Economics News: 29 Oct

October 29, 2010

Politicians seem to believe they can change the world, even though they know they can’t change themselves.

George Faludy—the hypocrisy is mind blowing; our governors are willing to censure others’ misdemeanours, but not their own!

Governments talk about cut- ting waste, but don’t mean it.

In mid-October, the Government announced a (regrettably modest) cull of quangos. Of the one thousand then in existence, 20% would go and another 10% be merged. Francis Maude, the Minister responsible, his face displaying hardly a trace of the irony that he must have been feeling, said he hoped the changes would improve accountability and cut costs.

They’re happier spending our money than theirs.

What he probably knew (and the rest of us merely suspected) was that they’d be un- likely to do either. The changes wouldn’t allow the Great British Public to make decisions for itself. It’d still be nannied by a bunch of remote appointees, whose costs would be reallocated rather than eliminated.

If Ministers knew anything about businesses . . .

Last week, there was more disappointment. The Business Secretary, Vince Cable, announced the creation of twenty-four Local Enterprise Partnerships! Was the man serious? Did he think these bodies would be any different from the Regional Development Agencies created twelve years ago by Gordon Brown? Did he think that we’d think they would be?

. . . they’d be running one!

Local businesses and civic leaders, he told us sonorously, would work with the new agencies to spur economics growth and create new jobs. What arrogance! How could he imagine that an under-employed civil servant or an under-achieving politician had anything useful to say to a businessman?

They ought to get out of the way of those who do.

The reality is that interfering official busybodies are more problem than solution. If Ministers wanted genuinely to help, they’d clear the decks. They’d require that quangees get proper jobs. They’d cut public spending and regulation. Most importantly, they’d cut taxation.

Britain’s PM is being invertebrate about Europe again . . .

It wasn’t just the Business Secretary who looked foolish last week. It was the Prime Minister as well. He’d said previously that he wanted the EU’s budget “frozen or cut.” But, at the summit in Brussels, he changed his mind. He agreed with others that a 2.9% increase would be acceptable

. . . first, it was the Constitution; now the Budget.

Not to taxpayers, it won’t be. It’s the budget that undermines economics vitality. Un- surprisingly so: it takes resources from those who contribute and gives them to those who don’t! Every year, the sums get bigger; every year, the economy performs lesswell. Figures published last week underlined the trends: unemployment rising to a twelve year high even as inflation quickened!

The EU’s economy will go from bad to worse.

The lunacy is that, at a time when national budgets throughout the Union are strained, in some places to breaking point, self-serving MEPs think it acceptable to grab more for themselves and their chums. In Europe in the past, it’s usually taken a revolution to contain abuses of this sort. One is overdue.

Things aren’t too bright in the rest of the world.

Elsewhere in the world, economies are thought to be decelerating moderately. It’s difficult to make an accurate assessment. Some data are strong, some weak, most indeterminate. But it looks as if those in the negative camp are gradually gaining the upper hand.

The US is slowing.

In the States, for instance, the spurt of growth that occurred at the beginning of the year seems not to have been maintained. That’s confirmed by recent psephological soundings. Voters tend to favour incumbents when the economy is doing well; alternates when it’s not. Polls suggest that forthcoming congressional elections will be a disaster for the Democrats. A disappointing economy will have been one of the ingredients.

And so, probably, is China.

China is interesting. The authorities in Beijing know they have a problem. They’ve concluded that, in the fragile circumstances that characterise the world economy these days, the PRC will not be able to stabilise both its exchange rate and its inflation rate. One of them will have to rise sharply.

Money there may be about to be tightened.

But which? It’s not simply a matter of economics. Politics is also relevant. There’s a requirement to preserve access to world markets (those in the US in particular). If Washington is urging a stronger currency, therefore, Beijing is likely to pay attention.

The objective is to avoid Japanese-style debility.

Prime Minister Wen will certainly want not to follow the example set by Japan. Analysts in Beijing will have noticed that the latter’s numbers in the twenty years up to 1985 look rather like China’s in the last twenty. Might the parallel be extended? Might China experience first a bubble, and then a protracted slowdown? What mistake did the one make that the other can avoid? The questions are easy, the answers aren’t.

Security prices will appreci- ate for another year

The bottom line for asset markets is quite encouraging, though. Money will be easy; inflation low; and corporate profits resilient. Valuations—bonds and equities both— will rise.

