Friday, March 16, 2012

Better Late Than Never

Budget purdah aside, the Guardian got the leak that everyone was chasing. Patrick Wintour reports:

“The chancellor has, sources say, been intellectually persuaded of the case for a cut in the top rate, a move that will endear him to the Tory right.”

Given that this sounds like a recent conversion to basic economic principles, Guido wouldn’t be so sure about the word “endearing”. Having got in touch with Team Ed this morning, they are yet to confirm or deny that Labour would reinstate the rate, on the off chance he ever ended up in power that is.

Tricky one for him…

Sunday, February 19, 2012

Ed Balls Calls for Tax Cuts to Boost Growth from Zero

Ed Balls was on the Marr show this morning and also has an article in the Sunday Times ahead of the budget, advocating tax cuts to boost growth. He repeats his long-standing call for a reversal of the consumer whacking VAT hike and comes over like a born-again Nigel Lawson in his article:

…cut the basic rate of income tax by 3p for a year. Or raise the income tax personal allowance to more than £10,000… It would be better to cut VAT now — it’s fairer and quicker and would help pensioners and others who don’t pay income tax. But any substantial tax cuts to help households and stimulate the economy would be better than doing nothing.

Tax cuts won’t scare international bond markets, even the austerity friendly IMF is advocating a VAT cut for Britain, government gilts are propped up by QE (for now) so the issue of bond market vigilantism doesn’t arise.

It was a mistake to hike VAT and it is a strategic error to burden industry with crushingly high green taxes and penal marginal income tax rates of over 50% discouraging entrepreneurs from coming to invest in Britain. If the government is going to miss the deficit target, and it is, miss it because the government slashed taxes to grow the economy. The international bond markets will forgive a finance minister with a growing economy who misses his deficit target, they won’t forgive a finance minister with a contracting economy in any circumstances. Chancellor Zero knows that with no growth there is no hope for the deficit.

Tuesday, February 14, 2012

Sunday, January 29, 2012

Zero GDP Growth Has Zero To Do With €urozone

Last week’s shrinking GDP figures were spun by George Osborne as due to the crisis in the €urozone. The decline in GDP could hardly be blamed on the US market which is picking up and growing at a respectable 2.8% last quarter, nor on Asian markets where China grew at an annualised 8.9% and India at 7.8%.

Is the decline in UK GDP really, as George Osborne implies, down to economic trade with the crisis ridden continent falling? The answer is no.

UK exports to €urozone states actually rose a healthy 11.3% last year:

It is a myth that the decline in GDP has anything to do with the €uro-crisis leading to a decline in exports to the €urozone. The barriers to growth are a domestic problem… 

Wednesday, January 25, 2012

Chancellor Zero

Even if the GDP numbers are not entirely unexpected, they are still a failure, a failure to grow the economy. The deficit can only be paid down if the economy grows, we can’t borrow our way out of a debt crisis. It is time for a supply-side revolution, why is the government implementing a policy of selected regional enterprise zones, why not make the whole economy an enterprise zone? It was a mistake to hike VAT and it is a strategic error to burden industry with crushingly high green taxes and penal marginal income tax rates of over 50% discourage entrepreneurs from coming to invest in Britain.

If the government is going to miss the deficit target, and it is, miss it because the government slashed taxes to grow the economy. The international bond markets will forgive a finance minister with a growing economy who misses his deficit target, they won’t forgive a finance minister with a contracting economy in any circumstances. Chancellor Zero knows that with no growth there is no hope for the deficit.

Sunday, January 1, 2012

Hello 2012

As is traditional during the New Year low in news flow pundits are expected to predict the future. Recently Guido has been veering between pessimistic and apocalyptic on the economy. Not quite as apocalyptic as expecting  the world to end on December 21, 2012 as the Mayan calendar comes to an end and the winter solar solstice sees the alignment of the sun with the Milky Way to form a galactic equinox. Am betting that doesn’t mean the end of the world, and if it does, well no one will collect on that bet…

Guido’s predictions for this year:

  • Margaret Thatcher will outlive the €uro as we now know it. If one of the weaker countries doesn’t break free in 2012 it will just mean the crisis will drag on unresolved until 2013.
  • The probable Eurozone recession will be worse than the possible UK recession.
  • Inflation will drop sharply as the VAT hike falls out of the calculation but it will be stubbornly higher than many forecast. Savers will still face negative real interest rates. There will be no sign of the deflation predicted by Mervyn King since 2008.
  • There will be a collapse of another major European bank, arguably some have essentially collapsed already, it is just being hidden by governments and the ECB propping them up.
  • Boris will vanquish Ken Livingstone from frontline politics forever.
  • Ed Miliband will remain as leader of the Labour Party.
  • A Tory cabinet minister will resign in disgrace.

