Deficit Disaster

It is a fundamental proposition of rational Political Economy that a country must aim over any run of a few years to have an equal balance of imports and exports. Britain has a regular annual surplus on trade in services: insurance, banking, legal services, hosting film-makers and offering a reliable market in stocks, shares and bonds routinely make a profit for the country.

But the national appetite for imported goods considerable exceeds the rest of the world's demand for British goods. The figures that have just been published by the Office for National Statistics show that the deficit in June increased to £9.4 billion; the highest this year. The main component in this worsening picture is the drop of £400 million in material exports: this reflects a declining demand for oil [of which Britain is still a small net exporter], but a much bigger factor is the rise in the exchange rate of the pound for other currencies. This makes British goods dearer in exports markets; while foreign goods are relatively cheaper in this country.

In turn, the weakness of export sales discourages British firms from investing in new machinery and developing new products; despite the fact that many companies have large holdings of cash. Many boards of directors have  decided to cheer up their investors by buying-back shares from the existing shareholders at higher prices than have recently been offered on the stock market. The shareholders who have sold have been inclined either to buy shares in more dynamic foreign companies [adding to their working capital] or to buy imported consumer goods or to invest in property - often buy-to-let homes. Thus there is a net diminution in the circulating capital available for investment in British economy: yet again!

The government and most commentators are oblivious to this disaster; and the main opposition party, Labour, plans to make this disinvestment worse by taxing productive businesses and individuals even more to give greater handouts to the beneficiary consumers who buy imports; and to compel employers to increase basic wages, which will make millions of marginal jobs non-viable, forcing the occupants of those jobs into the benefits system.

This entirely predictable [and predicted] tragedy is not inescapable, but the wasted half-century when the need to accumulate circulating capital and convert it into productive capital was ignored has established a very poor basis for a real recovery to begin. The pointy-heads still fail to understand the difference between productivity [the cash-per-job that is generated by firms] and productiveness [whether or not jobs add to the circulating capital of the country, that can be applied to increase future production]. Jobs can have high productivity in terms of each employee bringing in millions of pounds from retailing highly desired imported brands, while their negative contribution to national productiveness is massive in terms of the purchasing-power that is exported to the firms that own the brands. Until the incredibly simple basic truths are recognised and adopted as the basis for policy, the economy will fester and the stench of decay will eventually reach the nostrils of foreign investors who have hitherto been duped by postkeynesian statistics: they will then cease to buy British state debt and the vultures will come home to roost.

I will continue to do my bit to point to reality and realism.

Academe and Apprenticeship

Fifty-one years ago, in 1963, as a student in the University of Durham I took part in a Union Society debate on the issues implicit in the Robbins Report on the future of the Universities. The Report was the outcome of a long investigation by a Royal Commission [the highest level of public inquiry] which was chaired by Lionel Robbins, the great man of the London School of Economics and one of the earliest Life Peers. The panel included the General Secretary of the TUC and a series of captains of industry and that magic circle known as the 'great and good' [then much more respected than they are now].

The predominant conclusion of the Commission was that it was vital for the future health of the economy, and of society in the wider sense, that there should be a vast increase in the number of people in university courses. There should be both new universities and great expansion of existing institutions. It seemed obvious that Britain must at least keep pace with other countries in expanding higher education: and very few people gainsaid that. However, I based my speech on a caveat to that consensual position.

Britain had developed a massive system of qualifications for industrial and commercial occupations, mostly validated by the City and Guilds of London Institute. Tens of thousands of people underwent a mixture of workplace experience and theoretical underpinning derived from day-release courses in technical colleges all over the country. I argued that these qualifications were at risk of becoming under-rated, with a cataclysmic impact on the quality and advancement of production. I proposed that City and Guilds qualifications should be recognised as equivalent to many technical degrees in other countries, with a dramatic positive impact on the comparative statistics for the UK. Constant review of both the practical and the academic quality and content of the diplomas could ensure that parity was maintained.

