Back Again To Productiveness

There has been serious panic in the Treasury, which has resonated round other government departments, about the latest 'findings' of the Office for Budget Responsibility [OBR] on the basic facts about the UK economy. With no evidence in the raw data to support the supposition, it has been assumed that the productivity of the economy is increasing. If it were true, it would mean that on average, across all sectors of the economy, the output per worker per day is increasing. For half a century until 2007, year after year, on average productivity was increasing by around 2%. This constituted the strongest evidence that the output in the economy was growing and that there was more output to provide investment in  new plant in industry and commerce, and to renew the economic infrastructure, and to improve welfare services and education, and still to afford more wages for most of the employed people year after year.

It is now admitted, rather shamefacedly by the government ministers and officials who have assumed that productivity 'must have been' rising since 2010 at something close to the historic norm of 2%, that this has not been the case. The financial crunch of 2007-8 was a huge shock to the whole economy; but it has optimistically been assumed that things have been returning to 'normal' since 2010. It is also noted that the entire world economy suffered a shock in 2007, and that most  'mature' economies' growth since 2010 has been less than the pre-crunch norm. Nevertheless, the USA, Canada, Australia and the Eurozone all have experience increasing productivity in recent years: while India and China have continued to make massive strides forward [though at an irregular rate year-on-year].

I am not alone in having banged-on since 2007 about the fact that productivity in the UK is abysmal because the people who control the country - grossly misled by the Econocracy [the professors of Economics] - are totally unaware that productivity is always dependent on the productiveness of the system; but not many people have been saying it, and nobody has been listening. Productiveness is the capacity of the system to deliver increased productivity; and it can only be increased by well-targeted investment. Karl Marx was at one with the other nineteenth-century Political Economists who saw that industrial progress [and the development of the infrastructure of railways, ships and ports, postal systems, banking and the telegraph] was entirely dependent on a surplus being accumulated from the sales of current output and withheld from consumption by the people so that it can be converted into new and improved means of production. Marx thought that he had made the discovery of the age by claiming that the accumulation of capital had been captured by a 'class' of capitalists, who were taking over the levers of economic power from the landlord/aristocratic class who had dominated Europe since the dark ages. Other Political Economists saw that the development of shareholder capital allocated the profits that were derived from from industrial and commercial activity between the controlling shareholders in firms [who could decide how they divided the dividends and wages that they received between their own consumption and re-investment of the profits to produce even higher returns from the business in future years] and the other shareholders who would decide for themselves how much of their dividend income they would apply to their own consumption and how much they would spend on buying more shares. Investors in shares could choose between all the shares and bonds that were on offer in the stock market: so provided those investors were reasonably sensible the majority of buyers would opt for putting their investment into firms that were effective and innovative: those that were enhancing the productiveness of the economy, whose fruits would be seen in terms of higher productivity and high future dividends. Workers could be rewarded with high wages [or even profit-sharing schemes] and thus the entire economic ans social systems would be strengthened.

Obsessed Marxists gained control of Russia in 1917 and it took their successors seven decades to prove decisively that a simplistic Marxist regime does not work. Mao tried the same, and drove China into even deeper poverty than had been achieved in Russia; only for China to be restored by pragmatists who know better than capitalists the importance of concentrating on the productiveness of all sectors of the economy.

Britain's 'productivity problem' arises from the failure of industry and commerce to invest since the 2007 crunch. Companies have built up cash piles, some of which has been distributed to shareholders through devices such as share buy-back; while consumers have increased their borrowing to carry on buying goods as prices rise faster than wages.

Now the Chancellor of the Exchequer has been driven into a corner by the productivity data: the entire nation is heartily sick of 'austerity', but output is [at best] stagnant. Hospitals and prisons are in crisis, schools are increasingly stressed, the police has been cut back too far. What can he offer in his autumn Budget?

Jeremy Corbyn's almost pristine Marxism cannot be any sort of solution; but at least he has adopted more reasonable rhetoric for the purposes of getting elected. Provided Labour produces - and adheres to - a rational Manifesto, they offer the best bet for the nation in the coming years. But the trust problem is probably unsurmountable. 

Brexit and a Chance of Liberating London

We are now learning that the decaying corridors of the Palace of Westminster have been alive with an undercurrent of negotiation between the parties, as the Tory party has confronted its near-defeat in the general election. If Mrs May is able to pull off her shabby compromise with the Democratic Unionist Party, to enable her to face up to 'confidence and supply' votes in the Commons, her ministers will [apparently] go ahead with building a Grand Coalition in the form of a Commission or Committee on Brexit. Potentially this can accommodate all parties around a set of principles similar to those set out in this blog last week: separating the UK from the 'political' aspects of the European Union while keeping the country within the 'economic' community [possibly as a member of EFTA and the European Economic Area].

Soon, there will be a large literature on how the Remainer May became - to all appearances - an Arch-Brexiteer, reckless of the national interest: and how that Arch-Brexiteer May was so comprehensively rejected by the nation. With her defeat, and the consequent imperative to accede to the demands of the DUP [particularly the softening of austerity and the need for a 'soft' border in Ireland] a sensible consensus can be envisaged. This will all become swathed in legend, as everybody involves gathers around the new Brexit forum and carefully forgets what they actually said in May and the first week of June, 2017.

One issue of importance is prominent in today's press, however, and I want to stress here how important it is that the UK should be the apparent looser in this debate. This is the question of the location and regulation of the market in euro derivatives. Currently the market is overwhelmingly located in London, in terms of where the contracts are datelined and in specifying that any disputes are to be settled under The Law of England; though the actual trading is in cyberspace. The amount that is traded is reported to be around a trillion euros a day: that is, one thousand thousand million euros [given that a modern 'billion' is a thousand million]. European-based bankers and the European Central Bank and some members of the Commission and the Parliament think that this market should be datelined and contracted in a eurozone country under EU law. I strongly agree. Let the European system, the eurozone system, accept all the risk that is inherent in that market. The content of the market is not money, is not comprised of 'real' assets or assets exchangeable in any meaningful way for 'real' assets: it is an Everest of betting slips. It is a bigger accumulation of debts than that which is still being sorted out from the 'crash' a decade ago. The British state and the Bank of England should be pressing as hard as possible for that market to exit the UK: even as the UK softens the official perception of Brexit.