This blog, with the help of co-conspirators and readers, will in 2012 go on being Britain’s favourite political blog. Happy New Year…

Thursday, December 22, 2011

£250,000 Prize Christmas Cryptic Challenge

It is a fact of life that they stop manufacturing news over Christmas, which is why the papers are filled with even more dross than normal. Double-page jumbo cryptic crosswords help you while away the time between Christmas lunch and the turkey sandwiches. Guido has something equally as cryptic but far more rewarding…

If you can figure out how a Eurozone state can leave the Euro you could win £250,000. Guido isn’t joking, the Wolfson Economics Prize will be awarded to the person “who is able to articulate how best to manage the orderly exit of one or more member states from the European Monetary Union.”

You have a month until the deadline for submissions on January 31, 2012. So instead of snoozing in the armchair after lunch dreaming of escaping to sunny lands dream of rich sunlit post-Euro uplands. According to the Wolfson Prize announcement the detailed issues that exiting the Eurozone raises include:-

  • Whether and how to redenominate sovereign debt, private savings, and domestic mortgages in the departing nations.
  • Whether and how international contracts denominated in euros might be altered, if one party to the contract is based in a member state which leaves EMU.
  • The effects on the stability of the banking system.
  • The link between exit from EMU and sovereign debt restructuring.
  • How to manage the macroeconomic effects of exit, including devaluation, inflation, confidence, and effects on debts.
  • Different timetables and approaches to transition (e.g. “surprise” redenomination versus signalled transitions).
  • How best to manage the legal and institutional implications.
  • A consideration of evidence from relevant historical examples (e.g. the end of various currency pegs and previous monetary unions)

The Wolfson Economics Prize, worth €286,000, is the second biggest cash prize to be awarded after the Nobel Prize. It aims to ensure that high quality economic thought is given to how the Euro might be restructured into more stable currencies. Guido is read widely in  City dealing rooms, crammed with bond market vigilantes and Phd wielding economic analysts. Given the paucity of bonuses this year, best get your thinking caps on…

Full details from the website:
policyexchange.org.uk/WolfsonEconomicsPrize

Monday, November 28, 2011

Grow Faster, Go Further

Growth is anaemic, that much of the Balls critique is true, the cause is not the government’s spending cuts, they are a mere 1% of GDP. Osborne has made mistakes, hiking VAT hit the High Street by taking money out of the real economy whereas QE at the moment only puts money into high finance money markets. Back in June the IMF issued a report recommending

“…tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households, or job creation to increase their multipliers… Simultaneous adoption of deeper long-run entitlement reform would be desirable to safeguard fiscal sustainability and market confidence…”

It also pointed out that

“The level of public spending as a percentage of GDP in our forecast has reduced by about half a per cent of GDP as compared to the previous fiscal year. However, it remains very far above the pre-crisis levels of spending and represents a long-term high in spending. It’s important to maintain that perspective”

Plan B, the Balls plan for bankruptcy and bond market collapse, is for higher taxes and more spending, this can be dismissed. Osborne is right when he says the international bond markets would crucify Britain if he switched to Plan B, for as Jeff Randall points out this morning

“At the moment, the Chancellor is pulling off a brilliant confidence trick: persuading the markets that Britain remains a triple-A credit, able to borrow on the same terms as Germany, while managing an economy with an inflation rate 66% higher than the eurozone’s average, and a national debt that is forecast to hit £1.32 trillion in 2015, nearly 40% greater than today.”

Tricky. Gordon Brown inherited an economy in a sweet spot and left an economy drowning in debt, Osborne believes he must bear down on the deficit to keep the confidence of the bond markets. Yet a paper produced by Dr Tim Morgan of bond brokers Tullett Prebon argues that if the government is going to miss its deficit reduction target anyway, what option would placate the bond markets more?

  1. “Britain has missed its deficit target because growth hasn’t happened”
  2. “Britain has missed its deficit target because the government failed to cut spending sufficiently”
  3. “Britain has missed its deficit target because taxes have been cut in pursuit of growth”

We’re currently in the first situation, the second situation is unpalatable to the government, the LibDems don’t have the stomach for a shock doctrine style short term austerity programme. Balls advocates stimulus in the form of higher spending, no one in government is advocating the alternative, which is to stimulate the economy by cutting taxes instead. Of course if we also rolled back government spending there would be more room for tax cuts to boost consumer confidence and the economy, without matching spending cuts the deficit will rise. Osborne is going to miss his deficit target regardless of which option he takes, it wouldn’t scare the bond market so much if cut taxes in pursuit of growth…

Tuesday, November 22, 2011

Thomas Cook On the Brink

After doing a whip around the banks, are we about to see the end of the company that started excursions in 1841?