Economics News: 22 Oct

October 22, 2010

Mix a little foolishness with your prudence: it’s good to be silly at the right moment.

Horace—he was wise enough to know when not to be; does Osborne?

The pre-event hype was exuberant.

The Public Sector Spending Review didn’t live up to its advance publicity. Its provisions turned out to be timid, not bold; somewhat smaller than those implemented in the seventies. Overall spending was to be cut in the years that lay ahead, but, in aggregate, only moderately. Four years hence, total outlays would be no lower in real terms than it had been five years ago. Public sector employment would decline, but not severely: fewer than half the jobs created by Blair and Brown would go!

The post-mortem analysis dull.

Reactions to the package caused few surprises: political opponents judged it to be too draconian; financial commentators thought it insufficiently so. The Labour Party predicted recession; the TUC strikes. More worryingly, sterling fell and gilts failed to rise. The markets feared the Chancellor hadn’t done enough. In a couple of years, in the midst of a cyclical downturn, they fretted he’d have to return to the dispatch box with a new austerity package!

The Chancellor had to deliver bad news.

His choice of areas in which to make savings was curious. Why had he exempted Education and Health? Probably for electoral reasons. Not because heavy spending there in the past had yielded great benefits.

The hope has to be that he does it just once!

He’d been most severe with the Welfare budget. His argument was that its provisions had been comprehensively abused in recent years. Costs, already high, had risen at 10% per annum. He wanted to save money, but, more importantly, to change attitudes. He hoped that tightening the eligibility criteria might induce a significant number of people to return to the labour force. If so, output would increase and inflation decline; tax collections rise and benefit payments fall.

But why didn’t he tackle public pensions?

Sadly, he refused to apply comparable logic to public sector pensions. Arguably, their abuse of the taxpayer was much greater. Gordon Brown, when Chancellor, had funked the issue. George Osborne was to do so as well. He did call for employee contributions to rise, but only by a little. And he did announce an increase in the retirement age. But only by a year! And not until 2020!!!

And why not nail the bankers?

There were more disappointments to come. The Chancellor demonstrated he had no stomach to deal with the commercial banks. They had been at the centre of the economy’s troubles. They’d contributed to the initial imbalance and been responsible for a huge part of the fiscal deficit. The last administration had mis-analysed the issues. For a while, it had been hoped that this one would put things right.Are they better at persuasion than finance?

Are they better at persuasion than finance?

But it was not to be. The cause of (nearly) all our woe was to continue indefinitely in taxpayer-financed luxury. There’d be a “financial services” tax, but it would be applied, not just to banks, but to the rest of the financial community as well. He said he couldn’t afford to be too harsh. He wanted to tax the malefactors, not frighten them away!

Is the Chancellor’s pusillanimity part of Brussels conspiracy . . .

It might have been Vince Cable talking. The Business Secretary does not appreciate the difference between bankers and brokers or fund managers and actuaries. He thinks commercial banks are a valuable part of the City; that London’s status would be diminished if they left. The Chancellor similarly.

. . . to emasculate the City of London?

The reality is otherwise. There’s no need to bribe banks to stay. On the contrary, there’s a case to be made for paying them to go abroad to do to other economies in the future what they’ve done to Britain’s in the past. It’s the high-IQ parts of the financial community that it’s worth keeping. The Chancellor’s programme risks preserving the bad and dispatching the good.

The economy is unlikely to revive strongly.

The economics news from elsewhere in the world continues to present a picture of activity that is growing, but at progressively slower rates. The East is performing better than the West, but not strongly enough to make the aggregates satisfactory. 2011 will be critical.

A new recession is highly likely.

Pessimists, a minority, expect the deceleration to persist. Within nine months, they look for a new recession to be beginning. Optimists, including most Central banks and nearly all investment banks, unfazed by their errors in the past, suppose there’ll be a revival. What makes them say so? Wishful thinking!

Asset prices, though, will shrug it off

The markets, on the other hand, look set to rise. It’s because economies are going to be dull that credit will be expansive. Corporate profits, meanwhile, will be quite strong, and inflation very low. An excellent conjunction. Bonds and equities (income reinvested) will generate splendid returns. It’s 2012 and 2013 that we might have to worry about.

