Since the summer of 2008 central bankers, finance ministers and government spokesmen from all over the world have been saying that they understand how the world sank into depression in the nineteen thirties, and they have offered reassurance that they would ensure that such behaviour was not to be repeated now. Yet now we see serious signs of a slide to depression in Europe, despite the strong growth in emergent economies and tentative signs of recovery in the USA.
One small but glaring example of political stupidity has recently being enacted in the daily news in the UK. Politicians and journalists demanded that the board of the Royal Bank of Scotland should renege on the contract that they made with their chief executive, which was approved by the then Labour government. The failed bank had been nationalised and Stephen Hester accepted an offer to manage it as a patriotic duty: the remuneration was well below the norm for bank CEO jobs. He has performed at least satisfactorily. On his appointment the bank's board set a salary-plus-bonus package; but now the woodentops have questioned whether the bonus is 'earned' and whether the concept of a bonus is acceptable in principle. The screeches of politicians and the media eventually had their perverse effect, and Hester agreed not to take that which he was contractually entitled to receive. This furore demonstrates astonishing ignorance of the scandal in finance: the so-called bonuses that are in fact commissions on turnover for gambling in derivatives, futures and swaps. The traders constantly expand the coverage and range of the 'products' that they devise in cyberspace, finding new markets and discovering - sometimes creating - new counterparties. Before the crunch their daily trading exceeded months of material world trade, in nominal value; and bizarrely they have continued 'developing' the market since the crisis began. After the crunch the real-world-related trade done by the retail banking subsidiaries of the finance conglomerates was restricted by new capital requirements and constrained by the caution that is endemic in a recession; and their merchant banking activities [managing new issues of companies' shares and bonds, facilitating mergers and acquisitions of businesses, and offering analysis of firms and of markets] were all constrained by the cautious mood of investors. Therefore in providing notional profit for the conglomerates casino banking became even more important than it had been during the boom. Some of the notional profit from the traders' activity could be used to bolster the conglomerate's consolidated balance sheet; but most of it had to be paid the the traders in their 'bonuses', according to their contracts. The many successful traders were paid far more than the senior executives of the firms for which they placed their bets but it was considered normal that the executives' pay should be bolstered to reflect the size of the consolidated balance sheet that they were responsible for; and on that scale Mr Hester's £1million salary plus £1million bonus is peanuts. The fuss has completely misdirected mass anger and perverted public perception: and this is a typical of political rhetoric about the economy, which apparently follows the press in regarding contracted rights as subject t withdrawal on whim.
Political posturing and point-scoring are having even worse and more durable effects on the European mainland. In recent days the Greek government has refused another 'final offer' from non-governmental holders of Greek debt; and a further last chance is anticipated this weekend. Greece has promised to arrange billions of euros-worth of debt settlement by the middle of March, which it will only be able to do if the other eurozone countries and the IMF lend it the money. The other eurozone governments, orchestrated by the Germans, Dutch and Finns, have indicated that they will not provide the loan unless the Greeks settle the 'private' debts. A suggestion from Berlin that economic discipline might be imposed on Greece by a Commissioner who would control all state spending and oversee taxation has provoked fury in Greece, and embarrassment elsewhere in the EU. Propaganda and graffiti all over Greece have already harked back to the occupation in the Second World War: the appointment of a Commissioner [presumably controlled from Frankfurt] could well provoke revolt. The mere expression of the idea makes an eventual Greek exit from the eurozone more probable. It will make life simpler for the Greeks if they can first settle with their private sector creditors as a member state of the euro, then exit the system to manage their own restructuring of the economy
Angela Merkel's speech to the Davos assembly last Monday clearly implied that a Greek default is preferable for her to any toleration of demands for an unlimited bailout from Germany. The Germans' reluctance to risk their own prosperity has been increased by the antics of hedge funds. These professional chancers have bought Greek debt at significantly discounted prices. In many cases they have also bought Credit Default Swaps [CDSs] created by financial buccaneers, some of whom work for subsidiaries of the financial conglomerates. If the Greek debt is restructured the hedgies will profit by selling the assets for more than the knock-down prices at which they bought them. If Greek debt can be consolidated the CDSs would not be activated and the premiums that the hedge funds have paid for the swaps would go into the top line income of the firms that sold them. So the huge lobbying power of the financial conglomerates can be put behind the opportunistic option that the Greek debt will first be restructured [with the financiers taking a 'haircut' that they have already allowed for in the business plans] leaving them with some value, expressed in euros, before the Greeks slink away from the eurozone. The odds are that the lobbying will be successful: while the politicians' blustering about keeping Greece in the eurozone will ultimately be nugatory.
Chancellor Merkel has also repeatedly stated that the problems of the eurozone would be speedily resolved through closer integration of the member states. But her vision of integration would focus on establishing discipline over the finances of all the member countries: it would not entail Germany opening up her reserved to support the debts of other countries' governments: and still less t support the debts to which their banks have exposed themselves. Her argument is exactly contrary to what bankers based in London, New York and the far east want to hear: so they assume that the current state of the EU and of the eurozone economies is unsustainable, consequently they discount the euro in global markets where it it traded against the yen, the pound and the US, Canadian and Australian dollars. The weaknesses of the EU and especially of the euro are increased by the political rhetoric which follows the ideological basis on which the EU institutions have developed. Besotted politicians ignore the corruption that is endemic in the unaudited and unaccountable Commission; the obvious lies on which the euro was floated; and the counter-intuitive Franco-German policy of giving even more powers over member states to the sclerotic Brussels bureaucracy.
Now, to add to the mess, the probable winner of the coming French presidential election has come up with a Manifesto - a long list of policies that he promises to introduce if he wins - including a strong counter-Merkel bias and attacks on the finance sector [with scarcely-veiled threats specifically to undermine London's leading role in financial markets. M Hollande proposes to reverse all the measures of economic discipline that have been introduced by the Sarkozy regime: which would further put him at loggerheads with Germany and would undoubtedly lead to a major [further] downgrading of France's debt by the rating agencies. His election would undermine the current consensus, and thereby threaten the future of the euro as French debt joined Italian, Spanish and Portugese debt as 'junk'.Sarkozy has responded by announcing the unilateral imposition in France of a tax [0.01%] on 'financial transactions': it is not yet clear [and may never need to be clarified, if Sarkzy looses] as to what range of transactions the tax will apply to. Whichever candidate wins the French election will be at loggerheads with Germany, or with the UK, or both. Sarkozy will support the new EU treaty today - in principle - but by the time that the deal is formally due for ratification [probably in March] the divergence of his policy from Germany may stymie the completion of the new deal.
Britain's tentative planning to cope with a eurozone collapse needs to be beefed-up, urgently: as does contingency planning for that scenario in China and the USA, and all their trading counterparties.
Friday, 27 January 2012
Tuesday, 24 January 2012
Back to Basics: Political Economy 2: Maribou Weed
The Maribou weed was introduced to Cuba for use as a hedgerow plant: to mark the boundaries of fields and gardens. The plant thrived excessively, it has spread wildly over the landscape. It is a very hardy growth with woody stems: and it has proved very hard to eradicate. The story has been unrelievedly depressing for several decades.
However, very recently, researchers from the University of Strathclyde [in Glasgow] have found that when it has been burned to produce charcoal the wood forms an amazing form of carbon. On early examination it appears to have the capacity to store electricity more effectively than Lithium batteries - at a fraction of the cost. The discovery will take a considerable time to verify, and applications can be developed only step-by-step; but it is so far an extremely promising concept. A huge range of applications, not least more practicable electrically-powered vehicles, can quickly be envisaged for new cheap super-batteries and by exploiting the carbon's high conductivity. .
Such an example shows that no possibility should be ignored in looking for uses for the most unattractive forms of waste and for the most damaging weeds [a weed having been described as any plant that is in the wrong place]. Innovative experimentalists must be allowed - and, where feasible, funded - to pursue hunches. For many centuries British innovators [often solitary part-time inventors] have produced new products and concepts in profusion: yet nowadays only a very small proportion of the new ideas are funded in a way that enables the product to be sold to the world as a British-made quon [defined in my book, PPE, accessible via the link] that purchasing managers all over the world will need to buy. Many new concepts are stillborn because the inventor lacks capital to implement them. In other cases inventors and their families and friends invest in the development of the product but do not generate enough revenue and publicity to fund viable growth so that their investment is lost, the idea is shelved and the family and friends are worse off than they were when the business was started. Not infrequently, bold risk-takers lose the homes that they have pledged against business loans. Almost equally dispiriting from the perspective of the national economy are instances where a new concept attracts sufficient publicity to interest overseas investors who buy the intellectual property vested in the concept: which takes the potential profits into another state's balance of payments. Athough the inventor who sells her patents may be left with a pot of money to spend within their home economy the major part of the benefit from the invention is lost; and demand may develop so that importing the product becomes another strain on the national blance of payments.
The political class frequently say that they have got the message: that investment in new products must be encouraged. Modest tax concessions are offered for investors in start-up businesses. But the prospect of some future tax relief might not be enough to encourage an innovator to risk his family's comfort by depositing his house deeds with a capricious bank in order to secure a short-term business loan. Attempts by politicians to force banks to lend money to small and start-up enterprises invariably fail, because the banks' responsibility to avoid excessively risky lending is paramount in the perception of the bank's owners and of its regulators. This inhibition applies especially in the current circumstances when all banks have been ordered to build up secure reserves to meet tightening regulatory standards. In addition to that general limitation on banks' lending there is the structural factor that banks no longer employ authoritative local managers who could make lending decisions on the basis of the family history, career record and reputation of customers requesting business loans. The majority of lending to small and medium-sized businesses in Britain in recent years has been to roll forward existing loans to firms that have shown themselves reliable in servicing their debt, often from a lacklustre but solid performance in distributing imported brands or in providing entertainment, catering and other leisure services.
The discoveries about Maribou weed by the Strathclyde team have relatively good chances of attracting investment, compared to inventions or discoveries by English individuals, for a clutch of special reasons. The University in question is a mature and respected research institution with special strength in applied sciences and engineering: and as such it is geared up for providing 'seed corn' funding for promising innovations. Universities are also sufficiently media-savvy to publicise discoveries, after the crucial itellectual property has been secured. Secondly the Scottish government is willing to use its powers to provide extra resources for Scottish innovation, over and above those that are available for regional development throughout the UK. The essential task facing the university is to create some product or process that can quickly become the subject of a patent application. The wood is found in Cuba, and other countries but not the UK. Therefore the way a British academic team can turn the discovery into a marketable asset is by creating intellectual property in the means of converting the raw material into desirable products that can be protected from competitors.Thus there is going to be a period of stressful competition between scientific teams trying to capture the potentially huge value of the patents that may be capable of development.
What has this tale to do with the basic facts of Political Economy?
As has been stated often in this series of blogs, one of the two Laws of Political Economy is the Iron Law of Wages: the proposition that a nation cannot distribute for consumption more than the net output of the economy, after allowing appropriately for capital investment and the legitimate costs of government. Imports must be balanced by exports. If the country owes debts accrued in past years, these must be repaid and the cost of doing that is automatically deducted from the amount of wealth that is available for distribution to the population in the years while repayment is going on. If the country cuts investment in order to maintain or increase consumption that inescapably results in the national product being lower than it should have been in subsequent years.
Higher technology products and highly fashionable brands earn the most income to the companies that supply them, compared to the material costs incurred in producing the goods. So a country that exports highly priced goods and services, and imports only cheap commodities and products, is most likely to be able to repay debts [or to avoid becoming indebted] to foreigners. The potential earning power of technologies exploiting maribou carbon is immense, and could give a significant fillip to the balance of payments of a country that was able to enforce the exclusivity of its ownership of the relevant ik or intellectual property. A constant flow of highly valued inventions was the basis on which Britain gained global economic leadership between 1780 and 1850: since 1870 there has been a pattern of relative decline that has now reached its nadir. 1870 was the marker year for the replacement of Political Economy by Economics, which marked the beginning of the obfuscation of the basic truths that formed the core of the older [and sounder] subject. The truth must now be confronted, as the central concept on which economic recovery can be based; and opportunities such as may be offered by maribou carbon must be optimised. By such means, real economic growth can be consolidated.
