Category Archives: Debt

How Britain Returned to Growth

What could a Brit know ???

As the U.S. and Britain recover from the Great Recession, the question being asked of advanced economies like ours is this: Do we now face secular stagnation and long-term decline, so that it simply won’t be possible to promise the next generation better lives than our own?

Having met with policy makers and business leaders in the U.S. over the past few days, my answer is an emphatic no. Britain, the U.S. and others in the West do not have to accept defeat in the global race and resign ourselves to eroding living standards. The way to avoid this fate is to acknowledge two premises about the modern economy—and then take the necessary actions to surmount our nations’ economic problems.

First, we are not going to get richer by borrowing more from others in the world just so that we can buy the things they make. We have to earn our own way in the world, by making our countries attractive to overseas investment, better educating our workforces, and providing a climate in which our businesses are able to produce goods and services of sufficient quality that the rest of the world wants to buy them.

Second, our governments have to live within their means, and not pile up deficits and debts that will burden future generations with the taxes to pay for them. We have to reduce entitlements and drive value for money through government, so we can focus public spending on areas likely to enhance our productivity.

In Britain, we have been pursuing a long-term economic plan that seeks to achieve these two goals. The evidence is that our plan is working, although the job is not done.

When the coalition government came to power 3½ years ago, the United Kingdom’s deficit was forecast to be higher than any other country in the G-20. The International Monetary Fund estimates that the government has since achieved a 4.4% reduction in the structural deficit over three years, larger than any other major advanced economy. We’ve done it with a balanced program: 80% of the consolidation will come from cutting spending and welfare, and 20% from raising mainly sales taxes. The richest have paid the most. Yet we’ve protected key budgets, like science and schools, and increased planned infrastructure spending to invest in our country’s long-term economic success.

Some said that deficit reduction and economic growth were incompatible, predicting major job losses and another recession. Those predictions were wrong. The lingering damage wrought by the crash of our financial system, plus the eurozone crisis, dragged down economic growth in 2011 and 2012. But there has been growing economic momentum throughout 2013, with big improvements in credit conditions. As a result, in its latest forecasts the IMF revised up U.K. economic growth to 1.4% this year and 1.9% next year, the biggest upward revision of any G-7 7508.TO +0.27% economy. Jobs are being created at the rate of 60,000 a month, roughly equivalent to 300,000 in the U.S.

That doesn’t mean we can let up. While the deficit is coming down more quickly, stronger economic growth alone cannot be relied upon to solve what is a structural budget deficit. So the government will continue making difficult decisions, from reducing welfare entitlements and increasing the state pension age, to controlling public-sector pay. The aim is to run surpluses in good years to pay down debt. In other words, we’re going to fix the roof when the sun is shining.

We’re also reforming our tax system to make it more competitive, and to make sure that British people keep more of what they earn. The corporate tax rate is being cut to 20% from 28%. The top rate on income has been cut to 45% from 50%, while millions of the poorest won’t have to pay taxes at all. As a result, more international firms are moving their headquarters to Britain, and investment is flowing into our country. At a time when other European countries are thinking of introducing damaging financial-transaction taxes, we’re abolishing some of the ones that already exist. This will strengthen Britain’s reputation as the home of global finance—including new offshore renminbi markets and the first sovereign Islamic bond, or sukuk, issued in a non-Islamic country.

Our two countries have led the way in building a safer financial sector. In the U.S., this has been through the Dodd-Frank Act, and I welcome the new Volcker rule in your country. In the U.K., the Banking Reform Bill, which becomes effective this week, will end “too big to fail.” Both of our countries should also be tearing down trade barriers and opening up to investment from countries such as China. I’ve just been in Beijing to secure Chinese investment in a new generation of British civil nuclear power plants. Many Western nations lack the ambition to build such energy infrastructure, let alone encourage overseas investment in it. Not Britain.

