Month: December 2011

2012 is a year crying out for leadership.

2011 saw dreadful drift in the West. The EU politicians proved incapable of deciding whether to press on to create a single country called Euroland or not. Would they take the necessary powers to tax, spend, send money to troubled regions and print money on the scale needed to shepherd through their chaotic union? Would the voters let them? Could they do so by stealth, without referenda?

As a result they fell between the two schools of thought. Some wanted to avoid spending and borrowing collectively, thinking they could have a currency union without the usual systems for using budgets to ease the problems in the less successful parts of the zone. Others wanted more transfers and common borrowing, but were unable to convince Germany fully, as she feared she would be paying a lot of the bills.

The US politicians ended up in stalemate. US politics is polarised between those who want to spend and tax less, and those who want to tax more. It is split between proponents of Obama’s health care reforms, and those who want them reversed as soon as possible. Major deficit reduction has been delayed. The US wants to pull out of its Middle Eastern wars, but has sounded an uncertain note over how and when.

In the UK there is clear leadership from two parties in favour of deficit reduction, but the latest figures shows the early plans have been overtaken by slow growth and a slowing world economy. They needed to revise them substantially last autumn, allowing much more borrowing. They have decided to take two more years to get there, as the strategy relies heavily on rising tax revenue.

Politics has been living through a long period of followership. In the US and the UK it has been the fashion to spend large sums on focus groups and polls, allowing the senior politicians to craft messages they know will play well. The aim is to tell people what they already know, what they want to hear, or what they half believe. Whilst in a democracy the people are often more savvy than the politicians and capable of good commonsense, public opinion can be both volatile and contradictory, depending on how it is polled. Trying to make policy and govern by the guiding lights of polls is not a good model.

The worst kind of such approaches could best be called followership. It is unlikely to generate policy that will tackle difficult problems strongly and in a way likely to solve them. All too often politicians duck the issue because the solution polls so badly. Many of the successful Thatcher reforms polled badly when undertaken, but have not been reversed as the country and the Opposition came to see the sense of them.
Today we need leadership. The west needs leaders who will explain that we have to change our ways. The west is too debt soaked. The public sector needs to be transformed, to do what it needs to do for less, and to confine its actions to the those most needed. The Euro area needs to settle its intentions quickly – do they want to pay the massive bills needed to complete their union? Wouldn’t it be cheaper and wiser to cut the membership down now, before more economic damage is done? The US needs to accept that borrowing one dollar in every five that the Federal government spends is not a sustainable model. The UK needs to redouble its efforts to carry through a working plan to eliminate the structural deficit. Getting more people back to work through welfare reform and a growth strategy are crucial to success. It needs to develop a looser relationship with the EU to avoid the collateral damage the Euro’s tribulations will bring.

Enjoy seeing in the New Year – the west needs a new approach.

I do wish the media and journalists would sharpen their questions for 2012. I am getting fed up with the old spin that seems to have been hanging in the air for so many years.

Wouldn’t it be good, for example, to put behind us the old lie that we have to accept everything the EU dishes up because 3 million jobs are at risk. Why don’t the interviewers who are given that tired old line ask:

Do you think Germany would stop selling us BMWs and France stop selling us wine if we demanded a change of relationship with the EU?
Wouldn’t WTO rules protect our export jobs to the EU?
How come China and the USA can export to the EU successfully when they are not members?
If more than half our goods exports and a bigger proportion of our service trade is with non EU countries, isn’t that a plus as the rest of the world is growing?

In response to the line that the UK only has influence in the EU and the wider world if it is a full and keen member, they could ask:

Does that mean that the UK by opting out of the Euro has ceased to have any influence in the world?
Has the US stopped asking the UK to help it out in its wars and diplomacy, now that we have opted out of the Euro?
What influence within the EU have we wielded? Why is the CAP still unreformed? Why is there no deregulation at EU level? Why does the EU budget still keep going up? I thought the UK wanted less regulation, a lower budget and a market friendly CAP from the EU.

Wouldn’t it be helpful if instead of always demanding more public spending and spreading stories about cuts, we heard some of the following questions:

Why has current public spending gone up by £29 billion a year in the first year of the Coalition, and by an additional £23 billion a year in the second year? Where did all the extra cash go?

