Bitcoin Marches On

Nobody really knows what 'Bitcoin' is, or what damage it can do to the global economy. Some people know [but do not tell] who invented this 'virtual' pseudo-currency; several dozen people and firms have made money from trading in it, and it is rumoured that some people and firms have played in the market and lost.

No government has responsibility for bitcoin; but several governments could find themselves dealing with a crisis which arose from reckless or careless trading in this medium to the extent that it impinged badly on their national economy. It would be unconscionable if any government required its taxpayers to assist any firms or persons who found themselves in a bitcoin crisis; and it would be politically disastrous if any government thereby plunged its citizens into a decade of reduced living standards as the British government did with the bale-out of the banks in 2008.

There have been plenty of warnings from well-known market players, to the effect that this totally unregulated free-enterprise market has no substance and can thus cause major disruption in any economy that allows assets designated in this nonexistent medium to take a prominent place in anybody's asset register.

Despite this, and despite asserting even a few days ago that they would never allow their platform to be used for bitcoin-denominated trades, the CME [formerly known as the Chicago Mercantile Exchange] has announced that bitcoin will be allowed in trades passing through their books. It is immaterial that this is experimental, and is envisaged only ever to be a small sideline in the market. The big point is that one of the world's largest and most important exchanges has legitimated this bastard child of greed.

Gordon Brown's memoirs are being marketed, for a big launch next week. He would not have wished it, but the commentariat will concentrate primarily on his failure to develop a mature prime ministerial personality [with the resultant tantrums and failures] and on his success - with Alistair Darling, the Chancellor of the day - in 'saving' the world banking system; at the long-term cost of the British people. In extracts that have been released already, Brown makes it clear that he deplores how completely his successors [the Tory-Lib coalition, the Cameron government and now the May regime] have totally failed to reform and rebuild the banking system so that it has the clarity of structure, the strength of reserves, and the separation of banking from wholesale gambling that were shown by the crisis to be absolutely necessary.

The Bank of England has warned that some 75,000 City jobs will migrate to Europe unless Britain gets a Brexit deal that keeps the country within the European Economic Area: but that is just the start of the catastrophe that could be played out if the bonkers Brexiteers ally with the 'free markets' lobby of wholesale gamblers in making the claim that any losses from legitimate banking and financial trading within the EU context can be replaced by growth in 'virtual' finance and betting.

Media muckrakers have found that Jacob Rees-Mogg was a notably unsuccessful fund manager in the period when Gordon Brown was at the apogee of his power, before the 2008 market failure. He is not a believable prophet of supposed good times that can follow from a 'hard Brexit'; nor is any other of the vociferous minority who are agitating for Britain to be plunged at the deep end of the shark-infested global market: if any of those buffoons comes out as an advocate of bitcoin, that will be proof positive of their intellectual limitations and perversity.

Politicians' Earnings

There is a glorious row rumbling on about the salaries of Vice-Chancellors [general managers] of Universities. A new Vice-Chancellor of Oxford feels constrained to defend a salary of less than £400,000 as the head of one of the half-dozen most powerful and effective academic communities in the world: and that is quite inappropriate. To attract a significant global academic-cum-manager needs that amount of money: though it is only a couple of decades since Sir Colin Lucas occupied the office of Vice Chancellor for a couple of years as Master of Balliol College. Colin was able to persuade the powers-that-be in the university that the time had come to drop the hit-or-miss rotation of the Vice-Chancellorship among the heads of colleges and to employ a top manager on a longer-term contract. Cambridge did the same thing about the same time, and so far the two institutions between them had some successes and some embarrassments: but nobody is proposing a reversion to the medieval system.

The silly title of Vice-Chancellor implies an assistant or deputy to the honorific head of a university, who may be a member of the aristocracy [even a minor royal] or a politician or a benefactor or a distinguished scholar or scientist: but who is in no way involved in the routine management of the place. Several vice-chancellors have added titles like 'president' to their portfolio [evincing a painful need to say 'I'm really the boss'] and Scots avoid the whole morass by being known as 'principals'.

