Economics is B.S., and Clever People Haven't a Clue

I'm sorry, but macro economics just ain't a respectable discipline.

Read this long piece from the highly regarded Chris Dillow - manifestly a very smart guy** and admirably balanced in his pronouncements - and tell me any politician has a hope in Hell of figuring out from it what to do next, by way of some kind of logical conclusion.  One the one hand.  On the other.  Maybe.  But, but, but.  Maybe not.

Nope, there's no chance that intelligent people can be expected to agree on how to interpret a given set of facts by the lights of macro economics.

The human condition.  Outside of the hard sciences, smart people see no reason to agree on very much at all.  And then they wonder why people like Corbyn and Johnson get to the top.

ND

________

**OK, he says he's a marxist, I know.

A Must-Read Essay on Climate Modelling

Recently we chewed the fat over econometrics and the dumb modelling that goes with it, eliciting one of my all-time favourite comments from long-time C@W reader Sebastian Weetabix:

There is nothing like a collision with reality to destroy a lovely theory.  There is something beautiful about a gang of facts murdering a thesis in a dark alley.

"Globull warming comes to mind", he went on. "Peak oil and the rent seeking green c***s are all of a piece."

It's mainly crass economic models I suffer from in my line of work, but there is indeed another rich seam of stupidity to be found in climate modelling.  And here, courtesy of the frequently excellent Watts Up, is a superb essay on the flaws inherent in much of what we are assailed with on the weather front.  An extract to encourage you to read further: 

... a direct piece of engineering wisdom: If a system is not dominated by a few major feedback factors, it ain’t stable. And if it has a regions of stability [sic] then perturbing it outside those regions will result in gross instability, and the system will be short lived. Climate has been in real terms amazingly stable. For millions of years. It has maintained an average of about 282 degrees absolute +- about 5 degrees since forever. 

So called ‘Climate science’ relies on net positive feedback to create alarmist views – and that positive feedback is nothing to do with CO2 allegedly: on the contrary it is a temperature change amplifier pure and simple. If such a feedback existed, any driver of temperature, from a minor change in the suns output, to a volcanic eruption must inevitably trigger massive temperature changes. But it simply never has. Or we wouldn’t be here to spout such nonsense.

What excellent stuff!

ND

Oil Price: Halved. UK Power Cost: Halved

There we go, oil halved in a tad over 6 months, to a 5-year low.  Trouble in Libya?  Pphh!

Tell you something else that has halved:  the supposed value of capacity in the UK electricity market.  Back when the government launched the recent Capacity Market auction for 2018-19 power generation capacity guarantees, they and their expensive advisers 'estimated' that the clearing price would be £39/kW.   Meaning they'd need to offer that amount annually to power plant owners in order to get them to guarantee to be available on demand in that time period, in the desired amount.  Pretty much all the idiot energy market forecasters went along with this - indeed, several 'calculated' it would be even higher.

But the auction, which happened in the week before Xmas, cleared at ... £19.40/kW.  Hah!  There are so many amusing aspects of this, I expect we shall return to it in 2015.

For now, back to the two price-halvings.  Are they related ?  Not by cause-and-effect, that's for sure.  Rather, they are two manifestations of the same phenomenon: economists don't know what the hell they are talking about.   And yet somehow they have salaries and positions of, ahem, power.

To energy consumers everywhere - a Happy New Year !

ND

Barrosso and the Euro groupthink

Great news out today, Europe is saved after all. The unelected President of the European Commission has decreed that all is well in Europe - here are some top quotes:

"We don't anticipate a recession in Europe.
"The latest forecast by the European Commission shows there will be growth, modest growth it is true."

Mr Barroso added: "I want to be very clear here - the European Union and euro are strong and resilient.

"We are doing all it takes, from tackling the underlying budget problems, to strengthening the governance of the eurozone, from tighter financial regulation to improving our overall preparedness."

What is more disturbing for the Eurozone members is that Jean Claude Trichet, President of the ECB, has also said over the weekend that the ECB cannot replace Governments and so may soon have to end it bond buying programme. Spanish and Italian yields on their debts have increased above 5% for the first time since the EC began illegally (according to Germany's President) buying their bonds last month.

Worse still is that the new IMF head, Christine Lagarde was the one who caused the above statement to be made when she openly questioned the need to recapitalise European banks due to the ongoing crisis and likely need for credit writedowns.

Perhaps the most important thing for me to read into this is the clear demonstration of Groupthink within the European Commission and member states. Lagarde was a paid up member until recently but now free, sings with the other side freely. As for Trichet, now about to retire and having been shafted by the German president, he also seems to be moving away from the Party line; it is very dangerous for a Groupthink team to start having numerous high profile dissenters as this often leads to the collapse of the Group.

