Helping number one came in the shape of the latest figures on US consumer confidence. You may recall, this fell sharply last month. In fact, there are two barometers of US consumer confidence that economists monitor: the University of Michigan measure and the Conference Board measure. Both indices fell in June, but the Michigan University index saw the more dramatic fall, just about cancelling out all the rises seen over the previous 12 months. Yesterday the Conference Board measure for July was out, and it was down again. It has now fallen from a recent peak of 62.7 in May, to 54.3 and now 50.4. Okay, the index is still way up on the depths it sunk to during the recession, at one point falling to just 25.3, but then again, the index was much higher going into the last recession, so the runes are not looking promising.

Helping number two relates to the US housing market. Actually, at face value the latest news was not so bad. According to the S&P Case-Shiller 20-city index, prices were up 1.3 per cent in May, and that on a seasonally adjusted basis. It was the second successive month for price rises, and annually the index is up 4.6 per cent. The big snag is that the recent hikes in the data relate to that period just before the end of the first-time buyer tax credit. What is more worrying is that in the second quarter of this year no less than 18.9 million homes were empty. The quarter also saw the highest number of repossessions in US history, with 269,962 homes taken into possession.

You probably know that one of the big differences between the US and UK property slumps has been repossession numbers. In some ways the attitude of US banks brings back memories of British banks in the early 1990s. Banks’ ruthless attitude to repossessing properties in the UK during the early 1990s made the property crash worse, and in the process may have left banks with more bad debts. This time around banks have a more sympathetic attitude, are more helpful towards lenders who are behind in their payments, and as a result we see fewer forced sales of properties. This is probably the single biggest factor for explaining why the fall in UK house prices has been so modest.

And yet don’t be too quick to slam US banks for their thoughtlessness. The rules in the US are different. In the UK if your property is repossessed, and your bank finally gets less money for it than the mortgage, you are still responsible for paying the difference. In the US, once a property is taken into possession, the mortgage that was taken against the property becomes the bank’s problem. Take that into account and you can see why US banks have a less sympathetic attitude.

But there is a good side to the US way of doing things. At least under the US system the bad news can be got out of the way all the quicker. In Europe, much of policy seems to be designed to simply put problems back. As if the motto is: “Why deal with a problem today when tomorrow things might be easier?” It’s a seductive way of doing things, but then such an approach may make the economic hard times stretch out for longer. In fact, this European way seems to have more in common with Japan’s approach in the early 1990s. So it is possible that the US might see a sharper slowdown, but much quicker recovery.

Helping number three of evidence pointing towards a US double dip comes from Robert Shiller, the very same Shiller who lent his name to the Case-Shiller property index. He was quoted as saying: “For me a double-dip is another recession before we’ve healed from this recession. The probability of that kind of double-dip is more than 50 per cent. I actually expect it.”

So that’s not very encouraging.

And then there was Jim Rogers. Now Mr Rogers is known as a hedge fund guru, and is, by the way, a former partner of George Soros. He told CNBC: “The world is going to be in worse shape because the world has shot all its bullets.” He said that since the beginning of time there has been a recession every four to six years, meaning the US is due a recession in 2012. But he said that because the full arsenal of weaponry was fired at dealing with the last recession, there will be nothing left for the next one.

He also struck a somewhat cynical view on Ben Bernanke’s policy of creating money when he said: “Is Mr. Bernanke going to print more money than he already has? No, the world would run out of trees.”

These comments from Mr Rogers go right to the core of the debate. Is it possible that every time governments try to interfere by softening the effects of a recession, they end up making things worse?

Maybe the economic cycle is good for the economy, with each recession creating an opportunity to purge bad ideas from the system.

There is certainly a case to be made for saying Alan Greenspan’s heroic antics while he was at the Fed, managing to cushion the effect of each crisis, from savings and loans, Argentine default, Asian crisis, Russian crisis, LTCM and dotcom crash, actually shored up an even bigger set of woes to hit us down the line.

And yet for all the bad news, Capital Economics, which by the way was very bearish on the US economy in 2007 whilst others were still dismissing talks of an impending recession, reckons the US growth rate will merely slow next year from 3.5 to 2.5 per cent.

The snag with banking crises is that hardly anyone understands them. The US electorate know they don’t like banks, but they are not sure what they know about Collateralised Debt Obligations or Credit Default Swaps. And so it is that Barack Obama does what he was elected to do, and much of his electorate ask why isn’t he doing what he promised.

Meanwhile, the Republicans and big business line up against the Act.

