Economics News : 29 Jan

January 29, 2010

An’  the dawn comes up like thunder,

out’er China ’cross the Bay! 

Rudyard Kipling, but he wasn’t referring to a difficult financial dawn! 


Virtually all markets have fallen in each of the last fifteen sessions!
Why have the world’s equity markets fallen so steeply in recent weeks? Had the indices previously run ahead of fundamentals? Or were fundamentals not living up to expectations? Probably neither. Much the most likely explanation is that monetary conditions were being tightened.

That signifies tightened credit?
Many of us had not expected such a development. We’d argued that the fragile state of the world economy would stay the hand of the monetary hawks. They’d not dare mop up excess liquidity, we thought, until GDP growth rates had risen to something close to their potential.

Who done it? The Chinese, almost certainly.
It looks as if that reasoning may have been wrong. We paid too much attention to the sensibilities of the Fed, the BoJ and the ECB and too little to those of the PBC (China’s central bank). It was probably the latter—its assessment of the risk of inflation rising, that of recession falling—that tightened the credit screw and withdrew the fuel that had previously been firing the enthusiasm of the investor.

Is there more to come? Possibly. But the BoJ and ECB might loosen in compensation.
Will the PBC continue to act in this way and, if it should, how would other central banks react? Nobody knows the answer to either question, but a good deal is likely to depend on the economics numbers. If China’s should stay as strong as they appear to have been recently, it’s possible that the central bank will maintain its relatively austere posture. Equally, if Europe’s and Japan’s should stay as weak as they’ve been in the last few weeks, it’s likely that the ECB and BoJ will stay accommodative; it’s possible, indeed, that they’ll loosen further to compensate for the Chinese tightness.

Currencies, in that event, will be very volatile.
In that event, it’d be currencies that bore the strain. The yuan would rise; the yen and euro fall. Is Beijing currently signalling its acceptance of that outturn? Does it see currency accommodation as the least bad of its unattractive options? Maybe so. It might think that a touch on the credit brakes will do more to contain bubbles than provoke crashes. It might calculate that enhanced levels of foreign direct investment, coupled with ambitious public spending programmes will lift activity by almost as much as tighter credit and stronger currency will lower it!

The euro is the most vulnerable of the majors.
Tokyo and Frankfurt will not demur. Both want to realign their currencies but aren’t sure how to. They know that dollar exchange rates are irrelevant, but that yuan ones aren’t (in the areas in which they specialise, competition from the US is mild; but from China, intense). Optimally, the yen might fall 20%, the euro 40%: the benefit to GDP being large (1%?); the detriment to inflation small (½%?).

Unsurprisingly, it’s coming apart at the seams.
For Germany, of course, there’d be the additional advantage of lightening the burden imposed by peripheral members of the euro. Attention is focused at the moment on Greece, but the outcome there will set the precedent for difficulties in many other countries. Germany, the paymaster, will have to decide how it wants to play things.

Germany’s attitude is crucial.
It knows that its generous rescue of the Eastern Länder took a generation, and permanently changed the economy’s growth characteristics (from moderately fast to disappointingly slow). Will today’s politicians be as selfless with non-German slackers? Will voters want them to be?

Whatever happens, though, Greece is due some misery.
Greece has two options: it can stay in the monetary union or it can leave. Neither is attractive. Staying, it sacrifices any remnant of political sovereignty or popular democracy (policy being set for it by Brussels bureaucrats and Frankfurt bankers; the preferences of voters counting for nothing). Leaving, it provokes a huge crisis (a sizeable devaluation, a re-scheduling of its euro-denominated debts; and an exclusion from international debt markets for a generation).

It’ll be interesting to see how the cradle of democracy reacts.
In either event, of course, there’ll be economics privation and political humiliation. Who’ll be blamed? That’s not clear. But the people who deserve to be are those who rushed through monetary union without a thought. Everybody knows that currency unions that are unassociated with political unions fail. Why, then, was the euro proposal allowed to go ahead? Why didn’t the Parliaments (national or federal) control the Executive?

