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By Toby Baxendale, on 27 September 10
There’s another great article from Liam Halligan in The Telegraph, recapping how we got to our current situation, and considering the impact of further quantitative easing being proposed in the US.
Central bankers lowered rates in the aftermath of 9.11 and the dot-com crash, then kept them low far too long – so pumping-up the biggest credit bubble in history.
Now, the Western world’s policy response amounts to printing money and heaping debts upon debts, while shoving the banking sector’s losses on to the general public – and particularly, their children and grandchildren. This is perhaps the most systematic act of inter-generational theft the world has ever seen. But that’s not the point – at least for now. The point for now is that QE and the related fiscal boosts simply aren’t working.
Halligan highlights the challenge we face,
In the early 1980s, Western governments bit the bullet and tackled the vested interests that had caused recessions – not least recalcitrant trade unions – so allowing enterprise to flourish and fuelling the recovery. This time around, the lobby group blocking sustainable growth is even more powerful – namely the banking sector itself.
As Simon Johnson has written: “The finance industry has effectively captured our government – and recovery will fail unless we break the financial oligarchy that is blocking essential reform”. Strong words from a Former Chief Economist of the International Monetary Fund – but no less true for that.
The whole article is well worth reading.
By Mark Goodhand, on 22 September 10
Liam Halligan’s latest article for The Telegraph considers the role of political manoeuvres and industrial lobbying in Japanese economic policy:
when the victorious Kan on Wednesday ordered a wholesale yen sell-off, the country’s first currency intervention in six years, the markets were entirely wrong-footed. That allowed the yen to be pushed down by 3.1pc against the dollar and 3.4pc against the euro.
Since then, Japan’s yen manoeuvre has attracted much economic comment – as pointy-headed analysts have recalibrated their complex models and updated their spreadsheets. In the real world, though, currency interventions are strategic, not scientific. This one, too, should be analysed through an unashamedly political lens.
As well as trying to secure his position in the Diet, it appears Kan has also been looking out for certain vested interests:
The yen’s recent rise has deeply unsettled Japan’s powerful export lobby. Kan’s decision drew rare public praise from carmakers such as Toyota and Mazda. Adding to the air of euphoria, the Nikkei index of leading shares soared by 3pc on Wednesday, as the yen fell. With the Ministry of Finance declaring that “the strong currency can no longer be over-looked”, more selling may be in the pipeline. Japan’s currency, after all, remains higher than just three weeks ago.
But while such interventions may help Kan, Toyota, and Mazda, they do nothing to promote the long term health of the Japanese economy:
In the end, only structural reform, not short term fixes, will allow the Japanese economy to recover in a meaningful way – a lesson that holds in the UK as well. When I’ve argued against “quantitative easing” and debt-fuelled Keynesian boosts over the last two years, I’ve often been met with a glib one-word response: “Japan”.
Many UK policymakers have been brain-washed into thinking Britain needed to print money like crazy and prostrate itself with more state debt in order to avoid a Japanese-style “lost decade”. This was always dangerous nonsense.
Japan didn’t stagnate because it refused to do QE and a massive fiscal expansion, or because it waited and did both half-heartedly. Japan suffered a 10-year slump precisely because its too-big-to-fail, politically-connected “zombie” banks were allowed to stagger on, acting as a massive drain on the broader economy. The same is now happening in the UK. That’s the real lesson from Japan – a lesson that Prime Minister Kan, with his myopic currency move, has shown he is yet to grasp.
Read the whole article.
By Toby Baxendale, on 7 September 10
There was an excellent article from Liam Halligan in Sunday’s Telegraph:
The stark underlying message from these WTO numbers is that the West’s inability to recover is holding back the rest of the world much less than many predicted. Rather than being reliant on American and European demand, the emerging markets are increasingly making the global economic weather – generating growth organically, by trading among themselves.
Brazil’s biggest trading partner is no longer the US, but China. The same applies in Japan, where rather than being dependent on American demand as they have been for fifty years, Japanese companies are burying the historical hatchet and shackling their economy to that of the People’s Republic. Intra-Asian commerce is the fastest-growing component of global trade.
For a long time now, Economic Agenda has banged-on about the need for the leaders of the world’s biggest economies – particularly those in the West – to show the courage needed to face-down domestic vested interests and make the compromises necessary to secure an over-arching trade liberalization agreement among the WTO’s 153 member-states.
Halligan concludes:
The European Union espouses free trade. America espouses free trade. Yet between them, these two massive trading blocs maintain a vast, sprawling web of barriers and subsidies that not only dump agricultural goods on world markets, condemning countless peasant farmers to poverty, but also seriously undermine global commerce more broadly.
