Monday 3 October 2011

Manic Monday - 3 years and counting

3 years ago this Monday, the first in October, RBS and HBOS collapsed, the Government was left with literally a few minutes to decide what to do and whether to let the cash machines get switched off or not.

We now know 3 years later that they chose one form of sanity, but on a day when there were not good decisions to be made, it has also come at a huge cost.

The current Prime Minister is struggling against the wave of anti-cuts media and lobbying. Yet the truth is the cuts are more likely to have to be extended rather than reduced as the earning capacity of the UK falls and world growth falters.

More bad news is in the FTSE too, down another mere 2.5% at time of writing. Just like 3 years ago, there is panic in the markets, this time over the Sovereign Debt Crisis that the Financial crisis bequeathed to us. The focus on the default of Greece is irrational, in that a small country failing on a few billion in loans is chicken feed. The real question is how is the Euro going to survive and will the cost be a lost decade or two?

I wonder where we will be 3 years hence on an October Monday?


Tango 5 said...

Greece is small, the cost, in Euro-govt budget terms is acceptable. Couldn't the EU just write off 50% of Greece's debt.{By buying it from the banks, redistrubiting the cost between the member states and then reducing the debt to zero.}

Greece is left with a more manageable 50% of debt.
Then much more generous 1.5-2% rates on Ireland's and Portugal's loans and the crisis ends,
Oui - et - non?

Steven_L said...

Some of these German manufacturers are looking dirt cheap now.

I'm getting very tempted to get back in long on either the DAX or just BMW.

Botogol said...

What is it about Mondays in October?

Remember 1987?

Budgie said...

I did say that the Coalition would not be able to cut government spending by supposedly making the departments more "efficient". I was unfortunately correct.

To succeed in cutting government spending we must cut out some government functions - completely. Hence my previous list: shut down DfID; sell off the BBC; leave the EU (we must ask to do this because of Lisbon); stop subsidising Wind; stop propping up the euro with our cash.

Old BE said...

Three years from now? Early stages of a British economic renaissance: public deficit eliminated, private debts reduced, stable but not stellar economic growth, tax cuts on the horizon.

Jim said...

@Tango 5: and whats to stop Ireland, Portugal, Spain and Italy demanding a 50% cut in their debts too? The EFSF is similar anyway - everyone puts into the pot (or borrows to put into the pot) and gets a bailout if needed. The trouble being the pot can deal with Greece Portugal and Ireland, but no more. Hence the trouble.

@Blue Eyes: you are very optimistic - any particular reason? My best guess is we will miss our growth, spending and revenue targets, but will muddle along because the rest of Europe and the USA are in worse positions. No light at the end of the tunnel, but no crash either.

Anonymous said...

I wonder where we will be 3 years hence on an October Monday?Expecting an general election, but things in the doldrums if there is no upturn in the near future.
The Euro is in big trouble but the pound will be dragged in because of bank guarantees to Euorpean banks (and various fiscal instruments). At the moment the government stands no chance of selling the shares in HBOS and RBS.

Old BE said...

@Jim yes because things are never nearly as bad as we fear them to be. The Euro countries will pull some kind of fast one and stave off a crisis. The cuts won't drag down growth as far as Balls hopes they will. People will get bored of not buying any thing but by the time they get to the shops UK companies will have come up with some nicer stuff than the rubbish we are importing at the moment.

hovis said...

Hmm I'm not one for Normalcy bias on this one.

Three years from now hopefully we still havent fallen over the precipice.

However Greek default / China bubble / Currency Wars / Protectionism make the world a much darker place. Remember only one needs to edge us over, I like a bet but the odds on none of them (or some other unforseen event) occurring is not one I'll wager on.

James Higham said...

Don't forget that George says that if he and we tighten our belts, we'll all pull through together.

andrew said...

I recommend (again) This Time Is Different: Eight Centuries of Financial Folly. Basically it won't be and you need to wait until at least 8-12 years for full recovery.
The other principal message was that countries do not grow out of their debts, inflation has been the usual solution - which is interesting for the greeks.(btw do not get the kindle version, the graphs look silly).

CityUnslicker said...

Anon - At thew moment the shares in RBS ande LLoyds are far mor likely to get wiped out and the banks natioanlised. RBS/LLoyds have tens of billions of exposure to Irish Real Estate.

Andrew that is a great recommendaition and is next on my reading list.

Electro-Kevin said...

