DABERIAM LXIII

August 2011

The extraordinary events of the last two months both in Europe and the USA have now resolved into some kind of stability. European governments have agreed to continue to fund Greek deficits, hoping to push the problem into the future. In the USA, Washington, after what would have been a rather third rate TV soap, has done much the same.

One has to assume the present deal will be ratified, and the debt ceiling raised; however the ‘but’ on how the deficit will be addressed, is based on an agreement to agree! The Western world has basically kicked the government debt problem into the latter part of the year. The rating agencies, however, who work to a set of rules will inevitably continue to downgrade the various European government debts and the US government debt, that is provided they can withstand the increasing political pressure being put upon them.

The bad news is these political antics have stalled the western economies. The rapid growth and reconstructions of western industry after the banking crisis of 2008/9 has been remarkable. The industrial recovery of 2010 has continued into the first half of 2011. Most companies in the USA came in better than forecast and in the normal course of events, one could anticipate the rate of growth to only slightly flatten going into the second half of 2011 and 2012.

Washington, however has really unnerved industrial decision makers. If you are working on capital expenditure decisions with paybacks of five and ten years, the non resolution of the US budget deficit is causing companies to start holding up their plans and this is having a knock-on effect throughout the economy. I suspect that the mood of Corporate Boards has changed from “OK , let’s start getting ahead with the Cap Ex programme” to “Let’s use more of our corporate cash to buy back stock”. While this may be good in the short term it has a negative impact on headline GDP numbers. All the more serious as GDP is already being depressed by declining retail sales as individuals increase their savings rate. The majority of the public who have until the last two or three months been happily disinterested in Washington’s activities, have recently been force fed on a diet of quite juvenile debate by both Congressmen and Senators. This is likely to further un-nerve the public in general and, on the one hand encourage saving, possibly not a bad thing, but discourage people from investing in the stock market, not a good thing for the general well-being of the country.

As I alluded to in June, the greatest danger to Western economies is the public demonstration of political incompetence in Washington and Brussels, precipitating a wholly unnecessary double dip in our respective economies. Western government leadership is encouraging alarm and despondency, which makes the outlook not encouraging. Always the optimist, I feel there is a possibility that the general mood could improve, certainly in Wall Street as we go through the third quarter and everyone gets used to political paralysis; while most companies continue to be profitable. This is a hope, in which it is difficult to be too confident. There is some certainty that Greece and/or a couple of the US States could collapse by the end of the year, , causing the scale of psychological fear to rise further.

The hangover of debt from 2008 and before has to be reduced, either by default or repayment. Either way, that element of the debt fuelled GDP in the past is paid for by a similar reduction in GDP going forward. The pain of this process is enormously increased by the lack of political leadership.

Its going to be a long summer of confusion and uncertainly, not a good backdrop for businesses to invest and develop in industrial countries to re-start growth in their economies.

Damon de Laszlo
August 2011