Economics Views : 31 Mar

March 31, 2010

A little madness in the Spring
Is wholesome even for the King.

Emily Dickinson—was the King she was referring to: George III or the Governor of the Bank of England?

It’s not just about expenses . . .
The political process in Britain is no longer held in high regard. Voters are deeply suspicious, not just of those currently in office, but of those aspiring to be. Indeed, the distrust extends to the whole panoply of governance: to lazy bureaucrats, incompetent regulators and arrogant central bankers. That being the case, the forthcoming general election is not expected to do much to remedy the problem; substituting Tweddledum for Tweddledee addresses symptoms, not causes.

. . . people don’t trust politicians!
It had been hoped that the television debate between “Prospective Chancellors” would lance the boil. Some hope. The spectacle merely confirmed people’s scepticism. Each candidate had been so thoroughly prepared by his minders as to render him invulnerable to the tricks of the other.

The television debate was a great disappointment.
There was some disagreement about the likely rate of economics progress in the next year or so, and some dispute about the danger of running large fiscal deficits. But these were nothing more than anodyne differences of opinion. The big issues were largely ignored.

Why so little discussion of demented bankers?
Had it been sensible to bail out delinquent banks? Was it appropriate that the decision to do so had been taken by central bankers rather than elected representatives? Was it acceptable that Parliament was not even informed of the procedure for a whole year?

Why nothing about pensions?
And what was going to happen to pensions? How much would the retirement age be raised, and when? Why, in the meantime, were public sector workers treated so much better than their private sector counterparts? Why did society reward consumers of resources rather than producers of them?

The disenchantment is palpable.
Lots of questions; not many answers. The incumbent was understandably wary of venturing into difficult territory. The alternate was worried that saying something now would be held against him in the future. Better to be bland than sorry.

Not much different overseas.
Elsewhere in the world, the picture wasn’t strikingly different. Politicians had been caught on the wrong foot when the crisis struck, and they’d been trying ever since to convince electors that the situation was returning to normal. But it wasn’t!

Economies are faltering, but the authorities pretend not to notice.
Retail sales and industrial production had enjoyed a “dead-cat” bounce at the end of last year, but had been disappointing since. And employment was very precariously placed. Jobs had been spuriously maintained, not genuinely created. The risk was that it’d go horribly wrong later this year. If activity remained subdued, workers would be laid off—precipitating a slide in sentiment and spending.

Employment and protectionism are the two big worries.
What, moreover, of protectionism? In the US, Obama would have noticed that electors approved his tough line on China. He’d likely to continue to push for a sizeable yuan revaluation, therefore. And he’d be tempted otherwise to threaten sanctions.

As they were in the thirties.
At the moment, the Chinese authorities seemed not to appreciate the danger; nor, of course, did comparable countries in the thirties! Are politicians today less insightful than they were then? It doesn’t augur well!

Equities are appreciating. But for how long?
The only good news is that securities valuations are rising. Long may they do so. But, if economies are as dreary as they seem to be, and politicians no better than they ought to be, we’re right to be worried.

Economics News : 26 Mar

March 27, 2010

I am a deeply superficial person.

Andy Warhol, but it could just as well have been Alistair Darling.

Was the Chancellor serious?
The 2010 Budget was pure fantasy. The Chancellor proposed a set of measures that he knew, because the forthcoming election would send him into political oblivion, he’d not be in a position to implement. If, improbably, Labour were to be returned to office, it’d be the execrable Balls who took over. If, more probably, Labour were ousted, it’d be the only slightly less execrable Osborne who did so.

Did he think his Budget meaningful?
Why then did Darling bother to present a budget? Because he was playing to the electoral gallery! He didn’t often get listened to: only rarely was he given significant exposure on national television news. Budget Day was the exception. And he couldn’t resist the temptation to be celebrated—even if it were to be for only half an hour or so.

Probably not. It was just a game.
Another aspect of the fantasy, perhaps the most significant part, related to his economics projections. The fiscal deficit, he said, would cure itself because the economy would grow briskly. The recovery, he claimed, had only just started. It was going to strengthen and broaden. GDP would advance rapidly this year and continue to do so until the middle of the decade!!!

His forecasts, though, were certainly amusing.
Really? What was this forecast based on? Was it made by the same people who, in 2007, at the onset of the economics slide, had been forecasting resilience, who’d thought the danger of inflation greater than that of recession, who’d recommended higher interest rates?

