Monday, January 04, 2010

Sufficient unto the day is the evil thereof

Well, a long holiday- and a long break from blogging. I have travelled several thousand miles across several European countries, but am now back in Tallinn, under a record covering of snow. Like all of Northern Europe, the winter here is breaking records, being both much colder and much snowier than usual. The ice is beginning to cover the sea, and we are told that the ice road to the islands will be open within a couple of weeks.

Meanwhile, the last part of 2009 was a time of a large number of goodbyes- including the flat I lived in for 12 years in London. 2010 seems a more than usually uncertain year- and not just for me. In the press and amongst my friends I see a sense of foreboding. There is very real anxiety- continued terrorism, continued war in Afghanistan, continued economic crisis. In a way it takes me back to my childhood in the 1970s, where Britain in particular faced serious economic decline, combined with a particularly vicious and insidious form of terrorism from the IRA. Of course in addition to all of that we had the challenge of the cold war, with nuclear mega-death in theory only a four minute warning away.

Despite the depth of our economic problems, the fact is that the "Noughties" were not anything like as bad as the 1970s. Now, as the new century begins its adolescence, the question is how to calm our own insecurities in order to be able to avoid new problems while we address the problems that we have. The response of George Bush to the threat from Al-Qaida now seems very ill judged, and by taking the line of revenge, the Bush administration made the horrors of 9/11 into the most successful terror attack ever. Iraq- not involved in the attacks- was made a scapegoat and while settling the Bush family score with Saddam Hussein, President Bush (junior) fatally compromised the real effort in Afghanistan. Now the Taliban, Al-Qaida and its suicide death cultists have made new bases, in Somalia and in Yemen. In Somalia our failure to recognise the only piece of the imploded state that still works: Somaliland, is a dreadful mistake, that may lead to the expansion of terror there too.

Nevertheless, although heavily criticised for indecision, President Obama's caution now looks increasingly wise. Although -disgracefully- his Republican opponents are openly hoping for his failure- in order, partly, to make the Bush fiasco look better in retrospect- Mr. Obama's legendary coolness may be about to pay off. Although there are tough battles ahead, his political success on the domestic front- opening up the way for American health care reform- may now be matched by a substantial economic success, as the United States unwinds its quantitative easing and returns to more stable economic times. Despite the challenges from a disruptive and overly assertive China, America remains the dominant economic and political force in the world, and in 2010 its economic recovery may remind us of this fact.

In the European Union too, there are signs of recovery- and the economic power of Germany is reaching new heights, even while those countries in the EU which have not reformed now struggle to play catch-up with the bloc's undisputed leader. The tough decisions being made in Spain and Ireland, while very painful in the short term, seem set to place those countries on a more sustainable economic footing.

Only in Britain, mired in election mudslinging for the next six months, is the outlook continuing to dim. The failure of the exhausted Labour government to address the looming fiscal crisis is more critical every day. Unlike America, the banks remain in a dreadful state, and the emerging collapse of the commercial property market may require a second rescue as large as the first. As public sector workers receive new wage increases- including increases in their unfunded pensions, as bank bonuses are being paid despite the absence of any recovery, as consumers splurge over Christmas, there is already a palpable sense that this level of irresponsibility will have terrible consequences.

Although the general world outlook continues to brighten a little. The outlook for the UK in 2010 is now as grim as it has been for nearly 40 years. Many argue that the fall in sterling will rescue the economy. Unfortunately British manufacturing now comprises only 11% of the economy and the bulk of economic activity is now in the public sector- all a falling Pound is doing is importing inflation. So in addition to emergency government spending cuts sometime in the mid year, we will see much higher inflation- and a rise in interest rates that will finally undermine the UK housing market. Although self-interested groups have been pointing out that housing has become more "affordable" the fact is that this affordability is based on ultra low interest rates. They fail to note that the historic average Bank of England base rate is 5%. Meanwhile the ratio of price:rent in the UK is still 20% above its long term average. The combination of inevitably rising interest rates and large job losses in the public sector can only mean a significant real fall in house prices. Either the currency will collapse or housing prices will.

I expect it will be both.

Happy New Year

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