Economics News: 27 Nov

November 27, 2009

That Money talks I’ll not deny;
I heard it once: it said “Goodbye.”

Richard Armour—it’s easy to accumulate funds while the bull market lasts; difficult to retain them when it ends.

Those who’ve borrowed heavily for years are often thought to be good risks.
The financial community was shocked last week to learn that the Emirate of Dubai was experiencing cash flow problems. It was well known that property developments there were under a cloud, that receipts from tourism and financial services were anaemic, and that oil revenues were modest, but there’d been no prior suggestion of a problem severe enough to warrant deferment. Indeed, there’d been a presumption that reserves were sufficient to deal with any temporary embarrassment; that, in extremis, the ruling family would guarantee the debts.

They’re not. Always a surprise nevertheless.
We should have known better. Economics downturns do not differentiate between rich and poor; nor developed and developing; only between geared and ungeared. Dubai, very heavily borrowed, was in the wrong category; like Iceland and Ireland, it was an icon waiting to be tipped from its pedestal.

Dubai’s rehabilitation will be difficult.
The markets are right to be worried. Things will get worse before they get better. Dubai’s image has been tarnished. In future, its property developments will be perceived to be less desirable, its financial services less competent. If new finance can be found, its suppliers will want compensation for what they regard as heightened risk. That means it’ll come in the form of equity, rather than fixed interest, and probably from neighbouring oil states. Dubai might end up merely as manager of its operations, not owner of them.

How much of our money have the pesky banks risked?
Who in the developed world will be the major losers? The banks, of course. They’d lent huge sums and won’t get it all back. There’s been no indication yet of which are most heavily exposed. But it would be surprising if the delinquent Scots, RBS and HBOS, weren’t at the top of the list. If so, it’ll be interesting to monitor the reaction of their compatriots in government. A year ago, the Darlings and Browns and Macphersons had told the taxpayer that his money was safely invested. Shares in banks had been purchased at favourable prices. They’d be sold subsequently at a profit. Some profit!

Mervyn King’s right: they have to be broken up.
The Governor of the Bank of England, addressing a Parliamentary Committee last week, hinted that he thought the bailout had been a mistake. When guilty of serious misjudgement, he said, banks had to be allowed to fail. To use taxpayers’ funds to save them misallocated resources. Worse, it stopped depositors and counterparties and shareholders exercising their discretion. Absolutely right! Pity he hadn’t said as much a year ago when it might have done some good!

It would be helpful if others in the Bank considered their position.
The Governor’s colleague, Paul Tucker, on the other hand, seems not yet to have seen the error of his ways. Talking to a different audience last week, he defended the decision to lend £60 bns to a couple of failing banks. If the loans hadn’t been made, he said, the economics downturn would have been worse.

It’s not too late to make amends.
How does he know that? He doesn’t, of course. It’s what his forecasts indicate. And we know how good his forecasts are: they’re useless. If they’d been any good, he’d have seen the crisis coming. He’d have recognised in the implosion of the sub-prime mortgage business in the States the possibility of a similar problem here. He didn’t.

And the first step is acknowledgement of prior error.
He defended also the secrecy of the operation. The Prime Minister and the Chancellor were told of it, but not Parliament, and certainly not those, the taxpayers, whose money was being used. It was essential that the public be kept in the dark, said Tucker. Otherwise, there might have been a run on the banks. And then saving them would have been difficult, perhaps impossible. What a disaster: the country would then have had three viable banks, rather than two as now; and the national debt would have been tens of billions of pounds lower!

How will Beijing’s central bank behave?
Elsewhere in the world, there were other financial problems building up. China’s monetary explosion, necessary to keep GDP growing moderately and the yuan pegged to the dollar, was creating the sort of collateral damage that had afflicted the Americans in 2007. Beijing’s officials thought aloud about cooling things down, but that caused ructions in finances around the world. It threatened also to set at risk the world’s anaemic recovery.

It’ll keep rolling the presses!
For that reason, Beijing won’t tighten. Not, anyway, for the moment. Instead, the accommodation will continue, and so will the upwards momentum in the indices.

Economics Viewpoints : 25 Nov

November 25, 2009

He’s half absolved who has confessed.


  Matthew Prior—but only half absolved; there’s a requirement also, notate bene, to try to do better in future. 


The Governor doesn’t often talk sense; but this week was an exception.

Reporting to a Parliamentary Committee earlier this week, Mervyn King made the point that society was wrong to ask regulators to compensate for the failings of bank executives.  The former weren’t knowledgeable enough, certainly not clever enough, to limit the risks run by the latter.  It was, he said, for markets to arbitrate on such matters. 

He recognised the correctness of Schumpeter’s analysis.