London-based traders would remain more adept at devising and trading in these bets than their continental rivals, once the datelines are shifted to Frankfort or Paris [or both], and their turnover would not saddle the British state with an immeasurably great potential burden. There would be no downside to that shift of responsibility: and as there is no possibility of Britain joining the euro, the regulation of the market should piously be passed to the eurozone. The UK economy need loose nothing but a burden.

The Euro: What's New?

The European Central Bank [ECB] has now put a modest amount of flesh on the bare bones of a contingency plan that is a long way from being implemented. If Spain or Italy [or France] asks for help from the EU - maybe something short of an appeal for a Greek-style bailout - and if the EU and the IMF agree terms with the government, the ECB may buy bonds issued by that government. These could either be bonds that are already in the market, or new issues of bonds that will have three years or less to run before they must be bought back by the issuing government. Some government spending in the target country [provided that the borrowing falls within the approved strategy] will be funded by new euros issued by the ECB, if any country qualifies for the scheme.

The ECB's balance sheet will be increased if this should happen; on the debit side by its liability for the new issue of euros and on the credit side by an equivalent notional 'value' of bonds. All the member-countries of the eurozone own the assets and liabilities of the ECB, and the bigger they allow its balance sheet to grow, the more deeply they will be committed to backing the whole dodgy structure. Many news media on 7 September 2012 copied the bizarre assertion [whose originator I have not yet been able to identify]  that this new policy would have the 'opposite effect' to that of the Reparations that were payable after the First World War. The sheer idiocy of this wild assertion makes it notable, and it may even prove memorable.

Reparations - money to pay for repairs - was demanded by the states that had participated in the war and had not collapsed at the end of it; as had the empires of Russia and Austria. Republican Germany was required to accept the Peace of Versailles, which included reparations; and Keynes made his name internationally by publishing The Economic Consequences of the Peace, a book that predicted the disaster that would inevitably follow. It is not clear how far, if at all, Keynes's analysis influenced members of the US Senate when they refused to ratify the Treaty; but history teaches that this decision - which seemed catastrophic at the time - was ultimately of no importance. The Treaty could be blamed for hyperinflation and economic catastrophe in Germany: and thus for the emergence of Hitler; and the Senate had no part in it.

The German electorate and the managers of the Bundesbank [the German central bank] are now united in regarding the ECB's new plan as being very adverse for Germany. By opening up the balance sheet of the common currency to weak regimes in southern Europe, the Germans and the Austrians and the Dutch [with others] find themselves forced into the situation where they will have to back the ECB, or withdraw from the eurozone: which would have catastrophic effects for the whole continent. The relatively feckless countries will have the power to undermine the strong: those who have worked hard and saved will be penalised to service the accumulated debts that were incurred by reckless welfare state awards [and by massive corruption] in another group of states. The European lie is well understood, now; but those who were conned cannot work out how the truth can triumph. The coming months will be extremely fraught for all who live in the eurozone: and for all whose economies rely on trade with the zone.

The USA and China, Russia and India, have a massive interest in this situation and have no influence over it. Britain, Sweden and Denmark have seats in all non-eurozone  EU gatherings: they could thus be in the unique position of power-brokers, but there is no sign that they have any useful advice or suggestions to offer to their beleaguered neighbours.

Keynes would have had an answer; but he was unique!

Fair Enough?

The election campaign in the USA is now in full swing, with unprecedentedly large sums being spent, largely on advertising that is virulently abusive of the candidates, their histories and the probable effect of their policies. The incumbent President carries a heavy burden of blame for the ongoing - relative - stagnation of the US economy; while his challenger carries the double burden of being a Mormon [which most people privately dismiss as a nutty religion] and being rich, with most of his wealth having been gained by his own efforts. The extreme disparity in wealth between the very rich and the poor in the USA is the greatest that it has ever been, certainly since the abolition of slavery. Thus there is a constant call that the rich - and especially any rich men or women who dare to enter politics - should be made to surrender some of their wealth, and/or more of their income, through revised taxation. There is behind this the assertion that this would simply be 'fair'.

In the UK, where a weak coalition government is struggling to achieve any policy consensus that may have a chance of stimulating economic growth, there is an even more strident call from one of the coalition parties [the Liberal democrats] for taxation of the rich to be increased, probably by introducing a wealth tax [sometimes narrowed down to a 'mansion tax'] on the grounds that this would simply be 'fair'.

In Ireland, Spain, Portugal, Italy and Greece, governments have formally agreed to impose highly restrictive policies, which include higher taxation and reduced state borrowing. In these countries there is resentment of those who prospered greatly during the credit bubble years at the start of this century, exacerbated by anger at those who use their guile and their contacts to move money out of the country before it is exposed to the risks of higher taxation and the threat of devaluation if the country is forced out of the eurozone. The rich - and the comfortable, especially senior bureaucrats and politicians - are vilified for their [real or imagined] past depredations against the economy: and the whole farrago of criticism is crystallised in the call "it is not fair".

China has been rocked by a scandal at the centre of which is a party official whose wife had become deeply embroiled with a British businessman who was helping her to move massive sums of money out of China. Both in China and abroad this case is regarded as an example of what has been happening on an heroic scale: officials have protected their families and associates as they have accumulated massive fortunes, and tried to move significant sums to the relative security of foreign banks and assets. For a communist country to permit the emergence of extreme inequality, in direct opposition to the most basic Marxist principles, is hugely embarrassing: and popular feeling can be summarised in the assertion that "this is not fair!"