The danger of course is that, actually, Barack Obama’s big move will end up solving nothing and creating a whole new set of problems.

Obama said: “Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts. Period. If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. And there will be new rules to make clear that no firm is somehow protected because it is ‘too big to fail,’ so that we don’t have another AIG.”

He said that the Act will ensure “that everyone follows the same set of rules, so that firms compete on price and quality, not tricks and traps.”

But not everyone is impressed. Business Week quoted Mort Zuckerman, who is the chairman of commercial real estate firm Boston Properties (BXP), as describing the Act as “an economic Katrina”.

A few days ago, the Senate Republican leader Mitch McConnell said: “This is a bill that creates a vast new and unaccountable bureaucracy that, if past experience is any guide, will lead to countless burdensome, unintended consequences for individuals and small businesses, that will constrict credit and stifle growth in the middle of the worst economic period in memory.”

The American Bankers Association stated that the Act: “contains a tsunami of new rules and restrictions for traditional banks that had nothing to do with causing the financial crisis in the first place.”

Others say the legislation totally fails to grapple with the issue that really matters, namely Fannie Mae and Freddie Mac, the two mortgage behemoths.

The headline reform relates to something called the Federal Deposit Insurance Corp. This scheme will enable authorities to enforce the liquidation of a failing financial company. The idea behind this is to avoid a repeat of the Lehman Brothers debacle, when authorities were powerless to do anything about the bank’s collapse.

The Act also attempts to enforce regulation to try and avoid the problems of companies which are too big to fail. The biggest criticisms of the Act relate to this portion of the legislation. The argument against this reform says that the size of banks had nothing to do with the financial crisis, rather it was the way the banking system was inter-connected. Investment and Business News goes along with the idea that “too big to fail” is a major problem that needs solving for the simple reason that when firms are too large to be allowed to fail, economic evolution is stymied.

The Act will also introduce regulation that will stop banks from trading in securities that it also advises clients on. It always amazes us how banks can seriously put up an argument in favour of this practice. Proprietary trading in which banks may trade in certain vehicles, sometimes against the customers they are advising, has conflict of interest written all over it. The fact that banks have got away with this for so long is indicative of how much power they yield.

The Act will also pass various regulations ensuring consumers are given more information on the financial products they buy. In this respect, US regulations seem to lag way behind financial regulations in the UK.

You may also recall that one of the most contentious practices of the financial industry is the way it incentivises salespeople to push certain products, irrespective of whether these products make money in the long run. For example, foisting a subprime mortgage onto some poor unsuspecting soul, enjoying a fat commission but then avoiding having to suffer paying any penalty whatsoever when the mortgage finally goes bad. The Obama legislation will go some way to ensuring that the companies that sell securities will suffer some of the downside if the securities fail at a later date.

The Fed will also be charged with taking more responsibility for dealing with systemic risk.

There is no doubt that Obama and the people behind the legislation have their hearts in the right place.

The problem is, it is attempting to deal with horrendously complex problems by enforcing more complexity. As such, the Act is a recipe for confusion.

In the UK, it sometimes feels as if the FSA stymies companies that have good products, and it can create such a wall of bureaucracy that any form of common sense goes right out of the window. For an IFA, for example, navigating financial rules and giving clients good advice at the same time, can feel like wading through treacle.
But at the same time, the FSA altogether misses the issues that really matter. Dodd-Frank could impose a similar strait-jacket of regulation on some US financial firms. In some cases this may prove to be a good thing. But you can be sure it will also suck much that is good out of the system, too.

What has that got to do with anything? Well this toeing and froing seems to be a phenomenon of the economy, too. And in best Chuckle Brothers fashion, the object they are passing back and forth is not very pleasant.

First off it was the US economy with its sub prime woe. “From me, to you,” said Uncle Sam, as the eurozone picked up the debt burden and plunged into debt crisis.

But the last few days have seen the economic poison passed ever more rapidly. Two days ago, doubts that China was going to crash into recession were growing. But the bad news was passed on, and over the weekend talk of a US double dip recession seemed to drown out everything else. What could possibly top that, you might ask? Well, Uncle Sam has had enough already: “From me to you,” he said this morning, and this time we could see a crisis spasm, but in Hungary. Don’t be dismissive of the problem in the making just because it is only little old Hungary. This one has got legs.

But at least one development out of China, or at least a part of China, could change things for the better.

Uncle Sam’s latest double dip warnings

First off, then, what is the latest evidence to point to double dip in the US?

