There is no way out for Europe from CNBC 14 Nov

November 15, 2011

There is no solution to the current debt crisis plaguing the euro zone, and it’s an illusion to think that one lies on the horizon, an economist told CNBC Monday.

“There is no way out, I never thought there was, not for any of the countries that are in trouble. Once one of these countries goes into this sort of problem, there is no escape,” Roger Nightingale, economist at RDN Associates, said.

He dismissed the current, positive sentiment among investors regarding Italy as temporary and fleeting.

“In a few days time or a few weeks, things will go wrong again, yields will go up and the whole thing will skid into decline. It’s a foregone conclusion most of Europe is already in recession. It is relatively uncompetitive, and it is facing extra bond yields, extra interest rates which of course it can’t live with, and (it) will have slower rates of growth,” he added.

Nightingale was scathing about the possibility of the new interim heads of government - Mario Monti in Italy and Lucas Papademos in Greece - being able to deliver their countries out of the current crisis.

“These politicians can do nothing, there is no solution. I’m amazed that the media keeps on as if there’s an obvious solution and that these politicians know what it is,” he said.

He said the existing group of politicians and central bankers would be the last people in the universe to come up with the solution, if one indeed existed.

“It is somewhat ironic that the prime minister in Italy is Monti. He was a member of the European Commission. He was one of the architects of the system that caused all the problems. Why on earth would you put him in place? It would be a semi-miracle if the solution works” Nightingale said.

However, Alessandro Capuano, head of the Italian desk at IG Markets, disagreed with Nightingale, saying Italy had sound fundamentals underpinning its economy.

“If Italy can implement the austerity measures it needs to, we’ll still have a strong economy and in the medium term, we can balance the issue of the big debt and start to grow again,” Capuano said.

How fragile is China’s economy?

September 13, 2011

The dinosaur was probably the most “successful” creature ever to inhabit the world.  Its adaptation to the environment was so perfect that it was able, effortlessly, to dominate land and sea and sky.  For more than a hundred and fifty million years, it left no niche unoccupied; none in which a competitor species could prosper. 

But the perfection of its adaptation was at once a strength and a weakness.  So long as the environ­ment was constant, its position was unchallenged.  But, when things did change, it became vulnerable.  The mammal, though less well-adapted to the old environment, was less badly-adapted to the new one.  It survived; the dinosaur didn’t.

Does palaeontology have a message for economics?   Are countries that have been enriched by one environment likely to be impoverished by the change to another?   Possibly so.

Argentina has much in common with the dinosaur.  For a while, it was the most successful economy in the world.  Its per capita GDP in the early years of the twentieth century was significantly higher than that of any other country. 

Its wealth was agriculturally based.  The country could produce wheat and beef very efficiently:  unit costs were just 80% of America’s; 60 % of Eu­rope’s.  Unsurprisingly, those who own­ed the land became millionaires; those who worked it, well paid.

But Argentina’s success depended on its access to foreign markets.  In the nineteenth cen­­tury, largely perhaps because of Britain’s commitment to free trade, Argentina enjoyed that access.  And, early in the twentieth century, it continued to do so.

But the depression of the thirties changed everything.  Levels of demand collapsed; levels of supply didn’t.  Everywhere in the world, there was excess capacity.  Production had to be cut back, and workers laid off. 

In such circumstances, free trade came to be regarded as an expensive indulgence.  In the US Congress, in the early thirties, tempers ran high.  Argentine shipments of wheat and beef (high in quality and low in price) were said to be intensifying American farmers’ problems.  Protectionism was thought to be the answer.  There weren’t many who disagreed.

Europe, also vulnerable to Argentine competitiveness, came to the same conclusion.  France was particularly keen to protect its farmers.  It banned most imports.  And Britain, persuaded to re­serve its markets for Com­mon­wealth producers, banned some.

Argentina’s competitiveness in the thirties was not an advantage, but a disadvantage.  It was the rationalisation for discrimination.  Exports fell, incomes plung­ed, and unemployment soared.

The country did not react well to adversity.  In politics, stability gave way to instability.  The populist Peron came to power.  And his eccentric policies probably made a bad situation worse.

Per capita GDP suffered substantially:  the highest in the world in 1929; it wasn’t in the top twenty in 1939.  And, remarkably, it didn’t recover much when the outbreak of war lifted demand.  Nor did it do so when the post-war settlement brought a return to free trade.

So!   Might there be another dinosaur roaming the world today?   Which country is most vulner­able to changes in the economics environment?    

The obvious candidate is China.  It’s as devastatingly competitive in manufacturing now as Argentina was in agriculture then.  But competitiveness is nothing without free trade.

