Austerity may be wunderbar

Five years on from the tsunami of the Lehman’s default and subsequent recession it’s probably a good moment to assess the relative merits of the monetary and fiscal strategies that developed countries have deployed to reboot their economies.  There have been a range of initiatives that have been tried but the “standout” response has been austerity, which can also be derived as a noun – austerian and there is even an antonym – Krugman!

Living it up - throwing a light on living standards

Since 2009 the UK has been in a liquidity trap, where depressed consumer spending has contributed to an overall shortage in demand.  This demand shortfall played its part in creating the “flatlining” economy that Ed Balls was so fond of.

We won't remember them!

The main reason for this lack of demand has been the squeeze on private sector pay and living standards, this squeeze has been vicious and this is because disposable income is “marginal”.  A wage earner on average income of £37,000 only has about £15,000 of disposable income a year after paying for taxes, housing costs, utilities and transport.  Since 2008 pay increases have been less than 2% a year and prices have increased at 3.5%.  Five years of real earnings decline at 1.5% annually means a reduction of £2,600 or a whopping 17% of disposable income. This squeeze was combined with a rise in the saving rate, as Britons have lowered their debt-to-income ratios.  

Living in the past

The last few days of summer traditionally bring us some warm weather before the autumn gales roll in off the Atlantic Ocean, and this year is no exception.  The orchards are dripping with fruit and the late flowering Asters and Dahlias provide a splash of colour before we drift into a world of grey and cold. To soak-up this fleeting moment fruitfulness before the mists roll in one could hardly pick a better spot than Brighton; nestling at the foot of the South Down a short distance from the Garden of England (the weald of Kent) the town is perfectly placed for an early autumn break.

Brighton Pier

Sadly for those planning to enjoy the last warm weather of the year they will have to share the town with the Labour Party gathering for their annual party conference.  For a modern new look Party Brighton is a strange place to pick, reminiscent of old fashioned 70s conferences where Trades Union bosses owned the agenda with a block vote and a Sterling crisis was the most likely ex-curricular distraction.  On second thoughts maybe the conference organisers have got the location spot on; Ed Miliband’s Labour party is starting to resemble the Harold Wilson era more and more.  Wilson was adept at the politics if not government, endlessly shifting his position to remain in power, his governments achieved little and left the UK in a parlous state.  Ed Miliband has a similar style – all grease paint but no show.  So it should be of no surprise that, as deftly as a well-trained circus act, the Labour Party have switched horses from a strategy that demanded a “plan B” for economic recovery to new mount that demands action to improve living standards.

Handbrake Politics

Although we are only 65% of the way through the duration of this government’s ‘fixed term’ it’s probably a good time assess the achievements of the coalition; as the next 18 months will be more about electioneering than government.  This audit is obviously vital for the LibDems and Nick Clegg as they had to prove two things over the last 3 years, firstly that they are fit for government and secondly that coalition is better than one party government. Nick Clegg’s speech at the recent LibDem party conference offered us the radical message, that the last three years of coalition is not just be an historical aberration but a permanent fixture.  His talk of "bringing down the two party system" and ending what he calls the "clapped-out politics of red and blue" is a bold pitch for a party with such a low standing in the opinion polls - about 10% share!

The Right Type of Recovery

The doomsayers in the British media, having been unable to call the timing of the recovery in the UK, are venting their frustration on the type of recovery we are ‘enjoying’.  A short while ago these same experts were screaming that we were on the edge of a triple dip recession and they blamed risk adverse banks and frightened consumers, who were both rebuilding their reserves and savings.  In six short months we have metamorphosed from ‘triple dippers’ to the ‘northern tiger’– growing at a rate not seen since the 1990s.  In a typically display of British pessimism we have been unable to take this good news at face value and the icons of our ‘thoughtful media’ the BBC, the FT and The Telegraph all tell us that we are in having the ‘wrong type of recovery'!  These doomsters say that at some point, the bond markets will bite us in the backside and that, house prices will fall, the cost of borrowing will rise and we will be back in recession. The overall indebtedness of our economy is the thing that worries these media luminaries and the numbers are quite frightening - currently we owe 300% of our GDP.

The Rate Debate Gets Interesting

Five years ago today Lehman Brothers the Wall Street Investment Bank went bust and for a few days the world held its breath to see what other banking titans might fall.  In the nick of time a new breed of super-hero was to step into the breach and save the day; central bankers arrived at the scene of the crash their pockets bulging with credit and cash for bail-outs and thank God they did.

Since the emergence of this new class of super-hero we have all be enthralled to the charms of negative real interest rates, quantitative easing and other creative policies for easing the money supply.  A new arrival on planet earth might be forgiven for thinking that messrs Carney, Bernanke and Kuroda actually are the people who rule the world and in fact they probably do!

Ding Ding Round Three of the Cameron Miliband Rivalry

All great rivalries are dependent on time to reach maturity, conflict in repetition is addictive, the history adds to the fame and to the pain.  So the show down between Obama’s and Assad has none of the piquancy that the second gulf war delivered – the animosity between the Bush family and Sadam Hussein was palpable because of the history.  In the same way, who can remember the first match between Federer and Nadal - a lame affair fought out in the Miami Masters in 2004, not a harbinger for the excruciating excitement their later battles would provide.   And what about the Ashes, even when the quality of the cricket is poor the weight of history turns every match into a nerve shredding struggle.  Sadly these intense rivalries seldom materialise in the world of politics and this is particularly true in the UK.

A Northern Tiger the UK economy roars back!

No one else will say it, so I will!  The UK is in the grip of a full economic recovery, this recovery does not look fragile, nor unbalanced, nor debt driven and it’s probably unstoppable.  So how has it been possible for the sick man of Europe, as we were described barely six months ago, transform himself into the “northern tiger” that we have become.  After years of miserable economic data, there was unanimity that the UK was permanently stuck in a liquidity trap where the shortfall in demand was looking like a problem without solution.  Having thrown monetary policy (£375bn of QE), fiscal policy and a much weaker currency at the problem,  the economy was still flat-lining and all the talk was of a triple dip, much to the amusement of the Labour opposition.

Not Your Bucks hands off the Vodafone windfall

I have been a trenchant opponent of multi-national corporations who see no need to pay UK corporation tax mainly because this behaviour is anti-competitive.  Amazon and Starbucks and other businesses have been free to grow their unprofitable companies to the detriment of our own domestic businesses.  I strongly believe that multi-national corporations must operate on a level playing field or be ‘red carded’.
This week we have a slightly different tax avoidance story that has got everyone excited.  Vodafone are about to realise a £84bn windfall on the sale of their 45% stake in Verizon Wireless, their US partner.  Not a bad return on the £20bn invested in 1999.  Our cash strapped government and specifically the House of Commons public accounts committee can’t wait to get their hands on some of the loot and ministers are already dreaming up ways of spending these unplanned revenues.  However, before they all get too excited there is a suspicion that the company is going to manipulating the rules to avoid capital gains tax.