Opinion

Anatole Kaletsky

Who will get credit for Britain’s economic turnaround?

Anatole Kaletsky
Jul 5, 2013 17:38 UTC

Mark Carney, the former head of the Bank of Canada who has just taken over as governor of the Bank of England, presided Thursday over his first monthly meeting of Britain’s Monetary Policy Committee (MPC). The meeting produced no change in monetary policy, yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the greatest compliment that any middle-aged white male could wish for, when it compared his appearance and hairstyle to George Clooney’s. Carney may continue basking in this adulation because he is lucky enough to be in the right place at the right time.

He has arrived at the BoE at the precise moment when the economic figures have started to suggest that the British economy is pulling out of its longest and deepest recession on record. One of the main reasons for this turnaround has been a sudden pickup in housing prices and mortgage lending, the traditional driving forces of the British economy. This improvement, in turn, has reflected a bold new government-backed borrowing program, whereby the British Treasury is guaranteeing up to £600,000 of new mortgage debt for anyone who can put up 5 percent of equity into buying a home. While this audacious policy attracted surprisingly little attention in the media when George Osborne announced it in his March budget, British homeowners and bankers were quick to catch on. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and homebuilders’ shares have almost doubled. And all this is before the government incentives are expanded from newly-built houses to secondhand properties and remortgages in January 2014. For the moment, house prices are being bid up by cash-rich buyers who are front-running the government subsidies, in the confident expectation that a full-scale property boom will begin in 2014.

Given the powerful response to the government’s mortgage subsidies, the additional quantitative easing that was widely expected from Mark Carney’s “monetary activism” may no longer be required. It may be enough for the BoE to provide commercial banks with liquidity to finance the government’s planned credit expansion and to keep short-term rates near zero. Instead of trying to persuade the hawks on the MPC who repeatedly thwarted his predecessor Mervyn King’s requests for more QE, Carney may succeed in reviving the British economy simply by making a few speeches — the “forward guidance” he used in Canada to convince investors that interest rates would stay near zero for several years ahead.

But what will the impact be on the British economy if Carney and Osborne manage to generate a property and mortgage boom? Refloating the economy on a wave of property appreciation and mortgage borrowing would return Britain to the debt-driven, consumer-led growth of the pre-Lehman period. It would mean abandoning the “structural rebalancing” from consumption and services to exports and manufacturing that Mervyn King believed was essential to Britain’s economic rehabilitation. But King’s views are no longer relevant — and his record of economic management suggests that a degree of skepticism about his analysis may be in order.

Britain’s economic history suggests that the conventional wisdom about the benefits of rebalancing from services to manufacturing may simply be wrong. In the five years of attempted rebalancing since the financial crisis started in 2008, Britain’s economic performance has been abysmal. GDP has lagged behind every G7 country apart from Italy. GDP per capita, the broadest measure of living standards and productivity, has done even worse, falling by 6.7 percent from its 2008 peak, with no evidence of recovery since 2010. The industrial production record has been just as bad. Despite the official efforts to promote manufacturing and the big devaluation of the pound after 2008, industrial production has been even weaker in Britain than in France — down by 13.6 percent since its peak in May 2007, compared with 13.5 percent in France.

Are markets making another blunder?

Anatole Kaletsky
Jun 20, 2013 14:50 UTC

In the four weeks since Ben Bernanke first mentioned that the Federal Reserve Board might start to taper its program of quantitative easing (QE) later this year, more than $2 trillion was wiped off the value of global stock markets — and probably far more from the value of global bonds, which is harder to estimate.

On Wednesday Bernanke spent almost an hour answering press questions to try to clarify the Fed’s policy on interest rates and QE. The result was a further steep fall in equity and bond prices around the world. Does this mean that Bernanke did not really want to signal to, and pacify, financial markets and was trying, instead, to prepare investors for higher interest rates and tougher times ahead? Or is it possible that the market has simply misunderstood his comments, both at Wednesday’s press conference and in his statement on May 22?

I have argued repeatedly in this column for the last interpretation — that tapering would not begin before the end of this year and that financial markets have misinterpreted the Fed’s intentions, partly for reasons connected with the vested interests of analysts and traders, whose livelihoods depend on convincing the world that economic policy is highly volatile and uncertain. If monetary policy were predictable and stable, which is essentially what Bernanke has promised, then the status and salaries of Fed-watchers in Washington would be hard to justify and the profits of short-term macroeconomic speculators would disappear. But maybe this view was simply wrong.

When illogical policy seems to work

Anatole Kaletsky
Jun 13, 2013 15:23 UTC

It’s cynical, manipulative and hypocritical – and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy?  Not often enough.

The media and a surprisingly high proportion of business leaders, financiers and economic analysts seem to believe that policies which are dishonest, intellectually inconsistent or obviously self-interested in their motivation are ipso facto doomed to fail or to damage the public interest. But this is manifestly untrue. The effectiveness of public policies and their ultimate desirability is in practice judged not by their motivations, but by their results.

