The Bewilderness

One day they will regret the long grass

The Draghi put may come to be seen as a short-term delaying tactic that destroyed any potential for implementing a deeper political and economic union. A deluge of money reduced the pressure on Italy and Spain removing the need for a coordinated bailout. Proposals for a banking union and greater political unity lost any immediacy and, as Euractiv have reported, are now pushed forward till next year. The drive for ever closer union has also become entagled with the electoral cycle of the paymaster, Germany: due to take effect in September this year. Angela Markel is not allowing European issues to affect the election since Eurosceptic parties are already outflanking the Christian Democrats and the Free Democrats on this single issue. 

But political expediency, in its own terms, is not news. Angela Markel agreed with Francois Hollande, at a summit meeting on the 29th May, that these issues would be negotiated and agreed upon after the European elections in May 2014. That is a delay of a year, probably eighteen months. This is where the issue of the slow burn may find them out.

The Economist cover for last week described the political leaders of the Eurozone as sleepwalkers. The urgency of the markets has been replaced by the apathy of stagnation. The problems have been institutionalised with an economic desert in southern Europe. This leaves the ingredients for further emergencies and bail-outs in place; spreading to other candidates within the currency union such as France and the Netherlands. The balm of press releases will not delay or prevent this crisis. The continual decline in economic activity and rise in unemployment cuts across the nonsense spouted by Eurocrats and renders the continent vulnerable to global crisis.

The Europeans will regret that they did not act whilst they had an opportunity to do so. Pain postponed is crisis redoubled.

Stripped of AAA

Moody's has decided to strip the United Kingdom of its AAA rating; rather a disappointment from the government's perspective after their three years of austerity rhetoric. This is not a surprise for onlookers. What did they expect after beating the drum about spending cuts? And avoiding any actual pain. The coalition government will be viewed as a missed opportunity. Monetizing debt on the backs of wages, foisting pain on to the next generation and avoiding the radical cuts required has led to a fatted state draining life from the private sector aided by the stagnation of zero interest rates.

There may be plenty of external headwinds but our predicament is predictable, political and homegrown. Plenty of pain all round.

Euroland has a plan, god help us all

Euroland is the new Schleswig-Holstein Question. Nobody knows the answer except for three people: one has forgotten, one is dead and one is mad. Mad and dead may be farcical, but pretending to know the answer is just plain bad. When one man from the government says they have a plan, you run; when seventeen say they have a plan, you hide all your assets. This is the latest deliverable from the currency union that brought you Berlusconi's austerity (avec marocaine) and youth unemployment that devastates a generation.

The debt cycles are feeding upon themselves, each pressure point cascading to the next in linked feedback loops. The diseased arteries of finance in Euroland are drying up: undead institutions sucking lifeblood from the sovereigns, and under the radar, from their own customers. The causes of this financial-political complex are opaque, but its parasitism was launched after the financial crisis in 2008. Unable to accept the necessary pain from deleveraging, politicians and financiers joined together in extend and pretend.

The danger lies in those problems abjured during the good times, and now festering ever closer to the surface. If the banlieues light up at a time of growth, what will a true downturn bring? Acquiescence? Further isolation from the host society or an eruption?

Keynes runs with the bulls

Are the bears wrong? Every small setback is shrugged off, every small signal of economic growth is cheered onwards. The Dow has just broken the 10,000 barrier and new statistics indicate further growth.

Economies are always very hard to read, yet the had trends remain very uncomfortable for economic growth. Bullish analysts have little foundation for their sentiments, and rely on the thrust of fiscal stimuli to kickstart the economic engine.

Why should this offshoot of Keynesianism prove right now?

Have we avoided slump?

Link to an interesting map at Mint showing the set of declines against the US Dollar. Britain is in good company with Mexico and Russia: though the declines are mostly commodity linked, and other industrial heartlands head upwards, which is another sorry story for them.

The hollowing out of Europe and Japan is continuing apace. Now, the decline in commodity prices has begun to hurt Australia. Export prices have plunged whilst an increase in the value of the Australian dollar will begin to put a following behind the contraction.

As the trends continue without any sign of abatement, are we facing a round of protectionism and beggar thy neighbour devaluations? It seems that both the Euro and the Japanese yen could be subject to collapse at some point, as the economic fundamentals are upset by economic and demographic decline.

The consensus views sharp contraction, followed by a floor and an anaemic recovery in 2010. Nobody wants to consider the alternative: slump, though it has already hit Ireland and some other countries.

Idiot consensus calls time on growth

Whilst the sheer scale of the drop has reached a floor, the bouts of optimism infecting the media whores has been tested to destruction. Weened on the teat of confidence, they know no other currency and boost growth as the panacea to their ills. I think not, as do wiser heads:

The National Institute of Economic and Social Research (NIESR) has calculated that GDP, which is a key measure of a country’s economic strength, dropped by 0.4 per cent in the three months to June, leading to the fifth consecutive quarter of economic decline.

Some analysts had predicted that GDP would stagnate or even rise slightly in the second quarter, but this is now looking increasingly unlikely.

Both manufacturing output and industrial production fell in May, contradicting the idiot consensus that sings Springtime for Britain and Brown. The debt overhang and the large public deficit show that priming the pumps of public expenditure is the only engine in town.

An unsustainable policy consensus will lead to crisis. Cutbacks to short-term stagnation. Whoever is mapping this new territory is not in government or the Bank of England..

