A fundamental change is underway in stock market investing, and the spin-off effects are poised to dramatically impact corporate America. In the past, individuals and large institutions mostly invested in actively managed mutual funds, such as Fidelity, in which fund managers pick stocks with the aim of beating the market. But since the financial crisis of 2008, investors have shifted to index funds, which replicate established stock indices, such as the S&P 500. The magnitude of the change is astounding: from 2007 to 2016, actively managed funds have recorded outflows of roughly US$1,200 billion, while index funds had inflows of over US$1,400 billion. In the first quarter of 2017, index funds brought in more than US$200 billion – the highest quarterly value on record.
The leak and then publication of the Labour Party’s general election manifesto triggered the much-expected claim by the Conservatives that it marked a return to the bad old days of the 1970s when growth was weak, inflation high, and the UK had to go cap in hand to the IMF for a bailout. Never mind that the 1970s problems was as much caused by the embargo by OPEC as by domestic mismanagement by both Tories and Labour - nor that it was also actually a decade of rising living standards, growth in credit, and rising property prices. It was still a good slur and was eagerly picked up by Theresa May’s allies in the rightwing press.
Under any normal Conservative government, the Budget would be a high profile opportunity to reward their core vote, whether it is big business leaders, pensioners, white van men or women, or the ubiquitous hard working families. If tough measures need to be taken then it will be against soft targets such as work dodgers, benefits scroungers, lie-in-bed-till-noon layabouts or public sector workers. But despite having a working majority of just 17 MPs, Chancellor Philip Hammond decided to use a third of his March 2017 Budget speech attacking the growing number of self-employed people and landing them with a hefty tax bill. They now face a rise in the National Insurance contributions they pay from 9% to 11% by 2019. Hammond justified this by saying that the new state pension had reduced the gap between the entitlements of the employed, who pay up to 14% NICs, and the self-employed.
The new chancellor, half a year into his job, has already given his last Spring Budget. Henceforth budgets will take place in autumn. Also gone are the theatrical days of Gordon Brown and George Osborne: this is a chancellor who revels in nickname ‘Spreadsheet Phil’. Hammond’s first full budget was an attempt to bring together the themes of Theresa May’s government. It was a budget that acknowledged the challenges that Brexit poses to the British economy but also the prime minister’s priorities of creating a country that works for everyone. Despite the challenging circumstances, Hammond was able to announce that cumulative borrowing has been revised down between 2016 and 2021 to £24bn since the Autumn Statement, a small improvement: public sector net borrowing as a percentage of GDP is also predicted to fall from 3.8% last year to 2.6%.
Two of the 12 priorities set out in the UK government’s Brexit white paper are focused on trade: Ensuring free trade with European markets Securing new trade agreements with countries outside the EU In terms of trade with the EU – the UK’s largest trading partner – the white paper makes clear that the UK will not be seeking membership of the single market and the customs union. Instead it will pursue “an ambitious and comprehensive Free Trade Agreement and a new customs agreement”. This is in line with the government’s desire not to abide by the single market’s freedom of movement rules. However, the white paper still lacks clarity on the matter. It stresses the interconnection of the UK and EU markets in many sectors (automobiles, agriculture, transport, financial and other services), and argues for the need to reach an agreement that guarantees continued stability in the trade relationship
We are only four weeks into this Godforsaken year but already everything is looking very different - and generally worse - than it did when we joined hands to sing Auld Lang Syne. Back then we laughed with grudging respect at the comment by Trump-backer Peter Thiel that while the liberal left had been foolish in taking the Donald literally but not seriously, his electors took him seriously not literally. In other words, how foolish we were to get irate when Trump said he would build a wall on the US’s southern border and make Mexico pay for it, those who listening to him properly realised he was echoing their anger at the volume of immigration. Equally, warning US companies that they would pay if they carried on using factories in Mexico to makes goods and then send them across the border for American consumers to buy.
The threat that Britain might soon become a “corporate tax haven” – issued by its chancellor, Philip Hammond – revealed a fundamental truth about Brexit. This is not just a decision about the UK’s relationship with the European Union; it is also about what kind of economic and social model the UK will have in the future. As the UK disengages from Europe, politicians have to consider how its role within the global economy will be redefined. This inevitably raises questions about its domestic policies and institutions, and how these might need to adjust to a changed international context. Hammond’s speech made clear that the UK government plans to use this uncertainty over the shape of its socio-economic model as leverage within the Brexit negotiations.
In recent years, the annual World Economic Forum meeting in Davos, a regular January fixture, has not enjoyed quite the same cachet as it did before the global financial crisis. Back then, this gathering of world political and business leaders was widely seen as setting the agenda for governments and multinational companies the world over. Following the crisis, it was patently clear that the participants in the Davos conferences were no closer than anyone else to having answers to the questions posed by ongoing trends in the global economy.
If 2016 brought Brexit, Donald Trump and a backlash against cosmopolitan visions of globalisation and society, the great fear for 2017 is further shocks from right-wing populists like Geert Wilders in Holland and Marine Le Pen in France. A new mood of intolerance, xenophobia and protectionist economics seems to be in the air. In a world of zero-hour contracts, Uber, Deliveroo and the gig economy, access to decent work and a sustainable family income remains the main fault line between the winners and losers from globalisation. Drill into the voter data behind Brexit and Trump and they have much to do with economically marginalised voters in old industrial areas, from South Wales to Nord-Pas-de-Calais, from Tyneside to Ohio and Michigan.
As Britain prepares to start its first full week of work of 2017 after the four-day warm-up following the New Year celebrations, there is a strong feeling that we are still in a phoney war and that the full drama of this year has yet to begin. President-elect Donald Trump does not starting wearing the cloak of power until 20th January and the much-awaited start of Britain’s exit from the European Union may not happen for another 11 weeks. Yet one thing is clear - much to US Democrats’ and British Remainers’ consternation - and that that is the economies on both sides of the Atlantic are doing very well despite forecasts that the election of the billionaire warmonger and the triumph of the Brexiteers would lead to immediate carnage. In fact the opposite is true.
Given that the campaign for the election of the 45th president of the United States was a circus from beginning to end, it should be little surprise that a clown got elected. But is Donald Trump just a pantomime villain with an arsenal of vile epithets and put-downs but little interest in anything but money, or a demagogue whose rise to power can be compared to Hitler’s in 1930s Germany? Trump’s election has rightly horrified and sickened liberal-minded people in America, Europe and many other parts of the world. The revulsion at his views is correct - his misogyny, racism, Islamophobia and nationalism need to be called out.
