Economics Views : 18 Nov

November 18, 2010

Economics progress, in any society,
implies turmoil.

Joseph Schumpeter—but turmoil doesn’t necessarily imply economics progress!

It’s necessary sometimes to be harsh to be fair.
The rule is simple: the good can succeed only if the bad are allowed to fail. It’s a rule that the authorities break at their peril. Sadly, they did so in 2008. That’s when worthless banks were saved at the expense of worthwhile taxpayers.

Indulgence may harm rather than help.
It was a huge mistake. Two years later, banks aren’t yet viable. If their life-support system were turned off, if their subsidised finance were discontinued, chaos would ensue: they’d collapse in a heap.

In banking, it has.
Apparently, Cameron and Osborne see things differently. They think the billions deployed to prop up delinquent Scottish banks was money well spent. Accordingly, they intend now to do something similar for failing Irish banks!

But the PM and C-of-E don’t get it.
It’s a question of priorities. When there’s a shortage of resources, it’s important to cut the trivial so as to make room for the essential. And who is in which category? That depends on who’s calling in the shots. But the Prime Minister and Chancellor are suggesting that, in the first, are to be found this country’s pensioners, industrialists and soldiers; in the second, other countries’ bureaucrats and bankers!

Voters, unsurprisingly, are unhappy.
It’s not a judgment that’s been universally applauded. There are some who say that, if the Brits were to want to help, they’d offer good advice, not bad. They’d recommend a return to the kind of economics that works, not a continuation of that which doesn’t.

The Irish should never have joined the euro.
They’d start with the EMS. It would probably have failed in any event. But disaster was assured when Ireland (and Greece etc.) joined the euro at too low an exchange rate. The consequence was joy initially, but pain subsequently—the former insufficient compensation for the latter.

Especially, at a low level.
It would have been better if the starting rate had been higher. It would have been difficult, but salutary, for companies and their employees to have had to struggle for a few years with poor competitiveness. If they’d overcome the difficulty, containing costs and capping expectations, their economies would have been well set for the medium term.

Nor should they have accepted the Commission’s fiscal handouts.
That’s how the Eastern Länder acclimatised themselves to life in the FDR; difficult at first but easier later. It’s how the FDR as a whole dealt with European Monetary Union; a generation of debility, giving way only recently to signs of revival. It’s how the Scots succeeded after Union with the English in 1707; miserable failure for the first fifty years, brilliant success for the next one hundred and fifty.

Short-term benefit; long-term detriment!
But the psychology of countries currently in difficulty in the EZ seems not yet to be ready to contemplate sacrifice. People are looking for short-term scapegoats, not medium-term solutions. Bankers are an obvious starting point; politicians another. Rightly so.

Devaluation looms.
Eventually, the US example—combining devaluation with fiscal austerity—may be followed. Thus far, it’s worked rather well for its initiator. Two years after the therapy began, America appears to be competitive, growing reasonably briskly, and boasting negligible inflation.

Asset valuations will continue to rise.
Securities markets tumbled when investors foresaw change. But they’ll recover just as sharply when the change, whatever it turns out to be, is implemented. The rally won’t last forever, but it’s unlikely to end before autumn next year.

Economics News : 12 Nov

November 12, 2010

By dint of railing at fools,
we risk becoming fools ourselves!

Gustave Flaubert—be kind to politicians and central bankers, therefore!

Some phenomena are essentially temporary.
Currencies have been too stable for too long. The European monetary authorities have suppressed changes in EZ exchange rates. And a number of Asian Central Bankers have operated similarly to preserve the dollar value of their currencies.

Fooling traders is one.
Until earlier this year, the policies were quite successful. A skilful mixture of psychology and open market operations convinced traders that there was little to be gained from speculation. No longer.

It can be done, but there’s always a reaction.
The money policies that caused currencies to converge prompted economies to diverge. And that convinced speculators that adjustments would have eventually to be made. The only issues worth debating were: how much and how soon?

