September 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

Maybe it’s desperation on the part of Microsoft. Yesterday, the company which seems to be under threat from all quarters: from the EU commission, from Google, from Linux, from Sony and Nintendo and from Apple, has just attempted to buy itself a big chunk of the face of the Internet’s future. At least it’s the face of the ‘Net’s immediate future.’ Who knows what will be next?

To say social networking sites are all the rage is an understatement. First there was MySpace, then there was YouTube, perhaps not social networking as such, but it’s the same ball park, same kind of audience and the same mystifying business model. Now there’s Facebook.

The inflation in the price of social networking companies goes like this. Thirty months or so ago, MySpace was offered to Google for around $290 million. The company’s two bosses Brin and Page have foresight aplenty. Since their own particular company is the very model of stratospheric dotcom growth, the two men were no doubt used to seeing business plans with lots of noughts in the projections. Even so, they reasoned, it was an absurd price. You would have been hard pressed to disagree with them. Yet, a few months later, Rupert Murdoch came busting onto the scene, said, “G’day” to YouTube’s founders, and offered $580 million. Had the Australian maestro finally lost the plot? Had his brains gone walkabout? Well, in no time, it seemed he was proven right. For while the ink on his $580 million cheque had barely dried, Google was signing a $900 million advertising deal with MySpace, and no doubt cursing along the way. It’s a fast growing business indeed when not even Brin and Page can keep up.

But Google was not to be disappointed a second time. As that famous dotcom analyst Oscar Wilde once said, to “lose one dotcom purchase is unfortunate, to lose two seems like carelessness,” and before you could say, “Let’s put our family video on the Internet” Google was forking out $1.65 billion for YouTube, a company which at the time could only point to modest revenues. The YouTube purchase was agreed in October last year and so now all eyes move to Facebook.

At least, eyes at the Wall Street Journal turned to Facebook and earlier this week reported that Microsoft is considering offering $300 to $500 million for a five per cent stake. But Google is not sitting back. It too wants some of the action and may even bid for the same shares.

So, if Facebook is worth $10bn, and MySpace has even more visitors, you would think Mr Murdoch would be pleased as punch right now. Well, actually, the NewsCorp shares price fell when the Facebook rumours started.

You see, in this rapidly changing world of social networking, it’s growth that matters. Right now, Facebook is growing faster. In the UK it is now more popular than MySpace, and the traffic on the site has swelled 541 per cent this year. But, on a global basis it’s still around half the size of MySpace, which had 68 million visits last month.

Mark Zuckerberg, the 23 year old sandal-wearing founder of Facebook, a business he founded in an attempt to make enough money to take his buddies on a holiday, can perhaps now contemplate asking the travel agent to book a month on Mars for his friends’ jolly.

But, is this inflation in dotcom valuation rational? Or will it all go belly up? It’s important you realise that this time it’s not investors adopting a herd instinct, rushing headlong to the edge of a cliff and jumping with joy over the edge, oblivious to their error. This time, it’s big business. Shrewd, albeit in the case of Brin and Page as yet inexperienced, businessmen, pragmatic, savvy and probably just as bemused as the rest of us. Moore’s Law might talk about processors doubling in speed every 18 months, but that’s nothing compared to the pace at which the Internet is changing culture. In nature, evolution is a slow process, but in humanity has given way to cultural evolution where things start to accelerate. And when we developed agricultural techniques, things went up another gear. The Industrial Revolution brought with it a new level of evolutionary change, but it appears we have now moved to a new phase, one in which change itself seems to occurring at an accelerating rate. The new Moore’s Law should not refer to capacity doubling every 18 months. Rather, it should state that the speed at which things double, doubles every few months.If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 26, 2007 | posted by Michael Baxter in IABN | comments (0) |

Alan Greenspan called it ‘irrational exuberance’. It’s when absurdly optimistic investors push the values of companies to completely unrealistic levels. Then there’s the opposite. The other day we called it ‘irrational exacerbation’. That’s when the public backlash against banks threatens to turn a problem into a full blown major crisis. Right now, it appears, the US has got both.