However, very recently, researchers from the University of Strathclyde [in Glasgow] have found that when it has been burned to produce charcoal the wood forms an amazing form of carbon. On early examination it appears to have the capacity to store electricity more effectively than Lithium batteries - at a fraction of the cost. The discovery will take a considerable time to verify, and applications can be developed only step-by-step; but it is so far an extremely promising concept. A huge range of applications, not least more practicable electrically-powered vehicles, can quickly be envisaged for new cheap super-batteries and by exploiting the carbon's high conductivity. .
Such an example shows that no possibility should be ignored in looking for uses for the most unattractive forms of waste and for the most damaging weeds [a weed having been described as any plant that is in the wrong place]. Innovative experimentalists must be allowed - and, where feasible, funded - to pursue hunches. For many centuries British innovators [often solitary part-time inventors] have produced new products and concepts in profusion: yet nowadays only a very small proportion of the new ideas are funded in a way that enables the product to be sold to the world as a British-made quon [defined in my book, PPE, accessible via the link] that purchasing managers all over the world will need to buy. Many new concepts are stillborn because the inventor lacks capital to implement them. In other cases inventors and their families and friends invest in the development of the product but do not generate enough revenue and publicity to fund viable growth so that their investment is lost, the idea is shelved and the family and friends are worse off than they were when the business was started. Not infrequently, bold risk-takers lose the homes that they have pledged against business loans. Almost equally dispiriting from the perspective of the national economy are instances where a new concept attracts sufficient publicity to interest overseas investors who buy the intellectual property vested in the concept: which takes the potential profits into another state's balance of payments. Athough the inventor who sells her patents may be left with a pot of money to spend within their home economy the major part of the benefit from the invention is lost; and demand may develop so that importing the product becomes another strain on the national blance of payments.
The political class frequently say that they have got the message: that investment in new products must be encouraged. Modest tax concessions are offered for investors in start-up businesses. But the prospect of some future tax relief might not be enough to encourage an innovator to risk his family's comfort by depositing his house deeds with a capricious bank in order to secure a short-term business loan. Attempts by politicians to force banks to lend money to small and start-up enterprises invariably fail, because the banks' responsibility to avoid excessively risky lending is paramount in the perception of the bank's owners and of its regulators. This inhibition applies especially in the current circumstances when all banks have been ordered to build up secure reserves to meet tightening regulatory standards. In addition to that general limitation on banks' lending there is the structural factor that banks no longer employ authoritative local managers who could make lending decisions on the basis of the family history, career record and reputation of customers requesting business loans. The majority of lending to small and medium-sized businesses in Britain in recent years has been to roll forward existing loans to firms that have shown themselves reliable in servicing their debt, often from a lacklustre but solid performance in distributing imported brands or in providing entertainment, catering and other leisure services.
The discoveries about Maribou weed by the Strathclyde team have relatively good chances of attracting investment, compared to inventions or discoveries by English individuals, for a clutch of special reasons. The University in question is a mature and respected research institution with special strength in applied sciences and engineering: and as such it is geared up for providing 'seed corn' funding for promising innovations. Universities are also sufficiently media-savvy to publicise discoveries, after the crucial itellectual property has been secured. Secondly the Scottish government is willing to use its powers to provide extra resources for Scottish innovation, over and above those that are available for regional development throughout the UK. The essential task facing the university is to create some product or process that can quickly become the subject of a patent application. The wood is found in Cuba, and other countries but not the UK. Therefore the way a British academic team can turn the discovery into a marketable asset is by creating intellectual property in the means of converting the raw material into desirable products that can be protected from competitors.Thus there is going to be a period of stressful competition between scientific teams trying to capture the potentially huge value of the patents that may be capable of development.
What has this tale to do with the basic facts of Political Economy?
As has been stated often in this series of blogs, one of the two Laws of Political Economy is the Iron Law of Wages: the proposition that a nation cannot distribute for consumption more than the net output of the economy, after allowing appropriately for capital investment and the legitimate costs of government. Imports must be balanced by exports. If the country owes debts accrued in past years, these must be repaid and the cost of doing that is automatically deducted from the amount of wealth that is available for distribution to the population in the years while repayment is going on. If the country cuts investment in order to maintain or increase consumption that inescapably results in the national product being lower than it should have been in subsequent years.
Higher technology products and highly fashionable brands earn the most income to the companies that supply them, compared to the material costs incurred in producing the goods. So a country that exports highly priced goods and services, and imports only cheap commodities and products, is most likely to be able to repay debts [or to avoid becoming indebted] to foreigners. The potential earning power of technologies exploiting maribou carbon is immense, and could give a significant fillip to the balance of payments of a country that was able to enforce the exclusivity of its ownership of the relevant ik or intellectual property. A constant flow of highly valued inventions was the basis on which Britain gained global economic leadership between 1780 and 1850: since 1870 there has been a pattern of relative decline that has now reached its nadir. 1870 was the marker year for the replacement of Political Economy by Economics, which marked the beginning of the obfuscation of the basic truths that formed the core of the older [and sounder] subject. The truth must now be confronted, as the central concept on which economic recovery can be based; and opportunities such as may be offered by maribou carbon must be optimised. By such means, real economic growth can be consolidated.
Saturday, 21 January 2012
Vigorous Capitalism
In another brilliant instance of intelligent capitalism in operation, Warren Buffet has taken advantage of herd irrationality by so-called professional investors in the UK. He has bought another 2% of the shares in Tesco [increasing his holding to 5%] at a time when the shares had fallen by around 15% in price because of a single set of bad trading results.Buffet is famous as a long-term investor in companies whose future prospects meet criteria that have been formed in his extremely well-developed mathematical brain. Most of his punts have been proven successes; and sometimes the success has been secured by him reinforcing his investment by buying shares in a company, or lending money to it, when it has hit a temporary bad patch on its growth path.
Who are the idiots who sold shares in sufficient numbers to depress the price by a huge percentage, on so thin a pretext? Not small-scale personal investors: most such people take a similar long-term view to Buffet's. They are mostly professional investors, buying and selling shares for institutions - pension funds, insurance reserves, investment trusts, charities etc - who possess degrees and professional qualifications [many of them in 'actuarial science'] and supposedly have experience that enables them to make intelligent decisions. Why, then, did a large number of them offload shares in Britain's most-successful-ever retailer in huge volume on a single report, and despite the fact that the company made clear that it understood and was already addressing the causes for the relatively poor performance? Some did so like automata because the funds that they managed were committed to 'track' the stock-market index. Some saw the price going down and joined the rush. A few may have been quick-moving opportunists who sold as soon as the price began to fall so that they could use the money to buy more shares at a lower unit price in a few days [or even a few hours] time. The combined effect of their selling was to give Buffet a great opportunity.
Friday's news also included the item that the Chinese sovereign wealth fund has bought 8.68% of the shares in Thames Water. This means that users of water and sewerage supplied by Thames will be paying tribute to investors in China, as well as in Abu Dhabi and Australia; who will also be able to exploit loopholes in UK water regulation to increase the dividends that they receive by increasing the debt that the water company and its customers will have to carry in future and cashing-in on such deals.
In the first case supposedly clever professional investors were the mugs, in the second a massive disadvantage to British consumers was created by Parliament and its advisers when they privatised the water industry. In both cases intelligent foreigners took advantage - quite legally - of dysfunctional systems.
Also on the same day the press reported a speech by a senior Bank of England official who suggested that international accounting standards [that were created by a forceful Scottish 'expert'] had not 'stood the test of time' and had almost certainly added to the misunderstanding of the credit bubble and the exaggerated assessment of the calamity that followed the crunch. This is because the standard assumed that there was a 'fair value' of any asset that was magically equal to the market price of the small sample of similar assets that were actually sold on any day. The sublime idiocy of such a notion was unnoticed all through the process by which it was adopted by international regulatory structures. Hence it was strangely appropriate that on the same day both the British Prime Minister and the Leader of the Labour opposition should make speeches on how to transform a much-criticised form of capitalism into a 'responsible' system that would guarantee prosperity and 'fairness' for all. The both suggested [in different terms, but with similar aspirations] that markets were the best way to generate wealth and to distribute it fairly among the population, provided that markets were regulated properly. There is a germ of truth in this assumption.
No market has ever succeeded in a vacuum: markets only work if they are interconnected with the rest of the economy: they need buyers to enter with purchasing power that was gained outside that market, and in it the sellers offer produce which incorporates components [including inputs by autonomous human beings] that are attracted from outside the market. No market has ever been free of crooks and liars and predators: people who decide that they can gain personal advantage by bending or breaking the rules that the other buyers and sellers assume everyone in the market is following. No market has ever been composed - and no market will ever be composed - of participants with exactly equal intelligence, the same ethical principles, identical capital resources, and identical access to all the same data as all the others [about their specific market and about the prevailing economing conditions and about prospective changes] which they all interpret in exactly the same way. So the assumptions about 'perfect competition' that set the criteria for formal market theory in Economics are utter balderdash; and any attempt to regulate markets as if they can be compelled to conform to the theory are doomed to fail.
So when the politicians step down from their podiums and ask their civil servants how on earth they can give effect to the high-blown [loudly applauded] rhetoric about 'responsbile capitalism' they get an answer in two parts: both of which are wrong.
The first part of the answer is to look for some well-publicised cases of 'unfairness', some individuals who are paid vastly more than the norm for employees in the country, and suggest that their income should be capped - or even reduced - at source, and then subjected to confiscatory taxation. In the last couple of days the media and some politicans have picked on Stephen Hester, the Chief Executive of the Royal Bank of Scotland; and they have suggested that he should not receive the income to whch he is entitled under his contract. He was brought into the bank, from a good job elsewhere, to pull it away from the catastrophe into which its former managers had dragged it. Because it was a state-supported institution in crisis, Hester patriotically accepted an unusually modest salary for a bank Chief Executive, to which was attached a bonus scheme if he achieved certain steps to assist the recovery of the business. Now the 'gutter press' and some policy-making fools are suggesting that the state should order the Royal Bank of Scotland to welsh on the contract, to appease public anger at the fact that some people in other banks whose functions are not understood by the policy advisers [and even less by the press] are getting much more than Hester; mostly as bonuses for proprietary trading.
The second string to the advice offered to politicians is much more long term than the scalp-hunting of individuals. It is to 'enhance' the system of regulation within which markets should be constrained. The phrase 'risk-based regulation' has recently been in high fashion but very few people in business have understood the concept. Business men and women well understand risk: they take risks on their own behalf and that of their firms every day: those who have the sharpest appreciation of both opportunity and risk are usually the most successful in planning investments and avoiding losses. It is now considered necessary to determine what categories of risk the regulators should require companies to avoid, or to mitigate if they cannot be eliminated if they must necessarily be accepted to enable the operation to continue. Some policy advisers have reached deep into formal Economics and suggested that regulators should compute the future long-run average cost of producing the output and require the price regime to converge with the assumed future cost. Provided the generality of firms in the market are moving towards convergence of prices around equality with the average cost at a selected future date, the market should be allowed to operate freely. The theory predicts that firms whose prices rise above the trend will fail to secure customers because rational consumers will buy cheaper alternatives. Similarly the theory predicts that firms that charge below cost price will bankrupt themselves. The firms that charge prices broadly in line with average cost of production [including a fairly-calculated 'cost of capital' that is the same for every firm] are good: the market will eliminate the others.
Such a model ignores branding, and therefore ignores the predominant determinant of 'value' in the perception of the vast majority of global consumers. Any attempt by regulators to impose such a naive theory would be ruinous to the real economy. But the concept of regulating to aim for average long-term cost pricing is presented on the political agenda because it is the one idea that people trained in Economics can think of in the present circumstances: old-hat Victorian marginalism is presented as the new panacea. My simple text PPE explains this point in depth. Such regulation as is now being advocated would transform the present economic crisis into an unmitigated calamity.
