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Monday, 24 December 2012

Seasonable Weather

It is 07.10am on Christmas Day: a day when I was determined not to enter this site at all.

However, a couple of minutes ago my attention was drawn to the window by the noise of exceptionally heavy rain: and that distraction was immediately followed by the rattling of the windows under a strong gust of wind. The morning is unusually mild for late December. The streets of Wapping, like fields in most of the island of Britain, have large areas of standing water which have no exit via the sodden land or the clogged drainage system.

It is hard to remember that the first months of this year confronted the  nation - especially in Southeast England - with a threat of acute water shortages due to an unprecedented succession of dry winters. Since then there has been no wholly dry day. Summer was a washout; and the winter has come in with unprecedented flooding.

This unusual climatological conjugation has refreshed the debate on global warming; with the 'pros' saying that they always predicted extreme climatic events, and the 'antis' responding that there is a long history of incidents of exceptional weather and anyway temperatures in the UK are lower than a decade ago.

The already-impoverished economy is being taxed heavily [both through state taxation and through energy bills] for the construction of inefficient windmills that will shortly experience metal fatigue, concrete cancer and other highly-predictable evidence of the harebrained concept of relying on such a source. Meanwhile the authorities - the Department for the Environment, OFWAT the economic regulator of the water industry and the Environment Agency that controls water abstraction for human use - have all stood firm against more funds being taken from 'hard-pressed families' to build reservoirs, desalination plant and other new net sources of water supply. The current flooding - a monumental, unusable surplus of water - will eventually drain away; but in the next drought it will be remembered; as will politicians' assurances that there will be no future threat of standpipes in the streets of London.

In the days when most people went to church and to Sunday School every child knew the Old Testament story of Joseph and his prophesy that seven good harvests would be followed by seven years of crop failure. So convincing was he that Pharaoh put him in charge of a scheme to collect surplus crops from all over Egypt and store them for distribution in the lean years, which duly followed.

Britain did not use its [past generations of affluence adequately to develop the infrastructure: roads, railways, water services, telecommunications, nuclear power, flood defences and the other essential components of a stable advanced economy. The present tragic flooding is a prophetic signal, a clear marker of the extreme events to come, for which the country is not prepared. The cause of some significant events may - or may not - be global climate change; but that is immaterial to the key fact that a past of profligate consumerism based on borrowing, benefits-for-all, unlimited immigration and the replacement of home-made commodities by imports has left the country almost totally exposed to whatever Nature may throw against it.

Well done, the 'Economics Profession'!!

Friday, 21 December 2012

Bonkers About Bankers; Wet About Water

The British media are currently commenting both on the future regulation of the water industry and about the report of a Parliamentary Commission that has been discussing the changes in banking regulation that the Treasury is likely to bring forward following the Vickers Report which proposed the saparation of retail from wholesale banking.

The common thread linking the OFWAT licensing package to the Vickers proposals is the attempt in each case to crystallise an illusory distinction between 'wholesale' and 'retail' operations. Behind both follies lies the Economists' dogma that 'competition' is a good thing; which in the crazy world of contemporary politics is pitted against the bureaucracy's recognition that a failure either of the domestic and industrial water supply or of the accessibility of cash to households and firms would be both economically and humanly cataclysmic in its consequences.

If the supply of water or of 'retail' bank accounts was left to rampant open competition with no restraints, some firms would grow by using both fair and unfair tactics; while others would be driven to bankruptcy. A failed bank or water company could leave its customers destitute or dying; so retail competition in banking and in water trading must be underpinned by a system that would ensure continuity of supply to the customers of failed suppliers. Hence the appearance of retail competition is pursued, by the politicians who hold the ring between ideologues and bureaucrats; who have some inkling of the extent of the damage that was done to the economy by the near-collapse of banking in 2008 and who are desperate to avoid being blamed for another ruinous cock-up.

At present both the water business and so-called banking are vertically integrated. Banks deal with every sort of financial transaction from managing children's saving accounts to ensuring that their whole complex pattern of operations has sufficient liquidity at all times. Water companies convey the fresh water supply from lake, river or aquifer to the kitchen sink [and Water-and-Sewerage companies carry the process forward to the point where the cleaned waste is returned to the environment]. Dogged Economists have come up with suggestions that in both cases 'retail' operations should be separated - or, at the least, 'ring-fenced' - from the risks and costs that are incurred in the 'wholesale' sectors if the industry; and that a show of competition, albeit closely controlled by regulators, should be fostered in the retail market. All this complex bureaucracy would be paid for by the users of banks and of water so that Economists would be able to claim that suppliers would be pushed a few metaphorical inches towards the nirvana of marginal cost pricing [a fantastical concept that any non-economists can pursue on Wikipedia if they have a few days to spare.

It is generally conceded by all observers except currently-orthodox Economists that water supply is a natural monopoly. So much capital is invested in securing abstraction points, purification plant, water mains, distribution pipes, customer connections and meters [where they are in use] - and in providing the energy to pump the water around the system - that it would be unimaginably expensive to install a second, third or fourth supply network simply to provide competitors for the incumbent company. The prices that customers would have to pay to finance the construction and maintenance of the unnecessary additional infrastructure would be prohibitive: to which must be added the maintenance costs for systems would be used at significantly less than their capacity. The nutters who propose 'competition' simply because that is the ideal of Economic Theory would love to be able to ignore the material realities of of water supply. The coalition government appears to be content to leave the physical infrastructure in the hands of geographical monopolists; albeit expressing some pious hope about eventually making it easier for new companies to take over access to raw water. This could only be achieved by changing the pattern of abstraction licenses, whose award is in the scope of the Environment Agency: not of OFWAT, and would almost certainly require the expropriation of some of the assets and contractual rights belonging to the incumbent companies. Economists argue that provided the new entrants could offer water at source at a 'wholesale' price that was competitive with other sources, the distributors would be compelled to buy a proportion of their supply from the new competitors. Alternatively, the distributors would be compelled to receive the water into their systems, and pump it around to the connection points at which the competitor's [or an associated business's]  customers would be billed by a 'retail' water company that would be a separate entity from the delivery company.

Anybody who pretends that cost to the customer would not increase with the creation of a raft of new companies that employed chief executives and nonexecutive directors on the usual terms, bearing the advertising and other costs of competition should look across at the energy sector, where boards are highly-paid, where competition is ritualistic under a fanciful regulator, and within which absurdly expensive green objectives are met by compelling customers through their bills to throw enough subsidy to constructors of windmills and nuclear power plant - and even converting coal-fired power stations to using biomass [which is increasingly challenged on ecological grounds]. The cost of capital for all the companies will also increase with every increase in the uncertainty of the companies' income flow that follows from fake competition and from the appropriation of upstream assets from the companies.

With sulkily expressed threats that they will return to the government's preferred agenda of legislated pseudo-competition as soon as possible, in the face of near-unanimous opposition from the industry, OFWAT has withdrawn a recent threat to change the basis of remuneration for shareholders within the price review due in 2014. It is still threatened that the regime will be changed to fit Economists' models; but the danger is deferred for an indefinite period.

Meanwhile the banking business gets massively more coverage in the media than does water; partly because editors and journalists do not recognise the immense difference between unconditional human needs, represented by water,  and the availability of convenient services, such as banking: and also in recognition of the fact that finance is under much more obvious scrutiny as the Economics editors and commentators try to elucidate the debate around the 'Vickers proposals'. Vickers has proposed, and the Establishment has rallied around the concept, that a 'retail-wholesale' bifurcation of banking should take place. The UK Treasury policy is said to be that the corporate structure of the post-2008 financial conglomerates should not be changed; in line with the pretence that the amalgamated banks will eventually expose 'where all the bodies are buried' and hygienically dispose of the remains. Meanwhile it is proposed that operating divisions within those massive entities - and in  the immensely smaller niche firms that operate as specialists in that sphere  - should manage 'retail' banking on the assumption of being underwritten by the government: while 'wholesale'  areas of the agglomerated leviathans would be allowed in theory - to fail. Even if this were practicable - which it is not - it would not address the basic issue. Very simple tests can confirm that a colourless liquid is or is not water; and more-complex tests can verify whether identified water is potable: equally simple tests can verify whether a passage of credit through a succession of bank accounts is financing a real-world transaction that supports material business [or business with a material objective, such as insurance or investment for pensions].

But just as a water company could not guarantee the current high level of service to British consumers if it did not control all the processes in the supply sequence, so a 'retail' bank needs to operate knowledgeably in the wholesale arena to ensure the best returns on investments for its shareholders and to give assurance to all its customers that they can receive their deposits - in cash - on demand. To concentrate on the wholesale-retail issue is nonsense. As has been argued previously in this blogsite and in thousands of pre-blog, pre-twitter era discussions I have argued - and asserted - that in finance the essential distinction is not between retail and wholesale but between categories of 'products'. In terms of the flow of business in this millennium, transactions to fund the movement of goods around the world and to support material industry - including investment - are swamped by contracts [and by the consequential notional flows of money] that are outstanding in the betting games of derivative and futures trading, short-selling and the multiple other forms by which 'banks' hove been institutional gamblers. Far from ensuring the liquidisation-on-demand of their retail depositors' assets, they made the whole banking business.insolvent: compelling already-bankrupt governments in the US, Spain and the UK to raise massive financial packages to rescue the complex banks. The logical split is that of finance from gambling: with banks that have retail operations being unconditionally forbidden to gamble. That simple measure would massively increase the stability of banking, and would set a tight cap on the losses that governments and central banks could be expected to bear in the peculiar event of the fortuitous failure of a retail bank.

