Economics Views

April 22, 2011

Distrust politicians who talk most often of freedom;
they tend quite often to be covert warmongers.

Kennedy and Bush in the US, for instance; Blair and Cameron in the UK!

We stand for freedom, said JFK.
In the early sixties, shortly after he’d been elected, John Kennedy began to send US military personnel to Vietnam. But they’re not front-line troops, he explained, just logistical advisers. Their role is to help train the South Vietnamese army. They’ll not be in Asia for long!

So much so that we’re prepared to impose it forcibly on others!
Wrong, of course. But it wasn’t clear then, nor is it to this day, whether the President’s initial inexactitude was deliberate or accidental. No matter: as advice was found to be insufficient to turn the tide of the conflict, military deployment was progressively increased. Soldiers and firepower both!

The ploy had worked had worked in Korea in the late forties.
Kennedy thought that only by conflict could the allure of Marxist ideology be resisted; only by confrontation could the encroachment of Communist powers be halted. The policy, he noted, had been successful in Korea fifteen years earlier. And the threat of it was stabilising the situation in Europe. It would win the day also in Vietnam.

But it went wrong in Vietnam in the sixties.
In the event, though, the strategy went horribly wrong. US troops won the set-pieces, but lost the rucks and mauls. Even worse, the PR battle went awry. Abroad, the story became one of an American Goliath bullying a Vietnamese David; at home, of incompetence and duplicity. What had begun in 1960 as Camelot ended as Mordor.

Will it fail also in Libya now? Probably.
Is there a parallel here with Cameron and his adventure in Libya? Sadly, there may be. The PM’s analysis of the situation in North Africa today appears as naïve as was Kennedy’s of that in South East Asia then. The latter’s war didn’t halt the advance of Communism. It probably delayed its demise!

War has to be the final resort, not the opening gambit.
It was the failure of the Communist world’s economies, not of its armies, that proved decisive. As it became clear that only market disciplines could deliver satisfactory living standards, the peoples demanded change. They did so first in Eastern Europe, then in the Soviet Union, then in China, and finally in Vietnam itself.

Economics success or failure is usually the driving force.
Political liberalism followed (hesitantly) in the wake of economics liberalism. Democracy (of a sort) began to be considered in a few places. Excellent. But the changes had been caused, not by external force, but by internal dissent.

Libya’s time will come.
North Africa likewise. It’ll opt for liberalisation when the time is ripe. Western intervention beforehand won’t help; it’ll probably delay the process. As it has in Iraq and Afghanistan.

Its people will decide not the west’s busybodies.
Kennedy’s assassination silenced the criticism that would otherwise have come his way. Will Cameron find some way of escaping censure? Probably not.

Cameron would do better to focus on the British economy.
And what will history say of his economics judgment? That it was poor. That he went along with the Brownian policy of bankrupting the rest of the British economy to provide the funds to support domestic bankers in their ill-deserved luxury; that, worse, he subscribed to the fund to bail out foreign bankers; that, contrary to earlier promises, he allowed the EU to increase its impositions on UK residents; and that, incomprehensibly, he passed the regulation of the City of London to Brussels bureaucrats.

Things hitherto haven’t been going well.
A sad litany. Little wonder that Britain’s GDP is sagging, that London’s markets are dull. It was much the same in the States in the Vietnam era: the economy underperforming and the stock price indices faltering.

Economics News

April 15, 2011

For NASA, space is still a high priority;
likewise, for the Fed, credit.

Dan Quayle—there have been few men in the recent past who could, so unerringly, get to the essence of an issue!

The economics outlook isn’t good.
Where interest rates and bond yields have risen in the last few months, it’s likely that real growth will slow; where they haven’t, it’s probable that inflation will quicken. For most countries, one of these factors may turn out to be unsatisfactory; for several, both of them. Central Banks will find life trickier than usual. They’ll have to choose which of the “two evils” they’re to attempt to control and which they’re therefore prepared to indulge.

In some places, the threat comes from inflation; in others, from recession.
In Europe, the ECB has made its decision. The Bank sees the containment of inflation as the priority. It’s prepared to sacrifice growth to this end. Interest rates have been raised once; they’ll doubtless be raised several more times. That’ll reduce the EZ’s aggregate growth somewhat, but it’ll devastate the outlook for the economies of some of the member countries.

