The price of everything

Distant but real

 

“Senator Joyce said the chances of a US debt default were distant but real and politicians were not doing the electorate a favour by refusing to acknowledge the risk.

“'That is the first scenario, which is extremely bad for Australia. The worse scenario is where the US doesn't repay its debt - the $ 2 trillion in debt it owes to the Chinese, the $ 1 trillion in debt it has to the Japanese and the $ 1 trillion in debt to others - and then we are really nailed.

''The outcome is a shift away from the US dollar as the international trading currency and a shift to the Chinese yuan, and China becomes an immensely powerful player overnight.’”

 

-       Australian Senator Barnaby Joyce, quoted in The Sydney Morning Herald.

 

In the ‘Looking Glass’ world in which we are now trapped, we have had to get used to dealing with six, or more, impossible things before breakfast. But few things reveal the rising risk in supposedly safe markets than the marked extent to which the UK economy is in thrall, not just to its bankers, but to its politicians. The banking supertax is one example of a cravenly populist administration desperately lobbing out distractions to placate the mob, and its bluntness and lack of sophistication as a policy instrument are becoming increasingly clear (bankers are an easy target but financial advisers per se have a more convincing claim upon clemency). But a cynical pre-Budget report (one that Vince Cable called “a good budget for bingo and boilers”) gives an even more breathtaking sense of a government in utter denial about the hard choices ahead – by tweaking up selective benefits, such as Child Benefit, ahead of a wholesale and inevitable post-election slashing of benefits largesse irrespective of which party wins. In response to the pre-Budget report, bookmaker Paddy Power cut the odds of the UK retaining its ‘AAA’ credit rating from 3/1 to 6/4.


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Whose default is it, anyway ?

 

“Government bonds are now an extremely poor investment.”

 

-       Société Générale Global Strategy Outlook, 1 December 2009.

 

As Detective ‘Dirty’ Harry Callahan once said, a good man always knows his limitations. The employees of investment banks are not always the first to concede to any kind of limits with regard to human intelligence, insight or fortune-telling. Bloomberg reported on Friday the opinion of [name withheld to avoid embarrassment], an interest rate strategist at [name of bank withheld to avoid embarrassment]. [Name withheld to avoid embarrassment] has just joined [name of bank withheld to avoid embarrassment] having previously worked at another bankrupt investment bank, namely [name of Wall Street bank withheld to avoid embarrassment]. His opinion is that US Treasury bonds are outrageously cheap and that next year will be the year of the bond. He may be right.

On the other hand, he may be catastrophically wrong. His employer, for example, which is effectively in government ownership having wrecked its own balance sheet and impoverished most of its shareholders, is also the UK bank with the single biggest exposure to the troubled holding company Dubai World. (As Shakespeare once said, when sorrows come, they come not single spies, but in battalions.) Never mind. His previous employer, a US investment bank that wrecked its own balance sheet and impoverished most of its shareholders, is now a unit of a commercial bank that itself required emergency government support. Never mind. You can’t necessarily be right all of the time. Or indeed any of the time.

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