DABERIAM : Second Series, No.3

Since putting pen to paper in October, we seem to have been experiencing a world that goes around in circles.  The votes on Brexit, the Americans electing Trump and now the Italian elections, all express an acute dissatisfaction with the status quo.  Austria produced a near miss and could have elected an “alternative” government from the far right.   As we go into next year with elections in Germany and France, one can only guess that general dissatisfaction with the unsatisfactory growth in Europe will produce more upsets. Unsurprisingly Brussels, in its bureaucratic ivory tower, seems to have hardly noticed the democratic groundswell, but to be fair even if they had, there is very little likelihood of public acknowledgement.  Bureaucracies cling like limpets to the status quo. 

 

Currently, the Brexit debate has turned into trench warfare, with the Remainers, while complaining that uncertainty is damaging to the economy, are doing everything they can to destabilise the process and create uncertainty. 

 

Whether one is for In or Out, if one believes in democracy, one must accept that a referendum is the ultimate test.  From a process point of view, the government has committed to triggering Article 50 in March, then it must lead inevitably to a exit.  All the discussions about Hard and Soft Brexit depend on the reaction from Brussels, and Brussels, in the form of Donald Tusk, is quite clear.  He has said “the only real alternative to a Hard Brexit is No Brexit”.  The European Council President could not be clearer, and his words are backed up by Michael Barnier, the EU’s lead negotiator when he says “cherry picking is not an option”, and is suggesting that the process can be completed in under two years and that effectively no trade deal will be completed, only some transition arrangements agreed.  All this is likely to mean that British trade with Europe reverts to the WTO pattern, which means we will trade with Europe on the same basis as the USA, Japan, China etc., not in fact a major commercial problem.   The danger in all this will be the inability of the British and European Customs authorities to deal in a timely fashion with bundles of paperwork that today follow goods across borders, even within the so-called Common Market.  It is not unusual for Customs to hold up trade today, because of incorrect form filling!  The idea that this is all going to be sorted out efficiently is optimistic. 

 

On the US front, the idea of Trump for President is becoming more accepted and even welcomed.  While he is certainly a Maverick and the opposite of everything that is represented by the complacency and the status-quo huggers of the political establishment, he is likely to be a lot better for the US economy than the alternative. 

 

Of the two people I know who actually know him, they say he is exactly what he appears to be, with the important exception that he is quite happy to change his mind when presented with a brief that is backed up with facts – a trait unusual in so many of the ideologically driven politicians.  If, as seems likely, he will be in a position to get the enormously complex 

US Corporate Tax system sorted out, this itself would be a major advance.  If he can further discourage the short termism of the US financial institutions and the tendency for large company boards to be rewarded with misaligned short-term financial incentives, which are a major headwind for productive investment; then things could look even better.  He has also suggested that policy could be implemented to push up US wages.  While this in economic theory may not be “a good thing”, it should help encourage capital investment to improve productivity in US industry.  The lack of capital investment by US industry, and therefore the slow rate of US productivity improvement, has been exacerbated by the way the very large company boards are remunerated, as mentioned, and the lack of wage growth.  

 

The very low interest rates in recent years, both in the US and in Europe, while making it easier for government to borrow and also encouraging private individuals to borrow, have minimal impact on productive investment, compared with the headwind produced by financial engineering and low wage growth. The exception to this being Germany where these two headwinds apply to a much lesser extent. 

 

In Europe, low interest rates have enabled both governments and financial institutions to avoid the necessary financial restructuring following the 2008 crisis, so there is a continuing danger that at some point a new crisis in Europe will emerge.  It is, however, impossible to predict what will trigger the crisis or when – by definition, the unexpected is unpredictable! 

 

China on the other hand is acknowledging and endeavouring to deal with its financial excesses.  One can be very confident that the expertise and cohesion in the Chinese government can avoid a crisis. 

 

Looking into a very unpredictable 2017, there is I think room for considerable optimism, the government complacency and the status quo of the last six or seven years that has been slowly strangling western economies has been upended.  Business in general is waking up and Keynes’s famous “animal spirits” will take advantage of the opportunities that will arise. The rate of change is likely to increase and while this may be a little uncomfortable, it usually leads to growing prosperity. 

 

Merry Christmas. 