Will it persist?   Or will the US and EU and Japan be tempted by protectionist policies?   Nobody knows.  But the risks are not insignificant.

Governments always claim to be virtuous, but rarely are.  Their principal objective is to stay in power.  If that means bending the rules a little, most are willing to do so. 

In the thirties, it was depression that drove Governments to reject free trade.  It might be depression that does so again in the current decade.  The outlook for the world economy is currently very dreary.  The business cycle is about to peak and a recession is likely in 2012.

But it could get a good deal worse.  If consumers, disenchanted with debt, were to seek to pay it down, the economics weakness would persist.  If, concurrently, central bankers were to raise interest rates (as they did in 1929), the negative momentum would become protracted.

In such circumstances, populist politicians would probably be quick to climb on the protectionist bandwagon.  It’s be one thing to surrender a rising share of the home market to foreign producers when aggregate sales are growing; it’s be quite another when they’re falling.  Europe has always been predisposed to direct action on this front.  It wouldn’t need much of an excuse to prompt renewed measures.

If the wind did seem to be blowing in that direction, how would China respond?   Pedantically or pragmatically?   With confrontation or compromise?   With revolution or militarism?  

Nobody knows, of course.  But, in the past, China’s leaders have tended to play the “long game.”  They’ve recognised there’s no point in winning a battle only to lose the war.  If the good times are to be exploited, the bad ones have to be survived.

Accommodation might, therefore, become the order of the day:  a voluntary programme of export restraint in key areas (but largely unrestricted access in others); a huge reva­lu­ation of the yuan; and a massive increase in foreign aid.

Near term, China is certainly vulnerable.  Its economy could crash and its politics dissolve into anarchy.  But there’s a better than evens chance that it’ll ride the storm; tossed by the waves, but not sunken by them.   In such circumstances, the long-term future could still be Chi­na’s:  the wheel having turned full circle—its virtuosity two millennia ago, reborn in the decades ahead.

Global Recession Likely

September 6, 2011

Global recession in 2012 is “65 to 75 percent certain” and could deteriorate into a lengthy depression.

The peak rate of growth for the world’s economy occurred more than 12 months ago and “it carries on going down,” Nightingale said. “We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario. I would say the recession is 65 percent, 75 percent certain.”

The economist warned that should recession kick in, the global economy might be too weak to generate any GDP growth for years, or even decades.

“When the downturn ends, and when the upturn begins, will it be powerful enough to take us into some sort of growth again? Or are we going to find ourselves in a protracted depression-type scenario?” he wondered.

“Seven years would be a very short depression; depressions last a lot longer than that. I would be extremely pleased if it were to only last seven years. In Japan’s case, it lasted 20 years,” he said.

Nightingale added that the US economy has “some big pluses”, but was uncertain it was strong enough to steer the world out of a recession.

“America is very competitive at the moment, and she has a lot of advantages in finance, agriculture and many other areas. There are some big pluses in the American situation, and they are causing some growth. Whether they are going to be big enough to keep the thing going, and to bail out the rest of the world, is another issue,” he said.

But Nightingale said that Europe is in, “absolutely desperate trouble”. He warned that BRIC nations China and India might be heading in a “somewhat similar way”.

The strategist also raised concerns about the German ‘strong man of Europe’, saying its industrial production figures would plummet with Japan’s recovery from the tsunami.

“Germany is the major beneficiary of the Japanese tsunami, and as the Japanese come back on stream and production increases again, they will take their markets back from the Germans,” Nightingale said.

“Watch out very carefully for industrial production numbers falling quite significantly, perhaps from autumn of this year through to spring of next year,” he added.

 

Recession Likely

September 6, 2011

CNBC Television

30 August 2011

We have been seeing growth coming down for some time already. We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario.

Debt Threat Unimportant

August 11, 2011

CNBC Television

9th August 2011

“The real threat out there is protectionism.  This debt thing is pretty jolly unimportant, it was unimportant before, it’s unimportant now, it will be unimportant in the future.  Don’t worry about debt… worry about GDP, worry about the economy, that is the real problem,” Roger Nightingale said.

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.

Interview on CNBC

May 3, 2011

The world’s central banks are all considering whether it is time to end the ultra-loose monetary policies that have helped the global economy recover from the financial crisis but one strategist believes the tighter monetary policy can only lead to recession, and a severe recession at that.

“Throughout the current cycle, the world economy has progressed disappointingly. In its ‘weak’ phase, it underperform­ed. And in its ‘strong’ one, it’s done so as well. The outlook is not good. Activity is due to peak again this autumn. Thereafter, another recession may occur,” Roger Nightingale,  told CNBC on Tuesday.

