Britannia Radio

Edmund Conway is no optimist but he is desperately unsure of himself  
and while admitting inflation is on its way he seems to urge us to  
concentrate now on the dangers of DEflation.  ‘Walking a tightrope’  
is hardly an adequate description!

Anatole Kaletsky, The Times principal commentator on economic and  
financial affairs, is now Associate Editor.   He, in his own self- 
deprecating way, admits each year to how wrong he has been in his  
forecasts.  Here we find him in an unacustomed pessimistic mood!

Between them they encompass the situation as we go into Easter and  
the best summation might be the colloquial “You ain’t seen nuffink yet!”


xxxxxxxxxxx cs

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TELEGRAPH                    9.4.09
Let's not forget that even the Great Depression had green shoots
We will repeat the 1930s if we stop the stimulus too soon, says  
Edmund Conway

What does a Great Depression feel like? Everyone has seen the  
pictures of the breadlines and the starving families in the American  
Dust Bowl; everyone knows about the deprivation, the suicides and the  
despondency. Today doesn’t feel like the 1930s. But here’s the thing:  
neither, at first, did the 1930s.

The worst economic slide in modern history did not happen in one fell  
swoop. It evolved over a number of years, growing organically and  
almost imperceptibly. It was punctuated with moments of optimism,  
months where things seemed tantalisingly to be improving – genuine  
green shoots.

Few springs were sweeter than that of 1931. After 18 months of bad  
news, those shoots appeared to be sprouting everywhere. Industrial  
production in the United States was recovering, and for the first  
time in months the stock market was buoyant.

The parallels between then and now are striking. Economies were still  
shuddering in the wake of a catastrophic financial and stock market  
collapse (in that instance, the Great Crash of 1929); unemployment  
was rising as fast as economic growth was plunging; world trade was  
in freefall. The statistics were horrendous. Yet there were enough  
signs to suggest that the recession would, like so many before it, be  
over relatively quickly. And all the while, at the back of people’s  
minds, was the risk of inflation.

There were some governments that had endured nasty bouts of inflation  
and were determined not to do so again (the American, French and  
Germans). At the first sign of recovery, they argued in favour of  
withdrawing the stimulus that had been put in place; that is when the  
seeds of the true depression were laid.   [The French and Germans are  
taking this line now though for election reasons Germany has singled  
out its car industry for totally exceptional stimulus which is  
running out of control and is harming the rest of the economy - see  
my “The law of unintended consequences strikes Germany!” and “Maths  
is not Merkel's strong point it would seem| sent yesterday -cs]

Painful as the German episode of 1920s hyperinflation was, it was as  
nothing compared with the hyper-deflation that ensued in the 1930s.  
It was deflation that caused the deprivation which helped brew up  
Nazism. We are in danger of forgetting that.

Those early years of what we now call the Great Depression were where  
the real mistakes were made, and they were made precisely because  
governments started to anticipate recovery far too early. It is a  
perennial error. The horrors of inflation are branded so deep into  
our collective global consciousness that, in the wake of an economic  
collapse, we are apt to try to fight it off before it has arrived.

It is what happened in the 1930s; and again in the 1990s when the  
Bank of Japan withdrew its fiscal and monetary medicine too early,  
consigning the world’s second-largest economy to five more years of  
stagnation.

History is in danger of repeating itself. So unrelenting has been the  
flow of bad news for 18 months that we are in danger of mistaking a  
few recent signs of stabilisation for genuine recovery. They are not.  
House prices are not falling as fast or as steadily as they have been  
for the past two years, but they are not bottoming out; inflation may  
have picked up a touch last month, but it won’t be shaken from its  
downward path for long; economic growth and stock market prices may  
appear to be recovering, but this is more likely to be the result of  
companies running down inventories. [surely “rebuilding run-down  
inventories” ? -cs]

In 1931, spring gave way to a terrifying summer as swathes of US  
banks collapsed, leaving millions bereft of savings; Credit Anstalt  
in Austria imploded and triggered the onset of European economic  
misery. Months later, about a thousand British sailors took part in  
the Invergordon Mutiny – one of the few strikes involving the Armed  
Forces – and triggered our departure from the Gold Standard.

