Category Archives: Economics

What is good for an economy – inflation or deflation?

We often hear about inflation. Recently, more about dangers of deflation.

So I thought I will write about this phenomenon as I have noticed from the point of view of employer -`capitalist` and employee- `labour`.

 

Men have short memories, a few years of inflation or deflation taken to continue forever and economic decisions are based on them.

 

 

Moral of the above story!

In a capitalist system, where capitalist is free to employ his capital to whichever source is most profitable, labour also has this choice and should make this choice of providing his services to the capitalist who pays him the highest wages.

 

The question arises why does capitalist makes this choice and labour does not?

Answer: Habit.

Man is a slave to his habits.

A capitalist is thinking about his investment decision practically every day.

And an employee makes it very occasionally. Usually when he is forced by circumstances.

Labour has nothing to offer but himself; thus one should always gain knowledge, experience + new skills to make oneself more valuable and constantly change employers.

Farmageddon

Farmageddon

I had been reading this book recently and few interesting facts that I came to know, are listed below:

1 – Common Agricultural Policy (CAP) of EU ; setup in 1962 consumes nearly half of EU budget – c€50bn. Similarly, US has a Farm Bill policy setup in 1933 , total bill $30 bn ; 3/4th of which goes to top ten farms in US.

2. Farm animals consume :
1/3rd of all world cereals; and
30% of global fish catch ; and
1/2 of all antibiotics consumed in the world.

3. Mad cow disease ( happened in Britain) due to cows being feed meat and bone meal.

4. Lastly more than 200,000 Indian farmers have killed themselves since 1997 because they could not repay debt taken to buy fertilizers and GM seeds.

Amazing world we live in !

 

 

Banking and its regulation

Bank of England  (BOE)                                                                       Reserve Bank of India(RBI)

BOE                                                                                    RBI

Banking in recent past has also changed because of :

A. Technology – I remember when I first started at a bank,  our major job was to calculate  interest, balance books, all sorts of tasks were being performed manually, technology has brought a quantum leap in banking mostly for the better, but as one of my old bosses used to say our stock in trade is money by increasing the velocity of money, we can gain a lot of money but other other hand loose even more, before we even know about the loss !

One side effect, in the UK I observe that banks have basically de-skilled in their frontline staff.

B. Deregulation – I came to the UK from India. In India most of the banking sector is dominated by the government owned banks. It has its advantages like mis-selling does not occur but a bigger negative side is the banks are not customer focused or competitive.

But the Central Bank (RBI) is very active and helps a lot in providing guidance and support. Reserve bank is  truly  a lender of last resort and thus have an omnipotent presence in the market, it does not hide behind rules and procedures as I have noticed in BOE’s case.

One of the most surprising thing I came to know after the crash was that BOE did not see the housing asset bubble as its problem. Now we have PRA in the UK with a mandate to oversee the market risk, before this as per BOE’s interpretation of its own job profile, it was not their job to see what was happening in the market.

All these scams like LIBOR manipulation, miss selling of PPI, miss selling interest hedging products, selling of card lost protection (when one did  not even need it as per law), FX rate rigging were happening in the market. Even de-skilled frontline staff were aware of them, it’s hard to believe BOE was not aware of them. The problem was, BOE thought it was not their problem.

This is a simple error which happens when there are more than one regulator, one regulator thinks its the other’s job and vice versa and nobody does the job!

Housing Bubble in UK

earnings-to-hosue-prices

Borrowing costs have reduced resulting in high assets prices including housing. Investment banks and hedge funds have borrowed money and invested in stocks. Individuals in the UK have borrowed and invested in properties. Both have taken advantage of low borrowing costs.

Asset bubble has also taken place as FIs are lending ever greater amounts. Example income to loan ratio have soared in past 30 years from 2.5 to 4.5 times eg. Banks in the 1980s in the UK were lending maximum of 2.5 times of income as loans.

Lets say if Mr and Mrs A have a combined income of £30k in 1980s, they would get a maximum loan of 30 x 2.5 = £75k.  In 2014 (after the crash) they can get 4.5 ie. 4.5x 30 = £135k.

As we all are aware most of the houses are bought with bank’s money (mortgages), people are inclined to pay more as a purchase price, if the banks are willing to lend more. If banks curtailed their income to loan ratio house price increase can easily be arrested, even reversed but I am not sure if a reversal will be a good idea !

Age of turbulence by Alan Greenspan

“Some books are to be tasted, others to be swallowed, and some few to be chewed and digested”

Francis Bacon

 

While turning over my old papers today, I found a note I made on this book.

