June 2015

Much water has flowed under many bridges since April but, to mix metaphors, there are also what one could call stagnant pools!

In no particular order, in the stagnant pool category, Greece is clearly the top contender. It is generally agreed that the country is bankrupt, yet a dance continues that tries to pretend there is a solution other than the massive write-off of compounding debt. The EU ignored the natural aversion of Greeks to pay tax, a matter of national pride. It also ignored the hidebound bureaucracy and hopelessly inefficient government when it offered Greece membership of the EU. The EU umbrella enabled the Greek government and the Greek banks to borrow to their hearts’ content and, following the financial crisis, Germany discovered that its banks were vulnerable to a Greek default and initiated further loans. The current dance is a farce, the debts can never be repaid and default is inevitable. The amazing thing is that any bank is holding any Greek debt today!

The result of all this is that the population of Greece has been subject to appalling economic pressure, negative growth since 2008 with a minor aberration in 2014, nearly 30% unemployment and over 50% youth unemployment, along with political paralysis. Opinions differ as to whether Greek default will produce contagion in the Euro area or relief, but it certainly won’t be a surprise. Hopefully for the sake of the Greek people it will be sooner rather than later.

Britain’s surprise election result last month should be all good news. In an Internet world it raises major questions about polling methods. The pollsters moved as a herd to predict what would have been potentially a catastrophic hung parliament and a few have admitted that the herd opinion was so strong that they “re-interpreted” some poll results that had showed a Conservative win. In any event, the great British public ended up looking at the nightmare scenario of a Scottish Nationalist/Labour coalition and voted to protect their pocketbooks. Mr. Cameron’s honeymoon, however, is not likely to last. The majority is small and his Party is fractious. The commitment to an EU Referendum is going to be a headwind for economic decision taking and the political promises that have been basically not to raise personal taxes, nor to cut the massive social budgets, means that the control of large areas of Government profligacy are out of reach. We will see soon whether this budgetary box will mean increases of taxation on the industrial and commercial sectors of the economy.

Britain is an interesting case study for a global problem; government profligacy fuelled by debt, along with low interest rates and the creative packaging of consumer debt, were major contributors to the financial crisis in 2008. In the aftermath, while corporates and private individuals have, to a considerable extent, repaired their balance sheets, most governments with the exception of the USA, have failed to do so. One of the side effects of this failure is the current lack of government expenditure in the West on infrastructure. Bad maintenance

and lack of building in road, rail, airports and telecommunications is crimping economic growth.

China has for several years been embarking on a re-orientation of its economy. The massive 20-year industrial revolution fuelled by exports is coming to a halt, along with its massive infrastructure led growth. This slowing down of its GDP from the mid-teens to what is likely to be mid-single-digit growth is not only causing internal stress but changing trade patterns. It is also likely to tip the deflationary trend in traded goods that we have benefited from in the last ten years.

Another by-product of the Chinese economic rebalancing is likely to be a reduction in its trade surpluses. This, coupled with the reduction in oil prices, which is greatly reducing the cash surpluses of the Middle East, will in due course affect global dollar liquidity with a probable knock-on effect on interest rates. China’s policy externally is turning towards soft power with the set up of the Asian Infrastructure Investment Bank (AIIB). This move was to some extent precipitated by the refusal of America to allow China an increased role in the IMF and the World Bank.

The AIIB will provide infrastructure finance to Asian countries and will have large political implications for China’s role in Asia and be part of the stepping stone to making the Chinese RMB a world currency alongside the US dollar in due course. The freeing up of the convertibility of the RMB could easily cause large fluctuations in exchange rates as the Chinese domestic institutions learn to handle the potentially vast flows of capital.

While national, political and economic issues dominate the news, there is a growing impact on the world economy from the so-called millennial generation. That is, those born after 1980, now some 30% of the US labour force: a generation that has grown up with the Internet where Facebook and Twitter are part of everyday lives, and where creativity and ideas can spread infinitely faster than in previous generations. This generation are more sceptical about big “corporations, brands and governments”. A generation that is growing up with the “Internet of things”, and the idea that data changes the way we look at the world, in politics, in business, in the way we live. Artificial intelligence and data analysis is radically changing the way the world is going to work. It does not need a lot of thought to extrapolate a statement in the Financial Times recently that “data gathered from the sensors in smartphones as well as an analysis of social activity on sites such as Facebook could one day be used to improve the diagnosis of mental illness”. Sensors and data analysis are around us but are not part of our economic and political understanding!

Data gathering technology that is already embedded in your mobile telephone and algorithms could in the near future predict that when you leave a meeting or a restaurant, you will need a taxi to take you to your next destination and it will be waiting for you at the door. Data gathering already can predict whether you are likely to use a taxi and can also know where you are likely to go next! Technology that can predict illness, as mentioned above, or organise transport for you will be a massive challenge to current practices and professions.

Damon de Laszlo 9th June 2015