Another week with no market-moving news, and bond traders still in the cheerful state they call “death watch,” waiting for the Fed’s formal QE2 “go” on November 3rd.
Why the anxiety over something supposed to be good news? A lot of money has been bet on lower rates to come, but that wagering has already driven rates down. If there is anything disappointing in the Fed’s announcement (magnitude, duration, objective)… thus life ends for wrong-side traders.
The New York Fed’s Bill Dudley: “The momentum of recovery has slowed…. The current situation is wholly unsatisfactory.” Dudley pointed to steady deceleration from 2009’s 3.25% GDP gains to 2.75% in early 2010 and, “most likely…even slower….”
As we stumble through this unprecedented predicament, there is a model for success, or at least how to try to succeed. And, no, it’s not one of Rogoff’s mini-fables of financial crisis in Liechtenstein or Upper Volta in 1882. (“This Time It’s Different” leaves me cold, in part because it misses wrong-headed government efforts that made crises worse, and includes too many economies the size of phone booths.)
The one place not missing a step: the United Kingdom.
1. Flood the financial system with cash. The US got that far.
2. Devalue your currency. At the onset of disaster, the UK knocked down the value of the pound almost 25%, from $1.95 to $1.50, making exports more competitive and discouraging imports. After three years, the US may be getting around to it.
3. Re-capitalize your banks. Banks without capital are useless, smelly bloats that can neither write off bad debt nor make new loans. The US injected TARP cash as capital, then had no clue what to do as partial owners, then let them pay back TARP (which the weak could not afford), and now banks still sit with inadequate capital and bellies full of rotting toxics. The UK held its nose and got the job done.
4. As capital provider, instruct bankers reluctant to lend: “Make loans, or we’ll find someone who will.” You mean, make more loans that will go bad? “If you don’t make new loans, they will all go bad.” The US has failed completely; the UK got it right in ’08.
5. Begin quantitative easing, buying your own sovereign debt, and ignore inflation risk. The UK has done so since 2008 despite near-3% inflation, and continuously, no go-stop-go as here in 2010.
Then the hard part.
6. Get your spending in line with your tax revenue. Ignore the spend-now, tax-later Lefty-Keynesian drunks. Start by cutting excessive promises to spend in the far future, which does no immediate economic harm, and walk the cuts back toward the present.
Brave, new, young Prime Minister David Cameron announced the overriding rule: “Four pounds in spending cuts for every pound in tax increases.” And now the details: chop all branches of the military by 40,000 (to a total smaller than the US Marines), and cut equipment and aircraft, and mothball one of two new aircraft carriers; cleave 490,000 employees from public payrolls (in a nation one-fifth our size), slash the Royal Family, the Olympics, National Health Service, Foreign Office, BBC… everything.
Borrowed to the brink of ruin? Balance the budget by 2015. It’s not done, but it’s underway. Not some “3% of GDP” perma-deficit, the pitiful US target. The Brits are a hard lot, accustomed to collective belt-tightening. After WWI, in the Depression, in WWII, and worse after it; then, really not enough to eat, and as cold indoors as out.
We pride ourselves on pull-together, and know-how, but that was our grandparents. We can’t even talk a good game. We pretend.
As a kid, when it was time to get a tooth filled, or for stitches, or to scrub a skinned knee, my Okie Dad looked into my frightened eyes, squinted his, gritted his teeth, and growled to give me brave words to say to myself, whenever in need for the rest of my life: “How tough… are you?”
If we find the will, the UK is the way.