UKC

A few interesting and connected pieces. 

First, even the IMF admits what damage neo-liberal policies and austerity have done to the UK economy:

https://www.theguardian.com/politics/blog/live/2018/aug/02/austerity-and-cu...

Second, in a piece entitled 'Brexit offers London’s rivals a poisoned chalice'  Nicholas Shaxton explores the dangers of a dominant financial sector for those EU countries who think they might benefit from Brexit, and explains the British 'finance curse': 

https://www.ft.com/content/e0a4ccd6-ce1e-11e8-8d0b-a6539b949662

(FT is notoriously paywalled but this link worked for me.)

Finally, there are good arguments and analyses to suggest that a key factor in the vote for Brexit was the damage done by austerity, for example this study:

https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/public...

Hardly rocket science.....

So Tory-imposed austerity is the main driver for Brexit, which may well in turn destroy the Tory party. 

Who says the Universe doesn’t have a sense of humour?

Couldn’t get the FT article but this one must be very similar as it’s also by Shaxton.

 https://www.theguardian.com/news/2018/oct/05/the-finance-curse-how-the-outs...

Good spot - that’s actually a better piece in that it’s more focused on the ‘financial curse’ .

i know, but he makes the case pretty well. 

This also looks like it has some useful pieces on the causes of Brexit:

http://www.compassonline.org.uk/wp-content/uploads/2018/10/Causes-and-Cures...

The Tax Justice Network has some good material on the 'Finance Curse'. Their podcast is very entertaining. 

It’s not a curse. It is something the uk is good at,that generates a lot of jobs etc.

What would people prefer,that the financial centre is in Berlin or Paris or New York or Shanghai?

You would then be moaning about that position.

And an article giving the strong counter argument

https://www.economist.com/business/2018/10/11/the-notion-that-the-city-need...

A reminder that the then Labour Party were faced with similar austerity measures post the crash.

Did you read the articles?You need to respond to the case there, not just say it generates jobs. 

The Labour manifesto in 2010 certainly wasn't radical, but equally it advocated a much slower reduction in public spending than the Tory one. The idea being that too much austerity would throttle the market, one of the reasons why the Government had to change tack a little in 2012, but they had already done a lot of damage.

Read my link to the economist article

The Economist article wasn't exactly one of unqualified support for the financial services industry was it?

There was a lot about regulation in there, which is the only way to change it anyway. A more regulated industry might be smaller or bigger who knows. Regulating it so we never have to bail it out again would be nice. Don't forget where all that public money went - asset inflation. Inequality. Resentment. etc etc

It is well balanced and does not shirk from the issues .

And what was the end conclusion ? All the things can be addressed by regulation.Yes some areas are socially useless, but so what?

But to downsize the sector will have a negative impact on our economy and all of us will be impacted as a result. 

The public money went first and foremost into Lloyds, HBOS, RBScot, NatWest, not to mention the likes of Northern Rock and Bradford and Bingley, so that every penny saved by a majority of the inhabitants of the UK over long lives of prudent graft was not destroyed by the contagion of events that had their genesis several thousand miles away. Then consider what devastation the collapse of the banking system would have done to the economy. No transfers of money between companies, no wage payments, the inability to service loans resulting in their technical default. It would have been a matter of days before the total collapse of the economy and outright war on the streets.

That said, asset inflation is certainly a by-product of QE. Now, it shouldn't be forgotten, QE has largely been accepted as an successful remedy for the greatest economic shock of the last 80 years. But inequality is far less a factor of asset inflation than it is of macro-economic forces like the rise of globalisation, of which the EU is a powerful manifestation. Equally, I'd be wary of blaming the Tories or Labour for the rise of global supply chains and their effect on UK manufacturing.

"...QE has largely been accepted as an successful remedy for the greatest economic shock of the last 80 years"

It has certainly been accepted as hoofing the economic can a long way down the road. Not sure that qualifies it as a remedy!

(PS: Hope you're well.  Long time no chat on the forums!)

Hi Shani

Hope you are well.

Without a counterfactual we'll never know. Certainly QE's withdrawal will hit different economies in contrasting ways. The US is tightening fast without any apparent harm to the economy (yet), though the stock market has reacted by turning exceptionally edgy and that would have wider consequences if not contained.

