Britannia Radio

The 'experts' don't have a clue

The situation is dire but the papers are bored with telling us so so 
they’ve gone of to talk about other things, like the footling ‘price 
of booze’ argument.  They’re all at it except - heaven be praised  - 
for a few ghettoes around and one of these is the financial and 
economic team in the Business sections of the Daily and Sunday 
Telegraph.

The preliminary meeting of Finance Ministers this week was noted for 
words of solidarity and a vague agreement to increase the IMF’s funds 
without any agreement on ‘who’s to pay’!      Most of the rest was 
wallpaper noises.

Company after company makes remarks like “we were hit by a hurricane’ 
as if they were surprised.  Where have they been hiding ?

The first from LH: below is a totally apocalyptic  vision of what's 
in store.  It is written in forceful language but essentislly it is 
the same story unfolding of man-made disaster which has been set in 
train this very week.

The second by SJ:  a former chief economist from the IMF no less, 
also thinks that all the world's leaders whether they agree or fall 
out are not dealing with what matter,

The by contrast I give Conservative Home's idea of what was important 
in the papers today  Some contrast!

XXXXXXXXXX  CS
========================
SUNDAY TELEGRAPH             15.3.09

1. Leaving it to the 'experts', who don't know what they're doing

In the early 1990s, James Carville, Bill Clinton's famously blunt 
advisor, suddenly realised the power buyers of US Treasury bills had 
over the government.

"I used to think if there was reincarnation, I'd come back as the 
President or the Pope," Carville quipped.

"But now I want to come back as the bond market. You can intimidate 
everybody."

Last week, the Bank of England began its woefully misguided policy of 
"quantitative easing" – or QE. With Gordon Brown's gun to its head, 
the Bank created money via a complex "reverse auction" procedure.

It's tough to understand, but that's the idea. Our so-called leaders 
hope the public find it so baffling they "leave it to the experts". 
But the experts don't know what they're doing.

The Bank has just created £2bn and bought UK Treasury bills – or 
gilts – from holders of these bonds in the market. The authorities 
aim to purchase £75bn of gilts over the next three months – in the 
hope the new money "kick-starts" commercial lending.

Short of setting fire to offices, shops and factories, I can't think 
of a better way to wreck the UK economy.

In last November's Pre-Budget report, the Government said the UK 
faced a deficit of 8pc of GDP in 2009/10 – the highest since the 
Second World War.
That estimate was based on the economy returning to growth by July 
2009 – which is clearly nonsense. It also didn't include the massive 
bank bailouts and other measures to tackle recession.

In March 2008, Labour said the UK would borrow £38bn this year – 
already 40pc above the 2009/10 forecast made the year before. By 
November, that projection had ballooned to £118bn.

Since then, of course, the economy has nosedived. So in next month's 
Budget the new borrowing figure will be way higher.

The Treasury sold £146bn of gilts last year – the highest level ever 
and three times above the amount raised the year before.

Record levels of gilt sales will continue annually until 2012-13 – 
after which official projections stop. And given Brown's record on 
failing to admit future borrowing needs, even these jaw-dropping 
volumes of gilt issuance will be gross under-estimates.

Into this fiscal maelstrom Labour has thrown a multi-billion pound 
"Keynesian" boost and now QE. The authorities claim the first few 
days of QE have "been a "success" because Bank purchases have bid up 
gilt prices, so lowering yields.

Never mind that that plays havoc with the cost of financing 
occupational pension schemes – and will spark further scheme closures.

Lower gilt yields push down on all borrowing costs, ministers tell 
us, so boosting the economy. It is difficult to know how to respond 
to such nonsense.

The UK's problem isn't the price of credit but the lack of credit.

Households and firms can't access finance as the inter-bank market is 
still locked, because the banks – as I say each week – are still 
lying to each other about the full extent of their sub-prime 
liabilities. Until they're forced to "fess up", credit lines will 
remain frozen and jobs will be lost.

Even more worrying is the gilts market itself – which, in recent 
days, has been on an QE-induced high. Yields have plunged because the 
Bank is buying in large volumes.

The notion that the UK faces "deflation" is also crucial – giving the 
Government political cover to keep pursuing this absurd policy and 
because falling prices make a non-indexed gilt (the vast majority of 
those sold) seem a good bet.

But what happens when the Government starts SELLING gilts like crazy, 
as it must? What happens, above all, when the myth of deflation is 
exposed, and gilts traders start worrying about inflation instead?

High inflation is imminent.  [2 1/2 years is  the City forecast 
before that kicks in - see my “BRITAIN’S ECONOMY - BLEAK PROSPECTS” 
of 11/3/09.  But that forecast is about 10 days old and before QE 
started so the time scale will have shortened.  -cs]   Sterling has 
plunged, base-money has exploded and oil prices are ticking up.

When price pressures burst through and the QE "sugar rush" fades, 
gilt yields will rocket. The market for UK government debt will snap 
from euphoria to blind panic.

Our public finances are under unprecedented pressure, given our 
demography, years of Brown and the last few months of fiscal abandon.
It won't be long before the UK can only sell its debt at ultra-high 
yields, which will spread across the economy, saddling us with 
mortgage costs last seen in the late 1980s.   [Interest rates in 
Britain  generally will see huge increases which makes nonsense of 
the international agreement this week to “keep interest rates low for 
as long as necessary to bring an end to the crisis” .   They haven’t 
a clue! -cs]

But even that could be a rosy scenario.

Over the next few years, a whole host of highly-indebted, inflation-
prone Western countries will be trying to sell vast quantities of gilts.

Creditor nations won't have it. No wonder China has just warned 
America that Beijing's huge US T-bill purchases may soon have to stop.

The UK faces the very real possibility of a gilts strike – as this 
column has been warning for months.