One could circumvent the globe many times and find similar assertions about the state of society and of the economy in the great majority of countries. But while there is a widespread feeling that the distribution of wealth [and with it, the distribution of power] is 'not fair'; there is no clear and universal model of what would be 'fair'.

The rich can say, with considerable justice, in the UK or in France or in many other countries, that far too much tax is taken already to keep hereditary paupers in comfortable idleness; free to take and to trade in drugs, bootleg alcohol and smuggled cigarettes; and prone to civil disturbance. These people are propitiated because they could have votes; even though a very large proportion of them do not exercise that right, or even register as voters. In the USA the Congress is very careful to keep benefits for able-bodied adults of working age on a temporary basis, so there is a constant pressure on them to seek work; but for the elderly who are 'on Welfare' and potentially for people receiving treatment under 'Obamacare'  there is no time limit to their dependency. Thus although the structures are different as between the USA and Western Europe, the underlying issue is very similar. The relatively new aspect to the problem is that the concept of 'fairness' is becoming confounded with the necessary debate about the capacity of the economy [and of the social system, and of the political arrangements that prevail] to tackle the closely related issues of growing public debt and of long-term benefit dependency. People kept by the state are usually not contributing either to economic activity or to taxation of income or of wealth: so it is a fair question for the rich to ask:"where is the fairness in taking more taxation from productive individuals and dissipating it is the perpetuation of idleness?"

This question is ignored by the political charlatans who offer the voters the proposition that it is 'fair' to soak the rich, without questioning the ways in which government money is spent and the efficiency of that spending in promoting development of the real economy. Yet this is the nub of the issue, and that point must properly be drawn into the political debate.

Concern at the IMF: About What?

The Managing Director of the IMF has expressed concern about the probability that their forecasts for economic growth throughout the world must be downgraded. Her foreboding is justified by the regular downward revision of estimates for growth that are being published in various countries, especially in the light of the ongoing crisis in the eurozone and its potential negative impact on its trading partners in other parts of the world. In the face of such a negative mood among Economists, politicians, journalists, bankers and some business managers it is unsurprising that there is a growing feeling of unease among the general public.

During the so-called credit crunch of 2007-8 many governments tried to secure the future of banks in their territories by guaranteeing the deposits that people and businesses had placed in those banks. When banks could not meet depositors' demands for cash from their own resources the government supplied the money. Governments that had control of their own currencies, such as the US dollar and the British pound, could authorise their central banks to create 'new' money and make it available to the banks: some went further and actually create the money with which to buy control of threatened banks. In the USA this process was extended to the one insurance company, AIG, that had ruined itself by creating contracts by which it guaranteed to fund banks in certain circumstances which had been thought highly improbable until they happened to several big banks all at once.

In countries that did not have control of their money supply, notably those in the eurozone, the means available to governments to stabilise the economic situation were seriously constrained. For seven years before the credit crunch occurred the member countries of the eurozone issued bonds and bills [certificates of government debt] denominated in euros; and bonds that had been issued before the creation of the euro had become redeemable in euros. Those governments could not follow the lead of the Americans and the British in creating the money that they had to pay out to buy the bonds that fell due to be cashed: they had to borrow the necessary euros from the European Central Bank or the International Monetary Fund, or tap new funds created by other eurozone governments. In considering any of those options a government was faced with strict conditions attaching to any loan, that usually included the imposition of restrictive economic policies. At an early stage in the banking crisis the Irish government decided to guarantee all banks' obligations, raised a large loan and imposed dramatically restrictive conditions on the economy. Southern European members of the eurozone faced up to the crisis more slowly and then took the very different stance of demanding bail-out loans and prevaricated about imposing the conditions that they had accepted, threatening the northern eurozone countries with progressive economic collapse and political chaos. The northern eurozone countries regard this as simple cheating and are resisting any further concessions to the south unless they are accompanied by enforceable sanctions. Meanwhile the population of the whole Union is getting used to commentators covering the arguments about the possible withdrawal of some countries from the euro or the collapse of the entire venture. The fact that the eurozone is not coterminous with the European Union is widely understood: the Union could survive either the defection of some members or  the total collapse of the single currency.

The possibility of chaos in much of the EU - the world's largest economic bloc - is the cause of worry throughout the world economy. The shabby history of the Union - the political fudges, the pervasive unaccountability of the Brussels bureaucracy and the notorious 'democratic deficit' by which the eurorats have evaded public concerns in aggregating power in their own hands - has created the circumstances in which there is little mass empathy with any proposal to give more power to the Union. Spaniards and Italians would like the Union to be able to grab Germany's wealth and hand it to them in return for promises to which nobody gives the slightest credibility: Germany would never assent to such a scheme. The extension of another loan to Spain, agreed overnight, is an allocation of the existing funds which the Finns and the Dutch and the Slovaks and the Germans have already written off. This time round the northern eurozone members seem to be so little concerned about this further handout that they have agreed to give the Spanish government longer to impose austerity.

 And so the sorry saga drags on. Greece will leave the euro. With that example in their sights it is just possible that the Spanish, the Portuguese and the Italians will accept enough 'discipline' to keep the euro staggering along for a year or two. There is no hope of Europe leading the world economy to a new era of prosperity; and not much sign of the emergent economies or the US providing a 'motor' to drag the global economy into an era of growth. New thinking is needed, urgently.

Guff at the G20

Some of the people who are regarded as the most important 'leaders' and office-holders in the world have been to the seaside in Mexico with the ostensible purpose of stabilising the global economy. The slow-motion unwinding of the eurozone has been extended by the emergent powers placing additional credit with the International Monetary Fund so that it will be available to be pumped into Europe: conditions will be specified but it is most unlikely that these would be so draconian that they would ensure that the euro collapses. Low-grade politicians who hold on to power by default in countries outside the eurozone have again admonished those inside the common currency to get their act together; once more these focus on trying to bully Germany into dissipating its savings on helping other eurozone countries. So far, Germany has declined to obey, and the President of the EU Commission has blamed 'North America' for the crisis.

