Economics News

January 31, 2011

Bad news travels in clogs;
good news in stockinged feet.

Welsh Proverb—and there seems, sometimes, to be so much of it!

The economics news in the UK is awful.
It’s not been a good week for Britain. On the economics front, there was a conjunction in the fourth quarter of last year of everything that was adverse: declining GDP, quickening inflation, ballooning public borrowing and deteriorating trade returns. On the industrial relations front, it looked as if the public sector might be planning a series of strikes. And, on the political front, unsurprisingly, news of plummeting support for the Coalition.

In part, that’s bad luck; in part, bad judgment.
David Cameron must be ruing a number of his early decisions. The Coalition with LibDems, most importantly. It’s not endeared him to floating voters, but has prevented him from pursuing sensible economics policies and from fulfilling his promises to the electorate on Europe. Additionally, he’s been too slow and insufficiently severe in dealing with the public sector. Finally, he’s continued to featherbed the loathsome bankers.

Cameron is looking fragile.
Sadly, many of these choices have become irreversible. The Coalition, for instance: even if he were free to dump it and form a minority Government, he’d not repair the damage that has already been done. Huge swathes of the country would never trust his judgment again.

He needs the economy to recover, and it’s more likely to subside.
He’ll recover his standing if the economy improves, but not otherwise. He acknowledges the close relationship between approval ratings and economics conditions, and is keen to draw a parallel with Margaret Thatcher. Her popularity also fell in the early years of her first term, but recovered later. What he forgets to mention, though, is that she was pursuing sensible policies from the outset. She was encouraging economics renaissance, not discouraging it.

A re-launch is required: lower spending . . .
It’d be helpful if the Prime Minister and Chancellor were to take time to review and revise their initial economics policies. They need to make bigger savings on the spending front. They need to cut the salaries of those working in the public sector, raise their retirement age, and lower their pensions entitlement.

. . . and lower taxation, therefore.
The potential savings are enormous—£15bns to £40bns a year. What magic might such sums work if deployed sensibly? A halved corporation tax rate and a reduced personal income tax rate would start to make Britain an attractive location for investment. It was when Margaret Thatcher was in No. 10. But it isn’t now that David Cameron’s there.

Why did the Tories use English tax revenues . . .
And what possessed him to continue to rescue Scotland’s failed commercial banks? The Labour Party had to do so because it needed the votes. The Conservatives didn’t. David Cameron should have pulled the plug immediately. And he should have organised a referendum, not on the UK’s voting system, but on full independence for Scotland. At worst, the Northern Brits would have become quiescent; at best, independent and not represented, therefore, in Westminster!

. . . to prop up Scottish banks?
Too late now. But banking policy ought nevertheless to be reviewed. The time for Whitehall cover-ups is over. Straight thinking and blame allocation are in order.

Another own goal.
The starting point would be an acknowledgement that extended periods of excessive liquidity are bound to lead to increased speculative behaviour. It’s in the nature of markets. Regulators, even if they were competent (and they aren’t), couldn’t prevent it. Policy has to be directed, therefore, at minimising the adverse consequences of the inevitability of misbehaviour.

Glass Steagall to be revisited?
It would be helpful, for instance, if it were recognised that the commercial banks’ core activity is money transmission. They ought to be restricted to it and prohibited from complicated transactions. In compensation, when the banks get themselves into a mess (as they regularly do), they’d be rescued. The rest of the financial community (preferably owner managed) would be free to speculate, but would not, under any circumstances, receive taxpayer support.

But not supervised by malicious Eurocrats.
A reformulation of Glass Steagall. An enforced separation of functions to limit (not eliminate) risk. And a regulatory authority freed from pointlessly shuffling papers so as to be able to police no-go zones. A regulatory authority, incidentally, located in London, not Brussels.

Is Cameron thinking along these lines? No!
But there aren’t many signs that the administration is preparing for a rethink. When the subject was broached recently, the Prime Minister claimed that the economy was making good progress! How lucky for him that he’s able to think so; how unlucky for us.

