Friday, 26 March 2010

A Budget to Forget

"If we subtract spending on welfare and debt interest then we estimate that the rest of public spending would be cut in real terms by an average of 1.4% a year compared to an average increase of 0.7% in the Thatcher era."
Institute of Fiscal Studies

It was a budget we all expected just before a General Election, a budget aimed at claiming maximum votes. It was quite simply a farce. No real change anywhere, savings cancelled by further spending promises, it felt like a budget for an era gone by where the economy was once perceived to be humming along. Mentions of cuts were detailed after the actual event, with yet more 'efficiency savings'. Call me sceptical but surely if it was that easy to cut billions in Government spending, then why aren't they doing this already? Never in history have I seen a Government be able to bring down a budget deficit like ours with 'efficiency savings', only real cuts can carry out the required correction. Of course the truth eventually came out. The press picked up on the fact that Chief secretary to the Treasury Liam Byrne confirmed that the Labour Government would have to make larger cuts than Thatcher did back in the 80's. However I still don't believe Labour would do this. It stinks of Jim Callaghan who took over the mess Harold Wilson left him, talked tough, but never had the conviction to administer the cure.

What's amusing in all this is people's shock to it all, 'Tougher cuts than Thatcher, well I didn't think it was that bad', well think again, you won't get common sense from the media. Thatcher never had a deficit like this. She came in when interest rates had peaked. She came in when Unions were Striking everywhere, North Sea Oil production was on its way up and private debt was no where near what is today. Thatcher had it easy! We have everything in reverse at this current point in time. Still it will work itself out, won't it?

Growth is what we need or what we are told. We need to ensure a return to growth and this will solve everything, right? Communist Russia grew for years during Stalin's reign of terror, but it wasn't the paradise that the propaganda portrayed. Governments can grow an economy like now by borrowing from future generations but the bill has to be paid at some point. Communist economic systems recorded growth but this growth included people never having goods they wanted. Governments made Steel, Cement, machines that no one used but at the same time people in these countries couldn't get basics such as bread or clothes, items we now take for granted. They couldn't get homes. Russia has historically been one of the largest Oil producers in the world but its people couldn't even buy the stuff as it was rationed during Communism. The state needed the oil to to pay for imports as natural resources were the only exports the central planned system could sell to the West. They had growth but people weren't satisfied, peoples lives didn't get better. Governments can grow economies but they can't meet peoples individual needs, innovate and create like a free market can.

When you hear a politician saying we need 'to lock in growth' its just political engineering, telling people we need growth rather than letting people, as individuals, determine what they want to do, what they want to consume and produce. It's time to let our economy shrink if need be and put it on a more sustainable long term path.

IMF Greek Bailout

Well not quite a bailout, but it stinks of another 'Greenspan put'. If the market won't lend to you, we will. The market now knows there will always be a lender of last resort, again another moral hazard. I'm sure the Greeks will now be able to sell their bonds, in fact rates may even come down again as the market can rely on the IMF to buy if Greece gets in real trouble. A further inflationary wave among the existing ocean of expansive monetary policy. Problem is, the plaster doesn't cure the Cancer patient. They can get lazy once more. Why train as hard as the other sprinter to compete when they keep making the race shorter for you.

The Eurozone should have let the Greek Government fail. People may look at this stance as uncompromising but this is how free markets work. No one objects to small companies failing, indeed it frees up societies resources, labour, land and capital for others to use in a more productive manor that satisfies peoples needs. When it comes to Governments, people rationalise that they should print, get bailed out etc, but if Greece was allowed to fail this would be beneficial to the Euro and also for the Greek people.

It would have sent a signal that the EU is serious in maintaining discipline on Governments. Either Greece's Government would have been forced to shrink by market forces and the Greek people would have got more competitive or what I feel would happen is the Greek people would have just left the Euro, thus leaving the nations that are serious about trying to have a sound economy under the Euro.

Greece should have left. I can't see their culture getting real. They blame international 'speculators', the Germans, the Euro anyone but never themselves. They are not man enough to admit to the error of their ways and if you can't do this then you can never learn from your mistakes and improve. Let them have their drachma, they would probably encounter a short term inflationary bounce as they regained monetary autonomy once more. So called economic commentators would use this as evidence to support their theory that the Euro is a straitjacket. The bounce wouldn't last and their economy would tailspin into a basket case state once more over the long term.

