Category Archives: economy

Darwinism and EU Economic Theory

The European Union is languishing in a perpetual economic autumn whilst bankers, with the connivance of politicians, apply rudimentary quack remedies such as Quantitative Easing in the vain hope that somehow they’ll skip a couple of seasons and as if by miracle, an economic  summer will materialise out of the murk.

Last year I wrote that modern global economics owes as much to Chaos Theory as it does to Keynes and has mutated beyond the competence of mere politicians. Economic evolution has overtaken the ability of those who traditionally administer the remedies when economic sickness hits.

The mechanisms which are needed to be put in place to even begin to have any effect on economies are so diverse and complex as to make present economic theory, especially that tainted by political dogma, almost redundant. The best that a politician and his advisers can do is to prod a small corner of the economic matrix in the hope that eventually a positive effect is somehow brought-about.

It is fair to say that politicians are no longer shapers of an economy but have now been diminished to mere observers.

The post-war years have seen such an incredible acceleration in all the factors which affect us – from technology to global financing, that it is only now becoming apparent that old solutions will NOT cure new problems. Sometime in the not-too-distant past, the “butterfly effect” became the wing-flap of the American Eagle – until the eagle itself became subject to bouts of economic coma .

Now it is probably the hot-breath of the Chinese dragon which will burn economies.

It has been universally established (even by China and Russia) that Capitalism is the way forward. However, it is no longer the gung-ho, asset-and-natural-resource-stripping capitalism of the past. A democratic and more ethically accountable flavour of capitalism is now needed.

For instance,  “business” ought to be an activity which strives to maximise market share and commercial efficiency, i.e  it should be inwardly-focused with profits as the essential by-product which is then used to  disseminate wealth.

What we currently have is a business model where the rationale  is primarily concerned with the maximisation of shareholder profits which concentrates wealth into  comparatively few hands. Hence the 21st century craze for moving money in order to generate money without the added old-fashioned complication of production. A virtual world generates virtual money with a virtual value.

“Ah!” you’re thinking. Socialist!! Nothing could be further from the truth.

Let’s keep it simple and look at the two extremes.

The Left (Socialism, Labour, U.S. Democrats, EU) dreams of public or community ownership and what you might call “forced distribution” which unfortunately needs to be underpinned by bureaucratic control and masses of public expenditure.

The Right (Conservatives, Republicans) dreams of privatisation. That has absolutely nothing to do with the individual. It is to do with corporate power.

So, at one extreme, we have unsustainable and forever expanding bureaucracy and on the other we have unacceptable (to the individual) accelerating corporate power.

Western political systems have now become nothing more than a tension between those two extremes. For instance, witness the “Punch and Judy” politics of America and the United Kingdom, as currently exemplified by the quality of the United Kingdom’s EU referendum debate and the  antagonistically offensive quality of the USA’s 2016 Presidential campaign.

Currently, there isn’t a better example of extreme corporate power than that exhibited by the banking system. A debt-fuelled crisis, which was accidentally engineered by the banking system ………aided and abetted by politicians  who continue to have absolutely NO idea how to deal with it, except by assuming that the problem has gone away.  They have adopted the “rabbit-staring -into-headlights” technique and have even been reduced to appealing to the bankers better nature, by inviting central banks into the economic driving seat!!

Paradoxically, the only people who will be able to clean-up the financial mess are financiers. Unfortunately, the type of financier that is needed is not the traditional self-serving, avaricious, unprincipled type which we have all come to love.

It is an as yet undiscovered species. The socially responsible financier who, with the assistance of the politician can generate new ideas which will, in turn, evolve into a NEW Capitalism which places the individual and not the corporation at its nucleus.

The financial crisis happened in spite of politics  and will eventually cure itself  in spite of politics. Chaos has its own mysterious mechanisms.

It is obvious though that the Darwinian aspects of world economics have outstripped the development of both our politicians and our economic theories.

…..and as China is demonstrating….it is the Survival of the Fittest…..and as the #EU is clearly demonstrating, the answers do not lie in organisational chaos, bureaucracy and huddling for political and economic warmth with people you wouldn’t normally invite into your home.

The Queen’s Speech

carriage

Sometimes, one cannot help but feel sorry for our Queen. She has to put on a heavy metal hat covered in bling, get togged up in fancy dress and then walk up some steps (what’s wrong with a Stannah Lift), sit on a very uncomfortable looking chair and then read a load of drivel written for her by a Downing Street focus group, handed to her by the Lord Chancellor, wearing a rather fetching off the shoulder black and gold number……(Michael Gove has never looked lovelier).

Prisons, driverless cars and a spaceport were read out in the manner of an undertaker reciting from the the Book of the Dead.

it was not QE2’s fault – after all she is constitutionally obliged to read whatever nonsense the government of the day puts in front of her.

A spaceport is probably very appropriate for this government as it is mostly populated by space cadets and robots….but as the economy appears to be sliding towards the U-bend, it would have been reassuring to hear at least something about the economy. Unfortunately, it appears that Chancellor Gideon has finally admitted that he is a mere observer rather than a shaper of events – just like the Bank of England.

There is very little doubt that QE2 would have been much happier with her feet up, watching Loose Women or Bargain Hunt, rather than have been embarrassed by the unmitigated bollocks masquerading as some sort of government ‘plan’ that she had to recite.

 

Lagarde, Brexit & Panic

gideonLagarde
Je T’aime …..moi non plus!

It was the IMF’s Christine Lagarde’s turn today.

She says that Brexit would have “assez mauvais to très , très mauvais” consequences but was not particularly specific.

“Pretty bad to very, very bad” is once again a judgement and not a prediction….and if she wants to see “very, very bad”, she should keep a closer eye on Greece’s problems!

Make no mistake, just like Mark Carney before her, prior to issuing her predictable statement, she would have been on the phone to Chancellor Gideon or David Cameron for approval of this latest piece of the well-choreographed scaremongering pro-EU referendum jigsaw. So WHO is next to have been recruited by the ‘IN’ camp?

One suspects that either this weekend or possibly on Monday, it will be the turn of the ECB’s Mario (il Papa) Draghi to instil a bit of ‘panico’ among us gullible Brits!

It started with Obama and they’re travelling East……..

 

Ill Gotten Gains, Dave?

Let’s not beat around the bush……London is the money-laundering capital of the world. In addition to that, it is Britain which has all those ex-colonial islands and protectorates scattered all over the world. They have become the tax-free-no-questions-asked home to all the world’s drug and crime proceeds as well as the repository for a sizeable chunk of the aid money the West continues to dish out to the Third World …..in the full knowledge that much of it will eventually land in a Swiss numbered account while it waits to be properly buried in some obscure Caribbean offshore trust.

London is the crossroads of such a high percentage of the ill-gotten gains of corrupt politicians and criminals, that if our government genuinely had the stomach to legislate in order to clean-up all this cash-trafficking, it would put such a large hole in our Gross Domestic Product that our economy would collapse.

Our manufacturing represents only 15% of our GDP. The rest relies far too heavily on virtual as well as  illegal money….but unfortunately, after so many years, the economy has become totally addicted to it. All that our senior politicians can offer is the traditional mixture of fine words, promises and inaction.

Cameron’s family is the personification of the moral-free, double-standard, innocence-feigning disgrace that Britain has become.

….and the consequences? The odds are that once again, nothing will change. The media will have lots of fun, the Panama Papers will be milked until we all become bored, the politicians will find something else to distract us with.

Anyone for blini?

Panama Papers

PutinCameron

The Panama Papers reminded me of something that I have been thinking about for many years. What makes senior, specifically LEADER politicians so rich? Very often, all they have had is a career in politics, which as we all know, does not pay very well and yet they suddenly appear at the top of the pile with both the A-list film-star lifestyle as well as the mega-bloated bank account plus the services of sleazy bankers and agents for offshore tax havens.

As far as I can see, the only advantage they have over normal mortals is not ability, diligence, a business sense or even an entrepreneurial spirit. The only thing they do have is proximity to tax payer cash. For instance, the salary of a KGB colonel is not all that great and neither is the salary of a President-Prime Minister-President measured in millions. How then is that individual managing to measure his wealth in BILLIONS? It’s a conundrum.

There has been some criticism of UK Prime Minister David Cameron because his father was in the offshore tax-optimisation game. Of course, it is manifestly unfair to blame DC because, even though his school fees may have been paid out of an offshore Trust Fund ‘run’ by Nominee Directors of a Brass Plaque ‘Company’ located somewhere in a Central American Banana Republic , he cannot be held responsible for his father’s actions – anymore than the son of a bank robber can be held responsible for being clothed and fed on the proceeds of a bank heist………although bank robbers are often stripped of assets and their offspring allowed to go hungry. But hey….!

BURIED Steel News.

cameron

This is what is happening while #Cameron dispenses platitudes:

German newspaper Rheinische Post has reported that Tata Steel is in advanced talks to buy a stake in Thyssenkrupp’s Steel Europe, sending shares in Thyssenkrupp 5.2 percent higher to the top of Germany’s DAX index …………Thyssenkrupp declined to comment, as did a European spokesman for Tata Steel.

Tata Steel wants to dump Port Talbot and get into bed with our German friends.

So much for DC’s negotiating skills.

http://uk.reuters.com/article/us-tata-steel-thyssenkrupp-idUKKCN0WY4E5

 

A Nice Surprise for Chancellor Gideon.

The UK economy grew 0.6% in the fourth quarter of 2015, higher than the previous estimate of 0.5%.

As a result, the economy grew by 2.3% for the whole of 2015, rather than 2.2% as previously thought, according to the Office for National Statistics (ONS).

Unsurprisingly, the figure came as a surprise to experts, who had forecast that it would remain unchanged.

One wonders whether Chancellor Gideon will blame the Global Economy for this morsel of good fortune.

David “Mr Meeting” Cameron and his Balls of Steel.

The outcome is already a certainty. Cameron, his Ministers will be engaging in Cameron’s favourite pastime – a MEETING. This one is to “discuss” the fate of the moribund British Steel Industry. In fact, the industry’s fate had already been decided even as far back as 1988 when the British public was encouraged to throw its cash away by investing in an industry which has been dying since the end of World War II. British Steel eventually morphed into Indian Steel, with its epicentre on the Sub-continent. Now there is hysterical talk of us being stitched-up by China with its “inferior steel” (commentators are confusing “inferior” with “competitively priced” – and there is absolutely no proof that Chinese steel is, in fact, of poor quality)…..and forget all romantic notions of the “proud steel worker” being “thrown on the scrap heap”. It’s all about market forces, dear boy. Tata!

WEALTH WARNING!

Chancellor #Gideon is considering scrapping tax relief on Pension Contributions but then allowing tax-free access to savings upon retirement. This should be resisted by everyone. Not only is it a bad idea, borne of Treasury short-termism and a Chancellor with a singular lack of imagination but it is also a con…..He obviously has not learned the Tax Credits lesson and is obviously in a hurry – before the UK economy ‘tanks’ again.

Export worries.

cameron and osborne

David Cameron and George Osborne both appear to think that meeting other politicians somehow creates international trade. The fact is that politicians have very little influence on commerce and none at all on corporate trade-related decision-making.

The three months to September 2015 saw British exporters experience the weakest growth in orders since the second quarter of 2009 when the country was in the grip of recession.

Admittedly, manufacturing represents only about 10% of GDP but nevertheless it is worrying to see the UK’s export drive going into reverse at exactly the time when the government is dispensing such positive economic mood-music.

Yes, we understand that the UK economy is in better shape than most other European countries but then again, in the land of the blind, the one-eyed man IS king!

Our overall economic growth has slowed to 0.5% per quarter but it is most likely that almost all of that growth is as a result of domestic demand – which is certainly not particularly encouraging within the global economy.

A Markit survey published yesterday shows that  in spite of the rhetoric, the construction sector also slowed in October.

The Nouveaux Pauvres.

Socialism was not invented by the working classes. Neither is it a natural state. It is a construct.

It was developed by intellectuals (who incidentally, now appear to be reclaiming it as their own) for the benefit of the poorer members of society. Originally, the theorists who invented it were concerned with social discrimination.

We no longer consider discrimination of the poor by the rich as prejudice but this type of intolerance is just as insidious as discrimination on the grounds of race, religion or disability.

Economic and Social Apartheid developed over hundreds of years and eventually caused societies to polarise. It is only in the last 100 years-or-so that the expansion of the middle-classes served to gradually dilute the Rich-Poor divide and give it “fuzzy edges”.

Some countries took a shortcut through the medium of revolution. The French did it in the 18th century and the Russians in the 20th.

Society will always “tend” towards a rich-poor split and without proper economic, organisational and social control, the trend accelerates.

Unfortunately (and to everyone’s surprise), in the United Kingdom,  there appears to have been a sudden resurgence!

Huge economic changes, which are being accelerated by destructive remedial measures are driving an accelerated programme of social engineering, creating a clearly-defined society of  “Haves” and “New Have-nots”……………. The Nouveaux Pauvres.

As the stock of “Have-nots” grows, so will discontent. That always leads to social unrest….with Greece being the latest and most visible.

Several governments, notably that of the UK and the Eurozone should think and remember that Government by Balance Sheet is NOT Government for the benefit of ALL of the People – otherwise the consequences will be catastrophic.


The Call of the Mild.

Political and Establishment figures keep “calling” for stuff! “Calling” appears to be used as an action substitute. They “call” for ceasefires, they “call” for international responses and so on. They even “called” on Russia to get out of Crimea!

Today, it’s the turn of the Archbishop of Canterbury! Today, he will CALL for more help to prevent British families from going hungry.

I call on them all to shut up and DO something positive.

We’re SO lucky !!

TONITE, while me and  ‘er indoors  go to the Bingo & then to the boozer, I’ll tell the kids to go to the railway to see if there’s any discarded coal. Then, as a special treat, they can stand outside the pub with crisps, lemonade and maybe share a Woodbine!

We’re celebrating because I heard on the bus that Chancellor wassisname says we’re going to get £15 grand and we can have it all at once! It’s all because of the dificit or something.  The bloke said it was a percentage (whatever THAT is ??!) of GHQ or it could have been ATM!

Then , because we’re quite strict  with the young ‘uns (ha! ha!) it’s in bed by midnight for them! After all, they’re only six and eight. We give them ten minutes start because once we get going, me and the missus can get quite noisy!  One day we hope they can have their own room and we’ve been looking at bed sheets in that Argos Book!

Busy day tomorrow – it’s the Friday family trip to Tesco for a bit of light shoplifting and then off  to the food bank.

#GodblessyerChancellor

Gideon’s Pensioner, Bingo & Beer Budget 2014

Above is the official “Budget Diagram” just issued by H.M.  Treasury. Presumably we have to provide the crayons.

The most remarkable thing about this Budget was how small the numbers were – and I remember when ONE BILLION was a lot of money!

The ubiquitous “Scheme” was in there. This one was £3 billion to boost exports. As UK exports only represent a tiny percentage of GDP and because it is only “a scheme”…no harm done there!

UK potholes cost motorists about £730 million per year and cover  a surface area of about 300 square miles. Therefore £200 million “made available for Local Authorities to bid for” seems a bit parsimonious…but nowhere near as mean as only £140 million for repairs and maintenance to flood defences. We not only need to patch up the damage but we need NEW flood defences. Presumably, the government’s resolve dissipated soon after the last COBRA meeting and when the last retina was reattached…..

The first “headline grabber” was scrapping VAT on air ambulance services and inshore rescue boats as well as scrapping Inheritance Tax for members of emergency services. As the current IHT threshold is £325,000 , THAT won’t bother too many firemen and ambulance drivers’ descendants and neither will the reform of air passenger duty!

We already knew about Ebbsfleet Garden City  and PLANS for 200,000 new homes. Handy for the Ebbsfleet International Railway Station so that presumably, once HS2 has been completed,those pesky immigrants can be shunted-off to the North without even having to stop-off for a Starbucks.

Company-bought homes, valued in excess of £500,000 will now enjoy Stamp Duty of 15%. No doubt that can be recouped at the “sell” end of the process, which makes this a purely cosmetic gesture by Chancellor Gideon and a transparent attempt to create some egalitarian credentials ready for May 2015.

The Libdem-inspired tax threshold increase to £10,500 is a nice touch  as is the freezing of Petrol Duty.

We have become used to the “let’s patronise the poor” section in which we have the cut in Bingo Tax, the freezing of whisky and cider duty and yet another PENNY cut in the price of a pint of beer!! ..which was negated (and worse) by the increase in cigarette prices. However, as all toffs know, the working classes smoke roll-ups so they will be unaffected!

By far the most important set of measures has all the electoral subtlety of a house brick through a crystal chandelier. It was for THE PENSIONERS (Gawd love ’em!).

When they retire, they will be able to get their liver-spotted hands on all of their Pension Pot and will NOT have to purchase an annuity. That sounds fantastic!! However, if a pensioner takes his pot of pension and blows it all on a Porsche 911….who is going to pick up the tab when there is no pension at the end of the money? Annuities are there for a reason.

In addition, when a pensioner cashes-in his or her pension, where can they keep the money? Why….a BANK, of course! Ideal! So it looks as if the banking system is due yet another windfall…but this one will be from the over 65s!

THAT is why there will be a PENSIONER BOND! The banks will be able to lock-in the money and pay 2.8% for a year’s use of the cash and only 4% for three years’. Win-Win!

The Premium Bond ceiling will be raised from £30,000 to £40,000! So, if you like your investment to REALLY be in the shape of  interest-free eroding capital, then cash in your pension and give it to National Savings which, incidentally, is State-owned. Another Win-Win!

We won’t bother with the announced increase in tax threshold of a few hundred pounds for “middle income” earners because it is worth PENNIES.

The superficial generosity to the pensioners WITHOUT actually giving them anything is there for a reason!

Guess which section of the population has the highest percentage of voters?

Cynical?

He started it!

Remember John Gummer in 1990 when he tried to feed his daughter a beefburger to try to convince the public re the safety of British beef? How about David Cameron doing something similar by being present (with the cameras) at the first FRACKING test drilling in Witney? We’d ALL love to be convinced!!

The Inequality and Iniquity of Growth.

This Christmas there will be millions of puzzled and sometimes hungry people staring at their televisions. Their hunger is easily explained – they are poor but what will confuse them will be the newsflashes showing smiling people shopping and talking about ‘Tablets’ at £500 each, Champagne, and a million other expensive items and yes…even Christmas turkeys!

Then they will see celebrity chefs cooking Brussels sprouts with pancetta, more champagne, the perennial debate about goose fat versus oil on roasties and how we’ll ALL be ‘over-indulging’ and falling asleep on the sofa! An alien world which some will have tasted but sadly, too many – especially children, will never inhabit.

This (to them) is a ‘make-believe’ world of plenty. They know it exists somewhere near them but it is like the parallel universe of science fiction….there but impossible to access.

They see shiny, smug politicians saying words about ‘the recession being over’….something the poor haven’t been too acutely aware of because what the politician calls ‘recession’ and ‘austerity’, they call “LIFE”.

‘The economy’ appears to be doing very well! …………..By the way….what is that?

The disparity between the most affluent Brits and the rest is hurting the economy. This chasm between rich and poor appears to have become an unacknowledged issue, primarily as the result of too many of the Cabinet belonging to ‘the Affs’. It is apparent that few understand that everyone (up to middle class) has seen their income stagnate, whilst wealthy households have really thrived.