Markets may sag.
Valuations are drifting back. They may continue to do so. Corporate profits are good, but most other factors are negative.

Economics Views

January 28, 2011

Today’s disappointment
sometimes inspires tomorrow’s hope.

Evan Esar—but not always; occasionally the disappointment goes on and on!

Britain’s economy isn’t working.
Investors were prepared for a disappointment; but not, it seems, sufficiently prepared. When details of Britain’s economics performance in fourth quarter 2010 were announced, all asset classes took a hit. Not since the dark days of the seventies had the picture been so universally poor: real activity slowing, unemployment rising, retail prices accelerating, foreign trade deteriorating and public debt ballooning.

Quid faciendum?
What, it was asked, would be the reaction of the Bank? Would the Governor and his team try to protect the private sector’s living standards, or the public sector’s finances? And were they in a position to do either?

Don’t rely on the authorities!
The questions were easy; the answers difficult. But nowhere was there any optimism, and nowhere any confidence in the authorities. The Treasury and FSA were deemed to have misdiagnosed the problem; the Bank and Government to have mistreated it. All’d been complacent before the event. All were complacent still.

Another global recession is coming.
The reality was grim. The world was headed for another cyclical downturn and, instead of interest rates being cut to mitigate it, they were going to be raised to intensify it. All countries would suffer, but those that hadn’t got their finances under control, their inflation low and their trade balanced would fare worst.

And Britain might cop it worse than most.
The UK did not look good. Governor King said as much while agonising about monetary policy. It was a Catch-22 situation. If credit were tightened, the recession would be worsened; if loosened, inflation exacerbated.

Governor King recommends that public sector salaries (and pensions) be cut.
The only way out, he opined, was to exert significant downwards pressure on pay levels—those of public servants in particular. It wasn’t just their basic salaries that were too high; it was, more significantly, their pensions provision. The Coalition had made a huge error of judgment in not abandoning DB schemes as soon as it took office. It’d be more difficult to do so now. But the attempt ought to be made in any case.

Quite right; his own more than most.
There’d be a double benefit. Inflation would moderate and the fiscal deficit tumble. That’d allow the Bank to keep interest rates low and give the Chancellor the potential to cut taxes. Only under such conditions could a debilitating recession be avoided.

And use the savings to cut taxes.
Boris Johnson was right to deplore the country’s high tax burden. The levy on the personal sector was amongst the most onerous in the developed world and that on companies above average. Little wonder that the UK was no longer the attractive location for investment that it used to be. The process started by Gordon Brown had been continued by David Cameron!

As was done in the States.
In the US, by contrast, where spending cuts had been large enough to finance modest tax reductions, activity was reported to be progressing satisfactorily. Jobs were being created and investment was rising. Obama wasn’t yet popular, but his poll ratings were no longer falling.

Near term, though, asset prices may soften.
Unsurprisingly, London’s security valuations have continued to drift. There’s a fear that Gilts might start to be viewed in the same light as Irish or Greek Government bonds. There’s a fear also that the Coalition’s policies, already left-of-centre, will become yet more radical. A crisis of politics and economics is in the offing. A time perhaps for the investor to be cautious.

Economics News

January 21, 2011

What an economy gains on swings in one period,
it often loses on roundabouts in the next.

Joseph knew how to balance current surpluses against future deficits. Not so Brown. If he’d been in charge, the Pharaoh and all his people would have starved!

America’s economy is looking better than Europe’s.
At a time when most other developed economies have been reporting moderating activity, the US’s has posted a set of improving numbers. Its labour markets, export deliveries and housing sector have all exceeded the expectations of a slightly pessimistic consensus. GDP growth is not absolutely fast, but is relatively satisfactory.

Its starting point may have been worse.
How has the US succeeded where Europe, for instance, has failed? Arguably, by paying more attention to private sector competitiveness than public sector borrowing. While Brussels seemed to rely exclusively on the power of fiscal orthodoxy to revive the economy, Washington opted for a range of measures, including a weaker currency and a more cost-effective labour force.

