Monday, November 22, 2010

We don't know what is going to happen in the next week, but...

Are we set for inflation or deflation? Is world growth going to recover right now or in the near future - or only in a few decades?

If you have been following the various rantings of people trained in economics, such as myself (though I hope better trained and more eloquent than myself!), I think you will agree that there is no consensus and very little agreement among us.

So it interests me to see that the Conference Board (in the USA) hazards a view, not just about tomorrow or next week, not only about next month or simply about next year, but for the whole of the coming decade!

If you wish to consult this daring oracle, go to Sphere: Related Content

India's relations with Southern Sudan

An Indian friend who is active in this field wrote to me some time ago as follows, about an event at the House of Lords in the UK, where he was invited to speak:

"There was much interest from both aid agencies and business from the UK.
What saddens me is that this is a wonderful opportunity for Indian SMEs to step in and offer our brand of cost effective solutions that Sudan (and many other parts of Africa) so desperately need.
There are already some Indians from Uganda and Kenya moving in but they are perceived to be traders and profiteers.
I have given a number of talks in Bangalore and elsewhere to sensitize the business community to this fantastic opportunity to profit while helping to develop this war torn country that is limping back to normal.

It would really help if the Indian Government had a presence in Juba and if we could obtain travel permits to Southern Sudan here in India".

As I had promised to take up the last point, I wrote to the Indian Ambassador in Sudan (who used to be a fellow-student while we were at University) but I had no response - perhaps he was too busy or uninterested? Or is the Indian Embassy there as inefficient as most of our Embassies seem to be? Alternatively, is the topic felt to be such a hot potato that he did not want to even acknowledge receipt of my message?

If the latter, it would be a bit surprising as it is clear that Southern Sudan will opt for independence when the referendum is held in the next few months. Why not anticipate matters for once, and build relations with this emerging new country - with whom, as ourselves a country with experience of being colonised, we should be sympathetic? Sphere: Related Content

Sunday, November 21, 2010

The latest "Commitment to Development Index"

Is available at:

I have just written to them as follows, and I hope this is self-explanatory>

Sirs/ Mesdames

Your "Commitment to Development Index" is highly useful, but would be even more useful if it did not distort the picture by focusing only on government-to-government aid (which mostly ends up, in any case, in the pockets of corrupt politicians and bureaucrats).

You know of course that many countries, e.g. in Europe, disincentivize private philanthropy by high taxation and/ or not setting off private philanthropy against taxes due.

By contrast, other countries, e.g. the USA, incentivise private philanthropy by low taxation and/or setting off private philanthropy against taxes due.

What philosophy countries follow is entirely their own affair, though we might have our own views about it.

However, both government-to-government largesse and private philanthropy need to be considered together for a proper and complete picture of the field.

For your Index, therefore, kindly consider including both the figures for government aid and the figures for private philanthropy.

ENDS Sphere: Related Content

Thursday, November 18, 2010

Which hotel has the most expensive internet connection in the world?

I don't know, but I would guess that the Intercontinental Hotel in Geneva may be a candidate for that dubious distinction.

First, the hotel allows only two options: one hour and one day. There is no consideration for people who are staying two, three or more nights in the hotel.

Second, the charge is 32 Swiss Francs a day or 11 Swiss Francs an hour. That's something like twice the maximum that I have ever paid anywhere else in the world. Sphere: Related Content

Wednesday, November 10, 2010

Back to the Gold Standard?

Perhaps you were shocked to see news that the Chairman of the Federal Reserve wants the world to consider gold as money again - or something like that.

By contrast, I was quite pleased, as I have been speaking at conferences for some seven years on the need to move currencies back to something more solid than the say-so of governments and central banks. Usually, in order to make my point, I have naturally had to point to the US government's de-linking of gold from the dollar as one root of our current global problems. This has been taken to mean that I am argue for a return to the gold standard. I do not. But a return to the gold standard would certainly be better than the current system where a government or central bank can just print as much money as it likes.

That ability to print as much money as a government wishes, along with the ability to set interest rates (and lesser-used techniques), is supposed to be a key part of the array of "modern monetary policy tools" – and, in the circles that matter, there is widespread skepticism regarding whether anything other than the current system (with tweaks) is realistic, including Zoellick's suggestions.

However, everyone knows and agrees even in public that the current system is not working. The printing of excessive amounts of money since the 1970s by all governments is another root of our global problems.

So the challenges are: How to limit governments, so that they print only an appropriate amount of money? And what is "appropriate"?