Here’s the exuberance bit. Do you remember when Rupert Murdoch forked out $580 million for MySpace? It seemed like a lot of money and the world wondered whether Mr Murdoch, known for his pragmatic ways and cynicism to the Internet, had allowed himself to be seduced by a new wave of dotcom hype. Well, it now appears that Mr Murdoch had his feet planted well and truly on the ground. For just two years on, Facebook, a company which enjoys less visitors than MySpsace, and is presumably less valuable, has just been valued at around $10 billion. At least, Microsoft is reporting to be considering paying out between $300 and $500 million for a 5 per cent stake.

Facebook is expected to make a profit of $30 million this year, and in what may possibly go down as one of the biggest understatements of all time, the BBC said on its web site this morning “on conventional valuations a $10bn price tag would look expensive.”

And yet while the days of dotcom mania seem to be returning with a vengeance, the poor beleaguered US housing market, and now consumer confidence, appear to be in something of a freefall. In the US, the supply of unsold single family homes is now at its highest level in 18 years. According to one report, the price of existing homes has now fallen by 3.9 per cent over the last year and consumer confidence, which until last month seemed to be defying all the gloom, has plummeted, falling to a two-year low. There’s no doubt about it, there’s plenty of exuberance and exacerbation. But the question is this. On this occasion is it irrational or is the apparent madness built on solid pillars of reason?

If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

According to this morning’s FT, BP’s new chief executive, Tony Hayward, told staff at a meeting in Houston that its third quarter results will “be awful.”
It is understood that Mr Hayward believes that BP is suffering from an over-complex management structure, one in which no one seems to be able to take responsibility for decisions, one in which risk isn’t properly quantified and one in which there are simply too many layers of management.
It’s reported that Mr Hayward said, “There is massive duplication and lack of clarity of who does what.”
A couple of years ago, it was Shell that was hitting the headlines for all the wrong reasons. Now the baton has been handed to BP. What with fires in the refinery in Texas, oil spillages in Alaska, the ignominious exit of its former CEO, woe seems to be the best word for describing BP at the moment.
Earlier this year, a report into BP produced by former US secretary of State James Baker talked about a “corporate blind spot relating to process safety.”
He said the company was using the wrong criteria in measuring safety procedures. It was looking at personal safety, and proudly proclaimed the steps it took to ensure each worker’s individual safety, but did not seem to have a corresponding policy for process safety.
To put it in the words of the report: “While BP has an aspirational goal of “no accidents, no harm to people,” BP has not provided effective leadership in making certain its management and US refining workforce understand what is expected of them regarding process safety performance.” The report also said: “BP mistakenly interpreted improving personal injury rates as an indication of acceptable process safety performance at its US refineries.”
It appears that the problems James Baker found relating to safety are endemic within the group and apply to other areas too. Divorce staff from the ability to make decisions, insert a management chain that is too cumbersome, and the key issues can get overlooked. Risk taking can go down the oil well, faster than carbon dioxide can come out of the oil refinery. According to the FT, Mr Hayward put it this way: “Assurance is killing us.”
Poor old BP, with oil so high in price, right now it should be raking in the bucks. It seems that the British oil giants don’t know how to make the most of things.
Maybe, what BP really needs is to be bought out by private equity. That would sort out the layers of management. The trouble is, even when credit was booming, it would have been all but impossible for private equity to pull off that trick. Now, it would appear it’s all just impossible. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

Five months ago, the IMF was quite sanguine about it all, predicting another boom year for the global economy and only a gentle slowdown in the US. Today, its face is glum.

Yesterday the IMF released its stability report, and all of a sudden the credit crisis has it worried. “The potential consequences of this episode should not be underestimated,” it said, and even if the credit crisis proves short lived, the implications for the global economy could be “far reaching and significant.”

Many are now questioning whether the US can avoid recession, although at the moment, the general feeling is that it can. It really comes down to this, how much does the Fed dare reduce rates to boost demand to stop recession, without causing inflation. It’s a fine balancing act, and one that the Fed is by no means certain of getting right.