You probably know, a second fall in US house prices seems inevitable. The inventory of unsold stock is so large, and demand so low, that it is difficult to imagine any other outcome.

Last week saw a report from the Council of Economic Advisers indicating that the US government’s $862bn fiscal stimulus package created between 2.5 and 3.6 million jobs. It seems there are two major arguments against creating jobs from fiscal stimulus. The first argument is that such injections of money can crowd out the private sector. A bloated public sector means less innovation and fewer dynamic businesses creating new opportunity. However, while we have some sympathy with this argument when applied to the UK, in the US this criticism may not be valid. After all, this recession has seen not only US unemployment soar, but also productivity. This points to a private sector that is becoming more dynamic, and has plenty of spare capacity. It certainly does not indicate that the public sector is crowding out the private sector.

The second argument against fiscal stimulus relates to what will happen when the stimulus is over. The US government cannot boost the economy via massive borrowing indefinitely. So if an unsustainable fiscal stimulus created around 3 million jobs, presumably an austerity drive like the ones that are being enacted in Europe, and which is surely inevitable for the US eventually, would lead to large-scale job losses.

So that was Exhibit A amongst the most recent evidence pointing towards a US double dip.

Exhibit B is US consumer confidence. There are two key US consumer confidence indices. This column tends to focus on one, the index from the Conference Board. Last week we told how this had fallen sharply in June. But although the drop was severe, all it did was to cancel out the rather impressive rises seen in the previous two months. So the drop needs to be seen in context.

The latest development is from the other index, from the University of Michigan, and we are breaking our normal practice and reporting on it. The index plummeted from 76 to 65.5, and in the process pretty much cancelled out all the rises seen over the last year. In other words, consumer confidence is now at the same level it was at during the recession.

Exhibit C is news on US inflation. Consumer prices fell 0.1 per cent in June. The annual rate was 1.1 per cent. Paul Ashworth, Senior US Economist at Capital Economics said: “With the unemployment rate still above 9% and the recovery showing signs of faltering, the medium-term risk of deflation (meaning the next few years rather than the next 12 months) is even greater than before. The reality is that prices and wages react with a considerable lag to shifts in output and employment. Japan’s deflation didn’t begin until 1994, four years after the collapse in asset prices began. Accordingly, we would caution that the most recent rebound in core prices is no reason to declare victory over deflation. The threat will be with us for a number of years yet.”

Hungary’s resistance to austerity proves futile

Meanwhile in Europe, the IMF and Hungary’s government have had a falling out.

The row is over austerity. The IMF wants Hungary to impose more of it, the government said no. As a result, the IMF has withdrawn the remainder of its lending facility to the country.

Of course, the financial package from Hungary is a joint deal put together by the IMF and the EU. Maybe we are seeing a good cop–bad cop act, with the IMF playing the nasty one. But we know Germany must be grateful. Germans hate the idea of their money being used to bail out countries that are not willing to undergo the pain that they themselves went through under reunification.

The jury is out on the long-term implications of the IMF–Hungary dispute. If Hungary cannot raise the money it needs from this source, then default may be the alternative. If Hungary defaults, other Eastern European countries may follow.

The other side of the jury argues that the fallout will force Hungarian politicians, and maybe more importantly voters across indebted Europe, to face reality.

Our money is on default. It has been argued here many times that the real problem is not debt, it is saving. Globally, we had a savings glut before the credit crunch, and it has not gone away. Default is the inevitable consequence.

Stress tests

Meanwhile, the results of the stress tests of EU banks are being dismissed before they have even been revealed. Well, actually, it seems half the banking world are worried about what the tests will reveal. The other half says they won’t reveal much, and as a result we should ignore them.

Do remember, in the build up to the Iraq war, the US government said Iraq must be hiding weapons of mass destruction from the weapons inspector, otherwise he would have found them.

It is like that with the stress tests. Either they will reveal bad news at the banks, say the cynics, or the tests have been fiddled.

Maybe that’s part of the problem. We are so busy looking for bad news, that it increases the chances of that bad news actually emerging.

Hong Kong reveals minimum wage

It is funny how a measure that for so long has been hailed as socialist policy, is being celebrated by capitalists.

From next year there will be a minimum wage in Hong Kong. From 2011 it will be illegal to pay workers in Hong Kong less than the equivalent of US$4.23 an hour. For a place as maddeningly expensive as Hong, that rate is pretty low. Pity the worker who earns just that amount and has no family to fall back on.

Even so, it is still the latest of several signs pointing to higher wages in China. Earlier in the year the Chinese government revealed plans to get wages up. Since then waves of strikes have led to wage increases.