Which brings me to the real subject of this column: the improving outlook for the world economy and why many economists and financiers cannot bring themselves to acknowledge it. Let me begin with a striking example anticipated in this column back in March: the boom in house prices and debt-financed consumption that the British government is pumping up in preparation for the general election in May 2015.

What’s behind the spooked stock market?

Anatole Kaletsky
May 30, 2013 16:14 UTC

Strange things have been happening in the world economy and financial markets this week. While that sentence could be written almost any time in the past five years, since the outbreak of the global financial crisis, the strangeness this week has taken a particular form that reveals more than it confuses.

Almost all the economic news recently has been favorable, or at least better than expected. U.S. home values have risen more than at any time since 2006, job losses are down and consumer confidence has been restored to pre-crisis levels. Japan has enjoyed its fastest growth in years, with evidence mounting of stronger consumption and rising wages. Even in Europe, the outlook appears to be improving as policy shifts away from austerity and toward growth, with the European Commission no longer pressing governments to hit their deficit targets. Meanwhile, the European Central Bank hints at the possibility of negative interest rates and other extraordinary stimulus measures. But financial markets have reacted to all this good news by becoming more volatile – panicky, even – than at any time this year.

Although the U.S. stock market briefly hit a record high on Tuesday, prices quickly slumped. Meanwhile, Japanese shares have suffered their steepest fall since the 2011 tsunami. Most importantly, bond markets have collapsed the world over, pushing long-term interest rates in the United States, Japan and much of Europe to their highest levels in more than a year.

The many interpretations of Ben Bernanke

Anatole Kaletsky
May 23, 2013 16:05 UTC

Federal Reserve Board Chairman Ben Bernanke testifies before Congress in Washington, May 22, 2013. REUTERS/Gary Camero

On Wednesday in Washington, Federal Reserve Chairman Ben Bernanke presented congressional testimony that repeated, virtually word for word, statements about U.S. monetary policy he has been making since last September.

The Federal Reserve, Bernanke said, would continue buying $85 billion of bonds monthly until it was confident of reducing unemployment to 6.5 percent. The scale of these purchases might be increased or diminished – but only if and when such shifts were warranted by economic statistics. Now, he said, there is no case for a change in either direction.

The radical force of ‘Abenomics’

Anatole Kaletsky
May 17, 2013 04:35 UTC

Japan’s Prime Minister Shinzo Abe in the cockpit of T-4 training jet at the Japan Air Self-Defense Force base in Higashimatsushima, Miyagi prefecture, May 12, 2013. REUTERS/Kyodo

‘The 3.5 percent gross domestic product growth announced by Tokyo Wednesday suggests that Japan may be the fastest-growing economy in the G7. Since the Tokyo stock market hit bottom exactly six months ago, the Nikkei share index has soared almost 80 percent. Meanwhile, the yen has experienced its biggest six-month move against the dollar. All these events appear linked to the election of Shinzo Abe and the regime he has installed at the Bank of Japan.

Even after 20 years of stagnation, Japan remains the world’s third-largest economy, with a 2012 GDP of $6 trillion, equal to France, Italy and Spain combined. Financiers, business leaders and economists everywhere are starting to ask the obvious question: Is Japan finally taking the truly radical action required to fix its economy and end its “lost decades”?

Has a new long-term bull market begun?

Anatole Kaletsky
May 9, 2013 16:06 UTC

Two months ago, when Wall Street first approached a record high, I warned about the dangers of “stock market vertigo” – a condition that combines the fear of buying shares at unsustainably high prices with the equal dread of not buying shares at prices that will never again be on offer if the market soars to permanently higher levels.

At that time the world’s most closely followed index, the Standard and Poor’s 500, was still bouncing along the top of a trading range that had held since the bursting of the Internet bubble in March 2000. There was no way to know whether the market’s next big move would be a plunge back toward the middle of this 13-year range or a rise to new and significantly higher records. On one hand, improvements in the U.S. economic outlook and political situation at the end of last year suggested that a breakout was more likely than the last time the index came close to its 2000 peak ‑ in late 2007, when the subprime mortgage crisis was just starting and George W. Bush was still president. On the other hand, the European crisis looked as bad as ever, China seemed to be slowing, corporate profits were stalling and investors were well aware of the huge losses suffered by people who got sucked into the market when it hit similar levels in 2000 and 2007. There was no sure way to resolve this dilemma two months ago, and there still isn’t, since prices in financial markets are always balanced, by definition, between bullish and bearish expectations that are roughly equal in plausibility.

But the market’s behavior sometimes suggests an answer – and this week appears to present such a case. In the week since last Friday, when the United States reported much stronger than expected employment growth, the S&P 500 has moved more than 4 percent above the 13-year trading range defined by the 2000 and 2007 highs. This breakout has been confirmed by the Dow Jones industrial average and by broader Wall Street indexes, such as the Wilshire 5000 and the S&P equal-weighted index. And while share prices in most other countries are still far below their 2000 and 2007 levels, the Tokyo stock market has taken off like a rocket and Germany’s DAX has matched Wall Street’s ascent.

