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When I look at this chart it strongly reminds me of Lewis Carroll’s classic children’s story, Alice in Wonderland about a little girl who falls into a rabbit hole and has totally bizarre adventures.   A Wonderland where: ‘so many out-of-the-way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.’ What has been happening to the U.K. economy for the last eight years has certainly been bizarrely out-of-the-way.  Eight years is how long the Bank of England has held its base interest rate at half per cent, which more and more people are finding curiouser and curiouser.  Keeping interest rates this low for so long has created a topsy-turvy economy where loans are supposedly cheaper (though in real terms still expensive), and prudent savers receive virtually nothing for the money they have on deposit with banks.  It is a measure of how severe the financial crash of 2008 actually was and it shows that business is still having to cope with sluggish levels of demand.   Such low interest rates are a politically created solution aimed at shoring-up bank finances as a fall-out of the credit binge leading up to the 2008 crash.  But low interest rates do nothing to overcome the large debt that consumers still have and, as consumers in most developed economies make up roughly 70% of all economic activity, demand will remain low.  Risible interest rates and quantitative easing (printing money) is a form of debt relief for banks that favours the banks over consumers at the expense of the general population and pensioners in particular.  As an example my wife and I recently received annual statements from several pension funds that we possess.  In all of them the money invested over the years is actually shrinking, not because of inflation but because the inflated management fees the pension companies charge for running the funds now exceed the returns their fund managers are able to generate. This mad situation means we are trapped by tax rules into paying a pension company to shrink our money.  At the same time our building society savings rate has been reduced to a miserly 0.25%, and the national savings rate is dropping to 0.8% next month.  People used to be urged to save for their old age but in today’s looking-glass economy saving is not rewarded, while borrowing is positively encouraged.  Spend what you can while you can seems to be the prevailing mood.  This crazy change in society’s values is the result of eight years of democratically unaccountable Central Bank power ploys.  At some point it must end in a pool of tears, although for the fat-cat ex-Goldman Sachs bankers like Mark Carney (Bank of England), Mario Draghi (European Central Bank) and their many (usually ex- Goldman Sachs) colleagues from the New York Federal Reserve, this is unlikely – they’ll continue smiling like the Cheshire Cat.           In 2016 many banks still have zombie (non-performing) loans on their books that they will not write-off.  In fact this issue is the crux of the Greek debt problem because German banks have so far refused to allow Greece any form of debt relief on loans that the country will obviously never be able to repay.  Ninety-five percent of the Euro billions given to Greece as debt relief went straight to the banks…. No wonder the population is getting more and more desperate.  It will be interesting to see what kind of fudge the E.U. uses to resolve this situation as even the International Monetary Fund has finally realised the impossibility of Greece ever being able to repay its debts.   The German attitude to debt is shaped by a reliance on the thinking of the economist Hayek, the favourite of all neo-liberals, who I wrote about back in December 2014.  German and Austrian politicians are in the front-line of the anger felt by careful German savers as, in real terms, their savings decline.  Some people are explaining their frustration as part of the reason behind the rise of right wing political parties.  Combine this toxic situation with immigration and you have an inflammatory mixture in German politics somewhat reminiscent of the 1930s.  German attitudes are important as it is the major contributor to the E.U., funding nearly 20% of the total budget.  So nothing happens in the E.U. that doesn’t have German approval.  This is both a strength and a weakness, as it’s creating a crucial problem for the Eurozone that so far has been ignored.  Germany is a very successful global exporter (unlike much of the E.U.) and this was a major factor behind the problems facing Greece.  A lot of the money produced by selling German exports around the world ended up, via German banks, being loaned to Greece and much of southern Europe.  Thus creating a large credit bubble.  This credit bubble is the money that German banks stubbornly refuse to write off. The E.U. bigwigs in their wisdom understood that German exports posed a potential danger for the Eurozone which is why they organised a Macroeconomic Imbalance Procedure.  