Month: December 2008

I am a natural optimist. I like to see the opportunity and the possibilities in life. The background as we travel through the end of the old year and into the new is not auspicious. The news background threatens worse to come on jobs, company failures, house prices and much else. Just to make it all worse, violent war breaks out in the Middle East.

Last year I urged the authorities to try to stave off recession. I explained how “If the authorities cut interest rates and make more cash available to the banks we can avoid too sharp a downturn.”

This year I am forced to write about how they could limit the damage of what is likely to be a severe downturn in the UK.

It took them nine months to recognise the dangers of the high interest rates and tight money they were offering in 2008. All too late in the day they started to shower the banks with cash and bring the interest rates clattering down. These changes will have an impact, but not in the early months of 2009. The authorities seem to have forgotten that it takes a year or more for changes in interest rates and changes to money market liquidity to work through the system. In the meantime there is the remaining problem that the banks themselves are still weak, need to write off more from their assets, and are under regulatory orders to strengthen their balance sheets at the moment of greatest difficulty.

So how can I cheer people up? There is the outside chance that Mr Obama meant it when he said he would bring change. If only he would change the US approach to the Middle East that would help. If he would seek to spend the cash the US government is borrowing to good effect that would be a miracle.

The UK authorities could start to get a grip on their banks, and start to make better decisions about helping nurse them back to health so the wheels of borrowing can move the vehicles of commerce again. We need a government to understand that their regulatory and monetary policies need to reinforce each other, not struggle against each other, a government which finds a way for banks to pass on some of the cash it is now tipping into the system, and then controls the amount of that cash, before we start up another damaging inflationary cycle.

Last year at this time I went hoarse asking them to cut interest rates immediately. This year I say the rates are low enough. The problem now rests elsewhere. Indeed it is savers now who need the better deal, and I would like the government to help them.

They could afford to do so, and to lower taxes on income and jobs, if only they would forgo their foolish cut in VAT. We need now intelligent and affordable tax cuts, rather than clumsy and expensive ones which are not going to lift us out of recession.

I wish you all a happy and prosperous New Year. You will need the agility of a gazelle and the solidity of the ox to survive in business in 2009. It’s the year when savers are asked to share the misery of the borrowers, as we continue to sift our way through the debris of the Credit Crunch. I just hope you and yours have jobs that survive and enough cash to see you through.

Now government and media are blessed with 20/20 hindsight about the property and commodity price bubbles, they should ask themselves when and how they want to puncture the latest bubble – that in government bonds. Or do they wish to do exactly the same with this as they did with the property and commodity bubbles – supply the cash to fuel them, create the regulatory rules to allow them and sit back and watch until it is really painful to burst them?

The government bond bubble is currently growing large. The government probably wants this to happen, as it knows it has a lot of government debt to sell. But at some point investors and regulators will wake up and see it is not healthy for too many institutions and people to be lending to the government for tiny rates of interest, especially if the government’s aim is to inflate their way out of the crunch in due course. For the moment the government can inflate the bubble more – after all there is still a positive rate of interest on longer bonds, and short term interest rates are still above zero.

So why does the bubble matter? Lending too much to any company or institution, as we have seen in the private sector in recent years is not healthy and at some point has to be corrected. All the time they can get easy credit they are happy and the system looks stable. Once they cannot get the credit any more people are amazed at how much they were allowed to borrow on such good terms in the good times. The private sector went to the borrowing party in 2005-6. The Bank of England supplied the drinks, and the banking regulator organised the tickets and watched as they arrived for the binge. They are all now living with huge hang overs.

Now the government has invited itself to a similar party. The drinks are once again being supplied by the Bank, with help from the other banks and pension funds. The regulator has not merely issued the tickets but has told the banks to bring more booze so the party goes really well. Banking regulations are being changed to make commercial banks lend more to the government (to improve their liquidity). The authorities have dreamt up a new policy called “strengthening the banks” which entails putting taxpayers cash into some of the banks, so they can lend it back to the government at a loss.

The foreign exchange markets currently do not approve. Maybe they have read the detail of the Chancellor’s statement and do understand that this year’s borrowing is not £78 billion as advertised but a massive £157 billion or more than 10% of National Income. Maybe it is just the advertised promise that the government will borrow 8% of National Income next year that worries them. Maybe it is that and the weak performance of the UK economy, though Euroland and the US will not perform well either. Maybe it is thinking ahead to the losses about to be recorded by UK banks, including those that the government has invested in. Whatever it is, something has spooked the currency markets. Sterling hit $1.45, 131 yen and 1.03 Euros yesterday. The slide continues unabated.

