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20 november 2010, bad policy and catastrophic politics
The financial times has surely called it right that the eu using the irish crisis as an opportunity to rid themselves of the running sore of ireland's 12.5% corporate tax rate would "politically, be the most monumental own goal europe could score. The irish were converted to the lisbon treaty by guarantees on tax sovereignty. Reneging on them would cause cracks in europe's political edifice that no words could paper over." Much as many do not agree with this rock of irish fiscals, and much as the quid pro quo for a community bail out must be rigour and reality in national affairs, that policy has proved as successful as any, and is their democratic right to pursue. This is not greece, where root & branch reform of the fiscal administration is necessary; the irish have been bold and competent in this department. The tragically lax and wayward was bank lending, which surely means a focus on regulation and balance sheets, the ultimate journey being wind down and removal of irish lending capacity, which should not be irreplaceable given open access to other euro lending. Isn't that part of what a sustainable single currency needs to be ? The press in the uk meanwhile is full of tosh about how it's all ireland's fault for joining the euro in the first place, though of course having their own currency would not have stopped irish banks irresponsibly lending the ludicrous amounts of money that are the source of the problem. It would though have robbed them of 15 years of roaring tiger growth that economically transformed this once-obscure part of europe, and nor would there be weeks of negotiation with a friendly eu white knight, but rather it would be the immovable imf against an ireland with its hand undermined by a currency crash.
14 november 2010, of benefit ?
So much news: aung san suu kyi (free at last, but so little so late), abysmal failure at the g20, whose consequences will be with us for a decade (an excellent economist piece echoes my last post), and ireland again tests the euro. I'm struck most though by another excellent piece, by andrew rawnsley, on changes to the UK benefits system. Maybe because it's a problem facing all europe, with the outlier uk dealing with it first; or maybe because my horizons are now rather narrowing to things british. I really need to know much more about this. All sensible people agree that we have ingrained welfare dependency, which is both personal tragedy and economic millstone. British benefits though are not generous: I have personal experience of this, my other half having lost a well-paid teaching job in germany, and become entitled to two-thirds of her salary. Far more people though claim in the uk: around 5m says rawnsley, a third having been receiving for nine of the last ten years. All recent governments have been complicit in this gradual but rock solid rise, and all political parties want to reverse it. The way is, to use the slogan, to make work pay. Logically, this surely means both increasing minimum wages and/or enabling people to keep some benefits whilst in work, but also decreasing benefits. What to do though when there is no work, which for some is certainly the case, although much less than most think when we consider the lowest paid jobs. Should people be forced to do something for their benefits to become or stay accustomed to working ? That's hardly training to move people into the knowledge intensive economy we need - but work surely is work, and it's not benefits. There are of course the defenceless in society that need strong support; but how to tell them apart ? These are the questions. The grand experiment of the next years will not be without casualties, but it may provide some of the answers.
10 november 2010, the need to change global reserves
It's freezing out, so my study has made its annual migration from conservatory to dining room. It's cold too for some in the sovereign debt markets, with irish troubles worsening by the day, as countries become the new banks, ready to topple over, but for an imf or ecb bail-out. Biggest debtor of all is of course america, but it has no trouble raising endless funding due to dollar dominance. This is now being challenged though as never before. Ideas about a more balanced basket for global reserves are hardly new - see eg manchester's own stiglitz - but the greenback's relentless downward spiral, and the firm policy intention to drive it down further to drive growth and avoid inflation in the us (our currency, your problem) has moved this debate from obscure imf papers on creating a new global currency (the bancor) to the front page. It is the main item of discussion at the g20. In fact, there's already a perfectly serviceable global foreign reserve currency, the imf's own sdr, although alas it has no market presence and so is not really attractive for wider use. This may change, but more likely is an ebbing into slowly building up reserves in other currencies, mostly of course the euro, although the prospect of bailouts is hardly an advert for euro stability either. The big change will come when the yuan becomes fully convertible, and china has already taken the very first crucial steps towards making that happen. With some 15% of global gdp now tied up in reserves though, starving the world of capital, something, somewhere has to give, and it won't be pretty. It also won't be that soon - so for now, buy gold.
