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The economy: The scaremongers selling us short

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    The economy: The scaremongers selling us short

    http://www.thisismoney.co.uk/news/co...in_author_id=4

    ANTHONY HILTON, EVENING STANDARD FINANCIAL EDITOR

    The scaremongers selling us short

    21 January 2009

    When one hedge fund manager, Crispin Odey, tells you 'the country is bankrupt' and another, the American Jim Rogers, says Britain is finished, you can be sure of one thing - they probably both have a massive short position in sterling, and will profit mightily if they can engineer its fall. It tells you nothing about the true state of the economy or the realistic value of the pound.

    There was no fundamental reason for sterling's six-cent plunge against the dollar yesterday, as opposed to any other day in the past month, except that it was a good day to start a panic. The injection of more money into the banking system and the authorisation given to the Bank of England to engage in quantitative easing - also known as printing money - have been on the cards for weeks, and widely called for by many of those same hedge funds.
    But it was on Monday that the news came out, so what better day to try to whip up some hysteria, and see what they might loot from the bodies of those trampled in the panic? This has always been the way in financial markets, in that speculators always fill their boots first, then tell everyone else. But there are two major differences between now and the past.

    First, the sums involved are so much greater that the hedge funds know they have the power to overwhelm the resources of a central bank trying to defend the currency, or some normal sensible individual who had a good business reason for being in the markets but has got caught up in the rout. So they have a bit of a one-way bet. Heads they win; tails they don't lose.

    Second, a 24-hour media that is much better at producing panicky headlines than reasoned analysis makes it much easier than it used to be for them to whip up a storm. The suggestion that the UK is bankrupt is absurd, other than in the sense that we would all be bankrupt if we were called upon to repay everything we owe tomorrow. The fact is the UK Government's debt as a proportion of GDP is a lot lower than that of Germany and many other Western countries.

    The respected economists at Lombard Street Research argue further that our economic prospects in the short term, while clearly nothing to cheer about, are probably better than those of the big exporters - Germany, China and Japan - who will suffer more than we will from the collapse of world trade. There is even a view that one day before too long the Government risks being accused of profiteering, having bought control of the banks only to find that those toxic assets are not toxic at all - though I am not sure that is a view I subscribe to myself.

    Nor is there anything unprecedented in the fall in sterling. In 1981, it stood at $2.45 as North Sea oil began to flow. But in 1985, after four years of Margaret Thatcher's "sado-monetarism" and the recession this caused, the pound touched $1.03. That is a significantly bigger fall than we have seen this time, and we survived. So it may fall further in the next few days under the onslaught of self-interested selling, but in purchasing-parity terms the pound should be around $1.60.

    If you want to know where it is likely to be in two to three years, when the speculators have made their profits and gone home, that provides a benchmark.
    This default font is sooooooooooooo boring and so are short usernames

    #2
    Thanks for that - very interesting.

    The key thing is when listening to economic commentators is to listen to their reference points. If they just discuss sterling and the UK economy alone, they have an agenda or are purely focused on the short term for whatever reason. If they also refer to pressures on other economies - particularly the US and the Eurozone, then they have a view of the wider picture, and I listen.

    It is a fact that the run on the dollar and the run on the euro hasn't begun yet, whilst sterling has weakened. The reasons for this are many, but partly because the downturn is still gathering pace, and sterling is a smaller currency. However, just because sterling is a smaller currency doesn't mean we should drop it and adopt the euro, as some seem to think.

    Rest assured, the weaknesses in the very structure of the US economy, and the shearing forces on the Euro caused partly by the reliance on exports in the German economy, and partly by the variance in macro-economic forces and their effects across the whole spectrum of the eurozone, means those currencies are inherently weak over the medium term. What we are seeing happening now is short term.

    Personally, I wouldn't be the least bit surprised to see the dollar falling to near 2:1 against the pound again within the next 18 months, unless Obama can pull something amazing out of the hat that nobody has thought of. Particularly if there is a change of government in the UK, and particularly if someone in Uk government can get a clue and realize they need to create a toxic bank to get toxic assets out of the system - fast.

    Like I've said before though, fascinating times for anyone who is interested in economics and who has any sort of an understanding of what is going on - and who to listen to.
    Is God willing to prevent evil, but not able? Then he is not omnipotent. Is he able, but not willing? Then he is malevolent. Is he both able and willing? Then whence cometh evil? Is he neither able nor willing? Then why call him God? - Epicurus

    Comment


      #3
      HMG, the BBC, Robert Peston, and Vince Cable's scaremongering sold the Rock short !!!

      Comment


        #4
        The number one thing to stop somebody selling your currency short is not to give them reasons. Brown has just given so many reasons by his incompetence and waste for these commentators to believe that we are going bankrupt. I think many British people are starting to believe this also !!