Note: I propose to dispense with euphemisms such as “the well-off” and “society’s disadvantaged”. Let’s stick to rich and poor.

Bonuses, higher salaries, higher profits and exceptional stock market gains are flowing almost exclusively to the already-rich. Proportionately, however, the affluent household ‘spend’ represents much less of their money than that of  low and middle-income consumers.

One of the priorities of this government should be to engineer a much broader spending base – one which encompasses the poor……allowing them to actually participate in the economy.

Currently, there is a very distorted  picture of consumer spending because it is driven by the rich. The poor and the poorer are doing their best to keep up but inevitably need to borrow in order to spend – thus making themselves even poorer. Meanwhile, many rich are gaining profits from  bank or lending company shares which are fueled by the poors’ accelerating poverty….but the rich have something else which the poor have never had: OPTIONS or CHOICE!

One very profitable option this year has been the stock market – but once the markets have calmed down (which they will!) and gains are no longer eye-wateringly high, the affluent (As and Bs) will stop spending or at least, cut back dramatically.

THAT will have an immediate and devastating effect on this virtual economic recovery. SO, it is in the government’s interest to sustain the recovery illusion by keeping interest rates low and Quantitative Easing flowing to the banks so that , from an investment point of view, the equity markets (stocks and shares) remain the only game in town, so that the rich retain their mega spending power for as long as possible – at least until May 2015!

That is a very dangerous game for any government to play.

This is the phenomenon which has created and is sustaining the ever more bitter ‘CLASS’ debate and is in danger of feeding Populism and ultimately, major unrest.

Income Inequality and not airports or trains should be the government’s priority.

There is now little doubt that in spite of government policy, the United Kingdom’s economic growth is picking up….as it is everywhere else (Global Economy!)

NOW, while the mini-recovery lasts, would be a good time for the government to tackle the INEQUALITY OF GROWTH which is not an iniquity but the iniquity of modern times.

Chancellor Gideon – Fact or Fiction?

One of the greatest pleasures in life used to be for someone to read a great work of fiction to you out loud. You would sink back, close your eyes and let it wash over you ……and all that you had to do is to compose the pictures! Unfortunately, reading out-loud is a dying art and now a pleasure only enjoyed by young children and the infirm.

So imagine the frisson of  anticipation ahead of listening to Chancellor Gideon reading The Autumn Statement – (I have always been a great fan of realistic fiction!)  I closed my eyes, kicked back…but…the pictures just wouldn’t come. All I could visualise was a smug fat boy with a Caligula haircut and eyes with all the charm of two bullet holes,  reading with all the conviction of a posh grocer reading a Fortnum’s shopping list.

GDP..blah blah….Growth…blah blah….Deficit…blah….and so on.

Then, after the “de rigeur” and customary:  “Hard-working people” , “Mess they left behind” and “Tough decisions” plus the recently conceived “It will be less that it WOULD have been”….all from the Coalition Book of Platitudes, came something about the Normal Retirement Age (NRA) moving ever closer to life expectancy!

I felt myself slowly emerging from the Treasury-induced coma.

Whether the NRA is 69, 70 or 102, it will never affect those on a private pension or those with enough money to be able to make choices.

The ability to make choices is what individual freedom is all about. One of the overriding features of this government is that too many people perceive that their choices have been compromised. Control has been wrested away from those who are relying on the State to feed and provide their shelter in old age.

Meanwhile, the “well-off” will continue to be able to stop working whenever they want to.

It is only those clapped out individuals who see retirement age as The Finishing Line who will be affected. They are the ones who used to retire at 65 and die at 67.

Soon, they will retire at 70… not quite dead but maybe wishing they were, knowing that some of their better-off acquaintances will have already been retired for 20 years.

(BTW, unemployment at the time of the 2010 General Election was 2.47 million. It is STILL 2.47 million. ……NO statistical sleight-of-hand will ever change that fact!)

United Kingdom economic growth is weak and will remain weak. That means that unemployment will stay high.(It is the same today as it was before the 2010 General Election). No amount of statistical engineering, designed to tart up the government’s performance will alter that basic fact. The latest announcement by the Prime Minister of NOT maintaining the right of the 16-25 group to claim benefits means that young graduates will now be starting their adult lives in debt with little or no help from the State which put them in debt. Reminder to the Coalition government: AMBITION is driven by SELF-ESTEEM. What the government is doing is showing that all the talk of encouraging entrepreneurship in young people is nonsense because they are destroying the very mind-set  which they need to nurture.

Post-war German leaders have long argued German interests coincided with the greater European interests. Angela Merkel’s singular achievement, vindicated by her latest election victory, is to have kept Germany in the heart of Europe even as terrifying sovereign debt crises exposed the fissures and conflicting interests between states within the euro zone.

There is no doubt that the German economy benefited enormously from the euro-driven economic union. But when the crisis broke out, German taxpayers, understandably, did not want to bail out foreign governments and financial institutions caught in the upheaval. Merkel’s strategy was to protect the interests of her taxpayers while convincing them that the euro must be kept alive; otherwise the whole European project, the basis of the continent’s peace and prosperity, could collapse. To this end, she imposed much-criticised austerity on the hard-hit peripheral states in southern Europe while pledging support to them by committing the equivalent of Germany’s annual federal budget to various rescue funds.

Merkel preferred the step-by-step approach rather than any grand reform schemes. Euro-zone bonds to lower sovereign borrowing costs? No way. An even tighter banking union than currently planned? Forget it. She perceived that in all these big and ambitious schemes, Germany would be the one that ended up paying the most to support them, thereby putting German taxpayers on the hook.

Because of the delicate balancing act she had to pursue, she has been criticised, with reason, for dragging out the crisis rather than resolving it once and for all with a bold plan. But it’s highly doubtful that without her cautious approach, German citizens would have gone along in helping the crisis-hit states. And without German backing, no rescue plan could work. Now, finally, the euro-zone economies are showing signs of life. Most likely, they still have a long way to muddle through.

Merkel may not have saved Europe. But she deserves credit for preventing a euro-zone break-up. (SCMP)

HOUSING BENEFIT: So far ONE-THIRD of households affected by the Coalition Government’s reduced Housing Benefit are said to be in arrears with their rent. Eventually, Local Authorities will HAVE to step in – in spite of the fact that many have a non-eviction policy. Then, the Local Authority will have to ask the Government for more cash to balance its books and to provide alternative housing. The circle will have been squared. This government is ONLY looking at its own balance sheet when making what are life-changing decisions on behalf of the people affected. Luckily for them, the Socio-Economic groups which are suffering are unlikely to be Conservative voters so in effect, they don’t matter because they won’t affect the Tory vote. Meanwhile, the Tories’ self-styled social conscience, the Libdem Party, can do nothing but stand on the sidelines and wring its hands whilst dispensing warm words. Fiscal decisions are all well and good but what about the social aspects of say a small family which has had the same neighbours for years, gone t0 the same pub, the same playgroup and a which has a support structure within an area it knows, being booted out to be rehoused elsewhere?  Just so that an arrogant Works and Pensions Secretary can score a few Brownie Points and a desperate Chancellor can squirrel away a few more quid into empty Treasury coffers. The so-called Bedroom Tax will do for David Cameron what the Poll Tax did for Margaret Thatcher. A scrapping of this nonsense-attempt at Social Engineering would be one U-turn which would be very, very welcome.

LIBDEM conference: Yesterday, our professional (and perpetual) political bridesmaid, the Liberal Democratic Party rejected calls from party members to relax fiscal discipline and spend more. Instead, the Party pledged broad support for the government’s austerity-focussed economic strategy. The Party is assuming that by May 2015, those elusive green shoots will have finally emerged and that they will once again ride into Westminster hanging onto Chancellor Gideon’s (straw) coat tails……………(AUSTERITY? It’s a well-known fact that if you want to make a horse to run faster, you don’t encourage it through a combination of hay and ass-kicking….you pull back on the reins as hard as possible….don’t you?)

The last time we heard a UK  inflation figure, it was 2.8% per year. Today it has been announced that August inflation “fell” to 2.7%. However, the Consumer Price Index has INCREASED from 125.8 (July) to 126.4 (August). That is an increase of 0.6 in ONE MONTH, which when annualised, gives a price inflation figure of 5.7% per year!  This is a situation which we’ve been amused by for quite a long time now: Inflation falling while prices increase. The magic of numbers! Here is the latest ONS bulletin. The numbers are on page 4:       http://www.ons.gov.uk/ons/dcp171778_323760.pdf

UK Economy: I told you so!! But would you listen?!

“WTF?!”

A single  swallow doesn’t make a summer! Now is the time to calm down and  inject a bit of realism into the equation!

(Reuters) – British industrial output was flat in July and there was a marked deterioration in the trade balance, official data showed on Friday, taking some of the shine off recent strong economic data.

Output in the industrial sector – which makes up about one sixth of Britain’s economy – had been expected to edge up by 0.1 percent according to a Reuters poll.

The narrower category of manufacturing rose by 0.2 percent, just short of forecasts for a 0.3 percent rise, although June’s figure was revised up, the Office for National Statistics said.

Signs of a surprisingly strong recovery in Britain’s economy have come thick and fast in the past few months. Growth of 0.7 percent in the second quarter could be trumped by an even stronger reading in the third.

The Bank of England pledged last month to keep interest rates on hold until unemployment falls to 7 percent, something it does not envisage happening for another three years, but the strength of recent data has encouraged traders to bet rates might rise as soon as next year.

Separate figures showed Britain’s goods trade deficit widened to 9.85 billion pounds in July after narrowing sharply in June. Economists had forecast a gap of 8.153 billion pounds.

Including services, in which Britain traditionally runs a surplus, the trade deficit widened to 3.085 billion pounds. That was more than double its level in June and the worst reading since October 2012.

Exports to non-European Union countries plunged by nearly 16 percent, the biggest monthly fall since January 2009.

Monthly trade figures are volatile but July’s figures may dampen hopes that Britain’s economic recovery is broadening and moving onto a more sustainable footing.

(Reporting by Christina Fincher and William Schomberg)

#SYRIA:  Does the increasingly isolated Obama, with his barking-mad, cigar-chomping generals, not realise that an attack on Syria will cause  markets to tumble, wipe BILLIONS off share prices, accelerate the failure of the “propped-up-by-the Fed” American economy, damage the BRICS countries’ economies, raise oil prices, accelerate the collapse of the Eurozone and probably cause the deaths of thousands more innocent people? There are times when principle has to give way to pragmatism.  #Callmehysterical!

The Reports are telling us. The Statistics look good. The graphs appear to have turned a corner. Today’s good news is that August’s UK construction PMI has hit its highest level since September 2007! ALL fantastic news! However, we all look forward to the day when the  population-at-large is given the means to participate in the Coalition’s “New Atlantis” because, in spite of the statistics and flim-flam, too many Brits continue to struggle. The As and Bs “have it”! Great Britain is now a proper two-nation  state.

I’ve often written about the impact of Chaos Theory on modern economics. Usually, it is an unforeseen catastrophe or surprise which impacts negatively on the numbers. Today’s Vodaphone announcement is yet another unplanned-for event…but one which will have a very POSITIVE impact on the UK economy. The pound has already moved positively against the Dollar. Once the institutional shareholders get their hands on their dividends, they will use that cash to reinvest!! For once, it’s ALL good news! Chancellor Gideon can put down those Rosary beads!!

Chancellor Gideon says: “In the housing market  outside the centre of London … there is not some kind of housing boom or some dramatic increases in house prices.”……..The Royal Institution of Chartered Surveyors says: “We are experiencing the fastest growth in house prices since 2006, with homes in London increasing in value by more than 8 percent compared with a year ago.”……….You choose.

GOLD BULLION is being surreptitiously moved out of London. It is being pulled out of London’s Exchange Traded Funds. It then goes to Switzerland where it is melted down and converted into small bars and coins. In the last eight months, about 800 TONS (!) have headed East. First to Switzerland and then Asia. As I said the other day – NOW is a good time to think about buying! Mind you, many gold MINERS are also looking very interesting at the moment.

Economic “Growth”?

Politicians are currently gadding about, scattering statistics like confetti and pointing everyone at figures which are not preceded by a minus sign!

It’s time we paused, drew breath and took a closer look at the figures. Before we do, let’s have a go at putting some general perspective on the numbers. In Europe, it is being reported that the E17 (Eurozone) and the E27 (EU) have “grown” by 0.3% and that the figures signal a recovery!! A few points about what 0.3% actually means.

3% means THREE parts in a HUNDRED, so 0.3% means Three parts in a THOUSAND……but there’s more! The percentage change being quoted is the change in nothing more than the PREVIOUS QUARTER (see the top of the table above). That means that even if the figure was -100 and it changed to -99.7, THAT would be a POSITIVE growth of o.3%.

However, if you look at the PERCENTAGE CHANGE COMPARED TO THE SAME QUARTER LAST YEAR (the right-hand column above), the figures remain negative ( -o.7% and -o.2%).

France returned to growth in the second quarter of 2013, boosted by stronger domestic demand, after two straight quarters of decline. However, France’s reported increase in consumer spending is largely as a result of increases in energy prices. It was not an “en-masse” dash to the shops!

Meanwhile, Germany’s economy grew 0.7% in the second quarter (compared to the previous quarter), and when annualised, it was the fastest growth of all the world’s advanced economies.

The Netherlands, whose government has been a strong supporter of austerity, reported a a second-quarter contraction of 0.2%, confirming its fourth straight quarter of negative growth. It remains in recession.

Portugal reported a quarterly growth of 1.1%,  Spain -0.1% and Italy -0.2%.

Compared with the same quarter of 2012, the United Kingdom is showing a growth of 1.4%, the same as the United States.

These figures are NOT a sign of the end of the Financial Crisis. That crisis remains firmly in place, with many of the figures indicating little more than the continued recovery from a particularly bad  and exceptionally long winter……………… a weather-related catch-up.

The risks of a Greek Collapse

While Greece seems to be engrossed in its “success story,” the country’s partners appear more concerned with its “stability story,” in other words whether or not the country will stay on an even keel. There are several reasons why this is what they are most interested in.

Portugal is on the brink of a major political crisis; Italy seems unable to find solutions to its problems, and an out-of-control collapse in Greece would complicated this already tenuous situation. There are also broader geopolitical reasons. The Americans and the Europeans are becoming quite frightened by the chaos in the Middle East, especially at a time when Israel is particularly isolated. Their stance toward Turkey has also changed as they grow more and more concerned by the instability there and Prime Minister Recep Tayyip Erdogan’s arrogant behavior. A Greek “accident” is seen as very dangerous in such a climate. Of course there are those who expect Greece to fail, but argue that even if does, it will find a way to get back on its feet. The majority of international observers and officials, however, do not take the possibility of a Greek collapse so lightly.

So what is the problem? The Greek political system and public administration are nowhere near achieving reform targets, even when these are lowered. The international community is aware that it can exert pressure on Athens until the end of the year when Greece hobbles to a primary surplus. But, as that time approaches and it feels that it only has a few more months to exert influence, the more pressure it will apply. And this is where the danger lies: Greece’s creditors may cause the crash by applying too much pressure.

In the middle of it all are the markets, either in the form of large funds willing to invest in the new low-cost Greece or in the form of lenders who would like to see the Greek bond market operate again.

Prime Minister Antonis Samaras believes that maintaining calm is the top priority. He hopes that an excellent summer in terms of tourism, public works projects due to begin imminently, the TAP pipeline and some good investment news will create a positive climate come the fall.

At the same time he is equally aware that the people are about to be hit with a cascade of taxes and that if these are not collected the fiscal gap will be hard to manage. No one can predict whether there will be a sense of positive shock or an even greater feeling of misery in the fall.

All of this, meanwhile, is taking place ahead of an anticipated clash between Berlin, the International Monetary Fund and Brussels right after the German elections over whether Greece should receive a further debt writedown and a different policy mix.

©Alexis Papachelas : Ekathimerini.com

Brussels Pass-the-Parcel

There’s a European Summit in Brussels. This is when the EU leaders tell everyone what MUST be done.  It’s a sort of Brussels Pass-the-Parcel but the music is on a perpetual loop and never stops.

Here’s the AFP report on the game so far:

BRUSSELS — European leaders on Thursday tried to come up with new measures to tackle the crisis-hit continent’s soaring jobs crisis, but the head of the European Parliament warned that the plans were “a drop in the ocean”.

“We’re here to fight youth unemployment, a most urgent concern for our societies,” European president Herman Van Rompuy said as he opened the summit to which trade union leaders had also been invited to attend for the first time.

Shortly before the Brussels summit began, the European Union clinched a deal on its trillion-euro budget, which opens the prospect of the 27-nation bloc being able to quickly disburse billions of euros to help the one in four young Europeans currently out of a job.

“Today we have agreed on this budget that will make investment in Europe possible,” EU Commission president Jose Manuel Barroso said of the compromise that still needs to be approved by EU lawmakers.

“This is the growth fund for Europe,” Barroso said.

The talks were briefly held up by Britain’s demand for clarification on a rebate from farming funds — an issue already agreed in February, EU diplomats said, with one source saying the issue “has all been sorted.”

British Prime Minister David Cameron’s reiteration of the rebate issue ruffled a few feathers but most leaders said the fallout of Europe’s devastating economic crisis should take centre stage at the summit.

Prime Minister Antonis Samaras of Greece, which has the highest unemployment rates in Europe, said as he arrived for the summit that the key aim for the leaders was to come up with “drastic measures”.

“Unemployment in countries like mine has sky-rocketed,” Samaras told reporters.

The jobless rate for young Greeks is the worst in Europe — at 62.5 percent — followed by Spain at 56.4 percent, Portugal at 42.5 and Italy at 40.5.

Analysts warn the unemployment rate will continue to rise as the eurozone recession grinds on and that there is little the European Union itself can do, with much of the burden shouldered by national governments.

Among the measures being considered is a proposal to speed up disbursement from next year of a 6.0-billion euro ($7.8-billion) fund for young unemployed.

Other EU funds could also be tapped for such projects.

But European Parliament chief Martin Schulz played down the proposals being discussed.

“Releasing 6.0 billion euros to fund this new youth employment initiative is a start; but, as we are all only too well aware, that six billion is just a drop in the ocean,” Schulz said.

German Chancellor Angela Merkel, who faces elections in September in a country largely weary of funding struggling southern European states, warned that budget discipline remained key.

“The main thing here is about improving our competitiveness,” she said. “It’s not about creating more and more pots of money.”

Europe-wide, talk of a “lost generation” and concern over popular discontent are feeding support for extremist political parties and fuelling animosity towards EU institutions.

A Pew Research survey last month branded the European Union “The New Sick Man of Europe”, showing favourable opinion of the EU slumping from 60 percent last year to just 45 percent now.

“The European project now stands in disrepute across much of Europe,” it said.

But Eastern European states continue to bid to join the bloc of 500 million people and Croatia on Monday will become the 28th EU member in the first accession to the club since Bulgaria and Romania in 2007.

Serbia is expected to win endorsement at the EU summit on Friday to begin membership talks no later than January after having agreed to tough conditions to normalise ties with its former province Kosovo.

Albania is also hoping its membership bid will win fresh support from elections over the weekend that were won by the opposition in a landslide in a vote that was being closely watched by the European Union.