Indices will bounce again, but not yet.
Near term, investors are going to be scared. Indices will retreat. But valuations will recover as it is appreciated that money will stay fairly loose and profits quite strong.

Economics Views : 27 Jan

January 27, 2010

Do the right thing: it will gratify some,
and astonish others.

Mark Twain, more the latter than the former, of course.


Cadbury was voted into oblivion by a bunch of people who were not owners!
After the votes had been counted, it was established that those in favour of Cadbury’s sale to Kraft outnumbered those opposed to it. The disposal duly went ahead. Was that a famous victory for democracy or an infamous abuse of governance? Opinions vary.

Is the Law being applied sensibly?
The key issue is whether those who voted were entitled to do so. The Law is ambivalent; it says that “owners” must be responsible for disposals, but doesn’t always make it clear who the owners are. It doesn’t say, for instance, whether shares “held” by a financial institution are also “owned” by it.

It wouldn’t happen to a Landlord!
In other areas, there is no ambiguity; no confusion between principal and agent. If a man were to own a piece of land, but give its management to a steward, the latter would have no right to dispose of it without reference to the former. A prospective buyer might initially approach the agent, but the decision would be made subsequently by the principal—the beneficial owner.

Why are the beneficial owners of a company so pusillanimous?
Why should equity-based transactions be different? Aren’t the Cadbury shares held in a Unit Trust beneficially owned by Unit Holders? Why then were the latter not consulted? Why were their rights usurped by managers?

It’s habit not logic.
It’s a function of Trust Law, say defenders of the status quo. They claim that the Unit Holder is the equivalent of the twelve year-old school girl who, though she will later become the beneficiary, is currently too young and inexperienced to make her own decisions. Her interests are protected by a Trust.

Regular abuse becomes gradually acceptable.
Perhaps so. But the parallel with Unit Holders is patently absurd. The latter are typically older and wiser than the gun-slinging fund managers who administer their shares. Owners need protection, not from the impetuosity of their own decisions, but from that of their managers!

It was much the same with Union Bosses in earlier decades.
A second line of defence is that the proposal to refer issues of governance back to beneficial owners would be impractical. Hmph! That was what was said when it was proposed that Union Bosses not make strike decisions themselves, but seek the opinion of their members. The parallel is apt. Before the rules were changed, General Secretaries used to appropriate the voting rights of their worker-members; today, it is Chief Executives of Insurance Companies and Pension Funds who do the same to shareholders.

But the rules there were eventually changed.
There was another culprit involved in the Cadburys debacle; another agent that had presumed the powers of a principal. It was the Board. Why did it concede defeat at the outset? Why did the Chairman and Finance Director quibble only about the price of submission? Why hadn’t they devoted their energies to improving the on-going returns they earned for shareholders? What were the terms of their severance package?

Thatcher disciplined the Unions. When cometh such another?
The Law needs to be reviewed. It’s not only the social environment that’s broken; it’s the financial one as well. Cameron and Osborne must be prepared to tackle delinquency, not just in schools but also in board rooms, not just on the streets but in fund management houses as well. Will they do so? Don’t hold your breath.

Economics News : 22 Jan

January 22, 2010

There is no manne so blynd as he that will not see,
nor so dull as he that will not understande.

Thomas Cranmer, referring to mid-sixteenth century religious bigots, but applicable also to early twenty-first century banking dullards.

If we needed proof of bankers’ stupidity . . .
Did they not see it coming? Did they not realise their contemptuous treatment of taxpayers would provoke a reaction? Apparently not! When, Obama let slip the dogs of reaction at the end of last week, bankers were surprised! Like French aristocrats in 1789, they had no understanding of the society in which they were living. Pampered and privileged, they were ready enough to take from others but extremely reluctant to give anything back.

