Tag Archives: Recession

WORLD ECONOMIC DOWNTURN: Yet more evidence

Shock and surprise greeted hundreds of holiday makers recently when they arrived at the airport to pick up their hire cars.  Europcar, one of the most trusted hire car companies appear to have fallen on hard times, as the quality of their fleet is called into question.

What next?

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EURO ZONE CRISIS – GREEK DEBT, SYSTEMIC FAILURE AND POLITICAL PROCRASTINATION

Today is D Day for the Euro.  The deadline all in Europe are talking about. Yet denial is still at the forefront of European politics.

The other evening I listened in to a radio interview between commentators from Germany, France and the UK.  It was interesting in the mentality that was on show.  The French and German contributers were accusing the UK of having a “Daily Mail mentality” and saying this Wednesday is not really a deadline and everything will be fine.  They further stated that there was no way Greece would leave the Euro and the Euro will go from strength to strength even predicting that the UK would join within the next 50 years.

"I don't have a clue either Angela"

The UK contributers however, predictably had a rather different view.  Admittedly one of which was Norman Tebbit so we can guess his general view point.

However, what was quite clear from the exchange was the way the Europeans see the crisis and how “deadlines” and the word “crisis” has not really computed.

Having been through the crisis of October 2008 and the rapid re capitalisation that took place, the UK, the markets and the IMF seem to take the view that rapid action will be needed.  The European leaders within the Euro zone however, seem to see their antiquated way of long drawn out discussions eventually leading to some sort of a policy that will be ratified at some time in the future as perfectly adequate.

History however tells us something quite different.

Every time the Euro zone heads of state announce a new strategy, or policy it is quickly superseded by another crisis, or the markets take against it.  Even policies that they actually agree on take 18 months to implement like the recent 440 billion Euro bail out fund which when it was agreed was thought to be inadequate and was only passed recently into law and is out of date as a solution to an ever growing debt crisis.

It does not help that even when an agreement has been made, each finance minister for each country says something slightly different causing confusion and causing concerns in the markets.

The type of solutions now being talked about is a 2 trillion Euro bail out fund to replace the woefully inadequate  previous 440 billion Euro fund.  In addition a writing down of Greek debt, with banks taking a significant amount of the hit; re-capitalisation of the banking sector and yet more austerity for Greece.

The problem as ever will be IF this is agreed, how long will it take to pass into law and for the funds to be available.  The funds are needed NOW, but it will take a significant time to sort out.

In addition, this is just another, rather large, sticking plaster.  Systemically the Euro is failing.

The Euro needs restructuring with a much more streamlined way of taking decisions.  The simple way would be much more political union, one finance minister, and one economic policy with integrated tax and fiscal arrangements.  The chances of this happening are pretty slim, and if it was on the cards would anyone in Europe really have the appetite to do it?

The prospect of a German dominated Euro zone where everyone will have to play by their tune, fiscally, and politically will not go down well especially with the southern nations.

It is either systemic change or the splitting away of the weaker members who are debt ridden so that they can default, devalue and restructure.  This would surely help the Greeks who have no prospect of growth in their economy for a decade or more.  They do not have stagnation to worry about like the UK, but a continual downward spiral of negative growth that shows no sign of abating.

Even if this were to happen then a more streamlined system will be inevitable for the Euro zone if the Euro is to continue.

Would more pain now be better than prolonged pain for the next 10 years?  Greeks needs hope and a way forward.  The prospect of Austerity programmes on top of austerity programmes will not provide a future for new generations.

I seriously doubt that the Euro leaders can pull this one off, and the chances of the Euro zone staying in the form it is now are ridiculously slim.

What no one seems to understand is that with the debt in Europe and elsewhere that someone needs to be allowed to fail, but no one seems to get it.  Passing debt from one place to another will eventually catch up with us, and rather than sinking a few small boats we are determined to take down the entire fleet.