But its therapy was better.
It wasn’t that the Americans thought the containment of public debt unimportant, it was just that they accorded its treatment a somewhat lower priority. And, when they did act in the fiscal arena, they were happier to cut spending than raise taxes. They wanted the private sector to be in control, not the public one. They wanted individuals and corporations to have the money and make the spending decisions.

The re-establishment of competitiveness was key.
Initially, these choices caused pain to be heightened; but, subsequently, lowered. On balance, it looks as if the decisions were appropriate. In the coming slowdown, much of the EU risks being comprehensively devastated; most of the US will be only mildly distressed.

Britain, on the other hand, has messed up.
In recent years, the UK’s economics policies have tended to be closer to those in the States than in Europe. Not this time though. In the immediate aftermath of economics debility, Brown chose to increase public spending, not reduce it. He chose to indulge those who’d contributed least to the economy: his commercial banking compatriots on the one hand, his public sector supporters on the other. He and Darling and Balls fiddled while the finances burned. And to make matters worse, Cameron, when installed in No 10, was rather slow to make amends.

Its spending cuts and credit restrictions will exacerbate the softness!
Accordingly, the British economy will have to contend with spending cuts timed to coincide with its cyclical downturn in activity. And there’ll be no capacity for the Bank of England to provide monetary respite. On the contrary, the country’s worsening inflation rate will probably require that liquidity be tightened.

As will the Brussels’ regulators’ vengeance on Hedge Funds.
A frightful conjunction: cyclical downturn, reinforced by spending cuts and credit austerity! Is there any more bad news to factor in? Sadly, there is. Britain’s star economics sector, financial services, is to be left to the tender mercies of the regulators in Europe. Cameron’s promise not to allow any more powers to be transferred to Brussels was no more to be taken seriously than his promise to hold a referendum on the Constitution.

No respite for three years!
Everywhere, it’s looking as if the next recession will be severe; but, in Britain, particularly harsh. The outlook for next year is bad, that for the following year worse. Not until 2013 can there be much hope of a revival.

Can the LibDem-Con last that long?
Will the Coalition survive the economics trauma? Probably. The principal threat to it comes, not from dopey LibDems, but angry Tories. Both, though, can be expected to hold their noses, and not exercise the “nuclear option.” Both will feel that, bad though hanging together might be, hanging apart would be worse.

Possibly, but not happily.
And how will the securities markets respond? With a good deal of anxiety. They’ll not like the economics uncertainty, nor the political tensions. Many investors may feel inclined to eschew the UK and increase their purchases of foreign assets.

Valuations are vulnerable, but will bounce back.
That said, the indices are good value. Corporate profits are strong and may remain resilient into the economics downturn. It’ll be labour, not capital, that takes the bigger hit. After the initial shock, therefore, valuations may rise. Though, negative in respects, the environment won’t be unhelpful for securities. In particular, slowing inflation and stable profits will lift equity indices again.

Until the next time!
Let’s hope that, when equilibrium is finally restored, the politicians will not make the same mistakes again. Some hope!

Economics Views

January 21, 2011

Pain is inevitable; suffering optional.

Early diagnosis and appropriate therapy would have minimised both. But our leaders missed the warning signs!

Britain’s economy was sick in the seventies.
The UK economy isn’t performing well. Demand is weak, but supply even weaker. The resulting imbalance is causing the inflation rate to quicken and the foreign trade balance to deteriorate.

It’s none too healthy now.
What lies at the root of the problem? Arguably, a mal-distribution of resources: one that starves the economy’s productive sectors but force-feeds its unproductive ones. It’s a policy that Brown pursued for many years, and one that Cameron hasn’t yet reversed.

Sadly, the Government is inexperienced . . .
The Coalition’s spending cuts have been slower to take effect than its tax increases. And its treatment of the financial sector has been counter-productive. Valueless commercial bankers have been indulged, but valuable fund managers and corporate financiers thrown to Brussels’ ravening regulators!