The Transatlantic Trade and Investment Partnership, launched at the G-8 summit in Northern Ireland this summer, provides a huge opportunity to facilitate economic growth. A comprehensive deal to lower trade barriers between the European Union and the U.S. would deliver combined benefits to our economies of some £180 billion ($293.4 billion). That’s equivalent to $865 for the average American household, and $720 in the EU.

Negotiations will be tough, and compromises will be required. But neither the U.S. nor Britain can afford to turn their backs on the jobs and growth this trade agreement will bring. Nor can we afford to let our education systems fail the next generation. Neither country can be afraid to take on vested interests to drive up school standards and expand choice. That’s why in my financial statement last week, I announced that we would send more young people to college, lifting the cap on the number of U.K. students who can go to university.

Mr. Osborne is the United Kingdom’s chancellor of the exchequer.

George Osborne: How Britain Returned to Growth –


Confessions of a Quantitative Easer

Not the final word, but will YOUR totally ignore this guy?
By Andrew Huszar
Nov. 11, 2013 7:00 p.m. ET

I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system’s free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.

The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed’s central motivation was to “affect credit conditions for households and businesses”: to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative “credit easing.”

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed’s trading floor? The job: managing what was at the heart of QE’s bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

This was a dream job, but I hesitated. And it wasn’t just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.

It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

From the trenches, several other Fed managers also began voicing the concern that QE wasn’t working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.

Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.

You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.

That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.

Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.

And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.

Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again “bubble-like.” Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.

Even when acknowledging QE’s shortcomings, Chairman Bernanke argues that some action by the Fed is better than none (a position that his likely successor, Fed Vice Chairwoman Janet Yellen, also embraces). The implication is that the Fed is dutifully compensating for the rest of Washington’s dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street’s new “too big to fail” policy.

Mr. Huszar, a senior fellow at Rutgers Business School, is a former Morgan Stanley managing director. In 2009-10, he managed the Federal Reserve’s $1.25 trillion agency mortgage-backed security purchase program.

Andrew Huszar: Confessions of a Quantitative Easer –


Don’t Abandon the Sequester

Republicans aren’t the dumbest politicians there are, but they’re in the running… Especially if they lose this advantage.
The way the budget showdown is going, Democrats may soon require the Republicans to pay ransom before they’ll allow the GOP to reopen the government and raise the debt ceiling. That’s how badly the party’s Ted Cruz faction has messed up the politics of all this. But we sure hope part of that price won’t be to abandon the budget caps that are the only restraint on President Obama’s spending plans.

Democrats hate the spending caps and sequester because they squeeze their pet domestic programs, and two recent reports illustrate how much. The Congressional Budget Office’s latest monthly update, for the first 11 months of fiscal 2013 through August, shows that total federal outlays are down $127 billion over the same period last year. This means that when the report comes in for the full fiscal year overall federal spending may have fallen two years in a row for the first time since the end of the Korean War.

Meanwhile, the Congressional Research Service has released a new report that shows the sequester caps are providing better fiscal discipline than any budget deal has since 1980. The report looked at nine major deficit reduction deals and concludes: “In nominal (i.e., not adjusted for inflation) terms, the Budget Control Act achieves the greatest amount of deficit reduction of any act since 1980 over five years, based on the estimates produced near the time of enactment where five year totals are available.”

Adjusting for inflation, the report finds that the Budget Control Act’s estimated deficit reduction over five years will be second only to the 1990 George H.W. Bush-George Mitchell deal. The Bill Clinton package of 1993 that liberals love came in third.

Keep in mind that a little less than half of all the deficit reduction in 1993 and about 40% in 1990 came from tax increases. The 2011 Budget Control Act is reducing future deficits through spending cuts alone. This means the current sequester isn’t hurting economic growth by reducing incentives to save and invest.

