In his speech at the Mansion House [City of London] on October 11, 2012, Lord Turner, head of the Financial Services Authority and a leading candidate to be Governor of the Bank of England, revealed one of the darkest economic secrets that the infamous coalition government is fomenting. With the consent of the Treasury [Chancellor: the Right Honourable George Osborne PC MP] the Bank of England has created hundreds of millions of pounds in 'quantitative easing' [QE]. This notional credit has been used to buy bills and bonds that had previously been issued by the UK government, mostly from the holdings of 'reserve assets' that must be maintained by financial institutions. Much of the new spending-power has been used by the firms that sold the bonds to the Bank to buy new issues of government bonds, to enable them to retain their required 'reserve ratio' of relatively secure assets. Notionally this activity has not increased the 'money supply':because in principle the Bank of England has issued spending power that is matched by an increased stock of government debt that it holds as 'assets'.
Turner's innovative [implied] suggestion was that the Bank could 'write off' some of the assets that it has bought. This would mean that the selected bonds would simply cease to exist; they would vanish from the Bank's asset register, and be removed from the total of the government's debt. The coalition government claims that the present national debt is a smaller percentage of the national income than it was when they took office in June 2010: notwithstanding the fact that the number of pounds that the government has borrowed has continued to increase rapidly. Cameron's government has continued to borrow more money each year to spend on benefits, and to maintain health service spending and to spend hundreds of billions of pounds on its plan to double-up the most efficient railway in the country: from London to Birmingham. Meanwhile some important spending has been reduced: the national defences have been despoiled, the effectiveness of the police has been reduced, and the construction of coastal and riverside flood defences has been deferred.
Over the last couple of years the government has ordered the commercial banks to reduce the ratio of the money that they lend to the assets that they hold. Their recognisable 'assets' were being reduced anyway as the credit crunch unfolded and they had to write down the value of many assets and to write some off. The government - partially in response to European Union diktats - has raised the ratio of assets that the banks must hold to what they can lend: so they can lend a lower proportion of a diminishing resource. The reduction in the total that banks can lend requires the banks to refuse to extend some 'old' loans that come up for review, as well as refusing to make new loans to businesses. Hence one of the main sources of funding for economic growth has been reduced almost to vanishing point: and the economy has effectively ceased to grow while government spending has continued to grow.
By tinkering with taxes Chancellor Osborne has increased the government's income as a percentage of national economic turnover, but that means that less spending-power [in real terms] can be extracted as taxation from a diminishing national income. The gap between the tax-take and the government's spending is filled by borrowing.
The banks' liquidity has been maintained by the Bank of England's QE: buying government debt certificates from them. Already the Bank has bought up almost one-third of the whole vast pile of debt certificates that the coalition and former governments have issued: and Turner's speech contained hints that some [or eventually all] of the government debt that is held in the asset register at the Bank of England could be written-off. This would mean that the national debt would be reduced by some 30%; and when that was done, interest payments on that debt would cease. The government's 'books' and the predictions for their future spending needs would suddenly become much more favourable; to the extent that it might be possible for the austerity to be relaxed.
But this would be disastrous for pensioners. In interpreting legal requirements on pensions administration the Actuaries have used their own archaic methodology to insist that pensions trustees should sell shares [that can rise with the success of companies] and to put an increasing proportion of the funds that they hold into government bonds. So when the real return on government bonds is reduced by the great coming write-off, the purchasing power of pensions and annuities will hugely be reduced. The millions of people who have accepted reduced current purchasing-power throughout their working lives, while they saved in their pension funds to buy security in their old age, will inexorably be impoverished by the inflation. There will be a great show of handwringing on all sides of the political charade, but nothing can be done by a government of any party or by any coalition of established parties to protect the pensioners from the coming catastrophe. The calamity will almost certainly materialise. Impoverished pensioners will vote against whatever government 'betrays' them, only to find that no other gang of politicians has any idea of how to 'save' the situation. The powers-that-be have allowed this to happen through decades of purblind public policy: decent working people will pay the price of this incompetence, when they come to the most vulnerable phase of their adult lives.
Showing posts with label actuaries. Show all posts
Showing posts with label actuaries. Show all posts
Saturday, 13 October 2012
Saturday, 14 January 2012
Rating the Eurozone - Again!
One of the most depressing items in the British press this past week was a full-page advert from 'the Actuarial profession' announcing the huge number of people who have qualified by examination to join the ranks of those who have ruined private pensions and now threaten the future viability of general insurance. Actuaries can also find employment in Rating Agencies, those widely-despised institutions that did so much harm to the global financial system when they allowed their greed for fees to outrun even vestigial common sense.
Despite the bad publicity that they have received - and largely thanks to actuaries' nostalgic determination to give undue weight to Agency ratings [because there is no alternative to what they used to purport to do] - the Agencies continue to publish ratings; and often this has an impact that is disproportionate to its validity. But in some cases Agencies, desperate to rehabilitate their reputation and to rebuild their revenues, explain a rating change in terms that display insight and good observation of reality. Yesterday's downgrading of nine countries' sovereign debt was a fair commentary on the state of those economies in the context of the eurozone.