Renewed optimism can be a double-edged sword

Anatole Kaletsky
May 2, 2013 15:22 UTC

This is a critical week for the world economy and financial markets, especially in the United States. Friday’s U.S. employment report will signal either a renewal of the economic recovery or, much more likely, will confirm that the economy is sinking into another seasonal “soft patch” for the fourth time in four years. Despite this risk, stock prices on Wall Street are at record highs, suggesting that equity investors see this slowdown as nothing more than a temporary obstruction on the way to a sustained recovery, just as in the summers of 2010, 2011 and 2012. So should we prepare for more anxiety about a double-dip recession, or can we feel confident that this summer will be followed by an autumn of strong recovery, as in the past four years?

I had an excellent vantage point this week from which to assess this question: the global conference of the Milken Institute in California, which brings together 1,000 business executives, politicians and financiers in a U.S. equivalent of the Davos economic forum, transplanted to the warmer and even plusher surroundings of Beverly Hills. Clearly, there was anxiety about the flagging recovery and the self-inflected damage caused by January’s payroll tax hike and the unplanned cuts to public spending caused by the sequestration process. But there was also a palpable resurgence of optimism about America’s long term prospects: the opportunities created by 3 billion new global consumers; the U.S. track record of innovation and enterprise; the magnetism of U.S. universities for global talent; the promise of energy independence; the transformational opportunities from “big data” and robotics; the prospect of liberalized immigration policies; and, encompassing many of these issues, a sense that the hyperpartisan warfare in Washington over healthcare, taxes and public spending had reached a point of exhaustion. Both sides, it seems, might be ready for a ceasefire, if not yet a lasting peace.

A surprising highlight of the conference was an amiable hour-long discussion between two of the most partisan antagonists in Washington’s political dramas ‑ Senate Majority Leader Harry Reid (D-Nev.) and Eric Cantor of Virginia, the ultra-conservative leader of the Republican majority in the House of Representatives. This ended with both politicians agreeing that there might be scope for a deal on the U.S. budget and thanking the Milken Institute for bringing them to California so they could talk to each other constructively in a way that simply isn’t possible in Washington. Similar sentiments came from leaders of both parties, ranging from Tennessee Republican Senator Bob Corker’s appreciation that “President Obama has put himself to the right of the House Republicans on entitlement reform” to Senator Bob Casey, a Democrat from Pennsylvania, saying that “so many people have become intolerant of hyperpartisanship – this is an even bigger issue for voters now than unemployment.”

Market euphoria misreads the signals from Brussels and Rome

Anatole Kaletsky
Apr 25, 2013 15:31 UTC

Financial markets, which balance judgments from some of the world’s most highly paid and best-informed analysts, are often uncannily right in anticipating unpredictable events, ranging from economic booms and busts to elections and terrorist attacks. But markets can sometimes can be spectacularly wrong, especially when it comes to politics. A classic case was the slump on Wall Street after last November’s election in the United States. This week’s market action in Europe may offer an even clearer example of market confusion about two fascinating but Byzantine political entities – the Italian government and the European Central Bank.

European stock markets have rebounded strongly this week in the face of deteriorating economic and financial fundamentals from across Europe on the basis of two political events: the reluctant agreement by Italy’s 87-yearold president. Giorgio Napolitano, to serve another seven-year term because nobody else could be found to do the job; and hints from ECB council members that they might vote to cut interest rates from 0.75 percent to 0.5 percent next Thursday.

Neither of these events remotely justified investors’ euphoria. The ECB case is straightforward. First, the ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Second, even if the ECB does act, a quarter-point cut will do nothing for growth. Third and most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. So much, then, for the silly idea in Europe that “bad news is good news” because economic weakness will force the ECB to cut rates.

If Europe wants Thatcherism, it must abandon austerity

Anatole Kaletsky
Apr 11, 2013 16:43 UTC

Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep convictions, that accounted for her successes in the economic field.

Governments in Europe and Britain today are obsessed with hitting preordained and unconditional targets: Inflation must be kept below 2 percent; deficits must be reduced to 3 percent of gross domestic product; government debt must be set on a declining path; banks must be recapitalized to arbitrary ratios laid down by some committee in Basel. In sacrificing their citizens’ well-being and their own political careers to these numerical totems, modern leaders often claim inspiration from Thatcher. And when voters turn against them, Europe’s leaders keep repeating Thatcher’s most famous slogans, “There is no alternative” and “No U-turn”.  But are these the right lessons to draw from Thatcher’s political life? A closer look at her economic achievements suggests otherwise.

In the 20 years she spent in parliament before becoming prime minister, Thatcher first saw Harold Wilson’s Labour government wrecked by currency crises and trade union militancy; then Ted Heath ousted by a miners’ strike; and finally James Callaghan humiliated by the 1976 sterling crisis and driven out of office by the wave of public-sector strikes that came to be called the “winter of discontent.” After these searing experiences, her immediate priority on becoming prime minister was to turn British monetary management and labor relations upside down. Yet her actions were much more cautious and pragmatic than her rhetoric.

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