Trichet is about to be taught the lesson.
Last week’s GDP numbers from the EZ demonstrated how urgent the need for change had become: the weak were getting weaker, and the strong stronger. Germany’s third quarter growth was 2¾% (excellent, given the better than 9% figure in the preceding period), but Spain’s and Portugal’s, Greece’s and Ireland’s, were in negative territory. The money policy appropriate for the one was clearly inappropriate for the others.

It’s unlikely that either he . . .
What was Trichet to do? Focus on the good or the bad? In either event, there’d be a disaster: if money were tightened to suit the strong, the weak would suffer a 1930s-style depression; if it were loosened to accommodate the weak, the strong would overheat (or jump ship).

. . . or the EZ will survive.
In these circumstances, the only sensible thing to do was abandon the pretence of a single currency and let member countries implement independent money policies. That was the conclusion to which traders and hedge funds had come months ago. They saw the ECB as a busted flush. It’d not been respected in the past; it wouldn’t be in the future.

Short term, the euro might rise.
How much will the departing currencies fall in relation to the ongoing euro? Nobody knows, but the range of guesses is fairly tight: 15 to 40%! Much will depend on whether the Governments of the leaving countries honour or repudiate their euro-denominated bonds.

But, eventually, it’ll morph into the DM.
There’s another issue exercising the minds of traders. If the ongoing euro were to rise significantly in the aftermath of any departures, mightn’t that send the next candidate over the top? If the four obvious casualties were to go, it’s possible that a stronger euro, made stronger still by heightened German influence, would force out Italy and Belgium as well. Next in line: France! By 2014, it’s not impossible that the euro’ll be confined to Germany and a couple of its satellites!

The Chinese know they have to tighten money.
Asians are more logical than Europeans. They’ve already worked out what needs to be done, and have prepared themselves to do it. Currently, the Central Bankers in Beijing may be resisting, but probably only for the sake of form. They know that the alternative is protectionism. They know as well that their domestic economy is overheating (property bubbling). Higher interest rates and a stronger currency are needed.

The Indians also.
India’s analysis proceeds similarly. The monetary authorities have been remiss: they’ve let inflation rise to 15% and the external deficit to 5% of GDP. It may be that a recession will be required to restore equilibrium.

That’ll allow the Americans to loosen.
The Fed has a problem on its hands. US growth faltered in the second and third quarters. It needs a boost: easier money, a weaker currency, or both. Inflation seems not to be a problem. Jobs are. They’re not being created quickly enough to make the recovery self-sustaining.

The Fed wants a weaker currency.
Bernanke realises that, in the slowing phases of the cycle that lie ahead, it’s recession that has most to be feared. Quantitative easing will be implemented, therefore. And, if the dollar were to fall 25 to 50% against the yuan, he’d probably not worry. Republican hotheads will be allowed to pretend that fiscal policy is important. He’ll control liquidity.

So, probably, does the B-of-E.
The Brits are taking a somewhat similar line, albeit less expertly. The Governor of the Bank of England has mis-analysed the economy fairly comprehensively in the past. It’s to be hoped he’ll not do so again.

Pity about Cameron.
Nor is the Government inspiring much confidence. The GDP numbers for the middle quarters of 2010 were satisfactory. In part, though, they were boosted by last year’s devaluation. Things will get worse in the new year. And what a pity it was that, on the fiscal front, the Government missed the golden opportunity provided by the spending review to contain the pensions of the public sector and the excesses of the eurocrats.

The bull run isn’t yet over.
Currently, financial markets are nervous. Investors fear that political aggravation in Seoul will hurt valuations. It probably won’t. There’ll rise again in the months ahead.

Economics Views : 10 Nov

November 12, 2010

In international politics, as in high finance,
intelligence is unimportant, duplicity essential.

Mikhail Bakunin—economies are performing as well as the public had hoped they would, and politicians are being blamed.

All round the world, incumbent politicians . . .
At the G20 meeting in Seoul this week, the Press focused on international tensions: those between the US and the PRC on the one hand; and those within the EZ on the other. Both were the result of divergent competitiveness. And both had given rise to divergent economics performance.

. . . are unpopular, and being dismissed.
How were the imbalances to be resolved? Would the process be amicable or otherwise? The prospects for the one looked moderately good; those for the other worryingly bad. Politicians in America and China tended to be pragmatic; those in Europe idealistic.