There has been much speculation about Mark Carney’s future as governor of the Bank of England, following an unprecedented series of attacks by leading proponents of the UK’s exit from the EU. There was even speculation about the state of his relations with the prime minister. Yet Carney has now confirmed he will stay in position until the summer of 2019. The impact on markets and on the economy is hard to gauge, but on balance it looks positive. Carney and the Bank made some strong statements during the referendum campaign, but those statements were in line with a very wide consensus among economists.
Since the Great Financial Crisis, most central banks have drastically cut interest rates and in some cases introduced the world to Quantitative Easing (QE): ultra-low (and in some cases negative) interest rates have become part of everyday life. And with only a handful of major central banks - including the US Fed - likely to even contemplate raising interest rates near-term, this is unlikely to change any time soon. Central banks argue they had no choice but to cut rates - to all-time lows in many countries - and introduce QE to help stabilise economic growth, inflation and employment by lowering borrowing costs and indirectly boosting confidence and the price of assets, including housing and shares. There is evidence that this approach has worked to some extent.
About five years ago at the nadir of the global financial crisis and Great Recession I was at a dinner with leading academic economists and fellow journalists. A consensus soon emerged that with interest rates at close to zero in the UK and most western economies this was an ideal time to take on long-term debt to fund productive investment in infrastructure and the like. While it might have seemed obvious at the time, after five years of austerity the idea of borrowing to invest is only even beginning to emerge in the global economic and political debate. Christine Lagarde, head of the International Monetary Fund, the multilateral lender that is hardly known for its support of public sector largesse, has been putting the case for more government spending.
A higher minimum wage; billions of borrowing to fund infrastructure; opposition to the transatlantic trade deal; initiatives to ease the plight of those left behind by globalisation. Is this taken from Donald Trump's manifesto? Or from Theresa May's Downing Street victory address? Yes bits could have taken from either but actually the whole lot come from shadow Chancellor John McDonnell’s Labour Party conference speech. On top of that was something that could have been spoken by a Lib Dem - aiming to maintain access to the European single market post-Brexit. So why the vitriolic action from the usual suspects: The Daily Mail, the Daily Express and the Daily Telegraph?
Outrage has been mounting over the untaxed incomes of the global elite, foreign ownership of urban land and soaring rents in the private rental sector. Much of this boils down to two key matters: who owns property, and how they are treated. The UK, it seems, is a place that makes it very easy for individuals to generate a great deal of wealth from property, with little concern for social justice or the provision of affordable housing. But this problem is not uniquely British. Across the world - and particularly in many developing countries experiencing fast economic growth – capital is flowing rapidly into real estate. And increasingly, governments are waking up to the need to effectively capture some value from these investments, for the public good.
The millions of Britons still reeling at the “shock” vote in the referendum on the UK's membership of the European Union should reflect on this stark fact: whenever they are given the opportunity, voters reject more Europe. The Danish and Swedes voted against joining the euro, the French and Dutch against the European constitution and the Norwegians on joining the EU at all. Then in 2015 61% of Greeks rejected their crisis bailout package while the Portuguese and Spanish voted in similar numbers against austerity. Yet on every occasion policy remained unchanged and the measures were put in place eventually (except for Norway which could not be forced to become a vassal of Brussels). This point is made three times by Nobel laureate economist Joseph Stiglitz in his new book, which is a devastating indictment of the way that the Eurocracy established the European single currency.
For years, economists and psychologists have argued about whether the standard model that economists use to explain how people make decisions is correct. It says that people make rational choices: they weigh all the options against a well-defined set of preferences to choose the one which makes them happiest, or is the most valuable to them. These preferences - and what a person can afford - define what they are willing to pay for goods and services. Businesses and governments around the world use this view of human behaviour as the basis for weighing the benefits and costs of decisions affecting trillions of pounds every year. Psychologists are also interested in people’s choices, particularly the effect of emotions.
The aftermath of the Brexit referendum has intensified the debate on alternative templates for the UK’s relationship with the European Union. The “Norway option”, an arrangement which allows Norway access to the single market without being a member of the EU, is often proposed as a transitional station on the journey towards Brexit’s final destination. If this is the case, and given that transitions often outlast their intended life-span, it is worth examining the context in which Norway operates with the EU. Norway is a member of the European Free Trade Association (EFTA), a free trade group, along with Iceland, Switzerland and Liechtenstein. It is also a member of the European Economic Area (EEA), which gives it access to the EU’s single market. The Norway option contradicts most claims of “taking back control” made during the referendum campaign.
London, Tokyo and New York. The holy trinity of high finance. These three “Alpha World Cities” are collectively known as the global economy’s commanding heights. It’s here, overwhelmingly, that money decides where it will go. Of course, London now has a little problem. At least some, and possibly a lot, of its claim to commanding height status hinges on the UK’s place as a gateway to Europe for global banking. And, as you probably noticed, the UK is walking out of the EU. As with any major decision the prospect of Brexit offers both hazard and opportunity. And one aspect firmly in the former camp is that a lot of European finance is all-but certain to migrate to an EU city. Frankfurt, probably, or Paris. Should we be desolate at this? Are the tumbleweeds about to start blowing through the deserted canyons of Lombard Street and Canary Wharf?
Ever since June the 23rd’s seismic shock, Remainers and Brexiteers, the Roundheads and Cavaliers de nos jours, have been hitting each other with statistics. Broadly speaking you can take your choice. For every crumbling economic indicator, there’s another one doing OK, thanks. But there’s one metric which leaves Brexiteers floundering. Sterling. The pound has been clobbered since the UK stunned the world. No getting away from it. A quid bought you nearly $1.50 on June the 22nd. Now, well not so much. $1.28 if you’re lucky. In the usually sedate world of developed market currency trading that’s a mighty collapse. Now some of this is readily explicable. Foreign exchange traders, bless ‘em, are no more immune to a set of bookmakers’ odds than the rest of us. Indeed I’ve had the pleasure of knowing quite a few and I’ll be honest: bookmakers’ odds are a big part of their lives.
