Public Sector workers will always be paid well

It is being said that the Brown government is maintaining public sector pay rises because it is frightened of the unions. That isn't really the point. In times of unrest and dissatisfaction any government, particularly one that has poor support and popularity, has to shore-up its power base by looking after Government workers. That's why public sector workers are getting their indefensible and deeply unpopular pay rises while the private sector continues to cut pay and shed workers.

This will continue to cause real resentment in society, particularly as more and more private sector workers and pensioners suffer further cuts. This Government policy, while perfectly traditional, is likely to cause the most resentment in the usually laid-back middle classes.

G20 -- Obama and Brown marginalised

Obama and Brown are being increasingly marginalised by the rest of the world in pushing for further fiscal easing. The Chinese premier, the EU and King, Brown's own head of the UK central bank are all against further stimulus. Last night Brown seemed to be pulling back. This is from this morning's FT...

He [Brown] appeared to respond to pressure from Alistair Darling, his chancellor, and Mervyn King, Bank of England governor, in conceding on Wednesday there was little room for Britain to announce a second wave of tax cuts or spending increases.

Speaking in New York, he sought to shift the political focus from a fiscal stimulus to other mechanisms intended to kickstart the economy, amid forecasts that the UK deficit could rise to 11 per cent or 12 per cent of gross domestic product next year.

Asked at a Wall Street event about Mr King’s warning against a big new fiscal stimulus, Mr Brown said: “If you put that question to Mervyn King, he will say ... that we've got to be ready to take the action that is necessary to restore [economic] growth.”

Beware, this isn't quite the U turn you thought. This does NOT rule out further Quantitative Easing, in fact it almost rules it in. What happened is that yesterday's gilt auction (these are new 40 year Government bonds being auctioned off) failed to find enough buyers. This is very unusual and is a signal from the world's financial community that British debt isn't as safe as it could be. Since the only way that Brown can finance his proposed tax cuts and public spending rises is by borrowing, that's why he appeared to be pulling back last night but be clear, this does not rule out QE. QE is the most dangerous of the stimulus methods being used and has the risk of causing inflation. There have been many press reports in recent days that strongly suggest we are in an inflationary phase already with consumer prices rising, auto manufacturers putting up their prices significantly, and distributors announcing that once present stocks have been sold, prices will rise due to a fall in the value of the Pound.

What worries the world right now is that the US (and the UK) will inflate (devalue) away their debt. But maybe that's the only option open to them? That's why there will be considerable interest in some new reserve currency. It has to happen, and happen fairly soon. I think that it will probably be based on some kind of gold standard because there is no other way that isn't too contentious -- at least, not until the Dollar crisis plays out and the world's next obvious choice as a reserve currency emerges (the Yuan?).

I leave you with this thought. Large heavily-populated towns and cities in the USA would become literally uninhabitable without air conditioning and cars to carry people around. Imagine the consequences. They need oil in very large quantities. If Obama is going to inflate away US debt by devaluing the Dollar then clearly imported oil is going to be very much more expensive - by a factor of five times or more, taking it to truly unaffordable levels, for air conditioning. It is unthinkable that the administration hasn't already figured this out, so what are their plans?

China and US Treasuries - Update

The present position is that the US and the UK have started a policy of printing money (QE). Both governments claim that this is to counter deflationary pressures in their economies. I do not believe that there is any monetary deflation -- while prices are falling for a few things, overall, there is underlying inflation in the economies. It seems likely that the US and the UK are intent on inflating away their debt. If that is the plan, then the likely target is an 80% devaluation of the US Dollar and British Pound. The GBP/USD pair could remain fairly constant, of course. It does not seem likely that the EU can retain a strong Euro in this scenario and that will have to be devalued, also.

We are already seeing the USD decline on fears that this is the case (and gold has been rising on the same fears). Today, the Chinese have stated that China will continue to buy Treasuries despite the warnings given by the Premier Wen Jiaboa a fortnight ago. I presume that this is an attempt to stabilise the value of the USD. One assumes that there must be a tremendous dialogue taking place between Chinese and US officials constantly and the comments made public are simply the tip of a huge iceberg of discontent.

I don't see how this is going to change US or UK fiscal policy; the policy of QE, i.e. printing money to inflate away the debt, has not been halted. We would have been told, for certain, as nobody is very happy with that policy in any case.

For now, it is all happening behind the scenes but the really important issue facing us now is inflation. The recession is happening and it will get much deeper. House prices will continue to plummet. Firms will continue to go bankrupt, workers laid off (the motor manufacturers are in terrible trouble as are most banks), and tax revenues will continue to fall. This will make it impossible for either the US or UK governments to manage without 'printing' money.

I am only posting when I have something that either confirms or changes the overall outlook. I don't want this blog to become a micro-economic commentary -- there are plenty of those and many of them are excellent (and a few cranks, it must be said).

China and US Treasuries

China has warned the USA to maintain the value of the USD 'or else'.

It's a warning shot across the bows. China is worried that too much QE will devalue the currency, as a result of monetary inflation. The USA is in a horrible pickle right now; China is in a position to bring the USA to her knees, if she wanted to. Would the Chinese want to?

Do the Chinese prefer to work in factories, often no better than sweat-shops, or rake-over piles of European refuse for recycling, to keep the US and EU citizens in the comfort to which they have become accustomed? One hopes that they realise their station in life and being merely Chinese they should be glad of the opportunity to serve their betters. Some people say that the Chinese are getting fed up with it and would like to spend some of their own hard-earned that is presently being used to prop-up western economies. If they tried to do that there would be a run on treasuries that would make the Dutch Tulip Bubble and Dot Com Bubble look like diurnal trading swings.

Greenspan likes to define bubbles as 'irrational exuberance'. If lending someone hundreds of times more than they could repay in several generations isn't 'irrational', I don't know what is! The flood of funds into Treasuries from other asset classes can fairly be described as 'irrational exuberance' so yes, we have a Treasuries bubble. The odd thing about bubbles is that most of us don't perceive them to be bubbles until they have burst....there is always some rationale such as "there's a shortage of land...", "people have to have somewhere to live so house prices will always rise in the long term and at most will only fall back a few percent.....". The thing about houses is that at least you own them (unless they are mortgaged). People just refuse to sell until they have to, and that makes the decline slower. Treasuries, on the other hand, are simply an IOU. If 'I' looks as though he might default on paying 'U' then U want out, and out fast. Or if 'I' decides to repay 'U' in a currency that has devalued by x%, again U want out.

I don't believe that the Chinese want this. What the Chinese (and almost everyone else) want and are working towards, is a return to 2006/7. They want to turn the clock back. Quantitative Easing is about resuming lending, trying to turn the clock back. In my opinion that is unlikely to happen.

I think that we do have a Treasuries bubble and that it is about to burst. Cash or gold are good places for the proceeds right now unless you have the risk-appetite for very dodgy debt?