So what should the government do about the runaway borrowing, the bond bubble and the collapse of the currency? It should

1. Signal that interest rates have fallen enough.
2. Cancel the regulatory requirement for banks to buy more government bonds – they need to lend more to the private sector instead to start to lift the recession
3. Relax regulatory capital requirements on the banks as they declare write offs and create more realistic balance sheets
4. Get a grip on the nationalised banks costs – they need to make some money to offset the losses
5. Indicate there will be no more share capital for banks – future support for banks will be based around short term loans against proper security
6. Look for ways to get its capital back from the banks it has put share money into – through asset sales, cash sweeps and refinancings
7. Cancel the VAT reduction, and replace it with cheaper better targetted recession busting tax reductions
8. All the usual advice about how to control public spending

Yesterday’s Sunday Times reported a City analyst saying that RBS may report losses of up to £28 billion for 2008 when it reports its full year figures.

If it does, or if reports a mere £20 billion of losses for last year, that means all the extra capital pumped in by UK taxpayers will have gone in just a few months of ownership. Many of the losses will be on foreign banks and overseas investments within the RBS group.

In the meantime we do know, now that RBS shares are trading around 42p, that the taxpayer has lost a small fortune on the shares – around £8 billion at current market prices.

When the government first started briefing that it was thinking of buying stakes in several major banks I urged them to carry out due diligence, to ensure the assets they were buying were realistically valued. Why on earth, I asked, should taxpayers have to take the hit after they bought in? Surely any sensible person buying into such banks would demand write offs before putting in so much money?

I was told the government was in a hurry and would not therefore do what any commercial purchaser would do. They could have applied a sensible discount to the asset value when constructing the deal, but even that proved too much for this feckless and naïve government. Their bail out of the banks was their ERM – and its impact will be far worse than the damage the ERM did to the British economy.

Taxpayers have thrown their money down the drain, putting it into banks that had not written down their assets sufficiently to warrant the new capital. Nor have they cut their costs enough. If a bank is losing such huge sums it cannot afford all the people it is currently employing, and cannot afford the giddy level of salaries and bonuses it is paying to the managers and directors. The government should have insisted on proper write offs and proper action to cut costs before purchasing any shares. Instead we are all losing a packet, without helping fix the banks, who carry on incurring costs as if the world was still the same as during the boom.

Now we need to know from the Regulator whether it will inisist on replacing the lost capital or not. A few weeks agao when the government and Regulator increased the banking panic by insisting on extra capital we were told it was essential they have a higher capital ratio – i.e. more share capital relative to their lending. Does that rule still apply to RBS, or will it be allowed now post any losses to have a lower ratio again? If it is allowed a lower ratio can we have some assurance these losses mark the end of the likely write offs? Will the government do some due diligence on the figures this time to make sure they are prudent?

If the Regulator is still insisting on the higher capital ratio, where is the money coming from? Are taxpayers to be made to put more in, as Mr Bean of the Bank of England hints? Or will they now get on with selling assets and cutting costs in a way which gets the bank’s balance sheet back into better trim?

What should they do? Demand a full independent audit of the assets. Agree realistic values. Agree with Regulator and the bank an appropriate capital structure for the revised position. Then get the bank to raise any extra capital it needs through cutting costs and retaining more profit, selling assets, or finding someone other than taxpayers to put up the money. Taxpayers have had enough.

I pointed out in Parliamentary debates that the 3 banks with state shareholdings could lose the equivalent of the defence budget in a year. According to the Sunday Times RBS may have done most of that on its own within the first few months of state ownership!

On the economy we have heard from the President elect. Apparently the only thing wrong with the high spend high borrow strategy of George Bush is that he didn’t overspend and over borrow enough. We should expect more of the same when President Obama sits in the Oval Office.

On the alleged corruption within the Democratic party over the future of Mr Obama’s Senate seat in Chicago we hear loud and clear that whilst the police have interviewed Mr Obama he had nothing to do with whatever did happen.

Yet on the terrifying war in the Middle East that is daily claiming so many victims we hear the sound of silence. We are told that the USA can only have one President at a time. That is useful line when the wind is in the north.

The worry I have had about an Obama Presidency is twofold. Someone who was so good at persuading many that he is on their side will not find it easy to come off all the fences he has been elegantly astride. Being in power means taking sides and making decisions.Someone who put the case for change without specifying what changes will struggle in practise to differentiate what he is doing from what his predecessor was forced to do as he saw it by circumstance and by the mighty high spending Washington machine with all its vested interests.

With Mrs Clinton as Secretary of State it is difficult to believe there will be much change over Middle East policy. With Mr Obama himself wanting to intensify the war in Afghanistan it is difficult to believe there will be much change in policy. With the present Secretary for Defence staying in office it is difficult to believe there will be much change of policy. Yet surely, if change is needed, it is above all needed in the US approach to the Middle East?

