The Great Debate UK

from MacroScope:

The Law of Diminishing Greeks

The Law of Diminishing Returns  states that a continuing push towards a given goal tends to  decline in effectiveness after a certain amount of effort has been expended. If this weren't the case, Usain Bolt would be able to run the mile in  less than 2-1/2 minutes.

From an economic standpoint, this law now seems to be fully in force in Greece. The latest jobs figures from the twice-bailed out euro zone country paint a bleak numerical picture of the impact of unrelenting austerity in ordinary Greeks, regardless of whether it was self-inflicted or not. To wit:

More than one in five Greeks is unemployed.

There are more young people without a job than with one.

The record 1.08 million people  without work in January was a  47 percent tumble  in a year.

Putting aside for the moment the question of what such a condition means for political dissent, there is now the issue of whether any of this austerity-fueled pain is actually helping the Greek economy.

Austerity mixed with the inability of euro-tied Greece to devalue its currency  means  Greece is now in its fifth year of recession. As for job-creating small and medium -sized businesses, the latest projections are that more than a net 130,000 of them will have shut down over two years by the time 2012 is over.

The biggest example of the Law of Diminishing returns, however, is the impact all this is having on what ails Greece in the first place -- its budget.

Unemployed people offer no revenue to the government in terms of income tax and far less in sales tax than they would if they were working.

The U.S.’s big, fat political debt problem

By Kathleen Brooks

The U.S. has practically zero chance of solving its debt problem in the foreseeable future while politicians line up to contest the 2012 Presidential elections.

We have already heard President Obama lay out his partisan cards. He called for Congress to come up with a plan to trim $4 trillion from the U.S. deficit in the next 12 years. His favoured way to do this: end tax cuts for the rich – a well versed refrain from Democrats throughout the ages.

Ironically it was Obama who extended these tax cuts – for everyone – at the end of 2010, which arguably has contributed to the U.S. becoming the only G10 nation to have a rising budget deficit this year, according to the IMF.

The tax question obviously goaded the Republicans and the Speaker of the House of Representatives John Boehner immediately responded by saying that tax hikes were a non-starter. He argued that the U.S.’s fiscal problems were not down to a lack of revenue, but due to unbridled spending coming out of Washington. So there we have it: deadlock before we have even got started.

The wrangle over funding the 2011 budget that nearly closed the U.S. government earlier this month came down to an ideological fight between left and right, with those on the far right demanding cuts to programmes that didn’t support their ideology such as abortion programmes.

This highlights the level of detail and depth of discussion that will be held over the coming weeks and months to make even more radical cuts than those proposed for this year’s budget. Middle ground is virtually non-existent in Washington right now so a failure to come up with a credible deficit reduction plan in time for President Obama’s June deadline is looking increasingly more likely.

George Osborne and the band-aid effect

The second budget presented to Parliament by Chancellor George Osborne is likely to be less talking and more doing when it comes to bringing the UK’s public finances under control.

This won’t be to everyone’s tastes. Some argue that the UK is in less financial danger than Europe’s financially troubled states, yet Osborne is embracing deficit reduction plans with as much gusto as Ireland or Greece.

Osborne has indeed been faithful to the ‘band-aid effect’ when it comes to remedying the UK’s bloated balance sheet. There is to be no picking at the corners for him, he is getting ready to rip that plaster off with all of the short-term excruciating pain that goes with it.

The Chancellor’s fiscal targets are ambitious. He wants to virtually eliminate the budget deficit by 2014-2015 and to halve government borrowing over the same time period. Seventy-seven percent of this will be achieved through public spending cuts, with the rest of the 23 percent coming from tax increases.

In the clip above, Kathleen Brooks says this will be “a budget of no surprises.”

from The Great Debate:

Obama, Moses and exaggerated expectations

-Bernd Debusmann is a Reuters columnist. The opinions expressed are his own-

President Barack Obama is close to the half-way mark of his presidential mandate, a good time for a brief look at health care, unemployment, war, the level of the oceans, the health of the planet, and America's image. They all featured in a 2008 Obama speech whose rhetoric soared to stratospheric heights.

"If...we are willing to work for it, and fight for it, and believe in it, then I'm absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs for the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last best hope on earth."

The date was June 3, 2008. Obama had just won the Democratic Party's nomination as presidential candidate. He was also winning the adulation of the majority of the American people, who shrugged off mockery from curmudgeonly Republicans who pointed out that the last historical figure to affect ocean levels was Moses and he had divine help when he parted the Red Sea.

Obama took to the campaign trail again this month to help Democratic candidates for the mid-term elections on November 2 and he would need divine intervention to prevent his party from losing control of the House and possibly the Senate.