This was - of course - ignored, and Britain allowed the system to be weakened dramatically as the university system devised more and more irrelevant degrees for more and more students who regarded factory-floor employment with contempt. Britain has now reaped the results of this idiocy. While 49% of French firms, and 40% of German firms have apprentices, the proportion of British firms with apprentices is NINE. British factories are falling behind all their competitors. Between 1996 and 2013 British goods exports increased [in cash turnover terms] by 74%: while US exports increased by 133% and Germany's by 173%. Much of this gap was explained by the significant slowing in export increases between 2008 and 2012, the years of the 'recession'. Even at this comparatively low rate of growth, employers are reporting their fear of a coming skills shortage.

Graduates in [real] engineering subjects are invaluable, and the pathetically small number of British engineering graduates who complete higher degree studies is particularly worrying. For decades now, the research opportunities in engineering that have plentifully been available in the UK have been taken up by foreign students, who mostly take their high-level theoretical skills back to their native countries. With a serious dearth of native engineering doctorates, and a massive shortage of skilled factory employees who have a good understanding of the theory and mathematics that underpin the processes that they perform, Britain is denuded of the productive human resources that the economy needs.

I am not at all special: hundreds of thousands of people have recognised and worried about the issue on which this blog is based; but we are powerless in the face of an impregnable Establishment and a flood of disastrous evidence. Something must be done: and it can only begin at the grass roots. Government and higher education are too deeply sunk into their error to be expected to recognise the simple truth,

False Optimism on the British Economy

Today the Institute of Chartered Accountants (ICAEW) and the Confederation of British Industry tell us that employers' optimism is high about the future of their businesses. The government data report that more people are in employment in the UK than ever before; but that industrial output and exports are still below the already-low level at which they stood in the fake boom of 2006. There is no good news here for the real economy.
Consumers' borrowing, especially for house purchases and imported goods, has increased while total bank lending has declined; pointing to the fact that lending to develop manufacturing firms' facilities, and their export.  markets is stagnant or even declining. Indicators of business confidence are up to the level last seen in 1988, the year that was followed by the slump of the early 'nineties which saw huge falls in house prices, not least in London.
Thus the portents are bad, not good.

This issue in explained in my book SINKING BRITAIN which can be accessed via this blog site.

Why Didn't They Sack Haig?

As the commemoration of the tragedy of the First World War gets into top gear, there are already books and TV programmes focussing on the appalling carnage of the Battle of the Somme which began in July 1916. It was continued until the end of the year, despite the fact that there were 60,000 British casualties on the first day: with no significant gains. The British Commander-in-Chief, Douglas Haig (of the whisky firm)  committed successive waves of men to death in further fruitless pursuit of the same barren strategy. He followed the Somme by a series of further 'great pushes'  which had no significant success in the ensuing eighteen months.
uHis defenders claimed that by refining his techniques he eventually enabled the army to smash the German front in the late summer of 1918, by which time the German supply system was disrupted by civil unrest and the beginning of revolution.
Hundreds of thousands of men died in pointless repetition of the same boneheaded strategy as on the Somme, until new weapons and new training methods prepared the army to exploit the very different conditions that faced then from the middle of 1918.
Haig survived catastrophic failure, despite the repeated wish of the Prime Minister, Lloyd George, to be rid of him. The entire establishment, led by the King (George V) insisted that he should stay. 200,000 lives were valued at less than the vanity of Haig and of those who had appointed him.

I invite every reader to look at these articles and programmes, with the thought in the back of their minds that the position of the Economics establishment today is like that of Haig and his kind in 1916. " Just push harder and the strategy will work" said the boneheads; but it didn't.
Today the pointy-heads are saying " more competition, more cuts" and the economy will really rebuild itself.; but it won't. King George's granddaughter, Queen Elizabeth II, asked the assembled luminaries of the London School of Economics why they had not seen the crash of 2007 coming: and they had no answer. Haig had no answer for those who challenged him in 1917, but the old-boys' network saved him. Something similar is keeping the professors of Economics in their chairs now.

Actuarial Armaggedon

The greatest destruction of value in the British economy over the past quarter-century has been the erasure of most of the value of the savings made by women and men through their pension funds. It has often been pointed out that fees charged to funds by fund managers have removed much of that value; but it is trivial compared to the purblind misguidance given by the self-styled Actuarial Profession, with the cynical collusion of accountants.