Economics News: 15 Oct

October 15, 2010

The trouble, these days, is that the future’s not what it used to be.

Paul Valéry—not always exactly what it used to be, but sometimes disturbingly close!

The cycle is proceeding inexorably. There’ll be softness ahead.

World economies are continuing to slow. In most countries, rate of growth appeared to peak in early summer and to have fallen by about  1/2%   per annum since then. current progress is not yet dangerously slow, but it’s feared it might, if the trend would assist, eventually become so.

And the authorities don’t know how to prevent it.

Adding to the communities nervousness, economies seem not to have been responding to the official policy.  the surge in public spending 2008 barely lifted GDP -  a and has, in any case, now been reversed. The easier credit environment didn’t do much either.  it gave consumers the facility to borrow and spend, but failed to convince them but it was wise to do so.

A depression can’t be ruled out.

Politicians and central bankers are trying not to panic. They’re beginning to appreciate the extent of the potential problem. In the worst-case scenario, they’ll be depression, not recession; a decade or more of anaemic demand; unemployment that will soar;  it and tax revenues that will be insufficient to pay for social services.

In similar circumstances in the 30s, there were “competitive” devaluations.

Unsurprisingly, there is an interesting currency devaluation. Each country (of the Thirties) is keen to raise its competitiveness, and some are prepared to consider currency manipulation to do so. Most are willing to criticise others. Predictably, China gets a lot of stick, (competitive countries always do). Career or so. Inside the EZ,  it’s Germany that, irritatingly, has kept its costs under control. The euro is a disaster, it is whispered in private; it was a plot to facilitate German hegemony!

That led to protectionism. Similar this time?

Currency is only the starting point of the disputation. In the past, it’s been the prelude to protectionism. This time similarly? That’s what we should all be worried about. China and others will be accused among their practices and told to mend their ways. Failing to do so and failure is inevitable, punitive trading tariffs will be introduced. Tit will lead to tat, And exacerbate the inadequacy of demand at. a long, drawnout recovery will become even longer, even more drawn out!

Everybody has an axe to grind. The public sector, on the one hand…

In these circumstances, in the phoney war when economics debility is feared but not yet apparent, is to be expected that lobbyists will seek to influence the debate to suit their clients’ interests. those in the public sector have certainly done so already. If there is a danger of the world drifting back into recession (or worse), they say, it would be sensible to delay spending cuts. The presumption, necessarily understated, is that wasting resources on mollycoddled  civil servants or strike–happy transport workers would boost the economy! Hmph.

… the Bundesbank, on the other.

The Bundesbank has contributed also.  demand is not efficient, it says. On the contrary, activity is risking briskly. The problem has been missed–analysed by non-–Germans. The hip-hop in 2008 was caused by excessively easy money policies. That error of judgement should not be allowed to re-occur. What is needed is a speedy return to credit neutrality: higher interest rates and, probably therefore, the stronger euro!

Stock market investors seem not to be bothered.

In the investment community, there is not much anxiety. The presumption is that central bankers will always do what is necessary to stabilise valuations. Speculators speculators think that there is a “put” on the indices. That is, the way things have been for some time. But it is not necessarily the way they’ll be forever.

They think Central Banks will bail them out.

In 1929, the Fed played its hand very differently. It opted suddenly austerity. So, in 1989 did the BOJ. And it looks as though the Bundesbank, if it were to have its way today, if it were to be able to influence the decisions of the ECB, would also push world economies over the edge. Don’t rely on Central Bankers, therefore. They have “previous” in this regard; they seem not to be able to remain sane for long periods.

They will in the near term, but not necessarily forever. Look at the records.

Near-term, as far as the securities markets are concerned, it looks as if it’s a one-way bet. Activity will moderate, but not be a disaster. When it is barely rise, lowering inflation by raising profit margins. Settled that in the context of expansive credit and low interest rates, and valuations will improve. Bonds quite encouraging the; equities very encouragingly.

Be more cautious, therefore, from next autumn onwards.

Longer term, economies may be much more severely prejudice. If so, and if central bankers were to revert to orthodoxy, then the heavy price to pay. In that event, mind your eye!

Economics News: 8 Oct

October 8, 2010

If life were fair, Elvis’d be alive, his impersonators dead.

