Wednesday, August 31, 2011

Market Capitulation

Markets capitulate when all policy options run out, and it becomes clear that a definite new policy direction must be undertaken. We are getting quite close to that point in the current market volatility. As various commentators take the economic temperature after their return from some agreeable foreign holiday, it is becoming clear that we are close to a major failure of confidence. The inter-bank market is beginning to freeze again, and the implications are plain: banks are finding it ever more difficult to finance themselves, and governments and central banks are running out of options to support them.

Clearly governments are finding it more and more difficult to get their sums to add up, as the nascent economic recovery stalls. However, perhaps paradoxically, the failure of confidence may end up reducing uncertainty: it will be clear that the crisis continues, and that therefore the policy prescriptions will be clearer too. In other words, I think we are on course for a classic market capitulation.

Equity markets, after the August debacle, are indeed looking relatively attractive, yet there is still the lurking problem of the banks: buying the market at the moment leaves you exposed to what are very likely to be further losses in that sector. So, selective purchases of good quality non financials? That is certainly worth considering- it all depends on the collateral damage from the next fall.

Market capitulation is tricky to manage, even if you expect it to happen.

Sunday, August 28, 2011

Hurricane Media

As a relatively small hurricane moves the east coast of the United States in a relatively rare direct hit, can really be the only one to regard the media coverage as ludicrous?

Every trite cliche, every slick and empty phrase has been trotted out in support of the IMPORTANCE OF THE STORY, and for a day or two it will doubtless be a nuisance to my friends on the East Coast.

It is not, however, the end of the world if New York experiences a bit of sea flooding- and the City and indeed the country are well prepared: Hurricane Katrina, this ain't.

So why treat it as though it is?

This is news as a horror show. This is news as "entertainment".

It shows the media at its most base, most trivial, and most dangerous. The great pictures and the potential for nasties justifies the massive editorial commitment to the story, even if -as we hope, and as seems likely- it turns into a pretty minor event.

Such editorializing should remind us of the essentially tabloid nature of television. Immediate images and glib phrases, however, are not information. Indeed the immediate emotional impact of a powerful image can actually be irrational. We believe our eyes- yet television is a remarkably, and increasingly, dishonest medium.

As we "discover" the negative health impact of watching television for hours on end (well, duh!), it is easy to lose sight of the negative intellectual impact of television. Long gone are the glory days of David Attenborough's BBC 2, home of the Ascent of Man, Civilisation , Life on Earth, Horizon, Chronicle and Monty Python. The audiences of tens of millions who watched these landmark programmes have now shrunk to a level that is said to be too small to sustain the costs that it takes to make them. The cheap and trashy shows that were always a feature of the telly and now dominant. Ever increasing sensation and vulgarity have coarsened much in our society.

Television news has also dumbed-down to a level that is barely believable to those raised on the magisterial reporters of the 1960s or 1970s: Walter Cronkite, Alistair Cooke, Mark Tully, Alistair Burnet and Sandy Gall.

So as image becomes the measure of a story, I find myself thinking that the integrity of the news media has now evaporated. It is this breakdown in integrity that I see across many other realms of human activity- from politics to science- yet it is in the media where the rot seems most putrid.

The media can not hold anyone else to account when it is itself so bound up in its own corruption. The Murdoch scandal has revealed how deep seated that corruption has become. Now the trivial and trite banalities being sprayed around like a hurricane storm surge in today's coverage shows just how incapable television now seems of creating its own remedy.

Friday, August 26, 2011

The Crickets sing on the verges

The Northern sky of Estonia makes for a long twilight in the summer, and as the seasons gradually roll past I drive out from Tallinn in mid evening. The air is full of the smell of the new-harvested barley- a wholesome, delicious smell like fresh linen. The crickets are singing in the verges- the sign of late summer, as all the swallows have gathered and started their trek south.