Cyprus is in some ways a Greek dependency and though its economic situation, notably the state debt as a percentage of Gross National Product, is less stressed than that of Greece the interdependency of the two economies [and especially of Cypriot banks with Greek banks] makes the smaller country's finances very weak because Greece is chronically weak. So it is appropriate that Cyprus joins Italy, Portugal and Spain in being down-rated by two notches on the Standard and Poor's scale. This downgrade, the most recent of a significant series, reduces Portuguese state bonds to 'junk' status. Italy, Spain and Portugal have recently had new governments which are pledged to enforce whatever packages of restrictive measures are necessary to secure continuing support from the eurozone and from the IMF [the International Monetary Fund]. It is utterly impossible to predict how far the populations of these countries will tolerate the high taxation and the worsening standard of living that will have to continue for an indefinite future period if the deficits are to be eliminated.
Slovakia, Slovenia, Ireland and Austria join France in having their state debt de-rated by one grade. Austria and the two states that were parts of Hungary for centuries before 1919, Slovenia and Slovakia, have deep economic ties with Hungary which is outside the eurozone and has recently conducted policies that are on [and sometimes beyond] the boundaries of democratic acceptability. Austrian Banks, in particular, have lent heavily to Hungarian banks - borrowing that was largely used to fuel a housing bubble - and the chances of repayment in full have become negligible. So downgrading those three countries' state credit ratings is entirely reasonable. Ireland is managing the macroeconomics of crisis very well, but the depression is becoming more intense, emigration is rising and the banks [which are mostly state-owned] are having to accept larger and larger losses on bad loans that were made in the years when Ireland claimed the nickname of The Celtic Tiger.
France is the greatest casualty of the downgrading, and the most appropriate. President Sarkozy has tried hard to persuade Chancellor Merkel to use Germany's accumulated reserves to support the debts of all the governments whose countries are in the eurozone. Aware that German voters deplore the idea of covering feckless southern peoples for their foolish economic management, and for lying abut the liabilities that they have accumulated, Markel has tried to cap the commitment that Germany would make to bail-out funds. At the same time, Germany and France have led the eurozone [as such] in demanding that the most indebted states in the system must adopt strict austerity. Looking at this scene, Standard and Poor's analysts have built forward projections for what might be the economic future for each eurozone country: and the result is that the countries that are being compelled to restrict their state spending while maximising taxation cannot be expected to grow their national economies fast enough to begin to generate earnings that will enable them both to carry on servicing their debts and to invest in new industries, in high technology and in innovative business structures. The more successfully the austerity measures bite into the economic system, the less resilient and dynamic the economies of the chronic debtor states will be.
The only means open to a Rating Agency to issue a practical warning in support of such an observation is to downgrade their rating of the debt issued by the countries concerned. That makes it more expensive for them to borrow money, so it reduces the chances of the government adopting Keynesian methods to revitalise the economy. It makes a self-fulfilling prophesy of the Agency analysis: and the predicted negative outcome has a high probability of eventuation. Lower [or negative] growth in much of Europe will further imperil the collective viability of the eurozone: and it could possibly undermine the European Union as such. The very policies that are being imposed on eurozone countries in the cause of responsibility and stability may well cause greater chaos, despair and socio-economic dissolution than has yet been imagined. In this context, S&P's small adjustment to sovereign debt ratings may well be a harbinger of a very nasty future. In earlier centuries Europeans of all traditions accepted the validity of cautionary tales like the Prodigal Son, of axioms like 'waste not, want not' and of adages such as 'you will reap what you have sown'. In the last third of the twentieth century clever fools thought that they could defy both traditional morality and simple arithmetic. They were wrong, and the price that future generations might have to pay for that folly remains beyond computation.
In short-term practical affairs, what will be the impact of Standard and Poor's downgrading of all those countries' state debts?
For the British, it is a hopeful sign that the Agencies continue to shrug off demands from some downgraded eurozone states for Britain's debt also to be downgraded; but that happy state will not continue unless the maintenance of austerity in state spending by the UK is balanced by economic growth and a marked reduction in the balance of payments deficit. Positive growth of the UK economy has to be seen by the middle of 2013 - at the latest - or downgrading will be inescapable.
Meanwhile, the eviction of Greece from the euro is unavoidable: the key question is, whether France and Germany choose to continue supporting Greek governments until the whole eurozone collapses, or whether Greece will be expelled [or allowed to slink away] soon, enabling the rest of the system to avoid a general implosion. If Greece is put out of the system quickly, the euro can probably survive as the common currency in sixteen enfeebled countries; but even then the subsequent three years will be a precarious period. Standard and Poor's may have the French spitting venom in their direction just now, but they gain brownie points for being of sound judgement on his point, this time round.
