Tara Palmer-Tomkinson has never done a day's real work in her life. She is s serial hard-drug abuser, to such an extent that she recently had to have most of her nose replaced. If she was from Croxteth or Balsall Heath or Byker or Peckham, she'd have the police raiding her house all the time and David Cameron would be planning to take away her benefits. But she's not from any of those hardscrabble places; she's from West London, and so she was able to take her place at the Royal Wedding yesterday, in the company of the aforementioned Prime Minister.
I think that's what drives a lot of us to contemplate abolishing the monarchy and the peerage and turning the UK into a republic. It's not so much the inherited wealth -- dukes are just as good at pissing that away as the rest of us. It's the inherited privilege that rankles, because it means that a complete waste of space like Tara P-T not only avoids repeated harassment by the constabulary, but is able to score an invitation to Westminster Abbey along with the genuinely great and good (and Elton John).
That said, however, the redoubtable Chris Dillow this week produced a timely warning:
If we had an elected presidency, what sort of preening, self-loving narcissistic egomaniac would think they were capable of representing and symbolizing the nation? (Tony Blair, you all answer.)
Erkk! Time for second thoughts perhaps. So two cheers for the new Duke and Duchess of Cambridge -- but please guys, try to be more careful with the invitations* in future, will you?
* They omitted both Tony Blair and Gordon Brown from the Westminster Abbey guest list, which looks like a deliberate snub. A good start.
Saturday 30 April 2011
Wednesday 27 April 2011
UK Q1 GDP: it's not great, but it's not "flatlining"
Anyone care to parse this sentence, taken from today's "Independent"?
Sluggish GDP growth of 0.5% between January and March reverses a shock decline at the end of 2010 which is likely relieve pressure on Bank of England to raise interest rates in the face of soaring inflation.
Just how many years of education does it take to learn to write like that? Still, though that may be the worst piece of "analysis" of today's GDP data, it's not just the subs at the Indy who have struggled to present the data properly. BBC News 24 says that the economy grew in Q1 for the first time in six months, which makes it sound as if output fell in Q3 as well as Q4/2010, which it didn't. Even the normally-reliable Jeremy Warner at the Telegraph has succumbed. His blog says the UK "economy has gone nowhere for six months. It has flatlined, or plateaued".
That's a very misleading description, except in the very specific statistical sense that the gain estimated for Q1 exactly matches the decline seen in Q4/2010. However, the weakness in Q4 was entirely concentrated (as far as anyone can tell) in December, when the weather was so disruptive. That's significant because it means that GDP in December was well below its average for the whole of Q4. That in turn means that it required a sharp bounce back at the start of Q1/2011 just to get the economy back to the Q4 average, so 0.5% average quarter-to-quarter growth is not to be sneezed at. Far from "flatlining" or "on a plateau", it's likely that the economy grew in October and November, nosedived in December, and has grown in each month of Q1 -- which is five months of growth out of the last six.
Today's data will no doubt be revised, and there's some suggestion that the revisions may be upwards. The reported sharp fall in construction activity in the quarter has been greeted with surprise by the industry itself. The more important question, however, is what happens next. The plethora of bank holidays (Easter, Royal Wedding etc -- five in total) may exert some downward pressure on Q2 output, though these effects generally tend to be less than expected, and the fact that the holidays are concentrated in the first half of the quarter, so to speak, will further limit their impact. Announced production cutbacks at the Japanese car plants will also have some impact, though as none of the workers will be fully idled,the effect of this on overall GDP is difficult to predict.
And then, of course, there's the government spending cuts to worry about. Despite all the heated rhetoric from Ed Balls et al about how the government's fiscal tightening has been strangling the economy, it's only from this quarter on that actual spending restrictions really start to kick in. (The recent fiscal data from the ONS showed that government spending actually rose in March, though of course debt servicing was a big part of that). Once the Royal Wedding hoo-ha dies down, the national mood may take a turn for the worse, putting a crimp in consumer spending in particular. There's still no reason to fear the dreaded double-dip recession, but the next few months, like the recent past, may be more roller-coaster than flatline.
Sluggish GDP growth of 0.5% between January and March reverses a shock decline at the end of 2010 which is likely relieve pressure on Bank of England to raise interest rates in the face of soaring inflation.
Just how many years of education does it take to learn to write like that? Still, though that may be the worst piece of "analysis" of today's GDP data, it's not just the subs at the Indy who have struggled to present the data properly. BBC News 24 says that the economy grew in Q1 for the first time in six months, which makes it sound as if output fell in Q3 as well as Q4/2010, which it didn't. Even the normally-reliable Jeremy Warner at the Telegraph has succumbed. His blog says the UK "economy has gone nowhere for six months. It has flatlined, or plateaued".
That's a very misleading description, except in the very specific statistical sense that the gain estimated for Q1 exactly matches the decline seen in Q4/2010. However, the weakness in Q4 was entirely concentrated (as far as anyone can tell) in December, when the weather was so disruptive. That's significant because it means that GDP in December was well below its average for the whole of Q4. That in turn means that it required a sharp bounce back at the start of Q1/2011 just to get the economy back to the Q4 average, so 0.5% average quarter-to-quarter growth is not to be sneezed at. Far from "flatlining" or "on a plateau", it's likely that the economy grew in October and November, nosedived in December, and has grown in each month of Q1 -- which is five months of growth out of the last six.
Today's data will no doubt be revised, and there's some suggestion that the revisions may be upwards. The reported sharp fall in construction activity in the quarter has been greeted with surprise by the industry itself. The more important question, however, is what happens next. The plethora of bank holidays (Easter, Royal Wedding etc -- five in total) may exert some downward pressure on Q2 output, though these effects generally tend to be less than expected, and the fact that the holidays are concentrated in the first half of the quarter, so to speak, will further limit their impact. Announced production cutbacks at the Japanese car plants will also have some impact, though as none of the workers will be fully idled,the effect of this on overall GDP is difficult to predict.
And then, of course, there's the government spending cuts to worry about. Despite all the heated rhetoric from Ed Balls et al about how the government's fiscal tightening has been strangling the economy, it's only from this quarter on that actual spending restrictions really start to kick in. (The recent fiscal data from the ONS showed that government spending actually rose in March, though of course debt servicing was a big part of that). Once the Royal Wedding hoo-ha dies down, the national mood may take a turn for the worse, putting a crimp in consumer spending in particular. There's still no reason to fear the dreaded double-dip recession, but the next few months, like the recent past, may be more roller-coaster than flatline.