Passing the buck from financial institutions to states – from states to overseeing financial bodies (IMF) or larger political bodies (Euro zone) and then where?

The further problems of economic orthodoxy have also not been addressed which means that even if we do get through this crisis it will almost certainly happen again – the prospects for the Euro are . . . . bleak.

UNEMPLOYMENT HITS NEW HIGH OF 2.57 MILLION

Conservative ministers are out in force explaining why their economic policy is working so well, and that is why unemployment has hit a 17 year high today at 2.57million or 8% of the workforce.

What a day for the right and the left of British politics.  The same old arguments start being trotted out at these times, along with a few that we thought were dead and buried.  Not to mention some rather interesting excuses and analyses of statistics.

This morning began with the government claiming that the rising unemployment was all to do with the Euro zone problems and nothing to do with government policy.  Prior to this, all previous bad economic news was the legacy of the nasty Labour Party.

Later in the day, the government were stating that the slow down of the UK economy had only occurred in the last 3 months ignoring the fact that the UK economy has virtually not grown at all for 9 months.  Flat lining of the economy did not happen in the last 3 months.

Of course George Osborne has also blamed, the cold weather, the wrong snow, the hot weather, the royal wedding and bank holidays for economic woes over the past 9 months.  At some point you would think they would run out of excuses.

Don’t you love politicians who when they are out of power blame everything that happens on the incumbent government, and then when they get into power it is always someone elses fault.

The one thing about this recession that has been different than previous downturns over the past 30 years has been how employment has seemed to be a little more resilient.  Now though there has been a large nudge upwards in the unemployment rate and we will probably see it continue on its path to 3 million.

It is funny that this “nudge” has happened at a time when the cuts begin to “kick in”.  But maybe this is just a “coincidence”.

The pattern of unemployment is similar for youth unemployment as it is in the rest of the Euro zone now, with it reaching around 19% of those under 25 out of work.  At least we do not have the 45% youth unemployment of the likes of Spain, but as usual, it is the young (and old) who are sacrificed by an economic downturn.

David Cameron today defended the government’s strategy by saying that their economic policy is working because they have brought down interest rates to 0.5% giving the economy an advantage and being competitive.  Perhaps it was an oversight, but the interest rate in the UK has been at this level since 2009, prior to the present government coming to power.

In the Spectator, a rather skewed look at youth unemployment figures has revived the call from some to abolish the minimum wage for the sake of the under 25’s. The graph below tells the story.

The analysis of this graph by Fraser Nelson is that the reason that youth unemployment has risen in the UK to Euro zone levels is the minimum wage or the evil solialist regulation imposed by the last Labour government.

However, the minimum wage came into being in April 1999 and the rapid increase in unemployment came toward the end of 2007, at the time the Banking crisis hit, and the credit crunch began.  Matching almost to the day that the queues began outside the doors of the Northern Rock.  Another coincidence?

Like the idea that when we have a threat to national security we should put aside our objections to torture because it is inconvenient; we now have the argument that we should not pay people a low but half decent wage because the economy is flat lining.

It is unlikely to be the minimum wage causing youth unemployment to rise, but the wider problems of a debt crisis across half the industrialised world.

Like the arguments that we have a deficit problem because we spent too much, they ignore the real problem which is the collapse of tax revenue which is the real problem.

We now have to watch this space, as the IMF again reassess the UK economic plan.  They have already made noises to the effect that the UK government may have to draw back on its deficit reduction plan as the elephant in the room “GROWTH” suffers.

As unemployment creeps up, and the economy flat lines with no growth, the deficit will continue to grow and not fall despite the cuts in public expenditure.

Like a ship navigating iceberg ridden seas, the coalition has chosen to decide on the speed and course of the ship, without taking into account the changing conditions of the journey.  Simply a recipe for disaster.

I fear there are more stormy seas ahead, oh and a few more excuses.  Maybe Father Christmas will be next on George Osborne’s hit list!