They blame the “unfair practices” of foreign countries.
The former were expected to take contentious opening positions, but compromise subsequently. The latter, affecting initial co-operation, would remain dogmatically inflexible. A crisis would probably be avoided in the one case, not in the other.

The genuine cause is divergent competitiveness.
It wouldn’t help that the cyclical upswing in global activity was in its maturing phase. GDP was still advancing, but doing so at progressively slower rates. And, from autumn 2011, the cycle having peaked, the background would start to deteriorate. There wasn’t much time in which to do a deal!

The easy short-term solution is currency adjustment.
China knew what was at stake. The country’s leaders didn’t want to concede a sizeable revaluation of the yuan, but recognised that the alternative, protectionist legislation, would be much worse. A compromise was imperative.

China will co-operate.
Europe knew that it ought to behave similarly, but refused to do so. Loathsome Commissioners, unaccountable and out of touch, preferred economics disaster. They’d probably get it.

Europe won’t.
Greece and Ireland had already been condemned. Spain and Portugal would probably follow them to the stake. France, Italy and Belgium might do so as well. Their problem was twofold: they had to compete not just with Asia, but with Germany also. A decline in the euro-yuan exchange rate helped on the one front, but not the other.

The euro, part of the problem, is kaputt.
What was to be done to lower France’s costs, for instance, relative to Germany’s? The ECB and the Commission, disdaining currency adjustment and labour flexibility, recommended that balance be restored via differential inflation! In effect, for the greater glory of the EMS, they’d plunge France into a decade-long recession!

The ECB likewise.
In reality is that the EZ is finished. The single currency ceased to be a single currency several months ago. The corpse is rotting, and ought to be given a decent burial.

But will debts be paid out? Probably not.
What remains to be decided is who inherits what. When Greece reverts to the drachma, will its euro-denominated bonds be honoured or repudiated? If the former, economics recovery will be delayed; if the latter, the demise of the finances of other failing EU countries hastened.

The risk is that HMG’ll be asked to compensate dozy investors! And it will!!!
And where is Britain in all this? Not as well placed as she ought to be. The madness of the euro might have been avoided, but all the EU’s other lunacies were implemented. The Prime Minister reneged on his promised to hold a referendum on the Constitution and is now busily reneging on the promise not to transfer more powers to Brussels.

Blame Cameron, Brown, Blair etcetera etcetera.
The only good news is that London’s securities markets are faring reasonably well. Currently, the advantage is coming via the currency; presently it’ll revert to valuations.

Economics News : 5 Nov

November 9, 2010

Democracy allows voters to choose
which politicians get the blame.

Laurence J. Peter—and, not unreasonably, they always choose the ones in office at the time of the discomfort.

Voters everywhere in the developed world . . .
In this year’s mid-term elections in the US, incumbents were punished and alternates rewarded. As usual, the condition of the economy was the key consideration. The electorate was distressed by the squeeze on real incomes, and held the administration to be partly responsible.

. . . are feeling economics pain, and blaming incumbent Governments.
But there may have been another factor adding to the anti-Democrat swing. It was the rejection of “fiscal orthodoxy” by a sizeable minority of the population. Candidates subscribing to “tea party” principles secured a number of successes.

In the US, additionally, they don’t like to see tax dollars wasted.
What they were saying (often inarticulately) was that huge increases in public expenditure did more harm than good. The policy didn’t boost activity. It hadn’t done so in the States in the thirties, nor in Japan in the nineties, nor in Europe in the last few years.

There are fanatics in Europe as well.
Europe, of course, had already rejected “fiscalism.” Germany was intent on balancing its books, and was insisting that others in the EZ do likewise. The Greeks, Irish and Spanish were currently on the rack. Their Governments (though lacking an electoral mandate to do so) had cut public spending severely and raised taxation correspondingly.

The ECB is quite happy to burn heretics at the stake.
The new orthodoxy was the opposite of the old one. In order to secure sound economics growth in the long-term, it was necessary to impose fiscal discipline in the short-term, even if that meant (as it had in Europe) an intensification of the recession. Angela Merkel and Sarah Palin might not be intellectual equals, but they were demand-management allies!