Who are the idiots who sold shares in sufficient numbers to depress the price by a huge percentage, on so thin a pretext? Not small-scale personal investors: most such people take a similar long-term view to Buffet's. They are mostly professional investors, buying and selling shares for institutions - pension funds, insurance reserves, investment trusts, charities etc - who possess degrees and professional qualifications [many of them in 'actuarial science'] and supposedly have experience that enables them to make intelligent decisions. Why, then, did a large number of them offload shares in Britain's most-successful-ever retailer in huge volume on a single report, and despite the fact that the company made clear that it understood and was already addressing the causes for the relatively poor performance? Some did so like automata because the funds that they managed were committed to 'track' the stock-market index. Some saw the price going down and joined the rush. A few may have been quick-moving opportunists who sold as soon as the price began to fall so that they could use the money to buy more shares at a lower unit price in a few days [or even a few hours] time. The combined effect of their selling was to give Buffet a great opportunity.
Friday's news also included the item that the Chinese sovereign wealth fund has bought 8.68% of the shares in Thames Water. This means that users of water and sewerage supplied by Thames will be paying tribute to investors in China, as well as in Abu Dhabi and Australia; who will also be able to exploit loopholes in UK water regulation to increase the dividends that they receive by increasing the debt that the water company and its customers will have to carry in future and cashing-in on such deals.
In the first case supposedly clever professional investors were the mugs, in the second a massive disadvantage to British consumers was created by Parliament and its advisers when they privatised the water industry. In both cases intelligent foreigners took advantage - quite legally - of dysfunctional systems.
Also on the same day the press reported a speech by a senior Bank of England official who suggested that international accounting standards [that were created by a forceful Scottish 'expert'] had not 'stood the test of time' and had almost certainly added to the misunderstanding of the credit bubble and the exaggerated assessment of the calamity that followed the crunch. This is because the standard assumed that there was a 'fair value' of any asset that was magically equal to the market price of the small sample of similar assets that were actually sold on any day. The sublime idiocy of such a notion was unnoticed all through the process by which it was adopted by international regulatory structures. Hence it was strangely appropriate that on the same day both the British Prime Minister and the Leader of the Labour opposition should make speeches on how to transform a much-criticised form of capitalism into a 'responsible' system that would guarantee prosperity and 'fairness' for all. The both suggested [in different terms, but with similar aspirations] that markets were the best way to generate wealth and to distribute it fairly among the population, provided that markets were regulated properly. There is a germ of truth in this assumption.
No market has ever succeeded in a vacuum: markets only work if they are interconnected with the rest of the economy: they need buyers to enter with purchasing power that was gained outside that market, and in it the sellers offer produce which incorporates components [including inputs by autonomous human beings] that are attracted from outside the market. No market has ever been free of crooks and liars and predators: people who decide that they can gain personal advantage by bending or breaking the rules that the other buyers and sellers assume everyone in the market is following. No market has ever been composed - and no market will ever be composed - of participants with exactly equal intelligence, the same ethical principles, identical capital resources, and identical access to all the same data as all the others [about their specific market and about the prevailing economing conditions and about prospective changes] which they all interpret in exactly the same way. So the assumptions about 'perfect competition' that set the criteria for formal market theory in Economics are utter balderdash; and any attempt to regulate markets as if they can be compelled to conform to the theory are doomed to fail.
So when the politicians step down from their podiums and ask their civil servants how on earth they can give effect to the high-blown [loudly applauded] rhetoric about 'responsbile capitalism' they get an answer in two parts: both of which are wrong.
The first part of the answer is to look for some well-publicised cases of 'unfairness', some individuals who are paid vastly more than the norm for employees in the country, and suggest that their income should be capped - or even reduced - at source, and then subjected to confiscatory taxation. In the last couple of days the media and some politicans have picked on Stephen Hester, the Chief Executive of the Royal Bank of Scotland; and they have suggested that he should not receive the income to whch he is entitled under his contract. He was brought into the bank, from a good job elsewhere, to pull it away from the catastrophe into which its former managers had dragged it. Because it was a state-supported institution in crisis, Hester patriotically accepted an unusually modest salary for a bank Chief Executive, to which was attached a bonus scheme if he achieved certain steps to assist the recovery of the business. Now the 'gutter press' and some policy-making fools are suggesting that the state should order the Royal Bank of Scotland to welsh on the contract, to appease public anger at the fact that some people in other banks whose functions are not understood by the policy advisers [and even less by the press] are getting much more than Hester; mostly as bonuses for proprietary trading.
The second string to the advice offered to politicians is much more long term than the scalp-hunting of individuals. It is to 'enhance' the system of regulation within which markets should be constrained. The phrase 'risk-based regulation' has recently been in high fashion but very few people in business have understood the concept. Business men and women well understand risk: they take risks on their own behalf and that of their firms every day: those who have the sharpest appreciation of both opportunity and risk are usually the most successful in planning investments and avoiding losses. It is now considered necessary to determine what categories of risk the regulators should require companies to avoid, or to mitigate if they cannot be eliminated if they must necessarily be accepted to enable the operation to continue. Some policy advisers have reached deep into formal Economics and suggested that regulators should compute the future long-run average cost of producing the output and require the price regime to converge with the assumed future cost. Provided the generality of firms in the market are moving towards convergence of prices around equality with the average cost at a selected future date, the market should be allowed to operate freely. The theory predicts that firms whose prices rise above the trend will fail to secure customers because rational consumers will buy cheaper alternatives. Similarly the theory predicts that firms that charge below cost price will bankrupt themselves. The firms that charge prices broadly in line with average cost of production [including a fairly-calculated 'cost of capital' that is the same for every firm] are good: the market will eliminate the others.
Such a model ignores branding, and therefore ignores the predominant determinant of 'value' in the perception of the vast majority of global consumers. Any attempt by regulators to impose such a naive theory would be ruinous to the real economy. But the concept of regulating to aim for average long-term cost pricing is presented on the political agenda because it is the one idea that people trained in Economics can think of in the present circumstances: old-hat Victorian marginalism is presented as the new panacea. My simple text PPE explains this point in depth. Such regulation as is now being advocated would transform the present economic crisis into an unmitigated calamity.
Tuesday, 17 January 2012
Back to Basics: Political Economy [1]
As an independent backstreet blogger I am fascinated to observe the clouds of intellectual debris that flit through the internet in thousands of blogs written by people who desperately want to be regarded as innovative mainstream Economists. Most of them are academics who have contracted duties in a university or a research unit; and some - especially those who produce branded research for a bank or a commercial think tank - have a direct business interest in publishing their opinions. The academics are desperately keen to be quoted by other bloggers and their output is already systematised so that those with academic ambitions cite the number of references to their output that are made by other participants in the racket, just as they do in respect of the 'peer reviewed' academic journals. Soon indexes of citations will list references to blogs alongside references to more formal articles; and citations in blogs written by senior professors will have a higher allocation of points.
The most tragic aspect of this ballooning exocrescence of academic blogging is that almost all the participants display the usual sycophancy to the seniors who can help their careers, who might deign to mention the mini-bloggers in their own blogs.Therefore they are anxious not to step outside the orthodox boundaries of the subject as it is set out by the dominant professors. The majority of the bloggers also display a painfully serious intent to classify themselves in sub-schools within the ever-more-diffuse 'discipline' of Economics, built on phrases like dynamic stochastic general equilibrium that attracted well-deserved ridicule when it was uttered in the House of Commons: but are commended in the hypoxic atmosphere of an academics' conference.
The more intelligent mainstream Economists are forced to realise that Economics fuelled the hubris that caused the credit crunch, but they cannot yet face the fact that the 'discipline' itself has failed. Such an admission would require them to admit that they have spent their careers on presenting doctrines that have condemned their fellow citizens, and themselves, to a lower standard of living in future than should have been available to them.
Economics fails most obviously at the interface between macroeconomics and microeconomics. In principle, socialist planning is a system for directing firms' and individuals' activities day by day, with the intention that each participant delivers outputs that serve as inputs to a planned macroeconomic aggregate. Keynes was in his prime precisely at the time when Stalin's Soviet Union was claiming success for its planning mechanisms: while the world became aware of the brutality with which The Plan was enforced and the disasters [including deaths through famine] that were caused by its inefficiencies. Keynes's wife was a Russian refugee, whose table-talk frequently included information and anecdote about Soviet repression. In The Economic Consequences of the Peace [1919] he had forecasted a strong reaction in Germany to the way the country was treated by the victorious allies at the end of the First World War, and fourteen years on he took no pleasure in seeing the fulfilment of his prediction by Hitler's National Socialists. The Nazi's economic programme was built onto a Four Year Plan controlled by a Commissioner, Goring, who took draconian powers over businesses and the trade unions. The principal objective of that Plan was to prepare the economy to support an aggressive war in Europe.
Keynes was a Liberal who deplored the emergence of tyranny in Europe and during the nineteen-thirties he was concerned that Britain must avoid an economic collapse that would allow communist or fascist ideas to capture any significant proportion of the electorate. Keynes's mentor, Alfred Marshall [1842-1924], was the great founder of authoritarian academic Microeconomics: within a decade of his death it was painfully clear that his Economics provided no prescriptions for solving the practical problems that were causing mass unemployment in democratic societies. Keynes recognised that the macro-economy, the environment in which firms and the buyers of their produce operate, must be managed actively by the state. He suggested techniques for creating employment by government intervention through taxing and spending, and by adjusting the supply of money and by manipulating the factors that determine the rate of interest.
Keynes was crucial to the management of the command economy that supplied the country and its armed forces during the Second World War, and he worked hugely hard at international negotiations in planning for the postwar settlement. The extreme demands that were made on his mind and body were at least contributory to his death from heart failure very soon after the war. Had he lived for another decade he may have addressed the mechanisms by which macroeconomic devices could be made to articulate efficiently with microeconomic systems; but posterity was denied that guidance.
The lack of effective articulation between macroeconomic interventions and the achievement of intended outcomes by firms and people has been ducked by the entire 'Economics profession' through the six decade since Keynes died. Whenever the data disclose a trend that the government decides must be addressed by a shift in macroeconomic policy, it increases or reduces the money supply, raises or lowers rates of interest, increases or reduces taxation, increases or cancels government orders to firms, and/or to increase or reduce the number and rates of pay for state employees. Recently in Europe restrictive policies have been imposed on the economies of Greece, Ireland and other heavily indebted states. Within the eurozone, in cases where the elected governments have hesitated to act in the required manner, a change of government has been imposed; composed of technocrats: - which means Economists.
Because it is outside the eurozone, Britain still has monetary independence and control of most taxation. The current coalition government came together [and will probably stay together] because the party leaders recognise that the economy is in a very perilous situation. The government is taking radical steps to reduce the rate of increase in state spending to a level where - in an ideal world - the economy in total would be growing faster than state spending, so that government spending and borrowing would become smaller percentages of the gross national product. The appearance of 'stable economic growth' that was delivered by the Blair-Brown regime was derived from increased direct spending by the government and by increased consumption by the increasing numbers of employees who were taken on in the civil service and in state agencies: supported by strong but ultimately unsustainable growth in demand arising from the bubble in the financial services sector.
De-industrialisation had been occurring by default in Britain since the collapse of traditional textiles in the nineteen-fifties: But after Mrs Thatcher came to power in 1979 it became deliberate policy. Coal mining, railways, shipbuilding, steel making and heavy engineering were regarded as the natural breeding grounds for militant trade unionism, so it was fashionable to argue that they should be cleared away like mosquito-breeding swamps. When the Second World War ended significant sectors of UK industry were old-fashioned and inefficient compared to newer factories in the USA and to the newly reconstructed plant in Germany. Rather than direct the bulk of the nation's disposable income into re-equipping the world's leading shipyards, aircraft factories, motor plant, electronic and chemical industries, successive Labour and Conservative governments raised taxes from industry to support the welfare state. While Germany developed the regional banks that supported the development of the Mittelstand of small and medium firms that supplied specialist products and services for industry and commerce, British banks took an increasingly dim view of industry. Within a democratic structure, Germany provided means by which firms could be funded to deliver desired growth. Britain had no such system; but nevertheless enough of industry survived, and new industries grew up - without government support - such that even now manufacturing is still a greater contributor to net national income than financial services ever could be.