Despite the bad publicity that they have received - and largely thanks to actuaries' nostalgic determination to give undue weight to Agency ratings [because there is no alternative to what they used to purport to do] - the Agencies continue to publish ratings; and often this has an impact that is disproportionate to its validity. But in some cases Agencies, desperate to rehabilitate their reputation and to rebuild their revenues, explain a rating change in terms that display insight and good observation of reality. Yesterday's downgrading of nine countries' sovereign debt was a fair commentary on the state of those economies in the context of the eurozone.
Cyprus is in some ways a Greek dependency and though its economic situation, notably the state debt as a percentage of Gross National Product, is less stressed than that of Greece the interdependency of the two economies [and especially of Cypriot banks with Greek banks] makes the smaller country's finances very weak because Greece is chronically weak. So it is appropriate that Cyprus joins Italy, Portugal and Spain in being down-rated by two notches on the Standard and Poor's scale. This downgrade, the most recent of a significant series, reduces Portuguese state bonds to 'junk' status. Italy, Spain and Portugal have recently had new governments which are pledged to enforce whatever packages of restrictive measures are necessary to secure continuing support from the eurozone and from the IMF [the International Monetary Fund]. It is utterly impossible to predict how far the populations of these countries will tolerate the high taxation and the worsening standard of living that will have to continue for an indefinite future period if the deficits are to be eliminated.
Slovakia, Slovenia, Ireland and Austria join France in having their state debt de-rated by one grade. Austria and the two states that were parts of Hungary for centuries before 1919, Slovenia and Slovakia, have deep economic ties with Hungary which is outside the eurozone and has recently conducted policies that are on [and sometimes beyond] the boundaries of democratic acceptability. Austrian Banks, in particular, have lent heavily to Hungarian banks - borrowing that was largely used to fuel a housing bubble - and the chances of repayment in full have become negligible. So downgrading those three countries' state credit ratings is entirely reasonable. Ireland is managing the macroeconomics of crisis very well, but the depression is becoming more intense, emigration is rising and the banks [which are mostly state-owned] are having to accept larger and larger losses on bad loans that were made in the years when Ireland claimed the nickname of The Celtic Tiger.
France is the greatest casualty of the downgrading, and the most appropriate. President Sarkozy has tried hard to persuade Chancellor Merkel to use Germany's accumulated reserves to support the debts of all the governments whose countries are in the eurozone. Aware that German voters deplore the idea of covering feckless southern peoples for their foolish economic management, and for lying abut the liabilities that they have accumulated, Markel has tried to cap the commitment that Germany would make to bail-out funds. At the same time, Germany and France have led the eurozone [as such] in demanding that the most indebted states in the system must adopt strict austerity. Looking at this scene, Standard and Poor's analysts have built forward projections for what might be the economic future for each eurozone country: and the result is that the countries that are being compelled to restrict their state spending while maximising taxation cannot be expected to grow their national economies fast enough to begin to generate earnings that will enable them both to carry on servicing their debts and to invest in new industries, in high technology and in innovative business structures. The more successfully the austerity measures bite into the economic system, the less resilient and dynamic the economies of the chronic debtor states will be.
The only means open to a Rating Agency to issue a practical warning in support of such an observation is to downgrade their rating of the debt issued by the countries concerned. That makes it more expensive for them to borrow money, so it reduces the chances of the government adopting Keynesian methods to revitalise the economy. It makes a self-fulfilling prophesy of the Agency analysis: and the predicted negative outcome has a high probability of eventuation. Lower [or negative] growth in much of Europe will further imperil the collective viability of the eurozone: and it could possibly undermine the European Union as such. The very policies that are being imposed on eurozone countries in the cause of responsibility and stability may well cause greater chaos, despair and socio-economic dissolution than has yet been imagined. In this context, S&P's small adjustment to sovereign debt ratings may well be a harbinger of a very nasty future. In earlier centuries Europeans of all traditions accepted the validity of cautionary tales like the Prodigal Son, of axioms like 'waste not, want not' and of adages such as 'you will reap what you have sown'. In the last third of the twentieth century clever fools thought that they could defy both traditional morality and simple arithmetic. They were wrong, and the price that future generations might have to pay for that folly remains beyond computation.
In short-term practical affairs, what will be the impact of Standard and Poor's downgrading of all those countries' state debts?
For the British, it is a hopeful sign that the Agencies continue to shrug off demands from some downgraded eurozone states for Britain's debt also to be downgraded; but that happy state will not continue unless the maintenance of austerity in state spending by the UK is balanced by economic growth and a marked reduction in the balance of payments deficit. Positive growth of the UK economy has to be seen by the middle of 2013 - at the latest - or downgrading will be inescapable.
Meanwhile, the eviction of Greece from the euro is unavoidable: the key question is, whether France and Germany choose to continue supporting Greek governments until the whole eurozone collapses, or whether Greece will be expelled [or allowed to slink away] soon, enabling the rest of the system to avoid a general implosion. If Greece is put out of the system quickly, the euro can probably survive as the common currency in sixteen enfeebled countries; but even then the subsequent three years will be a precarious period. Standard and Poor's may have the French spitting venom in their direction just now, but they gain brownie points for being of sound judgement on his point, this time round.
Subscribe to:
Posts (Atom)