CynicusEconomicus: Consumer debt

Showing posts with label Consumer debt. Show all posts

Tuesday, November 20, 2012

France Downgraded

For regular readers, they will know that I do not have much (any?) respect for the ratings agencies, but will also recognise that their pronouncements have impact. When they pronounce, the world listens, and in the case of the banks, they must listen due to capital adequacy regulations. This is from Reuters:

France lost its prized triple-A badge from the Standard & Poor's in January and so Monday's move by Moody's was not surprising but it underlined doubts about Socialist President Francois Hollande's ability to fix France's public finances.

This is a commentary from the same article:

"I don't expect it (the downgrade) to have an immediate knock-on impact today on access to and cost of funding," said Espirito Santo analyst Andrew Lim of the possible impact on the banking sector. "But it's symptomatic of the wider concerns of a plain-vanilla negative impact on the economy being suffered in the next few months and quarters. Spain, Italy and peripheral Europe are weakening and France's exposure to them is something to be aware of."

The stronger news is that the EFSF and ESM ratings may suffer with the French downgrade. Also, French corporates and banks may be subject to downgrades following the sovereign action as well.

"We do note that downgrades are warranted as our own sovereign ratings model shows France's implied ratings at AA/Aa2/AA, which remain below actual ratings of AA+/Aa1/AAA", wrote the BBH team of analysts, seeing scope for more downgrades given what we see as major misalignments in its ratings, especially with Fitch now.

Read more: http://community.nasdaq.com/News/2012-11/france-rating-downgrade-threatens-efsf-and-esm-bbh.aspx?storyid=191416#ixzz2Cn4QcAbM

Whilst the Euro sank a little, it is not seen as a harbinger of crisis, or at least not yet. Another article notes some of the upcoming risks:

The stronger news is that the EFSF and ESM ratings may suffer with the French downgrade. Also, French corporates and banks may be subject to downgrades following the sovereign action as well.

"We do note that downgrades are warranted as our own sovereign ratings model shows France's implied ratings at AA/Aa2/AA, which remain below actual ratings of AA+/Aa1/AAA", wrote the BBH team of analysts, seeing scope for more downgrades given what we see as major misalignments in its ratings, especially with Fitch now.

It is a very good point. When those doing the bailouts look less creditworthy, there are the makings of a future crisis. This from the Wall Street Journal:

The European Financial Stability Facility is widely expected to receive a credit rating downgrade within the week, allowing it to resurrect plans to issue bonds after the rescue fund's second-biggest backer--France--saw its rating trimmed.

A downgrade could marginally curb demand for EFSF debt. It would normally make it harder for borrowers to raise funds. But for the EFSF, it would help resume plans to finish its 2012 funding program after it was forced to shelve a three-year bond sale Tuesday due to the rating discrepancy between the EFSF and France.

The EFSF--Europe's short-term bailout fund that has helped raise cash for Greece, Ireland and Portugal--said Monday that it planned to sell three-year bonds denominated in euros.But the decision later in the day from Moody's Investors Service Inc. to strip France of its triple-A rating complicated the proposed EFSF deal, as it left the rescue fund's rating standing above that of one of its key backers. The EFSF described the decision to shelve the deal as "technical." Under its so-called Deeds of Guarantee rules, it was forced to pull it despite having attracted more than 3 billion euros ($3.8 billion) in investor demand.

A piece in the Australian is highly critical of the (relatively) new French President, Francois Hollande (in some respects, a rather silly piece describing how he is enjoying the perks of power, but also with some more serious material):

Unfortunately, economic indicators suggest otherwise: unless it acts fast, "la belle France", for all its fine talk could become the latest and most significant victim of the eurozone debt crisis.

Economist Nicolas Baverez was one of the first to predict France's downfall a decade ago. He argued last week that the President, whose popularity has plummeted faster than that of any of his predecessors since his election in May, is in denial of the financial tsunami that could batter his palace walls by next year.

"He has missed at least three opportunities to begin a recovery," said Mr Baverez, warning that unless Mr Hollande quickly implemented reforms, the country would face the humiliation of being forced to go cap in hand to the eurozone and the International Monetary Fund for a bailout.

"In 2013 our country will be the world's biggest borrower of euros, bringing recession, soaring unemployment and an inevitable financial crisis," said Mr Baverez. "Germany will make France pay dearly for its backing."

[and later]

As thousands of people marched through the streets of Paris last week as part of a pan-European protest against austerity, student Laurent Botti, 21, handed out leaflets accusing Mr Hollande of being a "clone" of the conservative Mr Sarkozy.

"He has betrayed us," Mr Botti said, complaining that Mr Hollande had presented himself in the election as Europe's anti-austerity champion but had ended up siding with "big business".

Whatever the case, something has to be done, quickly: public spending accounts for more than half of French GDP, the highest share in the eurozone. No government has balanced the budget since 1981, thus public debt has risen from 22 per cent in those days to more than 90 per cent. The economy is stagnant and will hardly grow next year. More than 10 per cent of the workforce - and close to a quarter of the young - are without work.

This story has a particularly interesting aspect. Hollande campaigned on an anti-austerity ticket, and is now confronted with the power of the bond markets to discipline perceived high risk states. I found this an interesting story in light of a very thoughtful piece in Spiegel recently (I have growing respect for this publication, as one of the few outlets that offers real depth of analysis). This particular point came to mind when seeing the French downgrade:

The attempt by countries to bolster the faltering financial system has in fact increased their dependency on the financial markets to such an extent that their policies are now shaped by two sovereigns: the people and creditors. Creditors and investors demand debt reduction and the prospect of growth, while the people, who want work and prosperity, are noticing that their politicians are now paying more attention to creditors. The power of the street is no match for the power of interest. As a result, the financial crisis has turned into a crisis of democracy, one that can become much more existential than any financial crisis.

I have long railed against government debt, and continue to wonder why governments in mature economies need to borrow at all. The Spiegel analysis is quite correct. Democracy, and the belief in democracy is now on the chopping block. We can see this most clearly in the countries that are already going through the most severe crises, such as Greece.

The problem that we, meaning all of the electorates of the Western democracies (to varying degrees) face, is our own immaturity. Whilst some of the democracies are very mature in terms of age, the behaviour of the electorate remains immature. When we see protesters on the streets of Europe, protesting against austerity, we have a picture that is analogous to the teenager having a tantrum and demanding a new iPad. The fact that his parents are already in debt, and cannot afford the iPad is entirely absent from his thoughts.

In the case of Francois Hollande, he promised the goods and the French electorate duly elected him. However, when coming to power and facing the reality of France's economic situation, he is now being forced to backtrack. The result is that his popularity is plummeting (sorry, cannot find the link for this). The problem faced by Francois Hollande is the problem faced in so many countries. The electorate demand a standard of living that is higher than can be funded from the output of the economy. To return to the article in the Australian:

The figures tell only part of the story. A report commissioned by Mr Hollande from Louis Gallois, a respected business leader, blamed the eurozone's heaviest social charges on payrolls, over-regulation and exceptionally high taxes for undermining France's competitiveness.

Genevieve Forestier, who abandoned her dream to set up a fashion label last year to take a job in a lawyer's office instead, could not agree more. "All the social charges and taxes are enough to put off even the most enthusiastic of entrepreneurs," she said. "The worst thing, though, about running your own business in France is that once you've hired someone it is virtually impossible to fire them. I've heard of a case where an employer had to continue paying a worker's salary even though he was in prison."

Not surprisingly, new firms seldom get off the ground and France has fewer small and medium-sized companies than Germany, Italy or Britain. At the same time the government continues living beyond its means. Mr Hollande agrees that the state should spend less, but some of the cuts thus far seem cosmetic.

The prospect of France losing market confidence terrifies European Union officials. It might need a bailout on such a scale that the mechanism to preserve the euro would be overwhelmed.

It is a crude piece of commentary, but nevertheless captures some of the problems being faced by France. As France has lost competitiveness, the debt has been increasing. This is the story that sits underneath the economic crisis. The immaturity of demanding 'x' standard of living in economies that can only really afford 'x-' standard of living. Even as the emerging economies were rising in competition with the mature economies, the demands for ever higher standards of living increased. It was the role of governments, whatever it might take, to deliver these ever higher standards. This from the Spiegel article:

When the debts of companies and private households are added to the public debt, the sum of all debt has grown at twice the rate of economic output since 1985, and it is now three times the size of the gross world product. Economies in the developed world would appear to require credit-financed demand in order to continue growing -- they need consumers, companies and governments to go into debt and to put off paying for their demand until some unspecified point in the future. Of its own accord, this economic system produces the compulsion to drive up the debt of public and private households.

Governments delegate power and creative force to the markets, in the hope of reaping growth and employment, thereby expanding the financial latitude of policymakers. Government budgets that were built on debt continued to create the illusion of power, until the markets exerted their power through interest.

Interest spending is now the third-largest item in Germany's federal budget, and one in three German municipalities is no longer able to amortize its debt on its own. In the United States, the national debt has grown in the last four years from $10 trillion to more than $16 trillion, as more and more municipalities file for bankruptcy. In Greece, Spain and Italy, the bond markets now indirectly affect pensions, positions provided for in budgets and wages.

One of the notable points is about household debt. We can see the mentality that is driving the electorate, which is in turn driving the politicians, by visiting an electrical store. Why pay now when you can pay later? We know that the people who enter the store, with a tight household budget already, deep down know that the purchase of the latest shiny good is going to put their overall budget at risk. However, they still buy. They just want that shiny new good. This is the mentality of the electorate, and it is no surprise that we get politicians who pander to this immaturity. There is a fundamental lack of maturity, and self-justification is given for poor budget choices.