As Britain's retail banking inescapably passes under EU regulatory control, the innovative and globally significant high gambling business could flourish even better than before if it was pushed wholly outside the banking regime. It could grow in importance as an employer, an export earner and a source of taxation.

Friday, 7 December 2012

Posh boys out of their depth

Britain has had an interestingly depressing week; slightly enlivened by news of a royal pregnancy which two Australian yobs turned into a personal tragedy.

The Conservative Prime Minister showed how  far he was out of touch with the strongest conservative element in society by expressing his determination to bring in [and push through] legislation to permit homosexual couples to 'marry'; while denying civil partnership to heterosexual couples.

The worst news of the week, however, was the demonstration of ignorance by the finance minister, the Chancellor of the Exchequer, in his 'autumn statement'. George Osborne had to admit that his strategy had failed abysmally: and then he announced that he would intensify his pursuit of it. He would take yet more money in taxation; a small part of which would be used to support 'shovel-ready' projects to build tunnels and road improvements and schools that would employ people and increase demand for construction materials. He will increase old-age pensions and maintain the hugely-unpopular overseas aid budget while reducing allocations of finance to most other areas of government, including the health service. Despite the benefits to millions of people being reduced or capped, the total allocation to benefits will increase because the misery generated by moral and economic collapse is spreading to an ever-expanding cohort of underpaid as well as unemployed and helpless people. The need to pay benefits has developed the deficit and will further reduce economic growth, which will soon be in the negative.

These are the consequences of over half a century of ruinous economic policy, implemented by machine politicians [regardless of party] at the behest of Economists. I have spent the last few months again revising my presentation of the basic principles of political economy, which were set aside in favour of the fantasy theories that form the basis of Economics. When the 'iron laws' derived from political economy were followed, Britain had the most dynamic and successful economy in the world. So much wealth and power were accumulated that the country has been able to pillage the last vestiges of national wealth until now: but the stock is now very close to exhaustion. Ordinary people can sense it, and recognise the incomprehension displayed by the political class [and, of course, by Economists]. The lack of confidence is near crisis point.

There is a way forward. It will be no less stressful to follow it than it will be to sink into the morass into which Cameron and Osborne are conducting the nation: their way points to abject poverty and despair on an unprecedented scale: the alternative must be worth a try.

Wednesday, 21 November 2012

Another Ordinary Life

Today I will spend in my native Lancashire, attending the funeral [and the associated socialisation] for my Aunt Ada, who has died aged 102. Such an event causes reflection; both on the person and on her times. She grew up on the rural fringe of Preston, where my grandfather was a guard on the Lancashire and Yorkshire Railway, based at Lostock Hall Station which is only 200 yards from the church where the funeral will take place.

She married a farmer in the 'thirties, when almost all the motive power on the farm was derived from horses. Despite being a large-framed, fit young man he died of TB; leaving my aunt widowed, with a baby son, shortly before the second world war began. In the middle of the war she married a friend of my father - Ronnie Ashworth - who was serving in the navy. He never returned from his next voyage, leaving her pregnant with a daughter who was born four months later.

She moved into my grandmother's house where she brought up her children and took the lion's share of care for my grandmother who died at a great age. She remained in that house, and died there last week: thus her occupancy lasted for over sixty years. She got a job that she greatly enjoyed, as PA to the general manager of the Preston Co-op, which was then a major institution in the town. Throughout her long retirement she was active, with beautiful writing. She remained a churchgoer. On her hundredth birthday she was in excellent form; surrounded by the extended family. One of my cousins commented that this was the first time we had all been together in that room since our grandmother's seventy-fifth birthday. My cousin, Ada's son, quietly told me that afternoon that he had been diagnosed with melanoma: he was scared; and he was dead in six months. Thus my aunt's decline over the past two years is easily explicable; and it is fair to say that her death was a release, especially for her daughter Eileen and her close family.

Superficially, Ada Ashworth had a very ordinary, routine life: but that is untrue. She was a person of great resilience, deep understanding and the highest principles. She lived through hugely changing times, from infancy in the reign of Edward VII for more than a decade into this century. Long may she be remembered!

Monday, 19 November 2012

Ash to Ashes

The British are the most recent European nations to be made aware of an impending change in the landscape. Millions of Ash trees are fated to die, as a disease that has already decimated Scandinavian woodlands creeps over the United Kingdom. Eventually the dead trees, and the associated litter, will be burned; but the spores will remain in the soil and will fly on the wind. A tiny minority - perhaps 5% - of the trees have been found to be resistant, and a new strain of Ash may be identified; but it will never be possible to replicate the historic landscape.

Ash, like Oak, has had magical and mystical attributes attached to its by various cults, apparently throughout the history of humans in Europe. Richard Wagner captured this in the epic librettos for his operas, where the Ash has a specific role. Inevitably, today's doom-sayers have found scraps of Druidic and Nordic myth which associate the death of the Ash with the end of the world. Set alongside the heavily propagated fact that a Mayan carved calendar comes to an end on Friday December 21, 2012, the doomsters have a good field on which to express the view that our current economic and political problems are immaterial: merely minor signs of a complete catastrophe.

Next January we will have to face the economic and political dilemmas of a new year, accommodating in our thinking the added costs of addressing the Ash die-back disease. The soothsayers will quickly find another transcendent myth which will excuse them from taking any responsibility to address the urgent problems of the real world. The extent to which such myths gain attention from the public is a measure of the extent to which they despair of their own competence and of the politicians and bureaucrats in whom they have scant confidence. The time-scale for the Ash die-back disease to wreak destruction is indefinite: the Mayan myth is fixed on a single date. From December 22, the Ash myth will grow in popularity.

Tuesday, 13 November 2012

Striking Europe

Today will demonstrate how many people who still have jobs will join millions who do not have jobs, in the first almost-EU-wide strikes and demonstrations against the policy to protect the euro [and with it the objective of a bureaucratic European Union, freed from democracy] at the expense of people's living standards.

Divided Germany and the then-communist EU states fostered no delusion about political and economic reality in the 'sixties,'seventies and 'eighties of the last century: hence their economic policy subsequent to the credit crunch has been - and still is - dramatically different from the countries in western and southern Europe where the real economy in the 'sixties, 'seventies, 'eighties, 'nineties and 'noughties' was starved of investment [to different degrees in different countries] in order to create the fantasy-world of welfare freed from the individual personal obligation to work.

The present austerity, which is the more intense from one country to another according to the extent in which the welfare delusion previously prevailed there, is doing absolutely nothing to restore investment in actual output; the squeeze is barely sufficient to reduce the rate at which national indebtedness is being increased to pay for imports of manufactured goods from emergent countries and Japan and South Korea and the North America.

Today's mass demonstration of discontent at present policy will merely be a harbinger of what is to come; unless a wholly new and convincing pattern of policy is offered to the people by credible leaders. At present the leaders have not emerged: and no experienced individual has a scrap of expectation that the 'economics profession' or half-baked think-tanks will produce an intellectual basis for new policy. Still the right questions are not even being discerned by those who claim to have a popular mandate. The scene is bleak indeed!

Friday, 2 November 2012

Simple Truth

The debate on the EU Budget, and more specifically about how much the UK should properly pay into it over each of the next seven years, is becoming heated. Since a majority of the 27 member states are net recipients of funds from the EU it is to be expected that a simple majority will be in favour of the biggest possible increase in the budget. The relatively few states that are major contributors to the budget will claim added weight to their arguments: but in the final decision each country has one vote and can exercise only one veto. The exercise of the veto by any country does not cancel the budget, but  holds it at the previous year's level until the next annual debate. Whatever the outcome of the forthcoming meeting may be, it will have only a small impact on the formation of individual member governments' views in preparation for the next round of discussions about the future of the Union in the Council of Ministers.

One forthcoming issue that is being heavily signalled in London as a crunch point is the deliberation on proposals that the EU Parliament has already approved for the tightening of regulation, and the unification of regulation, over the 'financial services' sector of the economy. There is a huge amount of debate about the definition of the sector. The crisis of 2007 is generally ascribed to misconduct by 'the banks': but in fact a great deal of the reckless financing was done by firms that were not registered or regulated as banks. The main continental European businesses that wandered into the risky business, which was centred on London and New York, were registered and regulated in their home territory as banks. So it seems obvious to Europeans that the new regulatory regime must focus on preventing the things the continental banks got wrong when they ventured into anglophone markets in the noughties. During 2008-9 Britain and the US responded to the crisis by making the enfeebled non-bank institutions that survived [after Bear Stearns and Lehmans had gone under] merge into banks and thereby get a measure of protection from the banks' balance sheets; which could then be supported by cash injections from government and central banks. This created an unprecedented situation where it was not technically wrong to refer to the casino segments of the markets as segments of 'banking' or of 'the banks'.