Franc Fort

Back in the 50's, 60's and 70's the French Franc was like the British Pound - a basket case. For years the French had used the currency to try and solve the problems of the day but on all occasions it never worked. When the ERM was introduced throughout Europe its aim was to achieve currency stability between nations after Bretton Woods collapsed. It meant all Governments had to peg their currency to the German D-Mark, the cornerstone of the scheme in effect 'borrowing' anti-inflation credibility from the Bundesbank. The problem was other countries would always keep revaluing as they couldn't keep pace with the Germans uber-hard monetary stance. Ironically it was France's Socialist leader Mitterand who decided to get France serious and a policy known as the 'Franc Fort' was implemented. He liberalised markets, allowed unemployment to go where it had to, cut government spending and so forth. They didn't use the currency and allowed people to get competitive once more and in turn won the respect of the Germans who in effect exported their harder monetary stance to France. I'm not saying France is a free market utopia (far, far from it) but they are in a better shape now thanks to such policies. I also don't agree with currency pegs, but the peg meant the French had a commitment to track the Germans on monetary policy. The Euro of course removes the peg factor completely.

"As the chancellor made crystal clear, there is going to be no devaluation, no realignment...The soft option, the devaluer's option, the inflationary option would be a betrayal of our future, and it is not the government's policy."
John Major, days before the pound exited the ERM

Well the Conservatives tried but failed. The UK couldn't stand the heat or rather we are still stuck in a bygone age where we believe the pound to be still the best currency in the world, hence not for the first time we valued the pound way above market rates, in this case we overvalued it against the Mark. What a bunch of pansies we are! Speculators made great gains from the event at the time, many are critical of the money men for profiteering at a nations expense.

However what about the speculators that bet against the Franc at the time? No one tells that side of the story, where those speculators lost a bundle. Ten years prior the French wouldn't have stood the heat, their culture would have been too weak, but the Mitterand 'Franc Fort' meant they could maintain the peg, admittedly with great difficulty. The market still didn't believe the French, thats why they bet on a similar devaluation that had happened in Italy and the UK, but they underestimated the shift in French culture that had occured during the past decade and the determination of the Government not to bow to short term outlooks.

'Sound as a pound' is still a popular saying but its lost all meaning these days, referring to a time when the pound used to be sound compared with the worlds other currencies. A more fitting title going forward may be to replace the 'sound' with 'unsound'.

Market Prices need to be allowed to do their Job

Market Prices are there for a reason. Profit, Loss, Bond Yields, Currency Exchange rates - prices all directing economic activity in an uncertain world where we all have infinite desires and wants but limits in our productivity to meet them. Don't use a currency to solve your problems, it will just embed the rot further. Let prices do their job.

Sunday, 21 March 2010

Vote for Gordon

"Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."
Ludwig Von Mises, Human Action

The prospect of a hung parliament. The prospect of a Labour victory. The prospect of divided politics once more. With the British polls showing a narrowing between the Tories and Labour, markets have begun to get the UK jitters once more. David Camerons indecivness on issues such as the deficit and the inflationist policies of the current Government have casted doubts in the British peoples minds. With so many of the populace aboard the Government Gravy train, do we really want cuts? Maybe the government can inflate their way out of this mess resulting in us all obtaining our free lunch, living in endless prosperity? I'm afraid the laws of economics are the same as the laws of gravity. It doesn't matter which way you jump off a cliff, or in this case how the government chooses to inflate, the end result is the same, just like gravity pulling you towards the earth the free market demands the required correction. All the government can do is lower our standards of living for the long term. The more it fights the free market, the worse the end correction will be.

Vote for Gordon may seem like an odd title, as Gordon Brown and the Labour party are carrying out the worst policies listed above, a contarian view if you may. It's important for me to state that I have no political affliation. All parties are as clear as mud, all with agendas to infringe on peoples liberties, distorting markets and impovishing people. Get rid of Government I say, but that is seperate topic for discussion. We need Labour to win the next election. We need another term to discredit statist policies. I fear if the Conservatives win, the UK will be in serious problems.

If, as the Conservatives say, they will cut spending as should happen, this will spark off a further deflationary collapse. This is the required medicine, however the majority will not see it this way. As Ludwig Von Misses states above, "...inflationary policy is a boon for the treasury and very popular with the ignorant". Another quote that has stood the test of time. Recently it has been stated in the news that the UK may not need to borrow as much as initially forecast. 'Economists' talk about the recovery, people say the recession is not that bad, the malinvestments are proped up providing the illusion that its business as usual, all of course are the product of an inflationary mirage. Governments have convinced themselves that all we need to do is drive down interest rates as low as possible and print money to fix our problems. We can avoid the required adjustments by simply trying to continue consuming and borrowing, the exact measures that created the problems.

