Crocodile Tears and Banana Skins

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In a recent speech I was asked to deliver to a group of businessmen in Bristol in the West of England, I categorized the UK — and for that matter the US — as having a u2018Crocodile Economy’.

Effectively, I said, we can draw everything about the two in a series of sharply diverging lines; one set jagging steeply upward, the other downward, like the gaping jaws of a hungry reptile.

Going up were:

Government spending, Public workers, Part-time (and female) employment, the Trade Gap, Housing, Car Sales, Labour Costs, Prices of Car & House Maintenance, Services, TV, Rent, Insurance, Local government Taxes, Licence fees and Holidays.

Going down were:

Government Revenues, Manufacturing workers, Full-Time (and male) employment, Savings, Pensions, Capital Investment, Profits, Returns on Capital, Productivity, along with prices of Clothing, Oil, Electronics and White Goods.

Our US friends might recognise the symptoms!

We pointed out — to general agreement in the audience — that everything that burns wealth, or stores it in its least productive form (such as real estate), is part of the increasing upper jaw of our Crocodile, while everything that has the potential to generate wealth and to employ it in a fashion which might not only be productive, but hopefully reproductive, is sloping downwards along the lower jaw.

You could also see, we said, that fears of deflation — even in its erroneous standard definition of a fall in an arbitrary price index — were very much overblown.

Granted, internationally traded goods were indeed falling in price, but anything with a local labour content, or cost component, or subject to the burden of US & UK regulation, was rising — and rising very smartly indeed in many cases.

Now at last, the Bank of England is belatedly beginning to fret about this, too, as we heard from the Deputy Governor (the least dovish one), Mervyn King, as reported by Bloomberg, when he delivered the quarterly inflation outlook.

On the state of the U.K. economy, King said:

u2018Beneath the surface of overall stability lies a remarkable imbalance between a buoyant consumer and housing sector, on the one hand, and weak external demand, on the other. The tension between these two components of demand creates risks to the outlook. And the Committee spent a considerable amount of time discussing those risks.’

On threats to growth and risks of inflation, King said:

`The strength of the housing market has exceeded the Committee’s expectations… although the Committee’s central projection is that consumption growth is likely to moderate, there are, of course, significant risks. In the short term, these come
from the momentum of household spending and, looking further ahead, from the growing risk of a sharp correction to house prices and consumer spending.’

u2018The Committee remains of the view that there are upside risks to the inflation outlook from the upcoming pay round as a result of increase in public spending and higher National Insurance contributions.’

On the risks of a nasty end to the Housing Bubble (Oh Yes! Our American friends are not the only people with one of those — OUR prices are up 35% annualized in just the past nine months!!) and whether the bank would be responsible for a plunge, King said:

u2018The central view is that house-price inflation will slow, quite sharply. That’s not unprecedented. The last time house prices reached this level, a year later house-price inflation reached into negative territory. That is not the central projection.’

`I wouldn’t want to be too carried… there must be enormous uncertainty about this. We have no way of knowing’ just when house price growth will slow.’

King went on:

`The real concern that the committee has is what impact house prices are likely to have on consumer spending, in terms of making it more buoyant in the short term and causing a sharper slowdown in the long term. The honest answer is that nobody knows what will happen to house prices. I’m sure whatever happens in the next two years will surprise us.’

Don’t you think it’s so-o refreshing when the people who have the temerity to impose their choice of interest rates on the free market then admit to their utter ignorance of the forces at work in the economy.

Brits not already rushing by now off to the estate agents (what we call realtors) to sell their suburban palaces before they were again plunged into negative equity, were presumably less than reassured by what he went on to say:-

`We would all be happy if the imbalances (in the economy as a whole) that built up in the past four years unwind as gradually as they built up… The chance of that happening is close to zero… that’s the central outlook (but) we do look at a rate of growth which is unsustainable.’

Oh! And for the gloomsters who still dread the D-word, here’s what King had to say on the subject of deflation:

`To say there is a general risk of deflation is silly, frankly. There are problems with a divergence in the different sectors of the economy. The fact is that if you want price stability there is always a risk of deflation, but it’s a pretty small risk at the moment. We’re a long way off the position of having no freedom of action on interest rates.’

In his testimony to the Joint Economic Committee of Congress, Greenspan said he didn’t see much of a threat either:

`Our view is that we are quite a far distance from deflationary forces taking hold. We have seen no evidence we are close to a danger point in regard to deflation.’

If the Fed decided it needed to take steps to counter deflation, it could do so. There was`virtually no limit’ to the steps the Fed might take, even as interest rates fell toward zero, he said.

Among those he openly mentioned was a policy of buying large amounts of Treasuries to peg long rates — a step known as monetization, and one finally cast off in 1951, in an acrimoniously settled accord with the Treasury, as the final act of New Deal Fed Chairman Marriner Eccles, who called the process the u2018engine of inflation’.

Since the step of allowing government direct access to the printing press in this manner is exactly what has destroyed more currencies than any other measure through history, Greenspan’s intent to resurrect this, if u2018necessary’, should NOT be a matter for rejoicing.

United States or United Fruit?

That’s what you should ask yourself, for while we expect no better of Sir Eddie George and RobespiBlaire’s New Jacobins over on our side of the Anglo-American ocean, on yours, Sir Alan and the Bushwhackers are well on their way to presiding over the final transition of Jefferson’s free republic into the Banana version.

Sean Corrigan [send him mail] writes from London on the financial markets, and edits the daily Capital Letter and the Website Capital Insight.

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