As such, when the politicians, economists, and policy makers seek to justify yet further increases in debt, they are pushing at open doors of an immature electorate. We, the electorate grasp at their justifications willingly, as they are telling us that they can 'magic' into existence the shiny goods that we desire. And, as if by magic, they seem to keep on making them appear. However, it is just another variant of the electrical store offering 'buy now, pay later'. The Spiegel article understands the point. It subtitles the article 'betting with trillions'. The principle is this; increase the borrowing to solve the problem of previous borrowing. It is perhaps the greatest wager ever made. It is a wager that might collapse the global economy. We, the electorate, are collectively urging them to raise the stakes.

Saturday, June 11, 2011

The European Situation

I thought I would make a brief return again, as I have been watching the slide of Europe into a morass with that feeling of watching a slow motion car crash. I am writing this as a very general post, without referring to the specifics of individual countries, but highlighting the principles of why the European financial crisis just will not go away. There are differences in detail and circumstance, but I think that the general principles will hold. As a light introduction, I just saw an amusing Youtube clip, which seems (in a simlistic but effective way) to sum up the madness that is facing the EU.

Since the alarm bells about the debt of Greece, Ireland, Italy, Portugal and Spain were first rung, there have been a series of deals, bailouts, negotiations, austerity measures, and on and on...but still the crisis pops back into life. The problem is something I have long discussed, which is that you cannot easily reverse the direction of an economy. In all of the above cases, the economies were living on too much borrowed money, and that borrowed money shaped the structure of the economies. The direction of that money was into consumption, and the consumption beyond the actual income was unsustainable. However, a county that has lived on borrowed money has developed an economic structure to support the consumption of the wealth creation of other countries.

In simplistic terms, this translates into the means of importing and distributing goods and services paid for by the wealth creation of other countries. In practical terms this means the over-development of retail, the restaurant and entertainment sectors, the government services, and all of the infrastructure that supports these. In a madly self-destructive cycle, the more the country borrowed, the more the activity in the economy, the higher the employment and the higher the reports of GDP, and the greater the confidence of lenders to keep on lending. The problem with the cycle is that it keeps feeding on itself right up to the point that it does not. It does not even matter what finally triggers the loss of confidence by creditors, as at some point there must be a moment of realisation of the inherent unsustainability of the cycle.

The problem with the policy actions of all of the parties seeking to save Europe from the crisis is that, once the cycle breaks, the real underlying economy emerges. As the flood of borrowed money diminishes, all of the activities that were supported by borrowed money go into reverse, unemployment rises, GDP sinks, and government revenues fall. The debt to GDP ratio starts spiralling, and fresh borrowing comes at an ever greater cost as the weakness of the economy becomes apparent. The ability to service existing debt dimimishes, and the crisis emerges once again in full force, as the downward spiral continues. Even as bailouts are calculated and handed over, the ability for the country in question to support the existing debt (let alone the new debt) is diminishing. The bailouts are chasing a downwards moving target.

In the end, the only answer is austerity. Somehow, it is necessary for consumption within a crisis country to come back into balance with the wealth creating capacity of the country. The problem is that, the deeper and longer the debt accumulation, the more the structure of the economy will have been distorted towards the consumption of debt. The real income per capita, without the addition of debt into the economy, is much, much lower than people had come to believe. It is as if the entire country has been spending their salary X, but were unkowingly supplementing their income with a slowly rising credit card debt of Y.

When the credit stops flowing into the country, and the supplement of the borrowing disappears, it is apparent what the actual income is. It is far lower than everyone thought. As it is, there are large numbers of people who are actually supplementing their income with debt, but they were unaware of how much additional debt they were personally liable for when their government borrowed. They were also unaware of how much of the whole economy was reliant on the continual debt accumulation, and can not understand why their job has evaporated. And that of their neighbour. And their brother. It is no surprise that they feel angy. They just did not realise that the promises made by their governments were not built upon sound foundations, and that the shiny new businesses making so much money were reliant upon borrowing for their survival. That is, the aggregate borrowing over the whole economy was supporting so many businesses, so much employment.

It is quite understandable that people were deceived. When all around you, you see the signs of growing wealth, it seems only natural that it must be built upon real wealth creation. It is the great illusion that debt equals wealth. The reality is that debt for consumption equals a higher quality of life, right up to the point that the debt becomes due. Then, as has always been the case, ruin follows. What we are watching in the ongoing European crisis is the slow and painful emergence of the real size of the economies in question. The problem is that, when looking at many of the non-crisis economies, they also look to be troublingly reliant upon debt.

Sunday, July 11, 2010

When Cash Spending is Not Cash Spending

I have just seen a commentary which reminded me of an analysis I made long ago in another post. In the analysis, I pointed out that, even when a consumer went to pay for something with cash taken from their income, they were still spending borrowed money. In other words, even the financially responsible, spending only from their income, were in reality spending borrowed money.

I am aware that this is a difficult idea to grasp, but it is nevertheless the case. The first way in which the individual is spending borrowed money is that they are not actually paying the correct level of taxes to support government expenditure. In simple terms, if the government was not borrowing, but still providing the same services, the tax rate would be far higher. As it is, the government borrowing is the borrowing of the individual, as that individual will, at some future point in time, have to pay higher taxes than they would otherwise have done. This means that, as they make each purchase, a proportion of that purchase is paid for by money the individual is indirectly borrowing through too low taxation.

The second way in which the person is spending borrowed money is somewhat more complicated. For the sake of ease, we will just look at government borrowing, but a similar situation applies for private borrowing. If we return to our individual paying cash, and imagine that he is buying a car, part of his payment comes from borrowed money indirectly derived from government borrowing. When the car dealership accepts the money from the individual, they will have increased revenue, and that revenue will pay for many other things, such as their staff salaries. A proportion of the money indirectly borrowed by the individual making the purchase then ends up in the hands of the staff of the car dealership. The dealership staff will then go on to spend the borrowed proportion of the money, and that will then be used by whichever organisation is in receipt of the money from the staff.

In other words, the money that was originally borrowed by the government percolates through the economy, and it becomes ever more difficult to separate the borrowed money from the money earned as 'real' income. As the borrowings of the government are transmitted through the economy, it becomes apparent that what appear to be 'cash' sales actually are always utilising borrowed money.

As I have said, it is a difficult idea. You may wish to see my first post on the subject, 'The Cigarette Lighter Problem' as I was just starting to grasp at the concept, and it may therefore help in understanding the ideas behind it. The reason for my return to this subject is the curious case of Greece. This is a commentary on the subject:

Since 2000, Greek unit labour costs have risen by almost 40pc. Meanwhile, German unit labour costs have barely risen. This loss of competitiveness by the southern countries is central to their current poor economic performance and their lack of viable prospects for the future.

If governments are obliged to cut back and consumers and/or companies are lumbered with excessive debts, it is to exports that these countries must look for salvation. For the eurozone as a whole to achieve prosperity and economic success, accompanied by stability and sustainability, will require the solution of both these problems. But are they simultaneously soluble within the current financial framework?
If the southern members – "Club Med" – are to regain competitiveness within the euro, the only way is for their costs and prices to increase more slowly than costs and prices in the remainder of the eurozone, led by Germany. (Let us call these countries Germany.) If costs and prices in Germany are barely rising at all, then Club Med must regain competiveness by deflating – ie. costs and prices actually falling.

The key point in this commentary is the wage inflation in Greece. How was this achieved? For the following, you may wish to view here, which has an excellent collection of charts for the Greek economy. Greece has apparently achieved an increase in productivity per head, and also TFP. This might be seen as an explanation for the growth in wages (at least partial). However, if we look at charts for labour market participation rates, we can see that these rates have also climbed. The question is, why?

The answer is that there was a mass of borrowed money percolating through the economy, pushing up activity, wages and employment, as well as providing employment for a larger workforce. This is an example of how an economy might become distorted as it becomes structured around deficit spending.

This is why the only real solution for Greece is to lower wages and costs throughout the economy. When the borrowed money disappears, the Greek economy is left with a structure in which wages are too high, and that is because the borrowed money created wage inflation. Everyone in the whole economy were laying their hands on borrowed money, even if they were apparently spending cash earned from income. In essence, it is the reality of the 'Cigarette Lighter Problem' with a harsh spotlight shining on it.

What we see in the case of Greece is the illusion of wealth appearing over all of the statistics, and this is partly why Greece managed to appear to be in a sustainable position for so long. Many of the statistics appeared to be positive, but they were only positive because they were not accounting for the borrowed money that every individual in Greece included in their spending. The borrowed money allowed the rapid wage inflation that is reported in the article. And the lesson from the case of Greece and the Cigaretter Lighter Problem - I will let you draw your own conclusions.

Saturday, April 25, 2009

Finally, The Mainstream Media 'Get it'....

I have already published two posts recently, but could not resist a further post. I have been reading the Sunday editions and it has become apparent that the mainstream media is finally waking up. The Darling budget has finally persuaded the commentariat of the profound difficulty with which the UK is confronted.

Regular readers can now see many of the views I have long been expressing starting to be mirrored in the press - and it does not make happy reading. Despite this, I read the views with a grim satisfaction. It is not the satisfaction of seeing others coming to share my views, but the satisfaction that the first step in fixing the economy is the recognition of the nature and severity of the problem. With the mainstream media finally confronting the reality of the situation it is quite possible that the politicians will have to start to respond with real plans to address the underlying problems.