Under the 2010 coalition government state spending is being held in check and employment in the public sector is being cut. Ministers talk often and grandiloquently about how the country will achieve macroeconomic salvation through the growth of real-world enterprises: but they become increasingly vague when pressed for details, and show that they are ineffectual in directing funds from state-controlled banks to promising businesses. This is the nub of the present problem: how are individual firms to be enabled to deliver the contribution that they can - and must - make to recovery? What policies can build a proper articulation between the macro-economy and the firm? This vital topic must be the subject for further bogs in the coming days.
The most tragic aspect of this ballooning exocrescence of academic blogging is that almost all the participants display the usual sycophancy to the seniors who can help their careers, who might deign to mention the mini-bloggers in their own blogs.Therefore they are anxious not to step outside the orthodox boundaries of the subject as it is set out by the dominant professors. The majority of the bloggers also display a painfully serious intent to classify themselves in sub-schools within the ever-more-diffuse 'discipline' of Economics, built on phrases like dynamic stochastic general equilibrium that attracted well-deserved ridicule when it was uttered in the House of Commons: but are commended in the hypoxic atmosphere of an academics' conference.
The more intelligent mainstream Economists are forced to realise that Economics fuelled the hubris that caused the credit crunch, but they cannot yet face the fact that the 'discipline' itself has failed. Such an admission would require them to admit that they have spent their careers on presenting doctrines that have condemned their fellow citizens, and themselves, to a lower standard of living in future than should have been available to them.
Economics fails most obviously at the interface between macroeconomics and microeconomics. In principle, socialist planning is a system for directing firms' and individuals' activities day by day, with the intention that each participant delivers outputs that serve as inputs to a planned macroeconomic aggregate. Keynes was in his prime precisely at the time when Stalin's Soviet Union was claiming success for its planning mechanisms: while the world became aware of the brutality with which The Plan was enforced and the disasters [including deaths through famine] that were caused by its inefficiencies. Keynes's wife was a Russian refugee, whose table-talk frequently included information and anecdote about Soviet repression. In The Economic Consequences of the Peace [1919] he had forecasted a strong reaction in Germany to the way the country was treated by the victorious allies at the end of the First World War, and fourteen years on he took no pleasure in seeing the fulfilment of his prediction by Hitler's National Socialists. The Nazi's economic programme was built onto a Four Year Plan controlled by a Commissioner, Goring, who took draconian powers over businesses and the trade unions. The principal objective of that Plan was to prepare the economy to support an aggressive war in Europe.
Keynes was a Liberal who deplored the emergence of tyranny in Europe and during the nineteen-thirties he was concerned that Britain must avoid an economic collapse that would allow communist or fascist ideas to capture any significant proportion of the electorate. Keynes's mentor, Alfred Marshall [1842-1924], was the great founder of authoritarian academic Microeconomics: within a decade of his death it was painfully clear that his Economics provided no prescriptions for solving the practical problems that were causing mass unemployment in democratic societies. Keynes recognised that the macro-economy, the environment in which firms and the buyers of their produce operate, must be managed actively by the state. He suggested techniques for creating employment by government intervention through taxing and spending, and by adjusting the supply of money and by manipulating the factors that determine the rate of interest.
Keynes was crucial to the management of the command economy that supplied the country and its armed forces during the Second World War, and he worked hugely hard at international negotiations in planning for the postwar settlement. The extreme demands that were made on his mind and body were at least contributory to his death from heart failure very soon after the war. Had he lived for another decade he may have addressed the mechanisms by which macroeconomic devices could be made to articulate efficiently with microeconomic systems; but posterity was denied that guidance.
The lack of effective articulation between macroeconomic interventions and the achievement of intended outcomes by firms and people has been ducked by the entire 'Economics profession' through the six decade since Keynes died. Whenever the data disclose a trend that the government decides must be addressed by a shift in macroeconomic policy, it increases or reduces the money supply, raises or lowers rates of interest, increases or reduces taxation, increases or cancels government orders to firms, and/or to increase or reduce the number and rates of pay for state employees. Recently in Europe restrictive policies have been imposed on the economies of Greece, Ireland and other heavily indebted states. Within the eurozone, in cases where the elected governments have hesitated to act in the required manner, a change of government has been imposed; composed of technocrats: - which means Economists.
Because it is outside the eurozone, Britain still has monetary independence and control of most taxation. The current coalition government came together [and will probably stay together] because the party leaders recognise that the economy is in a very perilous situation. The government is taking radical steps to reduce the rate of increase in state spending to a level where - in an ideal world - the economy in total would be growing faster than state spending, so that government spending and borrowing would become smaller percentages of the gross national product. The appearance of 'stable economic growth' that was delivered by the Blair-Brown regime was derived from increased direct spending by the government and by increased consumption by the increasing numbers of employees who were taken on in the civil service and in state agencies: supported by strong but ultimately unsustainable growth in demand arising from the bubble in the financial services sector.
De-industrialisation had been occurring by default in Britain since the collapse of traditional textiles in the nineteen-fifties: But after Mrs Thatcher came to power in 1979 it became deliberate policy. Coal mining, railways, shipbuilding, steel making and heavy engineering were regarded as the natural breeding grounds for militant trade unionism, so it was fashionable to argue that they should be cleared away like mosquito-breeding swamps. When the Second World War ended significant sectors of UK industry were old-fashioned and inefficient compared to newer factories in the USA and to the newly reconstructed plant in Germany. Rather than direct the bulk of the nation's disposable income into re-equipping the world's leading shipyards, aircraft factories, motor plant, electronic and chemical industries, successive Labour and Conservative governments raised taxes from industry to support the welfare state. While Germany developed the regional banks that supported the development of the Mittelstand of small and medium firms that supplied specialist products and services for industry and commerce, British banks took an increasingly dim view of industry. Within a democratic structure, Germany provided means by which firms could be funded to deliver desired growth. Britain had no such system; but nevertheless enough of industry survived, and new industries grew up - without government support - such that even now manufacturing is still a greater contributor to net national income than financial services ever could be.
Under the 2010 coalition government state spending is being held in check and employment in the public sector is being cut. Ministers talk often and grandiloquently about how the country will achieve macroeconomic salvation through the growth of real-world enterprises: but they become increasingly vague when pressed for details, and show that they are ineffectual in directing funds from state-controlled banks to promising businesses. This is the nub of the present problem: how are individual firms to be enabled to deliver the contribution that they can - and must - make to recovery? What policies can build a proper articulation between the macro-economy and the firm? This vital topic must be the subject for further bogs in the coming days.
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.
Tuesday, 10 January 2012
The Truth About Immigration
Today's UK media carry stories that disclose - yet again - the infinite capacity of Economists for earning the contempt of the public. A think-tank, the National Institute of Economic and Social Research [habitually described by economic journalists as 'the respected NIESR' ] published a paper that asserted, unequivocally, that there is "no association" between higher immigration and the rise of joblessness in the UK.
Within a few hours the government's Migration Advisory Committee published a paper which declared that one Briton lost their job for every four non-EU migrants arriving over the past five years, which put 160,000 workers onto benefits. It also found that wage-rates for less-skilled jobs were pushed down by immigrant labour: while wages of higher-paid employees seemed to rise with immigrant numbers. This paper also indicated that further pressure would be put on living standards, particularly for the lowest-paid, because the inflow of immigrants would compete for housing [especially in London and the south-east] and cause upward pressure on rents and house prices.
Yesterday MigrationWatch - a pressure group opposed to 'excessive' immigration published its own findings, which were that: "Youth unemployment in the UK increased by almost 450,000 from [the first quarter of] 2004 to [the third quarter of] 2011. Over the same period, numbers of workers from the A8 countries [the new entrants to the EU, who became free to enter the UK in 2004] grew by 600,000". MigrationWatch made the caveat that "Correlation is not, of course, proof of causation," but went on to make the crucial point that "given the positive employability characteristics and relative youth of migrants from these countries, it is implausible and counter-intuitive" to draw a conclusion that "A8 migration has had virtually no impact on UK youth unemployment."
Readers will have noticed that the data sets taken by the three reports are different. MigrationWatch focuses primarily on youth unemployment and the relative attractiveness to employers of the work ethic and numeracy displayed by continentally-educated people, compared to the low literacy, negligible numeracy and unpreparedness for employment displayed by a very large proportion of young Britons [broadly regardless of ethnicity]. The government's committee compares total unemployment with the number of immigrants from outside the EU. The NIESR took all migrants who were issued with national insurance numbers [which are a necessary condition for gaining legal employment] and compared their numbers with the pattern of unemployment among the pre-existing population. The NIESR noted also that the growth of juvenile unemployment in the UK had begun before 2004 [when A8 citizens gained full rights of entry] and reached greater heights after 2008 although east European immigration was reduced and some Poles and Slovaks went home.
Recruitment to jobs in general diminished during and after 2008 as the recession intensified. Reliable, hard-working east Europeans generally kept their jobs in greater numbers than did Brits, and the number of east European arrivals tailed off when the word reached potential migrants that opportunities in the UK had diminished.
Political correctness forbids 'decent' researchers from ascertaining which specific categories of immigrants get well-paid jobs, badly paid jobs or no jobs; beyond the differentiation between EU and non-EU that is sanctioned by the Brussels bureaucracy and the European courts. Since increasing numbers of immigrants from outside the EU obtain citizenship in other EU countries, then come to the UK, there is no implicit ethnic connotation to the EU non-EU differentiation even though the overwhelming majority of A8 migrants were white Europeans. Consequently bar-room assertions about some ethnic groups 'coming here for benefits and free houses, with no intention of working' remain untested, but the legends fester with repetition: and the political class avoid mentioning the matter even though it is a widely expressed concern 'on the doorstep' to political canvassers.
The net effect of the three reports is to serve no useful purpose: they present no clear guide for policy-makers and their different selection of data contributes to a confused cacophony that has long been characterised by the lack of any agreed basis for comparison. On this issue, quintessentially, the disparity between the dialogue that emanates from the political class and the dialogue that rumbles on among the electorate has become extreme and will some time soon create a major political problem that will tax the present generation of politicians to the all-to-apparent limits of their competency.
Within a few hours the government's Migration Advisory Committee published a paper which declared that one Briton lost their job for every four non-EU migrants arriving over the past five years, which put 160,000 workers onto benefits. It also found that wage-rates for less-skilled jobs were pushed down by immigrant labour: while wages of higher-paid employees seemed to rise with immigrant numbers. This paper also indicated that further pressure would be put on living standards, particularly for the lowest-paid, because the inflow of immigrants would compete for housing [especially in London and the south-east] and cause upward pressure on rents and house prices.
Yesterday MigrationWatch - a pressure group opposed to 'excessive' immigration published its own findings, which were that: "Youth unemployment in the UK increased by almost 450,000 from [the first quarter of] 2004 to [the third quarter of] 2011. Over the same period, numbers of workers from the A8 countries [the new entrants to the EU, who became free to enter the UK in 2004] grew by 600,000". MigrationWatch made the caveat that "Correlation is not, of course, proof of causation," but went on to make the crucial point that "given the positive employability characteristics and relative youth of migrants from these countries, it is implausible and counter-intuitive" to draw a conclusion that "A8 migration has had virtually no impact on UK youth unemployment."
Readers will have noticed that the data sets taken by the three reports are different. MigrationWatch focuses primarily on youth unemployment and the relative attractiveness to employers of the work ethic and numeracy displayed by continentally-educated people, compared to the low literacy, negligible numeracy and unpreparedness for employment displayed by a very large proportion of young Britons [broadly regardless of ethnicity]. The government's committee compares total unemployment with the number of immigrants from outside the EU. The NIESR took all migrants who were issued with national insurance numbers [which are a necessary condition for gaining legal employment] and compared their numbers with the pattern of unemployment among the pre-existing population. The NIESR noted also that the growth of juvenile unemployment in the UK had begun before 2004 [when A8 citizens gained full rights of entry] and reached greater heights after 2008 although east European immigration was reduced and some Poles and Slovaks went home.
