Financial planning is best done with reference to the global economic situation but making sense of that situation is becoming increasingly fraught. Emile Woolf gives his assessment of the wider context in which financial forecasts are now having to be made and notes that, in our struggle, “we are not alone!”
Emile Woolf is a seasoned financial author, forensic accountant and currently director of Hyperion Insurance Group where accurate forecasting is critical to the business.
Forecasts are a particular problem these days. From 2009 to 2011 every prediction, from the Chancellor’s Spending Reviews to the Bank of England’s official outlooks, suggested that economic growth, however modest, would return by late 2012. Even the Office of Budget Responsibility and the Institute of Fiscal Studies, a dour duo if ever there was, foretold a return to GDP-growth mode by the end of last year. It hasn’t come.
Too big to miss
But we are not alone. Similar forecasting failures have been prevalent in the USA, throughout Europe and in the Far East, and it is only now that politicians appear at last to be facing up to what their own citizens know only too well: the financial tsunami that struck in 2008 had a far greater devastating force than any forecaster recognised. As the Queen famously enquired of the Governor of the Bank of England: “If this thing was so big, why did no one see it coming?” To which Prince Philip helpfully added a couple of years later, “Don’t do it again!”.
At least his blame allocation was on target. Central bankers everywhere need only look in the mirror to see who’s responsible for causing the crisis. The Bank of England, the US Federal Reserve, the European Central Bank (ECB) and the Bank of Japan have all acquired the habit of issuing freshly-minted fiat money to buy dodgy assets at face value from their barely solvent banking communities. Banks, once rid of all those toxic instruments and showing apparently healthier capital ratios, will classify the newly acquired funny money as ‘excess reserves’ (to distinguish it from legitimate depositors’ reserves) and funnel it into the regular money supply with an impact on price levels that is a mathematical certainty.
How Much Is Enough?
“Macho” Mario Draghi at the ECB, weary of interminable bailout-begging negotiations with the governments of Portugal, Italy, Greece and Spain, short-circuited the whole process with an undertaking to set aside a limitless ‘international rescue’ fund (how would he know how much to ‘set aside’?) available to any sovereign nation that asks for it, provided they sign up to strict conditions for imposed budgetary reform: more taxes, less welfare, higher retirement ages, lower persions – you name it; the usual faultless, yet pointless, rigmarole.
A Pointless Exercise
Short of sending in the gunboats (and the EU has just won the Nobel Peace Prize!) no enforcement mechanism exists. Since the default position therefore seems to be throwing still more fake money at a failing culprit, at even more penal rates, on which they are even more likely to default, all that is accomplished is to kick the can into the brick wall at the end of the cul-de-sac.
Take a case in point. One of Spain’s biggest banks, Bankia, is a 3,000-branch grouping of seven banks consolidated in 2010 and floated in 2011, accounting for 10% of Spain’s entire banking industry. It was last month officially declared bust-beyond-belief (literally) with a current valuation of minus 4.2 billion euros and over 30 ex-executives implicated in allegations of fraud and false accounting. Some 32 billion euros of loans to support dubious property speculation proved to be the tipping-point and the holdings of hundreds of thousands of ordinary investors, who succumbed to the aggressive sales promotion only 18 months ago, have been completely wiped out.
But fear not. ‘Restructuring talks’ are under way and an initial tranche (there’s never a ‘final’ one) of 18 billion euros of ECB money is on its way. What if it escalates into an unavoidable ECB bailout for Spain itself? Well, Mr Draghi will just have to give its Prime Minister, Mariano Rajoy, a jolly good talking to!