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Tuesday, 19 September 2017

The Glory of a Mixed Economy

Between 1950 and 1972, Britain boasted of its Mixed Economy. Then, in the 'seventies, the misapplication of Keynes's principles by the self-styled NeoKeynesians combined with the OPEC cartel to create an inflationary spiral that threatened to destroy the economy. That situation, in turn, made the opportunity for Thatcherite Monetarism and the 'free markets' dogma to be installed: with apparent temporary success and long-term ruinous outcomes. I have issued sufficient jeremiads about the latter state to give it a rest for the moment, and to pick out instead the features of the economic policy [broadly pursued by both Labour and Conservative governments] that prevailed beneficially under the generic description of the Mixed Economy.

During World War II the coalition government published the Beveridge Report, which promised a universal, compulsory social insurance scheme that would provide healthcare, unemployment insurance and old-age pensions for all contributors and their dependents. Both the major parties in the coalition were committed to implementing the scheme, and though the costs - especially of the national health system - always exceeded the income of the national insurance fund it was hoped that a time would come when those books would balance and a subsidy from general taxation would not be necessary. The National Health Service, in particular, was immensely popular and it delivered massive benefits to the entire nation.

Labour won the 1945 election, with a clear mandate to nationalise core infrastructure services and the 'commanding heights' of the industrial system. Under the infrastructure policy, the clapped-out railways, the partially-derelict canals, the major bus companies and the biggest road haulage companies [with their depots and other support facilities] were nationalised. The railways already owned some ports, and major hotels near stations, and these were taken into state ownership as well. For the first decade of nationalisation there was an attempt to support all of these facilities; but with the rapidly rising popularity of private cars and the consequential demand for the state to provide an appropriate road network the aggregate costs became too great. The slow death of the canals continued, and the subsidy of railways became excessively burdensome until a Tory government appointed a 'technocrat', Dr Beeching, to manage the railways. He just adopted a slash-and-burn approach, reducing the system too much in an orgy of destruction that is pretty universally regarded with hindsight to have been absurdly excessive. But the core railways system was preserved, to become a success eventually: and the motorways were built.

Coal and steel were among the 'commanding heights' of the economy which were nationalised, reorganised, and subject to massive investment and modernisation: which worked beneficially for a couple of decades. Electricity and gas services were nationalised, with massive investment in new power stations and the creation of the national grid for electricity and the beginning of a similar system for gas distribution. Telephones had been developed as a state monopoly, under the Post Office, and their availability increased immensely. Television had been suspended for the war, and it was reintroduced [BBC only, at first] to become massively popular.

The state managed all these things, while making good the massive destruction that had been effected by German bombing during the war and the massive wear-and-tear on all types of plant and equipment that had happened while concentration on war production had meant that maintenance and repairs had been minimal. Perhaps the greatest achievement was in housing. Private builders were enabled to develop private estates while the state sector built hundreds of thousands of houses. So great was the success of that programme, that under a Conservative housing minister in the later 'fifties 400,000 houses were completed in a single year. By contrast, the pathetic shower who govern us now cannot orchestrate the 'market economy' to provide so many as 100,000 homes in the face of desperate need.

Not all was perfect in those years; but things felt better than they do now because there was a feeling of common national purpose with significant objectives being achieved by the public and proivate sectors of the economy working in concert.

Monday, 18 September 2017

Brexit Britain Divided

The United Kingdom is more deeply riven by economic, political and social issues than it has ever been before. I say this with the benefit of a quarter of a century teaching Economics and economic History in a major university followed by a further quarter-century living in Tower Hamlets and active in the City of London. Thus I have half a century of reading, listening and probing; and, as a bonus, I have the luck to have a second home in the Peak District where I hear another spectrum of opinions and lore. Throughout history, most constituencies were controlled by a single party, after the dominant landowners surrendered control during the nineteenth century. Rural areas and affluent inner London were solidly Tory, some mixed-economy areas tended to return Liberal MPs, and the heavily industrial and mining areas were solid Labour. There were - and still are - anomalies: the constituency in which I first had a vote [Darwen, now Rossendale and Darwen] has improbably elected Tories all my life; but such exceptions are rare. However, in a rapidly-changing context, the old certainties have gone. The Brexit vote cut right across party traditions, and leaders' admonitions had minimal impact on voters' choice.

In the nineteen-nineties the Labour Party was split by the Blairites, who did not eradicate old-Labour in the new century but instead left stagnant pools of Marxist infantilism to fester while the legendary pragmatism of the big-union bosses became heavily diluted. The present mushroom growth of a new-left Labour is both an indication of voter dissatisfaction - especially [but not only] among the young - and of a search for ideals. The cupboard-love of the students and graduates who liked Corbyn's reckless 'pledge' about tuition fees during the recent election has dissipated, and the peak of the latest boom has probably passed.

The Conservative Party has never been in such disarray as it now displays: the old establishment of 'grandees' who could remove a leader with swift silence seem to have disappeared, and everything now hinges on a speech in Italy which has been heralded for weeks and will prove in the event [on Friday] to be a display of the Prime Minister's incomprehension, confusion and insecurity. Even if her cobbled-together second kitchen cabinet is able to deliver a more rational speech than I expect, the Tories will be left with the recollection that they set the referendum hare running - expecting a different result - and they have no idea what to make of the situation that they have created. Mrs May said "Brexit means Brexit", a supremely silly phrase which will haunt her even more than "strong and stable"; and she has given no indication of whether she thinks the vote was to leave the political institutions of the EU [only] - as would gain massive popular approval - or to cut adrift from the customs union and the common market, which would smash the economy and make the Irish situation irresolvable.

Tories and Labour are split on which sort of Brexit was intended by the voters, and by their opinions as to where to go now. The LibDems and ScotNats are determined remainers, and may well swing parliamentary votes: especially by the LibDems in the House of Lords.

Meanwhile, media commentators cannot agree whether or not the country has a wider gap between better-off and worse-off citizens; though the gap between the most highly remunerated and the lowest has not been greater than it is now, since the economy and society were put back to zero by the Second World War.

An early General Election would not resolve the situation. In England the LibDem vote might go up, which would mitigate Labour gains and produce the spectacle of Corbyn and Cable negotiating a coalition: that would then have to try to attract the ScotNats and some Irish contingent [most of whom hate Corbyn as an IRA supporter].

Most people know that they are getting worse off. Many worry about their borrowing. Many are extremely anxious about the homes they can barely afford to keep or those they cannot afford to rent or to buy.

Just as the majority of Russians are content to have Stalin rehabilitated, and his statues refurbished in some places, so there is a nostalgia in Britain for the mixed economy and the welfare state that the Thatcherites and the Blarites did so much to destroy.

To that I will return tomorrow; as my recent blogs have become overlong.

Sunday, 17 September 2017

QE: The Social Cost

The Labour governments of Tony Blair and Gordon Brown [1977-2010] progressively moved from following their Tory predecessor's conservative budgetary policy to creating a deficit on government spending [the amount by which the government spent more than their income from taxes, tolls etc]. As Chancellor of the Exchequer, then Prime Minister, Gordon Brown made a very quaint use of the word 'investment'. It has been normal for a couple of centuries [at least] to use the word 'spending' [or expenditure] to mean the amount that is spent on pay-as-you-go government activity, and the word 'investment' to mean spending on projects that have a net cost as they are undertaken, but which it is hoped will yield an economic or a social dividend - ideally, both - when they have been completed. Under Labour, this distinction was eliminated. 'Investment' was just part of current spending: it just sounded better to make it seem as if some future return was in mind.

Alongside this abuse of words [and of common sense] the Labour government introduced the wildly irresponsible PFI concept, by which a school or a hospital building [which could be seen as an investment for the long term, in the conventional understanding of the term] would be built by a private contractor who could then charge a rent for the building while it was in use. This crazy system meant that the contractors, and the funders with whom they formed consortia, would be able to take a high rent from the health service or the school governing body. In addition, many such contracts gave the builder the right to undertake all maintenance work - at their own 'costing' - for several years, at the expense of the user of the building. This obviously provided a massive drain on the income of the user organisation when the premises came into use. As the premises had often been designed many years before they came into use, the designs were often very much less that state-of-the-art when they became operational. Thus taxpayers were involuntarily having to meet these charges.

Thus, when the Tory-LibDem coalition came into power they were horrified at the 'out-of-control' public spending obligations that they confronted. They decided that the burgeoning annual deficit on the national budget must be reduced: then they experienced their own brainstorm, and decided that they must cut future spending projections by the state. Hence began the regime of 'austerity'. Under that regime, public spending has been held down; almost as a matter of faith.

This policy was imposed in 2010, just after the Bank of England had become used to administering its programme of Quantitative Easing, as explained in the previous two blogs. The orderly queue of bankers was allowed each to encash approved securities for new credit, which they could then spend as they wished. This meant that they could keep in being the securities whose existence had been threatened by the market crash of 2007-8 until they came to their term dates; and an increasing proportion of them could be sold once their face-value had been restored [more or less] within the highly flexible wholesale finance market. So while people running public services were increasingly constrained by what they could spend - including on wages and social benefits - the banks could lend more money to firms and to individuals. Not many firms needed to borrow from the banks: the successful among them could derive all the investment they needed from their profits and from share issues; the unsuccessful drew in their horns and hoped to survive. Furthermore, the government provided modest funds to help some classes of start-up and developing businesses [although most of the more successful of them fell prey to overseas takeover, whereupon the technological innovation that they embodied was alienated].