One example comes from Ambrose Evans-Pritchard in the Telegraph. He is recognising the impossibility of the funding of so many huge government deficits around the world. He points out that many of the previous supporters of Western debt are now turning off the taps, and that the level of debt raising was in any case increasingly impossible. Perhaps the most interesting comment he makes is as follows:

Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.

I have long suspected that this has been a part of how the debt has continued to be purchased. When I pressed the Bank of England on the subject of quantitative easing, one of the questions I asked was for them to confirm that they would not be using proxies to purchase bonds in debt auctions (they confirmed that they would not). However, the impossibility of funding such massive debt has kept me questioning how the government might be intervening, and I have recently been trying to find sources for who is buying the gilts at the moment (to no avail). If Ambrose is correct, the government is intervening in the auctions, and my guess that the government is using banks effectively under state control to buy the debt may well be correct.

Perhaps the most vocal in the criticism is another Telegraph commentator, Liam Halligan. His latest article is almost a mirror of my posting on the budget. For example, he notes that the budget does not acknowledge the many forms of off-balance sheet borrowing, and also adds that the bank bailouts are not included:

Remember, also, the hundreds of billions of pounds of off-balance sheet liabilities – not least the bill for public-sector pensions and the utterly dishonest private finance initiative.

For all these reasons, even Darling's outlandish borrowing totals are just the start of the Government's extra debts. Oh – and by the way, much of the cost of the massive bank rescues isn't in these numbers either. The Budget fine print claims officials "haven't yet been able to calculate their impact […] on public sector net debt".

So these borrowing estimates can only rise – as they have after every Labour Budget since 2001. Already, debt service is the fourth biggest item on the Government's balance sheet. Soon we'll be spending more public money on interest payments than on schools and universities combined.

As a final example from the Telegraph, Tracy Corrigan, details the retreat of investors from the UK gilts market:

At least the recently introduced policy of quantitative easing, designed to boost the economy, is helping to support gilt prices. But for how long? The scale of the Bank of England's purchase of gilts under this programme – it is buying £75bn and could return for the same again, if it decides the economic case merits it – is having a powerful effect on the market. But that will be, by definition, relatively short-lived, and at some point that spending, too, will have to be financed.

For the moment, the Bank of England's bulk buying is covering up another unpalatable truth. Other investors are not quite so keen to get involved.

Although UK pension funds hold gilts, they aren't buying much at the moment. Overall, UK fund managers were net sellers last year, and the recession causing lower dividend income this year means they will have less new money to invest anyway. Banks have been buyers, partly to meet new requirements to hold liquid assets, but they now largely have what they need.

Of course, the elephant in the room in regards to the quantitative easing is that, at some point, the gilts being purchased by the Bank of England must be sold back into the market. This will need to be done at a time when investor confidence is diminishing (or disappeared), and the issuance of new debt by the government is exploding. From the FT, there is a leading article which expresses cautious concern over whether the government can continue to finance debt:

Which, of course, is the trick. At the moment, the UK government has little trouble finding lenders, but this can stop on short notice. If gilt investors began to doubt its commitment or ability to close the deficit, the market’s willingness to refinance UK sovereign debt could come to a sudden halt. The government must pre-empt perilously self-fulfilling doubts before it is too late.
Retaining market confidence calls for plausibility: this government must shed its reputation for overly optimistic forecasts. It must also try to avoid the need to roll over a large amount of debt at any one time. The plan to complement auctions with organised syndicates of lenders is a good one. So is the substitution of medium-term bonds for the shortest maturities in sovereign debt issuance. Puzzlingly, however, the government has not increased the share of the longest maturities, despite pension fund demand for more such paper.
These steps, although sensible, do not guarantee safety. Like its biblical namesake, economic original sin differs from ordinary sins: whether you are guilty of it is largely outside your control. Nonetheless, the UK government’s only hope is to stick to the straight and narrow

Willem Buiter likewise expresses concerns in his blog at the FT, although he is broadly positive about the budget:

If the necessary fiscal tightening is not forthcoming because different groups and vested interests are engaged in a war of attrition aimed at shifting the fiscal burden to the other guy, markets could easily panic and Britain could face an emerging market-style “sudden stop”, with the rest of the world withholding financing from its public and private sectors.
To forestall the occurrence of a triple crisis (banking, sterling and sovereign debt), it would behove the UK to apply for an IMF Flexible Credit Line (FCL). Unfortunately, the criteria for qualifying for an FCL arrangement include “ . . . (iv) a reserve position that is relatively comfortable . . . ; (v) sound public finances, including a sustainable public debt position; . . . (vii) the absence of bank solvency problems that pose an immediate threat of a systemic banking crisis; (viii) effective financial sector supervision.” It is questionable whether criteria (iv) and (v) are met. Criteria (vii) and (viii) are obviously not met. In addition, with a £175bn annual borrowing requirement for the next couple of years, the measly $240bn or so the IMF currently has at its disposal is unlikely to make much of a difference.

One of the interesting points is that the IMF is no longer seen as an option to bail out the UK. Quite simply, the demands of the UK are seen as too great for IMF funding, and the possibility of the IMF being a safety net looks increasingly dubious. As it is, the IMF is already confronting problems in raising cash to fund its operations.....

Meanwhile the Wall Street Journal is also expressing the view that there are increasing concerns in markets over the ability of the government to finance their borrowing:

The plunge [in output] raised fresh concerns about the U.K.'s ability to handle the mounting costs of its financial and economic bailouts. Compared with a year earlier, the U.K. economy shrank by 4.1%. That cast doubt on an official projection this week that the economy will contract by only 3.5% in 2009 and rebound quickly enough to help the government get its stretched finances under control.

Even the Times is now accepting that we might have reached the limits, and that a funding crisis looms. I have highlighted the point that is tucked away in their leading article today:

For the people of Britain, the consequences of that imprudence will be with us for many years. It will take nearly a decade to get public borrowing to acceptable levels – if the markets allow us that long – and until the 2030s to get government debt back to the 40% “ceiling”. Whoever wins the general election, we can look forward to years of austerity and tax rises.

From the Independent we have another allusion to the problems of financing the government's profligacy (I have again highlighted the point):

There are fundamental questions that all our political leaders – at least those with serious designs on power – need to answer. What services do we want the state to provide? And what can Britain, as a nation reliant on the confidence of international investors, afford?

One of the exceptions to the increasingly gloomy views on the UK Economy is the Guardian, which still sees relatively upbeat commentary. As one example, Ashley Seager has the following to say:

So where is the economy especially weak? Everywhere, it seems. Manufacturing suffered its biggest quarterly fall since records began in 1948, driven by a 50% annual drop in car output, while the much bigger services sector saw the biggest drop since 1979.
Still, there was one bright spot in separate data from the Office for National Statistics that showed an unexpected rise in retail sales in March, driven by higher clothing and food sales. Is that enough to help pull us out of recession? No chance.
At some point, though, the Bank of England's record interest rate cuts, its £75bn of new money for the economy, combined with Darling's recent tax cuts and the big fall in sterling should put the economy back on an even keel. Today's GDP figures, though, suggest that the battle is far from won.

It seems that he actually believes that it is possible to turn the problems around with interest rates and printing money, but such delusions are increasingly on the retreat. Another similar positive outlook comes from Krugman at the New York Times, who is also positive about the policy of printing money:

So I’m actually fairly hopeful about Britain; right now, the fact that it’s not on the euro is serving it well.

Despite the remaining optimists, there can be little doubt that there is a growing perception amongst the mainstream media that the UK is in very, very serious trouble, and increasing concerns about whether the UK can actually continue to support the proposed levels of borrowing and spending.

I think that, over the coming weeks, there will be considerable interest in gilt auctions, and I would guess that many analysts will looking for cracks in the government financing of debt or the possibility of a gilt strike. Alongside this, there will also be major question marks over the value of the £GB.....

Interesting days are ahead, and increasingly worrying times.

Sunday, March 29, 2009

Capitalism and Consumption

I am aware that, in the current climate, a defence of capitalism and consumption will not go down well with everyone. An interesting question on the subject was added to my last post by Lemming, a regular commentator. I will quote his question, as others are asking similar questions, such as whether there is enough resource for endless growth:

Can you design a system of capitalism which doesn't rely on economic growth to function? (Or is this simply a contradiction in terms?)

There is a fundamental problem in capitalism with respect to endless growth. Regular readers will know that I am somewhat cynical about the modern environmental movement, but I accept that there is a real problem in the medium to long term with resources. In the short term there is also a problem, but rather this is a matter of output rather than absolute limits on resource. In light of this, Lemming is asking a very pertinent question with wider implications. However, for the purposes of this post, I will ignore the longer term issue of resource, as this is a question that is too complex to cover in this post.

Another problem associated with economic growth is the relentless growth of advertising and media representation of society, in particular the lifestyle advertising that seems to encourage so much consumption. It is a matter of controversy how much advertising is a reflection of society, and how much it might 'make' society, and again I will not address this question here due to the complexity of the subject.

On the other hand Lemming's question does raise a more fundamental question. If endless economic growth is a problem it would imply that, at some point, economic growth should be frozen. This is a difficult idea, as it raises the question as to when exactly, or at what stage of development, growth should be stopped.

If we can think back to the world twenty years ago, would that have been an appropriate time to have frozen growth, or should we say that we should freeze further growth now? It is only when we ask such questions that the nature of the problem becomes clear. If we were to imagine that the world had frozen in terms of economic growth twenty years ago, then we must accept what the world would be like today without such growth (we will ignore the current economic mess for the sake of illustration - as the crisis is not a result of economic growth but the way in which the growth has taken place).

