Who is rigging the market now?

In the run up to the credit crunch the market manipulations perpetrated by the world’s largest investment banks are now well known to us.  The banks rigged many of the important markets required for the global economy – proprietary trading held sway, credit and other derivative products were miss-sold, reference interest rates (Libor and others) were fixed and so it goes on.  Fortunately for us governments around the globe and their central bankers have been on a mission to sort out these market abuses.  The Wolves of Wall Street have been tamed by the Gnomes from Zurich, the ECB and the Fed – all very reassuring.  That is until one looks closely at the market manipulation now being pushed through by Central Banks culminating in the completely unexpected decision of the Swiss National Bank (SNB) to remove the 1.20 floor on the Swiss franc against the Euro.

Anything the banks can do .....

As Gavyn Davies tells us this was “one of the biggest currency shocks since the collapse of the Bretton Woods system in 1971. The decision has been heavily criticised, both for its tactical handling of the foreign exchange market, and for the collapse of the centrepiece of its monetary strategy, without (apparently) any overriding cause. The credibility of a central bank that has traditionally been hugely respected by the markets has clearly been dented.”

Floating free from Germany

Mario Drahgi has called for more integration and “sweeping powers” for the ECB to control fiscal policies and efforts to reform the Eurozone's economy. Is this “joined-up” thinking is a throw-back to the darkest days of the Euro crisis, when it became obvious that there was lack of cohesion between member states?  Or is this a power grab by the ECB, using the interminable recession, as an excuse to take control of a “fiscal and economic union”.  Currently the ECB owns interest rates and sets budget targets (roundly ignored by all but Germany), in this new and enlightened world the EBC would like set tax rates and drive to through supply side reforms to drive productivity and competiveness.

Drahgi believes in the “importance of each country sticking to its commitments under the stability and growth pact “and that this should now be beyond debate”.  He would like to go further by saying that in matter economic “sovereignty should be exercised jointly” – what a great line!!  What are the things that could do with harmonisation?

1. Actual interest rates
2. Rates of business taxation
3. Minimum wages and hours of work
4. Actual spending limits (properly enforced)

Living in Harmony

Cutting Taxes and Axing Osborne

In 2010 the Tories had plan A, deficit reduction, and by and large the British public bought the idea, which was simple, “We have to cut the deficit because sky-high public debt will kill growth and investment and lead to long term depression”.  Some of this proved to be wrong but enough of the narrative still works.  In all polls that ask the question “who do you trust to manage the economy?” the Tories are in a comfortably lead. We Brits have a long memory and the Brown / Balls bubble will not be forgotten and more recently Ball’s idiotic call for a plan B made him the laughing stock of Westminster.

Despite the Tory’s hard talk on deficit reduction the reality is that progress has been hampered by the coalition’s bargaining (with the illiberal Lib Dems), which ring fenced welfare, the NHS and pensions from the ravages of austerity.  Nearly all the cuts imposed in this Parliament have been born by spending departments that receive less 40% of the entire public sector budget.  There have been some interesting results – less spending on police has reduce crime, less spending on “enterprise” has helped growth take off, lower spending on Europe has made Europe even less popular and a huge increase in international aid has seen our stock in the world fall dramatically!

Where no hawks dare to fly

The doves at the Fed led by the chief "cooer" Janet Yellen have found a new reason to keep interest rates at an historical low.

Not a hawk in sight

The latest buzz words are “Pent up wage deflation” and they provide an elaborate excuse for ultra loose monetary policy. The essence of the idea is that in the Great Recession of 2009-2011 the market rate for jobs fell appreciably but that because wages are "sticky" and actual wages remained flat. This stickiness of wages is a function organised labour (Trade unions), employee nervous to move jobs and employers who are reluctant to loose key staff.