The future of the Transatlantic Trade and Investment Partnership (TTIP) between the US and European Union seems bleak. Beset by doubts and stumbling alongside the UK’s referendum on EU membership, the TTIP is starting to look like an awful lot of effort for unremarkable gains. US president Barack Obama may have given the negotiation process a shot in the arm in recent weeks, but there is a good possibility that a deal will not be struck during his administration. After that, all bets are off. So why has such a major piece of international deal-making found it so hard to make headway, and what are the chances of a deal ever being done? Well, the first reason for the impasse is that no one can agree on what it should cover. It is deeply complex, but there are essentially two choices.
Amid an incredibly febrile world with Britons voting to leave the EU, an historic flow of migrants into Europe, worsening chaos in the Middle East, lonely eyes are again turning to the perennially stable United States. But the image that greets them now is not the calm but powerful Uncle Sam character but a simmering pot of tensions that is already displaying sudden outbursts of fury and which looks in danger of boiling over in a dramatic and horrible way. The last year has seen a series of attacks on African-Americans by predominantly white police officers. Almost exactly two years ago on 8 August 2014, a white police officer searching for a convenience-store robber in Ferguson Missouri shot and killed an unarmed black teenager, 18-year-old Michael Brown, kicking off mass civil unrest.
According to the old music-hall song, ‘everybody wants to go to heaven, but nobody wants to die’. Much the same is true of the British government that has now found itself accidentally (because it happened without any of the usual policy-making preliminaries that are supposed to serve as a check on plausible but impractical policies) committed to leaving the European Union. Essentially, the time-inconsistencies in the process of leaving means that Britain will be seriously disadvantaged for years to come. As we all know the process of leaving the European Union is governed by Article 50 of the Treaty of Rome, which would give two years for member governments to agree new arrangements, after which the country leaves the European Union.
With the greatest respect to the 19,240 British soldiers who died on 1 July 1916, the carnage that has followed the Brexit vote almost 100 years later has seen an astonishing cull of the country’s leaders. Prime Minister David Cameron has fallen on his sword, Boris Johnson had abandoned the ambition that fuelled his sudden volte face in favour of the Leave campaign, while Rino (remainer in name only) Jeremy Corbyn is hanging on to the Labour leadership by his finger nails. Michael Gove is limping toward defeat in the Tory party leadership campaign after knifing Boris in the back, while Nigel Farage is content to step down as Ukip leader and revel in his victory by insulting fellow members of the European Parliament. A revolution, like Saturn, will always devour its own children.
While most discussion since the Brexit vote has focused on how the UK will negotiate the terms of its new trading relationship with the EU, much less has been said about the rest of the world. Brexiters have tended to believe that the UK could continue to enjoy the access to foreign markets that it currently receives through the EU’s trade agreements with over 50 countries; and that for other markets it would simply resume independent membership of the World Trade Organization (WTO), the body through which 162 states set the rules for world trade. In fact, this is highly uncertain. It will require a long and complex process of negotiation, for which the UK is under-prepared and has little leverage. Since the UK joined the single market in 1973, Europe has negotiated tariffs and other international trade rules on the country’s behalf - both in bilateral and regional agreements and at the WTO.
Mr Tusk, the president of the European Council, has warned in the German newspaper Bild that a UK vote to leave the EU could mean ‘the end of Western civilisation’. Not even Mr Cameron, in his increasingly anxious attempts to win a Remain decision from the UK electorate, has gone quite as far as that. We might well ask why, if a Leave victory in the referendum will have the dire consequences Mr Tusk predicts, EU leaders did not make strenuous efforts to keep the UK on board by meeting more of Mr Cameron’s demands during his pre-referendum negotiations. Mr Tusk, to be sure, was not the principal player in those talks; perhaps Mrs Merkel and Mr Hollande did not see the issue in such apocalyptic terms. Then again, even if they had believed the UK’s leaving the EU would in some sense be terminal, they might have been daunted by the difficulties.
There may not be much rejoicing yet, but the repentance by the International Monetary Fund over its devotion to policies of neoliberal austerity policies will certain leave many of its critics with a wry smile. In a monthly magazine that the financial watchdog publishes (that does not often receive much attention), three of its most senior economists said that “neoliberalism” had been oversold as a remedy. Buried on page 38 of the magazine, Jonathan Ostry, Prakash Loungani, Davide Furceri - respectively the IMF’s deputy director, division chief and economist - authored an article that appeared at first glance to turn three decades of thinking on its head. “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardising durable expansion,” they wrote.
To paraphrase CLR James badly, sometimes people who only cricket know, know a whole lot more. After his astonishing 10-wicket haul against Sri Lanka in the Test match at Headingley, Jimmy Anderson spotted the reason that he and Stuart Broad had finally achieved success at the Yorkshire ground. “Me and Stuart have just had a chat and said it has taken us nine years to realise we are bowling at the wrong ends here,” said Anderson. This may be the cricketers’ version of Einstein’s alleged definition of insanity as doing the same thing over and over again and expecting different results. Observers of Greece’s financial crisis and the European Union-led response to it may hear echoes of both the eminent scientist and the great cricketer.
You may have missed it while you were looking the other way, distracted by the nonsense coming out from the Brexit and Bremain camps, but something important happened. The price of oil has risen from around $32 a barrel in mid-February to almost $50 a barrel by mid-May. Indeed on 16 May alone while Boris Johnson was banging on about Hitler and George Osborne was roping in Ryanair in support, Brent crude jumped 2.5% in one day alone. Compared with the levels of above $110 that it had two years ago, that might seem much, but inflation of 53% in a matter of three months is not to be sneezed at. Thanks to the high levels of tax - correctly for climate change reasons - on petrol, the increase in crude prices has only a marginal impact on motorists as more than 70% of the pump price goes to the Treasury.
It is a good sign that a political issue has achieved “meme” status when it becomes the subject of a film. Michael Moore got to the heart of US school shootings with Bowling for Columbine, Al Gore put climate change centre stage with An Inconvenient Truth and the complex financial transactions that almost plunged the word into an economic depression got full public exposure thanks to the Big Short. Finally poverty and particularly the gaping inequality between the richest and poorest in western societies are - not before time - getting their place on the red carpet. The Divide looks in almost painful detail at the struggles that families at the bottom of the wealth pyramid have to go through to make ends meet and the sacrifices the “squeezed middle” will make to ensure to stop themselves from slipping back. Established filmmaker Katharine Round uses seven people - five Americans and two Brits - to give a very personal take on the reality of daily life in two of the richest and most sophisticated countries on the planet.