Banks had to be allowed to fail when their executives made serious errors of judgment.  Shareholders, counterparties and depositors had to assess the competence of a bank before entering into a business relationship with it.  He didn’t say explicitly, only implicitly, that he thought it unacceptable to require taxpayers to pick up the bill for regulatory negligence, banking venality and political intrigue. 

So will he recommend the break-up of the Scottish delinquents?

Excellent.  The scales seem to have fallen from the Governor’s eyes.  He’s finally acknowledged what disinterested parties knew all along:  that the authorities were quite wrong to bail out the Scottish banks last year.  It hadn’t preserved financial stability, but undermined it.  Those who were innocent had been punished, and those guilty rewarded.  What sort of disincentive to future misbehaviour was that?

De temps en temps, il faut tuer un amiral . . .

The Governor’s confessions didn’t end there.  He told the committee that more than £60 billions had been lent to RBS and HBOS last October to “buy time” to find a solution to their difficulties.  The action had been urgent, he said, because the banks were “effectively . . .  bust.”  The Chancellor and the Prime Minister knew about the loans, but very few others did.  The taxpayer was told nothing!

. . . pour encourager les autres!

A few weeks later, Lloyds bank was persuaded to buy HBOS.  The Chairman and Board of the vendor were told something of the parlous state of the vendee, but both sets of shareholders were kept in the dark.  Had they been informed, things might have transpired differently.  It’s likely that Britain today would have three viable banks, not two.  It’s likely as well that taxpayers would be much less indebted and Lloyds bank shareholders much richer.  The authorities, the Governor included, have a good deal for which to answer.  Heads ought to roll, and be seen to roll!

Was the judgment of those who misanalysed finances worse than that of those who invaded Iraq?

This week also saw the beginnings of what is claimed will be a genuine inquiry into the causes of the Iraq invasion.  Its Chairman, Sir John Chilcot, says he’ll supervise no whitewash.  Maybe.  But he’ll know that parsnips are no longer buttered by fine words.  Previous inquiries, run by his colleagues in the Civil Service and Judiciary, were fatally flawed by obfuscation and mendacity.  Sir John will do well to live up to his assertion. 

Markets will nevertheless rise for a year.

There wasn’t a lot that was new on the economics front.  Most of the world seems now to be growing moderately, but only moderately.  That’s very disappointing, given the chronology of the business cycle, and the extent of the stimulus.  When the former turns and the latter is withdrawn, the risk is that activity will decline again.  Corporate profits are relatively strong, though.  And equity prices likewise.  These trends look set to continue for a while.

Economics News : 20 Nov

November 20, 2009

Power is not a means; it is an end.
Dictatorship secures, not the system, but itself.

