A trilogy of economic tales!

Friends,

There has been a rich vein of material published recently, all of which is worth sharing, I hope that you find this informative.

I have three articles to share that feel as if they cascade down in scale, so that is how I have introduced them.

Firstly at the international level, is a report from a EU think tank, highlighting the challenges to the current capitalist model, but also focusing on social cohesion and the potentially severe impacts from inaction or weak policy around these issues.

What is really interesting about this, is that it comes to a similar conclusion about ‘Keynesian economics’ as did the MIT model run in the mid seventies on the old IBM mainframe. Whilst they use slightly different criteria (one being based on more quantitative data and the other analysis of evidence), it is remarkable that they both draw a similar conclusion!

The EU report clearly states that a business as usual approach to capitalism could effectively see it replaced by another model. Obviously the report is taking the view that some form of capitalist growth model could be maintained, I don’t really believe that so much, but the message is the same.

It also puts a clear focus on social cohesion, which is something that governments and trades unions alike need to consider. In a more individual World, governance will become much more tenuous, it is important that collectivism can still function effectively!

Second up and at the national scale is an article from The Economist, featuring areport from Adair Turner a former banking regulator.

He sets out in very clear terms why regulation is required and how free markets failed when he came into office and how they are likely to fail again!

He outlines how the flaky recovery has been founded upon past boom and bust practices and how the current recovery is fuelling the housing asset bubble.

Given that he has headed up the British Retail Consortium, amongst his roles, it is quite a refreshing surprise to find that he aligns with some of the current left wing economic policies proposed by Corbyn and his advisors. He is clearly in favour of regulatory control on debt creation and he is also an advocate for ‘peoples quantitative easing’!

Lastly and by no means least, is great local example of ‘playing by the rules’, in this instance also with esoteric objective!

Crickhowell a picturesque market town nestling at the foot of the Brecon’s has become the latest player in a game of Avoid the Tax Man!

Fed up with hearing about large corporations not paying tax in the UK, the towns independent traders got together with the local council to do something about it! They employed the same tax advisors as the likes of Starbucks and Google and went off-shore!!! Yes, they are now also depriving the Treasury/HMRC of income in the same way that large corporations do. They aren’t doing this in a spiteful way, they are doing it to try and get the loophole closed. A number of other authorities have now shown an interest, so there could become an obvious imperative to stem the offs-shore flow!!

It will be interesting to see how this pans out, but it is great to know that innovation and alternatives are gaining ground, even amongst those you might not suspect, hope lives eternal!!

Links to published articles provide additional and interesting information published by the journalists as credited.

Bubbles, dangerous beauty!

Everyone is captivated by them, children and adults alike!

They are used also to describe and be analogous to, complex features of our lives. Bubble formation or nucleation is used to describe the formation of our universe and the period of expansion in the short time after the Big Bang. For most of us, I guess it is comforting to think that we live in a bubble universe......but bubbles burst!

Much as I love the debate on astro-physics and quantum theory, I'm really more than happy to leave that to the experts! Instead I want to focus this blog on another use of bubble theory, that which deals with economic models relating to inflation and the formation of bubbles that can harm our economies.

With the globalisation of trade and the advent of World wide corporations, so the management of trade and individual economies has become larger and more complex.Governments are competing in a race to the bottom in attempts to keep the value of their currencies down, to keep export prices competitive. Normalisation of interest rates could unleash strong inflationary pressure.

Currently the most dangerous bubbles forming, and lurking almost unseen by the vast majority of us,  are asset bubbles. These bubbles form when there is over inflation of an asset price (demand pull), as an investment vehicle. The bubble is thus formed by rapid price rises over a short period, but this is not supported by demand (over a longer period) or by an underlying inherent lower value.

Inflation of the bubble (see this as an aggravation of the situation) serves to make it less stable. In the aftermath of the recent global recession and in major asset classes there have been some serious contributory factors to bubble inflation, that have been deployed to stimulate economic growth.

These have been prolonged low interest rates and over inflation of the money supply (quantitative easing). Because of these actions there are potentially inflated bubbles in Carbon (oil and fossil fuel industry), property, Gold (rare metals generally), agricultural land and property. The scale of the bubble may vary in priority from country to country, but in effect they are all linked due to the globalisation of the banking system. Most of these economic instruments, as politicians like to call them have been deployed in all of the major economies, I might wonder how capable they are at playing these instruments as opposed to their voters?!!

Let's take property as a case study, partly because we have already seen a fairly major collapse of just such a bubble in the US, which has led to many of the current problems! A derivative is a loan or financial product that is secured against an asset, in this case a mortgage, which provides the underlying security. Because of a housing shortage in the US (not exclusive to US,  UK and Japan are vulnerable too), leading to a spike in property prices. Hedge fund managers saw this as an opportunity with minimal risk and created a huge demand. This had to be underpinned by the creation of more mortgages, which in turn led to riskier lending and created a demand for more housing (over inflation of the price, underlying loss of asset value and increased risk). As house builders caught up with demand, so house prices began to level off and even fall. This created negative equity and exposed the risk of the over inflated asset price. The sub-prime lending (as it came to be known) had started and had too much momentum to be restrained, the bubble collapsed.

Unfortunately these tell tale signs can be seen in other assets/commodities, it might even be reasonable to expect that hedge funds would look for an alternative support mechanism for the derivatives market (although you might hope with the benefit of property hindsight!). There is great concern that oil, coal and gas investment has formed a bubble whereby the value is over inflated in relation to the amount that can be extracted and used, if we are to meet emission targets for Carbon Dioxide. Given that this bubble is large in comparison to the property bubble and that fossil investments underpin so many pension funds, it is difficult to see how the current economic system could recover were (or should that be when!), the bubble to collapse.

Other bubbles are also worth consideration: agricultural land values and food commodities have seen huge increases in investment over the last few years. Although the US first saw these increases at such a scale, in the last couple of years, there has been a global land grab going on. Such investments are now threatened by climate change induced (or exacerbated) water scarcity, crop pests and disease. Forecasts have put potential losses on investment as high as 5 trillion pounds (£5trn).

Thinking of things at a more human level, some recent research has suggested the formation of a productivity bubble! Companies have looked solely at the bottom line, with employees seen merely as another asset to be sweated! The hours worked have got longer and the holidays taken have been less as workers have been made redundant, or not replaced, leaving the rest to pick up the additional workload.

Productivity increased globally, however this is now starting to flatten off as chronic stress and illness in the workplace manifest themselves. In fact it is likely that productivity could start to fall again, if global temperatures continue to rise and more virulent disease affect the population. It is not sustainable to continue to inflate executive pay and the asset register on the grounds of infinite improvements in productivity!

The only real way to avoid several catastrophic collapses, is to live within our means and not to print money against future productivity that can't be met because it makes a false assumption of infinite resources and continuous improvements in productivity.

Addendum.

I have added the link below to an article in the International Debt Observatory, looking into the potential problems surrounding unconventional fossil fuels. It was recently published (post my blog), but serves to underline the problems emerging.

http://www.oid-ido.org/article.php3?id_article=1396