Storms Ahead?

There appears to be some trouble brewing for our friends across the way in the US. Given that we are pretty much the 51^st state, that means there is trouble brewing for us.

 

The Background……

Back in December 2012 the US Government had literally ran out of money and were unable to borrow further due to a previous Congress bill that had set a ceiling on borrowing (which had been reached). The current Government were within just a few hours of not being able to meet obligations in relation to pensions, military salaries and medical payments. Quite a state for the biggest and most powerful economy in the world!

 

Anyway, fear not! Congress passed a bill in January 2013 that increased the borrowing cap (a ‘public debt ceiling’) to $16.7 trillion. And for dramatic effect, that’s $16,700,000,000,000.00. Congress justified this as it was a ‘one off extraordinary measure’. 

 

Current Issue……

Well, who would have thought it……the US Government are running out of money again. The current US Treasury Secretary Jack Lew has warned and predicted that there will be no cash left in October 2013. The US are literally down to the last $50 billion.

 

Now, any self-respecting Government would borrow to fund this……simple. But when the Government is prohibited from doing so, you’ve got a problem.

 

Solution……

There is only one option in the eyes of President Obama……to increase the borrowing cap for another ‘one off extraordinary measure’. However, this would need agreement from all political sides and it will get very messy with no agreement a real possibility if previous experiences are the yard stick. 

 

The one thing for sure is that this will be a long drawn out affair that will leave many feeling uncertain about the economic super power that is the US. And that really isn’t good on many levels.

 

All eyes on Uncle Sam this autumn……again.

INTERESTing Times

I’ve thought long and hard about this one over the past week……pondered, counter pondered and undertaken a number of significant head scratching sessions……and I think I’ve got my head around it. Kind of. Sort of. Definitely. Perhaps……

 

The Story……

 

The incoming Governor of the Bank of England (Canadian Mark Carney) has hit the ground running and launched a series of interest rate policies that have grabbed the headlines. Namely, that interest rates will not rise until unemployment in the UK drops to 7.0%.

 

Given that the current rate is 7.8% and has not fallen to 7.0% since 1998, this is a good thing right? Well, actually no.

 

The Science Bit……

 

The Bank of England’s remit is to control inflation so that the real value of money is not eroded in a boom / bust scenario (think Brazil, Russia). This is undertaken by manipulating interest rates. Where inflation looks to be increasing, they can put less money in our pockets by increasing interest rates and reduce how much we spend (thus inflation reduces as a consequence). Conversely, they can put more money in our pockets by reducing interest rates, we spend more and inflation rises.

 

But the new approach of linking unemployment to interest rates creates many problems. The list is huge, but here is my top 3.

 

Problem #1

The graph highlights that unemployment and inflation are not correlated. So in essence, we are using a measure to determine whether interest rates should rise / fall that has very limited value. Or to put that another way, we might as well use the direction of the wind as it’s equally as useful!

Problem # 2

The rate of unemployment is a political hot potato as every Government wants to manipulate the figures to reduce the headline rate and every opposition party wants to manipulate to increase it. The actual rate of unemployment is down to successful political slipperiness. Is this really the right measure to determine interest rates?

 

Problem # 3

We save less per head than any other developed nation in the world. When the real value of money is eroded if savings interest rates are lower than the rate of inflation, where is the incentive to save for the long term?

 

And I could go on and on……but you get the picture.

 

Well, it’s certainly a radical approach and couldn’t be any more different to the more traditional stance of the previous Governor, (far from) Marvellous Mervyn King.

 

Better the devil you know? We shall see.

 

Time will tell.  

Bonus Party

OK, so we have bashed the bankers and we have bashed the regulator for their stance on paying bonuses. And then along came the Government to join the party. Who’d have thought it? Well, it was never really in doubt.

The story……

Work Secretary, Ian Duncan Smith paid his staff bonuses totalling £44 million last year as a consequence of his department slashing benefits. In all, 97,701 of the Department’s 99,739 staff (98%), shared the £44 million bonus payment.

The bonuses come despite the department being in complete chaos with delays to flagship benefit reforms, a huge benefits test backlog, botched work capability assessments and an IT crisis.

The fact that IDS is happy to reward incompetence and complacency tells you all you need to know about his attitude to the most vulnerable in society.

Shameful stuff.

The fact that few are surprised is even more shameful.

Bonus Stance

You remember RBS right?

You know, the one that was the largest bank in the world, was pretty much ignored by UK regulators for too long, needed a multi-billion pound bailout (equivalent to £617 per UK citizen) and ‘we’ now own 81% of it?

Yes that one. Well, a bit of a quirky and controversial stance by RBS.

They have appointed a new boss this week (Ross McEwan) and broke the mould for a top banker……he will get no bonus. That’s right, the penny has dropped. He is living on his salary alone and is not expecting to receive bonus payments until at least 2017.

It’s taken nearly 5 years of head scratching but the Banking Sector might actually get it……this is progress.

The bizarre thing is, this was not a Government, Regulator or RBS stance / initiative……it was the idea of Ross McEwan himself. All very commendable.

Don’t weep too hard for this financial sacrifice though……there is the small matter of McEwan’s £1 million a year salary.

It’s a start.

Hop, Skip & An Economic Jump?

Ever keen to get some positive spin into the public, the Government has published a report that highlights the economic boost to the UK economy as a result of hosting the Olympics is valued at £9.9 billion.

 

Clearly good news right?

 

Well, actually no……if you are not too dizzy from the spin. Scratch very lightly beneath the surface (well actually just blow the dust off) and the Government have estimated that the games cost £8.9 billion to host. The net effect being a boost of £1 billion.

 

But that’s still good news?

 

Consider this……what would UK businesses have created if the Olympics was not hosted? Surely we could trust the Private Sector to have created more than a £1 billion economic boost over a 4 year period? AKA ‘the counterfactual’ (what would have happened anyway).

 

Now take off the flakey optimistic assumptions used by the Government and I would suggested that the actual net economic boost is far lower in real terms and closer to breakeven.

 

Now I appreciate that I could be accused of being a killjoy given all the great memories, but one of the justifications for hosting the Olympics by the Government was the boost to the UK economy. 

 

Barely breaking even is not a boost in my books.

 

Just saying……