The ECB prefers recession.
Greece, for instance, is a hopeless case: its GDP plunging but its inflation not yet under control. Nor is there any respite on the horizon. Things are getting worse, not better. Although public spending has been cut savagely, the deficit now is worse than when the process began! The higher bond yields imposed on Greece by sceptical investors have plunged the economy into a recession so deep that tax collections have fallen faster than spending outlays!

The periphery is to be sacrificed for the . . .
Ireland is in almost as much trouble. Credit costs have soared and the country’s competitiveness has been undermined. It used to be easy to get companies to relocate their European HQs to Dublin. No longer. Bad publicity, straitened circumstances and the threat of higher rates of corporation tax have deterred a number of potential movers.

. . . greater glory of the core (serve them right for joining the euro).
Will Ireland persevere with austerity? That depends largely on how long it’s thought likely to have to last. If there seemed to be light at the end of the tunnel, if the pain were to persist for only another two years, say, the people would probably stick to their guns. If the economy were to remain moribund for ten years, on the other hand, it’s doubtful that they would.

The PRC is going well at the moment.
China finds itself with a different problem: quickening inflation because of frenetic growth. Interest rates have already been raised. But not, apparently, by enough. The initial estimate of activity in the first quarter of 2011 set GDP growth at almost 10% and inflation at 6%. Interest rates will continue to be raised, therefore.

But will the momentum persist?
At some stage, that’ll crack the demand for credit. When it does so, GDP will slow precipitately. In the meantime, the higher interest rates will have their major impact in the foreign exchange markets. A stronger yuan will make Chinese exports more expensive, adding extra pressure to the inflation rates of weak currency countries.

In India, it’s already faltering.
India is similar to China, but less so: its growth slower and its inflation faster. The Reserve Bank has been lifting interest rates for some time, and it’s beginning to look as if the data are responding. The pace of activity is faltering and trade balance improving. But prices aren’t yet stabilising.

The US has been moderately successful hitherto.
In the States, the Fed’s policies have been almost diametrically the opposite of the ECB’s in Europe. The American priority has been growth. Interest rates have been kept low, therefore. And currency softness has been permitted, almost encouraged. It’s worked: GDP boosted; prices still flat.

But there too, doubts are growing.
But it’s not clear that the policy can be continued for much longer. Another downwards lurch in the dollar might prove to be the final straw. Inflation might succumb, rising to unacceptable levels.

The pressure for change is substantial.
Even if it weren’t to do so, there’s a political dimension to the issue. There’s been growing political antagonism to the Fed’s policies. Republicans, tea-partyists in the van, have won substantial support for their advocacy of more spending cuts and less monetary indulgence. And in the States, in contrast to Europe, the authorities take notice of the views of the people.

Likewise in the UK, where it ought to be even greater.
It’s somewhat similar in the UK. Thus far, the BOE has been given a free hand and it’s used it to bail out incompetent bankers, to boost credit, and to weaken sterling. The results haven’t been good: GDP hasn’t recovered, but inflation has. Criticism of the “Old Lady,” unsurprisingly, has intensified. Will the Governor respond? Will the politicians?

The BOE has no room for complacency.
It’s not impossible. If sterling were to take a drubbing, if Gilts were to be shunned, the Bank would have no alternative but to change tack. Rates would be hiked and credit tightened whatever the state of the economy!

The odds on recession keep rising.
Overall, it looks as if the world will be tightening liquidity for some time to come. If that were to be occurring in a cyclically strong phase of the economy, there’d be stability. If, as seems more likely, in a cyclically weak one, there’d be recession. Ouch!

Spain Different?

April 14, 2011


Spain Different? Sadly Not

EU policy makers confidently told reporters in Budapest and Frankfurt last week that Portugal will be the last euro zone member in need of a major bailout. The comments were taken with a pinch of salt by those who have watched the contagion spread from Greece, to Ireland and then on to Portugal and expect Spain to fall victim to the crisis as well.