Janet Yellen - barking up the wrong tree

Over the last 40 years (well up until 2008) the role of central bankers was pretty clear – keep inflation under control - and it’s no surprise that during the great inflationary period 1970-2000 monetarist held sway.  Interest rates were raised, money supply was squeezed, unemployment rocketed (and then fell) and it was possible to pronounce the demise of Keynesian economics with complete certainty.  The fun went out of economics - the “Great Moderation” proved that once and for all we were the masters of our own economic destiny.  Then the credit crunch struck and the financial crisis kicked off which in turn led to the “Great Recession”, from which the developed world is still trying to escape.

Central Bankers - from heroes to zeros

The Bank for International Settlements (BIS), the only institution to call the financial crisis in 2007, has weighed back into the macro economic debate in the last few days in its annual report.  The report sets out a significant criticism on the current crop of central bankers, in essence the BIS lays the blames Yellen and Co for the falling: growth, demand and employment.  The expansion of national balance sheets and negative real interest rates are now the problem not the solution. The Keynesian approach that all central bankers have followed is now coming under close scrutiny as the global economy struggles to gain economic momentum. The process of piling the "cart" with more and more debt means Central Bankers are running a huge risk as the road ahead may not be as smooth as the would like!

Let's hope there are no pot holes ahead

Believing in Secular Stagnation

Across the fault lines of Adam Smith and Keynes, those who take an interest in the global economy fall into two camps - those who are general optimistic about humankind’s instinctive ability to create wealth an prosperity and those who believe we are pre-disposed to muck (no typo) things up.  You would think that those on the left are most agitated about market failures and the inefficiencies of capitalism - and many are, but social media exposes the truth that at least as many on the right are doomsayers.   Every article in the press welcoming the signs and firm evidence of recovery in the UK is met with a barrage of comments from conservatives foretelling the end of the world – house bust, savings dearth, public debt ruin, balance of payments crisis and so it goes on!

Float my boat?

The image of a rising tide lifting all the boats is a picture politicians like to paint – a fair recession and recovery, the reality maybe that the posh yachts and the scruff dinghies may be okay but the smartly kept but modest day boats may be stuck in the mud for a while yet!

Who will float my boat?

Five years after the Great Recession there is a sense that the world’s economy no longer adheres to normal rules, the tide is moving in a mysterious way.  In a recession wages are meant to be sticky and as a result of this unemployment rises sharply as workesr price themselves out of the market.  Following a recession, typically, productivity and wages pick-up quickly and eventually unemployment should fall.  This time around rates of employment have remained quite high through the recession, wages and earnings have fallen sharply and productivity has not bounced back; so why?

Other Men’s Flowers

There are plenty of people who live their life at work as is it were some intellectual exercise, choosing to take decisions that are for the great good but have a terrible impact on their own careers.  Field Marshal the Lord Wavell was one, he chose to pick a fight with an obdurate and all-powerful Churchill and was summarily dispatched to pull together his famous anthology of poetry “Other Men’sFlowers” rather than take any further part in the Second World War.  Britain lost her most talented commander but gained a literary gem. 

If you don't have it, do buy it

One might expect this kind of selfless attitude from a Wykehamist but it’s wholly unexpected, and unwelcome, from an Etonian and a politician to boot!

Starman Waiting in the Sky

Britain’s star man central banker, Mark Carney, has hardly blown our minds, getting off to a pretty slow start.

Apologies to David Bowie

Since he arrived in July the economy has continued to recover and all the attention has been on Ben Bernanke at the Fed - and the talk of tapering QE in the US.  In his first few months he has taken the first tentative steps – issuing some forward guidance, taking on the funding for lending scheme and the Help to Buy scheme.  But today for the first time Mr Carney stepped out from the shaddows.  The occasion was a 125th birthday party for the Financial Times, so Mr Carney was able to talk to a well-informed audience rather than having to sound bite for the benefit of the BBC’s simple minded economics experts.  The back drop to his speech is that the UK is the best performing economy in the G7 with annual growth of about 2% and rising, relatively low unemployment and no prospect of a deflationary bust - that is still a possibility in Europe, Japan or even in the US.