As for the politics of the sequester, a poll released last week finds that the sequester cuts of roughly 5% across the board (about 8% in defense) have barely been noticed by most Americans. The United Technologies-National Journal poll asked: “Have you seen any impact of these cuts in your community or on you personally since they took place, or not?” Seventy-four percent said they’d seen no impact, while 23% said they had.
The harm that President Obama predicted in January, and that Democrats keep claiming, simply hasn’t appeared. This polling on the sequester is a lot better for Republicans than the blame they’re getting for the shutdown.

It would be better government if Congress could set spending priorities, and defense spending in particular can’t keep falling without harming U.S. security. Many Senate Republicans would like to abandon the sequester to spend more on defense or go back to allocating domestic pork.

But the sequester is the only leverage that Republicans have in any negotiation with President Obama once the debt ceiling is inevitably raised and the partial shutdown ends. If Republicans abandon the sequester now as the price of reopening the government, they will be back at the same old stand of Mr. Obama insisting on another tax increase in return for any entitlement reform. It would turn a political retreat into a policy rout

Review & Outlook: Don’t Abandon the Sequester –


Whither goes France…

My ‘friend’ John Mauldin has a few thoughts on France. Interesting.
Austerity is a Four-Letter French Word
By John Mauldin | Jun 21, 2013

The France that I see as I look out from the bullet train today is far different from the France I see when I survey the economic data. Going from Marseilles to Paris, the countryside is magnificent. The farms are laid out as if by a landscape artist – this is not the hurly-burly no-nonsense look of the Texas landscape. The mountains and forests that we glide through are glorious. It is a weekend of special music all over France, and last night in Marseilles the stages were alive and the crowds out in force. The French people smile and graciously correct my pidgin attempts at speaking French. I have found it diplomatic not to mention that I think France is in for a very difficult future. Why spoil the party?

But for you, gentle reader, I will survey the economic landscape that I see on my computer screen. It shows a far different France from the one outside my window, one that resembles its peripheral southern neighbors far more than its neighbors to the north and east. The picture is not all bad, of course. There is always much to admire and love about France. But there are a lot of hard political choices to be made and much reform to be undertaken if this beautiful country is to remain La Belle France and not become the sick man of Europe. This week, in what I think will be a short letter, we’ll look at a few of the problems facing France.

Yesterday (June 20) the French called a Grand Summit of businesses, unions, and government officials to address the needed reforms to make France more competitive and its national budget more sustainable. Debt and deficits are high and rising as the country rolls into yet another recession in response to President Hollande’s hard left turn last year. One of the key issues is a very controversial plan to reform pensions.

Stratfor Notes:

  • France spends roughly 12.5 percent of its gross domestic product on pensions, more than most almost any other Organization for Economic Co-operation and Development member. (For reference, Germany spends about 11.4 percent of its GDP on pensions, and Japan spends roughly 8.7 percent.)
  • [Note: elsewhere we find that France has a comprehensive social security (sécurité sociale) system covering healthcare, injuries at work, family allowances, unemployment insurance, and old age (pensions), invalidity and death benefits. France spends more on ‘welfare’ than almost any other EU country: over 30 per cent of GDP as a total entitlement cost. As a reference, that would be about $5 trillion in the US.]
  • The fact that an increasingly larger proportion of France’s population qualifies for pensions factors into the debate. In 1975, there were 31 workers paying contributions for every 10 retirees; today, there are 14 workers paying contributions for every 10 retirees. As the baby boomers from the 1950s and 1960s begin to retire in the next decade, the pressure on France’s coffers will grow substantially. The deficit of the French pension system is projected to double between 2010 and 2020, when it will exceed 20 billion euros.
  • It is hard for Americans to understand just how much it costs to support the average French worker (or to be self-employed). From Paris Voice:
  • Total social security revenue is around €200 billion per year and the social security budget is higher than the gross national product (GNP), i.e. social security costs more than the value of what the country produces. Not surprisingly, social security benefits are among the highest in the EU. Total contributions per employee (too around 15 funds) average around 60 per cent of gross pay, some 60 per cent of what is paid by employers (an impediment to hiring staff). The self-employed must pay the full amount (an impediment to self-employment!) However, with the exception of sickness benefits, social security benefits aren’t taxed; indeed they’re deducted from your taxable income. Equally unsurprisingly, the public has been highly resistant to any change that might reduce benefits, while employers are pushing to have their contributions lowered.