“The fact is that nobody knows whether the country (Spain) will need external help in the months that lie ahead. But what everybody knows is that the European Central Bank’s decision to raise interest rates will intensify its difficulties,” said Roger Nightingale, a global economist in London in a note to clients.

Having taken what many would describe as a rather euro sceptic approach to the single currency [EUR=X 1.4485 0.0045 (+0.31%)] for more than a decade, Nightingale is scathing of the analysts who now say Spain will be OK.

“Spain is different from Greece or Ireland or Portugal, they chanted. Its economy is fundamentally sound; it’ll not need a bailout. Are their words of comfort to be taken seriously? Sadly not,” he said.

EU Bank Stress Tests About to Get TougherEuro Ministers See Portugal Bailout Deal by Mid-MayThe Euro Zone’s Worst Government Debt
Spanish unemployment tops 40 percent amongst the young and over 20 percent for everyone else and the housing market remains on ECB-sponsored life support, but the country’s national debt remains relatively low, even if local and private debt is high.

“Six months ago, Portugal’s borrowing costs were tolerably low and its growth prospects reasonably satisfactory, therefore. Eighteen months ago, Ireland’s outlook was comparably benign. But, for neither did the “present” prove to be a reliable indicator of the “future”, said Nightingale

“On the contrary, as GDP growth slipped away, tax revenues disappointed, the deficit mounted and investors lost heart. They demanded higher interest rates in compensation for what was perceived to be a higher risk. And, getting them, GDP was undermined still further,” Nightingale said.

The Two Tier Europe

The ECB raised rates last week by 25 basis points in a bid to curb inflation but with real rates for the Spanish businesses and individuals much higher it remains to be seen if the hike will have a major impact on Spain.

“(What) everybody knows is that the ECB’s decision to raise interest rates will intensify its difficulties. Spain’s “official” interest rate is low enough, but its “effective” one isn’t. For the public sector, for companies and for individuals, it’s high. And the chances are that it’ll carry on rising,” said Nightingale.

Nightingale believes a two-tier Europe is now assured, but questions whether those on the outside understand what comes next.

“A financial purdah has been established. To it have been dispatched a number of the Community’s (European Union’s) “lesser” countries. These rejects won’t have access to credit markets for a protracted period (five years, possibly fifteen). It won’t much matter whether the discards stay dutifully with the euro, or run rebelliously from it,” he said.

“Do they understand their fate? Not yet. They still think they can negotiate an escape. They hope that others, Germany and Britain have been the obvious soft touches in the past, will shoulder their burdens for them. They envisage a future; a year or two hence, when the good times will be rolling again. Watch out for the reaction when reality strikes home!,” Nightingale added.

“In the States, Governor Bernanke must be worried by what he sees in Europe. Hitherto, it’d been only obviously overheating countries that had raised interest rates. Now, an obviously underheating bloc had done so as well. The outlook for the world economy, he’s bound to conclude, is poor and getting poorer,” said Nightingale.

A Closer Look at the Markets

April 14, 2011

CNBC Television

Roger Nightingale, economist, joins CNBC for a closer look at the Wednesday’s markets action

13 April 2011

Economics Views

April 14, 2011

Discretion is knowing how to hide
what can’t be remedied.

Spanish Proverb—but, if it can be remedied, it’s not discretion; it’s cowardice!

Were Independent Commissions ever independent?
It’s no surprise that the interim report of the Independent Commission on Banking, headed by John Vickers, failed to condemn any of the malefactors involved, but it’s disappointing nevertheless. In the event, the Commission preferred discretion to disclosure. It recognised that its identification of the guilty would have been horribly embarrassing.

There’ve always been grave doubts about the Hutton Inquiry.
Commercial bankers would, of course, have been pilloried, but so too would much of the rest of the financial establishment. It would have been revealed that the Chiefs of the FSA, the BOE and the Treasury were asleep on the job. It would have been revealed additionally that the country’s leading politicians, Cameron and Osborne on the one side, Brown and Darling on the other, were guilty of major errors of judgment at the height of the crisis.