George Orwell, Nineteen Eighty-Four

Once upon a time, Europeans aspired to democracy. No longer.
As seems always to be the way with European Union affairs, the appointment last week of a President proved to be tortuous. For a protracted period, Heads of Government of member countries were torn between the Belgian who’d done nothing with his life and the Briton who’d initiated illegitimate wars. It was a close-run thing, therefore. And it counted as a major moral success for the Institution that, on this occasion, perhaps precedentally, the lesser of the two evils was chosen.
These days, they wait obediently to be told what to think.
Predictably, the people were not asked their opinion. Europeans favour elections so long as decision-making powers are retained in the hands of appointees. Sadly, voters themselves appear not to mind. There were no students on the streets of Paris or Berlin. Shamefully, none on those of London either.
Sadly, the Brits are as unashamed as the rest.
Measured in the terms in which politicians see these things, it was a triumph for Gordon Brown. He had stymied his loathed predecessor and secured the Foreign Affairs post for Baroness Ashton. He was the cat who’d got the cream. He was unable to suppress the broadest of grins!
Apparatchik Ashton was not appalled by her own appointment.
And who, incidentally, was the Baroness? She was a career bureaucrat. She’d earned a degree in sociology at one of London University’s undistinguished colleges, and had worked thereafter in a sequence of quangos. At no stage in her life had she ever had a proper job; nor, significantly, one that touched on foreign affairs. More remarkable still, she had never to face voters to secure advancement: she was appointed to the House of Lords, then to the European Commission, and finally to its Foreign Office!
Nor apparently were the Tories.
And what did David Cameron think of all this? Did he regret his decision to renege on the promise to offer Britain a vote on the Constitution? Apparently not. He saw lots of advantages in the process of appointment. It was just the way, he acknowledged, to overcome backwoods resistance to progressive change. Accordingly, when a local constituency party wanted to select an inappropriate candidate, he was willing to adopt Europe’s bully-boy tactics!
They used to believe in the Divine Right of autocrats; perhaps they do again.
It didn’t augur well for the future. He’d win the next general election easily enough, but it wasn’t clear what policies he’d pursue thereafter. He couldn’t be trusted to do what he’d said, nor not to. On Europe, it looked as if he’d continue to affect scepticism but deliver compliance. And would there be similar ambivalence on public spending? Would the man talk boldly and act pusillanimously? Probably.
The OECD, a useful counter-indicator, is optimistic about the world economy.
What was clear, in any event, was that the world economy was still fragile. The inventory bounce in the summer and early autumn had been modest, and had probably now run out of momentum. It was final demand that would drive activity in the future. But the outlook was far from favourable.
Personal spending looks set to soften.
The consumer was hard pressed. Pay rises were moderating and levels of employment declining. People wanted, moreover, to raise savings to repair their balance sheets. In much of the world, therefore, personal spending would be falling by 1 or 2% per annum. And, if central banks were to be daft enough to tighten credit, the rate of decline might be much steeper.
Likewise business investment.
The private sector’s capital spending would also fall. Because companies couldn’t sell what they were currently producing, there’d be no justification for installing extra capacity. Lower interest rates and higher profits were of no relevance (necessary, but not sufficient, facilitators).
Will public spending stay strong? Probably not.
It was only public spending that might keep the engines ticking over. But it probably wouldn’t. In most parts of the world, there was growing disenchantment with the process. In the States, it was particularly virulent. Just a year after election, President Obama and Treasury Secretary Geithner were in trouble. Democrats had majorities in both parts of congress, but no longer controlled them. And it was public spending that was the problem.
Even in the PRC, it’ll not maintain the momentum.
Only China, devoting an extra 15% of GDP to public spending, had achieved satisfactory growth. But, even there, the advance might prove not to be self-sustaining. Would momentum subside if the stimulus were merely maintained? Would it need to be increased to maintain growth? Next year was going to be fascinating for economics voyeurs.
But stock prices will keep rising.
The one bright star in an otherwise gloomy firmament was the stock market. Valuations were set to continue to rise. Negative inflation, negligible interest rates, plentiful liquidity and improving profit margins would drive the process. The next bubble was well under way, of course. But who’d be prepared to burst it? Nobody for twelve months or so.

Economics Viewpoints : 18 Nov

November 18, 2009

Politicians live in a make-believe world;

One in which reality rarely intrudes.

Fooling themselves, they think they’re fooling the people as well.  They should be told the truth.

Addressing her Parliament yesterday, the Queen was less impressive than usual.

Opening Parliament on Wednesday, the Queen outlined her Government’s legislative programme for the new session.  Nobody was listening, though.   Everybody knew that a General Election would overtake events.  Brown wasn’t serious in making the recommendations; nor Cameron in opposing them.

Her speech was not a legislative programme, but a call to electoral arms.

The ceremony had instead to be seen as the beginning of the election campaign.  The proposals were New Labour’s wish list:  a stronger economy, a lower level of borrowing, a better standard of education and a less objectionable collection of bankers.  But there was no indication of how to achieve the objectives.

Laws to control public borrowing or bankers’ bonuses?

What was the point of passing a law to contain the deficit?   If MPs were determined to return the public finances to equilibrium, legislation would be irrelevant.  And if, more likely, they were determined to find ways not to, it would be equally irrelevant.

Who did Brown think he was fooling?

Much the same might be said of the proposal to contain bankers’ bonuses.  How would it work?   Would there be regulators in every HR department?   Snitches in every bank?   And who would decide how much was too much?   Those, for instance, who’d turned a blind eye to MPs’ expenses?

Both problems stemmed, of course, from his decision . . .

The truth that daren’t yet be acknowledged is that it was a huge mistake to bail out bad banks.  It didn’t solve the problems; it exacerbated them.  Brown didn’t save the world with his misguided expenditure of our money; instead, he condemned us to many years of stiflingly inefficient regulation.

. . . to use taxpayer funds to save delinquent banks.

It’s not until banks are required to dispose of their esoteric operations, focusing exclusively on money-transmission activities, that sanity and efficiency will return.  The quid quo pro for being saved from the consequences of their incompetence ought not to be a smaller bonus, but a commitment to behave responsibly.  The exciting parts of the financial services sector—investment banking and proprietary trading; fund management and structured products—must be off-limits to banks, preferably the reserve of owner-managers.

The economy won’t improve until the decision is reversed.

If Brown had wanted to do something useful in the time he’d left in office, he might have drafted a proposal along these lines.  But he had no such ambitions.  He wanted only to fool the electorate into seeing him and his administration in a favourable light.

Similarly, his military adventures.

