Friday, 31 May 2013

Abenomics on the ragged edge

Economist around the world watch Japan with baited breath, there is much at stake for the both sides of the argument, The Keynesian wing have their fingers tightly crossed hoping that Abenomics will finally  be the solution to kick starting the world third largest economy, that has been moribund for years. Others on the monetarist wing believe that it will end in tears, and it looks like the markets are voting in favour of the monetarist.
Abenomics is in fact a sort of con-trick, the Bank of Japan (BoJ) is trying to break a deflationary cycle but massive doses of Quantitative Easing (QE) alongside a huge increase in government spending on capital projects.  It is hoped that these two levers will prize economic growth out of an economy that has been going sideways for 20 years.   What everyone knows, is that the moment inflation resurfaces and growth returns, the BoJ will return to a more prudent approach.  This highly transparent strategy has now turned into a game of cat and mouse between the BoJ and the markets.  This week bond yields rose (higher interest rates expected), stock prices fell and the yen rose a little against the dollar last week.  Paul Krugman argues that higher bond yields, a weaker stock market and a stronger exchange rate are all in response to a tighter monetary policy than the one now promised (a broken promise).  The markets don’t believe the Haruhiko Kuroda the new governor at the BoJ is going to be as mad as he says he will be!  The big questions are:

1. Will the markets believe that the policy to risk all for 2% inflation is real or just a short term con-trick 
2. Will interest rates remain lower enough to see this policy through
3. Will the fourth arrow of increase sales taxes to fund the capital spend programme actually be delivered

It’s difficult to believe that the BoJ will be utterly reckless for much longer, everyone knows that Mr Kuroda is trying a form of blind man’s bluff.  The markets will take a medium term view so this promise ‘to be reckless for a little while’ doesn’t cut much ice.  
A further difficulty is that the whole plan depends on low interest rates, to force down the value of the Yen (supporting export growth) and to drive up consumer spending in Japan.  But low interest rates are going to be dependent on the level and expectation of government debt, which already unsustainably high.  If interest rates rise then the need slash capital spending would create a very swift about turn in policy and this is what the markets believe will happen – this could become one-way bet.  
In addition to the interest rate time bomb another problem is that Abenomics has weaken the Japanese banking sector, which is now sitting on Y821tn ($8tn) of government bonds (the result of government debt and QE) and the bottom is falling out of this market.  This is making it very difficult for the Banks to lend money to new and growing businesses.   
The net result of all of this is that Shinzo Abe is on a tightrope above a shark infested river.  He needs to tread a fine line between a credible reflationary policy and need for low interest rates to manage the crippling public debt.  He might just totter across the ravine and receive a hero’s welcome but my money is on him ending up in the torrent with the short sellers enjoying a tasty lunch. 

Tuesday, 28 May 2013

Fair Tax - Kitemark Needed?

It happens in all great industrial upheavals, first there is a boom then a premature bust, followed by a period of consolidation, then we get the monopoly ‘robbery barron’ era, before settling down into a better regulated more consumer friendly state.  The evolution of train transport and telephony business followed this pattern as has the oil industry, all bringing untold benefits to society but at some cost!  The internet has followed the same pattern with the boom in 1997-2000, the bust in 2001-2003, the recovery and consolidation, and now we are in the robber-barron phase.  The evidence is all round us.  Business oligarchs have made undreamed of fortunes, The lack of enforceable regulation means a small number of companies have been able to secure and then operate virtual monopolies  (Google, Amazon, Apple) and a consequence of this crazy wealth creation is that they have become uncontrollable.  They have been aided by both the rise of the internet and the fact that we live in a global market.

Friday, 24 May 2013

The NHS - an accident waiting the happen

The current state of our hospitals and specifically Accident and Emergency (A&E)  is a car crash waiting to happen.  The problems in A&E are blamed on the number of visits, which have risen by 50% in England in a decade and recently waiting times and other performance metrics have been on the wane.  GP consultations are up by a third since the mid 1990s and the number of routine operations carried out by hospitals, such as knee and hip replacements, has still jumped by 60% since the mid 1990s.  The case for the defense as promulgated by the NHS’s management is – “we are having to do more with less or the same resources”.