But why did the media pay attention?
In other realms of life, it’s the guys who get things right who are listened to, not the ones who get them wrong. Warren Buffet has a keen following in the world of fund management because of his matchless track record. Likewise, in the world of football management, Alex Ferguson.

Why weren’t people more worried?
It’s possible that the Chancellor will be proven right, but much more likely that he won’t. It’s all a question of the economics cycle. To those who think that periodicity is largely constant, the outlook is a little worrying. The economy appeared to peak in spring 2006 and to trough at the end of 2008. That being the case, activity now, roughly halfway between trough and peak, should be experiencing its fastest rate of growth. Is it? Will things slowdown from now on? If they do, the Chancellor’s forecasts will be horrendously wrong. He’ll be to economics soothsaying what Eddie-the-Eagle was to ski-jumping!

Is a problem delayed one half-solved?
It’ll be interesting to see what the general public makes of the package. The initial reaction seems to have been one of relief. People know that there are serious problems ahead, but would prefer that the austerity be delayed for a while. They are, accordingly, willing to go along with the Chancellor’s fantasy.

The ECB and Commission seem to think so.
Elsewhere in the world, the picture is somewhat similar. In Europe, for instance, recent economics reports have appeared to be weak, and the plight of Greece (possibly of Portugal as well) dire. But the ECB and the Commission have cobbled something together to give the impression of resolution. And people are pretending they’re convinced. What do investors think? They’re underwhelmed. They expect the problems to return again and again.

There’s no escape for Oedipus, nor for the Euro.
The feature of Greek tragedy is that the audience knows the denouement in advance. The playwright can’t change the ending, only how it transpires. It’s much the same with the euro. It can’t succeed. It’s only a question of how long it lasts. And of how much egg appears on whose face at the end.

But equity indices are climbing.
That said, securities markets are strong and likely to remain so for a while. The weakness of the economies is a positive, not a negative. While the threat of depression lours, money will be kept accommodative and interest rates low. Given that, meanwhile, corporate profits are likely to rise (more the consequence of moderating wages than strengthening sales), equities are on a one-way street. It won’t last forever, but it may see out 2010.

And will continue to do so in 2010.
The problem comes in 2011. Then, a new economics downturn could bring a spate of bankruptcies. Simultaneously, the central banks, if they perform as they have done in the past, will start to fret again about a credit bubble. Garde-toi!

Economics Views : 24 Mar

March 24, 2010

Quis custodiet ipsos custodes?

Juvenal, asking the question asked previously by Socrates. The latter, recognising the dilemma, relied on the honour of the guardians. Hmph!

Don’t mess with German pensioners.
The world was amazed to learn last week that a group of disgruntled German pensioners, in dispute with their financial adviser, had abandoned due process in favour of direct action. They’d seized the man who, they claimed, had lost their money in real estate dealings in the US and held him captive for several days. Their objective was extortion: in compensation for their losses.

There’s a message here for all malefactors.
Predictably, the legal establishment took a dim view of their methods, but, equally predictably, the general public didn’t. Most people, though knowing few details of the case, admired the (putatively) bold pensioners and had little sympathy for the (allegedly) miscreant adviser. The problem, they thought, was the Law. The pensioners had had to look after themselves because the Regulatory System didn’t. It protected perpetrators of misbehaviour, not victims of it.

Are Governments listening? Probably not.
Did the authorities anywhere in the world think nothing untoward had happened before, during and after the recent financial crisis? Did they perceive commercial bankers to be blameless, central bankers prescient, regulators effective and government ministers virtuous? Of course not. But who was to lay charges against this lot? Under the existing system, the guilty would have to accuse themselves! Some hope!

But the people’s anger will not go away.
Instead, they tended to deal harshly with those who’d already suffered. That’d been the fate of the pensioners in Germany and also of their equivalents elsewhere in the world. As a result, there’d been no closure. Nor would there be while the miscreants went uncensured.

It may be intensified by economics softness.
Indeed, the embers of bitterness would be kept glowing by the on-going fragility of economies. Last week’s news in this regard was far from encouraging. Activity appeared not to be recovering in the old industrial world; at best, it was marking time.

Official forecasts are optimistic—unjustifiably so.
There’d been no follow-through to the modest quickening that had occurred in the summer and autumn of last year. On the contrary, reports relating to late winter and early spring implied significant deceleration. The inventory correction had run its course and final sales were as anaemic as ever.