And of course, almost the first thing that Monsieur Hollande did when he took office last year was to return the retirement age at which you qualify for a pension back to age 60 from the extremely controversial 62 that his predecessor, Sarkozy, had barely managed to push it to. Sarkozy’s “reforms” were greeted with massive protests, and Hollande used them to engineer a sweeping election victory for the Socialists. (I put “reforms” in quotes because nowhere else would a retirement age of 62 be seen as draconian, nor would the rest of the changes Sarkozy pushed through.)

Hollande faces a whole series of problems. Ambrose Evans-Pritchard notes:

  • The IMF’s Article IV Report on France published before the elections draws up the indictment charges: a state share of GDP above 55pc (or 56pc this year), higher than in Scandinavia, but without Nordic labour flexibility.
  • One of the rich world’s highest life expectancies but earliest retirement ages, a costly mix. Just 39.7pc of those aged 55 to 64 are working, compared with 56.7pc in the UK and 57.7pc in Germany. “French workers spend the longest time in retirement among advanced countries,” [the IMF] said. (the London Telegraph)
  • France has the highest tax and social security burden in the Eurozone and the second lowest annual working time. There has been a sharp rise in unit labor costs, making France even less competitive.

These developments have not gone unnoticed in Germany. A report by one of the conservative political parties there (the FDP) said, “French President Francois Hollande was trifling with reform, scarcely making a dent on the sclerotic labour market. Which is true of course. Hollande was elected in May 2012 on a campaign to preserve the status quo and protect the privileges of the French.” (Ambrose Evans-Pritchard, the Telegraph)

Not helping is the fact that France had a very anemic “recovery” after the Great Recession (never more than 1% a year) and is now back in full recession. Which means that tax revenues will go down, not up, and that deficits will swell.

And things are likely to get even worse. Charles Gave notes that French manufacturing is plummeting, and this has always led to further losses in GDP. The chart below from GaveKal shows the French Business Climate Survey advanced forward 9 months and the highly correlated GDP number, which follows. The IMF is now predicting a 2% annual recession in 2013, which means rising unemployment and very tepid 0.8% growth in 2014, not enough to really spur employment.

You can read a half a dozen reports and analyses of the French predicament, and they will all mention “labor rigidities” as being part of the problem. There is a high minimum wage cost, and it is hard to let employees go in difficult times, which discourages businesses from hiring young, inexperienced workers. New business start-ups, the source of real job growth, have fallen as a result of the relentless assault by the bureaucracy on entrepreneurs, not to mention the impredations of the tax-man. Corporate profit margins are thin in France, and companies are leaving for locales that afford them more-attractive cost options.

Debt servicing costs as a percentage of GDP have plunged in France from 3% in 1995 to 2% (today) even as the total amount of debt has risen four times. Low interest rates can be a thing of beauty if you want to lower costs, but when interest rates rise (and they would with a vengeance in the not too distant future if the ECB were not ready to step in, as the market clearly expects it to do) they can cripple a government already burdened with too large a deficit and unwieldy commitments. But without real reforms, how long will it be before the market sees France as another problem child, like Italy and Spain?

Austerity is a four-letter Anglo-Saxon – or even worse, Teutonic – word in socialist France, yet the market at some point is going to want to see a move toward sustainable budgets. Government bond investors are not philanthropists. They look for the least risk they can find. A realistic assessment will soon be made that France is no longer in the least-risky category.