Johnny Carson—equally, DB pensions would never have seen the light of day!

Another public sector pensions inquiry . . .

In the last twenty years, there’ve been numerous reviews of Britain’s public sector pension schemes. The authors all concluded that current arrangements were unfair and unsustainable. But none had the courage to recommend a solution.

. . . another statement of the blindingly obvious.

Hutton’s efforts are little different. He recognises the problem, but shies away from dealing with it. He prefers to tinker with a failed past, rather than devise a viable future. It’d be surprising, therefore, if his recommendations (not due to be published until the spring) made much of a dent in the deficit (the accumulated value of which amounts to something in excess of £1 trillion!).

We’ve known the problem for twenty years . . .

His Lordship, like the Prime Minister, wished to be “fair.” More easily said than done. To be fair to one person often means being unfair to another. It’s a matter of balancing the claims of contending parties. Many people think Cameron’s got it wrong; they may think the same about Hutton.

. . . but we’re still waiting for a solution.

Other things being equal, it’d obviously be unfair not to preserve a public sector employee’s accrued pensions benefits. But other things in this instance are not equal. Those benefits have to be paid for. People not in the public sector have to pick up the tab. Is that fair? It depends on many things. The relative incomes of the two groups would be one important consideration; the relative generosity of their pensions arrange- ments, another.

It’s not difficult. But it does require honesty.

How did Hutton deal with the issue? He funked it. He acknowledged there was no jus- tification for the discrepancy, but thought it best to leave the basics largely unchanged. It’d be unfair, he seemed to be saying, to eliminate the unfairness!!

Was Hutton the right man for the job? Probably not.

What’ll be the outcome? We’ll have to wait to find out. But there’s a realistic anxiety that not a lot will change. Tinkering, but no boldness: higher employee contributions, a later retirement age and benefits based on average, rather than final, salary. Pusillanimity, the guiding principle. Moreover, such changes as are to be implemented will probably be phased in slowly: the benefit to the Exchequer delayed; the cost to the taxpayer immediate.

The economics cycle is pro- gressing as expected: growth slowing.

The world economy, meanwhile, is drifting. Data released in recent weeks indicate that growth rates are moderating, but not (yet) plunging. What’s new is the attitude of the authorities. Governments, Central Bankers, the World Bank and the IMF are now fretting openly about protectionism and the not-unrelated phenomenon of competitive devaluation.

Protectionism’s a major threat.

Understandably so. Very few countries are experiencing economics activity that’s brisk enough to preserve jobs and living standards. Governments are tempted, therefore, to do what they can to lift their country’s share of domestic and overseas markets. The pa- rallels with the early thirties aren’t easily ignored.

America looks the best of the old brigade.

Amongst the old developed group, the US has been getting a bad Press, but has performed relatively well. The steep increase in unemployment reflects, less the economy’s anaemia, than the labour market’s flexibility. The latter, set in the context of significant currency devaluation, has kept the country competitive. Its manufacturing sector is doing well (technology in particular); its agricultural one better still; its financial services (London muzzled) are unchallenged.

Japan could be, but chooses not to be.

Japan is faring less well. Manufacturing is excellent, but handicapped by a strong currency and a refusal to opt for labour rationalisation. Farming and finance don’t contribute. It’s been thus for twenty years; it may be so for a while longer.

Europe is a continent of two halves!

The EuroZone is a mess. For a generation, Germany (and the Netherlands and Scandinavia) worked to establish competitiveness in the face of onerous community regulation; the rest chose not to do so. Two years ago, the tide turned: the former achieving moderate security; the latter desperate insecurity.

Those that are competitive and those that aren’t.

The ECB doesn’t know which way to turn. Trichet fears it’ll be all but impossible to impose the same monetary policy on the competitive as the uncompetitive. Attempting to do so would risk provoking huge social tensions. In Ireland, it looks as if the hardship will last for at least a decade. In Greece, longer.

Look at Government bond yields!

Convergence, in the EZ, ceased years ago. Divergence has become its defining characteristic more recently. It now looks to be unstoppable. The financial markets make it clear that, in the opinion of speculators (more prescient than that of politicians), the euro is not a single currency, but a set of national ones. They’re inadequately bound together at the moment, and unlikely to stay associated for long.

Despite the problems, markets will rally for a while.

