UK Strikes are Regrettable

June 30, 2011

CNBC Television

30 June 2011

“It’s very regrettable, it’s a consequence of the public sector having been bloated in the last 10 or 12 years or so, obviously it has to be cut back to size,” Roger Nightingale, told CNBC Thursday in a discussion on UK public sector strikes. He added it was “obvious” that pensions needed to be cut and the retirement age extended.

UK Strikes are Regrettable

June 30, 2011

CNBC Television

30 June 2011

“It’s very regrettable, it’s a consequence of the public sector having been bloated in the last 10 or 12 years or so, obviously it has to be cut back to size,” Roger Nightingale, told CNBC Thursday in a discussion on UK public sector strikes. He added it was “obvious” that pensions needed to be cut and the retirement age extended.

Economics Views

June 28, 2011

Flattery is like cologne water;
best smelt, not swallowed.

Josh Billings—amongst friends, there’s usually an ulterior motive; amongst politicians, there’s always one.

The Chinese are long of cash and short of allies.
The euro was able to breathe a little more easily last week. Visiting the UK, Chinese Premier, Wen Jiabao, declared his support for the single currency. Its longer term viability, he opined, was not in doubt. More to the point, he promised the PRC would shortly be adding to its holdings of Europe’s sovereign debt.

They’d like to do a swap.
Commissioners in Brussels and Central Bankers in Frankfurt were understandably relieved. The immediate crisis was at an end, they thought. Independent observers, on the other hand, were a little more cautious: Wen’s statement, they said, owed more to politics than economics. China feared protectionism. The country was keen that, if retrenchment turned to recession (probable), and recession to depression (not impossible), there’d be voices arguing the case for free trade. To that end, spouting a bit of economics nonsense about the euro and buying a few pre-devaluation Greek bonds would be a small price to pay.

The economics outlook is scary.
Beijing will not have failed to notice that most economies have been losing momentum for the last fifteen months or so. And that in the face of generally expansive monetary policies! What’d happen, they must be asking themselves, if money were to be tightened?

The PRC arguably the most vulnerable country.
They may soon find out! Central Bankers are becoming cautious again. They’re worrying that the easy credit conditions of the last couple of years will spark another bubble. Better a minor hiccup now, they say (shades of 1929), than a major one later. But if the global economy were to move even modestly into reverse, it’s possible that Chinese activity would be savaged (cf. Argentina in an earlier period): its efficiency and competitiveness no longer a blessing, but, inspiring demands for protectionism, a curse.

Britain too is exposed.
Britain suffered less than most of its peers in the last depression. It’d be lucky to do as well in the next one. Its public sector is bloated and inefficient; its government vacillating and out of touch. Real growth is 2% per annum below par; price inflation 2% per annum above. The BOE has made a fine mess of monetary accommodation in the last couple of years and looks set to make an even bigger one of monetary austerity in the next couple.

Its politicians, more liability than asset.
In the immediate future, the issue of public sector pensions has to be resolved. How will Ministers manage? Will Cameron and Osborne be vertebrate? Clegg and Cable reliable? Not very likely. Their irresolute behaviour in the past, backing down at the first sign of opposition, has served only to encourage the luddites: the Unions think (probably correctly) they’re dealing with a Brown, not a Thatcher.

Indices are set to fall.
Little wonder that financial asset indices have drifted lower, and that sterling has followed suit. Is the weakness about to come to an end? Almost certainly not. There’s lots more in the pipeline. It looks as if the crisis’ll have to get worse before it gets better. There’ll almost certainly have to be a Cabinet reshuffle, possibly a change in leadership. Use options to reduce vulnerability, therefore.

Economics Views

June 21, 2011

It’s not giving children more that spoils them;
it’s giving them more to avoid confrontation.

John Gray—but having done so in the past, how do you stop doing so in the future?

Why have politicians acted so unwisely about public sector pensions?
The surprise is not that Britain’s public sector unions have threatened strikes in an effort to protect their over-generous pensions, but that the issue has taken so long to come to the boil. It’s been bubbling gently for years. Brown, in relatively benign fiscal circumstances in the early part of the noughties, lost his nerve. Cameron, in fiscal meltdown in the teenies, won’t have that option.

