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Posts Tagged ‘Britain’

Central Banks are inhibiting growth

January 11, 2012 1 comment

Last night (10/01/2012) I went to a lecture given by the Governor of the Bank of Japan, Masaaki Shirakawa, at the LSE. The subject was entitled: “Deleveraging and Growth: is the developed world following Japan’s long and winding road?” In short, the simple answer is “yes, based on current trends and without any change of course.”

Mr. Shirakawa delivered a very interesting lecture the centred around, among other things including his love of the Beatles, how central banks should play a role as a guarantor of financial system stability. I have not touched the role of central banks in the past, but my opinion on the role of central banks differs from Mr. Shirakawa and probably from a lot of central bankers too.

My opinion is that the role of central banks should not extend beyond price stability. Why? Because the adoption of a extra-governmental role in guaranteeing financial system stability: a) reduces independence of a central bank; and b) aids in the depression of growth.

The independence of a central bank is undermined when it engages in a role outside price stability because, ultimately, the mechanisms and controls of a central bank are given over to the whims of politicians. For example, Quantitative Easing is a monetary mechanism to produce demand. Whether this actually works is another matter.

The crux of this argument revolves around the depression of growth.

The Bank of England’s base rate dramatically fell from 5% in September 2008 to 0.5% in March 2009, where it has stayed since. UK CPI trend since 2008 has been upward, largely encouraged by low interest rates. The same can be said of the Federal Reserve. QE itself is, arguably, a depressor of growth as the practical results would indicate an entrenchment of non-investment. Lender of last resort encourages the risky banking practices of the pre-2008 crash which aids in financial instability and depressing confidence. Unintended consequences of a policy often extolled by politicians.

By acting in an extra-governmental role, central banks maintain the status quo of “government spending is best”. This, to most economists is crass. Government spending, at best, does little to encourage innovation and enterprise because it is too busy propping up businesses that would otherwise have gone bust.

So, instead of an invigorated and dynamic economy, government spending and central bank intervention in its extra-governmental role is inhibiting growth.

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Don’t be fooled by Eurosceptic ‘libertarians’…

December 23, 2011 Leave a comment

…as they are just xenophobes.

This applies aptly to the Tory right and UKIP. Some might be theoretically libertarians but by calling for a withdrawal from the EU they cannot call themselves libertarians in practice.

The EU guarantees free trade, the basis for a free market, across member states. Freedom of movement for goods, capital and, most importantly, people.

Any renegotiation of Britain’s membership would precede the removal of these important contributing factors to the British economy.  Britain would become an isolated island with an increasingly discriminatory immigration system.

The EU is not perfect. Any one who says otherwise is deluded. However, it does lay an important foundation for the liberalisation of a global economy. The future of make-up of the world economy will likely be based on political and economic blocs – like the EU is. Like the USA technically is.

Once this shift has occurred free trade can take place between the blocs. It won’t happen in for a long time, but it will happen based on ongoing political and economic trends of co-operation at a supra-national level.

The right wing wish to prohibit this trend. A protectionist measure in the name of freedom.

 

Infrastructure Investment: Privatisation

November 28, 2011 1 comment

George Osborne, ahead of Tuesday’s Autumn statement on the economy, has announced that there will be a £30bn investment in UK infrastructure. £25bn to come from pension funds and the China Investment Corporation and the remaining £5bn to be provided by central government funded by cuts elsewhere in the budget.

As a Keynesian, I favour a demand led approach but I also recognise that there is also a shortfall in the supply side, such as re-skilling of the unemployed. As Sam Bowman tweeted earlier: “Ha ha. £30 bn of infrastructure spending. Good one. That will help people to reskill for the future, won’t it? #jesuswept” I also recognise that the two are symbiotic, but that’s for another blogpost.

Investment in the UK infrastructure could be handled much better and it could also draw in more short-term capital for the Treasury. I’m referring to privatisation. Fixed Phone Lines, made of copper, need to be replaced by fibre optics to cope with increased demand on bandwidths due to a recent surge in people and products using and requiring broadband. BT currently has a de facto monopoly on this aspect of telecommunications infrastructure, with Virgin offering a cable based alternative in limited areas. The liberalisation that often comes with privatisation will provide more choice to the consumer, remove BT’s Universal Service Obligation as it has, in my opinion, failed in its obligation to provide access to advanced communications (broadband) across the nation, and create a more efficient broadband service thus aiding in growth.