Don’t be dismissive of the importance of this.

It is popular in the UK to blame the union movement as the cause of Britain’s plight back in the 1970s.

Just recall, economic growth is still a youngster. Until the 1820s GDP per capita had risen at a snail’s pace for millennia. In an innovative economy, demand must rise in tandem with potential, or else the economy is derailed.

In Roman times, economic growth per person was tiny, because the economy was built on slavery and through conquest. The story of the Roman economy is the story of the slowest inflating and then bursting bubble in history.

The Victorian trade union movement may have been the surprising catalyst for the economic miracle of the last 200 years. (That and the development of a banking system based on debt.)

The reason why this column is a fan of the G20 meetings has little to do with economics. Churchill, a man whose economic judgement was woeful, provides the best explanation: It is “better to jaw-jaw than to war-war,” he said. For as long as the world’s leaders are communicating via words rather than guns, we should be grateful. Of course, in a way, economics does come back into it. Economic growth requires international cooperation.

By the way, we could present a similar argument for the EU, for as long as the EU is strong, the chances of a major war in Europe are slim.

But from an economic point of view, the disagreement is profound. Austerity is the new watchword. Germany is Europe’s creditor, China is the world’s creditor, and when you are in debt and the bank says jump, you jump.

Keynesian economics, which enjoyed a brief reprieve last year, is out. Preaching the gospel of fiscal stimulus is as fashionable as flares. But the bottoms of Barack Obama’s trousers are so wide, he is in danger of tripping over them.

Ms Merkel and Mr Obama made a statement saying they agreed, but the truth is, they don’t.
Germany is hell bent on its economic model of pushing exports, even though such a model would be unsustainable if applied across the world. China has allowed the yuan to appreciate, but the cap on its new price to the dollar is so low that in terms of likely impact, ranks alongside bringing Emile Heskey on as substitute for England.

Now in the US there is talk of hitting the economic nuclear button. Quantitative easing may be returning, but on a scale which dwarfs what we have seen so far.

US inflation is close to negative, the US M3 money supply is contracting faster than a boa constrictor on speed, the printing press at the Fed is the only resort.

Writing in The Telegraph, Ambrose Evans-Pritchard quoted a report from RBS predicting that the Fed chairman Ben Bernanke is set for ‘monster money- printing’. Mr Bernanke once said: “The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.” As an academic, Bernanke earned the reputation of being the world’s pre-eminent expert on the causes of the Great Depression. He is a disciple of Milton Friedman who said that in the event of a repeat of the conditions of the 1930s, the Fed could always scatter money from a helicopter.

Given that the global money supply is contracting. Given that global capacity greatly exceeds demand, it would be possible for mass quantitative easing without inflation. Such a programme could perhaps fund tax cuts, creating the demand the world needs.

But it is far from sure that the QE should be provided by the Fed. The creation of money is a good idea, but it is the ECB and central bank in China that need to be stimulating demand. But persuading them to do that would be like trying to persuade a teenager to wear his or her parents’ old flares to a party.

The Purchasing Managers Index was flat, equalling the same score from the month before. So, why so deliriously happy? Well, April saw the index reach a 15½-year high. Okay, it is always a tad disappointing to merely equal and not break a record, but let’s not get too hung up on that.

As for exports, the index tracking new export orders was down on last month. Should we be drowning our sorrows? Well, should Usain Bolt run the 100 metres in a time that is a tad off his world record during the World Championship this summer, it seems unlikely anyone will conclude that he is therefore not especially fast. And so it is with the export index. The May reading was shy of the April score, but then April saw an all-time high.

It seems that at last the cheap pound is allowing the UK economy to be realigned. It is a tad odd, because those who are most cynical about the UK’s prospects, and argue that the crashing pound is a sign of how bad things are, are usually the very same people who talk about how we don’t make enough. But the real cause of the fall in the UK’s manufacturing surely lies with sterling. From North Sea oil in the late 1980s and 1990s, and then thanks to the City, some sectors of the UK economy pushed sterling up so high that others couldn’t compete. Just as the falling pound in the 1930s helped the UK to grow while all around there was economic misery, and just as the ejection from ERM in 1992 sparked off the longest ever run of uninterrupted economic growth for the UK, the current low value of the pound is providing real opportunity for the UK to enjoy a sustainable recovery.

The only real danger to this lies in the plight of our big trading partners in Europe and across the pond. The single biggest risk to a sustainable recovery for the UK probably lies in the danger that sterling may rise back up again.