The English, as usual, are compromisers.
Britain had been part of the same shift in thinking. Under Brown, fiscal lunacy had known no limits. He’d sanctioned unconscionable increases in spending. Borrowing had soared to something in excess of 10% of GDP.

Cameron, most obviously.
Cameron had partially reversed the policy. He’d painted himself as a radical, but didn’t deserve to be. What he’d actually proposed was relatively modest. Five years hence, even if real growth in the meantime had been reasonably robust, borrowing would be about 5% of GDP. A second phase of austerity might have therefore to be imposed.

Perhaps he’s saving his powder for additional cuts two years hence.
That wasn’t necessarily a bad thing. Obvious targets hadn’t yet been attacked. Virtually nothing done to public sector pensions, nor to EU wastage! Was that the influence of the LibDems? Or was the Prime Minister naturally inclined to be half-hearted?

Short-term, Republicans in the States will triumph.
In the States, it’s likely that Obama will compromise with the newly Republican House. That’s what Clinton did in similar circumstances in the nineties. And, eventually, he came out on top. For the next couple of years, therefore, taxes are likely to be kept low and spending cut severely.

But Palin’s mumbo-jumbo will lift the economy no more than Obama’s.
In reality, of course, fiscal policy is a zero-sum game. Pouring water from one pot to another doesn’t increase the total that’s available. No more is overall spending power increased by transferring money from one person to another.

Money policy will have to stay loose therefore.
If faster growth is the objective, a more expansive monetary policy is the only option. It does work. But the technique is not without a downside. In extended periods of loose credit, there’s always a deterioration in financial standards. Banks can’t find enough “respectable” clients to whom to lend, and opt in consequence to lend to “disrespectable” ones.

And that’ll cause collateral damage.
That’s what happened in the States in the twenties, in Japan in the eighties, and in large parts of the world in the years up to 2007. In all cases, Central Banks (once they’d noticed) responded by raising interest rates. They took the view that economics discomfort in the immediate future was preferable to an intensification of financial misbehaviour over a protracted period.

Possibly constitutional change.
They may have been right, of course. Equally, they may have been wrong. But, in either event, was it their decision to make? Not in a democracy. It should have been elected representatives, those answering to the people, who did so.

Short term, the indices rise, whatever.
How will things pan out in the future? We don’t know. But the chances are we’ll see sustained easy money for a period. While liquidity is buoyant, whether or not the economy picks up, asset valuations will rise.

Longer term, they’re vulnerable.
Later on, if economies rally, credit will revert to normal, and asset prices weaken a little. If economies don’t rally, but rectitude slips, the monetary authorities may do again what they’ve done so disastrously in the past. Best for investors to become gradually more cautious as the months pass, therefore.

Economics Views : 3 Nov

November 9, 2010

Central Bankers don’t have real jobs themselves.
But we allow them to play God with ours!

It’s one of the mysteries of the Universe!

Economies march to a regular beat.
Job creation usually lags economics activity by about nine months. It’s a pattern that seems to have been replicated in the current cycle. In North America, Western Europe and Japan, GDP troughed at the end of 2008 and grew anaemically thereafter. The labour market followed suit: it deteriorated during the first nine months of 2009, t hen stabilised, and recently it’s improved a little.

If activity is already slowing, jobs shortly will.
What worries politicians is the outlook. The best, they fear, may shortly be over. If growth in real GDP peaked in the late summer, that in employment may do so next spring. Not a prospect that encourages workers looking for a job; not one either that enthuses incumbent Governments facing an election.

Governments will pay the price for failure.
Accordingly, while the payroll numbers published last week in the States were good, it’s likely that the administration will feel they weren’t good enough. They’d need to be much better before the prospect of an economics slowdown could be considered with equanimity. It’s much the same in Japan. Current conditions would be regarded as satisfactory if they were occurring at the outset of an upswing, but thoroughly unsatisfactory in the early stages of a slowdown.