The problems started with Tony Blair’s reorganization in 2004, which decided that GPs could no longer cope with out of hours work, this forced many non-critical cases to report to Accident and Emergency units in their local hospitals.  The College of Emergency Medicine estimates up to a third of patients turning up at A&E could be treated by a nurse or GP without going to Hospital. The BMA constantly tell us how hard there GP members work and that they are good value for money but the reality is very different.  The number of GPs per head of population has in fact remained pretty constant over the last 10 years.  The has been a slight increase in patient visits per year but in many cases GPs are paid to take on specific treatments and this probably drives consultation numbers.  More importantly, whilst the GP contribution to the NHS has been in decline for years their take of the financial pie has grown exponentially.  This is the  main problem in the NHS is the disproportionate funding that is soaked up by our GPs, who add little value and are now grossly over paid.  The sad truth is that (very) General Practice is becoming an anachronism, the growth of science and knowledge is forcing our best consultants to specialise:  once we had ENT consultants now they specialise in ear, nose or throat – what chance has a GP in this increasingly technical and specialist world?  
The Blair contract had the effect in its first two years of reducing productivity by an average of 2.5 per cent per year. In 2006 GPs worked on average seven hours less per week than in 1992, partly because of the removal of the responsibility for out of hours care. In 2005-06 the annual average pay of a GP partner was £113,614, an increase of 58 per cent on the pre-Blair deal of 2002-03. Since then there has been some slow down in wage inflation but this is about to change.  In addition to ballooning salaries, family doctors will be paid a further £26,000 to commission NHS services. Last year 210 GPs earned more than £250,000 and a Daily Mail investigation (needs to be treated with caution) has revealed that some GPS are earning up to £380,000 a year.   Out of the 250,000 doctors registered and working in the UK some 140,000 are GPs costing the NHS some £17bn a year (in salaries alone) or over 17% of all money spent on healthcare – an awful waste of money when the modern day GP is little more than a freight forwarding business shuffling patients around the system!
What the NHS needs is:

  1. Fewer and less expensive GPs
  2. More out of hours care provided by the district nurse equivalent
  3. A more regional structure NHS England is just too big to be managed effectively
  4. Competition for various treatments (heart, cancer, hip replacements, etc)
  5. Tax breaks for private health care that needs to soak up more demand
  6. Patient fines for self inflicted damage - drink , drug and  smoking related injuries / ill health

Thursday, 23 May 2013

BBC News Glamorizes Terrorism

Yesterday's attack on an off duty soldier in the London suburb of Woolwich is a truly shocking event.  The two deranged men hacked the man to death in broad daylight and then stood around proclaiming "god is great" and other medieval nonsense until the police arrived to deal with them. The press have been quick to tell us that this murder has all the hallmarks if an al-Qaida inspired attack, the terror organisation has apparently migrated to low tech "lone wolf" operations to reduce the chances of being caught by the security services.  The two assailants remained on the scene until armed police eventually arrived up to 20 minutes later, how long does it take to respond to a terrorist incident in central London?  Surely not 20 minutes!!  Scotland Yard's police commissioner, Sir Bernard Hogan-Howe, said officers from the counter-terrorist unit were leading the investigation into the "shocking and horrific" incident.  "We have launched a murder investigation, being led by the counter-terrorism command. Two men have been arrested in connection with that murder." There is a simple and chilling message that this sick crime is trying to communicate to other terror-curious Muslims - "anyone can be a terrorist now".  Given the scale of latent anger that exists within our Muslim communities and the lack of an alternative positive narrative for disaffected young Muslim men we should be concerned.  We should be concerned that inside our boarders we now have a pan-religion anger management problem that will certainly spill more innocent blood.  Solving the global problem of coexistence between our modern society and unreconstructed fundamentalist with Dark Age belief systems is going to be a long term project and the UK is on the front line.  Clearly the worst aspect of this incident is the violent death of an innocent man and the loss inflicted on his family and friends.  Insults has been added to this tragedy through the appalling coverage of this horror event by all the news media and particularly the BBC.  To have to watch the BBC news and Newsnight last night, where they gave these loony religious zealots airtime was one of the worst editorial decision in the BBC's recent history and that is saying something.  To broadcast the murderer, with blood all over his hands and the body lying in full view, was a gift to terrorism and a gross affront to the victim and all right minded viewers.