My analysis firmly locates the origin of the global financial crisis in London, England. With the 'big bang' of 1986.the Thatcher government smashed the traditional division of financial transactions in the City of London between stock brokers and jobbers, banks and merchant banks, separate exchanges for different types of transaction, self-regulation within each sector and ultimate oversight from the Bank of England [which preferred to steer market members into approved ways of working by winks and nods and secret meetings]. The phrase big bang had become central to theoretical physics, to describe the moment immediately after the creation of the universe when its great expansion and diversification began. By applying that phrase to the finance sector enthusiastic commentators implied that here was a new beginning in a newly structured market that could grow immeasurably and bring great profit to the participants: who could then be taxed to meet some of the growing deficit on government income as industry was destroyed while farming and fisheries were left to wallow under heavily protectionist EU regulations. The rapidly advancing capabilities of computers enabled the markets to be operated at speeds and with complexity far beyond the former trading patterns that had depended on word-of-mouth and typewriters. New types of 'product' - most obviously derivatives and new processes for securitisation - burgeoned on an almost astronomical scale, and old contract types such as futures were reformatted and used in vastly different new ways. The world's banks brought business to London and Wall Street looked set to lose the dominance of global markets that it had gained in the nineteen-thirties and consolidated through the Second World War, Marshall Aid and Cold War. Ferocious lobbying of the politicians in Washington led to the repeal of legislation that had mandated the separation of 'retail' and 'wholesale' banking,  and had differentiated banking from broking; with the specific intention of enabling Wall Street to compete with the City of London. Small differences in regulations led globalised businesses to put some business in New York, some in London and a little in other centres such as Hong Kong and Singapore.

Thus far the London big bang was the origin for the new pattern of trade; but then the US government decided to tap into the markets in the interests of social engineering. Given that such huge and flexible financial markets existed, surely they could be required to lend money to people who sat at the bottom of the heap in society. Let even the poorest become home-owners and thus gain some pride of possession and learn to earn the money necessary to service their mortgages and care for their homes. Mortgage lenders were required to allocate some of their funds to 'sub-prime' mortgage borrowers: two government-backed institutions underpinned the mortgage market, but the wholesale market practitioners became increasingly keen to securitise 'bundles' of mortgages and re-sell the securities into the general financial markets. After a very few years just about every bank and securities manager included some sub-prime mortgages buried within their so-called 'assets'. Once it was demonstrated that hundreds of thousands of feckless Americans were not paying their mortgage debts or maintaining their houses well, it was clear that some portion of the 'value' of many hundreds of thousands of 'assets' was non-existent. Thus the trigger for the crisis was squeezed in North America, but financial institutions from all over the world were deep in the mess and the resultant reckoning is ongoing. American sub-prime lending was the mechanism for the disaster; but its origin lay in the reckless gamble by the Thatcher government.

Dubloons for the Dons

Today's German press is highly critical of the fudge by which the eurozone is to bail out the Spanish banking system with a fund of up to 100 billion euros, by means to be clarified at an indeterminate cost to the currency union in general and to Germany in particular. In some editorials the term 'blackmail' is used frankly; in others the same analysis is more delicately expressed. While Greece and Ireland were implicitly deemed to be 'small enough to fail' Spain [like Goldman or Morgan] has been treated as 'too big to allow it to fail'. The eurozone could survive without Greece and Cyprus; provided there was no domino effect on Spain or Italy: but the impression over the past week became a conviction that if Spain was allowed to collapse financially the eurozone would be under terminal threat and the whole European project would massively be enfeebled.

All the eurozone finance ministers were complicit in the round of conference calls that took place at the end of last week. All their governments have become almost-unconditionally susceptible to being organised by Germany into a superstate. The details of the fusion, and of the way the inner union will articulate with the non-euro EU member states must be settled quickly; and Germany will predominate in all the discussions. The vulnerabilities of Italy and France are so significant that neither will have a veto on the integration process: and the influence of the eurorats in Brussels will be diminished in favour of the smooth suits in Frankfort.

The first few hours of trading in international markets after the announcement of the purported loan-guarantee to the Spanish banks demonstrated that supernational gamblers would only give credibility to the package when they can see the funds actually allocated by the Germans. The package was announced on trust: and it was not trusted. The eurozone expressed an intention to support Spanish banks, in circumstances where no fund had yet been established from which the guarantee could be converted into a series of payouts. 'The markets' on which the prices of Spanish [and Italian] bonds have fallen since the 'rescue' was announced are only in a tiny proportion driven by real-world firms [such as pension funds] that hold such bonds as part of their long-term investment portfolios. The majority of recent purchases and sales of state bonds and of bonds issued by south European banks are speculative gambles: the 'value' of the bonds is utterly irrelevant to the gamblers, who are interested only in making a gain by rightly predicting a rise or a fall in the price of the euro in terms of dollars, sterling, yen or other currencies. The market reaction strengthens the Germans' hand: the Spanish deal - and any subsequent deal for Italy or France - will only have credibility if Germany actually places resources in the appropriate backing funds. Chancellor Merkel faces elections: she and her party will be annihilated if they are perceived to have sold the German taxpayer short. Serious negotiations must now begin, with the collapse of the euro as the imminent threat. The eurorats will posture around the periphery, but the power unconditionally rests between Berlin and Frankfort; the modern and the medieval capitals of the German Reich.

Britain has blundered into the position where most of the electorate want the UK to be separated from this whole mess: so it can't be all bad!