Only one company that was known as an insurer - AIG - was ruined in the crisis: and that only because a tiny London-based offshoot was so utterly idiotic as to 'insure' the financial institutions through so-called credit default swaps. The rest of the massive insurance world was completely resilient to the crisis. Yet insurance is being subjected to heavy-handed retrospective requirements that will massively disadvantage the industry. In this the EU is behaving as stupidly as did the mavericks in AIG. There has been a little give by the purblind politicos, but the international leadership of the London Insurance Market - which has been unchallenged since 1700 and remains just as robust today - remains at threat. Thus dis-aggregation of insurance from the present EU regulatory proposals is essential.

Even more important - and further from the comprehension of the eurorats as they luxuriate tax-free in their favoured Brussels restaurants - is the necessary differentiation of the functions of the casino from any sort of banking. Proposals for a 'Financial Transactions Tax', whether it is to be a fraction of one per cent or several percentage points, presumes a commonality between 'real' banking, casino 'banking', insurance, and other 'financial services' such as shipbroking and arbitration. Derivatives, swaps, spread bets and most futures are simply gambling slips: they have some legitimate uses in offsetting perceived business and social risks for real world trade and industry; but they are based on the purchase of a ticket which is priced according to an assessment of future probabilities and such calculations are therefore wholly speculative - as all bets are. Such contracts should not be counted or taxed as a sub-category of banking transactions.

A price is paid by the entity that considers that it is mitigating perceived risk through a gambling contract, and there might in the future be a payment to the gambler if the predicted eventuality occurs; but no twist of the imagination could set the contract in accord with payments under normal regulated banking contracts. The subject matter of the contract is a bet: so its legal status should be defined in accord with betting laws, the conduct of market participants should be regulated by a gambling commission, and the transactions should all be subject to gambling tax.

 Three distinct regulatory regimes are needed: for insurance, for gambling and for banking. No elaborate differentiation between 'retail' banking and [non-casino] 'investment' banking, as perceived by the British Vickers Commission, is necessary. The EU proposals for financial services as a whole, as they stand, are likely to be significantly more detrimental to business growth over all sectors of the economy, seen from this perspective, than they are recognised to be by those who think that they are defending the London Market. The learning curve that London's defenders must climb should be even steeper than that they realise if they are to present the real issue to the European authorities; and one doubts that they will have the capability even to recognise the point that is made above.


Thursday, 1 November 2012

Leaving Politicians To It

A Greek journalist faces arrest and imprisonment for publicising a list of reputed avoiders of foreign-exchange regulations, with the imputation that many of these people were corrupt and/or tax evaders. Successive Greek governments have held, and apparently ignored, the list. A new super-tough budget has been laid before the parliament which will further impoverish the residue of the middle-income groups and increase unemployment throughout the age spectrum. Yet the challenges to the government come as ritualistic strikes and occasional riots, rather than as any movement with the potential to bring down the government. The so-called 'technocrats' [some of whom are classic eurorats] will continue to perform the charade of compliance with German demands for austerity that does not affect their own caste.

The British parliament last evening voted to demand that the Prime Minister should use his entire power and influence to bring about a real-term reduction in the European Union budget. A significant minority of the Conservative Members of Parliament voted for the motion; which nobody expects will have any effect other than to deepen ancient fissures within the tory party. Earlier in the day the government had orally accepted and institutionally shelved a Report by Lord Heseltine that proposed a reversal of forty [or more] years of centralising bureaucracy which was dedicated to the systematic destruction of industry around the country. Some parts of the former deputy prime minister's Report will receive some lip service: the Prime Minister may attend one or two meetings of a National Growth Council before it is handed down to Clegg and allowed to run into the sand; and there may be announcements - vitiated in the event - about the manner in which flows of funds already announced to support 'investment' will be publicised so that they can appear to be responding to the Heseltine proposals. As usual, the politicians will ignore the best advice and steer a course that avoids obvious day-by-day responsibility for company failures and the increasing dependency of the economy on imported manufactures. The process that Harold Macmillan condemned as "selling the family silver" back in the nineteen eighties continues, as beloved brands [most recently Branston Pickle] follow the utilities into alien ownership so that an outflow of revenue to brand-owners augments the flood of payments for imports.

Britain desperately needs a growth policy: but even more it needs a capitalist policy. The term capitalist is massively misunderstood. One of the most capitalist regimes in world history was that run by Stalin; in that no regime has comparably sacrificed human living standards, human rights and human lives in the interests of investing in the growth of industrial production. Since the invention of Economics, with its atomistic obsession with transactions and its determination to submit transactions to 'free market' conditions, 'capitalism' has been retained only as a term of political abuse. One needs to go back to the Political Economy that pre-dated Economics, as exemplified in the school textbook by Millicent Fawcett that featured in my last blog, to get an  understanding of why the concept of capitalism is a good and necessary central feature of economic thinking.

Heseltine's plan, even if it were to be adopted, would be useless without a monitoring organisation to ensure that all the investments that it supports are capitalistic. Heseltine comes close to recognising that it is essential to rebuild and consolidate the nation's capital; its capacity-to-produce material things. To do that the system needs to deliver the services [appropriate education, excellent workplace training, access to applicable research, real-world banking, positive and powerful trade unions, supportive planning rules and flexible trade regulations] that conduce to making things. In one of the last textbooks of sensible political economy Mrs Fawcett emphasised that a country will fail unless its economy maintains and develops - continually - enough capital to provide all that people demand [and can pay for]: either by producing the required commodities and services within the country or by selling exports that directly pay for the things and services that are imported. It will be a hugely difficult and prolonged task, to compensate for half a century of borrowing [both within the economy and from foreigners] and asset sales to pay for imports. It has seemed comfortable to generations of politicians to observe reports of a growth of transactions - which have increasingly represented statistics of material imports and of contracts that simply churned debts - and accept a delusion that the economy was growing. In a world where 'capitalism' and 'capitalist' have been terms of abuse, a concern with material reality became an irrelevance.

 In future bank lending, government investment, and investment by the few valid pension funds that survive, and all other flows of investment should be steered towards investments that really do strengthen the nation's capital. That requires not merely a radical shift of policy but also an intellectual revolution. The renewal of the economy cannot be entrusted to machine politicians. British politics will go the way of Greek, unless the inexorable decline into poverty is halted. Capitalism is the only way out of the crisis.

Monday, 29 October 2012

Millicent Fawcett: Political Economist

Over the past few weeks I have been analysing Political Economy for Beginners [1870] by Millicent Fawcett, who is now famous as one of the originators of the modern feminist movement. While it is the modern myth that these women were all militants, hostile to the political system as it was before the enfranchisement of women, the history of Dame Millicent [as she became] was very different from that model. The little book on which I have been working was published in the year when primary education was made available at the state's expense to all children: compulsory attendance quickly followed. Millicent was at that time married to Henry Fawcett, a remarkable man who was Professor of Political Economy in Cambridge University, a Member of Parliament and a minister in the Liberal government. Although blinded in an accident in his 'twenties he pursued both his academic and political careers with great effect: so it is almost unremarkable that he married an exceptional woman. After Henry's relatively early death she continued to research and to write on economic and social issues, and earned huge respect in political circles and in society.

When the British government came under heavy international criticism for confining women and children in concentration camps during the Boer War, Mrs Fawcett was invited to go to South Africa to inspect the camps and to comment. She was chosen because of her reputation for integrity with intelligence. Her report was devastating and led to a rapid change of policy. Her example was heavily quoted as evidence of the worthiness of women to participate fully in the political process; and I believe that she would be astonished if she could see that even today women are heavily unrepresented on the judicial bench, in the cabinet and in the boardrooms of major businesses. There is plenty of work for the Fawcett Society still to do!

It is an incidental tragedy that the Governor of German South-West Africa [now Namibia] was called Goering: in the nineteen thirties his son Hermann, Hitler's closest associate, attributed the concept of Nazi concentration camps to the British original which Millicent Fawcett had condemned.

The full text of her first book is available on line, thanks to the University of California Library. I think that it is extremely important, both because of the authority and distinction of its author and because of the exact time when it was written and developed through a large number of successive editions. Mrs Fawcett was convinced of the validity of basic doctrines in nineteenth-century 'classical' Political Economy that were soon to be set aside by the new wave of Economists. The leader of the new movement in the United Kingdom [and, indeed, the entire English-speaking world] was the man who was appointed to the late Henry Fawcett's professorship in 1884, Alfred Marshall. There had been two strong candidates for the job: Marshall, who wanted to present the new 'Economics' as a 'science'; and William Cunningham who had effectively invented analytical Economic History. Cunningham would have been very firmly an exponent of Political Economy [as was Mrs Fawcett]: elucidating the principles that politicians should understand and incorporate into public policy in order to create the framework within which the economy could thrive and grow. Marshall shared with several thinkers of his generation a belief that Marxism was a real and present danger to the existing social, political and intellectual order, and since Marx had used selected principles from Political Economy to formulate his hostile analysis of 'capitalism' Marshall was determined to present a wholly different view of the economy.