. . . its functionaries incompetent . . .
That’s not the only misjudgment the Coalition’s made. The decision, for instance, not to tackle public sector pensions, but to attempt instead another reorganisation of the NHS looks naïve. Both would have required a huge effort and the expenditure of a good deal of political capital, but, if implemented, the one would have delivered sizeable economics benefits, the other a damp squib.

. . . and its central bankers blind.
Europe is another area that’s been mishandled. Perhaps unsurprisingly so. It’s an issue on which the views of Tories and LibDems are diametrically opposed. Thus far, the former have given ground to the latter. But not without a good deal of mutinous muttering on their backbenches.

The rest of the world may falter . . .
Elsewhere in the world, economics developments are unhelpful. Global activity is slowing in line with business cycle chronology, but global liquidity is being tightened! Central bankers in China and India, in Brazil and Australia, are raising interest rates. In Europe, they’re itching to do so. The risk is, therefore, that activity will embark upon an especially steep decline at some stage in the next eighteen months.

. . . but Britain stumble.
Countries that grew least in the upturn are most at risk in the downturn. Europe’s periphery is particularly badly placed. And Britain too is vulnerable.

Unemployment is set to soar.
The recent unemployment data provide a hint of what’s in store. Already one youngster in five is unemployed. Two years hence, the proportion might have doubled. A generation that’s been ill-educated may find itself almost permanently out of work.

Pay will have to moderate.
Strong medicine will have to be administered. Job seekers will be required to price themselves back into work. The minimum wage will need to be cut sharply (preferably abandoned) and public sector pay savaged.

Especially in the public sector.
It’ll not be sufficient for the Civil Service’s Mandarins not to get a pay rise. Manifestly unfit for purpose, the case for dismissal will be strong. Those that remain ought to be awarded a 25% pay cut!

Investors are skittish.
And the markets? At the moment, investors are scared by the near-term prospect of a credit squeeze. They’re probably a little premature. The process is only just beginning. It’d be surprising if the indices weren’t to bounce again.

But will eventually recover their nerve.
That said, mid-2011 isn’t good: economics will be bad and politics worse. Inflation will fall, though, and profits hold up reasonably well. The indices, currently good value, may therefore be rising again in 2012.

Economics News

January 14, 2011

Judge a tree by its fruit, not its leaves;
a cake by its eating, not its cooking.

Euripides—and a monetary system by its results not its assumptions!

The single currency hasn’t pulled Europe together . . .

When Europe first opted for a Common Monetary Policy, it was assumed that the economies of the members would converge rapidly and painlessly. It wasn’t to be so. A decade later, the system is characterised by widening divergence and intensifying discomfort. Some countries are performing moderately well; most exceedingly poorly.

. . . but pushed it apart.
For a long time, the Commission and ECB denied the existence of a problem. Now, belatedly, they’ve admitted the system has to change. But how? That’s yet to be decided. There are a number of ideas.

It can’t go on as it is.
Germany argues that sound economies require sound credit policies. Excessive borrowing is to be avoided; it induces only illusory benefits. Later on, it causes inflation to rise and recessions to be steepened.

Germany wants orthodoxy.
The crisis in Europe’s finances, says Chancellor Merkel, is salutary. If the problems aren’t to recur, if the lessons are to be learned, it’s necessary that there be an element of pain. Germany will not guarantee the debts of its profligate neighbours, therefore. Nor will it countenance a huge increase in money supply.

Greece and Ireland want to start from scratch.
At the other extreme, Greece and Ireland accept that their economies must adapt and that pain must be an element of the therapy, but they’d prefer that the adjustment be neither too short nor too excruciating. They complain that Commissioners “mis-sold” the EMS to them. And hint that, in extremis, their electorates would demand that they withdraw.