The Chinese needs to compromise to secure Doha. So do the Indians, South Africans and Brazilians. But the West should be leading the charge when it comes to freeing-up world trade – not in the name of charity or “development”, but as a result of cool, dispassionate analysis combined with naked economic self-interest.
We recommend the whole article.
By Andy Duncan, on 13 July 10
With even sober commentators claiming that more than 10% of British government taxes will be used just to pay British government debt interest in four years’ time, we could be heading into interesting times. However, if the government’s planned austerity programme becomes window dressing and bureaucratic obfuscation rather than warm bodies out of the door, or if HM Treasury has been too optimistic on its growth estimates, or if the Debt Management Office gets hit by much higher interest rates to attract gilts buyers, then this percentage figure could go a lot higher still.
That’s an awful lot of hurdles to avoid. Or if the British state were an aeroplane, then that would be a particularly small runway to land upon. With no more parachutes to go round, let us hope that its pilots stay strong enough to remain at the controls rather than standing on the wings and praying.
To make things even more interesting, what these sober commentators usually fail to take into account is the amount of tax which the private citizen will also be coerced to hand over to pay most British government employee pensions. Currently, very few of these pensions are funded through investment and returns, which some might say leads to the moral hazard of civil servants failing to care about nurturing the business prospects and long-term financial health of the rest of the country. Most government pensions are funded on the hope that future British government taxpayers will accept increasing retirement ages and will remain happy to fork over increasing amounts of cash from their own dwindling private pension pots to ensure that most British government employees can continue to retire at 60 with comfortable index-linked pensions.
Add this to the debt interest payments coming from future taxation and the question the British government has to ask itself is will the taxpayer wear it? Will we be happy to work at 75 and pay 50% taxes to see most of this swallowed up to pay for the fiscal mistakes and the retirement comfort of the same British government civil servants who sleepwalked us into this gigantic financial mess in the first place? While pondering that, the first port of call they ought to visit for answers is the bubbling magma chamber underlying all of this potential calamity, which is centred on the question of these unfunded public sector pension liabilities. And who better to be our guide into this usually undiscussed inferno, than Liam Halligan of The Daily Telegraph, who wrote the following superb piece in his most recent Economics Agenda column:
Public Sector Pensions: The UK’s Hidden National Debt
Telegraph Media Group (London), Sunday 11 July 2010, City, Page 4
By Liam Halligan
For many years, this column has highlighted the spiraling cost of the UK’s unfunded public sector pensions. Others are now joining the fray. This vital issue is bubbling close to the top of the political agenda and there it should stay, until a solution is found. The taxpayer liability involved is the same size, or even bigger, than the UK’s official national debt.
Last week saw the publication of a compelling report by the Institute of Directors and the Institute of Economic Affairs – laying out a series of measures that would help rein-in the potentially disastrous costs of a pension scheme that caters to only a fifth of the UK workforce.
The word “scheme” flatters what actually goes on. Incredibly, the vast majority of UK public sector pensions aren’t funded by contributions that have been invested and, over many years, benefited from returns and compound interest. If only.
So chaotic is the UK system that most state workers receive occupational pensions paid for directly from current taxation. That’s why our public sector pension system is so vulnerable to changing demography, with the number of retirees growing and the tax base shrinking as the baby-boomers quit work. It is, in the words of this IOD/IEA report, an “unstable Ponzi scheme”.
It is disgraceful that, in one of the world’s most sophisticated countries, arguably the centre of the global asset management industry, years of Whitehall buck-passing and obfuscation have resulted in us running a public sector pension scheme that is almost entirely unfunded. As long as the civil servants involved clung on to their public sector pension entitlements, why should they care?
The same goes for successive government. Politicians have repeatedly ducked this issue – at least those from the main parties. As recently as March 2009, Lord Oakeshott, a Liberal Democrat peer widely admired for this financial acumen, led attempts to set up “Turner II” – an official inquiry into public sector pension costs, something that Lord Turner’s five-year “root and branch” commission singularly failed to do. Yet Oakeshott’s proposals were voted down, not just by the then Labour government, but the Tories too.
Unsurprisingly, the IOD/IEA document sparked knee-jerk condemnation from some of the union leaders who profess to represent Britain’s public sector workers. Ministers, apparently, “won’t know what has hit them” if they dare to modify schemes designed 50 years ago and barely changed since even though life expectancy has risen by almost two decades.