Greek Bondage, Eurobonds and Project Bonds

Greece is likely to leave the eurozone: I have said it ever since the bubble was exposed and it becomes more likely every week. More and more Greeks resent the restraints on public spending that have been imposed [not just by the EU, but more significantly by the IMF] to correct the inane profligacy that the eurorats studiously ignored for more than a decade. So intoxicated were the Brussels sprouts by their power to exploit the inertia and ignorance of the pseudo-statesmen who were notionally their political masters that they just pressed on with the delusory agenda  of full integration that assumed - contrary to available evidence - that all eurozone members were behaving 'responsibly' according to EU treaties and agreements. Ancient Greece was a slave-powered society: Greece today is bound by truly oppressive rules imposed by aliens. The Greek situation is so extreme that once it is tackled by measures that can be given a fair chance of bringing the economy into balance, the other enfeebled eurozone economies can be ring-fenced affordably to the rest of the European Union; possibly even including contributions from Sweden and other EU states that are outside the eurozone.

Investments that might be made in Greece after exit from the euro, by public sector and private investors from Europe and beyond, could support substantial growth of the 'real economy': but only if the investors are sure of the security of the investments. Foreigners will not invest if their assets could be written off by hyperinflation, or if they faced a high probability of being nationalised, or be immobilised by strikes that freeze the stream of revenue. Similar strictures would apply in any eurozone country where investment was sought for projects devised to strengthen productive resources or improve the infrastructure: Italy, Spain, Ireland, Portugal and - potentially - France.

The experience of several countries that have tried quantitative easing [usually explained as 'printing money'] is that the 'new money' is not used to buy industrial assets or  stock in material trade, but to enable the central bank to buy bonds that might otherwise plummet in price if there were no buyers. The propaganda machine says that the intention is to sustain real economic growth: in reality quantitative easing is an additional way of shoring-up 'banks' that brings a huge threat of future inflation of costs and prices [and an additional erosion of personal wealth]. The players in financial markets are very clear of the real nature of this charade and they will not support any such policy by buying bonds issued by a government that is not pursuing serious economic discipline. Thus in Europe there is a strong lobby - led by the less-responsible governments - for the creation of 'eurobonds' that would be guaranteed by all eurozone governments. The funds thus accumulated would be lent to countries and to banks that found it difficult to raise funds in other ways. In effect it would be slightly covert way of getting Germany to shore up financial institutions in Spain, Italy, Ireland, France [and possibly even Greece]. It is absolutely unsurprising that Germany is resisting this.

But now the evidence is unequivocal that the eurozone is in danger of collapsing, with or without Greece, so the Germans have indicated a willingness to consider issuing 'project bonds' with some sort of eurozone backing [perhaps through the European Central Bank]. This would stimulate employment and spending in member countries by building roads, airports, housing estates and other infrastructure that would have demonstrable material existence. The buyers of the bonds would become the indirect owners of the assets, and could be recipients of interest payments directly raised from the assets: this would give a limited guarantee that the money would be properly used according to the intention of the investors. That guarantee would only be as good as the legal system and the economic order within which the investment would take place. Politicians are fantasisers, liars and cheats: the investments would have to be ring-fenced from political  chicanery; then the idea may begin to take up some serious attention.

Greece in Europe and Another Wasted Opportunity for Britain

I interrupt my mini-series on the only truly positive prospect that faces Britain to comment on the 'new' situation in Europe following Greek and French elections.
My long-standing adherence to the view that Greece must, eventually, escape the intolerable burdens of eurozone membership is unchanged. Of course severance would be a plunge into the unknown, a choice between the devil and the deep blue sea [or, as my fellow Lancastrians put it, a choice between muck or nettles]; but the certainty of pain for Greek people while their country remains within the zone has now been confirmed. The new French President went to Berlin to agree with the Chancellor that the current EU policy must remain in place. This has been amplified this morning by the German Finance Minister who has declared that every detail of the Greek bail-out deal is part of an integrated whole and that no tinkering can be attempted without unscrambling the whole deal. The IMF has admitted that their contingency planning for a Greek exit from the euro is [necessarily] in an advanced state.
In this painful situation, British government debt is being sold at the lowest price since the modern system of public finance began around 330 years ago: London interest rates are a record lows because so many international investors are viewing Britain as a 'safe haven' for their money. They want to diminish their exposure to the euro in case a Greek exit causes 'contagion' affecting Portugal, Spain, Ireland, Italy and possibly even France. The Japanese yen has limited appeal, Brazil and Switzerland have taken steps to keep out 'hot money', the Chinese currency is not fully transferable, Indian money is not even trusted by the gold-hoarding home population and there is a limit to how many US dollars any portfolio can safely contain. So the familiar old pound sterling came under 'positive' pressure, regardless of the fact that the buyers understand the long-term fragility of the UK economy. If the UK had a government capable of capturing opportunity it would now create a huge investment pool to finance the Grand Oceanic Project that I am advocating, taking advantage of these unique monetary circumstances: but no such government is in prospect.

Sad Tidings

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.

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.

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.

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!.

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.

Conservatives and Europe: More of the Same

Jacques Delors - one of the all-time heroes of the European Project - has taken the opportunity of a press interview to damn the present condition of the EU, the establishment of the euro under a fake prospectus with a plenitude of false data, and the dangers of the 'Germanic view' of financial discipline.

Meanwhile the German view is absolutely prevelant in negotiations on the future of the whole project: in the absence of the current expectation by market participants that Germany would in the end 'rescue' at least a core of the present eurozone there could not be any 'value' in the euro or in any bond issued in euros. The immensely effective and intellingent - though often obtuse - French state machine that Napoleon established on the remnants of Louis XIV's omnipotent bureaucracy has failed to marshal arguments that can trump Bundeskanzler Merkel's simple housekeeping economics [which is massiviely supported in Germany]; so France will agree to a German plan, with minor modification. The full concept of fiscal union will take years to implement, and will probably cause the eurozone to shed up to a dozen member states on the way, but it will eventually come about.