A simple example to illustrate the question is to ask whether we think that we should have foregone the development of fMRI equipment - which have allowed considerable improvements in our understanding of the brain, as well as being used to treat a range of medical problems. As soon as the innovation was introduced, it would have been a spur to economic growth, as it created a whole new industry and no doubt many offshoots. It might be argued that this is a very narrow and selective example but, if it were not for the massive advances in computing (for example), then the fMRI process would never have been possible.

The point in this example is that it is very difficult to separate out 'good' economic growth from 'bad' economic growth. For example, the boom in consumer purchases of computers has no doubt created significant economies of scale in the computer industry, as well as being an ongoing spur for continued innovation. The economies of scale and innovations that resulted from this ongoing consumption will have fed into many areas, even possibly fMRI scanning (e.g. cheap displays or processing power) and it is difficult to propose that such improvements do not have 'worthy' outcomes. As such, the boom in consumption of computers will have indirectly contributed to the development of fMRI, as well as many other innovations.

On the other hand there is a general backlash against the relentless consumption of goods by ordinary people, a sense that this neither makes us happy or really better off. Like many people, I am somewhat cynical about this almost mindless consumption, and do have doubts about what it might (of itself) really achieve. There seem to be ever more articles in which this consumption culture is being challenged, and the articles are sometimes linked to wider problems of the capitalist system (or quasi-capitalist systems might be a more accurate description).

As another example of consumption, once again we can return back in time to twenty years ago. At that point in time, for example, the Internet was relatively new, and only later emerged into ordinary life - alongside a burst in consumption. As a blogger, I inevitably see great value in the Internet - I see it as a great tool of freedom of speech, and would not like to see a world without it. The trouble is that, in order to see this development I have to consume huge amounts of resources individually, and many other people and organisations must consume resources to create the necessary infrastructure. All of this represents economic development and growth.

Once again, in my own consumption, I can point to what appears to be a 'worthy' reason for why this consumption can be justified. What if there is no such 'worthy' justification? We might take for example the endless cycles of consumption that are associated with home redecoration, or the purchase of (the much used example of) a plasma television. Surely there is no 'worthy' way to justify such consumption?

It is very easy to sympathise with a view that relentless economic growth driven by consumption is somehow unacceptable. However, there appears to be a curious 'moralism' that frames the arguments about consumption.

Astute readers may, at this point, see that in some respects I may be setting up a straw man. I am starting to try to link consumption with a notion of worthiness. However, in linking the examples of consumption here to worthiness, I am hopefully illustrating a point. The point is that it is actually very difficult to regulate/control what is acceptable consumption. For example, a person may travel to far away places and offer the justification that they are learning about other cultures and people. That such an activity consumes massive resources might be considered acceptable by the person who undertakes such travel. On the other hand, another person might claim that this is an unacceptable use of resource.

We can see this kind of measure of 'worthiness' of consumption in the example of 4x4 cars, which have become a symbol of relentless consumption and environmental harm. Amongst some people, such consumption leads to the attribution of social pariah status for the consumers. The problem is that, with the exception of a small minority, most of those who heap such a status on others will themselves be involved in some kind of 'unnecessary' consumption. Even amongst the minority who do significantly restrict their consumption, they will often be using the resources and enjoying many of the benefits that are resultant from the system of consumption that the 4x4 represents.

The idea that consumption is somehow immoral is nothing new. We can see it in history in the sumptuary laws, as in the case of Renaissance Italy. It is a long while since I studied this history, but I recall laws such as restrictions on the use of feathers in hats. In this case the laws were dictated by the church, but who might dictate the laws to restrict consumption today? Who is going to determine which form of consumption is worthy, and which is not? How do we measure a holiday to learn about Chinese culture against the purchase of a 4x4, or redecoration of a house against a connection to the Internet? There seem to be many people who seem to think that they know the answer, but I find it difficult to see how they might make the distinction.

There is another area of consumption 'culture' which is clearly a problem. This is the encouragement of indebtedness of consumers. I do not believe that there should be restrictions on borrowing for consumption, as that is a matter for individual people to determine. For example, some people might claim that borrowing to buy a house is 'good' borrowing, whilst borrowing to buy a plasma T.V. is not. Once again, I find it difficult to determine a way in which we can determine what is 'good' and 'bad'. Is a £200,000 mortgage debt a better thing than a debt of £1500 for a plasma TV? How might we determine what is 'good' and 'bad'?

However, there is a problem in the modern system of credit. One of the first points is that there is a system in which it is very complicated to work out how much debt we are really taking on. For example, cost of credit is often presented in terms of monthly repayments, rather than absolute cost. 'Interest free' credit is promoted to such an extent that it becomes irrational not to accept the credit. However, it is not interest free, as the interest is loaded on the goods upfront, thereby disadvantaging the cash buyers. This then encourages the use of credit.

These problems can be addressed through legislation. For example, information can be better presented, with an emphasis on the actual real cost of the credit. Consumer credit law might be devised such that retailers can not charge less for credit than they themselves are paying for the cost of the money that they are lending (though this might be complicated to administer). Teaser rates, variable interest rates, and a whole host of other methods for potentially leading consumers into debts that they can not repay are also amongst the subjects that should be addressed. For example, how can a consumer know what their debt obligations might be on a variable rate of interest, when even an economist is unable to make that prediction? All of these solutions would likely see a shrinkage in consumer credit, but would not restrict the freedom of an individual to access credit. The central point is that the system should be transparent and allow people to make well informed decisions.

This does not mean that individuals will not get themselves into financial problems. As with many of my posts, the emphasis is on provision of good and clear information such that individuals are making informed decisions. The government just sets out a framework in which costs are clear and transparent. For example, as there is no such thing as 'interest free credit', it is a fraud and should be exposed as such. It is not the role of government to protect fools, but to help individuals understand what the risks are in their behaviour.

I therefore accept a role of government, but only in making the role and nature of credit transparent.

In one respect, I do not accept the role of government, and perhaps this goes to address part of the problem that Lemming raises in his question. This is the problem of government manipulation of the money supply and interest rates in order to actively encourage consumers into consumption. At its most extreme, governments have recently been guaranteeing the lending of financial institutions in order to encourage yet more consumer debt accumulation. The real problem here is that 'economic growth' has been tied too closely to debt driven consumption.

Even as I am writing, it is possible to find in many government policy statements, and policy proposals, an ambition to 'get credit flowing'. What they mean when they suggest this is that consumers should resume borrowing to buy housing, borrowing to buy cars, borrowing to buy consumer goods. They see this as a 'good thing'. At the same time, they have lowered interest rates, thereby creating disincentives for individuals to take the more responsible route of saving money to fund their purchases.

This is the point that I suspect that underlies the question that Lemming has raised. I am guessing that he is looking around at friends and family who have 'binged' on credit, paid too much for their homes, and sunk themselves in a quagmire of debt. We can all see the painful results around us, and this has been encouraged by endless inflationary policy, and manipulation of the money supply in order to keep the economy 'booming'. All the time that governments have encouraged the boom, politicians like Gordon Brown were infamously promising that the 'good times' could last.

This is the growth of economies built on the foundations of endless expansion in credit. The role of the government in this process is that, as soon as credit growth shrinks, they seek to inflate the money supply in order to encourage yet more lending to consumers by the financial institutions. I would not claim that this is only the result of individual governments, as this problem has arisen through the actions of many governments. For example, I have detailed how the Japanese government expanded money, and how this money flooded into the West through the 'Carry Trade'. This money in turn inflated house prices, and provided 'cheap' money for lending to consumers.

Whilst the government is not holding a gun to the heads of consumers to make them borrow, they have sought to structure their economies to encourage such borrowing. This has come at the cost of a culture of relentless consumption, unsustainable growth, and the abandonment of thrift and saving. The result is that there has been economic growth based upon a boom in credit derived consumption, and this was both wasteful and unsustainable. As a clear example of the waste, we can now see swathes of new housing developments being abandoned in the US, and the system was unsustainable because there would always be a limit to such credit expansion.

Whilst it would be foolish to heap all of the blame for the model of economic growth based upon credit expansion, there can be little doubt that governments have contributed significantly to the problem.

The answer to Lemming's question, and perhaps the questions of others, is that there is no basic problem in economic growth, and no real problem in a system built around consumption. The benefit of capitalism is the provision of goods and services to meet the needs and wants of individuals, and it has consistently delivered on that promise, and provided the many innovations that arise from such a system that benefit us in a myriad of ways. Whilst some point to over-consumption as a bad thing, it is hard to separate out what is good, and what is bad consumption, what is good growth, and what is bad growth. On the other hand the encouragement of consumption built upon the encouragement of debt is certainly not good for individuals, or for the wider economy. This illusion of economic growth should not be confused with economic growth built upon using savings or income for purchase of goods and services.

In other words, the underlying system works. There are broader questions about how we might sustain such economic growth in the face of finite resources, and how the marketing of goods and services might ignite a desire to consume more than we would otherwise do. However, the problem arises as to how we might restrict consumption without making moralistic judgements, and how such consumption might be restricted in a way that is fair or just. If I wish to use money for all of the consumption necessary to use the Internet, then I would feel aggrieved if someone told me that this was unacceptable. Twenty years ago, the majority of us would not have even owned a computer, but we now all accept them as items we want, and which are useful to us.

This is the reality of economic growth. We are all tied into it and, as much as we may protest otherwise, we all reap the benefits.