In both the public and the private sectors, wages were constrained; in the public sector by the austerity rules, which included either nil or 1% increases each year. The private sector was able to import staff from less high-wage countries, and a consensus of commentators accepted that the combination of immigration with the appallingly low level of skills among the indigenous British population kept wages low; in both cash terms and real terms. Hence after 2010, most people found that the only way to increase their spending on consumption was by borrowing. Loans and credit card debts were freely available, so people borrowed; largely to buy imported commodities. So the balance-or-payments deficit burgeoned, while the government struggled to keep public spending within the limits that Osborne and then Hammond vainly aimed to enforce. Unsecured household indebtedness increased, alongside the debt that the UK owed to the rest of the wThen it became apparent that QE had another perverse effect on ordinary people. After the financial crisis, new starts in house building had reduced to a record low level; and virtually nobody was building social housing. Thus the resale prices on existing properties increased: but with interest rates set at their lowest ever level by the Bank of England the cost of borrowing [per pound] seemed affordable. Cassandra-like warnings that people who had mortgaged their property heavily might not be able to maintain payments when interest rates rose received scant attention.To get a new home, people had to borrow the money to buy expensive new properties on terms that profitable to their constructors. Mortgages were freely available for house buyers with even modest incomes, thanks to QE and government schemes to enable a minority of first-time buyers to enter the market. The majority of would-be first time buyers could not find the cash deposit they needed to enter the housing market; and anyway their incomes, especially for those burdened by student loan debt, could not support the ongoing cost of house purchase. In addition to the existing poor, there was a growing cohort of nearly-poor, including many graduates. In the next blog I will examine the pattern of poverty in Mrs May's Brexit Britain, and relate it to QE and to austerity.

Saturday, 16 September 2017

QE For Ten Years: Saving the Banks and Smashing Society

My last blog began with a second reference to the ten years that have elapsed since the collapse of Northern Rock told the public - and the unobservant Econocracy - that there was a crisis already well developed in the world of banking. More than a year before the Northern Rock event hit the British system, the USA had had its own crisis in the collapse of several institutions which the Clinton regime had induced to accept 'sub-prime' mortgages. The term sub-prime was not in common currency in the UK, and the USA was far away, so not much notice was taken of those events even in the London money market.

Within the US financial system, it had slowly become apparent that the sub-prime mortgages had been sold on [in the manner described yesterday] as parts of securities which were just bundles of debts where the borrowers would [in the main] carry on making the payments they were contracted to make: thus the buyer of such a security was effectively buying a cash-flow of future payments. The original lender of the money would retain the duty to collect the payments and pay the interest on the security, and there would be an allowance for the proportion of the borrowers who would default on their payments. So the original price of the security was based on a supposedly objective view of what it would yield to its owner during the term for which it was valid. On that basis, the security could be sold on, for inclusion in larger or more inventive types of security. The sub-prime mortgages were a category where the borrower was very likely to default, and the continuing decline of the old industries in what were quickly becoming known as the 'rustbucket' areas meant that many families lost their main earnings and could not afford the repayments. Defaults on payments of sub-prime mortgages seemed, at first, an American problem: but during 2007 an increasing proportion of securities traders became worried about UK securities that included packages of mortgages issued by banks and building societies whose lending had become [by all historic comparison] reckless.

Among these was Northern Rock, which was borrowing credit in the wholesale market [see last two blogs in this series for details] in order to lend to new customers. The lending was reckless: more than 100% of the asking-price for the house was available to clients who were taken at their word as to how much they earned. This sort of lending [in which the Rock was only the most conspicuously adrift from traditional caution] led to clever traders realising that securities based on Northern Rock loans, and securities containing a 'repackaged' share of Northern Rock, may not perform as promised. So the wholesale market stopped buying Rock securities: and the Rock had no ready money in its tills beyond the usual daily turnover. Hence, as customers heard the rumours and queued with their documentation to demand their own money, the firm failed and [as explained previously] the government instructed to Bank of England to provide the money that the customers were demanding. After the crisis the residue of the Rock was sold off: its trading branches were taken over by Virgin Money and most of them are still trading, and the mortgage debts were sold to firms that managed the run-off so that most of the securities that the Rock had sold were successfully [and profitably] carried forward to their terminal dates.

Behind this happily makeshift resolution of the crisis caused by one smallish [albeit prominent] firm, the financial markets as a whole were beginning to panic about the multi-trillion pound market in securities that had been built up by 'innovative' firms that had been making their own paths to untold wealth by taking the fullest advantage of the market freedom created by the Thatcherites on the urging of the Econocracy in 1986. Within a year of the Northern Rock crisis, there was an emergent crisis throughout the market. Nobody could be sure which securities contained how big a proportion of debt that might become 'sub-prime' if the root provider of the cash flow failed. So the Bank of England was instructed to copy the US Federal Reserve, which had already begun an indefinitely large open-market operation which it called QE: Quantitative Easing. Though the detail is mind-bogglingly complex, the principle is simple. The banks were told to form an orderly queue, and slowly to arrange their portfolios of securities so that they could present government bonds at the Bank of England which would [in essence] 'print money' with which they bought the government securities [and just kept them in their vault, metaphorically]. Thus any bank could get cash by selling government securities to the Bank, and use that cash to fund the orderly winding-down of the 'assets' in the market. Those that were considered 'toxic' were disposed of cheaply, and holders of the rest of the mass of securities could resume trading, albeit cautiously. Nobody realised, when Britain adopted QE in 2008, that the queue would continue shuffling to the Bank asking for cash until now: but that has happened. it has saved the banks and the wholesale securities trade that lies behind the banks; but it has been ruinous to the economy in which human beings depend, and to the society that binds humans into a community. This is the subject for the next blog. 

Friday, 15 September 2017

Northern Rock: How the Crisis Happened

Northern Rock was the first bank in the UK to go bust for almost a century and a half; thus it was a great shock, which the authorities were not prepared for. I commented yesterday how Alastair Darling, the Chancellor, rose to the occasion ad accepted responsibility for finding a way of resolving the crisis and ensuring that the depositors got their money back.

There was no mystery about how the crisis happened. A few months earlier, in a lecture to the Insurance Institute of Ireland, I warned that the banking system was heading for a catastrophe. I said specifically that insurance companies should avoid accepting any bankers' risk onto their own balance sheets: if they did, they would be brought down with the crashing banks. Only one insurance giant, AEG, took on a massive amount of bankers' debt. Hardly recognised by their US head office, a minor London market component of the massive global conglomerate accepted billions of dollarsworth of a clever new 'financial instrument' that would only be activated in the most exceptional circumstances: then they would have to pay in full on those certificates. Hence, later in the crisis period, the US Treasury had to take over AEG and meet obligations of hundreds of billions of dollars. The existence of those obligations had not been understood by the firm's central management nor by any of their regulators while these liabilities were adopted.

The much smaller-scale, but still catastrophic, crisis that affected Northern Rock in September, 2007, arose from the same cause as the crises that hit bigger institutions in subsequent months. Thus it stands as a perfect example of the consequences of the Thatcher government releasing new 'market forces' into financial services. Until the nineteen-nineties Northern Rock was a Building Society, largely serving customers in and around Newcastle Upon Tyne. But in the mood of market freedom that followed the 'big bang' of 1986, 'the Rock' was transformed into a bank and it expanded its operations nationally. It could do this because the executives had realised that they no longer needed to accumulate new 'capital' slowly. There was a new 'wholesale market' of firms anxious to build their business by giving access to large amounts of credit to building societies. Ambitious managers throughout the country were changing comfortable businesses [which took in their assets as peoples' savings, and lent them to reliable wage-earners as mortgages] into aggressive, competitive lending machines. Licensed lending firms could sell mortgages to people who promised to repay over many years; but the new twist was that the lender could then bundle these contracts up into multi-million-pound 'packages' and sell them to the new 'wholesalers'. In return for millions of pounds a year of income [to be paid by the mortgagees], the wholesalers bought these bundles. Thus the ex-building society had more millions to lend to more customers, which became mortgage debts that the seller then bundled into new packages and sold into the wholesale market. This enabled the mortgage lenders to compete more aggressively for business. Northern Rock became famous [a fame later converted to infamy] for its willingness to lend more than the asking-price of the house that a customer wanted to buy: so that, in addition to getting a 100% mortgage there was a cash sum to pay for furniture. Furthermore, customers were not asked to prove what they said was their income: 'self-certification' was the polite term: 'liar loans' was often a truer description.

The banks joined in this competition. Most retail banks had always done some mortgage business; so they, too packaged parcels of promises-to-pay by mortgage holders and sold them in the wholesale market. What they sold was the promise of a cash flow into the future, embedded in a contract known as a security. Hence, the process came to be known as securitisation and all the people who used it both from the 'retail' market of mortgages and credit card debts and from the 'wholesale' side of the business that swapped credit for securities passed on the securities to other innovative firms.

The old style building societies had obligations to their depositors, and assets in the form of the cash balances that they held plus the valuation of the mortgaged properties. Their assets exceeded their liabilities, in general; and they had the added security that the [usually inflated] price of a house whose mortgagee failed to maintain payments meant that when the house was sold, the price would usually pay off the mortgage debt and the accrued arrears of interest. In the new world of securitisation, Northern Rock had also bought some of the packaged securities as part of their capital reserve. So when the word went around that the Rock was insolvent, and queues of depositors gathered at the doors of their branches, the firm did not have ready money to pay them. This caused a widespread market panic over the solidity and security of a vast range of securities, which may include some mortgages. There had already been a panic in the USA over the similar packages including 'sub-prime' mortgages, which made the British market more insecure. In order that the Northern Rock customers could get their money, the Chancellor ordered the Bank of England to make the cash available.