The little-used second verse of the British National Anthem says:
"May She defend our Laws,
And ever give us cause
To sing with heart and voice
God save The Queen."
Successive premiers have advised the Queen to breach that sentiment, and probably her Coronation Oath; to which she has dutifully acquiesced in line with her clear understanding of her constitutional duty. It is probable that her Diamond Jubilee will be accompanied by the increase of the power of Brussels over Britain, even though the UK will not be joining the euro and may even be repatriating trivial aspects of labour law. In those terms it is a sad thought that in the jubilee year there will be almost no reference to the third verse of the anthem, in which is a plea that the Almighty will deal with those who would undermine the Monarchy:
"Confound their politicks," and "Frustrate their knavish tricks."

Cameron will not see his policy as a knavish trick. He will be persuaded - as his predecessors were - that there is no future for the United Kingdom outside the EU. So he will risk his already-tenuous popularity, and probably his position, in the pursuit of what he will perceive to be the national interest. It is not easy to imagine such a smooth operator adopting the role of a martyr, but it is probably going to be his fate; and his Liberal Democrat allies will do nothing to save him from the dilemma that will send him down that path.

Tory Eurosceptics demand 'repatriation' of powers from the eurorats of Brussels. This is such an arcane demand, in the current situation of the European Union, that the British Prime Minister can only make himself a figure of ridicule in his peers' eyes if he does anything significant to pursue their demands.This incredulity would apply not just to the leaders of the other EU members, but to Putin and Hu and Singh and Obama who are all being advised that a stable Europe is necessary for their own countries' economic success. So Cameron will go the way of Heath who lied systematically about the implications of EEC membership; of Thatcher, who talked tough yet signed up to the EEC becoming the EU; and of Major who flannelled and equivocated while he squeezed the UK into the Maastrich Treaty. Blair's 'offence' in agreeing to the tidying-up excercise of the Lisbon Treaty was relatively trivial and was popular in his own party. The last three Tory Prime Ministers eventually ignored grassroots opinion in their party to drag the United Kingdom more inextricably into the European system [whose surviving founders, not least Delors, now regard with despair]. Cameron will continue in that tradition, whetever rhetorical devices he may deploy while he diminishes his credibility among his rank-and-file as he is pushed along the lonely and painful route that lies ahead.

Leading Europe

On this day -2 December - in 1804 a man originally called Nabuleone Buenoparte crowned himself Emperor in the Cathedral of Notre Dame, Paris. He grabbed the crown from the Pope, who was about to place it on Napoleon's head, on realising that he did not want even symbolically to receive the crown from anyone else. His empire was delineated as an enlargement of the monarchical France that had been toppled in 1792, but it effectively held sway over continental Europe from Gibraltar to the Russian border. After the fall of Napleon, in 1815, the old monarchies re-established their states under the tutelage of Russia at the Congress of Vienna; and in the revivified 'Congress System' that assembled in Paris in 1919 under the tutelage of the US President Woodrow Wilson a new and more subdivided set of sovereign entities was confirmed in the Treaties of Versailles and Trianon.

In 1935 Adolf Hitler began his campaign to reverse the Treaties. The Rhineland was remilitarised and Saarland was reincorporated into Germany. Attention was then focussed on incorporating Austria into 'Greater Germany' and thereafter in bringing the scattered German-speaking communities in Europe, and the territories where they were settled, also under rule from Berlin. The indigenous inhabitants who were not German would become subject peoples; and anthropological devices were bent to asserting the 'inferiority' of such people. After absolute defeat in a devastating war Germany was shrunk in size, and the scattered Germans who were able to reach the four zones of occupation - however grim the conditions in which they found themselves - were the lucky survivors.

With this experience behind them, the governments of the northern European monarchies and new regimes in the formerly fascist states that operated new Constitutions that were authorised by the victorious allies [US, the UK and France] faced a difficult future. Soviet communism had become established behind the 'iron curtain' in the middle of the continent. Defensive support from the US, and to a lesser but significant extent from the UK, was essential and came at the price of persevering with democratic institutions. Germany, in particular, took the message to heart and has developed into a genuinely democratic state whose citizens' views really counted. Thus in the euro crisis the German electorate has made clear the limits to which they are prepared to  pay for the past profligacy of countries that never met the criteria for membership of the eurozone.

The German Chancellor is called upon to lead the resolution of the euro dilemma, with foreigners asking her to lead in a direction that is not wanted by her people. She grew up in occupied East Germany; battered in school by the Communist version of German history. She has transcended those experiences and embraced democracy: and she is not prepared to impose intolerable burdens on German taxpayers at the behest of Obama, Cameron or anyone else outside the eurozone. Nor will she allow the fellow-members of the eurozone to despoil the assets that Germany has painfully accumulated since the nineteen forties. Germany wants to be a good democratic partner in Europe, not a new Reich with a wish to dominate.

A new settlement is needed for the euro: with or without retaining the fringe of spivs as members. Cameron is to visit Sarkozi today, to put down irrelevant markers: he is an impotent petitioner in relation to eurozone politics. Then over the weekend the serious talking that is scheduled to take place is likely to produce the basis for a new treaty by which the eurozone can be made manageable. That which will be defined as manageable, will probably be affordable. If Germany is to fund it, Germany must be satisfied by the new settlement. The crisis - for the moment - is a crisis of the euro: non-members depend on there being a solution that they cannot significantly influence. Eurozone members need a solution; and Germany needs it to be a democratic solution, so it must have a constitutional basis - a new Treaty. The odds are that Angela Merkel will take a modest place in proving that democracy can deliver success: that would be real leadership!

