Archive for November, 2011

Autumn Statement

Wednesday, November 30th, 2011

Given the reality of the situation and ignoring the phony shock of some economists, George Osborne did the best he could with a very bad hand on Tuesday. This is not to say he got it all right, but he got as much right as anyone can expect, given the underlying facts. These are that the debts of the Eurozone, the U.S. and the U.K. are so big as to put a huge brake on any form of growth. To that has to be added the difficulty that revenue falls short of income in the U.K. to the tune of £1 in every£4 and it has the highest total debt in the world.

The U.K. is now fighting on three fronts. There is an international debt storm sufficient to trigger a global recession, there is a crisis of control of the euro in a structural sense and the state of U.K. personal, corporate and public finances demand correction to avoid calamity. At the time of the crash and after researching the headline and underlying figures, I remarked that the problem was so big that it would take a generation to be resolved. At first it looked as if I would be proved wrong. Now it beginning to look as if I may have been right.

The OBR forecasts seem to have taken many by surprise. The mistake has been common that we were dealing with just a bubble and things would soon bounce back. The reality is that recovery has to come from within which will be a slow process, it cannot be hastened by borrowing more and that in order to get the year on year structural budget deficit into balance, the government will be forced to borrow even more than forecast in the short term.

Labour, having steered the economy into the situation where it was extra vulnerable to the effects of the banking crash, now demonstrates what amounts to economic illiteracy by suggesting that its own plan, which the electorate rejected, would have worked better. Had they been given the opportunity to put it into effect  we would now be facing borrowing costs like Italy’s, but with much more devastating impact upon every home in the land. A hype in interest rates on any scale would sink the frail finances of literally millions of people, because Britain, as a percentage of GDP, owes more money than any other major country in the world.

When a company is so over borrowed that it cannot any longer finance the running of its business without borrowing more and when the cost of the accumulated borrowing stifles the growth of the core business, which can then no longer keep up the payments, that company is bust. It is the same with sovereign debt.

Osborne might have been in a better place if he had introduced the measures proposed yesterday earlier, but he is right to maintain his cuts. It is imaginative, perhaps the first glimmer of hope that the core of the whole debacle is at last being understood in the Treasury, to try and fund development of infrastructure projects without more borrowing. Whether credit easing will make a big difference is less certain. Lending more money to new home buyers to reduce the deposit they have to pay is a bad idea because it will raise their repayments above levels, in many cases, which are safe. But at the end of the day, without picking over every detail, tow things emerge from yesterday. The majority of the measures may help a bit, but whether they do or not we are all in for a much longer haul, no matter what new plans are hatched, than anybody supposed and any economist foresaw.

Most significant of all, unlike America or the Eurozone, Britain has a secure government with a credible plan. That may, in the end be more important than the plan itself.

The Right To Strike

Wednesday, November 23rd, 2011

The government has signalled that it may introduce more stringent rules over strike ballots if the unions proceed, as they intend, with their disruptive day of action at the end of the month. It is certainly true that some of the votes for action were little better than a derisory minority, with percentages in the twenties, of the total membership.

A voting figure of 50% of the membership has been mentioned as a threshold for legality. This blog considers that is not good enough. It may be alright for a referendum or some such for a general public electorate, but a closed electorate of paid members of an organisation established to further a common interest is quite different. Trades Unions come under this heading. For them the demand should be that no strike is legal unless backed in a secret ballot by over 50% of the total membership.

Put simply, if the union leaders cannot get a fraction over half their members to back them, they do not have a mandate for anything. Time for that simple fact to be the law.

Euro: Tempers Rise

Wednesday, November 16th, 2011

Cameron has upset the Germans, who, in response, have started to say things which will catapult Tory backbenchers into orbit. Essentially the message from David is, get your act together and find solutions to the euro crisis. The message from Angela and her followers is, even though Britain is not in the Euro, it will still have to pay towards the rescue and restructure.

Last week it was all about new governments in Greece and Italy. Both appear to have new administrations, although neither is yet functional. The market turmoil has not steadied in consequence. It grows worse. A new country has been added to the list of possible casualties; France. There is disagreement between France and Germany over the role of the ECB. No other country from outside is willing to lend to Euroland bail out funds in whatever form. This includes the U.S. and cash rich China, Russia and India.

Thus it is that the dynamics, forecast by this blog a while back, are beginning to take on a very simple form. The only country able to pay is Germany. It is not yet fully clear that it is willing, but if and when it is, it, as paymaster, will set the rules. Other countries will have to surrender a good deal of sovereignty in order to survive financially. They will not be ceding to a collective. They will be ceding to one country; Germany. Whatever  further structures and councils are set in place, they will dance to Germany’s tune, unless a taxation system is set up to create enough cash flow to take the strain. This is why there is such enthusiasm for the financial transaction tax.