Recruitment to jobs in general diminished during and after 2008 as the recession intensified. Reliable, hard-working east Europeans generally kept their jobs in greater numbers than did Brits, and the number of east European arrivals tailed off when the word reached potential migrants that opportunities in the UK had diminished.
Political correctness forbids 'decent' researchers from ascertaining which specific categories of immigrants get well-paid jobs, badly paid jobs or no jobs; beyond the differentiation between EU and non-EU that is sanctioned by the Brussels bureaucracy and the European courts. Since increasing numbers of immigrants from outside the EU obtain citizenship in other EU countries, then come to the UK, there is no implicit ethnic connotation to the EU non-EU differentiation even though the overwhelming majority of A8 migrants were white Europeans. Consequently bar-room assertions about some ethnic groups 'coming here for benefits and free houses, with no intention of working' remain untested, but the legends fester with repetition: and the political class avoid mentioning the matter even though it is a widely expressed concern 'on the doorstep' to political canvassers.
The net effect of the three reports is to serve no useful purpose: they present no clear guide for policy-makers and their different selection of data contributes to a confused cacophony that has long been characterised by the lack of any agreed basis for comparison. On this issue, quintessentially, the disparity between the dialogue that emanates from the political class and the dialogue that rumbles on among the electorate has become extreme and will some time soon create a major political problem that will tax the present generation of politicians to the all-to-apparent limits of their competency.
Monday, 9 January 2012
The Paradox of Sovereignty
Today's news media carry strangely contrasting stories. The UK Cabinet is to discuss terms on which the people of Scotland should vote in a referendum on independence for their country, while President Sarkozy will be in Berlin plotting with Chancellor Merkel how to reduce the sovereign powers of states in the eurozone so that they are less able to decide on their own taxation and spending. Some stories refer to the situation in Canada where two referenda have been held on the independence of Quebec which have been challenged, after the event, as to what the question actually meant.
There was little doubt about the question in Sudan last year, when the south of the country voted very strongly in favour of independence from the north; which was then granted: now the world's newest country is torn by tribal conflict which its security systems are ill prepared to deal with, even though the problem was highly predictable. In other parts of Africa, from Nigeria to Kenya, religious affiliation has transcended tribalism as a cause of conflict which includes a tendency towards political separation. Campaigners for autonomy in Tibet and other Chinese regions occasionally get their message into the global news nexus; while the continued separation of the two Koreas is widely deplored. The ambiguous suzerainty of China over Taiwan is a constant problem, while the separation of Singapore from Malaysia was the start point for a massive success story. The saga of separation of the Faeroe Islands from Denmark is worthy of Nordic myth, while the needs of 'homeland security' have given a renewed emphasis to the ambiguities of the residual sovereign territories of Native Peoples in the USA. The collapse of communism in Europe led to reunification of Germany which was more than counterbalanced by the separation of more than a dozen ethnic groups into sovereign states.
Globally there is still a momentum, originating from the nineteen fifties, for states to coalesce in continental common markets even while more and more ethnic groups and geographic regions seek independence as internationally-recognised sovereign states; which could then take their own decisions on how far they commit to their regional common market and any other regional treaties [such as NATO]. Especially in the eurozone, key powers of sovereign states are being surrendered to the community while newly-independent states stand patiently in the queue to be admitted to the common currency. The dichotomous tendency of new states surrendering portions of their sovereignty will continue intermittently through this century.In several ways, sovereignty for new states is much more restricted than it was in the post-second-world-war period when India, Indonesia, and scores of other states emerged in full sovereignty.
It is not likely that the trading blocs will make warlike preparations against each other, as such: the EU is not likely to mutate into an armed alliance against North America or ASEAN [the Association of South-East Asian Nations]. It is long established states, notably the USA and China, that seem currently to be shaping-up in a way that is reminiscent of an early twentieth-century arms race. It is against the interests of neighbouring states who form a free trade association to extend their partnership into a regional miltary alliance with their partners that is hostile to some of their trading partners in a global economy. Economic unions and free trade areas are essentially pacific structures: they reduce the risk of war between the members of the union; and the different global trading interests of the member states in any such community are antithetical to collective chauvinism directed against states on other continents.
The creation of new sovereign states and the consolidation of economic communities of states alike create a massive number of well-paid jobs as ambassadors and representatives. It is simply daft that the United Kingdom maintains twenty-six embassies in European Union countries. It has become clear that no UK government could pull out of the EU, even though there might be more political separation within a 'two speed' Union; so the need for representation in the EU countries is going to be at the consular rather than the ambassadorial level, in perpetuity. So Britain [and all the other EU states] should downgrade their internal embassies immediately, save a massive amount of money [and even more flummery] ,and allocate the reduced number of diplomats to the posts where they could be more useful.
There was little doubt about the question in Sudan last year, when the south of the country voted very strongly in favour of independence from the north; which was then granted: now the world's newest country is torn by tribal conflict which its security systems are ill prepared to deal with, even though the problem was highly predictable. In other parts of Africa, from Nigeria to Kenya, religious affiliation has transcended tribalism as a cause of conflict which includes a tendency towards political separation. Campaigners for autonomy in Tibet and other Chinese regions occasionally get their message into the global news nexus; while the continued separation of the two Koreas is widely deplored. The ambiguous suzerainty of China over Taiwan is a constant problem, while the separation of Singapore from Malaysia was the start point for a massive success story. The saga of separation of the Faeroe Islands from Denmark is worthy of Nordic myth, while the needs of 'homeland security' have given a renewed emphasis to the ambiguities of the residual sovereign territories of Native Peoples in the USA. The collapse of communism in Europe led to reunification of Germany which was more than counterbalanced by the separation of more than a dozen ethnic groups into sovereign states.
Globally there is still a momentum, originating from the nineteen fifties, for states to coalesce in continental common markets even while more and more ethnic groups and geographic regions seek independence as internationally-recognised sovereign states; which could then take their own decisions on how far they commit to their regional common market and any other regional treaties [such as NATO]. Especially in the eurozone, key powers of sovereign states are being surrendered to the community while newly-independent states stand patiently in the queue to be admitted to the common currency. The dichotomous tendency of new states surrendering portions of their sovereignty will continue intermittently through this century.In several ways, sovereignty for new states is much more restricted than it was in the post-second-world-war period when India, Indonesia, and scores of other states emerged in full sovereignty.
It is not likely that the trading blocs will make warlike preparations against each other, as such: the EU is not likely to mutate into an armed alliance against North America or ASEAN [the Association of South-East Asian Nations]. It is long established states, notably the USA and China, that seem currently to be shaping-up in a way that is reminiscent of an early twentieth-century arms race. It is against the interests of neighbouring states who form a free trade association to extend their partnership into a regional miltary alliance with their partners that is hostile to some of their trading partners in a global economy. Economic unions and free trade areas are essentially pacific structures: they reduce the risk of war between the members of the union; and the different global trading interests of the member states in any such community are antithetical to collective chauvinism directed against states on other continents.
The creation of new sovereign states and the consolidation of economic communities of states alike create a massive number of well-paid jobs as ambassadors and representatives. It is simply daft that the United Kingdom maintains twenty-six embassies in European Union countries. It has become clear that no UK government could pull out of the EU, even though there might be more political separation within a 'two speed' Union; so the need for representation in the EU countries is going to be at the consular rather than the ambassadorial level, in perpetuity. So Britain [and all the other EU states] should downgrade their internal embassies immediately, save a massive amount of money [and even more flummery] ,and allocate the reduced number of diplomats to the posts where they could be more useful.
Friday, 6 January 2012
Two Twerps and Silly Milliband
On the morning of January 6 I heard an embarrassing interview between David Cameron, the British Prime Minister, and Evan Davies, a particularly drippy favourite of the current regime at the BBC who is often presented as an Economics expert. Davies's style is that of an insouciant fifth former from some long-vanished County Grammar School; including a tendency to ride hobby horses.
Today's spat was about the old chestnut of bankers' bonuses. The Prime Minister may not be as ill-informed on this issue as he routinely appears to be, but again today he spoke as if the core of the issue was bonuses paid to Directors - and particularly chief executives - and to senior managers of conglomerates that include banking divisions. In the USA and the UK, in particular, in banking as in businesses in many other sectors of the economy bonuses exceeding the nominal salary have been paid to such individuals, and many bonuses reached extreme levels during the bubble years before 2008. In retrospect it is clear that a significant minority of chief executives led their companies down routes that eventually proved to be disastrous: shareholder value was reduced - sometimes obliterated - yet it was palpable that the shareholders had not acted to curb the excess when the time was right. What Americans call "compensation" and Brits call "remuneration" has been determined [in most cases] by sub-committees of the board of directors who pay expensively for advice from specialist consultancies that compare top salaries over companies and sectors, looking at factors like the number of staff on the payroll as much as on the quality of thinking [which is almost impossible to assess] and profitability where the present strategy will only produce results in a few years time [so that present profits owe more to past managers and policies rather than to the present lot]. Shareholders [which includes investment trusts and pensions funds, with highly specialist and well-paid managers] let themselves be led by the consultancy reports; with the result that the gap between top salaries and "ordinary" employees' remuneration increased to a degree that most people thought was obscene.
There is now a battery of propaganda urging shareholders to recapture control of compensation [or remuneration] and to narrow the gap between top and bottom salaries. Governments have been put under pressure to use taxation and regulation to diminish the purchasing-power of top people's pay packages. An additional measure that has been used widely for more than ten years requires companies to pay a proportion of the bonuses in shares in the company rather than in cash, and to put restrictions on when the shares may be sold so that the recipients cannot just cash-in quickly. For those employees who are continuing to work for the company and who have already accumulated such a heap of shares there is a huge incentive to work effectively and so increase the value of the shares; and this fact is adduced to argue that bonuses positively help to drive progress and profitability for the business. Against it is ranged the fact that the average tenure of chief executives gets shorter and shorter so that it is rare for a boss to be in post to reap what he has sown.
Control of relatively 'transparent' remuneration packages for directors and top managers never was the biggest problem, and it is now obvious that that range of stipends will be brought under control: and may even gain public acceptability.
The bigger and more scandalous problem has been accidentally and partially addressed by the imposition of temporary taxes on bonuses, and it has been mitigated massively by the recession in the world economy which has cut back the trades for which the biggest bonuses were paid during and after the bubble. I was emphasising this problem by 2005; while most commentators - even many of those who predicted the crash - appear still to be as oblivious to it as David Cameron and Evan Davies appeared to be today.
The biggest bonuses, ranging to thousands of per cent of notional base salary in the most extreme cases, were available in what has - quite rightly - come to be called casino banking. But even those who coined the phrase do not seem to have grasped fully what it means, as I tried to express the matter in my Fellows Lecture to the Insurance Institute of Ireland early in 2007. Very able people, mostly graduates in mathematics, pure science or sophisticated engineering, and often with doctorates in those disciplines, were taken into the proprietary trading subsidiaries [or sections] of companies that had taken on a complex of traditional 'financial' transactions: stockbroking, jobbing [holding stocks and shares for brokers to buy from them], corporate analysis, financial advice to businesses, assistance in issuing new shares or raising loans, facilitating mergers and takeovers, and a series of specialist services. Having brought them together, as was permitted by the relaxation of market regulations in the nineteen 'eighties [the British 'big bang' was in 1986], their bosses were greedy for growth: to be achieved by the conglomerates competing with each other for established classes of business and by developing wholly new products and the markets in which to place them. The latter area was where the brilliant scientific minds could most profitably be brought to bear. People grounded in the old skills worked in close collaboration with lawyers who could draft the terms of new contract types, and auditors who could find ways of validating the reported outcomes, and rating agencies that claimed to be able to evaluate the contracts, they developed new ways of securitising loans that had been made to 'real world' people and firms; and ways of gambling against possible outcomes in 'real' markets without ever actually buying or selling commodities or company bonds or shares or insurance policies.