Individual public service providers should be asked where they think the waste and inefficiencies lie in their service, and pressed if they decline to answer. They should be asked how come productivity in making planes or cars keeps on going up, but has not risen overall in many public services.

Senior public sector managers should be asked about numbers and levels of remuneration of managers in their service or area, and put on the spot about it as commercial CEOs are regularly by the media.

Public sector managers should be asked how come Hammersmith and Fulham have been able to cut the Council Tax every year for six years without cutting main services.

How about the lie that the Credit Crunch was simply caused by the Bankers? Wouldn’t it be a good idea to ask:

Why did the Competition regulators allow mega mergers, when some commentators and City experts were warning that these banks would be too large to run well or to control?

Why did the Bank of England allow easy money until the middle of 2007, creating a bubble,and then tight money, causing a crash?

How can people claim that the problem was deregulation, when the 1990s and 2000s saw an explosion of additonal financial regulation, and the creation of new regulators by the Labour government on assuming office in 1997? Why was the regulation unfit for purpose?

Finally, to all those who argue the Coalition government is cutting too hard and too fast, it would be good to hear the following:

How does borrowing more get you out of a crisis brought on by borrowing too much?

How much more would you like the state to borrow, given that the Coalition is planning to borrow an extra £563 billion over five years (Public sector net borrowing)?

Why should we have things today and make our children pay for them tomorrow when they have to pay back the borrowing?

It would make understanding the problems and finding solutions for them so much easier if we call current public spending spending and not investment, if we call extra cash spending an increase and not a cut, and if we remind people that far from cutting the debt the government has only made a small dent in the extra debt or deficit.

John Major’s premiership was dogged by endless rumours of a leadership challenge. The media often told the story of the two Michaels. There was to be a great clash between Michael Heseltine and Michael Portillo for the crown. Whilst they both enjoyed tenure in the cabinet, their followers and supporters must have briefed about the coming contest. Little was done to silence these unhelpful comments. I remember MPs coming to see me to suggest I might run in such a ballot. I told them if they were true friends of mine they would not allow or encourage any such speculation. All the time I remained in the cabinet I felt I had to be loyal to the Prime Minister and seek to stop any unhelpful briefings about his position. As a result the press continued to talk about a contest of the 2 Michaels, ignoring me.

Of course, we now know there was no leadership contest between the two Michaels. Neither ran when John Major resigned and asked for a contest in 1995. Michael Heseltine cast aside his ambition to lead the party on the general defeat in 1997. Michael Portillo lost his seat and so was unable to contest the 1997 leadership election. He subsequently lost the 2005 leadership contest. The pundits had spilt loads of ink over a war which never happened.

When I turned up at party conference this autumn I was astonished to be asked by the BBC to cast a vote for either Boris Johnson or George Osborne to be the next leader of the Conservative party. They had placed large ballot boxes in the entrance area. I explained that there is currently no vacancy, and such speculation cannot be helpful. I did not cast a vote.

My advice to the friends of the two is to stop that kind of distracting media speculation. I doubt very much that there will be a leadership contest one day between Mr Osborne and Mr Johnson. Mr Johnson, after all, is not even an MP and intends to run to be Mayor again. This job does not allow him to be an MP and Leader of the Conservative party as well. By the time Mr Cameron does move on there may be plenty of new talents around who have not yet appeared as leadership material.

Meanwhile Mr Johnson needs to reassure his voters in the suburbs that he understands their wishes. They want lower Council taxes and better transport, including freer flowing less congested roads with good realistically priced parking.

Hammersmith and Fulham have shown what can be done. The Conservatives since taking over cut the Council Tax every year, from £916.97 in 2006 to £811.78 in 2010-11. They kept it the same this year owing to the system of government grants which rewarded a standstill, but aim to cut it again to £783 next year. At the same time they have brought the Council debt down from £169 million to £78 million, and improved services. That should be a model to other Councils and the Mayor.

The rising strength of China and Brazil, of India and the Civets, is based on hard work and free enterprise. Economies which have been kept poor by too much state control and by bad government in past decades, are being progressively liberated. As this occurs, so more businesses are set up, more jobs created, more people are better educated. A virtuous circle has been created.

