Month: January 2010

States so often behave badly. They pick fights or provoke each other. They often boss or abuse their citizens. If they were people we would get fed up with them, send them to coventry, seek to change them or even put them in detention.

The next few years are likely to see a continuing struggle between the USA and China. Mr Obama’s “new” jaw jaw rather than war war approach to dealing with the world neighbours has broken down in the sands of Afghanistan, and is now having a bad time along the Great Wall of China. This week-end there is sabre rattling over Taiwan. Mr Obama intends to sell them lots of armaments for “defensive” purposes. China sees such an act as one of provocation, as she thinks Taiwan is part of greater China and does not want more military hardware in the way of her ultimate “settlement” of the Taiwanese issue. The USA needs to export more whilst also still needing to borrow too much money from the Chinese. China cannot afford to overreach herself and lose face at this sensitive time in her climb to world significance.

I have always thought that one of the most important moments in the evolution of China as the other great power of the world will be the moment when China demands Taiwan. If she tries too soon the USA could well rush to Taiwan’s defence. If China judges it correctly and has prepared the ground the USA will back off and we will know there are two super powers in the world. Meanwhile many in Taiwan will be seeking to keep the USA strong and on side.

I don’t think this week-end’s sabre rattling is the start of the denouement of this long running issue. I expect China to complain, impose sanctions, cool relations but not to force any military action. The oral spat is unpleasant but I hope and expect it will not bring the world to the brink of disaster. It is important that Mr Obama is very clear about his intentions, as indecisiveness or hints of a change of position could be dangerous in such a situaiton. Mr Obama needs to remember he does still run the only world superpower when it comes to the ability to project force beyond the homeland, even if he does need to borrow a lot of money from China to pay for it all.

This week markets took fright at the mountain of money Greece wants to borrow to pay its government bills. It needs to borrow about the same relative to its National Income as the UK. The markets have pushed the price of Greek government bonds down, so Greece now has to pay twice as much interest as Germany to borrow the same number of Euros for ten years.

Greece cannot devalue within the Euro. The UK has already knocked one fifth off the amount it has to repay foreigners who lent it cash by devaluing by a fifth over the last couple of years. Greece is saddled with paying back Euros, which have been more stable against the strong currencies of the lending nations. There are five possible options for Greece from here:

1. Leave the Euro and devalue. That cuts the amount of real money they would need to pay back, would make their exports more competitive and their imports dearer, leading to a shift from consuming too much at home to working harder for foreigners abroad. They would still need to cut their deficit by cutting spending, as they would still need to borrow to pay some of the bills and they would no longer be able to offer Euros for repayment.

2. Stay in the Euro and accept the discipline of the club. They are meant to keep borrowing down to 3% of their income. Instead it has soared to 12.7%. They could cut their spending substantially, restoring confidence and limiting the amount they need to borrow.

3. The strong countries within the Euro zone could lend them the money they want to borrow on better terms than the market, or give them grants to see them through this bad patch. London sends grants and loans to Liverpool so they can stay in the same currency union, so why shouldn’t Munich send cash to Athens, say some single currency single Europe exponents.

4. There could be a deal. Germany and her friends within the Euro zone could agree a package, where Greece cuts her deficit by spending cuts and then is eligible for some grants, loans or subsidies to make up the rest.

5. They could all decide to do nothing. Greece would have to pay more to borrow internationally, and would gradually have to take action to curb the deficit. Otherwise the interest rate she had to pay might become so penal the markets forced a crisis, requiring action under one of the four options above.

I think Option one, leaving the Euro, is unlikely. Greece is keen to stay in, probably hoping for protection from her own folly by belonging to the larger club, and hoping against hope for more loans and subsidies from within. Whilst some in Germany and France might see going back to a core Euro as an attractive and more stable option, the overall balance of opinion in the EU is likely to want to keep Greece in. If Greece left, the positions of Spain, Portugal and some others would also be in question. It could lead to a messy unravelling of the wider Euro project.

I suspect Option 5 is also running out of room, as the markets are close now to forcing action to correct the deficit or to force a bail out for Greece.

I would think Germany unlikely to simply offer to fund the excessive Greek deficit. It would be an open invitation to all the other ill disciplined Euro members to run up big debts and ask the centre for easy money to pay the bills. It would also start to place too much strain on Germany herself, as Germany is not without her own economic problems.

So that leaves the two options of tackling the deficit herself or doing so with European help and assistance for meeting various targets.

The whole saga shows the folly of premature currency union without proper arragements in place for transfer payments and common fiscal policy. The Euro is becoming a system to try to impose discplined policies on the periphery, as Ireland, Greece, Spain, Portugal and even Italy have to keep reining in their excesses to live within the Euro scheme. Their reluctance to do so creates unemployment and lower incomes in each of them, and will generate a series of debt crises and economic crises as they push against the need to control spending.

