TELEGRAPH 26.1.09
1. Bad news: we're back to 1931. Good news: it's not 1933 yet
Barack Obama inherits an economy already contracting at an annual
rate of 6pc, much like the mid-Depression year of 1931 (-6.4pc),
writes Ambrose Evans-Pritchard
By Ambrose Evans-Pritchard
This may beat Germany (-7pc) Japan (-12pc) and Korea (-22pc) over the
fourth quarter. But that merely underlines the dangers ahead as the
collapse of global trade chokes the mini-boom in US exports, setting
off another stage of the crisis.
The US is losing 500,000 jobs a month. Brazil lost 650,000 in
December. Beijing says 10m Chinese have lost their jobs since the
crunch began. Japan's exports fell 35pc last month, year-on-year. The
central bank is printing money furiously, buying bonds to prevent a
relapse into deflation.
So yes, it is like early 1931. Citigroup and Bank of America have
more or less disintegrated. JP Morgan's health is failing fast.
General Motors and Chrysler survive only on life-support from the US
taxpayer.
But it is not yet like 1933. That second leg down was the result of
"liquidation" policies by a Dickensian leadership blind to the
dangers of debt deflation. By then the Gold Standard had degenerated
into an instrument of torture. It forced the Fed to raise rates from
1.5pc to 3.5pc in October 1931 to stem gold loss, with predictable
results for shattered banks.
It is worth glancing at the front page of New York Times on Monday
March 6, 1933 to see what the world looked like three days after
Franklin Roosevelt moved into the White House.
The newspaper splashed with the story that FDR had closed the US
banking system - invoking the Trading with Enemies Act - and ordered
the confiscation of private gold. From left to right, the headlines
read: "Hitler Bloc Wins A Reich Majority, Rules Prussia"; "Japanese
Push On In Fierce Fighting, China Closes Wall, Nanking Admits
Defeat"; "City Scrip To Replace Currency"; "President Takes
Steps Under Sweeping Law of War Time"; "Prison For Gold Hoarders".
President Obama faces a happier world. The liberal economic order is
still in tact, if fraying at the edges. Capital and ships move
freely. North America and Europe talk the same political language.
China has so far proved a dependable pillar of the international system.
But then the world seemed benign enough in early 1931. It is the
second phase of depression that does terrible things.
Roosevelt took over a country where the economic machinery had
completely broken down. The New York Stock Exchange and the Chicago
Board of Trade had closed. Thirty-two states had shut their banks.
Texas had restricted withdrawals to $10 a day.
Few states could borrow on the bond markets. Illinois and much of the
South had stopped paying teachers. Schools closed for months. An army
of 25,000 famished war veterans squatting in view of Congress had
been charged by troopers of the 3rd US cavalry with naked sabres -
led by a Major George Patton.
Armed farmers threatening revolution had laid siege to a string or
Prairie cities. A mob had stormed the Nebraska Capitol. Minnesota's
governor was recruiting Communists only for the state militia.
Lawyers attempting to enforce foreclosures were shot. More than
100,000 New Yorkers applied to go to the Soviet Union when Moscow
advertised for 6,000 skilled workers.
We forget how close America came to open revolt. Eleanor Roosevelt
feared the country was beyond saving. Her husband kept the faith. He
channelled the anger against Wall Street, diffusing it. "The
practices of the unscrupulous money-changers stand indicted in the
court of public opinion," he began his presidency.
The Fed was an ideological deadweight. Bowing to pressure from
Congress it began to purchase bonds in mid-1932 to boost the money
supply, but then recoiled, before retreating into pitiful self-
justification. A third of the rescue funds in Hoover's Reconstruction
Finance Corporation had been embezzled.
Today there has been no such failure of US institutional imagination,
even if, as George Soros argues, the Treasury's policies have been
"haphazard and capricious".
The twin blasts of fiscal and monetary stimulus have been massive. In
short order the Fed has slashed rates to zero. It is now conjuring
money out of thin air on an industrial scale, buying $600bn of
mortgage bonds to force down the cost of home loans, and propping up
the commercial paper market to avoid mass corporate default. Ben
Bernanke, a Depression junkie, is proceeding with a messianic sense
of certainty. The wash of money should ensure that the next 18 months
will not mimic the cascade of disasters from late 1931 to early 1933.
It buys time. But it does not solve the deeper problem, which is that
a West addicted to Ponzi credit has put off the day of reckoning with
ever more extreme monetary policy with each downturn, stealing
prosperity from the future.
It will be an extremely delicate task to right the ship again.