As a result of the uprising in Egypt people seem less keen on packing their bags for Cairo to see the pyramids. Turns out people haven’t been Thomas Cooking it. 

Sunday, November 6, 2011

Moral Markets and Other People’s Money

Guido has just got round to reading The Big Short by Michael Lewis, author of the eighties-era defining Liar’s Poker. It is the most readable book on the American sub-prime crisis that was the catalyst for the global sovereign debt crisis we now face. Essentially Lewis has found and written the story of the few who not only foresaw the crisis but bet on it, big bets. Was it moral for traders to bet that sub-prime lending would end in disaster? Via synthetic Collateralised Debt Obligations risk was added to the financial system, purely for speculative purposes. In a free society with a free economy it is good that consenting capitalists are allowed to take risks, the problem was that the PhD-equipped quantitative-modelling geeks who inhabit investment bank trading rooms got the models for analysing risk completely wrong. The ratings agencies bought into the models because their customers demanded it. When it all went wrong governments and central banks stepped in to bailout banks out of fear that the financial system would fail. The banks had allegedly become too big to fail.

Guido was an investment banker, has a lot of friends who are investment bankers, hell Guido even married an investment banker. Since the days of the Long Term Capital debacle at dinner parties Guido has argued that the problem with investment banking was that the geeks had brilliant reasons for losing big money, in that they had complex models that impressed management better than traditional trader’s gut instinct. The second problem was that investment banks were no longer partnerships, they were publicly listed companies, with shareholders who were not involved in day-to-day management. This has proved to be a disastrous form of capitalism, with owners who don’t know what the managers of their money are doing.

Up until Salomon Brothers listed in 1981 the investment banks were partnerships. That meant the firm’s capital was provided and risked by the partners who ran the firm. The oldest and most experienced partners tended to have the most capital in the firm. This had a risk management effect greater than any Nobel Prize winning computer-calculated risk model, the old guy with the grey hair stood to lose everything when some testosterone charged 27 year-old trader bet the firm’s capital. This incentivised senior management to control risk, because they know there are old traders and there are bold traders but there are very few old, bold traders. The bosses’ desire to keep their retirement pots concentrated their minds.

Michael Lewis points out that public listings transferred all the risks from management partners to the firm’s shareholders who had no idea what risks were being taken. Now we have huge financial combines with managements incentivised to bet the shareholders capital big, win and get out with their annual bonus. If they lose, the shareholders lose, or if they lose really big the taxpayer eventually bails them out because they have retail banking High Street subsidiaries which democratic governments are terrified will be dragged under as well. Capitalism with the risk being taken with Other People’s Money has the same fundamental problem associated with socialist governments spending Other People’s Money. Why worry if it isn’t your money?

Downing Street is briefing that the PM will be promoting the idea of “moral markets”. It is of course human nature to act in your self-interest, what has gone wrong is that the incentives have been given to those who manage the capital to take risks which informed owners would never knowingly take. There is nothing moral in asymmetric markets where the risks are borne by others than those taking the risks. If taxpayers in Western democracies are to implicitly insure retail banks – in effect owning the risk – the cost of that insurance should be such that it is prohibitive for retail banks to take exotic trading risks. Proprietary trading is for proprietors. Moral markets require risk and reward to be fairly priced.


Seen Elsewhere

Even Ed’s Friends Call Him ‘Bad Luck Magnet’ | Mail
BBC: It Was Guido Wot Won It | MediaGuido
Nick Robinson’s Britain First Selfie | Metro
Dyson: Leave German Dominated EU, Join EFTA |
How UKIP Won Rochester | Seb Payne
Labour’s Islington Problem | Harry Phibbs
Ed Lost More Than a By-Election | Labour Uncut
Labour the Biggest Losers in Rochester | Speccie
Thornberry a Gift to Farage | Nick Wood
Is Left Finally Turning Against EU? | Dan Hannan
Labour Votes Going Green | Guardian


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Ralph Miliband on the English…

“The Englishman is a rabid nationalist. They are perhaps the most nationalist people in the world.”



Left on Left says:

The lefties are attacking because the panellist is a millionaire and lives in a London home worth upwards of two million. Someone had best tell them he’s called Ed Miliband.


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