Wednesday 30 June 2010

Where Opinions are Facts

The ongoing discussion as to whether spending or austerity is the correct approach to solving the economic malaise is filled with many loud statements blindly claiming success or blaming the "others" for failure.

I have always had a problem with theoretical aspect of economics in which an idea if prefaced with the need to assume a certain situation exists a priori.

My favourite is the example requesting you to imagine you are on a deserted island and a can of vegetables washes up to shore. Now imagine you have a can opener....

So you get the new Treasury Minister Mr Osborne grandstanding in the run-up to the G-20 stating categorically that the cuts he is making in the budget will ensure the economic recovery. Really? For whom?

Leaked figures in the Guardian today say that according to Osborne's own papers, these cuts could result in public sector job losses of 100-120,000 each year for the next 5 years. It goes on to say that the private sector could experience the same sort of job losses.

I am not suggesting categorically that these job losses will occur-I am suggesting that in such an austerity budget there will be increased unemployment, an this at a time when unemployment is already over 8%.

I don't think there should be handouts for nothing. Some of these jobs are undeniably not very efficient. But isn't some form of employment better than no employment?

So I read in today's WSJ that the reason Obama's stimulus package isn't working is because "uncertainty about future taxes and regulations is enemy No.1 of economic growth". The author Mr Meltzer goes on to explain that the request for further stimulus measures is "convincing evidence that they too recognize that the earlier measures failed".

Mr Meltzer chooses to focus on Reagan's reduction of marginal and corporate tax rates as the engine of growth out of the stagnation of the early 80's, just as he praises Ms Thatcher's decision to reduce government spending during a severe recession in 1980.

Well, Reagan's real problem was inflation, and Paul Volcker crushed that opening discussing the fact that it would result in higher unemployment initially, but in the end would benefit everyone. That was the battle he was fighting.

Ms Thatcher might have introduced spending cuts, but she also benefited mightily from a 45% decline in the average value of the pound from 1980 to 1985 which brought in foreign investment and set the stage for joining, and exiting the ERM.

Neither of theses examples actually are that useful with regards to today's problems.
This is why the Great Depression is often referred to in discussing our Great Recession.

But even this comparison is difficult. Does one look at the results of the New Deal at its creation, or get into the sticky period of the 1938-40 period and get drawn in to the discussion that WWII "saved" the US economy?!?

Mr Bernake's greatest fear, and I would say feat was to avoid the shift from Great Repression into a Great Depression. There were immediate problems to be dealt with which required short-term responses.

And yet it is these short term responses which annoy Mr Meltzer. He wants long term solutions. I guess he would like us to worry about the barn while the house is on fire.

Monday 28 June 2010

Scaremongering by Idiots

I read an editorial by the CEO of the US Chamber of Commerce a Mr Thomas J Donohue recently in which he did his best to scaremonger the effects of the Financial Reform Bills currently in Congress.

I'm not really sure just who his target audience is but one of his examples of the likely result of the new regulation is that "one day your beer could cost $2.50, the next $4.75".

This outlandish claim is predicated on the idea that the use of derivatives by non-financial companies will be included in the new laws being discussed. He complains that these users of derivatives who incidentally tend to use them to hedge will now have to post collateral, and that the amount of collateral could change daily.

Wake up Mr Donohue. The futures market which is what most non-financial companies use requires an initial margin payment, and yes, additional collateral can be called for in the event of adverse price movements. This is also standard practice under International Swap Dealers Association (ISDA) documentation.

He throws numbers around about the effects of the bill which appear to either be snatched from mid-air, or from surveys and analysis done by like-minded groups whose sole interest is to fight regulation.

He claims that this new regulation will tie up hundreds of billions of dollars in working capital, will cost over 100,000 jobs, and drive many "main street" businesses overseas.

I don't mind if someone disagrees with changes being mooted in this bill. But please do so with more than blind ideology, and yes, ignorance.

The Eighth Mortal Sin

Recently I read an article on the evils of debt which mentioned that in some early versions of the Lord's Prayer the request is not "forgive us our trespasses", but rather "forgive us our debt".

I tell a lie. The article wasn't really on the evils of debt. The actual title was "Repent at leisure" which left me a little bit in limbo as to just what the article was about. Reading on however, and given the fact that the subtitle had the word debt in it I assumed debt and repentence would turn out to be intricately bound to one another.

The author went on to describe how the use of debt to finance assets has been around for a very long time and strangely almost always reaches a point where the "pyramid" can no longer self-supporting and the whole artifice collapses in on itself.

He even goes so far as to describe rising levels of government debt as a Ponzi scheme "that requires an ever-growing population to assume the burden". Or default.

It is interesting. Generally we talk about the "R" word as if a recession were somehow not politically correct. I think it is only a matter of time before we start talking about the "D" word.

I could mean deflation-that's getting a lot of press lately and it is certainly intricately linked with debt. And then there is default. It is linked with debt, and through forced asset sales/liquidations, which, if left to it's own devices stimulates deflation, more asset sales, more deflation and presto, we have a default.