His speech at the Mansion House had been constructed in a similar way.  It dwelt on Afghanistan.  He committed himself both to an immediate deployment of more troops and a timetable to bring them back again.  He wanted simultaneously to be America’s loyal ally and a Britain’s compassionate Prime Minister.  Too late.  He’d made his choice some time ago—the wrong one.

The economy is advancing again; but inadequately.

The economy, meanwhile, was improving a little.  But the cyclical rebound, now six months old, was proceeding disappointingly slowly.  No immediate crisis, though; it was not until the cyclical tide turned, in late 2011, that things would get grim again.  By then, of course, it wouldn’t be Brown’s problem!

It’s the equity market that’s flying.

The markets, happily, go from strength to strength.  Wages are moderating and thereby giving profits the potential to rise.  Set in the context of negligible interest rates, equities are a one-way street.

Economics News: 13 Nov

November 16, 2009


Some make minor errors consistently;

Some, major ones occasionally.


 But it takes an exceptional man, an old world central banker, to make whoppers always.


It’s difficult to judge economics developments.

It looks as if a number of Central Bankers now believe inflation to be a greater threat than recession.  They argue that the recovery in demand in the last six months has been too strong.  A continuation of excessive liquidity will cause it to quicken still further.  The risk is no longer economics debility, but financial implosion.

But some seem to do it more inexpertly than others.

It’s suggested that the case for monetary stimulus should therefore be reviewed.  If current trends continue, a reversion to neutral policies would be appropriate.  And it’s not impossible that, a few months hence, a switch to austerity might be called for!

Central Bankers, fretting more about inflation than depression, are matchless.

What’s surprising is that Central Bankers are so confident of their forecasts.  It’s not a confidence that’s justified by the accuracy of numbers in the past.  On the contrary.  Comparable estimates in 2001/2 were wildly wrong, and they’ve been an unmitigated disaster thus far in 2008/9.   On both occasions, it was presumed that activity would hold up satisfactorily; not collapse disastrously!

They’ve seriously misjudged conditions for twenty years!

Likewise 1989.  In that year, the BOJ had supposed its economy to be about to be overwhelmed by excess demand.  It hiked interest rates to forestall potential inflation.  A very serious miscalculation.  Instead, the penal interest rates plunged the economy into a debility from which today, twenty years later, it’s still not emerged.  Do other Central Banks not fear repeating the Japanese misjudgment?   Apparently not.

The wooden spoon used to belong to the BOJ, now to the ECB.

The ECB’s attitude is particularly surprising.  Of all leading Central Banks, its past judgments have been the most consistently wrong.  They’ve rendered EZ member countries seriously uncompetitive and national governments uncharacteristically critical.  But neither development has caused any acknowledgement of error, nor any hint of revisionism. 

Is the proposition one of tough love or tough cruelty?

Instead, Trichet and his team are determined to tighten credit, shutting their minds to the adverse consequences of doing so.  It’s a policy that might suit Germany, of course, but one which will be toxic for most of the rest of the membership.  The former, largely unchallenged by competitors in high value-added areas of industry, will be able to survive adversity with a degree of serenity.  The latter, with no comparable virtuosity, are going to find life very difficult.  Low-tech manufacturing, for instance, will stumble; agriculture survive only if subsidized extortionately by taxpayers; and tourism fade in comparison with the charms on offer in the East.

The Fed, meanwhile, may talk the talk, but won’t walk the walk.

Will the US also tighten money policies?   It says it might, but it probably won’t.  The Fed’s priority is a pace of activity that’s reasonably brisk and manifestly sustainable.  It’s unlikely to think it’s yet achieved the goal.  Net of the fiscal boost, it’ll fret that the consumption numbers are unconvincing; net also of the credit stimulus, that they’re a little weak.

Better a falling dollar than a rising joblessness.

Bernanke won’t be overly bothered if the dollar should continue to slide.  The weakness will helpfully boost exports, but not unhelpfully hurt inflationary.  With pay settlements so modest and productivity improvements so rapid, the danger is not a surge in prices but one in unemployment. 

The congressional elections aren’t so far away.

Obama knows that the political environment is going to get worse before it gets better.  He was elected too early.  He’d have preferred to come to office a little after the low point of the cycle.  He’d like to have been able to take credit for the early stages of recovery, not be blamed for the late ones of retrenchment.

And he’s messing up elsewhere.

It’s all gone a bit pear-shaped for him in the recent past.  The Health Care Plan didn’t proceed as he’d hoped and Afghanistan has been a disaster.  He can’t afford many more upsets.  Before the mid-term elections, he’d like to see some job creation and possibly some house price appreciation.  By comparison, a stronger dollar and a more orthodox credit policy pale into insignificance!