The route to being a vice-chancellor is complex, but now that there are some 120 of them it has become obvious that both the institutions and their general managers are of very different quality. The vice-chancellor of Bolton University [yes, there is even one there now] has waded onto the media several times, bragging of his importance despite his institution wallowing near the bottom of the league. He claims to be worth what he is paid, in a way that would perhaps justify £50,000 a year plus expenses and pension: the fact that he is within spitting distance of the top 'earners' is absurd on any objective criterion.

The row started with somebody making the observation that all the vice-chancellors are paid more than the Prime Minister is paid. This has been developed into something close to a vendetta by the obsessive proponent of the useless HS2 railway, who has been unable to make any inroad into the system; while the government looks most unwilling to intervene. There are at least twenty world-class university institutions in the United Kingdom, including the leading colleges of the University of London. Their heads need to be global figures. But for the rest of the so-say university system the salaries are indeed inflated. How did this happen? I was there at the time. During the 'seventies and the 'eighties of the last century several 'polytechnics' were created, usually by amalgamating teacher-training colleges and craft colleges with city technical colleges. These institutions grew quickly as they 'produced' graduates more cheaply than did the 'traditional' universities; so their Directors were able to negotiate high salaries with their local-authority-dominated  employers. Then the government decided that the polys should be given 'parity of esteem' by being designated as universities. Then the pre-existing vice-chancellors found it impossible to ignore the fact that their median salaries were below those of ex-poly directors; and a game of catch-up went crazy: resulting in the present system.

Then somebody drew in the comparison with the Prime Minister: if she gets a much more modest salary for 'running the country', then it can be claimed to stand as self-evident that V-Cs are paid 'too much'.

This is daft: everybody knows that most prime ministers in recent decades have been quite young people, who had a great deal of lifetime remaining in which to make a great deal of money, if they are so inclined. Gordon Brown is not so inclined: he has a comfortable existence doing global good works. But his old sparring-partner Blair was quickly notorious for the millions that have passed through his personal accounts as well as through the charities that give him a public profile that has not yet diminished his odious personal reputation. David Cameron's cowardly exit from Downing Street and the Commons was followed by the purchase of a hut-on-wheels in which he is writing the memoirs that he hopes will begin the repletion of the fortunes that he and his wife have inherited. Mrs May's impending departure will give her the opportunity to accumulate a cash pile to set alongside her husband's City earnings; starting, again, with heavily-supported memoirs.

The 'granny of them all' among ex-politician big earners, Hillary Rodham Clinton, is in the UK now to promote the memoirs that have been written and published in quick time since her election defeat last November. Like her husband, she had outblaired Blair himself in the league of big post-political earners. So to make a current prime minister's salary a template for anything is simply silly. Some civil servants, NHS managers and others in the public sector are necessarily paid more than the prime minister. If Labour re-nationalise any industries or utilities, they will have to pay their managers more than the prime minister, if they want the re-nationalisation to work. That is the way of the world. Meanwhile, the vice-chancellor of Bolton University will be the living proof that some people in the semi-public sector are indeed overpaid.

Boxed Patents

One of the good things that the Gordon Brown government did in the UK was partially to recognise that the economy has no hope of getting out of the hole that the political class has made for it unless the state recognises and rewards the creation of 'intellectual property'. Unsurprisingly, they did not understand the simple basic nature of  ik, as explained in my PPE [see link from this site], but this was a step on the road to rational management of the most important of national resources.

Under the coalition the grasping hand of the Treasury has been allowed to influence the deign of the concept for protecting British intellectual property, and consequently the government announced their intention to create a 'patent box' . Under this category a company [or possibly a high-net-worth individual] would be able to secure a patent, and to implement it into production, and get tax exemptions and reductions at various stages in the process. The 2010 Coalition government declared that they would implement the plan and a few companies, including Glaxo, entered discussion with the government about using the process. Glaxo planned to extend their UK factories under a Box agreement specifically to exploit a new product for which it was in process of securing a patent. The company announced its decision to invest in the UK on Budget Day 2012 [as featured in the previous Post here], to accommodate the squalid spin doctoring of sad politicians who would seek any propaganda point in the absence of evidence of real economic progress.  In this case, there was real potential in the investment. But [as already noted] the Patent Box is not the only inducement to locate industrial plant in the UK. British labour is becoming relatively cheaper as Chinese workers begin to enjoy consumerism with larger wages, and the tax system in the UK is becoming a little less oppressive. UK and EU Labour law and the omnipresent intrusion of inept and officious 'health and safety' regulations are still deterrents to investment, especially in physical production. But steps are being taken in the right direction, albeit they are hesitant and indecisive.