Still, the US may be in a bit of a state, and the UK might suffer an unpleasant 2008 (meaning, by the way, the General Election should either be called this year, or not until the government has no choice but to), but at least we know the rest of the world is doing okay. The developing world is doing so well, that it will help bail us out and mitigate against the effects of a US slowdown. That’s what they have been saying, anyway.
Well, maybe not. The IMF also said this: “Private-sector borrowers in certain emerging markets are adopting relatively risky strategies to raise financing, most noticeably, in some countries in Eastern Europe and Central Asia, banks are increasingly using capital market financing to help finance credit growth.”
In other words, debt is building up elsewhere too, which could create another problem in the months ahead. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

In Ancient Greek and Roman mythology, the Furies were the female personification of vengeance. Today, it sometimes feels as if the three Furies of the modern world are dollars, gold and oil.

And this morning all three are in the headlines. The dollar hit a new all-time low against the Euro yesterday and fell against the Japanese yen. Analysts are expecting further falls to follow. The recent decision by the Fed to lower the rate of interest and the expectation of another drop to follow are behind the falls in the dollar: when rates fall, money often flows out of the country into other countries with higher interest rates.

The declining dollar is good and bad news for Uncle Sam. It’s good because it helps exports become more competitive. GM, for example, will be celebrating the fall. It’s bad because it could stoke up inflationary pressure.

There are other negative circumstances. One of the factors that has boosted credit in recent years has been the carry trade, where people borrow in Japan, where rates are very modest, and lend to economies where rates are much higher, such as the US and UK. A rising yen relative to the dollar makes the carry trade less profitable and there could be ramifications here that as yet, no one can yet quantify.

But while the dollar falls, and while markets fret over the credit squeeze, gold soars in price. Yesterday it hit the highest level since 1980. There are many reasons for the current popularity of gold.

The dollar is losing its appeal as a foreign reserve, the pound too seems overvalued (at least many think it is), the yen has had a torrid time in recent years, and the Euro, well, many just can’t get their head around the idea of the Euro replacing the dollar as the reserve currency of choice. So, that means many countries, and China tops the list, might well move into gold.

That’s not all. Gold is increasingly used in technology. Back in 2001, around 10 per cent of gold produced was used in telecommunications and IT. Gold, it seems, is not only good for our appearance, it’s ideal as an electrical conductor. As a result, it’s a vital component in products such as computers, DVDs and mobile phones.
And, of course, there’s fashion. In 2001, it’s thought that around 2,870 tons of gold were produced: 80 per cent of that production was for use in jewellery. And it’s India especially, where demand for gold as a form of jewellery is soaring.
The triumvirate is completed with oil, still over $80 a barrel, which until recently was the all-time high. Of course, most of the world has not felt the full impact of soaring oil. It is, after all, priced in dollars.
But the question is, what next?
It’s quite interesting. There are two schools of thought over oil. One says we are running out of the stuff: we have not had a major find since the 1970s. The other school of thought says, “Don’t worry, this is just a temporary shortage, caused by lower investment in exploration a few years ago, which is only just being righted.”
The argument seems to apply to the gold business too. Yesterday, gold miners saw their share price soar, but companies who specialise in gold exploration are not doing so well, with many analysts fearing gold is proving too difficult to find.
But, there were more than three Furies, and it’s not just gold, oil and the dollar that makes the world tick. And right now, commodity prices are high.
And yesterday, Jim Rogers, commodity dealer ‘par excellence,’ and former partner to George Soros in the infamous Quantum fund. vented his fury.
The Fed should never have reduced the rate of interest, said Rogers. “The clowns in Washington have signalled to the world they don’t care about the U.S. dollar,” he said. Mr Rogers reckons that the commodity rally may have another 15 years to run, and oil will hit $150 a barrel. He believes that agricultural products will shoot up in price too. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 25, 2007 | posted by Michael Baxter in IABN | comments (0) |

At first glance, the decision by the United Automobile Workers (UAW) to strike its 73,000 GM workers is a disastrous move. After all, the US has enough problems as it is, without one of its once-mighty motor manufacturers, that is now struggling for its very survival, being hit by its first major strike since the 1970s. And yet, dig a little deeper, and it is just possible that the strike is exactly what the doctor ordered, and is good news, not just for GM and its workers, but for the other two members of the Detroit Three: Chrysler and Ford.