In April 2014, the economist Thomas Piketty found global fame; the French edition of his book Capital in the Twenty-First Century had caused something of a stir in his homeland, and when the book was translated into English the stir became a storm. It rocketed to the top of the New York Times Best Seller List and won plaudits from politicians, academics and commentators - there was even talk of a Nobel Prize. He toured the newspaper offices, studios and universities of the English-speaking world. Surprisingly telegenic for an academic, he was described, almost ad nauseam, as a ‘rock star economist’. Keeping up such media momentum was, of course, impossible. Piketty is French, lives in France and writes in French. While many people in the English-speaking world made the effort to slog through the almost seven hundred pages of the book (and even more claimed that they had), fewer people would, or could, read him in French.
It was the fifteenth-century when the first modern banks flourished in Florence and Genoa and the seventeenth-century when fractional reserve banking developed in Amsterdam. Banking is a historical phenomenon, not a necessary element in the economic structure. Indeed, a myriad of economic structures are possible and it was only under the influence of powerful historical forces that the medieval usury laws were eventually eroded sufficiently to allow banking activity to come out of the shadows. With this understanding of banking’s contingent nature, we should not take for granted it will always be an important feature of the global economy.
As the BBC Today presenter Justin Webb phrased it during an interview over the future of Tata Steel, this is about people and not just about a metal. The decision by the directors of the Indian parent company to put Britain’s biggest steel manufacturer up for sale not only threatens 17,000 jobs but also puts the government’s role firmly in the spotlight. The decision by the Mumbai board not to shut the company has meant that the steel plants in Port Talbot in South Wales as well as sites across the Midlands and the North of England will stay open - for now. If no buyers are found the impact will clearly be devastating on industrial regions of the country that have taken a series of hits since deindustrialisation took hold in the early 1980s.
The first Budget after an election is normally packed with tough measures to raise taxes and cut spending in the hope that as polling day looms, those measures can be reversed and electors offered bribes to vote the Chancellor back in. In 1997 Gordon Brown unveiled the windfall levy on energy companies to fund the New Deal employment programme while in 2010 George Osborne announced reductions in public expenditure to reach £17 billion by the end of the parliament. This year broke that rule. A whole host of micro tax cuts were announced up front, the tax hikes were on crowd-pleasers such as the sugar tax that raised just £285 million in this fiscal year and will give back £7.6 billion next year. The list is endless: more of the lowest paid were taken out of the reach of the taxman; many middle class workers will find they no longer fall into the top rate band; petrol duty has been frozen; as has beer and cider duty in pubs; corporate tax is cut; North Sea taxation is cut.
One of the most divisive issues in macroeconomics has just moved back onto centre stage after both sides - one joyously and the other reluctantly - believed the debate had been settled. Faced with a severe economic downturn that threatens not just recession but depression, what should policymakers do? The answer in 2008 when the failure of Lehman Brothers triggered a freeze in global trade and a recession in most advanced economies was to borrow from the thinking of John Maynard Keynes. Confronted by a sudden drop in spending by consumers and households instead saving ahead of a surge in unemployment and a subsequent drop in investment by business, there is a danger that the depression will become a self-fulfilling prophecy. While the cause may have been a market failure, such as the reckless financial innovation that led banks to rack up debts secured against worthless sub-prime mortgages, the markets cannot correct the problem on their own.
In a recent article, the Economist argued that the current policy debate relating to the UK housing affordability crisis may focus too much on housebuilding. It may overlook a bigger potential source of supply: existing homes. The argument goes as follows: overcrowding has gotten worse over the last 20 years, but more than one-third of households have two or more spare bedrooms. The solution: abolish the Stamp Duty Land Tax (SDLT). This would boost housing transactions and lead to a more efficient allocation of housing. It would also encourage elderly couples to downsize after their children fly the nest. The Economist estimates that there are 16 million or so spare rooms. Allocating housing more efficiently would free up some of these.
There used to be a Homeric quality to lunches in the City of London and not simply because they were epic in quantity and duration, although they often were. No, at table the young hero stood to hear eternal truths from ancient oracles. All he* had to do was remain sober enough to recall them the next day. One such luncheon came to mind this week as financial markets reeled. It took place twenty years ago. I was the young hero (well it’s my piece) and the oracle was a legendary stockbroker. He’d been in the business so long that he might well have broked stock to Homer himself. But he was contemplating retirement by this time and so felt free to be expansive.
The 2016 US presidential campaign moves into higher gear on 1 February as the Iowa caucuses mark the opening of the state primaries season. Casual observers of the US political scene could be forgiven for thinking that the process of choosing a successor to Mr Obama is well under way already; potential candidates have been on the stump since last summer. But the serious business of collecting delegates to the party conventions will only begin next week. So far, the political debate has revolved not, as in some previous elections, around the specifics of competing policies but more around values, ideologies and personal qualities (or the lack of them). What has emerged in the course of the campaign is that US voters are disenchanted with Washington politics.
Some leading Euro-sceptics in the UK expressed shock when Mr Cameron declared that his Government had made no plans to deal with the situation that would follow a referendum vote for Britain to leave the EU. They presented this as evidence that the prime minister did not seriously entertain the option of Brexit and, given his stance, would not be able to wring serious concessions from EU leaders. In fact, whatever Mr Cameron’s response to the question about Government preparations, he could not win. If he had said that contingency plans were well-advanced, he might have roused suspicions among EU heads of government that he was negotiating with them in bad faith.
As in comedy, the key to economic forecasting is in the timing. Economists have been widely and correctly mocked for failing to foresee any risk of a global financial crisis in 2007. But anyone who issued Cassandra-like predictions of a crash in 2005 was equally derided. Few people - if anyone - predicted that in 2015 Russia would annex Crimea, that oil prices would fall below $40 a barrel, that Daesh would capture the Iraqi city of Mosul or that Chinese shares would fall by 45% between mid-June and mid-August. But anyone expecting a happy new year after 2015 saw economic growth slow as commodity prices and emerging economies crashed while terrorist outrages and a refugee crisis sapped morale will have been disappointed. Just a week into 2016 has seen the Chinese stock market suspended twice amid tumbling share prices.