As the report shows, many state workers who retire at 60 years of age – as the vast majority still do – will draw a final salary pension, paid out of current taxation, for longer than they actually worked. Any trade unionist who doesn’t accept that this is financially insane is either innumerate or incredibly selfish.
So I say the coalition government should be bold. In these tough times, the general public is increasingly miffed at shelling-out ever more tax to pay for state workers’ guaranteed pensions at 60, while having to work longer before receiving their pension, the size of which has been slashed. Once the facts come to light, and the extent of the costs is more widely understood, I reckon recalcitrant trade union leaders will be blown away by a barrage of public disdain.
So I say bring on a fully-blown battle over public sector pensions. Because of all the excessive government spending that goes on, the huge bill for these gold-plated, index-linked, final salary schemes for state workers is among the most difficult to swallow.
For one thing, as the IOD/IEA report makes clear, the disparity between occupational pensions in the public and the private sector is vast – and getting wider all the time. As general pension provision crumbles, only 11pc of private sector workers now enjoy the relative security of contributing to an employer pension scheme that will provide them with a retirement income proportionate to their final salary.
This expensive privilege is, meanwhile, still bestowed on 94pc of state workers – the vast majority of whom can draw their pension from 60 years of age or even younger, even though private sector pension ages now average over 65 and are rapidly heading towards 70.
Union leaders claim that generous public sector pensions are “compensation for lower public sector wages”. As the IOD/IEA report says, “this cannot now be argued with any degree of credibility”. That’s because state sector wages are, on average, considerably higher these days than those in the private sector – especially outside London and the South East. On top of that, public sector employees work fewer hours, get more holiday and have much more job security than the rest of us. And far, far better pensions on top of that.
The unions like to cite that annual public sector pension payouts average just £6,000 in the civil service and £7,000 in the NHS. But the average doesn’t tell the whole story – seeing as it includes pensions paid to part-time workers and those who only held their state jobs temporarily. Many former state workers command annual pensions exceeding £20,000 – or even £100,000 in the top echelons of the civil service – and are set to draw such pensions for more than 20 years, paid for out of current taxation. That simply cannot be sustained.
Along with the huge discrepancy between public and private sector pensions, the IOD/IEA report highlights the lack of transparency in how the public scheme is run. People are now spending at least twice as long in retirement as previous generations. The cost implications of this have been very visible for funded private sector schemes – as annual pensions have fallen and pension ages have been pushed into the future.
The financial implications of our changing demography on public sector schemes has been deliberately hidden, though, allowing such schemes to remain largely unaltered. In short, Whitehall rigs the underlying assumptions to minimize future costs and then buries the entire liability off-balance sheet. Anyone running a business this way would be accused – and convicted – of fraud.
The government says total outstanding public sector pensions liabilities are equivalent to 53pc of national income. The IEA/IOD puts the true cost at 74pc of GDP. Towers Watson, a highly-respected group of actuaries, calculates total liabilities as no less than 83pc of national income – more than our national debt.
Remember, this liability must all be met out of current taxation and pays for the pensions of just a fifth of the workforce. And having attempted to hide the bill, Whitehall is increasingly trying to fund public sector pensions via council tax – paid by all retirees, of course, many of whom are struggling on denuded private sector pensions.
Our public sector pension system is imposing a massive burden on former and existing private sector workers – to say nothing of our children and grandchildren. And every additional worker the state employs increases that burden even more.
Coalition ministers tell me they now “get” the problem. An official commission has finally been set up – and will publish an interim report in September. I urge those involved to take note of the IOD/IEA recommendations – a minimum 2pc increase public sector pension contributions and reduced entitlements for each year of service, along with a “hybrid” scheme giving state workers some guaranteed occupational pension benefit with a money purchase scheme on top.
No-one wants to deny public sector workers a decent pension. But our shifting demography cannot be avoided and the burden must be shared by all.
Liam Halligan is Chief Economist at Prosperity Capital Management
By Toby Baxendale, on 22 February 10
I went to this event today.
“22/02/2010 – Ideas Space
Quantitative Easing: Friend or Future Foe?
The Bank of England entered unchartered territory in January last year when the Treasury authorised it to begin a radical monetary policy experiment that we now know as “Quantitative Easing”. Given the unprecedented monetary conditions resulting from the liquidity crisis, the Asset Purchase Facility has been welcomed with open arms, and now stands at almost £200bn invested in UK gilts and corporate debt. But has QE had an economic impact to match its political use? Will the cure prove as dangerous as the disease? How and when should the Bank close the lid on this potential Pandora’s Box?”