During the past 150 years Economics has dominated thinking and policy about economic issues in the west; and its accumulated effect - especially in the United Kingdom - has been catastrophic. Economics has concentrated on refining a normalised model of market processes, combined with an increasingly frenetic assertion of the dogma that free markets are the ideal structure of an economy while all the evidence of the real world has indicated precisely the opposite. The ultimate catastrophe to which the Economic establishment made a major contribution was the rapid growth of markets that the impotent and uncomprehending regulators simply did not attempt to understand. Those markets - mostly in intangible 'products' which, in some cases, defied clear definition -  produced the ultimate [almost terminal] market failure in 'finance' that came within an ace of undermining the entire Atlantic Economy. Firms passed from being notionally untrammelled entities to being nationalised or subject by government and state agencies to forced mergers into entities that were abjectly dependent on government and central bank funding.

If the regulators, central bankers and ministers of finance who held office between 1980 and 2007 had been educated in the principles that Millicent Fawcett elucidated they would have prevented the banks and securities firms from doing what they did. In the aftermath of the crash one leading British regulator said that a significant proportion of the activity that had gone on in the City of London and in other financial marketplaces was of no material benefit to the real economy: and he attracted a chorus of approval. Mrs Fawcett had been explicit on the differentiation of productive from unproductive labour.

While the essential principles of Political Economy, as elucidated by Millicent Fawcett, can be applied directly to the contemporary economy, some of the expression and most of the examples are incomprehensible except to expert historians. For example, her analysis of money supply was set in the context of the full gold standard, which has no relevance to the post-1931 world. I have therefore constructed a guide to the text, with extensive quotations that elucidate all the key principles in Millicent's words. I am now checking the guide for errors; and would welcome any offer to do some proof-reading or reality-checking.
Publication on-line soon!

Saturday, 13 October 2012

The Ultimate Betrayal: The UK Government and Inflation

In his speech at the Mansion House [City of London] on October 11, 2012, Lord Turner, head of the Financial Services Authority and a leading candidate to be Governor of the Bank of England, revealed one of the darkest economic secrets that the infamous coalition government is fomenting. With the consent of the Treasury [Chancellor: the Right Honourable George Osborne PC MP] the Bank of England has created hundreds of millions of pounds in 'quantitative easing' [QE]. This notional credit has been used to buy bills and bonds that had previously been issued by the UK government, mostly from the holdings of 'reserve assets' that must be maintained by financial institutions. Much of the new spending-power has been used by the firms that sold the bonds to the Bank to buy new issues of government bonds, to enable them to retain their required 'reserve ratio' of relatively secure assets. Notionally this activity has not increased the 'money supply':because in principle the Bank of England has issued spending power that is matched by an increased stock of government debt that it holds as 'assets'.

Turner's innovative [implied] suggestion was that the Bank could 'write off' some of the assets that it has bought. This would mean that the selected bonds would simply cease to exist; they would vanish from the Bank's asset register, and be removed from the total of the government's debt. The coalition government claims that the  present national debt is a smaller percentage of the national income than it was when they took office in June 2010: notwithstanding the fact that the number of pounds that the government has borrowed has continued to increase rapidly. Cameron's government has continued to borrow more money each year to spend on benefits, and to maintain health service spending and to spend hundreds of billions of pounds on its plan to double-up the most efficient railway in the country: from London to Birmingham. Meanwhile some important spending has been reduced: the national defences have been despoiled, the effectiveness of the police has been reduced, and the construction of coastal and riverside flood defences has been deferred.

Over the last couple of years the government has ordered the commercial banks to reduce the ratio of the money that they lend to the assets that they hold. Their recognisable 'assets' were being reduced anyway as the credit crunch unfolded and they had to write down the value of many assets and to write some off. The government - partially in response to European Union diktats - has raised the ratio of assets that the banks must hold to what they can lend: so they can lend a lower proportion of a diminishing resource. The reduction in the total that banks can lend requires the banks to refuse to extend some 'old' loans that come up for review, as well as refusing to make new loans to businesses. Hence one of the main sources of funding for economic growth has been reduced almost to vanishing point: and the economy has effectively ceased to grow while government spending has continued to grow.

By tinkering with taxes Chancellor Osborne has increased the government's income as a percentage of national economic turnover, but that means that less spending-power [in real terms] can be extracted as taxation from a diminishing national income. The gap between the tax-take and the government's spending is filled by borrowing.

The banks' liquidity has been maintained by the Bank of England's QE: buying government debt certificates from them. Already the Bank has bought up almost one-third of the whole vast pile of debt certificates that the coalition and former governments have issued: and Turner's speech contained hints that some [or eventually all] of the government debt that is held in the asset register at the Bank of England could be written-off. This would mean that the national debt would be reduced by some 30%; and when that was done, interest payments on that debt would cease. The government's 'books' and the predictions for their future spending needs would suddenly become much more favourable; to the extent that it might be possible for the austerity to be relaxed.

But this would be disastrous for pensioners. In interpreting legal requirements on pensions administration the Actuaries have used their own archaic methodology to insist that pensions trustees should sell shares [that can rise with the success of companies] and to put an increasing proportion of the funds that they hold into government bonds. So when the real return on government bonds is reduced by the great coming write-off, the purchasing power of pensions and annuities will hugely be reduced. The millions of people who have  accepted reduced current purchasing-power throughout their working lives, while they saved in their pension funds to buy security in their old age, will inexorably be impoverished by the inflation. There will be a great show of handwringing on all sides of the political charade, but nothing can be done by a government of any party or by any coalition of established parties to protect the pensioners from the coming catastrophe. The calamity will almost certainly materialise. Impoverished pensioners will vote against whatever government 'betrays' them, only to find that no other gang of politicians has any idea of how to 'save' the situation. The powers-that-be have allowed this to happen through decades of purblind public policy: decent working people will pay the price of this incompetence, when they come to the most vulnerable phase of their adult lives.

Sunday, 7 October 2012

The Great Pensions Tragedy

The economic naivete of politicians is most clearly seen when financial planning for the future is brought into their arena. The political class has been warned for over forty years that the number of surviving retired people will continue to rise at least until 2030. During the same past four decades Britain's envied position as the country with the best pensions coverage in the world has disastrously been lost. The huge expansion of public sector employment, which provided those employees with the promise of generous index-linked pensions in addition to their state pensions, requires the rest of the population to pay higher taxes [and incur more public borrowing]. Meanwhile the decline in pension provision for taxpayers in private sector employment has been so precipitous that fewer people are members of optional pension schemes than at any time since the nineteen-fifties. In addition, hundreds of thousands of hereditary paupers have no access to any supplementation of the state pensions that they will receive in their sixties, in succession to their benefits.

The present coalition government has increased universal state pensions and promised to maintain their 'value' in future in line with 'inflation'; and one cannot imagine a Labour-led government reneging on that promise. No similar promise can be made by any government in respect of personal or employer-funded pensions. Inflation inevitably and inexorably diminishes the purchasing power of funded pensions over the years, and the impact is greater the more years pass after the date of retirement. A small number of pension funds are so well endowed that they have been able hitherto to increase pensions-in-payment in line with the rising cost of living, but in general pension fund trustees have asserted [and most of them have exercised] their right to make annual increases of less than officially declared 'inflation', or to freeze the amount paid out. A majority of the people who are classed as 'pensioners' are no longer members of funds managed by trustees; they are 'annuitants'': people who on retirement were given notional control of the 'pot' of cash that had accrued to their account in an employer's pension fund, to which contributions were made jointly by the employer and the employee. The recipient individual is required by law to buy an 'annuity' which is an income of a fixed sum of money each year. Most funds allow individuals to take a portion of the 'pot' as a cash sum, in which case their annual income thereafter will be reduced. As an additional complication some annuities provide limited compensation for inflation in future years, and in such cases the annuity is reduced to cover the cost and risk to the provider of having to pay the promised increases in the event of future inflation.

In response to the collapse of banking governments in most developed countries engineered massive increases in the money supply have been used to keep the banking system afloat. At the same time a huge increase in government borrowing has been needed to support the banks, and to pay both civil servants and recipients of state benefits. Government acquiescence in the continuing deindustrialisation of the economy has meant that the UK now has minimal earnings from sales of goods into international markets; yet every indication for the future is that the emergence of powerful new economies will drive up the prices of commodities that Britain needs to import. Worse still, with the abandonment of Britain's capacity to process raw materials means that imports come in prepared forms and as manufactured goods.Relative to the eighteenth, nineteenth and early twentieth centuries, and relative to population size, Britain generates grossly insufficient material exports to compete as a long-term buyer of commodities in which it is not self-sufficient. The kingdom faces both declining real standards of living and the phenomenon of dramatically rising prices for things that are material necessities for life. A glaring example of the increasing problem is in the energy market: Britain dissipated the benefits of North Sea oil largely on paying benefits to the people cast out from industry by Thatcherite-Blairite policies, and sold nuclear firms like Westinghouse to foreigners: and now cannot afford to build nuclear power stations as imported oil and gas prices face long-term increases. The phenomenon of rising prices will be compounded by the devaluation of the currency, as the country's import bill far exceeds it export earnings. Pensioner poverty will escalate; and younger people, seeing the poverty of their pensioner relatives will be disincentivised themselves voluntarily to 'waste' their current income on buying pension rights.