The Commission, as always, wants to grab power . . .
The threat carries some weight with Commissioners who like to think themselves infallible. To be shown to have been wrong in one area would raise the possibility of their having been wrong in others also. That might cause the whole creaking edifice to come tumbling down! Too frightful to contemplate!!!

. . . including the right to sequester . . .
The Commission’s strategy is to work behind the scenes to effect a compromise. Herman van Rompuy, President of the European Council, touched on the subject last week. He noted that the extent of convergence amongst the EU’s members had been disappointing, and proposed to remedy the failing by enforcing “fiscal compatibility.”

. . . national tax revenues!
What he was really angling for was access to the tax revenues of individual countries. If he could get that, he’d have no trouble papering over the EMS’s cracks. Tax revenues would be shared. And those who organised the process, no matter unelected and unaccountable, would be immensely powerful.

But the ECB is opting for orthodoxy.
The ECB, on the other hand, seems to be aligning itself with Germany. Its President, Jean-Claude Trichet, focused last week on the threat of inflation rather than recession. He was keen to stress his willingness, if necessary, to raise interest rates. He didn’t mention the possibility of reducing them.

That’d mean lots of pain for the periphery.
That’s not good news for the community’s financially-troubled economies, nor for its power-mad Commissioners. Perhaps the ECB is playing politics. It sees Germany as the paymaster and therefore the powerbroker: it’ll call the tune to which others will have to dance. Germany’s economy, moreover, has been relatively successful. Growth is brisk, inflation low, borrowing moderate and competitiveness high.

And, given Cameron’s track record, lots of uncertainty for the UK.
How does the debate affect Britain? Uncertainly. Prime Minister Cameron is ambivalent about Europe. He has a habit of saying one thing and doing another. When he responded to President van Rompuy’s remarks, he indicated that any rules relating to fiscal convergence in the EZ wouldn’t apply to the UK. It has to be hoped that, this time, the commitment is solid.

Little wonder his poll ratings are falling.
The economy isn’t going well. Activity’s slowing and inflation quickening. Public borrowing isn’t yet falling, nor the trade deficit narrowing. Incomes, except amongst bankers, are under pressure. Unsurprisingly, the Government is unpopular. It lost a by-election last week, and is likely to lose many more before the tide turns.

Might asset values follow suit?
Asset markets are holding up reasonably well at the moment. But that might not last if current monetary trends continue. China and India are already tightening credit. So are other parts of Asia. So are leading commodities producers.

Possibly; money looks set to get tighter.
If, additionally, Europe should begin to do so, the balance between supply and demand in the financial markets might go beyond the tipping point. Even though corporate profits would stay strong, and inflation modest, it’s likely that price levels would be dull.

Economics Views

January 13, 2011

Good judgment is more the result of luck
than knowledge or intelligence.

If so, many of the world’s monetary authorities must be remarkably unlucky!

The Coalition doesn’t understand finance.
The behaviour of commercial banks, said the Prime Minister last week, has been outrageous; their abuse of taxpayer generosity shameful. They’ve taken huge sums of money from the public purse and used it, not to help reactivate the economy, but to boost executives’ bonuses. The PM seemed to be saying that something had gone seriously awry, but that he wasn’t sure what it was!

Commercial banks, in particular.
It was a failure of governance, of course. Foxes invited into henhouses cause mayhem. It’s in their nature. There’s no point in scolding them for it. It’s those who opened the door that are to blame.

Nor, unforgivably, does the Old Lady.
Culpability for the banking scandal has ultimately to be laid at the door of the authorities. Those who should have been supervising and regulating were asleep on the job. As the crisis broke, the FSA, the Treasury and the BOE were all in panic mode. Happily, officials in the first two didn’t make matters worse by exercising their flawed judgment. Unhappily, those in the third did.

Governor King and Deputy Tucker transferred countless billions. . .
The Governor and his Deputy took it upon themselves (they didn’t inform Parliament, let alone the taxpayers whose money they were about to sequester) to try to save the country’s delinquent banks. Their argument was that, in order to get the banks to lend to the rest of the community, the rest of the community had first to give the banks the money to do so! A proposition worthy of Kafka!!!

