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Thursday, 15 April 2010

Earth and Froth

In the past few days tectonic activity in Chinese Tibet and in Iceland has again displayed how puny is the human economy in comparison to elemental natural forces.
China has had to make heroic efforts to get even basic supplies to a remote mountain region.
Northern Europe has been shut to air traffic due to volcanic dust.
News of the dust cloud has - appropriately - taken many of the UK headlines away from the sad little 'debate' of three machine politicians. The least-known of the trio was able to come over as the freshest. The other two did a rather more polite re-run of their timewasting weekly yah-boo bilateral confrontation.  They have been at it so long that they have lost the capacity to surprise their audience.
The derided eurorat Clegg was able to present a different face and as an experienced lecturer and speaker he was not fazed by the occasion. One can expect his star to fade now that its supernova phase has been observed.
The really interesting question is whether or not the Icelandic dustcloud will outlast Clegg's moment of glory.

Monday, 5 April 2010

Soros Adrift?

It is reported that George Soros has donated a significant sum for the establishment of a unit at Oxford which is intended to review the intellectual basis of Economics and the reasons why its practitioners failed to predict the credit crunch.
The motivation is excellent: the outcome is likely to be deeply disappointing; because the people chosen to define the project are themselves inner-circle academics who failed to predict the crisis.
The money would much better have been allocated to some of us who predicted the crisis, and explained analytically why it was inevitable.

Tuesday, 23 March 2010

The Silly Sex?

One of the most significant phenomena about formal academic Economics is how few women have been seen as significant contributors to the mass of fantasy-theory that passes for 'analysis' according to the perverse peer review system that protects the supposed integrity of the whole farrago.
Forty years ago Joan Robinson had her Cambridge chair, and Ursula Hicks was almost as distinguished as her husband [who was the first Brit to get the 'Nobel Prize' in Economics]. Now there is no British woman of comparable prestige in the 'economics profession'.
During the credit crunch the dreaded Harriet Harperson suggested that it would not have happened if women had been in charge of the affected institutions. The absence of women from the top jobs was conspicuous indeed; so for the main part her remark was trivialised as potty feminism.
What should be pointed out for the future is that the absence of women from the acknowledged top rank of Economists may be attributable to womens' common sense. It is harder for most women to inwardly to accept authoritatively-delivered nonsense than for men, who compromise much more readily - intellectually - to get on in their careers.
One can assume that economic studies will become truly scientific when women occupy top chairs: as women have long done in natural sciences. It may take a very long time, as the Economics ratpack are so well established.

Monday, 22 March 2010

What Growth?

As the countdown to the UK Budget for 2010 comes to an end, the City is pressing for the Chancellor to reduce his estimate for economic growth. This pushes down the projection for tax revenue, and makes cuts in spending more urgent and imperative.
The City is right to be cautious in its predictions: because the City is the most likely component of the economy to 'underperform' in revenue growth as the global economy settles down to a post-crisis mode of operation.
So long as the UK 'retail' banks are badgered by the FSA to strengthen their balance sheets, there is little flexibility to support industrial growth. Company dividends are increasing: because firms are hesitant to put their own cash into material investments when projections of consumer demand are weak. Companies with 'cash mountains' that pay low dividends [and therefore have low share prices] are highly susceptible to takeover; so a defensive strategy requires distribution to the existing shareholders. That keeps them sweet, and reduces the takeover risk.
This all indicates lower rather than higher activity in the 'real economy'; and any apparent growth in corporate turnovers is likely to reflect the inflationary tendency that is lurking in the economy.
There's little good news in this scenario!

Tuesday, 16 March 2010

EU Still Underestimates the British Problem

News media today [March 16] are agog with the fact that the EU Commission does not find the British strategy for resolving the public sector deficit to be satisfactory.
Moody's has again warned that the AAA rating on British public debt is under threat; but the fact that the agencies still give the UK this sort of rating reinforces the impression of their fundamental incompetence.

The big problem is not the size of the government's debt: that is resolvable by foul means - especially inflation - if push comes to shove.

 The crisis is really about what the government spends as compared to what the nation earns. When that cassette of the tax credit system went missing a few years ago, there were already twenty-five million names on it, of adults and children: virtualy all of whom also receive child benefits. There are more than four million public sector employees, many of whom qualify for tax credits and child benefits. There is a dozen million of old-age pensioners paid by the state. There are at least five million not-in-work among the adult population under 65, and over a million NEETS; plus a million in the universities and further education. Accept that there is double counting of those who are doubly or triply remunerated by the state, and you have a total of FORTY-EIGHT MILLION incomes being paid in full or in part by the state.

To pay those incomes, the recipients of the incomes all have to pay more and more taxes: as do those few taxpayers who receive no benfits. While millions would suffer only minor effects from the loss of small income supplements, tens of millions absolutely depend on the state, for all their income or the majority of it. This tax-and-spend whirligig is Gordon Brown's proud creation: he thinks it represents 'fairness' and the elimination of poverty for many of those millions. Anarchy looms if any significant number of those incomes is abolished or reduced significantly.

So how can a government make 'meaningful cuts' in state spending, and divert tax revenue to paying-back the public debt, without hacking at the real economy? The few independent earners who have no benfits pay taxes on their incomes and on their purchases to support the whirligig; and most of that money, once taken into the tax system, remains dizzily circulating through the benefits system to people who face constantly rising taxation.

That's what the politicians dare not admit to themselves, let alone to the electorate! The situation is far, far worse than any of them can understand. 