China, despite the data, may be similarly placed.

It may be the same in China.  The authorities there are ambivalent about economics policy.  Their talk doesn’t match their action.  There’s a comparable inconsistency in the data:  the numbers for industrial production and retail sales are excellent, but there is no validation of them in imports.  It’s a mystery!  

Britain is being discounted.

And what of Britain?   Its fourth quarter GDP numbers will probably surprise on the upside.  But that’ll do Brown no good.  His goose is already cooked; his place in the history books already written.  It’ll be said of him that, when lucky, he was arrogant; and, when unlucky, petulant. 

Brown the PM should have tried harder.

It was his judgment that did for him:  he misunderstood pension funds and gold; he was duped by the chicanery of Scottish bankers and the mendacity of Europe politicians.  He miscalculated the consequences of each.  He should have resigned when Blair did.  Then, he’d have been flattered by historians:  the best Prime Minister we never had, they would have said.

Economics Views : 11 Nov

November 11, 2009

Those who aim for the best of both,

sometimes get the worst of each.

Thus far, banks have had everything their own way—riches unearned and crimes unpunished—but the tide is changing.

Tobin, as a stick with which to beat the banks, was alluring.

As a general rule, new taxes are best avoided. But there may be occasional exceptions. The “Tobin” levy, or a variation on it, might have been one. It had many attractions. It would, most importantly, have helped control financial institutions—that’s something that traditional regulators, the FSA for instance, conspicuously failed to do.

Anything too big to fail was too big not to be milked.

How would it work? By imposing a fee on the transactions of those financial institutions which, in the event of a crisis, were to be supported with taxpayer funds. All joint-stock lending companies, for instance, would be liable to the tax; most owner-managed fund managers would be exempt.

Children shouldn’t play with matches, nor bankers with complications.

Commercial banks, in the former category, would be priced out of intellectually-demanding areas of activity. They’d be confined to money transmission mechanisms. Excellent. Only those prepared to hazard their own capital would be entitled to engage in high-risk pursuits.

No need then to regulate bonuses; revenues would be insufficient.

The contentious issue of “bonuses” would automatically disappear. Restricted to low-margin areas, banks would not generate the revenues to pay their employees disproportionately. Only genuine high-flyers, those contributing to the community, would be able to do so. And they, only because, if unsuccessful, would depart the scene unlamented by the general public, and (more to the point) unsupported by the taxpayer.

Special Interests and Gordon Brown have a lot for which to answer.

But none of the proposals was allowed to see the light of day. Lobbyists arguing against the tax and Gordon Brown arguing in favour of it were sufficient to ensure its stillbirth. It might, at some stage in the future fight its way back up the agenda. But not for a while.

The one wanted to keep banking snouts in the trough . . .

The lobbyists, of course, were acting on behalf of banking behemoths. The latter wanted to keep things as they were. They wanted huge personal rewards when things went well and no personal liability when they went badly. Sadly, disgracefully, they seem to have got what they wanted.

. . . the other, the public sector as the only source of finance.

Gordon Brown hasn’t. His objective was higher taxes without an electoral backlash. He thought a levy applied to all financial operators was a good idea. He didn’t differentiate between those who were competent and those who weren’t; those who could leave London and those who couldn’t. With such an advocate for the tax, it was bound to fail!

The global economy, China excepted, is dull.

The world economy, meanwhile, is stumbling on. A patchy cyclical recovery is occurring, but it seems unable to develop self-reinforcing momentum. Without monetary stimulus and extra public spending, it looks as if growth would come spluttering to a halt. And what happens in 2011? That’s when the cycle is due to turn. If revival turns to retrenchment when underlying conditions are still dull, a new recession might ensue!

Are the figures coming out of Beijing to be taken seriously?

It’s only China that seems to be bucking the trend. Recent numbers show industrial production and retail sales growing at percentage rates well into the mid-teens! The surprise is that imports into the country are still dull, albeit recovering a little.

Onwards and upwards!

The unambiguously good news is that equity markets have recovered from their recent hiccup—and look set to go higher still. Vivat taurus.

The first casualty of war: truth.

November 11, 2009

Every nation, though sincerely desiring peace,

 pursues policies which make peace impossible.


Norman Angell—there are enough instances when conflict is unavoidable not to have to put up with it when it isn’t!



Remembrance Sunday figuring prominently in their thoughts, many week-end editorials touched on the future of the war in Afghanistan.  Most newspapers had been supportive of the case for hostilities during the early stages of the operation, but, eight years after inception, some decided finally to ask if things were going to plan, if the likely benefit would compensate for the manifest cost.  The surprise was, not that the questions were being posed, but that they hadn’t been previously!

