Other well known Q.E.s

The economic leaders, i.e. the governments have no clue how this is going to play out. Neither do the so-called experts – the economists, the analysts, the commentators.

Due to the unmapped landscape and the all-pervading fear of this unknown scenario, politicians have literally been given a free reign to try experimental cures at alarming doses.

Just imagine going to the hospital with cancer which has been caused by exposure to some strange kind of radiation called ‘borrowtoomuch’. When you get to the hospital the doctor says he’s never seen such a case before. Then he says that the best they could do was try an experimental cure – by giving you a massive dose of ‘borrowtoomuch’! “Wait,” you remark. “Isn’t that what caused the disease in the first place?” you ask the doctor. He replies, “Yes you are right. But your body has now come to be dependent on it, like a drug addiction. The reason you have got ill is that suddenly you stopped getting it. Perhaps if we pump you full of borrowtoomuch we can jumpstart your system once more. I can’t guarantee the cancer will be cured but maybe we can keep the symptoms at bay!”

The £75 billion quick-fix

That’s what all these enormous fiscal stimuli which are being bandied about like sweeties feel like. An attempt at treating a problem caused by too much credit, by creating further credit. However crazy this all sounds, even we have to admit it does sound intriguing and we wonder if it just might work, but that is only because the true cure seems so tough and unbearable, i.e. to let everything crash and burn, to suffer deflation and depression Japanese-style for a decade or so, let greed vanish and bad companies die, let politicians and public come to their senses and realise you must first save and then spend, let real businesses which provide real services and real products drive a gradual increase in the economy, rather than institutions and individuals borrowing credit and speculating on asset classes and derivatives. This would ultimately be the healthiest way forward, but who wants to go to the physician and take bitter medicine for many years when the surgeon can remove the tumour far quicker, even if he leaves some scars and the risk of recurrence. Even in an idealistic world, this would be a tough choice. However in the real world of politicians who must win the next election, its no choice at all – it’s the surgeon’s quick hand every time.

Right now, the dear old Bank of England is ripping open the chest of the UK money system, and pouring in several gallons of cash. Glug, glug, glug. Can you hear those £75bn filling up the Governments fiscal heart? That heart hopes to pump it out into the arms of the banking system, and hopefully on from there into the hands of industry and business, to shore up productivity and jobs, as well as into our hands, through more mortgage lending. Plus, if that doesn’t work, there’ll be another £75bn ready to be pumped in just for good measure.

Printing presses off to a flying start

Darling & Brown, but where is Prudence?

Bear in mind also, that with so many extra ‘quid’ floating about, and this increased money supply chasing the same goods/assets/services – you know what it spells don’t you friends? Inflation.

Now personally we don’t think that a bit of inflation is a bad thing, in fact we’d rather have a couple of points of inflation each year rather than deflation. That would be healthy. However that level of healthy inflation needs to come from increasing economic activity and increasing productivity leading to increasing wages etc. The kind of inflation we might get from this Q.E. would not be this type of ‘good’ inflation. Instead it would be coming at a time when the economy is doing badly, companies are going bust and unemployment high. This is a time of stagnation in the economy, and inflation due to artificial stimuli at this time of stagnation is known aptly as Stagflation. This is not good, especially if it were to turn into hyper-inflation Zimbabwe-style (give or take a few zeroes!!). In an already depressed job market and time of trouble, the value of the pound in our pocket would plummet even further, and our mortgages would rise again from these historic lows. Its something we will all need to keep watching out for over the coming months.

Liquidity is not the problem!

The core dilemma we foresee with this tinkering with Q.E. is that it is trying to rectify the credit supply. Banks are not lending. The Government hopes that once they are given fresh injections of capital, the credit will start to flow again to businesses and individuals. The trouble is that it is no longer just an issue of credit supply. The banks do now have money to lend, they just don’t want to lend! They are being uber-cautious because they are scared. They don’t know what anything is worth. That’s why you can’t get a buy-to-let mortgage for more than 70% loan-to-value these days. The banks would rather hold on to their capital until the murkiness has cleared and assets have bottomed out in value.

Furthermore, even if they did want to lend, who wants to borrow? The public at large are scared. Everyone is worried about the coming years and is paying-down debt. People have actually started saving and we have entered a thrift-conscious era. Not many people want a new house or a new car (4×4 is now a dirty word, even in Chelsea). Garden centres are doing roaring trade as everyone wants to ‘grow their own’ veg. State schools are finding that their admission applications are rising as more of the middle classes opt for free State education. So even with these billions being pumped in by the Bank of England its no automatic guarantee that the economy will get the boost it needs.

