Excerpts from David Cameron's speech at Davos, Switzerland on 28/1/11.

"  Not long ago we were heading towards the danger zone where markets start to question your credibility. "

The markets are still questioning the UK's credibility because, by taking money out of the system - 11bn in April 2010, 11bn in June 2010, and 6bn since then - have left, in tatters, industry's ability to produce that growth to actually repay the National Debt. All that money was used to artificially reduce the Budget Deficit and none left to invest in the economy. If we come out of this with the triple-A rating still intact, it will be because of the Captains of Industry not Government policy. I'm sure that Credit Rating Agencies look at basketful of indicators not just one. I'm sure that they look at the UK's GDP growth because it's the only way they can repay debt.

"  Yet in the past eight months we've seen our credit rating - which was on the brink of being downgraded - affirmed at the triple-A level. We've seen market interest rates - which were in danger of spiralling upwards - actually fall. "

The first sentence is correct but because of Labour's policies that ensured growth and minimised unemployment thereby minimising the repossession rate. The second sentenced is a bare cheeked lie. I've got a LIBOR tracker mortgage which, when it came out of the fixed rate in October 2009, the monthly payments fell to 310. They continued to fall until I was paying only 302 per month before the election. Once the election was over, they started increasing - they're now 315 and rising. So they fell under Labour and are rising under the Tories. Don't believe a word they're saying. No wonder the public don't trust politicians, they're just a bunch of bare cheeked liars who will run this country to the ground while the bankers, who caused the problem in the first place, will be running all the way to the...

"  All this has happened not in spite of our plan to cut the deficit, but because of it. That's why we must stick to the course we have set out. "

That's another lie. Although the Q3 GDP figures were higher than expected, it was momentum from Labour's successful policies. But it wasn't enough to withstand the pressures on industry especially after removing all that money from the economy. In August, I warned that Europe has a 6 month lag with the USA. In Q1 US GDP fell to 3.6% annualised from 5% in Q4 2009, in Q2 it fell to 1.6% annualised. I concluded that Europe's Q2 high GDP reflected the US's Q4 high. Since the US's Q2 GDP figure was abismal, Europe need to prepare for a "massive downturn by Christmas". We now have one leg in the grave, all we need is another negative GDP figure in Q1 2011, and we'll be in the middle of the much expected 2nd leg of a double dip recession. And, with the arrogance of the Government, there will be a 3rd dip and a 4th one; the same that happened in Japan 20 years ago and lasted a decade.

Five months ago, I warned that the Government policy may mean that we punish our public servants, industry will go down the pan, and we STILL lose our triple-A rating because the UK can't repay its debts. It's obvious that the public servants are suffering. Judging by Q4 GDP figures, it's clear that industry is suffering even before the Spending Cuts have been put into place. The only thing that remains is that we WILL lose our virginity - the triple-A rating.

I told you so

In my post of 27th August 2010, I made this statement:

"The WPM is still recommending war-time economics but it looks like they'll be ignored again and the governments will incur further debt to prevent a double dip recession. But the market will see through this and the 2nd dip will eventually take place. This gives us a clue as to what is needed.".

We're entering a 2nd dip BEFORE the VAT increase and the spending cuts started. This means that something caused it other the austerity measures. My mother, a pensioner, received 4 £25 cold weather payments. This is only 1 month out of 3 and can't be responsible for all the fall. In the 3rd quarter the economy grew by 0.7%. To fall to -0.5% it had to fall by 1.2 percentage points which is the same magnitude as it rose in Q2.

I also concluded in August:

"It seems that there's a 6 month lag between the US and Europe: In Q4 of 2009 in the UK, GDP was 0.4% and 0.3% in Q1 of 2010; but was 1.1% in Q2 which was revised to 1.2%. Germany grew by a massive 2.2% and France by 0.6%. This reflects the good time the US was having 6 months earlier. This implies that Europe will experience a massive downturn by Christmas - if our economies are coupled."

The UK had at least 2 months to do something about this "massive downturn by Christmas". Instead, the Coalition Government decided to take £6bn out of the economy. It isn't the austerity measures that cause this massive downturn nor is it the VAT increase, but Government policy who ripped up Labour's plans to slowly repay the deficit. The cold weather may have contributed to it, but the decline had started in Q3 soon after the Government took the £6bn out of the economy. Even if you claim that the people were preparing for the austerity measures by curbing their spending, it's still a side effect of the austerity measures if not a direct effect.