2015 has been a difficult year for the economy. The reassuring regularities of the business cycle, which used to provide reliable signals for market action, appear to belong to a past characterised by other features now seemingly historical, such as inflation, positive risk-free nominal returns and the widespread conviction that the supply of credit is, and ought to be, unlimited. The realisation is dawning that the apparent prosperity of the decade-and-a-half up to 2007 merely reflected a credit-induced spending binge. Policymakers failed to recognise this at the time because of their obsessive focus on targets related to consumer price indices (CPI), where rates of increase were temporarily suppressed by the processes of globalisation.
Like patients dreading the onset of a serious illness, countries across the world have been anxiously watching the United States since the summer of 2013 when the then head of its central bank, Ben Bernanke, started signalling that tighter monetary policy was on its way. Some 30 months later on 16 December his successor Janet Yellen has finally delivered on what must be the most telegraphed and long awaited rise in interest rates. The net result might look insignificant - the main official rate went up from a range of zero to 0.5% to 0.25 to 0.75% - but there is no doubt it is significant that the US Federal Reserve effectively raised the cost of borrowing money for the first time in almost a decade. As well as being well signalled, the move was justified by the economic data.
It would be churlish not admit that the agreement struck by 195 countries at the climate change summit in Paris was not a success. Yet over the coming days many people - some climate sceptics, some climate evangelists - will take that view, chiefly because the deal does not fit with their world view. But the reality is that the ability of the world’s leaders, with often diametrically opposing views on how global warming should be tackled and who should take the action and pay for it, is a once in a generation achievement. Yes, it's not perfect and, no, it won't guarantee a cap on the rise in temperature of 2 °C or less. But really how many instances can you recall when all the countries in the world agreed on one issue?
Great issues of our time have been resolved through high profile trials - desegregation in the United States by Brown vs Board of Education of Topeka, crimes against humanity by the Nuremberg trials, and the “Scopes monkey trial” on the teaching of creationism. Climate change is not one of those issues. The scientific jury has come back: 97% or more of actively publishing climate scientists agree that climate-warming trends over the past century are very likely due to human activities. The issue in Paris, where politicians and officials from some 187 countries are meeting, is what action they can agree to take to stop the emission of harmful CO2 and other gases that will lead to global warming.
I’m not going to any of them - kids and an early start you know - but I am willing to bet that none of London’s pubs and clubs will throb this evening with discussion of the Chinese yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights basket. Why would they? It’s esoteric, it’s ‘financial’ and it’s just not something good little developed market consumers spend time thinking about. But be under no illusions. This is a seismic foreshock, a precursor of tremors which could one day shake what complacency remains in the old, capitalist world perhaps to its foundations. In the old days the argument for free markets and democracy made itself. The countries which had them prospered beyond the dreams of the countries which didn’t. Eventually the countries which didn’t ran out of lies to tell their people, the Berlin Wall fell and history ended.
Forget the general election manifesto, today’s Autumn Statement that covers the four years from April 2016 almost precisely up to the next election is the government’s real statement of intent. It is hard to remember now that few people - including many in the Conservative party - expected the Tories to win this year’s general election. Many policies were put in the election manifesto that would most likely be negotiated away as part of the process of negotiating a coalition. Top of this list was the commitment not just to eliminate the deficit but to a £10 billion budget surplus in the final year of the current parliament. So what have we learned? The immediate headlines will go to the decision to scrap the proposed £4bn a year cut in tax credits for the poorest.
The one cry that has undoubtedly fallen on deaf ears in the last seven awful days since the Paris terrorist outrages has been: “Let me through, I’m an economist.” It is not for no reason that economics is known as the dismal science, and clearly rushing for a slide rule and calculator after 129 people have been slaughtered in cold blood could appear tasteless. But the reality is Daesh - like the French I refuse to use IS or similar as it is neither Islamic nor a state - has the economy clearly in its crosshairs when their operatives press the trigger on their Kalashnikovs or pull the detonation cord on their vests. The attack on the World Trade Center on 9/11 in 2001 sought to destroy Wall Street, the tube bombings on 7/7 in 2005 aimed to terrify people from coming into the centre of London, and the attacks on Paris sought to destroy the night-time leisure economy of the world’s most popular tourist destination.
There are many phrases that young Londoners will have to ask their grandparents to make sense of - working class Fulham, port and lemon come to mind. To that list should be added affordable housing. The capital is falling well behind on the number of homes that need to be built each year to cater for the city’s expanding family and the continued strong demand by businesses for workers. The Greater London Authority’s Strategic London Housing Market Assessment estimated in 2013 that the London housing market needed almost 49,000 additional homes a year to house the growing population and meet the severe backlog that weak development has allowed to build up . Last year, only 18,700 were delivered.
It should be clear that enforcing higher capital requirements on banks is not likely to be a sufficient response to the kind of problems that arose in 2007-09. Then, there were banking institutions that incurred losses which, even had they held capital sufficient to meet the requirements that regulators now plan to impose, would still have rendered them insolvent several times over.
There are distinguished economists of a neo-Keynesian bent who argue in favour of greater fiscal flexibility but theirs is not the standard view. There are two distinct forms that flexibility could take. Governments could simply spend more and tax less in the hope of priming a rise in economic demand. Those who present this policy-prescription do not usually take account of the quantity of existing government debt. Yet, in any practical situation, it seems more than likely that the size of the government debt will be an important factor determining the impact on the economy of the debt increase resulting from looser fiscal policy.
I have witnessed the devastating impacts of gentrification first hand. As part of my research, I spent many years living in inner-city estates in London, interviewing the impoverished tenants who made their homes there. Over and over, I was told that they could not recognise the place where they had grown up, that it was all different, they could not afford it anymore, and that they felt as though it was no longer “theirs”. Traditionally, research into urban issues has focused on the effects of poverty and deprivation on the fabric of our society.
It was Mark Twain who said, ‘facts are stubborn but statistics are more pliable’. He is also reputed to have been first to lay down the Law of the Instrument, popularised by 1960s psychologists, which states, ‘to a man with a hammer, everything looks like a nail’. What a perceptive analyst of the present economic situation he would have been! After seven years of trying and failing to restore the economy to a state as they themselves might recognise as normal, some central bankers might have been expected by now to be questioning whether the problems of the global economy are, indeed, primarily monetary.
A ship moored up at the London Container Terminal at Tilbury this morning, in from Hong Kong. Her name is the Maersk Lins and she’s pretty big. She’s not as big as these things can get, but still three hundred metres, more than a hundred thousand tonnes. Now, do you know what she does? She carries those steel boxes you see in endless lines on trucks - Twenty Foot Equivalent Units is their professional title. They hold almost all the stuff we buy these days as it gets transported from China. No human rights protestors marked the good ship Lins’ arrival.