Tuesday 26 April 2011
After the goldrush
There could be no more certain indicator than this that the spiral in gold prices is nearing an end: the reliably unreliable investment sections of the weekend newspapers are starting to tout the metal to their credulous readers. Yes, the same people who spivved millions of Brits into putting money into unpronounceable foreign banks a few years ago, triggering huge costs for the taxpayer when said banks collapsed, are now teasing their readers with headlines such as "Can you gain in the gold rush?"
It's true that gold prices are at record levels in US dollar terms, so there's certainly been money to be made if you got in at the right time. Take a look at the medium-term price chart, from goldprice.org.
You'd have made money out of gold by getting in at any time since 2002, and there was an entry opportunity in late 2008 when the price briefly fell back. But one of the few rules of investment that almost always works is "buy low, sell high", and the folks at the weekend papers are now cheerfully telling small investors to do the exact opposite. Small investors who pile into a long-running trend at a late stage rarely make money. Usually they just give those who got in early a chance to get out at a big profit. Gold may yet move higher, but it would be prudent to assume that the big profits have already been made.
One person who thinks so is Bill Emmott, former editor of The Economist, now plying his trade for News International. His column in The Times on Monday was titled "The end of the golden age will soon be with us". (Paywall protected, sorry). It's a good, balanced analysis of the factors that have pushed gold up so far. Unfortunately one of The Times subs who couldn't be bothered to read it properly stuck this entirely misleading sentence below the title: "The dramatic rise in precious metal prices is not a sign of Western inflation but of turmoil in the Middle East" . The "Arab spring" only began in January so it's hard to see how it can be the cause of a rise in gold prices that's now lasted for almost a decade.
There's no need to look much further than US Fed policy for the real cause. If the Fed signals an end to quantitative easing, which it could possibly do as soon as this week's FOMC statement, gold may start to lose some of its appeal.
Thursday 21 April 2011
It's good news week
Another gloriously warm and sunny day here today, and for once, we have economic data to match.
* The Society of Motor Manufacturers and Traders (SMMT) reports that UK vehicle production in March was 14.8% higher than a year ago, bringing the increase for Q1 as a whole to 13%. Aided by a weak exchange rate and strong foreign demand, vehicle production has risen in each of the past eight months. Closures at Toyota, Honda and Nissan plants in the next few weeks, as a result of parts shortages, will crimp the Q2 data, but the underlying picture is strong.
* Retail sales rose 0.2% in March, to be 1.3% above March 2011 levels in volume terms. Remarkably, BBC News turned to the British Retail Consortium for comment on this, even though the official data comprehensively refuted the BRC's own bogus survey, which had shown a sharp fall in sales. The BRC's Richard Dodds allowed as he was "surprised" by the data, and maintained that the underlying trend was weak. Well it isn't, Richard -- just look at the data again, will you? (The only "surprise" with BRC data is the rare occasion when it's within loudhailer range of the truth). Warm weather, a late Easter and the Royal Wedding (got your Waity Katey Platey yet?) should ensure another positive outcome this month.
* The ONS announced today that public sector borrowing for the fiscal year ended 5 April was £141.1 billion, below the forecast of £145.9 billion and 10% lower than in the previous fiscal year. All that lovely VAT rolling in from strong retail sales this month should get the new fiscal year off to a good start.
So, a double-dip recession? You can never say never, but you can confidently say "not right now". Happy Easter!
* The Society of Motor Manufacturers and Traders (SMMT) reports that UK vehicle production in March was 14.8% higher than a year ago, bringing the increase for Q1 as a whole to 13%. Aided by a weak exchange rate and strong foreign demand, vehicle production has risen in each of the past eight months. Closures at Toyota, Honda and Nissan plants in the next few weeks, as a result of parts shortages, will crimp the Q2 data, but the underlying picture is strong.
* Retail sales rose 0.2% in March, to be 1.3% above March 2011 levels in volume terms. Remarkably, BBC News turned to the British Retail Consortium for comment on this, even though the official data comprehensively refuted the BRC's own bogus survey, which had shown a sharp fall in sales. The BRC's Richard Dodds allowed as he was "surprised" by the data, and maintained that the underlying trend was weak. Well it isn't, Richard -- just look at the data again, will you? (The only "surprise" with BRC data is the rare occasion when it's within loudhailer range of the truth). Warm weather, a late Easter and the Royal Wedding (got your Waity Katey Platey yet?) should ensure another positive outcome this month.
* The ONS announced today that public sector borrowing for the fiscal year ended 5 April was £141.1 billion, below the forecast of £145.9 billion and 10% lower than in the previous fiscal year. All that lovely VAT rolling in from strong retail sales this month should get the new fiscal year off to a good start.
So, a double-dip recession? You can never say never, but you can confidently say "not right now". Happy Easter!
Tuesday 19 April 2011
IOU = UOMe
A sentence you never expected to read here: well done S&P for your timely action in placing the USA's AAA credit rating "under review". (Slate story by Annie Lowrey here). All past experience would have suggested that S & P (and its equally farsighted rivals at Moody's) would only have taken such an action the day after the US had actually defaulted on its debts and thrown the global financial system into meltdown. Instead it's almost gone too far in the opposite direction: its warning is not over an imminent fiscal problem, but over the longer-term consequences if American politicians can't get their act together in 2013. (They're assuming, almost certainly correctly, that nothing meaningful can get done before the 2012 Presidential elections).
A crisis of some sort could, of course, come sooner than S & P predicts. The debt ceiling needs to be raised in the next few weeks, or a government shutdown will be inevitable in May, and the US would become unable to repay its maturing debts some time in early July. There were few signs of willingness to compromise during the recent budget standoff, so this can't be ruled out, but even if some sort of deal gets made, S & P is surely right to assert that something needs to be done before too long to set the US on a more sustainable fiscal course. Mohamed El-Erian of PIMCO, a man who knows a bit about bonds, has called the S & P move "a timely warning".