It is hard to express the fragility of the economic and financial  
system; any hint of complacency would be foolhardy. On the one hand,  
governments have done far more than those 75 years ago to prevent  
their economies from sliding into permafrost. A $5 trillion wall of  
money has been thrown at the crisis. It will soon start working,  
[perhaps, we hope! -cs ] dragging us away from the precipice. State- 
funded social welfare systems mean that, as nasty as the downturn  
will be, destitution will be far less common. [As long ass we can  
afford them -cs]

On the other hand, this stimulus could easily be withdrawn as  
governments baulk at the size of the deficits they are running up.  
They might start to raise interest rates too early (while inflation  
will be a threat in a few years,  it is not the most immediate  
danger).  [the timing of this certainty is critical.  My guess that  
it is probably 18 months away but nobody can be sure -cs]    The  
second banking bail-outs on both sides of the Atlantic are half-baked  
schemes which neither dispose of the impaired assets nor cleanse the  
banks that hold them. Further horrors almost certainly lie dormant in  
the depths of the financial system, with much of the toxic waste  
still unaccounted for.

It is remarkable – though, upon reflection, hardly surprising – that  
we have let a couple of pieces of better-than-expected economic news  
distract us from the financial meltdown that is still unfolding. But  
consider: should another British bank stumble – or an insurance  
company or pension fund – the Government may have to pour more  
taxpayers’ cash in or contemplate outright default.

In the face of such a financial firestorm, the eventual recovery may  
not be V-shaped, or even L-shaped, but IMF-shaped.
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THE TIMES                    9.4.09
Eurozone braces itself for the perfect storm
If a financial emergency required immediate action, could Europe  
cope? That is the big question for the world economy
    Anatole Kaletsky

If you think Alistair Darling faces trouble in his Budget, spare a  
thought for Brian Lenihan, the Irish Republic's Finance Minister, who  
on Tuesday announced his second emergency budget in six months,  
imposing drastic tax rises, pension and wage cuts, still leaving his  
country with the by far the biggest budget deficit in the eurozone.
Or for Yannis Papathanassiou, his Greek counterpart. His country's  
credit has been downgraded to one notch above junk status and was  
justifiably described yesterday as teetering on the verge of  
bankruptcy in the German magazine Stern.

Or for Pedro Solbes, the respected Spanish Finance Minister, who was  
sacked on Monday in response to the meltdown of an economy and  
banking system said to be invulnerable only a few months ago.

Or even for Peer Steinbrück, the German Finance Minister, who,  
despite his swaggering boasts about the triumph of the Rhenish social- 
market model over Anglo-Saxon capitalism, presides over the weakest  
leading economy in the world outside Japan.

Europe, even more than America or Britain, is caught in the global  
financial storm and if the world suffers another blow in the months  
ahead, comparable to the collapse of Lehman Brothers, it is most  
likely to involve a crisis in the eurozone. Is it possible that  
Europe, whose biggest economies - Germany, France and Italy - never  
experienced an Anglo-Saxon style housing and credit boom, will suffer  
more damage than Britain or the US?

This seems so unfair that many supposedly unsentimental politicians,  
businessmen and financiers refuse to believe it. But such childish  
moralising has never driven international financial markets.

Economic performance should be assessed objectively, without all the  
talk of sin and retribution so popular at present. The eurozone faces  
three threats more serious than any in the US or Britain: the extreme  
vulnerability of Germany's economy to collapsing exports, financial  
instability in Eastern Europe and the growing tensions between the  
core and the periphery of the eurozone.

The ominous possibility is that, between now and the German general  
election on September 27, these three separate, but mutually  
reinforcing, dangers could combine into a perfect storm.