        Comment


          #5
          Originally posted by PM-Junkie View Post
          Thanks for that - very interesting.
          Aah Mr emtpy pockets PM-Junkie - I thought you would be quick to post.

          In fact there were some other threads on sterling the last 2 days where I was surprised you did not post - maybe I missed them!

          I do not have such a deep understanding of economics as you appear to have (judging by the big words in your article!), however I tend to agree with you - the Euro and the Dollar are lining up for some weakness.

          What is interesting about the toxic assets is some comment a bloke in the US made on the BBC world service news (or whatever it is called abroad) - that basically most of the "losses" claimed on the toxic assets are not real - they are paper losses that have to be "declared" by accounting rules (laws?) - particularly so as a lot of the underlying mortgages are still being repaid every month! What puzzles me about this is, if he is correct then how come the govts want to spend trillions when they could have just changed the accounting rules. Oh of course, 'cos then their pet projects would not get slipped in amongst the big figures!
          Last edited by MPwannadecentincome; 21 January 2009, 23:39.
          This default font is sooooooooooooo boring and so are short usernames

          Comment


            #6
            I am sure you're right - you can bet your life that a lot will get hidden. Just as you can bet your life that some of the shedding of jobs is not just a cost cutting thing, but clearing out people that companies wanted to lose but couldn't under normal circumstances without unnerving shareholders. I do wonder what percentage of job losses are truly due to the recession, and what proportion are simply down to idiotic managers with idiotic hiring practices.

            Recessions can be a wonderful smokescreen for the unscrupulous!
            Is God willing to prevent evil, but not able? Then he is not omnipotent. Is he able, but not willing? Then he is malevolent. Is he both able and willing? Then whence cometh evil? Is he neither able nor willing? Then why call him God? - Epicurus

            Comment


              #7
              Originally posted by MPwannadecentincome View Post
              What is interesting about the toxic assets is some comment a bloke in the US made on the BBC world service news (or whatever it is called abroad) - that basically most of the "losses" claimed on the toxic assets are not real - they are paper losses that have to be "declared" by accounting rules (laws?) - particularly so as a lot of the underlying mortgages are still being repaid every month! What puzzles me about this is, if he is correct then how come the govts want to spend trillions when they could have just changed the accounting rules. Oh of course, 'cos then their pet projects would not get slipped in amongst the big figures!


              I remember last year when a 55 Billion guarantee by HMG to the Rock was dressed up as a loss to taxpayers of so many thousands to each household. People believe this rubbish, unfortunately.

              Comment


                #8
                OK, having lived through the 1987 sharemarket crash, the dotcom boom and subsequent bust, and various other smaller boom and bust times, I can honestly say that a lot of the doomsayers are going to look mightly stupid in a few years time.

                You only have to look at say, the BBC or the Telegraph websites to observe two articles on the same day by two different analysts both saying contradictory things.

                AND it seems a curious thing about the English that you do seem to be remarkably over-optimistic or overly-pessimistic, espeically in the press.

                EVERYONE has their own agenda, so its difficult to take anything anyone says in the news seriously.

                One thing I can predict for sure, is that in a few years time things will be chugging along as they used to - low unemployment, rising sharemarkets and property values etc etc. Then it will all go mad again as a whole new generation of young greedy people seek to make quick fortunes, and there will be the Golden Years again for a while before another bust.

                Its the inevitable and unavoidable result of the way our capitalist society is created and human nature.

                In the meantime, just keep singing and whistling 'Always Look On The Bright Side of Life, do da..."

                Comment


                  #9
                  Originally posted by MPwannadecentincome View Post
                  What is interesting about the toxic assets is some comment a bloke in the US made on the BBC world service news (or whatever it is called abroad) - that basically most of the "losses" claimed on the toxic assets are not real - they are paper losses that have to be "declared" by accounting rules (laws?) - particularly so as a lot of the underlying mortgages are still being repaid every month! What puzzles me about this is, if he is correct then how come the govts want to spend trillions when they could have just changed the accounting rules. Oh of course, 'cos then their pet projects would not get slipped in amongst the big figures!
                  This is a good point - the mark to market rule & general stupidity means that the "toxic assets" are way oversold.
                  If people stop to think, they would realise that subprime mortgages are likely to return say 75%, but they are being marked at 30,20,0% even.
                  This is 1 of the reasons Barclays is getting attacked - traders think they are over stating the value of their subprime assets.
                  Believe me, anyone buying these assets at 10% of face values will make a killing in a few years.
                  Bored.

                  Comment


                    #10
                    Originally posted by ace00 View Post
                    Believe me, anyone buying these assets at 10% of face values will make a killing in a few years.
                    Isn't that Brown's plan - set up a 'bad' bank with the toxic assets then make such a big killing that taxes can be halved thus guaranteeing labour winning the next election?

                    Not before the next election I think - it will take years for these assets to be realistically valued!
                    This default font is sooooooooooooo boring and so are short usernames

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