Friday, April 10, 2009

No surprises ...

The idea of printing money to buy high interest gilts (a type of government bond) at the top of the market was the monetarists "solution" to our economic crisis. It even has a catchy name - quantitative easing - which makes it sound like they know what they're talking about. To anyone with an iota of sense, it's financial lunacy.

The first thing you've got to stop doing when you're in a hole is to stop digging. Alas dug we have and our much admired army of great economists and bankers have got us into further trouble. Whilst the ideas of recapitalisation through a forced nationalisation seems a good move (assuming we don't sell off cheaper later) and the need for direct investment in industry (a Keynesian style approach) is sound, much of the rest that is promoted as "a solution" has been woeful.

Interest rates have remained far too low, the currency has been depressed and inflation is increasing. As of Feb'09 it grew to 3.2%, well above the governments own target. There is even the chatter in some political classes that inflation is a good thing and that quantitative easing is working.

This action is all a result of the desperate search for easy options rather than dealing with the problem at hand. We should have nationalised the building industry, redistributed wealth through tax, increased the supply of social housing and prepared for the storm. Instead, we've let those who've most profited from their recklessness of the hook and raided the piggy banks of the prudent. Inflation will rise more, the economy will weaken but cheap foreign capital will help boost share and house prices.

You might be broke, lack housing and have no job prospects but look the FTSE will be rising ... so it must be good? Alas, not for the ordinary people and especially not if you are a saver. For these people, I reserve my deepest sympathy. You might have scrimped and saved your whole life but whatever you leave in the bank is likely to become worthless over the next decade. Your savings will in effect have been spent by other people.

Thanks for the bolly, thanks for bailing us out and thanks for the bonuses etc.

[Update 6th March 2013 - Notes on the current drama]

We are still continuing with our dogma of increased QE despite no visible sign of the economy improving and plenty of counter examples. The FTSE and house prices are doing well, inflation on core imports is rising and the economy continues to weaken. It's pretty glum and we're only getting into deeper trouble with increasing social divides.

There has been some good moves by the Cabinet Office regarding IT and we have a glimmer of a tech boom. At least some people seem to be on the ball and fortunately the insanity of Labour has been replaced by a Coalition.  Alas, some elements of this coalition have shown they can be equally insane.

Whilst austerity has been needed, the treasury is now suggesting a float of RBS (part nationalised), reduction of the higher tax rate and has done little in the way of major direct investment. There also seems to be a growing tendency to believe in the mythical concept of "trickle down effect". In a sign of the madness to come the BoE has even been talking about negative interest rates. 

The recession has extended far beyond what was necessary and in the next economic wave, we seem ill prepared. Banks have returned to their excessive bonus culture with claims of a necessity due to a global competitive market for talent. However, no actual data has yet been demonstrated that such a market exists and recently the global competitive market for executive talent has been shown to be the sham we all knew.

Of course, beyond all the Libor manipulation and other practices, we seem to be building up for the next CDO debacle - this time probably on student debt which has been turned into collateral.

On an international scene, China continues to grow from strength to strength showing the importance of using the market economic as a tool rather than a reason for society.

In the US, there has been a disturbing rise in false debates e.g.  Hayek vs Keynes which hides the issue that Friedman and the Monetarist approach would be supported by neither. Alas, Friedman's dogma rules despite no demonstrable benefit and no supporting data.

We've also seen some minor upheaval in the UK / US with a focus on changing the current social environment though the Occupy movement. This has been largely dismissed in the US despite its importance.  We continue to head towards the Rubicon.