The recession has hit Germany much worse than any other big economy  
save Japan. Its GDP plunged at an annualised rate of 8.2 per cent in  
the fourth quarter, compared with a 6 per cent decline in Britain.  
The OECD projects a further decline in Germany of 9.6 per cent in the  
first quarter, compared with 5.4 per cent in Britain. In 2009 as a  
whole, the German economy is expected to contract by 5.3 per cent,  
compared with Britain's 3.7 per cent. Germany is expected to have the  
highest unemployment in the G7 by 2010, while Britain would have the  
lowest outside Japan.

Germany's focus on exports has turned out to be a weakness. Its cars  
and investment goods have suffered even more from the recession than  
financial services and other knowledge-based products. The strength  
of the euro has damaged its competitiveness and Germany's fastest- 
growing export markets have been the booming countries on the  
periphery of Europe - Spain, Ireland, Central Europe and Russia - all  
of which have now collapsed.

Germany has found itself just as exposed to boom and bust as Britain  
or America. The key difference is that it relied on property and  
credit booms in countries such as Spain, Hungary, Russia, Ireland,  
Scandinavia - and Britain - over which it had no control.

This brings us to Europe's second problem: the financial meltdown in  
Eastern and Central Europe. In the past ten years Hungary, Romania,  
Bulgaria and the Baltic states have run up foreign borrowings much  
larger in relation to their national incomes than Thailand, Indonesia  
and other Asian countries that defaulted in the 1990s.

To make matters worse, a much higher proportion of these loans have  
been in foreign currencies - 70 per cent of the mortgages and car  
loans in Hungary are in euros or Swiss francs. Thus a sharp rise in  
the euro against local currencies would drive many households and  
businesses into bankruptcy. For this reason, Central European  
governments have desperately tried to defend their currencies,  
seeking IMF support and reacting joyfully to the increase in IMF  
resources agreed last week by the G20.

But experience suggests that currency defences based on IMF  
programmes rarely succeed. Indeed, the IMF normally forces borrowers  
to devalue their currencies, as it did in the case of every leading  
Asian and Latin American country. It is hard to see why China, India  
and Brazil, with their growing influence on the IMF, should agree to  
radically different rules for European borrowers.

Which brings us to Europe's third vulnerability: tensions in the  
eurozone. While financial conditions in Central Europe today are  
generally worse than in Asia in the 1990s, the Europeans have one  
immense advantage. They can rely on a rich uncle - the German  
taxpayer. There was never a chance of Japan or China bailing out  
Thailand, South Korea and Indonesia, but it is assumed that the EU -  
ultimately the German taxpayer - will stand behind the debts of  
Central Europe.

The problem with this comforting assumption is that a financial  
crisis in central Europe and Austria would greatly aggravate tensions  
already obvious in the eurozone. The Irish, Greek and Portuguese  
economies are in freefall as a result of collapsing housing markets,  
aggravated by the expensive euro's impact on exports and tourism.  
Spain looks increasingly vulnerable for the same reasons. As Alan  
Brown, of Schroders, noted in a recent study, prices in these four  
peripheral euro-members have risen 18 per cent relative to Germany  
since 1999.

If Germany bailed out Austria and Central Europe, it could scarcely  
deny support to the Irish, Greek and Portuguese governments - or  
later Spain and the true colossus of European sovereign borrowing,  
the Italian Government.

With German unemployment and budget deficits rising to previously  
unimagined levels, political support for a pan-European financial  
bailout might [‘might’ ? -cs]  be hard to muster, especially in a  
bitterly contested election.

Despite this, an existential crisis of the eurozone remains unlikely.  
In extremis, Germany would almost certainly offer support. But  
suppose an emergency package had to be organised over a single  
weekend in response to a European crisis. Is it obvious that the EU  
and Germany would cope any better than the US Government did in the  
Lehman collapse last September?

That is a question nobody seems to be asking - which probably makes  
it the biggest risk facing the global economy today.