Meanwhile yesterday the Governor of the Bank of England has advised British banks to be ready for rough weather if either the success or the failure of the euro has adverse effects on non-eurozone countries. He suggested that banks should not pay bonuses, but hold the cash in their reserves. This shows a sublime ignorance that was repeated by the former Labour City Minister on the Today programme this morning. The overwhelming bulk of bonuses in 'banks' are not paid to managers or 'executives': they are paid to dealers, broadly in proportion to the purely notional return that they deliver in return for gambling in cyberspace. The more inventive and arcane are the contracts that they devise, in general, the less understood are the risks that the gambles might bring on to their firm's balance sheet. The bonuses are partly paid in shares - removing a proportion of the ownership of the firm from the other shareholders - and partly in cash that is taken from the regular business turnover of the firm. The cost of the bonuses is 'real' and obvious; the risks that the dealers' gambling incurs are unquantified and dangerous: but billions in taxation has been levied on the notional turnover of the gambling, and on the bonuses, so governments have not had any interest in terminating the problem.

Gambling

Today's news contains much good, and many items where it is clear that risk is being accepted by governments on behalf of populations who have little understanding of what is at stake. We will take three instances.

One.
27 October 2012 is the twenty-fifth anniversary of the 'Big Bang' in the City of London and the wider British financial market. A tightly managed group of self-regulated professions whose members largely bore personal financial responsibility for their actions [and set their own ethical standards] was replaced by an open marketplace. Foreign firms bought the stockbrokers and jobbing firms and began to use them as bases for gambling on an ever-expanding scale on their own account, abandoning the former focus on customer relations. Their leaders spoke about accepting and managing 'risk'; until 2007 when their frozen gambling debts were so great that governments had to bail them out to prevent systemic collapse of the economy. Because they paid a huge amount of tax on their reckless transactions the financial markets became the great favourite of British governments [especially the Brown-Balls Labour lot]; and it remains conventional wisdom that their 'markets' are essential components of the British economy. So there is yet more risk eventually to be absorbed by a debilitated economy; and little evidence that the politicians have a better understanding of this situation than did their predecessors in 1987 [except Ken Clarke, who is still there and may have learned a lot].

Two.
The Eurozone leaders have gone home to bed after a very late night session, content that they have shored up the system for an indeterminate period during which they will move slowly towards some sort of fiscal union. The longer the negotiations go on, the more risky situations will arise and the more scared the less-well-managed economies will periodically become, and the more the Germans will have their way in determining the shape and structure of the final deal.

Like it or not, there is now a 'two-tier' European Union. The in-crowd of the Eurozone have huge benefits and massive risks in their refreshed situation. Their banks have been bullied into surrendering 50% of the cash that the Greek state notionally owes them: and the whole Eurozone will now try to compel the Greek government to stay in the Euro and eventually pay up their remaining debts in Euros rather than in a putative devalued Drachma.

The outer circle is composed of the willing Euro-abstainers like Britain, the Czech Republic and Sweden and of the reluctant who have simply not passed the economic tests that Greece should never have been allowed to self-certify - especially Poland. There is little probability that the outer ten will have the slightest wish to seek the sort of coherence that is essential among the insiders. Some of them will still seek admission to the Eurozone. Some may form informal alliances, such as the former members of EFTA who joined the EEC together in 1973 [Sweden, Denmark and Britain] and may forge a new relationship with the other ex-EFTA members Norway and Switzerland who are in the European Economic Area but outside the European Union. If this step were taken it could prove an attractive alternative option for Poland but may not be attractive to the Czechs or Hungarians. There is all to play for: no option is risk-free, but there are now clear options.

Three.
The British Office for National Statistics has announced that Britain can expect the population to exceed seventy million by 2030. This is perceived to be 'good news', in that millions of immigrants and their children will be of working age, offsetting a steep forecast risk that there will be a doubling of the number of people over ninety years of age who will impose heavy costs on health and social services. This assumption entails huge risks; not least the fact that there is already a growing anti-immigrant sentiment. That politicians have either ignored the hardening of the popular mood, or stigmatised it as 'racist', is a major risk for the coherence of the country. There are real worries about Muslim colonisation of the country [and, indeed, of the Continent], which will not be assuaged by bland political reassurances. Demography is becoming dicey!

Governments in Terror of the Markets

The media are at one with European Finance Ministers in asserting that 'the markets' threaten mayhem in the world economy unless the eurozone solves the 'Greek crisis' expeditiously. The deadline for a solution that was to be agreed between the German and French governments has slipped from Saturday to Wednesday, raising the sense of urgency.

In the mean time another 800million Euros have been given to the Greek government to meet immediate obligations [largely owing to west European banks and investing institutions], and a further eight billion have been earmarked for the Greek bailout subject to evidence that the blatantly unco-operative Greek population are actually enforcing the necessary austerity and tax-paying measures that are minimally necessary to meet the government's assurances to their partners in the Eurozone. There is no credible evidence that Greece can go far enough to appear plausibly to bring living standards within the earnings of the economy, year on year. If the Greek state and the Greek banks stop paying interest on their debts, and declare themselves unable to pay in full where debts have to be repaid, then it is asserted that 'the markets' will create problems for the banks that are not being paid what they were owed by the Greeks.

Banks in almost every trading country have lent money to Greeks to fund businesses and to grant mortgages  to households. If they are not being repaid in full, holes will appear in the balance sheets of those lenders. It is taken for granted that 'the markets' will instantly start selling shares of those threatened banks, and withdrawing deposits that were placed with them, as soon as there is clear evidence of an impending Greek default. The argument goes that there will then be a risk of a 'run' on the threatened banks: and conventional wisdom has it that the governments of the banks' home countries will have to take whatever measures are necessary to reassure investors and depositors in the banks that their money is safe. President Sarkozi wants to be able to draw on Germany's assets to give French banks the assurance of unconditional support: and within the eurozone what is available to one country must be available to all. So Germany came once more  under pressure to lead the bail-out of anybody else: otherwise it is asserted that 'the markets' will force a domino-effect collapse of one eurozone economy after another.