Central banks will have to extricate themselves from their venture
into the bond markets without setting off a bond debacle in 2010 or
2011. Governments will have to map out of a path of Puritan
discipline for year after year. [This equals cutting state
expenditure -cs]
This will be Barack Obama's grim test of statesmanship
===============
2. Exaggerated claim that we're going down the plughole must be rejected
It takes a real bear to make me sound bullish. I have been dispensing
gloom and doom about the economy for ages. In some quarters I am
known as Doctor Death. And I have to say, I am extremely gloomy now.
By Roger Bootle
But then last week, I read what the famed investor Jim Rogers had to
say: "I would urge you to sell any sterling you might have. It's
finished. I hate to say it, but I would not put any money in the UK."
"It's simple. The UK has nothing to sell." "The City of London is
finished, the financial centre of the world is moving east. All the
money is in Asia. Why would it go back to the West? You don't need
London." He added that, after financial services, the main pillar of
support for sterling has been North Sea oil, now being used up fast.
I know that many of my readers think that he is right - although not
necessarily for the same reasons. I had another mammoth e-bag last
week, some of it assuring me that Tunbridge Wells was really a very
nice place and it was unjustified that I gave it so much stick. But
another common refrain was that I just didn't get how serious our
predicament was. Apparently, we are going to hell in a handcart -
crime, family breakdown, welfare dependency, drugs, the collapse of
organised religion - you name it. I even had complaints on poor
performance by the England cricket team.
Now, I believe that there is much wrong with our country, in
particular the degree of personal irresponsibility. But that is the
subject for another column, and probably another columnist.
Here I am addressing the more restricted problem of the recession -
ie the phenomenon whereby output, income and employment are lower,
and there are unsatisfied wants co-existing with unemployed factors
of production ready and willing to supply them. Sorry, you disgusteds
and disgruntleds, but that is an economic problem and it can have an
economic solution - albeit one which won't improve your sex life, fix
your gammy leg, or sort out the louts at large in Tunbridge Wells of
a Saturday night.
So, sticking to this narrow economic compass, is Jim Rogers right? As
a country we should be used to being written off, both by ourselves
and by foreigners - especially Americans. There was a mood of deep
gloom and national crisis after the ERM exit in September 1992.
Remember that what we now call Golden Wednesday was at the time
dubbed Black Wednesday. However, we gradually escaped from both the
grim mood and the grim reality through lower interest rates, a lower
exchange rate, and (Gordon Brown take note) a large dose of policy
reform. Moreover, the budget deficit was sharply reduced, thanks to
both tight policy and the proceeds of economic growth.
What made the ghastliness of the early 1990s seem so awful was the
contrast with the over-exuberance of the previous period - the Lawson
boom, when it was widely believed that we had permanently enhanced
the performance and standing of the British economy. In fact, that
was partly true - but alas, not quite to the degree that was believed
at the time, notably by the government.
Similarly, what we are experiencing now is all the more painful
because of the contrast with the excessive optimism of the years when
Brown was in his pomp - "the end of boom and bust", the UK shooting
up the international rankings and the super-strong pound.
So although we have our crises in this country, it is a case of two
steps forward and one step back. Jim Rogers, though, seems to think
that there can be no further steps forward. His argument is crass. He
emphasises North Sea oil. In fact this resource has for some time
been of marginal importance to the economy. The UK's trade in oil is
broadly balanced. [Yes, but the point is, it WAS in surplus -cs]
Admittedly, as production declines we will import more and more but
this will be a gradual process. It is not of massive significance, as
it would be in many of the Arab sheikhdoms.
Nor is oil overwhelmingly important as a source of government
revenue. For this year the latest official estimates put the total
tax-take from oil at about £13bn, equivalent to 2.4pc of the
Government's overall current receipts.
The main part of Rogers' thrust was financial services. Yet the role
of this sector in the UK economy is widely exaggerated. It accounts
for about 8pc of GDP. This is large, but isn't overwhelming. It
compares, for instance, with 12.5pc for manufacturing.
Moreover, it is wrong to think of the financial services category as
being all wide-boy dealers and mega flows of footloose capital.
Probably around 25pc of financial sector output is wholesale or City-
type financial services. And of this, perhaps a half is in the field
which will be damaged by the collapse of the banks and the drop in
confidence in the UK - areas such as interbank lending, investment
banking, and cross border M&A. There are lots of other areas which
will be much less affected - fund management, commodities and foreign
exchange trading, maritime and aviation insurance, shipbroking,
reinsurance, bullion markets, and the trading of carbon emissions.
