12 Oct 2016

Business Debt in China

This speaks for itself really. Corporate debt in China is now 165% of GDP. Every time I see a figure like this my question is, "What interest rate are the paying on that?" Say it's 10% APR. That would mean that 16.5% of the GDP of China is being spent on interest payments. The next question is "Who are they borrowing from?". That is, where is 16.5% of China's GDP going? We know it must be going to banks, but Chinese banks, American, European...?

7 Oct 2016

Rent Seeking

@AnnPettifor tweeted a picture the other day. It was a cutting from the 2012 Financial Times. It turns out the article is available online.

The monumental folly of rent-seeking.
The success of market economies is not achieved by policies that encourage greed. John Kay.
"The activities of Shah Jahan epitomise rent-seeking – the accumulation of a fortune not by creating wealth through serving customers better but by the appropriation of such wealth after it has already been created by other people. Both are routes to personal enrichment and the tension between them has been a dominant theme of economic history. Whenever the balance shifts too far in favour of appropriation over creation, we see entrepreneurial talent diverted to unproductive activity, an accelerating cycle in which political power and economic power reinforce each other – until others become envious of the proceeds of appropriation, and the resentment of the oppressed undermines the legitimacy of the regime. Political and economic instability are an inevitable consequence."

Extracting and paraphrasing the definition
Rent seeking is the accumulation of wealth by appropriating wealth that has been created by other people rather than by producing something. Both rent seeking and production are routes to creating wealth. 
When the balance of wealth accumulation shifts towards appropriation over creation, i.e. when rent seeking over takes production, entrepreneurial talent is diverted into unproductive activities (such as the finance industry) and away from more beneficial activities.
I'm not sure how the last part follows from the first. I think the author skipped a few steps. But we can see that if people's effort is going into accumulating wealth created by other people without contributing anything that that is a problem. And we can see that for the last 40 years or so successive governments around the world have been facilitating rent seeking at the expense of producing things. Britain, which used to be a major producer of steel and manufacturer of steel products, is now more focussed on providing services, especially financial services. The banking and finance sector has expanded rapidly as manufacturing has shrunk.

In Britain, people with spare cash do not invest it in business, they buy a house and rent it out. This is the most basic form of rent seeking. It creates a divisive situation in which most housing is primarily a source of income for the wealthy rather than a home for anyone. It leads to the situation where too many people benefit too much from high house prices and therefore high rents and this distorts the market. In Britain too over at least two decades few houses have been built to meet the demand for housing, especially in the low-cost portion of the market.

This is exacerbated by drug lords, kleptocrats, and other world-scale criminals are using the London property market to launder their money. This tends to force prices up in central London and that has a ripple effect. The housing market has inflated at between 500%-1000% of the consumer price index.

Most people can now never dream of owning their own home. A lot of us can never dream of even renting our own home and must find lodgings or live communally. Rent money, wealth created through labour, goes to landlords who produce nothing but simply accumulate wealth created by others. It might be forgiveable if there were investing in housing so that there were enough houses for everyone, but they are not. And it would be very interesting to see how much tax large scale landlords are paying.

Another form of rent seeking is lending money and charging interest on it. But that is another story.

2 Oct 2016

The Warning

I don't usually cross post blog posts, but in this case I'm making an exception

I've just watched an excellent documentary which provides another important angle on the 2008 financial crisis. It actually first aired on PBS in the USA in Oct 2009. The Warning.

Hat tip to Ann Pettifor of Prime Economics for tweeting about this.

Asked about the financial crisis of 2007/8 and the subsequent recession/depression, the mainstream - including those still in charge of the economy - often reply that we could not have seen this coming. But this was only ever true because the mainstream were just not looking. Instead, they had their heads buried in troughs of money.

Brooksley Born
In American a woman called Brooksley Born did see it coming and was in a position to do something about it. She tried, but was shut down by Bill Clinton's financial advisors: Robert Rubin, Larry Summers, Tim Geithner and the Fed Chief,  Alan Greenspan.

Born warned that the market in derivatives--bets and insurance on the future price of assets and bets on those bets--was huge, completely unregulated, open to fraud, and likely to cause huge damage to the USA and world economies if they failed. Evidence that they certainly would fail was already evident in 1994 because of law suits brought by Proctor & Gamble and others against the hedge fund that lost their money in risky investments in derivatives. Banks were massively invested in the derivatives market. In 2008 this market was worth USD500 trillion. For perspective the UK's annual GDP is about USD2 trillion.

Greenspan was an disciple and acolyte of Ayn Rand. He did not believe in the necessity of pursuing fraud prosecution because "the market would sort it out". The others were like-minded. They shut Born down and made it impossible for her to continue in her role. The argued vociferously and repeatedly against any regulation of financial markets.

Greenspan retired in 2006. Then in 2007, Lehman Brothers went bankrupt. In 2008 the Great Financial Crash happened. Later, Greenspan recanted his free market ideology during a senate hearing. But does not seem to have been help culpable for this costly errors.