The CIPS/Markit index tracking jobs also rose. It’s been consistent, with rising recruitment in the sector for two months now.

Of course the CIPS/Markit report wasn’t all good. Manufacturers’ costs are rocketing. But then that’s the negative side of a cheap pound. Every product that our manufacturers have to import will be more expensive. That’s how we get rebalancing in the economy.

Meanwhile, in China there are two purchasing managers indices. An official one, and one compiled by Markit/HSBC. They were both down last month. Both indices point to stable exports, but falling domestic demand.

Finally, in the US, the Purchasing Managers Index fell slightly, from 60.4 to 59.7, but is nonetheless consistent with a 5 per cent growth rate for the US economy. As for the index tracking exports, this hit a two-decade high.

These purchasing managers indices are providing the biggest helping of economic hope at the moment. History tells us they are reliable guides, and the export recovery in the UK and US they are pointing to may indicate that at last the global economy is being rebalanced.

It’s odd. Economists are still lamenting the UK’s performance in Q1, and yet it is surely too soon to tell.

The ONS revised its assessment of growth in Q4 from 0.1 per cent in its first estimate to 0.2 per cent, then 0.3 and then 0.4 per cent. If the calculations for Q2 follow the same trajectory, the final estimate will say the economy expanded by half a per cent.

The main factor mitigating against growth was the rise in VAT. But the Q1 figures clearly showed that manufacturing was playing an important part in the UK’s recovery, which is surely what we need. The contribution of exports to growth in the quarter was zero. This is surprising given that the findings from CIPS/Markit have been pointing towards a very robust export-led recovery in manufacturing.

Meanwhile, across the pond, US consumer confidence rose to its highest level since March 2008. The latest score of 63.3 was more than double the reading seen in early 2009.

The rise in consumer confidence is occurring despite worrying news from the US housing market.

The latest Case-Shiller Composite Index, widely regarded as the most important indicator for gauging US house prices, has fallen for six months in succession. The US National Index for Q1 2010 was down 3.2 per cent on Q4 last year, which itself was down on Q3. With the US tax credit on property now at an end, it seems likely prices have much further to fall.

Alan Greenspan once said the US economy will not enjoy sustained growth until house prices recover.

The rise in consumer confidence at a time when house prices are falling is odd. It may be that US consumers have become so used to falling property prices that they learned to factor for this some time ago.

Click here for: Stock markets: is it like 2008, or just a case of springtime nerves?

The pain in Spain comes out of the drains

Should Greece default?

Punish savings

That great barometer of the UK economy is set fair again. Later this week, the Nationwide is set to release its monthly housing survey, and most expect its data to say house prices rose 10 per cent over the last year. Both the Mail and the Express gave advance warning of this expected news over the weekend, with the Express splashing the story over its front cover.

Meanwhile, other sectors of the media are lamenting the latest figures from the ONS that the UK economy grew by only 0.2 per cent in Q1. They say, oh dear, what a blow. Others express disappointment with the figures, but then say that at least we managed to avoid a double dip recession, that was the real worry. They go on to say the UK has passed the danger point, and fears of a double dip recession are over.

But they are wrong, all of them. And they are wrong for lots of reasons.

The great squeeze

Only an election separates us from the great fiscal squeeze. If the Tories win, the squeeze will begin in earnest on day one. If Labour wins, the squeeze will be almost as tight, but maybe not quite so earnest. If the Tories win, spending cuts will be the main focus. If it’s Labour, the spending cuts won’t be quite so radical, and taxes will rise. Both agree on more taxes and less spending, but they disagree on the balance between the two.

The Tories make the common sense argument. If a business or household is short of money, it needs to make cut backs. The flaw in the argument is that when we are talking about governments, the story changes. If government cut backs are too severe, job losses will become a major problem. Workers who lose their jobs will spend less; the businesses that used to sell to the workers who lost jobs will make less money, so they too will be forced to make cuts. The economy could fall into a downward spiral, tax revenue would fall, and the consequence of government spending cuts could be even greater government debt. This scenario is not controversial. All accept that this can happen. The disagreement is over whether we are at that point now, in which case spending cuts will have this adverse effect.

In an environment in which demand exceeds supply and there is little spare capacity, government cuts can free up labour, which will then be employed by industry in areas where labour is desperately needed. But we are patently not in that environment. Instead, industry has oodles of spare capacity. The surprise of the recession was the modest level of job losses. The price we paid for this was falling productivity. There is little demand for new labour. It doesn’t matter if government spending is inefficient. Cuts means jobs losses. And in an environment in which there is so much spare capacity, job losses will mean higher unemployment for quite a while.