The Selfish Giant and other fictions

Clio Barnard's film The Selfish Giant has already been described as "hauntingly perfect" and "jaggedly moving" as it premieres at the Cannes film festival, the director herself is being feted as a new and important presence in British cinema.  I have to declare some skin in this game as the original story (The Selfish Giant) by Oscar Wilde was my mother’s  favorite children’s book, and if you have children and you haven’t read the story you should pop out and buy it now!  The story goes something like this -
When the Giant returns from long trip away from home and discovers the local children playing in his beautiful garden, he chases the children away and builds a high wall around his plot to keep them out. The garden laments the loss of the children’s laughter and when spring comes, the plants and trees blossom everywhere except for the giant’s garden, which remains covered in winter snow.  From here the story then develops beautifully and sadly  -  you had better buy the book.

One of Ritva Voutila's original illustrations

Ignoring the Wealth of Nations

When Adam Smith published his economic treatise in 1776 he gave the world a number of defining ideas for wealth creation and preservation.  The first was that regulations on commerce are a menace and counter-productive. Smith’s amazing insight was that a nation’s wealth is really the stream of goods and services that it creates not the gold it accumulates.  Another important idea was that a country’s future income depends upon this capital accumulation (wealth) and that the more that is invested in better productive processes, the more wealth will be created in the future. As an adjunct to this idea people must be confident that their capital will be secure. The countries that prosper are those that grow their capital, manage it well, and protect it. The final theme is of course the “pin factory” and that productive capacity rests on specialisation (the division of labour) and the accumulation of capital that this makes possible.

My thanks to the Adam Smith Institute

Austerity may be wunderbar

Five years on from the tsunami of the Lehman’s default and subsequent recession it’s probably a good moment to assess the relative merits of the monetary and fiscal strategies that developed countries have deployed to reboot their economies.  There have been a range of initiatives that have been tried but the “standout” response has been austerity, which can also be derived as a noun – austerian and there is even an antonym – Krugman!

Living in the past

The last few days of summer traditionally bring us some warm weather before the autumn gales roll in off the Atlantic Ocean, and this year is no exception.  The orchards are dripping with fruit and the late flowering Asters and Dahlias provide a splash of colour before we drift into a world of grey and cold. To soak-up this fleeting moment fruitfulness before the mists roll in one could hardly pick a better spot than Brighton; nestling at the foot of the South Down a short distance from the Garden of England (the weald of Kent) the town is perfectly placed for an early autumn break.

Brighton Pier

Sadly for those planning to enjoy the last warm weather of the year they will have to share the town with the Labour Party gathering for their annual party conference.  For a modern new look Party Brighton is a strange place to pick, reminiscent of old fashioned 70s conferences where Trades Union bosses owned the agenda with a block vote and a Sterling crisis was the most likely ex-curricular distraction.  On second thoughts maybe the conference organisers have got the location spot on; Ed Miliband’s Labour party is starting to resemble the Harold Wilson era more and more.  Wilson was adept at the politics if not government, endlessly shifting his position to remain in power, his governments achieved little and left the UK in a parlous state.  Ed Miliband has a similar style – all grease paint but no show.  So it should be of no surprise that, as deftly as a well-trained circus act, the Labour Party have switched horses from a strategy that demanded a “plan B” for economic recovery to new mount that demands action to improve living standards.

Handbrake Politics

Although we are only 65% of the way through the duration of this government’s ‘fixed term’ it’s probably a good time assess the achievements of the coalition; as the next 18 months will be more about electioneering than government.  This audit is obviously vital for the LibDems and Nick Clegg as they had to prove two things over the last 3 years, firstly that they are fit for government and secondly that coalition is better than one party government. Nick Clegg’s speech at the recent LibDem party conference offered us the radical message, that the last three years of coalition is not just be an historical aberration but a permanent fixture.  His talk of "bringing down the two party system" and ending what he calls the "clapped-out politics of red and blue" is a bold pitch for a party with such a low standing in the opinion polls - about 10% share!