The truth is that the rationale for war was always non-existent.  A punitive raid in the aftermath of 9/11 was possibly justified, but occupation certainly wasn’t.  The Romans in their heyday understood the difference; so did the Brits in theirs.  The raid was surgical, quick and cheap.  It didn’t always succeed, but was usually salutary.  Sadly, Bush and Blair knew nothing of history—nor indeed of anything else.

They’d wanted to bring Osama-bin-Laden in chains to Washington.  And when the bombing raids failed to smoke him out, they fell into the trap of full-scale occupation.  Regime change became the new objective.  In order for democracy to work, the new mantra said, the country’s infrastructure had to be rebuilt; the educational curriculum redesigned. 

Soldiers were asked to be civil engineers on the one hand, social workers on the other.  Meanwhile, the Taliban, its coffers enriched by the corruption of local officials and the reinstatement of heroine trading, rebuilt military capability and perfected guerrilla tactics.  The fight became an unequal one.  The soldiers did not did not win “hearts and minds.”  They’d failed in this sense in Vietnam, Northern Ireland and Iraq.  And they failed also in Afghanistan.  The Taliban was disliked when in power, but became popular (faute de mieux) when it wasn’t.  It was the foreign invader who was disliked and distrusted by locals.  Allied casualties, unsurprisingly, climbed remorselessly.

The originating villains of the piece, the demonic duo who’d misjudged the situation so disastrously in its early stages had long since departed the scene.  But those who’d taken their places were mired in dilemma.  To withdraw would open them to the charge of appeasement and cowardice.  To fight on would raise the body count for no good reason.

And anyway, it was too late by then.  If a reversal of policy were to have been implemented, it would have had to be done immediately after taking office.  Obama and Brown had missed the opportunity.  They’d talked instead of their commitment to the struggle, of their hopes for eventual victory.  A U-turn at that stage would have dealt them a telling electoral blow.  It would have been seen as a sign of vacillation—worse even than appeasement.  Both politicians were caught, therefore, like LBJ in the sixties, in the tentacles of a war not of their making.

Britain will shortly have another chance to escape.  Next spring there’s to be a general election and Brown will be dismissed.  Cameron will take over.  And what will he do?   Nobody knows, of course.  If he were to be true to his word, he’d continue to fight.  But he’s not.  In certain circumstances, he’s prepared shamelessly to renege on promises.  If his position on Europe is anything to go by, what he says one day is the opposite of what he’ll say the next.



The reality, and very few will acknowledge it, is that the current con­flict has grown out of the bias with which Governments in Britain and the States have intervened in the past in the Middle East.  It parallels developments in religion in Europe in the seventeenth century!   Until the “dis­parity” ends, there’s not much chance of peace. 

By sending troops to Afghanistan, the potential terrorists’ perception of injustice will have been increased not diminished.  Violence has to be used sparingly if it is not to become counterproductive.  There’s al­ways a risk of its “jus­ti­fy­ing” re­taliation. 

What is clear in any event is that the war thus far hasn’t reduced the risks to the UK and US, but raised them.  Journalists writing in the Sunday papers know that to be the truth, but daren’t acknowledge it!   Politicians, a fortiori, likewise.  Very sad.

Economics News : 6 Nov

November 6, 2009

Admitting error clears the score,

And proves you wiser than before.

Arthur Guiterman; but it’s easier said than done; inadequates find it particularly difficult.

It’s important, not merely to recognise mistakes, but correct them.

A fund manager is bound to make mistakes from time to time.  But, if he’s intellectually competent and psychologically secure, he’ll acknowledge his errors and seek to reverse them.  He’ll not leave them unreviewed in a pathetic attempt to pretend they don’t exist.

Fund managers do so; politicians don’t.

Politicians are different:  slightly less proficient cerebrally, and much less mature emotionally.  The PM illustrates the syndrome.  In the early years of New Labour, he did fairly well.  He’d inherited a strong economy, and made a number of reasonably sensible decisions.  That, ironically, was fatal:  it convinced him that he was incapable of error.  When, subsequently, things began to go wrong, thick and fast in recent years, he went into a state of denial.

Brown’s term will be celebrated, not for his mistakes, but for his denial of them.

He wouldn’t admit mistakes and couldn’t therefore rectify them.  A few examples:  the Middle Eastern wars; the rescue of the Scottish banks; the European Constitution.  In each example, the original decision was made for reasons of expediency, not for those of principle or logic.  With good luck, the costs might have been tolerable.  But, in the event, the luck being bad, they turned out not to be.  A good fund manager would have recognised reality and cut his losses.  He’d have apologised for the errors of his predecessor and have pulled out of Iraq and Afghanistan; he’d have send RBS and HBOS to the perdition they deserved; he’d have staged a second vote on the Lisbon Treaty and have demanded that other members of the EU do likewise (Ireland, of course, already had).