And the alternative to QE.  Higher interest rates? Is that any better?

It's not QE that's the problem per se. It's how that money was dispersed in to the economy. 

True. But those massive bailouts have also rewarded failure. 

If QE is "medicine" then it's novocaine.

Blaming it on "Globalisation" is effectively a conscious or subconscious shortcut for "it's the fault of other countries and foreigners". Much more appealing to voters than the truth, for sure, which is that for the most part it's the result of the unintended consequences of national policies, which they often supported.

It's wealth inequality in Europe that has increased, and when you break it down, you'll find that it has been driven for the most part by:

- planning policy

- Reduction of taxes, in particular inheritance taxes

- QE

- Zero rates

- Bank bailouts

Income inequality has decreased in the EU since the 60s and stabilised in 2008. In the US it consistently increased.

I do agree though that "globalisation" increases systemic risk (as one failure in one part of the system can take down the whole). But in this case I think we are really taking about "centralisation", not "globalisation".

Global trade, on the other hand, has a stabilising effect.

Yes, it is better. It punishes borrowers and encourage savers. Which is what we need.

Did you know that the UK households are, on the whole, now spending more than they earn ? That cannot be sustainable.

They have. But moral hazard isn’t the point we’re debating

To maintain your analogy, pain relief and the associated reduction in inflammation is a successful therapy for many conditions. However QE is also a stimulus, a steroid if you like. Why else would markets fret about its withdrawal before recovery has taken hold?

Trump has been outstandingly successful pinning US blue collar woes on competition to US manufacturing from “unfairly advantaged” Chinese manufacturers. His current trade policy is remarkably popular given the local pain it is inducing. It’s not all about the wall.

I imagine that we both have a very good handle on the data behind all these issues. I think you would do well to give more weight to income inequality and job security. It’s fine for information economy beneficiaries like you and me to pontificate, but I wouldn’t like to try living on £9 an hour. Data aside, what’s important is to understand people’s perception and give it due weighting. I’m not saying that the real reasons don’t matter. It’s just that they matter less than perception as a motivating force.

In the round yes, but not for those who feel like losers. See Trump above.

I am still wondering if you bothered reading the original article, or better the Guardian one. They clearly explain how the financial services have a negative effect in sucking resources from other parts of the economy. If it reduces in size the other sectors will benefit. 

I'm not taking about the morals of it. If we you don't let things that don't work fail, we perpetuate failure.

The example often used is that of the restaurant business. Restaurants fail all the time and are replaced by new ones. When one restaurant fails, it doesn't take the whole restaurant industry with it and doesn't need bail out from others.

The financial system needs to be more like the restaurant business. And for that it needs to be broken down, and allowed to fail. A lot.

I suggest a very simple rule: Any business that is systemically so big that it becomes a liability to the taxpayer in case of failure should become de facto a public service, owned by the state. The managers of such businesses would do everything to avoid getting into such a situation, so hopefully we wouldn't need to actually use this power.

Because we've become addicted to the Novocain, but at some point, you've got to take the Novocain away. Pain relief is useful indeed and often the only thing you can do. But let's not pretend the patient has been healed.

Indeed, that exactly my point.

I agree. 

But it's simply not true that globalisation has harmed blue collar workers to any significant degree. In fact it made them richer, in absolute terms. What's happened is that they became poorer in relative terms, because of the explosion of wealth (and income, in the US) inequality in their own country, driven mostly by national policy, (which for the most part, let's be honest, they have approved of, or have been led to approve)

I remember arguing endlessly with Postmanpat years ago on this, he kept arguing that wealth and income equality doesn't matter as long as people are getting richer in absolute terms.

But of course, it's not true, people may be better of in material terms, but in terms of power balance, it's not sustainable.

Again, the problem is centralisation (of wealth and political power). And now the architect of this are scapegoating "globalisation" (shortcut for : foreigners), and use it as an excuse to promote even more centralisation of power.

An interesting idea but difficult to resolve with fundamental capitalist drivers of profit and employment. Why not just break them up via anti-trust legislation, preserving shareholders’ interests?

