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.

Comments

One Response to “Economics Views”

  1. Cape on August 7th, 2011 7:52 am

    Roger, you are on holiday too? We need you man, get back here and start the Views flowing again.

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