Friday 25 June 2010

The Ongoing Oil Crisis

Earlier this year I read Frank Schaetzing's novel "The Swarm". Unfortunately it gets classified as a science fiction book and so falls off of most people's radar. It is actually a novel about how extensive offshore drilling so endangers the ocean that it fights back.

I know, that sounds like science fiction or something like it. It does create another species which is water based and made up of single cells that act in conjunction with one another to undermine continental shelves, the result of which is to send massive tidal waves which destroy coastlines around the world.

Now I am not suggesting that there is such a species. I am suggesting that our search and destroy mission to find fossil fuels has consequences. This is in addition to the effects the burning of such fuels have on our environment, and that this a problem, a man made problem.

What is galling is that world opinion seems to get split into two. On one side is that part of the population who can only look at the world in terms of profits and can only think of the world as a resource to be be exploited, regardless of the "collateral damage".

On the other side are the environmentalists who correctly bemoan the destruction of our natural environment, yet have great difficulty coming to terms with the practical realities of the world in the 21st century.

The Drill Baby Drill idiots don't get it. Nor do the environmentalists who think wind power will solve all our problems.

What I find most curious is the way nuclear energy has been banished. The environmentalists hate it without understanding it. Industry has determined that it is too difficult to build in a cost effective manner because it is one area where the safety precautions are reasonably high as everyone knows the perils of radiation!

Sooner or later we will wake up and realise that nuclear energy, today fission, and tomorrow fusion is the way forward.

In the meantime we drill for oil in the most ridiculous of locations, skimping on safety precautions, until we have the "Chernobyl" of the Gulf Coast.

I am not concerned for the future of the world. Nature will survive. I am concerned about the future of mankind.

Thursday 24 June 2010

No Social Welfare, and No Jobs

Lest anyone feel that I am a bleeding heart liberal and a priori am against the coalition government in the UK I should like to once again stress that I am seriously impressed with the cuts that they have announced in terms of the amounts cut-just somewhat concerned with the effect they will have on an already grumbling proletariat.

With some exceptions the USA has always prided itself on the fact that instead of a wide-reaching social net it offered Yankee ingenuity which professed that in the land of infinite possibilities those that wanted to could and would climb up the economic ladder.

I say with some exceptions as the chances offered some ethnic groups were sometimes seriously limited and in times of severe economic dislocation even the most capable could be crushed under the wheel.

There are many theories/explanations offered as to why the USA has proven to be so resilient and flexible-indeed many would maintain that flexibility, which essentially means free trade/anti regulation, is the key to American success.

But this is not my focus today.

The European Model has evolved out of a much more formal Class System. From those beginnings there arose the idea of a Social Contract, which periodically is abused by all the various class groupings at one time or another. Through many trials and tribulations it has developed into a Social Market Economic structure.

Now in the UK the sense is that the system has gone too far in the direction of the social aspect. The Public Sector in terms of employment and in terms of Social Welfare spending is held up as the cause of the huge budget deficit, forgetting the costs associated with the bailouts of the financial system.

So the new Austerity Budget has decided to aggressively attack the Deficit through the means of cutting Social spending and downsizing the Public Sector, and increasing CGT and VAT.

All good. Those on Social Welfare should get up and go out and find work. The swollen ranks of the Public Sector should leave their cozy bureaucracies and go and get "real" jobs.

All good. But where are the jobs? Manufacturing is dying a slow death. New technologies require highly skilled labour, and very little of it at that. What's left is the Service Sector.

Services require people who can pay for them. And that's where the problem arises. The UK has a hierarchy of services with Finance at the top. In the good times everything works. Now the finance industry has been a drain on the overall economy, and by extension is creating the ripple effect of unemployment throughout the system.

So I think the Austerity Budget is great on paper- I just don't see where the employment is going to come from.

Wednesday 23 June 2010

A Return to the Class System?

So yesterday George Osborne got to carry the tattered briefcase of tradition and present his austerity budget. To give credit where credit is due, he promised to make drastic cuts, and he delivered.

Of course let's not forget Georges', Nick's or David's background of private schools and Oxbrdge which makes them eminently qualified to understand the other 96% of the English population who are missing that silver article seemingly the accessory of choice in this new government.

Last night at my monthly economics Stammtisch one of my colleagues described this budget in terms of a cartoon he had recently seen which was a reprint from the 1920's. In it there was a ladder stuck into an oozing muddy morass with the working class standing on the bottom rung barely holding their noses above the surface, and the rest of society placed on the steps above with the upper class swanning it on top. To show their fraternity with the rest of society the top-hat wearing toff bravely agrees that in these times of austerity, they will all step down a rung.....

I don't want to condemn this budget outright. Social spending has gotten out of control. Incentives are out of whack and the budget deficit is far too high. But I see nothing in this budget which is aimed at furthering employment. I see a lot that is intended to incentivize those receiving social welfare to get up and get a job- I just don't see the jobs. It was especially galling to see investments in engineering development be cut while banks get off relatively scotfree.