Other post
Great Recession
World Economic Crises – Austerity
Recession what Recession

 

WE HAVE NOTHING TO FEAR EXCEPT FEAR ITSELF

Sir Mervyn King has stated about the World Economic Crisis that:

This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever.

Just the latest in a line of adjectives to be uttered by world leaders; economists; the IMF; the World Bank; politicians and commentators.

This latest declaration of doom is nearing the end of the last roll of the dice for the Euro and the current system of capitalism as we know it.

Even John Major is being seen as being back in vogue as he waded in to the debate on the economic crisis by stating that the Euro is unbalanced and that Germany has massively benefited while the weaker Euro nations have suffered. His argument is that the Euro was formed with the wrong exchange rate causing massive imbalances within the Euro zone, so it was formed at the wrong time, without the right convergence policies in place and at the wrong rate.

He may well have a point, but sadly, his analysis probably comes from his own personal inadequacies on economic policy in the early 1990’s when he himself made those very same mistakes when entering the ERM.  The result was a massive home grown recession.

The past week has been another turbulent week for the markets, banks, investors and savers.

The latest of many shocks to the system has been the downgrading of British Banks by the credit agency Moodys.  A bizarre evaluation of the Vickers report which  actually means that the UK government is less likely to bail out banks in future.

I have thought about the logic of the markets and credit rating agencies a lot recently, and this latest news just confirms many of my suspicions.  Basically there really is no hope for the system as it works at the moment.

The markets are so divorced from the realities of the real world that the two cannot coexist.  Those that profess to believe in the Capitalist system as we know it today, are the very people who seem to forget how it works and why.

The Vickers report, although welcomed by many, may well be seen as weak in some areas, but is the least that could and should be done to try to make the capitalist system within the UK work. Indeed, reform of the world system is required, but few are contemplating such a move.

Capitalism works on the basis that those that take unnecessary risks that do not succeed are allowed to fail.  The survival of the fittest is crucial to it working properly within the boundaries of laws and regulations.

Sadly, the way the markets and credit rating agencies react appears to be without any logic.  Some might say, in a simplistic sense, almost Socialist in intent.  You couldn’t make it up.

The idea of Vickers is to make those that take the biggest risks and fail, to be allowed to fail and for the burden not to be taken by the tax payer or government.  What the credit agencies appear to be saying is that we should not let anyone fail and the government should intervene.

By downgrading banks in this way, it causes a further climate of fear which is already in a severe cycle, much like a whirlwind, causing havoc across the world.

The credit rating agency Fitch on Friday, proceeded to downgrade the credit worthiness of Spain and Italy.  This further exacerbates the problem by creating difficulties for those countries financing their debt.  This in turn puts more pressure on the Euro zone and in itself creates more debts for governments making the overall debt crisis worse.  The cycle just goes on.

The credit rating agencies are now a part of the problem rather than a solution to guide where the money should go.  Rather than deal with economic realities, the agencies are concerned with only what is a safe bet, based on little more than hear say, and intuition.  Every downgrade leads to more turmoil and more reactive policy making.

The economic realities are bad enough, with many more shocks to the world economy to come, but after the many downgrades recently from credit rating agencies like the downgrade of the US from its triple AAA rating, can we really any longer take them seriously?

We know, until the capitalist system collapses, the US will still be a safe haven for investment as seen by the negligible effect this downgrading has had on the US.  This is the difference between real economics and speculation.

Is it time to finally knock the credit rating agencies on the head when it comes to their influence?  It is a wonder anyone is willing to listen to what they have to say anyway, after they AAA rated sub-prime mortgages that partly caused the financial crisis in the first place.  Perhaps a part of the failure of the capitalist system is that the credit agencies themselves cannot fail.  Indeed, at the time they themselves “failed”, and rated sub prime mortgages and the assets of banks so inadequately was the very time that they made the most money.  Does this make sense?