The bigger issue that is disclosed by the Glaxo announcement is that safeguarding intellectual property is becoming the most important consideration of companies in the global economy: and while the US government has become obsessive about China's 'theft' of such property the EU and European governments have still not grasped the heart of this issue. The leading British ministry, BIS, has focussed on reducing the period between the filing of a patent application and the manufacture of the product; which is a good thing if it can be achieved while maintaining the secret.

But the entire positive story is yet to be told: that Brits, including Glaxo research teams, are unusually fecund in producing both patentable inventions and marketable concepts. The world's leading advertising agents are British, and several of the world's best-known and highest-regarded brands are British: yet a major feature of British business is the sad fact that while ideas continue to bubble up, and patents are registered, there is a dearth of funding to develop products fast enough. Firms  are sold in their infancy, usually to foreign owners who then reap the rewards for developing the product and its marketplace. To concentrate exclusively on implementing patents is to miss the point.

New patents can improve existing brands, or can be the basis for a new creation of brand value. The establishment of a new brand partly depends on marketing, partly on spontaneous shifts in fashion, partly on consumers' incomes increasing enough to embrace the new  consumer experience in addition to the existing standard of living. Investment must be made, often over a series of years, in the development of brand reputation as well as in the technicalities of material manufacture. Investment in systems patents and copyrights, brand-names and trademarks, is needed: these aspects can be more costly than the technical patents that are embodied in a material patent. The total suite of investments is needed to build a brand; otherwise patent-owners who are discouraged from developing their firms and their brands by lack of investments will still be tempted to cash-in their assets and sell the firm and its intellectual property to be developed in foreign hands. The British government needs to move a lot further to meet the need!

The Other Silly Milliband

The British political class has almost eliminated 'real people' [such as miners, dockers and self-made businessmen; who formed significant cohorts of MPs even within living memory] from Parliament. 'Unreal' people who have no attachment to any identifiable strand of British society have come to the fore; especially in the Labour Party. Even in the bizarre firmament of Westminster the Milliband brothers are an unusual component of the prevalent class. Their immigrant academic father became influential in the left of the Labour Party which has always preferred intellectual games to any engagement with ill-spoken vulgar working men and women. The boys followed the path that their parents' patronage made available to them: to a carefully exceptional 'comprehensive' school that actually enabled its pupils for university entrance, to read subjects in elite universities where the admissions tutors knew their father from his writings and in many cases personally. On graduation they slid into to jobs that were recognised preparatory steps to adoption as Labour parliamentary candidates.

Both were elected to parliament, as candidates handed down from Party HQ to take over constituencies that may as well have been in another continent in terms of the brothers' experience and empathy. Both reached the 'New Labour' cabinet and David Milliband, once he was appointed Foreign Secretary, was tipped as a future leader of the party. After the electorate decisively rejected Gordon Brown's highly personal general election campaign in 2010, Brown stood down and in the subsequent election for a leader the younger Brother - Ed - shocked the faithful and delighted the media by competing against his sibling. As the campaign proceeded it became clear that the trade union component of the electorate had been encouraged to think that Ed Milliband was more sympathetic to 'old Labour' and more likely to repudiate the perceived ineptitude of Brown and the reviled warmongering of Blair than were the other candidates: and so against all expectations of commentators outside the party Ed won the leadership. His performance has rarely rated above 'embarrassing', despite the best efforts of the array of minders and scriptwriters, psephologists and policy analysts that surround any contemporary party leader. The recognition that a forced resignation of the new leader, followed by another election, would earn disastrous media attention for the party forced all factions of the party to coalesce in a show of support for a leader who was popularly likened to a cartoon character who displayed neither intelligence nor social grace.