For the first: no government can be compelled to do anything except by extreme military force and that is not a favoured "policy tool" at present.

So the only option is to agree that countries and governments which do not abide by whatever international rules are agreed, should barred from trading in the international markets (i.e. those regulated through the World Trade Organization). That would admittedly entail a political process. But, sooner or later, as has become evident in the case of the contretemps over Chinese government policies to keep the Remnimbi artificially low, countries do start applying pressure. The problem is that the only sorts of pressure that they can apply at present are the sorts of pressure they have been applying. Those have not proven very effective so far, because there is no actual sanction available. But if an agree framework for currencies could be part of the World Trade Agreement, we would immediately have a relatively powerful sanction against recalcitrant governments.

That leaves the question of what an "appropriate" framework would be which might enable at least some minimum flexibility to governments/ central banks (so that they can still enable and steer growth) which providing some limits to the unrestrained printing of money.

One possibility is to use gold as the measure of how much money a country can print: the more gold you have, the more money you can print. Silver or platinum or silica (or a basket of such resources) might be another option. The availability of energy could be yet another option, perhaps with double points for non-fossil fuels. Each of these options have the problems associated with the quantity of the resources available (for example, in the case of gold, a sudden discovery of more gold in some country would immediately alter things!).

Now, we must distinguish between a gold "standard" (printing only as many "tokens" or IOUs as you can honour on the basis of the gold actually sitting in your vault) and the new Zoellick proposal which suggests that gold should be merely "an" indicator to help set foreign exchange rates, employing gold as merely "a" reference point for international expectations about inflation, deflation and so on. While Zoellick's system might well accomplish the welcome task of taking us away from the current preoccupation with simply devaluing currencies (the "currency wars") and therefore further away from the threat of protectionism and actual wars, his system is still a house built on sand. If gold is to be "an" indicator, what else will his system consist of? Nothing more than either a basket of currencies - or what the Chinese indicated several months ago: the IMF's Special Drawing Rights, which are themselves based on contributions by different countries of their own currencies.

So what's wrong with that? Simply that, if one rotten apple infects a whole cartload, what we have on hand are several rotten apples from around the world starting with the Remnimbi and ending with the dollar - and with almost everything in between: every country has been printing too much money. We could almost say that we have nothing but rotten apples, though there is a difference between the rottenness of say the dollar on one hand, whose rottenness can be inspected by anyone (including the Chinese), and the rottenness of the Remnimbi on the other, whose rottenness can be inspected by no one (including those Chinese who are outside the relevant small closed inner circle).

However, I must say that the Zoellick proposal is better than the Chinese proposal because it adds one element of solidity (gold) – even if only in terms of the varying value of its price, rather than actual gold, which is of course much more solid.

All that leaves us no wiser about the question: how much money should governments be allowed to print if they want to belong to the world trading system?

Well, let's go back to the beginning (always a very good place to start!). Money is (among other things) a medium of exchange, and that medium needs to be reliable – just as a yard or a meter is a measure of distance and needs to be reliable, rather than simply manipulated to suit.

In order to have a reliable medium of exchange, if one does not want to "go back" to a metal-based standard, it is surely logical to allow and indeed to force countries to print only as much of this medium of exchange as makes sense. What makes sense? That's simple: you cannot exchange more than you produce!

So here's my proposal: countries should be allowed to print each year, as much money as the worth of the total value of their goods and services the previous year.

It is difficult for us to be able to assess that accurately, but we have good methods of getting a rough estimation of that, and a three- or five-year rolling average could be as accurate as necessary.

Naturally, if you are an economist or politician, you can always find grounds to dispute what the "real value" might be of a country's goods and services. But, with my proposal, you would be at least within shouting distance of reality, rather in the sort of dream (or nightmare) world in which we are today. Sphere: Related Content

The G20 blinks

The G20 meeting should be starting in a few hours.

But I am alrady disappointed.

I believe that the G20 is set to defer a decision on whether there should be a globally set capital surcharge for systemically important banks.

That means that such surcharges will vary from country to country, and many countries will not have such surcharges at all - incentivising banks to move their activities to countries with no surcharge. Which, in turn, will create pressure, even in countries which do have surcharges, for doing away with surcharges.

The whole debate about "too big to fail" banks seems to have ended in the creation of banks that are much bigger than they were before the crisis and with no global mechanism for avoidng taxpayer bailouts of such firms.

It looks as if politicians and regulators around the world have abandoned efforts to reform the system.