Another of Rogers' refrains is that we don't make or do anything else
which can be exported. In fact, in the last full year for which we
have figures, we exported some £370bn of goods and services - £38bn
of chemicals and pharmaceuticals, £32bn of electrical and optical
equipment, £24bn of motor vehicles and £13bn of aircraft and
spacecraft, to name but a few categories.
Of course, in total we import more than we export, about which I have
been banging on for years. The gap is large and as part of the
recovery it will have to be closed. But it is important to get the
figures in perspective. Total imports amount to about 30pc of GDP,
compared to 26pc for exports. Moreover, to boost GDP, lower imports
are just as effective as higher exports. Initially at least, that is
where the realistic hope for improvement lies.
Nor is it true that the UK is uniquely badly placed among western
countries. Germany, for instance, is not better placed with its
smaller financial services sector and much larger manufacturing
sector. In fact, Germany's product mix, with heavy reliance on
exports of large capital goods, makes her particularly vulnerable as
this is precisely the category which is being hit hardest in the
global slowdown.
So I don't buy the Rogers view that the UK is going down the
plughole. Now don't get me wrong. I am not bullish and I am not
complacent. But we are not finished. What's more, we'll be back.
----------------------------------------------------------
roger.bootle@capitaleconomics.com
Roger Bootle is managing director of Capital Economics and economic
adviser to Deloitte.
===============
3. Cheer up - Britain is not about to go bust
[On reading this, the guarded optimism has an air about it of
'whistling to keep his spirits up'. It depends enormously on summing
up courage to express confoidence. Let's hope and pray he's right! -cs]
Last week's credit package was good news for firms and consumers,
says Richard Lambert.
Richard Lambert
It's all about confidence. Last Monday, the Government unleashed a
massive assault on the credit crunch. The package was complex, and
short on a number of important details. But the message was clear and
unmistakable for anyone prepared to listen: the United Kingdom's
banking system is being backed by the national balance sheet.
That means the public can have confidence in the integrity of banks
and, that provided their business is sound, companies up and down the
land are not going to be starved of the credit to finance their day-
to-day activities.
This was a big but necessary step. Back in October, taxpayers had
pulled the banks back from the edge of a precipice by an injection of
fresh capital. But this intervention had not filled the funding gap
left by a deepening recession and the withdrawal of foreign banks
from the UK lending market. More was needed to turn on the credit
taps - and last Monday we were promised that they would be opened at
full force.
But then the story started to get lost in translation. The Royal Bank
of Scotland came out with a grisly set of results, and all of a
sudden we were talking about a second bank bail-out rather than a
massive increase in the availability of credit. Bank shares went into
a spin, and normally sensible people - like John McFall, chairman of
the Commons Treasury Committee - started to make the case for bank
nationalisation, as if that is anything but a last resort.
Jim Rogers, a financial trader who has lived on sound bites for
decades, found himself being taken seriously for saying that the UK
was going to hell in a handcart. And then came a string of economic
data, all reasonably predictable but all very bad, so that by the end
of the week the country was sunk in collective gloom. Monday's credit
package had been more or less written off even before it had come
into effect.
So what's the reality? Public finances are in a poor shape, and will
get materially worse. But Moody's rating agency made it clear that
the UK's high grade investment rating had not been put at risk by
these latest measures. Or, as Goldman Sachs put it on Friday, the
market's negative reaction was excessive, and sovereign risk is low.
In other words, the UK is not about to go bust.
Our capital markets are deep enough to support the increase in
government borrowing. And our flexible labour market and floating
currency will make it much easier to adjust to the recession than
will be the case for some of our continental neighbours.
It will take a few weeks before some of the very complex details can
be worked out and credit starts to flow. And until it's clear just
how much risk the banks are going to be able to pass to the taxpayer
and on what terms, it will be very difficult to make sensible
judgments about their share prices.
But the Government's intention is clear. It's jumping through all
these hoops because it has no option but to do everything it can to
put the banking system back onto a more stable footing. That's a
necessary precondition for economic recovery.
None of this is going to stop the recession in its tracks, or halt a
painful rise in unemployment and lost output. But the measures will
be enough to prevent something much worse - provided we don't allow
ourselves to get swept away by the gloomsters.
Over in the US, there are signs of life and renewed confidence in the
money markets, and that's what we have to work for here. We've had
the weekend break, in which to regain a sense of perspective and
there's a quiet week ahead for economic data. Now the Government,
Bank of England and Financial Services Authority have a clear and
common interest: to get the details worked out swiftly, to be clear
and consistent in their communications, and to demonstrate that this
credit medicine - which is about to be doled out in enormous dollops
- is going to do the business.
--------------------------------------
Richard Lambert is director general of the Confederation of British
Industry.
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