ECONOMIC ANALYSIS: Lots of brave faces, but no brave ideas.

The global economic stalemate cries out for fresh ideas

Portuguese leader Jose Socrates made the least surprising announcement of the year to date yesterday, when he proclaimed his country to be broke, and in need of an EU bailout. The move was hailed by Eurocrat economics chief Olli Rehn as “a responsible move by the Portuguese government”. José Manuel Barroso (one of the many people in the EU with the title President) said he was “confident that Portugal can overcome its present difficulties”.

Here in Britain, the 1.2% plunge in manufacturing output in February was the biggest fall since mid-2009, roughly the time when Alistair Darling first started using the R word. Even the lure of new number plates failed to start a surge in new car sales, and there was a 7.9% drop on the March 2010 figure, the Society of Motor Manufacturers and Traders (SMMT) said. This is the first true comparison between a traditionally ‘high’ month with and without the scrappage scheme, but also the ninth month in a row that sales have fallen. Unperturbed, SMMT chief executive Paul Everitt said yesterday that “The March 2011 figures demonstrate sustained demand in what is traditionally the biggest month of the year.” He has to say something.

In the US, the White House (having reached its Constitutional ceiling of $13 trillion of debt) failed to agree new cuts in spending with the Congress, and so as of tomorrow there will be no American Government at all. Among many other ramifications of this is that it will be illegal for federal workers to use government- issued BlackBerry devices. Technically, this includes the President, but late last night (EST) Barack Obama said he was “absolutely confident that we can get this job done”.

As part of the effort to cap costs and cool inflation in the world’s second-largest economy, China raised petrol prices by 5.8%. While this action confirms that economics is not an exact science, in fact the idea is that people will drive less, and thus distribute less and spend less – so helping to cool the way-overheated economy. The previous day Beijing had raised interest rates another 25 base points. The rate there now is 3.25% – close to the rate at which, if it pertained in the USA, one third of Federal tax income would go to servicing the American national debt. As it is, a cheaper Dollar is the most likely result, thus helping US exports and deflating its overseas debt. Influential adviser to China Bank Xia Bin smiled while pointing out that “interest rates here are still negative really, so we have leeway for further rises”.

As crude oil prices soared to over $112 a barrel, one in five energy traders polled by Reuters said they expected oil to hit $150 by the end of 2011. But they don’t actually know, so this is nothing to worry about: only three weeks ago, the US Department of Energy forecast $108 a barrel by 2020….and they could still be right.

Several economists in the US went on various news programmes last night to say that this would probably trigger a recession, further proof that the experts in this field still can’t tell the difference between a real recovery and one costing $300 billion a month of Bernanke money just to get started. Yesterday The Slog revealed how oil producers are doing their bit for the economy by making five times the profit of any other sector during 2010, and several newspapers reported that the oil price-spike has wiped out George Osborne’s 1p cut in fuel duty. But Energy Secretary Chris Huhne said that rising oil prices “make low carbon policies cost customers less than sticking with fossil fuels”.

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Meanwhile, other people at the sharp end of the coal face on the ground with their backs against the wall between a rock and a hard place took a more sanguine view. Alan Clarke, chief economist at BNP Paribas, said the UK production output data were “bitterly disappointing”. In Asia last night, gold hit a new high of $1455, and US website Seeking Alpha declared that ‘In a world of debased currencies, gold will protect your savings; and (2) the stock of gold represents a very small percentage of global financial assets, therefore its price will be extremely sensitive to small increases in demand’. To the debased currencies point I would add stagnant economies alongside huge central government expenditure. I would also add ‘Jean-Claude Trichet’.

The problem with the EU’s Central Bank (ECB) President is that he warns, then he hints, and then he retreats. He also tells lies a lot of the time. So as of several months ago, very few executives involved in European debt and currency trading listen to anything he says. Thus, when yesterday he said the widely-hinted rate increases are “certainly not the start of a series”, everyone took it to mean the opposite. “We’re definitely at the beginning of a rate-increase cycle,” said Christoph Kind, head of asset allocation at Frankfurt Trust. “It’s unlikely that they would raise interest rates once as a gesture,” said Andrew Balls  of PIMCO Europe, “They want to continue on a path of interest-rate hikes. We’re going to have to wait and judge the impact, particularly on the weaker peripheral countries.”