Futures had been available for centuries: for example, a biscuit manufacturer could enter into a contract to get grain next year at a determined price from a merchant who bought and sold grain and believed that [to some modest extent, but better than others] they could guess probable future prices. If the merchant guessed wrong, and had to pay more to get the grain that was needed to fulfill the contract price that he had promised to sell it for, he took the loss: but if he had guessed right and the open market price for the crop on the day when he had to buy to meet the contract [the spot price] was below the level at which he would sell the grain to the contracted buyer, he made a gain.
Copying the 'real' futures market, the new wave invented financial futures. These were betting slips by which a punter [often a trader working for another conglomerate] would place his bet as to what movement would take place in the price of some share or bond with another trader who had a slightly different expectation. No shares or bonds were involved between the parties: they simply had a bet on how much the price of the bonds or shares [that were being held and traded by participants in the 'real' market] would rise or fall in a set period. If the seller of the betting slip was proved more accurate in his guesswork, he had nothing to pay out and he kept the fee for which the slip had been sold. If the issuer of the share or bond was a worse forecaster, in this case at this time, than was the holder the issuer had to pay to the holder whatever sum had been specified in the contract. This principle was extended to a vast range of derivatives and other instruments or products that were progressively dreamed -up. These creations existed only in cyberspace, as promises between firms, which had notional values when the contracts came to maturity. Many did not run their full course, where get-out clauses were exercised as external conditions and the internal needs of client firms changed.
Settlement had to be made periodically between the conglomerates and this was done by transfers of cyberspace credit: and trades between firms largely evened-out over the years. Nothing of value to the material world was generated as a result of trade in the more esoteric 'products': but the immense scale of the leading firms' balance sheets that resulted from totting-up the notional value of all the contracts they had bought was accepted to have justified them in increasing their securitisation of loans to people and firms in the 'real economy'. The success of the imaginary trade sanctioned an increasing use of securitisation to expand credit to 'real' householders and factory owners, and hence the credit bubble was fuelled despite minimal [or even negative] growth in the productivity of the material economy.
Massive imaginery profits were made from the imaginative trades: so the traders and product designers and lawyers - and, above all, the inventors who constantly created new species and variants of the contract types, were paid huge 'bonuses' which were volumetric commissions on turnover achieved by the skill and imagination of the team leaders and their clever supporters. The amounts that the best such people earned took the bulk of the real-world cash that was earned by the banking and advisory sections of the conglomerates. As the bubble grew in 2003-7 the banks did not have enough basic cash to pay the bonuses in full; but their directors were keen to go on expanding their cyberspace balances, for which they had to encourage the deal-makers and the secondary traders who backed-up the markets in the transferable slips. Pro-rata bonuses were paid to the creators of, and traders in, more spectacularly imaginative 'products' that were traded with ever-greater notional values. The conglomerates paid an increasing proportion of bonuses in shares: because the cybertrades delivered no significant cash earnings to the firms whose brightest and best were dealing in them. Until bonuses became a source of mass public concern the dealers could cash their shares by seling them on the open market. But the shares were becoming relatively less attractive because the comglomerates were using most of their net cash [real world] income to encourage their dealers to expand the scope and size of the unreal universe. The conglomerates didn't have sufficient cash left over to pay higher dividends: so firms like Barclays - which changed from being primarily bankers to being phenomenally bigger proprietary traders - did not significantly increase dividends and consequently their share prices did not grow significantly through the bubble period.
When the crash came, trillions of dollarsworth of the notional value of cyberspace contracts ceased to have calculable prices. The aftermath is still being felt, and many situations are unresolved; but it seemed obvious to the boards of the conglomerates that they had to earn what they could where they could: so they retained their dealers in the market segments that survived, encouraging them to maximise their turnover; and thus they had to continue to reward them in the way that had been evolved in the good times. The 'banks' had an intractible image problem that sat uncomfortably alongside their systemic business problem. The remuneration of the cybertraders was competing for cash earned by 'bog standard' banking with the regulators' demand that they had to keep more cash in their reserves [proportionally to their retail banking business].
To the public- including [apparently] the Prime Minister - bonuses are the income supplements paid to top directors, which have in some cases been stigmatised as 'rewards for failure'. On that assumption it seems obvious to put a cap on bonus payments in 'banks': but as has been shown above the bulk of 'bonus payments' have really been turnover commissions to dealers who are far removed from the sort of banking that involves the voting citizenry.
The simple solution to this dilemma [and a large part of the answer to the Merkel-Sarkozy nonsense of the Tobin Tax] is to classify all the problematic businesses as what they are - gambling. Take them out of the 'financial services' arena and stick them under the regulation of the Gambling Commission, with the appropriate regime of taxation. The banks can still own such firms, if they want to take the reputational and financial risk of doing so; but the true nature of the business and the proper explanation for its remuneration system would be apparent. One cannot expect Evan Davies to get the point, but there might be somebody in Whitehall who can coach the Prime Minister into an element of common sense.
UPDATE
On February 3 the Leader of the Labour party joined in the display of ignorance. He too berated "bankers'" remuneration packages withour recognising the differential between traders' commissions for turnover and directors' pay that is loosely related to the general level of 'compensation' in the business. This is another display of the fact that a well-chosen comprehensive school and Oxbridge can produce a result similar to a product of Eton and Oxbridge in becoming a clot who can join in the yaa-hoo 'debate' that is a natural development from the example set by the minority who have passed through the Bullindgon Club.
Today's spat was about the old chestnut of bankers' bonuses. The Prime Minister may not be as ill-informed on this issue as he routinely appears to be, but again today he spoke as if the core of the issue was bonuses paid to Directors - and particularly chief executives - and to senior managers of conglomerates that include banking divisions. In the USA and the UK, in particular, in banking as in businesses in many other sectors of the economy bonuses exceeding the nominal salary have been paid to such individuals, and many bonuses reached extreme levels during the bubble years before 2008. In retrospect it is clear that a significant minority of chief executives led their companies down routes that eventually proved to be disastrous: shareholder value was reduced - sometimes obliterated - yet it was palpable that the shareholders had not acted to curb the excess when the time was right. What Americans call "compensation" and Brits call "remuneration" has been determined [in most cases] by sub-committees of the board of directors who pay expensively for advice from specialist consultancies that compare top salaries over companies and sectors, looking at factors like the number of staff on the payroll as much as on the quality of thinking [which is almost impossible to assess] and profitability where the present strategy will only produce results in a few years time [so that present profits owe more to past managers and policies rather than to the present lot]. Shareholders [which includes investment trusts and pensions funds, with highly specialist and well-paid managers] let themselves be led by the consultancy reports; with the result that the gap between top salaries and "ordinary" employees' remuneration increased to a degree that most people thought was obscene.
There is now a battery of propaganda urging shareholders to recapture control of compensation [or remuneration] and to narrow the gap between top and bottom salaries. Governments have been put under pressure to use taxation and regulation to diminish the purchasing-power of top people's pay packages. An additional measure that has been used widely for more than ten years requires companies to pay a proportion of the bonuses in shares in the company rather than in cash, and to put restrictions on when the shares may be sold so that the recipients cannot just cash-in quickly. For those employees who are continuing to work for the company and who have already accumulated such a heap of shares there is a huge incentive to work effectively and so increase the value of the shares; and this fact is adduced to argue that bonuses positively help to drive progress and profitability for the business. Against it is ranged the fact that the average tenure of chief executives gets shorter and shorter so that it is rare for a boss to be in post to reap what he has sown.
Control of relatively 'transparent' remuneration packages for directors and top managers never was the biggest problem, and it is now obvious that that range of stipends will be brought under control: and may even gain public acceptability.
The bigger and more scandalous problem has been accidentally and partially addressed by the imposition of temporary taxes on bonuses, and it has been mitigated massively by the recession in the world economy which has cut back the trades for which the biggest bonuses were paid during and after the bubble. I was emphasising this problem by 2005; while most commentators - even many of those who predicted the crash - appear still to be as oblivious to it as David Cameron and Evan Davies appeared to be today.
The biggest bonuses, ranging to thousands of per cent of notional base salary in the most extreme cases, were available in what has - quite rightly - come to be called casino banking. But even those who coined the phrase do not seem to have grasped fully what it means, as I tried to express the matter in my Fellows Lecture to the Insurance Institute of Ireland early in 2007. Very able people, mostly graduates in mathematics, pure science or sophisticated engineering, and often with doctorates in those disciplines, were taken into the proprietary trading subsidiaries [or sections] of companies that had taken on a complex of traditional 'financial' transactions: stockbroking, jobbing [holding stocks and shares for brokers to buy from them], corporate analysis, financial advice to businesses, assistance in issuing new shares or raising loans, facilitating mergers and takeovers, and a series of specialist services. Having brought them together, as was permitted by the relaxation of market regulations in the nineteen 'eighties [the British 'big bang' was in 1986], their bosses were greedy for growth: to be achieved by the conglomerates competing with each other for established classes of business and by developing wholly new products and the markets in which to place them. The latter area was where the brilliant scientific minds could most profitably be brought to bear. People grounded in the old skills worked in close collaboration with lawyers who could draft the terms of new contract types, and auditors who could find ways of validating the reported outcomes, and rating agencies that claimed to be able to evaluate the contracts, they developed new ways of securitising loans that had been made to 'real world' people and firms; and ways of gambling against possible outcomes in 'real' markets without ever actually buying or selling commodities or company bonds or shares or insurance policies.
Futures had been available for centuries: for example, a biscuit manufacturer could enter into a contract to get grain next year at a determined price from a merchant who bought and sold grain and believed that [to some modest extent, but better than others] they could guess probable future prices. If the merchant guessed wrong, and had to pay more to get the grain that was needed to fulfill the contract price that he had promised to sell it for, he took the loss: but if he had guessed right and the open market price for the crop on the day when he had to buy to meet the contract [the spot price] was below the level at which he would sell the grain to the contracted buyer, he made a gain.
Copying the 'real' futures market, the new wave invented financial futures. These were betting slips by which a punter [often a trader working for another conglomerate] would place his bet as to what movement would take place in the price of some share or bond with another trader who had a slightly different expectation. No shares or bonds were involved between the parties: they simply had a bet on how much the price of the bonds or shares [that were being held and traded by participants in the 'real' market] would rise or fall in a set period. If the seller of the betting slip was proved more accurate in his guesswork, he had nothing to pay out and he kept the fee for which the slip had been sold. If the issuer of the share or bond was a worse forecaster, in this case at this time, than was the holder the issuer had to pay to the holder whatever sum had been specified in the contract. This principle was extended to a vast range of derivatives and other instruments or products that were progressively dreamed -up. These creations existed only in cyberspace, as promises between firms, which had notional values when the contracts came to maturity. Many did not run their full course, where get-out clauses were exercised as external conditions and the internal needs of client firms changed.
Settlement had to be made periodically between the conglomerates and this was done by transfers of cyberspace credit: and trades between firms largely evened-out over the years. Nothing of value to the material world was generated as a result of trade in the more esoteric 'products': but the immense scale of the leading firms' balance sheets that resulted from totting-up the notional value of all the contracts they had bought was accepted to have justified them in increasing their securitisation of loans to people and firms in the 'real economy'. The success of the imaginary trade sanctioned an increasing use of securitisation to expand credit to 'real' householders and factory owners, and hence the credit bubble was fuelled despite minimal [or even negative] growth in the productivity of the material economy.