The numbers suggest a new retrenchment.
Industrial production was faltering; world trade losing momentum; and employment threatened. Double-dip was back on the agenda of the consensual forecaster. Rightly so; but the danger was not so much 2010 as 2011. That’s when cyclical downturn would reinforce secular debility.

It’ll likely be exacerbated by protectionism.
Protectionism was likely to add to the forces of retrenchment. The process had started a couple of years ago, but might have much further to run. At some stage, China was likely to be asked to “help keep the world economy in balance” by engineering a substantial (40% say) yuan revaluation. If, improbably, the Beijing authorities agreed to do so, China’s inflation would go substantially negative, its interest rates substantially positive, and its GDP plunge. If, more probably, the authorities didn’t agree, protectionist measures would be implemented, production would go unsold and GDP plunge. Catch 22!

Stick with equities for the moment, but be prepared to unload.
The only good news, and it too might be temporary rather than permanent, was that asset markets in the industrial world would continue to appreciate. Not even the doziest of central bankers would tighten credit in current circumstances. And that, taken in the context of moderately strong profits, would justify higher valuations.

Economics News : 19 Mar

March 19, 2010

Bliss will it be in that rally to be invested,
But to own an option will be very heaven.

The markets are going up. But they’re vulnerable. A derivative has lots to recommend it.

Last week’s economics numbers were anaemic.
In the old industrial world, sales and production indices disappointed, leading indicators drifted and housing activity weakened. The recovery, such as it was, seemed to have stalled. It had been driven in 2009, not by a revival in final demand, but by a correction in inventories. The latter now completed, there was an implication that growth in the second half of 2010 would moderate.

Activity is not quickening, but slowing.
Central Banks acknowledged the prospective deceleration. The Fed and BOJ no longer talked of exit strategies. Mindful of the possibility of double-dip, they were careful to stress their long term commitment to monetary accommodation.

There’s no justification for tighter credit.
The ECB, of course, had no time to fret about economics trends. It was as much as it could do to stop the euro falling apart. The yield spread between German and Greek Government bonds had risen above three hundred basis points again. Investors, in other words, saw the risk of Hellenic default as being uncomfortably high: a 10% probability of a 30% repudiation in the next twelve months; a 50% probability of a 51% repudiation in the next ten years!

Jean-Claude is in a hole—and still digging.
It wasn’t just Central Bankers who were feeling the heat. Government Ministers too were under fire. In Japan and the States, support for incumbents had been falling for some time. In Europe, likewise. Chancellor Merkel’s poll ratings were not good; President Sarkozy had been slaughtered in recent municipal elections.

Politicians likewise.
Only in the UK was Prime Minister Brown holding his psephological own. And why was that? Because the British economy was shining again? Certainly not. Probably because the alternate, Candidate Cameron, was deemed equally unattractive: no more competent and no less dishonourable.

Why is Brown less unpopular than he used to be? Cameron!
For the moment, though, the securities markets were quite happy. Investors liked the idea of easy credit and they didn’t mind the anaemic real growth that accompanied it. The combination kept pay settlements moderate and profit margins satisfactory; concurrently, it kept demand for financial assets high. Bliss!

Markets are rising, though.
The anxiety was that the authorities mightn’t be able to preserve the favourable circumstances. If activity were either to quicken or slow, there’d be risks. In the one event, inflation would rise; in the one other, it would be bankruptcies that did so.

Will it last?
For London, there was another worry. It was that the European Commission, attempting to divert blame for the financial crisis from itself, would implement regulations aimed at making life for Hedge Funds intolerable. Significantly, Merkel and Sarkozy were supposed to have agreed some proposals along these lines, and had only to convince Brown to go along with their ideas!

Probably not.
What was to be made, though, of Wolfgang Schaeuble’s suggestion that the German Secret Service be used to spy on and identify those investors who’d undermined the euro? What a splendid idea! It was a story line that might have been dreamt up by the authors of “Allo, Allo!” Would today’s equivalent of Major-General von Klinkerhoffen instruct today’s equivalent of Herr Otto Flick? And would the results be as hilarious? Probably.

The loonies in the EZ are one threat.
The reality, less so. There’s a fairly high probability that the world economy will suffer another severe downturn in the not very distant future. The danger is not that it occur in the second half of 2010, but in 2012—when activity is due to be cyclically low. There is a fairly high probability also that the euro (and possible the whole EU) will disintegrate. In such circumstances, politicians can’t be relied on to behave rationally (vide Schaeuble now). The risk is they’ll do something daft (protectionism, for instance) and make matter worse

An economics aftershock, another.
We don’t know what will occur to them, and we can’t therefore protect ourselves from it. All we can say is that democracy tends to help: the judgment of the amateur typically being better than that of the professional. Predictably, therefore, anglo-saxons have a better track record than others.