Motorways could be sold off and made toll roads based on a Vignette. This would increase the immediate short-term access to capital that the UK government needs to reduce deficit and debt, remove its obligation for maintenance of the system and collect a revenue stream through a tax on the toll charges.

The attraction to these types of investment would be that the return of investment would be almost immediate and it would be of benefit to most of the citizens of this country. If the Chinese are looking to invest in the west, then the UK must be open to investment. With $410bn, that is a lot of capital to invest and the UK could do with all of it.

Retort to the Telegraph

November 18, 2011 Leave a comment

On Friday, The Telegraph ‘reported’ on “Germany’s secret plans to derail a British referendum on the EU”. The plans aren’t that secret. The think tank, Open Europe, has provided an English translation of the document, entitled:  The future of the EU: Necessary integration policies for progress towards establishing a Stability union.

The document itself mainly concerns itself with changes to Article 126 of The Treaty of the Functioning of the European Union. Article_126 is largely about maintaining a resemblance of balanced budgets amongst member states.

The document proposes that paragraph 10 of Article 126 be deleted. Paragraph 10 states “The rights to bring actions provided for in Articles 258 and 259 may not be exercised within the framework of paragraphs 1 to 9 of this Article.”

Article 258 and Article 259 deal with legal proceedings being brought against a member state by either another member state or the Commission if a Treaty is deemed to have been broken.  This would allow direct intervention into the affairs of the offending member state by the Commission or, in this case, a European ‘Stability Commissioner’.

The crux of The Telegraph’s argument comes as a note at the bottom of the penultimate page.

“Limiting the effect of the treaty changes to the Eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK).”

The proposals in the document are a change to a part of a treaty which only affects Eurozone members. However, as all treaties have to be ratified by members of the EU Britain would need to ratify the changes. The changes would only affect Britain if it were to join the Eurozone.

I recall the public being offered a referendum on Britain’s continued membership of the EU if there was a fundamental treaty change which affected its relationship with Europe. This proposed treaty change doesn’t affect Britain in the slightest.

Europe, China and the odd one out

October 27, 2011 Leave a comment

On Wednesday night the Eurozone summit convened and passed a motion agreeing to a €1 trillion European Financial Stability Facility (EFSF) top-up. It has already become obvious that this €1 trillion fund is not enough and negotiations will now start between the Eurozone, led by Nicolas Sarkozy, and China ahead of next weeks G20 meeting. It is expected that China will supply a further €1 trillion bringing the total fund to €2 trillion.

The summit also imposed certain conditions.  Banks will be limited in paying dividends and bonuses until they meet capital thresholds of 9%, or €106bn. This is the equivalent of another HSBC. No mean feat. Britain’s banks, having been forced by the Bank of England and the FSA to raise this amount will be spared the task.

Greece’s debt will be partially written off, reducing the debt burden from 180% GDP to 120% GDP. The next woe for the Eurozone is more than likely to come from Italy. Before the summit Berlusconi, the Italian Prime Minister, declared he would resign by the new year. A welcome announcement for pretty much everyone.  For months the Italian economy has been without leadership and this was openly declared by Steinmeier in the Bundestag on Wednesday.

The situation in the Eurozone, as is evident, is not contained to the Eurozone. Britain’s largest trading partner is the Eurozone. China holds €2.4 trillion in currency reserves. If the Euro collapsed China would be stuffed. As it is, China has had to resort to boosting domestic demand in anticipation that demand in EU27 will drop off, despite an increase of China to EU27 exports of 20% in 2010. China’s help, however, will not come from China’s desire not to lose any money. It is expected, and one would be surprised if they didn’t, that China will demand that Europe acknowledge China as a market economy and thus drop some of the trade barriers on Chinese products.

Britain, in the whole situation, is the odd one out. On Sunday, Sarkozy told Cameron “You are missing a good opportunity to shut up. If you wanted a say you should have joined the euro.” On Monday, Britain was the only Parliament to debate holding an in/out/renegotiate referendum on EU Membership. The Eurosceptics of Cameron’s Conservative Party threatened to tear his party apart. In the end, only 81 Conservative MPs (including the two tellers) rebelled against Cameron’s three line whip to vote in favour of the motion calling for the referendum.

