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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.