Over subsequent years, as the mortgages were repaid, it became clear that Northern Rock's assets had exceeded its liabilities as of 13 September 2007; but they had not been able to turn their assets into cash at the moment the depositors demanded it. Hence the crisis has rightly been called a liquidity crisis. Over the next ten years it became apparent that most of the clever 'products' that were floating around the wholesale market were basically sound: but as the financial crisis developed over 2007-8 those securities could not be liquidated: that is to say, swapped for cash on demand. Hence Quantitative Easing, QE, was needed; and more of that anon.

Thursday, 14 September 2017

Ten Years After the Northern Rock Crisis: and the Economy is in a Worse Condition

We are now ten years away from the date when a still-under-rated minister, Alastair Darling, took the decisive steps that 'rescued' Northern Rock; and, with it, the economy. I referred yesterday to the fact that some five years after the crash a few students in the University of Manchester dared to challenge the fact that their teachers in Economics classes could not explain [within their own intellectual universe] how the crisis happened, precisely what constituted the crisis, and why they had not adjusted their 'analysis' of the economy in the light of a shattering, cataclysmic event. A second set of questions, soon to be posed and left unanswered, was how and why all these clever professors had not seen the disaster approaching.

Off her own bat, the Queen posed the same question on a visit to the London School of Economics, and received no immediate response. A few weeks later a group of professors sent her a totally unsatisfactory sequence of exculpatory piffle, which satisfied no-one. The Queen later put the same question on a visit to the Bank of England; and because they had no answer to the challenge why they had not anticipated the crisis - and thus been able to avert it, or mininise it - they could not give any sort of satisfactory response.

The Econocracy, the Manchester students' term to describe the wrong-headed devotees of free-market Economics, cannot formulate an answer within their terms of reference: I have frequently damned them in this blog, and set them aside again today as being potentially part of a solution to the mess that their dogma created when it was embraced as deep state policy by the Thatcher gang. To anybody who questions the use of the term 'gang' I respond that the tight group of people who advised Mrs Thatcher and her guru Keith Joseph, several of whom were ex-communists, intended their ideologically-driven policies utterly to destroy the mixed economy no less completely than the Bolsheviks had planned to destroy capitalism.

I have perhaps not stated this point strongly enough in this blog so far. It lies at the root cause of the crisis of 2007-9, and thus it still overshadows the British economy, and damns millions of people to diminishing real incomes as they drag out their days on minimum wages in jobs with barely measurable productivity and negative productiveness. Behind the relatively few specific policies that are still recognised as having been 'Thatcherite' [such as selling council houses] there lay a serious ideology which informed the 'deep policy' that lay behind everything that they did. This dogma is the unconditional belief that 'free markets' release the inventiveness of the brightest and best of the rising entrepreneurial cohort: and that their spontaneous actions would give sufficient positive momentum to the economy that hundreds of thousands of redundancies and billions of poundsworth of plant and equipment that were scrapped [or just left underground] could simply be ignored. If you believed this fervently enough, no specific policy and no government investment would be needed to free self-centred components of the economy to expand at an unprecedented rate.

Of course, this ideology comes up against a mass of real-world inhibitions: laws against defrauding or cheating fellow-citizens, laws controlling dangerous substances, the requirements of national defence, the absolute belief of the public that there must be a national health service, the entrenched tradition that children should attend school, and many more. While telecommunications, gas, water and electricity supply were privatised quickly, many areas of the economy could not directly be attacked in the first wave of Thatcherism. Meanwhile the flow of taxation and government spending had to be maintained to keep the publicly-recognised essentials in being; though plans could be made to privatise hospitals and schools; and other public services were required to cut their real cost to the state. The government made a virtue of shutting down the most heavily-invested material industries [where the state had been the prime investor for decades: in some cases for centuries] such as shipbuilding, iron and steel, shipyards and coal mines, regardless of the damage that was done to the economy.

Much of the material economy went into a state of shock, as protections against competing imports were removed and supply chains from foreign countries had to be accessed because British suppliers had disappeared. When the mines and shipyards and steelworks closed, their suppliers were ruined also, and many supply-chain firms failed; which meant that across much of industry there arose   a need to import components that had previously come from the British firms whose major customers had been taken out in accordance with the prevailing ideology.

The one area where buccaneering entrepreneurs could thrive was in banking and finance, where many controls were removed precisely at the time when the emergence of sophisticated computers became available to firms; while the regulators [most notably the Bank of England] did not develop the means to understand what was happening. That was the fruitful field on which the the crisis, to be recognised by ministers in 2007, was developed over twenty years from 1986.

[Next installment tomorrow]

Wednesday, 13 September 2017

People and Political Economy Versus Econocracy

Yesterday a Times leader-writer who frequently writes an Economics column for the paper recognised the Manchester action group that created the Post-Crash Economics Society, and the related movement that has spread around the world [as frequently mentioned in this blog]. He noted that a very few university teachers have cobbled-together courses that give an introduction to the different approaches to the subject that have been taken over the last couple of centuries; and that the vast majority of the established teaching cohort - the Econocracy - have adhered rigidly to the pseudo-mathematical formularies that are their only stock-in-trade. That stock is being demonstrated to be putrid. I was a university teacher, specialising in the History of Economics, for a couple of decades until 1988. During that time I assiduously researched the question of how Economics was taking an increasingly perverse approach to the world; and meanwhile my colleagues selected me to be Dean of the Faculty and eventually Pro-Vice-Chancellor, which I like to think indicates that I was taken seriously as a person.

By 1988 it was clear that common sense and Economics were becoming implacably opposed. The Thatcherites were busily destroying industry, blinded by the mantras of open competition and monetarism that undermined the traditional support from the state budget for the economy [which was repaid as economic growth produced the tax revenue that increased the state's capacity to spend on infrastructure developments, research and product development, and popular welfare]. So I bailed out of academic life, into one of the great support organisations that underpin the skills on which the City of London depends for its unique depth of resources which constantly renew its role as the world's leading financial centre. I have continued to watch the consolidation of Thatcherism into 'austerity', which in turn gives the government the ludicrous notion that state spending [on almost anything] is a 'bad thing'.

There are, of course, the glaring exceptions: of which the most conspicuous are HS2 and Hinckley Point, where the state is in for tens of billions of pounds of useless and unwanted spending. Otherwise, spending by the state is a bad thing: especially on peoples' welfare.

Today's News on the BBC is headed by the facts disclosed in a report on tower blocks that has become critical in the light of the Grenfell Tower tragedy. Sixty-eight per cent of the tower blocks in the UK have only one staircase, almost 40 per cent have some form of cladding [of which a yet-to-be determined proportion are flammable], and only two per cent have sprinkler systems. Sprinklers have been proven as a valid means of quenching fires, and thus preventing their spread, for centuries. When Britain had extensive factories and warehouses, the insurance companies employed inspectors who had the right of entry to premises to check that the sprinklers were installed and operational: if they were not, the insurance was immediately cancelled. Factory Inspectors also had to duty to check on the effectiveness of spinkler systems, and could close units that were non-compliant; and in most local authority areas buildings were only licensed for use if certified as compliant with local specifications by the Fire Brigade. The present shoddy government have made it as clear as they clarify anything - which is not very far - that they will expect local authorities to use their own resources, to the extent of using up all their reserves to begin to introduce measures to address the fire hazard in the blocks that they control.

The Econocracy supports the government line: state spending, bad. Occupiers should pay competitive prices for their flats; and if they want safety measures built in they must pay more for that assurance. If their earnings or benefits or pensions will not cover the higher rents, they must move their homes; or get better jobs. For myriad reasons, such as access to schools and hospitals, proximity to relatives who need or provide care, lack of skills or lack of drive, millions of people cannot get better jobs or pay higher rents. The Econocracy has no patience with such people: they clog up the system and prevent the 'model' from functioning as they think it should, in all its clockwork simplicity. 

We need a new Political Economy, that takes account of people as they are, and has their development and the welfare as its highest goals. The housing situation - with hundreds of thousands of households outside the tower blocks effectively homeless - is a perfect example of the Econocrats' model economy not working: because it is utterly out of kilter with the realities of human existence.

Tuesday, 12 September 2017

Brexit: Farce Slides Into Disaster

I voted for Leave, on three grounds:
1. I was sure the Remain side would win; but if a strong minority voted to Leave that would provide a check on the political class in the UK and in the EU,
2. The Cameron-Clegg-Osborne policy of austerity was ruinous, economically and in its effect on social cohesion: so a strong opposition vote might cause a rethink;
3. In a despairing sort of way, I wanted to register my opposition to a European super-state.

When the result was announced, I was far from ecstatic: I then began to wonder how a post-Cameron government, inevitably to be led by Tory Remainers, would package the obvious outcome of withdrawal from the political EU institutions while remaining in the safety of the Economic Community. When Mrs May won the leadership, my hopes of any sensible outcome were smashed by her idiotic mouthing of the phrase 'Brexit means Brexit'. It was her job to suggest what Brexit might mean, in sensible political terms, and to lead her party to persuade the country of that proposition.

Instead, she blundered into the destructive notion that the vote implied complete withdrawal from all aspects of the EU. Which was soon to be modified by the recognition that from the daily business of air travel to the essentials of nuclear controls and commerce, there had to be continuity. Meanwhile, she appointed three ministers who were Levers to make and execute policy: Johnson to talk political waffle [his forte], Davis to 'get us out' and Fox to chase the chimera of compensating trade deals with the rest of the world as we left the EU.