Last night was doubly unusual for me. I had time to watch TV, and there was something on a Saturday night I was willing to watch. I tuned in to the story of the political awakening of John Adams, the 2nd President of the USA.

In their vivid and simplified documentary way the film makers captured the rising tensions in America against the bovine insensitivity of the British government. We saw John Adams, the honest and fair minded man, defend British redcoats against false charges of murder from an angry crowd that had taunted and assaulted them. We saw him turn down preferment from the clumsy colonial authorities, only to go on to advance radical proposals concenring the rights of man when even for him the autocratic inflexibility of the British government became too much to stand, let alone defend. He and his fellow delegates to the Convention fashioned the philosophy and the fine words of freedom that made the intellectual backbone of the new Republic. They shamed the gross incompetence of the British some 130 years after Parliament had had to make a stand for its rights against the Crown.The irony of Britain moving from home of liberty to colonial oppressor could not have been missed by the English gentlemen who made the Amrican revolution. I wondered if any Americans watching could see some of the irony now that America is viewed as the oppressor by some in countries where she uses her troops against the will of the locals. The cause of freedom requires tolerance to the differing views of others in most circumstances.

It made me think how much today we need to fashion a new coalition for liberty in our own country. The countless intrusions into our freedoms have often been criticised individually but when we look back over the last decade the total impact is large. Much damage has been done in the false name of security. More has been done by taking in vain the name of social justice, and still more in misguided ways to save the planet. The government has found causes it thinks are higher than liberty, and has then invented ways of seeking to further them that all result in the same dead and deadly end – more state power, more state control, more taxation, more rights and privileges for the governing and more duties and obligations for the rest of us.

When I go the local shops this morning I will doubtless see several people breaking the law, as many do now most of the time. Some will drive at 35 mph believing they do so safely in a 30 mph zone. Some will park on the double yellow lines in the side road close to the shop, seeing no harm as they will not bock the road. Doubtless some will fail to record cash payments for their businesses in their tax account file. Some businesses will be trading today in ways that doubtless violate some little known or unloved regulation. Some break laws because they cannot see the point of the laws, some break them inadvertently because there are so many to know about, and some break them because it makes their lives easier to break them. Recent research has unearthed just how many thousands of new criminal offences this government has introduced, finding new ways to ensnare the usually law abiding. If you invent enough complicated forms, difficult requirements and new rules for business and the general citizenry you will end up making criminals of most. To what purpose?

As I watched the Adams story unfold I knew I would have been with the crowd in demanding liberty in 1770s Masachusetts. I today I am with all those of you who feel there are too many taxes, too many spy cameras, too many new rules, too many needless interventions in our daily lives. We need to rebuild our free society. As we emerge from the Credit Crunch the message should not be that we need more government, but we need wiser government. We do not need more red coats with better weapons, but someone in charge who knows the temper of the people and trusts them to be freer and to make of their own decisions.

When we get a change of government we do not want managerialists who think it is just a question of running the existing system better, but freedom lovers who ask which bits of the creaking machinery of state do we need to keep running, and which can we pension off.

Men and women in Brtain are no longer born free, and live in chains. We need to burst them, to trust people more and governments less. It was big government working with regulated big banks that got us into our current economic mess. It was big government running scared of terrorism that sought to protect us with guards and gates in ways which cannot work when we need to win hearts and minds. I just wish the architects of the current autocracy had watched and understood last night’s docusoap of freedom. They should see that there is relevance today in Britain from those events long ago on the wintry Eastern seaboard of a great country.

Locally yesterday’s spree looked like a one day wonder this afternoon. In Wokingham there were long queues in Woolworths to pay small sums for items that are now heavily discounted and well thumbed through, but not a lot else going on. In Bracknell the furniture sheds were short of paying customers and the electrical and DIY shops far from busy. The MFI store looked forlorn. The car parks were half empty, which looks poor by Saturday standards.

It is true, as some have remarked on this site, that the big cuts in mortgage rates and the fall in petrol prices is helping those with the larger mortgages. At the same time the big reductions in interest rates is hitting many retired people who looked to the interest on their savings to supplement their pensions. What the shops might gain from the former they are going to more than lose from the latter, especially as many of the younger families are worried about job security and feeling they have to repay some of the debts.

This year there are three trends hitting the stores simultaneously. Two have become common in recent years.

We have become a nation of binge shoppers, with a temptation to all try to shop on the same few days each year when we think the prices will be keenest and when we have a holiday.

More and more people want to shop at a time of their choosing from the comfort of their own home, in a way which allows them to find the most competitive price for a good. They are choosing the internet in increasing numbers.

