Biscuitman

Roger Nightingale’s column from this weeks Investment Adviser:-

The economic news from most parts of the world last week was fairly strong. However, Britain was the exception. Its numbers continued to be disappointing.

Personal consumption was reportedly declining and house prices decreasing.

The problem was that the Monetary Policy Committee, (MPC), had raised interest rates too much last year.

Why it ha done so was not clear. Inflation was not unacceptably high them and it has not been since.

It looks, therefore, as if the MPC chose to deal with an issue, (perhaps house prices or the general level of debt), for which it had no mandate to act.

What the committee did not seem to realise was that in dealing with these considerations it risked sending the economy INTO phpbb_recession.

A house price bubble and a stretched personal sector balance sheet were the corollaries of not having a German-type economy. To eliminate the former was to risk inducing the latter.

So what will the MPC do now?

It is easy; it will reverse policy. It will cut rates and try to re-enthuse the personal sector. Will it be successful? It remains to be seen.

There have been numerous examples of economies which, once they had been cooled, resisted rewarming. Japan demonstrated the phenomenon in the first half of the 90s and Germany in the second half.

How far will interest rates have to be cut? It depends how willing the British public is to return to its’ old spending habits.

If in the meantime it should have become prudent, if rising unemployment should have dampened its’ shopping proclivities, rates might have to be reduced substantially.

Perhaps, therefore, the MPC will start off with a few point cuts and do more if demand does not respond. Unhappily, such judgements are not easily made; lags between cause and effect are often quite extensive. Action taken in one period has its impact about 9 or 12 months later.

Is there a message here for Alan Greenspan? Is the FED, (the US central bank), repeating the B-of-E errors?

Might the US economy, seemingly unaffected by the interest rate increases so far, suddenly subside in the early part of 2006? Possibly. It’s a risk the markets and politicians are not paying much attention to it.

For Bush and Blair, there are other risks; Iraq, most obviously. Developments there are going from bad to worse and the resentment among Muslim communities to which the invasion gave rise, is not diminishing. We may have to contend with a generation or more of smouldering discontent, interspersed with occasional and unpredictable conflagrations.

The price we will have to pay is not going to be low. Already the cost of extra policing is rising steeply. Mayor Ken Livingstone, (once a political liberal, now a political martinet), is preparing to levy a supplemental charge for secutity and the Home Office is pressing ahead with plans for ID cards.

The same people who made such a mess of passports and income support are to be given their head to spend countless billions on a system that criminals and terrorists will have no difficulty in circumventing.

The costs do not stop there. In a recent international survey of public attitudes, (which may or may not be reliable), the government and the people of Britain and America, (the latter especially), were condemned for arrogance and hypocrisy.

If those attitudes, supposing they exist, should begin to affect consumer and business preferences, it is possible that the economic cost of the events of 2003 will turn out to be huge.

Happily, neither Bush nor Blair is going to serve another political term. Both will shortly retire to the speaking circuit and the enjoyment of their cash piles. It will be for others to clear up the mess and bear the burden.
There is good news though. The securities markets are enjoying a good run. Indications of generally better international economic trends, (activity that is brisk bt not excessive), coupled with relatively easy money and mostly excellent corporate profits are lifting valuations.

The equity indicies have risen encouragingly in recent weeks, and, in doing so, have lessened the extent of pension shortfalls. Another few years of such circumstances, and the retirement age will not have to rise over 70.

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IF THE EU WAS THE ANSWER, IT MUST HAVE BEEN A STUPID QUESTION!