At home in the UK, the government has had a narrative of Austerity for the whole of its term so far.  The consequence is that people and businesses are scared to spend and invest, and banks are scared to lend, even to businesses with a strong order book.  Project Merlin has all but completely failed and the cuts are only just biting.

With a narrative of austerity and fear, along with every whisper on the grapevine of economic expectation being downgraded, it is no wonder that there is a race to the bottom economically.  We have effectively been in recession for the last 9 months, and the prospect of economic growth is bleak.

There are systemic problems with our capitalist system, but no politician or mainstream economist is even discussing it.  The credit rating agencies, banking system and speculators are all a part of this system that no longer works. Rather than dealing with the real problems, politicians and heads of central banks are chasing their tales with each bit of bad news reported.

FD Roosevelt said

 let me assert my firm belief that the only thing we have to fear is fear itself

Although, like any saying, this is simplistic, there is much in this simple statement about the predicament we face.  Much of the problems we are encountering on a day to day basis with the economy, is based on fear created by people who have no interest in economic stability, but in making money whatever the cost.

There are real underlying problems, but while speculators; credit rating agencies; the ideological madness in financial institutions like the IMF and World Bank; and the markets continue to have their hold over day to day political decision making, the chances of sorting out our problems are slim. Democracy itself is being subverted by the vested interests of the markets.

We have dark days ahead, but to see the light at the end of the tunnel, we need a radical rethink of how our capitalist system works.

WORLD ECONOMIC CRISIS: The Austerity Policy begins to Crack

The narrative of the great and the not so good in World Economics is well established.  Forget the lessons of the past, and take no notice of the specific circumstances of the hour, massive reductions in public spending is the name of the game.

The whole world economy has been following the same well worn path of tackling the deficit problem by cutting public spending and satisfying the markets.  Each austerity package has been followed by another, and then another.

Each Euro zone country that fails to reduce the deficit enough gets a bail out of sorts, at the last minute.

Yet the elephant in the room keeps trumpeting loudly.

GROWTH

The truth about the deficit is that without growth the deficit will remain or get progressively worse. Yet the austerity rhetoric has continued unabated.

Yet in the last few weeks, new noises are being made by those who have been the ones leading the Austerity approach.

The IMF and World Bank have both been making noises about the lack of growth.  As the bad economic news continues to grow with each passing week, in the US, the Euro Zone and in the world at large, the penny is beginning to drop.

Spooked by the recent turmoil in the markets, Christine Lagarde has intimated that austerity alone will not sort out the problems.

The markets will never be satisfied as the last months effective crash of share prices has shown.  The markets want both deficit reduction, cuts in public spending and growth.  This, sadly is not possible.

The spectre of a “double dip recession” is causing everyone to panic regardless of the economic realities.  Having had 9 months of economic stagnation, we are, as far as the general public is concerned, still in/or have gone back into recession.

We are staring a great recession or depression in the face.  A decade of stagnation.  Some economists are now suggesting the a Japanese style stagnation of two decades or more is now a real possibility.

The problem we face is that the rhetoric of austerity has altered and depressed consumer feeling throughout Europe and elsewhere, especially in the UK.  In addition, suppressed wages and the decline of standards of living over a protracted period of years is making everyone below the extreme higher incomes, less well off and gradually getting poorer.  Our high streets are turning into ghost towns.  Something last talked about in the early 1980’s.

In the UK, some departments within government are using rhetoric to justify policy options which the treasury would not dare to utter.  To justify interfering in the housing market and to build  a new high speed rail line.

The warnings from predictable circles like  Ed Balls, the shadow chancellor, now include others less used to such associations like Christine Lagarde, of the International Monetary Fund, John Cridland, director general of the CBI, and Bill Gross, head of the world’s largest bond fund, Pimco.