But asset markets find the scenario quite to their liking. Falling inflation and expansive liquidity are welcomed by bonds, and a concurrent squeeze on wages (relative to prices) brings joy to equities. The climate may not stay favourable forever (Central Bankers being a dangerous lot), but the wind’s probably set fair for another year.

Economics News: 1 Oct

October 1, 2010

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

It was our money, and we were foolish enough to let politicians give it to bankers!

Saving delinquent banks was said to be affordable.

The world economy may be stabilising, but many of its banks seem still to be troubled. Last week, it was Ireland’s turn to make the point. The message was that earlier bailouts hadn’t resolved the issue; recapitalisations in 2008 and 2009 had been inadequate. If the banks were to survive, more money would be required. And who’d supply it? Not those who were responsible for the problem, but those who weren’t. Not bankers, nor regulators, nor politicians, but taxpayers.

Not so. It’s turned into a bottomless pit.

The country’s Finance Minister, Brian Lenihan, said that the new arrangements would bring the crisis to an end. Within four years, the economy would have been returned to equilibrium. How did he know? Similarly optimistic forecasts had been made after the first bailout. They’d been wrong. Why would things be different this time? In truth, the Minister hadn’t a clue, and nor’d anybody else.

Equilibrium will take longer and cost more.

History, moreover, was unsupportive of Mr Lenihan’s optimism. The Scandinavian banking problem hadn’t been resolved in a decade, nor had Mexico’s. And Japan’s, twenty years on, was still a drag on the economy. Politicians were bound to say the things they did. But people weren’t bound to believe them.

The truth is that the experts are as ill-informed as the rest of us.

Understandably, they don’t. Scepticism is rife, and the authorities are widely distrusted. Irish voters ask themselves whether things would be better or worse now if the banks had been allowed to fail then. Whether economics recovery in the future would be helped or hindered by an independent monetary policy in the past. Nobody knows, of course. Least of all the politicians and their supposedly expert advisers.

An apology wouldn’t go amiss.

The economics may be obscure, but the politics aren’t. The National Government in Ireland has paid more attention to Commissioners and Central Bankers abroad than to voters at home. It’s much the same picture elsewhere in the EZ.

Europe’s politics, meanwhile, have become profoundly undemocratic

If the region’s democratic credentials are to be re-established, each country ought to hold an election or referendum to confirm that the people are prepared to stay in the EMS and abide by its strictures. That the agony of membership is preferred to the pain of non-membership. Otherwise, the Commissioners may very well go the way of the Bourbons they so closely resemble.Are their principles important, or just their living standards?

Are their principles important, or just their living standards?

The protests staged in a number of capitals last week weren’t serious. But they could become so. In Paris, in May 1968, the demonstrations were initially jolly affairs; only effete students participating. But the spark they provided lit a bonfire. The country blazed and de Gaulle capitulated.

Their economies are failing, some faster than others.

Will something similar happen to Europe? The economies of Germany and the Netherlands are doing reasonably well, those of Sweden and Denmark even better, but that just makes the contrast with the under-performers all the greater. It’s unfair, say some in the latter. The system was designed for one group and imposed on the others.

At least the Brits can be thankful that they’re . . .

Britain, thankfully, avoided the trap. But large numbers of the country’s chattering classes had been eager to ensnare her. The BBC and FT were to the Commission in Brussels what Pravda had been to the Politbureau in Moscow. Whitehall Mandarins were seduced (shamefully easily) by the concept of Monetary Union. And so, of course, were the LibDems.

. . . not being roasted on the euro spit!

Has the Deputy Prime Minister rethought his position? Has the Business Secretary? Do they still favour membership of the euro? Do they approve of unelected Commissioners and Central Bankers reversing the decisions of elected Parliamentarians? It must be very uncomfortable for them.

Asset valuations, moreover, look set to rise.

The good news is that the securities markets are holding up well, and are poised to rise further in the months ahead. Liquidity is going to remain plentiful because economies are still fragile (and probably losing momentum). Inflation, meanwhile, is low; and corporate profits reasonably strong. It’s a very attractive conjunction of circumstances.

Ordinaries by quite a lot.

Many investors fear it’ll not last. They’re probably wrong. And, so long as they are, the indices will advance. Bonds fairly moderately. Equities potentially exuberantly.

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