The most fatuous comment so far on these events has come from one UK commentator (left nameless to protect the guilty) who suggests that a US ratings downgrade might not matter that much. After all, the "argument" goes, Japan lost its AAA rating a decade ago and currently borrows money at 1.25%. That's true, but it borrows at those rates from its own savings-obsessed people. Japan is not constantly rampaging around the world in a desperate hunt for new creditors, as the US is. Borrowing from abroad changes the whole complexion of the problem. Let's look at that in more detail.
There have always been plenty of economists who are prepared to argue that government borrowing is harmless because "we owe the money to ourselves". That's sometimes expressed in the "IOU = UOMe" identity, and if you recall your high school algebra, you can strike out the common factors on each side, which reduces the equation to the obviously true proposition, "I = Me".
So there's no problem, right? Well, that might have been the case at one time in Japan (or Italy, another country of savers), but even in those cases there are issues. For one thing, borrowing risks transferring wealth from the poor (who get taxed to pay the interest on the borrowings) to the rich (who get taxed, but also earn the interest on the bonds). For another, there's the intergenerational aspect: "I" am borrowing the money now, but the "Me" who's being counted on to pay it back may actually be Mini-Me i.e. my children and their children, who weren't consulted. You can make a case for this as long as "I" am borrowing to invest, but it's a lot harder to justify if "I" am just consuming the proceeds. And the case gets even tougher to make if there are just not enough Mini-me's in prospect to repay the debt, as a result of demographic trends. This is Japan's predicament now.
In the debt-happy USA, of course, the "IOU" equation stopped being relevant years ago. Americans owe money to everybody, including a lot of countries they'd really rather not be beholden to. It all works fine as long as the US dollar remains the preferred international reserve asset, because that means that foreign investors are willing to hold the dollar-denominated debt that the US spews out in order to finance its spending. However, there are signs that the appetite for USD assets may be approaching its limits. OPEC countries seem to be trying to move away from exclusively dollar-based pricing. Criticism of US profligacy and the tidal wave of dollars it creates is being heard even from notionally friendly countries like Australia and Brazil, who are afraid of another bout of asset price inflation.
There's no sign of a buyers' strike over US debt yet (although the US is certainly not able to borrow at 1.25% or anything like it), but the S & P rating action should serve as a warning that things could change, and if they do, the ramifications for the global financial system are terrifying. Whether this concentrates the minds of the White House and its array of opponents remains to be seen; it's just as likely to become another element in the endless high-decibel buck-passing and mudslinging that has supplanted fiscal debate in Washington.
A crisis of some sort could, of course, come sooner than S & P predicts. The debt ceiling needs to be raised in the next few weeks, or a government shutdown will be inevitable in May, and the US would become unable to repay its maturing debts some time in early July. There were few signs of willingness to compromise during the recent budget standoff, so this can't be ruled out, but even if some sort of deal gets made, S & P is surely right to assert that something needs to be done before too long to set the US on a more sustainable fiscal course. Mohamed El-Erian of PIMCO, a man who knows a bit about bonds, has called the S & P move "a timely warning".
The most fatuous comment so far on these events has come from one UK commentator (left nameless to protect the guilty) who suggests that a US ratings downgrade might not matter that much. After all, the "argument" goes, Japan lost its AAA rating a decade ago and currently borrows money at 1.25%. That's true, but it borrows at those rates from its own savings-obsessed people. Japan is not constantly rampaging around the world in a desperate hunt for new creditors, as the US is. Borrowing from abroad changes the whole complexion of the problem. Let's look at that in more detail.
There have always been plenty of economists who are prepared to argue that government borrowing is harmless because "we owe the money to ourselves". That's sometimes expressed in the "IOU = UOMe" identity, and if you recall your high school algebra, you can strike out the common factors on each side, which reduces the equation to the obviously true proposition, "I = Me".
So there's no problem, right? Well, that might have been the case at one time in Japan (or Italy, another country of savers), but even in those cases there are issues. For one thing, borrowing risks transferring wealth from the poor (who get taxed to pay the interest on the borrowings) to the rich (who get taxed, but also earn the interest on the bonds). For another, there's the intergenerational aspect: "I" am borrowing the money now, but the "Me" who's being counted on to pay it back may actually be Mini-Me i.e. my children and their children, who weren't consulted. You can make a case for this as long as "I" am borrowing to invest, but it's a lot harder to justify if "I" am just consuming the proceeds. And the case gets even tougher to make if there are just not enough Mini-me's in prospect to repay the debt, as a result of demographic trends. This is Japan's predicament now.
In the debt-happy USA, of course, the "IOU" equation stopped being relevant years ago. Americans owe money to everybody, including a lot of countries they'd really rather not be beholden to. It all works fine as long as the US dollar remains the preferred international reserve asset, because that means that foreign investors are willing to hold the dollar-denominated debt that the US spews out in order to finance its spending. However, there are signs that the appetite for USD assets may be approaching its limits. OPEC countries seem to be trying to move away from exclusively dollar-based pricing. Criticism of US profligacy and the tidal wave of dollars it creates is being heard even from notionally friendly countries like Australia and Brazil, who are afraid of another bout of asset price inflation.
There's no sign of a buyers' strike over US debt yet (although the US is certainly not able to borrow at 1.25% or anything like it), but the S & P rating action should serve as a warning that things could change, and if they do, the ramifications for the global financial system are terrifying. Whether this concentrates the minds of the White House and its array of opponents remains to be seen; it's just as likely to become another element in the endless high-decibel buck-passing and mudslinging that has supplanted fiscal debate in Washington.
Friday 15 April 2011
What the NHS can learn from Bob Crow
Nobody remembers good forecasts; nobody forgets or forgives bad ones. I well remember one forecast that appeared in The Economist at the time of the privatisation of Britain's railways. The paper confidently opined that the occasionally malign influence of the railway unions would be a thing of the past; with the railway broken up into several separate companies, the unions would never again be able to hold the country to ransom by calling a national strike.
The flaw in this analysis was that the unions were never actually aiming to bring the country to a halt in the first place. They were aiming to improve their members' wages and working conditions. Strikes were just the means, and when there was only one employer (British Rail), they were just about the only means available. In econospeak, BR was a monopsonist, a sole buyer. If you were a train driver, there was nobody else you could work for. That gave BR a lot of bargaining power, which the unions could only combat by occasionally unleashing the strike threat.