There’ll probably be similar disquiet surrounding the Vickers Investigation.
Better, thought the Commission, advised possibly by the Mandarins, to do a snow-job. The financial collapse was an accident, it was concluded; it was attributable to a particularly stressful conjunction of circumstances, not to the activities of any group of individuals. Nobody was to be censured therefore.

Nobody, it managed to conclude, was to blame for the disaster in the past.
The Commission’s recommendations for the future were even more disappointing than its analysis of the causes of the problem in the past. More regulation and better monitoring of trends were the central proposals. And, to prevent a recurrence of the problem, it was suggested that a commercial bank’s retail operations be ring-fenced from its investment activities. That’d be sufficient, the Commission thought, to reduce to acceptable levels the risks of losses at the latter having to be borne by the taxpayer.
And only a few deckchairs needed to be rearranged . . .
Deeply unconvincing! John Vickers wasn’t the man to Chair the Commission. He was a former Chief Economist at the Bank of England. It would have been very difficult for him to point the finger at those who’d been colleagues a few years earlier. And, if the “Old Lady” was to be spared, the same clemency had to be applied to the Treasury and the FSA. Vickers could perhaps have had a go at the politicians, but not if he’d wanted a gong at the end of his career.

. . . to prevent a recurrence in the future!
As for his recommendations for the future, there seems to be an element of obfuscation. How much protection would “ring-fencing” provide? If, three years ago, RBS’s retail bank had been subject to the Vickers’ proposals, what repercussions would the implosion that occurred subsequently have had on the Exchequer? Would taxpayers have been wholly, or only partially, protected from banking excesses?

The general public isn’t so easily fooled. Heads should roll!
It’s difficult to get answers, but reticence sometimes speaks volumes. The likelihood is that, post-Vickers, bankers would be no more disciplined than they are now; taxpayers little more protected than now. If so, the Commission—its composition and findings—may be held to be another of the Prime Minister’s misjudgments.

On the economics front, things keep getting worse.
The economy, meanwhile, has continued to soften. Recent figures for industrial production and retail sales were shocking. They imply that the cyclical slowdown is steepening. Set in the context of rising interest rates in much of the rest of the world, recession seems to be on the cards.

Equity indices may follow suit.
And the markets? They’re holding their nerve for the moment. But that may be because they wish not to see the storm clouds gathering.

Economics Views

April 7, 2011

He who fights with monsters should take care
lest he become one.

Friedrich Nietzsche—if you gaze for long enough into an abyss, the abyss gazes also into you.


St George slew the dragon . . .
Politicians who tangle with the National Health Service are invariably buried by it. The system’s vested interests are not easily tamed. They fight back. After a few skirmishes, it’s the reformers who retreat in disarray; it’s the reactionaries who regain the high ground.

. . . but most who try are themselves slain.
The surprise is not that the Prime Minister’s proposals have failed, but that they were tried in the first place. They didn’t deserve the priority they were given. It was a major misjudgment to have allowed them to divert attention from more urgent (and more amenable) problems.

Cameron was misguided to try his luck.
The NHS debacle isn’t the only black mark hanging over the PM’s assessment of priorities. His decision to launch the UK into hostilities in Libya was as ill-considered. So was his agreement, contrary to earlier promises, to pass the regulation of Britain’s financial services to officials in Brussels. Each is likely to undermine the economy’s longer-term prospects; each to prejudice the country’s political standing.

He was behaving like Trichet.
In Europe, bad judgment is the norm. The ECB has turned it into an art form. Demonstrating his virtuosity, Governor Trichet will shortly raise interest rates. Germany’ll survive the ordeal with serenity. Many smaller countries won’t.

The prospects for the little guys in Europe isn’t good.
Greece and Ireland and Portugal can’t live with the euro’s current exchange rate. Nor, a fortiori, with the interest rates and bond yields that the markets impose on them for attempting to do so. The world is headed for recession in 2012 and 2013. The small fry will suffer particularly badly.

Shall we get recession or revolution?
What will be the reaction of the people in these countries? They’ll doubtless be angry, but with whom? The national government or the federal one? If asked, would they prefer to stay with the euro or to leave it? If not asked, would they take to the streets?