But officials privately worry about including more troubled economies into the European system and citizens from the core EU states are increasingly opposed to enlarging towards the poorer east.

Patient Banks.

Have you noticed that almost imperceptibly, the world has split along a 2008-weakened fault line. It is now a world of two halves. In 2008, governments rushed to the aid of their sick banks and five years later they’re still at their bedside. Like a bad parent who gives too much attention to one child, most of the politicians’ thoughts remain with the banks while we languish “Home Alone”.

The rest of us continue to feel like an organ donor being kept alive – but only just …….for no other reason than the benefit of the sick patient. At any moment there may be yet another call for a cash transplant but increasingly, it seems as if the patient’s needs are without end.

One thing we do know for sure is that the bond between politician and banker is now so profound that the politician would even sacrifice himself  before he would even consider turning off the life support.

Economic Recovery: Fact or Faith?

Whenever man has struggled with solutions to big problems, he has turned to his God, who has consistently said that if man endures deprivations and suffering on this Earth, he will get his just reward in Heaven.

The weird thing is that here we are in the Year 5PL (Post Lehman) and our politicians are behaving just like those prophets of old. WITHOUT any proof and relying solely on faith, they say “Endure the austerity and soon you will be transported to the economic heaven.” Meanwhile they (the prophets) search for “signs”. For instance, a small statistical variation in economic data is seized upon as a “sign” that all will soon be well. (Chancellor Osborne did it again yesterday when he announced “encouraging signs that the economy is healing” HERE In fact, he repeats the holy phrase.)

Is that true? Have we been offered any proof? Do we have to accept the words of the prophets without question or are we being heretical and behaving like Doubting Thomases?

If the New Religion is true, then we have been witnessing the longest Resurrection ever!

There is much talk of “positive sentiment” and Central Bankers accept gifts and many sacrifices from the people and prophets….but, is there really room for faith in economic thinking?

Currently, it would appear that it is all we have.

(As you listen to the Chancellor, notice the total lack of numbers and dates in the affirmation of his faith)

Reinhart-Rogoff : Serious Problems

Here’s an original article from economist Mike Konczal. It is somewhat technical but it describes a possible major error in the general view on Debt v GDP.

In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, “Growth in a Time of Debt.” Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan’s Path to Prosperity budget states their study “found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth.” The Washington Post editorial board takes it as an economic consensus view, stating that “debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.”

Is it conclusive? One response has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios. Josh Bivens and John Irons made this case at the Economic Policy Institute. But this assumes that the data is correct. From the beginning there have been complaints that Reinhart and Rogoff weren’t releasing the data for their results (e.g. Dean Baker). I knew of several people trying to replicate the results who were bumping into walls left and right – it couldn’t be done.

In a new paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff’s data was constructed.

They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result. Let’s investigate further:

Selective Exclusions. Reinhart-Rogoff use 1946-2009 as their period, with the main difference among countries being their starting year. In their data set, there are 110 years of data available for countries that have a debt/GDP over 90 percent, but they only use 96 of those years. The paper didn’t disclose which years they excluded or why.

Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That’s a big difference, especially considering how they weigh the countries.

Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that U.K. is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight.

In case that didn’t make sense let’s look at an example. U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for U.K.

Now maybe you don’t want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don’t discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.

Coding Error. As Herndon-Ash-Pollin puts it: “A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49…This spreadsheet error…is responsible for a -0.3 percentage-point error in RR’s published average real GDP growth in the highest public debt/GDP category.” Belgium, in particular, has 26 years with debt-to-GDP above 90 percent, with an average growth rate of 2.6 percent (though this is only counted as one total point due to the weighting above).

Being a bit of a doubting Thomas on this coding error, I wouldn’t believe unless I touched the digital Excel wound myself. One of the authors was able to show me that, and here it is. You can see the Excel blue-box for formulas missing some data:

This error is needed to get the results they published, and it would go a long way to explaining why it has been impossible for others to replicate these results. If this error turns out to be an actual mistake Reinhart-Rogoff made, well, all I can hope is that future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.

So what do Herndon-Ash-Pollin conclude? They find “the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim].” [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.

This is also good evidence for why you should release your data online, so it can be probably vetted. But beyond that, looking through the data and how much it can collapse because of this or that assumption, it becomes quite clear that there’s no magic number out there. The debt needs to be thought of as a response to the contigent circumstances we find ourselves in, with mass unemployment, a Federal Reserve desperately trying to gain traction at the zero lower bound, and a gap between what we could be producing and what we are. The past guides us, but so far it has failed to provide an emergency cliff. In fact, it tells us that a larger deficit right now would help us greatly.

[UPDATE: People are responding to the excel error, and that is important to document. But from a data point of view, the exclusion of the Post-World War II is particularly troublesome, as that is driving the negative results. This needs to be explained, as does the weighting, which compresses the long periods of average growth and high debt.]

Mike Konczal

The Eurocrisis isn’t just Financial.

The Eurozone crisis has managed to morph from a plain old currency crisis to a debt crisis, an economic crisis and now, a full-blown political crisis – although no-one seems to have noticed…….. and it’s not just the Eurozone:

In the United Kingdom, people are making increasingly indiscreet noises about the Prime Minister’s leadership capabilities and the Chancellor’s questionable competence, as the cold hand of political instability makes a (so far) half-hearted grab for No 10. Currently it looks as if there is already a swing to the right. Nigel Farage and UKIP no longer look like a bunch of extremist Right-wing loonies and as they gain respectability and seats, they will pose a genuine threat to the status quo.

Here’s a quick Grand Tour:

Greece’s political problems are well-documented and this is where the recent polarisation of national politics began with the success and increasing support of the right-wing Golden Dawn Party. Greece is on its knees.

In France  there’s the scandal of a Minister and his secret Swiss Bank account with the consequent  investigation of all Ministers – shades of the UK’s MP expenses outrage. President Hollande is keeping a very low profile because , let’s face it….he came to the table without any ideas. His mere presence has allowed Marine le Pen and her Right-wingers to re-emerge blinking into the sunlight, ready to build on her father’s legacy.

Germany’s Bundeskanzlerin Merkel is no longer odds-on to win her autumn election and so, in order to placate her detractors, countries such as Cyprus are being put through the debt-wringer and effectively having to bail themselves out! All in the cause of extra Brownie points for the Merkelator.

Many are anticipating more resignations from within the Cypriot government. Michalis Sarris, the Cypriot finance minister who negotiated Cyprus’s bailout agreement with international creditors has already gone.

Portugal’s Constitutional Court has kicked into touch some of the austerity measures imposed on the country by the Eurozone moneylenders. Now the politicians are wondering about how to plug the fiscal gap and Prime Minister Coelho may resign.

Belgium took 535 days to form a government after its last election and now has a 6-party Cabinet.

Italy is struggling to form a government and will most likely hold another election after President Napolitano comes to the end of his tenure as Head of State on May 15th. Goodness only knows what the reaction of not only the Eurozone but of the Markets would be  should Silvio Berlusconi (again) rise from the dead! Italy’s political scene has become so surreal that  ONE QUARTER of the vote in the recent election went to a protest movement headed-up by Beppe Grillo – a comedian!

Spain’s politicians, including its Prime Minister are mired in corruption scandals – and now there are anti-Royalist demonstrations as a direct result of the king’s daughter being implicated in a government financial rip-off. Mind you, affluent Spaniards have already pulled about $100 billion out of their Spanish bank accounts. They started running early. It’s only a matter of time before the Basques and Catalans start to make their separatist noises.

The difficulty is that one would normally expect the emergence of the Right to be counterbalanced by a strong showing from the political Left. But what Europe has are weak governments , compounded by even weaker oppositions. No European political party in government has over 50% of the vote……. and the less said about the European Union’s politicians, the better! They seem to have elevated ineptitude into an art form.

Currently, Britain’s Left is being driven by Ed Miliband and the New-Old-New-Who-Knows-Who-Cares Labour Party. They earn their salaries through the medium of being critical. They have shown themselves to be totally bereft of a coherent, cohesive strategy and will be directly responsible for the future success of UKIP.

Leadership (or a lack of it) within Germany’s Social Democratic Party will be the main factor which could give Merkel another few years of power. If that happens, the rest of the Eurozone should begin to consider itself as no more than a motley collection of Vassal States……there to do Germany’s bidding. Unless of course, Germany accepts George Soros’ advice and leaves the Euro.

France does not enjoy having a Socialist President and it is right to be sceptical. President Hollande is now totally ignored by Merkel and is doing what he does best – he keeps out of the way as Germany tightens its stranglehold.

Hollande could have been the Eurozone’s great hope but unfortunately is way out of his depth. France now has a negative bond rating  by all three rating services and has lost much of its international respect. It’s precarious banking system is just waiting (like many others) to go “pop!”

The Main Event this year will be Merkel’s re-election so the Eurozone states must not expect any major policy changes until then – and when she wins? More of the same – but without the compassion!

What of Europe’s medium to long-term future? Without some sort of political quantum leap, it will inevitably  descend into a collection of  Third World states but with running water, TV and a banking system totally independent of its economy and probably with its own flag.

Those Teflon Banks.

If the economy was purring along, companies were forming and not going bust, banks were lending properly (not statistically) and the government didn’t regard any GDP growth above zero as an achievement, most of us would not have any problem with those banker salaries and bonuses.

However, it is not sunny, manufacturing is down and we have a government which appears to be indulging in “Government by Accounting” as an increasingly panicked Chancellor justifies Welfare Butchery (in a newly-acquired Estuary English accent), to an assembled band of Morrison’s workers.

Meanwhile, senior bankers continue to pay themselves more than many of the largest and most successful corporations (the ones that make and export stuff).

As Chancellor Gideon might say these days: “Something ain’t right, innit?”

Since the largely-forgotten catastrophe of 2008, the incomes of many bank directors have increased by up to 60%!

So what else has happened to the banking industry since those far-off days? Oh yes………..they’ve had bailouts totaling BILLIONS, they have mis-sold an array of financial products and the Bank of England has handed-over BILLIONS  in Quantitative Easing for a variety of reasons, ranging from the perennial “rebuilding of Balance Sheets” to “Lending to Small and Medium businesses” to “Increased Mortgage Lending” ……(Notice I have placed those increasingly creative QE euphemisms in inverted commas!).

Admittedly, the effect of credit defaults on the banking system leading to those 2008 issues was devastating but the problems were self-inflicted and a direct result of the banks’ reckless leveraging with financial instruments, such as mortgage-backed securities and credit-default swaps.  Virtual money……just like Quantitative Easing.

The final straw should have been the LIBOR-fixing scandal…but the Quantitative Easing meant that the banks could easily afford the fines and legal settlements and still maintain those eye-watering incomes.

That wouldn’t be so scandalous if it were not for the fact that LIBOR is used to determine interest rates on student loans, mortgages and many other lending vehicles — and was “adjusted” in whatever direction benefited the banks’ bottom lines and the  resultant profits upon which many of those bonuses were based.

The question is – what do the banks have to do in order to stop being the government’s poster boys?

They certainly do not have the confidence of the ordinary investor, because , let’s face it, they don’t really NEED savers and depositors because they can either make cash by “adjusting” and then plundering the equities and bond markets or be given it by indulgent and clueless governments. Small businesses are wary of them because they (quite rightly) fear being ripped off.

There will be further scandals, more fraud, more “faux-outrage” from government Ministers but no meaningful legislation, culture change or reorganisation.

They are truly The Untouchables.

Equity Euphoria. Why?

The Markets are in the wrong place. For about two years, I have been suggesting that market sentiment bears absolutely no relation to what is really happening in the real economy.

Yesterday’s Markit manufacturing figures clearly show that Europe’s manufacturing sector is in a mess. At 12% , Eurozone unemployment is at an all time high with further austerity measures to follow.

In spite of all that and with increasing hand-wringing from economists, the markets are buoyant at near-record and record highs, the euro is showing only modest losses and for Bond investors it’s business as usual!

19 million Eurozone unemployed with Germany’s PMI at 49.0,  France’s at  a three-month low of 44.0 ….which is even below Italy’s at 44.5 and Spain’s at 44.2! But the Markets grind on regardless.

What is going on?

One thing that we can see from the manufacturing figures is that there is quite a marked divergence between Germany and the rest. Although manufacturing activity is shrinking to 5-6 month lows, the so-called “financial fragmentation” across the Eurozone has become increasingly obvious. The Eurozone does NOT have a uniform monetary policy which means that Italian and Spanish banks, for instance, pay much higher funding costs than Germany. That means that certain manufacturers are paying much more than German ones for their cash. On the face of it, that seems to be anti-competitive – but that unfortunately is just one of the many anomalies of the Eurozone – in fact of the entire European Union.

The poorer you are, the more you pay for your heating fuel.”

This is the backdrop to a largely blinkered , almost “autistic” equities market where we appear to have reached the stage of self-amplification where , because of the abysmally low bank rates, EQUITIES is the only game in town. Self-amplifying? Yes – as more and more investors pile into stocks – mainly because they don’t want to lose out on a rally which they themselves are now fuelling.

The only cautionary note should be for investors who are only just coming into the market to ask themselves “What is the real likelihood of me making a profit?”

When will it stop? History shows us that rallies such as the current one can stop pretty suddenly!

There will come a point at which traders, especially those with short positions will decide “Enough!” – in spite of the fact that currently, there is no obvious level at which to climb out and possibly take a loss.

Once one jumps, the rest are sure to follow.

We could go down so fast that you’ll get a nose bleed!

European stock markets slumped and the euro dropped under $1.28 for the first time in four months Wednesday owing to concerns over fallout from the Cyprus bailout and a disappointing bond sale in Italy, analysts said.

London’s FTSE 100 (FTSE: ^FTSE news) index of leading companies fell 0.69 percent to stand at 6,355.10 points in afternoon deals, as Frankfurt’s DAX 30 (Xetra: ^GDAXI – news) shed 1.44 percent to 7,766.11 points and in Paris the CAC 40 (Paris: ^FCHI – news) slumped 1.46 percent to 3,693.95 points.

Madrid tumbled 1.90 percent and Milan lost 1.59 percent. The Athens stock exchange, a low volume market, plunged 6.83 percent.

Italian borrowing rates fell slightly in a 10-year debt auction on Wednesday, but borrowing rates were higher for five-year debt and demand was weak amid concerns of political deadlock in the recession-hit country following inconclusive elections.

Stock indices were falling “as the ongoing issues in Cyprus continue to weigh on sentiment,” said Alpari trading group analyst Craig Erlam.

In foreign exchange deals, the euro dropped to $1.2751 — the lowest level since November (Xetra: A0Z24E – news) 21 — compared with $1.2861 late in New York on Tuesday.

Gold prices slipped to $1,591 an ounce from $1,598 Tuesday on the London Bullion Market.

The foreign exchange market “is concerned about medium-term contagion effects” of the Cyprus bailout, said Commerzbank (Xetra: 803200 – news) analyst Thu Lan Nguyen.

Troubled eurozone nation Cyprus on Wednesday scrambled to finalise capital controls to avert a run on banks, a day before they are due to reopen after a nearly two-week lockdown while the island secured a huge bailout.

Meanwhile there are fears that the controversial terms of the bailout could be mirrored in any future financial rescues of indebted eurozone members.

Nicosia early Monday agreed a last-minute deal with its international lenders that will see it receive a $13 billion rescue package to help pay its bills.

And while the decision to tax bank savings above 100,000 euros raised fears of a similar move in future rescues — reinforced by comments from the head of the Eurogroup of finance ministers — officials have since insisted that Cyprus is a special case.

“The negative sentiment is also enhanced by rumours that this format will be adopted as a template for any further bailout schemes,” said Currencies Direct trader Amir Khan.

“Although top officials deny any such move in the future, markets are still wary that this format will leave the banks with fewer deposits and in turn will allow them to lend less, shrinking growth.”

Elsewhere on Wednesday, in indebted eurozone member Italy there was weak demand at an auction of 5- and 10-year bonds, with bid-to-cover ratios of 1.2 and 1.3.

Ratios of above 2.0, where submitted bids are double those accepted, are considered strong.

The Italian treasury took in 3.91 billion euros at a rate of 3.65 percent, a five-month high.

However the yield on 10-year bonds dipped 4.66 percent, compared with 4.83 percent at the last similar auction on February 27, with three billion euros raised.

The European Commission meanwhile said its key business and consumer confidence index for the eurozone fell 1.1 points in March to 90 points, reflecting a downturn in the manufacturing and service sectors while consumer sentiment was steady overall.

Amid the gloom in Europe, US stocks moved lower Wednesday in early trading.

The Dow Jones Industrial Average gave up 0.33 percent, the broad-based S&P 500 sank 0.36 percent, while the tech-rich Nasdaq Composite Index dropped 0.26 percent.

The retreat followed strong gains Tuesday that resulted in a record high for the Dow and a near-all-time high to the S&P 500.

“Follow-through has been lacking this morning for reasons that are both convenient and clear,” Patrick O’Hare of Briefing.com wrote. “Headlines out of Europe are largely to blame.”

— Dow Jones Newswires contributed to this report —

Cyprus: A blessing in disguise?

The United States, the Eurozone and even our own administration here in the United Kingdom have shown us that we are fast approaching the time for a major rethink of the Democratic Model.

The Global Economy is becoming permanently unstable and  far too technical to be in the hands of gifted amateurs. Or, in the case of the United Kingdom:  the “Gentleman Politician”.

By all means, allow the Elected Ones to fanny about with the politics but sharp-end economics should now be in the hands of professionals who do not constantly keep one eye on the opinion polls and the other on their next election.

There have already been attempts to install  Technocrats, e.g. Italy and Greece  – but these were no more than economists dressed as politicians, who were then expected to play politics. Inevitably, they crashed and burned.

Cyprus is the latest to demonstrate that politics (of any flavour) coupled with an absolute inability to Manage at Macro level is slowly killing economies.

Some may repeat the “But it’s those bankers” mantra…. and to a certain extent they are correct. However, the Root Cause is the politicians’ inability and unwillingness to manage the banks, themselves and the economy.

Cyprus should not only be a very loud wake-up call but also a watershed moment for Western politics.

The Budget: George IV

Yesterday’s Budget had all the marketing qualities of a statement which is already anticipating the next General Election.

A few give-aways, something for the housebuyer, a little bit for the businessman and of course, a catch phrase!. In fact , the Chancellor provided three:

The Saatchiesque “Aspiration Nation” , another “nod” to Margaret Thatcher in the shape of the “Help to Buy” and  of course, “Britain is open for business!”

This was the Budget of a Chancellor who either does not fully appreciate the scale of the United Kingdom’s economic decline or who is trapped but feels that he ought to show willing and fiddle at the peripheries.

Bitter past experience has shown that direct Government interference  in the housing/mortgage market always ends in tears. On the face of it, it now looks as if the government may be encouraging house purchase by those who may not be able to afford it. That is what cause the 2008 banking meltdown. Luckily for the Chancellor, there is unlikely to be a big take-up of the “interest-free up to 20%” additional loans which the government is offering. Depending on how the £130 billion in “loan guarantees” is dispensed, it may just be more Quantitative Easing in disguise. Previous form suggests that once cash is handed to the banks by government, the difficulties arise when attempts are made to prise the money from their cold grasping hands. We’ll see!

Let us hope that on this occasion, some of the cash does end up in the hands of the house buyer rather than in Stocks or Commodity speculation by the banks.

