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Tuesday, 21 October 2014

On a paltry BoE race; a thin IMF prescription; plus Romney as Reagan

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Yesterday saw the application period for the role as governor of the Bank of England expire. One of my close personal friends had quite seriously contemplated submitting a form himself on the basis that, although not formally qualified, he couldn’t make a much worse job of it than the people who are. He might have a point.

Anthony Peters, SwissInvest Strategist

Today, I feel the same way about the IMF which is splashed across the headlines of the papers after its meeting in Tokyo where its Chief Economist, Olivier Blanchard, presented a report in which he stated what clear thinking people can only see as the blooming obvious. “Confidence in the global financial system remains exceptionally fragile..” and “Bank lending has remained sluggish across advanced economies”

Oh, yes? The key message was that the politicians need to do more to counter slower than expected economic expansion. The key number at the centre of the presentation was that of the global growth forecast for this and for next year which the IMF has revised down to 3.3% and 3.6% respectively from 3.5% and from 3.9%.

So… You earn $10,000 a year but spend $11,000 – the extra $1,000 being on your credit card. At the point when your accumulated credit card debt reaches $10,000, the card company cuts you off from further borrowing. You must adjust by cutting your spending by 9% in order to break even and by an unknown further amount if you want to begin to cut your debt and avoid shelling out a significant proportion of your earnings on interest servicing charges. Now, can you please explain to me what politicians can do to make the prudent management of your financial resources result in higher consumption?

If the political class could admit that it is also no more than a passenger on the train to longer term structural adjustment, then we might finally begin to make more progress.

Blanchard did make one particularly interesting point when he alluded to the Spanish and Italian rates which he believes to be rallying due the ECB bond buying programmes but which, so his view, would begin to rise again if the countries in question did not request bailouts. That means that Spanish Prime Minister Rajoy’s assertion that the country can live with rates at this level is based on rates which exist because the markets believe that he can’t. Work that one out.

Again, and without making a Nobel Prize winning discovery, Blanchard concluded that slow growth in the developed world is negatively impacting growth in the emerging economies. Well I never! I did love the renewed demand, an IMF staple, that measures need to be put in place to bolster confidence. It’s not about a lack of confidence, sir, it’s about a lack of disposable spending money.

The Romney rhetoric

Meanwhile, economy aside, the electoral story in the US continues to develop apace with the elections four weeks today. Governor Romney is now trying to carry the foreign policy fight to the White House. In a speech yesterday he accused the President of being, for lack of a better definition, a “people pleaser”. He seems to be embracing a more assertive approach to foreign policy. O’Bama inherited Iraq and Afghanistan but has brought the troops out of the former and has committed to the same in the case of the latter. However, as in the immediate post-Vietnam period, America is unsure of its footing on the world stage. Republican President Ronald Reagan turned that around, having unseated the one-time Democratic President Jimmy Carter. I hear something similar in Romney’s rhetoric. Incidentally, Reagan went into the TV debates as the underdog and came out very much on top.

As an aside, I picked up a little electoral titbit recently. Two out of three white Americans will vote for Romney but four out of five non-whites – Latinos included – will not. Racial equality stops at the ballot box.

Finally, Chancellor Merkel heads off the Athens to today. Most regard this as a trip to smoke the peace pipe with Prime Minister Samaras while she grits her teeth and agrees to bailing the country out yet again. Greece has met next to none of the fiscal conditions it was set but she will take a diplomatic approach, express sympathy for the hard times the country is going through and commend the government for its efforts. This will give the troika the green light to recommend that the next tranche of cash is posted from Brussels to Athens. Lies, darned lies and political realities.

Alas, when all was said and done in London, my friend didn’t send his application to the Bank of England. That leaves just two candidates, Paul Tucker and Lord Adair Turner. Given the latter’s record as a regulator – he was the FSA’s Managing Director of Wholesale and Institutional Markets – I’d not feel too comfortable with him in the Governor’s office.

That leaves Paul Tucker as last man standing. My money has been on him since the process to find a replacement to Sir Mervyn King began; I don’t think I need to hedge that position now.

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