Under this protocol the European Commission should instigate disciplinary proceedings when any E.U. country has a trade surplus of more than 6% for three years in a row.  Germany has exceeded this level for the past six years.  As world trade has stagnated Germany’s share of exports has continued to rise and now stands at 8.5% of their GDP.  Germany’s violation of this protocol has so far only elicited a promise to investigate, there are no signs of fines or any other injunctions.  On such an important issue Germany exerts its power to neutralise any action that is against its own interests at the expense of the rest of the E.U. community.  At the same time Germany feels free to impose ever stricter, and ultimately self-defeating, austerity on Greece to protect German banks.  Prior to the creation of the Euro, Germany’s more natural exchange rate for a Deutsch Mark was around 30- 50% higher than most of southern Europe’ currencies.  The Euro allows Germany to run with an exchange rate averaged out across all of Europe at a much lower rate, making all those Audi & Mercedes cars significantly cheaper and therefore easier for the middle class in other countries to buy.  This is another example of potty economics that goes against common sense. Quite where this will lead, and how long it can go on, is a matter for conjecture, but at some point a sharp correction will have to take place.  But probably only when the poor of southern Europe begin to realise the true cost of the transfer of publicly-owned infrastructure into private hands of the imposed “structural reforms” and in desperation react violently against German imposed austerity.  The German insistence on reforms comes, more often than not, from all the ex-Goldman Sachs bankers who converge like vultures to feast on the fat fees and opportunities their reforms open-up.  Don’t get me wrong, I’m a great admirer of the efficiency of German industry, and I believe we would all be better-off if we followed a more prudent and less credit intensive path like Germany.  Nevertheless, until Germany starts following the Macroeconomic Imbalance Procedure that they themselves helped create, and accepts that German banks will have to take a haircut on many of their loans to southern Europe, then the Eurozone’s economies will continue to fracture.  Protecting German self-interest will ultimately prove a self-defeating strategy for the Eurozone. Look again at the chart above and guess if interest rates will rise, stay the same, or fall?  In the Wonderland world of economic forecasting your guess could be more accurate than any Central Bankers.  Interest rates could gradually rise in small steps like those being made by the Federal Reserve in America.  Some Central Bankers are already aware that the damage to saving and economic good sense has already gone far too far.  They can now see the large black holes appearing in company and private pension funds and it’s getting worse:  Six Central Banks have already crossed the line into negative interest deposit rates: Sweden -1.25%; Switzerland -0.75%; Denmark -0.65%; Eurozone -0.4%; Japan -0.1%; and Hungary -0.05%.  So in these six countries you must pay interest if you want to save money, something so counter-intuitive that, like Alice, one has to think that very few things indeed are really impossible.  There may well be equally good arguments for raising interest rates as there are for lowering them, but the odds are that the Bank of England will keep interest rates the same, because our present Wonderland is way outside the boundary of any of its training or experience. What about considering that perhaps low interest rates are just reverting to the norm?  I’ve just read Killing the Host by Michael Hudson whose brilliant economic analysis is underpinned by a great deal of historical research.  Hudson says that the economic growth rate since the birth of Christ, i.e. for the last two thousand years, has only averaged 0.2%.  So in reality the interest rates that banks typically charge are way above anything their customers are likely realise.  In fact very few business investments are capable of generating high returns even if the forecast projections make it appear possible.  Yet for many years, up until the fateful events of 2008, the average expected investment return by U.S. pension funds was 8.5%, so you can see how artificially inflated and out-of-touch expectations about business had become.  If you think 0.2% growth (adjusted for inflation/deflation), or something approaching this, is low then maybe you need to reset your expectations.  In 2015 the management consultants McKinsey estimated that global debt since 2007 had increased by a staggering $57 trillion, and that no major economy had decreased their debt relative to their output.  Looking at the very low aggregate demand and the huge cost of servicing an increasing mountain of debt, little Alice wouldn’t be at all surprised to hear that we are all in for a long and painful period of slump, economic depression and stagnation.  It’s enough to make anyone want to jump into the nearest rabbit hole. May 2016