Ultimately, what started out as a credit crunch, that spawned a recession, has now become a Depression. Both ‘credit crunch’ and ‘recession’ are events led by a country’s macroeconomics. A ‘Depression’ on the other hand manifests in the hearts and minds of the citizens. We are now ‘economically Depressed’. Our spending has stopped. You can’t Q.E. us out of our fear at the touch of a button or whirr of the printing press. We won’t feel like spending again no matter how many speeches you give or assurances you give. Not until we get jobs. Not until our firms stop going bust. Not until we feel safe.

Recommended related articles:

http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/03/qe_day.html

http://www.fleetstreetinvest.co.uk/shares/market-outlook/quantitative-easing-devalue-pound-11246.html

Welcome dearest readers to Ultranomics

This will be the first edition – hopefully the first of many – of your newest and shrewdest viewsletter covering the economic situation both here in the U.K. as well as back in the Homeland of Pakistan.

Why Pakistan of all the places in the world and what the heck does Ultranomics mean you might enquire?

The answer to the first question is that we, your two co-editors that is, happen to be Brit-Paks (or EuroPaks if you’re pro-European Union and into milk cartons) and thought that it was about time we stopped our idle armchair commentating and actually put our points of view out there.

As for the name Ultranomics – well we made it up, so it never existed before – a bit like this website. But you could say its a concatenation of ‘Ultra’ and ‘Economics’ and in that there may be something to ponder for minds that like to ponder on such things. We don’t mind admitting to being somewhat impressed by the renowned American economist Steven Levitt who wrote the ground-breaking book Freakonomics. Its possible that subconsciously we picked up some inspiration from his work (but we’re not admitting to it)!

So folks, we’re going to don our thinking caps, dust off our wrist-rests and pretend for a while to know how and why the world ticks for us as it does. At least we’ll do our best in any case……bearing in mind that we’re not so pompous as to believe that the true workings of the gears of humanity versus Mother Nature are fathomable. Heck even the bankers, the ’stewards’ of our wealth never saw Mother Nature coming! But you’d better believe that she can’t be scammed for too long a time. In the long term Nature, for example in the guise of the markets, rewards us not with what we think we need or desire, but ultimately with what we deserve. We can only get away with risky speculation for so long. In the end the chickens always come home to roost.

Take those central banker’s, i.e. the Alan Greenspans of the world, who must truly have believed that they could simply print as much paper money as they liked to keep their ‘borrow,borrow,borrow’ and ’spend,spend,spend’ economies (B.S.economies!) afloat.

But dear readers this was literally money made out of thin air, not backed by a country’s hard assets or economic output. It was easy money and, whenever you pump easy money into a monetary system in simple terms you tend to get inflationary bubbles, such as the dotcom bubble of 2000 and of course the house price bubble that just went pop in the western world this year (2008). When the bubbles go pop the assets lose their inflated values. In the case of US housing they’re talking about a loss of housing ‘wealth’ in the order of $6-8 trillion – or thereabouts, give a trillion or two (who’s really counting and what does a trillion actually look like anyway???). That could amount to an average of $120,000 per US householder. But of course what everyone’s losing never existed in the first place. Those phoney paper notes printed by the US Federal Reserve have gone back to where they came from, thin air!

Anyway, you get our gist don’t you? There’s a lot under the surface that we’d like to talk about and if you bear with us, we hope to tell it to you in an entertaining a way as possible. It might take a week or two to get into our groove, but check back often and see how we’re progressing. Better still, go ahead and subscribe to our RSS feed or sign up to our regular ultraletter email. We value privacy so it goes without saying that your email address will never get past our website and of course you can unsubscribe at any time. We thank you in advance for your time and brains and hope we can imprint some interesting ideas into them.

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Hey readers, your humble co-editor jq has some pet hates to rant about too….

Pakistan – Some Core Issues

9th November 2008, JQ (co-editor)

I had always promised myself to be the beacon of righteousness in the face of all of the worlds’ wrongs but “home economics” always got the upper hand and until today did not not let me sort the socio-political world of real economics as Adam Smith would like to define. Well the good news [or bad depending upon which side of the scale you are on] is that the genie is now finally let loose by the thought police to play havoc on all of you alternative readers who took time out to find us. I say alternative because like TK mentioned we are different and want to present unique out of the box and possibly witty debate about the ultra problems at hand. So welcome to the ultranomics way of thinking.

