The Austerity Story
Dear All
Every year the folks over at Merriam-Webster's Dictionary award the coveted prize of "Word of the Year". Initially devised using a myriad of statistics, the award is now determined using an online poll devised by the popular internet dictionary and encyclopaedia company; which yields truly fascinating results. (Well to me anyway). Over the last four years, we have seen what I would refer to as intrinsically Finance related words take the crown (Pragmatic, Austerity, Admonish and Bailout) versus distinctly unrelated semantics from the preceding years. This includes the likes of the word "Blog" and "w00t". (for those wondering what exactly w00t is - it is the noise made when expressing joy - think whoop whoop!)
"All our work, our whole life is a matter of semantics, because words are the tools with which we work, the material out of which laws are made, out of which the Constitution was written. Everything depends on our understanding of them."
Felix Frankfurter
Anyway, I digress. This development towards a greater lay focus on the activities of the Finance world is hardly paradoxical. The actions of corporations, Governments and individuals alike have had, by the most part, lasting detrimental effects on the global population since the real-estate Ponzi exploded through the later half of the last decade. However, it is the winner of Merriam Webster's 2010 Word of the Year competition that brings me to the real point of this weeks first note. The word in question is: Austerity. Or, according to Wiki, the process of "deficit cutting, lower spending and a reduction in the amount of benefits and public services provided". A concept that the political powers of the US seem unable to get their head around.
The logic to austerity is very simple, cut your costs to reduce (or slow) the debt Burden. However, since its mass inception across various areas of the world, the economic skeptics among us have started to consider the validity of such measures. An excellent research report by Dr Tim Morgan initiated my skepticism over exactly how populations are expected to grow and cut concurrently. Is it possible? Well, Morgan argues that the fundamental growth assumptions built into the UK austerity plan are a little more than ambitious, and if this growth were to falter, we could experience a financially depressive state bought on through debt. Sound familiar? (A copy of the report is available HERE [13])
"There is no austerity equal to a balanced mind"
Chanakya
So does it work? Well, at this point I would like to introduce Hungary. The IMF austerity poster child. With a GDP half the size of California's, Hungary is a small European economy that has been indirectly crippled through profligacy of a vast quantity of other nations around the world. The story is actually fascinating. During November 2008, Hungary accepted the assistance of IMF, World Bank and Europeans (yes Europeans!) to help counter what can only be described as a run on the entire country. Since this point, the Hungarian government has successfully implemented a range of austerity measures to reduce their sovereign dependence on the global bond markets and, as the IMF puts it, "restore stability in the financial sector". In the period from January to November last year, Domestic borrowing fell by 8%. A truly staggering feat.
However, the story doesn't end here and im afraid that it doesn't end with "They all lived happily every after". Actually the result has been the polar opposite. Hungary, this week, was downgraded to junk by Fitch following what can only be described as a horrific bond auction. But why? The issue actually lies within Hungary's exposure to foreign denominated debt financing. Whilst Domestic Borrowing fell 8%, the repayments of Hungary's non Florint holdings increased by over 20% due to significant moves in the currency market from a weaker Hungarian economy and exposure to currencies such as the Swiss Franc. See, whilst the rest of the world was buying their 3rd, 4th or 5th house, the Hungarian population and Government were borrowing in Foreign currency denominations to avoid particularly high interest rates domestically. An activity that has vaporised the pertinence of any austerity measure in its entirety. The matter is made yet worse by evaluating the countries Monetary Policy. Any form of sovereign Florint printing would not result in a reduction of debt burden but would likely bring inflation.
Does austerity work? Can weak economies grow without reduced capital injections? I'll let you decide.
Before, I share my selection of the best articles from the last few days. I cannot go without mentioning the latest QE rumour that has emerged this week on the back of James Pethokoukis' article. Despite being better than a Jenna Jameson film to a certain bearded man over at the Fed, I see QE as the singularly most hopeless and dangerous policy that has re-emerged over the last decade. Supported by no credible or empirical evidence to suggest real long term growth, the policy is no different than the government lending the population their credit card for three months and expecting everything to be okay. Instead, the inflation that will result over the longer term will make the population as a whole poorer. Similar what they say for dogs, QE isn't just for Christmas it's for life. For those of you short EURUSD, I would urge you to look at the price change of the last two major interventions.
"Quantitative Easing is one of these PhD approved euphemisms that doesn't really convey the essential point..."money printing" would be so much a better step in the direction of intellectual hygiene. These people talk about quantitative easing as if they didn't mean to debase the currency over which they have temporary control"
Jim Grant
Without further ado, here are a number of articles well worth reading for the week ahead.
1. January Surprise: Is Obama preparing a trillion-dollar, mass refinancing of mortgages? - James Pethokoukis (Click HERE [14])
The article noted above that started the most recent QE rumour
2. Things That Make You Go Hmmm... - Grant Williams (Click HERE [15])
Grant takes another look at the Eurozone and Gold
3. Boom Time in the Middle East - Religare Research (Click HERE [16])
Religare discuss the growing Middle Eastern tension
4. Towards the Paranormal - Bill Gross (Click HERE [17])
Bill's welcome to the New Year
Best Regards
George Adcock
Founder
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