The Right Type of Recovery

The doomsayers in the British media, having been unable to call the timing of the recovery in the UK, are venting their frustration on the type of recovery we are ‘enjoying’.  A short while ago these same experts were screaming that we were on the edge of a triple dip recession and they blamed risk adverse banks and frightened consumers, who were both rebuilding their reserves and savings.  In six short months we have metamorphosed from ‘triple dippers’ to the ‘northern tiger’– growing at a rate not seen since the 1990s.  In a typically display of British pessimism we have been unable to take this good news at face value and the icons of our ‘thoughtful media’ the BBC, the FT and The Telegraph all tell us that we are in having the ‘wrong type of recovery'!  These doomsters say that at some point, the bond markets will bite us in the backside and that, house prices will fall, the cost of borrowing will rise and we will be back in recession. The overall indebtedness of our economy is the thing that worries these media luminaries and the numbers are quite frightening - currently we owe 300% of our GDP.

A Northern Tiger the UK economy roars back!

No one else will say it, so I will!  The UK is in the grip of a full economic recovery, this recovery does not look fragile, nor unbalanced, nor debt driven and it’s probably unstoppable.  So how has it been possible for the sick man of Europe, as we were described barely six months ago, transform himself into the “northern tiger” that we have become.  After years of miserable economic data, there was unanimity that the UK was permanently stuck in a liquidity trap where the shortfall in demand was looking like a problem without solution.  Having thrown monetary policy (£375bn of QE), fiscal policy and a much weaker currency at the problem,  the economy was still flat-lining and all the talk was of a triple dip, much to the amusement of the Labour opposition.

Mondeo Man Trap can win Cameron the next election

The tide has turned on the British economy; after the tsunami of the credit crunch we have been beached on the mudflats of no/low growth of for four years.  There have been moments when it seemed the after-shocks would create move waves, the Euro crisis being the most obvious risk.  There have even been moments when recovery seemed to be ebbing our way only to evaporate into the stinking sands of a flat-lining growth.  In December last year I blogged that we were at the beginning of the end and amazingly I think I called the low water mark correctly and 8 months on the sparkling waters of recovery our flooding in bringing relief to many parts of our economy. 

Low water - but the tide is coming in!

This change in the tide is very welcome but growth is still weak and localised.  Most of the benefits are being felt in London and its hinterland and only in pockets outside the south east of England.  More worrying our neighbours in Europe are still up to their knees in thick mud and going nowhere fast.  With a new governor at the Bank of England and only 20 months of the coalition government to run people in high places can't afford another false start, they need a full spring tide to come flooding in to all parts if our economy. 

The Full Monty on Osborne's economic policy

In the five years that have elapsed since the global financial crisis  erupted in the summer of 2008 living standards in the UK have dropped sharply (in 2008 a single person earning £13,000 would have reached the minimum they needed to get by. if their wage had risen in line with average increases, they would now be earning £14,000 – which is roughly three thousand short of the £16,850 salary needed to cover the same basic standard of living today).  During this period we have had two governments who have been  attempting to nurse our broken economy back to health.  In  the first two years of the crisis we had the 'fag end' of a long running Labour government, who had little stomach for the fight.  The only Labour minister who came out of this period with any credit was Alistair Darling the who, despite constant interference from Gordon Brown (self styled saviour of the world), did an excellent job of first aid on a patient that was dead on its feet.  His sensible approach to encouraging consumption through sales tax reductions and the motor car recycling scheme combined with a massive blood transfusion of QE made sure that Britain survived the trauma of an imploding financial services industry and the cataclysmic effect this had on credit markets and the tax take.  The rest of the Labour government were in shock as they watched 13 years of neo-socialism unwind before their eyes. 

Carney's Conundrum declining productivity

Understanding the mystery of our terrible productivity performance since 2007 in the UK is at the heart of Mark Carney’s concerns (this is a topic of great interest  to Mr Carney).   His analysis of this productivity fall is important to get right as it will determine whether the Bank of England decides to pursue a looser monetary policy or not.  Many economists believe that, after a brief period of decline at the start of a recession, productivity should pick up pretty quickly as a slimmed down labour force is raises production per head.  Before examining why our productivity has declined so much we should look at some numbers.