Friday, December 05, 2008

Eurozone Black Hole Coming Into View

Europe's financial crisis has hardly begun. The loss of $500 billion by Europe's banks into the US Sub-prime fiasco is only the starter as far as the full picture is concerned. Europe's banks have also been shovelling out loans into the hands of dubious borrowers for a decade or more - impecunious third word regimes. Now the downturn has struck, the chickens are finally coming home to roost. The biggest share of third world loans, it should be noted, are held with European banks.

First up, according to a confidential financial paper emanating from Wall Street this week, is good old Ecuador, always a star when debt repayment default is in the air. They are overdue and have two weeks left to make a $1 billion payment before they are officially in default. This could be the trigger which sets off a whole lot of these countries that are barely able to cope, and encourage them to come out into the open and admit en bloc that there are big problems to overcome.

The lending banks are predominantly French, Italian, Austrian and Spanish, and the borrowing countries are predominantly South American and Central European, where the Euro-countries hoped to build 'soft' power.

Once the scale of this next black hole becomes clear, the effects will be to put even more pressure on the splitting eurozone where interest rates in the different euro countries, all supposedly holding exactly the same currency, are diverging, with German Euro rates a full 1% less than those on offer in Italy or Greece.

The story put out by Europeans so far that the financial collapse has its origins in the USA will look very different when it is realised that European banks have created an equally large black hole of non-performing third world debt, all of their own. Maybe the arrogance of the Euro elite desperately trying to sweet talk Britain into joining their collapsing currency will finally be exposed for the tiresome tattle that it is.

The sovereign debt part of the world financial crisis will give many pause for thought about the survivability of the eurozone into the future.

Thursday, December 04, 2008

Labour Pigs Foul The Commons

As the story of Damian Green's arrest unfolds, we see that Brown's Labour Party have given up on any claim to possess civilised standards. The stench is seeping out through every pore of their body. It is not a familiar smell,or one that is associated with political standards in Britain, that sad ruin which is all that is left over from a once glorious past. The aura of former glory has gone. All colour has faded, and passed through grey-scale into a sickening monochrome. Parliament now casts off the sheen of Nazified black.

Outrage over the Metropolitan Police's arrest of Damian Green and the search of his Commons office turned to incredulity yesterday as the Speaker, Michael Martin, explained last week's sequence of events. For it emerged that this unprecedented raid, rightly described by Michael Howard as an "attack" on the ability of an MP to do his job, was unauthorised. The police officers had no warrant and the person responsible for the security of the House of Commons, the Serjeant At Arms Jill Pay, did not ask for one. Instead she signed a consent form allowing the police to trawl through Mr Green's correspondence and computers without, it appears, seeking the advice of anyone who might actually have a clue about what to do.

If Mr Martin wanted to turn Mrs Pay into the scapegoat, he was only partly successful. For his statement also exposed his own shocking negligence. He was told by Mrs Pay last Wednesday "in strictest confidence" that an MP might be arrested, and early the following morning was told both who it was and that a search of his office might take place. Speaker Martin, the "chief officer and highest authority of the House of Commons", then appears to have sat back and allowed events to take their course. According to his own account, he posed no questions and sought no counsel. He says he was not told there was no police warrant. Could that be because he did not ask? Mr Martin has not been tardy in the past in taking expensive legal advice to protect his own position when questions were raised about expenses claimed by his family. Yet when confronted by this assault on the fundamental rights of MPs, he seems to have displayed dumb acquiescence. Mr Martin's position must surely now be untenable.

It was Orwell in Animal Farm who saw how the pigs gradually changed from the oppressed into the oppressor. Labour has made the full transition from the supposed underdogs of British society into its enthusiastic destroyers and oppressors. The smell of raw corruption is overpowering, and can be detected wherever they carry out their slimy acts of repression. They are ripe for electoral slaughter.

Monday, December 01, 2008

Reckless Brown's Financial Mess Will Stun The World

John Redwood Conservative MP for Wokingham and Chairman of the Economic Competitiveness Policy Group is good at sums. He tells us that Prime Minister Brown's spin about how much he is currently borrowing, is a little bit short of the mark. Brown claims GBP 78 billion to be the amount he will be needing to borrow this year. Redwood, however, points out that Brown's this year's borrowing requirement is actually no less than GBP 157 billion. When you take into account that in a recession government spending balloons, and revenues plummet, (at least to the tune of 8% of GDP, in figures approx GBP 120 billion), anyone with an old envelope to scratch figures on would find themselves imagining a potentially vast sum for Britain's PBR next year, however optimistic their assumptions.

Redwood avoids making depressing prognostications, as he doesn't want to be associated with adding to the general level of despair, but here at The Tap, realism is preferred. Once the effect of the recession is taken into account, any estimate for next year's government finances must be looking at GBP 250 billion as the mark for Brown's fiscal shortfall, plus a bit more no doubt.

As yet no one has suggested that this level of borrowing is wrong-headed, or has questioned whether it is achievable, but let's face it. Who from the world's cash-holding countries will be tempted to hold their funds in sterling where the currency is prone to slides, and has no prospect of reaching fiscal stability at all, let alone over the business cycle?