I would start with some moans and groans to set the temperament! Then in the coming days we will look at possible resolutions to the ongoing painful points of Asian Economics (particularly in Pakistan) through the “common sense” approach. They say that common sense is very uncommon and honestly speaking not many brain cells seem to have been used so far otherwise Pakistan would not be in the current mess and would not still be banded among the third world countries, even though it is an atomic power.

The basic needs of a human being in today’s world can be summarised under the headings of food, shelter, power, health, safety, communication and transportation. Now if you live in Pakistan please look around and honestly answer as to how many of the population has access to all of these let alone a single one! Pakistan was created “60” long years ago and so far we don’t even have a proper international airport for the capital Islamabad and still are using the old Pakistan Airforce site.

It is shameful that being an agricultural country we are struggling to feed our own people, who in some cases are now forced to sell their own children in order just to get by and pay the bills. What happened to the Muslim Caliphates’ philosophy of being responsible for feeding even the single stray dog? George Orwell wrote: “All men are equal, but some are more equal than others.” I guess this stands true for the people in the driving seats of our poor country Pakistan’s throne who travel in expensive, third-world -country-budget-busting, lush bullet proof cars and eat lavish meals in comparison to a common Pakistani man who is struggling to pay his bills and only striving for daily grub so tell me how can we send a mission to the moon like India did, can anyone answer? Anyone from Suparco!

The Planning Commission of Pakistan believes that around 35 per cent of the Pakistani population are falling below the poverty line while the Pakistan Finance Ministry estimates only 22.3 per cent in accordance with the latest official survey [really have you ever seen a surveyor outside your door?]. This controversy if not resolved immediately, could potentially block the World Bank loan worth $500 million for Pakistan [I thought we had broken the so called kashkol] under the Poverty Reduction Strategy Credit (PRSC), which is desperately required to improve the depleting foreign currency reserves of Pakistan. Under the World Bank conditions Pakistan will have to prepare the PRSP setting targets to reduce the prevalence of poverty and establishing social safety nets in order to obtain a credit line of $500 million from the PRSC. The Finance Ministry is preparing the PRSP document for presenting to a visiting mission of the World Bank but is clueless about which figure is the official line. This really is mind boggling because if we cannot even get our statistics right then how are we supposed to plan our future. What happened to the professional norms and attitudes of the civil servants?

Why do all of the Pakistani roads have to be rebuilt every year? [I have to say the Pakistan motorway is an exception - credit where credit's due]. This is fuelled only by the kickback culture. Call it potato, call it potaato – the word though is “bribe” and will lead to hell fire. We will never know the real reasons why the Karachi bypass fell within days of its opening killing dozens of innocent civilians, so who will pay for their blood and the misery of near and dear ones? Can you put a price tag on anyone’s life? Can you price your own life’s worth?

We were taught in school that the essence of democracy is that it is for the people, by the people and of the people, it is the separation of powers between the executive, legislative, and the judiciary with all of them being independent of each other. In Pakistan no such arrangement exists so far. The Chief Justice of Pakistan Iftikhar Mohammad Chaudhary is a case in point who has yet to get any justice, so does a common Pakistani stand any chance of fairness in his trials?

Though it is true that states such as Pakistan with a weak economy and weaker political structure cannot hope to safeguard their sovereignty from arrogant superpowers such as the US, most Pakistanis still expect their rulers and armies to make a real effort toward this end instead of making hollow claims and raising false hopes [once is enough in 1971 war]. With such low credibility the ruling elite cannot hoodwink the people who now, thanks to the communication revolution and open access to the world media, are much more informed and enlightened and should not be taken for granted because they are able to fully grasp any given situation and arrive at intelligent decisions. We really need to take heed from the strong reaction of Syria’s President Bashar al-Assad’s government, which described the killing of eight Syrians in the attack as a “cold-blooded war crime”, demanded an apology and warned of consequences. With week knees if Pakistan cannot even stop its so called “allies” from attacking its borders then how are the Pakistanis going to get some favourable decision on the good old Kashmir issue?

Questions, questions and more questions! I will end this first journal perhaps for you to ponder and will touch all of the above and more Pakistan and Asian core issues, however my aim is to discuss a way forward and eventually suggest some solutions, yes solutions because we all know the problems by now and its time to get rid of them for good.

jq@ultranomics.com

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