Tag Archives: Global Economy

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!

Gideon Floundering?

The MOST wretched Cabinet job is that of Chancellor of the Exchequer. I  spent years criticising the “Iron Chancellor”,  Gordon Brown. During his posturing days when he was surfing the economic wave created by his predecessor Ken Clarke and even when Tony Blair had declared him the “best Chancellor we’ve ever had”. I saw that he was overspending and that if he’d carried on, the solids would have hit the air conditioning even earlier than they did .

He was given the credit for keeping us out of the Euro but I suspect that the only thing that stopped him was his innate inability to make a decision. He was constantly hounded by self-doubt – and quite rightly so.

It took others several years to realise that the Iron Chancellor was more Irn Bru than of  the metallic variety and in retrospect, perhaps  didn’t quite deserve the consolation prize of the keys to No.10.

I had a sneaky admiration for Alistair Darling because he and I once shared a platform in the early 90s when he was in charge of Pensions. He came across as  a Minister who had taken the trouble to familiarise himself with his subject and anyone who can do that with Pensions earns my undying respect. Plus, when the bankers crapped their own nest, he was the one who managed to wipe their noses and bottoms, give then some pocket money and send them back to their offices without alarming the rest of us.

His contribution has never been fully recognised because his then boss was arguably the worst manager and motivator I was lucky never to come across.

Nowadays we are in the hands of Gideon “George” Osborne. His public manner and voice belie that fact that he is a shrewd operator and very bright. The only problem that he has is one of communication. He is too defensive.

The Labour Government left him NOTHING. In effect, he was (and still is) is in a start-up situation. He has to create the conditions which give the rest of us a reasonable chance to create an economy which, had it been a horse, would have been shot by now.

For several years I have been saying that Economic Theory needs a healthy dose of Chaos Theory appended to it. Consequently, what has become increasingly obvious t0 some of us in the last few years is that economic forecasting has become a mug’s game. Both economic forecasters and politicians ought, by now to have learned that any projections have an inbuilt error of up to 100%. So, if growth is forecast at 5%, it is just as likely to be either 10% or Zero. This is exactly what we are finding today with inflation predictions. The Governor of England may as well hire Russell Grant or Mystic Meg to hand him the numbers.

Hence the overuse of the phrases “Higher than expected” and “Lower than expected”. In spite of the unpredictable variables – from the Japanese Tsunami to the Middle East Riots, politicians still persist in their own special brand of blind optimism. The nearest that they come to admitting that they are no longer in control of events is the occasional “Because of global economic conditions…”

Unfortunately, blaming the Global Economy now looks like an excuse, on a par with “the wrong kind of weather”. The “Global” excuse is only pulled out of the hat when things appear to be going wrong.

The fact is that  a loosely integrated global economy  contains an infinite number of variables, so Finance Ministers ought to relax and freely admit that currently, they are OBSERVERS rather than SHAPERS of economic events.

We have just seen a “surprise” increase in the United Kingdom’s unemployment figures. The figure is 2.49 million – which in reality means that there are probably over 3 million people out of work.

The Chancellor says that in spite of the “disappointing” figures, his policies “are creating jobs” – and do you know – HE IS RIGHT!

He has already cited “world markets” as an explanation – and once again, he is absolutely right! Unfortunately, after a year of unnecessary excuses, that in itself looks like yet another routine excuse.

The number of unemployed women has risen by 38,000. That is the sharpest increase in 2 years and the highest number of unemployed women for 23 years. Why is that? The truth is that no-one really knows. Unfortunately, politicians and “experts” cannot find it in their hearts to admit that they do not know. So we will have yet more pointless explanations.

The Chancellor of the Exchequer is NOT responsible for the current moribund state of our economy. That was caused by a mixture of Gordon Brown’s ineptitude, crooked Bankers and the resulting recession.

George Osborne may have the communication skills and manner of a 30s lounge lizard but, technically, he is without doubt the best we’ve got.

He deserves our support so that he no longer feels the need to sell us  what is undoubtedly the most  foul-tasting economic medicine that has EVER been dished out by a peace-time government.

Be nice to your Chancellor. The alternative sits on the bench opposite –  a Brownite about to explode out of his grey suit and it ain’t a pretty sight!

Hug a Hooray.

Politicians? Self-interest? Surely not!

The world’s economic problems will not be solved by politicians. Firstly because they do NOT have the skills to deal with a multi-causal, muti-faceted  and highly technical international phenomenon. Secondly, their decision-making is always impaired and affected by the very ugly spectre of self-interest and their primary preoccupation: re-election.

If you look at the very front-end loaded “austerity programme” here in the United Kingdom, it is no coincidence that so much has been concentrated into the beginning of the government’s  new term in office. The hope is that if all the bad stuff is dealt with at the beginning, then the year or eighteen months leading up to the 2015 election can be a time of faux-plenty with give-aways and maybe some unravelling of the incredibly draconian measures which have been thrust upon us in this last year.

The government could have “phased” the introduction of its programme of economic destruction but its other agenda was to please the euro bankers and money lenders – certainly NOT the electorate. The bankers (as usual) demanded immediate gratification.

There is a good argument for only ever allowing a government a single-term. Unfortunately , after 4 or 5 years, many leaders demand squatters rights over their job with some having extended their tenure for decades.

It would be MOST refreshing for a political leader to say ” We are in deep trouble and at the moment we do not have all the answers, so we are going to try a few random things in the hope that some of them work”. THAT is the truth because  THAT is what is happening.

The politicians REALLY have NO idea what to do next. They have joined us peasants in the gallery as mere observers while the Global Economic Tornado gathers strength and velocity.