The Chancellor’s “Rabbit out of the Hat” 20% Corporation Tax Rate already applies to businesses earning up to £300,000 with a marginal rate being paid by those earning up to £1,500,000. So, for several years, this will mean very little. Yesterday’s CT announcements were for big business only.

The Chancellor’s headline-writers  may have had a good day but in reality, commerce has NOT received the shot in the arm which it needs TODAY.

Finally, here’s a bit of lateral thinking: How about the government having the courage to make a massive investment in agriculture. The returns would be in the Exchequer’s coffers far sooner that having to wait for those “forced entrepreneurs” to contribute.

p.s.  Gideon……sack your voice coach.

Gideon’s Last Stand?

Regrettably, I will not have the pleasure of hearing the hubris-fired reading of the Budget Speech by Chancellor Gideon…..and I do SO enjoy hearing fiction read out-loud!

Today’s press is full of advice for him but unfortunately, he will not be able to stray far from the path he has already chosen for us.

The components of today’s Budget will be cosmetic low-cost “initiatives” , largely fueled by Public Service casualties. Gideon WILL brazen it out by feeding the nation carefully chosen and spun statistics but since he painted himself into Austerity Corner, he cannot move. He will try to give the impression that he is able to somehow warm the economy……. but this one-trick pony Chancellor will do it to the accompaniment of: “Throw another Public Servant on the fire!”

Yes, there may be talk of  “saving through efficiencies” but we know that efficiencies are a myth.

“Need a quick £2.5 billion? Sack a load of Public Servants and slash services.” The arithmetic is very simple!

By the way, don’t just blame Gideon. The Cabinet of “yes men” is fully supportive of his fiscal fumbling. They’re right behind him!

Incidentally, the OBR is  publishing  its latest growth and borrowing forecasts today. More ripping yarns!

The government’s  target for the elimination of the structural deficit, in keeping with tradition, continues to slip further and further into the future – where it will remain for many years to come. At the moment, the projected target is 2017/18.

We can already predict that the next estimate may be headed towards 2018/19……and so on.

p.s. I wonder if he’ll mention the banks?

“Geld ist ein Diener der Politik und des Landes. Wird aber die Politik und das Land zum Diener des Geldes, hat die Politik versagt.” Oliver Kemper

“Money is a servant to politicians and the country. But, if the politicians and the country become the servant of the money, the politicians have failed.”

Banking Reform – A Lack of Will?

When will groups such as  The Parliamentary Commission on Banking Standards wake up and realise that this government has NO real intention of reorganising the banks.

The talk has moved from buffers to firewalls, ring-fencing, electrified ringfencing , shocks and any number of excruciatingly bad metaphors.  As the Commission must have realised by now, the government is cherry-picking its recommendations in order to mollify the Banking Lobby  – which is probably the most influential in Westminster.

Today the Banking Reform Bill is being debated in the Commons, no doubt with the ultimate objective of yet more procrastination by a government which seems unable to either manage or take those “tough decisions” which it is always banging-on about. Unless , of course those tough decisions are aimed at and affect the less privileged.

Andrew Tyrie, the Chairman of the PCBS says “”The government rejected a number of important recommendations. We have concluded that the government’s arguments are insubstantial.”

He added: “There remains much more work to be done to improve the bill.”

JUST what the Chancellor and Prime Minister wanted to hear…..and just as long as the argument can continue until at least May 2015.

Banking reform is in the future – and that is exactly where the government intends to let it stay. Indefinitely.

Economic ruin: The Root (Banking) Cause.

Here is some simple high-level analysis which always helps to crystallise issues:

The 2008 mortgage-driven banking industry meltdown was directly responsible for the Eurozone debt crisis, political chaos, austerity, recession (in some cases – depression) and mass unemployment.

The  multi-billion bank and government bailout costs were borne by the surviving taxpayers through increased taxes, constantly inflating prices as well as erosion of their capital and their pensions.

The ROOT CAUSE of this catastrophe was the design and distribution by the banks of technically ill-conceived products which were designed for no other purpose than to optimise bank profits.

Mortgage Securitisation, Default Swaps, PPI, Interest Rate Swaps etc were (are) all bad products.

Against this background, the British Chancellor, on behalf of the Coalition Government wishes to do everything he can to preserve the banking status quo. An “industry” which continues to grind the economy into the ground whilst sucking more cash out of the economy than it is putting in.

Meanwhile, it declares largely illusory profits upon which to base eye-watering bonuses.

The argument that the financial services industry represents a substantial percentage of the United Kingdom’s Gross Domestic Product used to be a good one!

But if the economic collateral damage being inflicted by the banking industry continues, its contribution to GDP will soon tend towards 100% – once everything else disappears!

(On the subject of Root Causes – the NHS is failing to deliver because it is TOO BIG and over-populated by over-promoted Administrators rather than Managers!)

Forgotten Economic Lesson?

This was written in the 1960s:

“Yet it is also true that small events at times have large consequences, that there are such things as chain reactions and cumulative forces. It happens that a liquidity crisis in a unit fractional reserve banking system is precisely the kind of event that can trigger-and often has triggered-a chain reaction. And economic collapse often has the character of a cumulative process. Let it go beyond a certain point, and it will tend for a time to gain strength from its own development as its effects spread and return to intensify the process of collapse. Because no great strength would be required to hold back the rock that starts a landslide, it does not follow that the landslide will not be of major proportions. “

(Milton Friedman & Anna Schwartz)

A Monetary History of the United States, 1867-1960  P207 HERE

Greece: The Russians are coming.

There is  little doubt that the Eurozone has been so inward-looking over the last few years that the big-picture has eluded it.

Two years ago, I wrote about possible Chinese interest in Greece but it would seem that I was wrong. It is the Russians who appear to be first in the queue.

This is what the Vice President of the Russian Chamber has to say about the Eurocrisis: “This has not been a crisis of the Greek economy but of the European Union and Greece has been chosen as its victim”.

There is massive interest among Russian business people about opportunities in Greece.

In the next few weeks, Russia will be the first country in which Greece’s Investment Bill is presented – after it has been debated in the Greek Parliament.

Unlike Greece’s Euro “partners”, the Russians are showing great interest and confidence in the Greek economy and the Greek people.

The Greek Development Ministry’s General Secretary Tsokas and Simon Kedikoglou (a government spokesman) have already had discussions in Moscow about cooperation with Russian investors. Greek agriculture, tourism, alternative energy sources, pharmaceuticals and even holiday homes for the Russian middle classes were on the agenda.

Whereas Greece’s European ” friends’ ” main focus has been on maintaining the Greek banking system and the “intangibles”, it would seem that there are others who are willing to do what should have been done by Europe in the first place – they’re investing in the Greek economy.

The Nature of Modern Democracy

The concept of political power crystalised as a left/right divide is in its death throws.  UK Political Parties constantly confirm this by this by the politicians’ constant playground squabbles over the political “centre- ground”. Beppe Grillo’s recent success in the Italian elections also suggests that perhaps electors are looking for something concerned more with themselves rather than belonging to one of the “ancient” political herds.

In the UK, the search for a distinction between  the two main parties, has returned us to the Class War which we all thought had burned itself out in Margaret Thatcher’s and John Major’s day. It  certainly wasn’t apparent during Tony Blair’s tenure at No 10 Downing Street.

In the current “model”, it is usual for two major political herds to constantly battle whilst the smaller factions watch with puny impotence.

So where do the “little ones” glean their support? In the UK, smaller parties such as the Liberal Democrats can do no more than feed off the scraps of those at either end of the rapidly- shrinking political spectrum.

The Left- Right nonsense continues to have ‘legs’ primarily as a result of the efforts of the media ‘opinion-formers’ . Their prejudices and fixed views ensure that the Class War continues to simmer.

Instead of a contrast between the Working Classes and the Upper Classes, the modern argument is between the ‘haves’ and the ‘have nots’ – which nowadays is a subtly different distinction. Nowadays you cannot really spot a ‘have not’ because they may be wearing the uniform and  displaying the behaviour of a ‘have’.

We need to find a new set of values……and quickly!

Let’s forget flat-caps, whippets, bowler hats and black rolled umbrellas but at the same time, let’s accept that there are several components which we would ALL like to be included in our new thinking.

Our current political ‘values’ have their roots in past tradition.

We need political values to be in accordance with the one thing which tends to be the  MAJOR STUMBLING BLOCK in any political system.

HUMAN NATURE ……married to our basic instinct – not of  ‘Community’ but of selfishness. We do it for OURSELVES and NOT our neighbours. That’s why Communism failed.

These are three components which are non- negotiable:

1. FREEDOM  2.SOCIAL JUSTICE  3. EGALITARIANISM.

These basic components do NOT need to be overlaid by a PARTY POLITICAL system because these are ABSOLUTES.

In order to achieve the three components above we need to include an element of both Personal and National WEALTH CREATION.

We therefore also need to promote the dynamic of the BUSINESS ETHOS.

Unfortunately, the word ‘BUSINESS’ has become a bit of an emotive topic BECAUSE of the old (present)  LEFT- RIGHT Political system and  Feudal thinking.

Business is all about trade, vocation, craft, employment, industry, enterprise, commerce, bank transaction, negotiation, merchandising, making and most important of all – work and employment.

Unfortunately, because of the L-R divide, business has come to mean bosses, workers, management, greed, oppression and profit.

We need to generate a pretty major adjustment in perception and from that, a new ideology.

Capitalism, Communism, Socialism, Democracy etc are not concepts which have been around for ever. However, they do appear to be running out of steam.

Currently we assume that these labels are the only ones which work or have worked. Unfortunately, human experience tells us otherwise.

Imagine existing Political Parties in say 100 years time. They will still be confronting each other in that theatrical way we have come to love. Left and Right hacks will still be stoking the fires of discontent because that’s their job. The Left- wingers will continue to highlight the Politics of envy whilst the Right will continue to be disrespectful to everyone.

Here in the UK, we have a change of administration every 5 years but all that happens is that The Elected Ones merely continue the ‘blame game’ and the playground bickering.

There are visionless “little” people who ALL suffer from politically-induced Tunnel-Myopia. In the grand scheme of things, they are insignificant.

Meanwhile, whilst the puny jousts and rhetoric continue, the interests of the ordinary voter are sacrificed on the twin altars of blind political and corporate interest.

As the politicians become more and more irrelevant to the irreversible arrow of ‘progress’, democracy is being diminished daily.

Unfortunately the politicians’ self- serving vanity and an over- developed sense of belonging (to a Party) continues to cloud their already flaky judgement.

New thinking is needed. It needs a new METHODOLOGY – one based on expertise plus knowledge and NOT in the combative ‘here today- gone tomorrow’ nonsense of partisan politics.

Rhetoric must give way to implementation of scientifically and rationally-derived policies which are untainted by political dogma.

It is most definitely NOT about economics. Economics, as the main divider of political thinking does not, for instance, have anything to say about human nature or morality or human values – which are the factors which destroy every Economic Theory.

The mathematical formulae and conjectures of the economists are no longer enough.

We do need Capitalism. We need a form of Welfare Capitalism but we need it with a healthy dose of Sociology and Anthropology but with its roots embedded firmly in pragmatism rather than the economics-derived abstract thought and conjecture.

The New Thinking needs to start now- especially since five years ago, when capitalism was effectively destroyed by the Rentier Capitalism Kleptocracy of the United States – which is now becoming increasingly apparent in Europe. Spain is the last economy to fall to Rentier Capitalism.

What we considered to be a benign form of Capitalism has been infected by its malign cousin and currently no-one has a cure. The cause remains while politicians and bankers continue to attempt to cure some of the symptoms with what appears to be the wrong medicine in ever-increasing volumes. For example, the latest craze of Quantitative Earning.

Quack economic cures will soon have to give way to nothing less than major surgery, followed by a totally uncompromising cure.

An example of the “compromises” which highlight the schizophrenia of the current Party-based political and economic system is clearly demonstrated by the double-think of Thatcherism.

The Thatcher years are remembered for two apparently opposing concepts:   The dismantling of many State controls running alongside increased State control.

Nationalised organisations were privatised, thus removing them from State control. State aid was removed from dying industries. Prices and incomes as well as Financial Services Regulation were no longer State controlled and many State organisations were encouraged (forced) to ‘contract out’ many of their functions to the Private Sector, (NHS, Education etc).

At the same time State control was tightened in other areas. Education and Local Government became more centrally controlled, as did the Police. State power was used to control the Unions and State power was used to prevent price- fixing in private industry and commerce.

This sort of Political Schizophrenia continues to this day and clearly demonstrates a lack of ideological coherence.

In fact, it also highlights the traditional view of the two main parties. The intellectual social dogmatism of Labour versus the Conservative avoidance of any real systematic political theory.

Hence the Conservatives’ preference of viewing themselves as the ‘party of common sense’- a phrase one often hears from its leadership.

‘Freedom’ is another often-quoted concept. But is it a REAL concept or maybe just empty rhetoric?

America is (some may argue) the MOST Capitalistic country in the world. It has awarded itself the sobriquet ‘The land of the free’. In fact, there is little understanding of the word.

People do NOT feel ‘free’ because they are told that they are free.

Therefore any new political theory need to examine questions of Social Ethics as well as peoples’ psychological needs.

TRUE democracy HAS to be DIRECT. Modern democracy has dissipated the individuals voice in favour of its citizens handing their voice to someone they may or may NOT have elected.

The Eurozone Crisis has clearly demonstrated that you can have too much Democracy – especially if it generates intransigence because Left and Right views plus upcoming Elections cloud economic judgment.

The changes we need are NOT economic – they need to be a root and branch rethink of the Nature of Democracy and what really underpins it.

Chancellor Gideon’s Speech.

Still wondering why Chancellor Gideon was SO keen on maintaining the United Kingdom’s AAA-rating? Scroll down this speech, made just before the last General Election. I have highlighted the important bit in red. If you then care to read the next few paragraphs, you will see how the Chancellor’s original intentions and promises are developing.


George Osborne: Mais Lecture – A New Economic Model

Rt Hon George Osborne, Wednesday, February 24 2010

George Osborne

Thank you for inviting me to give this annual Mais lecture. Few Mais lectures have been given at a time when the challenges facing British economic policy makers were so difficult and complex as they are today.

Britain has emerged – just – from the longest and deepest recession in living memory, but growth is proving painfully slow to return.

The overhang of private debt in our banking system and our households weighs heavy on future prosperity.

And the public finances are the worst they have ever been in peacetime, with the largest budget deficit in the developed world.

This lecture is about these present problems and the urgent need to take us into a brighter future.  But consider this one stark fact about our recent past.

We are coming to the end of the first full Parliament since the Second World War when national income per person has actually declined.

Even through the dark days of the 1970s and the recessions of the early 1980s and 1990s, every full Parliament saw our GDP per capita grow.

But not this Parliament.

When people ask the famous question – “are you better off than you were five years ago?” – this will be the first election in modern British history when the answer from the government must be ‘no’.

My argument today is simple.

Britain has been failed by the economic policy framework of the last decade.

It promised stability, prudence and an end to the cycle – it delivered instability, imprudence and the biggest boom followed by the deepest bust.

We need to head in a completely new direction.

We have to move away from an economic model that was based on unsustainable private and public debt.

And we have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports.

This will require new policies and new institutions.

I want to talk about three crucial components of this new model.

First, a new approach to macroeconomic and financial policy, where we seek to contain credit cycles as well as target price stability.

Second, a new fiscal policy framework, with an independent Office for Budget Responsibility to ensure that public debt is sustainable.

And third, a supply side revolution that releases the pent up enterprise and wealth creation of our country, encourages a nation of savers, and addresses the long term structural weaknesses that no government has ever properly tackled – like poor education and a welfare system that traps people in workless poverty.

In order to ensure that a Conservative Government is accountable, I have set out eight clear benchmarks for economic policy against which I expect to be judged, together with the concrete measures we will take to achieve them.

If they are met over a Parliament then we will have begun to build a new British economic model.

I also want to explain today why starting to build this new economic model is not something we can put off until next year.

We have to get on with it.

There is no choice between going for growth today and dealing with our debts tomorrow.

Indeed we will not have any meaningful growth unless we show we can deal with our debts.

For it is the lack of a credible plan to deal with the deficit that is already pushing up market interest rates, undermining the monetary stimulus that

is supporting the economy, and sapping the confidence of investors and consumers.

It is the lack of a credible plan that has the credit rating agencies threatening to downgrade us unless action is taken urgently.

This is the reality of the situation we are facing.

Those who say we should simply ignore the markets are siren voices, luring us onto the rocks.

For an economic policy maker to rail against the unpredictable nature of financial markets is like a farmer complaining about the weather.

A loss of market confidence could force dramatic tax rises and spending cuts that were indeed savage and swingeing.

That would represent a loss of economic sovereignty.

And those cuts would be far larger than the actions that are needed now in order to retain our economic freedom in the first place.

Far better to be prepared and protect ourselves against the storm.

THE DANGERS OF DEBT

Before I set out the shape of this new economic model, let us first understand the nature of that storm.

No one doubts that there were massive failures of financial regulation over the last decade.

No one seriously defends the fiscal rules, once spelt out in a Mais Lecture like this, which proved unable to prevent the Government running a budget deficit at the peak of the boom.

But we will not draw all the right lessons for the future unless we understand the deep macroeconomic roots of the crisis.

Much has already been written about what went wrong.  Much more is yet to be written.

Perhaps the most significant contribution to our understanding of the origins of the crisis has been made by Professor Ken Rogoff, former Chief Economist at the IMF, and his co-author Carmen Reinhart.

In a series of papers and now a book, they have demonstrated in exhaustive historical and statistical detail that while it always seems in the heat of the crisis that ‘this time is different’, the truth is that it almost never is.

As Rogoff and Reinhart demonstrate convincingly, all financial crises ultimately have their origins in one thing – rapid and unsustainable increases in debt.

As they write, “if there is one common theme… it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks that it seems during a boom.”

So while the specific financial innovations and failures of regulation that contributed to the credit crunch were new, the underlying macroeconomic warning signs were depressingly familiar from many dozens of crises in the past.

In this context, all the signals were flashing red for the UK economy: a rapid increase in household and bank balance sheets, soaring asset prices, a persistent current account deficit, and a structural budget deficit even at the peak of the boom.

Our banks became more leveraged than American banks, and our households became more indebted than any other major economy in history.

And in the aftermath of the crisis our public debt has risen more rapidly than any other major economy.

So while private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one.

As Ken Rogoff himself puts it, “there’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt. It’s very likely that will trigger the next crisis as governments have been stretched so wide.”

The latest research suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant.

If off-balance sheet liabilities such as public sector pensions are included we are already well beyond that.

And even on official internationally comparable measures of debt, we are forecast to break through 90% of GDP in just two years time.

Indeed, baseline projections produced this month from the Bank for International Settlements show the scale of the adjustment that is needed to avoid that risk.

Once the costs of an ageing population are accounted for, they calculate that UK debt will rise to 200% of GDP in just 10 years without significant adjustments – that’s higher than any other country except Japan.

The interest payments on that debt would rise above 10% of GDP within ten years and to almost 30% in 30 years – the highest of all the countries they analyse including Greece and Ireland.

The BIS were amongst the few organizations who can credibly claim to have warned about the risks of a global financial crisis, and now they are highlighting the next source of risk.

