Trichet notice?   Will he relent?   Will Parisians man the barricades?   1968 revisited?   Interesting times.

Assets are not valued correctly.  They’ll appreciate.

The good news is that asset valuations will continue to rise.  Equities most particularly.  Profits will be strong because wages will be weak.  And the multiple applied to those profits will expand because there’s nowhere else to deploy the excess liquidity.  The indices are headed for a 15% rally in the remainder of 2009, a further 25% in 2010.



Depression: fairies forfend

August 6, 2009

Integrity without knowledge is weak and useless;

knowledge without integrity, dangerous and dreadful.


Samuel Johnson, economists are all right:  they have neither.



Economists are driven by emotion rather than logic.  Wanting activity to recover, they affect to see evidence of its doing so.  They lack the intellectual integrity that would allow them to analyse data dispassionately.

A couple of days ago, they ignored the report telling them that the US wage and salary bill had declined precipitously in the twelve months to June.  It shouldn’t have been a surprise:  it was partly a reflection of lower employment levels and partly a consequence of more moderate pay settlements.  And its implications were unambiguous:  for inflation and corporate profits, excellent; for consumption, dire.  

Household spending, published the following day, duly fell.  Who could have imagined it might have been otherwise?   How could economists have supposed that workers would magic the resources to spend in the malls?   Did they think fairies would bring it in the night?

They should have known that corporations wouldn’t have been spending either.  They had the wherewithal, but not the need.  Capacity was excessive.  They wanted to eliminate the imbalance, not exacerbate it.  It was obvious that investment would stay low for quite a while. 

And there was no relief on the exports front.  Most of the rest of the world was in the same fix as the US.  Internal demand was weak; unemployment was rising; and wages were soft.  Unsurprisingly, the requirement for other countries’ exports was low. 

So why had economies appeared to recover a little in the recent past?   Inventories!   They’d been slashed in the fourth quarter of 2008 and the first of 2009.  They’d stabilised thereafter.  The GDP numbers had looked horrible in the one period, only moderately bad subsequently.  And gullible economists had interpreted “less bad” as being “good”!  

The big negative was final sales.  They were falling before the inventory liquidation began; they continued to do so while it was occurring; and they’re still falling now that it’s over.  It’s not until they strengthen that economies will recover.

Currently, things look very bleak.  It’s not just the private sector wage earner who’s looking vulnerable.  When Governments run out of money to finance their fatuous fiscal boosts, when they start to cut back on their bloated bureaucratic establishments, there’ll be further setbacks.  The economy’ll not be characterised by “double dip” topography; it’ll be a “multiple dip” phenomenon.   




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