In these circumstances the older brother has kept his parliamentary seat, but stood aloof from the shadow cabinet; repeatedly insisting that his sole political intention was to stand in his constituency at the next General Election as a back-bencher who was wholly loyal to his leader. He took on various tasks outside parliament: notably as a well-paid director of a local football club in his constituency, and as chair of a group to study unemployment among 18-24 year-olds. The report of the group has now been published. It strongly advocates the more extended use of artificial apprenticeships and fake jobs, subsidised by the state, to give the victims of these devices material to pack their curricula vitarum; data whose lack of applicability to what used to be called 'habits of industry'  will be glaringly apparent to employers who need to ensure that every employee is able to deliver full value for every pound spent on wages. The report refers to the scandal that recruits even to simple jobs like serving in Pret a Manger or McDonald's are much more likely to be immigrants than native British [of any ethnicity]. The report does not emphasise the very much higher educational standards [especially in numeracy and rhetoric] that are achieved in many foreign countries as compared to the UK. Employers constantly point to appalling ignorance, illiteracy, innumeracy and lack of articulateness in British school leavers. Their lack of social graces sits uncomfortably alongside the limited knowledge and exiguous understanding that is represented by spoon-fed passes in mechanistic GCE examinations, to make tragically immature young men and women undesirable as employees.

With the publication of his report David Milliband has become a significant advocate for doing more of the costly lifetime-wasting fakery that began with the Thatcherites' YTS [Youth Training Scheme] in the 'eighties, was resurrected under Gordon Brown and is now a major aspect of policy under the Cameron-Clegg regime. It indicates a thoroughly bankrupt mental landscape, and goes some way towards vindicating those who preferred Ed over David as party leader. David has dug this neat new hole for himself: how very sad!

The Taxpayer Cheated - Again

The sale of the 'good' successor of Northern Rock to Virgin Money is just the latest in a long series of cases where the institutional incomprehension of the Treasury has played strongly against Britain's national interest, to the disadvantage of taxpayers. A 'price' of some £750 million has been set on the sale, of which roughly one third will be plundered from the company's balance sheet; and a comparable additional sum has been supplied by an American business venturer. So for a net £300 million - or rather less - an asset that cost the taxpayer well over a billion pounds [and over a thousand people their jobs] Virgin have gained a profitable business that will repay the investment in a couple of years. Bully for Branson! The Treasury excuses this outrage by asserting that the European Union requires the sale, according the a set timetable.

Eurorats are arrogant, but they are not idiots: they know how unpopular their vampire squid is to the British public, and they would surely have been willing to accept the deferment of a date that is anyway months in the future; especially in the knowledge that if the UK had simply told them to 'sod off' there is very little effectual that they could have done about it. The blame for the sale must fall on the Chancellor of the Exchequer, in whose name the decision was announced, and on the civil servants who advised him. Blame does not attach to the bankers who advised the Treasury, as such consultants normally deliver the advice that the customer wants. The incident may lodge in the mass memory, alongside Gordon Brown's idiotic sale of gold reserves at the bottom of the market. But there are other aspects of the situation that can be used to illustrate a long running saga of misreporting.

There is no gain to the economy from this sale. The country has 'lost' more than half a billion poundsworth of 'value' from the national balance sheet, because around £500 million has gone from the 'value' of the banking sector and a further £250 million has been taken over by a foreign investor. The national accounts should be adjusted to show these facts: which amount to negative economic 'growth' of around £750,000,000.

I have been a connoisseur of this sort of misrepresentation for many years. When Dr Beeching was axing thousand of miles railway, nobody was interested in the extent to which the value of national assets was being diminished. All attention was focussed on the running-costs of infrastructure that was abysmally ill-managed. To my best knowledge, nobody but me was pointing out that to construct a mile of railway - even of rural branch line -  even then cost many millions of pounds. So the opportunity-cost of every mile closed should be deducted from that year's GNP  [Gross National Product] figures and from future estimates of the 'value' of the nation's assets. Any cash returned by UK-based buyers to British Rail or to the government from the sale of rails, sleepers or land was an internal trasfer: it was turnover within the year but it was not an addition of value. Any structure built on the site, or with the use of former railway materials, was a subsequent addition to the nation's assets: but in very, very few cases was the 'value' of replacement land use the same as its occupation by a railway. Similar considerations can be applied to dockyards, airfields and other assets that have been sold at knock-down prices, often after large expenditure by the government on site clearance. Although such assets require large expenditure on routine maintenance, and intermittent upgrading, they are of permanent value to the state; especially when they are constructed to support the national defence. Military technology changes, so assets to support the current shape of the forces must constantly be adapted, but the gaderene rush that has taken place since the second world war to dispose of assets that would be useful in the event of war long ago passed the point where the competence of the state to defend its people was devastated.