Perhaps because they, the politicians, are part of the public sector!
There’ll be confrontation, therefore. Some politicians suspect it’ll be protracted; some argue it’ll be as decisive as that with the colliers in the mid-eighties. Probably not. Then, there was a risk of electricity supplies failing, of the economy collapsing, and political power passing (as in the Heath era) from Parliamentarians to Union Bosses.

Shades of Scargill? Unlikely.
Today, there’s not much risk of a comparable development. Those working in the local authorities and the civil service, in teaching and transport, are relatively spineless. They don’t see themselves as soldiers in the class war. They lack evangelical zeal. And, most importantly, their striking will barely be noticed in the rest of the economy.

But Ministers are also invertebrate.
On the other hand, of course, Cameron is no Thatcher. Clegg and Cable even less so. Would any of them stand firm in a crisis? Would any of them cast a shadow in the sunlight?

Get it done. And no more backsliding!
The reality is that the cost of public sector pensions is the major component of the fiscal imbalance. If it had been dealt with ten years ago, there’d not be a problem now. If a start had been made as soon as the Coalition took office, there might now be light at the end of the tunnel. But, as it is, the risks are all on the downside.

Will Greece ever end?
The Tragedy in Greece’s financial affairs has been similarly epic. It was obvious as soon as the EMS was set up that it’d fail. It was even more obvious that the global financial crisis, when it struck in 2007, would trigger the evisceration of a number of the EuroZone’s economies. So why hasn’t the process been completed? Why are Greece and Ireland, Portugal and Spain, still in the euro? Do the Governments of these countries think the status quo is viable? Do the people?

No so long as there are sugar daddies around.
Of course not. But there is always the chance of bigger and better bailouts! Sadly, that’s right. Merkel seems to have been persuaded by Sarkozy to soften her line. And Cameron is keen always to pour more good money after bad.

The world economy, meanwhile, is slowing.
They ought to stop fretting about the parochial and start worrying about the global. Has China, for instance, run into the buffers? Has India? What about the emergers, the commodity producers in particular? The economy’s not good anywhere!

And’ll continue to do so.
And it’ll get worse. By autumn, the world business cycle will have peaked. By year-end, it’ll be in retreat. If central bankers continue to raise interest rates, the setback will be steep.

Bonds a viable option?
Equity prices have softened significantly in recent weeks. They’ll probably continue to do so for a while. This may be the time to look at bonds. Recession and falling inflation will set the tone.

Economics Views

June 8, 2011

The winter of our discontent hasn’t yet started;
there’ll be no glorious sun for quite a while.

Cameron today is looking as feeble and indecisive as did Callaghan in the late seventies. A recipe for political oblivion!

Fine words butter no parsnips.
Addressing the GMB Congress this week, Business Secretary Cable touched on the subject of the economy. He was moderately upbeat. A recovery had begun, he said, and would continue for a protracted period.

The electorate is unhappy, and getting unhappier.
Really? What data had he been looking at? Did he genuinely think the economy’d embarked upon a secular improvement? Or was he merely trying to mislead the delegates? Was it his judgment that was faulty, or his integrity?

Coalition politicians have misjudged the mood.
Probably the latter. He knew the outlook for unemployment and living standards was poor, but couldn’t afford to admit it—least of all to public sector workers. They’d reaped the rewards of Brown’s indulgence. They’d have to pay the price of Cameron’s rebalancing.

Cable, addressing the GMB, demonstrated the error.
But how was it to be organised? Cable, it transpired, was inviting the Unions to persuade their members to tighten belts, and not make a fuss! He wanted the sacrifice to be cooperative not confrontational.

There’ll be a surge in strikes.
He should be so lucky! The GMB, like the NUM in an earlier period, saw things differently. It recognised it’d be damned if it collaborated, and damned also if it didn’t. That being the case, resistance was the better option. Cons and Libs were as bad as one another; salvation depended on the return of Labs.

Cameron and Clegg may go the way of Callaghan.
Accordingly, the period between now and the next election was likely to be one of difficult industrial relations. How’d the Government cope? Not well. Cameron was no Thatcher; still less were Clegg and Cable. They preferred to compromise and fail, rather fight and win!

That’ll intensify the recession.
The NHS operation had set the trend: reforms were announced; interested parties objected; and the reforms were withdrawn. It looked as if the recommendation that the BBC eliminate some of its excesses would go the same way. Likewise, those directed at the Universities. Another winter of discontent loomed. The invertebrate Coalition would be overwhelmed; it’d have to be recession that restored discipline.