Bad fund managers are quickly sacked; inadequate PMs more slowly.

Will he do any of these?   Of course not.  That would require him to admit his prior judgment was wrong.  He can’t; he’s too childish to live with such an admission.  As a result, his portfolio will continue to underperform, and his client continue to be impoverished.  Indeed, things will get worse.

Sadly, the Tory alternate looks just as dopey.

The good news is that the incumbent portfolio manager is shortly to be sacked; the bad news that the judgment calls of his likely replacement are no less bizarre.  David Cameron has let it be known that he’d continue to commit troops to Iraq and Afghanistan.  He believes, he says, that military action there is reducing the threat of terrorism!   He’s indicated also that he approves of delinquent bankers being rescued.  The best way of helping industrialists and retailers, consumers and pensioners, he argues, is to take away their money away from them and give it to bankers!!   Finally, of course, he’s thrown in the towel in relation to democracy.  The best way to promote the rights of the individual is to deny him any!!!

Is it too late to replace him?   Alas, yes.

Why the Tories take these positions is a mystery.  It’s one thing to defend your own mistakes.  It’s quite another to endorse those of your opponents.  Psychologists have studied the former extensively; the latter barely at all.  The implication, perhaps, is that mental health problems in Westminster are more widespread than previously supposed.

The US economy seems to be outrunning the pack.

On the economics front, the US issued more details about its performance in the third quarter.  GDP had risen reasonably briskly, and it had done so with a sharply reduced labour input.  Productivity, in consequence, had soared:  it had risen at an annualised rate of more than 9%.  The implications for inflation were favourable (the rate would be substantially negative for some time to come), and for profits exceedingly favourable (margins would climb to their highest level for many decades).

Unemployment the only fly in the ointment.

For employment, on the other hand, the outlook was ambiguous.  Would the extra productivity lead to worker layoffs, consumer disenchantment and inadequate activity?   Or would it prompt accelerating wages, ebullient sentiment and a boom?   Nobody was certain, but the Fed, significantly, was cautious.  It probably feared the former scenario, and was quick to assure the world that interest rates would be kept at negligible levels for a protracted period.

New York’s equities will soar, and so will most others.

That was enough for the stock market bulls.  They were off and running.  Quite rightly so.  Excellent profits set in the context of accommodative liquidity would lift the indices sharply.  They’d rise 10% in the remainder of 2009; a further 15 to 25% next year.  The rest of the world’s stock markets would largely follow suit.

Europe’s possibly bringing up the rear.

It was possible, though, that the advance in Europe would be a little below par.  It was recognised that the authorities there, when the crisis broke, had called things wrongly again.  The complacency of the Commission was palpable; the lack of understanding of the ECB pitiful.  The euro took the hit.  Its overvaluation was substantial beforehand; intolerable now.  But Trichet and Barroso, as psychologically adolescent as Brown, as intellectually challenged as Cameron, don’t acknowledge their errors and won’t remedy them.

Economics Viewpoints : 4 Nov

November 6, 2009

November 3rd 2009, a date that’ll live on in infamy.


  The day that Conservatives found it expedient to join with others to deny democracy.

When the going gets tough, the softies run away . . .

Perhaps the most regrettable aspect of David Cameron’s capitulation on the issue of the European Constitution was his dissembling attitude beforehand.  If he’d always intended to surrender without a fight, why pretend otherwise?   Why raise peoples’ hopes in one period only to dash them in another?   It used to be asked whether, in office, he’d be a Thatcher or a Blair.  No longer!

. . . inventing unconvincing excuses for their conduct.

The argument that the Czech Republic’s ratification of the Lisbon Treaty had removed the possibility of the UK’s holding a referendum was obvious nonsense.  Cameron had merely to point out that there was a precedent for a reconsideration of the issue.  Ireland had had a second vote on it.  Britain wanted to do likewise. 

Cameron knows he’ll win the elec­tion, so he pays no attention to voter sensi­bi­lities.

In pursuing this line, Cameron would have had law, logic and democracy as his allies.  He seemed to value none of them.  It remains to be seen how his pusillanimity will be greeted in the community at large.  What will the electorate think?   And what the Tory grassroots?   Disenchantment probably. 

Economics activity is quick­ening, but not by as much as it ought to.

The economy, meanwhile, looks as if it’s drifting into insipid growth.  Latest estimates suggest that, in the fourth quarter of 2009, GDP might be rising at 1½ to 2% per annum.  That’s better than hitherto, but disappointing given the chronology of the business cycle and the extent of the monetary reflation.  Under “normalised” circumstances, annual rates of advance would have been might higher—6 to 8% at least.  That they’re not is more than a little worrying; it hints at the continued operation of powerful deflationary forces.