There is no obvious way out of this impasse. It is a stark indication of the means by which the national impoverishment prepared by generation of politicians will begin seriously to bite.
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Friday, 28 September 2012

What is Spain Up To?

Spain has already inflicted huge economic sanctions on its citizens: 25% unemployment [at least], reduced pensions and increased age of retirement, underfunded schools and hospitals, bankrupt local authorities, tens of thousands of incomplete and unsold dwellings, increased taxes ... and the catalogue could go on and on. While the banks have borrowed from EU institutions and from foreign banks even in recent days, the markets are betting against the Spanish state being able to submit formally to the conditions that would be applied to a formal 'bailout' by the European Union, the European Central Bank and the International Monetary Fund. Since it is generally understood that the conditions on any formal baliout would be very harsh, why should the Spanish government not have done what the Greeks did: take the bailout as soon as possible, and blame the Germans [and the rest of the EU]  for the harsh treayment meted out to the population?

Simplistically, Prime Minister Rajoy is asserted to be over-endowed with Spanish pride; which makes him exceedingly reluctant to submit to mere north Europeans. More realistically, he has hoped to be able to avoid a bailout altogether. Meanwhile, his government has demonstrated that the Spanish state is sufficiently robust to be able to enforce very hard economic policies. Most importantly he has emphasised and demonstrated the huge difference between the Spanish situation, and the popular response to it, and that of Greece. Spain has presented strong evidence against the domino theory.

Greece will some day fairly soon be forced to withdraw from the euro; but that need not precipitate a gaderene rush by specluators to force Portugal, Sapin or Italy also to fail to manage their economy withon the eurozone.

Whenever Spain now applies for a bailout, on conditions that it will partially be able to dictate, that will not be a signal for the progressive withdrawal of all the weaker southern states from the euro. Spain has not just bought time for itself to get agreed terms; it has ensured that the gulf between Greece and the rest has become consolidated. Yes, there are demonstrations verging on the riotous in Spain; dismay affects most of the population some of the time, and some of the population all of the time; but there is not yet the degree of hopelessness and despair that now characterises the vast majority of Greeks.

The whole situation is classically tragic, but redemption for Greece is vastly different - and much more painful to achieve - than is the possibility to turn the Spanish economy round within the eurozone.

Wednesday, 26 September 2012

International Aid

Today's News in Britain features the last round in a long-running debate about the relative merits of 'defence' spending and the allocation of money for assistance to other countries for 'development'. David Cameron, the Prime Minister, is again reiterating his commitment [and that of his government] to give at least 0.7% of the reported national income in donations to developing countries.

There is a growing groundswell of opposition to this spending. Although 0.7% is a small amount, there is a great deal of evidence that some of the money over the years has been stolen by kleptocratic rulers, a lot has been wasted, and some attracts criticism by being awarded to India that has established a space programme [which many people regard as evidence of affluence].

Under the present coalition government major components of Britain's military might have been abandoned. No government since that of Charles II [who ruled from 1660 to 1685] has so far reduced the country's capability to defend itself or to make the sort of intervention against anarchy that restored stability and hope in Sierra Leone just a few years ago. The 'illegal' war in Iraq that was waged by George W Bush and Tony Blair, and the counter-historical 'intervention' that is still costing lives in Afghanistan, have alienated a very large proportion of the home population from government foreign policy; while generating in the population a huge empathy with the armed forces that are placed under extreme strain exacerbated by inadequate resources.

There is an increasing lobby that argues that having the military capability to intervene beneficially in destructive situations around the world is a more valuable source of assistance to the causes of democracy and to global economic stability than are cash handouts that can so easily dribble away in corruption and waste. There is a strong suspicion that the dominant Conservative component of the coalition adheres to the aid budget as part of the publicity that has been devised to try to show that their party is no longer the 'nasty party'. Cameron asserts that unless major problems of conflict and mass migration are addressed by an outward flow of aid they will "come home to visit us". The Prime Minister would only need to take a short bus ride from Downing Street to see that uncontrolled immigration, extra-legal employment and poverty are rampant already in London; to an extent that could not be 'cured' by the reallocation of the whole of the overseas aid budget to these legal and social problems. Out-of-touch governments have allowed these massive socio-economic problems to emerge; and the present government shows no signs of awareness of them; so, obviously, they have no way of addressing them properly.

Saturday, 22 September 2012

'Fair' taxation

In the United States, Britain and France - in particular - there is a debate about 'fair' taxation which is on the verge of reaching crisis proportions. In all three countries, there is deep concern about the need for economic growth to lead the economy out of recession. Growth comes from investment. A minority of the population directly contribute to investment by putting their savings and some of their income into shares and bonds that provide funds for commerce and industry; and a diminishing proportion of the population make indirect investments in shares and bonds through collective savings funds such as voluntary pensions schemes and insurance reserves. The inept extension of taxation of pension funds by Gordon Brown in the UK [combined with the disastrous ineptitude of the actuaries] has devastated the value of pensions, and thus has destroyed public confidence in the merit of saving through such funds, which have a much lower take-up than in previous decades. A compulsory state scheme will not correct this situation: it will merely produce pension 'pots' that are so small that they will have no impact on the growing disaster of pensioner poverty.

Investment by richer individuals has always been essential for economic growth to occur in any free society. In centrally planned authoritarian states, much of investment is wasted because a small cohort of bureaucrats cannot have the sensitivity to economic possibilities, and to adverse trends in productivity and the desirableness of products, that a wide range of personal investors can achieve. The optimisation of investment is only achieved by personal decision. There is now a hugely powerful intellectually-led movement to increase taxation of the rich - and thus to reduce the quantum and the selectivity of investment - on the idiotic ground that higher and higher taxation of the relatively 'rich' is intrinsically 'fair' and therefore appropriate. Some advocates of such taxation regard widening and intensifying the ruinous taxation as the most important cause in politics. The Obama Democrats in the USA and the Liberal Democrats in Britain and the Socialists who have quickly become querulous with their new president in France are all devotees of the doctrine that the investable funds should be grabbed from the relatively 'rich' and disbursed as immediate spending-power to the relatively 'poor'. This is an intensification of the ruinous policies that have helped to bring their economies into a condition of low growth and high 'welfare' spending. As long as this nonsense is prevalent, real economic capability will be destroyed and the potential of the economies to give their people real welfare will continue to decline.

There is also a socially divisive component to this issue. Class conflict is being promoted, with the classes defined in terms of tax-bands applied to incomes or to assets. People who do not declare earnings large enough to be required to pay tax on them are to be more explicitly defined as 'disadvantaged' or 'deprived' and [according the British Liberal Democrats] 'the rich' who earn more that £50,000 a year are to be taxed to transfer money to the 'deprived'; and then their assets will be valued and subjected to a further levy. If that levy is met from income their income will doubly have been diminished: their consumption and their potential to invest will be reduced - both inflicting direct damage on the economy; and if the levy is met by asset sales, leading to a mass sell-of of a range of assets [both material and financial assets] their prices will fall with further detriment to the economy. To this idiocy the same politicians are adding the notion that young people should be able to enter the housing markets by having the deposits on their houses secured by their parents' and grandparents' 'pension pots'. The funds that people hold in their pension funds are vastly reduced by the crass policies of the past two decades; and now they are being challenged to risk the loss of those funds altogether - and to face old-age poverty - if they take up the new scheme. If they decline to do so, there will be serious discord in families: if they do comply, they will be constrained in how much pension they can draw by the contractual form of the guarantee; and if there is another house-price slump they may loose their pension assets when the property is repossessed. Even if the housing market holds up, it is obscure as to how many years the guarantee [and therefore the restriction on the pension fund] will be maintained. None of this looks like constructive social engineering: it would be crude exploitation of the relatively-thrifty, leading to massive destruction of accumulated wealth.

Tuesday, 18 September 2012

The Implications of the Proposed EADS-BAe Merger

For many centuries there has been a close synergy in successful countries between the most advanced sectors of technology and the  military and naval forces of the regime. The Vienna Arsenal and the Woolwich Arsenal in London occupied massive sites which have quite recently been released for development for civil purposes, as the last survivors of the former Austro-Hungarian and British Empires go to their graves. From at least the fifteenth century until after the middle of the twentieth the British Royal Navy maintained a massive onshore infrastructure of dockyards and other facilities, as well as being the predominant customer for cutting-edge ship and weapons design and construction. In the twentieth century the potential of aerial warfare created huge high-tech industries in all the industrialised states at the same time as vast acreages of land were taken up by airfields; and that phase was followed by space programmes; which India and China have now taken up as western European states and the USA have cut back on their defence spending and of space exploration as the burden of 'welfare' has pressed upon national resources.

Britain's attempt to keep a presence  in aerospace and naval construction, and to retain at least some advanced weapons technology, was by cobbling together British Aerospace, which added shipyards and became BAe, which is the residual legatee of centuries of public investment in defence supplies. This company has been surprisingly successful in retaining a global market share in many segments of defence procurement. Simultaneously Europe - including the UK - agreed that it could only keep up a presence in global civil aviation by collaboration, hence was created the Franco-Germanic-Hispanic-British consortium called EADS. With their usual short-sightedness, the Brits then sold their 20% holding of EADS; which is now regarded as a eurozone business.