Greece has a simnple choice. Either live with German discipline, or run a shambolic fiscal and economic policy and be at the mercy of markets. The Euro is not the frree lunch some members thought it was going to be. It does not give a right to badly run countries to borrow at German rates of interest. You cannot run a single currency successfully unless you first create a single country and gain acceptance for the fiscal and other economic policies from all the voters of the enlarged area. The fact that we kept the UK out of it will mean the Euro is spared the bigger crisis of containing within it a large unruly subject with very different economic characteristics from the rest. It has also spared us in the UK major steps on the road to being subsumed into a European country.I helped oppose the Euro for the UK as a believer in an independent Britain, but one of the arguments I used was our actions would also spare the Euro a massive problem.

All past European currency unions have failed. All past attempts to create a large country or bloc of countries out of smaller European states have also ultimately failed. The plight of Greece a small chapter in the stpry of this latest project. If Germany and France are serious about a country called Europe they need to come up with deal quickly to keep Greece in on tolerable terms to both sides. If they are not, the sore will fester and the markes will dictate answers. Watch this space, and expect some messy compromises.

This morning Mr Blair returns to the centre stage of British politics. It is not a triumphant return. It is the return Mr Brown dreads. It is cross examination day over the Iraq war.

The 2005 election haunted Labour with their Iraq war. Anti war Labour candidates put up. The dislike of the war was one of the main reasons Labour’s vote slumped so low. Mr Blair was lucky, because the Conservatives were still unable to take advantage of Labour’s misery, and some Conservatives were keen supporters of the same war. A sullen electorate stayed at home in large numbers.

Many Labour strategists thought that was an end to it. When Mr Blair left office, they hoped the Iraq war left office with him. It was never going to be that simple. After all, Mr Brown was in the room when the decision was taken, and he had to pay the bills for the hostilities.

I read recently a Labour inspired comment that Mrs Thatcher would never have allowed a similar enquiry into her conduct over the Falklands. That is clutching at a straw that is well broken. The Conservative government did hold an enquiry into the Falklands war. That war was a popular, legal and just war. No-one queried its justice as it was designed to liberate people from an aggressor. It was legal under international law, as a country had been violated by another and sought intervention to free it. The hopes and good will of most of the country sailed with the Task Force.

The Brown/Blair war in Iraq was very different. It was never popular. Many people thought it unjust, intervening in an overseas country because the government did not like its Leader. Some thought it illegal, including we now learn a couple of senior lawyers at the Foreign Office.

So what can we hope to learn from Mr Blair’s appearance? I think the Enquiry should concentrate on three main lines of questioning.

The first would be to tease out the legal position. Parliament was always told the government had clear advice that it was legal. We need to know how many lawyers within government held a different view, how hard fought it was, and why the legal advice changed in the government’s favour at the last minute.

The second would be to find out why Mr Blair was so keen on going to war. Why was Parliament told there was an immediate and worrying threat from Iraq’s weapons of mass destruction when it appears there were no such weapons? When did regime change become the purpose? Why did the UK decide to change this particualr unpleasant regime by force, but not other regimes it disliked?

The third would be to ask why there was apparently so little intelligent planning for what was to happen once the war had been won. Why did they make such bllunders in handling Iraq after they had won?

Davos is a time for overpaid bankers and consultants to rub shoulders with the senior regulators and government officials who determine the rules for their money making games. Once again, just like last year, regulation will be a big topic of conversation.

Governments will be saying they want more of it. They will argue their favourite syllogism – Our purpose is regulation. Regulation has just failed. Therefore we need more regulation. Big businesses will be saying – Our businesses agree we need lots of regulation. We can live with all the regulation we currently have. If you impose any more the money making machines could break down. Both these stances are idiotic.

There will also be a delicious dance over the canapes. The politicians wil be seeking opportunities to cash in on the rich vein of public anger about bankers, polishing soundbites on how they too like President Obama will be tough on bankers and the causes of bankers. The bankers and consultants will be responding off the record saying that they cannot take too much pain, tactlessly saying that they are in a vicious squeeze already which means no remuneration over £1million until things have calmed down a bit.

The truth is there were both market failures and regulatory failures to create the Great Crash. Competitive markets work, rewarding the successful and customer friendly and weeding out the unsuccessful. The banking market is not a properly competitive market. In the UK the Competition authorities were asleep at the wheel or ordered by the government to turn a blind eye to the competition failures. They allowed mega banks to emerge, when they should have blocked the takeovers and insisted on more competition. We need to make the elaborate competition machinery work properly. That does not require more law or more regulators. It just requires a few senior regulators in the current structure to break up over large banks and to prevent new mega banks emerging from anti competitive mergers.