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When I look at this chart it strongly reminds me of Lewis Carroll’s classic children’s story, Alice in Wonderland about a little girl who falls into a rabbit hole and has totally bizarre adventures.   A Wonderland where: ‘so many out-of-the-way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.’ What has been happening to the U.K. economy for the last eight years has certainly been bizarrely out-of-the-way.  Eight years is how long the Bank of England has held its base interest rate at half per cent, which more and more people are finding curiouser and curiouser.  Keeping interest rates this low for so long has created a topsy-turvy economy where loans are supposedly cheaper (though in real terms still expensive), and prudent savers receive virtually nothing for the money they have on deposit with banks.  It is a measure of how severe the financial crash of 2008 actually was and it shows that business is still having to cope with sluggish levels of demand.   Such low interest rates are a politically created solution aimed at shoring-up bank finances as a fall-out of the credit binge leading up to the 2008 crash.  But low interest rates do nothing to overcome the large debt that consumers still have and, as consumers in most developed economies make up roughly 70% of all economic activity, demand will remain low.  Risible interest rates and quantitative easing (printing money) is a form of debt relief for banks that favours the banks over consumers at the expense of the general population and pensioners in particular.  As an example my wife and I recently received annual statements from several pension funds that we possess.  In all of them the money invested over the years is actually shrinking, not because of inflation but because the inflated management fees the pension companies charge for running the funds now exceed the returns their fund managers are able to generate. This mad situation means we are trapped by tax rules into paying a pension company to shrink our money.  At the same time our building society savings rate has been reduced to a miserly 0.25%, and the national savings rate is dropping to 0.8% next month.  People used to be urged to save for their old age but in today’s looking-glass economy saving is not rewarded, while borrowing is positively encouraged.  Spend what you can while you can seems to be the prevailing mood.  This crazy change in society’s values is the result of eight years of democratically unaccountable Central Bank power ploys.  At some point it must end in a pool of tears, although for the fat-cat ex- Goldman Sachs bankers like Mark Carney (Bank of England), Mario Draghi (European Central Bank) and their many (usually ex-Goldman Sachs) colleagues from the New York Federal Reserve, this is unlikely – they’ll continue smiling like the Cheshire Cat.           In 2016 many banks still have zombie (non-performing) loans on their books that they will not write-off.  In fact this issue is the crux of the Greek debt problem because German banks have so far refused to allow Greece any form of debt relief on loans that the country will obviously never be able to repay.  Ninety-five percent of the Euro billions given to Greece as debt relief went straight to the banks…. No wonder the population is getting more and more desperate.  It will be interesting to see what kind of fudge the E.U. uses to resolve this situation as even the International Monetary Fund has finally realised the impossibility of Greece ever being able to repay its debts.   The German attitude to debt is shaped by a reliance on the thinking of the economist Hayek, the favourite of all neo-liberals, who I wrote about back in December 2014.  German and Austrian politicians are in the front-line of the anger felt by careful German savers as, in real terms, their savings decline.  Some people are explaining their frustration as part of the reason behind the rise of right wing political parties.  Combine this toxic situation with immigration and you have an inflammatory mixture in German politics somewhat reminiscent of the 1930s.  German attitudes are important as it is the major contributor to the E.U., funding nearly 20% of the total budget.  So nothing happens in the E.U. that doesn’t have German approval.  This is both a strength and a weakness, as it’s creating a crucial problem for the Eurozone that so far has been ignored.  Germany is a very successful global exporter (unlike much of the E.U.) and this was a major factor behind the problems facing Greece.  A lot of the money produced by selling German exports around the world ended up, via German banks, being loaned to Greece and much of southern Europe.  Thus creating a large credit bubble.  This credit bubble is the money that German banks stubbornly refuse to write off. The E.U. bigwigs in their wisdom understood that German exports posed a potential danger for the Eurozone which is why they organised a Macroeconomic Imbalance Procedure.  Under this protocol the European Commission should instigate disciplinary proceedings when any E.U. country has a trade surplus of more than 6% for three years in a row.  