If in doubt, ask the people.
Near term, the chances are that equities will rise, but next year the going may be tougher. It’d be sensible for most funds to stay fairly flexible in the second half of 2011.

Economics Views : 17 Mar

March 18, 2010

You cannot shake hands,
with a clenched fist.

Indira Gandhi—but there are some occasions, dealing with a bully, for instance, when the threat is more efficacious than the salutation.

Politicians think they’re cleverer than the people.
As a rule, Governments are slow to acknowledge error, and even slower to take steps to reverse it. Ministers seem to imagine that, so long as they deny misjudgment, voters will give them the benefit of the doubt. That’s wishful thinking, of course. In reality, electorates are reasonably well informed and fully aware of the games politicians play.

They’re not. But they are less honest.
In the past, it used to be said that Brits were less duplicitous than others. No longer. Blair and Brown have laid that myth to rest. Their unwillingness to admit the blindingly obvious—in relation to wars, pensions, gold sales and many other issues—makes them as accomplished a pair of tellers of untruths as any elsewhere in the world.

Should we be suspicious of the Greeks bearing gifts or the French being honest?
It’s the French, rather surprisingly, who’ve begun to develop an appetite for candour. Finance Minister, Christine Lagarde, went further last week than most commentators thought possible in acknowledging that Europe’s Monetary Union was proving to be a liability rather than an asset. She didn’t put it in exactly those terms, but she did recognise that the EZ’s policy stance—fiscal balance and monetary rectitude—had delivered no dividends. Countries sticking with virtue had performed no better than those succumbing to vice.

We certainly should. Mme Lagarde probably has an agenda.
More to the point, she identified the misanalysis that had prompted the mistakes. The project’s original plan, she noted, had perceived Germany to be the ideal economy, the Bundesbank the ideal Central Bank. Accordingly, the rest of the EZ had to be encouraged to converge to the German model, not the latter to the former.

She’s right to point out that the EZ’s failed.
That would have been sensible enough so long as Germany’s economy had performed as well after the introduction of monetary union as it did before. But it didn’t. On the contrary, it was chronically disappointing, mired in semi-recession, for the last ten years or more. And the rest of Europe, chained by a currency peg to Bundesbank prejudices (borne during the Weimar Republic), has suffered similarly.

That the Greeks, for instance, can’t live with the Germans.
Mme Lagarde did not recommend that the EZ be abandoned. Instead, she wanted the budgetary rules relaxed, the monetary straitjacket loosened. In part, of course, it was a political power-play. She knew that most members of the EZ were thoroughly disenchanted; that they looked longingly at the economics flexibility and political freedom enjoyed by those who’d been sensible enough not to sign up to a currency bloc. She calculated perhaps that, getting them on-side, she’d restore France to its rightful position as the EU’s political master.

But partial reform is difficult; it has to be comprehensive.
Maybe. But it was a dangerous ploy. The Germans might, if they didn’t like the new rules, refuse to play the game. Quel cauchemar! How would the EU manage if its paymaster chose not to cough up? Who’d be blamed in such an event? French or Germans?

Will the English take advantage? Not with the Scots in charge!
There’s a lesson here for the English. The Commission, prompted by the French, are looking to impose impossibly restrictive regulatory rules on Hedge Funds. How should HMG respond? Easy. First, repeat the French analysis: recognise that membership of the EU has been a mistake. Second, repeat the (posited) German threat: tell the Regulators that the rules are unacceptable and that, if implemented, London’s financial community will take away its ball, and play elsewhere!

Economics News : 12 Mar

March 12, 2010

In order for the Cycle not to crash,
the Rider has usually to keep it going forwards.

It’s the same in economics and in transportation. Children are quick to learn the technique; Central Bankers slower.

The “periodicity” of economics cycles is helpfully regular.
It looks as if the world economy “troughed” in early 2009. If so, it’s currently more than a year (almost a quarter of a cycle therefore) into recovery. And that means it should be experiencing something close to “peak” growth rates!

“Levels” of activity trough a quarter of a cycle before “Growth” peaks.
In some parts of the world, it probably is. In China and India, for instance, the reported numbers suggest that growth has been well up to the standards achieved in comparable periods of previous cycles. In Australia and much of Latin America, the picture has been equally good. But, in the old industrial world, it’s been quite disappointing. If today’s growth rates are as good as they’re going to get in the current cycle, there’s much to be worried about the medium-term future.

