I identify as you. Now try arguing with me.

Tuesday, July 24, 2007

Michael Panzner relays the alarm

Michael Panzner's latest post discusses a warning from David M. Walker, the nation's chief accountant, about America's vulnerability to potentially unfriendly foreign creditors. This confirms me in my feeling that the recent purchases by the UK of US Treasury securities is extremely significant (see recent posts on Bearwatch).

I have attempted to elicit interest in various quarters, including Iain Dale's influential political blog ("Tuesday open thread", 24 July) but so far I seem to be speaking to the profoundly deaf. Today I submitted the following comment to Iain's Diary, but without much hope of a response - as I have said in an email to Michael Panzner today, the Brits add apathy to financial ignorance:

Okay, one last Cassandra-like call and then I'll admit defeat:

Does it really not matter to your sophisticated political readership that the UK (presumably the Treasury under Gordon Brown) has recently purchased an absolutely massive amount of American Treasury securities, most of it in the last nine months, which quite probably will lose us many billions of pounds through currency depreciation? We have gone in one wild leap from 10th largest holder of American debt, to third place.

The potential downside from this crazy investment (I think it has already lost the equivalent of the first year's interest) worry me less than the implication, which is that the US is using its "special relationship" with the UK to defer (for a short time) the end-stage of a US debt-fuelled global inflationary spiral, with the prospect of a deep economic depression and possibly a wealth-destroying hyperinflation. The problems this would give us make the current floods seem a minor inconvenience.

Or is it that everybody here knows already, and is merely filling the time in the rattling tumbrils with political chit-chat and mutual insult? Is it aristocratic insouciance, or financial ignorance? Surely not the latter, when Americans are discussing their economic problems so openly and extensively.


Anonymous said...

I was depressed before reading your blog.I understand what you are getting at and am now even more depressed!!

Have you any idea what will happen next in economic terms?

Is it worse than being unable to use a flushing loo for two weeks?Just joking!

bgprior said...

Economic literacy left the Tory party, and indeed most of Britain, some time ago. You are not so much preaching to the deaf as to the incomprehending. Do you not remember the wall of silence, and even contempt, that greeted Sir Peter Tapsall's criticisms when Brown sold our gold at the bottom of the market? Of course, everyone paid grudging lip-service when a few years later it became clear that he had been right, but that doesn't change anything. The same thing, of course, happened to Mises in the "impossibility of economic calculation in a socialist system" debate, not to mention Boehm-Bawerk on Marx, and Hazlitt on Keynes.

On the other hand, are you sure that the dollar will continue to slide against the pound? I spoke recently to the boss of a large construction company that is investing heavily in America on the assumption that the dollar doesn't have much further to go. Not that he's necessarily right, but there are respectable, experienced opinions that don't expect continued collapse.

If they are right, I guess it will be less because of a strengthening of the dollar, and more because of a weakening of the pound (and Euro). People seem to be altogether too complacent about our own economic prospects, given the ever greater structural flaws. I could imagine a scenario in which our economy starts to show real signs of pain and the BoE comes under pressure to start reducing interest rates.

But on the whole, I think you're probably right that perception will continue to keep us floating in mid-air without visible means of support (and that price-pressures will continue upwards, not helped by the floods and energy-costs, even as growth begins to stall), and that the dollar will therefore continue to fall against us for a little while longer, until reality suddenly bites.

You are certainly right, given that it's a fine call, that this seems like a big punt on an uncertain outcome. It looks like Britain propping up the dollar, and that in itself is reason to think that the dollar will fall further.

Sackerson said...

Thank you sincerely for your responses.

Ken, sorry if I seemed to make light of being flooded out, I know it's nasty and highly insanitary. As to economics, I'm merely learning (I hope fairly quickly, certainly very intensively) about the issues. As a financial adviser, I felt for years there was something wrong about the cheerful encouragement to push investments onto clients, but I didn't then know exactly why. I remember one "breakfast seminar" in the late 90s (bacon sandwiches, sticky buns and treacle-like coffee, no Bucks Fizz for us workaday IFAs) all about the wonders of some new fund, and then the investment house rep blithely told us (as though it didn't matter) that it was generally thought that the Dow was overvalued by 25-50%! I now suspect that many such presentations are an attempt to find mug punters to buy the stuff that the smart money - the favoured clients - are selling. It looks as though bog-standard IFAs, many of them ex life company salesmen, were being used as the "Judas goats" to lead the sheep to the door of the slaughterhouse. That's when I started warning my clients regularly. But depression is unfocused anger or action avoided -I'm trying to get the debate going and something productive done, by writing this blog; otherwise I'd simply shut up and buy commodities for myself.

"bgprior" - you probably know and understand more than I do, but do please fill me in. I'm not stupid. I tend to agree with you that we will devalue our currency to keep pace with the US - it's interesting that we increase our moeny supply by similar amounts. But as Ben Bernanke admits, much depends on managing the public's perception of inflation - once everybody knows that's the game, the run will start. The bust will hurt everyone, but those who have acquired our former industrial capacity will be in the best position to start again.

Once again, many thanks.

bgprior said...

Sackerson, You're doing a good job (a propos of response to Ken), and I don't think I know much more about this than you (a propos of response to me). We're all trying to make a judgment about the future, and it is complicated by the fact that perceptions can push markets in the opposite direction to the way they would "logically" go.

All I'm saying is that I think the British economy is in a much bigger mess than people realise, and that the sort of things you are talking about could quickly tip us out of the fantasy world that is propping up consumption and keeping stock- and asset-prices high. That would reduce inflationary pressures and increase pressures to reduce interest-rates to boost the economy. Falling interest-rates put downwards pressure on the pound, though that is obviously relative to many other factors, such as interest-rate directions in other countries. There will almost certainly be a lag (between the dollar falling and the pound following it), though it's hard to predict how big that lag would be. And the pound probably won't fall as much as the dollar, leaving it relatively stronger, and justifying your point about what this purchase of US debt will cost us. But the correction of the dollar:pound exchange rate may not be as extreme as predictions for the fate of the dollar suggest, because people are underestimating the weakness of the pound.

It's just a guess. It doesn't refute your point that buying a lot of dollar debt now is an eccentric choice unless it is to do an ally a favour.

Sackerson said...

I think you are probably right. The issue of what we might lose by a relative depreciation of the dollar against the pound, is secondary to the rest of what you say - the house of cards that could fall down when what looks like a last-ditch defence of the $US fails. The size and speed of the UK's support, though presumably meant to reassure, looks like quiet panic in high places.