With so little consensus it is no wonder the  markets are falling. A key element is how strong the Northern banks maybe to withstand any future losses. Tracy Alloway has provided that data in the chart which shows the amount of debt funding and recapitalisation that is currently being achieved by the Eurozone banks, its zero in 2011.

No way to run a currency

After all weekend talks to try and resolve the Greek situation, the net result is nothing today. Instead we will have a week or two delay whilst he Greek Government tries to hold together and agree some sort of acceptable plan.

All this demonstrates the fundamental weakness of the Euro when in a crisis situation. Politics is now the driver and politics takes days and week; but markets are open daily.

A sub-plot being worked out here is that I perceive that the Western banks in the City and elsewhere are liquidating their PIGS and European assets as quickly as they can; they know the end game is a default and probably exit from the Euro for Greece. If I was being conspiratorial I would suggest that the European leaders have left this gap open just long enough for the banks to try and save themselves (not that convinced by that line though, it has been obvious this was going to happen for 18 months).

When there is a crisis you need strong leadership and decisive action; the Euro currency leaders provide the diametric opposite. Weak and confused leadership and a variety of not quite satisfactory solutions to any problem.

Indeed, it will be a wonder if the Euro survives the next few years of Sovereign insolvency crises.

UK GDP not shock - 0.5% growth

Not great form for George Osborne to be front running the GDP numbers at Cabinet yesterday. Still the news is really as expected, with growth at 0.5% a decent start to the year.

The 'growth' spurt given by the pumping in of QE money and exorbitant Government spending is over and now we are left with the underlying private sector growth trying to outdo the very modest public sector contraction.

In real terms its rubbish because inflation is at 4% (UPDATE re comments, constant prices are compared to CPI not RPI, so the disparity is messing with the figures) so any growth this year under that is a decline in real terms on an RPI basis, on the plus side a low pound could re-value and alter the equation but ultra-low interest rates are not going to encourage that.

In the long-term, all is not so bad for macro-economic Britain, the deficit is being eaten into and the tax base will start to grow substantially and close the structural deficit as the Public Sector is shrunk over time.

Politically who would have thought that the Lib Dems hold the keys to the future of the UK a couple of years ago, if they fall apart and the Coalition fails then Labour will be back in and mess everything up again!

Shave and a haircut..

First thoughts.

Seems that benefits will be hit hardest. £7 billion cut to welfare. Not really a surprise. Welfare is the government's work and if it has to cut then that's where the cut comes. Council spending looks like being significantly more than Osborne's 7% cut claim. Will have to look at the numbers a bit more later on.

The government said it needs to cut £83 billion in public spending over the coming four years in order to wipe out a £159-billion deficit — the largest in Europe after Greece and Ireland.

The arguments for and against are pretty clear. Cut now, say Labour, and the recovery will end and tax receipts will plunge at the same time as unemployment will rise. The government points to a record £43 billion a year in debt interest alone and worries that a % point increase on borrowing would necessitate even deeper cuts later on.

In 2008 the debt was an already dangerous £525bn. Mr Brown was trying to find some way of pretending the phony 'golden rules' were still in place. Then the credit crunch. And the debt is doubled. So Labour's wait and see is not an option. When a nation has spent two years doubling its debt trying to buy off a recession its just not an option to suggest doubling it again just to be sure.

The 490,000 job losses will hurt if those people don't find other work. { suspiciously just under the 1/2 million tag George?} Something we should remember. When the 30,000 workers of Woolworths were kicked out with 4 weeks notice and a paltry statutory redundancy, no one thought they would never work again. Surely the same with public sector workers. If you listen to Unite you'd think people were being confined to their homes forever more. In shopping centres and high streets across the UK they haven't seen as many 'opening
soon' units being readied for Christmas since 2007. Osborne is probably just about right. The recovery is on.. so why wait?

And anyway, he can't wait. The coalition cannot follow Alan Johnson's advice even if they thought it was correct. For a start they can't do nothing. What kind of chancellor would George be if he decided that on obtaining power after 13 years he considered 'It's OK. Everything was already under control.'

Politically the coalition must act early on. They must cut and pray, fingers crossed, that it all works out and the early pain can be overcome by later tax cuts and spending commitments. The weakness of a fragile coalition, the public's temporary and only semi acceptance of Labour's wasteful spending, and the need to prove Blue was right and Red was wrong have driven the government to gamble on a cuts strategy.

OBR: The Truth hurts...a little

Well, today is the day the Government has been looking forward too only slightly less than the budget. The new Office for Budgetary Responsibility has published its report. A nice piece of pointing the shotgun at your own feet and pulling the trigger.

