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Sunday, 14 February 2010

20 Economists? What a Shame!

Half a dozen 'persons of distinction' have subscribed to a letter that the SUNDAY TIMES was delighted to publish, which takes a very grave view of the prospects facing the British economy.
The force of the argument is vitiated by all twenty signatories being tagged as Economists: members of a disgraced caste which validated all the excesses of the securities industry and facilitated some of the most egregiously insubstantial 'products'.
Their 'profession' has not yet explained to the Queen why they did not forsee and forestall the crunch. The long delayed response from the LSE to her direct question was a fatuous suggestion that Her Majesty should personally monitor the economy, on the basis of regular ministerial briefings.
It is sad that the highly respected Roger Bootle was a signatory: presumably he is more concerned about publicising the peril facing the economy than he is about any tag that is hung around his neck. His participation is a clear signal that the content of the letter is highly revelant to the present situation.
But it is a great pity that the argument has been presented under that disreputable banner.

Saturday, 6 February 2010

Will Germany 'save' Greece?

As the unwillingness of the Greeks to support their government's austerity package becomes clearer, the worry grows that the country will not be able to pretend to be close enough to the rules to be allowed to remain in the Eurozone.

A temporary suspension of Greece - a kind of purgatory - is more likely than complete withdrawal or expulsion from the single currency. The terms for any such special deal would be determined by the strongest member of the Euro, Germany; but Angela Merkel will not act without the agreement of Sarkozy plus an indication of greement from the Netherlands and Italy. As a coalition poliitician Merkel can not give too much away, especially to a state that has got into trouble by ignoring the rules over many years.

Talk of the PIGS [Portugal, Ireland, Greece and Spain] having a domino effect - each on all the others - is mere speculation: but the Germans will have it in mind that what they do to 'assist' Greece, on draconian terms, must be so structured that the other governments in the drop-zone will try even harder to conform to the requirements for Euro membership rather than follow Greece into special measures.

The unsettled condition of global stock markets in recent days is widely accepted as an argument that the Greek situation must be resolved sooner rather than later: to forestall any more widespread invalidation of sovereign debt. That point will undoubtedly be taken; so expect a reaction soon.

Wednesday, 3 February 2010

Why bother about the Rating Agencies?

The media have carried repeated stories that Rating Agencies have threatened to downgrade UK government debt.
It is well recognised that the government has 'prevented a slump' by spending huge amounts of money, much of which has been borrowed. The government has printed and sold billions of poundsworth of bonds every month: and so far there have been buyers, though the rates of interest attached to the bonds are much higher than the 0.5% official bank rate. Some government bonds yield 5% or more annually to their owners; and so far [since 1695] all bonds have been paid off in full on the due date. This still looks a pretty good deal.

But what if the value of the pound goes down seriously against other currencies? The government could offer an even higher rate of interest, but the money in which it is paid would be worth less to foreigners; and the bonds would progressively become worth less in foreign currency on the dates when they are cashed. So foreigners would be well advised to avoid British government stocks if such a devaluation was expected.

The agencies were utterly useless in their rating of bonds and businesses during the bubble that preceded the credit crunch: they have lost any right to be taken seriously by anybody. But they are big businesses stuffed with supposedly clever employees, who all want to keep their high earnings. So they desperately need to make a few right calls that will convince investors that they merit having attention paid to their predictions. If they call 'wolf' on the British economy too soon, they will add to their discredit; but if they call too late they will again prove their incompetence. Their call on Britain matters even more to them than it does to the viability of UK national debt: so there is a real issue here.