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By Steven Baker MP, on 30 November 09
Via Protectionism, Regulations and Globalization — ECIPE:
Economic history tells us many lessons. One particular lesson of contemporary relevance is that the internationalization of economies should not be taken for granted. It should not be viewed as a perpetuum mobile; a force that is impossible stop. The current crisis – and the responses to it – has triggered fears of a replay of the 1930s when tit-for-tat protectionism and economic nationalism followed hard on the heels of a financial crash. The world economy then experienced a giant process of deglobalisation that took almost 40 years to unwind.
The current crisis has been far from as severe as the crisis in the 1930s. Nor have crisis measures been ostensibly protectionist. Many protectionist measures have been introduced (still counting), but they have been far from as drastic as the spiraling tariffs of the 1930s. This is comforting knowledge, and it testifies to the disciplining effects on protectionist sentiments offered by WTO agreements. However, it might be less comforting than we are led to believe by most modern accounts of the crisis and globalization. To understand what is currently happening in the global economy we might have to release ourselves from traditional concepts of the integration of markets. In the past centuries, markets have been integrated through trade and cross-border movement of production factors. For most of the time, it has been a process of internationalization: one country after another have linked up with the global economy as it has become a destination for production and the origin of inputs and products for final consumption at home. In such an internationalized economy, trade barriers have damaged flows across borders and imposed costs on producers and consumers.
Read more: Protectionism, Regulations and Globalization — ECIPE
By Steven Baker MP, on 30 November 09
Via Treasury rift with Bank deepens over secret loan – Times Online:
Relations between the Governor of the Bank of England and the Chancellor hit a new low today after Alistair Darling faced a barrage of criticism from both sides of the Commons over the emergence of a £61.6 billion secret loan to RBS and HBOS.
Mr Darling was forced to make a statement to MPs this morning to explain why the Government and the Bank of England had kept secret the loan made last year to prop up the two banks. The existence of the loan – which has since been repaid – was made public by Mervyn King yesterday as part of his testimony to the Treasury Select Committee.
It emerged yesterday that the Bank of England had provided £36.6 billion in emergency loans to RBS and £25.4 billion to HBOS last year, in addition to the £500 billion of taxpayer funds used to bail out the banking system. The Bank had been so anxious about the two banks’ ability to repay the loans, they insisted on taking assets worth £100 billion to secure the £61.6 billion credit line.
See also Secret bail-outs erode our faith in the Bank | News:
THE Bank of England is the lender of last resort for British banks. That is part of its function.
It has routinely issued banks which have temporary liquidity problems with sufficient funds to tide them over their embarrassments.
So in principle the fact that the Bank lent HBOS and RBS £61.6 billion at the height of the financial crisis, last October and November, to ensure they continued to function, was not in itself remarkable.
What is remarkable, and deserving censure, is that this guarantee is only now coming to light. The Bank’s deputy governor, Paul Tucker, told the Commons Treasury Select Committee that “this was a dire emergency”.
By Steven Baker MP, on 30 November 09
Via The Four of Horsemen of the Apocalypse – Frank Field MP:
For some time now it has been possible to see the four horsemen of the apocalypse on the horizon. Most economic commentators ignore their existence and the potential damage that could be inflicted on our economy if they all swept through at once.
Horse one symbolises the ruinous state of public accounts. [...]
Horse two is the harbinger of inflation. [...]
Horse three warns of a rapidly collapsing tax base. [...]
Horse four sounds a jobless recovery. [...]
The economic and political outcome is too grim to describe if all four horses of the apocalypse swoop down at once.
[...]
Recommended reading.
By Steven Baker MP, on 30 November 09
Via IEA Blog » Blog Archive » Qualitative easing:
While quantitative easing has received much press, qualitative easing has been neglected. Qualitative easing consists of policies that deteriorate the average quality of the assets that a central bank holds. This can occur both with and without quantitative easing.
By selling high quality assets (i.e., foreign exchange, government bonds, or gold) to buy low quality assets (i.e., asset backed securities, or granting loans to a tumbling banking system), there may be qualitative easing without an increase of the central bank´s balance sheet (i.e., without quantitative easing). This was the strategy of the Fed before Lehman Brothers collapsed in September 2008. When the purchase of low quality assets is not sterilised, there is quantitative and qualitative easing at the same time. This has been the strategy of the ECB during the financial crisis and the Fed after Lehman.
Why is the average quality of the assets of a central bank important? There are four main reasons.
By Chris Neal, on 30 November 09
Via How and why China will flood the gold market:
As you read this, the Chinese government is doing an extraordinary thing… something nearly unheard of in the modern world.