All incumbents are unpopular.
In Europe, the picture is particularly fraught. Germany might be relaxed about the outlook, but few other countries are. Greece and Ireland are hopeless cases; Portugal and Spain not much better. They’re handicapped by uncompetitive exchange rates, penal interest rates and huge public spending cuts. If unemployment is rising in the favourable phase of the cycle, what’ll it do in the unfavourable one?

But those supervising the weakest economies are most vulnerable.
Britain’s outlook is slightly less awful than that of most countries. Its economy is strongest in areas in which global competition is least intense. Current progress is better than that of most of its peers. And it’s possible that the advantage will be retained if public sector cuts go smoothly.

They’ll keep credit loose, therefore.
What the Governments of all developed countries (that of Germany possibly excepted) will want to do in the next year or so is keep credit policies expansive. That constitutes the best chance of extending and accentuating the cyclical upswing. Protectionism is the only other option!

Or threaten protectionism!
Might the world risk going down that route? Possibly. It’s acknowledged that it’d hurt all countries; but that the developing would suffer more than the developed. There’s no great advantage in being competitive if access to export markets is denied.

Exchange rates may take the strain.
India, unsurprisingly in this atmosphere, is being nice to Obama, and China is anxious not to rock the boat. Neither wants to be overwhelmed by excessive liquidity, but neither wants to offend the sensibilities of western trading partners. The solution? Currency appreciation! Both will have to contend with real increases of 25% or so. China’s economy may not have too much of a problem; but India’s looks set to stumble.

And the bull will continue his run.
The outlook for virtually all asset valuations (measured in sterling) remains favourable. So long as excessive liquidity persists, indices will climb. The endgame may not come until late in 2011. There’s a risk then that that western central bankers, fearing financial bubbles, will hike interest rates!

Economics News: 29 Oct

October 29, 2010

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

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

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

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

They’re happier spending our money than theirs.

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

If Ministers knew anything about businesses . . .

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

. . . they’d be running one!

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

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

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

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

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

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

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

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

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

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

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

The US is slowing.

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

And so, probably, is China.

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

Money there may be about to be tightened.

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

The objective is to avoid Japanese-style debility.

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

Security prices will appreci- ate for another year

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

Economics News: 22 Oct

October 22, 2010

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

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

The pre-event hype was exuberant.

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

The post-mortem analysis dull.

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

The Chancellor had to deliver bad news.

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

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

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

But why didn’t he tackle public pensions?

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

And why not nail the bankers?

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

Are they better at persuasion than finance?

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

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

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

. . . to emasculate the City of London?

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

The economy is unlikely to revive strongly.

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

A new recession is highly likely.

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

Asset prices, though, will shrug it off

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

Economics News: 15 Oct

October 15, 2010

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

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

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

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

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

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

A depression can’t be ruled out.

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

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

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

That led to protectionism. Similar this time?

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

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

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

… the Bundesbank, on the other.

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

Stock market investors seem not to be bothered.

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

They think Central Banks will bail them out.

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

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

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

Be more cautious, therefore, from next autumn onwards.

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

Economics News: 8 Oct

October 8, 2010

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

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

Another public sector pensions inquiry . . .

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

. . . another statement of the blindingly obvious.

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

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

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

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

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

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

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

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

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

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

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

Protectionism’s a major threat.

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

America looks the best of the old brigade.

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

Japan could be, but chooses not to be.

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

Europe is a continent of two halves!

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

Those that are competitive and those that aren’t.

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

Look at Government bond yields!

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

Despite the problems, markets will rally for a while.

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

Economics News: 1 Oct

October 1, 2010

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

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

Saving delinquent banks was said to be affordable.

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

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

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

Equilibrium will take longer and cost more.

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

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

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

An apology wouldn’t go amiss.

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

Europe’s politics, meanwhile, have become profoundly undemocratic

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

Are their principles important, or just their living standards?

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

Their economies are failing, some faster than others.

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

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

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

. . . not being roasted on the euro spit!

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

Asset valuations, moreover, look set to rise.

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

Ordinaries by quite a lot.

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

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See Roger on CNBC here. He discusses Greece's problem of being uncompetitive.