So, yes, government cuts are unavoidable, but the price we pay will be higher unemployment and lower tax revenue.

The alternative is higher taxes. This is the preferred Labour approach. But this means our affordability is squeezed. We will spend less, so aggregate demand will fall. The rise in NI will reduce employers’ incentive to recruit. The perverse consequence of a tax rise is that tax receipts may fall.

Whichever way you look at it, the next government, whoever that is, is stuck between an economic rock and a fiscal hard place. There is no easy solution.

That is why claims that the UK is past the worst, and that the real danger was of a double dip in Q1 of this year, are complete rubbish.

ONS data misleads, and so does housing hype

In fact, when the ONS finishes revising its data for Q1, it seems likely that growth will be upgraded significantly. Those who proclaimed woe on how disappointing the first set of figures from the ONS on Q1 are, will almost certainly be left with egg on their face.

But equally, those who say we are past the worst and from now on in we can look forward to growth, may also be proven wrong.

The Mail and the Express celebrate the likelihood that the Nationwide data will show annual house price inflation is now 10 per cent. As if that’s good news. We are set to enter a period in which government austerity is guaranteed. If markets start fretting over the government’s ability to repay debt, interest rates will shoot up. As we enter this period, average house price to average income is too high. This means we are more vulnerable than ever to a housing crash, and as economists now surely realise, falling house prices creates all kinds of economic fallout. And yet the Mail and the Express celebrate that house prices are rising to even higher levels.

The higher they rise, the further they will fall. In early 2008, a survey from the Halifax revealed that while house prices were falling month on month, the annual rate was still positive. The Express ran a lead story celebrating rising house prices. It was an extraordinary moment. The point when madness of the crowd had surely reached a level which showed the economic lunatic asylum was full.

The US could fall sick again, and not even blaming Goldman Sachs can help

In the US, the inventory of unsold houses remains way too high. Foreclosure rates are surging again. A second dip in US house prices seems inevitable. The first US housing crash created the credit crunch. The mind boggles at what the second crash could create.

And still we look to blame the banks. Goldman Sachs has issued a robust rebuttal of the charges laid against it. But its key argument is surely that the bank made a $1.2bn loss from subprime. If the bank deliberately sold securities it knew were going to fail, so it could bet against them, then explain how the bank lost money?

The casino banking we now castigate was not casino banking at all for as long as house prices went up. Mortgage securitisation was supposed to reduce risk. The IMF hailed it as a key innovation in reducing financial risk. Banks paid out huge bonuses to staff who helped to promote a lie. But the bank did not realise it was a lie. Was their remuneration any more immoral than the wealth earned by people who did nothing more than live in a property that grew in value, and then spent the profits by taking out a top-up mortgage. They too benefited from an illusion of wealth creation that eventually created an economic crisis. And like the banks, they too were bailed out, in their cases by interest rates close to zero.

Greece needs to beware of IMF bearing gifts

And now Greece finally avails itself of IMF money. “Don’t worry, we are not that nasty organisation that created problems for the Asian Tiger economies 13 years ago,” says the IMF. “We are all soft and cuddly now.”

But borrowing money when you are in debt is no long-term solution. Greece’s problem is that markets demand interest rates of approaching 10 per cent on government bonds; the IMF/EU loans will cost around one-third that much. But still Greece is not competitive. It can’t afford the euro, because it needs a cheaper currency than Germany. It can’t afford to leave the euro, because it would lose the backing of its partner countries. Greece’s only hope is in its labour force accepting lower wages. Not likely. And as the great Greek bail out unwinds, all eurozone countries chip in, meaning Portugal, Ireland, Italy and Spain find themselves contributing the money they don’t have. Today’s Greek crisis is tomorrow’s EU crisis.

The danger, the get out clause

The danger of a double dip recession was never in the quarter just gone – it lies in next year.

The UK’s big hope comes from the cheap pound. Surveys from CIPS/Markit and the CBI suggest the export sector is growing at a record pace.

But weakness in the Eurozone and the US could change the picture. And that is why spring may yet turn to winter, and bypass summer altogether.