Industrial plant such as a steelworks can be kept running for a century or more, if it is properly upgraded; but it is eventually in a position where newer technologies make it comparatively uncompetitive. At that point it should be decommissioned; and its 'value' as a national asset should be written down over the years so that its net worth is recorded as zero even while it is producing output. Then the real and the notional loss to the national asset register can both be recorded as zero. Most industrial plant lasts much less time, and is written-off accordingly; and IT equipment and software is normally depreciated over a very short term. In most routine situations in business and in the public sector accountancy is effective in recording and reducing asset 'values' in a sensible and comprehensible manner. But strategic assets, such as the whole defence estate and infrastructure such as railways, roads, IT networks, power grids, reservoirs and flood defences stand outside the easily-accountable business arena; even if they are administered for the public by business corporates. The fact that they are enabled to exist only by legislation [or by legislatively authorised decree] and are regulated in their pricing and operations by criteria quite separate from those that are applied to 'normal' business shows that the state is fully aware of the distinction, of the public interests that are involved, and of the political sensitivity that can arise from mismanagement.

The Northern Rock incident is relevant to this whole discussion because the crisis of 2007-8 [and its long prehistory] shows that banks are quintessentially strategic assets, albeit they are in the main appropriately run as business entities. The whole world community, led by the G20, is busily setting new rules for the banking sector: and is unnecessarily drawing insurance into the same regulatory framework. But this has not yet tackled the issue that is exemplified by the sale of Northern Rock. What is the 'value' of a bank to the country in which is is domiciled? How is that 'value' calculated, reported and adjusted? It is a key part of the wider question as to how strategic assets are recorded and revalued in the computation of national assets and net national income. These are vital matters and I will revert to them in the coming days.

I will also return to the reason why I put a single inverted comma around the word 'value' in this [as in some other] postings to this blog. The issue is vitally important to any right understanding of the economy and it is a major underlying theme in my Personal Political Economy; see the link from this site.

Mervyn is Right!

If a few men go out to sea in a small boat to catch fish - say haddock - and one of them catches a cod, that must now be reported to the national government, which must report it to the EU, which will deduct that codfish from the national quota that professional fishermen are allowed to catch.
The EU pretends that it is allowing more latitude to national and regional governments: but, as this new regulation about cod fishing shows, it is merely building up intrusive bureaucracy.
A parallel point was made by Mervyn King in his Edinburgh speech on October 20, 2009. Detailed regulation is mere regulation: bureaucracy is just costly bureaucracy: and clever Dicks who know how to manipulate the fringes of legality to their own gross advantage will always outsmart the deskbound rulemakers. The bankers have been given greater power to ruin the economy than they had on New Year's Day 2007; and they can safely assume that there will always be a Gordon Brown to lead the next bail-out. This will be true until the idiocies of the historical Economics establishment have finally been abandoned.

A true measure of Britain's problem

The World Economic Forum [best known for running the annual Davos shindig] has announced that Britain is the world's 'leading financial centre'; but this apparent accolade is balanced by the fact that the same survey lists Britain in 37th place for 'financial stability', after Nigeria and Bangladesh in a table of 55 countries.
The UK was 44th for currency stability, 45th for the stability of the banking system, 39th for managing the public sector debt and 40th for managing private deabt.
This is because there is precious little evidence that the government and the Bank of England really have control of the system
By keeping the economy open to global financial trade the government gets taxes from the City trading firms and on the salaries and bonuses of the traders. The cost of doing this is to expose the 'real economy' and the economic existence of citizens to unpredictable and potentially violent fluctuations.
Gordon Brown thinks that he has 'saved the world': he may have benefitted other countries by his vastly expensive intervention in the meltdown of the financial system in 2008, but he has pushed Britain further out on the limb that hangs over an abyss.