Germany has exceeded this level for the past six years.  As world trade has stagnated Germany’s share of exports has continued to rise and now stands at 8.5% of their GDP.  Germany’s violation of this protocol has so far only elicited a promise to investigate, there are no signs of fines or any other injunctions.  On such an important issue Germany exerts its power to neutralise any action that is against its own interests at the expense of the rest of the E.U. community.  At the same time Germany feels free to impose ever stricter, and ultimately self- defeating, austerity on Greece to protect German banks.  Prior to the creation of the Euro, Germany’s more natural exchange rate for a Deutsch Mark was around 30-50% higher than most of southern Europe’ currencies.  The Euro allows Germany to run with an exchange rate averaged out across all of Europe at a much lower rate, making all those Audi & Mercedes cars significantly cheaper and therefore easier for the middle class in other countries to buy.  This is another example of potty economics that goes against common sense. Quite where this will lead, and how long it can go on, is a matter for conjecture, but at some point a sharp correction will have to take place.  But probably only when the poor of southern Europe begin to realise the true cost of the transfer of publicly-owned infrastructure into private hands of the imposed “structural reforms” and in desperation react violently against German imposed austerity.  The German insistence on reforms comes, more often than not, from all the ex-Goldman Sachs bankers who converge like vultures to feast on the fat fees and opportunities their reforms open-up.  Don’t get me wrong, I’m a great admirer of the efficiency of German industry, and I believe we would all be better-off if we followed a more prudent and less credit intensive path like Germany.  Nevertheless, until Germany starts following the Macroeconomic Imbalance Procedure that they themselves helped create, and accepts that German banks will have to take a haircut on many of their loans to southern Europe, then the Eurozone’s economies will continue to fracture.  Protecting German self-interest will ultimately prove a self-defeating strategy for the Eurozone. Look again at the chart above and guess if interest rates will rise, stay the same, or fall?  In the Wonderland world of economic forecasting your guess could be more accurate than any Central Bankers.  Interest rates could gradually rise in small steps like those being made by the Federal Reserve in America.  Some Central Bankers are already aware that the damage to saving and economic good sense has already gone far too far.  They can now see the large black holes appearing in company and private pension funds and it’s getting worse:  Six Central Banks have already crossed the line into negative interest deposit rates: Sweden -1.25%; Switzerland -0.75%; Denmark -0.65%; Eurozone -0.4%; Japan -0.1%; and Hungary -0.05%.  So in these six countries you must pay interest if you want to save money, something so counter-intuitive that, like Alice, one has to think that very few things indeed are really impossible.  There may well be equally good arguments for raising interest rates as there are for lowering them, but the odds are that the Bank of England will keep interest rates the same, because our present Wonderland is way outside the boundary of any of its training or experience. What about considering that perhaps low interest rates are just reverting to the norm?  I’ve just read Killing the Host by Michael Hudson whose brilliant economic analysis is underpinned by a great deal of historical research.  Hudson says that the economic growth rate since the birth of Christ, i.e. for the last two thousand years, has only averaged 0.2%.  So in reality the interest rates that banks typically charge are way above anything their customers are likely realise.  In fact very few business investments are capable of generating high returns even if the forecast projections make it appear possible.  Yet for many years, up until the fateful events of 2008, the average expected investment return by U.S. pension funds was 8.5%, so you can see how artificially inflated and out-of-touch expectations about business had become.  If you think 0.2% growth (adjusted for inflation/deflation), or something approaching this, is low then maybe you need to reset your expectations.  In 2015 the management consultants McKinsey estimated that global debt since 2007 had increased by a staggering $57 trillion, and that no major economy had decreased their debt relative to their output.  Looking at the very low aggregate demand and the huge cost of servicing an increasing mountain of debt, little Alice wouldn’t be at all surprised to hear that we are all in for a long and painful period of slump, economic depression and stagnation.  It’s enough to make anyone want to jump into the nearest rabbit hole. May 2016

Interesting times…

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