Jay Powell and his colleagues at the Fed unanimously disagree. Quantitative Tightening is underway with the economy growing at 4% 

That's essentially the same idea. Except that anti trust legislation would need to be updated so that it catches you not only on stifling competition, but also on risk.

ie, if a company creates a systemic risk, then we break them up, or threaten them with nationalisation, or whatever. What counts is that there is a strong incentive for businesses to not create systemic risk.

I agree that by preventing companies from growing indefinitely to the point that they become systemic, you probably harm economic growth in the short term.

But that's worth it in my view if that prevents massive systemic crashes that wipe everybody out every two decades or so.

You would do the same when managing a portfolio, you wouldn't invest in something where the losses would be exponential to any downturn. (Although, arguably that is what the portfolio of most people looks like right now).

The difference is that when you manage your portfolio, you don't expect others to bail you out when you get it wrong, and you own your risk. So you have an incentive to be cautious.

Most of it due to more debt and tax cuts.

How long do you think that's going to last ? It may be that we are on the cusp of vast productivity improvements and wealth creation through a new technological revolution that would offset everything. This may be true in which case we are just very lucky. I wouldn't bet on it too much though.

BTW I have zero trust in the BS vendors at the FED. They are co-responsible for taking us into this mess in the first place.

Although leverage has been supportive of out-performance, the most successful companies of the last 10 years, eg Google or Intuitive Surgical, have exceptional balance sheets. Meanwhile Trump's 2017 tax cuts are a recent phenomenon that won't filter completely through until 2019 and certainly cannot possibly have influenced the last 10 years.

Until the Fed tips the economy into recession with one interest rate rise too many. Unless, of course, an oil price shock or other exogenous crisis (CNY collapse? Chinese debt crisis?) precipitates a global recession.

You were talking about the last quarter, since you mentioned the 4% growth

Performance for the last ten years has been far from exceptional despite 19 trillions of QE sloshing around.

Exactly, except they may not have a choice. It could be that or hyper inflation, both of which are bad and will hurt the disadvantaged the most.

That view was shot to pieces in the Economist article. Simply by pointing out that those who go into financial services etc are hardly likely to end up in manufacturing for example.

And how for example would say the NHS gain? Reduced tax receipts means less money to the exchequer to pay for public services.

4% is the latest growth figure, yes. But the Fed has been tightening for several quarters as growth has been strong for a couple of years now. In the US, that is, of course, but also in large parts of the EM world. Europe (incl UK) is sadly lagging, not least because it is tearing itself apart.

Unfortunately I can't read the Economist article so I don't know what exactly was 'shot to pieces'. But perhaps you'd like to read what the OECD says about over-large financial sectors:

https://www.oecd-ilibrary.org/economics/finance-and-inclusive-growth_5js06p...

Has it been lagging ? Growth has been overall the same for US and EU for the past few years.
6.8 - 6.9% from 2014 to 2017 for both US and EU.

It's only recently that the US economy seems to be overheating.

I bought a house during the very high interest rates, it was tough, but the lenders were very good at lending.

now I have 3 daughters wth mortgages on low interest rates, but getting the deposit in the first place was the difficulty. 

On balance the fact that they had to have a self imposed austerity to save for the large deposit, and brought with it bit of financial reality and prudence, so even though they are paying a low interest rate, they have learned not to overspend ,and  to save a bit, or  least not borrow.

Those whom the gods wish to destroy they first make mad. 

A fine example of private equity running formally council owned property, hurrah for the free market. 

https://www.theguardian.com/business/2018/oct/24/freezing-uk-tower-block-wa...

I'm not sure what your point is here. Self-imposed austerity is a long way from the neo-liberal con. Can you say a bit more?

It's swings and roundabouts, I'm older mortgage free with low rate savings yielding very little, my 3 kids are young with low rate mortgages, (that is in their favour now that they have saved for the deposits.)

If it swaps round, and we get high interest rates, I will get 'a bit' more from my savings, but my 3 kids will each get a hike in their mortgage payments, which they may not be able to afford, and would come to the bank of mum and dad, and whilst TBOM&D has a little more money, its not going to be enough to cover the hike in their 3 mortgages. 

Well, part of the issue is that people take on mortgages even though they can't afford interest rate hikes, which is nuts.

No blame for them, really. The whole system is engineered to push people into this kind of stupid risk.