 

 

 

 

 

Damon de Laszlo 7th  December 2016 

From:    Damon de Laszlo                           December 2016            2nd Series No. 3    DABERIAM     Since putting pen to paper in October, we seem to have been experiencing a world that goes around in circles.  The votes on Brexit, the Americans electing Trump and now the Italian elections, all express an acute dissatisfaction with the status quo.  Austria produced a near miss and could have elected an “alternative” government from the far right.   As we go into next year with elections in Germany and France, one can only guess that general dissatisfaction with the unsatisfactory growth in Europe will produce more upsets. Unsurprisingly Brussels, in its bureaucratic ivory tower, seems to have hardly noticed the democratic groundswell, but to be fair even if they had, there is very little likelihood of public acknowledgement.  Bureaucracies cling like limpets to the status quo.  Currently, the Brexit debate has turned into trench warfare, with the Remainers, while complaining that uncertainty is damaging to the economy, are doing everything they can to destabilise the process and create uncertainty.  Whether one is for In or Out, if one believes in democracy, one must accept that a referendum is the ultimate test.  From a process point of view, the government has committed to triggering Article 50 in March, then it must lead inevitably to a exit.  All the discussions about Hard and Soft Brexit depend on the reaction from Brussels, and Brussels, in the form of Donald Tusk, is quite clear.  He has said “the only real alternative to a Hard Brexit is No Brexit”.  The European Council President could not be clearer, and his words are backed up by Michael Barnier, the EU’s lead negotiator when he says “cherry picking is not an option”, and is suggesting that the process can be completed in under two years and that effectively no trade deal will be completed, only some transition arrangements agreed.  All this is likely to mean that British trade with Europe reverts to the WTO pattern, which means we will trade with Europe on the same basis as the USA, Japan, China etc., not in fact a major commercial problem.   The danger in all this will be the inability of the British and European Customs authorities to deal in a timely fashion with bundles of paperwork that today follow goods across borders, even within the so-called Common Market.  It is not unusual for Customs to hold up trade today, because of incorrect form filling!  The idea that this is all going to be sorted out efficiently is optimistic.  On the US front, the idea of Trump for President is becoming more accepted and even welcomed.  While he is certainly a Maverick and the opposite of everything that is represented by the complacency and the status-quo huggers of the political establishment, he is likely to be a lot better for the US economy than the alternative.  Of the two people I know who actually know him, they say he is exactly what he appears to be, with the important exception that he is quite happy to change his mind when presented with a brief that is backed up with facts – a trait unusual in so many of the ideologically driven politicians.  If, as seems likely, he will be in a position to get the enormously complex US Corporate Tax system sorted out, this itself would be a major advance.  If he can further discourage the short termism of the US financial institutions and the tendency for large company boards to be rewarded with misaligned short-term financial incentives, which are a major headwind for productive investment; then things could look even better.  He has also suggested that policy could be implemented to push up US wages.  While this in economic theory may not be “a good thing”, it should help encourage capital investment to improve productivity in US industry.  The lack of capital investment by US industry, and therefore the slow rate of US productivity improvement, has been exacerbated by the way the very large company boards are remunerated, as mentioned, and the lack of wage growth.   The very low interest rates in recent years, both in the US and in Europe, while making it easier for government to borrow and also encouraging private individuals to borrow, have minimal impact on productive investment, compared with the headwind produced by financial engineering and low wage growth. The exception to this being Germany where these two headwinds apply to a much lesser extent.  In Europe, low interest rates have enabled both governments and financial institutions to avoid the necessary financial restructuring following the 2008 crisis, so there is a continuing danger that at some point a new crisis in Europe will emerge.  It is, however, impossible to predict what will trigger the crisis or when – by definition, the unexpected is unpredictable!  China on the other hand is acknowledging and endeavouring to deal with its financial excesses.  One can be very confident that the expertise and cohesion in the Chinese government can avoid a crisis.  Looking into a very unpredictable 2017, there is I think room for considerable optimism, the government complacency and the status quo of the last six or seven years that has been slowly strangling western economies has been upended.  Business in general is waking up and Keynes’s famous “animal spirits” will take advantage of the opportunities that will arise. The rate of change is likely to increase and while this may be a little uncomfortable, it usually leads to growing prosperity.  Merry Christmas.      Damon de Laszlo 7th  December 2016