DABERIAM LV

May 2010

Since putting pen to paper in March, there has been a step change in the various crises that
abounded only two months ago. 

Britain, from a country in a state of political suspension, has a new Conservative Prime Minister - David Cameron, with a Deputy Prime Minister - Nick Clegg, a Liberal Democrat. It seems that the coalition agreement has been worked out in very considerable detail and augers well for a stable Government. The relationship would appear to have been more firmly cemented than it might have been by a last ditch attempt by Gordon Brown to disrupt the negotiations in what would appear to be a cynical last throw attempt to hold on to power. The political uproar caused by his actions seems to have precipitated his peremptory resignation. He did, however, manage to be gracious in his last appearance in public, resigning and paying appropriate tributes. 

The new Government headed by Cameron takes over a virtually bankrupt Exchequer with committed current and future expenditure far in excess of revenue. Gordon Brown’s negligent management of the economy in the last five years or more has left a massive problem which can only be dealt with by increasing an already high general tax rate, but more importantly and more problematic, cutting probably one million or more Civil Servants and Bureaucrats off the Government pay-roll. The difficulty of achieving the necessary cuts in expenditure is enormous and is unlikely to be completed without very damaging union induced domestic strife. Cameron is I believe the man for the job. His background, his intelligence and his determination auger well for the successful management of a complex government situation. It was also worth noting that his baptism of fire in the last few weeks has shown him to be a man of integrity and he has a very precise political understanding of what needs to be achieved, characteristics we have not seen in the British Government for a long time.

Europe on the other hand has made an enormous leap into the unknown. Members of the Monetary Union have agreed to fund the ECB, along with help from the International Monetary Fund to a sufficient extent to solve the problem of Greek debt along with the capacity to deal with the other P I I G S. In economic shorthand Messrs Merkel and Sarkozy have re-written the European rule-book enabling their respective banks to unload Greek sovereign debt on to the ECB. A masterly exercise in bureaucratic manoeuvring to weave a plan out of the muddle of European treaties. 

It is now possible and practical as well as probably inevitable for Greece to default without doing systemic damage to the German and French banks. It is worth noting that Greece is a very special case within Europe. It is a country where many of the basic laws are unenforceable - Greeks, as a matter of national pride, do not pay tax and at a frivolous other extreme, virtually totally disregard smoking bans and the compulsory wearing of crash-helmets. 

The European experience is likely to cause the German Central Bank to continue to keep a tight rein on its money supply because of its fear of inflation, forcing the Club Med countries into further economic difficulties. In Global terms, Europe becomes an increasing irritant to America, China and the other Pacific Rim governments. 

The US economy continues its steady recovery almost in spite of Washington. The Government in Washington, while indulging in bank bashing, is now on a steep learning curve for the new game of oil industry bashing. This actually is indulged in with particular relish as BP is a foreign company. The oil disaster is, however, very serious. BP was pushing at the outer limits of technology, drilling a hold in 5,000 ft of water to a depth of 18,000 ft and encountering temperatures and pressures some 1,200 psi beyond the design limits of the primary safety equipment. The economic implications for BP are exceedingly serious but the dilemma for the Government, once they have got through the fun of the political grandstanding, is that if they shut down off-shore exploration the American balance of trade will be severely damaged by a massive increase in oil imports in the next five years or so 

The excitements of the various current crises which capture the newspaper headlines mean that the general economic recovery hardly reaches the front pages. The world’s economic recovery, excluding Africa and Europe, continues apace. China and India are suffering increasing inflationary pressures which will impact inflation around the rest of the world. It is also likely that interest rates will inevitably rise in the US and Europe as the respective Government deficits require funding, crowding out more productive investments; but it is likely that the Government debt bubble can continue to grow for some time, at least well into next year. In the end Government deficits will drive up interest rates and will damage those that are prudent and save, the pension funds and the insurance industry. Perhaps an inevitable consequence of mass democracy where the politicians have to offer the proverbial Free Lunch to the electorate! 

Short term, at least, looks good.

Damon de Laszlo 
May 2010