ECONOMIC OPINION: it is not possible to sustain overvalued bourses and currencies in the aftermath of Covid19.

by John Ward

The bill for Coronavirus opportunism is in the post, and we can’t pay it.


“Whatever it takes”

Between the 10th and 19th March this year – as the FTSE All-shares seemed to be diving ever-lower  at around 2,600 – the Bank of England cut the base lending rate three times – from 0.75% to 0.01%. These were already historically low numbers; but we would all do well to realise is that deposit interest rates are now ten times lower than they were three months ago. The rates vary a little by institution – but not much: whereas on March 10th, £50,000 invested with Nationwide earned £125, today it earns £25. For  a retired person, that’s a five-fold cut in salary.

During the three months since that time, the FTSE has regained all its 2020 losses, and is within 900 points of 2019 BC (Before Covid). It goes without saying that the economic outlook has worsened dramatically since November last year; but overall, the market has been going up.

The same thing has happened in the US, with the Dow recovering all losses and still rising – it’s currently back over 27,500 – and the S&P up a whopping 40%. There too, trade difficulties with China remain, oil is still deep in the doldrums (that’s like oildrums but without the calypso music) and official data analysis from the National Bureau of Economic Research rates the situation as follows:

‘a clear peak in economic activity has trailed off since February………The unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession’.

Bouyed by this sparkling outlook, the Dow powered ahead by 460 points yesterday.

The FTSE, Dow, S&P, Nasdaq and Tom Cobbleigh indices are completely disregarding economic reality on the ground. There’s a very real and blindingly obvious reason for this: most of the major central banks around the Anglophone World have made it clear that, whoever does wind up suffering from the barmy overreaction to Covid19, it certainly won’t be the banks and the bourse traders.

In the US, Unemployment is at 16.3%, and for 11 weeks in a row now, millions of Americans have turned to benefits for the first time. Small business owners are struggling with Lockdown closures….but all the bourse indices now skew sentiment towards very very Big business, and thus don’t hear the beat of Main Street. It is mainly, however, the insane belief that Uncle Jerome at the Fed and Old Bill Bailey of Threadneedle Street will “do whatever it takes” that keeps the markets happy.

Cometh the hour, cometh Lagarde. Oh dear…..

The major exception to the central bank rule is, as always, the European Central Bank – our guardian in these troubled times of the mickey mouse euro, a currency that should have been strangled at birth. As ever doing what she can to dodge the bullets, Christine Lagarde delegated talking about the euro outlook to ECB Vice President Luis de Guindos. He too didn’t want to risk a live event with real questions, so instead he answered some questions in the ECB’s house magazine last weekend. I’m serious, this is not a pisstake.

He told his interviewer he expected “the European economy to suffer a more severe recession than the global economy. Countries across the euro area will experience “a deep recession,” which entails unprecedented funding needs of more than €1 trillion”.

In fact, most forecasters think the amount is closer to €1.5 trillion, but either way, this is how the EU’s seemingly endless overlapping liquidity bodies will cough up:

“We have three main tools at our disposal. The first is the European Investment Bank guarantee, which has €25 billion available. The second is the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) program, which will provide lending of €100 billion to avoid job losses. The third is the European Stability Mechanism (ESM), which provides low-conditionality precautionary credit lines and already has €240 billion available, which can be increased up to €400 billion. Following the agreement the Eurogroup reached on Thursday, governments will be able to use the ESM to access the equivalent of 2% of their GDP and thus finance healthcare spending related to the pandemic.”

That adds up to €525 billion tops….or roughly a third of what’s required. There’s one of those delicious jargonised euphemisms bankers are so fond of in Senor Guindos’s answer, viz, low-conditionality precautionary credit lines. It’s what we statisticians call “screw the women and children, last one in the lifeboat’s a cissy and bugger the consequences”. It is certainly true that very little money is actually printed any more, because the stuff that counts is produced through the magic of electronic reserve button-pushing – and then treated as an asset to be one day redeemed.

It’s also worth realising, of course, that the ESM money is not liquidity at all, but capex to be allegedly ploughed into the restoration of public health services….most of which paucity was driven by the Germans and their 1923 view of economics. Only about two euros in five of the total will go into genuine business stimulation. As by September the eurozone gdp will be 10% adrift, my best guess is that the sum available for QE by any other name is going to be about 10% of that required.

Given that our old friend Philip ‘Bountiful’ Hammond tied the EIB debt to our ankles before sloping off the Westminster playing field in disgrace, we really do need to keep a beady eye on how these astronomical numbers are being divvied-up by the Sprouts as the costs go beyond the size of the galaxy and off towards another one far, far away.

So where is Frufru Lagarde in all this?

Well, her last statement of any substance (and such are rarities in her case) came on April 24th last, when she warned of a 15% plunge in Europe’s economy during the post-coronavirus recession.

Given the hyperinflation of coming doom involved here, one begins to appreciate the rapid volte-face of, for example, the Macron Government in France – where Lockdown is being reversed with what one might call almost indecent haste.

But five days ago, our Chrissie suddenly found other funds under the bed, and upped something called the Pandemic Emergency Purchase Programme (PEPP) budget to 1.35 trillion euros. So if you thought I was fear-mongering about Britain catching EIB20, then think on this: why does the eurozone need yet another liquidity-charity….other than as a means of hiding where these invented funds are coming from?

Some deluge conclusions

The problem with the major World economies is this: they have all tried to use Covid19 to blur the edges of a failed fisco-economic model. At the same time as doing that, the main élites involved have splurged money they don’t have in an attempt to counter criticism of the neoliberal tendency to invest in shareholders…..as opposed to infrastructures like public health. Lockdown was a flawed defence and, from Day Zero, an obviously unaffordable one.

As I have opined before, stopping economic activity dead was designed to protect élite reputations, not the genuinely vulnerable in our cultures.

The net outcome is that in the Anglosphere, we have our bourses even further removed from gdp growth realities than ever before – and beyond that, an ill-advised Single European Currency whose valuation is beyond exaggeration: it will prove to be junk on a scale beyond the imagination of the German 1923 Tendency.

We are in a terrible mess. Those that suggest otherwise are either mad or pernicious – and quite possibly both.