United in discord

So much for European unity! The threadbare "common front" on economic stimulus packages is unravelling in style. The UK government got a very public dressing down from their German counterparts, who deemed the UK Labour Party's record borrowing as "breathtaking".

At last! Someone in the political space has come out with an iota of common sense. It's great politics (in the short run) to try and spend your way out of recession, but the ballooning debt burden could take decades to work off. A fine legacy indeed. Thank goodness that Gordon Brown has saved the world - talk about delusional!

Of course, there is a political agenda here. Within the Eurozone, there is great tension between the fiscally efficient German economy and some of the more "basket case" members (such as Spain, Italy and Greece). Berlin is reluctant to weaken the euro as a quick fix for less efficient Euro countries, and rightly so.

Talking Airhead

Commenting on monetary policy is seldom a measured affair - between the ideological hobby horses and political allegiances, rational thinking rarely comes into it. Stepping across the pond to Olde England, a particularly damaging form of delusion is taking hold, courtesy of a nefarious perma-optimist called Anatole Kaletsky.

In his latest piece of sanctimonious claptrap, Mr. Kaletsky contends that the UK government is "right" to be ratcheting up the borrowing to a dizzy 57% of GDP. Poor Anatole, he fails to realise that the quasi-nationalisation of the banking system has two very nasty consequences to his quaint academic theories.

First, bankers will be "guided" to lend based on political expediency - especially if a Spring election is on the cards. As an example, in normal times a bank may well lend to a sound private-equity backed firm, and not to a group of credit-naive households. But with a state-run lending system the priority becomes votes, not rational loan underwriting.

Second, banks need to de-leverage. Even if you set aside the massive writedowns from the upcoming bankruptcy tsunami, banks would be crazy to be lend more - math tells them to make net lending negative, in order to repatriate funds and rebuild the balance sheet.

So Oliver Brown and Laurel Darling have completely misunderstood the problem, and lumbered an already imbalanced economy with a debt millstone.

I actually met a client of Mr. Kaletsky's research services yesterday. A key selling point was that the reports concerned were "straightforward - simply A to B". Just like a train heading for a crash, I guess.

PS: Anatole, just for your information - it's now cheaper to buy credit protection on Unilever than UK government debt. Your piece states that this borrowing binge is "not a serious problem" - the market seems to be pricing in something horribly different.

Tax-fiddling while the economy burns

Over in the UK, the latest wheeze to try and get the highly leveraged consumer back into the shops (and into even more trouble) has been announced by the government. This is in large part based on a one year reduction in sales tax (VAT) from 17.5% to 15%.

Let's do some quick math on this "major" stimulus package. According to the UK National Statistics, the average UK household spent about £21,000 per year (I've removed food from the equation, as it is VAT exempt). So that tax rebate is equivalent to a whopping £525 per year!

Laurel Brown and Oliver Darling strike again - this means that every household can treat itself to a nice cafe latte every workday for a whole year. Forgive my cynicism, but it will take a lot more to encourage Joe Public to forget the existing bills and go buy another flat screen TV.

I confess to being mystified as to how so much taxpayer money can be funnelled into dead-end temporary gestures like this. It makes TARP look like a carefully crafted and balanced strategy. If the government is intent on spending, why not do so on a useful investment programme, such as a high speed train network?

Instead, the UK government seems intent on wallowing in economic ineptitude by flooding the bond market with record levels of gilt issuance. The lesson from the subprime disaster isnot to extend lending to borrowers who could not afford it. Granted, the UK is not (yet) there, but that AAA rating is becoming a bit of a joke. Although in this day and age, perhaps ratings themselves are going the way of Bear Stearns?