Cash In Combat

The US took one of only two steps required to go into recession as the economy shrunk by 0.1% in Q4 of 2012. Growth for 2012 as a whole came in at 2.2%, up from 1.8% in 2011, but still unusually slow compared with previous economic recoveries in the US following recessions in the post-War era.

Remember, the US is a big deal to us (as I wrote in a previous post) http://stevesmithlive.blogspot.co.uk/2012/11/obama-re-elected-president-of-uk.html

The fourth-quarter shrinkage in economic output comes as a shock to analysts on Wall Street, who had been expecting 1.1% growth (according to a poll by Reuters). Interestingly……not one economic expert surveyed had predicted an economic contraction. Your guess on the US economy would have been as valuable as theirs clearly!

Perhaps the most interesting point was that growth was dragged down by a 22% cut in the federal government's defence spending. Or to put this another way, so many businesses / personal prosperity is linked to war in the US. To put this into perspective, this was the biggest defence spending cut since 1972, when the US was winding down from the end of the Vietnam War.

Spending on war / defence has been a reoccurring theme for the past 50 years in the US. At one extreme, you have George W Bush who won two elections by being devoted to war (and oil)……to the other extreme you have John F Kennedy who probably lost his life in 1963 due to an anti-war stance. 

 

One thing for sure, a reduction in defence spending will hit the US economy……another issue to add on top of other public spending cuts and tax rises.

Interesting times……

HMV - Good News?

Before I start and you think I am a cold hearted__________ (insert your own word), it is only right that I put my thoughts into a little bit of perspective. I completely appreciate the heartache and stress that thousands of families will be going through due to HMV being placed into administration and their futures uncertainty. My angle here is very much relating to the wider economic implications and in particular the banks……HMV could actually be a positive signal for the rest of us.

Why? 

 

The evidence of past recessions is that economic growth doesn't resume at any great rate until ‘corporate zombies’ (unviable and inefficient businesses) are put out of their misery as they are simply a drain on economic resources. However, HMV is only the 32nd significant retail chain to go into administration in just over a year and there have been fewer corporate collapses since the financial crisis of 2008 than was predicted on the basis of past economic experience.

 

So if HMV's demise signals a rising incidence of banks and other creditors being more ruthless in putting lame companies out of their misery, that might be a good thing. If those rising corporate mortality rates were real, it would show that banks are feeling increasingly confident that they have sufficient capital to absorb the consequential losses. It would also highlight that banks have sufficient capital reserves to extend necessary credit to viable businesses.

This is a massive positive sign for us all economically and cannot be stressed enough.

 

There are still plenty / far too many corporate failures that are clinging on, absorbing bank resources and holding back job creation by those companies with much better prospects.

Just think slightly differently when you hear of the next retail casualty……it might just be a good thing long term.

5 Becomes 10

Quick Recap

The Public Sector spending cuts and tax increases that we are going through are designed to address the gap between what we earn as a nation and the higher amount we spend (which means we have to borrow to cover the gap). Or to put that another way……spend less, create more income and then there is no need to borrow. Austerity at its finest……apparently.

 

The Problem

Westminster informed us that their 5 year austerity plan would lead us to economic redemption. The problem……unemployment and slow economic growth is hampering how much is coming into the coffers and there is very little left to cut in public spending to make savings.

 

School Report Time  

As a consequence of the austerity measures not addressing the income / outgoing balance, Public Sector borrowing was up £600 million to £15.4 billion in December.

 

5 year plan you say? There are only 2 years left! Let’s call it a 10 year plan shall we? What’s an additional 5 years of pain between friends!

 

Frightening really.

Fiscal Cliff

Love him or loathe him (no need to answer that), George Bush's actions at the start of the banking crisis were effectively to all but stop taxes in the US. This would be paid for by higher taxes and spending cuts many years later, giving him plenty of time to escape into the night on his horse.

 

That time is now upon us.

 

Unless all political parties agreed otherwise, the tax rises and spending cuts became law on 1 January 2013 in the US. This would see significant and far reaching negative consequences on economies throughout the world (the UK included).

 

However, at the 11th hour, an agreement was reached and a craze of optimism swept through investment markets......falsely. 

 

 

Reality Check #1

No agreement was made on the tax increases and spending cuts. The parties simply agreed to delay a decision and stop Bush's law coming into effect.

 

Reality Check #2

Let's take the following example household:

 

Annual Income:     £  21,700

Annual Expenditure:      £  38,200

New Debt On Credit Card:     £  16,500

Outstanding Balance On Credit Card:     £142,710

Total Budget Cuts So Far:                               £        39

 

Now, replace £ with $ and add 00000000 to the end of the figures......and what do you get? The US economy. Frightening isn't it.

 

Now add to this the UK's reliance on the US economy buying our goods / services, we have a problem.

 

Let's imagine President Obama comes home from work to find sewage problems. The sewage goes all the way up to the ceiling. What should he do?

 

(a) Raise the ceiling.

 

Or

 

(b) Remove the sh*t?

 

It's a tough call but it can't be ignored. This is what US politics will now debate over the next 6 weeks.

 

So the next time you hear the US Fiscal Cliff mentioned and dominate the TV / radio / newspapers, remember......it is a big deal for us. The US economy is effectively our economy.

 

Frightening but reality.

The Magic of '9'

It started with the banks and it must end with the banks.  

 

Please remember this throughout the next 2 -3 years as the UK economy limps along and we dip in and out of recession……It started with the banks and it must end with the banks.
 

Our Government has no money to ignite the economy when it is insistent on increasing taxes and cutting public spending to tackle the budget deficit (we spend 8% more than we earn). So that leaves the Bank of England……but they have pumped £375 billion into the UK economy and it has had little / no impact.
 

And that leaves just one other option for the UK……the banks.
 

In essence, we need the banking sector to make money easily / cheaply available to allow the UK to spend on goods / services. This will then allow the magic of the multiplier effect of ‘9’. Basically, when £100.00 is borrowed and it is spent, the recipient of the £100.00 then spends it plus the profit they made on the £100.00 (let’s call it £110.00). The recipient of this £110.00 then spends this and the profit they made. And so on, and so on. The impact is that £100.00 borrowed is eventually £900.00 injected / created within the UK economy. The magic of ‘9’.
 

But here is the problem……the banks don’t want to lend. They really have no interest at all in lending. It is not in their best interest to lend. Why? Quite simply they want to meet the requirements of the Basel II Bank Rules that force all banks within the EU to hold sufficient cash reserves within their balance sheets by 2019. These reserves are significantly higher than previous and lending money does not help them meet this requirement as they have to set aside even more reserves with each loan leant out.
 

Banks in the UK are likely to take 2 – 3 years to be in a position to sort out their reserves and balance sheets. In the meantime, loans will be difficult to come by or be far too expensive for the majority.  

With the hands of the Government tied (albeit self-imposed), the banks have Westminster and the UK economy in a hostage situation and we have to wait for them to lend again. The result is a UK economy that will literally limp along in 2013 and 2014.     

Like it or not (and I’m guessing you are a ‘not’), it started with the banks and it must end with the banks.

We have literally gone full circle and learnt nothing.

Shameful