The head of the world bank Robert Zoellick, does not think current austerity measures and short term liquidity measures will be enough to save the Euro zone calling for what he calls “decision time”.  Namely, split the Euro zone, or fiscal union.

Meanwhile the UK’s growth forecasts have been downgraded err . . .. yep again.  When this government first came to power, forecasts were in the region of 2.7% annual growth for 2011.  The British Chambers of Commerce has downgraded its forecast from 1.9% in January of this year to 1.1% now. The Bank of England last month cut it’s growth forecast from 1.75% earlier in the year to 1.4% now.

Today the OECD announced its fear of the world economy grinding to a halt, and although maintained it’s support for cutting public expenditure and fiscal tightening, expressed a view that this should be eased at every opportunity.

What is apparent is that the Austerity machine along with the world economy is grinding to a halt.   Fiscal tightening will just slow growth further causing more difficulties.  Options though are now limited and world action is becoming fragmented as countries begin to focus on their own positions.

For George Osborne, the political game may well be slipping him by.  Clearly a calculation was made when the current government came to power that we would have cuts before a recovery took hold and a recovery to be acclaimed before going to the country at the next general election.  This is looking rather optimistic.

However, entrenched positions are backing him into a corner on fiscal tightening.  The talk of a plan B would no doubt spook the markets even more, and make his and David Cameron’s credibility suffer.  Perhaps they can save face by taking a “common sense” or “flexible” approach and doing more to support infrastructure projects and housing, and thus investing for the future.  A little loosening of the clenched fist of fiscal policy rather than reverting to a full blown “deficit denier”.

Maybe George Osborne knows something we do not, that he is holding back, waiting for the calamitous collapse of the Euro zone before altering course?

What is clear is that austerity alone will not sort out the world economic problems  and those with the unelected power are beginning to realise this.

A Double Dip Recession

Oh how amusing our world is at the moment.  It never ceases to amaze me just how the so called “experts” pussy foot around the bleeding obvious.

Last night I witnessed another “crisis” debate on the economy, complete with the ideologically minded,  inept and stupid discussing whether our mighty economy or indeed the world economy will enter the “double dip” scenario so feared for the past 3 years.

The definition appears to be the pre-occupation of the economists.  Will we enter 2 quarters of negative growth?  However as ever, the obvious is missed.

It makes absolutely no difference whether our economy enters the technical definition of a recession thus entering our history books as a double dip recession.  For most ordinary mortals in our country, Europe and the USA, we ARE in recession and will remain so for many months ahead.

Our economy has been bumping along the bottom for 9 months.  The economy has virtually not grown at all for that time and standards of living have decreased.

Consumer confidence is at its lowest, money is not being spent in the shops and unemployment is rising as employers hold off expansion or recruitment.

For ordinary mortals THIS IS A RECESSION.

What makes things worse at the moment is that there were many people in our society which were actually BETTER OFF than they had been for years when the initial recession hit.  These are the home owners with a mortgage who stayed in a job.  These people saw there outgoings reduce by hundreds of pounds as interest rates tumbled.

Now however, these same people are also feeling the pinch as we have had several years of rising prices and lower wages.  Some are now working part time rather than full time and others have lost their jobs or taken pay cuts.  The advantages first felt have worn off and further job losses in the economy are inevitable.  The feelings of recession are hitting every corner of the middle and lower incomes and women in particular.

The most as an economy we can hope for is stagnation for the the next few years.  Some in government will be hoping for a bit of inflation at the same time, to inflate and devalue us out of our predicament.

The UK , though not in the worst position in the world economy, is thoroughly dependent  on Europe and the USA.  We are so globalised and rely on trade, that the Euro crises and US economic doldrums will affect us badly.

Rather than debating the technicalities that no one really cares about, we should be discussing the systemic problems with our capitalist system so that we c an look long term and put things right.  This however is a forlorn hope.

THE US ECONOMY AND THE LOSS OF THE AAA RATING: Why do we maintain faith in failed institutions?