. . . we got it last week.
Will Obama succeed in taming the monsters? Or will he be destroyed up by them? Probably the former. He has public opinion on his side. Theodore Roosevelt, in the early part of the twentieth century, was in a similar position. He was confronted by “robber baron” corporations. The latter thought they were above the law, immune to public opinion. Roosevelt demonstrated otherwise. Anti-trust legislation was successfully implemented; arguably, it saved democracy and capitalism in the States.

Obama, attacking them, has found a cause that’ll rally the nation.
Obama’s problems in 2009 arose from his being on the wrong side of public opinion. He’d sought to shift resources from the majority to the minority. But, with the economy mired in recession, the former was in no mood to be generous. The Republican’s election victory in Massachusetts last week demonstrated how people were feeling. All the more reason, therefore, for the Democrats to regroup behind the popular platform of a measured attack on bankers.

Brown and Darling should have taken this line a year ago.
It’ll be fascinating to see how British politicians react to the news. Thus far, they’ve ignored the views of the general public. They’ve claimed they were right to support the failed Scottish banks, and they’ve fudged the issue of bonus payments. In part, that’s because they’ve been fooled into believing that the banks are an integral part of the City.

They should have exposed the confidence trick perpetrated by the money lenders.
Not so, of course. The essence of the City is its fund managers and brokers; its actuaries, lawyers and accountants. Bankers, by comparison are irrelevant; of no more significance than coffee-shops or hair-dressers. Obama’s proposals make clear the distinction.

They should have implemented an updated Glass-Steagall Provision.
He plans to have banks sell all their non-core activities. He says, very reasonably, that if taxpayers are to be required to support banks, the latter have to be required to operate in much the same way as utilities, paying their executives accordingly. Banks must choose whether to be protected and necessarily low margin, or unprotected and potentially high margin.

Instead, following rather than initiating, they’ll be deemed poodles again.
If Citibank, for instance, were to want to try its luck in the cut and thrust of the competitive world, it should be free to do so. But the US authorities would let the world know that, in the event of a crisis, depositors and counter-parties would not be eligible for taxpayer assistance. Could the bank survive in such circumstances? Probably not. Banks aren’t used to a level playing field!

Rightly so, of course. They know nothing of the City.
Brown and Darling, profoundly ignorant of the City, will have to rethink their strategy. There’ll be pressure to co-operate with the US—a year ago, the PM was vocal in stressing the need for global authorities to act in concert! Will the Scottish bankers be thrown then to the wolves? That would set at risk the lucrative directorships that some who are currently working in public service thought they might receive on their retirement.

Likewise Mervyn King, whose ignorance extends to economics.
What does the Governor of the Bank of England think of the Obama proposals? He too has a lot for which to answer. He mis-analysed the economy’s problems in 2007 and early 2008 (thinking inflation a greater threat than depression). And he compounded his error in later in 2008 with the unilateral decision (no reference to Parliament, nor any to the taxpayers whose money he was using) to bail out Edinburgh’s delinquents!

Will the Tories be any better? Hmph.
And what of Cameron and Osborne? Caught on the wrong foot again? Can they yet make a distinction between those parts of the financial services sector that are valuable and those that aren’t? Will they tell the latter that their time is up? That if they wish to go abroad and do to other countries what they’ve done to Britain, nobody’ll stand in their way? Don’t count on it.

The indices have been knocked. They’ll almost certainly recover, though.
Temporarily, in the flux of reassessment, the markets will decline. But the chances are that there’ll be recovery a few weeks down the road. Money is going to remain accommodative and profits quite strong.

Economics Views : 20 Jan

January 20, 2010

War is a cowardly escape from the problems of Peace.

Thomas Mann—and there is always more cowardice than courage!

In the sixties, the Viet Cong were poorly equipped, but thoroughly determined.
Forty-two years ago, on 21st January 1968, the “Tet Offensive” began. Viet Cong forces launched attacks on all major cities in South Vietnam. Militarily, the insurgency was insignificant; but, psychologically, it was the beginning of the end. Although Allied troops re-established physical control within a couple of weeks, they could not re-establish mental serenity. Many people who’d previously thought a US victory inevitable started afterwards to ponder the possibility of defeat.