Taking a deeper look, it seems to this blog that the moment when new governance arrangements would make all the difference may have passed. This is because the markets have now begun to see that the overall debt, or if you prefer leverage, of the entire western structure is, if not unsustainable, certainly crippling. Sooner or later there will have to be a universal write down to sustainable levels for everybody, otherwise stagnation is the only prospect.

To illustrate this, it is worth looking back to the end of the second world war.  Germany and Japan emerged beaten, with their countries and economies so smashed to smithereens that they had to start again from scratch. They rose  to become numbers two and three in the ranking of economic powers of the world, behind only the United States. On the other hand Britain, having won the war, was crippled by debt and outdated infrastructure which it could not afford to renew. It lagged ever farther behind, never catching up or achieving the standards of prosperity of its defeated enemies. They emerged out of the war they had lost, stronger. Britain, having won, emerged weaker. When it did begin to prosper, it did it by debt. Now, once more within a span of sixty five years, Britain is struggling to reduce a growing debt mountain.

The moral is that it may be better to take the pain in a single dose early.

Euro Crisis: What next?

Friday, November 11th, 2011

Even this Blog cannot answer that question. The classic symptom of a situation out of control is that nobody can tell what is coming next.

We can be sure that this is the end of the euro zone Mark I, which sought to run its currency with loose undertakings, declarations and conflicting, but powerless, institutions. We can also be sure that the changes necessary for the survival of the project sufficiently to become Mark II, will fundamentally change the European Union. There are two very broad future structures in prospect.

The first is that there simply is no way significant treaty changes will be capable of getting the necessary democratic mandate and that the existing institutions will have to muddle on. In this event the paymaster is Germany, the German parliament will have to approve the money and this will only be available on terms and conditions acceptable to the German electorate. This will represent the ceding of financial sovereignty to one power within the euro zone and it, Germany, will provide the leadership, discipline and resources to keep the show on the road. This will include the imposition of new taxes which all will have to pay. Some will be happy, many will not. Those who cannot stomach such a thing will drop out of the euro and join the non-euro members of the EU, which grouping will become more like the old EEC. All of this will work perfectly well.

The alternative is that those countries willing to go the full mile, which would be likely to include France, Germany and the northern and eastern countries able to run sound economies, will pool their sovereignty on economic matters. They will need a Parliament, a Finance Ministry, a full blown Central Bank and possibly an elected President. France is reported to be working on just such a plan. The rest will drop out into the EEC type group with their own currencies.

With either style of outcome the UK and other non-euro EU members should find no difficulty in establishing a more arms length arrangement connected to free trade which will be just as economically worthwhile as the present arrangements at the time when the whole thing appeared to work. What is imperative is that the euro zone has to decide, very soon, what it is going to do, or face the certainty of collapse.

The Prime Minister of the UK, David Cameron, has indicated that full scale preparations are in hand in case the euro zone goes over the cliff. It would be wise to include the thought of a free trade area consisting of the U.S., the U.K. and Ireland. This would be the largest single market in the world, bigger than the EU inclusive of the UK and a lot bigger without. There are very close business links between the UK and US and culturally and temperamentally it would be a far better fit. Moreover it would be anathema now for the UK to use the Euro, ever. The dollar could be a different matter.

May: Is She Going?

Wednesday, November 9th, 2011

It’s too early to tell if the chaos in the UKBA is about to prove fatal to the Home Secretary. What is not in doubt is the confusion. The Minister says one thing and the former departmental boss says another, backing his challenge with lawyers. Whatever this looks, it is not good. Cameron will wish this excitement away, but it does not look as if it is any longer beneath the wishing threshold.

Following David Laws and Liam Fox, with Chris Huhne teetering (why does it take so long to investigate those speeding points?) another unexpected departure from the government would  be unfortunate. The Home Office has become a poisoned chalice. It is in charge of so many emotive issues with so many agencies within its thrall, that being appointed Home secretary is now equivalent to being made Northern Ireland Secretary at the height of the troubles. If May falls, Cameron would be really clever if he put Nick Clegg in the job. The difficulty is that Nick is cleverer; he would say no


Friday, November 4th, 2011

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Unison: Not So United

Thursday, November 3rd, 2011

The announcement of the Unison ballot result shows how little support the posturing union leadership, with its trade mark confrontational style, actually has among its rank and file. A 29% turnout is a slap in the face for any idea of an angry membership spoiling for a strike. Of those 78% voted for action; that is 22% of the total membership. Such strikes, putting innocent members of the public to great inconvenience at a tough time for everybody should not be legal.

The government should legislate that for a strike to be valid, an actual majority of all members must vote for it. Simple.