Compounding Hollande’s problems is a growing disenchantment with the whole European project in France, the putative home of the movement for integration.

No European country is becoming more dispirited and disillusioned faster than France. In just the past year, the public mood has soured dramatically across the board. The French are negative about the economy, with 91% saying it is doing badly, up 10 percentage points since 2012. They are negative about their leadership: 67% think President Francois Hollande is doing a lousy job handling the challenges posed by the economic crisis, a criticism of the president that is 24 points worse than that of his predecessor, Nicolas Sarkozy. The French are also beginning to doubt their commitment to the European project, with 77% believing European economic integration has made things worse for France, an increase of 14 points since last year. And 58% now have a bad impression of the European Union as an institution, up 18 points from 2012. (Tyler Durden, Zero Hedge)

And Stratfor adds:

  • Hollande thus faces a dilemma: He could try to push for comprehensive reforms unilaterally, but that would be incredibly unpopular, at least in the short term. Otherwise, he could try to enact diluted reforms, which would be more palatable for French citizens but ultimately would be ineffective at reducing the costs of the French pension system.

Hollande’s problem is shared by many Western European leaders, who have responded to the ongoing economic crisis by implementing painful reforms in their welfare states. The problem is that countries consider the welfare state one of the defining economic, political and social features of postwar Europe and a symbol of economic prosperity. The French have a long and rich tradition of fighting for their civil and social rights, and the notion of a social contract between rulers and the constituents is a key feature of French politics. For the French – not to mention the Italians, Spanish or Germans – a generous welfare state is an acquired right, a part of the social contract in Europe.

But what one group may see as an acquired right another will see as a tax burden, excessive cost, and unwanted risk. This is not just a French problem, of course. Governments everywhere have promised far more than they can ever deliver. And when a program gets prohibitively expensive, adjustments will be made. It goes without saying that when you cut a promised benefit to people who are already retired or soon will be, they will not be happy.

In July, 2012 Hollande called the first Grand Summit to solve the very same problems that were still facing at the latest one. As there is not yet a true crisis, no imminent cliff to fall over, I doubt that anything of substance will get done. Which means there will be yet another conference in the future as the stress intensifies.

Hollande is now down to a 30% approval rating. True reforms would anger his base, and a lack of them will lead to even lower ratings by the markets. He has no standing within his own party to force a compromise; and as elections draw closer, fewer and fewer within his party will want to be seen in a photo op with him.

France is on its way to becoming the new Greece. In 20 years, the Harvard Business School will do a case study on what not to do when faced with a massive fiscal crisis. France and Hollande will be Exhibit #1…..

I remember (I think it was two years ago about this time) that Herwig hosted another dinner party where Louis’s father, Charles, was in attendance and in rare form. I remember there were 16 people present, all involved in the investment business in one way or another. Charles and I were at the center of the table facing each other, bantering back and forth, with me serving as the straight man for Charles.

It was a gorgeous summer evening and the table was relaxed, with the wine and food matching the magnificence of the weather. We were debating the valuation of the euro, and I asked for a poll of the group as to whether they thought the euro would be higher or lower the next year. The show of hands had 11 voting lower, 7 thinking higher, and one abstention. (Yes, that is 19 votes for 16 people, but there were a number of economists present, who evidently felt compelled to vote in both directions, presumably using different hands, at least.)

I will remember the next moment all my life. I had noticed that Charles did not vote. I asked him about that, and he answered in that authoritative tone of voice that sounds to me exactly like what the voice of God should sound like, punctuating the air with his finger for emphasis, “John, that is an absurd question. The euro will not exist in a year.” I will remind Louis and the table of that moment and ask the same question if Herwig will allow me – and I’ll report back.

I am in the midst of designing a new abode. Since it has been a very long time and I’ve undergone a few personal reinventions since I last owned a home,….

Your planning on seeing a few museums analyst,
John Mauldin

3 unread – mrrossol – Yahoo! Mail.