Most people agree there does need to be some addtional regulation on banks and other deposit taking institutions besides enforcing a competitive market. We need the reassurance that the banks will be able to pay our money back. That requires regulation of cash and capital. Again, that is already part of the present system. There are plenty of highly paid people who are meant to do that. The only change we need to is to have a few people in each major jurisdiction who know how to do it properly. It does not take many people in the UK, as the banking market is so concentrated. If you get the top ten banks right you have sorted out the problem. One person could do that, armed with the right regulatory powers, if he or she understood bank balance sheets.

Large companies like all present regulation because it keeps competitors out. They have spent the money on complying with it, and don’t want that changed. Just because the regulators and the large companies agree does not mean we should. The truth is much current regulation is a waste of money, an anti competitive practise, a nonsense which does not keep our money safe. If Davos wanted to do somehting that actually helped get us back to stronger growth it needs to do three simple things:

One: Assert the need for more banks and a much stronger enforcement of competition policy. The UK could pledge to create half a dozen new banks out of the two it currently owns
Two: provide simple counter cyclical rules on cash and capital to ensure we have better endowed banks in future
Three : Prune the other regulations, so more businesses can start up in competition against the established players.

Bolting on more rules to a system which does not work is a bad idea. Failing to create a competitive banking market means business as usual.

The government keeps telling us borrowing more, spending more and printing more boosts the economy. They should look at the figures and ask themselves Where has all the stimulus gone? The figures are amazing.

Since 2005 the government has doubled central government borrowing (on its own understated figures ) from £469 billion to £922 billion – an injection of £452 billion.

Since 2004-5 money supply (M4) has surged from £1,212 billion (£1.2tn) to £2,100bn (£2.1 tn) – it has also almost doubled. Notes and coin have gone up from £42 billion to £55 billion.

And what has happened to real output? It is almost the same in Q4 2009 as it was in Q3 2005! No growth at all for 5 years.

So where did all the stimulus go? Much of the public borrowing went on inefficiencies and on imports. Some of the extra money went into price inflation, and some is just circulating less rapidly now, given the poor state of the banks and the new regulatory toughness.

The government needs to go back to the drawing board on whether these sorts of stimuli work. If they had studied Japan over the last twenty years they could have seen for themselves that huge boosts to public spending and public borrowing just put the state more into debt but did not lift the growth rate. It could have saved us a lot of money and false hopes.

13 years of Labour goverment has produced even greater income inequalities. The Labour response is likely to include new tortures for people who work hard, try to get on in the world, who aspire for themselves and their children.

What we need are policies which raise the sights and motivate the energies of the many. The way to reduce inequality – and to make most people better off – is to encourage and foster, not to regulate and tax in a fit of jealous anger that some have still succeeded.

We need an enterprise package to make it easier to set up and run your own business, a small business package so more small businesses can expand and take on more labour, and a shake up of some schools and training Colleges so more obtain worthwhile qualifications.

I have been interested in the wide range of responses to my piece on prisons. It is right that many burglars and petty thieves are never caught, so prison does not act as a great deterrent. It is also right that some of the thieves who are caught are not up to holding down a normal job, especially those on drugs. We do need to do more work on getting people off drugs, on getting them into a condition where they can do something useful and earn an honest living. Some will need to go to prison to do that.

So that was what it was all about? All that well orchestrated hype, all those well honed briefings concerning the end of the recession, brought forth a mouse of a recovery, the smallest margin possible. Let’s hope the figures are not revised downwards. We know the economy struggled again in January, with a couple of weeks of snow bringing much of the country to a halt. The government must be hoping the next couple of months pick up speed, so the first quarter figures this year do not show an overall reduction again.

The bigger picture is alarming. The economy has fallen 6% from its peak, taking it back to levels of output in 2005. So this long Labour led Parliament has produced a standstill Britain, a UK going nowehere. To bring about this worst ever economic performance for a post war Parliament, the government has doubled the national debt and printed more money than any of its predecessors. Then they want us to say “Thank you” for spending all this money we have not earned, claiming it has made us stronger.

The Conservatives have rightly argued that if we do not start cutting the deficit now interest rates will be driven higher by the markets, and more damage done to the halting recovery of the private sector. They also need to point out that we have a two tier interest rate structure in the UK. Interest rates for small businesses and much of the private sector are already too high. It’s only the banks and the government that enjoy rates related to the notional 0.5% the MPC solemnly sets each month, and then only for very short term borrowing.

As Quantitative easing ends, so you would expect the government’s borrowing rate to rise further. Then the MPC has a simple question to answer. Does it wish to carry on with the fiction that 0.5% is the short term interest rate in the economy, so it can endow banks with a bigger windfall, or does it want to get its rate back in charge of market rates for the rest of the economy, in which case it has be higher.

When the Opposition says we need to cut the deficit to keep or get interest rates down, they are right. There remains the gross distortion of our current interest rate structure to sort out. It has been created by a government that wanted to offer sweetheart deals to the public sector and the banks at the expense of everyone else. They are running out of road for this policy, as the markets will extract a higher price for their excesses.