It has recently been proposed that BAe and EADS should merge; with EADS owners holding 60% of the equity in the resulting firm. The biggest drawback to the merger is that BAe is the repository of a massive range of secret material relating to the military resources and plans for both the UK and US governments; and while the US has badgered Britain to integrate with Europe for over half a century, in matters like this the US establishment prefers its close satellite to keep close to the US without strings to the continental European states. The British government has a 'golden share' in BAe [as do the continental governments in EADS] and there will doubtless be a great deal of discussion in secret between the US and UK governments before the deal is allowed. One sure outcome if the merger does go through, is that the now-strong position of BAe as a supplier to the US military and space programmes will be reduced, most likely very severely and very quickly.

Thus the capacity of the wider Europe, including the UK, to remain active in globally important fields of production and research will be lost, precisely when China and India are developing their capability. The spin-offs from research into defence and space technologies, applied to terrestrial consumer products, has been responsible for many very popular product developments and innovations: that torch could soon be abandoned to Asiatic innovators. Europe will only have its Economists and politicians [and its supine electorates] to blame for allowing the catastrophe that is already well-developed to come to maturity. Then Europe will be too poor to build shipyards and aircraft factories, or to test rockets. Militarily as well as technologically Europe will be eclipsed, and the politicians will do nothing to avert the catastrophe because they are fixated on buying the votes of hereditary paupers whilst they purport to be controlling the expansion of the national debt.

Friday, 14 September 2012

What the Fed is Doing

The Federal Reserve Board, the central bank of the USA, has announced that it will continue on a large scale to buy 'mortgage-backed securities'. A security is a promise-to-pay that has been issued by a firm or a government agency, that is considered to be highly likely to be cashed [or exchanged for another acceptable asset] when the owner demands payment in accordance with the terms on which the security was created. By concentrating primarily [though not necessarily exclusively] on mortgage-backed securities the Fed is slowly capturing the reckless expansion of credit during the nineteen-nineties and twenty-naughties, when the spending-power that was created was used to 'buy' houses. Hundreds of thousands of Americans were encouraged to participate in Bill Clinton's concept of a property-owning democracy by taking a material stake in the country - and gaining a material asset - through house purchase. Lending institutions, mutual funds and banks, were bullied by the agencies of federal government into making mortgage loans, even to people whose incomes and history of indebtedness indicated that they were incapable of resourcing and managing the repayments.

Notionally the books balanced. The population collectively borrowed more money each month to buy an increasing housing stock, comprised of properties whose resale prices were increasing in line with the rising price of new homes. The public's debt to the banks notionally matched the liability of the banks in the form of the sums that they owed to the investors who had supplied them with the credit that they had advanced as mortgages. Month by month the vast majority of mortgaged householders paid the sums due to their mortgage lenders. The lenders used the inward cash flow to pay their business costs and to pay the interest that was due on the credit that they had borrowed, and to repay those creditors and depositors who asked for their money back: and they had enough left to carry on lending to more borrowers at higher prices. Then during 2006 economic conditions became tougher for low income groups. Unemployment and prices were increasing, and an increasing number of 'sub-prime' borrowers either surrendered their properties or were evicted from them as their arrears on mortgage payments were deemed intolerable by the lending institutions. The mortgages had partially been funded by sales of securities that were 'bundled' with other mortgage lenders' debts and with the ownership of loans that had been made for other things. These 'complex' securities  were said to be 'safe'  because they would not lose more than a fraction of their value if any one of the lending institutions became unable to pay out against the security on demand. During 2007, however, it became clear that several major mortgage lenders had so large an exposure to sub-prime mortgages that there could no longer be a guarantee of the value of the securities that they had issued; and it was unclear, in the case of many complex securities, how much of the asset had been eroded because it was not clear how much of the asset was devalued. So the only way to treat such a security was to assume that it had no determinable value. This caused the catastrophic collapse of banking confidence and of asset values generally that was quickly dubbed the 'credit crunch' and which spread around the world.

A variety of headline-grabbing measures was taken by governments and by central banks both to calm down the markets and to prop up the values of as many shares and securities as could still be seen to retain positive value. The banks were enabled to carry on allowing customers to access their own money, and to service those of their debts that it was necessary to pay off. Where it was deemed necessary the government took partial or even total ownership of the banks; though the most preferred method was to 're-capitalise' the banks by topping up the cash that they had available so that they could continue to met their obligations.

Though house prices fell significantly, valuations were still quoted and contracts for house purchase continued to be made; and the vast majority of mortgage holders carried on making all or most of their payments. For a while the mortgage backed securities could not be valued, but they continued to exist. But then in 2011-12 conditions became more stable, particularly in the US housing market, as the massive spending on infrastructure by the federal government and the constant increase of the amount received by the American people in welfare and unemployment pay and the sluggish creation of new jobs worked together to increase confidence in the valuations of most US house property. Significant value could again be attributed to the securities from the 'nineties and the 'noughties that had been in limbo since the credit crunch. The Federal Reserve has now announced the continuance of its programme of taking such securities into the asset registers of the banks that are members of the Fed, in turn for new credit that is given to the banks to support their ongoing operations.

The short-term impact of this policy will be slightly to stimulate activity in the US economy, adding to business turnovers and employment. The major impact of the policy of 'Quantitative Easing' will be to increase the notional money supply; to convert the inflation of credit that had been confined to the housing sector to general credit within the banking system. The excess debt that was accumulated in the housing sector is being nationalised in the hands of the Fed, and a huge amount of spending-power is placed in general circulation. It will create inflation of general prices; and will stimulate modest economic growth. Without allowing any other major default of a bank to occur since Lehman's disappeared at the height of the crunch, the absurd sectoral credit expansion from the bubble era is being legitimated. This will be a phenomenal achievement, if it can be brought to completion. The objective is clear. In Britain the promised continuance of quantitative easing is not similarly targeted at 'monetising' the inflation of house prices that went so disastrously wrong through the sub-prime experiment; it is principally helping the banks to continue to meet their obligations from past casino banking, and secondarily allowing them to perform the statistical tricks that are needed to 'strengthen' their balance sheets to meet new global capital requirements. However long it goes on, it is unlikely to assist the growth of the real economy.

Thursday, 13 September 2012

Saving Children

UNESCO has been congratulating its supportive countries - and itself - on how many thousands of children's lives have been saved in recent years; and at the same time their report deplores the daily toll of child deaths that disfigures the global statistics. The means for saving the lives that are continuing has been "well-targeted aid"; which implies more self-congratulation for the staff.

Most of those who have been saved, and most of those who have died despite the flow of aid, were born in South Asia and sub-Saharan Africa.

The downside of this wonderful story is that there is no way of assuring that these people will survive to adulthood; or that they will survive a normal lifetime as adults; or they will procreate the next generation responsibly. There is no guarantee that their lives will not be blighted by warlordism, civil war, extortion or racketeering [whether or not it is disguised as militant trade unionism]; or that they will develop a culture of idleness, alcohol and drug dependency in preference to gainful conscientious employment.

A superficially heart-warming story boils down to a sequence of concerns for the future. All that is assured is that in consequence of the "well-targeted aid" there will be more people will be exposed to these difficult issues than would have been the case without the intervention: consequently more children can be conceived only to die in 2032 than otherwise might have been the case. One does not need to be a Malthusian to recognise the grim logic that follows on from the 'success story' that has been pumped around the world over the past thirty hours. It is an ongoing item of the Agenda for Life that nobody can ignore.

Saturday, 8 September 2012

The Euro: What's New?

The European Central Bank [ECB] has now put a modest amount of flesh on the bare bones of a contingency plan that is a long way from being implemented. If Spain or Italy [or France] asks for help from the EU - maybe something short of an appeal for a Greek-style bailout - and if the EU and the IMF agree terms with the government, the ECB may buy bonds issued by that government. These could either be bonds that are already in the market, or new issues of bonds that will have three years or less to run before they must be bought back by the issuing government. Some government spending in the target country [provided that the borrowing falls within the approved strategy] will be funded by new euros issued by the ECB, if any country qualifies for the scheme.

The ECB's balance sheet will be increased if this should happen; on the debit side by its liability for the new issue of euros and on the credit side by an equivalent notional 'value' of bonds. All the member-countries of the eurozone own the assets and liabilities of the ECB, and the bigger they allow its balance sheet to grow, the more deeply they will be committed to backing the whole dodgy structure. Many news media on 7 September 2012 copied the bizarre assertion [whose originator I have not yet been able to identify]  that this new policy would have the 'opposite effect' to that of the Reparations that were payable after the First World War. The sheer idiocy of this wild assertion makes it notable, and it may even prove memorable.

Reparations - money to pay for repairs - was demanded by the states that had participated in the war and had not collapsed at the end of it; as had the empires of Russia and Austria. Republican Germany was required to accept the Peace of Versailles, which included reparations; and Keynes made his name internationally by publishing The Economic Consequences of the Peace, a book that predicted the disaster that would inevitably follow. It is not clear how far, if at all, Keynes's analysis influenced members of the US Senate when they refused to ratify the Treaty; but history teaches that this decision - which seemed catastrophic at the time - was ultimately of no importance. The Treaty could be blamed for hyperinflation and economic catastrophe in Germany: and thus for the emergence of Hitler; and the Senate had no part in it.