The storks too have already started for Africa, and before long the great ribbons of clanking geese will be seen decorating the sky. The late summer light- grey-white and flecked with the colours of the sunset makes every needle of the sharp shapes of the pines and spruce stand out as a tangible shadow. Passing the woods leaves the cool scent of earth and the sound of the small birds in the air.

The warm days of summer are drawing to an end, and before long the languor will be replaced by the brittle chill and the first frost. The winter- long and dark and snowy- looms as a presence at the end of this day. In a few short weeks the skies will be dark and silent while those on the ground brace themsleves against the pervading chill.

In the gloaming I catch sight of a few cheerful twinkles from the country houses, there the people are gathering wood and apples, bottling fruit and mushrooms. The cycle of the seasons has not yet changed for Estonians and, as in my own British childhood, fruit comes in and out of season. After the forest strawberries, the raspberries, blackcurrants, blueberries and the cherries we now have the blackberries and the apples- the last harvest before the frost.

As the crows settle on the barley stubble of a good harvest, I reflect on the consoling power of the seasons of harvest and renewal. Returning to the light and the relative silence of the city, a little of me stays amid the sounds and scents of the darkening woods.

Thursday, August 25, 2011

Buy/Sell, by Cell

This brilliant KAL cartoon from the Economist used to be on many desks at UBS in the 1990s. I think it may well help explain the skittishness of the markets recently. The fact is that the economics data at the moment is rather ambiguous, and the market is filling the information gap by talking to itself.

Of course there is much that is pretty bleak: the US downgrade, the downward revision in growth across much of the developed world, the growing sense that the debt crisis is likely to require many years to finally get things under control.

On the other hand, stocks now look historically cheap on virtually very measure that one can think of. Although the price of gold continues to rise, and so- paradoxically given the downgrade- do US Treasuries: all of the safe havens are looking historically expensive, even as they keep powering upwards. Meanwhile risk assets languish: perhaps this rejection of risk is now overdone, and the strong of nerve can consider things from the big picture and the longer term.

To my eye, even the deepest recession looks pretty well priced in- and while there is still the risk of another secondary banking collapse- which is why everyone is so scared- such a risk is far from a certainty. I don't like banks and hate the controversial Kazakh stocks in the FTSE-100, so will not buy that index. In the UK I would love to buy the old FT-30 index (no banks and only blue chip), but no one seems to want to sell me that index, and it is too fiddly to recreate myself. So I will have to think about a more concentrated portfolio.

Technology may allow people to trade from their smart phones, but it seems to me that whatever the quick trading models now suggest, the question is not one of volatility but of value. Taking a step back and doing calculations with a pencil suggests to me that the stock markets are now quite an attractive investment: many blue chips have high and sustainable dividend yields, and are priced at levels of less than a third of their real-terms peak. Of course nothing is certain, and I make no firm predictions, but I am now, for the first time in four years, beginning to think about starting to reduce my very high cash position and to move into the markets again.

Wednesday, August 24, 2011

Rating the ratings agencies

Amid all of the controversy over the downgrade of the United states debt rating from AAA to AA+ by Standard & Poors- which seems to have resulted in the early exit of the President of S&P, Deven Sharma, from his job- it is easy to lose sight of the bigger picture.

In Estonia there has been a mild celebration at a two notch upgrade in the Estonian credit rating to AA-, that is to say only three notches below the United States and just one below Japan (according to Moody's, another one of the big three rating agencies, which now also includes Fitch). The celebration was rather mooted simply because the value of such a rating is no longer the unquestioned blue ribbon it once was. Although, for regulatory reasons, investors are compelled to pay attention to ratings, the fact is that much of the latest credit crisis came about when structures, such as CDOs, which had been rated AAA by the agencies (largely, it should be said, for technical reasons) turned out to be worthless securities after all. The fact is that large firms, such as Goldman Sachs, created structures that would comply with the rating agency rules, but that this compliance was simply cosmetic. The large fees that the banks paid the agencies in order to obtain the ratings were a significant conflict of interest. In the end the co-operation between the two may well end up being considered as a market collusion in order to defraud investors.