People have very short term memories and short term outlooks which I have witnessed throughout my life. For example people always state what a disaster Thatcherism was, as they looked at the short term effects, high unemployment, less government support for individuals, the acceleration of industrial decline. Over the long term of course, it was for the benefit of Britain, my generation are all Thatchers children. We all benefit from goods that we used to make, that are now made in China at a lower cost. We have all moved into other areas of employment, better jobs in many cases.

Its peoples short term memory that is dangerous. If the conservatives win at the next election, will the squeeze provoke the public to turn to the left? "We were doing fine under Brown before he left?" - remember "people say the recession is not that bad", the required corrections would be painful. There is so much imbalance, I don't think the Tories could correct the mess in one term. I also think they don't have the spine or the conviction to go through with the required medicine. The temptation to eventually inflate after initial cuts will be too great, the short term benefits will give the government room for manove. This in turn would confuse the people, believing that cuts are the last thing we need, we need further Government action to solve the issues. A resurgance of left wing politics once more could take place. The free market will be blamed once more for the problems.

However if Brown were to win a second term, cuts would not be on the agenda nearly as much. Further inflationist policies will be carried out as the Government spends its way to popularity. The market would not tolerate this, instead capital would flee, interest rates would rise, currency instability or a full blown currency crisis would occur. Its better that this happens on Labours watch rather than the Tories. People would have a clearer picture of what caused the mess - continued Government intervention - "We need the free market to solve our issues, no matter what the cost".

You see the Tories are a classic scapegoat, they generally tell people the truth, that we need disipline. Labour are the weak parent, who give in to their children and let them run riot. We need labour to continue in power so that the Tories can say "Told you so". The end game is a deflationay collapse, hard times?, sure but good for the moral character. The only other alternative is the quote at the top of the blog, monetary collapse.

How likely is Hyperinflation?

It's a topic that comes up in various articles, with authors proclaiming its just around the corner, weeks or months away. Truth is Hyperinflation will happen if we as a nation wish it to happen, which is exactly the path we are walking towards. An excellent article has been published by Dr. Krassimir Petrov detailing the road to hyperinflation. It is only a road and at any point we are free to turn off it, but only if we wish to do so. Vote for Brown, it will build the moral fibre we need to avert such a situation and as Dr. Krassimir Petrov points out, buy some Gold in the meantime.

Thursday, 4 March 2010

Jim Chanos and a Word on Expansive Monetary Policy

Another Hedge Fund Manager, with some wise words.

Government is the Problem

Avoid Fancy Money Managers

China Bubble

A Word on Expansive Monetary Policy

There have been rumblings from the IMF that central banks should raise their inflation targets to try and combat the crisis, with a doubling of the current targets put forward. Why stop there, why not three times, or four times, or lets ask what a bunch of infants what they think the 'target' should be set at? Governments always bend the rules, trying to patch up the mess they create. I took the title of this blog from Alan Greenspan's book 'The Age of Turbulence' in which he details the various events throughout his life, along with his view of what was to come in the future. What I did find interesting was his awareness of the 'deflation' factor that has afflicted the West for the past 20 years or so. As he describes, with the opening of Asia, the collapse of Communism and the rise of Global Communications, the free market kept lowing the costs of goods and services at an ever frantic rate. As Governments and Central Banks look to a positive CPI measure of inflation they had to expand the money supply at a very brisk rate in order to compensate the efficiency of the marketplace.

What Greenspan also recognises, when explaining what is to come, is what happens if these very same 'deflationary' forces are subdued in the years to come? In such an environment the same expansive monetary policy would show up as much higher prices for goods and services.

This is what 99% of people forget, the China factor, the cheap labour, the telecommunications savings, these are all a one time hit. As time passes these forces subdue. We are not going to find another China. We are not going to find another telecommunications revolution. All these factors are a once in a lifetime phenomenon. This is another problem (add it to the list) policymakers will face. At the first sight of financial problems a knee jerk reaction is to expand the money supply, but in the future this will cause much greater problems and Governments will not have a clue how to fix them.

Inflation will become more embedded in the system, 5, 10, 15 years from now. Much more than people think. This in turn will drive Interest Rates up, as market forces force these prices towards a real rate of return. Greece has this problem already along with other Med nations. Here in the UK our Government Bonds are rising just as bad. We even have higher rates on our 10-year bonds than Italy and Spain. While the rating agencies keep us at an AAA rating the market is already ahead of the regulators, asleep on the job once more. But hey Sub-Prime was once AAA. Beware of people who prescribe the cure is more unwarranted inflation. The future will not be as accommodating for such policies.