Which means we should currently be steaming ahead!
Least bad amongst the underperformers has been the US. Its numbers have been bouncing back quite well in recent months. And it’s no longer just the consumer who’s contributing to the revival; the exporter’s doing so as well. A softer dollar and much lower unit labour costs have worked wonders for competitiveness. Where, previously, overseas sales were a drag, they’re now a spur.

The numbers from America and Japan, though, are disappointing.
Japan has also made some progress, particularly in industrial exports, but the overall picture is not good. Domestic consumers are gloomy and not inclined to spend freely. Retail sales have recovered from last year’s slump, but not by enough to persuade local businessmen to invest or recruit. Fiscal considerations, meanwhile, remain dire. Tax revenues have undershot targets and that has set a limit on public sector outlays.

Those from Europe, awful.
Bringing up the rear, as usual, has been Europe. Over-governed, over-regulated and over-taxed, the region is dispirited and failing. It underperformed during the credit-fuelled boom in the earlier years of the decade, it sank more quickly than the average in the correction, and it has grown more slowly than the average during the recovery. It lacks competitiveness and its capacity to innovate, once formidable, is now emasculated.

And from Britain, just as bad.
Britain is as badly placed as Europe. Its public finances are a disaster; its educational standards pitiful; its institutional infrastructure crumbling. An election is coming and the main contenders for office demonstrate a comprehensive misunderstanding of the problems, let alone the solutions.

If it’s bad now, what’ll it be like . . .
It all looks rather gloomy for the “Old World.” Assuming the usual chronology applies, the next eighteen months will be difficult, and the year or so after that dreadful. In the first period, there’ll still be advances, but at progressively slower rates; in the second, a return possibly to retrenchment.

. . . in the weak phase of the cycle?
In Europe’s case, annualised growth that’s been in the 1 to 2% range during 2009 might slip back to negligible rates in the one period, and to negatives in the next! Just how bad things get will depend crucially on conditions in labour markets.

Unemployment could rocket.
Employees were not shed in normal numbers during the contraction. Perhaps employers thought the recovery would be as steep as the contraction, and that it would be sensible therefore to hoard labour. If so, employment is going to remain very vulnerable to shifts in employers’ perceptions.

A nuclear explosion!
If businesses were to start to think that the best of the recovery had occurred and that activity in the next couple of years would fall below a critical level, they’d probably take decisive action. It’s not impossible that an initially huge shakeout in employment would trigger a subsequently reinforcing reaction! Fewer workers prompting lower consumption, still weaker activity, and still lower employment; lower tax revenues leading to yawning deficits, investor disenchantment, higher real interest rates, and yet lower employment!

Will money therefore be kept loose? Probably.
It’s a doomsday scenario. And, not until well into the next recovery in 2012, will the danger have receded. In the meantime, have the monetary authorities the intelligence to keep credit easy and interest rates low? Probably, but not certainly. Every few months, one of them frightens us by saying that he thinks that containing inflation is more important than preserving activity!

And markets’ll probably rise. But central banks don’t fill us with confidence!
That’s invariably been the signal for equity markets to plunge. But, thus far at least, the threats have come to nothing. There’s always been a reassessment of economics prospects, a reversion to monetary sanity and a new surge in valuations. Will it continue? Yes, but not forever. At some stage, if history is anything to go by, the dogs of war will be let loose.

Economics Views : 10 Mar

March 11, 2010

Infamy! Infamy!
The hedge funds have got it in for me!

Kenneth Williams, as Euro Commissioner, in Carry On Misunderstanding Finance.

Logic is important, but psychology more important still.
Is the messenger responsible for the news he delivers? Of course not. But, when the news is bad, there’s a temptation nevertheless to blame him. And the people most inclined to do so are those who fear they’re partly to blame for the disappointment. Witness the reaction in recent weeks of European Commissioners to reports of instability in the EuroZone.

People believe what they want to believe, and blame whom they want to blame.
They weren’t expecting turmoil in financial markets, and were irritated by its manifestation. Once again, it seemed, a shattered Europe was failing in comparison with a booming Asia and a resilient America. Did Commissioners secretly suspect the cause of the problem to be the region’s excessive bureaucracy and relentless regulation? Very possibly. That would explain their accusatory response. The hiccup had been caused, they asserted, by “subversive elements” in the investment community. The authorities had been ambushed and the sovereign debt markets laid waste!