Most punters pick the former; but the latter can’t be ruled out.
The questions are easy to pose, but difficult to answer. Thus far, perhaps because of psephological inertia, the inclination seems to be to stay. It’ll be interesting to see if the resolve survives an intensification of pain. Some cynics argue that the current willingness to put up with the euro is based on an expectation that Germany (and Britain) will be persuaded to finance transfers. It’ll be a different story, they claim, if it becomes apparent that no handouts are to be made.

America is good by comparison, but only by comparison.
In the US, the economy is growing, but at below-par rates. At the current stage of the cycle, job creation would normally be running at more than 300 thousands a month. March’s figure was a little over 200 thousands. That’s good by comparison with the rest of the developed world, but not good enough to generate self-sustaining advances.

What’ll the Fed do?
Bernanke, like most other central bankers, has a problem, therefore. Does he continue QE or not? The one option risks a bubble, the other a recession.

Equities are enjoying a relief rally. It won’t last.
The markets are currently seeing things through rose-coloured spectacles. They presume that liquidity will stay plentiful, inflation moderate significantly, real growth slow only a little and corporate profits boom. They should be so lucky! Valuations might hold up reasonably well for a few weeks more, but’ll probably sag again in the summer and autumn.

Economics News

April 5, 2011

Comparing apples with apples is instructive;
apples with pears isn’t.

But it happens a lot: sometimes accidentally because of foolishness; sometime deliberately because of knavishness!

American jobs numbers are good . . .
Employment in the US was reported to have accelerated in March. In a Press Release issued in Washington, the Labor Department estimated that more than 200 thousand additional jobs had been created in the third month of the year. The news prompted an optimistic response from commentators, but there was a suspicion that it was partly contrived.

. . . but not very good.
There’s no denying that America’s labour market has progressed more satisfactorily than those in other developed countries, nor that its recent numbers have been better than its earlier ones, but the more pertinent comparison, that with the same period of previous cycles, is less encouraging. The numbers chalked up in autumn 2006, for instance, were higher. Those in 2001 and 1995, much higher.

The current recovery is dull; the coming downturn might be severe.
Bernanke will have recognised the problem. If job creation isn’t to rise much beyond 200 thousands a month at the most propitious stage of the cycle, it’s likely to be fairly weak in the forthcoming summer and autumn. And, next year, it may very well go negative again. The dilemma for monetary policy is obvious: tightening will risk a severe recession; not tightening, a damaging bubble.

It’ll be worse for Europe, though.
It’s somewhat similar, probably worse, for Europe. Trichet has the additional problem of the euro: it’s priced reasonably competitively for Germany, but excruciatingly uncompetitively for the rest. That mightn’t be terminally destructive if the former were prepared to bail out the latter, but that’s not the case.

Monetary union fails without political union.
The EU is not a political union. If it were, things would probably be different. Resources could be more easily transferred from one region to another. In Germany in the nineties, for instance, after the Berlin Wall had fallen, the Länder in the west didn’t veto the provision of help to those in the east; nor, in the US, after the Civil War had dealt with States’ Rights, did the successful Californians query transfers to the less successful West Virginians.

Trichet was in charge when the truism was demonstrated.
Trichet knows he’s in possession of a poisoned chalice. He has responsibility without power. He has to pursue policies dictated by an unsympathetic German Finance Ministry and take the brick-bats hurled at him from the National Governments of the other member states.

His footnote in history will small and unflattering.
He’s now coming to the end of his term of office and fears (justifiably) that history’ll judge him harshly. On his watch, Europe hasn’t pulled together, but pulled apart. Most worryingly, he has to acknowledge that no competent alternate wants to take the job from him.

Britain should have been a beneficiary.
Britain’s fortunate in not being involved in the euro mess compulsorily, but unfortunate in having elected leaders who are anxious to share in it voluntarily. The second phase of the Irish banking problem illustrated the point. It elicited from the PM a sizeable financial transfer: money taken from domestic taxpayers was given to foreign bankers! A sensible use of scare resources? Of course not; it was even dafter than giving it to the local miscreants two years earlier!

It hasn’t been.
Currently, there’s a bit of a flap over Portugal. Its economics numbers are looking fragile; its prospects grim. The bottom line, in any event, is that investors aren’t prepared to lend to the country at rates at which it can afford to borrow. In other words, the situation is close to having become irremediable.

