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.

3 comments:

  1. Britain has never been good at realism; if it had not shamelessly exploited many other countries it maybe wouldn't have developed an overinflated idea of it's own power and importance.
    Greece survived perfectly well before the EU, if you discount the Colonels influence.Economies where the general population are self-sufficient and barter and trade with each other on regional levels will always survive, just as they have done always.
    World monetary manipulation by the big banks and global markets don't help the ordinary people survive but are great for the greedy.

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  2. The stamp duty initiatives do give the impression that they will continue to depend on credit as the means to give the appearance of economic success - I heard an excellent comment by a BA striker, who said she was taking action to enable her to keep paying her £1/4m mortgage, as her £11k pay was hardly enough... I know, I tried doing the sums too!

    Re:Greece or wherever - economic failure is not an option: failure polarises opinion and increases social pressures which leads to escalating confrontation.

    Europe exists in the knowledge that the only way to avoid massive wars is to do whatever it takes to avoid such failure.

    Which means there is no way back from increasing integration and the only question is whether there is sufficient institutional capability to prevent failure.

    It remains to be seen whether the measures being used in the attempt to save Greece will be enough, and if it is this may further postpone dealing with the internal structural problem of high levels of tax and tax evasion in the country unless those ad hoc arrangements are made accountable by being put on a statutory basis.

    The fact of our trade with the nations of the Euro-bloc means we have a strategic reciprocal interest in their internal workings so the Greek problems are effectively an argument for greater institutional power and multilateral coordination.

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  3. "I heard an excellent comment by a BA striker, who said she was taking action to enable her to keep paying her £1/4m mortgage, as her £11k pay was hardly enough"
    lol - thats responsible in our age of easy credit?

    Failure leads to improvements - if we don't know we made a mistake early, then how came we correct the problem. The problems just get worse.

    "Greece survived perfectly well before the EU, if you discount the Colonels influence."
    Apart from when they had hyperinflation. Apart from before the EU treaties were drawn up they had some of the highest bond rates in Europe as they were notorious for defaulting by inflating. Oh, and apart from they have poor industry - a shiping industry due to its geographic location, tourism from its natural climate and making ouzo! Nope Greece has always been a basket case. I'm sure Greeks would disagree!

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