The European Commission has been looking for a stick . . .
Who were the guilty parties? The Hedge Funds! Their infamy was boundless. They’d exploited derivatives to create havoc; deployed financial misinformation to unsettle ordinary investors; then raided the markets to secure huge gains for themselves and misery for ordinary citizens. Their behaviour was unacceptable. Action would have to be taken to prevent a recurrence.

. . . with which to beat the Hedge Funds.
The Commission noted that the vast majority of residents appreciated the stability (sic) that the euro had engendered. It was anti-democratic of Hedge Funds, therefore, to act as they did. Much stricter regulation would be required if they were to be disciplined in the future. They had to work with the community, not against it. If the Funds couldn’t mend their ways, they’d be outlawed.

It thinks, in Greece, it may have found one.
It might have been Robespierre or Stalin talking. Autocrats don’t tolerate dissent; they know that, left unchecked, it can turn into insurrection. The Commissioners know that they’ve made a mess of the economy and the currency, and fear that things will get worse before they get better.

Much depends on what the rest of us are prepared to swallow.
Greece can be bullied into rebalancing its budget, but that’ll neither revive activity nor restore confidence. The future looks grim: under current policies, there’ll be a lengthy recession and endless uncompetitiveness. And the risk is that the longer the authorities try to suppress criticism, the more violent will the denouement eventually be.

Do we line up with the lynch mob or its prospective victim?
What, though, is the future for Hedge Funds? Might they be banned from operating in the EU? And, if the Directoire/Politburo were to anathematise them, causing their migration to Switzerland and the States, what would be the reaction of HMG? Spineless, if history is anything to go by.

Don’t look from leadership from British politicians; they’re weak reeds.
Brown, were he still PM, would do nothing to protect them. He doesn’t understand them, but thinks they’re dangerous. Nor would Cameron, if newly installed, be likely to be much better. Initially, he might offer a cast-iron guarantee of support; but, subsequently, under pressure from Europe, renege on his promise.

Thank Goodness markets are rising!
The only good news is that the indices will continue to rise. Central Banks in the States, Japan and China fret that growth can’t be sustained without accommodative credit. For the remainder of this year, and possibly part of 2011, therefore, money will be easy and markets strong.

If in doubt, ask the people.

March 9, 2010

If people behaved like governments,
you’d call the cops.

Kelvin Throop—if the difference between lawyers and criminals is that the former are guiltier, what distinguishes governments from voters?

The European Union has done its best to eliminate the rights of the people.
It’s refreshing to see that, in Iceland, if nowhere else in Europe, respect for democracy has not been completely extinguished. The country’s (admittedly severe) banking problems have been resolved by seeking the views of the people. Its Government, though initially reluctant to do so, has staged a referendum.

But it’s failed in an unlikely place. Iceland’s rebelled.
When the crisis first broke, there’d been an inclination to follow the (somewhat dubious) example set by other European countries. It had been proposed that the sins of bankers be visited on taxpayers (probably to the third and fourth generation). Unsurprisingly, the recommendation proved not to be popular.

The people have voted against the banks, and, as an added bonus, they’ll not join the EU.
The people thought the guilty ought to pay, not the innocent. It was bankers and regulators who had caused the problem; it was they who ought to be required to contribute most to the solution. Popular prejudice had it that the troublemakers ought to be officially censured, face swingeing penalties, and be barred in future from holding responsible positions in society.

If only the Brits had been given such a chance!
Would the Brits have voted differently? Of course not. If there’d been a referendum here, if English taxpayers had been asked whether they wanted to pay for the excesses of Scottish bankers, there’s not much doubt that the answer would have been a resounding “No!”

Ultimately we shall, of course. But there may have first to be a few broken bones.
Would that have been better or worse for society? Nobody knows. Those who claim otherwise aren’t to be taken seriously. When, for instance, the Prime Minister declares that the decision to support the banks was the right one, he compares a reality on the one hand with a forecast on the other. He compares what actually happened after the bailout with what he forecasts would have happened if there’d not been one. For the technique to deliver useful results, of course, his forecasts have to be reliably accurate. Have they been? What a silly question! If they had, we’d not be in the current crisis.

If we’re silent in the face of abuse, we encourage it.
But there’s another issue to consider; one more to do with administration than economics. It rests on the proposition that it’s not healthy for society’s malefactors to escape criticism. It is one thing to forgive a transgression; quite another to pretend it didn’t occur. Cicero knew that to ignore a problem was not much different from condoning it.