As The Economist might have realised, replacing the monopsonist BR with a group of smaller companies did not weaken the unions' hand -- it strengthened it. It's true that there are fewer train strikes than there used to be, but that's because the unions now have a new bargaining chip. Drivers who are not satisfied with pay or conditions at one company can just go down the line to work for another. Any examination of union demands in railway pay disputes these days will show that demands for wage parity with workers at another company feature regularly, and the companies have little power to resist, so wages have been steadily ratcheted higher. It's the structure of the industry, just as much as the pugnacity of RMT leader Bob Crow and his ilk, that have resulted in London Tube train drivers earning upwards of £40,000 a year.
The experience of the railways casts serious doubt on the Government's assertion that decentralising control of the National Health Service budget to groups of local GPs will help to restrain costs. Goodness knows, the NHS is not much of a monopsonist anyway: data for the "primary care trusts" reveal that they pay suppliers wildly differening amounts for the same goods and services. (Last year's review of public sector waste by Sir Philp Green showed that this was an issue all across central government).
Any well-designed reform of the NHS -- which does not include the one currently under review -- should look to take much more advantage of its scale as a buyer, even if that implies more rather than less centralisation. It's very hard to see how groups of clinicians, with limited business experience and even less spare time, will be better at negotiating prices and terms with multinational drug companies than the NHS or the primary care trusts have been. Just ask Bob Crow.
The flaw in this analysis was that the unions were never actually aiming to bring the country to a halt in the first place. They were aiming to improve their members' wages and working conditions. Strikes were just the means, and when there was only one employer (British Rail), they were just about the only means available. In econospeak, BR was a monopsonist, a sole buyer. If you were a train driver, there was nobody else you could work for. That gave BR a lot of bargaining power, which the unions could only combat by occasionally unleashing the strike threat.
As The Economist might have realised, replacing the monopsonist BR with a group of smaller companies did not weaken the unions' hand -- it strengthened it. It's true that there are fewer train strikes than there used to be, but that's because the unions now have a new bargaining chip. Drivers who are not satisfied with pay or conditions at one company can just go down the line to work for another. Any examination of union demands in railway pay disputes these days will show that demands for wage parity with workers at another company feature regularly, and the companies have little power to resist, so wages have been steadily ratcheted higher. It's the structure of the industry, just as much as the pugnacity of RMT leader Bob Crow and his ilk, that have resulted in London Tube train drivers earning upwards of £40,000 a year.
The experience of the railways casts serious doubt on the Government's assertion that decentralising control of the National Health Service budget to groups of local GPs will help to restrain costs. Goodness knows, the NHS is not much of a monopsonist anyway: data for the "primary care trusts" reveal that they pay suppliers wildly differening amounts for the same goods and services. (Last year's review of public sector waste by Sir Philp Green showed that this was an issue all across central government).
Any well-designed reform of the NHS -- which does not include the one currently under review -- should look to take much more advantage of its scale as a buyer, even if that implies more rather than less centralisation. It's very hard to see how groups of clinicians, with limited business experience and even less spare time, will be better at negotiating prices and terms with multinational drug companies than the NHS or the primary care trusts have been. Just ask Bob Crow.
Tuesday 12 April 2011
For this relief, much thanks
As a general rule, the Bank of England only makes rate changes in months when it also issues an updated inflation forecast. Since those forecasts are scheduled for February, May, August and November, markets have been focusing on the May meeting of the Monetary Policy Committee as the likeliest date for the start of a gentle tightening cycle.
Today's news that consumer inflation unexpectedly slowed in March is likely to give Bank Governor Mervyn King the ammunition to persuade his more gung-ho colleagues to delay any rate increase at least until the August meeting. CPI slipped to 4.0% from February's 4.4% (still twice the target rate, lest we forget); the old RPI measure slowed to 5.3% from 5.5%; and "core" CPI slowed to 3.2% from 3.4%. According to the ONS, the slowdown in CPI was mainly the result of falling food prices, with a bit of an assist from air fares. (This latter may well have something to do with the timing of Easter, which is as late as it can possibly be this year).
It may be no more than a temporary reprieve. Energy prices are still rising: the Sterling price of oil recently hit an all-time record, which tells you something about the performance of the pound over the past three years, given that we are $30 or more below the all-time high dollar price for crude. More broadly, factory gate prices continue to rise at an alarming rate. Either these will be passed on to consumers at some point, or margins will come under severe pressure. More optimistic commentaries on today's numbers suggest that it may be the latter, that supermarkets and others are losing pricing power as consumers respond to the squeeze on incomes. But there's an alternative view, as expressed here by Jeremy Warner on the Daily Telegraph website:
Regrettably, the sort of inflation Britain has today is not “demand-pull”, where an excess of demand on limited supply pulls prices up, but “cost-push”, where increased costs push prices higher. On the costs side of the ledger, there’s no let up, from high energy and commodity prices, to growing wage inflation in the big manufacturing centres of China and the rest of the developing world. The terms of trade have turned seriously against the UK, with higher prices cutting ever more deeply into our standard of living.
There's something quite nostalgic about that: the last time I read the terms "demand-pull" and "cost-push" must have been in the late 1960s. Still, he's not wrong, and as long as monetary policy remains wildly expansionary, there will be a persistent risk that those cost pressures will permeate the rest of the economy. Mervyn King and the rest of the MPC can't start to relax just yet.
Today's news that consumer inflation unexpectedly slowed in March is likely to give Bank Governor Mervyn King the ammunition to persuade his more gung-ho colleagues to delay any rate increase at least until the August meeting. CPI slipped to 4.0% from February's 4.4% (still twice the target rate, lest we forget); the old RPI measure slowed to 5.3% from 5.5%; and "core" CPI slowed to 3.2% from 3.4%. According to the ONS, the slowdown in CPI was mainly the result of falling food prices, with a bit of an assist from air fares. (This latter may well have something to do with the timing of Easter, which is as late as it can possibly be this year).
