Daily Times

You wish fervently for something then, when it happens, it’s not what you hoped for at all. That is how central bankers must be feeling as they watch corporate debt soar to record highs.

They wanted companies to borrow and grow, but not like this. Last week, this concern was visible in the minutes of Bank of England’s financial policy committee. They show that the committee, which overseas bank lending and is chaired by governor Mark Carney, likened a rapid growth in lending to indebted companies around the world to the US sub-prime mortgage market, which triggered the 2008 financial crisis.

For a sober, usually reticent group of regulators, comparing today’s corporate borrowing boom to the reckless years before 2008 is a sit-up-and-take-notice moment.

The trillions of dollars of cheap money pumped out by Threadneedle Street, the European Central Bank, the US Federal Reserve and the Bank of Japan over the past 10 years had to find a home. The hope was that companies starved of cash would take the money and invest in new machinery and processes.

Instead they appear to have done two other things. The first was to borrow enough to pay off old debts. This is classic zombie behaviour and leaves the company’s managers without any funds for investment. If they make a profit it is because workers can accept low pay and poor conditions now that cheap borrowing keeps their bills low.

The second destination for central bank money was property – seen as a safe haven investment when a punt on new machinery seemed like a silly gamble.

Central bankers must have known this might happen. They work on the basis that a business cycle of eight to 10 years culminates in a recession. During the recession, interest rates climb and firms that borrowed heavily and failed to improve profits go out of business.

The financial crash was so big that it caught out good businesses and bad. To prevent a calamity, the bank cut interest rates, and expanded the money supply, which saved the bad firms and the good.

That banks are lending to businesses that have done little with their previous borrowing is a worry. The debt just piles up, and too often continues to be used to pay off old debts. Not just once, but on a rolling programme of debt funding.

That the money pumped up property prices is not much better. That has obvious consequences too.

As the committee points out, this is a global trend and not just part of the UK narrative. Maybe that makes UK policymakers feel better. Yet it just means that when the crash comes, it will be more bloody.

Is there a remedy? The Bank of International Settlements, the grouping of central bankers based in Basel, says interest rates should be going up in the developed world and, more importantly, more should be done to make commercial banks pass on the effect to customers.

For some time, the response from high street banks has been to keep interest low by squeezing their margins and making up for the loss of profit by lending even more.

However, when so much commercial activity is based on ultra-low interest rates, the BIS remedy matches Lord King’s warning to regulators after the collapse of Northern Rock – namely that when the party is in full swing, they have to be prepared to take away the punch bowl.

Is the party in full swing? Full employment would tell them it is. On the other hand, pay that is still below 2008 levels on average would say the party hasn’t even started.

Full swing or not, high street banks cannot help themselves when it comes to reckless lending, which leaves regulators contemplating more direct intervention. Given the potential for another calamity, direct intervention should be an option.

Lies, damned lies and China’s GDP

The regularity with which China’s official growth figure comes in smack on forecast confirms the assertion, attributed to Benjamin Disraeli, that there are three kinds of lies: lies, damned lies, and statistics. No serious observer believes that the world’s second-biggest economy is actually growing at 6.5% a year, or anything like it.

The real story in China is of an economy that was slowing even before Donald Trump imposed his protectionist measures.

Its exports were actually robust in the third quarter, as US companies brought forward purchases of Chinese goods to avoid paying tariffs. China’s problems are mainly of a homegrown nature. It avoided calamity during the global recession of a decade ago, through a combination of public and private debt. State-owned enterprises were kept afloat, and cheap credit fuelled a housing boom. Rising property prices allowed Chinese consumers to use their homes as cash machines, and this boosted demand for cars and other durables.

In the past few years, China’s policymakers have been trying to do what proved impossible in the west: deflate the bubble without causing a massive recession. All the talk has been of slower but better balanced growth. If only.

Balanced growth would mean production shifting away from inefficient state-owned enterprises (SOEs) towards private companies. In recent months, China’s policy makers have been doing the opposite. Purchases from SOEs have increased while loans to the private sector have been restricted. Restrictions on credit have eased.

With the impact of Trump’s trade war yet to be fully felt, Beijing will increase the scale of its stimulus. In the short term, this will lead to a pick-up in growth – but will harm the country’s long-term growth and make a future bust more likely.

Another Gatwick runway should be stopped

Barely has Gatwick seen one runway scheme cut down than up it pops, like an asphalt-spewing hydra, with two.

Having seen its expansion plans knocked back by the government in favour of Heathrow, the West Sussex airport, unabashed, has unveiled a masterplan to turn its emergency runway into a fully operational second landing strip, and safeguard land beyond its perimeter for a possible third runway.

This latest proposal has the backing of businesses and the London mayor – chiefly, one might surmise, for not being Heathrow. The competing merits of expansion at the rival airports could fill a book – as, of course, they have: the Airports Commission answered this question in two lengthy tomes, over years of consultation and research. So why is it being asked again?

Gatwick’s 15-year plan makes it clear that it could handle substantially more flights just by maximising the output on its existing single runway. Turbocharging that growth with another strip of tarmac raises several questions.

On a practical level, there is still a back-of-the-envelope whiff to this. Accepted wisdom has long been that the airport’s dimensions could not accommodate two runways; widening the emergency runway may not convince the safety regulators. Also, the commission made it clear that only one more runway in the south-east would made economic sense – and give Britain a reasonable shot at meeting its climate change targets.

The UN’s warning this month of the devastation expected beyond another 1.5C of temperature rises might have given the airport expansionists a moment’s pause. More airport capacity is available and more is coming, at a time when economic jitters and Brexit could dampen demand for air travel.

Few require, or will benefit from, these additional runways bar Gatwick’s biggest shareholder, GIP, which aims to cash in its 42% stake and needs to sell a vision of ever more planes over southern skies. courtesy the guardian

Published in Daily Times, October 22^nd 2018.