It is encouraging citizens to put at least 5% of their savings into precious metals.
The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year’s meltdown in the stock market, people believe it. After all, Chinese citizens don’t receive government retirement money… and they don’t have company pension plans like people in many other countries do.
This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it’s cheaper per ounce).
By Steven Baker MP, on 29 November 09
The Independent reports:
Tony Blair will be quizzed over a devastating official memo warning him that war on Iraq would be illegal eight months before he sent troops into Baghdad, it was claimed last night.
The Chilcot inquiry into the Iraq war will consider a letter from Lord Goldsmith, then Mr Blair’s top law officer, advising him that deposing Saddam would be in breach of international law, according to a report in The Mail on Sunday.
But Mr Blair refused to accept Lord Goldsmith’s advice and instead issued instructions for his long-term friend to be “gagged” and barred from cabinet meetings, the newspaper claimed. Lord Goldsmith apparently lost three stone, and complained he was “more or less pinned to the wall” in a No 10 showdown with two of Mr Blair’s most loyal aides, Lord Falconer and Baroness Morgan. Mr Blair also allegedly failed to inform the Cabinet of the warning, fearing an “anti-war revolt”.
I look forward to the progress and conclusions of the inquiry.
In the meantime, I recommend reading the 1929 Kellogg–Briand Pact, the “General Treaty for the Renunciation of War”, which I understand remains in effect:
WHEREAS a Treaty between the President of the United States Of America, the President of the German Reich, [...] His Majesty the King of Great Britain, Ireland and the British Dominions beyond the Seas, [...] providing for the renunciation of war as an instrument of national policy, was concluded and signed by their respective Plenipotontiaries at Paris on the twenty-seventh day of August, one thousand nine hundred and twenty-eight,
Deeply sensible of their solemn duty to promote the welfare of mankind;
Persuaded that the time has, come when a frank renunciation of war as an instrument of national policy should be made to the end that the peaceful and friendly relations now existing between their peoples may be perpetuated;
Convinced that all changes in their relations with one another should be sought only by pacific means and be the result of a peaceful and orderly process, and that any signatory Power which shall hereafter seek to promote its ts national interests by resort to war a should be denied the benefits furnished by this Treaty;
Hopeful that, encouraged by their example, all the other nations of the world will join in this humane endeavor and by adhering to the present Treaty as soon as it comes into force bring their peoples within the scope of its beneficent provisions, thus uniting the civilized nations of the world in a common renunciation of war as an instrument of their national policy;
Have decided to conclude a Treaty and for that purpose [...]
ARTICLE I
The High Contracting Parties solemly declare in the names of their respective peoples that they condemn recourse to war for the solution of international controversies, and renounce it, as an instrument of national policy in their relations with one another.
ARTICLE II
The High Contracting Parties agree that the settlement or solution of all disputes or conflicts of whatever nature or of whatever origin they may be, which may arise among them, shall never be sought except by pacific means.
By Steven Baker MP, on 29 November 09
Via FT.com / Comment / Editorial – Dubai reveals the fragility of finance:
Such nervousness is the result of continuing financial fragility. The economic crisis was caused by a build-up of leverage. As the crisis unfurled, policymakers rescued debtholders, rightly betting that the best escape route was to meet obligations to creditors and then rely on future economic growth to make debts manageable.
As a result, the financial system remains over-leveraged and undercapitalised. Growth may be returning and green shoots breaking through, but this week has confirmed that the world is not yet in the clear. The financial system remains fragile. Losses and clouds of uncertainty, such as those now hanging over the Gulf, can still trigger skittish sell-offs.
There is continuing financial fragility because very little has been done to address the root cause of our difficulties: artificial credit expansion. However, although commentators may insist on using phrases like “a build-up of leverage”, at least they accept that excess credit caused the crisis.
Now what is to be done about it?
By Toby Baxendale, on 26 November 09
Our good friend of the Cobden Centre, Sean Corrigan, is a wealth of fresh economic insight. Here in this small piece, he shows us that, if you strip out Government from GDP figures, you actually see what the private, productive sector of the economy is doing.
Sean does this for Japan. It shows that the current GDP recovery that has been reported widely in the press for this country, when you strip out the Government part of the economy, has actually gone backwards for 6 successive quarters. It has retuned to a level not seen since the early 80’s.
Sean is of course quite right to strip out government, as doing a bit of QE here and a bit there will inflate GDP figures for sure, but do little to grow the economy as we have previously explained before in this article . Now government can spend your money as a taxpayer on things that it views to be priority, i.e. transfer payments to the worthy and not so worthy and building cap ex projects such as railways, providing services such as justice etc, but this just redistributes what you as a taxpayer has earned and moves it form A to B.