Who will buy our debt? And if the bond market was intimidating in the 
early 1990s, remember this recession will be deeper and the fiscal 
imbalances far, far worse.

==================
2. G20's real agenda should be saving Europe from itself

By Simon Johnson

The media coverage of the G20 finance ministers meeting this weekend 
was dominated by the apparent battle between those who support more 
fiscal stimulus and those who want to impose more regulations on the 
financial system.

This, we are led to believe, is the big debate facing the full G20 
heads of government summit early next month: the US is pushing for a 
bigger global fiscal stimulus (2pc extra government spending from 
everyone, to be monitored by the IMF), while the continental 
Europeans are holding out for greater regulation. Gordon Brown is 
trying hard to cast himself as the broker for any apparent deal.

However, don't be fooled by all this sound and fury. The rival 
agendas of fiscal stimulus and regulation are both red herrings at 
this point in time.
The reality is much less promising, for three reasons.

First, co-ordinated fiscal expansion made sense early in 2008, when 
it was first proposed by the IMF. But the severe downturn that 
followed the onset of financial panic last September means that very 
few countries can now afford to spend more or tax less.

And while the hard-headed redesign of regulation should be a top 
priority going forward, the G20 regulation agenda is weak.

Who really believes that establishing an international "college of 
supervisors" would achieve anything in terms of reigning in the power 
of major banks? Always a good principle to keep in mind when 
evaluating international reform proposals: anything that sounds 
meaningless is meaningless.

Second, while the conventional official reluctance to discuss 
unpleasant truths is always awkward, during a major global crisis 
it's downright dangerous. Across the industrialised world, the 
financial sector has become too large and too politically powerful.

How do we break this power and move resources into something more 
productive and less inherently unstable? How do we deal with the 
failures of risk management, CEO leadership, and corporate governance 
in our still massive banks? Can we break them up before they break 
our economies?

There is not even an inkling of these major issues on the G20 agenda.

Third, politicians keep repeating something along the lines of "we 
face a global problem that needs a global solution" – this was Gordon 
Brown's refrain in Washington recently. But the most pressing 
problems in 2009 are not so much global as European.

Back in the 1990s, much of east central Europe put itself on a high 
risk debt-fuelled growth path, egged on by Brussels. European Union 
accession countries were told that they could afford to import far 
more than they export – and that this difference would be financed by 
capital coming in from Western Europe. This was true, for a while, 
but now the crash in Eastern Europe threatens to bring down banks in 
Austria, Greece, Italy and other places that bet big on Hungary and 
its neighbours getting rich quick.

As Eastern Europe has plummeted into crisis, the West European 
response has been further bad advice. Countries with fixed exchange 
rates, such as Latvia, are told to cut wages and prices by 20-30pc, 
rather than devalue their currency.

Never mind that this is political suicide and bad economics. Brussels 
considers it better for the West European banks with capital at risk. 
Almost all of Eastern Europe is in trouble and will need to borrow 
from the IMF; the massive over-representation of Western Europe on 
the IMF's board suggests that this will end badly.

And that's not all. The crash of real estate in Ireland, Spain, and 
the UK worsens bank balance sheets that are already damaged from 
losses incurred in the crazy casino that was the American mortgage 
market.

The financial sector globally is shrinking, and this will lead to 
significant job losses in countries like the UK and Switzerland.

It gets worse. The US has banks that can plausibly claim they are Too 
Big To Fail, and this is bad enough – because it lets them get big 
bailouts. But Europe has banks that may be Too Big To Rescue – ask 
Iceland or, more recently, Ireland.

Far from being able to afford government expansion, European 
economies with big banks see the prospect of budget cutbacks – to 
persuade the financial markets that their governments are still good 
credit risks.

European countries face two types of future. On the one hand, 
countries that still control their own currencies can engage in 
creative monetary measures, pushing down the exchange rate and 
raising inflation; the Bank of England leads the way in this regard. 
Inflation will reduce debt burdens but of course comes with other 
costs. Think of it as the worst of all possible policy choices, apart 
from the alternatives.

And those most unpleasant alternatives are faced by Eurozone 
countries. Their economies are slowing dramatically, their banks are 
impaired, their budgets are constrained, and their monetary policy is 
in the hands of the European Central Bank (ECB).

These countries face the prospect of falling wages and prices. Most 
central bankers would recoil in horror as this deflation threatens 
further defaults and a deeper recession, but Jean-Claude Trichet, 
head of the ECB, is actually welcoming this development in Ireland 
and elsewhere.

The real agenda of the G20 should be helping save Europe from itself, 
for example by encouraging the creation of a €2-trillion European 
emergency economic stabilisation fund, funded primarily by richer 
Eurozone countries, and a major relaxation of Eurozone monetary policy.

Without such measures, we are likely on the path to a bigger slowdown 
in global growth and a more difficult recovery.
----------------------------------------------------------------
Simon Johnson, former chief economist  of the International Monetary 
Fund, is  a professor at the MIT Sloan School of Management and a 
senior fellow at the Peterson Institute for International Economics. 
He co-founded and contributes to economics blog the Baseline Scenario.
==================================
CONSERVATIVE HOME           15.3.09
Today's ECONOMIC STORIES plus links!
George Osborne: Brown is strutting on the world stage but the real 
work is at home - The Sunday Telegraph
France and Germany say no to Brown's G20 plan for coordinated new 
fiscal stimulus - Observer | Independent on Sunday
G20 nations must pledge to stop protectionism - Sunday Times leader
Labour MPs want 45p tax band for top earners to be introduced now - 
The Sunday Times
Third of constituencies have more jobless than when Tories left power 
- Independent on Sunday
Vince Cable: RBS collapse would have wiped out the budget of an 
independent Scotland - BBC