There is an immense amount of wishful thinking in the "green shoots"
euphoria. It flies in the face of continued dearth of business
lending as the proceeds of Quantitative Easing increasingly go to
foreign banks, to British banks where it is being used to build up
their balance sheets rather than to increased lending, and back to
the government itself where it is used for increased bureaucracy.
This can't go on but the Treasury proposes to throw another $50
billion at it which we will shortly have to pay back.
Meanwhile the number of people paying the current top rate of tax
(40%) has shrunk by a million, April tax revenues - normally the most
buoyant revenue month of the year - plummeted into a massive deficit
and retail sales in May fell. OK, so the consumers are more
confident? Ignorance should not count in the equation. And business
confidence as expressed is merely a sales tool!
In his tailpiece Halligan turns the spotlight onto Brown's
mismanagement of the whole economy from the start. We are reaping
the whirlwind already of his hubris and arrogance and the next twenty
years could see prosperity eluding us as we pay back the borrowing
made by Chancellor Darling [too toxic to fire apparently] . There is
only one way out and that is massive cuts in government spending; -
not tinkering at the edges but drastic changes in policy.
xxxxxxxxxxxx cs
=================================
SUNDAY TELEGRAPH 7.6.09
Time to examine tough truths rather than talk of green shoots
Newspapers are full of "evidence" the worst is over and we'll soon be
toasting recovery.
By Liam Halligan
Are those much talked-about "green shoots" real?
Having been stagnant or contracting for over a year, the British
economy may have grown last month. The all-sector PMI index ventured
above the crucial 50-level in May for the first time since last
March, indicating tentative growth. Mortgage approvals also reached
43,000 in April - the third successive monthly rise. [Each year they
rise each month in the spring, and fall in the winter. Check the
figures against last year! -cs]
Across the eurozone, the manufacturing and service sector slump is
easing. Consumer confidence on the continent just hit a six-month
high. In America, too, the ISM index for new manufacturing orders
went above 50 for the first time since 2007. US business confidence
is also up.
Among economists, the "recession is over" camp has been getting
louder. With the FTSE 100 gaining 28pc since early March and
America's Dow Jones index up 35pc, some investors seem to be
listening. But maybe they're hearing what they want to hear, for the
signs remain ominous.
The UK remains locked in the credit crunch. Lending to companies and
households fell in April for the first time in 12 years. A lack of
crucial working capital could stamp on those fabled green shoots.
The PMI sub-indices suggest the UK's employment outlook is still
firmly in negative territory. Credit-starved firms will be forced to
make more lay-offs, pushing unemployment higher still. That means
more defaults, threatening renewed financial turbulence.
As the credit crunch destroys productive capacity, a new London
Chamber of Commerce survey suggests UK corporate costs are up 5.1pc
per annum - way above inflation. That points to future price
pressures, as this column has often warned. And while mortgage
approvals did rise, they remain way below the 80,000 needed each
month for house price growth to reappear.
In the US, where the "recession is over" camp is most vocal, the
signs are just as grim. The ISM numbers suggest service orders kept
falling last month. Manufacturing is showing signs of life as the
inventory cycle ends but America's massive service sector - much more
important for jobs - remains in the doldrums.
US disposable incomes are rising, but only due to a one-off fiscal
boost that will fade. In the real world, consumer spending fell in
both March and April as debt-soaked US households struggled.
Across the Western world, lending remains subdued. Banks are using
state bail-outs and the proceeds of quantitative easing (QE) to
rebuild their balance sheets rather than lending them on to firms and
consumers.
Credit that is available is offered at rates much higher than on
wholesale money markets, which in turn, remain way above base rates.
So the banks are imposing enormous spreads - yet another way they're
bolstering their balance sheets at the public's expense as they try
to avoid the implications of their own mistakes.
In my view, the on-going lack of credit means the Western world faces
a double-dip "W-shaped" recession. Having said that, I should add
that certain developments last week, and from an unlikely source, did
give me grounds for optimism.
Having worked at the interface of economics, politics and finance for
some years, I'd say the most you can hope for from politicians is
that they don't make matters worse.
The mess we're in was largely caused by too much state intervention -
not least the justified assumption politicians will always bail-out
their friends in high-finance. That's what caused excessive risking-
taking, rather than any "intrinsic problem" with capitalism. I'd also
argue the overtly political "response" to sub-prime - the grotesque
bail-outs and QE - will make matters much worse.
In recent days, though, we've had some brave statements from several
significant politicians and policy-makers that suggest reality is
punching through and our so-called leaders could soon stop making
moves that are ultimately counter-productive.
By stating that QE is "harmful", and calling for a return to
"policies of reason", Angela Merkel has called time on the excesses
of the last six months.
Charles Plosser, a senior figure at America's Federal Reserve also
weighed in, dubbing the Fed's absurd plan to give even more money to
Wall Street to buy-up toxic loans "a bridge too far". Too senior to
ignore, Plosser's words will rein in his masters.
George Osborne, the next Chancellor, also risked causing offence by
arguing that we need to be more transparent about sub-prime losses or
Europe will end up "burdened with zombie banks". Good for him.
This is a glimmer of the kind of truth-telling we need; a pre-
requisite of the "creative destruction" that is needed to purge the
global banking system and get the global economy moving. Such
statements are of far more importance than the cries of the "green
shoots" brigade.
++++++++++++++++++++++++++++++++++++++++++++++++++++
We're paying a heavy price for Brown's successes
Everyone knows, of course, about Gordon Brown's policy failures.
During his 10 years at the Treasury, the Prime Minister clearly spent
recklessly and stored up massive future liabilities (many buried off
balance sheet).
It would be tough to design a worse way to tackle poverty than
Brown's complex, fraud-ridden tax-credits. His annual raid on pension
schemes, a policy buried in his first Budget, has also gained pariah
status - depriving our retirement funds of some £130bn and counting,
a stealth tax they can ill afford.
What's happening now, though, is that even Brown's policy "successes"
- the basis of any claim he has to a "legacy" - are starting to unravel.
The 1997 Bank of England Act has often been cited as his
masterstroke. Handing the Bank "operational independence" to set
interest rates was clearly the right thing to do.
The Monetary Policy Committee hasn't been truly independent,
featuring too many of Brown's stooges for my liking, but has worked
quite well. Over the past 12 years, inflation has generally been
lower than it otherwise would have been because populism has been
tempered by economic common sense and rates set with at least an eye
on price pressures.
In recent months, though, quantitative easing has destroyed even the
pretence of independence. Brown and his henchmen have yanked control
back from the Bank - creating money to buy government debt, a policy
doomed to backfire.
Last week the other aspect of Brown's once-lauded 1997 legislation
came under attack as the House of Lords' Economic Affairs Committee
laid into his decision to strip the Bank of responsibility for
banking supervision and transfer it to the newly-created Financial
Services Authority.
This resulted in "an inadequate definition of roles and
responsibilities of the Bank of England, the Treasury and the FSA",
said the committee, causing "failures of regulation and supervision
that contributed to the UK financial crisis".
Their Lordships infer the Bank was deprived of crucial information
about specific institutions, hindering its ability to make well-
informed decisions on overall financial stability.
A separate paper on the same subject by Sir Martin Jacomb, also
published last week, went further. Brown's tripartite regime has been
"disastrous" said the one-time Prudential Chairman, accusing the
former Chancellor of splitting supervisory responsibilities between
the FSA and the Bank in order to "divide and rule".
As Sir Martin says: "Brown's desire for ultimate control was
decisive, and ultimately ended in failure".
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Liam Halligan is chief economist at Prosperity Capital Management
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