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Tuesday, 31 July 2012

Olympic Optimism and Reality

Ask any London concierge and you will get the truth. More than a year ago the common conversation at their meetings was to compare their observation of reality with the official optimism that was being promoted by the government. Actual forward bookings of hotel rooms for the summer of 2012 were alarmingly few. Using their contacts in the travel business, they found out that the number of visitors to any Olympic city whose trips were directly ascribable to their sporting enthusiasm was far fewer than the British government imagined. Meanwhile 'normal' tourism dried up as massive official block-booking of rooms at inflated prices pushed London beyond the price range of tourists who were anyhow worried at the possibility of terrorist attacks during the games and the difficulties that the might face on overly stressed transport systems.

By the autumn of 2011 it was clear that major companies which annually brought large numbers of tourists to London as the base for a European experience had transferred their bases to Paris: and the wise old cross-keys stated their expectation that if that worked out, at least some of those tours would be lost to London for an indefinite future. The Olympic effect would be negative and longlasting. This confident prediction was made during 2011 in defiance of a dogmatic official line that is still being repeated as retailers in central London have begun to deplore the absence of tourist-shoppers. Currently available data suggest that 100,000 Olympic visitors have squeezed out a normal end-July crop of 300,000. Official Economists  [of course!] continue to predict that the games will provide a much-needed boost to economic growth. This will prove to be on a par with their normal degree of accuracy; and they will again shrug off the evidence that the facts are at odds with what they should be. Another small nail in the coffin of the sad subject.

Friday, 27 July 2012

Investment into Britain: Profit out of Britain

David Cameron, temporarily the British Prime Minister in a coalition government, took advantage of the Olympic Games to convene a large gathering of fellow-politicians and international business leaders to which he made a well-known sales pitch: 'invest in Britain, stimulate growth in this country, help the world economy to recover, and take the profit'. The last and most important phrase is usually excluded from reporting of the speeches within the UK; but it is the one crucial part of the proposition from the perspective of the potential investors.

A masive proportion of the British economy is already under alien ownership; much of it by outright ownership and most of the rest by shareholder participation which [although split between various overseas owners] often exceeds 50% of the total shares. This means that the Political Economy of British capitalism has failed, and is failing further. For centuries before the emergence of  modern academic Economics it was absolutely understood that investment was crucial for economic growth; and that the primary source of investment resources was from 'the profits of stock': the earnings produced by the efficient use of the resources that were available for investment in previous years; after the costs of running the state and the wages of labour had been paid.

The de-industrialisation that began during the period of very high inflation in the nineteen-seventies, and was massively expanded in range and pace during the nineteen-eighties, compelled many formerly-productive employees to retire, and thus become eligible for state benefits  until they reached the age at which the state old-age pension [with all the attendant benefits] was receivable. Other people of working age who became unemployed could not get new jobs in their area, and many of them became physically and/or mentally ill as a direct consequence of unemployment [often shading into unemployability] and thereby recipients of benefits. Hundreds of thousands of people came out from schools and colleges onto the employment market which offered nothing to people of of narrow and limited education in whom was instilled the absolute lack of any work ethic. Politicians readily recognised the effect of this socio-economic situation on children. 'Hereditary pauperism' had been well-recognised from the middle ages until the end of the nineteenth century and massive endeavours were made by charitable institutions to assist children to gain the attributes that would enable them to gain useful and remunerative employment.

The 1945 government introduced 'child allowances', cash sums payable to parents of a second and of subsequent children. The Thatcher government and its successors developed a system of family income supplements which new Labour converted into 'tax credits'. By 2008 and the exposure of the fake economy through the credit crunch, Britain had become one of the greatest  and most disastrous socialistic experiments in human history. There was no correlation between work done and income received, for a huge proportion of the population. The highest-paid employees received massive multiples of average earnings, often withour justification; many thousands of low-paid employees worked extremely hard for minimum wages which were below any realistic 'subsistence level', especially in London, and thousands of cases were recognised in which recipients of benefits 'played the system' to huge pecuniary advantage [not counting conspicuous cases of benefits fraud of which those which were exposed were recognised as the 'tip of the iceberg'. The allocation of government funds to the benefits system drained the national treasury, forcing the government to cut spending in other areas and to borrow in order to fund essential services such as health and education. The present policy of spending cuts, ostensibly designed to reduce the government's rate of increasing its borrowing, is recognised to have a negative impact on economic growth. But the government can see no alternative to its present course, even though the weakening economy increases demands on the benefits system and exaggerates the original problem.

The Labour opposition was the government which for thirteen years pushed the socialistic experiment forward, expanding the deficit  at an increasing rate. Their present abstract proposals that the government should relax their limited efforts at austerity would soon be forgotten if the government 'got real'  and Labour politicians hurled insults at 'Tory' measures directly and radically to challenge the unsustainable benefits drain of the nation's income and wealth.