As we all know, habits are hard to break, especially when they have been reinforced by repeated behaviour for so long.

The fall out from the US losing it’s triple A rating will only be known in the coming days.  The comments in the business pages are fairly predictable on the whole.  The Spectator through Fraser Nelson writes that Obama is “addicted to debt” while at the same time stating that the triple AAA rating may not affect US borrowing at all except make it somewhat more expensive to borrow.

It’s kind of amusing that Obama is being blamed for high debt, when it was President Bush who ran up the deficit at the same time as cutting taxes they could not afford on the same ideological grounds stated by commentators on the right. Apparently the same arguments used for Cameron et al for “inheriting the crisis”, cannot be applied to Obama by the very same people.

Yet at no point does Fraser Nelson, or many others question the legitimacy of the credit rating agencies themselves.

World leaders are bracing themselves for a volatile week ahead where the markets have us all on the run, and could well create the crisis they are worried might happen by making the Italian debt too expensive to service.

Since 2008, responsible governments have been trying to contend with a catastrophic financial crisis by dealing with the symptoms and not the causes, because as usual the causes are very difficult to confront.  A financial crisis that was not predicted by most economists, the IMF, World Bank, world leaders, think tanks or credit rating agencies.

Indeed the IMF and the credit agencies were at the forefront of causing the crisis by   a) an economic orthodoxy of encouraging or even forcing countries to deregulate, sell assets and open up markets   b) valuing assets and financial products with AAA ratings that were in fact junk, thus encouraging frantic trading in worthless financial products that were too complicated and/or no one could understand or value.

Yet now, whenever a country justifies it’s economic policy or deficit reduction plan, it immediately quotes the endorsement of the IMF as an authority on sound economic management, which it quite obviously is not.  Then we trot out the belief that we have to satisfy the credit agencies, which have been completely discredited.

CREDIT CRUNCH AND RECESSION 

In 2008 governments looked to the only crisis in the recent history that matches the extent of the crisis today – the 1930’s –  and attempted to ensure that a depression did not ensue.

The US tried to let some institutions fail, like Lehmans – this was a disaster and the realisation of banks being too big to fail led to the effective state ownership of the banking system and coordinated  stimulus packages.

Recession hit, tax revenue fell and deficits increased.  Since then, rather than bouncing out of a deep recession, the western economies are stagnating and are being hit hard by other external factors and economic shocks – natural disasters, war, commodity prices, food prices and raw material costs.

While some discussions have been had regarding ensuring that the financial crisis does not repeat itself, the world financial system and the ideologies and agencies that influence it have not changed.

The IMF and World bank are at the forefront still of economic prudence; credit agencies still have the ability to sink economies and companies; neo-liberalism is the mainstay economic ideology; while the banking industry and derivative products have not been reformed.

In short – the CAUSES have not been dealt with.

THE FUTURE FINANCIAL CRISIS

Next week could see the other credit rating agencies downgrading the US – if this happens the costs of borrowing for the US will increase and further undermine markets. It could also call into question the dollar as a banker currency.

The markets could well ensure the crisis hits Italy as the interest costs to service the deficit rises toward 7%.  This would lead to a default position, even though their deficit is relatively low (under 5%) and their debt is largely held by Italian investors.  The self fulfilling prophecy of the markets acting hysterically could be the straw that breaks the back of the Euro zone with the dithering of northern European leaders.

The markets are held as the bastions of correct decision making by marketeers. “The markets are always right” is the mantra – but in reality, they can “create” the very problem they are afraid of.  Akin to the phobia of having a mental breakdown, and worrying and getting so stressed out that it creates one. Hardly logical.

When we consider the underlying problems of the world economy, the debate over how deep to cut the deficit seems “almost” irrelevant.  If we do not reform how we create money; the undemocratic and ideologically driven IMF; and allow the banking sector to be too big to fail, then a further crisis and financial collapse is inevitable.