The third complication specific to 2008/9 is the savage downturn in the economy, undermining confidence and forcing people to keep what cash they have.

The retailers and shopping centres have strategies to handle the first two. They have responded to the wish to go shopping on special days by catering for the large numbers, spending on advertising, and changing some of the prices to create some excitement.The main stores are increasingly concentrated in large modern shopping centres where there is adequate parking, and plenty of catering alongside so people can make a half day out of their trip and combine it with a grand coffee or lunch.

The retailers understand that modern shoppers want to drive to the shopping area, park easily, have plenty of choice within and between the shops,and be able to sit down and relax over a drink. A few will still return home to find the cheapest version of what they have seen on the web, and others, especially men, will prefer not to venture to the mall in the first place, but the overall package is a good one which the majority prefer to scrolling through dozens of web pages which may give an imperfect representation of what is on offer. Some of us prefer to see and even touch the goods before buying, and like the event that shopping has become. Many see shopping as day out, something to do with friends or relatives.

Both customers and retailers understand the bizarre price dance retailers now have to lead to entice and complete the transaction. Why buy the items just before Christmas, when you expect them to be 20% cheaper in the January sale? Why then not offer a discount before Christmas, to prevent all the business being delayed until January? The stores need to attract the business when there is some need to buy. People need to buy some things before Christmas for presents and for the full enjoyment of the holiday. People also take advantage of the long Christmas break from work to buy those bigger items or special purchases that require some time to understand the range and to choose the right one. Retailers need to be there with persuasive prices when people might be in the mood and have the opportunity to shop.

But what can a retailer do to survive when there is, thanks to the authorities conduct of monetary policy and banking regulation, a massive belt tightening going on? It’s the same general rule – have the right products available at the right price in the right place, as applies in normal conditions. It is also more difficult, because there are fewer retail pounds to be attracted, so there will be more losing retailers. The general advice to retailers is simple – hold less stock as you will be selling less, buy more cheaply so you can sell more cheaply, and hold relatively more of the cheaper ranges. Make your price promotions more frequent and more dramatic to try to get people into the store, and train staff to sell other itmes once you have attracted the public through a knock out central offer.

Generating some more business in the three last days before Christmas, and at the start of the post Christmas sales, is a help, as shops appear to have done this year. Buying that marzipan which many of you have commented on clearly helped after all! The months of January, February and March will prove tougher, unless a retailers paces his or her price promotions and offers, and finds a magic touch with the stock they buy. It will not always be the cheapest line that sells. There will be scaling down that can sometimes help premium ranges. Yesterday I saw a news item to say higher priced fancy foods were selling well, probably because people wanted a cheaper treat at home instead of going to the restaurant. That is where retail is a real skill or art, requiring deep understanding of purchasing trends in a very depressed market.

Today we sympathise with the plight of Woolworths workers, facing redundancy on a big scale. There will be no governemnt handout for them. There will be more store groups going under in these conditions, which remain the cruellest I can remember. Cost cutting and care with merchandising are essential for survival. Not all will make it.

The Japanese industrial output figures show a drop of 8%. That should come as no surprise.
Other economies will also produce dreadful figures for manufacturing output in the weeks ahead, as there is now a big shut down underway which will last well into the New Year.

People ask why the lower interest rates and the budget stimuli are not working. The answer is simple. It always takes time for them to work in normal circumstances. Interest rates need to be moved about a year ahead for them to work through. That is why this site was calling for halved interest rates over a year ago, to try to fend off the worst of the downturn.

But nothing will work well unless governments and banks work together on how to fix the banking system. Together they wrecked it, and together they have to fix it. In the UK all the time the Regulators decide to throttle the banks with higher capital ratios, they will be forcing more people out of jobs and more factories onto short time. The choice is theirs. As they have been doing for the last five years they are making the choice which maximises the agony.

I was pleased to learn this morning that there is now a final deadline to get our remaining troops out of Iraq. They have done a great job in difficult circumstances, made worse by political disagreement about the desirability and nature of the mission and by the lack of certain vital items of equipment.

The return of those troops just highlights the issue about how much longer troops are going to remain in Afghanistan, and why there isn’t a clearer political strategy for resolving the conflicts of that faction torn country. The arrival of President Obama clearly does not make for the change we want in that direction, as he like Gordon Brown seems committed to digging us in more deeply rather than finding the least inelegant way of exit.

Meanwhile the continuing crisis in Zimbabwe leaves open the moral issue of why do we invade certain Middle Eastern countries when we do not like their governemnts, to impose democracy, but do nothing elsewhere however gross the misconduct? Would it have been any different were Zimbabwe a large oil producer?