All three major parties got Britain into this mess: they show no sign of recognising its real nature or its gravity, so there can be no hope of them resolving it within the current system.

Sunday, 22 July 2012

China in the Driving Seat

It has been made known during the past week that the British Department of Energy and Climate Change [in my childhood, it was the Ministry of Fuel and Power] is in discussion with Chinese authorities with a view to installing Chinese-built nuclear power plant - funded by Chinese capital - in the United Kingdom. German and French companies have progressively drawn back from making any definite offers to construct the next generation of nuclear power plant for their UK subsidiaries as the euro crisis has developed and the probability of making a profit from providing electricity in the UK has diminished.

Britain was the world leader in nuclear research until the Second World War when a cohort of her leading experts in applied nuclear energy were exported, with their knowledge and their plans, to the safer territory of the USA to contribute to the Manhattan Project with the leading American experts. The rapid success of that exercise, enabling the first atom bombs to be used in anger in 1945, was significantly due to the British input: though the USA undoubtedly put in the greater intellectual resources as well as the funds that carried the project forward. At the end of the war some Britons came home; but the Americans embargoed any export of the technology, even to the UK which had freely contributed all that it had available. The Atlee Labour government decided that they must have nuclear weapons if they were to keep Britain as a power in the world, and despite the postwar austerity regime the funds were found to make a new start to bring this about. The civilian application of nuclear power was already projected, and nuclear-powered vessels - especially submarines - came on the planning horizon.

Thus Britain became a nuclear power, originally alongside only the USA and the USSR, in both military and civil applications. Nuclear power came into supply in just two decades after the war: with the power stations build by British firms with access to sufficient British [state] capital. Then it all went wrong.

Successive governments of both major parties cut back spending on the nuclear sector, as on defence generally, as they took up the socialistic agenda of subsidising unearned incomes for both the employed and non-employed members of society. The 'green' lobby emerged, with their profoundly irrational loathing of nuclear energy, and politicians could feel better about about allowing the UK to fall behind in this area of technology on the grounds that they were recognising ecological considerations. Facilities for designing nuclear installations were diminished and then stood down, and the residual capability to design and build nuclear power plant was sold abroad. In no area of economy or military technology has Britain more shamefully and shabbily sold out the future that in nuclear power and weaponry. The nuclear missiles carried on British submarines are bought from the USA and the suppliers hold a veto on their use: so the idea of an 'independent nuclear deterrent' is a sour joke.

And now the shabby political dwarfs who form the coalition government have admitted that the future 'mix' of power supplies in the UK must include a nuclear component: so they are toting around the possibility of profiting from British consumers - with cast-iron guarantees that they will make a profit on the whole venture, including eventual decommissioning - to the countries that have developed nuclear power-plant construction over the same period as Britain has withdrawn from the field. It is increasingly obvious that even with massive subsidies and fake pricing models the windmill obsession will be a costly disaster; before metal fatigue cuts short the estimated 'life' of twenty-something years for the turbines.

So the nuclear option becomes more obviously necessary: as it is accepted as a 'given' that the country has no capacity to produce the generating capacity itself; though that it not strictly true. Rolls Royce's residual capacity to provide nuclear propulsion for submarines could, with sufficient drive and resourcing, be scaled up massively. Just as most English water consumers pay for the profits of foreign-owned companies, so buyers of electricity largely do the same; and will do so even more in future if the present approach to the nuclear option is pursued. There is no better or clearer example of the devastation that has been caused to the real economy by the consensual all-party shambles that the politicians have delivered over the past half-century.

Tuesday, 10 July 2012

Concern at the IMF: About What?

The Managing Director of the IMF has expressed concern about the probability that their forecasts for economic growth throughout the world must be downgraded. Her foreboding is justified by the regular downward revision of estimates for growth that are being published in various countries, especially in the light of the ongoing crisis in the eurozone and its potential negative impact on its trading partners in other parts of the world. In the face of such a negative mood among Economists, politicians, journalists, bankers and some business managers it is unsurprising that there is a growing feeling of unease among the general public.

During the so-called credit crunch of 2007-8 many governments tried to secure the future of banks in their territories by guaranteeing the deposits that people and businesses had placed in those banks. When banks could not meet depositors' demands for cash from their own resources the government supplied the money. Governments that had control of their own currencies, such as the US dollar and the British pound, could authorise their central banks to create 'new' money and make it available to the banks: some went further and actually create the money with which to buy control of threatened banks. In the USA this process was extended to the one insurance company, AIG, that had ruined itself by creating contracts by which it guaranteed to fund banks in certain circumstances which had been thought highly improbable until they happened to several big banks all at once.