As they argue, “persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth potential.”

In the short term, governments should not be “lulled into complacency by the ease with which they have financed their deficits so far” – especially those with relatively weak fiscal frameworks and a high degree of dependence on foreign investors.

For an economy like the UK with such high levels of private debt, increases in market interest rates would be particularly devastating to the prospects of a private sector recovery.

We have been warned.

MONETARY AND FINANCIAL POLICY

The long term implications for our economic policy framework of the crucial role of rapid debt accumulation in causing economic instability are profound.

It forces a fundamental reassessment of the way we conduct both monetary and fiscal policy.

Let me begin with monetary policy.

In his famous Mais Lecture of 1984, Nigel Lawson argued that monetary policy should be the main tool of short term macroeconomic management while fiscal policy should be set for the medium term.

Over time that became the consensus, and it was later explicitly endorsed by the Labour Government.

The monetary policy framework developed too, from the adoption of inflation targeting by the Conservatives in 1992 to the granting of independence to the Bank of England five years later.

Nigel’s original insight remains valid today.

The next Conservative Government will keep the inflation targeting framework because the benefits of anchoring inflation expectations remain substantial.

I have said before that in office we will review, in cooperation with the independent Bank of England, what modifications are appropriate to ensure that housing costs are once again properly reflected in the target – this process is already underway at a European level but there may be a case for accelerating it.

But given the fragility and uncertainty in financial markets, let me make it absolutely clear that we have no plans to change the CPI inflation target, and we will maintain the current arrangements and protocols for making decisions around quantitative easing.

I don’t want there to be the slightest suspicion that the next Conservative Government might try to inflate its way out of the previous Government’s problems.

But it is now clear to everyone that narrow inflation targeting is not in itself sufficient for macroeconomic stability.

Given what we now know about the way that unsustainable increases in debt can cause devastating financial crises, we must be as concerned about credit cycles as we have been about business cycles.

Alan Greenspan and others made the case for ignoring credit bubbles and then ‘mopping up’ when they burst.

But even Alan now concedes that this approach has been shown to have unacceptable costs.

So as economists like Robert Shiller and others have argued, we need a more sophisticated understanding of how financial markets actually work, including the psychology that drives them away from stable equilibria.

And we need an approach that actively seeks to identify emerging imbalances and takes action to reduce them.

The question is what tools are needed to do that.

In the UK, inflation targeting succeeded in anchoring inflation expectations, but the very design of the policy framework meant that responding to an explosion in balance sheets, asset prices and macroeconomic imbalances was impossible.

Because the tools needed to deal with these imbalances had been taken away from it, the Bank of England became excessively focused on controlling consumer price inflation to the exclusion of other variables, as the Bank itself has acknowledged.

And the Financial Services Authority became a narrow financial regulator almost entirely focused on rules-based regulation.

They had neither the capacity nor the inclination to stand back and make difficult judgments about the macro context and the growth of systemic risks.

To be fair they too have also be commendably candid about those failures.

So, while much has been made of how the tripartite system led to a fatal lack of leadership when the crisis broke, the much greater failure was in the years leading up to the crisis as the imbalances built up.

Crucially, this failure was hardwired into the institutional design of the framework, and no amount of tinkering with new committees and new statutory obligations will fix it.

Indeed we are in danger of making similar mistakes in the aftermath of the crisis, with too little consideration of the impact of higher capital and liquidity requirements on overall financial conditions and the pace of recovery.

And despite everything we know about the aftermath of banking crises, there is still no single institution that is responsible for ensuring that the monetary transmission mechanism is functioning as it should, so that policy rates are properly passed through to businesses and consumers.

So we need a wholly new framework.

Some have questioned our decision to put the Bank of England in charge of macro and micro-prudential supervision.

I see it as absolutely fundamental to a new economic framework for monitoring and controlling the growth of private debt in our economy.

Only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments that are required now and in the future.

Of course they must operate with a mandate from, and accountability to, the elected Government, similar to the existing inflation targeting system.

But this new role will inevitably require a degree of judgment and discretion that goes beyond the narrow rules-based system that failed either to spot or prevent the crisis.

And, because central banks are the lender of last resort, the experience of the crisis has also shown that they need to be intimately familiar with every aspect of the institutions that they may have to support.

So they must also be responsible for day-to-day micro-prudential regulation as well.

That case is particularly strong where the banking system is highly concentrated as it is in the UK, where the boundary between micro and macro-prudential regulation is not easy to define.

For example, who could deny that the micro-prudential regulation of a large international bank like Barclays, RBS or HSBC has in and of itself significant macro-prudential implications for the UK economy?

Since we’ve been making this argument about a new model of financial regulation, the intellectual tide has turned decisively in our favour.

The arguments we have made are the same as those that lie behind the direction of reform at the Federal Reserve and in the Bundesbank, and they are argument now publicly supported by the likes of Jacques de Larosiere, Ben Bernanke, and Stanley Fischer – the eminent monetary economist and Governor of the Central Bank of Israel.

The precise tools of macro-prudential regulation must now be the subject of intensive debate, international coordination, and ultimately experimentation.

They may include variable risk weightings for different asset classes, adjustable capital and liquidity requirements, and even more direct interventions in lending behavior, but we should rule nothing out at this stage.

We should also recognize that no system of supervision and regulation will ever eliminate failures.

That’s why we must keep up the pressure for reform so that our banking system itself is more robust to failure and the damage that failure inflicts on the broader economy is minimised.

It would be a tragedy if we ended up with a banking system that is even more concentrated, riskier and more prone to moral hazard than the one we had before the crisis.

More and better quality capital, credible resolution procedures, living wills and more competition are all important parts of the solution.

But I also believe we should pursue international agreement for a levy on the banking system, similar to the levy on wholesale funding proposed by President Obama or the levy already implemented in Sweden, as well as for structural reforms to prevent retail banks with implicit taxpayer guarantees from engaging in the riskiest activities such as large scale proprietary trading.

These would not have prevented the crisis on their own, and they cannot be a substitute for a better underlying macroeconomic and regulatory policy framework.

But together they would help to create a system that is more robust to failure.

FISCAL POLICY

These are the new tools and institutions that we need to control the growth of private debt in the future.

They are a key component of moving to that new model of economic growth.

But the bigger risk to our economy now stems from an explosion in public debt.

To entrench economic stability for the long term, we need fundamental reform of our fiscal policy framework.

There is wide agreement among economists on the need for more independent scrutiny of fiscal policy to replace the discredited fiscal rules.

Conservatives first proposed that independent scrutiny more than five years ago.  We have now set out in detail how that scrutiny will be performed by an Office for Budget Responsibility.

Let me say a little bit more about this Office, because I don’t think people have fully appreciated what a radical departure this represents from the way Chancellors have put together Budgets in the past.

Everyone can see how the fiscal rules created in 1997 failed catastrophically.

They did nothing to prevent the Government from running a current budget deficit at the peak of the boom.

To coin a phrase, we didn’t fix the roof when the sun was shining.

The flaws in the fiscal rules are now well known – they were backwards looking, so that past surpluses could be used to justify present deficits, and they were adjudicated by the Treasury with no independent oversight, undermining their credibility.

But there is also an emerging recognition in the academic literature that any system of rules is likely to be unsatisfactory – either so general as to be ineffective, or so complex as to be inflexible and impossible to enforce.

Instead there is growing support for the concept of fiscal councils that can bring independent and forward-looking scrutiny to bear on governments.

Institutions of this kind now exist in Sweden, Denmark and the Netherlands.

I believe that just as we need to move away from narrowly defined rules towards greater judgment in financial regulation, the same is true in fiscal policy.

The benefits of fiscal councils for sustainable fiscal policy could be as profound as those of independent central banks for monetary policy.

Evidence suggests that many of the same time-consistency problems that lead to inflation bias when politicians are in direct control of monetary policy can lead to deficit bias in fiscal policy.

Of course the analogy is not exact – unelected bodies should not be given independent executive power over the levers of fiscal policy because of the fundamentally political distributive consequences of decisions over spending and tax.

But the power of a fiscal council to hold politicians to account for the fiscal implications of their tax and spending plans should not be underestimated.

These powerful arguments, and the steady erosion of public trust in official forecasts, lie behind our proposals for an independent Office for Budget Responsibility.

The OBR will be made up of a three person committee, accountable to Parliament, and a small secretariat of economists and public finance experts.

It will be responsible for publishing independent fiscal forecasts at least twice a year around the time of the Budget and PBR, based on existing government policy at the time.

And the committee will publish a recommendation for the amount of net fiscal tightening or loosening it judges necessary for the Treasury to have a better than 50% chance of achieving a forward looking mandate set by the Chancellor.

If the Chancellor choses not to abide by that recommendation he or she will have to explain their reasoning to Parliament, but it would be a brave Chancellor who chose to do so.

At least once a year, the OBR will also publish a comprehensive assessment of the true long term sustainability of the public finances, including off balance sheet liabilities such as public sector pensions, PFI and the likely costs of an ageing population.

For the first time we will have a transparent national balance sheet.

The Office for Budget Responsibility will be up and running on a temporary basis for the first Budget of a Conservative Government, much as the Monetary Policy Committee initially functioned for a year without underpinning legislation.

Sir Alan Budd has agreed to chair the Office for Budget Responsibility during this period.  No one can doubt his independence, and I want to thank him for taking this important task on.

Whether I thank him in a couple of years’ time is another matter – but that is the whole point.

So this is how we will entrench fiscal responsibility for the long term, but we also face an immediate fiscal challenge.

In the last two weeks, disagreements within the economics profession over how quickly to tackle the record budget deficit have been thrust into the spotlight.

Before I address those disagreements, it’s worth remembering that there are broad areas of agreement that didn’t exist even six months ago.

There is a recognition that the scale of the deficit and the rapid increase in the national debt cannot safely be ignored, and that public expenditure will have to be cut.

That is something we Conservatives have been saying since the start, and we had to face down those who said that cuts were never going to be necessary.

There is also general agreement now that Britain needs a more credible medium term plan to deal with the deficit, as both the IMF and the OECD have argued.

The Governor of the Bank made this point yet again yesterday, as did the signatories of one of those letters to the Financial Times last week.

So when it comes to identifying the problem, the need to set out a more credible plan, and the case for having that plan independently monitored, there is broad agreement.

Where disagreements remain is on the details of the timing and pace of deficit reduction.

The economists who signed those two letters cautioning against early action are reasonable people who care deeply about the future of the British economy.

But while I respect their position, I take a different view – a view shared by the equally eminent economists who wrote to the Sunday Times, many leading business figures and crucially by international investors.

And that view is simple.

A credible plan is not really credible unless you’re prepared to make a start on it this year.

Otherwise we are trying to persuade people that we will be virtuous, just not yet – and when you’ve been as irresponsible as Britain has been, that isn’t easy.

That is my hard-headed assessment.

And it is driven by three things:

The nature of confidence; the realities of financial markets; and the practicalities of government.

Let me take each in turn.

First, confidence.

Those who recommend delay argue that when private demand is weak, cutting government spending too quickly risks undermining the recovery.

In its most simplistic form this argument fails to ask why it is that private demand is weak.

Modern economics understands the importance of expectations and confidence.

Businesses and individuals look to the future, and while they are not the perfectly rational creatures assumed by the theory of Ricardian equivalence, uncertainty over the future paths of tax rates and government spending does play an important role in their behaviour.

This is particularly true when it comes to consumer spending and business investment, and as the Governor has made clear, the Bank of

England tries to take these effects into account when making its forecasts.

So a credible fiscal consolidation plan will have a positive impact through greater certainty and confidence about the future.

Businesses can expand safer in the knowledge that an out of control budget is not going to lead to ever higher taxes.

Consumers can spend safer in the knowledge that mortgage rates will remain lower for longer.

To be fair, a more sophisticated version of the argument for delay also takes into account the complex interaction between fiscal policy and monetary conditions.

It says that at the moment, and for as long as policy and market interest rates remain low, fiscal tightening should be as gradual as possible because there is little scope for more accommodating monetary conditions to accompany it, either through lower market interest rates or through the reaction function of the Bank of England.

And only as and when monetary conditions begin to tighten can the pace of fiscal consolidation be accelerated.

But even this, more nuanced, version of the case for delay is too complacent.

For it brings me to the second consideration: the realities of financial markets.

Experience shows that market adjustments tend to be neither smooth nor gradual – instead reassessments are more likely to be sudden and brutal.

The luxury of waiting for monetary conditions to tighten before embarking on fiscal tightening may not be one that we are afforded.

That is why the experiences of other countries right now, not just Greece but also Ireland, Spain, Portugal, Poland and others, as well as examples like Sweden and Canada in the past, are so important.

If markets start to lose confidence in a country and interest rates are driven up, recovery is undermined and the inevitable cuts to spending end up being deeper and more savage than would have been necessary to maintain market confidence in the first place.

Take a look at the measures the government was forced to implement across the Irish sea.

That is not a risk that I am prepared to take.

Already the yield spread between 10 year gilts and 10 year German bunds is more than 90 basis points, compared to 70 basis points for Spain and 110 basis points for Portugal.

In the most extreme cases, countries that lose the confidence of markets effectively lose their sovereignty.

As Goran Persson, the Social Democrat Prime Minister of Sweden who eliminated a huge budget deficit following a financial crisis and a deep recession in the early 1990s, used to say, “a country in debt is not free”.

This is why credibility is so vital.

Far from accepting “as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place”, as one of last weeks letters to the FT put it, establishing credibility does exactly the reverse – it buys you more freedom from the very real constraints of financial markets.

How much better to make difficult decisions about spending on your own terms and at your own speed than to have them forced upon you on somebody else’s terms?

So undermining credibility by giving the impression that cuts can be avoided, or by suggesting that unexpected improvements in the public finances will lead to more spending, only makes deeper cuts more likely.

But the decisive case for making an early start on reducing our record deficit is not only based on confidence and the need to establish credibility.

It also draws on an understanding of the realities of government – in particular institutional inertia and the difficulty of real reform.

These considerations don’t appear in most economists’ models.

Economists usually talk about fiscal tightening in billions of pounds or percentages of GDP, but cutting spending is not simply a matter of numbers in a Budget Red Book.

It is a myth, perpetrated by politicians, that all Ministers have to do is sit in their Whitehall offices pulling levers, and things change on the ground.

More often than not, the levers aren’t connected to anything.

Real change that drives up productivity is a difficult process.

If unstable financial markets do force emergency cuts, then those are precisely the conditions in which their impact on the poorest in society and the quality of public services is likely to be greatest.

As Gordon Brown told his party conference when he was Shadow Chancellor: “Losing control of public spending doesn’t help the poor.”

Making an early start, on your own terms, creates the space for better targeted cuts.

It will give more time for public sector reforms to take effect so that lower spending is delivered through greater efficiency not cuts to the front line.

And it makes it easier to preserve public support for difficult decisions by protecting the poorest and most vulnerable.

A key lesson from the successful examples from around the world of fiscal consolidation is that you must be able to demonstrate that ‘we are all in this together’ in order to maintain a coalition for action.

So that is why we will make an early start – in order to bring confidence to the economy, establish the credibility with markets that buys you time,

and to ensure that spending cuts are well targeted.

Let me explain how a new government will do that.

There will be three clear phases to our plan of action.

Phase One involves finding out the truth.

Within days of taking office we will establish our new independent Office for Budget Responsibility.

We have put in place the plans and the people to be ready to do that on a non-statutory basis, until the legislation is in place to make it permanent.

The Office will help us publish a truly independent audit of the public finances before the first Budget.

So everyone will know the true state of the nation’s balance sheet.

And everyone will be able to see independent forecasts for growth.

Only then will anyone know the true scale of the fiscal challenge that faces whoever forms the next government.

Phase Two is the Budget.

This will take place within 50 days.

It will set out the overall fiscal path and spending totals that we will stick to over the years ahead.

As I have made clear, our aim will be to eliminate the bulk of the structural current budget deficit over a Parliament.

That is what the Governor of the Bank of England has called for and I agree with him.

The Budget will set out some of the cross-cutting measures on pay, the cost of Whitehall, the review of the pension age, and the largest public sector pensions, that will help to put our public finances on a sustainable footing.

Crucially, the first Budget will also contain measures to boost enterprise, encourage new jobs and show that Britain is open for business.

We will take targeted steps to reduce some budgets in-year – and we have set out some specific examples – in order to build credibility and make a start on reducing the deficit.

The scale of these steps will be informed by that proper audit of the nation’s finances, that independent assessment of growth and discussions with the independent Bank of England about the scope for monetary policy to remain supportive.

At the same time the rest of government will be embarking on the major structural reforms to the public services that will, over time, deliver the lasting productivity gains that drive real value for money.

Phase Three is the Spending Review

Over the Summer we will work flat out to conduct the detailed departmental Spending Review for the years after 2011 that the current government has simply refused to carry out, and publish that results of that review in the Autumn.

The only possible reason why the Treasury has not already produced a Spending Review is that the Government do not want to spell out the difficult decisions that even their own spending plans imply.

We will not hesitate to take the difficult decisions to get Britain working.

A NEW ECONOMIC MODEL

So this is the new economic framework for monetary and fiscal policy that we need to ensure that private and public debt are sustainable in the future.

But given that we cannot go back to the last decade’s debt-fuelled model of growth, the question I am asked most often at the moment, is “where is the growth going to come from?”

The answer is the final part of this new economic model.

The economics profession is in broad agreement that the recovery will only be sustainable if it is accompanied by an internal and external rebalancing of our economy: in other words a higher savings rate, more business investment, and rising net exports.

Economic theory and evidence both suggest that the macroeconomic policy combination most likely to encourage that adjustment is tight fiscal policy, supportive monetary policy and countercyclical financial regulation.

But that on its own will not be enough.

We need a program of supply side reform that is no less urgent or radical than the reforms of the 1980s and 1990s.

When our households, our banks and our government are so indebted, raising the real rate of return on investment is the only sustainable route to prosperity.

All the evidence suggests that Britain’s trend rate of growth has declined over the last decade.

And as we saw in the 1980s and 1990s, supply side reforms can take some years before their full effect is felt.

But a new government presents a golden opportunity to set out a new direction and harvest some of the long term benefits up front.

By embarking upon a series of reforms that will raise the real return on investment, we can raise the rate of investment right now.

That’s why I have pledged that a Conservative Government will use the opportunity of a change of government to send the signal that Britain is once again open for business.

And in order to bring some accountability to economic policy, I have set out eight benchmarks for the next Parliament against which you will be able to judge whether a Conservative Government is delivering on this new economic model.

So we will maintain Britain’s AAA credit rating.

We will increase saving, business investment and exports as a share of GDP.

The plans I announced at the weekend to sell in due course the government’s stakes in RBS and Lloyds will help to encourage millions of people to start saving and investing for the future, often for the first time.

We will improve Britain’s international rankings for tax competitiveness and business regulation with specific measures on corporation tax and regulatory budgets.

We will reduce youth unemployment and reduce the number of children in workless households as part of our strategy for tackling poverty and inequality.

We will raise the private sector’s share of the economy in all regions of the country, especially outside London and the South East.

And we will reduce UK greenhouse gas emissions and increase our share of global markets for low carbon technologies.

But perhaps the greatest challenge is reforming the public sector itself.