Massive imaginery profits were made from the imaginative trades: so the traders and product designers and lawyers - and, above all, the inventors who constantly created new species and variants of the contract types, were paid huge 'bonuses' which were volumetric commissions on turnover achieved by the skill and imagination of the team leaders and their clever supporters. The amounts that the best such people earned took the bulk of the real-world cash that was earned by the banking and advisory sections of the conglomerates. As the bubble grew in 2003-7 the banks did not have enough basic cash to pay the bonuses in full; but their directors were keen to go on expanding their cyberspace balances, for which they had to encourage the deal-makers and the secondary traders who backed-up the markets in the transferable slips. Pro-rata bonuses were paid to the creators of, and traders in, more spectacularly imaginative 'products' that were traded with ever-greater notional values. The conglomerates paid an increasing proportion of bonuses in shares: because the cybertrades delivered no significant cash earnings to the firms whose brightest and best were dealing in them. Until bonuses became a source of mass public concern the dealers could cash their shares by seling them on the open market. But the shares were becoming relatively less attractive because the comglomerates were using most of their net cash [real world] income to encourage their dealers to expand the scope and size of the unreal universe. The conglomerates didn't have sufficient cash left over to pay higher dividends: so firms like Barclays - which changed from being primarily bankers to being phenomenally bigger proprietary traders - did not significantly increase dividends and consequently their share prices did not grow significantly through the bubble period.
When the crash came, trillions of dollarsworth of the notional value of cyberspace contracts ceased to have calculable prices. The aftermath is still being felt, and many situations are unresolved; but it seemed obvious to the boards of the conglomerates that they had to earn what they could where they could: so they retained their dealers in the market segments that survived, encouraging them to maximise their turnover; and thus they had to continue to reward them in the way that had been evolved in the good times. The 'banks' had an intractible image problem that sat uncomfortably alongside their systemic business problem. The remuneration of the cybertraders was competing for cash earned by 'bog standard' banking with the regulators' demand that they had to keep more cash in their reserves [proportionally to their retail banking business].
To the public- including [apparently] the Prime Minister - bonuses are the income supplements paid to top directors, which have in some cases been stigmatised as 'rewards for failure'. On that assumption it seems obvious to put a cap on bonus payments in 'banks': but as has been shown above the bulk of 'bonus payments' have really been turnover commissions to dealers who are far removed from the sort of banking that involves the voting citizenry.
The simple solution to this dilemma [and a large part of the answer to the Merkel-Sarkozy nonsense of the Tobin Tax] is to classify all the problematic businesses as what they are - gambling. Take them out of the 'financial services' arena and stick them under the regulation of the Gambling Commission, with the appropriate regime of taxation. The banks can still own such firms, if they want to take the reputational and financial risk of doing so; but the true nature of the business and the proper explanation for its remuneration system would be apparent. One cannot expect Evan Davies to get the point, but there might be somebody in Whitehall who can coach the Prime Minister into an element of common sense.
UPDATE
On February 3 the Leader of the Labour party joined in the display of ignorance. He too berated "bankers'" remuneration packages withour recognising the differential between traders' commissions for turnover and directors' pay that is loosely related to the general level of 'compensation' in the business. This is another display of the fact that a well-chosen comprehensive school and Oxbridge can produce a result similar to a product of Eton and Oxbridge in becoming a clot who can join in the yaa-hoo 'debate' that is a natural development from the example set by the minority who have passed through the Bullindgon Club.
Wednesday, 4 January 2012
Not a New Year Economic Review
Thousands of Economists have written millions of words in forecasts for the performance of the economy in 2012; globally, country-by-country, through individual business sectors and from various perspectives.
Very few of the pundits are predicting that the eurorats can relieve the eurozone of the crippling problems that arise from the falsification and fudges that marked the establishment of the single currency. The European Union was founded on a fervent hope: that war in Europe could be prevented, permanently, by drawing all the potential belligerents into a single economic and political entity. Once in the Union, it was hoped that it would effectively be impossible for any state to leave it. There have been endless moves to lock member countries into an 'ever-closer Union': which is interestingly different from the historic US aspiration to create a 'more perfect Union'. European integrationists have been content to drive through notably-imperfect measures provided each fudge received the assent of the member states, however reluctantly the consent was conceded. Once the deal was done the outcome was regarded as irreversible. The creation of the euro was the most significant single step in that direction. It went spectacularly adrift in 2010, then it continued to be an unsolved crisis through 2011. 2012 will be the year in which reverse gear is likely to be engaged; and at least one of the members of the eurozone who have been strapped into ejector seats may actually be parachuted out of the system.
At the end of 2011 China reaffirmed its aspiration to put a man on the moon by 2020, which implies leapfrogging the USA and Russia and the EU in the application of complex and significant technologies. A reconditioned Soviet-era aircraft carrier has taken to the high seas under the Chinese flag. Chinese agencies are buying huge areas of farmland in Africa, to add to their mineral rights and construction interests on the continent; and while China refused to take any direct part in a eurozone rescue fund their central bank has boosted its contribution to the IMF [which may be used to assist the European Central Bank. on appropriate terms] and it has frankly been admitted that Chinese agencies will be happy to buy European companies that control significant ik [see my book PPE]. Alien commentators who predict worsening conditions for the Chinese economy in the coming years should take note of the extent of the 'unnecessary' spending that the Chinese state is making on strategic and prestige projects that will deliver only long-term dividends, if any. China can cancel or defer a huge range of massive discretionary spending if the more short-term interests of economic and social stability call for such retrenchment; so China is unlikely to experience any shock to the system that cannot be compensated by easily deliverable actions.
India has much less flexibility over budgetary allocations because of the immense complexity and confusion within the social and economic structures where thrusting modernism contends with ruthless traditionalism. Publicly announced plans are never fulfilled on budget and on time, and only very rarely is legal action taken against corrupt politicians and administrators [in sharp contrast to China where dozens of death sentences each year ensure that most party figures and administrators are cautious not to get caught: often by committing no offences].
Very broadly, Latin American countries are consolidating their improved political situation. Venezuela has a very uncertain future which may partially be resolved by the election that is due this year, and the uncertain health of the President adds a further imponderable. The most significant headline in the continent is probably the relative success of Brazil's measures to limit the destruction of rainforest: and this achievement has not significantly been at the expense of economic growth which is taking Brazil higher among the 'top ten' global economies. Democracy is not fully consolidated in depth throughout the continent but blatant abuse is rarer than at any time since the expulsion the Spanish governors early in the nineteenth century.
The Islamic world has been intrigued by the 'Arab spring' which began last year, but it is far too soon to jump to any conclusion that democracy must develop and become entrenched in countries where closed systems of government have been disrupted. It has proved naive to assume that the momentum of progress will spread to unseat other oppressive regimes. Iran continues to make bellicose gestures which are partially generated for the age-old reasons of distracting the population from domestic oppression and partially in reaction to aggressive murmurings from Israel and the United States. It is widely assumed that the USA is not capable [either logistically or psychologically] of waging a full-scale war with Iran, while Washington shares the Israelis' determination to do what can be done to prevent Iran from being able to wage nuclear war on Israel. The presumed progress of the Iranian weapons programme, and of the related missile development, will determine whether Israel is able to hold off from intervention of the sort that has already caused delays to the project. The stand-off between Israel and Iran is an important component of the 'Palestinian question', even though Iran is not an Arab country. As Zionist settlements continue to be developed in occupied territory, and the rhetoric arising from the settlers [and from their supporters in Israeli politics] becomes more strident, the chances of a 'two-state solution' diminish and the relevance of Tony Blair's hugely overstated role as a peacemaker is more conspicuously diminished. Israel will continue to be the most important external influence on US politics, less because of the power of the conspicuous 'Jewish lobby' within the USA than because of the the increasingly clear parallels between the fate of the Palestinians and that of the 'Indians' who were dispossessed and allowed to die as the Frontier was pushed out over the lands that became the continental USA. If West Bank settlements are offensive to human rights and probably contrary to International Law, so was the establishment of most of the towns and cities of the USA. Nobody should be surprised if the vast majority of Americans have no wish to contemplate the similarities of the two situations [see my book Fundamental Tensions]. The longer the standoff between Israel and the Palestinian Authority continues, the more the settlements will grow and the self-confidence of the settlers will increase. The harrassment and alienation of Palestinian families will increase and lead to demands for more vigorous reactions from the Authority [or from rival structures if the Authority continues to accept American money and influence]; and self-selected surrogates for the Palestinian cause - including Iran and terrorist groups - can cause a great deal of damage. This problem will not be resolved during 2012, and at worst it can disrupt many aspects of world business by restricting the open market supply of oil, by creating instability in various Gulf states, and through the damaging potential impact of random terrorist attacks on worldwide targets.
The simple term 'Sub-Saharan Africa' has implicitly confirmed an impression in other parts of the world that the continent was somehow subnormal in economic performance, and in democracy, in legality, in culture and social cohesion. The nineteenth century concept that Africa was [or contained] a 'heart of darkness': of cults, primitive religion, tribalism, low intelligence and slavery continued to be quoted. Positive developments over recent years have done very much to make traders in the other continents aware of the economic opportunities, and of the increasing legitimacy of some governments that have reasserted the rule of law and even suppressed corruption. In some part-Muslim countries violence against Christians is increasing; but such incidents are being reported internationally. The depressive mood of crisis that infests Europe is sharply in contrast to the optimism that has been spreading across Africa. Despite the awful failures like Somalia and Zimbabwe there is very much positive thinking in and about Africa: which is really good news.
These pointers to the prospects for the world in the next few years all pivot on political data, and the key fact that the economic prospects of the various countries are heavily influenced - if not absolutely determined - by their politics. But these signs do not point down any single path. In Latin America the strongest economic growth is apparent in countries with the best achievements in democratic politics, while in Africa the maintenance of the rule of law - which is essential for secure growth - is less closely associated with electoral democracy and constitutional legitimacy. India is proudly [and genuinely] the world's biggest democracy: but the institutions of the state are as much inhibitions on growth and development as they are supportive of progress. The European Union is recognised to have a 'democratic deficit': most voters resent the loss of powers by their state parliaments even though they recognise that significant benefits derive from a common market and a commitment to peace. There is a great and growing tension between the eurorats of Brussels and the mass electorate, which is not articulated adequately at the interface of the European Council of Ministers and the Commission of the EU. Japan is publicly a chaotic democracy, and works efficiently because there is an effective, secretive Imperialist elite that can get things done regardless of the apparent weaknesses of the official government; while in China omnipresent [and unabashed] manipulation by the Party also makes the formal constitutional institutions irrelevant. These Asian models have been successful. Japan's much-described 'decade of stagnation' has been statistical rather than experiential, and there is little doubt that most Chinese welcome economic development and would not swap it for democratic stagnation.
The world is a patchwork of different political models, each of which serves some economies better than others. There seem to be no general rules: the American belief in the universal export of Democracy is not generally accepted, especially by people who prefer improving living standards to the irregular opportunity to have a negligible impact on the outcome of an election. The unedifying state of US politics in this election year is likely to be the worst possible advert for democracy: Brazil's economic success is a shining example of it. We face interesting an uncomfortable times!.
Very few of the pundits are predicting that the eurorats can relieve the eurozone of the crippling problems that arise from the falsification and fudges that marked the establishment of the single currency. The European Union was founded on a fervent hope: that war in Europe could be prevented, permanently, by drawing all the potential belligerents into a single economic and political entity. Once in the Union, it was hoped that it would effectively be impossible for any state to leave it. There have been endless moves to lock member countries into an 'ever-closer Union': which is interestingly different from the historic US aspiration to create a 'more perfect Union'. European integrationists have been content to drive through notably-imperfect measures provided each fudge received the assent of the member states, however reluctantly the consent was conceded. Once the deal was done the outcome was regarded as irreversible. The creation of the euro was the most significant single step in that direction. It went spectacularly adrift in 2010, then it continued to be an unsolved crisis through 2011. 2012 will be the year in which reverse gear is likely to be engaged; and at least one of the members of the eurozone who have been strapped into ejector seats may actually be parachuted out of the system.