The global warming theorists have been in overdrive predicting extreme outcomes.

We have now heard or read:

1. The Arctic ice will all have melted within 5 to 7 years
2. The Himalayan glaciers will all have gone by 2035
3.Tropical storms are now the result of man made global warming
4. The UK will run out of water thanks to the dry hot summers
5. Champagne grapes will shrivel in France and will have to be grown further north in England
6 The sea level will rise drowning several large cities
7. The UK will have a barbeque summer in 2009 and a mild winter 2009-10

We are now witnessing some backtracking. The IPCC has apologised for the glaciers, admitting it was an error. Some global warmists were uncomfortable with Mr Gore’s Arctic ice prediction, as we will soon know how accurate it was. Apparently the settled science is not sure that tropical storms and other extreme weather events are all the result of man made global warming. The Uk weather forecasts are of course about weather and not climate, so they are mistakes that could happen to anyone in the meteorological business. We are assured that when the weather goes in the wrong direction, it is just weather and not climate.

From CEO
To Shareholders

I told you Conco were a busted flush. The latest market research shows people are not going for their nonsense that we need to stop spending and borrowing so much. Thank heavens they are so stupid. We can win the Board elections after all.

Enough of these minor matters. As your company’s grand strategist I have my mind on bigger things. I have good news to announce this week.

We are currently having a strategy conference with our Afghanistan subsidiary managers. During this I am going to launch my latest initiative to spend and borrow more. We have come up with the idea of offering cash back or incentive payments to all those Afghans who have been trying to damage our company in recent months.

I think you will agree with me that we can’t go on as we have been doing. Managers have been attacked, and some Afghans seek to undermine our brand. So why not offer them money to be part of our team? That way we can expand our spending and borrowing further, and cement a new bloc of customers to our Afghan operation. Pretty shrewd, don’t you think?

This builds on the success we are having with our never knowingly underbribed approach to key customer groups closer to home. Our ever popular cash back benefit offers now affect around half the population. The huge take-up of these offers led us directly to the idea of simply printing the money, cutting out the middlemen involved in borrowing it. I know we dressed it up as borrowing to buy back borrowing, but it was really printing it.

We will also be having another conference on how to regulate banking operations. As you know, now we own two of the largest banks in our main territory it is all so much more straightforward. We just tell them how much they need to lend to UK PLC and they stump up the cash. It takes the waiting out of wanting, I find. However, there are still unenlightened parts of the world where the main companies have not bought their own banking subsidiaries. We need to be at the table to discuss what to do about this.

I think the best course of action is to design more taxes and regulations for everyone else’s banks. That way we might be able to bring them down to the levels of performance of our own banking subsidiaries, which will make it easier for us in managing our huge conglomerate.

I have heard some people criticise us for having banking subsidiaries that are larger than the rest of the company. I used to think they were wrong, but now I have some sympathy. So I am now putting my thinking cap on to how we can accelerate the size of the non banking bits to catch up. The answer, of course, is to bring more customers in through our cash back benefit offers, and to borrow and print more to finance all our growing activities.

Our message boffins have been working on what we should call this new offer. After our ever popular “Tax a Tory toff today” campaign, they are thinking along the lines of “Treat a terrorist today”. Is it just too much alliteration to put it altogether as “Tax a Tory toff to treat a terrorist today”? That might put the wind up Conco! Let our spin doctors know what you think.

It’s coming on a treat. Yours in clover, welcoming my new Afghan friends,

The CEO

Let me make it clear at the outset before the spinners get to work. I think prison is the right place for anyone who represents a threat to the public. If people have committed acts of violence from terrorism to burglary with assault, they should go to prison for a good long time.

However, our cuts in spending need to be wide ranging. One good cut would be fewer criminals in prison. There are two big categories we need to look at.

The first is all those people who commit crimes by taking money or property that does not belong to them, ranging from the common thief to the fraudster. Surely it would be much better to prove to them that crime does not pay. They should be made to pay the costs of the police and judicial system in handling and prosecuting their case. They should make full restitution to any third party affected by their actions, including an element of compensation.

If someone stole my car, for example, I would like them to buy me a new replacement. I do not wish to pay for them to spend time in prison as well as being financially as worse off from the loss of my vehicle and the ensuing insurance claim. That’s a further punishment for me, the victim. The thief or fraudster would have to work harder and longer hours to meet the bills. Of course if the thief was unable and unwilling to work and refused to pay the bills then prison would be the last resort.

The second is the wide range of new crimes this government has dreamed up to pursue its political correctness and power of the state agenda. Many of these should never have attracted a possible prison sentence in the first place. Judicious changes to the penalty clauses – or outright repeal – would cut down the numbers of such offences.