Buttonwood's notebook

THE Olympics are almost over (the great county of Yorkshire theoretically stands 10th in the medals table) and it is time to head off on holiday. But there are a couple of big issues rattling round in what passes for your blogger's brain that seem worth thinking about on the sunlounger.

The reliance on central banks. Regular readers will know my thesis of the last thirty years; that the debt boom has been linked to asset bubbles and that central banks have regularly intervened to support markets, cutting rates when share prices falter. This has encouraged speculation and the greater prominence of the financial sector (where salaries took off, in relative terms, after 1980).

BANK runs don't always involve small depositors queuing round the block. As we saw in 2008, institutions can withdraw their money with devastating effect.

US money market funds are exiting the euro zone in what can only be described as a stampede. According to Fitch, the ratings agency, the funds' exposure to euro zone banks has dropped by 33% since May this year, and is now 78% down on its May 2011 level. (French exposure is down 88% since May 2011.) Just over 8% of all their assets are now in the euro zone, compared with nearly 40% in 2009.

Britain, though not in the euro zone, has not been spared in the rush.

JOSH ROSNER was one the earliest and most perceptive critics of the subprime lending boom and the alphabet soup of structured securities that accompanied it. He has now turned his attention to Europe in a 33-page paper (sorry, no link), taking a bearish view of German bunds, writing that

the German government will be forced to choose either a large share of the costs of supporting a further integration of the European Monetary Union or, alternately, the larger economic and social costs of its failure, including the massive costs of recapitalising German banks and financial support for German industry. Either approach will lead to German debts rising markedly while its economy contracts.

BACK in October 2008, just after the investment bank Lehman Brothers collapsed, the International Monetary Fund unveiled its forecasts for growth in 2009. The IMF is the global lender to national governments; its economic pronouncements are highly respected. So what did it predict? The US would grow 0.1% in 2009, countries in the euro zone 0.2% and the world as a whole 2.6%. The actual outturns were declines of 3.5%, 4.2% and 2.6% respectively.

This lamentable short-sightedness was not unique. Economists have regularly failed to predict recessions and were completely caught out by the recent financial crisis, as the Queen famously noticed. 

The shortfalls of the profession are old news.

THE nature of economics is that the same fact can be presented in many different ways. A country's GDP can be measured as its output, income or expenditure. Thus an ingenious polemicist can always recast the figures. Take Edward Conard in his book Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong (alternative subhead; Why Everything President Obama Has Done is Wrong and Why My Friend, Mitt Romney, Should Have His Job). There has been much debate about the problem of rising inequality in America; the top 1% gets a very large proportion of the income.

But if they get the income, Conard reasons, they must earn it. So he writes that

READING the latest volume of Robert Caro's wonderful biography of Lyndon Johnson*, one economic passage leaped off the page. Almost LBJ's first task was to pass JFK's budget; Congress was balking at the spending figure passing $100 billion for the first time. Nowadays we have become used to trillion dollar deficits, let alone the spending total.

It just goes to show how much everything has been inflated over the last 50 years. There was a particular problem in the 1970s, of course. But it seems very odd for Joseph Stiglitz to claim, as he does in his latest book The Price of Inequality, reviewed here, that

EARLIER in the week, I noted that Britain was not making the kind of progress in slashing spending that everybody assumed. Today, the ONS confirmed that UK output did fall in the first quarter by 0.3%; the country is in a double dip recession. But this is despite growth in government spending of 1.2% year-on-year.

The other odd thing is the tone of the recent data. Yesterday's CBI retail indicator, for example, showed a 21-point jump rather than a 10-point decline as economists expected.

Some analysts remain very sceptical about the GDP numbers as a consequence. Here is Chris Williamson at Markit