GM, like the other two famous US car makers, is facing a number of problems. For one thing, all three caught that US disease so prevalent a few years ago, called “burying your head in the sand”, over climate change. The desire to be more environmentally friendly, not to mention to avoid paying out a fortune for their gas, has led consumers to flock in their droves to the likes of Toyota. The Japanese company’s market share, now standing at around 16 per cent of the US market, from just 9 per cent at the beginning of this decade, means it is getting close to being the United State’s market leader. GM, on the other hand, has seen its share fall from over 28 per cent to around 23 per cent today.

But it’s not just a case of misreading market trends. The US motor industry is also facing ever tougher competition from abroad, and in this respect the challenges it faces are simply a reflection of the challenge we all face in this new emerging world: where countries with massive populations enjoy a relatively large industrial base.

Then, there’s healthcare. If the other two problems weren’t bad enough, the legacy of giant healthcare commitments could be enough to make the unthinkable happen and force one, or maybe all three, of the US car giants into liquidation.

Unions are aware of all this. They do not want to make their fears over job security and healthcare to become a self-fulfilling prophecy, and through strike action they make happen the very thing they fear. But, as ever, opinion is divided. Some union activists are more anti-management than others. While some might see the change that is sweeping over the US car industry as unstoppable, others feel they can stop the tide.

Like the court of King Canute, the union activists are wrong. It was they, not the King, who said he could stop the tide. By striking now, maybe the UAW can mitigate against a bigger, more disastrous strike and perhaps even reduce the chances of a strike hitting the other two big US car manufacturers.

GM is actually in better health than Ford and Chrysler. Chrysler is moving towards private equity and Ford is so riddled with debt that many say it should be bankrupt by now. GM on the other hand has been fighting a rearguard action that is actually not half bad. Good enough, even, for shareholders in the company to support the current management from the plans of Kirk Kirkorian, who wanted the company to tie up with Renault and Nissan. Perhaps the jewels in GM’s rather forlorn crown are the new breed GM autos, the Buick Enclave, GMC Acadia and Saturn Outlook.

So what will the strike cost GM? Well, if it lasts for a few days, it could actually help the bottom line. The company has so much inventory that it can afford a few days of no production. If anything, it will help clear the backlog, not to mention cut the wages bill. Problems will arise only if the strike lasts longer, and becomes more protracted. Unfortunately, the vehicles the company is pinning so much hope on are not in such ample supply. So, the time GM has on its side is limited.

For its part, the UAW has over $800 million stashed away. The plan is to pay striking workers around $200 a week. So, you would have thought it could afford to go some distance. But workers are used to earning a lot more than that, and it is thought the union leader Ron Gettelfinger is anxious to resolve the dispute as soon as possible. “No one benefits in a strike. But there comes a point where someone can push you off a cliff. That’s what happened here,” he said yesterday.

Right now, the union fears are twofold. First they are worried about healthcare, as well they should be. As the company’s US workforce declines, as sales ebb in favour of Japanese and other foreign car industries, 44 per cent of union members are retired, and over 63 per cent of the current workforce will be eligible for retirement in a few years. The problems they are grappling with are not dissimilar to the problems we will be facing in a few years time when the baby boomers start retiring.

But actually, there appears to be a fix to the problem of healthcare. Not a perfect fix, but one that may do. GM is to hand responsibility for running the healthcare funds to a trust administered by the unions. It is thought the car maker will have to inject around $50 billion into the trust, although this is still being negotiated, but can then focus on the business of survival and competing with Toyota et al. The two sides have their differences to settle, but broadly they are both in favour of the idea.

The strike was caused not because of the issue of healthcare, rather because of the decisions by GM to outsource some production to a facility in Mexico. Protesting workers held up barriers proclaiming their disregards for NAFTA (the North American Free Trade Agreement), while others expressed their fears over China.
It does illustrate quite perfectly one of the major challenges facing the global economy. To continue to expand, the world needs ever more trade and ever less barriers to trade, and yet in the US, there is very real, and understandable, resistance to the idea.