There has been gross abuse and we have been deathly silent.
The simple fact is that the bad guys have got away with, not perhaps murder, but very serious failings. Bankers have acted appallingly but reaped huge rewards. Regulators have been incompetent but not been dismissed. Monetary Authorities have been asleep on watch, but their shortcomings have been overlooked. Government Ministers lazy and negligent, but their malfeasance not reprimanded.

Westminster’s venality is replicated elsewhere in society.
There’s been too much of the “Old Boys’ Club” about this scandal: too much of one rogue’s turning a blind eye to the misdemeanours of a second, on the understanding that the myopia will be reciprocated as and when necessary. Ultimately, it’s the rest of us who suffer in these circumstances. We oughtn’t to leave the asylum in the control of the lunatics. We must demand that penalties for misbehaviour be set, not by criminals, but victims.

It’s our money that’s being wasting, not theirs. Bring them to heel, or throw them out.
Indeed, it’s a question of democracy. Before the Chinless Wonders in the Bank of England and the Treasury, in Parliament and Whitehall, were so free with our money, they should have sought our opinion. They’re not our masters but our servants. What they did was outrageous. What the Icelanders did, albeit dragging their feet, was correct.

If the ballot box isn’t used . . .
Time for a change. Time to act more boldly and more honourably. Firstly, the views of the electorate have to be established. Let’s find out whether voters want to support the delinquency of the bankers? Whether they want to overlook the negligence of the regulators?

. . . the therapy will have to be more radical.
If, as is likely, the people show themselves to be “not content” with the way things were handled, the plug must be pulled! The publicly-owned banks must be sold; legislation passed to prohibit bankers ever again being allowed to engage in activities for which they are (psychologically and intellectually) ill-equipped; and a facility instituted to allow taxpayers to file class-action suits against those deemed to be responsible for the mess. In short, control must be re-established!

Economics News : 5 March

March 5, 2010

Economics is Noughts and Crosses, not Chess.
Only highly qualified experts can misunderstand it.

Europe has lots of experts. They’ve emasculated their economy, but seem not to have noticed!

Does the ECB appreciate the mess it’s in?
“It’s absurd,” said Jean-Claude Trichet last week “to suggest that Greece might leave the euro bloc.” Politically, perhaps, he’s right; but, economically, wrong. It’s more absurd that Greece should contemplate staying.

Probably not. Hubris hides a lot.
What we are witnessing is a tussle between immovable political will and irresistible economics logic. Which will win? The latter, of course; it always does. The only uncertainty is the timing. We don’t know how long the inevitable can be delayed. Nor how much damage to the country’s living standards will be inflicted in the meantime.

Trichet, like Napoleon at Waterloo, seems to be prepared . . .
It looks, though, as if it’ll be a long haul. Officials at the ECB and Commission regard it as a matter almost of honour that the integrity of the bloc be preserved. Last week, they did their best to raise the financial markets’ perceptions of Greece’s viability. Indeed, they scored a minor victory. A sizeable bond issue from the Athens authorities was well received by investors. Interest rate differentials (Greece versus Germany) declined quite significantly.

. . . to spill a lot of blood to prove himself wrong.
It’s one thing, though, to avert immediate crisis; quite another to resolve chronic debility. What’s required for the latter is that the Greek economy be returned to vitality. There is, admittedly, an obvious correlation between fiscal deficits and GDP growth rates, but the causality goes from second to first. Take Japan as an example. Its huge borrowings are the consequence, not the cause, of the loss of its economy’s momentum. If reasonably brisk rates of growth could be re-established, its deficit would disappear in a flash.

Greece is to be the sacrificial lamb.
It’s much the same in Greece’s case. The problem is not one of debt but of uncompetitiveness. To deal with the second is automatically to deal with the first. Sadly, Europeans don’t see things this way. They reckon the causality operates in the other direction, and act accordingly. When Trichet and Barroso review Europe’s performance in the last ten years, they seem to feel no shame. It hasn’t occurred to them that their policies have spawned the region’s scleroticism; that the institutions they represent aren’t the solution, but the problem.

People get the Governments they deserve, of course.
Have they noticed what’s been happening in the States, for instance? There, the focus has been on growth. The currency was devalued, labour was shed, and taxation cut rather than raised. No great surprise that activity responded. While GDP in Europe stalled in the closing months of 2009, in America it accelerated. The difference will be reflected in tax collections. There’ll be a dearth in the one, lifting the deficit; a surge in the other, lowering it.