The part of our economy that is responsible for delivering this framework for economic success is the one that has performed the worst of any sector over the last decade.

Public sector productivity has actually fallen since 1997.

Indeed if productivity in the public sector had grown at the same rate as in private sector services we could now have the same quality of public services for £60 billion less each year.

A radical program of public sector reform is not just a fiscal necessity, it is vital if we are to deliver the world class education and welfare services that support a competitive economy.

So we will raise productivity growth in the public sector by increasing diversity of provision, extending payment by results, giving more power to consumers and improving financial controls.

We will expect productivity improvements to match the best of the private sector.

And crucially, the Treasury will return to its core role of ensuring value for money for the only interest group it should represent – taxpayers.

There will be no more empire building or attempts to interfere in every area of government policy.

How can I put it in a topical way?

You will have a Chancellor and a Prime Minister united with the common goal of unleashing the forces of enterprise.

CONCLUSION

Delivering the new economic model that I have set out today will not be easy.

Britain cannot run away from its problems. And if we fail to learn the lessons of the last decade we are doomed to repeat them.

We have to deal with our debts to get our economy back on its feet.

The core values that we need to apply are responsibility and accountability.

Over the five years that I have been in this job I have put fiscal and financial responsibility at the heart of my approach.

I resisted the calls to offer up front unfunded tax cuts. I said that an economy built on debt was living on borrowed time – and so it was.

I have also been straight with the British people about the challenges ahead.

I said that whoever won the election would have to cut spending.

And I have set out the benchmarks against which we can be held accountable.

Our ambition is nothing less than a new economic model for Britain.

Let us move from an economy built on debt to an economy that saves and invests for the future.

ECONOMIC CHAOS ?

The piece below is over 2000 words long and I have just completed it for a client .

It is about the random nature of an economic system.

Have you ever wondered why ALL economic predictions are wrong? Have you noticed that in spite of a proven record of error, economists and politicians continue to bang their heads against the forecast-wall and refuse to do anything else but continue to predict outcomes which by now, they must realise will be incorrect?

They certainly use all the latest computer models which have been empirically derived and used for many years.

So, are there any incorrect assumptions about “fundamentals”?

Is the economic process Stochastic (a sequence of random variables)? Or is it Deterministic (when the output of a system is totally dependent on its initial state and  subsequent inputs – and therefore, predictable)?

(Mind you, to add to the confusion, deterministic systems may occasionally produce random  and therefore unpredictable results. )

Is economics a question of Stochasticity v Determinism?

Why do I ask the question? Because there appears to be a total absence the ‘stable equilibrium’ predicted by classical economists.

On the contrary, Market Economics behaves like a collection of dynamically unstable systems. The instability is attributed to external ‘shocks’ rather that any fault in the basic concept. There is what can only be described as ‘non lineality’.

One solution to this ‘non-lineality’ is CHAOS THEORY!

So far, no real evidence has been produced of ‘low – dimensional’ Chaos in economic processes but there are definitely discrepancies between the ‘expected’ according to classic economic models and the ‘observed’. Just look at any economic prediction within your memory. It was probably incorrect.

We still have a ‘mechanistic’ view of the world and economics as a ‘hangover’ from 18th century SCIENCE.

Scientific thinking is very simple: ‘Measure, predict and adjust until you no longer have any more surprises. Then keep measuring to confirm that what you measured in the first place can be replicated’.

Economics was conceived on that same principle . It was established as a ‘science’. That’s where the Determinism crept in.

It was at this time that man first considered the possibility of his own intellect being so unconstrained that he would eventually understand the ‘Universe and everything’ through the medium of scientific reasoning.

This principle was applied to all sorts of activities and thinking – including economics.

The so-called ‘Enlightenment Policy’ would help man in his pursuit of happiness. Especially in the sciences. Science was cool and now in the early 21st Century it is enjoying a bit of a revival.

Of all the subjects on offer, Physics became the admired Paragon for Enlightenment and so it continues.

The way Physics works is simple: Carefully describe an environment and you should be able to predict the outcomes of any experiment conducted within that environment.

Likewise in Economics:  Know the initial environment and you should be able to predict outcomes based on subsequent inputs.

The belief stemming from that philosophy is that EVERYTHING is governed by ‘NATURAL LAWS’ which are a set of ‘cause-effect’ regularities. That means that everything can be predicted.

These same principles have been applied to Economics.

A simple scientific rule is that ‘The state of any system is a consequence of what it was in the preceding moment…..and so on.’

In the beginning, random occurrences had no place in such linear thinking. Everything was governed by Mathematics and Laws.

However, there is one major flaw in the way that we ‘do’ science: That is our ignorance of the CAUSES which generate phenomena and events.

For instance, we know the effects of gravity – which we can measure but we don’t really know the CAUSE.

However, in spite of our ignorance of the exact causes of events added to the imperfection of our analyses, we still cannot have 100% certainty about the vast majority of phenomena.

Economists also appear to have forgotten both the imperfection of analysis and their ignorance or (at best) of the exact CAUSES of events.

What is the solution? What is to be done about our comparative blindness?

Our ‘crutch’ is the science of probability. Chance.

Current economic thinking is a throwback. In economics, the world is still viewed as totally deterministic.

‘STOCHASTIC’ is non-existent – as is uncertainty because uncertainty is treated as ignorance or a failure to understand the deterministic rules of a very complex system.

Yet, with ALL our processing power, no-one has yet been able to establish those rules which should  predict outcomes.

So, as Chaucer wondered in The Nonnes Priest Tale – Travelling from A to B:  Freewill or Predestination?

Looking at the unpredictability of economic outcome, we move from linear to non-linear dynamics, from certainty to probability, from Economic Theory to Chaos Theory.

Theories of economics have been shaped by the assumption of ‘Rational Man’ who behaves in accordance with a known set of rules.

The evolution of economics into a science was ‘booted’ into becoming a science when it was ‘mathematicised’. Formulae arrived and suddenly, it became a bona fide branch of Applied Mathematics.

Many of the original people who translated economics into a mathematical form were physicists, engineers and mathematicians…… and it still shows. At that time, their view of the world was ‘linear’.

Does that work in economics? The short answer is ‘no’. That is why economists are struggling, interpreting and making excuses.

Marshall in his ‘PRICIPLES’ compared the study of economics to the study of tides. The number of variables affecting tides means it is impossible to create a consistent dynamic picture.

Even nowadays, there isn’t enough processing power to generate an accurate picture of such a dynamic system, especially as the number of variables affecting such a system is, for all intents and purposes – infinite.

Imagine random stones being thrown into the sea or small outcrops of rock or variations in the seabed. They all have an effect on the ‘shape’ and speed of the tide.

And so it is with an economic system: lots of rocks, stones and other variables.

It is not possible to formulate or predict a picture of such an infinitely dynamic system.

Currently, economic theory appears to predict that any shock to such a dynamic system will (obviously) have an effect on the system but that it will ultimately converge-to or seek either a new equilibrium or ‘tend’ towards its original equilibrium because, after all – that’s what ‘systems’ are supposed to do!

Economic Theory assumes a tendency towards stability and equilibrium with certain ‘oscillatory happenings’ on the way.

So we have a situation where economic thought was (and still is, in most cases) linear, deterministic and quasi-dynamic. That is to say, the ‘set-in-concrete’ notions of certainty, invariant economic laws and sameness……………..rather than approximation, probability and infinite variety.

For instance, the Bank of England  predicts an inflation rate one year ahead, based more on hope than fact or perceived fact. But when such predictions are (always!) wrong, there is no revisiting of the thought process, merely another prediction with little or no basis in anything-in-particular.

Often, both ‘inputs’ and predicted outcomes are decided by committee and vote!

All predictions appear to be based on an assumption of an ultimate convergence of economic process to stability, via those periodic cycles which, although not understood are treated with a certain sense of fatalism.

Chancellors are so locked into predictions based on erroneous facts that they will even massage their outcomes in order to land somewhere near the expected landing point – purely in order to retain credibility not only for themselves but also for ‘the system’.

What cannot possibly be countenanced are the random fluctuations of what is most likely a permanently unstable economic system. We don’t do that sort of thing because it may suggest a lack of control!

Let’s have a look at non-linear Economic Dynamics.

Actual (REAL) economic results indicate little resonance with the symmetry and regularity suggested by a linear mechanistic dynamic system. (Something that moves predictably along a pre-determined path).

On the contrary, fluctuations and movements are totally unpredictable. That means that regular Deterministic Laws cannot apply.

If we look at an economic situation in say, the Eurozone at a particular point in time, we may try to predict an outcome in say, 10 years’ time.

However, a small variant or an incorrect assumption in our analysis of the initial economic situation will have an effect on the ultimate outcome. The earlier that variation occurs, the more devastating will the effect be.

For instance Greece’s hidden debt at the time of its accession to the Eurozone, undetected at the time, is having a huge effect on the Eurozone’s economic outcome.

Meanwhile,  the economists, bankers and politicians crave and need the comfort of ‘stability’.  They know that the further the Eurozone travels from the initial conditions at Greece’s entry into the Euro, the more anomalies“The Greek Effect” will generate. It’s a self-amplifying issue.

Consequently, the bulk of the  work of Eurozone politicians is  now concentrated on creating a series of ‘faux’ stabilities.

It is the fallout from Stochasticity which is causing  fear with Determinism being their comfort and shelter.

It was only 60 years-or-so ago that stochastic considerations were appended to classical economic theory.

But the so-called New Classical Macroeconomics was no more than a compromise. “Let’s introduce a Factor X because we can no longer ignore it.”

Yet, the economists still needed their ‘models’ – because deep down they were still the mathematicians and physicists of old.

A formula was devised (SLUTSKY) which took the linear dynamic business cycle model and added random (not necessarily economic) terms which attempted to explain the real ‘actualités’!

At last, an attempt had been made to explain ‘exogenous shocks’ to an economic system by the introduction of nothing more than random error terms.

But  what was REALLY missing in classical economic reasoning was the concept of  NON-LINEARITY.

So, the battle was between a Linear Model with a Stochastic Term (a fiddle factor) versus a pure Non-Linear Model.

Obviously by now – 200 years from the beginning, we have to assume that the evidence for linearity in economics has been overestimated!

So, if we agree that we do need a new non-linear model of econonomics, what are we searching for? What are the other ingredients and how do we ‘work them in’?

Do we want a synthesis of economics, psychology, politics and sociology? Or do we simply stick to the notion of determinism?

Human evolution is viewed as a random process (although the way it is often expressed makes it seem as if scientists view it an ‘inevitable linear’).

The evolution of an economic system is also pretty random, except that, applying psychology, politics and sociology, it can never be a system that can develop naturally. (For example, Survival of the Economically Fittest).

Mind you, economists have already had several attempts at introducing the concept of non-linear economics.

Followers of Keynes developed theories which generated Real Business Cycle Theory but any exogenous shocks to the new non-linear system were considered as merely ad hoc disturbances.

Economists could NOT break away from LINEAR THINKING. Linear thinking was being applied in an attempt to imprison a loose and free system, which tended to CHAOS.

The result? More economic models that you can shake a stick at!

It is only fair to say that our understanding of economic phenomena has been greatly enhanced by all these models and formulae…… but still no cigar. No General Theory of Economics. No equivalent of E =mc2….+εe

So Chianella, Pun, Goodwin, Kaldor, Baldrin, Woodford, Barmal, Benhabib etc have all done their bit but we’re still NOT QUITE there.

Unfortunately, for all intents and purposes, many of the models did no more than introduce the concept of economic ‘white-noise’.

Chaotic systems generate their own randomness without need for external input. Therefore in a chaotic system, predictions can ONLY be very short term and even if there were deterministic rules within such a chaotic system, an inability or failure to 100% ‘book’ the initial conditions of the system will always yield forecasting errors.

This all suggests that economic forecasting (except that on a very short time-scale) is a nonsense. PLUS – the bigger the system, the bigger the CHAOS.

That would suggest that a proposal such as a EUROPEAN ECONOMY is a flawed concept because there is very likely to be an exponential amplification of Chaos.

The dynamic of a mega-economy is very different to a housewife balancing the books at home – although economists are still applying the same principles to both.

Unfortunately so far, classical economists continue to resist economic chaotic concepts.

The reason for this apparent intransigence is simple: it is very difficult to extract evidence of chaotic dynamics from economic data – especially on a meaningful scale. Especially if another dose of chaos is injected into the ‘mix’ by erroneous or spurious data.

In order to predict in a chaotic system a VAST (infinite) amount of data is required – far more than is normally available and so far, the search for Chaos in economics has not been successful.

Meanwhile it is Chaos which is making long-term economic forecasting totally impossible and increasingly sophisticated and precise measurement of ‘initial conditions’ incredibly difficult and potentially prohibitively costly.

If we imagine an economy to be like a cloud – subject to all those forces that clouds are subject to, we can  see the impossibility of a mathematical model which can predict the size, shape and exact direction of the cloud or even its shape and volume as it travels.

Its ultimate shape will always remain a mystery.

Politicians, bankers and economists ought to be able to say ‘I don’t know’ without us constantly expecting magic answers which do not exist.

For example: ‘Mr Chancellor or Mr Banker – what will be the effect on the economy of billions in Quantitative Easing?’ Correct answer? ‘We don’t know.’

“The initial conditions of a system are always uncertain, while Chaos guarantees that these uncertainties make prediction impossible.”  (Heisenberg)

THAT is the essence of Chaos within an Economics System.

Highest employment since 1971? Bull***t !

Politicians are always looking for new angles and prisms through which to observe and present statistics in the most benign way.

A comparatively recent statistical gem is as follows:

“Almost 30 million people were in work at the end of 2012, an increase of 154,000 on the quarter to September and the highest total since records began, in 1971.”

“Since records began” is quite a new angle and as nonsensical as the rest.

Today’s UK population is about 63.2 million.

The 1971 population in was  55.9 million.

That’s an increase of 7.3 million.

In 1971, unemployment was 2.98% of the workforce. Today it is 7.8%.

The figures don’t lie – they’re just encouraged to do so……..

UK Unemployment – It hasn’t MOVED!

The United Kingdom’s latest unemployment figures have just been published amid extravagant “progress”  claims by the Coalition Government.

Here is a BBC screen from April 2010 – just before the last election:

Here is the BBC screen from TODAY:

DO please click on both images! Your eyes are NOT deceiving you!

We appear to have had a lot of activity and bustle from the Coalition Government but the unemployment figure is exactly the same as it was three years ago.

The government claims to have created ONE MILLION new jobs in the private sector.

That must be the MOST UNPRODUCTIVE block of workers ever seen because they have had no impact whatsoever on National Productivity.

What is occurring? Apart, that is, that MORE of the 2.5 million are now either under-employed and/or  part-time.

The Greek question. It’s all Greek.

The Hellenic Telecommunication Organisation (OTE) is to sell a euro benchmark Bond in order to finance itself and redeem previous bond issues which mature both this year and next.

So, what are its chances of successfully issuing the bond in the international bond markets?

Quite good!  OTE is 40% owned by Deutsche Telecom – although that is NOT the only reason.

CONFIDENCE is the new Euro buzzword.

Even Greece’s Central Bank Governor Provopolous is feeling it. He says that the worst of Greece’s crisis is over because Greek 10 year bond yields have no dropped below 10%! That’s a bankers measure of “confidence!!

In spite of a falling GDP (a further contraction of 4% is expected this year) , unemployment at 26% (and rising), strikes and a very cold Greek winter, according to Mr Provopolous “There is improved confidence” and  “We have turned the corner”.

The bank Governor seems to be confusing the ECB’s promise to “do what it takes” to save the Eurozone with internal “confidence”.

In fact, as a result of last year’s declaration of love for the Eurozone by Mario Draghi, ALL  Eurozone bond yields have fallen. Greek economic policies have  had very little to do with what so far, appears to be the “Miracle of 2013” ……..when Markets are rising and bond yields are falling. The Athens Stock Exchange (ASE) has risen by over 10% since the beginning of the year!

In reality, all the unusual market activity further reinforces that fact that the dislocation between the REAL economy and the virtual money-printing-driven economy is more-or-less complete. The Markets are performing in spite of the economy and NOT because of it.

“Confidence” is all very well…but confidence in what exactly?

Economic recovery or the ability to borrow more?

Whilst Greek politicians are pointing to the fact that Greek bank deposits are increasing, have they forgotten the 50 billion euro recapitalisation which Greece’s largest four banks are still awaiting?

Only THREE MONTHS ago (October 29th  2012), the Greek banking sub index tanked by 13.59% as a result of the unresolved recapitalisation. It remains unresolved.

The only change has been the European Union’s temporary rescue fund which  has “earmarked” about 50 billion euros for the Greek banks….and there will be another delay in paying the money over. There always is. June 2013 is the latest estimate.

The “confidence” cannot possibly be related to any future growth of the Greek economy because that cannot happen until the banks have been mended.

Apart from the bank recapitalisation, there is another EU-IMF allocation of 31.5 billion euros for the banks to “restore their balance sheets” so that they can at least think about participating in Greece’s economic recovery.

Greek bankers and politicians may well be feeling “confidence” but can they honestly say when Greece’s 5-year recession (depression) will be coming to an end?

It looks as if Greece’s recovery is firmly embedded  in the future . Permanently.

The Silence of the Auditors.

In the Good Old Days, when every day was sunny, there were only two TV channels and Bank Managers weren’t anonymous, every Debit used to have a Credit. Unfortunately, in Banking, this is no longer the case…..but is it only the bankers who were to blame for the hugely creative accounting which resulted in the 2008 banking meltdown?

While we’re all busy vilifying bankers for their greed an incompetence, there is still one group of professionals which has managed to remain silent since 2008.

Here is a table (by no means complete) which shows companies and the results of their 2008 Audit Reports.

COMPANY AUDITOR AUDIT DATE AUDIT RESULT AUDIT FEE (Millions)
Abbey National D &T 4.3.2008 Unqualified £2.8
Alliance&Leicester D &T 19.2.2008 Unqualified £0.8
Barclays PwC 7.3.2008 Unqualified £29
Bear Stearns D &T 28.1.2008 Unqualified $23.4
Bradford& Bingley KPMG 12.2.2008 Unqualified £0.6
Citigroup KPMG 22.2.2008 Unqualified $81.7
Dexia PwC/Mazars 28.3.2008 Unqualified €10.12
Fannie Mae D&T 26.3.2008 Unqualified $49.3
Freddie Mac PwC 2.3.2008 Unqualified $73.4
HBOS KPMG 26.2.2008 Unqualified £9.0
ING E&Y 17.3.2008 Unqualified €68
Landsbanki PwC 2.1. 2008 Unqualified ISK259
Lehman Brothers E&Y 28.1.2008 Unqualified $27.8
Lloyds TSB PwC 21.2.2008 Unqualified £13.1
Northern Rock PwC 27.2.2007 Unqualified £1.3
RBS D&T 27.2.2008 Unqualified £17
UBS E&Y 6.3.2008 Unqualified CHF61.7
US Bancorp E&Y 20.2.2008 Unqualified $7.5
Wachovia KPMG 25.2.2008 Unqualified $29.2

An “Unqualified Audit” is also known as a complete audit. That’s an audit that has been performed and researched so thoroughly that the only possible remaining discrepancies stem from information that could not be obtained by the auditor.

An unqualified audit analyses both the internal systems of control, as well as all of the details in the organisation’s books.

