Colin James's column for the Otago Daily Times for 25 October 2011

After the cup, back to the election grind

The was the cup that is, just. The childlike headlines can be pasted in the kids' scrapbooks -- oops, cached on their iPads. Now we come back down to earth. We may find the earth is moving.

The last seven weeks have had an end-of-empire feel -- end of the Roman empire, that is: lavish spending by imperious officials on public spectacles and games to divert and entertain the plebs and narcotise anxiety and discontent.

And as at the end of the Roman empire, barbarians hover just beyond the horizon. They come these days in the form of northern hemisphere banks and debt rating agencies. The banks require German and other well-run European countries' taxpayers' money to rescue them from what were supposed to be safe bets on risky or feckless Greeks, Portuguese, Irish, Spaniards and Italians.

But the taxpayers are less and less fond of banks: the Occupy Wall Street movement may not have a detailed programme but it -- and the Tea Party -- reflect deeper, and international, currents of discontent and anger. Peter Dunne dropped in on the Wellington branch and bothered about "wealth and opportunity disparity", as he might have in his long-gone Labour days.

And if in the end governments and banks aren't rescued, financial pain will spread round the world and this time governments and central banks do not have the wherewithal to rescue economies on the post-2008 scale. That goes for China as well as for the old rich countries whose brilliant financiers got us into this.

If the 2008 crash finally really crashes, it will cut the capacity of the old middle classes in the old rich countries and the new middle classes in the rising countries to buy our food and to buy products made from Australia's exports.

If that happens and it then takes a while to come right, the next parliamentary term here could be downbeat or even bleak.

Now note that the world's population gets to 7 billion next Monday, give or take a few days.

That is twice the 1960s population and people are using resources about 20 per cent faster than the sun and earth produces or replenishes them. (Some say faster.) This cannot go on indefinitely: outbreaks of water and food shortages round the world tell us that. That is food for conflict.

So far there is little sign of strategic Beehive or official thinking about what this means for us. No party wants to seriously debate population.

Population puts the spotlight on India, set to be the most populous country on current trends and a growing economic power. Tim Groser is seeking a free trade agreement. A "NZ Inc" strategy for India issued last Thursday after months on the desk of the dynamic Murray McCully, reshaper of our global destiny, aims to align the actions of departmental and agency officials and the private sector in the hope we do more business there.

Six other NZ Inc country and regional strategies, some completed months ago, are to be issued next year.

Trade is the NZ Inc preoccupation. McCully's speech to a foreign issues conference on Thursday focused tightly on trade. The India strategy gives one paragraph to "people-to-people exchanges" plus some tips on differences. Just as with China, there is no plan to build an educated public knowledge of the history, heritage, culture or languages of these two emerging giants.

The strategy is tactical rather than strategic.

But neither, so far, has the government been strategic about the looming 2020s fiscal crunch in pensions and health services. John Key sticks to his 2008 commitment to a pension qualifying age of 65 and Tony Ryall's vigorous (and effective) focus has been on more efficient delivery of selected services.

This is the backdrop for the election campaign which can get serious now the cup's run is over: short-term uncertainties that could turn nasty and, in the background, longer-term global structural change.

The Labour party hopes to link the external financial turmoil and its effects here such as the country debt downgrade to cabinet action or inaction. It will use today's pre-election fiscal and economic update and forecasts, which is likely to display more red than the budget did back in May, to say the tax cuts were irresponsible and fiscal management skewed.

The National party's interest is in getting through the next five weeks looking calm and in-charge. It's poster set is accordingly more-of-the-same.

The risk for National is that voters buy its soothing line but that things go bad after the election and there is a whiplash. This is obviously not a 2011 election risk but it is a 2014 risk.

Of course, there is another scenario: that there is not a new and worse global financial crisis and slowdown because Europe fixes its immediate mess and China stays on its growth trajectory, that gradually over the next 10 years rich countries fix their badly red-inked balance sheets and that smart organisation and new technology solve the global resources challenges -- and that here we stay on cruise.

Place your bets.