It is in that context that the public revelation that Lloyd Blankfein, the head of Goldman, has retained personal lawyers is so significant. Goldman Sachs has come in for some very heavy criticism- and as I have noted in previous blogs, some of this hostility to "the Vampire Squid", may well be justified. It is also interesting to note, without prejudice to Mr. Blankfein's own position, that despite the scale of the crash, there have been remarkably few investigations, let alone prosecutions for activity that -at best- might be described as questionable. Indeed, while banks have been created and destroyed in the crisis, until recently very few Bankers saw much impact on their personal positions. It is only now that we are beginning to see large numbers of bankers losing their jobs.

So the reputation of the ratings agencies has been one of the principal victims of the crisis. Furthermore it underlines how very little of real value has been actually offered by finance professionals. Ratings opinions have often proven worthless, but throughout the finance world, much else has proven to be of highly questionable value. Among the key figures in finance, the fund managers- whether in mainstream funds, or in so-called absolute return funds- have generally delivered sub-market returns. That they do this while still charging high fees (or indeed any fees at all) is now a matter of growing irritation. It is now quite clear that the whole paradigm of modern finance has rested more on chance than on skill, and as a result the rewards for these questionable skills must now fall substantially.

So as countries find their debt ratings moving up or down, the reputation of the ratings agencies -and the reality of the rest of finance, for that matter- has fallen well below investment grade.

I have spent twenty years working in the City of London or on Wall St. Only now, as I get closer to the companies that I invest in, do I see the way in which the financial system has broken down. As the likely decade-long recovery from the "Second Great Depression" slowly advances, it is only now that we are beginning to see that major changes may be coming to the conduct of the global financial system. Those responsible for the failures will now pass, and a new generation will emerge. Along the way I suspect many legal tussles, but the most important recognition will be that the fundamental ideology of finance must be altered. The value destroyed in the crash is greater than the entire value ever added by banks in the whole history of finance.

That alone must tell you that the global financial paradigm is based on a false premise. Finance does not create value: it merely transfers it. Chance is a greater determinate of performance than skill. Under those circumstances, the outlook for those who have made fortunes selling non-existent skills is- and should be- much diminished.

Tuesday, August 23, 2011

Lockerbie and Libya

The fall of the Qaddafi compound in Tripoli may not be the precise end of the vile regime, However, I -for one- will mark the fall of the lunatic Colonel with a certain savage delight.

The wreckage of the fuselage of Pan Am flight 103 looked like small pieces of paper on the hills around Lockerbie. The gouge in the highway looked like a giant bite into the carriageway.

Now, maybe we can find the truth behind that vile and cowardly act.

Though it is still a difficult and dangerous time for the Libyan people, it really does seem like the end of a disgusting regime.

Our avowed enemies are set to replaced by our avowed friends.

For that relief, we should praise those who have helped to bring it about. The battle is not yet finished, but the war surely is.

Long live Libyan freedom and democracy!

And if that seems a little idealistic, then I would just remind people of the depravity of the regime just removed. The future can only be better than the past.

Monday, August 22, 2011

Morality and Humbug

I am not sure whether or not the UK can blame a general moral collapse for the riots that convulsed the country in early August, although that is what Prime Minister Cameron appears to believe.

I am, however, pretty sure that any comments about morality from Tony Blair should be treated with disdain, if not actual contempt.

As Peter Mandelson helps himself to the point where he can now afford an £8 million house, and Mr. Blair himself continues to collect ever larger cheques from various international investment banks, it seems pretty clear to me that at least two of the new Labour triumvirate have parleyed their public service into private profit.

Mandelson, of course, was a notably indifferent minister, being forced to resign on two separate occasions for reasons directly concerned with a rather careless attitude to money. It remains to be seen how history will judge Mr. Blair, but given the aftermath of his policies in Iraq and the economic catastrophe that hit the UK shortly after Mr. Blair departed from office, it is hard to see how that judgement will be particularly positive.