The declining relative strength of the west, especially of Europe, is based on the opposite process. There is growing government interference in every aspect of economic life. The top down Euro scheme, little wanted by the German and French people, let alone the British, is doing untold damage to economic prospects. It is proving to be the ultimate ill judged intervention by the political classes, the final expression of governing power that is damaging families, businesses and job prospects.

It is of course true that the emerging nations have two natural advantages which should make it inevitable that they overtake the west in terms of total income and output. They are much more populous. They can catch up with western living standards by applying western technology and ideas to less productive economies.

In a way the surprise is just how big the gap was in favour of the west for many years given how few people live in the richer countries. Chinese communism prior to the enterprise reforms held the Chinese people back. Brazilian incompetence at macro economic policy led to many years of disappointment in Brazil. Russian communism combined with reliance on the Soviet empire restrained Russia for several decades and diverted a very high proportion of its low income into military spending. The west, led by US capitalism, powered on , from innovation to innovation. Waves of new technology, electrical, electronic, and then digital fuelled growth and rising living standards.

Listening to the Today programme under guest editors this week, we still hear the same complacent western mantra. Yesterday we were told that Africa needed an EU style market to make it rich. A BBC correspondent blamed global warming for the failure of the continent to feed themselves. Evan Davis was a breath of fresh air when he pointed out that crops were going to waste in fields because the trucks could not get to them to take them to market owing to poor roads.

I had hoped we might get a guest editor who would ask the big question – Is western decline inevitable? Was the Credit explosion of 2005-8 the last fling? Does the west have to accept a 10% cut in living standards to get off its diet of debts? Or can it bounce back with new energy, new ideas, a new wave of technology the world just has to have? How can it grow itself out of too much borrowing? How will we earn our combined livings in the new world which is emerging, where energetic Asian and Latin American countries make so much of what the world needs?

It would be good to go on from the big picture question to the role of the Euro and European government in hastening the western decline. Why not interview the enthusiasts for the Euro scheme and ask them how much more damage they want to do? Are they pleased to have brought the European banking system to its knees, to dependence on artificial injections of cash from the ECB? Did they learn nothing from the diaster of the ERM? Why is the Euro scheme different? Do they regret cobbling economies together that were performing so differently? Have they any idea on how to channel the German surpluses to cover the southern deficits? Was it part of the plan to create a world where the EU sends in technical administrators to distressed EU countries to put through large cuts in public spending? Did they realise they were creating a mutual austerity machine?

Do they think the industrial companies will hang around in western Europe to pay the high energy prices they impose in the name of anti global warming? Does making them conform with the growing libraries of rules help, when they can go to cheaper and easier jurisdictions to make their goods? Are they yet alarmed by the amount of industry that has decamped to Asia and Latin America?

There is dramatic change sweeping through the economies of the world. The west is not owed a living by the rest. The inequalities which affront many can be reduced by the west experiencing falling living standards, as well as by the rest enjoying rising ones. This may not be what the architects of Euroland had in mind, but it is the necessary consequence of their folly. It is high time the west asked itself more fundamental questions about how it will earn its future living and whether that needs a new approach from governments to do so.

The centre of London is buzzing. The streets are crowded day and night. There are traffic jams at 11pm. The pavements are congested after dinner or the theatre. The shops are busy. There is a wide range of very expensive boutiques in a number of different high street locations. The central London economy has detached from the more humdrum reality in most provincial towns and suburbs. Rents are rising, property values have climbed part of the way out of the 2009 trough, and flats and houses go for incredible sums.

The main reason is that central London is now a very cosmopolitan place. Much of the new money coming in to buy the flats and the expensive clothes comes from overseas. There have been waves of money in the last year from Arab countries where people have been worried by the Arab spring and the Libyan war, from Greece, where rich people have wanted to get out before the euro collapse, and from the usual BRIC countries as successful people decide to diversify their asset base and own a safe home in the west. London makes people feel welcome, and provides that range of culture, shopping, top class property, and international society they want.