“It’s possible it’ll be a severe one because large numbers of central banks will have raised interest rates into the slowdown,” he said.

“Many in the ‘emerging world’ began doing so in 2010. Some in the commodity-producing world followed suit a little later. And the ECB is currently itching to add its two-pence to the restrictive cocktail,” said Nightingale.

With personal debt so high and consumer confidence so weak, Nightingale believes higher rates now could lead to a recession, “possibly as bad as the last one”.

Denial Not a River in Africa

Dismissing the positive comments on the global economy from politicians and policymakers as wishful thinking, Nightingale believes they are simply trying to keep spirits up, knowing they have got it wrong and are unwilling to admit it.

“They know that credit shouldn’t have been allowed to grow so recklessly in the nineties. They know that delinquent banks shouldn’t have been bailed out when they implod­ed. And they know that cuts in public spending shouldn’t have been timed to coincide with the cyclical downturn,” said Nightingale.

“The developed countries that look least troubled now are those that in the past most closely followed these rules: Germany, Japan and the US,” he said.

“For a couple of years, equity markets have been strong. Easy money and strongly recovering corporate profits have been the driving forces. Neither will be so favorable in the future. The chances are, therefore, that indices will be drifting lower in the second half of 2011” said Nightingale.

 

Higher Rates Mean Severe Recession

May 3, 2011

CNBC Television

3 May 2011

“The outlook is not good. Activity is due to peak again this autumn. Thereafter, another recession may occur.”

Joseph knew that current trends wouldn’t last indefinitely

May 2, 2011

Joseph knew that current trends wouldn’t last indefinitely;
so he saved in the good years to survive in the bad ones.

If Brown or Darling had been in charge, the Egyptians would all have starved!

Cameron criticised Brown for doing little to tackle the economy’s problems.
Twelve months after the election, not much has changed in the British economy. There’s been a great deal of talk about remedying its shortcomings, but very little action; lots of announcements about public spending cuts, but barely any implementation of them. The “rebalancing” still lies ahead, therefore. So does the pain!

But his own track-record leaves a lot to be desired. A huge misjudgment!
The chronology could hardly be worse. Lower public spending and less expansive credit policies will coincide with the cyclical slowdown; each probably reinforcing the others. If so, the second half of this year is going to be bad; 2012 and 2013 worse.

The cuts, when they do eventually occur, . . .
Electorally, Cameron and Clegg have made things very difficult for themselves. The economics softness in the years ahead will be blamed on the fiscal austerity. The Coalition, unpopular for other reasons, will be charged with incompetence; the Opposition, phoenix-like, will arise anew!

. . . will make life politically difficult for the Coalition.
Much of the rest of the developed world is similarly troubled. Nearly everywhere, fiscal policies have been ill-conceived. Governments were reckless in their spending proposals in the “good” years, and they’ve been dilatory in amending them in the “bad” ones.

In Europe too, policy prescriptions have been ill-judged.
In many countries, things are getting worse rather than better. In parts of Europe, for instance, GDP is declining so quickly that taxation is falling faster than spending. Debt, as a result, is spiralling out of control. Will society implode? Will revolution ensue? Possibly.

Japan’s done better.
Japan has fared much better. It’s had to live with the problem (in a relatively mild form) for a couple of decades. And it’s coped rather well. Public spending hasn’t been cut particularly severely, nor rates of taxation raised particularly sharply. National Debt may have soared, but public finances have been largely untroubled. Inflation has stayed low, and unemployment tolerable.

America, best of all the oldies.
Arguably, it’s the US that’s done best. It entered the last recession in a very sorry state, but looks set to handle the next downturn in a much better condition. Its Government was fairly quick to cut public spending, but was quick also to cut taxation and boost credit. The result, initially, was deterioration; but, subsequently, amelioration!

It’s growth isn’t fast in absolute terms . . .
Recent figures for GDP, employment, exports and tax returns have been encouraging. Growth isn’t fast in absolute terms. But it’s good in comparison with the achievements of most of its competitors. Debt is still rising rapidly, but the hope is that it’ll moderate in the future—and do so more because of strength in taxes than weakness in expenditures.

. . . but is the best of a very indifferent bunch.
Unsurprisingly, security markets have held up fairly well in the last year or so. Monetary policies have been accommodative and corporate profits supportive. Are things about to change, though? Many developing countries have been raising interest rates for some time. Commodity producers likewise. Recently, the ECB has followed suit. Might the Fed, BOJ and BOE shortly do so as well?

Asset prices are vulnerable.
Possibly. In that event, stock price indices would be hard pressed. The conjunction of economics retrenchment (possibly recession) and reduced liquidity (possibly a dearth) might send valuations tumbling. Investors are ignoring the downside!

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