What I find most revolting is the nakedness of the greed of these erstwhile public servants. They are filling their boots by working for institutions that themselves have a pretty questionable view of morality. As it is revealed that students are being put off entering the City because of the stigma banking is now getting, I also note that John Le Carre has highlighted this issue in his latest novel, "Our Kind of Traitor".

Perhaps more interestingly there are barely disguised references to the Mandelson /Osborne /Deripaska affair. Those controversial meetings that took place then, must- we hope- have had a less sinister intent than the fictional meetings on a similar yacht.

Whatever happened in the riots, the idea that morality prevails unsullied in British politics is not one that John Le Carre shares, and -as I have noted before- Russian money in Britain is indeed being used for purposes that undermine our own freedom.

Any politician who promoted such business would certainly be involved in activity that, if not actually illegal, would most certainly be immoral.

Wednesday, August 17, 2011

Why A Billionaire pleads for higher taxes

In most Western countries, the rich are taxed less than the poor.

This is even though most Western politicians demand that the rich should pay more tax than the poor, both in absolute terms and also in relative terms.

Yet the fact is that these same politicians then enact policies that precisely fail to bring this about. They enact more and more detailed tax codes in order to "close loopholes" and to promote some specific social or political benefit, and with every regulation that they put into place they increase the burden on the the low and middle income earners, but not necessarily on the high income earners. Indeed some, rather self-serving, rightist politicians deliberately reduce tax rates on the rich "in order to promote incentives", as though becoming wealthy was not incentive enough.

As your economics text book will tell you, there are essentially three components to creating wealth in the modern capitalist world: Land, Capital and Labour. Of these, the the first two are insufficiently taxed- indeed Land is often not taxed at all- while the third is taxed way too much. Employees pay a huge percentage of the gains from their labour directly in income tax or indirectly in consumption taxes, to the point that- as Warren Buffet noted this week - where the very wealthy are now paying the lowest percentages of tax, since they derive a high proportion of their income from "investment" or "carried interest".

I am something of a realist when it comes to tax. No one wants to pay if they don't have to, but the rich, well advised and geographically more flexible, are far better able than the rest of us to avoid onerous taxes. Indeed, although their nominal tax rates are set higher, as Warren Buffett shows, they often end up paying far less as a percentage than the majority on middle or low incomes. So, to my mind simply getting the rich to pay then same as the rest of us would already be an achievement, and ought to significantly improve the level of tax receipts.

The first observation to make is: the simpler the tax code, the more difficult it is to avoid tax. Instead of setting multiple levels of different tax rates (remember the higher rates are more avoided anyway), I believe that we should set a simple 20-25% flat tax rate. Initially progressives recoil from this, finding it repugnant that those on say €100,000 per year should pay the same as €25,000 per year. This, they argue is morally and economically wrong.

I have two answers to this mistaken analysis, firstly keep in mind that the rich currently pay less tax as a percentage than the poor; secondly, if the tax free allowance was set at- say- €12,000 then the individual earning €25,000 is paying tax on €12,000, i.e. half their income, while the individual earning €100,000 is paying tax on 88% of their income. Set the tax free allowance higher, and the tax becomes highly progressive. The point is that it is progressive, not because the richer are supposed to pay a higher rate, but because the poorer are increasingly opted out of tax altogether. The simplicity of this regime eliminates the need for the vastly complicated and hugely expensive system of tax credits which are supposed to help the poor, but in reality do little to improve social conditions and often remove an incentive to work. The key is to set the tax free allowance sufficiently high.

If the taxation of income could be simplified and made genuinely progressive, that already helps the poorer, whose position, vis-a-vis the richer in the West has been eroding for at least the past three decades.