. . . to miscreants who, unsurprisingly, kept it!
Things didn’t work out as planned: the banks didn’t lend and the economy (net of a cyclical upturn) didn’t recover. There was a redistribution of resources, though: the guilty being winners and the innocent losers. Bankers and supervisory authorities were rewarded; pensioners and taxpayers punished.

Shortly, interest rates will have to be raised.
There’ll be worse to come. Monetary policy is about to be tightened. For two years, it’s been kept very loose in a desperate, albeit fruitless, attempt to persuade bankers to lend. The ploy didn’t lift real activity, of course, but it did raise inflation. Throughout the public sector, wages accelerated and efficiency decelerated. Understandably so. If taxpayers had to fund the exorbitant lifestyles of regulators and bankers, why not those of their colleagues driving tube trains?

The economy will crash.
It’s looking now as if interest rates will be raised at the worst possible time: not when they’ll offset the downturn, but when they’ll intensify it. The brake will be applied to a vehicle that’s already slowing. The setback may therefore be sharp.

The UK’s only consolation: it’s not in the euro!
It’ll be worse in Europe. There, the judgment of the regulatory authorities was even worse than here. It led them to join the euro! Those on the periphery now regret doing so. But they don’t know how to correct their mistake. Stay in the frying pan or jump into the fire? There’ll be a good deal of pain in either event.

Securities markets to rise for a while longer.
Equity prices have not yet been affected. Nor will they be for a few months. But, in the spring and summer, negatives will begin to outweigh positives. Valuations will slip even though inflation and profits please.

Let’s not go over old ground

January 12, 2011

Let’s not go over old ground,

but prepare for what’s to come.

Cicero—but how do you do the former without the latter?

Economists tend to be better at analysing the past than anticipating the future. After an event, they have 20-20 vision; before it, they’re blind. The last recession demonstrates their dubious acuity.

Prior to its emergence, virtually all of them had thought the economy to be at a greater risk of overheating than underheating. Inflation was the principal threat; recession only a minor one! Credit ought to be tightened, interest rates raised!!!

Subsequently, an alternative logic emerged. The recession was claimed to have been a reaction to (and therefore an indirect consequence of) the excess credit. The cause of the problem had stayed the same, but its effect it had changed diametrically!

Is it any wonder that economists are treated with disdain? Is it a surprise that they’re compared unfavourably even to weathermen? Of course not. They’re hopeless at forecasting, but unwilling to admit error.

The next couple of years may prove especially embarrassing for them. They’ve predicted a recovery that’ll broaden and deepen. That it’s been disappointing in the last couple of years is disregarded.

Egged on by politicians, economists claim the expansion will be compensatingly protracted in duration. Momentum might have dipped a little in autumn of 2010, but it’ll rise again in 2011. Activity won’t peak until late 2012!

So optimistic a prognosis flies in the face of normal cyclicality and ignores hints of prospectively tighter credit. Almost anything is possible in economics, but some outcomes are less likely than others. A discontinuation of the usually reliable 5½ year periodicity ranks low in this regard. So does the proposition that activity won’t respond to the monetary curbs promised (or already implemented) by China and India, Australia and Brazil.

And what of the EZ? Germany wants a more restrictive environment; the periphery a more accommodative one. Who’ll win? Probably Germany; it’s the paymaster. But even if there should be a compromise, conditions are likely to become somewhat tighter than they are now.

Retrenchment is on the cards, therefore. Will it be severe? Nobody knows. But the downside risk is obvious enough. And, if politicians were to adopt protectionist policies, it’d be heightened.

Britain is unlikely to be well placed in the next few years. The country’s public finances are in an appalling mess and risk provoking the sort of credit downgrades that have become common in Europe. If global investor sentiment should turn against the UK and sterling, higher interest rates would be forced on the economy. In that event, activity would plunge and unemployment soar.