It may be no more than a temporary reprieve. Energy prices are still rising: the Sterling price of oil recently hit an all-time record, which tells you something about the performance of the pound over the past three years, given that we are $30 or more below the all-time high dollar price for crude. More broadly, factory gate prices continue to rise at an alarming rate. Either these will be passed on to consumers at some point, or margins will come under severe pressure. More optimistic commentaries on today's numbers suggest that it may be the latter, that supermarkets and others are losing pricing power as consumers respond to the squeeze on incomes. But there's an alternative view, as expressed here by Jeremy Warner on the Daily Telegraph website:
Regrettably, the sort of inflation Britain has today is not “demand-pull”, where an excess of demand on limited supply pulls prices up, but “cost-push”, where increased costs push prices higher. On the costs side of the ledger, there’s no let up, from high energy and commodity prices, to growing wage inflation in the big manufacturing centres of China and the rest of the developing world. The terms of trade have turned seriously against the UK, with higher prices cutting ever more deeply into our standard of living.
There's something quite nostalgic about that: the last time I read the terms "demand-pull" and "cost-push" must have been in the late 1960s. Still, he's not wrong, and as long as monetary policy remains wildly expansionary, there will be a persistent risk that those cost pressures will permeate the rest of the economy. Mervyn King and the rest of the MPC can't start to relax just yet.
Monday 11 April 2011
Breaking up is hard to do
The UK's Independent Commission on Banking published its interim report earlier today. (Be warned: it's 200 pages long and it crashed my computer when I tried to download it). For a one-line appraisal of the contents we need look no further than the stock market, where shares in several of the major UK clearing banks are trading higher.
The Commission's Chairman, Sir John Vickers, has already had to defend himself against accusations that he "bottled it" (his term, not mine) by not recommending a full separation of retail banking from investment banking. Instead, the Commission wants to see retail operations of each bank placed in a separate subsidiary, which would have to hold capital of at least 10% of its assets, above the current requirement of 7%. In the event of another financial crisis this capital cushion would protect the retail operations, while leaving the investment side of the banks open to collapse, all without imposing costs on the taxpayer.
Even though this approach would allow the banks to remain "universal", which they claim is advantageous to them, their initial reaction is not positive. They warn that raising the additional capital needed to ringfence the retail operations would be expensive, and these costs would have to be passed on to customers. (Well, we certainly couldn't expect the banks to pay any of the costs of keeping themselves safe, could we?) They also complain that the higher costs could place them at a significant competitive disadvantage against foreign rivals.
These are entirely predictable objections that are unlikely to carry much weight with either politicians or the public. There are, however, other concerns regarding the Commission's proposals that merit closer scrutiny, namely, who decides what goes inside the retail ringfence; and is the Commission even focusing on the right problem?
Let's look at the definition of "retail" first. The liability side is fairly simple: all personal deposits and all company current accounts presumably count as retail. The asset side is more complicated, because the whole purpose of the exercise is to avoid the kind of "black swan" credit events that triggered the financial crisis. Extreme versions of the "utility banking" approach would allow retail depositors' funds to be used only for the purchase of entirely riskless assets (i.e. government debt), but this is too restrictive to be practicable. But what else do you include? All mortgages and personal borrowings? Or only those made in accordance with certain preset criteria -- so no NINJA mortgages, for example? Or do you insist that all assets on the retail side meet certain credit rating criteria -- and in that case, how much do you really trust the ratings agencies, given their past failings? These are important questions; getting the demarcation line between retail and wholesale assets wrong would impose higher costs on banks and their customers without ensuring the protection against failure that the whole exercise is supposed to achieve.
And then there's the bigger question: is the Commission perhaps looking at the wrong question in the first place? Apologists for "universal banking" like to point out that Northern Rock, the UK's biggest failure, was a purely retail bank, while Lehman Brothers in the US was purely an investment bank. This is a nonsense argument. RBS, undoubtedly a universal bank, was only saved from failure by the taxpayer, and there can be little doubt that if it had toppled, others would have followed. RBS didn't survive because it was a universal bank, but because it was deemed to be too big to fail.
Northern Rock wasn't too big to fail, but neither was it purely a retail bank. It's true that its assets were mainly mortgage loans, but its deposit gathering was inadequate to fund the asset portfolio it was able to generate, so it was a heavy user of securitisation on the liability side of the balance sheet. The higher capital ratios that the Independent Commission is suggesting might have provided some additional protection, but they would almost certainly have been inadequate to save it from the consequences of its flawed business model once the global crisis hit.
And that's where the case against allowing banks to become too large can really be made. With a relatively small number of banks, the systemic risks posed when even one of them "goes rogue" can quicly become unmanageable. Given the well-known herd instincts of the banks, of course, it's never just one bank that goes rogue, as the near-death experience of RBS (and HBOS, rushed into a shotgun marriage with Lloyds) clearly shows. A larger number of smaller (but NB -- not tiny) banks, with differing business models and less potential to wreck the system through contagion, may be at least as important as higher capital ratios in protecting depositors and taxpayers from future financial crises.
The Commission's final report is due in September, and then the Government has to decide what it wants to do about it, if anything. The best way to make money out of all this? Invest in a lobbying firm.
The Commission's Chairman, Sir John Vickers, has already had to defend himself against accusations that he "bottled it" (his term, not mine) by not recommending a full separation of retail banking from investment banking. Instead, the Commission wants to see retail operations of each bank placed in a separate subsidiary, which would have to hold capital of at least 10% of its assets, above the current requirement of 7%. In the event of another financial crisis this capital cushion would protect the retail operations, while leaving the investment side of the banks open to collapse, all without imposing costs on the taxpayer.
Even though this approach would allow the banks to remain "universal", which they claim is advantageous to them, their initial reaction is not positive. They warn that raising the additional capital needed to ringfence the retail operations would be expensive, and these costs would have to be passed on to customers. (Well, we certainly couldn't expect the banks to pay any of the costs of keeping themselves safe, could we?) They also complain that the higher costs could place them at a significant competitive disadvantage against foreign rivals.
These are entirely predictable objections that are unlikely to carry much weight with either politicians or the public. There are, however, other concerns regarding the Commission's proposals that merit closer scrutiny, namely, who decides what goes inside the retail ringfence; and is the Commission even focusing on the right problem?