But, this is not a crisis which can not be solved. The UAW’s famous former president, Walter Reuther, who negotiated the healthcare agreements in the 1930s, once said “a contract is not a dead piece of paper; it’s a living document.”
The UAW’s leaders want GM to remain a living thing, not a dead testimony to how a lack of willingness to change cost it its very survival. But before the company can get down to the business of survival, a few more lessons need to learned. Both sides need to be seen talking tough, they then need to experience a bit of pain, and only then will they get the grass roots support they need for an agreement.If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

In the world of New Media there has been much talk about the threats to Microsoft, others have argued that Google is becoming too powerful, and that despite its righteous slogan is itself turning into an evil empire.
But maybe, another giant could be about to fall. Well, actually, not just one giant, but maybe an entire business model. The business model that seems so under pressure, is the model pertaining to the big wireless operators.
And just as Google has got the analysts worried, it seems that the wireless industry might see nothing but evil coming their way from Google.
If you were to make your way to Mountain View, California, then you would be able to access wireless Internet access thanks to Google. Mountain View, is Google’s home. So far, it’s small fry but it is thought the company is planning its own wireless network and at the same time has plans for its own mobile phone (no doubt with calls made over the Internet with personalized advertising subsiding the cost to the end user).
Apple seems to be making ever bigger waves with its iPhone. Okay, rumours that it too is building its own US network seem to be little more than rumours at this stage. In the UK, Apple is working with O2
Yesterday, just for a change, a bank made an announcement that it had nothing to do with the credit crisis and everything to do with the future of technology.
First Direct has now created a new service designed for owners of the iPhone, and presumably other iPods offering Internet access. First Direct says that “users of the iPhone will be able to surf onto the First Direct website and access all their online banking services wherever they are as easily as they could from a personal computer.” In fact it says that First Direct has adapted its Internet banking site to work better.
It seems the Internet is becoming more and more accessible for consumers on the move. Apple, with its user-friendly interface, is leading the way into the mass market. And where the Internet goes, VoIP is sure to follow. For the consumer and business it’s good news, another step in the communication revolution that has been behind much of global growth in recent years. But right now, the giant wireless operators really should be quaking in their boots. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

Even the Economist magazine joined the bandwagon. Last week, the Bank of England governor, Mervyn King, agreed to pump £10 billion into the market for 3 month bonds, and dangled the carrot of more injections to follow. The Economist called it at an “extraordinary turn around,” while most of the UK’s media seemed to have tried Mr King and found him guilty and in the process have sided with the banks whose reckless lending created the crisis in the first place.
Okay, you might argue, why didn’t the Bank of England warn the banks and try and persuade them to curb their kamikaze behaviour? The truth is that this is exactly what the Bank of England did do, on numerous occasions. It’s just that their warnings seemed too subtle, too couched in jargon and long windedness.
If you want to blame the Bank of England for not talking enough plain English, we would happily join the list of critics, but that’s not what the media and City are saying. The City were, in effect, caught with their trousers down, and now they are busy trying to pass the buck.
Before he bailed out Northern Rock, Mervyn King was busy talking about “moral hazard,” and argued against a bailout of the banking system, saying that such an act “undermines the efficient pricing of risk by providing ex-post insurance for risky behaviour. That encourages excessive risk-taking and sows the seeds of a future financial crisis.” Okay, you can see what we mean about plain English but, even so, he has a point.
So why did he bail out Northern Rock? Because he had no choice. He understood the danger of a panic. Ideally, he would have executed a covert rescue, but regulations do not allow that. So, he bailed out the bank in the full glare of the public gaze. If he had done it any sooner it could indeed have been argued that he had made life too easy for Northern Rock. Any later and the panic would have been much worse.
The decision to then pump money into the market for 3 month bonds is harder to justify. There might well be truth in the talk that the Government gave him no choice. If so, last week we saw the shattering of the myth of Bank of England independence.
But then again, we think it is possible to underestimate the seriousness of the problem that was emerging. There was a very real danger of the crisis escalating and causing a major economic recession. Mr King did not want to reward risk taking when it went wrong, but neither did he want to see economic woes escalate out of hand.
Liberal Democrat Treasury spokesmen Vince Cable said, “What I think is really worrying is the way Mervyn King has been made the scapegoat. He’s been hung out to dry.”