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When people ask me why I am so critical of the current model of capitalism, I write pieces like this. It’s an easy way to  point out all the obviously silly, pointless, and at times downright surreal results of accepting bonkers premises like globalism, Friedmanite markets, a bloated financial derivatives sector, and ‘trickle-down wealth’. Specifically in the snapshot above, an EU group that’s falling apart will have a stronger currency this afternoon following Trichet’s rate rise announcement at lunchtime. Both the British and American governments, by contrast, will have reduced their debts by not doing so, and thus be in a ‘better’ position – even though high wages, too much credit, and overdependence on financial services means they are both, effectively, flat broke.

On the other side of the world, China is raising petrol prices to stop prices rising, and the price of a self-adornment metal remains by far the most popular safe haven in the light of the obvious chaos cascading across the world.

The key point to take away here is unreal prices. In a healthy situation of normal global trade and economic advance, prices should reflect something tangible about the item on sale. But derivatives are massively overpriced, the world’s bourses are far too high for the economic outlook we face, the Yuan is far too low given China’s export success, the euro is hugely overvalued given the parlous state of its guarantors and their banks, Australian house prices are at a height beyond insane, the price of oil is way too high for the global economic activity levels, UK house prices remain 30% higher than is realistic, we are approaching $1500 an ounce for a shiny metal of little purpose outside dentistry, and interest rates almost everywhere are at a level so abnormally low, the vital process of social saving simply cannot take place for most citizens. (Even worse, the weaning of banks and governments off this is going to be horrendously painful).

The most important problem with our existing capitalist model is that all values are based on speculation, directionalising, and government massages – not the real economic strengths and weaknesses of the players.

The whole thing is so ironic, it almost physically hurts to watch what’s going on. Almost everything to do with economics and fiscal issues today is the result of a fix. Quantitative easing, Chinese currency manipulation, eurozone bond prices, car scrappage schemes, bank bailouts, and falling real wages for most people alongside seven-figure bonuses for people doing something nobody can understand or measure.

This is free market economics in action? I think not: it’s the cobbled together, piecemeal rescue job for what Friedmanite economic ideas produced when allowed their day in the sun – third degree burns for almost everyone. I’m indebted to the entirely sane blogger David Blackie for pointing me at an article in the latest Vanity Fair by Joe Stiglitz. Mr Stiglitz is loathed by the American Right for his habit of pointing out the dafter bits of Milt Friedman’s economic extremism; and after writing his latest Vanity Fair piece, the sheer weight and virulence of angry denunciation heaped upon his follically challenged head by the nutters has to be read to be believed. But the piece itself has to be read because – whether Stiglitz is old fashioned Big State or not – his article is crammed with commonsense. Here’s the extract that spells it out for me:

‘Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

Growing inequality is the flip side of something else: shrinking opportunity. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had.’

Almost all of these observations would apply equally to the UK. Take a look at that final para in particular, and you have a pen portrait of almost every banker, CEO, financial commentator, politician, media anchorperson and civil servant across the Western world.

The Establishment tribes continue to insist either that Socialism is the answer because people are thick and greedy, or free market purity is the answer because it is the only way to preserve liberty. Bollocks. People have been made more greedy by the welfare dependency ideas of the Left, and the plutocrats on the Right have taken liberties rather than extended them.

We can solve this without either Big State or the drift into ancien regime thinking. We can do it by recognising that we have a piece missing in the jigsaw of social anthropology: mutuality. It is an idea whose time has come. And this explains why it is being ignored by the people in charge. They offer us only brave faces. What most of us would prefer is brave ideas.

Follow The Slog’s ideas on a bigger mutual sector at the MUTUALITY page on this site.