Monday, 25 November 2013

Where have all the bubbles gone

The UK economy may be in the midst of a stellar year in which growth has returned, most unexpectedly, but there are special circumstances that have benefited us.  Elsewhere in the developed world, we face a persistent economic stagnation. Across the developed world employment rates are low, wages and disposable income are depressed; real interest are still negative; government debt is staggeringly high and rising; companies and individuals prefer to hoard cash than invest and to cap it all it looks like deflation is now stalking the planet. 

Despite extraordinary efforts by the world’s central bankers in the aftermath of the Lehman’s default, which has included the massive increase of liquidity (QE) and negative real interest rates, five years on the outlook is pretty poor.  Larry Summers re-coined the term secular stagnation to characterise the economic landscape and went on to float the idea that the west has grown on the back of asset bubbles for the last 20 years (Property, DotCom, Emerging markets, Sub-prime, etc) and that any return to pre-2008 levels of growth will demand some new bubble to help us along.  Larry Summers suggests the level of real interest rates required to generate full employment might be, say, -2 or -3 per cent.  More practically bankers in both the Fed and the ECB are now contemplating negative interest rates on short term money they hold over-night as a way of stimulating demand.  

Where have all the bubbles gone

Thursday, 21 November 2013

Other Men’s Flowers

There are plenty of people who live their life at work as is it were some intellectual exercise, choosing to take decisions that are for the great good but have a terrible impact on their own careers.  Field Marshal the Lord Wavell was one, he chose to pick a fight with an obdurate and all-powerful Churchill and was summarily dispatched to pull together his famous anthology of poetry “Other Men’sFlowers” rather than take any further part in the Second World War.  Britain lost her most talented commander but gained a literary gem. 

If you don't have it, do buy it
One might expect this kind of selfless attitude from a Wykehamist but it’s wholly unexpected, and unwelcome, from an Etonian and a politician to boot!

Monday, 18 November 2013

The world's economy is off-balance

Economists around the world are dusting themselves off after a bruising few years of terrible forecasts, messed up assumptions and missed diagnosis.Whether you have been on the Rogoff / Reinhart or Krugman side of the argument there are red faces all around. The simple problem is that economies are not meant to behave in the way they are.  We have got to a point where old models (classical, Keynesian or monetarist) don’t work and excuses just don’t wash.  The problem is that after five years of negative realinterest rates the world’s economy has been unable to return to “historic trend” levels of growth – we are still bumping along the bottom.  Most economists believe that interest rates can be set to create a sustainable equilibrium in the economy where growth, employment and inflation can be held in a positive balance.  The absence of the interest rate equilibrium after years of interest rates set near or at the lower bound of zero raises the question as to what the alternatives are to negative real interest rates might be?  Larry Summers the former Secretary of the Treasury of the United States made  an important speech on this subject a couple of weeks ago.

Larry Summers - tired of waiting for the recovery

Friday, 15 November 2013

The Great British Bail-in

There is an old boy in our local community who has, over the last 15 years, restored a scruffy over-grown wood into a beautiful heathland with heathers, gorse and wonderful roan trees.  This labour of love has been completed with some support from the village but without the time, leadership and effort of one man we wouldn’t be able to enjoy the great amenity he has created.  He has done this because he can afford time but he has given this time so lovingly.

Not out of the woods

 As with this wood so with the national economy;  in 2008 the British economy and our way of life was hanging in the balance.  The financial bust created a structural deficit that amounted to 6% of the national economy (caused by the banking collapse) and on top of that we had the recession the rest of the developed world suffered adding some 4% to the downturn.  There is no precedent for a the UK economy taking a 10% hit to its national income in two years.  Following the bust we have been through a very painful process of rebalancing the economy so we can start again.  The rebuilding process has been achieved by a section of society is the same stoic and silent approach that the man in wood has brought to his restoration.

Thursday, 14 November 2013

Who's Been Eating My Porridge

Even the Bank of England has now confirmed that the green shoots of recovery are growing strongly and that we have reached escape velocity.  Even inflation is falling towards the Government’s target range of 2%.   Some might describe this as the perfect Goldilocks scenario for our economy– not too hot not to cold! However there is one angry bear that might ruin the breakfast – poor productivity and falling living standards.

Tuesday, 5 November 2013

The Return of the Robber Barons

In the US there has been a huge row brewing on the “take” that the top 1% earners have as a proportion of all wages, currently they earn 20%.  This is the highest share since 1928; the roaring twenties with The Great Gatsby and all that.  Conversely in the UK there is a remorseless focus on the poor share that low paid workers receive, the so called crisis in living standards;  and this weekend Ed Miliband offered a cack-handed subsidy solution to this important issue.
David Miliband's brother
The tales of low income poverty and indecent wealth tie together neatly in the recent spat at the Grangemouth oil refinery in Scotland.  The refinery is owned by one of Britain’s wealthier individuals,   Jim Ratcliffe, the somewhat reclusive 61-year-old chemical engineer turned offshore billionaire and owner of Ineos.  The dispute at Grangemouth was initially about victimisation of a Union leader but it turned into a battle of wills between Ratcliffe and the Union Unite over pay and conditions at the plant in return for job security and investment.  Ratcliffe played “hardball” by threatening to close the plant and eventually a deal was done on his terms.  The left has painted Ratcliffe as a sinister bogeyman and the media have added to the fun by christening him “Doctor No” in deference to his lifestyle on his €100 million super-yacht Hampshire ll.   The yacht is 258 feet long with a helicopter cum sports deck, a crew of 23 and seven suites, the perfect lair for the “Bond villain”.

Ratcliffe's yacht - Hampshire ll 

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