Share selloff

Starting last Friday and ending today, I sold every share I own.
I believe that the markets are so well ahead of the economic situation that even the losses I made on many shares will be worthwhile, because soon I can buy them all back at much lower price.
That 7 month bull market bubble is about to pop!
Why am I so confident? Three main reasons: Firstly, the unemployment situation is still getting worse, and unlikely to improve for a long while yet. Secondly, the government has drastically overspent to try to make the situation look better than it is. Thirdly, the increased the money supply increases inflation.
On the first point, one of the most important things any economy can do is obtain high employment. As long as everyone is fulfilling needs and wants then the economy has a good chance of prospering. As long as the economy is paying people to be idle, taxation must increase for no benefit. Increase taxation and spending slows, along with economic recovery. Delay the taxation and the interest on the debt must be paid, so the total cost of the debt goes up, but is spread over a longer period. Always living on loans is an inefficient way to run an economy, and should not be necessary. Indeed legislation should prevent the idiot politicians from doing it, only being allowed to do so after a referendum.
On the second point, politicians are always willing to wreck an economy to get back into power. Their power obsession is only rivalled by their greed. Their massive overspend on the public sector is creating a huge public debt. Their gambit was to offset the decline from private sector expenditure, in the hope that confidence would return before the debt grew too big, or at least while an election was held. Well it has failed, and public sector redundancies (always crazily expensive) will restart the private sector collapse in confidence. Expect an election soon, before everyone realises how bad things are.
On the third point, inflation makes savings less valuable. While it also reduces the real value of debt, it decimates savings income, penalising the thrifty and the many and growing population of retirees that depend on it. Those at the margins will need help, further increasing the burden on the public purse. Inflation also causes prices to rise, reducing the ability of people to buy, slowing output, and so losing jobs. In addition, expenditure tends to go to cheaper goods, and they come from abroad, worsening the balance of payments and so increasing debt again.
This is not the beginning of the end, but the beginning of the second fall.

Credit Crunch 2

Sadly, I believe that this recession probably has not reached its nadir. I know much evidence suggests it has, but fundamental problems remain that are being masked by the concerted action of governments in the most developed economies i.e. America, UK + Europe, and Japan. Even if recovery is now certain, crunch 2 is already set in motion.
Broadly, the problem was a collapse in confidence in the viability of high debt to income and income to savings ratios in the most developed economies. This was expressed as reduced confidence in the ability of debtors to service their loans. That problem was precipitated by a collapse in confidence in house prices as they reached unsustainable multiples of income in America and later the UK, and then other parts of Europe. That house price situation was mainly enabled by over generous lending criteria and stable low interest rates over a protracted period. At an anthropic level, irrational optimism and competitiveness are the underlying drivers of these problems. At a policy level, governments failed to take into account those human traits to exercise sensible control. At a factual level, it is obvious that no country or individual can continue to increase its debt to income ratio indefinitely, nor should have a high income to savings ratio. However, that is what governments continue to do and allow. Probably most politicians lack sufficient expertise to see and avoid the probelms. Those few that do just hope is to have their moment of glory and money, but be gone when the account has to be settled. This indicates another deep problem, that a system of government by politics is flawed at the most basic level. Government should be run by experts, not by power obsessed self-serving administrators.
Take a look at the video on this useful blog post to see a wise economist explain the debt problem in more detail, as not just a confidence problem, but also an absolute problem. Australian economist Steve Keen explains the problem, and that more trouble is to come.
The Times tell us of Ann Pettifor who also forecast the credit crunch, and also thinks the debt mountain has more trouble in store for us.
So why is the credit crunch yet to revisit us? We need to look at the main tactics being deployed to fix the crisis in confidence; they are low interest rates, public sector spending exceeding revenue, increasing the money supply, deferral of foreclosure on debtors, and direct incentives to spend. The most significant of these is ‘public sector spending exceeding revenue’. This is effectively shifting the balance of the problem from the private sector more to the public sector in the belief that confidence in a larger debtor will be higher. That is a reasonable assumption, but debts must be serviced even by government, and that is funded by taxation, which must then increase in the future. The notion is that as private sector spending slows, public sector spending is increased to help maintain business until private spending recovers. Governments have failed by overusing that tactic, so it needs cautious use. The tactic of ‘reducing interest rates’ is not safe. As we look back at the original problem, sustained low interest rates fuelled the unfounded early confidence that helped lead to high debt to income and income to savings ratios. In addition, low interest rates create compelling disincentives for savings, and low savings levels are part of the root causes of the problem. Further, the increasing retired population partly lives off the interest from its savings, so they will take a less active part in a spending lead recovery and at the margins will be looking for help. The tactic of ‘increasing the money supply’ enables more public sector capital expenditure in the short term, but also increases inflation in the midterm, which erodes the value of savings as welll as debt, further exaggerating the problems of savers stuck on low interest rates. If the problems are not rectified quickly, the tactic of ‘deferral of foreclosure on debtors’ only delays inevitable for many, and buries the remainder in long term debt. Providing ‘direct incentives to spend’ is another disincentive to save and head toward debt, so a lot of this kind of stimulus can also be a bad thing.
In conclusion, I think the wise among us know that moderation in everything is best. We have experienced a period of excess growth and are seeking to diffuse the inevitable correction and return to another period of unsustainable growth with some very strong policies over a short period. It is possible that one strong imbalance can correct another, but the stronger and faster the measures the more tortuous it is to achieve good balance again. I have low confidence that the failed institutions that enabled the problem forged in our human failings have the vision to correct it. I have even less confidence that a system of power obsessed self-serving administrators will ever be effective as government. I expect that even if this situation is rectified in the near term, unless sober experts are appointed to form governments that crunch 2 will one day visit us. On the bigger picture of how we conduct ourselves, perhaps we should question the race back to a hedonistic consumption based life style.

Icarus Economy

I distinctly remember Gordon Brown not so long ago implying he should receive plaudits for a successful UK economy. I also remember thinking that he did not do all the work, we did, the best one can say for him is that he did not get in the way too much.

Now it seems the economy is going pear shaped, will he be as quick to seek the responsibility for that? Perhaps there are problems even his mighty skills could not quell. Then again, perhaps it was just a combination of good fortune and our application that allowed the UK to prosper.

If we flew too high fuelled on hubris, we would do well to remember who was the designer of our wings.

Confidence Needed

A vital element of any market based system, especially those trading nonessential items, is confidence. Firstly, confidence in the reliable operation of the market place and secondly that the items traded have some stability in value. Lower confidence and fewer people will be prepared to use the market. It seems the significance of this axiom has been lost on the various interested and influential parties in the Northern Rock debacle. They need to refocus on this fundamental. Further, I suggest that reviews and action should be proactive rather than reactive.