The world’s finance ministers and central bankers have been making tracks for Lima, where the annual World Bank/IMF meetings are taking place. Their mood is apprehensive. While world GDP is far from shrinking, as it was in 2009, growth forecasts are continually being cut. In estimates released last week, the IMF reduced its projected 2015 rate of expansion in global GDP to 3.1% from its 3.3% July forecast.
In 21st century Britain – a country which, for all the headlines about debt and deficits, still boasts the sixth biggest economy in the world – does poverty really exist? No. Not according to Alan Sugar, at any rate. In an interview last week the business mogul asked: ‘Who are the poor these days? You’ve got some people up north and in places like that who are quite poor, but they all have mobile phones, being poor, and they’ve got microwave ovens, being poor, and they’ve got televisions, being poor’. As demonising shows like Benefits Britain are only too keen to remind us, the poor today have never had it so good.
As financial disruption reached threatening proportions in 2008, global policymakers were reminded of the 1930s, when troubles in the banking system had led to economic depression. At one international meeting after another they resolved that history would not be allowed to repeat itself.
Just over 150 years ago Parliament leapt into action and ordered a massive rebuilding of the sewer system in London whose failure had caused raw waste to pour into the river Thames. The problem had been mounting for some years but it was only when the 1858 Great Stink made it intolerable for MPs to conduct their business in the riverside Houses of Parliament that the public purse was opened. Fast-forward a century and a half and a stench created by inequality is becoming overpowering even for middle of the road politicians. Almost 1.4 million households are on councils’ housing waiting lists in England alone while 740,000 privately rented homes fail to meet minimum legal standards for housing.
What will Labour’s economic agenda be on the morning of 13 September? As if to prove the old saying about economists’ ability to have two opposing views on any issue, so far one bunch has come out in favour of his plans and another strongly against. Usefully the Islington North MP has published an economic manifesto, The Economy in 2020, that sets out both his vision - “to create a balanced economy that ensures workers and government share fairly in the wealth creation process” - a detailed critique of George Osborne’s 2015 Budget, and some specific proposals.
Of the ten conflicts in human history with the highest death tolls, five were civil wars in China. Chief among these was the Three Kingdoms War (184-280 CE) when up to 40 million are reckoned to have perished in military operations and from the destructive consequences of warfare.
While the world wonders whether to gasp at Yanis Varoufakis’ taste in shirts, or the boldness of his financial planning, the negotiations taking place in the Athens Hilton with the International Monetary Fund, the European Commission, the European Central Bank and the European Financial Stability Facility, called the ‘quartet’ to distinguish it from the now-discredited ‘troika’, have revealed the insubstantial foundations that were created for the European Monetary Union in the 1990s. The Maastricht Treaty inherited from the hubris of monetarism the dangerous notion that the only function for a central bank was to use monetary policy to keep inflation low. The private sector would look after itself, and all that governments needed do was balance their books. Above all, the central bank should not lend to governments, because to do so would be inflationary.
It is not easy to decode what is happening in Greece. The essential facts are as follows: On the 24 June, the Tsipras government had rejected the terms set by the European Union and the International Monetary Fund for a new loan to allow the government to roll over the payment of €1.55 billion due to the IMF. The European Union broke off negotiations when Tsipras announced a referendum in which the terms set by the European Commission would be put to the Greek electorate. In the face of a refusal by the European Central Bank to increase the emergency liquidity assistance, Greek banks were shut down, capital controls were imposed and withdrawals restricted to €60 per day. But as it defaulted on its payment to the IMF, Alexis Tsipras wrote to the European Commission more or less accepting its terms.
At a time when Greece’s chances of staying in the euro zone and possibly the EU have been a focus of concern in financial markets, the bookmakers’ odds on Brexit have been shortening. It is of more than academic interest, therefore, how the UK might fare if it were to quit the EU. There is a general sentiment that the UK financial sector might be among those parts of the economy facing the stiffest challenges in adjusting to the new conditions but no consensus on how well it would succeed.
You've got to hand it to the man, George Osborne’s Summer Budget left even the most ardent lefty shell-shocked by the announcement to introduce a living wage — taking the minimum wage to £9 an hour. Mr Osborne delivered what Ed Miliband would have only dreamed of putting in the last election manifesto. Semantic debates are likely to follow on whether it really is a living wage or just a charged-up minimum wage, but there will be no escaping that the hourly rate of pay for the over 25s will increase by almost 40% by the time of the next election in 2020.
Banking and financial systems can only work in the conviction - often no more than a polite fiction - that all debts and financial obligations will be paid. This is why householders, when they are unable to make the payments on their mortgages, are often offered a payment holiday with the arrears and interest on them added to the capital outstanding. In corporate finance, most financing is the refinancing of a less convenient, or more expensive, obligation. The assurance of future payments is also why banking and finance cannot flourish in autocracies or where warlords or gangsters arbitrarily vary payments.
After yet another summit on the Greek debt on 22 June, there are signs of an “extend and pretend” deal until winter. There is vague talk of a “debt relief” in the future, although it is unclear how much of the debt the Eurozone governments are willing to write off. Most importantly what are the conditions they impose in return? According to the current proposals of the Greek government, even if there are elements of a left austerity with redistributive concerns, the primary budget surpluses imposed on them are too high to secure economic and social recovery; further privatizations are expected; the demands regarding minimum wages and collective bargaining are postponed, and the type of cuts in the pension system continues to be the sticking point.
The European Commission has set on a course to make the economy of the 27-nation union one of the most competitive in the world by 2020. Underpinning the grandiose strategy it has recommended ever more deregulated labour markets and policies that keep wages low. Although we are already half way through the decade-long Europe 2020 strategy, the track record of these kinds of labour market policies over the last three decades have resulted in poor economic growth, a declining share of wages in national income and rising inequality. Policies of wage moderation are counter-productive and lead to stagnation of economic growth. Keeping wages low also increases the risk of deflation and, in some countries, destabilises the economy by stimulating debt while in others it creates excessive reliance on exports. When wages are treated wages as drivers of demand in the economy and not simply as a cost for employers, the more those wages are squeezed, the weaker eventual growth.