It would be much easier - and cheaper - to allow Greece to default on its debts and then to ensure the security of the other Eurozone countries: and that will probably be how the whole issue is ultimately resolved, however much bravado is displayed in the mean time about levying the rest of the zone to continue to prop up Greek corruption and indulgence.

In the received wisdom 'the markets' will require a convincing resolution of the eurozone crisis to be concluded, at the latest by the closure of the forthcoming G20 Meeting, if it cannot be sealed-off by the European leaders on Wednesday. And what can the markets do if they do not consider the solution to be workable or sufficient? On investigation, it immediately becomes apparent that the markets as such never 'do' anything. Actions taken by participants in markets can be supportive or disruptive of government and of EU policies: but it is equally apparent that the full-time market players are ultimately and abjectly dependant on governments. No significant bank or investment house in Europe or the United States of America would be in existence now if they had not been supported by their government and Central Bank in 2008-9. How then could the same firms undermine governments and Central Banks in 2011-12? The conventional responding assumption is that the banks would demand repayment of advances that they had made to banks in the supposedly at-risk countries - Portugal, Spain and Italy are the favoured candidates for this role - and they would sell government bonds from the most-threatened country at ever-declining prices; while they would refuse to buy any new issues of bonds by those governments].

Governments need not roll over in shock at such actions by financial institutions. Governments [or Central Banks acting on their behalf] can freeze or  'demonetise' the cash that institutions get by selling 'distressed' government bonds of named states, and the money they collect from recalling deposits made in their banks, so they cannot make any use of the funds, which would remain inaccessible until governments release them in stabilised circumstances. Governments can react to the threat of sovereign credit being downgraded by the rating agencies by banning any publication of ratings in any context within their territories. They  can suspend banks' licences if their actions threaten to be disruptive of state policy. Governments have a massive range of powers - some of them not yet imagined - which they can use to cajole and if necessary compel institutions to conform with urgently-necessary policy requirements. Econmists will screech that such policies would undermine 'the market': so what value do Economists bring to the debate? They have not helped hitherto.

Governments should ignore threats from market operatives, or market forecasters, or market trends, or market analysts. The government can always freeze transactions across a market or in any part of it; or they can freeze any cache of cash or credit within the system.  Markets and their participants are the government's creatures. They just need the guts to act decisively. Of course there will be an aftermath: but that is in the future and sufficient unto the time is the evil thereof.

One Day to Go

President Sarkozy missed the birth of his daughter yesterday in order to try again to persuade Chancellor Merkel to release German wealth to support something close to the present situation in the eurozone. All the signs are that he has failed: though Mrs Merkel again said that they would reach an agreement by Friday evening; which is likely to mean that the French will have to accept something close to the German position.

Meanwhile the streets of Greek cities have been defaced by increasingly violent protests against the relatively low-key measures that the Greek government has so far announced to meet some of the demands that have been made by their partners as the price of subsidising them. Many Greeks have already experienced real hardship, and the idea that the worst they have experienced is just a first tranche of the misery to come is infuriating.

Germans who read about it in the papers or watch the television pictures of the Greek riots could well feel that the Greek situation is irresolvable on the terms that have been offered by the eurozone countries, and that a more draconian solution - Greek default on their debts, probably accompanied by their withdrawal from the euro - is the only available resort.So the Germans' position could well harden against any thought of compromise.

The French and the Germans have promised to bring proposals for consideration by the other EU Finance Ministers [not just the eurozone seventeen] this weekend. The portents as to what they will agree upon are doom-laden; which scares the US Administration and has caused the Chinese to make it clear that they would be unwilling to contribute to any bail-out in Europe in the absence of some credible comprehensive provision [with the implication that China's Sovereign Wealth Fund would buy EU bonds if the context had been stabilised]. The overwhelming probability is that there will be a blatant fudge, followed by panic-as-usual. The medium-term outlook is stormy.

In the distant background to the Grand Continental Eurodrama is a delightful vignette of the fundamental rottenness of British politics. The 2010 intake of Conservative MPs are predominantly 'Eurosceptic' to various degrees, meaning that a majority of the Parliamentary Conservative Party is now of that mindset. They have used some of the Commons timetable that is allocated for Members' own motions [as distinct from Government time and time granted for formal Opposition motions] to propose that there should be a Referendum in the UK offering people various options. First, do they want Britain to stay in the EU, or to leave it? Second, should there not be a total breach with the EU, would they want Britain to be able to re-negotiate its relationship with the EU, including the repatriation of significant powers that have been ceded to
or arrogated by EU institutions? Both the Prime Minister and the Foreign Secretary have in the past indicated that they favour renegotiation; but in the Coalition agreement the Tories were committed to keep the issue off the agenda because their Lib-Dem partners are abjectly pro-EU. The vote has been brought forward to Monday so that the Prime Minister can quell the 'revolt' himself before he flies off to Perth [Western Australia] for the Commonwealth Summit Meeting. If he succeeds in whipping the great majority of the Tories into betrayal of a strong and often fervently-held position the shredded credibility of the political class will be further damaged; and Cameron's chances of winning a majority of seats in the next General Election will recede even further.

The Lib-Dems' treachery on student fees, and the Tories' betrayal of their Eurosceptic rhetoric will not be forgotten: and so the puerile Labour Party could form a government by default, in or before 2015. So much for integrity. 'Democracy' entails no integrity. Millions will see their options as lying between support for minority parties or abstention - staying away from the poll.

The next election will, however, be the occasion when millions of voters  could bestir themselves to go to their Polling Stations, get their ballot forms and mark them with bold writing 'NONE OF THESE'. If the 'spoilt' forms represent an overall majority of all the votes cast, the knell of the stinking corpse will at last be sounded.