Several leading economic figures including Roger Bootle, Tim Congdon and Allister Heath, chaired by Policy Exchange’s Chief Economist, Andrew Lilico, will debate and discuss the merits of quantitative easing, the exit strategies for the Bank of England, the main challenges the UK’s economy will face as a result of the program in 2010 and beyond, and how policymakers should face them.”
These are my notes:
Tim Congdon spoke first , this basic message was that unless money supply, primarily bank deposits, is kept very tight and only moderately growing, there will be trouble ahead with boom or bust. QE has kept the economy on the road and the money supply has not fallen. He acknowledges that there were some problems in measuring this.
Roger Bootle second, he opened by accusing one of our columnist, Liam Halligan of being intellectually devoid of any understanding of economics as he viewed Liam’s world to be predicated on massive inflation and a bond strike and this would never happen. He also said that QE could happen an infinitum. I tell no lie, this is what he said. In fact he was of the view that this should go on and on for whatever amount of time until we were out of trouble. People needed to believe that this policy was going to be the policy that would sort out the economy and indeed he agreed with Krugman, that crude of all the crude Keynesians, that Japan had actually done too little to stop the ongoing deflation. The UK’s risk was never going to be inflation but deflation.
Allister Heath opened with saying he reluctantly supported QE as the key thing was to stop a monetary deflation but questioned why we were having a debate in the first place about the merits of QE and should we do more etc when we should be questioning why do we inflation targeting ? As this has given us the biggest boom and bust in living memory should we not dispense with this independent Bank of England , FSA and other so called control bodies and centralise further into one overall controlling body that controls the broad money supply?
I was utterly bemused by all this tosh spoken in the name of economics with glimmers of hope only coming from Allister Heath.
The chairman asked three questions and the audience were asked three questions with one follow up.
I asked “in business I create wealth by making my factors of production work more efficiently to produce more goods and services. I invariably have to lengthen the structure of my production by saving and investing this money in new and more efficient kit to produce more of my goods and services for better prices and service level for my customers. With those goods I can exchange them with other entrepreneurs, shop keepers etc for my basic food, rent for my roof over my head etc via the medium of money. Money is bits of paper in this country and an electronic bank deposit, so having more of the bits of paper and banks deposits to exchange for the same goods and services would only mean my purchasing power had been debased, so no wealth would have been created. I thought this question go to the heart of the matter.
The second was about bond yields – had they or had they not moved up or down.
The third as about what the panel thought about the questioner’s view that we could only get out of this mess via and export related recovery.
Peter Bottomley asked a question that I cannot remember.
The Chairman then had another round of questions.
Mine was relegated to the bottom by the Chairman. Roger Bootle thought it should be answered by Tim Congdon and in the end Allister Heath did give an answer which acknowledged that no wealth could be created by paper alone and that there was a large body of work in Mises and Hayek showing that the creation of credit causes boom and bust . He was reluctant to support QE as it at least kept money supply near static as opposed to imploding, but saw no ability for it to create wealth . I was not allowed time to debate this with Allister , but did mention afterwards that as he said to me, the Austrian School was divided between those who would support a printing of money to offset a fall in V and those who would just advocate a deflation to allow the market to clear at new lower prices. Having to go I should have added, there is a third camp based around the Cobden Centre who would advocate 100% reserves as this would fix the money supply and you can never have a run on the bank with 100% reserves in place. This is explained here http://www.cobdencentre.org/2010/02/a-day-of-reckoning/ .
Allister framed his discussion in the mainstream language of the Quantity Theory of Money, more I suspect to engage with his fellow economists rather than he having any belief in it being more than a tautology. For a refutation of the Quantity Theory see here http://www.cobdencentre.org/2009/09/qe-errors/ . I did point out at the end after the event had finished that if V went down, how could me selling a house to someone, real bricks and mortar exchanging for money and having it sold back to me for the same 10 times create any wealth? Yes we can increase the velocity of the circulation of money by doing daft things like I describe, but Allister accepted nothing like wealth creation will come of it.
The medium of exchange will not create wealth on its own. It is not wealth. If you hold these bits of paper you hold claims to wealth. The retained goods and the savings we have are wealth. The whole capital infrastructure of our companies and private balance sheets are wealth . This infrastructure drives wealth creation via the dynamic entrepreneurial spirit of men of action who mix the factors of production into the most efficient combinations to satisfy the most amounts of needs. No small matter of printing paper that facilitates exchange or adding electronic reserves to banks will make that wealth creation process any easier. The second part of this article explains how wealth is created http://www.cobdencentre.org/2009/09/can-the-manipulation-of-interest-rates-create-wealth/ .
A poor day for economics!
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