Johnson has continued to talk nonsense, and has progressively diminished what reputation he had for intelligence behind his 'wit'. Fox has had very little to do, except propagate his fantasies, latterly helped by an imported 'negotiator' from New Zealand who expresses extreme isolationist views [based on the very different experience of New Zealand, which was cut adrift by Britain's slide into the EEC, then the EU: and saved by the rise of China as an importer country] that have no relevance to the situation of the UK in 2021.

Davis, meanwhile, says that the British people did not vote for confusion: but that is what now faces us. I have assiduously read the largely off-beam papers prepared by hard-driven civil servants for dim, obsessed ministers, that collectively do not add up to a coherent guide to anything. Britain has no recognisable policy.

And now, the Commons has voted for the bizarre power-grab of the Bill that they passed last night; by a clear majority.

Failing governments in failed states take up the power to rule by decree; then become increasingly dogmatic in their assertions of their rectitude as freedom is circumscribed and the economy collapses. This is the situation in Venezuela: so Mr Corbyn will understand what is going on as aspires to take over in the United Kingdom.

There is a slim chance that Tory Remainers - surely, still a majority of the party's MPs - will recognise the need to revolt; otherwise, the last hope for democracy would have to be fought out in the House of Lords early next year.

My vote was insignificant in leading to this outcome: but I do share in the post facto responsibility for the irresponsibility of the government that has followed it.

Monday, 11 September 2017

This Day - 9/11 - and the Knell of the Free Trade Fantasy

September 11, in the UK and many other countries, is summarised as 11.9.17. But in the USA they put the month first, hence 9.11 or 9/11. The date 9/11 has become even more rooted in folklore and the media as the descriptor of the terrorist attack on New York than is 'ground zero' as a synonym for the site at which the destruction was centred. It is purely coincidental that on this same date in 2017 an unprecedented storm has struck the mainland USA in Florida.

Besides providing an opportunity for him to show, for a second time, that he performs better in the context of a natural catastrophe than George W Bush did, Donald Trump has completely overcome his verbal incompetence in addressing this calamity. If he reverts to his usual bluster once the crisis is passed, his recent performance will quickly be forgotten: but, for the moment, his image is greatly enhanced by his mobilisation of congressional Democrats to expedite relief programmes.

Both New York on the 'original' 9/11 and the present [diminishing] hurricane Irma are proof that in a world where both the weather and the wickedness of human beings can create unprecedented catastrophes, a system of untrammeled free trade cannot prepare social and economic institutions, or the political system or the psyche of individuals to cope with unprecedented calamity. While it is probable that any extreme weather or earthquake event that we have recently experiences has been exceeded by many greater events before humans existed, we live within the record of human experience. In a much reduced timescale than the period over which we have economic records, the insurance business has grown sophisticated, within its own parameters, in coping with disasters that affect businesses and individuals' estates [i.e. all their material assets] by paying for repair, replacement or reinstatement of assets that are damaged or destroyed by flood, fire, storm winds and other catastrophic and humdrum accidental causes.

Insurers are even prepared to take on concentrations of obvious risks, such as the tower blocks in the City of London or at Canary Wharf; and the homes, hotels, shops and offices in Tampa and other built-up areas of Florida. But they only take on those risks on strictly defined conditions. The properties must accord in full with the building standards that apply to the type of building and its location; which, of course, represents a massive restriction of free trade imposed by government. Thus Florida can ban construction that does not provide assurance of its capacity to withstand storms of the force of Irma. No government can compel insurers to extend insurance cover to building that do not meet building regulations that the insurers do not accept as sufficiently robust for the perceived risks that could operate in the area where the asses are placed. There are many instances where state authorities in the USA will only allow insurers to operate if they take on risks in categories that the firm would not accept: so they simply do not write such business in such areas. In one case, over many years, one major US insurer did not write some categories of business within the state where they were headquartered. In the UK, where expectations of catastrophe are much lower, properties susceptible to serious flooding can only be insured at affordable premiums under conditions established and guaranteed by the government. Thus the accessibility of insurance is limited by the choices that have been made by political bodies; to which companies have to conform.

The idea of complete freedom to build almost any sort of home anywhere in a hurricane-high-risk area cannot survive the need for structures to meet requirements for both health and safety and for insurance; while the state authorities and relevant utility companies exert their right nor to provide a road, or sewerage, or water or gas supply to property that is inappropriately sited in terms of risk management. Thus, to a very considerable extent, taxpayers are protected by not having their communal resources and assets put at risk by buccaneering businesses.

It will be interesting [and often very sad] to see how far the sort of system of building regulations that has been implemented in Florida in recent decades has been set up in the various territories through which Irma passed. How much property has been insured, to what extent, with what exclusions: in the end,this will show how much loss will fall on the well-capitalised and highly organised insurance business and how much will fall on people who had to take the risk themselves.This will emerge over the coming weeks. But the key point to note here is that insurers and governments necessarily collaborate to make any sort of insurance, and any sort of sophisticated structure or business activity viable.

The Econocratic idea that there should be free trade in every field simply does not work in this area.

What does work, is collaboration between government agencies and insurers to ensure that when people [personally as as managers of firms] make investment decisions that are rational in the geographic and temporal context, then viable insurance is available at a fair price. There may from time to be small differences in the price [the premium charged] for an insurance product in any month, but these arise from the need of competing insurers each to maintain the balance of their 'book'  - their total range and cover of risks - so that it meets their template for the mix of business. by making small adjustments in the price, up or down, one insurer brings balance to the book while all their competitors experience a countervailing movement of business away from them. This helps all the books to be balanced as the companies plan, all the time.

Primary insurers who supply policies for individuals and households and for all types of business constantly balance their book of business internally. They also buy reinsurance so that larger losses than they want to accept on their own balance sheet, which could drain away too much of the company's own capital. Reinsurance is a highly efficient market in which capital providers find a profitable way of investing their funds until more lucrative possibilities emerge.

Both insueBoth insurers and reinsurers

Sunday, 10 September 2017

Firefighters Memorial

The second Sunday in September is kept special by the fire services of the UK [and the Isle of Man and Channel Islands] as this is when, in 1940, the blitz on the UK really began in 1940. The Fire Service was then in the front line, which remained on UK soil until the last V2 landed in London  just a few days before the German surrender in 1945.

I have had the honour of being a Trustee of the fine bronze memorial, by St Paul's Cathedral, for over 24 years. I will be proud this midday to march one more from our annual church service to the memorial, where a wreath laying will take place.

Representatives, including standard bearers, will be there from fire services across the country. We now remember all firefighters who have given their lives in the course of their duties. Sadly, again, there will be present the family of a firefighter who died on service in the past year. For his family there will be strong fellow-feeling from all the past and present firefighters, whose families have had the daily awareness that when they went to work today they may never return home.

Mercifully, the Grenfell Tower cost the fire service no lives as the London Fire Brigade saved dozens of people from the appalling fate that befell at least eighty of their neighbours. The news coverage of that event showed the risks that the service takes, in less spectacular circumstances, every day. The living, the surviving and the dead of this great service deserve the honour that will be paid to them today.

Saturday, 9 September 2017

The University Conundrum

The Vice-Chancellor of the University of Bath has become notorious as the highest-paid head of an English university. While the Vice-Chancellor of Oxford has [in my view, mistakenly] defended her more modest stipend by drawing comparison with US salaries and footballers' wages, nobody doubts that she has been attracted to Oxford in international competition because of her proven talents and experience. The lady at Bath, however, appears as a sort of machine product: she was deputy V-C before being given the top post in the same institution - very rarely a good thing - and before that she was a professor in a middle-ranking university. There is no evidence at all of her exceptional abilities or achievements.

How have the Vice-Chancellors come to be so highly paid? This is an intriguing story: especially as the number of universities has risen from fewer than 40 when I was a student to about 150 now. Long ago the universities ceased to be part of any national plan for 'manpower' development. The last serious attempt to do that was in the nineteen sixties with the Robbins Report. They proposed, and the government accepted, very significant expansion of the system, both by increasing the number of universities and increasing significantly the student population in the existing institutions. Some - notably Loughborough - were designated as Colleges of Advanced Technology [CATs] and although that status has been eroded away Loughborough stands well in the league tables of universities because it has stuck closer to its founding mission than have most other institutions.

The University in which I was employed for a quarter of a century had a world reputation in materials science: metallurgy, glass, ceramics etc. Robbins recommended further strengthening this orientation, and new buildings were provided with superb facilities; even a small steel rolling-mill.. But UK students were not interested. The a few students who were UK citizens rattled around in the workshops and laboratories, as an increasing number from emergent countries came, learned assiduously, and took the most advanced skills home to build up Britain's competitors.

Ever since then, there has been a nonsensical push for a higher proportion of the population to get degrees; but this has never been linked to building up the skill base that Britain requires. I was horrified this year to see that the Faculty of Social Sciences [of which I was Dean more than thirty years ago] produced nearly four times as many graduates as the whole of engineering and applied science: and while the majority of the Social Sciences people were UK nationals, the majority of engineers and metallurgists were from overseas. As emergent economies forge ahead, Britain is being clogged with 'skills' that are not needed: some are even socially and economically destructive, as with Economics [see this blog, passim].