Of course, things could still change during the summit. But if everything goes as the agenda suggests, look out for even more volatility and vulnerability in the global economy. A huge opportunity for putting at least one key matter in the the global financial system on a sensible basis appears to have been lost. Sphere: Related Content

A fundamental mistake: the G20's two-tier bank plan

According to reports, most Asian banks will be exempted from a global regulatory regime in spite of their size.

As some of the biggest banks in the world are now Asian, this is surprising.

Why would Asian banks be exempted from a global agreement?

Apparently, because of their domestic focus!

This is a fundamental mistake: many Asian banks do operate ENTIRELY domestically (gathering and loaning assets only within their countries). However, there are many banks, specially the larger ones, that may operate MAINLY within their countries, but are involved in all sorts of activities that are international. For example, these apparently domestic banks finance companies involved in international trade. More important, they borrow funds via some route or other from foreign entities.

At a time when Asia and other emerging markets are the engine of whatever growth is taking place, and Western investors are stampeding east, the bankruptcy of a big Asian bank will have the same catastrophic effect on sentiment as the bankruptcy of a big Western bank. Sphere: Related Content

Monday, November 08, 2010


No, not the ship!

Rather the second round of "quantitative easing" (printing more money) by the US Federal Reserve!

To put the matter fully: a friend asked my view about the decision of the Fed to to add $600 billion of fresh liquidity to the USA.

Here is my response:

Isn't it ironic that after the election triumph of the Tea Party, the US public is confronted with yet another splurge of liquidity creation.

However, this splurge is simply another desperate effort to ignite the recovery of the US economy - which will continue to fail to work, for the reasons I outline below (when seen merely in the US national context; when seen in the global context other reasons for the failure of this effort will also become evident).

1. The dollar will fall further in international markets. Though this will incentivise some foreigners to invest in the US (as US assets will then be relatively cheaper for foreigners to buy), it will disincentivise others whose existing investments (bonds, equities, et al) will be hurt by the fall of the dollar. No doubt the Fed has done its calculations on this - and one can only hope that its calculations are proved right.

2. While a cheaper currency might be expected to help exports, and may indeed do so, that won't help job-creation because an increasing amount of the output of "American companies" comes from workers abroad.

3. While this QE will continue to provide a floor to the economy itself, it will not create substantial lending to the mass of business and, even if it did so, will not incentivise the mass of such businesses to employ US citizens. Why? Among other things, because most work that needs to be done, whether in manufacturing or in services, can be done much more cheaply in countries, such as China, which do not care for basic environmental and human considerations (whatever their protestations to the contrary, and whatever token gestures they may stage in these directions). That is why so much outsourcing of jobs has gone on - and will continue to go on.

My conclusion:

If the US wants to sustainably improve its economy and sustainably increase employment inside the US, it will have to either withdraw from the WTO, or reform the WTO so that the treaty's rules integrate minimum pay, pensions, holidays, health, safety, and environmental standards - as well as agreed rules regarding how much money can be printed relative to GDP, how bad loans are categorised, calculated and registered, and so on. This will necessitate extending to the whole of the WTO the sort of work that is intended to be undertaken by the newly-established Office of Financial Research which the Dodd/ Frank Act at present implicitly limits to the US.

I am assuming (perhaps wrongly?) that Spencer Bachus or whichever other Republican eventually chairs the new House financial services committee will not "roll back" the few good things that the Dodd/Frank Act has put into place such as the Volcker rule's ban on proprietary trading and the restrictions on banks’ investments in hedge funds and private equity firms.

Given the possibility of such a roll-back, it is perhaps worth revisiting the (still largely-unaddressed) issues at the heart of the current crisis:

- too much liquidity as a result of the delinking of currencies from anything beyond the say-so of a government or central bank (I am interested to see Zoellick's proposal to include gold as an indicator in the global financial system, and will comment on that separately);

- too much (vastly multiplied!) speculation as a result of the elimination of the Glass-Steagall Act and of the possibility of unlimited leverage (which had already led to the LTCM crisis, but we refused to learn from it!)

- too much opacity in the financial system (the creation of the "shadow financial system") following the government's encouragement of non- and near-banks, and then encouraging recognised banks to participate in and emulate their activities, topped by the abolition of the need for the "big boys" to register their financial activities as a result of the Gramm-Leach-Biley Act which led to banks ceasing to trust each other - which is what actually finally caused the crisis triggered by speculation and the resulting sub-prime defaults;

- overly-lax provisions for Special Purpose Vehicles, intended to encourage off-balance-sheet activities (which torpedoed Enron et al - but we refused to learn any lessons from that beyond imposing expensive and only partially necessary SOX on everyone);

- too much reluctance on the part of authorities to impose (and of executives to accept) any system of accounting that will enable right evaluation of risks in companies and in the financial system, such as can easily be done);

- too much short-termism due to the current structure of the "institutions" of exchanges, shares and frequent trading (in relation to which I have already proposed solutions).