Unfortunately, an audit has to rely on the information provided by the company and as there is often a “relationship” between senior bankers and senior auditors, the auditors have always assumed that the information that they are being given by their clients and chums is accurate and honest.

You can see from the table above that in 2008, every audit signed off every bank as “Unqualified”. A QUALIFIED audit would have meant that a “qualified” opinion would have been given. THAT would have outlined the auditor’s reservations concerning the organisation’s financial statements.

However, so complete was the conspiracy and fraudulent reporting by the banks, that experienced Audit Companies just sailed-by the morass of deceit and misreporting.

Note the fees in the right-hand column. They are in MILLIONS………..NOT that fees measured in so many zeros would EVER have any influence on the outcome of an audit!

So the FIRST question is VERY simple: Should the  Bankers AND their Auditors be standing shoulder-to-shoulder in the dock?

The SECOND question is also very straightforward: Shouldn’t the Regulators be working with the Auditors and NOT with the Banks?


BTW, if you’re investing in Equities, do take the time to read J.K Galbraith’s (very short) book entitled “A Short History of  Financial Euphoria”. Hopefully, it will help you to realise exactly where Markets are headed and on the day after the banks have climbed out, you won’t be one of the many unable to sell your investments.

HS2 high-speed rail route. The Coalition’s next train crash?

Everything that our Coalition government has touched so far has been a train crash. Today’s initiative, announced by the Secretary of State for Transport, will be no exception.

The latest economic miracle-cure is the HS2 high-speed rail link between London and Birmingham  ………. and maybe beyond to some of the outer planets such as Manchester and Leeds!

I just want to go on record to say that no matter what the cost assumptions are in respect of this rather grandiose and quite unnecessary scheme, the “guesstimates” made by proponents of the scheme are bound to be incorrect. Why? Because they’re ALWAYS wrong!

The government  intends to invest £32.7 billion. Their advisers (whose computations, as we know from bitter experience, are always SO accurate!!!!!) have convinced the Cabinet (and others)  that this investment (after factoring-in new job creation, less road congestion and profits from ticket sales etc.) will produce up to £47 billion in benefits!

On the face of it….a “No Brainer”. So…what’s the problem?

The major problem is the Law of Unintended Consequences, such as creating a gradual shift of trade from North to South……. “Accidental” Economic Engineering.

But the most obvious is the cost – and this is why I want to be on the record.

As government is dealing with Private Enterprise it will be ripped off.  The Private Sector ALWAYS rips-off the government.  It’s a national sport.

I predict that after factoring the pre-scheme aggravation, NIMBYS’ and government lawyers’ fees etc with ongoing expenses such as the crippling financing costs of such a project, this scheme cannot be delivered for less than about £250 billion.

Yes….a quarter of a billion!

£32.7 billion? Don’t make us laugh……and by the way…what do THESE GUYS think?  They seem quiet….

(Thanks for your emails . For the moment, I cannot see Twitter or Linkedin.  Back later this week.)

Twisted Logic?

Forget all that “Triple Dip” recession nonsense and hysteria.

A more logical way to look at the economy is the exact converse:

The United Kingdom has been in an economic recession for over two years with the occasional anomaly or “blip” which, in certain quarters, has made GDP growth appear temporarily positive.

If we adopt this approach then many more things will begin to fall into place.

GDP excuses?

These are the GDP figures per quarter since Q4 2010, the time from which we can assume that the government’s policies “kicked-in”.

Q4 2010:      -o.4%

Q1 2011:      +0.4%

Q2 2011:      +0.1%

Q3 2011:      +0.6%

Q4 2011:       -0.3%

Q1 2012:       -0.2%

Q2 2012:       -o.4%

Q3 2012:       +o.9%

Q4 2012:        -0.3%

If we now look at a “Moving Year”, that is to say, starting a year at Q4 2010, taking the four figures in blue and then adding them…..and then taking the next four numbers, starting with Q1 2011 etc, we have these GDP figures for the Moving Year:

+0.7%     +0.8%      +0.2%    -o.3%     zero    zero

WE HAVE BEEN IN RECESSION or “FLATLINING” SINCE  THE YEAR BEGINNING Q3 2011

The OECD statistics are HERE.

As you can see from the table, no matter how our government dresses-up the figures, we are the worst performing nation in this list (apart from Spain and Portugal).

The basic solution is simple. The Chancellor of the Exchequer needs to prioritise Growth ahead of Credit Rating.

Incidentally, much has been claimed by the government in respect of how many jobs they’ve created , WITHOUT any significant increase in GDP or “tax take”.

This could be the reason:

When the Coalition took power in May 2010, the number of unemployed people was 2.51 million. See HERE.

The latest figure shows that there are still 2.51 million unemployed in the United Kingdom. See HERE.

……….and no-one appears to have noticed!

All this banging-on about “THE MILLION JOBS we have created” since coming to power?


(Once again, the government appears to have been “economical with the actualité”.)

Dave Camenor and the Banker – a Fable

The Gates to Economic Recovery and  New Prosperity were being guarded by the Bankers.

A tired and bedraggled band of travellers stood before them. They were led by Flashman, the legendary illusionist and Prime Minister of the Ukshire. The Chancellor, the Cabinet and other Uks were busying themselves trying to appear invisible – an ancient trick modeled after the mythical Bank Elders.

Flashman raised his pink chin so as to appear less terrified than he really was. He tried one of his famed rictus-like smiles. “Please let us in!” .

After he had spoken, he looked round to his band of followers who made the customary grunting and “Hear! hear!” noises of approval.

The Bankers were confused and a little frightened but nevertheless, were obliged to follow their elders’ orders.

” You have to pay to come in,” oozed the Banker as he counted heads and flicked at his abacus. His fingers were a blur as he remembered: “…then there’s the insurance.”

” But we have already collected and given you all the gold that we could  find. And you did promise than when our coffers were empty,  we could come in. It is getting so cold out here. We are tired and hungry and we can see that behind the gates there is sunshine and the New Prosperity. If you will not let us in, would you please lend us a little of our own gold back, so that we can eat . Many are dying”

” That is not our problem. You enjoyed the Old Prosperity when we gave you more than we had. We have no more to lend.  Anyway, you look as if you would not be able to repay it.”

” But who are all those smiling happy people who I can see through the gates?”

” They are the Bankers. Are you a Banker?”

” No I am not but there are occasions when I am speaking to an audience – I imagine that I can hear a whisper in the audience.”

” And what is this ‘whisper’ ?” sneered the Banker.

” It seems that there are some who think that I am a Banker – because that is the sacred word that imagine I hear. On some occasions, I can hear it several times. There must be many who think that I am a banker. Can I at least come in? Just to see?”

” Why should anyone think that you are a Banker? Do you receive a large bonus? Do you have ridiculously large expense account? How big are your share options?”

” I have none of the Sacred Trappings –  I am merely the Prime Minister of  the Uks but there are those who see me nearly as important as a Banker. In fact, sometimes I hear whispers which make me think that the people wish me to be in charge not only of the Cabinet, the country but of even …………………the Bankers.”

Flashman immediately looked down at his feet because he sensed that he may have gone too far. His entourage cowered.

The Chancellor tried to make himself even more invisible and tried to stop himself from laughing by biting so hard into the back of his own forefinger that blood flowed from the wound.  As you would expect, it was clear liquid.

The two Bankers both took a step back. They had never heard such an preposterously outrageous claim. “In charge of the Bankers???? Who? You?!!”

They knew in that instant that they were dealing with a “Dangerous” but decided to continue the dialogue.

They had heard the legend that one day, a simple creature would come to the Gates and become “In Charge”. No-one quite knew what this strange phrase meant but they wanted to be sure. Was this “The One?”. They doubted it because the legend suggested that the one who would one day be in charge, was to be a red-headed female called Merkin from the Land of the Goths.

But the pink-faced stranger had just used the sacred “In Charge” words!

It was a joke among Bankers because they knew that no-one but a Banker could be “in charge”. They were the chosen ones.

They used to serve the people but now the people served them.

” Are you ill? What are the people saying?” The Banker took out his Blackberry and punched some buttons. His eyes did not leave Flashman, who continued:

” Sometimes when I am speaking in riddles to the people – I seem to hear not just “Banker” but also “King” Banker. That is the phrase! They call me a  ”….King Banker”. That is the phrase I hear.”

” But can you talk in riddles? Can you make money disappear? Are you so self-serving, selfish and thick-skinned that you can ignore the criticisms of all those around you? How good are you at offering help to those who do not need it? Were you unpopular at school? Have you ever given money and then changed your mind and taken it back?  Well…… have you. Do you have the Gift of Sneer ???????”

It was like a bolt of lightning. Flashman knew! He was The One !!

He tried his smile once again. Some recoiled in disgust but there were those within earshot who were also beginning to believe that perhaps Flashman was “The One”.

Flashman certainly believed it. He would ask for an Inquiry – just to be sure. He liked an Inquiry – that most holy of Ministerial Sacraments. Meanwhile, he decided to take the bull by the horns – he would assert himself.

” Bring the Head Banker to see me here at the Gates. Tell him that David of Camenor (for that was his real name) wishes to see him.”

There were gasps. Humans, UKs and Bankers looked at each other. For what seemed like an eternity, there was a cold silence – just like the one which would follow a joke made by the Prophet Milibrand the Younger!

Just as suddenly, the beyond-dead atmosphere was broken by a commotion inside the Gates. Word had been sent to the Head Banker. There was no going back!

Eventually, a short man in a black silk pinstriped suit appeared at the gates. His gold tooth and diamond in his chunky gold pinkie ring glistened as he removed his Fedora. The black overcoat remained draped over his shoulders as he approached  Flashman.

Flashman noticed that the Head Banker’s white silk tie matched the handkerchief tumbling out of his breast-pocket. He briefly imagined his own finger in the Head Bankers chunky ring!

They stood toe-to-toe. It was the Banker who spoke.

“Yes?”

Flashman felt more resolute than he had ever done in his life. This was his destiny. He would be the saviour of the people. This was his time. He cleared his throat.

” On behalf of the people, I command you to lend them the money so that they can enter the Gates of Prosperity.”

It was the briefest and most ” to the point” statement that Flashman had ever made – and he’d managed it without an Inquiry.  He felt quite exhilarated and just in case someone was sketching this historic moment, he struck a heroic pose and focused his bloodshot piggy eyes on the horizon.

The Head Banker moved even closer. They exchanged a knowing smile.

Almost imperceptibly, the Banker’s expression changed.

Swiftly, he brought his knee up.

Central Banks – The FOUR big lies.

The first lie you’ll hear this year from central bankers is that they  intend to stop minting cash to buy government debt. Moreover (and more blatantly), they will announce their intention to start selling back to the market government bonds they’ve already bought. That’s impossible at this stage of the crisis… but a lie the markets need to be told nonetheless.

The second lie is that these asset purchases will be small and limited in scope. But from day one, the size and scope (ie, the type of debt they’re buying) has ballooned. Actions that seemed unimaginable just a few years ago are now the norm. Market players have been hypnotised into thinking this is all very normal.

The third lie is that there’s a considered time scale to all of this. In fact, it was a release from the Fed that suggested the reversal is coming sooner than many think that sent the precious metals into a spin just after Christmas. Of course there is no exit strategy and no timeline here. These guys are making up policy on the hoof. And to my mind it’s only going one way – and that is more of the same and for as long as they can get away with it.

The fourth lie they’ll tell is that they’re fighting deflation. But if that were really true, how can they also say that QE will be reversed? That would surely be to welcome deflation down the line.

No, these guys are pursuing inflationary policies and they use the four lies to send the markets the wrong way.

They have to! I mean, if the inflation indicators – gold, silver and oil – took off, then the game would be up. Their precious bonds would get crushed under their own weight of debt.

So what happens is that whenever the inflation indicators turn up, the banks come up with some rhetoric to pull them down. And if the paper markets take a turn for the worse, they throw in some easing to pull them up.

This is what’s causing the big market swings.


(with thanks to Moneyweek)

World Economy: The lunatics ARE running the Asylum!

Today, I was asked what I thought about this year’s European economic outlook. It isn’t great!

One factor which I have consistently underestimated is the ability of politicians to “wheelbarrow” a tragic set of circumstances from one meeting to another without even aiming for a holistic solution. Plus, I have always been conscious of the symbiotic relationship between politicians and bankers but, like an illicit love affair, it has grown over the years. Not into a mature loving relationship but instead, it has acquired all the charming qualities of an incestuous shotgun marriage.

I have been feeling very pessimistic about the world’s banking system for years – even before the 2007/2008 crisis. HERE!

Today, the ENTIRE financial system remains in crisis with both bankers and politicians apparently reduced to the role of observer. Their well-timed occasional “good news” is both ritualistic, orchestrated and largely illusory.

The problem is most acute in Europe where all major banks are barely managing to contain gut-busting levels of very bad government bonds.

Asian banks are at risk as Japan has begun to print and we all owe them money. Plus, we been in the habit of paying for their goods with money which they’ve lent us.

As a result of the sharp decrease in world demand, Asian economic growth has slowed very sharply.

Meanwhile, the United States was becoming addicted to the easy “fix” of Quantitative Easing, but nevertheless, in spite of the supply of virtual money, many of its institutions remain on life support.

Now we have the frightening prospect of the Fed stopping its money printing and the U.S economy having to go “cold turkey”. That won’t be a pretty sight!

Because nothing has really been done post the 2008 banking system collapse, I fear that we may be soon heading for an action replay.

The so-called “stress tests” which various governments have been performing on the banks have been less than useless as an indicator of banking “health” because the entire banking industry has been dispensing the wrong information to those who dare to try and measure what they’re doing and what they’ve got.

Bankers have only ever told  us what they feel we ought to hear.

We are all aware of how badly the Rating Agencies managed to mess things up prior to 2008 and guess what…………the likelihood is that they’re still doing it! It is clear that, for instance, the Eurozone is about to suffer Cardiac Arrest but the Agencies are still telling us that everything is (more-or-less) fine!

The Rating Agencies have a history:

In a landmark 1994 study of the rating agencies, the U.S Government Accountability Office (GAO) concluded that Standard & Poor’s didn’t issue a “vulnerable” rating for one of the biggest failed companies, Fidelity Banker’s Life, until SIX DAYS before the failure … and for another, Monarch Life, until 351 days AFTER the failure! Similar instances of outright neglect were true of Moody’s as well as A.M. Best .

The Enron Failure of 2001: The New York Times reported that ratings agencies saw signs of Enron’s deteriorating finances but did little to warn investors until at least five months later  –  long after more problems had emerged and Enron’s slide into bankruptcy had already accelerated. It wasn’t until four days before Enron filed for Chapter 11, that the major agencies first lowered their debt ratings below investment grade!

What about the U.S mortgage meltdown of 2007 and 2008? EVERYONE now agrees that triple-A ratings on mortgage-backed securities grossly overestimated the investments’ credit quality  and that this played a pivotal role in the debt crisis and that the primary factor behind their inflated ratings were multiple conflicts of interest between them and the issuers.

In the United Kingdom, the collapses or near-collapses of Northern Rock, HBOS, RBS etc were also a surprise to everyone except a few impotent accountants and auditors.

Do you remember anyone commenting on the “ratings” of the companies which had been bankrupt for months or even years?  Me neither.

Nearly all ratings issued by the major agencies are paid for by the issuers — in other words, by the companies that are supposedly being rated!

In addition, the ratings agencies have often earned substantial additional consulting fees to help structure the very Securities which they rate!

To add insult to injury, it’s been proved that the major ratings agencies have often revealed their ratings formulas to issuers, helping their clients to pre-manipulate their data and “adjust” reporting in order to achieve the highest rating.

During the first phase of the financial crisis (2008), and largely because of the inherent conflicts of interest, the major ratings agencies continued to feed investors disinformation. (b******t).

For example, on the day of Bear Stearns’ failure, Moody’s maintained a rating on the company of A2 — the same rating it had published from June 1995 through to June 2003.

S&P was equally generous, giving the firm an A rating until the day of failure.

And Fitch assigned Bear Stearns an A+ rating for 18 straight years all the way up until the day it imploded!

The same basic facts apply to Lehman Brothers and all the other companies that either went belly up or were acquired for pennies.

The major ratings agencies have failed time and again to provide adequate warnings on collapses in all kinds of stocks, bonds, and even entire companies.

The scariest thing today is that European banks are now on the verge of being decimated just like Lehman, Bear Stearns and other firms were back in 2008.

The world economy is slowing from one end of the globe to the other. With massive debts piling up, unemployment rates soaring and the world’s banks still HIGHLY leveraged (overborrowed), it’s only a matter of time before the entire system blows up.

Nowhere is the crisis more acute than in Europe — and nowhere are the risks so great.

The key reason is that European banks are so HUGE relative to their home economies.

The aggregated European economy is roughly equivalent to that of the USA. However, European banks have almost THREE TIMES the assets of our American cousins. Now THAT’s disproportionate power!

That makes it all but impossible for European countries to successfully bail out their banks without jeopardizing their own credit standing and crushing their citizens under the weight of massive tax increases.

Greece, Spain, Portugal, Italy and soon France,  have been lined up like fairground ducks under the jackboot of austerity by tax-starved governments.

That’s why we’re seeing sovereign credit ratings fall, bank share prices decline, and policymakers scrambling from one end of the continent to the other in a desperate attempt to find some kind of workable solution!

The problem? THERE ISN’T ONE!

The perfect recipe for an epic, global financial collapse that will sweep up major banks around the world!

Happy 2013!

50 Predictions for 2013

Last year’s predictions are HERE.

Some were right, some were nearly right whilst others were nowhere near! That’s because most forecasting is a mixture of extrapolation, conjecture, wishful-thinking and luck…………..apart, that is, political and economic divination , which also includes an unhealthy slice of blind optimism.

My interests are mainly political and economic although the list below contains a few random “fun” ones!

I have not included too much of the blindingly obvious, such as the 2013 Eurovision Song Contest in Malmö, where the United Kingdom will be in the bottom THREE and the most likely winner will be Scandinavian.

Wishful thinking has been avoided. For example I do wish that Mo Farah would stop sticking his hands on his head and doing an impression of a demented Pretzel in a vest!

Conjecture, based on past performance suggests that there will NOT be any banking reorganisation because of vested interests and political cowardice. Governments have it within their power to keep that particular pot boiling for years!

All Eurozone Crisis predictions of the last four years vastly underestimated politicians’ capacity for procrastination, ineptitude and political self-interest.

However, I do perceive that European countries with reasonably strong economies will begin to see the advantage of NOT prolonging the Euro agony and once again, striking out on their own, setting their own interest rates and returning to the Lira or Peseta!

These are my predictions:

1. Gold will skyrocket in value.

2. Brazil will finally become THE place to invest(shares and currency)….but see 41 & 42 below.

3. Germany will accelerate the sale of its Bunds, in spite of the fact that it hopes to sell about only about €250 billion Euros’ worth which is lower than in 2012.

4. As predicted last year, Silvio Berlusconi will reappear in Italian Politics – much to Frau Merkel’s chagrin.

5. Pressure will increase on Chancellor George Osborne to be replaced (It’s the ONLY way that the Coalition can move to Plan B without too much loss of face).