Mr Greenspan has written if I remember correctly on the 1st page of this book something which amazed me as if I found the key to economic progress.

Main requirement for an economy to grow is ‘Property rights’.

This is in direct opposition to Marx’s idea.

“As living requires physical property food, clothing, homes – people need the legal protection to own and dispose of such property without the threat of arbitrary confiscation by the State or mobs in the street”

Being an Indian I thought, how does this translate to the Indian context, what things we need to do in India:

Police and Judicial reforms – by more investment and better training in these sectors.

 

Privatization in the UK

To be, or not to be, that is the question

–  Hamlet, William Shakespeare

Recently I have been reading about how the government should tackle our debt problem, many are clamouring for privatisation, citing Mrs Thatcher as an example a champion of free markets, a heroin, which we know the present Prime Minister wishes to emulate, selling our public companies to raise money to pay off the debt.  I thought country must be in deep trouble to start thinking about selling family silver.

I decided to look at the problem and came across an interesting chart given below which gives the scale of UK’s national debt on Wikipedia.

800px-UK_GDP

 

Major Peaks

1812 – Britain is fighting war with US and France. Period of Napoleonic Wars 1803 to 1815.

1912 to 1952 – Debt taken to fund the two world wars

If you take a moment you will notice that during the last 300 years our debt levels have been over the present levels for most of the time.

Then why so much clamoring about cost cutting about privatization about job cuts about austerity.

Arguments for Privatization

In favour Against
Raise government revenue Yes, it is like killing the golden goose and taking all the eggs in one day. As the sale proceeds received one year and all dividends lost for ever.
Pay off public sector borrowing Good deed but will this reason suffice for the public inconvenience for higher charges charged by private players in their pursuit of ever increasing quick rich schemes.
Efficiencies which will be pass on to the consumers in forms of lower prices and better service As our experience suggest, utilities privatised , indeed create better services but higher prices as well and if not regulated properly, will soon become a menace to society

 

What it seems like it is a matter of choice.

 

Major companies privatised and then what happened to them

British Petroleum October 1979 – While in government hands, British Petroleum paid too little attention to profitability, constrained by its need to please elected officials who often cared more about keeping energy cheap and employment high. But in private hands, it may have cared about profits far too much, at the expense of other objectives. “BP veered from being a company that made sure nothing blew up to one focusing on cost-cutting at all costs,” Professor Fisman #.I read somewhere that BP came up with a concept called self insurance
British Aerospace February 1981 Still struggling, even after year on year support through Government contracts. Last I heard about this company was regarding a failed deal with EADS of France.
Cable & Wireless October 1981  Sucked by all, lastly by John Pluthero and at last sold to Vodafone
Amersham International  February 1982 It went all right, acquired by GE in 2003.
National Freight Corporation February 1982
Britoil November 1982 Bought out by BP
Associated British Ports February 1983 No news
Enterprise Oil July 1984 Bought out by Royal Dutch Shell
Jaguar August 1984 Loss making for a longtime, turnaround in 2008 under ownership of Tata Motors an Indian Company.

#“The Org: The Underlying Logic of the Office,” a book by Ray Fisman, a professor at Columbia Business School, and Tim Sullivan, the editorial director of Harvard Business Review Press.

 

 

 

British Telecommunications December 1984 Doing alright now
British Shipbuilders 1985 onwards Ceased , in 2013 all liabilities passed back to the Government
British Gas December 1986 Doing well
British Airways February 1987 
Rolls-Royce May 1987 Doing well
BAA July 1987 Under Spanish ownership
British Steel December 1988 Did badly, ultimately bought by Tata Group of India , many plants closed or mothballed.
Water December 1989 Majority in private ownership, customer suffering from low service and increasing bills
Electricity 1990 Majority in private ownership, customer suffering from low service and increasing bills

 

All the privatisations focused on cost cutting mainly by cutting staff numbers and their benefits mainly pensions and sky rocketing in executive pay.

What’s next

Royal Mail                               German’s have showed us that it can be successful in form on DHL

NHS                                           Private sector wants a pie of this, PPP experiement shows that                                                                private partnership in not viable

Courts and Police               Cannot think how this will work !

 

Paradoxes

Young are unemployed and old are suffering for want of care !

Only if we could convince our government that money , savings and debt are just Maya all to be utilised and manipulated in a way to create full employment and to increase the standard of living of its citizens rather than safe guarding the indefensible mark of AAA from some obscure rating agencies which have already shown their competency in the fore play of financial crisis.

That we will again proceed on a path of recovery and happiness.