But hope has not yet returned to the economic Pandora’s box. It is out, along with all the economic ills. Hope comes in the form of the extraordinary rises in US productivity, which at least in part are down to new technology. But rising capacity must be met by rising demand. And it seems we are set for a new consumer electronics revolution too, with 3D-TVs, a new generation of smart phones, and the iPad type products that mean the dream of a PC on every desk has been replaced by the dream of a PC in every room in the home. This new revolution has already begun, and is reflected in the stunning corporate results coming out of America recently. This could provide the foundation of sustainable growth, and with growth fiscal debts become manageable. It seems we may yet innovate our way out of disaster.

US producer prices rose by 0.7 per cent in March. That may seem pretty alarming. But then again, when you consider that food prices surged 2.4 per cent in the month and gasoline prices were up 2.1 per cent, the overall rise in the index seems quite modest. In fact core prices, that’s with food and energy taken out, rose by a mere 0.1 per cent, and the year on year rate fell from 1 to just 0.9 per cent.

There is a school of thought that says rising oil and food is actually a deflationary pressure. That if all else is unchanged, then a rise in food and oil means affordability becomes stretched and we spend even less on other items, forcing their prices down. In fact, in some ways a rise in oil has a similar impact on the economy as a rise in interest. A number of people fall into the trap of thinking 1970s inflation was down to rising oil. In fact, this is not the case at all. Inflation during that era rose because consumer spending increased faster than economic capacity. This was caused in part by the US government funding both the war in Vietnam and the space programme via the creation of new money, and in part down to rising levels of credit.

People make the mistake of assuming that because the Fed and Bank of England are printing money, inflation is inevitable. But the fact is, the credit crunch has not ended, and for as long as credit remains short, underlying inflationary pressures will remain muted.

Meanwhile, sales of existing homes in the US rose by 6.8 per cent in March, eliciting claims that the US housing crash is over. But these claims are wrong. The rise in sales is down to a rush to buy before a temporary tax credit expires. In this sense it is a little like the rush we saw in the UK in 1987, when people queued up to buy properties before the removal of mortgage double tax relief for couples. But there is one difference. In the US, despite the surge in sales, house prices according to the FHA index have been down for three months in a row. With the stocks of unsold properties still way too high, and with foreclosure notices on the up again, it seems that big falls in US house prices later this year are inevitable.

The IMF has been busily forecasting impressive growth for the US this year and next, but it is tempting to conclude it has learnt nothing. When US house prices began to fall in 2007, a chain of events was kicked off which eventually led to the worst economic crisis in over half a century. Economists totally failed to call that crisis, largely because they failed to grasp the link between house prices and the rest of the economy. The banking system and consumer confidence hinge on rising house prices. They didn’t realise this then, and the penny still hasn’t dropped today. Unless Uncle Sam can find a way of exporting a lot more, next year will be a tough one for the US.

Meanwhile, news on the US housing market should be enough to shake up any recent complacency over the US recovery. And then there’s Greece; the tale of woe just gets more woesome.

Singapore’s latest growth rate is more akin to a cricket score than to economic data. Preliminary data for Q1 puts annualised growth at no less than 32.1 per cent. It was the highest growth rate since 1994. Manufacturing saw output grow by 130 per cent on the previous quarter.

Of course it won’t always be like Q1; a significant slowdown in the growth rate is inevitable. Capital Economics is forecasting growth of 7 per cent for the year.

Then there’s Argentina. You may recall, a few months ago, Argentina’s President Fernandez fired the president of the central bank for refusing to go along with her ideas for using foreign currency reserves to fund government debt. A new bank president, Mercedes Marco del Pont, has been appointed. It appears Ms Marco del Pont goes along with her country’s president, and despite opposition from Argentina’s parliament to the plan, government debt is to be at least partially funded by foreign currency reserves. Meanwhile, last night Argentina unveiled a debt swap plan for repaying $20bn worth of debt that was defaulted on in 2001. It seems bond holders can expect to get around 58 cents in the dollar by 2033. The question is, will bond holders accept the offer?

Argentina’s credibility problem with the markets makes Greece look positively saintly. Fiscal debt is the highest ever, and Capital Economics reckons true Argentinean inflation is around 20 per cent.

And now head north, north of the border, Mexico way and beyond, to the land of the free.

According to RealtyTrac, foreclosures on US properties, that’s an early stage on the road to repossession, rose 16 per cent in Q1. Apparently, one in 138 homes received a foreclosure notice. As for repossessions, the news here was even worse, up 35 per cent on a year ago. The inventory of unsold homes in the US is already too high, and suggests house price falls will follow.

Remember, it was falling US house prices that were the catalyst for the credit crunch, and Alan Greenspan has said the US economy can only expand in a sustained way once house prices stop falling.