The vote is in part a referendum on his first two years in office and the adoration has faded, not least because it would have been difficult for anyone to actually meet the high expectations he raised in dramatic speeches.

There is a certain symmetry between next month's mid-terms and those four years ago, when Democrats took control of both houses of Congress (and consolidated it in 2008). The result stemmed from dissatisfaction with the economy, with the Republican Party and with President George W. Bush. Now there is dissatisfaction with the economy (much more troubled than in 2006) with Democrats, and with Obama.

from Global News Journal:

Ireland’s boasts come home to roost

Irish Finance Minister Brian Lenihan

Irish literature and legend is full of boasts, like the claim by Christy Mahon in Synge's "Playboy of the Western World" that he has killed his da with a loy (Irish for spade), only to have the old man track him down in another town.

Perhaps that's the way to view Irish Finance Minister Brian Lenihan's announcement two years ago that the state-backed guarantee scheme to rescue the country's troubled banks, hit hard by the collapse of the property market, was "the cheapest bailout in the world so far".   It seemed too good to be true. And it was.   On Thursday, Lenihan, who has spent the last two years scrambling from one fiscal crisis to another, announced that, actually, the cost for cleaning up years of reckless lending was "horrendous" and in a worst-case scenario the price tag would be over 50 billion euros ($68 billion).   The bill will shackle Ireland, once the EU's fastest growing economy, with a public debt burden of nearly 99 percent of gross domestic product.   Ireland's now crippled economy, meanwhile, has done everything but recover. Unemployment is stubbornly high, property prices remain depressed,  taxpayers face years of cutbacks and, in the second quarter, growth again went into reverse.   What happened?   Maybe what Lenihan said two years ago was wishful thinking, or perhaps it has taken this long for Ireland to wake up to just how colossal a hole its one-time high flying property tycoons have dug for themselves, and for every Irish taxpayer, even though much of what they were up to is so big as to be unmissable.   Take, for example, the Battersea Power Station in London, which is Europe's largest brick building and has been derelict since it was decommissioned as a coal-burning power plant about a quarter century ago.   In 2006, a firm controlled by two Irish property magnates, Johnny Ronan and Richard Barrett, bought the building and land surrounding it for a staggering 400 million pounds ($750 million) -- even though previous plans to develop it had all come to nought.   The boys, as they are referred to in some of the Irish press, had ambitious plans for a new, exclusive, "Knightsbridge"-class development for office, commercial and residential space, including an extension of the Northern Line branch of the London Underground.   Four years later, the site is still derelict, promoted, perhaps a bit desperately, as a location for lavish weddings held inside a marquee, and most recently as the venue for a Red Bull-sponsored high-jinx, daredevil motorcycle show.   Ronan and Barrett's property empire, meanwhile,  has seen some of its loans  earmarked for the Irish government's National Assets Management Agency (NAMA) -- Ireland's "bad bank scheme", which was  established to purge lenders of commercial property loans, many of them non-performing.    Battersea is at the top end of the scale of Irish property investment during the decade of the Celtic Tiger boom, but replicate it at a lesser level all the way from Eastern Europe to the holiday beaches of Spain and out to Asia, and it becomes clear why Lenihan has had to change his tune.   A historical footnote: a Reuters feature informs us that the Battersea Power Station was used during World War Two to burn 120 million pounds worth of banknotes that had to be disposed of to stop enemy forgeries.   Something to boast about then. Comparatively small change now.

EU stress tests: for banks or governments?

- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead.  Concerns centre on four areas.

First, there are obvious worries about Greece and the other small countries facing debt problems, notably Portugal and Ireland, where the local banks have lent heavily to their governments and in addition may need to make provision for a substantial build-up in the level of bad debts in their respective corporate sectors as their economies struggle through the recession.

Second, there are worries about the small-to-medium banking sector in Germany, where some of the first signs of the oncoming crisis appeared early in 2007. It is hard to tell how seriously we should treat these concerns, because the Landesbanken are closely linked to their regional (“Land”) governments, so the question is unusually sensitive. Third, there are worries about the European giants, especially the big French and German banks.

Not only is it still unclear (to me, at least) how badly hit they were by Lehman and its aftermath, it is still a matter of conjecture how much sovereign debt they are holding.

Fourth, there is the enigma of Spain, worth a blog on its own. The bald facts about Spain are frightening – 20 percent unemployment (and nearly as much even before the credit crunch), the economy most dependent on construction of any in Europe, a large budget deficit, tourism suffering from the strong Euro.