6 november 2010, reality is almost always wrong
Not the doctor, but the place to live, of which there is a chronic shortage in the uk, as house building has declined dramatically over the last 2 years, with no signs of improvement. Apart from land that people want to build on not being made available, this is largely because the norm here is home ownership. However, as hefty deposits are now needed for first time buyers, and declining prices have hit those who already own, the market is weak and indeed getting weaker. Public interventions have kept things afloat until now, but with all spending now slashed, that is grinding to a total halt. It may be a while until it percolates through that the fundamentals have changed and that the end of the access (now gone) to cheap money (going soon, as high inflation and interest rates mean expensive money) that fuelled ever-increasing house prices means that owning your own house no longer makes such great sense. Like germany and so many other continental markets, renting is more and more likely to rise, and not just for students. This view is strengthened by the fact that even with the last years' decline, uk house prices remain vastly overpriced: they need to fall a further 25% to hit their long-term average. What is needed to unblock the system is investor confidence in a financial model that securitises long-term rental incomes, so enabling a mass of building in the first place, and enabling more to be built from revenue and profits. But this isn't going to happen before it takes hold that the change from own to rent isn't a blip but a trend.
30 october 2010, the amazing mrs merkel
I am one of angela's biggest fans (13 feb), not least from seeing her at close quarters resurrect the european constitution virtually single-handedly. Less than a year after lisbon came into force, it is worth recalling the firm consensus then that this would be the last treaty for a very, very long time. Now though, it looks like everyone was wrong. In a modern day retelling of twelve angry men, it seems that angela went into last week's summit alone against 26 "nos", but came out with unanimous agreement for a new treaty to tighten eurosystem rules. Contrary to the common telling though, this is not a new treaty. There have been dozens of "treaty" amendments over the years, not least with every new accession. Most had painless ratifications. I myself helped amend the treaty when the new member states joined in 2004 to change the way of calculating countries' voting rights on the (interest rate setting) ecb governing council. Interesting one that: tiny luxembourg came out more powerful than poland, which has 80x the population. The point though is that the uk adopted it with the "ponsonby rule", meaning it was laid before parliament for 21 days. I monitored opinion closely: there was not one comment or colomn inch. This time around, we are going to road test lisbon's new mechanism of what I called "silent ratification" (p17). This would, for example, enable the permanent crisis mechanism to be established within the treaty's "no bail out" parameters, but would not allow member states' voting rights in the council to be truncated. The former will be designed to stop germany's highly sensitive constitutional court feeling the need to weigh in. There is the risk that an activist parliament could block it, not least as a negotiating chip for something else. Step forward the uk, whose parliamentarians have a host of such wants. However, the uk government should relatively easily be able to head that one off at the pass, and one would suspect the price of that is already negotiated. The precise amendment is going to be hard fought, germany's stance being to really accelerate euro area economic governance in the way that lisbon was designed to enable to happen if the backbone was ever found. We may be in that territory. Marvellous merkel may again have pulled an astounding rabbit from what everyone else saw as an empty hat - and if it does lead to tighter euro area economic governance, it may well be a rabbit that lays golden eggs.
23 october 2010, salami slice or restructure ?
Although this is about the local "here", the need to learn from the local "there" hopefully provides interest to my (mainly) non little england readers. Though more complex, local government here is essentially losing around a quarter of its income, making the need to cut costs drastic. Of course this has been long-known, and 3 london authorities, have already gone quite far down the road to keeping all their separate political structures and identities, but having a single set of people supporting them and providing services. Is this the way to go ? Those authorities have a combined population of some 600k: larger than the uk's largest single authority (manchester's range from 182 to 483k), but much less than broader city areas (manchesters' totalling 2,600k). There are 2 factors: what is the most efficient size for such a unit (from the perspective of both cost and, let's call it, social capital); and what do people want. There is much literature on the first question, and the answer to the second is it depends who you ask and how you ask them (this is absolutely brilliant). The real answer to the question is the balance between bulking up - which improves outcomes and reduces costs, through economies of scale, transparency, lesser ability to protect inefficient local connections and better practice transfer, and keeping it small enough to avoid the tragedy of the commons, when people become so removed from the community that they act solely as rational and selfish individuals even when such action is clearly contrary to the broader community's interests. A starting point for greater manchester is that political change is a nightmare. However, there are many ways to change other things that would vastly reduce costs for everyone. With hugely far sighted intention, the political leadership has already asked whether it's "better to do things 10 times over or do it once, and save on administrative costs but still deliver the same service to the public ?", and how soon we rise to that challenge will determine whether we create tomorrow's landscape, or become its victims.