One side of me welcomes this. It is great to see enterprise thriving. The best of the retail is brilliantly done. The west end can afford good street furniture, great floral and light displays, wonderfully designed shop windows, and high quality merchandise. The property stock has never been in better condition. The high values encourage owners to spend more on perfecting the space they own, and expanding it wherever possible. If top of the range residential property is worth £2000 to £3000 a square foot, and an owner builds a high quality mansard or basement extension for under £1000 a square foot, there is every incentive to do so if they have the cash to splash.

That is where the other side of me has worries. The truth is very few UK citizens paying high UK taxes can now afford to buy a property in the centre of our capital city. Very few could afford to shop on a regular basis in the exclusive and expensive boutiques and grand stores that populate the West End. As I glance up at the blue plaques on the walls of comfortable London town houses commemorating where previous generations of UK artists, authors, inventors, business people, politicans and others lived , I am looking back on a lifestyle which has gone. Those houses now will be mainly owned or lived in by occasional visitors from abroad, or used by the more affluent institutions as Embassies, offices or smart blocks of flats.

The problem for someone like me who usually welcomes change and is not jealous of the success of others is the question of tax. Many of those who can afford the luxuries and properties of the west end enjoy much more favourable tax arrangements than the rest of us. That is how they can bid the prices of these places to heights we could not consider. London is acting as host to part of the world’s rich elite. They come because we do not make windows into men’s bank accounts. Just as we host Wimbledon for other countries’ tennis stars to win, so we host parts of central London for other countries’ rich to enjoy.

I do come down in favour of carrying on offering central London as our window for the world, our Wimbledon of first choice for the rich and successful. At least we can go and look at how such a society lives. UK ctiizens can make good livings out of providing services and goods to the rich who come. I accept that if we tried to enforce UK taxes on their incomes from out side the UK around the world, they would go somewhere else that was less demanding. By all means end the Stamp duty loophole, and ensure they pay UK taxes on UK incomes and businesses. On balance I think the UK and London is better for this cosmopolitan presence.

Maybe the moral of the story is that lower taxes work and help create and stimulate wealth and income. If Central London can enjoy some benefits from non dom tax status, why not try lower tax rates on income and enterprise for UK citizens living anywhere in the UK as well? Who knows, it might catch on, and generate more tax revenue in total.

There is a simple answer to this question which is usually correct – “No”.

If you regarded Central Banks as normal businesses, or even as normal banks, you would be mighty alarmed by their balance sheets today. Several of the leading western Central Banks are doing what they condemned commercial banks for doing in the run up the Credit bubble. They are gearing their balance sheets massively. The Bank of England has a £245 billion balance sheet, with equity and reserves of just £4.4 billion. In other words, its total liabilities are 55 times its capital.

The Governor and Directors of the Bank do however retain some sensible caution. The Bank of England’s balance sheet is massively distorted by the £200 billion of Quantitative easing the Bank has carried out so far. Here the acquired assets, UK government bonds, are matched by a Treasury loan. The Treasury gives a guarantee against loss. The UK state is expected to stand behind the Bank if it started losing significant sums on these assets at market prices, and it could hold them to redemption at par anyway. If you take this off the Bank’s balance sheet, it looks altogether more prudent.

Over at the European system of Central banks, before we factor in the mega loans to EU banks announced this week, a balance sheet of Euro 2.4 trillion is supported on Euro 81 billion of capital. That means they are 30 times geared.

These same central banks now think that maybe 10 times geared is about as risky as a commercial bank ought to go. So what makes them different?

There are two characteristics of a Central Bank that enable it to gear much more than other businesses in certain conditions. The first is single country Central Banks have the country standing behind them. Like the Bank of England they are usually owned by the state on behalf of taxpayers. The full taxable capacity of the country stands behind them to pay any losses. If need arose the state could put in more capital.

The second is a Central Bank usually has the power to create more of its own currency, with or without the control of the government. So a Central Bank should always be able to meet its payment schedules, at least in the currency of the day, as it can create some more. If it does this on too big a scale it will of course damage the foreign exchange value and the purchasing power of the money it presides over, but should always be able to meet its legal nominal obligations.