Let's look at the definition of "retail" first. The liability side is fairly simple: all personal deposits and all company current accounts presumably count as retail. The asset side is more complicated, because the whole purpose of the exercise is to avoid the kind of "black swan" credit events that triggered the financial crisis. Extreme versions of the "utility banking" approach would allow retail depositors' funds to be used only for the purchase of entirely riskless assets (i.e. government debt), but this is too restrictive to be practicable. But what else do you include? All mortgages and personal borrowings? Or only those made in accordance with certain preset criteria -- so no NINJA mortgages, for example? Or do you insist that all assets on the retail side meet certain credit rating criteria -- and in that case, how much do you really trust the ratings agencies, given their past failings? These are important questions; getting the demarcation line between retail and wholesale assets wrong would impose higher costs on banks and their customers without ensuring the protection against failure that the whole exercise is supposed to achieve.
And then there's the bigger question: is the Commission perhaps looking at the wrong question in the first place? Apologists for "universal banking" like to point out that Northern Rock, the UK's biggest failure, was a purely retail bank, while Lehman Brothers in the US was purely an investment bank. This is a nonsense argument. RBS, undoubtedly a universal bank, was only saved from failure by the taxpayer, and there can be little doubt that if it had toppled, others would have followed. RBS didn't survive because it was a universal bank, but because it was deemed to be too big to fail.
Northern Rock wasn't too big to fail, but neither was it purely a retail bank. It's true that its assets were mainly mortgage loans, but its deposit gathering was inadequate to fund the asset portfolio it was able to generate, so it was a heavy user of securitisation on the liability side of the balance sheet. The higher capital ratios that the Independent Commission is suggesting might have provided some additional protection, but they would almost certainly have been inadequate to save it from the consequences of its flawed business model once the global crisis hit.
And that's where the case against allowing banks to become too large can really be made. With a relatively small number of banks, the systemic risks posed when even one of them "goes rogue" can quicly become unmanageable. Given the well-known herd instincts of the banks, of course, it's never just one bank that goes rogue, as the near-death experience of RBS (and HBOS, rushed into a shotgun marriage with Lloyds) clearly shows. A larger number of smaller (but NB -- not tiny) banks, with differing business models and less potential to wreck the system through contagion, may be at least as important as higher capital ratios in protecting depositors and taxpayers from future financial crises.
The Commission's final report is due in September, and then the Government has to decide what it wants to do about it, if anything. The best way to make money out of all this? Invest in a lobbying firm.
Sunday 10 April 2011
Ice scream
To no-one's surprise, the voters of Iceland have again roundly rejected a deal to repay the governments of the UK and the Netherlands for losses suffered by their depositors when the entire Icelandic "banking" system collapsed at the height of the financial crisis. (BBC story here). It now seems certain that the dispute will end up in court.
The main reason given by Icelandic voters for turning down the deal, which would have seen repayment stretch all the way to 2046, is that they saw no reason why they should be on the hook for losses incurred by private bankers. At one level this is a fair point: by the time of the crisis, Iceland was little more than a flag of convenience for Kaupthing, Landsbanki et al. Almost all of their assets and most of their deposit gathering were located outside the country. However, the very fact that these banks and their activities were notionally based in Reykjavik provides a clue to one of the primary causes of their eventual demise. Iceland's banking regulation was notoriously lax, giving the banks free rein to undertake activities they would never have contemplated in better-regulated jurisdictions. Even if Icelandic voters balk at paying for the sins of the banks, it's not as easy for them to gainsay responsibility for the failings of their government-appointed regulators.
So to court, then, where things may not prove entirely simple for the UK and Netherlands governments, both of whom, no doubt responding to the frenzied atmosphere of the time, reimbursed depositors who were never protected by any official deposit guarantee scheme. One would think a good lawyer could make a reasonable argument that Iceland cannot be expected to pay for decisions consciously taken after the event by other governments. While this drags on, though, Iceland's economy will remain under serious pressure, and any hopes of EU membership will have to be put on hold indefinitely. And at the end of it all, the court may well impose terms that are much more onerous than those the voters have just rejected. The deal on the table may come to look very good, with the benefit of hindsight.
The main reason given by Icelandic voters for turning down the deal, which would have seen repayment stretch all the way to 2046, is that they saw no reason why they should be on the hook for losses incurred by private bankers. At one level this is a fair point: by the time of the crisis, Iceland was little more than a flag of convenience for Kaupthing, Landsbanki et al. Almost all of their assets and most of their deposit gathering were located outside the country. However, the very fact that these banks and their activities were notionally based in Reykjavik provides a clue to one of the primary causes of their eventual demise. Iceland's banking regulation was notoriously lax, giving the banks free rein to undertake activities they would never have contemplated in better-regulated jurisdictions. Even if Icelandic voters balk at paying for the sins of the banks, it's not as easy for them to gainsay responsibility for the failings of their government-appointed regulators.
So to court, then, where things may not prove entirely simple for the UK and Netherlands governments, both of whom, no doubt responding to the frenzied atmosphere of the time, reimbursed depositors who were never protected by any official deposit guarantee scheme. One would think a good lawyer could make a reasonable argument that Iceland cannot be expected to pay for decisions consciously taken after the event by other governments. While this drags on, though, Iceland's economy will remain under serious pressure, and any hopes of EU membership will have to be put on hold indefinitely. And at the end of it all, the court may well impose terms that are much more onerous than those the voters have just rejected. The deal on the table may come to look very good, with the benefit of hindsight.
Saturday 9 April 2011
The contractionary stimulus
Record commodity prices. Rising energy prices. Over-indebted households. Countries on the edge of default. Unstable banks. It sometimes seems as if central bankers see these ills of our time as plagues sent by a vengeful god (or extraneous factors, in econospeak), rather than as what they surely are: the inevitable consequence of a decade of irresponsible monetary expansion. Not that identifying the cause of the problems would make them any easier to solve, of course, but it might at least dissuade the Fed and others from trying to claim that the solution to problems caused by printing too much money is to print even more money. That could only be a good thing.
There was an interesting discussion about this on CNBC's pre-market show on Friday morning. The panel was speculating that the Fed is starting to realise that it is locked into a negative feedback loop: printing more dollars is driving down the value of the USD and, as most major commodities are still traded in dollars, pushing up the price of commodities. Wow, who would have thought that could happen?? Higher commodity prices, particularly for oil, are becoming a major drag on global growth, implying that the stimulus is having exactly the opposite effect from what the Fed intends. The view on CNBC was that the Fed would keep its fingers crossed that commodities would fall back in the next few months, but if that didn't happen -- and frankly there's not much reason to think it will as long as the monetary spigot is at full blast -- then it would start to remove the stimulus in the fall.