21 october 2010, dread the launching of the bad ship qe2
Blanket news in the uk is fiscal, with a fearful "spending review" (see the attached) slashing more spending than any time since 1273 bc. The real date with destiny though though is november 3rd, and its monetary, as the good ship quantative easing prepares to set sail again. It's back - and this time its going to be mind-bogglingly bigger than ever. First off the blocks dropping bucketfuls of money from helicopters will be america, followed a day later by the bank of england. This is very bad news. Qe2 might help steady the bigger ship of state in the short term, holding down interest rates and devaluing the currency (the dollar is already falling in anticipation), so boosting exports, but this is bugger-thy-neighbour stuff and stores up many, many troubles, not least inflation - which is already running well above target despite desperately bad economic times. With dollar purchases potentially massive, central banks are increasingly taking over the markets themselves, the fed to create more dollars, the others to keep their own currencies steady against a sinking global reserve, with anyone that dares hold out (that's you, euro) likely to be clobbered by rapid strengthening, as japan just found out. Surely, even the dollar though has limits somewhere to its elasticity and ability to export inflation. Managing the world's main global reserve currency is the goose that lays the golden egg, but it is being slowly strangled - and who knows what happens then ? The biggest problem is where the bucketloads of money actually land, and as consumers in the west are going to remain cautious however cheap money is (it's already virtually free), a huge part of it finds its way to where interest rates are higher and profits are being made: the emerging economies, who are then staring at sustained inflation down the barrels of whatever weapons come to hand in the currency war that is surely really soon to be upon us. This is uncharted territory all around. Bon voyage - not.
Attached File: csr.doc
17 october 2010, ...and what happened next
Just to complete the sequence of my last blogs: friday, manchester and luton, as after a day's work I picked up the kids and drove them down to a travelodge just outside luton airport. Saturday was budapest as we flew over to meet up with my other half and then stayed in hungary for my mother in law's funeral on the monday. All in all, it went as would be expected, with moments of deep regret, memories, smiles, togetherness, bitterness, tears and children running around all swirling over the day, which ended for us on a plane back to luton and a long drive back before a horrendously busy four day week, leading to a rather neglected blog. This was a week that will be with us for a long time.
7 october 2010, thursday, london
Virgin rail has done well out of me these last weeks. Took the 6.43am to london this morning, and aside from a couple of hours putting the kids to bed as soon as I got home, I send my last email just shy of midnight, so work is pretty all-consuming at the moment. Every day though, I see evidence that it's worth it. Today I spent a great deal of time on child poverty. Can change make a difference ? Even yesterday a new york times journalist reinforced my faith that it does. Drawing on a raft of different studies, his striking conclusion is that life in the womb "allows poverty to replicate itself generation after generation. Pregnant women in low income areas tend to be more exposed to anxiety, depression, chemicals and toxins... [and] more likely to drink or smoke... kids facing stresses before birth appear to have lower educational attainment, lower incomes and worse health throughout their lives." Traditionally the Chinese count life as starting at conception, so you are born aged one. I think they're on to something...
6 october 2010, wednesday, manchester
Home sweet home, and without a boarding card, as it was texted to me on my phone, and I just flashed that as I went through. Amazing ! Holed up at home for the day (19 november) but piling through lots of stuff, and mixed feeling about seeing us held up in the ft. As a family, we are digesting the news about child benefit (richer folk will lose it), worth a hundred and fifty pounds a month to us. I have to say that with the monumental nature of the savings that will have to come, if we are indeed as a society to do what needs to be done by the poor, all these higher-income supplements are surely going to have to fall by the wayside. As one bbc wag said though, that's £1bn done, so just another £82bn to go now. It's going to be a long and tortuous couple of years, and just about everyone is going to be getting less of just about everything at the end of it, and so the sooner we get used to living in a new paradigm the better.