If 90% of all "financial innovation" over the last few decades has focused on nothing more than regulatory arbitrage, what we need is global rules covering the crucial matters I mention above.

Global business activity cannot be conducted on a sustainable basis in the absence of sensible minimum global rules that create a level playing field on which the best players can win on the basis of innovation, quality, service and other good things - rather than the present system where those qualities may be rewarded but other rather worse things (such as environmental degradaton and human exploitation) are rewarded even more.

Regrettably, there is so far little sign that most people in the US (or indeed most of their political, economic and cultural leaders) are willing to recognise such basic facts. Sphere: Related Content

Lies, Damned Lies and Statistics

A rather eminent publication has recently published the following:

"Europe's economy has progressed over the past 15 years, but its per-capita GDP is $11,250 lower than that of the United States. A preference for leisure time is one reason, but recent McKinsey research suggests that a widening productivity gap between Europe and the U.S., particularly in services, is more important. Local, business, and professional and financial services accounted for 19 percentage points of gross value-added growth from 1995 to 2005 in the U.S. but for only 10 percentage points in the EU-15."

Note, first, how the first sentence implies that only a little progress has been made in Europe. US publications regularly conduct propaganda against Europe. I can recollect such pieces from as long ago as the Sixties, with talk of "Eurosclerosis", "the European Disease" "Old" and "New" Europe, and so on

Second, the United States has a long history as one country. The EU is only a rather loose grouping of independent countries so far basically for purposes of trade. Comparing Europe with the US is comparing apples and pears.

Third, "per capita GDP" is a meaningless concept in the absence of other comparators - such as quality of life, gap between the poorest and richest, longevity, health, and so on.

Fourth, there are many kinds of capital as we all know (financial, social, relational, institutional, intellectual....). It is alwasys closer to reality if one attempts more well-rounded comparisons.

Fifth, it is a bit dishonest to quote figures from so long ago, and then for only a decade. If took only the ten years from 1998 to 2008, the comparison would be heavily weighted in favour of the EU.

Lastly, what's wrong with a preference for leisure time? Life is not all about work!

However, Northern Europeans (from the Protestant influenced part of the Continent), don't only take their leisure seriously but also work hard, though of course in the Orthodox- and Roman influenced parts of Europe, people are not sufficiently rewarded for their efforts as the elites still continue to rig the system against individual merit and effort, so the poor southern and eastern Europeans are left with little alternative but to enjoy what they can. Sphere: Related Content

China does many good things and this is one of them

My readers know that I can be very caustic in my comments, and that I have more than once taken the Chinese regime to task. If I do deliver brickbats to those I think deserve them, I am very happy to deliver bouquets where those are deserved - and China deserves a bouquet for the following:

A few days ago, China started trading the first Renminbi-denominated credit-default swaps, though it had announced as long ago as September last year that it was going to start doing so.

What China has done right this time is not so much to start doing what it said it was going to do (though that is of course a good think!) but the following:

I understand that the contracts, apparently regulated by China's Central Bank and traded through the Shanghai interbank clearing system, may only be sold to investors in possession of the corresponding underlying assets. In other words, they cannot be used for what I call speculation (where the speculator does not hold the underlying assets, but is only interested in gambling on whether or not the value of the assets is going to go up or down).

Moreover, these contracts cannot be used to insure high-risk securities - another way in which capital enters the speculative frenzy.

Finally, the contracts may not exceed five times the value of the underlying debt. I would have preferred the limitation to be only twice or thrice the value, but the rule that the Chinese have put in place is bolder (stricter) than many other countries that either allow unlimited leverage or allow a significantly higher multiple.

