Economics Views

July 18, 2011

If you don’t ask the right questions,
you’ll not get the right answers.

Edward Hodnett—the trick is to know which to ask (either instinctively, or by trial and error).

The EU is a rich source of case studies . . .
Incorrect diagnoses lead to inappropriate therapies. The result may be an aggravation of the original malaise, not an alleviation of it. It’s a rule that applies as much to economics as to medicine.

. . . for would-be administrators.
Recent events in the European Union illustrate how things can go awry. The periphery’s sickness is obvious enough, but its cause isn’t. The Commissarial Establishment claims that the problem’s been caused by excessive government borrowing. Accordingly, it’s recommended that public spending be cut and taxes raised.

The Commission demonstrates better than any other institution . . .
Member countries—Greece and Ireland, Portugal and Spain, Italy and France—have all hurried to comply. But the problem hasn’t been resolved; it’s been worsened. Most worryingly, the markets have lost confidence in the single currency. They doubt it’ll survive. They envisage devaluations, possibly repudiations.

. . . how not to do things.
Predictably, the response of the Commissioners has been tetchy. They haven’t revisited the causes of the difficulty, but have attempted to camouflage its symptoms. They’ve proposed that the debts of suspect countries be guaranteed with bonds issued by the EZ itself.

Previously, the euro had a slim chance of survival.
And who’ll guarantee the EZ’s bonds? The taxpayer, of course! Has anybody asked him if he’s willing to do so? Ne me fais pas rigoler!

No longer.
Interestingly, the German authorities (not always noted for their support of democratic freedoms) have ridden to the aid of the individual. The Commission’s proposal, complained the Bundesbank Chief, would impose the costs of profligacy in the periphery on taxpayers in the centre! It can’t be allowed to proceed.

So, who’ll be blamed?
At a stroke, therefore, the Commission’s managed to antagonise both of the EZ’s principal sources of finance: the Private Investor and the German Melkkuh. The outlook for the euro has been transformed: what was previously only probable failure is now assured catastrophe. All that remains to be decided was who’ll get the blame and who’ll pick up the tab.

Those who forecast its demise, of course.
The UK, not a member of the EZ, shouldn’t be liable. But in similar circumstances in the past it’s sometimes managed to land itself with sizeable liabilities. Prime Minister Cameron and Chancellor Osborne keep saying that the country will not be sucked into the crisis, but, to many, that’s more a cause for concern than comfort. They said the same before throwing monies into the Irish banking black-hole. And they promised also a referendum on the constitution before nodding it through!

Recession won’t help.
Making matters worse, the world economy is continuing to lose momentum. Growth in the US has begun to disappoint. So has that in most commodities producing countries. Likewise, recently, India. Only China, if the data are to be believed, is maintaining its earlier momentum.

But inflation’ll subside.
That may shortly ease the pressures on inflation. Indeed, the most recently published numbers have come in a little below expectation. By year-end, the trend may be more pronounced. By mid-2012, it’s possible that price rises will have been almost eliminated.

And asset prices benefit: bonds this year; equities next.
If so, interest rates may stop being raised and start shortly afterwards be lowered again. Then, the stock price indices would respond. The weakness in the immediate future might be quite sharp, but it’ll probably be short-lived. In the second half of 2012, the indices could be rising again.

Economics Views

July 13, 2011

If your face seems to be awry,
it’s no use blaming the looking glass.

Nikolai Gogol—it may not be sensible, but it’s what everybody does.

Nobody resigns these days.
Rebekah Brooks can’t have it both ways: either she knew what journalists at the News of the World were doing, or she didn’t. If the one, she was guilty of moral delinquency; if the other, of administrative incompetence. In either event, she’s disqualified herself from high office at the newspaper.

No matter how reprehensible the behaviour.
Her only “honourable” option in the circumstances was resignation. That she chose not to take it spoke volumes about her code of ethics. That the Murdocks, père et fils, chose not to sack her said much the same about theirs.

Society must exact penalties in other ways.
It looks now as if the takeover of BSkyB won’t proceed. Not until a number of executive heads have rolled will it be possible for the proposal be reconsidered. In the meantime, a forced breakup of NI might have to be contemplated.

It used to be possible to trust the police.
The Metropolitan Police Force appears similarly to have snared itself: caught between the Scylla of incompetence and the Kharybdis of corruption. Its officers have been responsible for a good deal of bungled inquiries over the years, but few rivalled the comprehensive ineptitude of this exercise! The question therefore arises: were the mistakes accidental or deliberate?

No longer.
In a sense, as in the case of Ms Brooks, it doesn’t matter. Senior officers have damned themselves in either event. Fools on the one hand, knaves on the other. Heads must roll.

And politicians?
And what about the politicians? Weren’t they too close to Murdock? Didn’t their enthusiasm to win the man’s imprimatur cause them to overlook his misdemeanours?