Brown's whole plan depends on foreign lenders being willing to fund him for years to come, and the signs are already there that they ain't buying the story, with demand for British Government Gilt-Edged Stock already tiring (See HERE) The rates of interest on offer on 'Gilts' have recently had to be raised to 1% above LIBOR, and the Bank Of England has had to make embarrassing appeals to buyers about the dependability of the British government since 1694 when gilt-edged sales first started.

The signs of buyer fatigue are already visible at a point when the government has sold GBP 77 billion of stock so far this year but it still needs to sell another GBP 70 billion to fund the current year's deficit. But what if Brown seriously tries to sell GBP 250 billion or more next year?

It seems most unlikely that Brown will have a chance of raising the money he will need, without a bail-out. But how would the IMF raise the money to tide him over, when they have so many other countries also close to the edge?


The problem is not simply the wrong-headedness of the spending programmes already embarked on by Brown over the last eleven years creating his vast client state, costing billions which have to be sucked in taxes out of the productive economy. The problem is that Brown sees further vast state spending as the only way to address the current downturn. His barrel is already empty but he's determined to carve into the woodwork in case he can find any more pork, in the processing permanently wrecking the barrel.

He's like a gambler in a casino who's thrown his inheritance away, but so enjoyed himself that he wants to lose it all over again.

But do Britain and other countries really need to go about setting up these extra state spending programmes? Will this really solve the recession as they hope?

The problem is that the world has fallen under the spell of the likes of Paul Krugman, who has convinced western governments that the best way to stop unemployment rising too much is massive government spending. See Amity Shlaes' column from the Wall Street Journal today The Krugman Recipe For Depression, which offers the opposite opinion.

The truth is that the spend will be followed by tax rises to fund them, which will kill off the economic growth which would have actually created real jobs. And in Britain taxes are already some of the highest in the developed world.

The problem is that governments feel they have to be seen to be doing something. The more they try to intervene, however the longer the downturn will last, and the more damaging it will be.

The current economic correction is taking place after 16 long years of debt-fuelled growth and is well overdue and very necessary. It is not a mistake, but the necessary consequence and response to the accumulated mistakes of regulators and governments over the last 16 years.

Markets will work fast to set growth back in motion if they are allowed to do so, and if people are set free to take advantage of the new scenario of much lower costs, where prices can be set by genuine supply and demand not by excess funds chasing all assets. Businesses should be moving to new products and services which people want, not demanding subsidies to keep them going with the old ones.

Let the GBP fall. Let wages fall, and hours worked fall, along with the prices of nearly all commodities. But in the process let as many businesses as possible survive so they can quietly and quickly rebuild their markets and reinvent themselves. Saddling everyone with long term high taxes is not the way to go as it will lock Britain into depression for years. If taxes and spending are kept to a minimum, business and entrepreneurship will see great opportunity in the slump, and start building the ladder out of the pit by themselves unaided.

A sharp downturn which pushes all business operating costs to the floor would in months bring forward green shoots of recovery, and the temporarily unemployed could find a few places hiring again, rebuilding confidence. Unfortunately Britain has a Prime Minister who has already spent his time in power hampering business and driving businessmen to quit.

He will now be doing the same thing but even faster, as his own finances spiral into greater and greater crisis, and he sees tax rises as the only way to fund his last few desperate throws of the dice. Who will see it as a worthwhile exercise to build a business creating jobs just to pay Brown's high rate income tax and his ramped up National Insurance? When Bloomberg called him the Sub-prime Minister of a Sub-Prime economy, there were perfectly correct, but that was before he set about his latest descent into fiscal hell.

Brown is the cause of our troubles and he is now fast becoming the prime barrier to our recovery. But the voters who backed Blair, Brown and New Labour cannot complain. They are getting exactly what they chose - high taxes, high unemployment, low growth and an end to business confidence. But be prepared for the scale of the mess being beyond anything that you can imagine, and the bottomless chasm in Brown's finances being in multiple hundreds of billions of Pounds. The smash will be spectacular when it finally hits home. Brown's mess, unable to be hidden from view any longer, will stun the world.

See John Redwood's figures HERE.

PICTURED - The blog banner from John Redwood's Diary where he revealed the true borrowing figures, correcting Brown's 'spin'. And the complete post here -

I have been reading the Sunday papers about the economy and wonder why I bother to. Several of them rightly condemn the government for borrowing too much, but they all use Ministers’ own figures in the press releases and budget statement rather than reading the much larger and doubtless more accurate figures they had to put out in the small print of the budget book.

They tell us brrowing will reach 8% of National Income next year. Wakey,Wakey. The PBR book shows the government is already borrowing more than 10% of National Income this year. You can’t leave out all the borrowing to buy banks and bank shares, as the Chancellor did in his misleading presentation. The Chancellor said he would borrow a large £78 billion this year. His supporting book says it will be an eye watering £157 billion. Why can’t journalists report these simple and worrying facts?

If Economics editors and Business leader writers can’t be bothered to read the detailed 200 plus pages of the PBR they could at least read this website to avoid these howlers. They should know by now you cannot trust Ministerial figures.