Cameron has done well to isolate Britain from the European Community, and Germany in particular. The withdrawal of the Conservative Party from the European People’s Party in 2009 in favour of setting up a right-wing bloc in the European Parliament consisting of European fringe parties from the former Soviet bloc. Since becoming Prime Minister, Cameron has moved closer to France without German involvement. France and Germany are inseparable in Europe and to snub Dr. Merkel is an unwise decision.

In the Bundestag, on Wednesday, Kauder (CDU) said : we’re prepared to reach in our pockets, but expect solidarity from Britain & agreement on financial transaction tax. Was that solidarity given? No. Osborne stated that Britain would not give any money to the EFSF but did not rule out giving indirectly via the IMF. The same result will occur – Britain will give money to the Eurozone. The route that Britain has taken, however, will only serve to further isolate the island nation.

On Thursday morning, the Daily Express jumped on comments made by Merkel in the Bundestag on Wednesday:  “If the Euro falls, so does Europe.. No one should assume that another 50 years of peace in Europe are a given.” The Express took this for an implied declaration of war, thus cooling the frosty nature that Britain currently has with Germany. Britain is fast becoming the ‘odd ball’ of Europe.

Britain’s isolationism beside, will the current round of funding to the EFSF work? In the short-term it will. In the long-term it is unlikely. As a European Federalist, tinkering with the Euro will not save it. Fiscal and further political union will save it.

Soon to be Dead Ed

On Thursday Ed Miliband defied the wishes of his paymasters and called the strikes a mistake and further claimed that the Basic State Pension is enough for everyone to survive on and didn’t know what all the fuss was about. He said this as he hoisted the Hammer and Sickle flag above his £1.6 million home near Hampstead Heath.

The Unions were fuming. With the usually docile ATL issuing a fatwa on Miliband’s head – dead or alive (preferably dead). A Unison representative said they gave life to Miliband and they ‘can take it away’. Bob Crow, of RMT fame, offered to ‘crack some f***ing nuts!”

Those on the right issued as statement in solidarity with Miliband, stating that it is ‘better to be dead than red’ whilst they visibly backed away from Mr. Miliband in case the angry mob turned on them after dealing with Miliband. Have fear right wingers, they’re after you too.

Some or all of this report may have been made up.

The Budget, Spending Review and Fairness

October 25, 2010 Leave a comment

It was once said that ‘Beauty is in the eye of the beholder’. The same could be said for fairness. What one calls ‘fair’, another calls ‘unfair’. With the June Budget and October Spending Review, many have called them unfair. The government, on the other hand, calls them fair.

The government, in trying to reduce the deficit, has cut spending, increased taxes for every section of society. On this basis it is fair. However, seeing as the deficit was caused because of the recession, and the recession was caused by the deregulation of the financial sector, ultimately, it is unfair that everyone is effected by the changes in fiscal policy. To be completely fair it should be the financial sector and policy makers that should pay the shortfall and eliminate the deficit.

However, to do so would be unwise as they will look to the other sections of society and say “why aren’t they involved? We gave them credit, it’s not our fault they can’t repay it.” And thus it escalates until you are left with a large proportion of society feeling slighted, bitter and, those that can, an exodus of talent and wealth.

However, the main problem with the June Budget and Comprehensive Spending Review is that the poorest 10% are the second worst off, in relation to the policy decisions, behind the richest 10%.

In terms of income lost, the bottom 10% loses 1.6%. The richest 10% loses 2.2%. The main problem with this is that the bottom 10% cannot afford to lose 0.1% of their income let alone 1.6%. This section is either in poverty, or near to poverty. The richest 10%, arguably, can afford to lose 2.2% of their income. The poor rely more on public services than the rich, altering the percentages of how the cuts effect the actual income of these groups. This is unfair.

However, if the rich were negatively effected too much by the policy decisions then there would be an exodus, a loss of tax revenues and more demand on the next richest 10% to pick up the shortfall left by the top richest 10%.

Whilst we agree with the principle that every person must play their part to reduce the deficit, we also believe it is unfair to place the burden on the polar extremities of the wealth spectrum. Whilst we believe the poorest 10% should not be let off, we believe their contribution to be too much. The burden should fall in relation to the ability to pay, much in the same way that credit is granted. We believe this to be fair.

However, fairness is in the eye of the beholder.