Thursday, 16 May 2013

Should central bankers be concerned with unemployment

In a recent speech Ben Bernanke, head of the US Federal Reserve told us that the stagnation of the labour market is a “grave concern” because of “the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years”. This is pretty strong language for a banker?  On our side of the pond Mark Carney arrives to take the reins at the Bank of England in a couple of months and he has hinted that the Central Banks should have wider concerns than interest rates and inflation.
There are two question that are prompted by this loose banker talk, firstly what monetary policies might they have up their sleeves to save the world from high unemployment and secondly,  should they have these wider concerns anyway. 

Tuesday, 14 May 2013

Sequestration, the new democracy

In many parts of the democratic world there have been growing concerns for the centralisation of power into the Executive.  In the UK this has manifested itself with the declining influence of backbenchers; evidenced in the marginalisation of committees and restricted time for debate in the House of Commons.  Things got so bad in 2010 that Harriet Harman was asked to look into the ‘repatriation’ of powers away from the executive and David Cameron jumped on the bandwagon telling us, “We will weaken the old political elites, strengthen the power of the people, fix our broken politics and restore people's faith".  He must be ruing these remarks today.  For years we have expected backbenchers to behave as loyal supporters of their chosen Party – “Cannon Fodder,” indeed this was an important convention that secured “sensible and orderly government”.  The new Tory in-take has obviously not read the rule book!
Defense cuts in the US 

The North South Divide - welfare reform adds to the problem

The UK is embarking on a long overdue revamp of its welfare provision, this includes unemployment benefits, incapacity benefits, pensions, housing benefits and a whole range of tax credits too numerous to name.  The aim of Mr Duncan Smiths reforms are to simplify the system, put the emphasis on work rather than paid-for idleness and to reduce the amount of expenditure.  These changes have been greeted with howls of anger from the Left, although Labour have made no firm commitment to reinstate these cuts if re-elected in 2015.

Friday, 10 May 2013

Lost Productivity Killing the West

The developed world’s economy is still staggering shakily after the credit bubble burst in 2008, all the indicators are flat-lining or falling; GDP growth is poor, liquidity is tight, employment is falling and real interest rates are negative, but above all productivity is the problem.  Productivity is a calculation that takes constant price GDP per hour worked and per worker or all GDP divided by the average number of people in work in the year and divided again by the average number of hours worked.  The charts express this as an index based at 100 in 2007.

Wednesday, 8 May 2013

A grown up Germany needs a new partner

Modern Germany (the Federal Republic) is now 64 years old, which is pretty young in comparison to most other nation states in Europe.  But for this adolescent state the question of maturity is becoming important as Europe looks for leadership and a new sense of direction.  Angela Merkel has done a sterling job over the last 2 years in corralling the broken Southern Eurozone states into recovery mode.  However, there is a subtle difference between crisis management and business as usual.  Whilst countries like Spain, Italy and Greece have had no option today, they may be less inclined to kowtow to Berlin in the future. 

George Osborne and the IMF - the blind leading the blind

Stock markets are generally a much better forward economic indicator than ‘independent’ forecasters, and the indices around the world are climbing, this is in part driven by the need for investors to find better yields but it’s also a sign that the money men think the worst is over or that the balance of risk has moved in favour of the real economy and away from sovereign bonds.   
Against this back drop of soaring stock markets the UK economy is having its annual health check from the IMF and like a sickly patient waiting in the surgery waiting room there is some nervousness.  Much of this nervousness comes from the fact that we are surrounded by a large number of ailing economies with high contagious problems, most of who hail from southern Europe.  Unfortunately one of the examining ‘doctors’, has already pronounced on our untimely demise without any examination.  In an ill-informed outburst, the IMF's chief economist, Olivier Blanchard, recently accused the UK of "playing with fire" by persisting with growth-destroying austerity.
Since 2008 the UK has performed worse than most other ‘developed’ economies, this is due to our reliance on the banking and financial services sector and the structural deficit that emerged due to a lower tax take from these businesses.  Making a correction to resolve this structural problem, equivalent to 6% of the economy, is proving to be very painful, but there are early signs that we are well into our convalescence.  Banking profits are rising, even RBS made a substantial profit in the first quarter, and these profits will eventually flow through to the exchequer and the wider economy.  Linked to the banking sector is the housing market and again there are some reasonably solid signs that recovery is under way.
The evidence supporting the IMF’s view is pretty weak and points again to the generally poor service this organisation provides the world economy.  The IMF ‘missed’ warning signs in the run up to the financial melt-down and then became invisible during the Lehman crisis and they are still playing catch up.  The IMF is also a very European centric organisation (Blanchard is French as is the current MD Christine Lagarde) and they never pass-up the opportunity to bash the Brits.  It’s likely that, following their detailed examination over the next three days, they will recommend a less austere approach. 