Dishonesty in the dire times of the depression

The clear danger signs are here that the temporary stimulus provided by the huge growth in government expenditure is already beginning to peter out. As one would expect from the huge force of debt arrayed against the thieves. They have plucked the goose so much that it is now spitting feathers.

The banking problems caused by debt have not been addressed: nationalise and then leave them to work out their own bad debts. The amount of lending in the country continues to dry up and it is feared that inflation will rise due to quantitative easing:

A continuing drought in bank lending, evidenced in the latest figures from the Bank of England, and the threat that spiralling public borrowing will feed through to higher interest rates and inflation, are judged by international economists to be mortal dangers to a sustained recovery.

The Organisation for Economic Cooperation and Development (OECD), which comprises the 30 most advanced economies in the world, added to the gloom, saying that Britain remained "deep" in recession and faced a "bleak short-term outlook".

"The recovery is likely to be slow and unemployment is expected to climb significantly," it said, adding that the Treasury could do "considerably more" to fix the public finances.

From a short-term perspective, politicians have confused short-term stopgaps with solutions, especially where the electoral cycle is causing deceit to be used as a hiding place for these problems. Such is the charge from David Cameron as dishonesty in dire times results in a levy on Labour's polls:

Mr Brown is likely to be dealt a further blow today when official figures show that the economy has shrunk even more than thought this year. The Office for National Statistics is expected to revise its figure for the drop in GDP in the first three months of the year to 4.4 per cent.

Meanwhile, a ComRes survey for The Independent will show that only one in five people trust Labour to decide where spending cuts should be made, compared with 31 per cent for the Conservatives.

As the current equilibrium is unsustainable, we may see either a crisis or a change in circumstances that demand public expenditure cuts before the election. Does Brown think he will be lucky enough to stave off this threat?

The depression: sloping away?

News from the economic front either trails or mimics the Great Depression. The problem for us is that we do not know which is the right path. Some use the anodyne and specious argument that good news on a rise in confidence is some biblical adjuration to get out and spend more, thus letting all the policymakers off the hook. This blog, tracking news from 1930, lays that specious gem to rest and stakes it out.

The difference between now and then is the scale of governmnet intervention, with its attendant effects upon the downturn. The trajectory will differ, the problems do not: meaning that we face the same banking bust and overhang of debt, neither of which have been solved. Graphs from the Council of Foreign Relations show that some of the indicators are not as bad as the 1930s, that house prices have fallen much further, and that the general price level has not fallen as far. Of interest is how this also compares with pre-war recessions.

Government intervention will make a difference in the downturn. It has done so, but like Smoot Hawley, it is too early to tell how far the relief of short term pain translates into long term loss.   .

General Motors: Obama sings band-aid for the terminally ill

The consequences of the bail-outs have been profound for the Anglo-Saxon economies. Whilst certain sectors were considered too large to fail, the corporate governance failures have been compounded by political interest and distortion by lobbies such as trade unions.

The banking and automotive industries have been bailed out because they are judged to be too important to fail.  It has been extraordinary how quickly governments have become, in the wonderful American phrase, shovel ready.  In other words, everyone is now a Keynesian.  The question must be whether these new habits of intervention will stick after the immediate crisis has receded? Governments don't have the competence or resources to get involved in the detail of managing businesses..

They have recreated the failures of yesteryear, the grandest of which is the equivalent of Leyland. Chris Higson, Professor of Accounting at London Business School, gets the money quote:

Indeed, government help may be akin to putting a band-aid on a terminal patient..

The Bear Pit: Economic Decline in 2009

Europe is beginning to face a prolonged slump as the tides of liquidity continue to recede. All continental countries continue to decline as the European Central bank maintains a higher interest rate and lower money supply levels than other advanced post-industrial economies. Most alarming is the news that credit conditions are worse than they were at the height of the credit crunch in the winter.

Europe's industrial output continued to slide in April and was down 22pc from a year earlier, suggesting that talk of a "V-shaped" rebound is premature. At best, the pace of decline has slowed. Production fell 23pc in Germany and 24pc in Italy.

The ECB expects the eurozone economy to contract by 4.6pc this year and a further 0.3pc next year, with no recovery until mid-2010.

Structural rigidities of the region raise risks that it will remain trapped in slump well after the rest of the world has turned the corner, as it did after the dotcom bust.

This time Europe faces the extra head-winds of a strong euro, over-valued against the 45-odd countries such as China that are linked to the dollar. This currency effect is slowly "hollowing out" Europe's industrial core.

The key question is whether a fiscal stimulus in other countries will have prevented or postponed the painful adjustment. This is a gamble on which two politicians have thrown the political dice: Barack Obama and Gordon Brown.

As yet, the United States is giving off signals of a critically ill patient:

His comments echoed those of others reacting to the mixed data, with Brian Bethune of IHS Global Insight saying that in spite of the uptick in retail sales, the prospect of a swift consumer recovery is far from certain. "The state of retail sales remains weak. Wages and salaries are declining on an annual basis, and net household worth can at best stabilise in the second quarter of 2009. Overall, we are still looking for a decline in real output in the second quarter of 2009," said Mr Bethune. .

If they are not lucky, the patient may yet have another heart attack on the table as there is no way that stimulus will kickstart swift growth, which would require debt to vanish and asset prices to rise. Haven't we been here before?