First Drafts
Economy
Tom Streithorst —
4th March 2010
Not good foundations for economies
Here in the depths of the bust, it is tempting to feel nostalgia for the boom. Let’s not. The bust has been brutal but the boom wasn’t so great either. The British economy actually grew more in 1979, the year of the “winter of discontent,” than it did in 2006 at the height of the bubble. Most of the western economies did better in the late, unlamented 1970s than they ever have since.
For the past 30 years, the world’s engine of growth has been debt-fuelled consumption financed by asset price bubbles. Growth has been sketchy, financial crises common, inequality rampant. Last week I wrote about the fragility of borrowing and spending as an economic strategy and suggested it might be time for our policymakers to find a better one, by taking a look at what worked during the golden age, 1950-1973, the greatest period of growth the world has ever seen.
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Alasdair Roberts —
3rd March 2010
The gold rush: welcome relief for a debt-ridden US economy
As the Eurozone contemplates the possibility of Greek default, American pundits are boasting about US federalism. American states, they say, would never allow the fiscal irresponsibility that plagues Eurozone countries. And when states do lapse, the country’s leaders do a better job of putting accounts back in order.
These pundits ought to know their history. In fact, the US has experienced a very similar crisis, in which one third of state governments defaulted. That crisis only ended after years of wrenching political change.
The trigger was the collapse of a land boom. In the 1830s, Europeans invested on a huge scale in US cotton plantations, banks, canals and railroads. Many state governments served as conduits by borrowing abroad and investing directly in banks and public works. Policymakers stoked the boom with reckless monetary and banking policies.
In 1837, the bubble burst. Banks collapsed, tax revenues evaporated, and improvement projects became white elephants. The first states to renege on their debts were Michigan and Indiana, which defaulted in July 1841. Others—Arkansas, Florida, Illinois, Louisiana, Maryland, Mississippi, and Pennsylvania—soon followed. The federal government refused to bail any of them out.
Damage to the country’s credibility was profound. “The eyes of all capitalists are averted from the United States,” wrote the English clergyman Sydney Smith in 1843. “Great and high-minded merchants loathe the name of America.” When the US government itself attempted to borrow, Europeans gave it the cold shoulder. “You may tell your government,” James de Rothschild told US agents, “that you have seen the man who is at the head of finances of Europe, and that he has told you that you cannot borrow a dollar.”
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Tom Streithorst —
26th February 2010
Bernanke: the sputtering recovery means interest rates will remain low for “an extended period”
The economy was supposed to bound out of a deep recession like a tiger: hungry, with spring in its step, full of pent up demand. But this one looks more like a sickly kitten, its weakness palpable to the men in charge of fixing it. On Wednesday Ben Bernanke told Congress that the sputtering recovery requires interest rates to remain low for “an extended period.” And on Tuesday, Mervyn King told MPs that “the health of the global economy” might require a return to the £200bn emergency quantitative easing programme.
It’s a tough time to be a central banker. Right now, as Bernanke and King admit, the only thing holding up a sputtering world economy is the laxest monetary policy in human memory combined with wartime levels of government deficit. Without these policies, the economy would collapse back into recession, if not depression. Imagine if interest rates were at normal levels. House prices wouldn’t be stabilising, they would be going through the floor. Lower interest payments are invaluable in stoking demand by providing households and business more disposable income. If rates went up, spending would inevitably go down. Also, low interest rates force asset prices higher. Market participants know any rate hike would crush share prices. We are lucky Bernanke plans to keep rates low.
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Tom Streithorst —
19th February 2010
Spend, spend, spend: in this climate, you can't have too much of a good thing
Britain, along with much of the western world, has (barely) managed to crawl its way out of recession. That it has done so is mostly thanks to unprecedented and, I dare say heroic, government easing. For two years, monetary policy has been spectacularly loose, with interest rates close to zero, and fiscal policy has been hugely expansive, with deficits more than doubling. Finance ministers haven’t had much choice. With the private sector deleveraging, households and businesses saving instead of spending, the government has had to step in order to maintain demand. Imagine what a mess we would be in today with interest rates at normal levels and without massive deficit spending. Unemployment would be through the roof. But all this government expenditure, combined with lower tax revenues, has pushed deficits to almost wartime levels. The question is: will bond markets continue to shrug off what some see as unsustainable budget deficits?
Economists are fighting a civil war over what is more frightening: government deficits or their eradication. We should all pay attention, because the consequences of either side winning could be brutal.
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Elizabeth Kirkwood —
10th February 2010
Public spending: what should get the chop?
Of all the things that the modern British state provides, what could we do without? Britain has to cut state spending, and while we might argue about how much and how soon, there is no question that it will have to come down.
To this end, we’re inviting our readers to suggest how they would go about cutting Britain’s £655bn state spending by 15 per cent. We are looking for a range of answers—from serious and practical to imaginative and amusing—and if they are inventive and original enough we’ll publish them in the magazine.