It’s not yet begun, but it’s close.
That was an increasingly likely prospect. Even the IMF, not famed for the forward-looking virtuosity of its forecasts, was downgrading the outlook for Britain’s economy. It opined last week that GDP would grow at 1½% per annum in 2011; in the spring, it had predicted 1¾%; last autumn, 2%.

And it may last for longer than usual.
By year-end, the number may be down to 1%; by next spring, to ½%. Better late than never. The reality is that Britain, along with much of the developed world, is losing momentum. It’ll probably have drifted into negative territory by mid-2012; it may be in recession for several quarters thereafter.

Bailing out delinquent banks was the initial misjudgment.
Interestingly, the IMF’s worried also about the banking system. Uncritically supportive during the crisis, it’s now showing signs of revisionism. In particular, it has anxieties about lender forbearance. The process seems to delay pain, but not eliminate it. Over the longer term, it’s possible that it makes matters worse.

A rethink is needed.
Unsurprisingly, Cable also had something to say about banks. There oughtn’t to be rewards for failure, he claimed. Brilliant. But it’s a principle that comes a little close to home, doesn’t it? What about politicians? Shouldn’t they also forgo rewards?

Are Central Banks more trouble than they’re worth?

June 8, 2011

Are Central Banks more trouble than they’re worth?

Would economies be more stable, people’s living standards higher, if Central Bankers didn’t intervene?

Recession is louring. It’s a pity those on watch are asleep.
The world economy, losing momentum gradually during the preceding twelve months, lost it precipitately in the early summer. In part, the process was involuntary; in part, engineered. The chronology of the business cycle was such that activity would have slowed in any event. But its impact was powerfully reinforced by a drift towards monetary austerity.

Instead, they feather bed the public sector, and raise interest rates!
In India and China, central banks had tightened credit to curb excess demand; in Australia and Brazil, they’d done so to contain inflation; in Europe, the ECB’s interest rate hike was an act of defiant bravado—Trichet, preferring to scuttle the fleet rather than abandon the euro.

Even in the States, the Fed seemed to be wavering.
Previously, Bernanke had claimed he’d pursue accommodative policies for as long as economics activity stayed inadequate. Suddenly, though, in the face of weakish labour market numbers, he too was changing tack. The talk was no longer of whether “quantitative easing” would be unwound, but of when it would be.

Housing will be hard pressed.
Unsurprisingly, sentiment crashed. Housing proved to be particularly susceptible. Valuations had been fragile when unemployment was falling and credit expansive. They’d likely be hammered when these factors were reversed.

Those that suffered last time will suffer again this time. And some others as well!
Spain and Ireland were most vulnerable; the US, the UK and Australia not much better placed. China and India would have also to be monitored carefully. If, as in the thirties, protectionism became fashionable, the latter would take a beating. Like Argentina, in the earlier period, they’d suffer, not prosper, as a result of their competitiveness!

Politicians will be changed.
Predictably, incumbent politicians have been blamed. In 2007 and 2008, when the financial crisis began, they’d pretended they knew what to do. Today, when it’s obvious they didn’t, they’re having to pay the price. Tweddledum is routinely preferred to Tweddledee.

Perhaps policies as well.
Will that change economics policies? Probably. It’ll justify gradually lower public spending, for instance. It’ll be acknowledged that transferring resources from the relatively efficient private sector to the relatively inefficient public doesn’t boost overall activity, but does reduce living standards.

Those relating to commercial banks, for instance.
Similarly, it’ll be appreciated that bailing out the commercial banks in 2008 was a huge error. Those who made the decision to do so, primarily central bankers, are likely to have to fall on their swords. Those who approved it, incumbent politicians and dozy academics, will have to apologise, promising not to be so silly in the future.

Stock prices may be resilient.
Ironically, some would say perversely, the securities markets may hold up quite well in the difficult period that lies ahead. The prospective setback in activity will stifle economies’ inflationary tendencies, and that’ll allow nominal interest rates (though not real ones) to be cut again. Coupled with lower public borrowing, that’ll transform the outlook for Treasuries markets. Most (the no-hopers in the EZ only excepted) will be rallying within a few months.

Bonds initially; ordinaries subsequently.
Meanwhile, corporate profit margins are likely to exceed investors’ expectations. Recession will have a particularly significant effect on labour costs. Dividends and earnings won’t be buoyant, but sufficiently good, given the lower bond yields, to justify current valuations!

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