Just how open is that monetary spigot? Consider this little nugget from the pen of Dennis Gartman:
As for the Fed itself, the adjusted monetary base continues to rise skyward. Since the end of last year when the adjusted base was approximately $1.95 trillion it has risen to a stunning $2.475 trillion. This is high powered, and we fear inflationary, money of the first order, and we wish not even to annualize the number for it is mindnumbing in its implications without being annualised.
And this is happening at a time when monetary authorities around the world are supposedly looking to tighten conditions! A number of Fed governors, including the Presidents of the regional Federal reserve Banks in Minneapolis, Richmond, Dallas and Philadelphia, have been sounding more hawkish in recent days, and the markets are pricing in one 25 bp hike in the funds target before the end of the year. According to The Economist, however, it may not happen:
Markets habitually assign too much weight to the hawks, however. The real power at the Fed rests with its leaders: Ben Bernanke, the chairman; Janet Yellen, the vice-chairman; and Bill Dudley, the New York Fed president. Their views are more discreet but they are the ones that carry the day. At present they are sanguine about inflation and worried about unemployment, which means a rate rise this year is unlikely.
Bernanke's views are, as The Economist says, "conventionally Keynesian"; basically, he does not believe that inflation can get out of hand if there is a lot of surplus capacity (e.g. high unemployment). Thing about Keynes, though, is that he was never conventional. If he had encountered the type of monetary growth that the Fed is visiting on the world economy right now, and observed its apparently perverse effect on growth prospects, it's likely that his policy prescription would have been very different from Mr Bernanke's.
There was an interesting discussion about this on CNBC's pre-market show on Friday morning. The panel was speculating that the Fed is starting to realise that it is locked into a negative feedback loop: printing more dollars is driving down the value of the USD and, as most major commodities are still traded in dollars, pushing up the price of commodities. Wow, who would have thought that could happen?? Higher commodity prices, particularly for oil, are becoming a major drag on global growth, implying that the stimulus is having exactly the opposite effect from what the Fed intends. The view on CNBC was that the Fed would keep its fingers crossed that commodities would fall back in the next few months, but if that didn't happen -- and frankly there's not much reason to think it will as long as the monetary spigot is at full blast -- then it would start to remove the stimulus in the fall.
Just how open is that monetary spigot? Consider this little nugget from the pen of Dennis Gartman:
As for the Fed itself, the adjusted monetary base continues to rise skyward. Since the end of last year when the adjusted base was approximately $1.95 trillion it has risen to a stunning $2.475 trillion. This is high powered, and we fear inflationary, money of the first order, and we wish not even to annualize the number for it is mindnumbing in its implications without being annualised.
And this is happening at a time when monetary authorities around the world are supposedly looking to tighten conditions! A number of Fed governors, including the Presidents of the regional Federal reserve Banks in Minneapolis, Richmond, Dallas and Philadelphia, have been sounding more hawkish in recent days, and the markets are pricing in one 25 bp hike in the funds target before the end of the year. According to The Economist, however, it may not happen:
Markets habitually assign too much weight to the hawks, however. The real power at the Fed rests with its leaders: Ben Bernanke, the chairman; Janet Yellen, the vice-chairman; and Bill Dudley, the New York Fed president. Their views are more discreet but they are the ones that carry the day. At present they are sanguine about inflation and worried about unemployment, which means a rate rise this year is unlikely.
Bernanke's views are, as The Economist says, "conventionally Keynesian"; basically, he does not believe that inflation can get out of hand if there is a lot of surplus capacity (e.g. high unemployment). Thing about Keynes, though, is that he was never conventional. If he had encountered the type of monetary growth that the Fed is visiting on the world economy right now, and observed its apparently perverse effect on growth prospects, it's likely that his policy prescription would have been very different from Mr Bernanke's.
Tuesday 5 April 2011
Danger to public health
The UK government's plans for "bottom-up" reform of the National Health Service have run into fierce opposition from, well, just about everyone. The plan, which was nowhere to be found in either the Tories' or LibDems' election pledges, involves giving control of 80% of the NHS budget to local groups of GPs, replacing the existing faceless "primary care trusts". The doctors' own professional bodies have come out against it; nursing organisations are up in arms because there's no role for them; patients' groups are terrified of what looks like a leap in the dark; and even the media, some of whom were initially enthused about the increased role for private sector providers, are frantically rowing back.
In response, the Health Secretary Andrew Lansley has announced a period of fresh consultation, or as he puts it "pause, listen and engage". (It sounds like he may spend his weekends refereeing rugby matches, but that's just speculation on my part). However, it's not clear whether this will result in any real changes to the legislation, which is still expected to be brought forward in June. A BBC reporter on the story today insisted that there will be no change in the "direction of travel", which is one of those phrases that normally causes me to need medical attention.
What's the biggest waste of money in the NHS today? No, actually, I don't know that either, but one candidate has to be overprescribing of medication by GPs. A frequently-cited example, not least by doctors themselves, is the provision of antibiotics to cold sufferers. This is a perfectly ineffective treatment, but it's often the only way to get the patient out of the consulting room without a tantrum.
The government's proposed reforms are supposed to align health care spending more closely with "patient needs", but as this example demonstrates, GPs often find themselves catering to patient wants rather than needs, even when the distinction between the two is perfectly clear from a clinical viewpoint. There's every reason to fear that the same would happen if GPs are given control of more of the health budget: those who shout loudest will get the treatments they want, whether or not that produces the best results from a societal viewpoint.
We already know what happens if healthcare is based on patient wants rather than needs, because that's what happens in the US. Healthcare swallows up 15% of the largest GDP in the world, yet tens of millions of people have no health cover, and outcomes, as measured by life expectancies, are no better than in other countries that spend far less.
Nobody could claim that the NHS is perfect. In a lot of respects, it's not very good at all. However, the UK's extensive private system provides a useful yardstick for the performance of the NHS. In that context, the loss of revenues suffered by private health care providers over the past decade suggests that increased spending has produced positive results in the public system. If Andrew Lansley really does intend to "listen", he will hear health professionals telling him that his "direction of travel" is all wrong.