Bravo, China! Sphere: Related Content

Saturday, November 06, 2010

10-point action plan for the USA

NOT mine, but that of a business executive I met recently; here it is without any comments from me, for or against, simply so you see how a lot of Americans are thinking:

1. Close the borders; return “Illegal” persons to country of origin; especially the criminals sitting in our jails.

2. Reform the tax code; move to national sales tax.

3. Term Limits on politicians at all levels.

4. Compulsory National Service (Armed Forces, Peace Corp, Local Community, etc.)

5. Tort Reform. (at present, the system benefits the Medical & Insurance industry; punish frivolous lawsuits)

6. National Skilled Labor Training System – not everyone needs to go to college

7. Reform Welfare – work if you are able, everyone should contribute, stop systematic reward for bad behavior

8. Citizenship not guaranteed by being born on U.S. soil.

9. Amnesty Program for U.S. Citizens and companies to bring cash back on shore.

10. Mandatory Balance of the Budget at Federal, Local & State levels. Sphere: Related Content

Friday, November 05, 2010

Chinese aims

According to one of the most senior Chinese diplomats:

1. The maintenance of power by the Party

2. Maintenance of "national unity"

3. Ensuring adequate food and resource supplies for the world's largest nation

4. In the long run, attaining superpower status.

Interestingly, Americans seize on the last point as if it was the most immediately important.

However, while the world watches the third, we should note much more the first (so don't expect any moves towards democracy) and the second (so Tibet will find it difficult to become free, and the Chinese would like to reintegrate Taiwan as soon as possible). Sphere: Related Content

New Global Economic Governance?

New Global Economic Governance?

Another issue that President Sarkozy would like to put at the heart of the next G20 summit is what he calls " new global economic governance"

Here is his thinking: "what global governance have we got in the economic sphere? We have successfully reformed the World Bank; (and) the IMF reform is clearly at last on the agenda. (But) what role (should) the IMF (have)? What representation in the IMF? What role in the IMF for regions like Africa? . Where are the decisions taken? Who takes them? According to what democratic process?"

All important questions. Which is why they will be subject to plenty of horse trading and to plenty of gambling on the part of the leaders concerned, since every decision means incalculable benefits or disadvantages for the players – and for the world. Sphere: Related Content

Sarkozy's call for creating a "new monetary order"

Sarkozy's call for creating a "new monetary order"

Speaking at the 8th Europe-Asia Summit a few weeks ago, President Sarkozy of France called for a "new monetary order".
This week, he tried to rope in the support of China's President Hu.
At the Europe-Asia Summit, President Sarkozy put it this way: "we live in a world where monetary imbalances are putting all our economies at risk. Let me take two examples: do you know that since 1990 the world has experienced 42 currency crises? 42 times, whole countries in Asia and Europe have been literally drained of their capital. Secondly: 1974 saw the creation of the G7 – which became the G8 – to talk in particular about monetary problems. Today the G7 forum is no longer the legitimate one in which to talk about them. Why? Because, for example, China isn’t a member of the G7. So today, in 2010, we haven’t got a single place where, in the world, we can talk about monetary questions. Every country does what it wants, tries to safeguard its sovereignty, but we are living in the 21st century without a monetary order. We’re living on the basis of the Bretton Woods fiction that there is only one economy and one currency. We clearly need to define a new monetary order. Where do we discuss currency issues? Aren’t currencies a matter of concern to heads of State and government? Does every world region have to accumulate reserves in order to avert a crisis? These are issues we have to address and resolve".

Reading between the lines, Sarkozy may be leaning towards the creation of a single global currency.

If so, it would lead to huge concentration of power with attendant abuse - and therefore a disaster for civilization.

Far better to let currencies (and, by implication, governments) compete.

How then to address global imbalances? By addressing them at the level of the root cause. And that is a world trading rules which exclude environmental and human concerns, thereby tilting the board towards countries such as China which pay no attention to such concerns. Include environmental and human concerns in the WTO's rules, and we would not only sort out global imbalances but also lay the foundation for a genuinely humane global civilisation for the first time in history. Sphere: Related Content

President Sarkozy says we need commodity price regulation because of speculators

In his speech at the 8th Europe-Asia Summit, French President Nicolas Sarkozy is reported to have drawn attention to "the terrifying volatility of commodity prices. In one year, oil has risen from $40 to $140... There have only to be catastrophic fires in our Russian friends’ country and the cereal price rises 65% in two months".

He went on to ask "Who can accept that?"

And he argued that, as governments have made efforts to regulate derivatives in the financial arena, so we must regulate commodity prices: "is the existence of commodity derivatives acceptable ...? I’m in favour of the market, but there must be no lies: the market doesn’t set commodity prices today, it’s the speculators. We must regulate".

Well, as the last option, regulation may be inevitable. But if the French President really believes in markets, he should first use financial mechanisms to try to limit speculation.

Speculation can be constrained by limiting the amount of money available for speculation (which was essentially the strategy of the Glass-Steagall Act), by limiting the amount of leverage allowed (e.g. by substantially increasing "skin in the game"), by disproportionately large taxation of speculative trading , and so on. Sphere: Related Content