During a recent stay in a hospital ward, I found myself writing a report from my bed while putting off work on another that involved turning pages and pages of corporate speak into plain English. During a previous visit I had used my mobile phone to connect my laptop to the Internet so that I could engage in a spot of live editing. Yes, I am self-employed and this is how many of us work these days. And while I am neither looking for sympathy nor hoping for a medal it is worth highlighting that, even in sickness, we freelancers have to keep going when the work is there. It is now becoming a social and economic issue given the dramatic rise in the number of freelancers in recent years. About 4.6 million people or 15% of those working in the UK in 2014 were self-employed - the highest proportion in the four decades since figures started being compiled. There’s been a 39% increase since 2000 alone.
Chancellor George Osborne has announced a more ambitious set of targets for fiscal policy than those he set out while in coalition with the Liberal Democrats. Rather than seek to balance the current budget he will aim to run an overall surplus in ‘normal times’. ‘Normal times’ are yet to be defined. While the need for a degree of austerity to rein in one of the largest structural deficits across the OECD is clear, the Chancellor’s argument that high government debt contributed to the crisis, or that reducing it will by itself deliver sustainable growth is far less convincing. The excessive level of public debt at the time the crisis began made it worse than it might have been, but the real source of the UK’s crisis was excessive bank lending to households, leveraged against a grotesquely over-valued housing market. Moreover, the only known means to sustainable growth and rising living standards is productivity growth. And while the Chancellor is rightly frustrated at still presiding over one of the largest structural deficits in the OECD, it is the UK’s woeful productivity performance that deserves his attention above all else.
Throughout the general election campaign, political pundits were free with their estimates of how much the Chancellor George Osborne would have to cut public spending to eliminate the deficit in the timeframe he had set. The Chancellor himself appeared to encourage this speculation, possibly calculating that the Labour Party would never be able to identify tax and spending adjustments it would make that would come close to reaching objectives he had established in the public mind as the minimum consistent with fiscal prudence. His opponents, Labour and SNP, were reduced to labelling his budgetary strategy as ‘austerity’ in the hope that voters would not like the sound of it. In the event, that ploy did not work.
David Cameron became Prime Minister in 2010 saying we were ‘all in this together’. It was a call for national unity, and a promise that everybody would share the burden of fixing the government’s finances. Five years on, that promise rings hollow. The British economy is chugging along with a tepid recovery, but in a time of food banks and funding cuts there is an irrepressible sense that things aren’t quite as rosy as we’re led to believe. While the wealth of the richest 1% doubles, the average worker has suffered the steepest drop in living standards since World War II. It is no exaggeration to repeat again and again, then, that inequality is the defining issue of our time. Once a country has become affluent – as Britain has – the amount of wealth it has pales in significance when compared to the way it distributes that wealth. This exposes its core values, and makes all the difference between citizens either having fair life chances, or becoming stranded on opposing sides of a gulf between ‘haves’ and ‘have-nots’.
A great deal has been written about one of the scourges of our time, the rise of economic inequality in most parts of the world. Much of of what has been written documents the phenomenon, deplores it and - as if with a shrug of the shoulders - offers little in the way to remedy it. As the title implies, “Inequality - What Can be Done?” by University of Oxford professor Anthony Atkinson, not only documents the growing inequality gap of recent decades, but asks why we should care about it and, most importantly, what can be done about it. But the value of this book lies not so much in the recommendations but in the full frontal assault Atkinson makes on the lazy intellectual dogma that inequality is inevitable. Atkinson’s views deserve special attention not only because he was studying inequality long before it became fashionable, but because he harnesses the evidence to show that political choices rather than economics are at the heart of whether governments should tackle the widening gulf between the very rich and the rest.
Despite the pound’s present buoyancy, a growing perception of political risk surrounding the UK could yet carry it lower. The question is one of timing. It may be far too soon to expect currency market traders, whose horizons are increasingly foreshortened, to discount a UK rupture with the EU that may not occur until 2017, if it happens at all. Businesses drawing up medium-term capital investment plans, on the other hand, may feel they have to take fully into account the risks of a politically-triggered sterling decline even if it happens two years hence. Initial indications of their concern may show in the long-term capital account of the UK balance of payments rather than in the sterling exchange rate. Any marked deterioration in the long-term capital balance might portend a weakening in sterling. Consequently, it is not too early to begin to assess the likely course and outcome of the British Government’s negotiations over reform with its EU partners.
The Greek government’s eleventh-hour payment of €750 million to the International Monetary Fund on the 11 May illustrates the brinkmanship and grand-standing of national electorates that are making the drama of debt negotiations into a crisis. The actual repayment is a mere pin-prick compared to the estimated €323 billion of total government debt and the €6.6 billion due to be repaid in June. The real test of the crisis are not the numbers, nor even the insistence on debt cancellation by hard-line sections of Greece’s Syriza ruling party, and its counterpart in the German Finance Minister Wolfgang Schauble who insists that all debts are paid in full. The key factor is whether the Greek government can pay its running costs (not including debt payments) from tax revenues, or what economist term having a primary balanced budget. This is crucial because it determines the balance of power in the debt negotiations.
I first got an inkling that the Conservatives might scrape back into Downing Street a couple of years ago, over lunch during a trip to the US. With me was a colleague from a British newspaper and my foreign-born editor, when the topic of the housing market came up as we ate Southern soul food in a restaurant in Georgetown, just outside Washington DC. My editor was worried that the housing initiatives put in place by the Coalition such as Help to Buy gave a hand-up (and hand-out) to private buyers, combined with a failure to build anywhere near enough private or public homes to meet demand would fuel an artificial spike in prices.
First, and it is important to state this, the Labour government was not responsible for the 2008 recession. The recession was caused by the housing bubble bursting in the US which led to subsequent financial crises in other countries. One could argue that banks should have been under stricter regulation in the UK under the Labour government. However, this is easy to say with the benefit of hindsight and no other political party was arguing in favour of more regulation of the banking sector at the time. In fact, the Conservative party argued for less regulation of the banking sector.
Politicians and economists often frighten us with tales of the horrific burden that we are passing onto our children and grandchildren by allowing the government to run up debt. Across the capitals of Europe, but particularly in Berlin and Athens, politicians add to the voices of influential and distinguished economists such as the American Robert Barro who argue that debt-financed government spending is bad for the economy. Their logic is that any benefit from extra government spending will be offset by anxious tax-payers saving and passing on money to future generations to help the pay off the debt. The logic rests on an analogy with household budgets: if the debt isn’t settled by the parents it will be passed on to the kids. But while the analogy is simple it is also wrong.