The Taliban today are much the same. They may lose battles but not the war.
Is there a parallel here with the Taliban’s attacks on Kabul last week? Perhaps so. There’d previously been a presumption that the insurgents merely controlled the countryside; that the cities were secure. Apparently not. Even in the capital, the influence of the Americans and their Allies is limited; that of the Opposition significant.

The Tet Offensive changed the American mindset. Likewise the Attack on Kabul?
If events forty-two years ago were crucial in changing American attitudes to the war in Vietnam (and to the Presidential Election ten months later), might not the events of last week do something similar to perceptions of the war in Afghanistan (and to the Congressional elections ten months hence)? Arguably, the parallels go further: Lyndon Johnson was destroyed by a war he’d inherited from a delinquent predecessor; Barack Obama may risk a similar fate for similar reasons. The Democrats loss of a Senate seat (in Massachusetts) last week was a telling blow. It speaks volumes of the public’s disenchantment with their President and presages further Congressional setbacks in the autumn; possibly the loss of the White House in 2012.

The Brits come out of this episode rather badly.
How will these developments be interpreted in Britain? Thus far, there’s been strong disapproval of the Middle Eastern conflicts, and especially of those who promoted them, but sufficient loyalty to the Principle of the Transatlantic Alliance not to want to rock the boat. Things may be changing, though. The Chilcot Inquiry has unearthed a rich seam of revulsion to Blair and his henchmen. It’s not just to be found in the Labour Party, but in the Civil Service and the Judiciary as well. There are many scores yet to be settled.

Blair was a monster; Cameron is aiming to be a fool.
Worryingly, Cameron seems not to have noticed. The poor chap’s track record in misreading public opinion remains unblemished: he failed to understand the electorate’s disapproval of the European Constitution; its contempt for miscreant bankers; and its suspicions about Blair’s wars. The Tories may win the election, but, if the past is any guide to the future, they’ll not put right the country’s wrongs.

Economics activity, meanwhile, is faltering; Europe in the van.
The world economy is another cause for concern. The anaemic (inventory-based) recovery in the old industrial world seems to have run its course. Activity is subsiding again. Europe, its currency over-valued and its workers over-compensated, is particularly vulnerable. If the ECB were to be daft enough to raise interest rates, it’d plunge the region, possibly the world, into a second stage of recession.

But equity valuations will probably rise for another twelve months.
That being so, the securities markets are likely to perform well! Companies’ sales will disappoint, but their profits, driven by moderating wages, will advance. Set in the context of negligible interest rates and generous liquidity, the indices will rise. The magic may not last forever, but there’s a good chance it’ll see out 2010.

The Case Against China

January 19, 2010

For the last couple of decades, China has been the best performing economy in the world.  Over these years, its per capita growth has been approximately 7% per annum faster than the average of all other countries.  China has already quadrupled its share of global GDP, and looks set, so long as other things remain equal, to double up again by 2020.

But will things remain equal?   Or will unequal ones interrupt the straight line progress?   Recall that Japan looked an unstoppable behemoth until, in 1990, it came grinding to a halt.  Remember also that Argentina, in 1929, was thought likely to continue to be the world’s richest (per capita) country.

Things do change, usually without warning, and always without having been forecast to do so.  The reasons for Japan’s hiccup are as obscure today as they were then.  Argentina’s problem at the onset of depression is more easily understood.  The country was outrageously competitive.  It could produce wheat and beef and timber at 60% of the US’s costs, 50% of France’s.  As a consequence, it was able to sell whatever it wanted to produce at a huge margin.  Doing so, it enriched its Population and adorned its Capital.