Every pension fund must have a named Scheme Actuary, who has huge influence over the decisions that are notionally taken by the Trustees. In the face of the facts that the scheme Actuary and the Auditor [a Chartered Accountant] must sign off the fund at least once a year, confirming that it meets the law and the standards set by their professions, the [usually non-expert] Trustees are virtually bound to follow any guidance from these signatories. Despite rules and 'Chinese walls', the accountancy giants manage to sell a lot of advice to their clients: the actuaries, who have no comparable constraints, have huge 'advisory' power to steer the funds into investing the deferred pensioners'' money according to their very limited understanding of the economic system.

In 1987 almost exactly 50% of all investments by pension funds were in shares - equities - whose market prices vary regularly but over the long term rise significantly in market valuation. The other half was in government and other bonds, property and other assets that largely compensated in the stability of their prices for the volatility of the stock market. This ensured that whenever a fund member came to retire the fund could allocate them either a generous pension drawn from the future income of the fund or a large 'pot' of cash with which to buy an Annuity. The funds that backed Annuities were split between equities and other investments in broadly the same proportions as applied to pension funds.

In in the early 'nineties, Actuarial Tables [the basis on which scheme actuaries assessed how long fund members would live, and thus what each member's demand on the fund was likely to be, from the date of retirement] were hopelessly out of date: longevity had increased far beyond the assumptions shared by actuaries.. Hence they started to say that funds were over-funded, which came to the ears of the scavengers in the Treasury who decided to tax any 'over-funding' of pensions. So many firms declared a 'pensions contribution holiday', usually just on their payments-in to the fund, which meant that the tax on the employees' contributions was slightly reducing the pool of money available for the future pensions. Then the actuaries' idiocy was recognised, and many funds were suddenly under-funded according to the updated longevity tables. So firms and employees were asked to put more into the funds.

This was in the mad era of the 'dot-com bubble', which challenged comparison even with the idiocy of the early eighteenth-century 'South Sea bubble' when firms that had never made profit - in some cases had never received revenues - were valued in millions of pounds. The turn-of-the century [1999-2001] boom was 'valued' in trillions of dollars: and inevitably the collapse of that market dragged down the prices of sound industrial and commercial shares in a general panic. The combined impact of the miscalculations of the actuaries in the 'nineties and the crash of 2001-3 was to create in the 'actuarial profession' a panic conclusion that shares were a bad investment generically.

 If a bond has a date for encashment, and a stated sum to be repaid on that date, it is relatively simple statistics to guesstimate reliably what the bond is 'worth' on any date. So as share prices were cashing down right across the spectrum actuaries - encouraged by Gordon Brown's Treasury [which was already industriously increasing the taxation of funds' investments, in the notorious 'three-billion pound grab'] - demanded that funds sell their shares and buy bonds. This intensified the collapse of share prices, while raising the prices of bonds; reducing the total valuation of assets in the funds and removing most of the assets that could have replenished the funds as stock markets recovered. The same tactics, of selling shares and demanding bonds, were required in the crunch of 2007-9: and this time it really suited the government because they needed the future pensioners' funds to buy the bonds with which they funded the deficit.

The net result of all of this is that now only 5% - yes, one-twentieth - of pension funds [on average] are invested in equities which have risen strongly since the crunch, while most of the rest is in government bonds whose riskiness increases by the day. Most companies have closed their 'final salary' pension funds, giving the staff the chance of getting only defined-benefit schemes or of choosing a private pension entirely at their own risk.  Pensions are massively reduced from their equivalents as awarded by 1999.

George Osborne's cynical decision to give retirees with accumulated 'pension pots' the choice not to buy an annuity, and take responsibility for their own financial survival through a prolonged period of retirement, will potentially exacerbate old-age impoverishment. This sets the cap on a tale of devastation, by which millions of current and future pensioners will live in relative poverty compared to the lucky people who retired just a few years previously, So far, the accountants have taken some of the blame for some aspects of the crunch: but not very much for this facet of the present situation. The long-term depredations of the actuaries have yet to be attributed appropriately The contribution of these actuarial sins to the destruction of the material economy and the increase in the national debt deserve due recognition.