Well, first up the OBR is copying the Bank of England in using fan charts. This is a way of making it seem that your predictions are never wrong. Two lines with a nice spread in between. The BOE use this to show inflation is within their guidelines when plainly they have been wrong for some months; now the OBR joins in this charade. They would be useless company down the bookie.


However, the central prediction (page 13) is that the economy is likely only to grow at around 2.8% for the next 3 years. Below Alistair Darling's heroic 3% growth forecasts, but I say politically so. Not enough to really dent the public finances and yet a little to show Labour were wrong - a perfect political fudge. However, not much approaching the truth there and an ignorance of the fact that with GDP growth below inflation there seems to be a continuing diminution of the Country's wealth in real terms for the whole Parliament.

Page 16 has an output gap too, I am yet to understand what this is. Many people have tried to explain it too me, but in reality it is a bogus economic concept. There is not real way of knowing if there is slack int he economy or not. The inflation rate and money supply creation rate will give you the answer eventually.

The final page says it all, Government spending is to fall considerably, whilst Private Investment takes up the slack to produce good GDP growth, along with house prices and exports. Quite a bet, better than pouring more Government money in forever, but somehow this set of predictions does not sit well with the world we live in.

Exclusive: Banks to be broken up in Con-Lib deal

A source who has been privy to the detail in the Con-Lib negotiations has told Cityunslicker that a deal to separate Investment Banking and Retail Banking organisation is one of the key policy platforms to have been agreed upon.

George Osborne has of course advocated this in the past as a solution to the long-term instability of the UK having four banks which are nearly as big in assets as the UK GDP. On the Lib Dems side, the City has been horrified at their smash the City mantra.

I would not like to own shares in the likes of Barclays or RBS when this news comes out, at it will be a big cost to share holders to split the businesses and lose all the benefits that the stable cash generative retail bits give to the high risk Investment Banks.

Quite how this will work for overseas institutions I do not know.

Some of the banking shares were the biggest benefactors of the stunning rally today; on the back of the EU debt Union which has been de facto announced. Seems like the people of Germany are going to pay for the Euro after all and subsidise the PIGS trough.

No prizes for guessing the effect when this gets out.

UK Q1 GDP growth at 0.2%: Treasury fail

Whomever forms the next Government one of their first jobs is going to have to be lining up the Treasury mandarins against the wall and giving them their P45's.

Today's figures for GDP growth are exactly in line with what most independent economists expected.

However, they are far behind what the Government was forecasting. Even the BBC is forced to the old chimera of claiming that the figures will be revised upwards - who is to say they won't come downwards? (Historically the revisions work out about 50-50).

What this shows is how craven the Treasury is tot he wishes of the discredited Labour Party. Clearly the advice for the Budget was fudged to help the Government. This is not the role of the independent Civil Service.

With 0.2% growth there is little chance in the rest of the year of the GDP figures for growth hitting the Treasury predictions - this means more spending on social welfare and lower tax receipts - a double whammy to the budget and national deficits. Remember too the comparatives for this Quarter are still with the dreadful situation of this time last year.

After firing the mandarins it does confirm that a new Government is going to have to announce an emergency budget where they re-work the figures to paint a picture more akin to the truth - and that will be painful for the X-Factor Election voters.

UPDATE: Perfect Darling response to this post. We are all fine and everything is ok, at least our statistics are not dodgy like Greece...no really, he said this!

China passes Japan into 2nd place

This will be the talk of the markets in the far East this week. after over a century of being outshone by Japan. China will emerge as the largest economy in the far east. Not only bigger than Japan but every other country too except the United States.

No doubt there will be more lengthy articles this week focusing on the how much this changes the political and economic balance of the world. My question is though, how can China avoid going the way of Japan?

Japan had so much going for it in the post-war world. A commitment to working hard, saving hard and supporting the Government. Ths made Japan rich. Then the lack of a balanced economy, a banking crisis and demographics caught up with it. Now Japan is stagnant and still seeking renewal after 15 years.

China certainly faces a worse problem with demographics, its one child law (a huge boon to the world as a whole let us not forget, reducing the huge over-population problem the world has) meaning it will get grey quickly in about 5 years time and there are far more ment than women. This greying will reduce China's ability to create domestic consumption and will also ensure the savings rate remains high

As mentioned I the FT article, the need to come off a dollar peg will cause a massive boom for China the likes of which normally end in a financial crisis. This may well be a theme of the next few years.

China will undoubtely overtake the US to become the world's largest economy, it has after all 5x the population. Will its people ever match income with Americans though?

Dubai saved by Abu Dhabi after all

Yes, those friendly UNITED Arab Emirates have decided enough face has been lost and now the process of recovery can begin. Indeed, the whole Middle East took a battering on the markets re the Dubai default.