The German electorate and the managers of the Bundesbank [the German central bank] are now united in regarding the ECB's new plan as being very adverse for Germany. By opening up the balance sheet of the common currency to weak regimes in southern Europe, the Germans and the Austrians and the Dutch [with others] find themselves forced into the situation where they will have to back the ECB, or withdraw from the eurozone: which would have catastrophic effects for the whole continent. The relatively feckless countries will have the power to undermine the strong: those who have worked hard and saved will be penalised to service the accumulated debts that were incurred by reckless welfare state awards [and by massive corruption] in another group of states. The European lie is well understood, now; but those who were conned cannot work out how the truth can triumph. The coming months will be extremely fraught for all who live in the eurozone: and for all whose economies rely on trade with the zone.

The USA and China, Russia and India, have a massive interest in this situation and have no influence over it. Britain, Sweden and Denmark have seats in all non-eurozone  EU gatherings: they could thus be in the unique position of power-brokers, but there is no sign that they have any useful advice or suggestions to offer to their beleaguered neighbours.

Keynes would have had an answer; but he was unique!

Saturday, 1 September 2012

Fair Enough?

The election campaign in the USA is now in full swing, with unprecedentedly large sums being spent, largely on advertising that is virulently abusive of the candidates, their histories and the probable effect of their policies. The incumbent President carries a heavy burden of blame for the ongoing - relative - stagnation of the US economy; while his challenger carries the double burden of being a Mormon [which most people privately dismiss as a nutty religion] and being rich, with most of his wealth having been gained by his own efforts. The extreme disparity in wealth between the very rich and the poor in the USA is the greatest that it has ever been, certainly since the abolition of slavery. Thus there is a constant call that the rich - and especially any rich men or women who dare to enter politics - should be made to surrender some of their wealth, and/or more of their income, through revised taxation. There is behind this the assertion that this would simply be 'fair'.

In the UK, where a weak coalition government is struggling to achieve any policy consensus that may have a chance of stimulating economic growth, there is an even more strident call from one of the coalition parties [the Liberal democrats] for taxation of the rich to be increased, probably by introducing a wealth tax [sometimes narrowed down to a 'mansion tax'] on the grounds that this would simply be 'fair'.

In Ireland, Spain, Portugal, Italy and Greece, governments have formally agreed to impose highly restrictive policies, which include higher taxation and reduced state borrowing. In these countries there is resentment of those who prospered greatly during the credit bubble years at the start of this century, exacerbated by anger at those who use their guile and their contacts to move money out of the country before it is exposed to the risks of higher taxation and the threat of devaluation if the country is forced out of the eurozone. The rich - and the comfortable, especially senior bureaucrats and politicians - are vilified for their [real or imagined] past depredations against the economy: and the whole farrago of criticism is crystallised in the call "it is not fair".

China has been rocked by a scandal at the centre of which is a party official whose wife had become deeply embroiled with a British businessman who was helping her to move massive sums of money out of China. Both in China and abroad this case is regarded as an example of what has been happening on an heroic scale: officials have protected their families and associates as they have accumulated massive fortunes, and tried to move significant sums to the relative security of foreign banks and assets. For a communist country to permit the emergence of extreme inequality, in direct opposition to the most basic Marxist principles, is hugely embarrassing: and popular feeling can be summarised in the assertion that "this is not fair!"

One could circumvent the globe many times and find similar assertions about the state of society and of the economy in the great majority of countries. But while there is a widespread feeling that the distribution of wealth [and with it, the distribution of power] is 'not fair'; there is no clear and universal model of what would be 'fair'.

The rich can say, with considerable justice, in the UK or in France or in many other countries, that far too much tax is taken already to keep hereditary paupers in comfortable idleness; free to take and to trade in drugs, bootleg alcohol and smuggled cigarettes; and prone to civil disturbance. These people are propitiated because they could have votes; even though a very large proportion of them do not exercise that right, or even register as voters. In the USA the Congress is very careful to keep benefits for able-bodied adults of working age on a temporary basis, so there is a constant pressure on them to seek work; but for the elderly who are 'on Welfare' and potentially for people receiving treatment under 'Obamacare'  there is no time limit to their dependency. Thus although the structures are different as between the USA and Western Europe, the underlying issue is very similar. The relatively new aspect to the problem is that the concept of 'fairness' is becoming confounded with the necessary debate about the capacity of the economy [and of the social system, and of the political arrangements that prevail] to tackle the closely related issues of growing public debt and of long-term benefit dependency. People kept by the state are usually not contributing either to economic activity or to taxation of income or of wealth: so it is a fair question for the rich to ask:"where is the fairness in taking more taxation from productive individuals and dissipating it is the perpetuation of idleness?"

This question is ignored by the political charlatans who offer the voters the proposition that it is 'fair' to soak the rich, without questioning the ways in which government money is spent and the efficiency of that spending in promoting development of the real economy. Yet this is the nub of the issue, and that point must properly be drawn into the political debate.

Friday, 24 August 2012

Greece, Time and Eternity

The Greek Prime Minister is running around Europe, ostensibly to seek an extension of the timescale against which, he asserts, the Greek state will be able to achieve the cost and debt reductions that were promised in return for a loan that has already been received from the euro area and the IMF. He knows, as everyone he talks to knows, that his mission is impossible. Greece has neither the will nor the means to meet the requirements; and it is most improbable that politicians from the relatively-strong 'northern' eurozone member countries will dare to agree to lend Greece any more money to burn, because of the opposition of their own electorates. The exit of Greece from the eurozone is inevitable; and it will happen as soon as the zone has been able to agree on terms that will keep Spain, Portugal, Italy and Ireland within the system.

For more than two decades the Greek people were the over-indulged victims of a gigantic con, pulled on them by their politicians and bureaucrats, and by their Economists, acting in close concert with the eurorats who assembled the eurozone on the basis of an untrue prospectus and egregiously fudged data from various member states; among whom Greece was conspiculously mendacious [and, almost certainly, self-deluding]. The political future for Greece is deeply uncertain as living standards for wasters and for savers alike plummet into dire poverty. The one massively viable business sector - tourim - depends on the visitors feeling safe: if there are street riots, muggings on a vast scale, embezzlement of tourist companies' cash floats, and closure of hotels while the visitors are still in them, that will cause hundreds of thousands of tourists to opt for 'anywhere but Greece'  for their annual over-exposure to solar energy.Greece faces anarchy - a Greek word - as the time for the resolution of the debt problem extends until an exhausted cohort of creditors agrees to a settlement of the debt at a monumental write-down; with everyone aware that the notional ultimate repayment will never happen.

The British peoples have similarly been deluded to the Greeks; and the present coalition government - like the Greek coalition - is trying desperately hard to achieve some sort of result that will vindicate its assertions that the austerity policy is 'succeeding'. But just as the Greeks are spending what they have most recently borrowed, within an economy that has declined significantly but which has not significantly been reconfigured; the British state is borrowing more than was projected and is doing massively less to stimulate growth that anyone believes necessary. The economy has shrunk for three successive three-month periods, with no sign that this trend will cease. The pound remains strong against the euro and the dollar simply because it is an alternative to those currencies as a short-term 'safe haven' for international investors, and among the assets denomiated in pounds that can still easily be sold are British government bonds. This is a precarious temporary solution to the conundrum of how to fund the excess of state spending [especially on benefits for the unproductive members of society]. George Osborne entered the government as the lead missioner for the doctrine of austerity, with full support from his colleagues: now he looks increasingly isolated. His former close ally, David Cameron, is less able to support Osborne as his own credibility has evaporated. Outside the national government, the Conservative Mayor of London has featured largely in the euphoric promotion of the Olympic Games by all the media; to an extent that begins to make him credible figure as a challenger for the Conservative Party leadership.The strong element of buffoonery in his persona is held to be an asset by many of the public, and probably makes him an ideal candidate to soften the members' pain as his party shrinks rapidly from the national political scene.

Greece has run out of plausible politicians: the current prime minister is a technocrat who was effectively appointed by the EU; though he then managed to gain a reluctant endorsement from the electorate.

The British Conservative and Liberal-Democrat parties are busily undermining any myth of their relevance or their competence. Despite the appalling legacy that the last Labour government left to the country, they probably need one more short stint in power finally to destroy their own credibility. Then - as in Greece - politics will be voided.

Saturday, 18 August 2012

Big Science, Cost and Risk

A couple of days ago the USA announced the catastrophic failure of a test fight for a new super-high-speed aircraft. This news came a few days after the successful landing of a superb American vehicle to explore the surface of Mars, and to analyse the materials that it can collect. The combination of triumph and disaster has a cost of billions of dollars; with more massive expenditure to follow as the errors with the plane are corrected and as the success on Mars is followed-up before the Chinese programme for Mars exploration [which is gaining momentum] scoops up and exploits the gains from the American research. The US Congress has always distrusted the 'military-industrial complex' but it recognises that unless their country leads in both pure and applied science it cannot lead the world in anything; and it recognises that only the state can fund great strategically significant developments. Thus the federal budget must fund projects of vast scope, some of which will fail.

