Monday, March 23, 2009

What's Been Going On, Then ?

The economic crisis, and the government's responses to it, is still the biggest story around. And it won't go away for years - perhaps decades, at the rate HMG are clocking up the tab marked 'future taxpayer liabilities'. I'm still reading stuff like UK Bubble, the Capitalists and the FT's excellent Alphaville blog (I'm sad to see that having bailed out the Scottish banks, a Scottish building society, the Dunfermline, may be next in the queue) pretty much daily.

HMG's plan is to deflate away the value of outstanding debt, devaluing fixed incomes (like pensions) in a transfer of wealth from savers to debtors (and to governments - after all, they own the presses). They're aware that too much borrowing and not enough saving created the mess in the beginning, but in the interests of keeping the show on the road they've reluctantly decided that these habits must be reinforced rather than curbed. The collapse of asset prices is such that the bubble must be reinflated.

When the markets saw what Labour were doing, they devalued the pound. What's really scary is that the Swiss - of all people - have been selling off Swiss francs to drive down the value of their currency - while the US have followed Gordon to the printing presses.

The Swiss example wasn't too bad, although surprising - a competetive devaluation. If all countries do that, the net result is pretty much zero. But if all countries start up the presses, the inflationary implications are that it's time to get out of cash and find some asset - any asset - which will hold value. Shares, gold and oil all rose on the news of the US printing.

Obama seems not to have a grip on the crisis - admittedly, neither has anyone else. The bail-out is turning into the biggest pork-barrel in US history.

President Obama still enjoys the popularity that comes with not being George Bush, especially in a city top-heavy with Democrats. But his initial response to the global calamity that he found on entering the Oval Office has not inspired popularity’s more sober elder brother, confidence. Large constituencies, notably business, are voicing their scepticism openly. The President’s much-vaunted $787 billion stimulus package is being widely interpreted, even by some of those (such as Warren Buffett, America’s second-richest man) who openly supported Mr Obama for the presidency, as a serious failure. And we are only just past the first 50 days.

The big question from a purely selfish point of view is - will there be a window of opportunity between now and inflation kicking in ? When prices are still falling and cash still has some value ?

I've been reading Paul Kennedy's The Rise and Fall of the Great Powers over the last week or two :

"he provides a straightforward and persuasively argued thesis: Great Power ascendency (over the long-term or in specific conflicts) correlates strongly to available resources and economic durability; military "over-stretch" and a concomitant relative decline is the consistent threat facing powers whose ambitions and security requirements are greater than their resource base can provide for"
It's not exactly rocket science. Countries with a military clout greater than their industrial base warrants will in time lose that military clout. Countries with a hefty economic base will find it easier to develop military clout. And (as applies to individuals as well), if it can be done, it often will be done. It's a long time since Cheng Ho's fleet sailed the Indian Ocean - I just have a feeling I may see his successor admiral in my lifetime. I was thinking that as I assembled my son's new Argos corner desk for his homework last week - bolt-together veneered chipboard from China.

"whose ambitions and security requirements are greater than their resource base can provide for" - Afghanistan, anyone, as our soldiers continue to be blown up in under-armoured vehicles ? Iraq ? What's scary is that the US is also becoming such a nation - and, like us, they've chosen to keep the existing, declining system going - it's the rational short term thing to do.

As I'm continually pointing out, when an economy declines, financial hegemony will move on. Florence and Antwerp are no longer the capitals of world banking.

One other nice little quote from the book, which is apparently taken from C. McEvedy's Penguin Atlas of Recent History. Particularly relevant in the light of Boris Johnson's illegal immigrant amnesty plans (he also wants to keep taxes low for high earners). He's talking about the late Austro-Hungarian Empire :

(For most European Great Powers) a majority of the citizenry shared a common language and religion. At least 90 per cent of Frenchmen spoke French and the same proportion belonged at least nominally to the Catholic Church. More than eight in every ten Prussians were German (the rest were mostly Poles) and of the Germans 70 per cent were Protestant. The Tsar's seventy million subjects included some notable minorities (five million Poles, three and a half million Finns, Ests, Letts and Latvians, and three million assorted Caucasians), but that still left fifty millions who were both Russian and Orthodox. And the inhabitants of the British Isles were 90 per cent English-speaking and 70 per cent Protestant. Countries like this needed little holding together; they had an intrinsic cohesion. By contrast the Austrian Emperor ruled an ethnic mishmash that must have made him groan every time he thought about it. He and eight million of his subjects were German, but twice as many were Slays of one sort or another (Czechs, Slovaks, Poles, Ruthenians, Slovenes, Croats and Serbs), five million were Hungarians, five million Italians and two million Romanians. What sort of nation did that make?

The answer is none at all.

Have a nice day.


Anonymous said...

Let's look on the bright side - at least this means that the EU can really have no future.


Anonymous said...

"HMG's plan is to deflate away the value of outstanding debt": even that shower of crooks and incompetents probably plans to inflate it away.

Anonymous said...

Ooh, another "Rise and Fall" fan. Excellent book. But for some time I've been wondering about the premise's reverse.

We also take it for granted you can't have chaos on the high street and simultaneously also see local business flourish. There has to be "law and order." Similarly, how about a strong military also being necessary to foster and protect an economy?

Consider this, too. The British military is underequipped in Afghanistan not owing to Britain's economy being too weak to supply its army with some armored vehicles and new helicopters. The fifth largest economy in the world (still) certainly can do that.

A major problem methinks has been recent policymakers and their choice of priorities. Evidently, they deem it far more necessary that Britain throw increasing billions of its national wealth mostly in other (usually unaccountable) directions: from "schoolsandhospitals" (including the NHS computer system from hell) to funding the likes of local government "climate change officers" (yes, seriously). In the mid-1980s, Kennedy couldn't account for that "policy" outlook of three decades later.

CityUnslicker said...

This is a very well written article. The difficult piece you alude to is for Politicians to make long-term sensible decisions, even though they mean short-term pain.

It can happen, I think Thatcher did it when she came to power, Atlee too.

The 24hr world of the internet makes a week seem like a long-time now. In such circumstances, the chances of sensible long-term decision making are nowt.

Anonymous said...

"HMG's plan is to deflate away the value of outstanding debt, devaluing fixed incomes"

Yes, as Dearieme says, you probably mean 'inflate'.

Deflation would crucify the government, as anyone else who happens to be a debtor.

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