The second improvement, to my mind, should be to tax capital in a simpler way. It seems to me- and to Warren Buffet too- that income derived from the investment of money is not truly different from income derived from the investment of time (i.e. labour). The distributed return of capital invested is income, and should be taxed in exactly the same way as income derived from labour is already. Some argue that this might reduce capital invested and thus damage the economy, but the fact is that capital is already taxed, and no matter what the tax rate, investment capital is little affected: far more significant is the general condition of the economy, both global and local. Since no one - except some of the more extreme supporters of the so-called Tea Party in the US- seriously proposes to end the taxation of capital altogether, I submit that a simpler tax regime might promote new investment, simply by eliminating distortions: retained earnings: not taxed, distributed profits: taxed as income.

Then, finally, there is the highly vexed issue of Land. For many, a Land tax has a rather quaint air, yet even today in the UK, the possession of large holdings of land defines wealth far more accurately than capital does. Huge holdings of land in the UK are not subject to tax, and yet large incomes are derived from them. This is where so much special pleading has distorted the British economy significantly. Less than 10% of the landmass of the country is built up and only 1.3% is devoted to housing. Yet this represents well over 90% of the tax take from property. Substantially all of the remaining 90% of the surface of the UK is subject to nothing more than peppercorn taxes. If it is agreed that capital and labour should be taxed, then why is land totally exempt? It is not an accident that the biggest opponents of a land tax and some of the most vocal supporters of the green movement are large landowners. Behind the cant they offer up, the fact is that their "stewardship of the countryside" is nothing more than giant special pleading. Huge subsidies are offered to agri-businesses, and as a result much of the countryside is disfigured by mono-crops and industrial tillage. A green agenda could be far more effectively delivered through a flexible tax regime than any other policy framework.

As a significant benefit, a land tax shows that we are actually serious about protecting the countryside, and promoting a sustainable housing policy. The current, horribly distorted land policy means cramming in more housing on already densely populated areas, while village communities are becoming ever less attractive as institutions such as pubs, shops and schools become uneconomic. A land tax makes a policy of flexible and sustainable development far easier.

So there you have it, a fairness agenda in tax is not about higher nominal rates of tax for the rich, it is about ensuring that it is simply easier and fairer for the richer to pay than to avoid. By attempting to promote "progressive taxation", we have in fact promoted a highly unfair (and very expensive) regressive taxation. With a clear tax code, then the idea of attempting to opt out of taxes becomes socially far less acceptable- since most people will understand that it is not about opting out of higher taxes, but opting out of tax completely. Of course people like Phillip Green can already do that, but with a simple flat tax on capital and income, he would find it far more difficult and far less socially acceptable than he does today.

In the end I slightly admire the -in my view- public spirited way that Warren Buffet has pointed out the outrageous unfairness of the current system. In Britain, it is time for the Liberal Democrats to stop grandstanding on tax rates and get serious about promoting a truly radical, truly fair tax agenda. A Flat tax/Land tax agenda can promote this.

Are their working examples already out there?

Absolutely: Welcome to Estonia!

Monday, August 15, 2011

The Tea Party, Americanism and where the US goes next

It is a saying attributed to Huey Long, the one time Governor of Louisiana, that "If Fascism ever comes to America, it will arrive under the disguise of Americanism". As I contemplate American politics in the second decade of the second Millennium, I am beginning to wonder what is coming next, because it is hard to believe that the money soaked banalities of the Republican straw poll in Iowa constitutes much that is particularly optimistic.

The decline of America has been predicted for most of its history, Clemenceau famously once said that "America is the only country to have gone from barbarism to decadence, without the usual interval of civilization". Yet, in fact the United States has overcome many serious challenges in the past, not least the existential challenge of the civil war, and proved itself a robust and flexible political entity and an economic and social powerhouse. If, as a foreigner, I can hardly share the jingoist sentiments of many of its boosters, yet nevertheless I have always found much to respect and admire and often to like about the United States.

However, it would be foolish to deny that the United States faces new and significant challenges, and the national humiliation of the credit rating downgrade is a spectacular own-goal inflicted upon the country by its own political class. In the face of the relative rise of new powers in Asia, especially China, could it be that the United States now faces not only greater global competition, but that its domestic challenges could threaten the global position of the United States from within?