What makes matters worse is that the country’s great strength, its financial services sectors, are being hobbled by regulators who seem to be unable (or unwilling) to distinguish between guilt and innocence. The sins of commercial bankers are being visited on fund managers and brokers, actuaries and accountants. If the bureaucrats in London and Brussels (mindless in the one case, vindictive in the other) should get their way, financial services here in the future would go the way of manufacturing in the past!

Economics News

January 7, 2011

The debtor must find friends where he can;
the creditor is free to choose.

Felix qui nihil debet. Very few Western countries, Switzerland possibly excepted, have good credit ratings!

Money buys most things.
Visiting a number of European capitals last week, China’s deputy premier, Li Keqiang, indicated that his country was committed to playing an active role in international financial markets. The PRC, he said, would support Europe’s single currency and its political integration. It found euro-denominated bonds attractive, and was minded to buy some of those issued by the Government of Spain. Unsurprisingly, investors were relieved. Asset prices everywhere, but in the European periphery in particular, rose strongly.

Political friends, for instance.
Was it significant that the statement had been made by a statesman rather than a central banker? Of course. The message was political not financial. China was long of cash and short of friends; a deal with countries that were oppositely placed would be to the advantage of both.

China is worried about the erection of trade barriers.
The authorities in Beijing were particularly worried about the possibility of protectionism. They recognised that the outlook for the global economy was not good. If cyclical retrenchment were to coincide with restrictive credit policies, there’d be a recession, possibly a severe one. In such circumstances, the risk of trade barriers being imposed would rise sharply. All countries would suffer, but China, competitively matchless, would be hit harder than most.

It hopes that friends in political places will allay the danger.
It’d be no use appealing to the WTO. In economics extremis, it’s possible that nothing would stay the hand of mercantilist luddites. But neither would it do China any harm to have a few political supporters. To this end, Beijing has been active in Africa and Latin America in recent years. It has secured a number of “allies” in each. Spain and Portugal, Ireland and Greece were the obvious next targets.

An offer to buy Spanish bonds . . .
The ECB will certainly be grateful. At the moment, lacking the resources to support its troubled members, it’s only a pretend Central Bank. And its paymaster, Germany, intends to keep it on a short leash.

. . . is seductively attractive.
But will the PRC’s money resolve the EZ’s problems, or merely camouflage them? If the issue is one of efficiency and competitiveness rather than liquidity and debt, it’s possible that China’s initiative will make matters worse rather than better. The troubled periphery would continue in a state of suspended animation—economically undead!

The US, not handicapped by commissioners, has resolved its problems itself.
Meanwhile, the US is making progress. President, Congress and Fed squabble about what’s to be done, but they get things more right than wrong. At the outset of the economics crisis, they opted for easy money and devaluation on the one hand; for lower public spending and reduced taxation on the other. The policy mix has worked: activity has risen and jobs have begun to be created.

The UK hasn’t. Cameron’s better at talking than doing.
The picture in the UK is much less favourable. The Prime Minister quarrels, not with opponents, but supporters. Brown did nothing to resolve the economy’s problems in his last couple of years in office. Cameron likewise in his first seven months—even the attempt to cull the quangos has come to nothing!

He needs to distinguish between friends and foes . . .
Policies are seen through political rather than economics spectacles. They’re devised to appease LibDems at home and Commissioners in Brussels. Grassroots Tories aren’t happy. More to the point, the policy mix isn’t working: activity’s subsiding and inflation quickening.

. . . to discriminate between parts of the economy that contribute . . .
Britain’s manufacturing base (10% of the total economy) may be reviving, but its services sector (75%) isn’t. And financial services, the high value-added parts of the latter, are being handicapped by politicians and regulators alike. Nobody in either area seems to be able to distinguish the good guys from the bad: commercial bankers on the one hand; fund managers, brokers, actuaries and accountants on the other.

. . . and parts that don’t.
Amazingly, the Prime Minister appears to be happy to let intellectually-challenged LibDems and maliciously-inclined EuroRegulators write London’s rule book. It’s causing tension in the Tory party. It’ll have to be addressed.