The depression changed all that.  It provoked protectionism.  The US denied Argentina access to its markets:  “they’re not large enough for our own farmers, let alone for yours as well,” said the politicians.  The Europeans did likewise.  And Britain, previously Argentina’s largest market, felt it had to reserve sales for Commonwealth countries.

The price Argentina could obtain for its product collapsed.  The country went overnight from rich to fairly poor.  There was a political revolution; the country turned in on itself; and the economics debility was intensified.  Today, GDP per capita is still depressed.  It ought to be at least as high as Australia’s.  It isn’t. 

Is there a parallel here with China?   Might depression cause the US and Europe and Japan to opt for protectionism?   Yes.  It’s already happened to some modest degree and the measures would doubtless be intensified if the economics were to deteriorate. 

Could China retaliate?   Could it threaten to do things that stayed the hand of protectionists in other countries?   No.  It’s the small but fast-growing ones that always prove to be the more vulnerable.  They have no big stick (other possibly than the threat of war) to wave at the large slowly-growing ones. 

China’s medium-term success, therefore, depends crucially on world activity remaining fairly strong.  Were it not to do so, the economy would (at least temporarily) crash and the value of its securities (especially to protectionist foreigners) follow suit.  It may be thought to be a fairly low probability outcome, but a devastating one nevertheless.

What’s required for the investor in such circumstances is a degree of protection if things go awry, but a reasonable measure of participation if they don’t.  There are a number of ways of achieving the result for the small and medium sized fund.  But one of the best may be to put the bulk of the portfolio into a western-domiciled hedge operation, and to buy an appropriate amount of warrants and calls on the Chinese market:  limited downside, but (so long as the counterparties honour their obligations) lots of upside!

Economics News : 15 Jan

January 15, 2010

The ECB has turned economics misanalysis into an art form.
For much of the last twelve months, the ECB dismissed claims that the economy of the EuroZone was vulnerable to secular retrenchment. Governor Trichet, full of hubris, was consistently upbeat in his assessments of the outlook. The region had not been exposed to excessive liquidity in the period prior to 2007, he explained. It had not developed imbalances, and had little need therefore to make corrections. Other countries, he implied, were less well placed. Some, the US and UK for instance, might struggle to keep their heads above water. Not so the EZ; it would power serenely ahead.

Its assessments of the outlook are beautifully crafted . . .
The published data were never consistent with the spoken words, but, for quite a while, financial markets accepted the proposition at face value, lifting the euro in relation to the dollar and sterling. Europe’s emergency financial aid would shortly come to an end, it was presumed. Interest rates thereafter would be returned to “normal” levels. The euro would rise by another 10 to 20%!

. . . but invariably wrong.
That’s no longer the view of the consensus. It’s accepted instead that the global recovery is faltering, and that that of the EZ is particularly fragile. Recent numbers for retail sales have been shockingly weak and those for industrial production modestly so. Additionally, exports have begun to falter. It’s only public expenditure that continues to rise and, even there, probably not for much longer. If the ECB should have its way, state spending will fall and taxes rise.

The EZ is not on the verge of recovery, but on the brink of systemic collapse.
Confirming the picture of EZ debility, the German authorities indicated that the Federal Republic’s GDP had stagnated in the fourth quarter of 2009. The modest growth in the second and third periods was a reflection, not of final demand resilience, but of inventory stabilisation. The future was bleak: unemployment was set to rise and sales to retreat; a double dip was on the cards!

Germany is troubled, and a number of smaller countries headed for disaster.
And Germany was the most competitive of the EZ’s members. If it were sneezing, others would be
succumbing to pneumonia. Indeed, they seemed to be: Greece and Portugal in the lead, Spain and Ireland not far behind. Belatedly, the ratings agencies had woken up to the problem. They were busily intensifying the problem by marking down the creditworthiness of the countries concerned.