In countries that did not have control of their money supply, notably those in the eurozone, the means available to governments to stabilise the economic situation were seriously constrained. For seven years before the credit crunch occurred the member countries of the eurozone issued bonds and bills [certificates of government debt] denominated in euros; and bonds that had been issued before the creation of the euro had become redeemable in euros. Those governments could not follow the lead of the Americans and the British in creating the money that they had to pay out to buy the bonds that fell due to be cashed: they had to borrow the necessary euros from the European Central Bank or the International Monetary Fund, or tap new funds created by other eurozone governments. In considering any of those options a government was faced with strict conditions attaching to any loan, that usually included the imposition of restrictive economic policies. At an early stage in the banking crisis the Irish government decided to guarantee all banks' obligations, raised a large loan and imposed dramatically restrictive conditions on the economy. Southern European members of the eurozone faced up to the crisis more slowly and then took the very different stance of demanding bail-out loans and prevaricated about imposing the conditions that they had accepted, threatening the northern eurozone countries with progressive economic collapse and political chaos. The northern eurozone countries regard this as simple cheating and are resisting any further concessions to the south unless they are accompanied by enforceable sanctions. Meanwhile the population of the whole Union is getting used to commentators covering the arguments about the possible withdrawal of some countries from the euro or the collapse of the entire venture. The fact that the eurozone is not coterminous with the European Union is widely understood: the Union could survive either the defection of some members or  the total collapse of the single currency.

The possibility of chaos in much of the EU - the world's largest economic bloc - is the cause of worry throughout the world economy. The shabby history of the Union - the political fudges, the pervasive unaccountability of the Brussels bureaucracy and the notorious 'democratic deficit' by which the eurorats have evaded public concerns in aggregating power in their own hands - has created the circumstances in which there is little mass empathy with any proposal to give more power to the Union. Spaniards and Italians would like the Union to be able to grab Germany's wealth and hand it to them in return for promises to which nobody gives the slightest credibility: Germany would never assent to such a scheme. The extension of another loan to Spain, agreed overnight, is an allocation of the existing funds which the Finns and the Dutch and the Slovaks and the Germans have already written off. This time round the northern eurozone members seem to be so little concerned about this further handout that they have agreed to give the Spanish government longer to impose austerity.

 And so the sorry saga drags on. Greece will leave the euro. With that example in their sights it is just possible that the Spanish, the Portuguese and the Italians will accept enough 'discipline' to keep the euro staggering along for a year or two. There is no hope of Europe leading the world economy to a new era of prosperity; and not much sign of the emergent economies or the US providing a 'motor' to drag the global economy into an era of growth. New thinking is needed, urgently.

Friday, 6 July 2012

Timescale

It is suddenly becoming commonplace for British commentators, and commentators on Britain, to look at a timescale much longer than the period 2008-12 to find the explanation for the current malaise of the economy and of politics. Those who take a long view often fasten on Thatcherism as the dogma that destroyed much of British material industry and freed the financial services to enter the global market with London as the biggest and most risk-welcoming casino. Those developments are linked with the rapid increase in the gap between the richest and the poorest members of society, the collapse of educational standards, and the rise of benefit dependency.

Much further back, in 1971, Ken Watkins [a Political Scientist] and I published a slight book called Can Britain Survive? We discerned already then in British politics an increasingly reckless contest between the Conservative and Labour parties to exploit the economy to enable individuals to have more to consume, with increasing disregard for investment in the future. The 'seventies was a terrible decade, with national wealth greatly eroded by inflation. Change was needed; and Mrs Thatcher promised change. Thus she narrowly won the 1979 election and she began to pursue a radical agenda of reform. Ken Watkins became a devoted advocate of the new policies: I recognised that they were wildly destructive. Jobs were removed from mining, shipbuilding and all the basic industries: fewer jobs were created in financial services and the distribution of imported goods. An increasing proportion of the population became early-retired, involuntarily unemployed and [in a bizarre conspiracy between family doctors, Employment Department staff and the Treasury] became classified as unable to work through disability or medical conditions. The state turnover for 'benefits' increased sufficiently to absorb more than the total of savings achieved by the government in other areas of spending.

The same ruinous track was followed by new Labour in 1997 to 2001, and the pathetic attempts of the current Lib-Tory coalition of 2010 to address the perceived problem are disabled by the failure of the government and its advisers to comprehend the immensity of the problem tht they confront and the length of time it had been developing. Only when the context is understood can the real needs for reform be addressed.