The United States is a very wealthy society. It generates new wealth from new ideas in a truly admirable way. Apple, for example, is probably the single most successful innovator in the global corporate world. Hugely admired, it has generated spectacular wealth for its founders in only a matter of a couple of decades or so. By contrast, the state where Apple makes its headquarters, California, is a political and fiscal basket case. The politics of the Golden State have been tied in a mesh of special pleading and spending and fiscal limitations that makes it next to impossible to balance the books. In an increasingly literal sense, California has become ungovernable.

Nor is California alone, the entire US, to a greater or lesser extent, from town government level to the Federal government itself, is unable to deliver on the promises that it makes with a budget that is sustainable. The political retribution visited on those who raise taxes is matched only by a similar retribution to those who cut high spending programs. The so-called Tea Party refuses to countenance further tax rises, yet they do not have the political integrity to explain to the voters that this will mean drastic reductions in expenditure - not just the easy target of "welfare mothers", but across the board, from military spending to investment tax breaks. By international standards the United States is a relatively low tax country, but in so many ways the increase in the activities of the government now makes it look like a high spending country.

High spending and low tax means big deficits, and this is now no longer a sustainable policy either. Yet the American debt downgrade is not a matter of the debt capacity of the United States: the country remains exceptionally rich. The issue is one of political capacity. S&P doubts the political will of the American political class to raise taxes and genuinely tackle the deficit.

Which brings us to the political choices that the Americans now face.

Personally I have found much to admire about President Obama, in particular the dignified way that he conducts himself. A thoughtful, perhaps calculating, figure, I nevertheless feel a lot happier about a President who clearly uses his intelligence to consider issues: "No drama Obama" has looked like a safe pair of hands. Yet, I certainly do recognize that the President has made mistakes. He has suffered from Gordon Brown's disease of trying to micro-manage issues which in reality he can only do well be leaving well alone. Regulation is not always the best way to deliver a political agenda, and there is no doubt that this administration has continued to dramatically increase the regulatory burdens on both businesses and individuals.

I, for example, will no longer travel to the United States, where I once lived and worked, because the level of information that I now need to provide for a simple border clearance is simply too onerous. The bureaucracy is astonishing to someone now used to the borderless Schengen zone of the EU. Of course the US has the perfect right to screen or restrict foreigners seeking to enter their country, but the capricious and non-user friendly US borders now make it too much of a pain for me to bother with. I now spend my tourist money elsewhere and meet my American friends in London. My spending might only have been a few thousand, but duplicated on a global scale, the cost of to the US economy is nonetheless significant.

Which brings us to Iowa.

Whatever the original impetus, the so-called Tea Party is no longer in the hands of Libertarians who would challenge such over regulation, but highly prescriptive social Conservatives, such as Sarah Palin and Michelle Bachmann. These are not just polarizing figures, they are dangerous. They offer strident voices, defying compromise as a betrayal of principle. They do not offer intellectual coherence: they offer simplistic populism. Reducing arguments to a series of slogans is of course the stock in trade of a politician, but it is still shocking to me to see the gigantic disconnect between the purported vision of Bachmann and simple reality.

Yet it is this trite populism that has overcome the far greater intellectual strength of candidates, such as Mitt Romney, for Michelle Bachmann has emerged as the victor in the Iowa straw poll. It may not mean much- at this stage in the campaign, there is still much to play for, yet even this very early test has winnowed out some potentially credible candidates, such as Tim Pawlenty, while leaving Michelle Bachmann stronger: that is not a result that cheers.

The Republican party needs to offer up a serious challenger to President Obama, and Bachmann is simply not it. If the US where to choose such a figure as its leader- for President Obama is eminently beatable- then it would confirm beyond doubt that the political culture of America lacks the vision to retain its global leadership. The failures of the wastrel President Bush would be repeated and the country would continue to disengage and decline.