The first thing that should be done is for that most sacred of sacred cows, the world’s banking system to be reappraised. Once again, self-interest and re-election prevent the politicians from doing anything but complain  and maybe introduce small doses of irrelevant pseudo anti-bank legislation. More window dressing.

Banks should be a service industry which supplies and redistributes money and not the Black Hole which it has become.  The billions  that banks generate in profits is NOT money which has been generated by production or even work – it is “profit” which takes money and value OUT of the economy. Bank profits are profits which commerce would have generated if banks did the job that they were supposed to do.

So that’s Number One on the agenda.

Now who has the guts to take that first step?

25 Predictions for 2011

The predictions for 2011 are in no particular order and are a mixture of both British and world events. For the last two years, governments all over the  world have been doing no more that playing a wait-and-hope game;  the political equivalent of whistling in the dark.

Here in the UK, the Coalition government has introduced its so-called “austerity measures”. The rhetoric may well be very impressive  to the IMF or the European Bank but what is really happening is that the day-of-reckoning is being postponed by being nudged along by successive disjointed government policies. Everyone is confused.

For instance, in spite of the very negative economic prognosis for the coming year, Stock Markets have been climbing. That  demonstrates is that there has been a final dislocation between economies and  world markets. Stock markets have become no more than a large sandpit in which speculators and bankers play their money games and continue to throw sand not-only in each others eyes but  have also somehow managed to blind whole governments.

Bankers have progressed from custodians  and redistributors of money to self-important untouchable deities who are feared by all.

The most bizarre aspect of Global Economics is the inconsistency with which politicians address  it. 

The blame for the collapse (yes!) of  Western economies is often ascribed to a “downturn in the world economy”. However, governments continue to tinker with their own economies without considering any global impact of their policies. In reality, there is no Global Economy. It is a nonsense phrase.  All that we really have is a large number of  increasingly interdependent local economies. It is a jigsaw of economies, the pieces of which can never fit together properly.  The only solution will be a world currency (that would stop the speculators!) and a real globally conceived, calculated and controlled economy. 

So what is holding us back? That’s an easy one – politics and man’s natural parochially tribal nature.

One of the most ignored aspects of modern economics has been the rise of the bureaucrat. In that group, I include not-only large slices of the public sector  but all non-productive professions such as accountancy, the legal profession, consultancy and those who “analyse”. They do not produce anything new or tradable and  there are too many of them. Large slices of the banking profession also fall into that group.

These groups are a massive a drain on an economy. They do not add value – on the contrary, they take. These “professions” are all due for rationalisation because their only contribution is to take and redistribute money which has been  earned by others.

It is highly probable that 2011 may be remembered as the year when the waiting and procrastination had to stop so here are the predictions:

1. The era of BIG Government is dying and all governments will be forced to cut public expenditure.

2. This will be a year of strikes, general public unrest and riots. Students and pensioners will stand together.

3. The Euro will finally stop twitching and die. Germany has already realised that it can no longer remain in the Eurozone when it it surrounded by so many lame-duck economies.

4. Most western countries will experience cuts in police, the fire service and rubbish collection. Paradoxically, times of austerity produce more crime and a substantial increase in the incidence of insurance-inspired fires.

5. China is beginning to experience inflation. This will result in an upward revaluation of the Yuan – which effectively will be a devaluation of the dollar.

6. Banks will be punished for holding too much cash and  for continuing to withhold funds from commerce and industry.

7. There will be a downward correction in world stock-markets. That is very likely to happen very early in the year.

8.  Gold and Silver prices will decrease early in 2011 but rally massively during the rest of the year.

9.  Commodity prices ( wheat, soyabeans etc) will rise very substantially during the year.

10. Oil will cross the $100 per barrel barrier.

11. In the United Kingdom, the Coalition government will collapse and there will be a general election in October 2011.

12. Nick Clegg will be challenged for the leadership of the Liberal Party and  is likely to “cross the floor”.

13.  The Labour anti-Ed Miliband movement will become more and more vocal as the year progresses and  as Labour realises that they elected the wrong man.

14. After the next government reshuffle, Vince Cable will become Minister-without-Portfolio and will quietly be put out to grass.

15. The concept of Man-Made Global Warming will be further eroded as a scientific theory.

16. We are overdue a nuclear or chemical accident. Look out for one in either China or India.

17. An earthquake in California is also overdue.

18. There has been some tittle-tattle about the state of the Beckhams’ marriage. Do not be surprised if there is a sudden announcement of an impending divorce.

19. As a result of fewer students, public sector redundancies and over-optimistic projections in the manufacturing industries, UK unemployment will officially breach the 3 million barrier.

20. The 279 Council elections in May 2011 will signal the beginning of the end of the Liberal Party. They are already an endangered species and will now  progress to near-extinction.

21. The referendum on the alternative vote will see the “first past the post” system retained. That will signal a long-overdue questioning of the Liberal leadership.

22. There will be an anti Coalition revolt with Labour and the Conservative right-wing standing shoulder-to-shoulder with disaffected Liberals.

23. The January visit to the United States by Chinese President Hu Jintao will not produce a cosy new relationship between the two superpowers. On the contrary, the visit may well produce  “sabre-rattling”  for the rest of the year.

24. Israel will carry-out a pre-emptive strike on Iran – as a result of the latter’s nuclear programme. Needless to say, the United States will wade-in with all guns blazing.

25. Sudan will implode. That will produce an ethnically-driven Yugoslavia-like civil war. Needless to say, the United States will wade in with all guns blazing -only this time they will be wearing United Nations hats.

The most difficult and surreal world political question – and potentially, the most explosive (literally) is whether the American nation has the appetite to elect Sarah Palin as the next President of the United States. Because, as sure as eggs is eggs, she will be a candidate. That all depends on how far to the right America is willing to lurch as a result of the inevitable failure of Obamanomics.