As this daft situation has been built up, the universities have been decoupled entirely from the local authorities who used to have some control of funding as the bodies that paid for students fees, maintenance grants, union membership, sports subscriptions and so on. Councillors and Directors of Education had some power of the purse over higher education, and their representatives served on governing bodies. Technical colleges that had been directly controlled by local authorities merged with teacher-training colleges and gained designation as polytechnics: and at that time there was a genuine hunt for real talent to head these rapidly expanding institutions. Salaries of Directors of Polytechnics shot higher than the universities paid their V-Cs; so when the polytechnics became redesignated as universities the established V-Cs were able to demand parity. Thus the racket began of ratcheting-up the boss-man's pay; as a prestige game rather than evidence of performance.

Since nobody now has the slightest idea what the lower-ranked seventy or so 'universities' are for, there can be no criteria for assessing the performance of their heads that reflects the national interest. So at present students borrow billions of pounds to buy 'education' which is aimless and not properly quality-controlled. A really great British achievement!

Friday, 8 September 2017

Jim O'Neill Tilts at Productivity

Lord O'Neill, formerly the bank Economist who coined the term BRICS to characterise the main emergent markets of the millennium period, and then went to the Lords as one of Osborne's Treasury Team to be minister for the chimerical 'Northern Powerhouse' and then had the sense to resign, is now participating [as a judge] in a competition to find somebody - presumably an 'Economist' - who can re-work the data on input-output ratios in the services sector of the British economy with a view to making the data on productivity look a bit better than they do.

Almost 80% of the economy falls into the broad category of services, from financial services to waste disposal. While it is broadly possible to work out the costs of running a factory: maintaining it, depreciating the buildings and machinery, employing the staff, buying materials, warehousing incoming and outgoing commodities etc, and to set that figure against the prices received for the output, it is much harder to do this for a bank or even a hairdressing salon with the many ancillary 'treatments' that many such establishments offer. Thus the 'productivity' of manufacturing activities can superficially be assessed with more apparent assurance that applies to services.

However, I have shown a few times in this blog that the higher 'productivity' that is reported in French and German firms, relative to British equivalents, is largely related to the incorporation of intellectual property within the prices that the firms can charge. In the many cases where firms in continental countries have the huge advantage of being recognised as the national leader in the field, they have the capability to charge premium prices and still get the demands of the public in preference to cheaper alien products. This applies to coffee grinders and to banks, as much as to car makers and washing machine suppliers.

Of course, the Germans have the advantage of the brilliant meister system of operation within companies, just as American forms benefit from massive intellectual property and a strong work ethic among the workforce [far exceeding UK norms], but many of the aspects that cause higher productivity in this country rather than that are intangible. I hope that Lord O'Neill will winkle out someone who can really provide the way to an answer; but I will not hold my breath.

Thursday, 7 September 2017

More Pathetic Government Papers on Brexit

It is becoming increasingly apparent that the British State does not have the resources that are necessary to arrange for any sort of Brexit. Some commentators [from both sides of the debate] have welcomed this absence of any clear thinking and positive planning as a time during which a consensus can emerge in the wider public, in favour of a 'soft Brexit' based on remaining in the European Economic Area [EEA]. Such commentators argue - persuasively - that Mrs May's government does not possess sufficient brainpower [either in numbers of people or on a basis of their average intelligence] to work out alternative solutions to the tens of thousands of issues that are emerging, within eighteen months.

The EU has now produced two papers [among others] that are unanswerable by the May team within the constraints of time and human resources that apply. One challenges Britain to find a way of carrying forward the European system for designating such products as Cornish pasty, Stilton, Camembert and Parma Ham. The other carries the ultimate challenge: it throws entirely on the British government the initiative in creating open borders in Ireland that is acceptable to the Irish Republic and supported by all 26 other EU member states. England opened the 'Irish Question' when the English Pope Hadrian gave King Henry II an invitation to assume the role of Lord of Ireland, and the Union of England and Scotland has been struggling with the aftermath for at least two hundred years. The chances of it being resolved, other than in the context of the EEA, are negligible. Mrs May depends on the support of the most hardline opponents of concessions to the Irish Republicans for her majority in the House of Commons; thus there is no chance of the Irish Question leading to any new answers.

This blog has also emphasised the simple fact that a 'hard Brexit' could only be implemented at the cost of many billions of pounds of extra state spending on border and customs controls, both to implement the hard border then to maintain it. It would be impossible to continue to implement 'austerity' if such extra costs were being imposed on the state budget. Borrowing to pay for such border controls would make the government's attempt to end state borrowing [that has failed so far] even more ridiculous than it already is. The alternative, to try to pay for the new resources of equipment and manpower by increasing taxes, would result in revolt by business lobbies and the general public. The Chancellor of the Exchequer, whose department would have to present this scenario to the public [and must, surely, have attempted to warn the Brexiteers in the Cabinet of these facts], has argued for the general acceptance of a transition period in recognition of the fact that none of these issues can be resolved by March 2019: which is deadline set by Mrs May when she formally notified the EU of her interpretation of the referendum result.

The headbanging Brexiteers know that the longer time passes before a resolution is imposed on the country, the chances of a rational solution - withdrawal from the political EU while remaining in the EEA - will rise; and they hate this concept. They will therefore be hell-bent on pushing the weakest Prime Minister since the Second World War to take panicky decisions in a show of uncharacteristic determination that would make her ridiculous, and almost certainly push her to a position where the DUP would refuse to support her and Tory Remainers would be opposed to her.

In all this political maelstrom key facts could get lost; but here the sheer incompetence of the UK government's papers on Brexit are significant. A draft text on immigration, post-Brexit [leaked to the Guardian], assumed that Britain does have the native resources of skilled, fit and willing labour to fill most of the jobs that would be vacant in the period after a 'hard Brexit'. The mass of work that has been done on labour supply and skills shortages in the UK contradicts that naive assumption; unless - and this is a really chilling thought - the authors assume that there would be so big a contraction in the economy that skills shortages would disappear. The absence from the paper of any reference to seasonal labour from the EU, on which much of UK agriculture depends, illustrates the sheer incompetence and inadequacy of the work that is being done in Whitehall.

This all serves to strengthen one's fear that those who have a clear policy, who I call the headbanging Brexiteers, will have too much of the argument for too long; because everybody else is inadequately informed to make judgements on myriad issues that any form of Brexit will throw up.

Wednesday, 6 September 2017

Neither Econocrats Nor Brexiteers Understand Productiveness

The Archbishop of Canterbury had significant business experience in a major company before he was ordained, and can therefore speak on economic matters with at least equal authority to most Members of the House of Commons. As a member of a commission whose interim report has just been published, he has issued his own statement that declares the British model of managing the economy to be 'broken'. Living standards for the mass of the population have been static [on the average] and declining [for many] since the financial crisis ten years ago; and this is noted to be the longest period of stagnant earnings since the 'great depression' around 1870.

The interim report highlights the fact that has frequently been referred to in this blog: this issue of productiveness. It is well understood that productivity in British companies is some 20% below the more advanced European economies, and a greater productivity gap exists between the UK and the USA. Successive government members have wailed about it, and promised to do something about it; and they have not done so. The more important fact about productiveness has been ignored: and it is brilliantly summed up in the commission interim report. The British economy as a whole is recording more depreciation of productive resources than investment in new plant and equipment: if you tot up the notional 'value' of the  amount of equipment that is abandoned or accepted as becoming obsolescent [and thus recorded in company and government accounts], that total exceeds the total spend on new equipment.

In real terms, in its capacity to support living material human beings, the British economy is shrinking: FACT!

But the government asserts that there is constant economic growth. Only a couple of years ago Britain's reported growth was boasted to be the fastest in the group of advanced economies. This blog pointed out that what is recorded in these figures is the fact that more money is spent on more transactions, at higher prices; and an increasing majority of these transactions that include a material component in the goods traded are handling imported commodities. Thus the balance of payments deficit increases.

Confronting the evidence accumulated by the commission, Treasury spokespersons affirm the growth rate, the fact that on the basis of national income figures the UK still is the 'fifth largest economy in the world', and the assertion that 'inequality' between socio-economic groups is reducing. You can claim anything with statistics, of course: but the issues of productivity and productiveness are fundamentals to an understanding of the economic system: which is certainly failing in Britain.

Two groups of people who ignore the concept of productiveness are the Econocracy - the professors of Economics, as characterised by a group of dissident students - and the 'hard Brexiteers' who lurk within the Conservative Party. These are they who encourage each other to believe that the economy will automatically grow much faster if Britain is freed from the constraints of the European Economic Area.They are utterly wrong. The world does not conform to Economists' models: all countries and communities are heavily protectionist when it suits them, not least in their protection of agriculture. All the evidence of real-world activity by human animals, as opposed to the specious models that can be produced from statistics of turnover in a UK economy whose money supply has massively been inflated by a decade of Quantitative Easing, is of dereliction, decay and decline.

Regrettably, this truth has to take a major part in the blog. One could hope that things were different: but they aren't.

Tuesday, 5 September 2017

Aveva: Another Case Against British Policy

The technological software company Aveva is a very successful Cambridge spin-off company. Although in a different field of activity from ARM, it shares many similarities with the firm that Mrs May allowed to go to Japanese owners in her first days in office. These include the availability of talent and significant start-up funding in physical and intellectual proximity to Cambridge, and strongly competent management.

This company has become a world leader in an area where there is an almost-infinite global demand for their software, which provides a template for designing almost any process plant and the structures in which it can best operate. It is growing promisingly, and could probably have a great future on its own. However, a leading French company has decided that they way forward [regardless of Brexit] is to take Aveva over, then incorporate some of its operations into Aveva, and profit further.

