The Confidence Fairy

George Osborne has presented himself as the “Iron Chancellor” willing and able to make the tough decisions required to see-through the Tories “long term economic plan”.  With an Election 80 days away it’s time to assess his track record in this regard as he is now promising (with some glee) another 3 years of austerity, as he tries to achieve a budget surplus in by 2018. Osborne believes the winning narrative goes like this: Labour wrecked the economy, we inherited unsustainable debts, we then embarked on un-popular but necessary polices to restore confidence in the UK economy and bring down the deficit, these policies took time to work but supported by monetary policy (QE) the plan is now paying dividends.  One would have to be a dumb fish to swallow this story hook line and sinker.

Taking the bait

A Free Lunch for Europe

In three short years Angela Merkel has gone from being the Superwoman to the Boggiewoman of Europe.  Having faced down the Euro crisis of 2011-12 she became the heroine of the hour – being fated around the world and the re-elected at home in 2014.  Her unwavering commitment to securing the Euro based on secure fiscal framework has made her the Mistress of Austerity.  It was she who enforced the bail-out process and the “Fiscal Pact” that accompanied the money.

Here's looking at you PIIGS

The solo becomes a duet

The world economy is a bit like my early love life – long periods or inactivity and boredom interspersed with rare flashes of excitement.  Growing up in rural England with no Facebook, mobile phone, nor any natural ability to chat up girls made things pretty dull!  The same is true of the world economy - one minute we are in a world of dull stagnation and deflation and the next we are in mortal danger, thanks to Greece.

The excitement of a good riot

Forgive and Forget

The Greek crisis is about the only story being covered by the financial press.  It’s the perfect seasonal pantomime not unlike Cinderella – a damsel in distress (Greece and its distressed debts) the drama of a tight deadline (Greece could run out of cash in March), comedy villains (the Trokia of the ECB, the European Commission and the IMF), a grumpy old maid (Angela Merkel) a handsome prince (Alexis Tsipras, the Greek prime minister, and his henchman Yanis Varoufakis, the finance minister).  The only questions are; where is the Fairy Godmother who might save the damsel in distress and will there be a happy ending?

George and Yanis - could this be the start of a special relationship?

Who is rigging the market now?

In the run up to the credit crunch the market manipulations perpetrated by the world’s largest investment banks are now well known to us.  The banks rigged many of the important markets required for the global economy – proprietary trading held sway, credit and other derivative products were miss-sold, reference interest rates (Libor and others) were fixed and so it goes on.  Fortunately for us governments around the globe and their central bankers have been on a mission to sort out these market abuses.  The Wolves of Wall Street have been tamed by the Gnomes from Zurich, the ECB and the Fed – all very reassuring.  That is until one looks closely at the market manipulation now being pushed through by Central Banks culminating in the completely unexpected decision of the Swiss National Bank (SNB) to remove the 1.20 floor on the Swiss franc against the Euro.

Anything the banks can do .....

As Gavyn Davies tells us this was “one of the biggest currency shocks since the collapse of the Bretton Woods system in 1971. The decision has been heavily criticised, both for its tactical handling of the foreign exchange market, and for the collapse of the centrepiece of its monetary strategy, without (apparently) any overriding cause. The credibility of a central bank that has traditionally been hugely respected by the markets has clearly been dented.”

Demand for the old normal

For the last six years the developed world has been suffering from a chronic shortage of demand: demand for goods, demand and services, demand for investment.  The need to deleverage personal, corporate and government debt has meant that there has been massive excess capacity and a huge shortfall in aggregate demand.  This lack of demand has been driving up unemployment and driving down prices.  All this has been complicated by the fact that we in the West are at the zero bound of interest rates this nasty cocktail has been characterised as secular stagnation.  Over the last six years wages in all normal income groups have flat-lined and living standards will now be lower at the end of this economic cycle than they were in 2008 – this is extraordinary, almost unheard of in the developed world.  Or is it?  Thomas Piketty, the French Rock Star Economist (is that an oxymoron as the French have no rock stars?) would have us all believe that we are now returning to a more normal state of affairs, where vast pools of wealth lie idle in the hands of a financial elite and the rest of us jog along at a steady but uninspiring rate.

A French Rock Star??