Post your suggestions in no more than 200 words below, or if you feel you can be really frugal with your pitch why not tweet us your ideas: @prospect_uk
Tom Streithorst —
10th February 2010
Banks all over Europe hold Greek debt
The euro, which has been falling for months, rallied yesterday as markets grew slightly more confident that Germany would bail out Greece. For years, the strong economies of Europe have insisted that no matter what, they were not responsible for the debts of other eurozone nations. However, this policy may be changing.
Is Greece Europe’s Fannie Mae? The US corporation, put into government conservatorship in the dark days of September 2008, flourished for years because of an implicit guarantee from the federal government. Markets took the guarantee seriously, allowing Fannie to borrow at preferential rates, only a few basis points over comparable treasury bills. Shareholders and management made out like bandits, exploiting their huge funding advantage over other financial companies. Even as Fannie became dangerously overleveraged, markets shrugged off the risk. They knew Uncle would come to the rescue should anything go wrong. Read more »
CityBoy —
27th January 2010
Goldman Sachs: everyone in the top 20 per cent
So Goldman Sachs are the first out of the traps to make it clear just how sorry they are for making so much darned money.
Partners at the firm have announced that they are rationing themselves to a meagre £1m bonus package each in a move which, I suspect, will be repeated across the financial sector as businesses aim to appease an angry electorate and increasingly belligerent political class.
While this will certainly leave their swollen pockets looking rather like a windsock on an eerily calm day, what is most interesting about this latest round of public self-flagellation is who it will not impact. If you guessed those very same traders who got everyone into the mess in the first place then give yourself a pat on the back.
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Tom Streithorst —
20th January 2010
Rio's Dona Marta favela has benefitted from a greater police presence
House prices in the Dona Marta favela overlooking Botafogo beach in Rio de Janiero have quadrupled in the past year. Part of the reason is Brazil’s booming economy, probably more is President Lula’s policy of Bolsa Familia (providing a cash safety net of cash to the poorest Brazilians) but mostly it is because Dona Marta was the first in a pilot programme to take back the favelas from the drug dealers.
For years, drug lords have ruled Rio’s hillside favelas. Large swaths of the city were free from government control. The police might stage a raid from time to time, but after a bit of bang bang, they would retreat back to their secure police stations, leaving the favelas to the gangs. It seemed the natural order of things, inevitable unchangeable. Perhaps the police could control the asphalt below, but the gangs would always rule the hillsides.
That seems to be changing. A year ago, the State Police of Rio de Janiero had a new idea. Instead of showy and ineffective raids, now they grab some land in the middle of a favela, use it to establish a police station and staff it with rookie police officers just out of the academy—officers new to the force and thus not implicated in its culture of corruption. Today, the police regularly patrol these favelas, both day and night. Consequently, crime has gone down and house prices have gone up.
If this strategy sounds familiar it is because it is pretty much what General Petraeus did in Iraq in 2007. For the first few years after the invasion, the US army would stage raids, use its massive firepower to kill or capture “bad guys”, and then go home to sleep on their large and secure bases. Petraeus’s insight was that control of an area required “boots on the ground”, that a raid followed by withdrawal did nothing but confirm the insurgents’ day-to-day domination of the neighbourhood.
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John Naish —
8th January 2010
Last year's most pointless gadget
Fancy buying a portable urinal that’s shaped like a golf club? Or maybe you’d prefer a motorised ice-cream cone? Well, someone surely wants them. Such prime examples of human ingenuity have inspired the launch of the 2010 Landfill Prize, the award for Britain’s most useless consumer product.
The golf-club urinal is an early nomination for this year’s award. It’s basically a hollow plastic tube that’s been made to look like a club. The idea is that golfers can wee into it while playing a round. What’s wrong with the time-honoured practice of nipping behind a tree?
The motorised ice-cream cone won last year’s prize for the most gimmick-laden, pointless junk anyone had seen in the previous 12 months. This battery-driven plastic cone whizzes around so that all you have to do is hold your tongue out and apply face to gadget. Bingo—no more dull wrist-twirling, but probably a lot of ice cream down your front.
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Tomas Hirst —
4th January 2010
Russian swagger: turning off the pipes
News that Russia has suspended oil shipments to Belarus should give the rest of Europe cause for concern. It shows that more than ever before the country is willing to use its commodities leverage to ensure cooperation, even of its allies.
The collapse of commodities prices in July 2008 illustrated the true vulnerability of the Russian economic growth story: in the second half of 2008 the price of crude oil fell from almost $150 a barrel to under $33 a barrel, forcing the government to take a huge chunk out of its currency reserves to stave off a rouble collapse.
While the fall was almost catastrophic, it appears to have done little to dampen Russia’s swagger, which is riding comfortably once more following the sharp snapback of commodities prices. Like the gas dispute between Russia and the Ukraine in January 2009, Belarus is a further example of the negotiating technique employed by the Putin government—a stark warning that the country is once again willing to rile friend and foe alike to achieve its goals.
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