Protectionism ‘Real Threat’ of Recession
August 11, 2011
From CNBC Tuesday, 9th August 2011
As markets braced themselves for another turbulent day Tuesday, one economist warned that the real danger of a double-dip recession is protectionism.
The real threat is protectionism. This debt thing is unimportant,” Roger Nightingale, economist and strategist at RDN Associates, told CNBC Tuesday.
“Don’t worry about debt, worry about GDP, worry about the economy.
“The economy is looking at a serious recession, possibly a major 1930s-style depression, in the near future,” he added.
“If you look at the situation now, we don’t know what growth in the third or even second quarter is going to be.”
He predicted that third-quarter growth would be around zero or slightly negative in the developed world, and that China will suffer as consumers in the US and Europe cut down on their spending on Chinese-made consumer goods.
Markets are awaiting the Federal Open Market Committee’s regular meeting later today. Any remarks afterwards from Fed chairman Ben Bernanke will be followed closely.
This is very serious and it’s going to be awful. That’s why we sell equities and buy bonds,” said Nightingale.
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.
UK Strikes are Regrettable
June 30, 2011
CNBC Television
30 June 2011
UK Strikes are Regrettable
June 30, 2011
CNBC Television
30 June 2011
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!