So much for the blame game. What will happen next? Writing in the Independent, David Kauders put forward an interesting theory. He argued that credit will tighten at the same time as the rate of interest falls. In short, credit is about to get harder to come by, but if you do manage to get hold of it, it will be a lot cheaper. Maybe that’s quite a cheerful prospect. If much tighter credit conditions limit the amount of money floating around pushing up house prices, but for those who do buy a property the cost of the mortgage is much lower, we have what seems like a dream scenario. But then, maybe that prospect is too good to be true.If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

Can we afford our debt? If we can, then the recent crisis in the money markets will soon die down and in a year or so we might actually wonder what the fuss was about. But supposing debt is simply unaffordable at its current levels? If that is the case then expect more trouble. Expect the UK to see its own equivalent of a subprime crisis and given that house prices relative to income are much higher in the UK, the fallout for us could be even worse than that currently being experienced by Uncle Sam.

But right now, on the question of whether debt is affordable, the jury seems to be out.

Yesterday, the Sunday Times economics writer David Smith continued his attempt to shake off the commonly held belief that economics is a dismal science, when he followed up last week’s bullishness on the housing market with the following equation.

“Between 1997 and 2006 the level of household disposable income rose by £276 billion, while consumer spending rose by £293 billion.” Ergo, suggested the economics journalist (whose crystal ball seems to be permanently half full), debt is affordable.

Mr Smith is not alone in his optimism. Earlier this summer, the Halifax said, “In the past ten years, housing assets have grown by 213 per cent, comfortably outpacing the 160 per cent rise in outstanding mortgage debt.”

Yet not all are so sanguine. In this week’s Economist, the magazine looked at the relationship between debt and disposable income. Back in 1987 debt stood at just under 80 per cent of disposable income in the US and just over 80 per cent in the UK. Today, the ratio in the US has shot up to around 130 per cent, but in the UK the increase has been even bigger, rising to over 150 per cent.

The fact is that our savings rate has fallen dramatically in recent years. During the early 1990s, UK personal sector savings rates (percentage personal disposable incomes) were around 7 to 8 per cent, much the same as in France and Germany, and above that in the US, where it was 4.5 to 5 per cent. According to the Office for National Statistics, our savings ratio today, which includes our pension contribution, is just 2.1 per cent, the lowest since 1960.

It is quite difficult to square the figures produced by the Economist and the data on the falling saving ratio with Mr Smith’s more optimistic take. It is worth remembering, however, that the figures on disposable income do not tell the full story. Over the last ten years, council tax has risen and mortgage payments have shot up, and yet neither of these two measures are taken out of the disposable income data: in other words, our true disposable income might not have risen as fast as the official statistics suggest.

There’s lies, damned lies and statistics, and it is clear that the statistics can be made to show we are sitting under a mountain of unsustainable debt, or that actually debt is quite affordable.

Sometimes though, economics statistics do not paint the true picture. In the late 1980s, when Nigel Lawson was Chancellor, he failed to spot the unsustainability of the boom because the figures did not bear out what most people on the street knew: debt was rising fast.

It’s the same today, and it’s illustrated by our massive balance of payments deficit. We are clearly spending more than we can truly afford. Maybe business is caught up in it all, employing workers and paying salaries based on debt-funded demand for their goods and services. And the argument that debt doesn’t matter, because house prices are rising even faster, an argument that Gordon Brown put forward yesterday in his interview with Andrew Marr, is very dangerous.

Some time ago we argued that one very worrying trend is the way individuals are seeing their property as their pension. The truth is, there is no economic growth in property. Money invested in houses does not increase our ability to produce and if future pensioners base their spending on equity release, the resulting consumption will not be matched by rising supply, and we’ll get inflation. We have pointed out the dangers of this before, and in his book, the “Age of Turbulence,” Alan Greenspan highlighted exactly the same danger. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved

September 24, 2007 | posted by Michael Baxter in IABN | comments (0) |

In all the furore, many seemed to forget the real underlying cause of the recent market turmoil. Inflation is the beast that lurks behind the scenes. Earlier this decade, despite rising government and consumer borrowing, there seemed a very real danger of deflation: the risk of falling prices encouraged central banks to reduce the rate of interest and in turn encouraged even more borrowing. Then over the last couple of years, inflation pressures have started to build, and with that interest rates have shot up, hitting those who borrowed when rates were lower particularly hard.