Currently healthcare is a matter for hugely damaging dispute throughout American politics, but in terms of state spending it is relatively unimportant: the debate focusses on whether it is appropriate - and constitutional - to legislate for compulsory purchases of health insurance by small firms and by individuals. The budget cost for the immense scheme of Obamacare is modest. The biggest debate about state funding of big science in the US in recent years was over NASA making cuts in spending that were seen as excessive, especially the retirement of the shuttle craft that had conveyed people and supplies to the space station. In China and Russia there is no publication of defence budgets and western estimates of the extent of the related spending on science are conjectural. India and Pakistan, which possess nuclear weapons, throw up massive obfuscation about both the scope of scientific research and the budget for it.

Most obscure of all is the situation in North Korea, whose progress towards developing the capability to deliver the nuclear weapons that it has almost certainly constructed cannot clearly been assessed; but that 'rogue state' is recognised by all the leading members of the United Nations to be an extreme danger for the whole human race.There is little doubt that the North Korean budget for big science and for a ludicrously large mass army overwhelms expenditure on the maintenance of the civil population. And now Israel and its dependency the United States, are determined to prevent Iran from reaching a situation where it too could become a nuclear threat to anyone. The proportion of the Iranian budget that has been spent on the development of weapons and vehicles to convey them is more in line with the Indian than with the North Korean, and hence progress has been slower and the achievement [thus far] is less dangerous than in North Korea: but it has become a crucial test case in global diplomacy and a major threat to peace and to oil supplies globally.

In Britain, where austerity is still a matter of gossip rather than an acute personal experience for the majority, there is annoyance that India is developing its own space programme while Britain still gives that country hundreds of millions of pounds a year in development aid. Progressively over five decades the UK has chosen not to afford its own aerospace or space programme. The political class apparently still consider it intrinsically good to assist rapidly-expanded populations in dozens of countries to secure health for the children who will become the next breeding stock within two decades; during which the projected rate of economic development [even on the most optimistic interpretation of global and local trends] cannot possibly elevate the existing population to a current American standard of living. Britain taxes its people to hand out international aid; then taxes them more, both through the tax system and in the form of raised electricity prices, to spend on constructing windmills and to close viable power stations in order to meet global standards for the control of carbon emissions that both the USA and the emergent economies ignore. What little capital the economy is investing is in largely applied to low technologies that will be delivered at high cost to captive consumers. Britain is not in the space race, which India and China have joined: and which Britain could have led in the 'fifties and'sixties of the last century. Instead the British state poured wealth into welfare and the dissipation of real wealth. The results are at last now beginning to become understood.

Wednesday, 15 August 2012

Schemes of Socialism

The newly selected Republican Vice-Presidential candidate for the forthcoming US General Election is quoted as likening Obamacare - the compulsory provision of health insurance for Americans - to the 'socialised medicine' that is common in European countries.

The Opening Ceremony for the recent Olympic Games in London included a hospital scene that may have convinced millions of Chinese and Americans that UK health services are primitive, with nurses in antique costumes putting two or more children in some beds. Within the United Kingdom there is mounting scepticism about the Conservative Party's promise that while they are in government 'the National Health Service is safe with us'. The minister in charge, Andrew Lansley, has shown himself to be a poor communicator and deaf to challenges; while implausible 'efficiency savings' are advanced as the cover for real-terms reductions in the funding that will be made  available to many components of the system.

It is notoriously a fact that research is constantly presenting new forms of treatment and new drugs that are often very expensive. The pharmaceutical companies spend massive amounts of money on research, which they can only recoup by selling drugs profitably. Thus health services, whether state funded, insurance funded or charging patients individually, have to pay for the research through the purchase prices they pay for the drugs. It is also  notorious that new treatments, including surgical and radiological and pharmaceutical procedures, prolong the lives of patients; so those individuals are likely to live longer as users of maintenance treatments. So if any healthcare system were to provide the best available treatment to all comers, free to the patient at the point of delivery, the costs would increase massively year on year. If the funding for a state system of healthcare is capped, it must follow that some treatments are unavailable to some patients; and some treatments are not available to any patients. This all creates stress points where the decisions are taken as to which treatments shall be available, to what categories of patients. In a country like the UK, where the National Health Service is hugely popular, voters resent restrictions on treatments and would always vote by a huge majority for untrammelled funding of the Service.

Politicians are coming to understand that for at least forty years the state has been raising more and more taxation - and also borrowing massive amounts of money - to maintain the NHS while paying ever more massive sums in benefits and 'tax credits' both to non-employed citizens and in wage subsidies to employees. This massive scheme of socialism has constantly been extended by both Labour and Conservative [and now by Conservative-led] governments; and it is an unavoidable fact that the spending is grossly excessive. There is no practicable means by which voters can be kept on-side with the sham democracy that still totters   on by default, if a government drawn from any of the existing parliamentary parties made a realistic attempt to reduce spending on health and benefits and all other government services [not least the defence of the realm and the law and order system]. The bathos of the present coalition government's situation is that they are actually borrowing more money, year on year, while they are claiming 'success' by reducing the rate of increase of borrowing that might occur without the cuts that they are making in public services and in defence.

The conclusion that US conservatives have reached, that any system of state-supervised compulsory healthcare becomes an intolerable burden on taxation [and that the same would apply to any open-ended permanent benefits system for people of working age] is born out by the British experience. Greece, Spain and Portugal are in varying degrees of proximity to bankruptcy because they have had similar systems. In the Greek case welfare costs have been accompanied by massive state spending on excessive public sector salaries, excessive pensions available from early ages, and tax avoidance on an heroic scale has ensured that the state met spectacular budget deficits by borrowing: time has now been called on that country.

To the American conservatives there is no difference in principle between Greece and the United Kingdom. They are not wrong as they hark back to the founding fathers of the republic and the great libertarians who have ensured that the massive scope of the US federal government has been restricted as compared to European countries. One of the many reasons why Americans strongly supported the foundation and the expansion of the European Union was that it presented a good prospect of becoming a federation like the USA, where there would be a balance between federal and state powers; leading to less 'big government' over the long term. The dishonest way in which the eurorats have tried to establish federalism by stealth meant that countries like Greece were able to act irresponsibly and continue to sell government bonds because international bond buyers assumed that Europe would collectively guarantee the debts of all the member countries. German voters are now determined not to be suckered in consequence of the eurolies that their government allowed to become common currency. The majority of Germans [and Finns, and Swedes, and Austrians, and Slovaks] are prepared to let Greece fail economically. Europe will then permanently be changed: jerked back into at least partial reality.

Britain has so far maintained its AAA credit rating: in defiance of the evidence that is all too apparent. The fake prosperity that engulfed and deluded the population for two generations is rapidly coming to an end. Both the safety net of benefits and the beloved National Health service are in danger: as are the equivalent systems in Italy and France, even though their different funding mechanisms partially obscure the parallels. The future is bleak.

Friday, 10 August 2012

Take Away from Zero......

Britain [along with other countries in the EU] has recorded zero economic growth in the current year. This is nothing unusual for a declining economy, especially one that remains subject to a political delusion that has prevailed for more than half a century, and to fundamentally misdirected economics that have been departing from reality for almost a centuryand a half.

Politicians bicker about details and score points off each other, to the increasing frustration and disgust from a populace that has lost confidence in the political class which despises all life outside the Westminster bubble. There is a great deal of talk about rebuilding and refocussing the economy, with no comprehension of the real issues that are involved. Scots are being diverted by the ambitions of a small clique of Scottish Nationalists, which is temporarily attractive to those who find it a sort of antidote to Westminster politics.

Britain still has huge capabilities and resources; but the present government - like all its predecessors since 1956 - still pursues policies which are destructive of wealth and enterprise. The massive 'scheme of socialism' that has almost-completely segregated the receipt of income from the mental and physical effort that is needed to drive and serve an economy is being strengthened rather than challenged in principle. Investment in new enterprise is at an unprecedented low. And governments are 'investing' heavily in windmills, and encouraging electricity generators to burn 'biofuel' in conditions where the inefficency of windmills can no longer be concealed [even before metal fatigue and exhaustion of parts begins to drive costs still higher] and where the improbability that the world can both feed people and burn crops is rapidly becoming a well-evidenced certainty. Windmills also demand a massive subsidy in the form of higher priced power to consumers whose living standards are threatened in many ways.

It is readily possible to turn zero into minus one, or even minus ten per cent, economic growth. the government seems hell-bent on doing this. Of course the politicians will deny this: as the church denied that the earth was a sphere while every king and emperor carried an orb, to symbolise power in the 'round world', as their ancestors had done for centuries. Official 'truth' and the actual truth are segregated by the mass of people, as happened under totalitarian regimes in the last century where the state's official line were heared with winks, nods and inner despair. The British political class does not have the resources either of police or of local party-political supporters to establish thought-control, even in a sense of superficial conformity. Challenges to official idiocy will increase, too quickly for a failed democracy to manage them. There is trouble ahead.....