Nobody will willingly hold a Greek bond, especially one denominated in euros.
Understandably, the bond markets were in a frenzy. Devaluation aside, international equilibrium in these countries (an acceptably small current account deficit) could be achieved only by years of enervating recession. But that would exacerbate domestic disequilibrium (making the fiscal deficit unacceptably large). It was Catch 22: what ameliorated one problem worsened another!

There is a preference for any other currency—yen, dollar or sterling.
By comparison, the US looked much better: its industry was growing; its retail sales advancing; and its employment stabilising. Unsurprisingly, the dollar has stopped falling and seemed to be about to rise. Once again, Americans had proved themselves better able to handle a crisis than Europeans (or Japanese).

Will the European authorities interpret the signals correctly?
How will Trichet and Barroso interpret these observations? Will they accept that the financial straitjacket they’ve applied to the European economy prejudices not merely the people’s democratic rights but also their material well-being? Will they consequently abandon monetary union and abolish the commission? Probably not.

Very unlikely. But a euro devaluation is coming anyway.
But it is possible that they’ll encourage (or not discourage) a euro devaluation. A return to parity with the dollar would be a sensible target. It would make Germany competitive in world markets and it would extend a lifeline to Greece and Portugal.

Equities, meanwhile, will continue their advance.
In any event, the near term monetary outlook is going to be very easy (no foreseeable reversal of QE). Accordingly, asset prices will continue to rise. It’s not until the liquidity starts to be abused (late 2010 at the earliest) that we have to worry about valuations. In the meantime, equities will lead the charge. Another 25% is a realistic expectation.

Economics Views : 13 Jan

January 13, 2010

To deal logically with bankers, we ought to start from scratch.
But where is scratch?

Elias Canetti—the miscreants, like their first cousins, the criminals, are likely always to be with us.

It’s natural for humans to judge each other.
If members of the public were to witness a man beating a dog with a stick, they’d probably be sickened. The spectacle would evoke in them sympathy for the dog and disgust for the man. But what about the stick? How would they feel about it? Largely neutral. They’d know it was inanimate; that it had neither the will nor the intelligence to set an agenda of its own; that its actions, good or bad, were the responsibility of those who wielded it.

But it’d be better if the process were less biased.
There’s a potentially illuminating financial parallel to be drawn here: the dog represents the economy; the man, the regulatory authorities; and the stick, the commercial bankers. What’s clearly happened in recent years is that the economy has been savagely thrashed. And what’s equally clear is that the banks were the instrument through which the drubbing was inflicted. But where does culpability lie? With mindless bankers or those who wielded them?

In identifying the minor malefactors, the major ones often escape censure.
The latter, of course. Bankers could only inflict the damage the authorities allowed them to. The problem arose partly because central bankers created immoderate amounts of extra liquidity (to prevent the economy slipping into recession), and partly because banking regulators failed to monitor the uses to which the liquidity was being put (the FSA seemed to model itself on Haringey Council’s Child Protection Agency).

The Treasury and the Regulators were primarily responsible for the financial chaos.
The consequences of these errors were exacerbated by HMG’s actions in the immediate aftermath of the thrashing. The Prime Minister and Chancellor claimed they wanted to help the dog. To this end, they drew blood from the poor creature and transferred it to the stick! They said that the procedure would make the dog better!!! They said that, if the industrialist were to be extended extra credit, the banker needed addition funds. The solution was that the industrialist give his money to the banker, and that the latter lend it back to the former: Monty Python could never have dreamt up so ridiculous a proposition!

Bankers were very greedy, but only moderately culpable.
Of course bankers didn’t lend the money back to industrialists. They kept it for themselves. And why didn’t politicians, well versed in avarice and venality, anticipate the problem? Was their misanalysis deliberate or accidental?