Rubin took over City Bank in time for it to be bailed out by the US tax payers because of it's reckless gambling in derivatives.

Obama's financial advisors are... Larry Summers and Tim Geitner. So we know that Summers and Geitner basically facilitated the financial crisis and they are the economic advisors to the President.

One of the problems for Hillary Clinton is that she is associated with this crowd of losers who wrecked the economy and walked away from it unscathed, like drunks who walk away unharmed from the multiple car pile they caused.

Brooksley Born is a name that ought to go down in history.

Further Reading

The Great American Bubble Machine (2010). Rolling Stone Magazine. "From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression -- and they're about to do it again."

 The Woman Greenspan, Rubin & Summers Silenced (2009) The Nation.

27 Sep 2016

Emerging Market Debt

via @IIF [Institute of International Finance] on Twitter today
"[Emerging Market] non-financial corporate indebtedness rose more than $1.6 trillion in H1 2016, surpassing $26 trillion"

The report this comes from is available to members only.

Note that corporate Saudi Arabia is currently accruing large amounts of debt. Not sure what is going on there!

A brief recap on what happens when the private sector gets over indebted. Business changes its behaviour from maximising profit to minimising debt. Rather than investing in growth, business seeks to minimise their interest payments. It's really the only rational thing to do. But it results in an economic slow down. Richard Koo calls this a balance sheet recession. He explains it well in this short video.

25 Sep 2016

Private Debt

A chap called Richard Vague seems to know what he is talking about when it comes to private debt. His essay in Democracy, A Journal of Ideas is called The Private Debt Crisis and comes with the strapline: "China is drowning in it. The whole world has too much of it. History suggests: This won’t end well." The essay is reprinted in Evonomics where it is called How to Suffocate Your Economy: Drown it in Massive Private Debt.

The essay looks mainly at USA private debt, but the remarks are salient to any economy. When your consumers have large aggregate debts the interest payments become a significant proportion of income and they become reluctant to spend. We get slowdown in demand, which ripples through the economy and undermines growth.
"a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth."
Vague points out that high levels of private debt also makes consumers and businesses unwilling to borrow more. Borrowing for investment is a fundamental principle of the capitalist economy. I would point out that, until the modern era, this is how banks made their money. Now of course, banks make 90% of their money by speculating on asset and commodity prices and derivatives.

The essay also looks at the situation in China where private debt has been growing rapidly and seems likely to be the next flash point in the global economy. That much private debt accumulated that quickly, cannot help but cause problems.

The essay finishes with some ideas on how to alleviate the problems caused by private debt. This blog is inspired by Steve Keen's idea of the modern debt jubilee (government gives money to consumers instead of banks, with the proviso that they must pay down debt before spending).

What the essay does not do is address the fundamental problem that leads to very high levels of private debt and repeated economic crisis. The actions of governments in the 1970s and 1980s who stripped away of regulation designed to prevent exactly this ought to come under scrutiny. We know how to prevent this happening.

2 Sep 2016

General Equilibrium Theory - Still Dead.

Ackerman, Frank. (2002). Still dead after all these years: interpreting the failure of general equilibrium theory. Journal of Economic Methodology 9:2, 119-139.


More than 25 years after the discovery that the equilibrium point of a general equilibrium model is not necessarily either unique or stable, there is still a need for an intuitively comprehensible explanation of the reasons for this discovery. Recent accounts identify two causes of the ending of instability: the inherent difficulties of aggregation, and the individualistic model of consumer behaviour. The mathematical dead end reached by general equilibrium analysis is not due to obscure or esoteric aspects of the model, but rather arises from intentional design features, present in neoclassical theory since its beginnings. Modification of economic theory to overcome these underlying problems will require a new model of consumer choice, non-linear analyses of social interactions, and recognition of the central role of institutional and social constraints.

Via General equilibrium theory — still dead after all these years, blog post by Lars P Syll.

18 May 2016

New Zealand history relevant to Brexit Debate.

The following observations from the Encyclopedia of New Zealand are relevant to the debate over whether the UK should leave or remain in the UK.
"In 1961 Britain announced that it was seeking to join the European Economic Community (EEC)... If Britain joined the EEC it would have to sign up to the [common agricultural policy], and that would mean an end to New Zealand being able to export agricultural products to Britain."
With UKs help and based on NZ support for Allies during WWII, NZ managed to negotiate access to the British markets with quotas that reduced over time. But...
"In the late 1930s Britain took more than 80% of New Zealand exports. By 1960 it took 53%, which reduced to 36% in 1970, and 5% in 2007."
Britain is not even a major trading partner of NZ any more. What the British don't seem to realise is how protectionist the EU is. It routinely erects trade barriers for those outside the EU to protect the industries within. Farming, for example, is heavily subsidised throughout the EU, while tariffs and quotas prevent other countries from outselling heavily subsidised produce. Something that cost New Zealand most of it's existing export market in the 1960s and 1970s.