The New World Order of 1992, when Francis Fukuyama hailed the end of history on the view that a never-ending regime of liberal democracy and free-market capitalism under the hegemony of the US had been inaugurated across the world, never quite came to pass. That vision is now fading fast under challenge from a number of nations, notably Brazil, Russia, India and China, that reject US domination and aim to establish a pluralistic pattern of global governance in which US-favoured solutions to problems would not necessarily determine outcomes. Signs are that US ruling circles are aware of the danger to their position and will attempt counter-measures to ensure that it is not weakened further. They have already withstood one challenge, from the Soviet Union during the Cold War. They may well feel they can see off this latest threat too.
Britain's sclerotic planning system, kept in place by a political class fearful of taking on the vested interests of NYMBY homeowners, means we now build about a third of the homes that we did in the late 1960s. House building has been in free fall for almost half a century because we have a system that does not allow the supply of homes to increase, no matter how high prices rise. The solutions proposed by politicians attack the symptoms rather than the causes of the problem. And they make matters worse because they stimulate demand, but do little to increase supply.
News that HSBC is considering whether or not it wants to remain headquartered in London has sent predictable shockwaves through the UK media, no doubt to the great satisfaction of those in the big corner offices in Canary Wharf. There is an election coming up after all, and our banking chums probably don't think it hurts to concentrate politicians' minds a little. But this is ultimately comedy and in comedy, timing is everything. But when you stop to think about it, the pool of likely destinations is really rather small for these financial behemoths. Angola? South Sudan? Russia? Argentina? I don’t think so.
We all have a current account and most of us have been in the red at some point. If we can, we pay off our overdraft quickly because bank fees and interest make them expensive. If we don’t pay it off, eventually we go bankrupt. The UK has an overdraft which is running at almost £98 billion. That’s because there is more money leaving our shores and then there is flowing into Britain. Economists refer to this as the current account deficit. It is important to understand what this beast is and what it isn't. It is less sexy that the budget deficit — which is what the government borrows — and it has barely got a mention in the election campaign. It is arguably as important, if not more than the budget deficit — and it could have a more serious effect on the economy. The last time we got into trouble over the current account it was resolved by Black Wednesday in the early ‘90s.
In the two arduous months since Syriza won the Greek elections on a platform to renegotiate the country’s debt and end the austerity imposed from abroad, much noise has been generated but seemingly little has been achieved. A more constructive view might be that the range of possible outcomes is narrowing as crunch time approaches. Prime Minister Alexis Tsipras has proven wrong the pessimists who predicted the country’s exit from the euro. Leaders, in private at least, realise all too well that a Greek default and/or exit from the eurozone would seriously dent the European project at a time when Russia is trying to increase its influence. It would also bring large losses for creditors, including the European Central Bank, national governments and banks. There have even been some modest gains for Greece such as the increase in the amount the ECB will lend to Greek banks to €71 billion and the halving of a target to have the government’s books in surplus.
There appears to be a general consensus that the USA’s standing in the world has diminished since 2008. Some would blame the loss of power and prestige on President Barack Obama’s uncertain handling of foreign policy. That does not seem entirely fair. It is not difficult to think of other US leaders who, if they had been occupying the White House in Mr Obama’s stead, might have guided the ship of state into even more dangerous waters. There is probably more justice in recognising that, after the disasters of the ‘noughties, the USA’s influence would have waned, whoever had been in charge. For decades, US global hegemony had rested on the twin pillars of military and financial power.
Economists call it a market failure when the quantity of a product demanded by consumers does not match the quantity offered by suppliers. There is strong demand for homes from a large number of people but there is limited supply of the wrong type of product. If there was ever a clear case for government intervention where a market failure is taking place it’s here. And no, it’s not the George Osborne-style interventions to help people buy an over-priced homes. All that does is push prices higher. There’s no shortcut. We have to build more homes, of the right type, at the right price and in the right location. Private house builders — often held back by the state planning permission system — aren't doing it.
The one thing you can say about the 2015 Budget is that it more or less spells out what the Conservative Party is planning to do if it wins the election in May. Cut spending and cut taxes. We weren’t afforded such luxuries in 2010. Back then, Big Society Tories were all about matching Labour’s spending plans while the LibDems gave voters no clue that they would support austerity so enthusiastically. A coalition programme agreed during the first crisis in Greece justified reductions in government spending not seen for many decades. This time we know that, if he keeps his job, George Osborne will press ahead with plans to reduce the amount the government spends to the equivalent of about 36% of the economy.
In the first series of the blockbuster American TV show The Wire, the anti-heroes Avon Barksdale and Stringer Bell employ murder, serious violence and threats to stay one step ahead of the police and rake in profits from drug dealing. The stakes are high: capture means a heavy jail term but success translates into a small fortune. Given the options, the pair carry on in the face of any setback with the catchphrase: “The game is the game.” While few normal people would consider drug dealing and murder a “game”, economists — by definition not normal people — have found this concept useful in analysing how people make decisions with economic implications: they call it game theory. One intriguing aspect to negotiations in Brussels last week was that the lead Greek negotiator, finance minister Yanis Varoufakis, is a renowned academic expert in game theory. His opponent, Germany's finance minister Wolfgang Schaeuble, is a career politician who studied law and economics at university. Here’s how the theory played out in practice.
Failure to resolve differences between Greece and its creditors by the end of February could quickly bring matters to a head. But, even if Mr Tsipras were resolved to reach agreement with EU partners in the end, he would want to show he had wrested worthwhile concessions from them. This suggests that, at the very least, the next five weeks will see Greece and its creditors playing a game of chicken as the euro teeters on the precipice.
Squatting in Spain has become a reality, not just for those pursuing some youthful ideal or subversive lifestyle, but for people like Maria, married couples, and families, with no other recourse. From Valencia David Cano brings a tale of survival and solidarity five years on from the nation’s catastrophic housing market collapse.
We've known for a long time that enough houses aren't being built in the UK and that this is the main reason why house prices are so out of step with what most people earn. Recent analysis suggests that we could build 1 million homes on 20,000 hectares of the 515,000 hectares that make up London's greenbelt. That would leave 96% of it untouched and help take the heat out of the market.