The Tories are out of their depth when the writing is joined up.
And it wasn’t just the Old Labour dozos who misread the situation; their New Conservative equivalents were equally foxed. Cameron and Osborne proved themselves clueless about the causes of the crisis and ill-informed about the value of commercial bankers to the economy. Like so much of the Press, they seem to regard the latter as an integral part of the City’s financial services. Not so, of course. It’s the higher forms of animal life that make worthwhile contributions. It’s fund managers and brokers, actuaries, accountants and lawyers—most of them vertebrate—that do so. The single-celled organisms that populate the commercial banking world are, like the local authority workers they so closely resemble, consumers of resources, not suppliers of them.

Don’t let’s wait for the bankers to go; let’s expel them!
If the commercial bankers were to up-stakes and leave London, it’d be a cause for celebration, not commiseration. If the Goodwins and Hesters were to inflict on other economies the damage they’ve done here, Britain’s competitive advantage would soar into the stratosphere!

Economics News: 8 Jan

January 8, 2010

Within the infinite possibility of error, it is generally the case that:
unfashionable untruths are more popular than unfashionable truths.

Bertrand Russell’s Essays—it works for economics: the consensus can usually be relied upon to be wrong.


Is the global economy accelerating or decelerating?
How strong is the world economy? Is it surging on the back of huge fiscal and monetary stimuluses, or subsiding under the weight of intolerable consumer debt and mindless bureaucratic incompetence? During the third quarter of 2009, when published numbers were generally improving, most forecasters were optimistic. Indeed, many thought that activity might become strong enough to risk a reversion to unacceptably fast inflation. That threat was dissipated in the fourth quarter as the data became a little more mixed, but commentators were slow to revise their expectations. Only a few voiced concerns that activity might slip back into recession in 2010.

The jury is out. But the Singapore numbers imply the latter.
More might do so after the publication last week of Singapore’s estimate of GDP in the fourth quarter of 2009—down on the preceding period at an annual rate of almost 7%! What had happened? How could the Lion City, ferociously efficient and devastatingly competitive, have faltered? How could it be that China was booming, but Singapore not participating? Lots of questions; not many answers!

Japan is stuttering, and the EZ, Germany excepted, is dead in the water.
Amongst the major economies, meanwhile, there was another trend that forecasters had failed to anticipate: the improvement in conditions in the US relative to those in the EU and Japan. None of the three was faring at all well, but the former, after a dull start, seemed to be outpacing the latter. Arguably, the development was a reflection of relative competitiveness. The dollar had fallen a good deal against the euro and the yen. And corporations in America had cut levels of employment significantly, while those in Europe and Japan hadn’t.

By comparison, the US looks almost satisfactory.
In manufacturing, the US’s recent numbers were noticeably better than the EU’s or Japan’s. In services, the difference was even larger. How would this be reflected in GDP estimates? Nobody was sure, but it was not impossible that growth in the former might be a couple of percentage points faster than that in the latter.

Not so Britain. It’s handicapped by a bloated public sector.
Unsurprisingly, Britain’s economy had been slow to return to growth. Though currency weakness boosted competitiveness, huge increases in the size of the public sector have neutralised the benefit. Not until balance was restored would the country’s prospects improve. It might be a long wait. Though Cameron would win the election, it looked as if it would be Brown’s policies that prevailed.

Something that Cameron’s boys are not fussed about.
Differences between New Conservative and Old Labour were barely perceptible. Both were supine in relation to the EU; both supportive of military action in the Middle East; and both happy to waste taxpayer funds in the support of the public sector establishment. Was it worth having an election? If the procedure would change nothing, if new Tweddledum was to be indistinguishable from old Tweddledee, wouldn’t it be better not to bother?

The cost imposed by Local Authority incompetence is insupportable.
The “cold spell,” meanwhile, did nothing to lift people’s spirits at home nor the country’s image abroad. In earlier decades, when weather conditions had been comparably bad, roads got gritted, bus services weren’t cancelled and schools didn’t close. It was rather shaming that, in the twenty-first century, after excellent meteorological forecasting, the public sector had found itself in such a shambles. More justification, perhaps, for Government Ministers to wield the axe.