That is not a prospect that any Westerner can view with anything but horror: for the decline of the US would mean the decline of the West, and there are no other potentially hegemonic powers that believe in freedom and the values of democracy in a way that we can recognize. The choice of the Republican party for the next Presidential election needs to be serious: for there is a serious debate at stake, and the United States stands on the cusp of a new epoch.

American can recover, if the political class wills it. Equally it can accelerate into decline, if the political class wills that too. The Republican party nomination is no sideshow, but if a freak candidate is chosen, then it will only reinforce those voices that suggest that the United States has lost the political maturity to deal with its problems.

Tuesday, August 09, 2011

Riot thoughts from abroad

From a distance, it is hard not to see the similarities between the current riots across the UK and the student riots of a few months ago.

At that time, I pointed out that there was an organised cadre of so-called "anarchists" determined to cause trouble. Clearly, when one looks at the new targets for the rioters: Oxford Street, Notting Hill, it seems pretty obvious that the same or at least a very similar group is operating here again.

They are trouble makers, without a viable vision, simply spurred on by a dead ideology. They can not be taken seriously as a political force in themselves. However the damage that these criminals are causing, not just to the political process, but to the communities where the rioting has been most focused, is significant and the challenge must now be met.

All of the community work that has been put into improving the security and prosperity of such places as Tottenham and the St Paul's area of Bristol has been lost- to the drastic detriment of the residents there. Now, the only short term solution is heavy policing to restore order.

Security starts with zero tolerance for the thugs and "anarchist" fellow-travellers. Once order is restored, then the long and painful process of rebuilding must begin again. A depressing prospect indeed for those that live there- and indeed the rest of us.

However we must not kid ourselves that the way that the violence has escalated has been accidental. Whatever the initial spark, these riots have been deliberately incited by anti-democratic thugs. We need to find those responsible and punish them according to law- and it needs to be done quickly. That is the first challenge for the Prime Minister and the Home Secretary as they return to their desks. Once the fire is out, only then can the process of rebuilding the burnt out communities begin anew.

Sunday, August 07, 2011


The fact that the United States political class as a whole clearly lacks the will to raise taxes is the fundamental reason behind the downgrade of the US credit rating.

The inability of the Congress to understand that it is not just about the ability to spend less money, but to raise more revenue that underlines the strength of a country's credit rating is why America now faces an undeniable crisis.

Unless the Americans can get their house in order, the market will force ever more stringent restrictions on the freedom of action of the Federal government, the State governments and indeed all US based borrowers.

Although this downgrade has been predicted for some time, it is only now that market capitulation accepts the horrible truth: the US has neither the capacity nor the political will to pay its bills in full.

Doubtless it will be President Obama that pays the political price, but ultimately this crisis is the fault of the Republicans: the wastrel President, George W. Bush and the Know Nothing Republican House of Representatives.

Without real leadership on the American right, as opposed to the ignorant posturing of the "Tea Party", the United States is going to find that this symbolic moment becomes an all too real downgrade of American power and prestige.

The economic tectonic plates are shifting, and although I have a certain faith in the ability of the Americans to recover, the fact is that the crisis is not going to be wished away and the idea that the recovery comes without painful choices, both on spending, but also on tax increases is utterly false.

If the US can increase revenues and cut spending, it will recover its AAA rating, but unless it can, it will be downgraded again within two years.

The free lunch promised by American politicians is over. The reality will be difficult, painful and very expensive for the American people. yet who, among the identikit American politicians has the vision to offer the voters "blood, sweat and tears"?

Tuesday, August 02, 2011

The Silly Season

I notice that this is the one thousandth post on this blog. Something of a milestone, and not one I always expected to hit.

The content has varied- mostly comments on topics of the moment, and therefore easily dated. Sometimes whimsical, and therefore easily ignored, sometimes polemical, and therefore easily discounted. Some of my pieces are a lot better than others, but when I compare with the newspaper columnists, I do not feel unduly ashamed about the overall quality.