Note 1: I would like to apologise for not posting for a while, and am very grateful for the comments and lively debate after my last post. In particular MattinShanghai has presented an interesting post which seemed to stimulate lots of debate, and many interesting follow on comments. I am hoping to post again on the weekend, as there are several interesting points in the news, such as the G20, the struggle to sell bonds, and the issue of inflation figures. It will be tough to choose which, so I may try to do a broad brush post.

Note 2: I know that the environmental question is a major factor in the discussion above, and no doubt some people will comment to that effect. However, I have yet to see anything on the table that can realistically solve the problem of resources. With regards to man made global warming and the Kyoto protocol, I would point people to Bjorn Lomberg, as he offers an interesting perspective. However, I do not want to get into the rather muddy waters of this debate, as it will distract too far from the main point of the blog - the current economic crisis and the immediate impacts. The purpose in this post was really to put a simple (perhaps simplistic) case forward for continued economic growth. It is a huge subject in reality, and the post was always going to be limited in scope.

Note 3: Lord Sidcup - yes, the $US is still hanging on in there. It defies logic, but somehow it just withstands whatever is thrown at it, including QE. With regards to the Schiff book, I am afraid I have not read it. I was disappointed you did not like the Ascent of Money - I liked his discussion of bubbles, and I broadly agree with his Chimerica thesis, though disagree with his views on the resolution of this situation. I don't recall the economic hitman point in the book, so can not comment on that point. Like many books it has strengths and weaknesses, but for me the strengths outshone the weaknesses.

Note 4: Lemming - some good questions, and sorry I can not answer all the points.

Note 5: I have noted that there are some commentators on the blog who appear to be white supremacists. I will always publish the comments, as I follow John Stuart Mill's 'On Liberty'. However, I might mention that I do not accept/ agree with any such views, as they simply do not relate to any reality I have ever seen. I note that other commentators are addressing the points that are being made, which is good.

Note 6: Some excellent links are being placed in the comments section. As ever, these are appreciated. Some interesting posts alongside these, and it is interesting to note that there is more contemplation of war appearing. One of my ongoing worries with the current situation is that it will be easy for the situation to lead to various forms of conflict, though I do not believe that China is in any kind of position to risk a 'hot' war. I have noted ever more news of Chinese assertiveness, and note that China has just done a deal with Argentina to use the RMB for settlement of trade. The march towards the RMB as a reserve currency marches on....whilst talk of IMF SDRs as a new reserve currency seems to be keeping everyone distracted.

Thursday, December 4, 2008

Money Printing Economics - US and UK as the New Zimbabwe?

I am afraid that I am going to backtrack on my promise to post on the reform of the taxation system. I did mention that I might do so if the news (or events) are of particular significance. The news is indeed pointing me in that direction. In particular I have just read the last weeks edition of the Economist, had an interesting comment posted, and read some news in the Telegraph, all of which discusses so-called quantitative easing.

For those who have not encountered the expression, quantitative easing is the weasel worded expression for printing money.

This from the Economist magazine (a magazine I once had great respect for and for which I am a print subscriber):

'This is where the Fed has already been inventive: printing money to buy all manner of assets. In October it said it would buy short-term commercial paper. This week it unveiled two new schemes: a $600 billion plan to reduce mortgage rates by buying government-backed mortgage securities and the debt of America’s state-sponsored mortgage giants; and a $200 billion scheme to buy the debt backed by credit-card, car, small-business and student loans (see article). This approach could be broadened to other markets that have shut down. For instance, there is little fresh (senior) credit for firms in bankruptcy. If the government can provide that cash, it could stop the coming wave of bankruptcies from becoming one of corporate liquidations'

Apparently, printing money is now 'inventive'. Here is the same magazine discussing Zimbabwe:

'WITH prices doubling every few days, Zimbabweans now spend huge amounts of time and energy preventing their meagre cash resources from completely evaporating. Trying to catch up with galloping hyperinflation, now officially running at 2.2m per cent a year and at least four times faster in reality, the central bank has been printing ever bigger denominations. But it is outrun by galloping prices:'

And:

It may seem odd that the local currency is still used at all. From Z$25 billion to the American dollar at the beginning of this month, the cash exchange rate had jumped threefold within a fortnight. In restaurants or shops, prices are still quoted in local currency but revised several times a day. Salaries are paid in Zimbabwean dollars, still the only legal tender. A minibus driver taking commuters into Harare every day still charges his clients in Zimbabwe dollars—but at a higher price on the evening trip home—and changes his local notes into hard currency three times a day. The local money is losing its relevance.

So apparently the printing of money is a disaster in Zimbabwe, but if Western countries do it, it is 'inventive' and to be commended.

The following is a comment on my last post:

'The press is suddenly awash with the notion of " quantitative easing " the helicopter strategy is now seriously being prepared by the boe and ecb, the printing presses are being readied.

It seems that the govt has no intention of borrowing the money when it is so much more convenient to simply print it.

How do you see this playing out and how quickly will deflation turn to rampaging hyper inflation. Presumably, investors will flee sterling as soon as this policy is enacted.

Will this hasten the end, or will it result in the mother of all dead cat bounces before the structural problems induce the final plunge?'

If we compare the comment above with the Economist, I think I that the anonymous poster on this blog has a better grasp of the situation.

Another commentator a while ago asked whether the UK would follow the US in this policy of printing money. I have this from the Telegraph:

'In what would be a major departure for British monetary policy, the Bank is considering pressing the button on printing presses by engaging in a so-called policy of quantitative easing. It emerged after the Monetary Policy Committee cut borrowing costs by 1pc to just 2pc - the lowest level since 1951.'

As is painfully illustrated by the case of Zimbabwe, printing money is the surest way of destroying the value of a currency. Now the really odd part is that there is a claim in the same Telegraph article that:

'The radical proposals, which are currently being explored by Bank experts, could be put into action within weeks, although they would have to be vetted by the Treasury, which is thought to remain sceptical. '

As I have already pointed out in previous articles, there are storm clouds on the government borrowing horizon. The article in the Telegraph proposes that the printing presses may get started in a few weeks. This is about the time that I predicted a government debt default, and at which time I suggested that the government would be faced with either - you guessed it -printing money, or default. Bearing this in mind, the idea that the treasury opposes this move looks to be very dubious.

Now we come to the crux of it. If the government prints enough money, this will provide an potentially unlimited amount of liquidity to the banking system, and the banks can then use that money to buy government debt, thus financing government borrowing. Meanwhile, the government can continue to service its expenses and keep repaying the debt owed to overseas creditors. In other words, the government will appear not to default. However, overseas investors will not see it this way. They will see it as it is - a default. Instead of failing to repay, they will be repaying the debt obligations in what can only be termed 'comedy money'.

At this stage, some readers may be tempted into thinking that this is all well and good. UK Plc is the winner, and those poor foreigners lose out. The same argument can be said for the US and other countries that go down this route. However, as we can see from Zimbabwe, this is not a winning situation. The first problem is that the currency will collapse, making every single import into the UK horrendously expensive, thereby impoverishing everyone. The second is that the devaluation will destroy the value of savings and investments. Thirdly, you end up with a currency in which no one has confidence, even leading to a move to barter, much as is the case in Zimbabwe.

The people who appear to gain most are those who have huge debts. They will see their debt diminish with the hyper-inflation, but this will also mean that nobody will lend any money, including investing into businesses, except at insane rates of interest, but even then very rarely (excepting the government who can just print more to lend, thus enhancing the hyper-inflation). I pointed out in a previous post that the value of a currency is entirely based upon confidence, and the loss of confidence means that there is no more saving, no more investment, nothing but the most crude economic activity fixated upon immediate consumption before more value is lost in the currency, and finally with money fleeing the country in search of a safe haven.

It is a situation in which the cautious and responsible get burned, and the spendthrifts win. However, even the spendthrifts lose in the end, as the general economic collapse hits everyone. This, as the anonymous commentator has identified, is a recipe for complete disaster. I seem to remember another commentator asking whether there would be food shortages, and my suggesting it could not get that bad. Getting the printing presses started is a good road to take you to that situation - though I still do not think it will get that bad (I hope).

I will return to the anonymous poster's question, which was:

'Will this hasten the end, or will it result in the mother of all dead cat bounces before the structural problems induce the final plunge?'

I will confess that I am not sure of the answer here. It all hinges on confidence, and how quickly it evaporates, and how quickly the currency sinks on international markets. That will, in part, be determined by how quickly the banks churn out the money, how they spin it, and how long it takes before everyone gets wise to the damage that is being done. There may be a bounce, but I can't see it lasting.

The one certainty is that it will make an already catastrophic situation even worse. When I predicted the default all that time ago, I did think about the option of printing money, but saw it as a last resort to pay government workers, whilst the government tried to scale back expenditure. This is different, as it is an attempt to print the government out of the black hole, and will just lead it deeper into the hole. In both cases it is an act of desperation, but doing so before it is the last resort has the suggestion that people actually think that this is a good idea.

That is very scary indeed.

Note 1: Pocmloc asks me this about the forthcoming taxation post (about half written now).

'I noted your past welfare proposals. have you ever done any analysis of ideas along the line of flat tax/national income/no benefits schemes? They seem superficially sensible but no one takes them seriously enough to say what their real effect on the economy would be'

You will be please to hear that this is at the heart of the proposals, but more of that when I post.

Note 2: I have to go in a moment, so will post this 'as is'. I hope there are no errors...