But, near term, the local equity market is flying.
The good news, and there’s not much of it, is that the London equity market is performing well. Its total return in the fourth quarter was about 9%; and, in 2009 as a whole, 25%. The new year had begun strongly, moreover. It was a combination of easy money on the one hand and satisfactory profits on the other. Would the recipe last? Yes; it probably would. If Singapore were anything to go by, the global economics environment would be dull. That’d undermine the bargaining position of employees (keeping profit margins spritely), and it’d cause the authorities to fret about a recurrence of recession (keeping credit policies expansive as well).

And will probably continue to do so for a while.
Another advance of 25% was on the cards—enough to restore the index to its previous all time high. That’d be excellent news for the pensioner. Beware the taxman, though. He’d got form. He’s not to be trusted. Let him nowhere near the money.

Economics Views: 6 Jan

January 6, 2010

Justice is open to everyone,
in the same way as is the Ritz Hotel.

Judge Sturgess—those with power and money getting good service, those with neither being ejected.

What audacity! The upstart Icelandic President has asked the opinion of the people!
Earlier this week, the Icelandic President refused to ratify the decision of the Reykjavik Parliament to compensate British and Dutch savers for the losses they incurred following the collapse of the internet bank, Icesave. It was only the second time in sixty years that a President had acted in this way. He did so recognising the general public’s strong feelings on the issue. His recommendation was that the proposals be referred back to the electorate for a definitive decision.

Parliament had required each voter to pay £14½ thousands to cover the cost of banking incompetence.
Why had the problem arisen? Because the Icelandic people felt they were being asked to pick up the pieces of a breakage they’d not caused. There was lots of blame to go round; others should take their share fair of it. Executives who’d mismanaged the banks ought to have been first in line; regulators who’d turned a blind eye to signs of impending danger only a little behind; and gullible savers who’d neglected due diligence oughtn’t be deemed blameless.

And the miserable plebs started whingeing! Bring back the cat; that’d teach them to know when they’re well off.
The arguments were compelling: it was a central principle of justice that the guilty be punished, not the innocent. If, in similar circumstances, the British people had had a referendum, it’s unlikely that RBS and HBOS would have been bailed out with taxpayer funds; extremely unlikely that their delinquent board members would have been lavishly rewarded; and absolutely certain that incompetent regulators would have been severely censured.

Brown’s boys know better than to let the people get uppity.
Instead, Britain made its decisions in secret. The people were kept in the dark. Parliament was not informed. A tiny cabal of unrepresentative insiders gathered in the gloom to bail out their chums and impoverish the rest of society!

Myners’ reaction was a study in hypocrisy.
Understandably, the Browns and Darlings, Myners and Turners were incensed by the Icelandic President’s veto. It wasn’t the money that irritated them—the sum involved, £3.6 billions, was insignificant in comparison with those already expended. It was instead the political comparison that irked. While Iceland had bowed the knee to democratic principles, Britain had demonstrated its preference for the jackboot.

A living proof of Peter’s Principle.
In the immediate aftermath of the crisis, HMG had seemed to over-react when it used anti-terrorist powers to sequestrate Icelandic assets. And now, apparently not regretting the earlier stance, it sought to make the country a financial pariah. Myners, the man who’d been responsible for nodding through Goodwin’s £32 millions pension pot, was incandescent. Iceland’s relationship with the IMF would be scuppered, he thundered, and its application to join the EU vetoed (every cloud having its silver lining!).

It’s the bankers and regulators who ought to be punished.
It’ll be interesting to see how the referendum goes. Will the Press draw parallels with events in the UK? In any event, the process will not reflect favourably on the UK or its Government. It’s not something Brown would have wished for in the run up to an election.

Equities, however, are running before the wind.
The good news is that, while the economy remains very dull, the equity market is shining brightly. 2009 brought total returns of 25%; 2010 might do almost as well. Inflation looks set to be negligible, but profits satisfactory. If only the rapacious public sector could be contained, the outlook would be very bullish.

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TV Appearances

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