Bank exposure, oil prices and deficit economics are the bombs in store for those flying global economy
The bad news is, there are no engines. The very bad news is, there’s a bomb on board.
As is often the way with people unable to get real, the banking community seems to have taken lower bonuses after all….and wiped out the loss by simply paying itself more. It’s this kind of behaviour that makes the Vickers Report fairly meaningless, but from a more professional perspective, allowing your staff overheads to rise in that manner – where the discretionary part becomes a contractual fact – illustrates yet again that investment bankers live in Creditland: that place further up from down the road, where everything can be paid for and chickens never come home to roost.
This Easter weekend has seen (largely unnoticed, I suspect) very clear signs that at last the media think the econo-fiscal clock is heading towards midnight. Liam Halligan in the Telegraph – not normally a doom-merchant – wrote a very black piece about the US outlook during the break, and even his usually cheery colleague Jeremy Warner is now having doubts about both the EU and the UK. His piece this morning points out that, ‘It’s now more than two years since the nadir of financial crisis, and despite all the fiscal and monetary support, still UK output remains way below its pre-crisis levels. The economy is failing to show the same “bounce back” capacity it has after most other post-war recessions….’
The same is true in the US, and the reasons are broadly similar: jobs sent offshore, poor marketing, laurel-resting and globalised consolidation have produced structural unemployment throughout the West. So much so, in fact, that The Independent’s Sean O’Grady ran a piece on Sunday outlining ten ways in which Crash 2 might start. There were actually huge gaps in the piece – most notably the relationship between US government bonds and interest rates – but just in case anyone was in doubt, Reuters points out today that 31 US states now have woefully underfunded pension schemes….and the gap has increased by a staggering 26% in the last year.
At least a dozen US states are technically insolvent, and projecting forward from where we are now, there is every reason to expect that our local government units will go the same way – albeit massaged along a little by those with a political motive. The Coalition cancelled the council tax property revaluation, and froze council tax formally, when it came into office. Excellent for votes, but bad for deficit reduction – and catastrophic for local project financing: remember that after 2007, Labour quietly slashed the grant to local authorities from £44 billion to £29 billion. So one day soon, local taxes must go up, and service levels come down. Neither of these are what you’d call moves to stimulate employment and the economy.
The short-term development which may well clobber everyone is the rising oil price. Since January last year, petrol prices in the US have risen by nearly a quarter, and crude oil by a third. The Arab Spring and the Japanese post-earthquake nuclear disaster have reduced the oil available and made its future use likely to rise respectively. However, neither outcome is at all certain in the long term, and as ever there re strong suspicions that oil’s price is being partially hiked by a combo of deliberate under-production and dishonest price-setting.
With the two main Anglo-Saxon political elites in the West grossly underestimating (or hiding) the size of these problems, it wasn’t surprising that S&P decided to take a swipe at the bigger of the two – having downgraded the smaller one two years ago. Much more disturbing to me, however, was the way the US elite reacted: either by shooting the messenger, or in Geithner’s case, with a shrug and a “Yeh, whatever”. There is something about Western government at the moment that makes me wonder if its luminaries haven’t already stocked up on beans and gold, after buying secluded estates in the mountains somewhere. Certainly, I don’t buy all this bollocks about S&P wanting its downgrade to be a self-denying prophecy. It looked to me like a perfectly sensible commentary on a nation gone mad.
The business media are billing this as a big week. Tomorrow, the UK’s quarterly gdp figures will emerge from the ONS, while on the other side of the Pond, a little later Bernanke will be giving the world’s first talkie from the Federal Reserve. For myself, I don’t think these numbers matter any more. After all the speculation about where Crash2 might begin, in the end it was S&P which fired the starter’s gun. From now on, the race to the bottom is under way.
The Slog 