The Coalition has snatched defeat from the jaws of victory.
Not so, claim Government Ministers in Lisbon: in their opinion, the problem is manageable. The Commission in Brussels says it agrees. So does the Central Bank in Frankfurt. Understandably, given their track records, markets are unconvinced. They’re waiting only for the PM in London to express optimism to be certain that a crisis is imminent.

It’s determined to waste resources on wars and banks.
When it occurs (if it does), will HMG dip its hand into taxpayers’ pockets once again? Probably. The Coalition is aiming to make significant savings in many areas of public spending, but two are exempted: pointless military conflicts and pointless banking indulgence!

Deficits might stay persistently high therefore.
That’s going to render the fiscal situation increasingly difficult in 2012 and 2013. Instead of declining rapidly, the deficit may stay high. As the economics slowdown gathers force, tax collections will disappoint. Set that in the context of insufficiently rigorous spending strictures and it’s not impossible that financial markets lose confidence in the UK.

Stock price indices may be close to peaking.
The world’s equity markets have fared well in the last couple of weeks. Political anxieties have moderated; likewise nuclear fears in Japan. Concurrently, there’s been another surge in liquidity. But the favourable conjunction won’t last. Time to lighten exposures perhaps.

Economics Views

April 4, 2011

In the sixties, many western politicians fretted that the “third world” would succumb progressively to communism. As soon as one country had done so, its neighbour would become vulnerable. The fall of one “domino” would cause the next to totter.

Today, it isn’t politics that are causing the anxiety, but finances. And it isn’t the developing world that’s become vulnerable, but the developed one. The European Union is the focus of the problem. Investors are no longer confident that its debtor nations will be able to meet their obligations.

Initially, it was Greece alone that seemed stretched. Then, Ireland too was thought to be vulnerable. Today, Portugal is presumed susceptible. Investors aren’t certain that any of them will renege. But they’d prefer not to take the chance.

Accordingly, the perception of heightened risk dictates the reality of steeper borrowing costs. Once the adverse rumours begin, credit dries up. Economics activity stalls and the fiscal deficit balloons. What was initially mere speculation seems subsequently to become proven fact.

Predictably, Europe’s commissioners have been irritated by these developments. And predictably also, they’ve identified the source of the problem as London’s insufficiently regulated financial markets. If there’d been no speculative excess, it is claimed, there’d have been no disruption!

Not so. Suppressing evidence of failure isn’t the same as creating success. Responsibility for the crisis in European finance ought properly to be laid at the door of those who rushed unthinkingly into monetary union. And who was that? Commissioners, politicians and bureaucrats: all of them ill-informed and unaccountable.

Hadn’t they done their research? Didn’t they know that currency blocs unattached to political union always fail? Did they think the rules wouldn’t apply to Europe? That the disastrous experiences of Mexico, Brazil and Argentina in the last decades of the last century wouldn’t be replicated in the more fragile parts of the EU in the years ahead?

Uneasy ought to rest the head that wears the regulatory crown! People wouldn’t be pleased if they knew how cavalier those in authority had been. Retribution might be on the agenda!

It’s likely that a number of other countries will have to go through the wringer before the problem resolves itself. Spain and Italy are obvious candidates; France and Belgium less obvious ones. It’ll be interesting to see if any can resist the fall of the neighbouring domino.

Britain has less to worry about than most. But it’s not an entirely without risk. The country has a good track record in meeting its debts; and has the huge advantage of not being part of the euro bloc.

What about its politics though? The Coalition with the LibDems is a big negative. It’ll constrain the country’s freedom of action for the remainder of the parliamentary term. Arguably, it’s already been responsible for passing the regulation of the financial services sector (Britain’s USP) to Brussels!

Unsurprisingly, London’s securities markets have lagged those elsewhere in the world. Economics growth has been disappointingly slow; inflation, worryingly high; the external accounts parlously in deficit. Corporate profits are moderately strong. But that may not persist. While the availability of liquidity stays high, valuations will drift higher. But in the summer and autumn, they’ll probably retreat.

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