In Q4 US growth was a stunning 5.6 per cent on an annualised basis. Indicators suggests Q1 was pretty good, too. But the underlying weakness of the US housing market suggests a double dip remains a danger for later this year or in 2011.

And then there’s Greece. You will recall the whole point of the EU agreeing to fund Greek debts was to give markets confidence. The sheer fact that Greece could avail itself of EU and IMF funding would probably mean the markets would be willing to supply the readies, at least so goes the theory. In reality, well, Greece says it doesn’t need the loans, but it has also requested talks with its would-be backers.

So, Greece wants to have further talks about the loan it doesn’t need. What’s that smell, did you catch it too? Well the markets certainly did, and the euro fell against the dollar yesterday on the news.

Meanwhile, a piece in the Telegraph earlier this week said that four German professors are planning to contest Germany’s contribution to any would-be loan to Greece in the High Court. In Germany the Greek rescue is about as popular as a hole in one’s head.

The professors are arguing that Germany’s planed loan is an illegal subsidy and goes against the Maastricht treaty.

The Telegraph piece quoted Hans Redeker, Currency Chief at BNP Paribas as saying:

“This court hearing is going to be very dangerous, it could lead to Germany itself being catapulted out of the currency union.”

Okay, so do you think Germany will get kicked out of the euro? Send your answers on a postcard please, marked for the attention of “Mr Not a Chance in Hell”.

Still with Greece, Capital Economics reckons there is a real danger of a Greek banking crisis, partly because many wealthy Greeks are withdrawing their money and putting it in banks abroad. Apparently, Greek bank deposits are worth 110 per cent of Greek GDP.

So what do you think will happen to the Greek economy if its banks have to be bailed out? We are running a second competition for this question, but send postcards to the brother of the person who is dealing with the “Will Germany be kicked out of the euro” competition. It’s the same surname, but substitute “Not A Chance In” and replace with “Road to”.

Exports over the last year to China rose 24.3 per cent, but imports were up 66.4 per cent. The trade deficit was £7.2bn, more than three times greater than the UK deficit for February. The recent peak for China’s surplus was £24bn, set in October.

So does that mean that China has changed? That global imbalances have been fixed, that the row over the yuan has been made redundant? Well, does it mean that?

Not on your Nellie, does it.

It seems China’s March deficit was down to two reasons. First of all, the timing of the Chinese New Year. Secondly, surging commodity prices. China’s rise in imports was almost entirely down to commodities: oil and other raw materials are up. China’s investment boom means she needs an awful lot of these goods.

In fact, China’s surplus with the US rose.

In many ways, China’s March deficit is a symptom of her investment bubble. The cheap yuan is all a part of this problem. China’s house prices rose 11.7 per cent on the year before in March. Property investment surged 35.1 per cent.

China needs higher interest rates. But, as US Treasury Secretary Tim Geithner said yesterday , the US effectively sets China’s interest rates.

When a Chinese exporter sells a good to the US, dollars flood into his or her account, which its bank converts into yuan. So Chinese banks are left awash with dollars which they swap for yuan at the central bank. This has two effects. Firstly, China’s central bank finds itself with a massive amount of dollars. Secondly, commercial banks are rolling in yuan. So, the central bank issues bonds, effectively soaking up China’s money supply, and funds the interest it pays on these bonds by using dollars to buy US bills. So it must ensure it pays out a lower interest rate on the bonds it issues than the US bonds it buys. That’s why the Fed is effectively setting Chinese interest rates.

Mr Geithner said: “As a strong, large, independent, growing economy, it doesn’t make sense for that country to run a monetary policy exchange-rate regime that effectively lets the Federal Reserve set interest rates for their economy.” He added: “That’s why I think – why I’m confident that they’re going to move.”

On the other hand, the more the US asks China to let the yuan appreciate, the more China digs its heels in. It may seem like cutting off your nose to spite your face, but China will not bow to US pressure, no matter how much it is in her interest to do so.

And that brings us to the US trade figures for March. US exports rose by 0.2 per cent on the month before, but imports by 1.7 per cent. The US trade deficit with the EU, Mexico and South America expanded, but against OPEC countries, Africa, Pacific Rim, and that includes China, the deficit narrowed.

The real snag with US trade, however, is that for the last few months now the deficit has been growing. Back in 2008, Uncle Sam saw sharp improvements in its deficit, but just under a year ago, these improvements came to a shuddering halt. The good news, the US deficit is around 60 per cent of its size for much of 2006 and 2007. But the trend is worrying.