Osborne’s book-balancing a risky venture

-Tony Cleaver is senior teaching fellow in Economics and Finance in the Durham University School of Economics, Finance and Business. The opinions expressed are his own.-

George Osborne is taking a risk.

The Chancellor is also placing himself firmly in the orthodox school of financiers who assert that governments must balance their own books even in times of recession.

The Chancellor’s action to add to the squeeze on public finances already started by his predecessor (aiming to raise 40 billion pounds to the 73 billion pounds already provided for by former Chancellor Alastair Darling) and to reduce government borrowing down from over 10 percent of GDP to close to 1.1 percent in the space of five years implies kicking away the support of the UK economy that the country has desperately needed.

It is worth remembering that substantial government spending was called for after the 2008 credit crunch caused a collapse in the private sector that was at the time threatening a 1930s-like slump.

Without a compensating public sector stimulus, Britain like the U.S. and others was faced with the re-run of the Great Depression.

Roger Bootle analyses the potential impact of the budget

London-based Roger Bootle, director of Capital Economics and an advisor to business accountancy firm Deloitte, shares his thoughts on what Chancellor George Osborne’s budget may hold and its long-term effects on the economy.

Bootle suggests the coalition government must narrow the deficit for this year and give confidence to the markets that something will be done longer term to restore the economy to health.

Watch the video clip here:

Picture Credit: Chancellor George Osborne (L), sits with Deputy Prime Minister Nick Clegg during a meeting at number 10 Downing Street in London June 21, 2010. REUTERS/Dominic Lipinski/Pool

Entrepreneurs needed if the UK is going to make up the deficit

-Joe White is managing director of Moonfruit.com. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

The first Tory budget is a critical one. The Treasury and Chancellor George Osborne have been dropping hints for weeks about a big slash in public sector spending in an effort to try and prepare Whitehall for the worst, and to rally the private sector to step in and fill the deficit.

It’s a risky strategy. The belief that you can slash deficits and generate private sector growth is close to Tory hearts, and further encouraged by recent successes in this area by the Canadians.

But the difficulty is that when Canada implemented rapid deficit reduction, the wider global macro-economic climate was much more benign. One person’s spending is another person’s income, so reducing spending will reduce income unless other kinds of spending rise to fill the gap.

Economically there are only four kinds of spending, the total of which equals the national income: Consumer (you and I spending), Government (we all know about that one), Investment (generally spending by companies) and the net of Imports and Exports (net imports sends cash overseas, net exports increases domestic income).

Government spending is going to fall, that much is clear. Unless something else rises, national income will fall by definition.

UK chancellor has mixed message for gilt investors

– Ian Campbell is a Reuters Breakingviews columnist. The opinions expressed are his own –

The UK sounds Greek again. Britain’s new government is finding skeletons in the fiscal cupboard. George Osborne, the incoming chancellor of the exchequer, is appointing an independent watchdog to check the numbers out. The gilt market perhaps ought to recoil at the revelation that things are even worse than thought. But it’s more likely to look on the bright side: coalition honeymoon, transparency and rectitude to come. UK government bonds will for now probably continue defying threats that kill in the Aegean. A record peacetime deficit, an inflation rate of 3.4 percent, a plunging pound: no matter, UK 10-year paper has risen in value by about 2 percent this year and yields a miserly 3.8 percent. But while Osborne’s deficit-cutting commitment will reassure, the medium-term risks to gilts remain great. Gilts’ appeal is largely relative. UK debt levels have worsened appallingly — but are not yet appalling. Britain, like the United States, is rightly judged to have a more adaptable economy than the euro zone’s. The pound can weaken, helping competitiveness and growth and therefore favouring rebalancing of the government’s accounts. But the growth that can save is not strongly in evidence now. Mervyn King, the Bank of England governor, has warned of possible growth disappointment as fiscal cuts kick in. Ironically this is another factor supporting gilts. Inflation is up, but is expected to be dragged down by economic weakness. That means interest rates will probably remain low, favouring bonds. Still, gilts investors cannot be complacent. The fiscal deficit is huge but money-printing — quantitative easing — exceeded it in the year to March. Spencer Dale, the BoE’s chief economist, speculated last week that QE had taken about one percentage point off gilt yields. Unless the economy worsens, the BoE is unlikely to resume gilt purchases. And one day it must start selling its gilt mountain. There are other big risks. The coalition honeymooners may fall out. The economic turnaround will be extremely hard to generate. And Osborne’s fiscal surgery may half kill the patient. For a UK that has much to do to stop its debt spiralling, gilt returns look poor. But the remarkable bonds may smile through the honeymoon all the same.