Monday, 2 July 2012

Reshaping the Banks

The Vickers Commission on the UK banking business has already proposed that the banks' 'retail' and other activities should clearly be separated; and the government has promised to enact that policy. This would in itself have made the future banks very different from those of the recent past; and now more change is in the air. New scandals have emerged very recently - the manipulation of libor and the reckless mis-selling to small firms of inappropriate [and  ineffectual] 'protection' against interest-rate changes - to add to the existing flow of compensation funds to individuals who were mis-sold payment protection insurance by their banks. International financial institutions, a swathe of small and medium-sized businesses and individuals have all been cheated by the London banks.

For several decades successive governments have complacently observed the increase of trade in the finance sector of the economy, and have taken more than ten per cent of the nation's taxes from the sector. This was seen as largely compensating the country for the destruction of material industry. That progress is now likely to be slammed into reverse by the restructuring of banking firms, by new UK and EU regulation, and by international traders moving activity away from the discredited London Market. Thus the situation is nothing less than a disaster for the British economy and for the sixty million human beings who depend upon it

The principal asset of any financial firm is its reputation for integrity in its employees' intentions and its efficiency in administration. Despite the impact of the credit crunch, London has been seen as a reliable market until very recently. Before the start of the millennium the London Market was dramatically changed from the gentlemanly world that existed until the early nineteen eighties when the Thatcher government initiated the 'big bang' which created the environment in which huge conglomerates were created which undertook almost the full range of financial services [insurance was the great exception] and developed massive markets in a great variety of new 'products'.

The traditional business of banking was to receive deposits from customers who want their money to be in safe custody until they have a use for the spending-power, to hold reserves proportionate to the deposits so that customers can always access their funds when they want them, and to lend the rest of the money they have to firms and to people who have viable economic uses for it [investment, house purchase, trade finance etc]. Alongside basic banking by 1850 there had emerged a small cohort of 'merchant banks' that managed international transactions and currency exchanges and advised firms on aspects of business development, including decisions whether to sell shares or bonds to increase their capital,  and when and how to try to take over other firms. Alongside the banks and merchant banks were specialist trades of stock-broking and stock-jobbing, discounting government securities and other niche markets: each of which was self-regulating under the oversight of the Bank of England. After the big bang these activities were brought together in new conglomerates, many of which formed as - or were absorbed by - international conglomerates; and their turnover increased massively. However, the emergence of the 'new' economies of Asia and Latin America meant that in the new millennium London's share of global banking trade and of profits quickly declined, from more than ten per cent in 2000 to less than five per cent in 2011. Many of the 'products' in which the global banks trade have been invented in London, but can be used anywhere. London remains highly innovative and attracts people from all over the world to learn and to practice their trade in London before they take their skills home. Many such individuals develop a liking for the lifestyle that has been available in London for the highly affluent, and several of those buy homes in London even when their employment has moved elsewhere. Thus house prices in the British capital remain high,  conflicting with a nationwide trend for all but the finest houses to decline in price as individuals'  access to mortgage funding becomes more difficult.

Most of the new trade that was developed since the mid-eighties of the last century was misguidedly regarded as 'banking'. It was gambling, speculation. Derivatives, most swaps and many forms of futures were  just bets: neither party owned any assets related to the deal: in the first instance they were bets about how the prices of assets would move in the future, but they quickly moved on into guesses about how derivatives, futures and swaps would move in the future. People and firms who place the right bets [for them] at the right time in the development of the market situation can make profits from which hey can mitigate anticipated losses due to risk events such as adverse currency or interest-rate movements: such hedging can be beneficial to the clever, lucky players. Many other punters enter into contracts and escape from them without making significant losses. This has all added to the 'banks'' turnover, and the traders who have been granted bonuses on the basis of their turnover have thrived. The credibility of these markets is now at risk: and it is becoming impossible for the conglomerates to hold enough reserves on their balance sheets both to be able to fund for potential losses in the esoteric markets and to provide investment funds for 'real' businesses at the same time. So investment is suffering. The way to end this nonsense, as had many times been stressed on this blog site, is to recognise the gambling contracts for what they are, and to regulate them and tax them appropriately. If it is prepared to take the risk a conglomerate could have a retail banking subsidiary, and a merchant banking, stockbroking and bond issuance subsidiary which offers a mergers and acquisitions advisory and assistance service; both of which must be separately capitalised and conformably managed according to the rules set by the bank regulators. Such a conglomerate could also apply for a gaming licence for a separately-financed casino subsidiary that managed and issued derivatives, swaps and futures. If such a subsidiary satisfied consumer demands it could continue to grow the business as a complex of hedges for clients who understand what the market is offering them and what costs and risks are involved.

London casinos attract international high rollers:UK regulation of gambling is good and creates consumer confidence. There are grounds for hope that a regulated market in swaps, derivatives and futures could thrive and grow: but let it never be called banking, nor have access to the reserves that are accumulated to support the proper activities of retail or merchant banks.