We, in Britain, must have been very remiss, therefore.
Where does Britain fit? Closer probably to European dogma than American empiricism. The currency may have been weakened, but there is no predilection for cutting taxes. None either for cutting public sector waste. Brown’s team still argues it was right to take money from the good guys and give it to the bankers. And, worse still, Cameron’s boys agree. Not for some considerable time, therefore, will sensible policies be implemented. It’s unlikely the forthcoming election will change anything: the alternates being almost as bad as the incumbents.

On the general economics front, all is not well.
Elsewhere in the world, there is a degree of anxiety about the strength of the economics recovery. Fifteen months or more after the cyclical low point, the stimulus having been unprecedented, it would have been reasonable to expect rates of progress to be brisk. In general, they haven’t been. The inevitable conclusion is that there are powerful forces of deflation still at work. If so, there is a risk, eighteen months hence, when the cycle is due to turn down, that another severe setback will occur.

Equities are set to rise, though.
The good news in the interim, though there’s not much of it, is that securities’ valuations will perform reasonably well. Money will be easy, interest rates low, inflation negligible and profits moderately strong. A 15% advance in the indices is justified; it might be larger.

Especially after the public sector axe starts to do its work.
Progress will certainly be rapid on each of these fronts once public sector spending employment starts to be cut. There are huge savings to be made; potentially huge benefits to be accorded to the living standards of the rest of society. All that’s needed is a perceptive Government. Ah, there’s the rub!

Economics Views: 3 March

March 3, 2010

The difference between genius and stupidity

is that genius has its limits.

Albert Einstein; he was talking about mathematics, but the point is better illustrated in politics.

Psephology is one of the dark arts. It’s quite often produced surprises.
Opinion polls suggest that the Tories have blown it. It’s a measure of their lack of appeal that, at a time when economics policy is in tatters and foreign policy in shambles, Cameron’s lot are reported to be only a few points less disliked than Brown’s. Are the soundings accurate? Might voters be misleading pollsters? Possibly. But there’s no mistaking the momentum. It’s favouring the latter. Six weeks hence, it’s not impossible that Labour be returned with a workable majority!!!

But none that would compare with a 2010 re-election of Labour!
How can that be? Why, on this occasion, is Britain’s usually reliable electorate prepared to condone failure? Why no longer willing to give Buggins his turn? Is it because the alternate is deemed to be too similar to the incumbent? No point in changing personalities if policies stay the same?

Is that because Tweddledum is indistinguishable from Tweddledee?
On the military front, for instance, there’s not a scintilla of difference between the two parties. Both want to spend huge sums of money and spill huge amounts of blood fighting wars that are probably illegitimate and certainly counterproductive. The Chilcot inquiry may have exposed something of the mendacity that led to hostilities, but has not dampened the enthusiasm to continue them.

Are the policies of the one as disdained as those of the other?
Regarding European affairs, the differences are rhetorical rather than substantive. In the final analysis, the one Party is as invertebrate as the other. Initially, both promised a referendum on the constitution, but subsequently reneged. Both have remained silent as well on Greek developments. By implication, neither disapproves of unelected Commissioners seizing the powers of elected Parliamentarians.

Wars and Europe . . .
On public spending also, it’s much of a muchness. Brown and Cameron both feign anxiety at the size of the debt, but neither says how the problem is to be tackled. Instead, there is a pretence that “front line services” can be maintained, only “non essentials” being eliminated!

. . . Banks and Public Spending?
There’s a similarly duplicitous line on banks. The huge financial cost of supporting Scottish failures will burden English taxpayers for generations to come. But both political parties say it was the right thing to do, that the cost of not bailing out the delinquents would have been even higher. Really? How do they come to that conclusion? Because their forecasts say so! And are their forecasts to be trusted? Of course not. If they’d been good at anticipating the future, we’d not be in the current mess!

Is the Electorate saying it wants a real change, not a pretend one?
Perhaps the electorate is right. If the difference between Labour and Conservative is to be limited to accent and haircut, it might be as well to stick to the devil that’s known rather than the one that’s not. How ironical that, in Brighton last week, Cameron should claim the keynote of his campaign to be “change”!

At least equities are rising (albeit in devalued pounds)!
The equity market, meanwhile, is roaring ahead and likely to continue to do so. Another five years of Brown is having a predictable impact on the foreign exchanges. Sterling is plunging and equity prices rising in compensation.

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