There is no French university in the global big league: where Cambridge, Oxford and the leading London colleges are stars; so it makes sense for the intending French owners of Aveva - as with the Japanese owners of ARM - for the time being [at least] to maintain and even extend the operations and the investment at the Cambridge site. Cross-fertilisation and the simple buzz of social and physical proximity to talent are huge benefits that Britain gains from having top quality intellectual resources.

Even the dim politicians who are dawdling about the Brexit discussions, and balking at the inevitable decision that any sane leaders have to take, that Britain must remain within the European Economic Area must see, yet again, that Britain has huge resources of inventiveness that have for centuries been the country's greatest economic asset. Discussions about how far the UK can collaborate with EU institutions that will keep the UK in the closest contact with the intellectual developments forging ahead are a very important aspect of the whole Brexit debate. There are some signs that collaboration and the transfer of people between UK and continental universities are already being reduced by the irrational fears which people like Liam Fox and the 'hard Brexiteers' are unconsciously fostering in people who are concerned about their personal futures.

As with the concentration of intellectual and technical resources in insurance and banking in the City of London, so with the leading universities the concentration of technical and scientific talent in the British hubs is massively greater than anywhere on the continent. If the City or Cambridge University is weakened by any sort of boycott by the EU, it will not enable the French to build up Paris as a hub for finance, or Bonn or Bologna as a global technology giant: any spiteful weakening of British institutions will merely strengthen New York, Singapore and other non-EU business centres, and the great universities of the USA as foci for research. Specialist journalists have been making this point effectively over some years, but it has not yet spread into the wider public consciousness and has barely touched the limited wits of the political class. It would be hoped that the example of Aveva would enlighten them, but my expectations of those woodentops are extremely low.

Monday, 4 September 2017

Deserving Bank Shareholders?

The 'rescue' of various banks in the crisis of 2007-9 took various forms; partly depending on how far the crisis had run when the individual firm faced insurmountable difficulties, and partly depending on the perceived degree of blame that was laid at the door of the organisation's management.

I am moved to write this piece today because former shareholders in Northern Rock - a historically worthy building society based in north-east England - got nothing when their firm was taken over and dismembered by the government; while Lloyd's and Royal Bank of Scotland kept their names and their structures, and the shareholders retained some of the equity under Treasury tutelage. The Northern Rock shareholders have retained their organisation, and while some former shareholders have accepted their losses and moved on, a hard core has revived the claim that as the government will make a net 'profit' from selling off parts of the firm, it should now reimburse some of the losses that individuals suffered.

This is a technically complex, legally difficult and morally ambiguous area for debate, and I will just make two basic points.

One is that Northern Rock and the Royal Bank of Scotland were both based away from London, and both had rather buccaneering chief executives who became heroes in their regions. Although RBS had a nationwide shareholder base, largely due to the absorption of other major banks into the group, the board was largely focused in Scotland. It only became apparent how far off the rails RBS was going when a 'takeover too far' collapsed precisely as the liquidity crisis hit all the banks. The urgent need of the bank for a rescue of very large proportions placed it abjectly at the feet of the government, and ad hoc measures were taken, of necessity. It was decided that such a large entity could not be made to vanish, as Northern Rock was allowed to disappear: hence the restructure of the RBS conglomerate is still ongoing.

The principal asset of Northern Rock was a large book of mortgages on residential properties; which has over the succeeding years been sold profitably; largely because the policies of almost-zero interest rates and quantitative easing have resulted in a steady rise in house prices so that the assets of the old building societies have been consolidated in market 'value'.

The key point about the need to 'rescue' Lloyd's is that this was only necessary because Lloyd's board - without an time for consultation with the shareholders - had agreed to rescue Halifax Bank of Scotland, a conglomerate of a massive building society and a Scottish bank that had pursued similar policies to those of RBS. Lloyd's conservatively-managed balance sheet could probably have survived the storm without the HBOS increment of problems: so the Lloyd's shareholders were the least disadvantaged in the restructuring that was judged to be necessary in 2008-9.

The Northern Rock shareholders should have been more vigilant as the company's lending became more reckless: instead they were hubristic. Similar complacency affected the RBS shareholders until it was too late to 'save' the firm. The HBoS merger was dumped on Lloyd's shareholders by a board that was anxious to help the government. Lloyd's wide constituency of shareholders had no say in the decisive action that precipitated near-bankruptcy. RBS shareholders were complacent through a decade of increasingly reckless management. Northern Rock shareholders [mostly] gloated in the national success of their local bank until the truth was borne in on them. These attitudes have more-or-less fairly been rewarded since the crisis.

And, of course, Barclays shareholders are still taking action to challenge the possibly-illicit actions that their firm took to stay technically solvent.

These issues will run and run, but so far I think that rough justice has been done.

Sunday, 3 September 2017

North Korea: Utter Pointlessness

Stalin argued throughout his political career that all the privations that his regime placed on tens of millions of of people, and the punishments and penalties inflicted on millions, were all necessary impositions on the route towards creating a better society than humanity had ever provided in the past. It is impossible to know how much he believed it at the successive phases of his career, but there are many metres-length of the books in which his writings and speeches were recorded, still lying in the deeper stacks of many libraries. He spent a huge amount of his time giving massive speeches, writing for the press, and producing ideological tomes: and there is good reason to believe that most of this output is genuinely his own. He was obsessively concerned that the gulags and the torture chambers served a positive purpose: and  many intelligent and able people believed him; or, at least, were prepared to acquiesce in both his regime and his ideology.

No such motivation has been claimed for the North Korean dictator, who was pictured yesterday 'inspecting' what was said to be a hydrogen bomb that was capable of being fitted into an existing model of ballistic missile. Then, within hours, seismologists were announcing that there had been an earth tremor under North Korea that was consistent with a deeply buried nuclear weapon test.

The immense achievement in such a deprived country making such weaponry is quite extraordinary. It is built on three generations of enslaving the people both physically and mentally, while the regime has steadily built up its destructive capabilities. Russia and China are two of the countries that have land borders with North Korea, so there can be no doubt that the threat of nuclear attack can apply to them as well as to South Korea. Yet it is the USA, and to a much lesser extent Japan, that are most obviously threatened, along with South Korea.

Hereditary dictator Kim III has never pretended to any idealistic objective. No attempt is made to mitigate the appalling living conditions in which his half-starved subjects are made to conduct their lives. The Chinese have continued in broad terms to support his continuance in power, as have the Russians: President Xi and President Putin would probably very much rather not have this troublesome neighbour plaguing them, but they do nothing materially to weaken him.

Diplomats and experts on world affairs, in large numbers, assert that North Korea's weapons buildup is intended to force the US [and, by implication, its dependencies and allies] to enter into talks with the regime. The object of such talks would be blackmail: Kim would [so the peaceniks say] agree somehow to 'neutralise' his weapons in return for assurances that he, and presumably Kim IV and Kim V in due course, would continue to hold his power and access the west's luxury goods for himself and his courtiers. Perpetual immunity to enjoy power, and to oppress the millions of his subjects, is an utterly squalid objective. There is no idealistic pretence about it, as there was about the Chinese cultural revolution and even Hitler's gas chambers.

This is a new step towards a deeper hell than terror states have ever achieved before. It is highly dangerous. China presumably wishes that the rogue regime had been killed off a few decades ago, but the clock cannot be turned back. The Chinese are glad that the maniac's target is the USA and not the Han mainland, but given the instability of the situation in Pyongyang, Beijing must be more acutely worried by the nuisance neighbour as his destructive capability is developed. This is a world problem; but the world's institutions do not have any answer to it: and Mr Trump is on the front line.

Saturday, 2 September 2017

Doctor Fox and Free Trade

A former medical practitioner, Liam Fox PC MP, the Secretary of State for Trade, is chafing at the bit He cannot begin any substantial work towards the task that he has supposedly been given - to arrange post-Brexit trade agreements with countries outside the European Union - until it is finally decided to what extent [if any] the United Kingdom will remain in the European Economic Area after 2020. It is beginning to dawn on Mrs May that a 'hard Brexit' will be calamitous for the British economy. Far from enabling the country to hold its head high among the major powers, solitary Britain would be seen for what it is: an ill-managed struggling economy with more legacy issues than thriving new world-class companies, with a huge and growing balance-of-payments deficit and massive external indebtedness.

Nevertheless, Dr Fox is apparently buoyed-up by the dogma that free trade is a universal 'good thing'; because that is what members of the Econocracy tell him. The professors who can no longer con their more intelligent students still hold sway with the headbanging Brexiteers who seem to control the present government; partly because the sorts of things that they say make the current policy ['no deal is better than a bad deal'] seem almost rational.

In the ever-narrowing intellectual universe that the professors inhabit, inconvenient facts can simply be ignored. So they chose not to notice that the eighteenth century, when Britain pursued protectionist policies, was a period of high economic growth during which the agricultural and industrial revolutions were accomplished. The period when so-called free trade was at its peak, 1848-1914, was the age of imperialism, when European monarchies led by Britain with its globally dominant navy and Russia with its serf army conquered all of northern Asia. The European empires controlled the world, with the exception of the United States.

For every free trade agreement that now exists between countries there are hundreds of inhibitions on free trade. Smoking, alcohol and mind-changing drugs are to varying degrees controlled by law, penal taxation and religious interdiction. Health and safety laws can easily be used to control imports when a government agency chooses to use such rules to restrain some trades. 'Free trade' in sex is increasingly subject to controls and bans. Point protectionism remains a powerful tool of government, when a country slaps a tax on a competitively-priced import on the grounds that the import is too disruptive to the market for competing products made in the country concerned.