In response, the Health Secretary Andrew Lansley has announced a period of fresh consultation, or as he puts it "pause, listen and engage". (It sounds like he may spend his weekends refereeing rugby matches, but that's just speculation on my part). However, it's not clear whether this will result in any real changes to the legislation, which is still expected to be brought forward in June. A BBC reporter on the story today insisted that there will be no change in the "direction of travel", which is one of those phrases that normally causes me to need medical attention.
What's the biggest waste of money in the NHS today? No, actually, I don't know that either, but one candidate has to be overprescribing of medication by GPs. A frequently-cited example, not least by doctors themselves, is the provision of antibiotics to cold sufferers. This is a perfectly ineffective treatment, but it's often the only way to get the patient out of the consulting room without a tantrum.
The government's proposed reforms are supposed to align health care spending more closely with "patient needs", but as this example demonstrates, GPs often find themselves catering to patient wants rather than needs, even when the distinction between the two is perfectly clear from a clinical viewpoint. There's every reason to fear that the same would happen if GPs are given control of more of the health budget: those who shout loudest will get the treatments they want, whether or not that produces the best results from a societal viewpoint.
We already know what happens if healthcare is based on patient wants rather than needs, because that's what happens in the US. Healthcare swallows up 15% of the largest GDP in the world, yet tens of millions of people have no health cover, and outcomes, as measured by life expectancies, are no better than in other countries that spend far less.
Nobody could claim that the NHS is perfect. In a lot of respects, it's not very good at all. However, the UK's extensive private system provides a useful yardstick for the performance of the NHS. In that context, the loss of revenues suffered by private health care providers over the past decade suggests that increased spending has produced positive results in the public system. If Andrew Lansley really does intend to "listen", he will hear health professionals telling him that his "direction of travel" is all wrong.
Saturday 2 April 2011
OK guys, decision time is here
A very odd headline came across Bloomberg's Twitter feed this week: "Australia boom means men without degree earn more than Bernanke". It's not clear why the writer thought that might be a meaningful comparison, but what's interesting is that the "men without degrees" are not sportsmen, as most readers in the US or UK might have surmised, but workers in Australia's booming mining sector. For all the doom and gloom about the global economy (at least in the UK press), commodity prices have been robust, and Australia, with its proximity to Asian markets, is a major beneficiary. The Reserve Bank of Australia is having to balance concerns over mounting wage and price pressures with the dangers of an overvalued exchange rate, as the AUD moves above parity with the USD.
Meanwhile, back in the US, March job creation was higher than expected, and all of the new jobs were created in the private sector, suggesting that the expansion is well-established, yet the Fed shows few signs of easing up on the monetary accelerator, let alone tapping on the brakes. In the UK the state of the economy is much less robust, as fears of the effects of fiscal austerity mount, but inflation is more than twice the official target and set to rise further; yet here, too, there is hesitancy about raising interest rates by even a nominal amount.
For some years Japan has found itself in a position in which the default setting for monetary policy involves zero interest rates and repeated quantitative easing. It hasn't worked, except in the rather depressing sense that you fear things might have been even worse if the BoJ had not been so aggressive. But are the US and the UK really in the same position now? You might think that, based on the attitudes of the central banks: both the Fed and the BoE seem to fear that their entire economies will be thrown off course if they even attempt to remove the "emergency" stimulus that they hastened to provide during the financial crisis. It's impossible to imagine the implacable Paul Volcker behaving in the same way, if this had happened during his time at the Fed.
The problem is, of course, that the 2000-2007 economic boom was credit-driven to an unprecedented degree. The failure to impose greater monetary restraint when that would have been easy and beneficial, in mid-decade, meant that the Fed and BoE in particular had no conventional ammunition left when the crisis hit. Having been forced into unconventional measures, they lack any real decision-making framework for unwinding the stimulus. Add in the fiscal tightening in the UK, and you can maybe see why it's a difficult decision for the Bank of England, but it's harder to fathom Bernanke's reasoning.
The RBA is already on the case, and there's a good likelihood that the ECB will tighten things just a notch this week too. If the Fed and the BoE don't start thinking on the same lines very soon, they risk undoing the painfully hard work done all those years ago by the likes of Paul Volcker in squeezing inflation out of the economy. Not something that either Ben Bernanke or Mervyn King should want on his resume.
Meanwhile, back in the US, March job creation was higher than expected, and all of the new jobs were created in the private sector, suggesting that the expansion is well-established, yet the Fed shows few signs of easing up on the monetary accelerator, let alone tapping on the brakes. In the UK the state of the economy is much less robust, as fears of the effects of fiscal austerity mount, but inflation is more than twice the official target and set to rise further; yet here, too, there is hesitancy about raising interest rates by even a nominal amount.
For some years Japan has found itself in a position in which the default setting for monetary policy involves zero interest rates and repeated quantitative easing. It hasn't worked, except in the rather depressing sense that you fear things might have been even worse if the BoJ had not been so aggressive. But are the US and the UK really in the same position now? You might think that, based on the attitudes of the central banks: both the Fed and the BoE seem to fear that their entire economies will be thrown off course if they even attempt to remove the "emergency" stimulus that they hastened to provide during the financial crisis. It's impossible to imagine the implacable Paul Volcker behaving in the same way, if this had happened during his time at the Fed.
The problem is, of course, that the 2000-2007 economic boom was credit-driven to an unprecedented degree. The failure to impose greater monetary restraint when that would have been easy and beneficial, in mid-decade, meant that the Fed and BoE in particular had no conventional ammunition left when the crisis hit. Having been forced into unconventional measures, they lack any real decision-making framework for unwinding the stimulus. Add in the fiscal tightening in the UK, and you can maybe see why it's a difficult decision for the Bank of England, but it's harder to fathom Bernanke's reasoning.
The RBA is already on the case, and there's a good likelihood that the ECB will tighten things just a notch this week too. If the Fed and the BoE don't start thinking on the same lines very soon, they risk undoing the painfully hard work done all those years ago by the likes of Paul Volcker in squeezing inflation out of the economy. Not something that either Ben Bernanke or Mervyn King should want on his resume.
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