I couldn't understand the strategy adopted by the Government i.e. the spending cuts because the resulting unemployment would mean less money for the local economies which will have a devastating effect on the GDP. This was touted as: if we reduce Government spending then international investors would invest in the UK and we get to keep our triple-A credit rating. I mean if the UK's economy is in tatters, who would want to invest in the UK? I alluded to this sometime ago. My fear then was the public sector would've suffered; the private sector would've suffered; and the UK will still lose its triple-A credit rating.

We are now seeing the beginning of that dark senario. You know, when I make a prediction, it's usually based on facts even though it seems like a load of drivel. The only way out of this is to create value and this calls for investment i.e. more borrowing NOT Qunatitative Easing. And I don't mean throwing money at the problem. The Government has to work together with industry and monitor their activities to ensure they're on track and facilitate working together so that one sector doesn't get in the way of another etc.

Many months ago, I read an article where small business owners complained that banks are not lending to them and the banks were saying the money is there but they're not taking it. Some small businesses don't want to take on too much debt - they've learnt that lesson from the quagmire we're in now. Similarly, banks haven't got the stomach for greater risks not after the excessive risk of the past decade that went bad; and small business loans are the riskiest (?) I thought derivatives were the riskiest. Besides, the Government is telling banks to set aside a lot of cash to support potential defaults.

I thought of many solutions one of them is credit guarantees a bit like factoring except that the Government underwrites them. For example A supplies to B who in turn supplies to C who supplies to D who retails to the consumers. Now the government can give a %age of the invoice total to A and ask B to pay up; B is dependent on C so B's bill is cancelled and C is asked to pay up; C is dependent on D so C's bill is cancelled and D is asked to pay up but D is dependent on the consumers. The government then ensures that the consumers stay in their jobs with adequate pay to pay their bills. Once D has been paid by its customers, they pay the Government's IOU who then distributes the profits among A, B, and C - D will have kept their profits before giving the rest to the intermediary for distribution.

This is obviously simplistic but you get the picture. The Government will ensure that goods and/or services are not only of a good enough quality but also that they serve a purpose. This will make transparency mandatory and will reduce fraud particularly tax evasion because the Government is directly involved.

QE2 is not working

In my post of 27th August 2010, I made this statement:

"The WPM is still recommending war-time economics but it looks like they'll be ignored again and the governments will incur further debt to prevent a double dip recession. But the market will see through this and the 2nd dip will eventually take place. This gives us a clue as to what is needed."

The trouble makers (those who caused the credit crunch) will give the Governments false information which implies that Quantitative Easing is a necessary evil in a similar way that Austerity measures are a necessary evil. I'm not implying that austerity measures are wrong - it's better to make them early rather than them being forced upon us as they forced upon Greece and now Ireland.

QE2 in America is NOT having the desired effect. In my opinion, QE by itself does not solve the problem because investors are looking for value and QE does not create value. Quite the reverse, QE destroys value by devaluing the currency. The aim is to inject liquidity into the financial markets but what happens to that extra liquidity? Instead of interest rate going down, which is the intended effect, they're going up.

The Government could've done better by borrowing money and investing it directly in industry in tranches based on results. However, as was seen from the last stimulus package, when the money ran out, the growth fell in leaps and bounds. In the USA Q4 2009 GDP was 5%; in Q1 2010 it was 3.4%; and in Q2 it was 1.6% and people started talking about a double dip recession. Thankfully this hasn't happened - yet.

The lesson for the UK is that they shouldn't start their version of QE2. The austerity measures may take money out of the economy thus reducing liquidity thus prompting calls for QE2. If this happens, then QE2 will invalidate the austerity measures and the UK will still lose its credit rating as international investors will see through it as they saw through America's QE2. The UK will lose it's credit rating despite the austerity measures. This implies that either the UK is heading for a credit downgrade or it isn't. If it is heading for a downgrade, then the Government must make sure that liquidity in industry does not dry up necessitating QE2 even if it means diverting some of the money saved from the austerity measured into industry. Actually, as much money as necessary.

The WPM has nailed its 2011 repossession forecast to the mast at 32,000. With the above in mind plus austerity measures will make it difficult to achieve 32,000 or even 33,000 - the lower the result the more positive the economy is. Actually, it's the performance of the economy that has a positive effect on the repossession rate.