6. The banks will continue to rebuild their balance sheets as the value of their assets diminishes, resulting in an increase of non-bank lending. Credit Unions, peer-to-per lending, asset leasing, community finance organisations and  invoice finance will all accelerate as the banking system continues its introspection.

7. United Kingdom property prices will fall by 25%.

8. Frau Merkel will be re-elected and continue as Germany’s Chancellor.

9. Italy will talk about leaving the Euro and readopting the Lira…………..and Berlusconi will be accused of blackmailing Europe.

10. People-power will win-out in Greece and it too will (finally) seriously consider leaving the Euro as its austerity programme is given a violent  “thumbs down” by its people.

11. The theoretical €30 billion in French tax hikes will have a negligible effect on its tax “take”. High net worth individuals and businesses will continue the exodus which began in late 2012.

12. Greek banks will begin to totter as loan defaults by Greek borrowers (both personal and commercial) continue to accelerate.

13. The “restructuring” of Spanish banks will fail.

14. David Cameron and other members of the UK Coalition Government will continue to add 100,000 to the ” number of new jobs we have created in the Private Sector” every time they make a speech. By mid-2013, the “figure” will have swollen to over 1.5 million. Unfortunately without the associated increase in tax-take which one may be forgiven for having expected.

15. Japan printing money will result in a currency battle, primarily involving the American dollar.

16. Greek Tax authorities (in spite of all those reorganisation noises!) will still fail to collect the taxes.

17. David Cameron will realise that UKIP is a clear and present danger and will begin the fight-back by the only way possible. He will adopt their policies and reinforce that by continuing to spray copious volumes of testosterone in Brussels.

18. Mario Monti will stand for election in Italy in a last-ditch attempt to maintain the stranglehold on European politics by Goldman Sachs old boys.

19. The Euro will make its annual journey “to the brink”.

20. Protests will accelerate across Europe – into the United Kingdom….as voters wake-up to the politicians’ ineptitude, procrastination and complacency. Voting-out incompetent governments and merely replacing them with incompetent outfits of another flavour will no longer be viewed as the solution.

21. In France, Francois Hollande will continue to demonstrate why the French don’t really appreciate Presidents who are Socialist.

22. The ECB’s Mario Draghi will once again tell the world that he will do “all it takes” to keep the Euro intact…..including the ruination of millions of Euro lives.

23. Someone, somewhere will wake up to the fact that the banking system is not working and has morphed into a fat, ever-hungry cash cow which no longer executes the functions which it was designed for (to support individuals, commerce and government).

24. Youth Unemployment in Greece and Spain will approach 60%.

25. By the end of 2013,the Catalans and  the Basques will decide on their self-determination.

26. There will be a massive surge in the Spanish anti-Royalist movement and the Spanish Royal family will feel “unloved” as demands are made for the abdication of King Juan-Carlos.

27.The Franco-German Euro Axis will be consigned to the poubelle of history as Frau Merkel finds herself another “favourite”.

28.There will be an exodus of high-earners from France in protest to the Socialist-style “Politics of Envy” taxes on those earning over €1 million.

29. British P.M David Cameron will continue to bang-on about “the mess that Labour left behind” – THREE years after coming to office. That will remind the electorate that in spite of the PR, the Coalition still has no idea about how to deal with the budget deficit, except to adopt the bad part of the Merkel Model.

30. Japan’s money-printing programme will drive up its inflation, to match (and exceed) that of the USA, possibly achieving “hyper” levels. Then, they’ll print some more!

31. USA: There will be no “Fiscal Cliff”. The cracks in policy will be papered over by compromise and political expediency………. as America lurches towards the next crisis.

32. In the UK, the Church of England will continue to fret about sex-related matters such as gays, gay marriage and lady bishops. Hopefully, some of them will find  a bit of time for their God and congregation!

33. The winners of the X-factor and Britain’s got Talent will have no discernible…………talent. (That’s my annual, sure-fire, 24-carat banker!)

34. In Europe (as usual), neither Barroso nor Van Rompuy will say anything REMOTELY interesting or pertinent.

35. Europe will continue to TALK of fiscal and political integration………but that’s what it will remain…..TALK. Why? Because one of the by-products would have to be some form of Debt-Mutualisation which so far,  remains a deal-breaker.

36. German resistance to European supervision of the banks will result in the smaller banks remaining unsupervised.

37. In Italy, Mario Monti has clearly demonstrated the usefulness of a government of Technocrats: they have pushed through economic reforms and budget cuts which a properly-elected government would have NO CHANCE of implementing. However, the honeymoon appears to be over and Italy will return to a Berlusconi-led coalition.

38. Bundeskanzlerin Merkel will strengthen her position as de facto European leader as other (weaker, male) European leaders (half of who are on their way out – including the UK administration) continue to defer to her.

39. After the German elections, Mrs Merkel’s Christian Democrats will form a new coalition with the Social Democrats.

40. Stagnation, Recession and Depression will continue in Europe. Greece will remain in depression (yes!), as will Spain and Portugal.

41. If you’re an investor, you could do worse than keep an eye on Mongolia’s mining boom which will pick up speed in 2013.

42. If you’re a gambling person, here’s an interesting “double”. Lord Patten to resign as BBC Chair . Then, invest your winnings on anything in Macau whose economy is booked to grow by about 15% in 2013.

43. The “in denial”  UK Coalition Government will continue to spout meaningless statistics as the retail trade continues its slow-motion collapse and accelerating volumes of businesses go into administration and bankruptcy.

44. The Protestant Church will begin to turn more to Bible-centred Christianity – away from the airy-fairy, trendy, unleaded and flaccid Christianity of the Rowan Williams era. More “splintering”.

45. Last year I predicted a dismembering of the UK’s Coalition government but now realise that it was just wishful thinking. I underestimated how much Tory crap Nick Clegg could swallow. Last year, his capacity seemed infinite. However, for 2013, I predict that Europe will provide the catalyst for an all-out Coalition Civil War.

46. Unless the Chancellor can sell 5G, 6G and all the other “G” Futures and assuming he collects for 4G, there will be a massive government Welfare Review designed to further butcher Public Spending. ( He has no choice because of his rather stunted economic repertoire). That will finally shake the Libdems from their collective coma and fight the Tories. Otherwise…….Libdem Oblivion.

47. “Dead-tree” journalism will continue to atrophy and die with an announcement that at least one major newspaper is to go exclusively digital. (My money is on the Guardian).

48. Massive Solar storms may envelop the Earth which, according to NASA, could render the above predictions both irrelevant and obsolete. Keep an eye on www.swpc.noaa.gov

49. Andrew Mitchell MP will make a return appearance in the Cabinet after the nonsense of allowing the police to investigate themselves in what is increasingly looking like the fit-up of the year.

50. William Hague and Hillary Clinton will keep-on “condemning”  the Syrian Authorities as they continue to murder with impunity. Western powers have learned that when they intervene in the Middle East – only one group ever benefits: The Construction Industry.

Mark Carney, the Governor-elect of the Bank of England is the perfect hire for this Government.

Over the last two years, it has become increasingly evident that Chancellor George Osborne and Business Secretary Vince Cable have no policy at all in respect of banking.

The Conservatives have known all along what they want and need from our banking system, whereas Vince Cable has been reduced to delivering the odd grumpy sound-bite.

It’s been nothing more than window dressing.

Because of the symbiotic relationship between politicians, retired politicians and banks, they had to hire someone who would  more-or-less preserve the status quo but who was also a major international player.

Mr Carney, a Goldman Sachs-trained Investment Banker is the exceptional candidate for the role……..as long as he delivers what Chancellor Gideon expects and doesn’t overdo the Bank of England’s “independence” bit.

We can forget Banking Reform (remember “firewalls”, “good banks”, “bad banks”, “Splitting the banks”, “Too big to fail banks” and all the other buzz phrases from the last four years?)

Forget them all.

Mark Carney is the current Governor of the Bank of Canada and as such, responsible for the Canadian Banking system which is considered to be the safest in the world. However, the Canadian Banking system is dominated by five main banks and most importantly, these banks are not just retail banks but they are Holding Companies which also control  activities such as  credit cards, brokerage, mutual funds, insurance etc.

That is probably the model which appeals to our Chancellor and the government –  and, most importantly, which will require the minimum amount of “tweaking” of the British banking system.

The Coalition government had absolutely NO INTENTION of ever reorganising our banking system and is now able to say: “Let’s wait until the new Governor is in place.”

Meanwhile, because ALL regulation will eventually land in the Bank of England’s lap, we should expect the FSA to atrophy and die – as it has been doing since inception and anyway, Lord Turner stands absolutely no chance against this guy – with the added “frisson” of Turner having also applied for the BoE Governor  job.

Here’s the Chancellor’s slightly overdone sales pitch:

“Mr Carney is unique amongst the potential candidates, in combining long experience of Central Banking, huge international credibility in economics, deep expertise in financial regulation and a first-hand experience of private-sector financial institutions.”

He wasn’t the exceptional candidate. He was the only candidate.

Not a Graduate? Tough!

It has become fashionable for politicians to spout about “apprenticeships” – although most look and sound as if they may not quite be sure what one is. Although they do know that it is something that the young underclass does at “work” …………whatever that is.

Unlike the Germans, we still consider an apprenticeship as a bit “infra dig” because Mr and Mrs Smith would still prefer Little Johny to “have a degree”.

“He’s the first in our fambly to have letters after ‘is name. We’re so proud!”

This British quest for letters after one’s name is one of the reasons why we continue to fail as a manufacturing nation.

Reality Check: Not everyone can be a desk jockey.

According to the CIPD, SIX OUT OF TEN  United Kingdom employers do NOT offer routes into their organisation for non-graduates.

But on the PLUS side, we have one of the best-qualified Unemployment Queues in the Western world.

An Early Vince Christmas

In the last FOUR YEARS, the British taxpayer bailed-out the banks and  insured them against failing and the government has TALKED about reorganising them. It has also TALKED about excessive bank profits and bonuses.

So it is only natural that as the banks are busy “rebuilding their Balance Sheets” – which is already one of the longest construction jobs on record,  the UK Government undertakes to lend more TAXPAYERS CASH to Small and Medium Enterprises. (THIS time, £1 BILLION is the headline figure.)

Meanwhile, during this recession-without-end, Banks are booking profits at pre-banking-crisis levels!

….and how will this cash be distributed to SMEs?

Through “intermediaries” and small banks…..although the Business Secretary is still a bit light on detail. That signals MORE meetings, MORE forms, MORE reorganisation, MORE training, MORE Treasury Select Committee…etc.

You know the drill.

….and by the way, it is no coincidence that Vince Cable has been allowed to announce this latest initiative during the Libdem Conference.

**Applause**

p.s. How many more businesses will go to the wall while the politicians continue to meet, ruminate and pronounce?

Money printing – a simple question.

Today, the Head of Germany’s Bundesbank, Jens Weidmann, has asked a very simple but critical question about Quantitative Easing and its cousin, the Unlimited Bond Purchase:

If a central bank can create unlimited money from nothing, how can it ensure that money remains sufficiently scarce to retain its value?”

Money is a commodity and was invented when someone did not have goods or skills to trade  in return for a commodity he wanted. He was able to offer “money” which could be redeemed at a later date for something that the original “seller” wanted or needed.

However, if there is a too much of a commodity, its price goes down.

So, if there is too much money, its price WILL go down.

THAT is why Central Bankers are playing a very dangerous game.

The simple answer to Herr Weidmann’s question is that a Central Bank CANNOT ensure that by increasing the money supply, it can even begin to ensure that the money will retain its value.

What they’re doing is the equivalent of fixing a stalled car engine by painting the car…..again….and again….and again…..

Eurozone: Decisions Decisions

LONDON: Global stocks and the euro dipped yesterday as investors cashed in some of last week’s sharp gains ahead of a German ruling on the euro zone’s new bailout fund, Dutch elections and potential new stimulus from the US Federal Reserve.

The European Central Bank’s statement last week, indicating that it was prepared to buy an unlimited amount of strained euro zone government bonds pushed European shares to a 13-month high and the euro to a four-month peak on hopes it could mark a turning point in the bloc’s 2-1/2 year crisis.

Investors started the week by taking some of that profit off the table. The MSCI index of top global shares was down 0.1 ahead of the opening bell on Wall Street, with the euro and stock markets in London, Paris and Frankfurt all slightly lower.

US stock index futures also pointed to a lower open on Wall Street, with futures for the S&P 500, Dow Jones and Nasdaq 100 all down just over 0.2 percent.

Europe faces another testing week, with Dutch voters going to the polls and Germany’s constitutional court set to rule on new powers for the European Stability Mechanism, the euro zone’s new bailout fund, both on Wednesday.

Since ECB President Mario Draghi first mooted the ECB’s new crisis plan on July 26, world stocks have rallied more than 8 percent, euro zone blue chips have jumped almost 20 percent and the euro has risen more than 4 percent. Analysts are wondering whether the gains can continue.

“The Draghi effect obviously helped the markets hugely, so people are likely to be a bit more hesitant this week,” said Hans Peterson, global head of investment strategy at SEB private banking.

“Risk appetite is likely to be on the way up, but we have to clear some hurdles, and the things in Europe have to go according to plan. The key issue this week is the approval of the ESM by the German constitutional court.”

Strategists at Goldman Sachs also issued an upbeat note on equities, saying that while there were worries over China’s wobbling growth, the brighter European news and signs of gradual improvement in the US were both positives.

There is still room for market rallying,” they said, citing their target for the Eurostoxx 50 to hit 2,700 points in the next 12 months. “From current levels, however, we expect further gains through to year-end, but at a slower pace,” they added.

BOND FOCUS

The euro followed the downward trend, easing against the dollar, but stayed close to a near four-month high hit on Friday after below-forecast US jobs data fanned speculation the Federal Reserve may launch more monetary stimulus this week.

Hopes that powerful ECB intervention in Italian and Spanish bond markets could finally draw an end to the seemingly endless euro crisis has seen massive upward shifts across global markets, from European stocks and treasuries to commodity-reliant economies.

Spanish 10-year yields have tumbled more than two percentage points from an unsustainably high 7.8 percent to around 5.6 percent, while the reduced demand for safe-haven German debt has pushed equivalent yields up 36 bps from their record lows to stand at 1.48 percent.

Spain’s borrowing costs hit a fresh five-month low on Monday while German Bund futures bounced around in choppy conditions, supported initially by worries over Greece’s fiscal repair plans and Fed aid hopes before going into negative territory around midday.

U.S markets are waiting eagerly to see whether the latest data have convinced the Federal Reserve that more stimulus is required.

The benchmark S&P 500 index rose 2.3 percent last week, its biggest weekly gain in three months.

SEB’s Peterson said it was still uncertain whether the US central bank would act and cautioned that any new support was likely to provide a temporary rather than a long-term lift.

“What is really important here is the wider macro picture, whether the euro zone sorts itself out and what happens in China and Asia,” he added.

Fresh data from China on Monday showed exports grew at a slower pace than forecast last month while imports surprisingly fell, underlining weak domestic demand as the global economic outlook dims.

Oil markets are riding high, underpinned both by hopes that economic stimulus around the world will fuel growth and geo-political tensions in parts of the Middle East, the world’s most important oil-producing region.

Brent crude futures for October delivery were trading 46 cents higher at $114.71 per barrel by 1248 GMT, after settling up 76 cents on Friday. US crude was trading up 7 cents at $96.49 per barrel.

“Chinese data had been expected to be weak, so to some extent it has been taken into account in oil prices, but having said that, it basically caps the upside,” said Masaki Suematsu, energy team sales manager at Newedge Japan.

Copyright spygun/Reuters, 2012

Venizelos’ Oral Plan

Here is a 10-point “plan” for a strategic framework, presented to the Greek Parliament by PASOK leader Evangelos Venizelos. He described  his 10-point proposal as a plan for an “integrated national strategy”. (I have highlighted certain words in BOLD.)

1. There is need for immediate actions by Greece in the period of August-September that will concern high-level contacts with the leaders of the EU member states and also the institutional partners (European Commission, European Central Bank and International Monetary Fund), and also for shielding the domestic front. The national negotiating team must be formed and the opposition called on to contribute to the effort. Venizelos said it would be a “mistake” and “insult to the country” for it to be said that it has been inert with respect to the structural changes, adding that the changes effected from 2010 to the present are “unprecedented” and the reproduction of such stereotypes at Greece’s expense must stop.

2. The country must manifest its strong determination to promote structural changes, and noted the 77 obstacles pinpointed by the Fund for privatisations, which he stressed need to be immediately eliminated through legislation.

3. The end fiscal target must immediately be confirmed, so that from a deficit of 11.5 billion euros we will go to a primary surplus, and a 2.6 percent growth rate must be achieved.

4. The fiscal adjustment period needs to be extended to 2016.

5. It is necessary to draft an updated programme for the period 2012-2016, so that the 2012 budget may be closed and a draft budget drawn up for 2013, which should be tabled in parliament in early October.

6. A proposal should be drawn up for full itemisation of the programme for 2012-2014, without across-the-board cuts that affect small and medium incomes.

7. Improvement of the macroeconomic climate which, if improved, will enable an easier implementation of the second stage of fiscal adjustment in 2014-2016.

8. Immediate and tangible measures must be taken to increase employment in tandem with a reduction of the cost of money, as well as measures to control prices.

9. Measures must be taken to reinforce social cohesion.

10. The international communications framework that is negative towards Greece must change, in cooperation with the partners.

The “must be” phrase is the one which gives the illusion of action but in fact means absolutely nothing. It is not even a statement of intent. You will notice (in bold above) that Venizelos is using exactly the language which I outlined HERE .

Political pronouncements would carry far more gravitas if they sometimes contained dates and more definite verbs. For example, looking at just ONE of the items on Mr Venizelos’ shopping list:

See the wording of No 8 (above)…NO amount…NO date…..in fact, NOTHING definite. Here’s a slight modification:

The original:

8. Immediate and tangible measures must be taken to increase employment in tandem with a reduction  of the cost of money, as well as measures to control prices.

A modified version:

8. Directly through the Treasury, we are allocating €5 billion to be available to employers, specifically for them to hire new people. This money is available now and the employer will be paid the equivalent of six months of the new employees salary on Day 1 of that employee joining the business. This facility will be open only to those employers with an annual turnover of under €500,00 per year.  All start-up businesses will be completely tax-exempt for 12 months.

(The figures are only for illustration purposes but they do shed some light on the difference between empty political words and a PLAN.)

It looks as if Mr Venizelos continues to practice exactly what Eurozone politicians have been indulging themselves in for the last FOUR years:

ORAL POLITICS :  Words WITHOUT actions.

Gideon’s latest Wheeze!

Various half-arsed stimulus packages by clueless governments without properly jump-starting their economies achieve nothing but a postponement of the day of reckoning.

Banks will fail, more housing  markets will collapse and panicked governments will attempt to raise taxes from the survivors as they borrow even more in a vain effort to create yet more economic stimuli.

Today, in the UK, after Project Merlin (“a great success!”), the National Loan Guarantee Scheme (“a great success!”), we have the launch of the Funding for Lending scheme.

This latest scheme, is potentially worth £80 billion but to the trained eye, looks suspiciously like rebranded Quantitative Easing.

This scheme , like most “schemes” promises no economic outputs or goals and the wording is very interesting (and flabby):

Funding for Lending aims to encourage banks to lend to both businesses and households”.

It “aims to encourage”.

Give it a rest, Gideon.