Note 3: I have just found this article, which may be of interest to those who read my previous post. It mentions that there is growing unrest an industrial heartland of China - Guangdong. Guangdong was the first part of China to open to the West, and has been leading the way in trade of many exportable goods. The boom has also seen large numbers of other Chinese people move to the province, as the pay and work prospects were so good. If Guangdong is hurting, the rest of China will follow.

Note 4: I forgot to add a link and quote in the above post, which is for the following article which was provided in a comment (apologies for not citing it earlier, and thank you for the link):

How quickly could the United Kingdom go bankrupt? Given the speed at which countries and companies have been brought to their knees in recent months, it is no longer hard to envision a scenario in which foreign investors become spooked by the UK's soaring debts and flee.

If you have time, it is an interesting read.....

Note 5: A commentator, Jeremy (see comments below) has very kindly referred me to national statistics and points out that M4 is at a very high level. The definition of M4 from the bank of England is as follows (link takes you to BoE page on which there is a link to a Word document):

UK private sector's (for first time defined as the non-bank non-building society private sector) holdings of:-
Sterling notes and coin; plus Sterling deposits (including share certificates of deposit) with banks in the UK; plus Building society shares, deposits, and sterling certificates of deposit.

At the most basic level, M4 is the money sloshing around the UK economy. At present M4 is £billion 1 718.3, compared with £1 538.2 in 2006/7. The same statistics show that there has been a steady rise in M4 during this year, and that the numbers have been climbing faster through the last few months, commencing in July.

The important point here is that, if the money supply expands faster than output, then inflation will follow, and output is falling. The most simple example of the principle of money supply and inflation can be seen in the housing boom, in which creditors injected large amounts of money into the UK mortgage market, with a finite supply of housing, thereby pushing up prices. i.e. if you have more money chasing the same number of goods, then prices will rise. What I believe Jeremy is pointing out is that there is an inflationary impetus within the economy. The spectre of deflation has been promulgated whilst inflationary circumstances exist.

If we look at the other statistics for the UK, we see that inflation is going down. From National Statistics, we see that the Consumer Price Index is showing a -0.2% drop for October, but that inflation still remains reltively high. A report from the Telegraph says the following of shop price inflation:

'Overall prices were 2.7pc higher than the same month last year, compared with 3pc in October and a peak of 3.8pc in August, and the BRC said that there was more deflation to come following the VAT cut to 15pc from 17.5pc. '

The answer quite simply is that the slowing of the rate of inflation reflects the decline in commodity prices, as well as deep discounting by retailers. However, as Jeremy points out, there is still a relatively high rate of inflation. What we have are opposing factors. On the one hand, there is the increase in money supply, and on the other we have the discounting in retail, as well as the falling back of commodity prices. To add to this, we have the fall in the value of the £GB which is inflationary, as it will make the prices of imported goods higher. This is a fairly simple explanation of what is going on, but I will try to expand further on what all of this means later.

Note 5: Lemming (see comments below) has passed on a fascinating link to an article, in which it is apparent that the new Banking Bill means that the BoE is no longer obliged to publish details of their issuance of money. Bearing in mind that we are currently being prepared for the printing presses to be started, this looks mightily suspicious at this particular moment. I recommend viewing the article here.

Regular readers will know that I am the arch cynic when it comes to conspiracy theory. However, this is looking more than a little 'iffy'. It is just too much of a coincidence. It looks like the politicians have grasped the severity of the situation, know that they are about to default, and are hoping to hide the fact that they are about to attempt a 'Zimbabwe'. That they think that this will go unnoticed, is damning indication of their competence.

Thank you, Lemming, for such a useful link.

Monday, November 24, 2008

UK Government - More Madness

The madness of UK economic policy has ratcheted up another notch. It is impossible to have missed the latest headlines. This is what Alastair Darling had to say about the cut in VAT:

"This temporary reduction is the equivalent of the Government giving back some £12.5 billion to consumers to boost the economy. It will make goods and services cheaper and, by encouraging spending, will help stimulate growth."

I will translate this statement as follows:

'This temporary reduction is equivalent to UK consumers borrowing £12.5 billion, and will replace the borrowing that consumers are no longer able to obtain with government borrowing instead. Government borrowing will allow less tax to be levied on the sale of goods and services, making them appear to be cheaper, but really it is buy now pay later credit, and this will help stimulate more shopping for goods and services, because consumer shopping = economic growth'

In other words, if consumers can no longer borrow to buy their brand new plasma TVs, the government will now subsidise the purchase of the TV through government borrowing. Buy now - pay later becomes government policy. The real worry is that, at the heart of this economic thinking, there is a belief that consumer spending equals economic growth. Whilst consumer spending creates more activity in an economy, it is only represents real economic growth if it is not funded by borrowing. In other words, economic activity only equals wealth when the economic activity is derived from the transfer and distribution of wealth from productive activity such as manufacturing, the the export of services, or the extraction and processing of commodities. Economic activity built upon borrowed money is spending of future wealth.

Assuming that this cut creates an increase in economic activity (which I doubt), it is fools gold.

The result of this particular foolishness has been a record rise in the FTSE, which just provides further evidence that the city needs to find some new economists. However, we have been here before. If we look back at the banking bailout, the same reaction, then the same evaporation of confidence as soon as the reality of lack of real effect kicked in. Regardless of the bailout, banks were still tightening their lending.

This brings me on to the other subject of my post, which is that (as I predicted) the strings attached to the banking bailout are that the banks must now do the governments bidding. Over a series of articles it is apparent that the government is bullying the banks into lending against their commercial judgement. Just as the banks have (rightly) understood that their previous profligate lending was foolish and unsustainable, the government is telling them to unlearn the lesson, and is therefore storing up future problems for the banks, by forcing them to lend recklessly.

Meanwhile the first of the banking rescues is (again as predicted) showing that the government liabilities are rising. It seems that Northern Rock is going to need more state funding to survive. Even without the government encouraging reckless lending, the same will happen with the other banks that the government has rescued. With the reckless lending the bill can only get ever larger.

On top of all of this, it appears that the relentless growth of the state continues:

'Independent specialists published forecasts showing that an extra 50,000 public officials will have been recruited in the six months to the end of the year.

The Centre for Economic and Business Research (CEBR) forecast that over the same period 300,000 private sector workers will have lost their jobs.'

I am not sure whether I wrote about this on this blog, or somewhere else, but this is an ongoing problem that feeds upon itself. The more people the state employs, the more tax that the government needs to take from the productive parts of the economy. The more tax that needs to be taken from the productive part of the economy, the less able the productive part is to compete. The loss of ability to compete leads to less employment. Less employment in the productive part of the economy means that more government jobs are created to take up the slack, as politicians know that high employment means electoral success. And so the cycle continues....

In this case, if we make a conservative estimate (does anyone have figures, I could not find any) of the cost of these 50,000 new public sector jobs costing £40,000 each (ignoring deferred costs such as pensions), the total cost to the economy is £2,000,000,000 per anum. All of these individuals are not involved in wealth creation. Add in other costs, such as pensions.....

Essentially, what we are seeing is the government putting itself at the centre of the economy, literally trying to borrow itself out of trouble, when the trouble itself has been rooted in the borrowing of both consumers and government. The government reaction to the crisis is to try to replace consumer borrowing with government borrowing. In this case, they are borrowing with the target of increasing consumer spending, a sector of the economy which at best can only redistribute wealth, but can not create wealth.

When the money is borrowed, it increases activity at the cost of future activity. At its most simple, if I spend £50 of borrowed money now, I will not spend that same £50 in the future, because it is already spent. As such, borrowing to encourage consumer activity now may support that activity now, but at some point in the future, it must mean a reduction in activity. It just becomes a question of when that activity must decline. Furthermore, when I spend the £50 with borrowed money, it costs me more than £50 because the cost of the borrowing. As such, not only do I withdraw the £50 from future activity, but I also reduce the future activity by the cost of the interest. As such, a boost to consumer spending through borrowing now means a reduction in future activity of £50 + the interest on the loan. In the case of the borrowing, large amounts (in particular if the source of the borrowing is government debt) are funded externally to the UK, meaning that some of that interest is an export of wealth out of the country - a direct cash loss.

The result is that whilst consumer activity may be supported now, it means a larger shrinkage in activity later.

In amongst all of this activity, is it possible to see any single point which will see the encouragement of new real wealth creating activity (i.e. economic activity that is not centred around funding more consumer shopping, more government activity)?

It is unsurprising that the government have continued on this path of ruin, but I also have an irrational hope that, at some stage, someone in the government will have the courage to call a halt to this madness.

Note 1:

As part of my rooting around for civil servant costs I found a strange chart. Can aynone make sense of this chart (below), taken from a government website? Is it because they are using contractors, more flexi-time and job sharing? How is it that they can create these figures?

Note 2: Sorry not to respond to the many recent comments, but I will do my best to respond in my next post.

Monday, October 20, 2008

Economic Crisis - The Eye of the Hurricane before the 'Service Economy' Collapses

It seems that we have now entered a period of relative calm, following the storm of the bailout. For a while, following the Bernanke promise of yet more support for the finance system, stock markets rallied, only to later wobble on bad economic news. This is now becoming a pattern, where governments take action, markets have a fit of optimism, then the real economy offers bad news and pulls sentiment back down. In short, governments are pouring liquidity, guarantees, and borrowed money for short term bounces in confidence, completely ignoring the possibility that the underlying economy is in deep trouble.