We need, however, to ask if these two very special characteristics of single country state controlled Central Banks fully apply to the European central Bank. We have to ask which country or countries stands behind it? If the ECB lost large sums on its assets, would all the shareholder members of the ECB put in new capital in the amounts required? Do the countries standing behind it have enough taxable capacity to carry the risks their Bank is running?

We also need to ask how much new Euro money the ECB is empowered to create? Given the understandable German fears of excess money creation, and the rules against state financing by the ECB, can we rely on the Bank always being able to print its way out of pressing obligations, if tax revenue from member states is not forthcoming?

The European central Bank is building a portfolio of assets in the form of loans to weak banks, and a bond portfolio with the emphasis on weaker sovereigns. Armed with such assets, and given the high gearing of the Bank. we do need to know what if these assets cause substantial losses? Who stands behind the Bank? Is it now full Central Bank, with all the powers it needs to finance its large portfolio?
I assume the answer to our central question is for the ECB as for the others, that a Central Bank cannot go bust. It would be good to have official confirmation on how any possible future losses could be covered and how much conventional Central Bank power the ECB now has.

Don’t worry. I wrote this a few days ago, and do have better things to do today.

I want to wish you and yours a very happy Christmas. I also want to say a big thank you to the regulars who contribute. This blog does provide a forum for you to make your points and help win important national arguments. It is much richer for the diverse views and characters that populate it.

I look forward to many of your remarks. I find Dennis Cooper’s forensic reading of the EU documents most helpful in a public debate where too many opinion formers fail to read the source documents. Javelin often gives us good insights into financial markets. Peter Van Leeuwen bravely tries to explain the workings of the EU in a more favourable light to challenge many of us. Bazman makes us all think with his down to earth voice for modern welfarism. Uanime5 winds many of us up with a strange mixture of intelligence, odd ball comments and errant “facts”. Conrad Jones weighs in with an alternative view.

So often Alan Wheatley, Lola, Zorro, Sue, a different simon, Barbara Stevens, Electro-Kevin, APL, Mike Stallard, Bob, Brian Tomkinson, Gary, Rebecca Hanson and Alan Jutson come in with good insights and contributions. Then we have the distinctive voices of Lifelogic, Singleacts, Disaffected, English pensioner, Lojolondon,Tedgo, Oldtimer, Outsider, libertarian, Qietzaple, backofanenvelope and Figurewizard, who combine to provide wry and sceptical commentary on how we are governed.

It all makes for a lively forum, and an eye catching site that is read widely by opinion formers.
A Happy Christmas to one and all.

After Christmas I will be examining the UK’s role as a host to the super rich. It is our Wimbledon tendency, our willingness to invite in multi millionaire stars, business people and lucky inheritors of wealth to the UK who do not pay full UK taxes. They come enjoy our country, use our facilities, win some of the prizes.

Do you agree with it? Does it make us richer? Aren’t the jobs they create and the investments they make enriching the UK? Isn’t it just part of being a free society? Does it worry you that it raises the inequalities of wealth and income in our country? How much tax should we ask them to pay? Your thoughts would be appreciated.

Carols from Kings
Mulled wine for all
Joy to sing
Holly in the hall

Great aromas from the pot
Sauce and gammon hot
Mulled wine simmers
Outside shivers
Pudding steaming,
Of presents dreaming

Carols from Kings
Mulled wine for all
Joy to sing
Holly in the hall

Guest arriving,
As snow is driving.
Let past cares drift
Think of Noel gift
Christmas lights shine
Flames leap from the wine.

Carols from Kings,
Mulled wine for all
Joy to sing
Holly in the hall

Fill happy the home
Leave no-one alone
Carve the meat
Give all a treat
Christmas is tomorrow
So banish all sorrow

It was a good headline this morning. I do hope it is going to apply to the public sector as well. I seem to spend so much time these days complying with public sector rules, and making payments for permissions and to meet tax demands. The public sector has a habit of telling me that if I want to pay by credit card there is an extra payment, on top of the tax they are levying. Yesterday it was a demand for a surcharge in order to pay my road fund licence. Austerity UK so far has been about ever more tax to meet the public sector bills. Dropping the surcharges in public demands would be a nice Christmas present, but they will probably claim their surcharges are “reasonable additional transaction costs”.