Thursday, 11 March 2010

FSA Again Hits the Wrong Target

Hector Sants has decided, as one of his louder swansongs on leaving the FSA, to reduce the range and increase the costs of products for personal savers.
Nobody condones wantonly careless or deliberately deceptive mis-selling: but that is not the issue.
A bunch of bureaucrats wll doubtless rely on their employed actuaries to assess whether 'products' are viable: then undercover mystery shoppers will try to con agents into selling 'inappropriate' products to the people they purport to be.
Actuaries have an appalling record of getting the big picture wrong. They didn't notice the aging population for a whole generation down to the late 'nineties. Now, on the threshold of a massive inflation they are still advocating that the few remaining savers' assets should be put into bonds.
Fake identities never can act or think as real people.
The whole charade will make the fewer permitted product types more expensive because of the enhanced costs of the FSA employees and the compliance people in the firms.

Sunday, 14 February 2010

20 Economists? What a Shame!

Half a dozen 'persons of distinction' have subscribed to a letter that the SUNDAY TIMES was delighted to publish, which takes a very grave view of the prospects facing the British economy.
The force of the argument is vitiated by all twenty signatories being tagged as Economists: members of a disgraced caste which validated all the excesses of the securities industry and facilitated some of the most egregiously insubstantial 'products'.
Their 'profession' has not yet explained to the Queen why they did not forsee and forestall the crunch. The long delayed response from the LSE to her direct question was a fatuous suggestion that Her Majesty should personally monitor the economy, on the basis of regular ministerial briefings.
It is sad that the highly respected Roger Bootle was a signatory: presumably he is more concerned about publicising the peril facing the economy than he is about any tag that is hung around his neck. His participation is a clear signal that the content of the letter is highly revelant to the present situation.
But it is a great pity that the argument has been presented under that disreputable banner.

Saturday, 6 February 2010

Will Germany 'save' Greece?

As the unwillingness of the Greeks to support their government's austerity package becomes clearer, the worry grows that the country will not be able to pretend to be close enough to the rules to be allowed to remain in the Eurozone.

A temporary suspension of Greece - a kind of purgatory - is more likely than complete withdrawal or expulsion from the single currency. The terms for any such special deal would be determined by the strongest member of the Euro, Germany; but Angela Merkel will not act without the agreement of Sarkozy plus an indication of greement from the Netherlands and Italy. As a coalition poliitician Merkel can not give too much away, especially to a state that has got into trouble by ignoring the rules over many years.

Talk of the PIGS [Portugal, Ireland, Greece and Spain] having a domino effect - each on all the others - is mere speculation: but the Germans will have it in mind that what they do to 'assist' Greece, on draconian terms, must be so structured that the other governments in the drop-zone will try even harder to conform to the requirements for Euro membership rather than follow Greece into special measures.

The unsettled condition of global stock markets in recent days is widely accepted as an argument that the Greek situation must be resolved sooner rather than later: to forestall any more widespread invalidation of sovereign debt. That point will undoubtedly be taken; so expect a reaction soon.

Wednesday, 3 February 2010

Why bother about the Rating Agencies?

The media have carried repeated stories that Rating Agencies have threatened to downgrade UK government debt.
It is well recognised that the government has 'prevented a slump' by spending huge amounts of money, much of which has been borrowed. The government has printed and sold billions of poundsworth of bonds every month: and so far there have been buyers, though the rates of interest attached to the bonds are much higher than the 0.5% official bank rate. Some government bonds yield 5% or more annually to their owners; and so far [since 1695] all bonds have been paid off in full on the due date. This still looks a pretty good deal.

But what if the value of the pound goes down seriously against other currencies? The government could offer an even higher rate of interest, but the money in which it is paid would be worth less to foreigners; and the bonds would progressively become worth less in foreign currency on the dates when they are cashed. So foreigners would be well advised to avoid British government stocks if such a devaluation was expected.

The agencies were utterly useless in their rating of bonds and businesses during the bubble that preceded the credit crunch: they have lost any right to be taken seriously by anybody. But they are big businesses stuffed with supposedly clever employees, who all want to keep their high earnings. So they desperately need to make a few right calls that will convince investors that they merit having attention paid to their predictions. If they call 'wolf' on the British economy too soon, they will add to their discredit; but if they call too late they will again prove their incompetence. Their call on Britain matters even more to them than it does to the viability of UK national debt: so there is a real issue here.

Friday, 22 January 2010

Obama can split the banks; Osborne can try

The loss of Edward Kennedy's Senate seat to the Republicans has compelled the Obama Administration hastily to demonstrate its populist intentions. 'Main Street versus Wall Street' has been a battle-cry resonating through the USA for eighteen months, and it has become a mass clamour as the bonus season has proved just how insensate and arrogant - and downright stupid - the giants of financial services have become.
The huge US economy is still based on the broad acres and natural resources of the continential USA, and [above all] on the immense accumulation of scientific and technical intellectual property that the country possesses. America can afford to make the banks become once more the servants of real business; and cease to be autonomous cyberspace empires that can threaten the functionality [though not the substance] of the US economy.

Britain is in a very different place. Industry has all but been destroyed. The country is carrying some four million state employees, more than ten million pensioners, and more than eight million adults who are 'not economically active' below pensionable age. Another twenty-five million adults and children benefit from tax credits, and the parents of all children are recipients of child alowances and other benefits. The tax income that is needed to support that number of individuals is massive.
The industrial base is narrow, though it contains world leaders in aerospace, pharmaceuticals and biotechnology. The biggest-spending area of the private sector and the prime source of taxation has been finance, which has gone heavily into gambling. To shut down the casino or even to ban some of the high-rolliing games, would make any survival strategy for the economy much more precarious. Separating the gambling from retail banking is basic common sense - which is no guarantee that a government of any complexion would actually do it - but it would be ruinous to drive the gambling hive overseas. This means that the country must bear the risk of harbouring an increasingly-adventurous casino City as the major source of tax for the period until research, technology and industry can be reconstructed. These are not nice thoughts, but they are reality.