Meltdown; 2008 or 1931? ©

The Governor of the Bank of England believes we are in the midst of the greatest financial crisis in history. George Soros says the situation reminds him of the USSR collapse. “Collapse’ has also been used at the ECB and the IMF. Robert Shapiro (IMF) seems credible when he warns that unless a solution to the EU’s credit crisis emerges soon, the world economy will face a collapse larger than the one in 2008.
Shapiro may be under-stating the gravity of the situation. If we are talking collapse, why not look at the big one: 1931?
There were many straws in the wind in 1931; the Wall Street collapse of 1929, plunging world trade, ongoing wrangles over war debts and reparations but the one that broke to camel’s back was the collapse of the largest Austrian bank, Creditanstalt. Creditanstalt was insolvent because its assets had depreciated. Investors bailed out and other banks cut its credit lines.
Creditanstalt was founded by the Rothschild’s and its failure came as a shock as it was regarded as impregnable. It had been the most important bank of the vast Austro-Hungarian Empire and also had support from central banks. Its collapse in May 1931 soon took many other banks with it, especially in Germany.
Banks fell like dominoes because the collapse of one make all banks suspect. Inter-bank lending begins to dry up. This is serious as many banks depend on short-term funding. But there is also counter-party risk. A failed bank cannot meet its contractual obligations and this causes almost endless repercussions as happened when Lehman Bros fell in 2008.
The storm in Europe 2010-2011 has expanded beyond the periphery, and is beginning to make inroads into the core. First it was Greece, then the Mediterranean’s and Irish. Last week the crisis struck through the Dexia Bank (NBR 14/10) to the Benelux area, core of the EU. Last week Max Bank of Denmark failed and swag of British banks was downgraded. This week the Erste Bank of Austria admitted to huge losses.
I have good contacts in the Erste Bank and its difficulties brought to mind the Creditanstalt collapse of 1931. The eastern periphery of Europe is presently wracked with huge difficulties of which we hear little. I might cover these in another column as they have all the usual sovereign debt problems plus Hungary’s horrors of having to repay outstanding loans in appreciating Swiss Francs.
1931
The 1931 crisis differed from 2008 because 2008 was largely a banking crisis. In 1931 a banking crisis brought down the credit of nations. When Austrian banking assets froze in 1931, the pressure moved to Germany where foreign investors tried to realise assets. A run began and massive loans were removed from Germany. The Banks of England, France and International Settlements, plus the Federal Reserve extended credit to Germany but not the long term loans which were necessary.
Meanwhile a general shortage of funds led to many realising their most liquid assets, often deposits in London. London funds drained, exacerbating fears about sterling and increased the drain. Reserves melted despite French and American loans. The British Government resigned on August 23. Although the UK’s difficulties were largely temporary, the drain of
funds led it abandon the gold standard on September 21. It also devalued. Others followed in order to remain competitive. This destroyed a pillar of the international system. .
While fiscal and monetary conditions have been very relaxed since 2008, the opposite occurred in 1931. In the UK, for example, the state cut wages, provoking a mutiny in the Royal Navy. Moreover, while the economy has almost recovered to 2008 levels, in 1931 the world economy nose-dived. There is much international cooperation now, but it virtually ceased in 1931: by 1932 Britain passed the Import Duties Act which ended 75 years of free-trade. Most countries hurriedly constructed protective economic devices like tariffs, quota, and currency controls etc. Blocs formed, like the British Empire’s preferential tariffs.
To sum up: The 2008 crisis was a severe shock to the financial system, which was contained by states supporting collapsing institutions (and adding to sovereign debt). While the economy received a severe shock in 2008, the following economic recession was moderate and most states have almost recovered to 2007 levels of GDP. There has been little deleveraging so far. Monetary and fiscal policies have been very liberal.
1931 was a severe crisis which not only damaged financial institutions but wrecked the credit of nations, destroyed the gold standard and international cooperation. Nations began to wage economic warfare. World trade withered with calamitous falls in prices, especially of commodities. The world slid into a grim depression with widespread poverty and massive unemployment.
Can a slide be halted?
A 2008 or 1931 episode is not inevitable. Policy makers are well aware of the horrors of the 1930’s and are determined to prevent a slide into systemic collapse. There is still a huge degree of international cooperation and goodwill. Both the EU and G20 will employ their best efforts in the coming weeks.
Nevertheless, there is some concern that markets may deteriorate before remedies can be put into place. The rating agencies and bond traders are concerned about the quality of many assets and the ability of sovereign states to service their debt or banks (and their counterparties) to maintain solvency.
The current secret EU plan, a very “planny” plan (NBR 14 Oct) will be hard to deliver if it involves, as anticipated, increasing bank capitalisation, the bailout fund, and haircuts on Greek debt. It may not be enough. The market wants Germany to underwrite all EU debt but the Germans are understandably averse to assuming an impossible burden

The politics of trading through to a new normal

Relax. If it is going to hit, it won't hit till after the election. Or, at least, it won't hit hard before then. The "it" is damage to our economy from the north Atlantic turmoil. There will be some damage. What no one knows is how much damage and in what form. What isn't happening in the so-called rich countries is a "normal" "recovery". That is because what used to be normal is not normal now and the world hasn't yet settled into a new normal. We have been in transition for a decade or more and we are not through. Politicians, commentators, economists and even philosophers argue over what poultices to apply. What should have worked under the old rules hasn't.