A marriage made in heaven - Osborne and Lagarde

This is missing the point completely.  George Osborne has presided over one the greatest con tricks in political history, claiming to be the Iron Chancellor whilst actually being soft on reducing the public deficit, the result of which is the deficit has hardly been dented but employment rates have been protected.  This cautious approach to dealing with our public finances has infuriated many of us but is can hardly be described as austerity.
So what is the IMF up to?  Their main priority is saving the Eurozone and if they can convince the UK to pump up our economy this will have benefits for the exporters in the Eurozone and as one of the largest importers of European goods the UK is a vital component in the wider European economy (we are the second largest economy in the EU).  Obviously George Osborne should resist their advances robustly and we should focus on solving our problems and rebalance away from banking dependency and EU dependency.  Despite his best efforts our economy is mending and we are probably well in advance of Europe whose major economies; France, Italy and to some extent Germany are in denial of the structural changes required.  This reconstruction of the UK’s economy has been achieved by stealth through the effects of quantitative easing (QE), which has the effect enforcing haircuts on all creditors by the introduction of a negative real interest rates, this obliges saintly savers to pay for the bad debts of the boom and provides banks with the time and liquidity that they need to rebuild their balance sheets.
The issue for the IMF and Britain specifically will be how we can now kick the drug of QE without slipping back into recession.  Perhaps Mr Blanchard should confine his thinking and remarks to this problem rather than promoting the policies of the Jurassic period – see my post

Tuesday, 7 May 2013

Lord Lawson Gives Up On Europe

The intrigue around the UK's Europe Union membership ratcheted up several notches today as Lord Lawson (once the ardent follower of the European Exchange Rate Mechanism ERM) proclaimed himself to be in favour of a complete EU exit; quite an about face.  Would Lawson have made such a pronouncement without the surprise Ukip performance in the local elections?  I rather doubt it.   Was he put up to it and who stands to gain?  Goodness only knows but the conspiracy theories will start to reverberate. 
Lawson in his pomp
However, what has become clear is that the issue of Europe is set to rival the economy as the overriding political issue in the UK.

Friday, 3 May 2013

The UK lurches to the Right

The dust is settling after a traumatic and interesting set of local elections in the UK.  The results are still being gathered up by there is only one story- the rise of UKIP, who achieved 26%+ of the popular vote in the areas where they had candidates.  At the last general election in 2010 UKIP garnered only 3.1% so they have had a meteoric rise.  It still puzzles me that such a sizable proportion of the voting population would vote for a single issue party, a party of protest?  An opinion poll published on the same day as local election results reinforces the picture that UKIP have moved from being also ran's in the domestic political scene (they have been important for a while in Euro elections) to being the third party, displacing the Liberals.

Thursday, 2 May 2013

Reinhart and Rogoff - Battered but not beaten

Like boxer who has taken a pounding Reinhart and Rogoff, the Harvard economics duo, have donned the dark glasses and have been responding to their critics.  They strongly contest that their research was slipshod and that their Excel skills are childlike, but the accusations that they doctored the figures to suit their point of view just won’t go away.

Wednesday, 1 May 2013

Walking with the Dinosaurs

I spent last week at a finance conference in Asia, and what a revelation it was!  The contrast between the vibrant growth and optimism of Singapore and the depressed state of old world bankers was tangible.  It was like watching a Brontosaurus eat its last lunch.  In the distance I could hear the rumbling of another dinosaur.  Paul Krugman!

There is no doubt that Paul Krugman punches above his weight, a Nobel Laureate, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics blogger in chief at the NYT.  As he says in a recent blog post, he has had a good run over the last two weeks.  The unraveling of Reinhart’s and Rogoff’s research on the 90% tipping point for debt to GDP ratio was greeted with great glee by Keynesian economists. 

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