To be clear nothing new is created from a wealth perspective, as it was already created by you, the taxpayer, to be given to someone else, directed by the government. More than ever, we need to be looking at how the productive sector is performing in all economies and not how the transfer, sector i.e. government, is doing. This is the engine of recovery and not the government side of the economy for the reasons stated.
I hope Sean or one of our readers would like to prepare this data for the UK. I suspect it would show a similar dismal story. In fact, when we hear of all these nations lifting out of the recession, I have a nagging doubt in my mind that this is the case.
The other interesting measure Sean uses is Debt to Private GDP. In Japan it has risen a staggering 28% in 18 months and is now sitting at 237%. In the UK we are told we now have a Debt to GDP ratio of 59%. What do we think it is in the UK? Without doing the numbers myself, I would suspect for us the Debt to Private GDP is over 100% as government is well into the high 40% + range of the economy.
A third insight is the Japanese MI money measure which is 31% up YOY and that correlated, with a time lag to inflation, so beware Japan for the inflationary Tsunami!
By Steven Baker MP, on 25 November 09
Cobden Centre Advisory Board member Chris Neal writes on ConservativeHome’s Platform:
We have endured a torrid time of late and appear to be in the process of throwing the baby out with the bath water. For years now we have benefited from a robust and thriving financial services sector. City firms contributed £67.8billion to tax coffers in 2007 but this had already dropped to £32.5billion to the end of March 2009. Arguably this is the most transportable global business; consequently droves of hedge funds and private equity firms are relocating to jurisdictions with tax friendly regimes.
Well chaps, let me make this clear: we are losing these tax revenues and the high earning individuals that spend lavishly on smart homes and consumer lifestyle – which benefits society as a whole. These guys have had enough. They are not all responsible for what happened, yet the knock-on effect of their departure is plain to see but you are all ignoring it: choosing to kill the golden goose with higher taxes and by handing over regulation to an unelected Brussels elite.
Read more.
By Steven Baker MP, on 23 November 09
 Tony Deden By kind permission, Tony Deden on capital preservation and the present economy:
Despite of what the program says, I do not see myself as an expert. This is why I have added the word «Reflections» to the title. What I will share with you in the next twenty minutes are merely my own ideas on the subject – each of them, in fact, significant enough to demand far more discourse. Finally, I will also try to summarize my own recent practice with respect to gold and the reasoning that it entails.
First, let us define the terms. By the word «gold», I do not mean gold futures contracts, or a structured note, or a warrant, or a gold certificate. I do not mean gold mining stocks or most gold ETFs. By the word «gold» I mean just that – the old-fashioned kind that shines.
Secondly, let us define «investment practice». Forget the dictionary for a moment. In a city like Zurich, you have bankers, private bankers, asset managers, wealth managers, fund managers, portfolio managers, and the assorted variety of investment types. They are all investors. For the purposes of this talk, let us put them into two broad categories:
Those who work with other people’s money, savings, pensions and are obsessed with the idea of achieving results, money and fame on the basis of how markets do, others do or what the expectations of their customers are.
Those who look after money and capital that belongs to people they love (i.e. themselves, a father, an uncle, a grandmother, an old neighbor and so on) and who can not afford to lose it. These people are responsible for irreplaceable money.
On the surface, the jobs sound similar. But this is where the similarities end. If you are in the first category, most of my talk tonight may seem trivial and perhaps even irrelevant. If you are in the second category, welcome home.
…
To be an investor in our times without an understanding of history, classic economic theory or the common sense of our grandfathers is a recipe for disaster. And there is more disaster to come.
Here is my summary: In pursuing my goals in capital preservation, I am interested in tangible assets – not promises, not claims, not contracts, not confidence and not hope. I will continue to pursue wealth creation by participating in the capital of the few remaining outstanding entrepreneurs. And I will continue holding cash for a while, expecting to find opportunities to use the latter to purchase more of the former. I do not really trust the money issued by governments. And so, I see gold as a tool in the same manner I see common stocks, bonds, or just any other type of asset.
Let me be very blunt: the discovery of value and/or wise speculation becomes extremely difficult, if not impossible, in an irrational and dysfunctional economic system.
And so, at different times, for different reasons, in different amounts and for different purposes, none of which are suited for a simple explanation or a model—I seek to have such a mixture so as to pursue a noble cause in the economic life of those I serve—capital owners and savers—that of seeking to protect their savings from the rent-seekers, the fools, thieves and assorted charlatans that clutter our world.
Read the full speech.
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