Sinking Britain; This blog has been inactive since early in 2013, while I concentrated on publishing my new Book: SINKING BRITAIN. While Messers Cameron and Osborne gloat about the 'recovery' of the British economy, they also note that the country's position in terms of external balance of payments [in deficit], national debt [still growing], public spending [still in deficit], show that their policies have not succeeded In any meaningful sense. Exports and manufacturing are still way below their levels in 2007. The intractable problems of the British economy have not been addressed. All that the 'good' economic data - national income - shows is that people are turning-over more money in the economy to no good purpose.

 WBritain is still sinking!

Sense

I have been offline for a month, as I got on with crucial jobs including a last attempt to re-present my basic ideas for the general interest. If that fails, I think I will abandon more than four decades of research and analysis.

Meanwhile, in the hope of belated success, I continue to comment on the matters of the day; seen from the perspective that my researches have endowed me with.

Under the Accounting Standard FRS 102 - supposedly bang-up-to-date and state-of-the-art - the powers that be have promulgated the crazy assertion that 'Financial Instruments' should be accounted for, especially in corporate balance sheets, at 'Fair Value'.

 Neither of those terms has any substantial meaning.

The term fair has prominently been used in the past 24 hours by advocates of the idea that homosexual people should be allowed to marry: at this stage, only in twos. Although an Anglican, I have no fundamental objection to people of any sexual orientation [or of none] taking steps to protect their reputations and to safeguard their assets on a basis of legal and social equality with other people. But I do find completely silly the notion that a legally recognised relationship of two people can be called a 'marriage' in any sense other than that which has been traditional throughout the world for thousands of years. Changing the lexicon to be 'fair' to people who want to annexe the words 'marriage' and 'wedding' to events that simply are not what the words mean is an abuse of lawmaking and an affront to common sense. To use 'fairness' as the motivation for a mutilation of language further devalues the already debased concept of 'fairness:' that has come to mean "whatever will pander to the next demand upon the political system from some interest group". Each such concession to unreason tends in the end to make society ungovernable and the implementation of the plethora of conflicting demand unaffordable.

As to value, the more that is written around the term the clearer it becomes that it is even more meaningless than fair. Millions of times quoted is the adage condemning an individual who 'knows the price of everything, and the value of nothing'. In this all-too-real world prices matter to almost everybody all the time: as prices increase faster than wages and pensions and benefits received by the majority of the population, so living standards decline. This inevitable aspect of the forced move that society must make, from the fake affluence of the pre-credit-crunch era to a materially affordable future general standard of living, is set to intensify as the failure of the coalition government's 'austerity' policy becomes more blatant. People will be forced to decide what they wish to continue to consume, and [at least by default] what they are consequently prepared  to drop from their shopping baskets. Some commentator may take the view that the resulting preferences reveal the relative value that different people apply to the items that have been in their pattern of consumption, but that simply means 'relative preference' and has no scientifically measurable or verifiable content.

The only possible meanings of 'Fair Value' that can responsibly be used to tell a firm or an individual what an asset is 'worth' are:
a] the current market price of the instrument;
b] a notional price [not being the price that exists momentarily in a specific trading arena], which is accepted by the current owners and by their actual and potential counter-parties as being an accurate average of the prices  that were struck on a recent succession of trading days. Thus any exceptional leap or dip in the price of the asset would not invalidate the valuation; on the assumption that exceptional price movements will be corrected in a very short period.

Either of these concepts is more accurately expressed in the words just given than in the ephemeral term value. Far from meaning something absolute, value means nothing-in-particular. For centuries, Political Economists and Economists have pursued the notion that there should be something more meaningful than price, in disclosing how humans respond to an intrinsic quality of goods and of services, which causes the commodities to be priced higher or lower relative to the material costs of their production or provision: and this quality is called value. No such thing exists. Defining the components of price, and how the prices of different commodities and services deviate more or less from equality with their measured costs of production will be the subject of my next effusion.