The cost of bailing out the banks last year effectively negated all the tax income from the banking sector for the past 10 years. Many bankers who benefited from the low-tax low-regulation environment are now jetting off to tax-haven shores after having made their fortunes leaving the rest of society to deal with the mess.

My concern is social unrest. The British went on strike during WW II. They went on strike in the 1973 Winter of Disconten. Was all this a mild precursor to 2010?

Tuesday 22 June 2010

Who's Health is it Anyway

This morning I was listening to a radio program on the perils of drinking alcohol for pregnant woman. There was an American professor and an English doctor comparing how alcohol and health matters in general are addressed in the two countries

First of all, just as a bit of scary trivia- the first warnings about the dangers of drinking while pregnant were made in 1977 in the United States and in the mid-'80's in England!

Another shocking statistic: more foetuses in the United States are harmed by drunk men physically abusing pregnant woman than by the effects of consuming alcohol.

The American professor went on to say that in the litigious society that America is that the main effect of putting warning labels on alcoholic beverages is to free the producers of said beverages from any lawsuits arising from alcohol damage to a foetus. The onus for the drinker's health, and in this case for the unborn child therefore lies completely in the hands of the individual.

Not the Alcohol Industry; not the Health Industry; and not the State.

In the UK, under the National Health Service (NHS) the responsibility for one's health is deemed to be the State's rather than the individuals. On the surface this makes sense. If everyone pays into the NHS but some individuals abuse their own health they are essentially abusing the NHS, which all taxpayers support, thereby actually abusing the Nation.

This has created the "Nanny State" which tries to reach into everyone's lives and legislate as much as possible in an attempt to ensure that the State is not overwhelmed by it's responsibilities. The public's response is to complain loudly about the intrusions to their privacy- and then to complain even louder when the NHS is overwhelmed by illnesses including a high percentage of self-inflicted through poor health habits.

The rise of obesity for example, although not yet to the levels of the USA suggest that this approach is not succeeding. It does open up interesting discussions. Should for example, the NHS really be responsible for the health of an obese diabetic smoker with a drinking problem?

Questions such as these have lead to a myriad of research projects aimed at removing even more responsibility from the individual such as looking for the "obesity" gene. I don't wish to suggest this is not valid research, nor that such a gene doesn't exist. I do wish to highlight that in the UK there is a glaring need for the individual to start assuming some personal responsibility-and not just in terms of health care.

In the USA we are just entering into this realm of a more mandated State's responsibility as the Health Care Legislation comes into effect. The ability of an insurance company to refuse or withdraw coverage would appear to be on the way out. Along with rising premiums I assume that the insurance industry will change it's tact in that they will gnaw on the sacred cow of freedom and individual responsibility because it will now have a direct impact on that other sacred cow, profitability.

Monday 21 June 2010

Strangers in a Strange Land

Nothing like a trip to the continent to clear your mind from the daily grind and look at the world from a different angle.

I should add that my trip was a mixture of family and culture and with the exception of the news broadcasts shown during the halftime break of the world cup broadcasts I was relatively cutoff from the markets.

My return to the UK was to the news of the shift by the Chinese with regards to the $ peg but all in all it seems the the market activity of the past three weeks was a lot of activity with very little result.

Sort of like many of the World Cup matches-but that will be for another day.

My regular trips to Germany encompass Stuttgart and Munich, with a brief stopover in Ulm. This trip, as mentioned in my last post took us to deepest darkest Bavaria, and then to the former East Germany and on to Poland.

Bavaria was in the Bavarian Forest, nudged up against the Czech Republic. Before 1989 this area was essentially a dead-end as it bumped up against the iron curtain. In the 50's it was very backward-peasant woman would still hike up their skirts and squat by the side of the road to relieve themselves.

Today the area has Muehlbauer AG, one of the largest computer chip producers in Europe, Vaillant, a major heating and plumbing group, and as a result of it's location in the middle of the Bavaria Forest is a hiking and camping destination. In a word- the epitome of the German Economic Miracle.

Fast forward to former East Germany. The DDR had first 12 years of Fascism, and then 45 years of Stalinism. 20 years later the history of both is being eradicated as the consumerism of the west carpetbags on the coattails of the massive fiscal stimulus provided by former West Germany to it's eastern brothers.

Then cross into Poland. In 1945 the Russians expelled the German population of Pomerania and it's surroundings and replaced them with Poles that the Russians had expelled from eastern Poland when they occupied it in 1939.

Since the collapse of the Soviet Union and the accession of Poland to the EU the border between Poland and Germany is completely open. Cross it however, and you cross from daylight into twilight. These Poles who previously bordered Belarus and the Ukraine do not speak German. They have no historical relationship to the land upon which they live. Scratch the surface and a faint hint of Germany lies exposed like the ghosts of Christmas Past.

They are strangers in a strange land.

Monday 7 June 2010

Germany in Springtime

I am currently doing a tour of Germany which began with a wonderful lunch in Paris, then to Stuttgart, Ulm, Muenchen, Regensburg, Roding,
Weimar, Dessau, Berlin, Leipzig, Stettin (Poland), Ruegen and Hamburg. I will start my blog again on the 20th of June.