No worse than the others, but no better either.
Cameron is probably most vulnerable on this front. Why did he employ Coulson? Because of the man’s general ability to communicate, or because of his particular skill in liaising with Murdock’s editors? If the latter, was there a quid pro quo?

Will the guilty talk?
At the moment, nobody seems to be prepared to say anything. Each of the protagonists hopes his own silence about the misdemeanours of others will ensure theirs about his. Will that keep things under wraps? Not necessarily. A couple of minor revelations could break the logjam.

Or maintain silence?
On the other hand, it’s not impossible that the miscreants escape the rigours of the law. Theirs is a powerful alliance. If other news stories should start to grab the attention of the public, the hacking scandal could find itself be kicked into the long grass again.

The euro’s crisis may divert attention.
The principal alternative story at the moment is Europe’s financial crisis. It’s been brewing for months, and there’ll be many journalists, politicians and policemen who try assiduously to keep it going. They’ll claim, fatuously, that on its outcome will rest the fate of the world economy.

Europe has a lot for which to answer.
Nonsense, of course. The world is headed for recession and the euro for implosion, but the two events are only obscurely connected. So who’ll be held responsible? Who’ll have to pick up the pieces?

Its economics nonsenses most of all.
Not the lunatic central bankers who caused the problem. Not the demented politicians who devised the EMS. A shame: it’s the privileged wot gets the pleasure; the others wot gets the blame!

Equity slippage in prospect.
Unsurprisingly, market indices are sliding. The central bank in Beijing can’t stop the rot. Nor can any other. As a rule, officials (cacoëthes attingendi) do more harm than good.

Economics Views

July 5, 2011

Deficit financing is fine so long as
Creditors suppose they’re going to be paid.

The trick is to ensure that they don’t lose confidence. The Greek Government failed. Might the UK do as poorly?

Politics is a matter of perception; economics, of reality.
From a fiscal perspective, last year’s election changed very little. Britain’s public spending was out of control beforehand and remained out of control afterwards. If there was a difference, it related to the response of the party leaders. The one approved of incontinence it, the other didn’t.

Is Cameron tackling the issues? On one basis, he is; on the other, not.
In the event, that wasn’t much of a distinction. The Leviathan seemed to be unstoppable. Cuts were announced, but not implemented. Life proved to be much the same under Cameron as it had been under Brown: the private sector straitened; the public sector indulged; and the taxpayer picking up the pieces!

The reality, for what it’s worth, isn’t good.
Economics activity, of course, responds to reality, not rhetoric. GDP stalled, therefore; inflation quickened and the external accounts deteriorated. Sadly, the near term future’s not likely to be much better than the immediate past. It’ll not be until Ministers implement genuine cuts that the economy will mend.

Nor is it likely to be for some time.
That may not be soon! Last week, there was more bad news on the spending front. It looks as if the forces of political reaction are planning to challenge the decision to limit social benefits. Labour and LibDem, working in unison, successfully torpedoed the NHS reforms; they hope, along with a leftward-inclined Tory element, to do the same to welfare.

The PM is no Thatcher.
If so, Cameron will probably back down again. He wants consensus, not confrontation. He’ll be disappointed, though. Compromises tend not to satisfy the Opposition, but to encourage it. The risk is one of another financial crisis.

His Deputy, even less so.
Cameron and Clegg are out of their depth. The first twelve months of their term has already gone but the fiscal correction hasn’t begun. It’ll be another year before it does; two, before the private corporate sector feels any benefit; three, before personal living standards start to recover. What are the odds on the incumbents being re-elected? Very low!

They’d have done better . . .
Their priority, on coming to office, should have been to cut outlays. The pointless conflicts in the Middle East should have been the first priority. The overpaid Mandarins in Whitehall the second.

. . . to act rather than talk.
There should have been an immediate cut in the pay of top Civil Servants of 15% say, (25% in the case of those in the Treasury, Home Office and MOD; 40% in those at the BOE; 80% in RBS and HBOS). A similarly rigorous regime should have been imposed in the Local Authorities, Schools, Transport etc. An even more austere one in the BBC. For the public sector as a whole, headcount ought to have been set to be fall by 2½% per annum throughout the Parliament.

On pensions most obviously.
Most importantly, the pensionable age for the public sector should have been raised sharply and immediately. The policy wouldn’t have been popular. It would have provoked stoppages. But better sooner than later.

Too late.
Dream on. The world economy is drifting towards recession and Britain’s looks likely to fare worse than most. Thus far, it’s been the currency that’s taken the hit. But, in the next eighteen months, it’s likely to be unemployment that does so.

The die’s cast.
For the moment, asset prices are being supported by easy money. That may change in a crisis. It’s a time for caution rather than exuberance, therefore.

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