I have spoken about the fact that GDP measures have been inaccurately measuring economic growth previously. I think it may be time to return to this theme, and take a look at why there is no escaping the simple fact that the US and UK economies must contract by such a large amount. Below is a chart of UK GDP growth:

And additionally a chart for US and Canadian GDP Growth (it includes Canada because this was the first good chart I found):

So now we have one side of the equation. What of the increase in debt? First a chart for the UK and US as a percentage of disposable income:

And now a chart for the US of absolute debt (the UK would look a similar shape):

My apologies for the variable sources for these charts, but I hope you can get a feel for the situation from these (I am rushed so just did a Google image search - I usually use the ONS but do not have the time to find the section). I did have a very good chart for the UK which shows that there has been a close correlation in debt growth and GDP, but have been able to dig it out again. However, if you review these charts, you will see that there during the recent boom, there has been a massive growth in debt. Like any figures that correlate the charts do not prove causation of GDP growth, but causation becomes more likely if there is an explanatory mechanism that can be identified.

So how can the increase in debt translate into GDP growth. I have discussed the multiplier effect, and also illustrated examples in 'A Funny View of Wealth'. The principle is very easy, and I will use the example in 'A Funny View of Wealth', as follows:

If we go back to Mr. Smith in the restaurant, we can see that he has borrowed money to finance his restaurant visit. In doing so he has decreased his wealth in order to fulfil a short term need. This is, partly, what wealth is for, but this is Mr. Smith’s future wealth that he is spending. This borrowed money that Mr. Smith has spent in the restaurant will then recycle throughout the economy in many ways. The restaurant owner will be a little wealthier, and will then spend some of the money on buying goods and services, the restaurant staff likewise, and so on. Furthermore there will be suppliers to the restaurant who will also be beneficiaries of the spending of Mr. Smith, as his consumption of foods will mean that the stock will need to be replenished, and the process of cooking will require energy, and some of his money may contribute to decorators, maintenance people and so on through all of the restaurant support services. We can then see the same process with each of these support services spending their small share of Mr. Smith’s transfer of wealth in a host of different ways, each further helping to support another layer of businesses.
It is only when we look at lots of versions of Mr. Smith, all borrowing money, all of which dissipates through the economy in a myriad of ways, that we can see what a dramatic effect this has on the economy. Throughout the UK economy there are millions of people who, just like Mr. Smith, are reducing their future wealth daily through the borrowing of money. Each of these individuals supports a multitude of businesses through each of their purchases of goods and services. This massive dispersion of borrowed money is financing large numbers of businesses, and the transfer of their (future) wealth that occurs is apparent in what appears to be a booming economy.

The reason why I am returning to this theme is that I have, on several occasions mentioned that the way that GDP is measured is flawed. In the case of borrowing, it can either be an internal transfer of wealth from within a country, or it can be from outside of the country. Much of the borrowing in the US and UK has been funded from overseas. Each time a person goes into a restaurant, or buys something on credit, there is a transfer of wealth out of the country, and a foregoing of future wealth. I will return to 'A Funny View of Wealth' again:

What if the money that provides the loan has been borrowed from outside of the UK, and the UK bank is effectively the ‘distributor’? In this case the transfer of wealth from Mr. Smith will go to the restaurant, the UK bank and the foreign bank. In this case, there has been a real transfer of wealth from Mr. Smith in the UK to the overseas bank that provided the finance for the credit. There is therefore a transfer of real wealth to the country of the overseas bank.

It could be argued at this stage that the overseas lender only has a very small amount of the total transfer of the wealth, and that the majority of the wealth goes to the restaurant owner. This is largely correct. However, depending on the status of the individual and the type of loan, the final interest that is paid on the loan might actually be very high, and translate into a large sum of money over the period of the loan. Some of this interest is profit for the UK bank, and some of the interest is profit for the foreign bank. If we say Mr. Smith is an overstretched credit user, with a moderate credit history, and give him a £500 balance on this credit card, an 18% interest rate, and ongoing minimum payments of 5% of the balance, this £500 will cost Mr. Smith a shocking £214 over the life of the loan. This is not an atypical profile for a heavy credit card user with a moderate credit history, but better and worse examples can be created in any number of permutations. In this case a £50 meal will see a transfer in wealth of £21 to the banking system from the restaurant goer, a significant loss of wealth to the individual, and a significant transfer of wealth to both the UK bank and the overseas bank. Different profiles will produce different results, and the example given is just to give a sense of the potential scale of the transfers. In this case we might hazard a guess that Mr. Smith has just transferred as much as £8 of his wealth to another country, in order to pay for a £50 meal, a meal that might otherwise have seen no transfer of wealth outside of the UK.
This is a very expensive transaction for both Mr. Smith and UK Plc, and has a negative impact on the overall wealth of both.

Despite this, the example of Mr. Smith above will be seen in the UK GDP figures as economic growth. My purpose here is not to recycle the original essay (which I recommend reading if you have not done so).

I have also not covered government debt in the charts, as you will all be aware of the growth in debt over the last few years, and this also creates a multiplier effect once it enters the economy.

The key point here is that the GDP figures do not reflect the reality of real growth in the economy, but growth in debt. If you factor in the multiplier effect, then it is even possible that the underlying growth of the economy might even have been negative. This is why I am predicting that the economy will have to drop back at least 10 years in growth terms, but quite possibly a lot more. As I have pointed out several times, the world was a kinder place for the West 10 years ago with still relatively little competition from countries such as China.

I thought I would add this post because the symptoms are now apparently arising from the disappearance of the debt based multiplier effect. Whilst the economy has been sliding very fast towards collapse, the first signs of spinning out of control have appeared. One of the first elements to go when consumers tighten their belts is discretionary spending. This means meals out, leisure activities of all kinds, and taxis in particular might be seen as the 'canary in the mine'. The reason for taxis being of particular interest is they are a particularly vulnerable form of discretionary spending, as there are always alternatives (albeit less convenient) to their use. They are also widely used in the evening, and are therefore a good symptom in the slowdown in leisure spending, such as restaurants, bars and nightclubs. Whilst there has been plenty of 'bad news' on consumer confidence and spending, I was struck by an article in which sales of new London black cabs are described as 'tumbling'. Whilst mainstream economists look to other (often abstracted) barometers, I am always looking for these kind of signals, as taxis are such a good barometer of spending behaviour. This example only applies to the UK, but the UK and US are going through a parallel process, so it might also be suggestive of the US position in the crisis.

From here we come to the real point of this post, the destruction of the service economy. Other articles are also starting to tell the tale (though the black cab story is the best illustration). For example, in the headlines today, there are calls for a fund to help small business survive the bad times, and another commentary is highlighting the plight of small businesses. Small business is at the heart of the service economy, and these businesses will be the first to really feel the pain. We should also remember that many of these small businesses will show a time lag before they start to appear in the bankruptcy figures. Again, the black cab story suggests that the we are now at a point where the pain has really kicked in. It is sad to say, but many small businesspeople will now be facing the hard fact that they are in deep trouble. The sole traders, and other small business people, are probably already appearing in the unemployment numbers, but the drip of new claimants will very shortly become a deluge.

If we strip out the debt led growth of the last 10 years, then the scale of the coming carnage in the economy becomes painfully apparent. Quite simply, most of the economy has been supported on a life support of debt, and now that life support has been switched off, we can start to see what will happen next. As I have said, the black cabs are the canary in the mine and we can now expect bankruptcy figures to soar.

Meanwhile, in the US, reportedly they are pressing Fannie Mae and Freddie Mac to boost lending, in a desperate attempt to regain credit driven growth. The same will happen in the UK, and there are already, for example, reports that pressure and/or legislation will be put in place to slow down the mortgage repossession process. We can expect to see more and more of such measures in the coming months. However, all they will do (at best) is create further losses for the financial institutions, and in many cases that will mean losses for governments.

Meanwhile, as time progresses, the fiscal position of both the UK and US government will deteriorate very rapidly, as the full savagery of the crisis are unleashed in the service sector. I am taking the black cab story as the signal that a new phase is starting in the economic collapse. I predicted the state of the economy as it now stands, as an ever faster downward spiral. I recently identified that all of the elements of the collapse were in place. I think that we are now about to see an even more rapid acceleration. The unemployment figures are going to rise at an ever faster rate, along with a massive rise in government expenditure, and government receipts are about to fall through the floor.

As such, I am very sorry to say that we are moving on track for the first government credit crisis, which I predicted a couple of weeks ago (as coming within three months). I suspect that the UK will go first, as the position in the UK is far more acute, and the US will follow shortly after. At the moment, the pattern of disaster is starting to emerge into reality, just as it did for the bank failures. Just as when I predicted the bank failures, the failure of (at the very least) the UK government is now probably irreversible. There was a brief period during which they could have built a buffer of confidence for creditors with a tough program of reform, but I believe that the moment has passed and the course is set.

At this stage, you might consider that this a fairly extreme analysis from the news about purchases of new taxis. However, if you think about the behaviour of your friends and family in their use of taxis, you will see why this is such a stark warning. If the money is drying up in the taxi business to this degree, then the rest of the economy is very likely freezing very fast.

Note 1: I have had an intriguing post from a regular commentator, who posts under the name Lemming. Lemming had the following to say:

Are you absolutely sure that our creditors will be turning the taps off any time soon? Is China, in fact, happy to fund our lifestyles indefinitely so they can simply 'buy' the West in the long term? To me, that sounds like a perfectly rational explanation, and Western politicians who espouse globalisation would be more than happy to facilitate it, I imagine, even if they were unaware of exactly what they were signing up for.