Free trade is, and always was, a fantasy; and the more democratic a country may be - in the sense that the government has to respond the the demands of statistically-important minorities of its citizens - the less chance there is of that country implementing free trade arrangements that can do damage to the economic interests of such minorities. This, and no 'ideal' of free trade preached by Econocratic professors, is the reality of the trading world; and always will remain so.

Friday, 1 September 2017

Shabby Britannia!

As I reported a couple of days ago, Mrs May's expedition to Japan turned out to be a salutary learning experience. Far from being welcomed as the harbinger of a new trade pact between isolated post-Brexit Britain and Japan, she was told in no uncertain terms that Japanese investment in the United Kingdom depends unconditionally on Britain remaining  in the European Economic Area.

While she was in Japan, David Davis her 'Brexit secretary' was making a fool of himself in Brussels by refusing to play the negotiations as the EEC [all 27 remaining countries] said they must be played.

There should now be no room for doubt in Mrs May's limited mind, that at least tens of thousands of jobs will vanish from the UK within a decade, as Japanese investment is shifted to continental Europe, unless a form of Brexit that is acceptable to external investors is secured. In a blatant item of propaganda which Dr Goebbels would cherish as a model of incompetence, Dr Liam Fox [who has been with Mrs May in Japan] said that the EU 'must' begin negotiations on the future trade relations of the UK with the the Union because 'business' is demanding that progress is made. It had been made clear in Kyoto and Tokyo that Japanese business, in particular, needs speedy reassurance as to Britain's future trading status. Japanese motor firms operating in the UK produce a greater proportion of their complete vehicles in the UK; but, like all the other firms, they need to buy some components from the continent. It is a fact that some parts of cars pass over the channel two of three times between different plant, and thus the future of the entire motor sector [as several others] depends on the free movement of goods and of the experts who manage their creation.

Britain is indeed under pressure, to take up a stance on Brexit that is uncongenial to Dr Fox, who is seen as a representative of the 'hard Brexiteers' who choose to imagine than Britain alone would be able to negotiate deals all over the world on terms at least as favourable as those now standing to the EU. This is nonsense: isolated Britain, with a market of 60 million people who have declining real incomes, would have a negligible fraction of the leverage that the EU has when negotiating for a market of 300 consumers who include millions of the richest in the world.

The EU representatives can just sit this one out, as the British government begins to learn in depth just how deep would be hole into which the United Kingdom would fall if the calamity of a 'hard Brexit' comes about; because of the stupidity and incompetence of Mrs May and her chosen team.

Meanwhile, that team is going forward with the unnecessary and excessively costly new railway from London to Birmingham, HS2. As the existing end-to-end journey now takes around seventy minutes, all that is needed is greater capacity on the existing line: especially to bring commuters into and out of London from stations much nearer to the capital then Birmingham [who would not be served by HS2 anyway; as a large number of stops to take on or drop off many passengers would slow the high-speed train down to a journey time longer than that for the existing line].

While Mrs May was in Japan, China announced that it was considering building an innovatory 600 mile-an-hour link between major cities, which are already linked by high-speed trains. It has been suggested to HM government - who have ignored the proposition - that the major centres of the thus far nugatory 'northern powerhouse' could probably be linked by such a system, more cheaply than the cost of building the unwanted HS2. This is just another example of the shoddy, limited thinking of the May gang. There will be no end to their stupidity: they should go soon. The idea of Mrs May standing in the next election verges on insanity.

Thursday, 31 August 2017

Flood, Fuel Prices and Human Costs

The tragic flooding in Texas and Louisiana over the last few days has no precedent in the history of North America, and its consequences will only emerge in full over several years. The immediate effects are that thousands of homes will need to be replaced or majorly reconstructed, a massive proportion of the infrastructure will have to be reinstated and transport links repaired. Mercifully few deaths have been reported so far; and the life-saving capabilities shown by thousands of ordinary small-boat owners and their helpers have been both effective and heartwarming. Much of the damage is insured; probably more is not insured because damage on this scale had previously been inconceivable, so there is a huge cost to be met by the public purse and by private individuals.

The main industry in the area is oil refining, with a huge proportion of the United States' refining capacity being concentrated along the coast of the Gulf of Mexico: precisely where the hurricane [as it then still was] hit the coastline. It is forecast that global oil production is now so flexible that the loss of any oil wells to active exploitation in the coming weeks will have no significant impact on the availability or the price of oil, as such. However, the loss of massive refining capacity for [at least] a period of weeks will significantly affect the availability of petrol ['gas'] to American drivers and of refined fuel for domestic and industrial purposes. There may, therefore, be a period of raised prices for refined oil products, partly because the net supply is cut, but more because to deliver fuel from places other than the Gulf coast requires longer supply-lines, the use of different pipelines and more vehicles to move the products to their consumers, and thus the costs of actually making the petrol and heating oil available will rise significantly until the gulf refineries can begin operation again.

One of the problems that the refinery companies are already tackling is the fact that thousands of staff have had to move from their homes; and a large proportion of them will not be able to reoccupy their homes for many months. Thus, though the operation of the refineries may not suffer much as a result of inundation in the flood [because many measures of damage mitigation could be taken after storm warnings had been issued], the need to rehouse so much of the labour for many months had not been taken into account in the contingent planning of the refining companies. The unforeseen costs of these measures to secure attendance by the workforce - over several months, at least - will add to the increase in the price of petrol and other refined products, and will extend the period over which the price increase will endure. This may be sufficiently significant to add a fraction of a percentage point to US inflation.

So, while the human and social costs are rightly the primary concern at the moment - and for some time to come - the economic consequences of the flooding [and the relative small amount of wind damage that has occurred] will be long-lasting and significant. They will also require the entire risk-management approach of the community and of its major employers to be recast. Nature is constantly stressing her power to disrupt humanity's activities, and to show that our risk management was not sufficient. This is the first lesson of the Texas tragedy of the past few days.

Wednesday, 30 August 2017

Mrs May in Japan

I find it increasingly difficult to believe that Mrs May has any significant common sense at all. She demonstrates daily that she has no dress sense; and in the selection of her kitchen cabinet when she went into Number Ten she created a machine that came close to destroying her credibility with her party and her relations with her most necessary ministerial colleagues.

The Chairman of the EU Commission was quite right yesterday to assert that the position papers that have been cobbled together for the UK government lack both conceptual clarity and essential data. It appears that the Prime Minister - who was an indecisive 'Remainer' in the 2016 EU Referendum - has been bullied into quiescence by the noisy minority in her party who choose to believe that the narrow result of the Referendum must be interpreted to mean that the UK must leave the political Union and also the European Economic Area.

And now she has gone to Japan, where she will encounter almost-infinite courtesy but where it is most unlikely that anyone will speak directly to her of their country's attitude to the risks that are inherent for them in the present utterly unclear Brexit situation. Thousands of Japanese firms in both manufacturing and the financial services have established facilities and bases in Britain. One major factor in this is that London is [obviously] an English-speaking city so this suits the Japanese, most of whom are not great linguists but have been schooled in English for at least a decade of their lives. But a bigger factor than the use of English is that the UK is fully in the European Common Market and the customs union.

The "hard Brexiteer" position on the future relations of the UK with the EU will seem to the Japanese - who located their assets in Britain-in-Europe in good faith - to be a complete betrayal of the understanding on which they have invested so heavily in the United Kingdom. The Japanese are still keen on concepts of honour, and if Mrs May and her team dishonourably shuffle their papers and equivocate on the key question of whether Britain will remain in the European Economic Area after any 'transition period', Japanese finance will be withheld: and if Britain is sufficiently idiotic as to opt  openly for a 'hard Brexit' Japanese firms will be among the first to move assets out of Britain. There is no equivocation about this, and however much Mrs May might try to con herself by accepting Japanese courtesy as acceptance of any stance that she might take up, the fact remains that Japan will be strictly self-interested. Grandiloquent talk about "island peoples furthering their common interests in a wide trading world" will just be talk.

Britain outside the European Economic Area is only of minimal interest to Japan, as a minor market for some exports. The main Japanese concern about Britain, in the event of a 'hard Brexit', will be to get their assets out of the UK with the least possible loss of money and of 'face'.

Prime Minister Abe is an unusual Japanese: he is more capable of directly expressing his individual thoughts than are many of his compatriots: and he seems to be more willing than most to do it. There is just a small hope that he will be able to educate Mrs May [who is, indubitably, difficult to educate], but I am not optimistic.

Now that the Labour Party has approached a sensible position on Brexit, the Tory majority of 'moderates' are realising that they have very limited time to talk their leader into common sense. I doubt that she is capable of undergoing that learning process: if so, the sooner she is removed from office, the better.

Tuesday, 29 August 2017

All Quiet on the Eastern Front?

A North Korean ballistic missile was fired yesterday, whose trajectory went over the centre of Japan before it was ditched in the Pacific Ocean to the east of Japan. This was a hugely provocative act: yet the Japanese stock market was unaffected by the news: the main index fell by less than 100 points,and that can be attributed to a number of minor technical adjustments within the market. There is no reason to think that the news story had an impact on the market.

Japanese ministers again mentioned the possibility of reviewing defence policy, which has been constrained since 1945 by the terms of the treaties that followed the Japanese surrender at the end of the Second World War; but no immediate action was taken.