At the end of 2011 China reaffirmed its aspiration to put a man on the moon by 2020, which implies leapfrogging the USA and Russia and the EU in the application of complex and significant technologies. A reconditioned Soviet-era aircraft carrier has taken to the high seas under the Chinese flag. Chinese agencies are buying huge areas of farmland in Africa, to add to their mineral rights and construction interests on the continent; and while China refused to take any direct part in a eurozone rescue fund their central bank has boosted its contribution to the IMF [which may be used to assist the European Central Bank. on appropriate terms] and it has frankly been admitted that Chinese agencies will be happy to buy European companies that control significant ik [see my book PPE]. Alien commentators who predict worsening conditions for the Chinese economy in the coming years should take note of the extent of the 'unnecessary' spending that the Chinese state is making on strategic and prestige projects that will deliver only long-term dividends, if any. China can cancel or defer a huge range of massive discretionary spending if the more short-term interests of economic and social stability call for such retrenchment; so China is unlikely to experience any shock to the system that cannot be compensated by easily deliverable actions.
India has much less flexibility over budgetary allocations because of the immense complexity and confusion within the social and economic structures where thrusting modernism contends with ruthless traditionalism. Publicly announced plans are never fulfilled on budget and on time, and only very rarely is legal action taken against corrupt politicians and administrators [in sharp contrast to China where dozens of death sentences each year ensure that most party figures and administrators are cautious not to get caught: often by committing no offences].
Very broadly, Latin American countries are consolidating their improved political situation. Venezuela has a very uncertain future which may partially be resolved by the election that is due this year, and the uncertain health of the President adds a further imponderable. The most significant headline in the continent is probably the relative success of Brazil's measures to limit the destruction of rainforest: and this achievement has not significantly been at the expense of economic growth which is taking Brazil higher among the 'top ten' global economies. Democracy is not fully consolidated in depth throughout the continent but blatant abuse is rarer than at any time since the expulsion the Spanish governors early in the nineteenth century.
The Islamic world has been intrigued by the 'Arab spring' which began last year, but it is far too soon to jump to any conclusion that democracy must develop and become entrenched in countries where closed systems of government have been disrupted. It has proved naive to assume that the momentum of progress will spread to unseat other oppressive regimes. Iran continues to make bellicose gestures which are partially generated for the age-old reasons of distracting the population from domestic oppression and partially in reaction to aggressive murmurings from Israel and the United States. It is widely assumed that the USA is not capable [either logistically or psychologically] of waging a full-scale war with Iran, while Washington shares the Israelis' determination to do what can be done to prevent Iran from being able to wage nuclear war on Israel. The presumed progress of the Iranian weapons programme, and of the related missile development, will determine whether Israel is able to hold off from intervention of the sort that has already caused delays to the project. The stand-off between Israel and Iran is an important component of the 'Palestinian question', even though Iran is not an Arab country. As Zionist settlements continue to be developed in occupied territory, and the rhetoric arising from the settlers [and from their supporters in Israeli politics] becomes more strident, the chances of a 'two-state solution' diminish and the relevance of Tony Blair's hugely overstated role as a peacemaker is more conspicuously diminished. Israel will continue to be the most important external influence on US politics, less because of the power of the conspicuous 'Jewish lobby' within the USA than because of the the increasingly clear parallels between the fate of the Palestinians and that of the 'Indians' who were dispossessed and allowed to die as the Frontier was pushed out over the lands that became the continental USA. If West Bank settlements are offensive to human rights and probably contrary to International Law, so was the establishment of most of the towns and cities of the USA. Nobody should be surprised if the vast majority of Americans have no wish to contemplate the similarities of the two situations [see my book Fundamental Tensions]. The longer the standoff between Israel and the Palestinian Authority continues, the more the settlements will grow and the self-confidence of the settlers will increase. The harrassment and alienation of Palestinian families will increase and lead to demands for more vigorous reactions from the Authority [or from rival structures if the Authority continues to accept American money and influence]; and self-selected surrogates for the Palestinian cause - including Iran and terrorist groups - can cause a great deal of damage. This problem will not be resolved during 2012, and at worst it can disrupt many aspects of world business by restricting the open market supply of oil, by creating instability in various Gulf states, and through the damaging potential impact of random terrorist attacks on worldwide targets.
The simple term 'Sub-Saharan Africa' has implicitly confirmed an impression in other parts of the world that the continent was somehow subnormal in economic performance, and in democracy, in legality, in culture and social cohesion. The nineteenth century concept that Africa was [or contained] a 'heart of darkness': of cults, primitive religion, tribalism, low intelligence and slavery continued to be quoted. Positive developments over recent years have done very much to make traders in the other continents aware of the economic opportunities, and of the increasing legitimacy of some governments that have reasserted the rule of law and even suppressed corruption. In some part-Muslim countries violence against Christians is increasing; but such incidents are being reported internationally. The depressive mood of crisis that infests Europe is sharply in contrast to the optimism that has been spreading across Africa. Despite the awful failures like Somalia and Zimbabwe there is very much positive thinking in and about Africa: which is really good news.
These pointers to the prospects for the world in the next few years all pivot on political data, and the key fact that the economic prospects of the various countries are heavily influenced - if not absolutely determined - by their politics. But these signs do not point down any single path. In Latin America the strongest economic growth is apparent in countries with the best achievements in democratic politics, while in Africa the maintenance of the rule of law - which is essential for secure growth - is less closely associated with electoral democracy and constitutional legitimacy. India is proudly [and genuinely] the world's biggest democracy: but the institutions of the state are as much inhibitions on growth and development as they are supportive of progress. The European Union is recognised to have a 'democratic deficit': most voters resent the loss of powers by their state parliaments even though they recognise that significant benefits derive from a common market and a commitment to peace. There is a great and growing tension between the eurorats of Brussels and the mass electorate, which is not articulated adequately at the interface of the European Council of Ministers and the Commission of the EU. Japan is publicly a chaotic democracy, and works efficiently because there is an effective, secretive Imperialist elite that can get things done regardless of the apparent weaknesses of the official government; while in China omnipresent [and unabashed] manipulation by the Party also makes the formal constitutional institutions irrelevant. These Asian models have been successful. Japan's much-described 'decade of stagnation' has been statistical rather than experiential, and there is little doubt that most Chinese welcome economic development and would not swap it for democratic stagnation.
The world is a patchwork of different political models, each of which serves some economies better than others. There seem to be no general rules: the American belief in the universal export of Democracy is not generally accepted, especially by people who prefer improving living standards to the irregular opportunity to have a negligible impact on the outcome of an election. The unedifying state of US politics in this election year is likely to be the worst possible advert for democracy: Brazil's economic success is a shining example of it. We face interesting an uncomfortable times!.
Monday, 2 January 2012
Manning Democracy
Democracy has many weaknesses, some of which have recently become apparent.
Greece and Italy have had 'technocrats' slotted in as Prime Ministers, because their constitutional procedures did not deliver people for the top jobs who were acceptable to those who control the two national economies.
Politics in the USA are more bitterly polarised than at any time since the US became a global power. The Democrats are obliged to support their incumbent president, though it is doubted whether he will carry mass support into the next election to match the pile of money that has been promised by both loyalists and those who judge it a worth-while investment in the incumbent standing for re-election. His Republican opponents [who absolutely loathe Obama] are bitterly divided, with a leading candidate suffering the almost terminal disability of being a Mormon: this division is so profound that the 'Grand Old Party' has been seen as a probable looser since long before the General Election campaign begins. Meanwhile the debt and the deficit are increasing enough to improve the prospects for Prophets of Doom; who are probably the only group of Americans who can look forward with confidence and are able to ignore the undoubted underlying strength of the economy.
Angela Merkel knows that she would face electoral suicide if she promised any significant amount of real support over the long haul to Greece and other struggling eurozone states. No significant commentator, and no opinion poll, indicates that Nicholas Sarkozi will be re-elected in this year's French election; leaving the field open to a Socialist machine-man and a woman from the far right. Vladimir Putin has massively lost support ahead of this year's election, entirely due to his own actions, but there is no credible opposition candidate: so Putin will almost assuredly win: but the lesser a proportion of the vote he gets, the more chance there will be of his taking notice of his need to project a different image.
Elections in Egypt will be a test of whether the Muslim Brotherhood and their allies really do aim to achieve "one person, one vote, once"; followed by a very different regime.
In China almost excessively elaborate succession planning will produce a hugely different array of personalia in the top political posts by the end of 2012, but they will be expected to continue with an agreed evolutionary programme. The names that appear to be in the frame for advancement include some that are associated with dogmatic assertions of communist - basically Maoist - principle who counterbalance the Party's willingness to continue with sophisticated macro-economic management of a rampantly capitalist economy. The percentages may change from year to year but spectacular economic progress is essential: if growth falters too much the Party's monopoly over politics will be challenged.
Nowhere is politics likely to produce genuinely popular outcomes that could give people new confidence in the direction that the country will take in the coming years. Charismatic leaders who become self indulgent and wilful are a danger to their own people, and often disastrous for their neighbours. Dull politicians who keep to the constitutional rules and who try to implement the policies on which they stood for election remain dull; but if they try to perpetuate their tenure they can mutate into oppressive dictators More and more obviously politics produces unimpressive governments, precisely at the time when the consequences of the failure of Economics have matured into a new crisis of sovereign debt which can only be resolved through appropriate Political Economy applied by confident and competent governments. This big issue will be of major concern to this blog throughout 2012. On early signs, China will probably manage the political succession most effectively in 2012, and again western doomsters who predict catastrophe for the Chinese economy will not be vindicated.
Greece and Italy have had 'technocrats' slotted in as Prime Ministers, because their constitutional procedures did not deliver people for the top jobs who were acceptable to those who control the two national economies.
Politics in the USA are more bitterly polarised than at any time since the US became a global power. The Democrats are obliged to support their incumbent president, though it is doubted whether he will carry mass support into the next election to match the pile of money that has been promised by both loyalists and those who judge it a worth-while investment in the incumbent standing for re-election. His Republican opponents [who absolutely loathe Obama] are bitterly divided, with a leading candidate suffering the almost terminal disability of being a Mormon: this division is so profound that the 'Grand Old Party' has been seen as a probable looser since long before the General Election campaign begins. Meanwhile the debt and the deficit are increasing enough to improve the prospects for Prophets of Doom; who are probably the only group of Americans who can look forward with confidence and are able to ignore the undoubted underlying strength of the economy.
Angela Merkel knows that she would face electoral suicide if she promised any significant amount of real support over the long haul to Greece and other struggling eurozone states. No significant commentator, and no opinion poll, indicates that Nicholas Sarkozi will be re-elected in this year's French election; leaving the field open to a Socialist machine-man and a woman from the far right. Vladimir Putin has massively lost support ahead of this year's election, entirely due to his own actions, but there is no credible opposition candidate: so Putin will almost assuredly win: but the lesser a proportion of the vote he gets, the more chance there will be of his taking notice of his need to project a different image.
Elections in Egypt will be a test of whether the Muslim Brotherhood and their allies really do aim to achieve "one person, one vote, once"; followed by a very different regime.
In China almost excessively elaborate succession planning will produce a hugely different array of personalia in the top political posts by the end of 2012, but they will be expected to continue with an agreed evolutionary programme. The names that appear to be in the frame for advancement include some that are associated with dogmatic assertions of communist - basically Maoist - principle who counterbalance the Party's willingness to continue with sophisticated macro-economic management of a rampantly capitalist economy. The percentages may change from year to year but spectacular economic progress is essential: if growth falters too much the Party's monopoly over politics will be challenged.
Nowhere is politics likely to produce genuinely popular outcomes that could give people new confidence in the direction that the country will take in the coming years. Charismatic leaders who become self indulgent and wilful are a danger to their own people, and often disastrous for their neighbours. Dull politicians who keep to the constitutional rules and who try to implement the policies on which they stood for election remain dull; but if they try to perpetuate their tenure they can mutate into oppressive dictators More and more obviously politics produces unimpressive governments, precisely at the time when the consequences of the failure of Economics have matured into a new crisis of sovereign debt which can only be resolved through appropriate Political Economy applied by confident and competent governments. This big issue will be of major concern to this blog throughout 2012. On early signs, China will probably manage the political succession most effectively in 2012, and again western doomsters who predict catastrophe for the Chinese economy will not be vindicated.
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