I have to admit, this a fair point. If China keeps lending, they will gain formidable economic power in the long term. As such, it is a very real possibility, and I can not discount that this might be a reason for continued lending. However, as China slows down, they might need to start to redeem some of that lending in order to support their own economy through the crisis, and will want to use whatever resources for that purpose, restricting their ability to lend. In this situation, depending on what happens with the Chinese economy, they may not have the option of continued support for the West. Another commentator kindly posted the following link, and I will repost it here as it applies:

Note 2: Another poster has kindly posted a link here. It makes interesting reading, in particular the article of 1998, financial capitalism vs industrial capitalism. I recommend it to all readers.

Note 3: Jeremy commented as follows:

Darling's plan of bringing spending forwards is truly dreadful. I can only imagine that he thinks that it might boost the economy prior the the next election as a last ditch effort for labour to avoid complete wipeout. I suspect the chances of that are nearly as small as the grey nobbly organ situated between his ears. Either way, we can reasonably expect sterling to get trashed in the process and look forward to some serious inflationary pressure moving into 2009.

This was a prescient comment, as £sterling has been tanking. The curiosity is the $US is still acting as a 'safe haven'. How much longer? Not much longer, I believe, though perhaps it will take the default of a major rich world government to finally do it? Meanwhile, would you lend into anything demoninated in £sterling at the moment? I think others will have their doubts too - which means that demand for £sterling to lend back into the UK will probably fall back, creating a stronger downward spiral.

Note 4: LordSidCup has the following to add to some other interesting comments:

My point is; if the politicians and financial elites could use whatever means to get confidence high again, is it possible that after after a correction things could stay the roughly the same/ a lower level ) for many more years, if not indefinitely?

Also, there are all these interbank debts looming, Credit Swaps etc, why don't the most important banks get together and write them off? I assume that would be painful, but as its all abstract wealth created as debt, what would it matter?

For the first point, others widely share this idea, but confidence is not a magic force but has to be rooted in something. If every day brings news of an ever slowing economy, ever smaller government receipts, then how can a government maintain confidence. Without the fuel of debt, it is impossible that confidence can be maintained, as I have outlined here. This is why every attempt to pour money into the economy sees a subsequent later fall in confidence. Reality just keeps on intruding and governments just do not have the resource to bail out both the financial sector and the rest of the economy.

For the second, the Credit Default Swaps are guarantees against default. They are therefore an insurance policy that moves real damage in the economy to a different place. Whatever happens, somebody will make the loss, and it is just a question of who will suffer. Note added approx 1 hour after the post: MattinShanghai has commented below on this answer and has pointed out that I have blundered. One of the wonders of the online world is that, when we make an error, we are soon corrected. Apologies to LordSidCup, for an incorrect answer....I will rethink and hopefully, if I have enough time enough to get my facts straight, will reply again.

A note to my note, added a little later.....MattinShanghai is quite correct to say that there is no knowing the size of the market, due to the private nature of the transactions. However, the products are an insurance contract, according to a reference I quickly checked: 'The seller sells protection (buys risk) and generally receives a fee for this protection' ('Credit derivatives and Synthetic Structures', J Tavakoli, 2001, p5). A note of caution however, as this in derivatives terms is a little dated as a reference. Apparently they are called swaps to avoid regulation as an insurance, which I dug out from Wikipedia, as I could not find anything more substantive in the economics journals on why they are not classified as an insurance. However, they still appear to be an insurance, whatever the legal niceties that determines their name. I think Matt is referring to the fact that:

'Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can "naked short" the debt of companies without restriction.' from here.

It is, as Matt said possible to buy an insurance against another person's house burning down. The point I think that Matt is making is that, in principle, it is possible for LordSidCup suggests to happen. This is I believe the comment Matt made about the fact that the counterparties being on the line for more than the value of the original debt - the ability to profit from debt default....

However, the complete abandonment of the CDS contracts would presumably hit some institutions harder than others. In the current situation, where the banks are so exposed to wider damage as a result of defaults, in principle I can not see why it would not be possible to write them off if they could see a common interest in their survival as a group. The trouble is that the institutions who stand to gain would have a very tough time being able to justify their giving up their positions. Such a position moves into game theory, and requires trust and cooperation from all parties to secure a common good - it is not a zero sum game. It would face problems of imperfect information, due to the private nature of the transactions. Who does hold what, and what is their exposure, or their potential for gain? I am probably doing injury to game theory here, but hope that the answer helps. Thank you Matt for your clarification, and thank you LordSidCup for what was a far more challenging question than I originally considered. I also think that there is more to the point being made by Matt, so any further clarification will be welcomed. In the meantime, time allowing I will look at this a little more, and may add a further note if I have anything more to add. I am not sure that I have yet got to the root of the question, or the operation of CDS contracts. Even as I am writing, I have found a helpful quote on the underlying principle of CDSs which I hope will help others (The Journal of Finance, Volume 60, Issue 5 (p 2255-2281)'An Empirical Analysis of the Dynamic Relationbetween Investment-Grade Bonds and CreditDefault Swaps'), & a good introduction to first principles.

'Single-name credit default swaps (CDS) account for around half of the credit
derivatives market. They are the most liquid of the several credit derivatives
currently traded and they form the basic building blocks for more complex
structured credit products.1 A single-name CDS is a contract that provides
protection against the risk of a credit event by a particular company or country.
The buyer of protection makes periodic payments to the protection seller until
the occurrence of a credit event or the maturity date of the contract, whichever
is first. If a credit event occurs, the buyer is compensated for the loss incurred
as a result of the credit event, which is equal to the difference between the par
value of the bond or loan and its market value after default.
2. CDSs provide a very easy way to trade credit risk. Many corporate bonds are
bought by investors who simply hold them to maturity (Alexander, Edwards,
and Ferri (1998)). Secondary market liquidity is therefore often poor, thereby
making the purchase of large amounts of credit risk in the secondary cash
market difficult and costly (Schultz (1998)). Shorting credit risk is even more
difficult in the cash market. The repurchase agreement (repo) market for risky
bonds is often illiquid, and even if a bond can be shorted on repo, the tenor of
the agreement is usually very short. Credit derivatives, especially CDS, allow
investors to short credit risk over a longer period of time at a known cost by
buying protection.'

Matt may well be right that they are another bomb about to go off. No doubt they will add to the damage, but I still think that they are more likely to just relocate it. Defaults may melt one institution's balance sheet, but will improve that of another (assuming that the institution can pay). It all depends on the how many times the same house has been insured by whom, and that is not clear. This returns to LordSidcups question - as the lack of knowledge is a source of fear and that threatens stability further. In writing off the credit default swaps, the system as a whole would benefit, and that would be big plus for all instituions. However, I was not previously aware of some aspects of these derivatives, and suspect my knowledge is still imperfect. I would like to look at this more closely, but that is it for time for the moment.

Origninal post continues below......

I'm afraid that is all I have time for today.

Note 5: Despite my assertion of having finished, it should be noted that the LIBOR has fallen, which will hearten those who supported the bank bailout. However, is this because the state owned banks are now lending again because it is required, or because they think it is wise to do so? I do not know the answer, but in any case, the bad news in the economy feeding into more losses will drag the rate back up, unless the government has very deep pockets indeed....

Note 6: Oil has now dropped into the $60-70 per barrel level, as I predicted would happen. However, much, much sooner than I expected. For once, the news is positive, as the drop in oil prices will be a major positive for the world economy - as long as OPEC does not spoil the party by cutting back on production.

Key Posts From the Archive...

If you are new to the blog, you may want to start with these key posts:

Some posts on the underlying causes of the crisis:

'5 Minutes to Midnight' - A summary of the problems in the world economy, published in the magazine 'Trade and Forfaiting Review' (external link). 'The Economic Crisis - The Underlying Cause' - An update from a previous post (see next). The Banking Crisis - What is REALLY going on - An overview pulling many of my thoughts together in one place (a useful introduction, but not a substitute for the original posts). A review of 2008 and predictions for 2009 here.

General Posts:

A Funny View of Wealth - A long essay that describes the problems in the UK Economy, and which predicted the current economic crisis in 2007. Isn't all Growth Built on Debt provides a short/basic introduction, but read the original if you have time.

The Cigarette Lighter Problem - An illustration of the fundamental problems in the Western economies and 'Government Borrowing and Interest Rates' for the troubles government can cause. 'The Central Banks and Their Role in the Crash' - includes an explanation of why quantitative easing in Japan is different from the US and UK.

The Banking System - Synthetic Economics - Why our entire financial system is built on confidence alone (bear with it, because it is not easy).

The collapse of the Service Economy, or why the US and UK economies are about to shrink by around 30% in the next couple of years.

US and UK Guarantee Consumer Debt - a summary of what the bank bailouts really meant.

The Perpetual Economic Growth Machine - A Basic Problem with Keynesian Economics

Some Solutions:

NHS, Education and Benefits System reform - Several posts on possible long term solutions. A controversial post on reforming energy policy. Reforming Banking and Money can found here, and taxation here.

To grasp the full picture, you may want to take a look at the archives (below). There is a lot more to be found than the above....

Look here for more...

Recommended Sites

The IFS

Adam Smith Institute

Steve Tierney - a blog from a regular commentator on this blog (see comments on most posts) Tiberius Leodis - another regular commentator, who occasionally challenges some of the points in this blog. Focused on Leeds city in the UK, and the effects of the crisis on the city (see comments on the most posts in the last few months). Social Democracy for the 21st Century - A blog established by Lord Keynes, a long standing commentator on the blog and critic of much of the content of the blog. If you are looking for a different point of view, a good starting point. For some interesting opinion, one of the commentators on this blog publishes a blog, interestingly called The Fat Bigot NZClimate