Commentators on the world's stock markets have felt the need to comment on this lack of any response in the level of stock and share prices to a significant demonstration of the rogue state's rapidly developing power to attack its neighbours, which is regarded as, a side-issue to its plan to develop the capability to attack the continental USA. The general view is that the main markets [in the the Americas, in Europe including the UK, and in Asia] are all in a euphoric condition, carried ever-forward by the massive creation of 'money' by the central banks over the past decade. The cautious withdrawal of the policies by which the capitalist system was 'saved' in 2008-9, by the US Federal Reserve over recent months has not affected that highly positive set of conditions for dealers and players in the global market.

Two other factors are in play. The first is, that if there were to be any direct action by the USA or by any other threatened power against North Korea the consequences would be calamitous and totally unpredictable. The possibilities of a thermonuclear response by North Korea to an attack by the US Air Force, using high explosives in an attempt to destroy buried facilities are so enormous that nobody can assess the effects that would ensue: so the possibility cannot be factored in to stock market price adjustments. The second factor is that governments in the region appear to assume that the Chinese have the power forcibly to 'discipline' North Korea, and would use it, if they judged that the situation really needed it.

Inevitably, it has already been announced that the United Nations Security Council will meet this afternoon, for another session of tut-tutting and to allow the main players to make their positions even clearer and for the North Koreans to say - as ever - that they do not care what the UN says or does.

North Korea has land borders with South Korea, China and Russia. North Korea was created by Stalin's USSR, before the Peoples' Republic of China was established. The position of Russia in relation to North Korea is no less important now than it was in 1950 at the time of the Korean War. Though Chinese troops rather than Soviet forces actually entered the land war, the supplies for the Communist side came from the USSR. It is inconceivable that Mr Putin is not hugely influential in Pyongyang, though the connection is downplayed in the public discussion of the matter; and lazy commentators have taken the view that the North Korean dictator pays little attention to Russia. It will be very important to take note of exactly what the Russian delegate says in the Security Council today: the nuance will matter. The state of US-Russian relations is important in what happens in North Korea, and pretty well the whole of the US political system is in a dangerously anti-Russian frame of mind at present. This does not play out in the calculations of the world's stock markets, but it is a factor not to be forgotten

Monday, 28 August 2017

More Lessons from British Home Stores

The defunct chain of shops that was British Home Stores has had more publicity in the past year than it enjoyed in any decade when it was an active business. This has largely been due to the pathetic way in which the life of the business ended, and the way its deferred pensioners were treated by the last two majority owners of the firm. The penultimate owner, Sir Philip Green, has in my view unfairly been lambasted: he has made a donation to the pensions fund that has been acceptable to the Trustees [who cannot be excused of negligence] and to the Pensions Regulator. The circumstances of his sale of the declining business to a twice-bankrupt chancer are murky, but there has been no indication of criminality. The final owner might well have been out of his depth, but he pushed his luck and took what he could out of the struggling business in a way that can at best be characterised as cynical.

For many years I had wondered how the business survived: and the one commonly recurrent answer was that it was the best place for lampshades and other lighting, especially for the home. I used the BHS shops for that purpose because they really were at least as good as anywhere else in the range, variety and taste of the wares in their lighting department. I became surprised at the longevity of that lead in one aspect of the business, over a couple of decades when all other departments seemed to get more run-down and the selection of goods was less attractive than in other stores. I was also surprised when Philip Green took the chain over, because his other shops were focused on particular market segments, which they addressed [in the main] successfully; and I was unsurprised when he dumped the cuckoo from his nest.

It is now a year on from the collapse of the business, and research publicised today makes interesting reading. More than 90 of the 160 BHS shops that closed last year remain empty; but almost all the London shops have been re-let and are in operation [mostly as shops] under new management. But around the rest of the country almost all of the shops are empty: this applies to most of the high street sites, and also to a few that are located in modern shopping centres in relatively prosperous towns. Large stores are less and less needed, as more shopping is done on-line via large warehouses and delivery services; which include the revival of Royal Mail for whom the internet has provided compensation for the decline of letter mail, which is itself largely to product of the internet.

Behind these obvious changes in shopping habits lies the more important fact that all Tory and many Labour politicians fail sufficiently to emphasise: the absolute real-terms decline of the economy in most regions since the Thatcherite destruction of so much of the material capital on which true prosperity ultimately depends. Human beings are material structures: we need the clothes and furnishings that British Home Stores used to offer us, almost as much as we need food and housing. Much of what we eat [and an increasing proportion of what we wear] is imported: so we need to sell countervailing exports to the rest of the world. But we no longer export goods in sufficient volume or with sufficient quality, novelty or other positive characteristics that used to make British goods attractive in global markets.

 Britain - hailed as the 'workshop of the world' before 1800 - became a net importer of manufactured commodities early in the Thatcher years: but the residue of old industries and the rise of new sectors, especially in the so-called 'knowledge' and 'technology' sectors as well as pharmacology and financial innovations, meant that until the financial crisis [that became apparent in 2007 and reached its peak in 2009] the balance of payments could from time to time be maintained. Since the 'crunch' a deficit on the UK's balance of payments has become entrenched: even after foreign money has been paid prolifically to UK sellers of London house properties, small estates in the home counties and firms that have made successful innovations. While super-luxury shops proliferate in central London, largely addressing wealthy aliens and the very small top-earning segment of British society, the majority of the country becomes increasingly dependent on pound-shops and charity shops and the most competitive supermarkets. A walk along any high street, especially one that lies more than commuter distance from London, is a salutary experience. It is proof of the material decline of the British economy; which no amount of financial manipulation can conceal.

British Home Stores, both historically in its decline and fall and now through its legacy of unlettable premises, stands as a stark symbol of the disaster that Mrs May and her cabinet have not yet noticed.

Sunday, 27 August 2017

Labour, Brexit and an Alt-Econocrat

There is no more pressing issue in British politics than that of the future relationship of the UK to the European Union, and therefore no apology is required on returning to the subject.

The Labour Party has taken a huge step towards rationality on that matter over this Bank Holiday weekend by making a new and very different statement on its policy. Under the new Shadow Secretary of State for exit, Sir Keir Starmer, they now accept that it would be essential for there to be significant transition period during which the UK would continue to enjoy the comfort of being within the European Economic Area [though out of the political Union, in deference to the referendum resut]. This would be at the  expense of keeping the country under the jurisdiction of the European Court, and obliged to accept the free movement of people with the EU. Starmer can claim to be far more traditionally Labour than the public schoolboy Jeremy Corbyn, because his working parents named him in honour of Keir Hardie: an early Labour leader. If discussions during the transition can include the resolution of the two difficult issues of free movement and the extent of the powers of the European Court, Labour holds out the prospect that the 'transitional' could become the permanent basis for the relationship of Britain to the EU: while the country would be able to make additional pacts on trade with other countries provided the conditions for retaining membership of the European Economic Area are maintained.

This presents a package on which Labour can make a strong bid for the 'middle ground' of politics, and knocks any idea of the LibDems forming the core of a strong new 'Centre Party' right out of the picture. Corbyn's caricature student-leftery can virtually be ignored if the party continues to promote rational 'moderates' [with good political credentials] to shadow posts. Pro-EU Tory MPs - who formed the vast majority at the time of the referendum, and who have been largely ignored since Mrs May's 'conversion' to hard Brexitry - should be really scared, to the extent that they should now make clear their reservations about the tone of Cabinet policy, in view of the fact that Labor has displayed a capacity for rationality.

Also in recent days, Professor Patrick Minford has obtained publicity for his view that a 'hard Brexit' would be beneficial for the United Kingdom. According to his ultra-Econocratic model of the economy, Britain would gain massively by being completely outside the European Union [including all aspects of the European Economic Area], with a GDP at least 6.5% higher than is being achieved within the union. This rests on the assumption that the country could trade on a completely level playing field with all economic entities in the world; according to his model of a market economy whose participants operate on the basis of 'rational expectations' of each others' actions conforming to the psychological assumptions that are implicit in the model. Professor Minford achieved prominence when he supported extreme Thatcherism against the majority of the then-still-NeoKeynesian 'economics profession' in 1981. For a while he had the Prime Minster's favour, though he was eventually palmed-off with a CBE.

The fruits of Thatcherism are here for him to see, and to input into his model [which is now even more comprehensively Econocratic]: desperately low productivity, nil productiveness, a massive deficit on public spending, a constant deficit on the balance of payments, over-dependence of the economy on the service sector and on consumers spending borrowed money. To that catalogue of the achievements that are ascribable to the policies that he recommended to the Thatcher government, we can be sure that after a hard Brexit the UK would find that there was no permanently level patch on the playing field of global trade. Point protectionism [as mentioned several times in this blog], combined with long-term protectionism of favoured sectors in virtually every economy on the planet will ensure that a naked Britain, alone in the wicked world - which still remembers the slights from the British Empire of the past - would be nothing like the heroic entity in the professor's model, and the irrational prejudice which is more common in global statecraft than anything like Minford's 'rationality' would ensure that the model could not work. The limit to the Econocrats' world view is seen in the fact that real people have not vanished from the villages that surrounded the closed coal mines: they stay as second and third generation malcontents whose habits undermine their health, while they survive on a combination of low wages from non-productive jobs, state benefits and borrowing.

Keit Starmer is well on the way to producing a rational and humane model of Brexit for the Labour Party. Patrick Minford is trying to power the nutty Tory Brexiteers along a path that would enable
them massively to intensify the range and extent of the problems that already confront the real-world population of this benighted country.