Stock markets are pausing.
Politics rather than economics may be driving asset markets at the moment. Understandably, investors are nervous. They think that current conditions are satisfactory, but fear that future ones will be adverse.

They’ll perk up later.
They’re probably right. The indices look set to recover their nerve in the period immediately ahead, but lose it again in the summer and autumn. The downside wouldn’t so bad, though. If the worst should come to the worst, the world’d be characterised by protractedly dull activity, low inflation and resilient margins. Markets would lap it up!

Don’t Count on Europe Manufacturing

January 7, 2011

CNBC Television

3 January 2011

Europe manufacturing has shown fast improvement, but growing Asian countries will not be able to absorb the continent’s goods, Roger Nightingale told CNBC.

Economics Views

January 7, 2011

All marriages are happy;
it’s the living together afterwards that’s not.

Raymond Hull—coalitions a fortiori; they’re marriages between partners who didn’t even like each other in the beginning.

Europe is like Marmite: either hated or loved.
It was always likely that Europe would be the issue that caused the LibDem-Tory Coalition to come unstuck. It was the one over which the instincts of the two parties were furthest apart. The leaders might have claimed that their differences were unimportant, but the grassroots knew otherwise.

Tories and LibDems are on opposite sides of the divide.
Tempers have been rising for some time. They may boil over in the next few days when Parliament discusses the EU Bill. Tory backbenchers feel they’ve been let down by Cameron. He’s thought not to have delivered on his promises: failing to hold a referendum on the Constitution; using taxpayers’ funds to bail out Europe’s banks; and letting Brussels regulate London’s financial services sector!

Will the EU Bill clear the air? Unlikely.
In the debate, the “sovereignty clause” will be crucial. It’ll re-assert Westminster’s supremacy. But does the Coalition intend to take the provision seriously? Or is it more likely to continue to allow unelected Brussels bureaucrats to dictate English Law? It may be difficult for Cameron and Clegg to fudge this one.

Tensions’ll be exacerbated by a disappointing economy.
The British economy, meanwhile, continues to drift into unsatisfactory territory. The final quarter of 2010 will have been adversely affected by the cold weather, but it’s likely that its underlying trends were also deteriorating: real growth subsiding and inflation rising. There’ll be no immediate crisis, but it’ll be difficult to avoid one later on.

The next downturn will be bad or very bad.
The global business cycle is due to peak in autumn 2011, and to turn down for two and a half years thereafter. If, concurrently, a number of countries were to decide to implement restrictive monetary policies, the softness would be worse. If others were to opt for protectionism, it’d be much worse.

It’ll be less frightful in the States.
The risks are high: recession is probable; depression can’t be ruled out. Almost every country will take a hit, but it tends to be those that are most adaptable, that move most quickly to rebalance their economies, that fare least badly. The US looks good in this regard; cutting costs early and restoring competitiveness resolutely. Today, as a result, GDP is advancing briskly, and unemployment falling significantly. The incumbent administration isn’t yet popular, but the chances are that momentum will be with it in the next year or so.

But China and India will stall.
Elsewhere, delay has intensified the problems. China and India, for instance, were quick to act to loosen credit to prevent recession in 2008, but slow subsequently to tighten it to prevent inflation! Doing so now, will they achieve a soft landing? Very unlikely.

Australia and Brazil also.
It’s not dissimilar for Australia and Brazil. Huge beneficiaries of the commodities price boom, they allowed their currencies to appreciate sharply. Inflation was held at bay, but competitiveness in manufacturing and services undermined. What’s the appropriate therapy now? To tighten or not? To cut spending or not? In any event, they’re vulnerable. When China’s economy pauses, theirs will turn down.

Equity prices to hold up for a while longer.
In the near term, equity prices will probably hold up quite well, liquidity being adequate and profits strong. But, later in the year, the former might evaporate and the latter falter. That’ll not be a time for investors to be overexposed.

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