DABERIAM XXIV

March 2006

It is a good moment to make some observations on the UK - before the Chancellor presents his new budget later on in the week. It will not be possible to make an intelligent comment on the budget for several months after its announcement, as it is now the customary habit of the Labour Government, and the Chancellor in particular, to make grandiose announcements, the real meaning of which will not be apparent until after the detailed legislation has been published. 

Over the last ten years we have seen a Government that has gone from having some good ideas and honest political intent, to one of extraordinary arrogance where the public announcement of usually ill thought out initiatives, framed in sound bites, don’t materialise as actual deliverable policy. Over the last few years Government action has amounted to serial meddling with every instrument of state, reducing the health service to a shambles, the education system to chaos, and the social security system that supports the poorest and most disadvantaged in the land to a complete farce. 

The Chancellor, who will no doubt announce in his budget rafts of reforms, has, over the years, made the tax system so complex that it is now almost impossible for any individual or company to comply with the rules. At any time the tax authorities can haul a company over the coals for breaches in the now endlessly complex waivers, calculations and allowances that even the best accountants don’t understand, let alone the revenue officers themselves. Non-compliance is called fraud, and the numbers of co-called cases of fraud have skyrocketed.

Global Economic Indicators

World Economic Growth  (World Bank figures)	2005 (est.)	3.20%	2004	3.40%	2003	2.90%
Base rates: 28 February 2006	USD	4.50%	EUR	2.25%	GBP	4.50%
MSCI World Equity Index	28/02/2006	210.596	31/12/2005	203.143	YTD %	3.67%
Gold (PM London Fix $ per ounce)	28/02/2006	556.00	31/12/2005	513.00	YTD %	8.38%
Oil (WTI Crude $ per barrel)	28/02/2006	61.42	31/12/2005	61.04	YTD %	0.62%

As a digression, arriving back from Singapore the other day and after a long flight confronting the chaos of London Airport, when they couldn’t get the jetty to the aeroplane, the Hostess announced "Welcome to the Third World" - a frighteningly true statement! 

While starting the year feeling optimistic, it is difficult to maintain this optimism as the day to day experience of running a company in Britain and Europe gets more and more difficult owing to the legislative overload that continues to pile up. Having said that, business opportunities around the world continue to improve. China, Japan and the rest of Asia continue to grow steadily and the underlying strength in the US economy continues to confound the pessimists. 

The US domestic economy grows and evolves according to basic economic theories. The efficiency of the US banking and industrial sector continues to evolve, as is the case in Germany and Japan. The legacy problem of old age pensions and Union intransigence gradually get solved. 

This compares with the huge growth in China and the other Asian countries with new capital investment, and new entrants into the workforce, but rather inefficient banking and capital allocation systems. Nevertheless, the China and India growth will drive the world economy for some considerable time. If we include Japan and Russia, it is possible that in the near future these groups will become self sustaining and will not require USA and EU as their primary markets. 

The twin American mysteries of the US negative savings and huge balance of trade deficits continue to defy reason. There must be a possibility that the report of these two deficits is skewed by a lack of good data. The most peculiar of the two deficits is on the current account, where China and the Middle East governments continue to buy US Treasury Bills with the dollars they earn from exports to the United States. As I mentioned last month, US politicians are doing their best to discourage this flow of dollars back into the US but the difficulty for countries outside the US is - What else do you do with dollars! While this is a difficulty in the longer term, in the short term a disruption to the dollar flow would be very damaging to the US economy and the stability of the dollar. The US Senate‘s continuing flirtation with the 27.5% tariff on Chinese imports would also impact US inflation and the inevitable Fed response. Hopefully we will continue to muddle along, and the markets will continue to rise as companies embrace new technology. There are still enormous productivity gains to be made from capital expenditure and we are only at the beginning of this cycle of increasing profitability. There only remains the question of the rather cavalier Western attitude to the Global economy, which could be a worry.

Damon de Laszlo 
March 2006