The banks are partly res­pon­sible.  Rescuing the failures was a big mistake.

The banks, of course, are one of the main drags on activity.   Last week, the authorities announced that there’d have to be another huge injection of taxpayers’ funds into their balance sheets.  What hasn’t yet been admitted, but is starkly obvious, is that the decision to bail them out last year was wrong.  While it was reasonable to protect depositors (on a sliding scale), it was unreasonable, counterproductive even, to extend protection to those who’d misbehaved.  Managers and workers should have had to reap the consequences of their poor judgment.  Shareholders likewise. 

The decision might still be reversed.

To reward the guilty and punish the innocent is economics insanity.  It’ll encourage the one and discourage the other.  But it’s not too late.  The plug could still be pulled on RBS; it could be closed and the pensions of its senior executives reviewed.  HBOS could be disentangled from Lloyds; the good reprieved and the bad condemned.

But neither Government nor Opposition has the mettle to do it.

Will it happen?   Not a chance.  Darling’s Treasury team are clueless, and Osborne’s no better.  They’ve all been sold the idea that banks are an integral part of the City; it’s not true, of course.  The banks, as a money transmission mechanism, are a low-tech and not very valuable part of the financial community.  The reform that’s necessary is one that prohibits them from dabbling in areas for which they are neither intellectually nor psychologically equipped.

Twenty years hence, there­fore, the problem will recur!

Will the Tories introduce such restrictions?   No, they’ll be too busy doing as they’re told by Brussels!  And, to make matters worse, there’s been a modest, and unintended, credit squeeze in place.  It’ll temporarily undermine asset valuations.

Confucius, he say: economise or agonise.

November 2, 2009

Crisis, written in Chinese, is composed of two characters:

danger and opportunity.

Yes, but the danger part affects many people; the opportunity part very few.

Speaking in Shanghai at the end of last week, China’s Commerce Minister, Chen Deming, said he thought there’d be risks associated with an early discontinuation of economics stimulus measures. Though global activity had shown signs of significant improvement, he fretted that the crisis wasn’t over. Things might deteriorate again. Another thirties-style slump couldn’t be ruled out.

His remarks probably caused eyebrows to be raised around in the world. It was one thing for an official from a manifestly troubled economy to argue the case for maintaining a reflationary stance. It was quite another for the representative of the world’s most vibrant economy to do so. Was he telling his audience that all was not well in the PRC? Were the summer’s reports of a quickening rate of growth of GDP wholly the result of heightened public expenditures? Might the acceleration therefore prove unsustainable?

Maybe. It’s possible that Minister Chen was hinting that the private sector seemed not to be doing what the Government had hoped. Local Authorities built houses when told to, and Navies ordered frigates, but would the Consumer step up his spending or the Industrialist his investment. Perhaps not. Similarly, the Central Bank might have cut official interest rates in line with policy, but had commercial banks passed on the benefit to customers or kept it for themselves?

It might be that the Chinese in 2009 were beginning to experience conditions comparable to those in Japan in the nineties, in America in the thirties. Though higher public spending initially rippled through the economy, lifting employment and posing extra demand for raw materials, there might not have been any perceptible impact on the private sector. The people might have stayed sullenly gloomy, unconvinced by the shenanigans of their political leaders.

Welcome to the real world. Economics is not physics. People are not inanimate. Their response to a stimulus varies from one time to another. They have an agenda of their own (and memories of the past that affect responses in the future). It means that the authorities can’t make the economy behave as they wish it would. And, sometimes, infuriatingly, Le Châtelier’s Principle takes over: people’s cussedness comes to the fore, and then they seem almost to wish to subvert the objectives of their Government.

To some degree, that’s happening at the moment in America, Europe and Japan. Perhaps in China also. In the old world, the ratio of response to stimulus has been extraordinarily low: a pathetically small quickening in consequence of an unprecedentedly large reflation. Has China’s experience been similar? Do the authorities fear that, when the spending splurge comes to an end, activity will sink again; arguably, falling to a level lower than that which would have occurred in the absence of the public spending!

It’s too early to be certain, but the initial auguries are not good. It’s possible that Minister Chen did not put his anxieties strongly enough. It’s possible that in both worlds, developed and developing, activity will disappoint. After rallying insipidly in the spring and summer, momentum will be lost in the autumn. And, crucially, there’ll be nothing much the authorities will be able to do to remedy the condition. They couldn’t in the States in the thirties; nor in Japan in the nineties; nor anywhere in the world perhaps in the coming decade!

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