Now though this damage can be repaired. The Hedgies and traders who bought Middle Eastern bonds will be very pleased with themselves now!

Also, this news should push the markets to have a nice festive end to the year, if not a major bounce.

JJB and Blacks

Two of C&W picks for struggling retailers 2009 award are still struggling; Blacks Leisure and JJB.

Black's has warned that its financial performance will be below market expectations after renegotiating its working capital facility with Lloyds Banking Group for a further 12 months. This leaves them without the resources to re brand the weak Boardwear {surfing} concept stores into the more successful Outdoor {camping}outlets.

JJB have been in the news for a bizarre story that says, according to The Telegraph, Mr Ashley is to issue legal proceedings against JJB after one of its security guards hired for its AGM allegedly ‘tailed’ one of Mr Ashley’s representatives in a dangerous manner on the M61 motorway. More worrying for JJB are these results:

Underlying sales fell by 40.4%, with like-for-like sales down by 26.5%, with the sales fall “almost entirely a result of low stock results”.

Low stock results means empty shops. A large restocking exercise will further erode profits. 26.5% down isn't too catastrophic if, as it seems, they have been selling last years stocks.
But it must improve in the fourth quarter.
Overall retailers have performed above expectations. Since the Woolies collapse only a few high street names have disappeared.Chain stores cut stock levels very quickly and responded aggressively to the downturn.
In 1991 I remember a major shopping precinct where 25 out of 40 shops were empty. I have not seen anything like that devastation today. Partly because the chains are so much bigger. The bland 'everytown' high street is its own saviour, spreading the risk. Retailers have been able to secure their funding and renegotiate their debts, failure of which seemed the most likely scenario for their collapse back in January. Sadly, the lousy summer will almost certainly show a retail drop, on the back of the early summer's retail rise. But its all 1-2% stuff anyway and not worth worrying about.
If quarter 3 can be level then quarter 4 should show increases in sales.
Remember, the recession really started hitting right about now last year in the US.
Retailers MUST show increases in like-for-likes for Q4. They are facing their softest figures for years.

"The American consumer is 70 percent of this economy, and if the consumer hits a brick wall and stops, then the economy all across the nation will be in serious trouble."
July 2008.

Economic Generals focus on the last war

There is much discussion, see here for example, of whether the FSA or Bank of England get to oversee future financial regulation. Personally, I am getting a bit tired of it all as it is a really typical Government-style piece of bureaucratic infighting.
Worse, it is clouding over the real policy failures that have been made these last few months and also ignoring the real crisis we are seeing now in the Country.

Who cares about a macro-prudential economic panel that may or may not help to avoid another bubble in 50 years time. No sane bank or borrower is going to repeat the mistakes of the past few years having learned their lessons in such a costly manner so recently. Not that we do not need new rules, but the market has enforced them much faster than any regulation can be imposed.


So this hypothetical discussion is of little interest. It also is hiding the true debate which is what on earth we can do to both try and stop doing more quantitative easing whilst not letting the economy completely die? This may be happening in any event, in which case all the bureaucratic political warfare is real deck-chairs-on-the-Titanic-stuff: As with Generals down the ages the orders and weapons put in place for a new army are those needed to fight the last war, not the next one. The next economic period is about the controlling the collapse of the fiat money system as was and the huge inflationary pressures of a 6 billion person, resource-constrained world.

The Bank of England has run out of bullets, the FSA is concerned with minutiae and the Government is busy fighting over its future in opposition. This is not the leadership we would ideally like to see us through the crisis, it is a terrible failure of the UK political system as a whole.

There will be no Bad Bank

This idea is not gonna happen.

A lot of ink is being spilled (or digitally rendered at any rate) over this idea. However the main issues with the bad bank idea, in the US or the UK, are here:

1 - It is very expensive. In the US they are talking $4 trillion. I don't think the bond markets have the appetite for that and neither to taxpayers. Even Magical Obama is not going to get that rammed through Congress.

2 - It will bankrupt all the banks. Yup, rather a key point. Bad bank gives prices to the assets that are currently without valuation. Set too low and then all banks will be bankrupted by mark to market accounting rules. Changing accounting rules is a dumb option of the first order - that would destroy all Western stock markets as all market confidence was removed.

3 - There is the Insurance scheme invented for AIG and Bank of America, also copied by Gordon Brown. This is less effective, but much less costly and allows Banks to remain in private hands. The force of inertia is strong with this one.

So, no doubt you will read many column inches about bad banks etc in the near future and how they are going to save the world or not; don't bother it is a theoretical cul-de-sac.

As I said before, what we really need is a 'bad country' to step up to the plate. Currently best candidates are Japan, UK and US; but I have a hunch a vote in the UN might go against Iran.