...a blog by Richard Flowers

Friday, January 25, 2008

Day 2576: Actually, it IS the Economy, Stupid!


In THEORY the stock market works like this: extremely clever (and highly-paid) City chaps study a company, decide what future income they might get, work out how risky it is and then set a price based on how much money they would need to have now to get the same sort of interest. Other chaps guesstimate that it's worth a bit more, so they will buy. The market averages out the estimates of value and works out the right sort of price.

In PRACTICE it works like this: "Ooh look a fluffity little kitten!" "Arrrgh, arrgh; sell, Sell, SELL!"

An extremely clever analyst, yesterday
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So we get another STOMACH-CHURNING day on the stock markets with billions of (sort of imaginary) pounds disappearing out of the window. And occasional (less imaginary) City chaps also jumping out of the window.

Today's "fluffity kitten" was in actual fact the American Monkey-in-Chief, probably causing the panic by saying he was going to TAKE ACTION. (That's ALWAYS a cause for worry.)

Mr Shrub's announcement of an "emergency economic stimulus package" does TWO things.

First, it shouts from the rooftops: "This is an EMERGENCY!!!"

Second, it reveals that the Monkey-in-Chief's PLAN is… more tax cuts, at a time when the US government has never been in more debt.

Obviously that means more BORROWING, and – in the current climate of credit shortage – that means that the PLAN is to make the Credit Crunch crunch HARDER.

And, of course, tax cuts also mean a protracted WRANGLE between the Monkey and the Democrat-controlled House over the budget. Hardly the most PACEY of "emergency" action.

Clearly, someone had to take GENUINE emergency action to deal with the Monkey-in-Chief's emergency action, and so the Federal Reserve stepped in to throw money at the problem.

On the one fluffy foot, there is nothing like shocking the markets with an announcement in order to announce that you are making the biggest rate cut for 26 years for saying "PANIC NOW!"

On the other fluffy foot, it does seem to have worked.

And yet, of course, the FUNDAMENTAL problem is that there is just too much BORROWING, so is MORE borrowing by the US Government coupled with making it easier for people to borrow MORE, really really the solution?

Mr Frown is quick to reassure us that the British economy is in great SHAPE and we do not need to worry. After all, why worry about the world's largest consumer economy toppling over like a mortally wounded BRONTOSAURUS, especially when you are standing right next to it?!

Interest rates are LOW, inflation is LOW, unemployment is LOW: what could possibly go wrong? …as the Captain of the Titanic probably asked himself. Because judging how the voyage has been going is no excuse for not looking ahead to see what you're headed towards.

As Mr Vince "Strictly Liberal Democrat" Cable has been saying for some time, conditions in the BOILER ROOM suggest that we might not be as UNSINKABLE as the Prime Monster likes to pretend. Just like America, we have been holding off the "iceberg of recession" though consumer spending, fuelled largely by CREDIT. Rising house prices have given people the ILLUSION of magical ever growing pots of money under their houses which they can use to borrow bigger and bigger mortgages against. Which is fine so long as house prices DO continue to grow. Oh, and indeed, dear.

But it's not just the voters who've been running up a BIT OF A TAB, with Mr Frown achieving RECORD levels of government borrowing in December. Perhaps he was maxing out the credit cards for Christmas along with the rest of us.

Mr Frown's famous GOLDEN RULE is: the budget should balance over the course of the business cycle. Without getting too TECHNICAL, that means in the good year, you spend LESS than you take in tax so you can REPAY your government loans while things are going WELL. Then, when things start to go BADLY, you can borrow a bit more to TIDE you OVER.

Mr Frown has NOT done this.

He DID repay a lot of borrowing at the start of his ten years as Chancellor – he sold off the 3G licences and windfall-taxed the banks and raided the pensions in order to pay back the huge loans that Mr Fatty Clarke left him with.

That was GOOD.

But then he started to spend money like it was going out of fashion, so much that he was borrowing to meet the gap between tax receipts and spending even when the economy was booming. By FUDGING the start date of the "business cycle" (which you can do because no-one can agree on what a "business cycle" actually is) he managed to make it add up so that the big repayments at the start still cancelled out all the extra borrowing. Even though it's not supposed to work that way.

Which was BAD.

Now, he has left himself with not a lot of room to manoeuvre. Meaning he has to come over all MEAN to hardworking members of our public services like policepeople and, er, MPs.

Instead of controlling spending in the good years so that he can smooth the economy over the bad ones, he has EXAGGERATED how well things were doing by being MORE generous than he needed too, so he will have to slam on the brakes all the harder now, EXAGGERATING the impact of the slowdown as well.

Remember how DIFFICULT it was in the first years of the Labour, when they stuck to the ludicrously tiny spending plans that the Conservatories had made up so that it looked like the economy could work – the ones that the Conservatories themselves had no intention of sticking too? Remember that? Well he's going to have to do it all again now.

So here's a NEW GOLDEN RULE for Mr Frown: don't break the RULES and don't spend all the GOLD.

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