It is interesting identifying what people want to read: some pieces that I expect might strike a spark end up with a pretty low readership, while I have occasionally been surprised by a blog, that I had rather rattled off, gaining a much higher hit rate. It is not always possible to predict what will interest people. Of course the key to successful blog is regularly updating content, and given the intense nature of my work, that is not always possible.

As July slips into August the so-called silly season is upon us, although after the death wish visited upon the US credit rating by the so-called Tea Party, it is unclear how silly it will end up being. The volatility in the markets continues, and there are still horrible threats to the stability of the global financial system. The US has been held to ransom by the know-nothings; the Euro continues to need major restructuring; the Japanese wallow in a post-Tsunami crisis; Britain in a sea of Labour originated red ink, and even China faces increasing problems from gigantic mis-allocation of capital to white elephant projects. The threat of a repeat of 1931 remains very real, and it is surely going to be many years before the age of austerity passes.

Yet maybe there are positive signs: the trivial greed of the boom eroded the moral compass of society- and as more people made more money, they grew more casual about what that money represented. That has clearly changed. The greed of the baby boomers for pensions that they had not themselves saved for, and which will impoverish the post boomer generation, is now recognized. On the other hand, we see new trends: rates of obesity, for example are now beginning to fall, across the Western world- symptomatic of a significant change in people's approach to health. More people are expressing the view that there are things in life that demand personal responsibility. The role of the state as referee and provider is coming under challenge. The message that unlimited debt is a positive has already been exploded. The virtues of thrift are once again more fashionable, as conspicuous consumption becomes seen as crass or even simply vulgar. Of course these are just general trends, barely discernible amid the noise of new social and economic pressures.

Meanwhile, as the holiday season finally opens, we can take stock and consider. There are compensations for the pressures, and there is hope for the future, even if the present remains uncertain.

Even on the political front, I see hope for the tenets of Liberalism and the values of my political party- and the polls are showing a tentative recovery even here. So with all to play for, I wish the readers of this blog a happy summer, and while blogging may be sparse in the next couple of weeks, I look forward to returning to the fray, who knows, maybe even for the next 1000 pieces.

Monday, August 01, 2011

The skin of their teeth

As Congress prepares to vote on he increase in the US debt ceiling, it is salutary to reflect on the way that a routine Congressional vote has very nearly turned into an existential crisis for the United States itself.

We can hope that the vote marks the nadir of the US crisis, and indeed there are some signs that, despite recent disappointing growth numbers, America may now be turning the corner.

In the UK too, several indicators are showing some improvement: in particular the Coalition is currently ahead of its plans in the process of deficit reduction. The determination of the British government has been rewarded by Gilts now trading inside US Treasuries for the first time in many years. The political horsetrading in the UK has actually led to progress in deficit reduction, a sharp contrast to the US which still faces a rising tide of red ink, unless the growth outlook improves soon and the politicians continue to bicker.

So if the US has indeed avoided the catastrophe of default, then we may now see some stabilization on that side of the Pond. Yet in Europe, there remain significant issues to address before the crisis can be said to be over. The collapse of the Cypriot government is merely the latest manifestation of the way that the market is testing to destruction the weaknesses in the Euro system.

The solution is increasingly clear: a much deeper monetary union, including a transfer union is increasingly likely. This, of course, raises significant political issues, particularly in Germany, but I have been struck in recent weeks by the readiness of German policy makers to commit to this deeper union. For the UK, that may mark the parting of the ways with the EU, at least in the short run.

Yet, if the Euro is ultimately successful, it will be yet another European project that the UK initially opposes outright, then reluctantly agrees that others may participate in, if the they wish, although the UK will not, and ultimately which the UK still finds it imperative to join. It may be a decade or two away, but short of the break up of the EU- which many Tories openly advocate- I suspect that the pattern will indeed repeat itself and that far from enjoying our isolation, we will chose once again to engage with the EU, albeit a decade or two late..

However, as the Americans avoid default by the skin of their teeth, we are still not out of the woods- in Europe or America- yet.