I have to say there were some very grave looking faces at the Tory party conference today. You couldn't fake those expressions.

What do I think ?

Well I'm glad the cashpoints didn't run out of cash and that the banking system didn't crash. I'm glad we're out of the Euro.

I don't think things will ever be the same again though. We're going to get poorer by some margin (it's palpable decline at the moment) before any upturn and I think we will all be working a lot harder for our living.

Three years time ? Eating a lot less. Clothes patched up. The house a lot colder. Friends and neighbours unemployed - possibly myself too.

We'll get through but I think a new world order is in the making and we will look on the old days with fondness.

Old BE said...

Have you all forgotten LancsGas? Graphene? Numerous other developments which always spring from nowhere?

The world is getting richer overall and although we might not be in the top ten economies in ten years time it doesn't mean as individuals we will be poorer, just less obviously richer than everyone else.

Anonymous said...

In three years time we will be involved in world war 3. There are no reasons for optimism, our financial system is imploding under the strain of derivatives losses, which will vastly cut government revenue, leading to the end of the welfare state.
I wonder what odds ladbrokes will give me on that scenario?

Electro-Kevin said...

Blue - The world isn't getting richer. Most people live in poverty. We may find ourselves out of the top ten (our education isn't even in the top forty - a faster drop than anyone could have imagined.)

More and more people are being imported here to compete for low skilled jobs and scarce housing - when will that become food too ? I know of no law which states that we shouldn't experience poverty.

I am not Anon btw though I do see the potential for conflaguration. I expect the Americans to be particularly tetchy about Chinese mineral grabs - by which the Chinks will have the chance to grab them by their minerals.

Old BE said...

"The world isn't getting richer"

China, India, Brazil, Thailand, Vietnam?

Eastern Europe?

Which planet are you looking at?

Sebastian Weetabix said...

Blue Eyes - hear, hear.

The idea the world is not getting richer is just laughable. Hundreds of millions of people in the third world have been lifted out of poverty in the last 30 years, through economic liberalism and better access to markets through free trade and tariff reductions.

Europe is however charging in the opposite direction thanks to the mad state dirigistes and reborn Maoists/Marxists/Leninists - oops, I mean environmentalists - trying to reintroduce central state supervision of absolutely everything.

Ryan said...

"Couldn't the EU just write off 50% of Greece's debt". Well it could but that would [1] create a "moral hazard" - i.e. other indebted countries would look to take the easy way out and [2] it would only buy time.

The Greek problem is that whilst it is in the Euro it cannot compete with Turkey which is not in the Euro. Therefore it cannot generate any wealth. Because it doesn't generate and real wealth there is no ability to tax. However, Greece needs to raise tax to pay for public sector workers and the growing demands on the welfare state as large numbers of people become unemployed.

This is the real problem. The Greek economic model became unhinged when it joined the Euro. It simply cannot stay in just as Argentina could not survive with a currency pegged to the $. The Greek economy was hollowed out by the French, Germans and Turks. It is not subsisting on debt until the debt hit the endstops. So the real underlying cause of the problem is not debt - the debt is just a symptom. If Greece stays in the Euro then it will end up in the most appalling poverty with people eating their own babies to survive, or it will need to live off EU (but essentially German) welfare payments forever rather like the people of Wales living off English welfare but on a much bigger scale, or the entire p0opulation of Greece will migrate to Germany.

To be honest, pulling out of the Euro and re-starting the Greek economy in competition to Turkey is the only real solution to the underlying problems but for some reason the masters of the universe don't want to admit it.

All the weak economies in the Eurozone have the same problem but there are too many EU supporters out there to admit the grand dream is over. It will be forced upon them eventually. If you want to know more read about the Argentine default which occurred largely because the Peso was fixed to the $ just as the Greek currency is fixed to the Euro (well, it is the Euro so you don't get more fixed than that!).

The Euro is doomed because these weaker economies will find they are forced to float their own currency to survive.

The fascinating fact is that Barraso doesn't realise what is happening. He actually wants to use this crisis to force greater European integration. This would mean that when countries like Greece face economic failure the EU will actually prevent them from doing anything about it. This would then cause poverty in Europe on a scale not seen since the Great Depression. The EU will (rightly) get the blame and war will INEVITABLY break out. We are one bad decision away from that happening.

The only solution for the PIIGS is to drop out of the Euro and float their currencies. Their unwillingness to accept this is scary.