The obvious response to all the current market and economic kerfuffle is to reduce rates, something the Fed has already done. It should come as no surprise. A reduction in the rate of interest has been the Fed’s response to economic crisis many times over the last decade or so. Now, in the US, markets seem to be pricing in another cut in rates later in the year, but what about the UK? Are interest rates about to slide here too?

Inflation is down: the fall in the Consumer Price Index (CPI) to 1.8 per cent in September barely showed up on the radar of most newspapers, so preoccupied were they with the rather exciting news that the Bank of England and FSA might be fallible, but the fact is the CPI index is now at its lowest level in 18 months and the joint lowest level since February 2005.

Then there’s the Bank of England. Last week saw the release of the minutes from the meeting held earlier in the month when rates were kept on hold. It was a decisive victory for the doves, with all nine members of the MPC voting to stick. The minutes also said that the risks to rising inflation have “probably receded.”

Then there’s the continued news that wage inflation is staying under control. In fact, wages are rising much slower than the Retail Price Index, meaning that in real terms most of us are becoming worse off.

You need to bear in mind that there is a time lag between a change in the rate of interest and the onset of inflation: the recent rate hikes have not yet been given time to filter through the system. Remember, the recent credit crisis was, just like Bruce Springsteen, born in the USA, and the last time rates went up Stateside was June 2006. So, combine the fact that we have not yet felt the full impact of this year’s increases in rates with the ramifications of the credit crisis and you have good reason to suppose rates will come tumbling down soon.

Capital Economics which, for much of this year, has sat in the hawk camp (calling for rates to rise even faster than they did) is now predicting three cuts in rates: in May, February and August next year.

And yet, while you can see the arguments for a rapid fall in interest rates, it’s not that simple. For one thing, oil is sitting at around its all time high dollar price. It is true, we are partially sheltered from the full impact of this by the high value of the pound, although even when measured in sterling, oil is much higher today than it was at the beginning of this year, or even when the Bank of England last upped interest rates.

For another thing, what you and the rest of us think matters. If we expect inflation to rise, we tend to spend our money more rapidly, before prices go up, which in turn can create excess demand leading to price rises. Our expectations of inflation can cause the very thing we were expecting to happen. They are self-fulfilling prophecies. The latest inflation expectations survey from the Bank of England, which was published last week, found that 69 per cent of us expect inflation to rise over the next year.

Then there’s China. Inflation in China is soaring. It’s partly due to the outbreak of blue ear disease among pigs that has led to hyperinflation not only in pork, but in substitute goods as well. But it seems unlikely this one-off factor is the only cause of China’s rising prices. Most economists think that surging demand is creating underlying inflationary pressures too. Chinese inflation does not necessarily mean rising prices in the West. The fact is that prices in China are much cheaper than in the US or Europe, and even if prices from China go up, providing our level of trade with China continues to increase, then it seems likely that the deflationary effect of increasing trade will easily make up for any rise in the price of Chinese goods. But in the shorter term it is not like that. A sudden rise in Chinese inflation is likely to outpace the rise in trade and will inevitably mean the import of some inflation from China over the next year or so.

But, maybe the key to whether inflation is really is set to fall, and whether the Bank of England can indeed prudently start slashing rates (as opposed to slashing rates in response to government pressure), may lie with food. The combination of bad harvests and the use of agricultural products in bio fuel has led to sharp rises in food prices. But, according to a report on Bloomberg this morning, farmers across the world have responded to the rising cost of food by throwing their resources into producing more. Now, it is thought we are on course for seeing the biggest wheat crop in ten years. Bloomberg quoted James Gutman at Goldman Sachs as saying he expects the worldwide price of wheat to fall by 30 per cent in the next 12 months.

And that should just to serve to remind us that the true factors that shape our economic prosperity lie with our ability to produce, and it seems somehow quite ironic that perhaps agriculture, the oldest of industries and something whose economic impact we all intuitively grasp, could bail out the developed world from an economic problem that few, if any indeed anyone, can truly understand. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Find.co.uk Limited. All rights reserved