Greece And The Euro: A Way Forward?

Thursday, November 3rd, 2011

There is now such political confusion in Greece, with splits opening up even within the government itself, that it is not possible to prophesy what will be the situation even by the end of today. Oddly however, the situation in the Euozone has become much clearer.

People can be masters of their own destiny and organise affairs to lead them in this direction or that. Procrastination and indecision eventually mean that destiny takes over and natural forces control events. There was a time when actual fiscal union on  democratic principles could have been set up by the euro members of the EU. That moment has slipped by. The reality has now emerged. The Eurozone will be run by France and Germany and everyone else will have to do as they are told.

There is a massive ceding of sovereignty, not to some alternative authority in which all have an equal share, but to two countries, the most powerful, working together as what has become the Franco-German axis. They will now move to secure their banks against not only against Greece but contagion. That done they will sort out the rest. Already Greece is told no more money until you hold your referendum and then, no matter what your finance minister says, it has to be a Yes or No to staying in the euro. Significantly China agrees and is withholding support until the issue is decided. If the Greek government falls in the confidence vote tomorrow, its new government will be given the same message.

If Greece says no, it goes bust, as does every weak financial institution in Europe. If it votes Yes, then whatever government it has, is financially irrelevant. Greece will have to do as it is told. Once that issue is decided it is Italy’s turn. Then Spain Portugal and Ireland. The  reasoning behind this projection of events is historic.

For the whole of the post reformation period tension in Europe has been driven by rivalry between France and Germany, the most powerful nations on the continent. Britain has played a decisive role backing either the one or the other, usually siding with the weakest against the strongest. This time, over matters Euro, Britain is not a player. France and Germany had a choice. They could divide; in which case the Euro would collapse. Or they could unite. There was a row. They looked into the abyss.

They drew back and chose unity. Now they are setting the agenda and the terms together. The Euro will survive for them and for their satellites. It will remain a powerful currency, but it will be the Franco-German currency which other countries use, but do not have a say in managing. The rest can take it or leave it, but Franco-Germany will take the economic and fiscal decisions.

That is unless all the countries in the Euro agree to pool their sovereignty into a new fiscal and economic union and that all the affected countries ratify the deal. This seems unlikely.


Tuesday, November 1st, 2011

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Euro Crisis: Greece Bites Back

Tuesday, November 1st, 2011

This blog has many times stated that there is a limit to what populations will accept and Greece has now brought this prophesy to life. A referendum will be lost unless a significantly better deal is offered. Aside from tinkering, the paralysis in the structural dysfunction at the heart of euro governance will make this unlikely.

In the end the key issue is that many Western governments have borrowed beyond their capacity to repay and the eventual defaults will seriously damage those presently looking strong. For years there has been a false prosperity built on borrowed money, sovereign, corporate and personal, the cost of servicing and repaying which is now crippling economies and their constituent societies, to the point of near stagnation. The only hope offered by economists is to stimulate growth, but that is impossible without making the borrowing worse.

The Western economic model, especially the one favoured by the U.S. and the U.K. is medieval in its ability to suck resources from the less well off and give them all to the rich. An orgy of greed and selfishness has broken out wherein governments and other institutions, including the churches and in particular the Church of England, have lost their grip of values. This is fuelling a sense of outrage, especially among the young, which is beginning to manifest itself in protests, camps and sit ins in the relatively stable countries and violent strikes and demonstrations in those in greatest difficulty.

The game is now changing. Not only is the money running out, but so is the patience of the people. It is difficult to predict exactly what will happen, but it will be big and it will eventually need a universal default to put it right to create the conditions for a fresh start. When that happens it will be important to remember certain lessons. Together these will predicate that the most successful economic model is one in which the population feels secure and content, whilst at the same time inspired to strive for better. This requires low sovereign, corporate and personal borrowing in step with higher saving and much higher taxes funding top quality health care, education, infrastructure, utilities and social services. It is a model which incorporates the best of socialism with the best of free enterprise and could be called social capitalism.

As for the City of London and its offshoot Canary Wharf, a massive reconfiguration will be required. The day of universal banks, all of which are now technically bust if reality is faced, is over. Big Bang has lived up to the prediction in its name. The lesson learned, or if not it should be, is that far from being critical to the economy of the United Kingdom, we would actually be better off without it. Its continuing damage potential, the cost of its bail outs and the flawed economy it fuelled have all cost taxpayers far more than the revenue it earns. For this reason it is essential to impose discipline, logical mathematics, effective taxation and investment integrity upon the paper empire now smouldering. If some of them cry foul and up stumps and go, let them. We do not want them here. Let them go and wreck some other economy. Eventually they may wind up in China. There they may well be shot. This Blog will be hard pressed to shed a tear.