The idea that if Britain leaves the EU it will automatically retain the right to free trade with Europe is idiotic. At the very least there will be protracted negotiations during which Britain will not have access to the EU markets. Of course UK is a major trading partner of the EU so trade agreements will definitely be put in place. But the EU is in a position to demand major concessions of the smaller entity.

For this we can use the model of Norway, which remains outside the EU mainly because of the issue of fishing quotas, but has to pass all the laws made by the EU and pay into the various funds. It is in almost every respect a fully paid-up member of the EU, except that it has no voice in policy making. This would not be a favourable situation for Britain.

Leaving the EU at this point would be disastrous for Britain. There is no doubt the need to reform the EU and in particular the Euro, but being outside will leave us powerless to demand or effect change.

26 Apr 2016

New Article on German Cities That Began to Provide Public Goods in 1500s.

This is very interesting:

Origins of growth: How state institutions forged during the Protestant Reformation drove development.

Jeremiah Dittmar, Ralf R Meisenzahl. Vox 26 April 2016.
Throughout history, most states have functioned as kleptocracies and not as providers of public goods. This column analyses the diffusion of legal institutions that established Europe’s first large-scale experiments in mass public education. These institutions originated in Germany during the Protestant Reformation due to popular political mobilisation, but only in around half of Protestant cities. Cities that formalised these institutions grew faster over the next 200 years, both by attracting and by producing more highly skilled residents.

21 Apr 2016

House Prices vs Average Earnings

"The relationship between earnings and house prices began to break down in the 1980s, after sweeping financial deregulation began in the 1970s." 

15 Apr 2016

Fuck Neoliberalism

The academic world experienced a minor stir last week with the publication of the text of a paper given at an AAG meeting in San Francisco, by Dr Simon Springer of the University of Victoria, Canada. Published on the academic website academia.edu, the paper entitled, Fuck Neoliberalism, has been viewed more than 14,000 times which has put Dr Springer in the top 0.1% of scholars using the website.

The author is a serious academic with a long history of publishing on the subject of Neoliberalism, viewing it as an inherently violent ideology. The paper is unrepentantly vernacular in tone while still being rooted in the discipline. This quote gives a flavour of the former:
"Fuck the hold that it has on our political imaginations. Fuck the violence it engenders. Fuck the inequality it extols as a virtue. Fuck the way it has ravaged the environment. Fuck the endless cycle of accumulation and the cult of growth. Fuck the Mont Pelerin society and all the think tanks that continue to prop it up and promote it. Fuck Friedrich Hayek and Milton Friedman for saddling us with their ideas. Fuck the Thatchers, the Reagans, and all the cowardly, self-interested politicians who seek only to scratch the back of avarice. Fuck the fear-mongering exclusion that sees "others" as worthy of cleaning our toilets and mopping our floors, but not as members of our communities. Fuck the ever-intensifying move towards metrics and the failure to appreciate that not everything that counts can be counted. Fuck the desire for profit over the needs of community. Fuck absolutely everything neoliberalism stands for, and fuck the Trojan horse that it rode in on!"

Dr Springer sums up, in both his words and his attitude, so much of what I think and feel about the current situation in the world. I'm grateful for his articulation of the problem in this manner. It is calculated to offend a system which routinely offends those it feeds off. Neoliberalism itself is offensive, it is violent, and ultimately Dr Springer believes that it necessary to act against it, to resist Neoliberalism:
We must start to become enactive in our politics and begin embracing a more relational sense of solidarity that recognizes that the subjugation and suffering of one is in fact indicative of the oppression of all (Shannon and Rouge 2009; Springer 2014). 

He also suggested using the hashtag #fuckneoliberalism though this has not really taken off. I'm using it however.

There is a video of the talk on YouTube. The sound quality is not very good, but it is interesting to hear the author of the paper speaking the words in this context.

14 Apr 2016

How Broken is the World's Tax System?

A recent Oxfam report, Broken at the Top: How America’s dysfunctional tax system costs billions in
corporate tax dodginguses the top 50 US companies to expose just how broken the tax systems of the world are.
"US corporate giants such as Apple, Walmart, and General Electric have stashed $1.4 trillion in tax havens... The sum, larger than the economic output of Russia, South Korea and Spain, is held in an “opaque and secretive network” of 1,608 subsidiaries based offshore." - Guardian
The $1.4 trillion held offshore contrasts with the $1 trillion paid in tax by the top 50 US firms between 2008 and 2014. However, the same companies had also enjoyed a combined $11.2 trillion in federal loans, bailouts, and loan guarantees during the same period. This meant the firms had reduced their effective tax rate from the US headline rate of 35% to an average of 26.5%.

And some of the saving was spent on lobbying the US government for great tax-payer funded handouts. The top 50 US firms spent $2.6 billion between 2008 and 2014 on lobbying the US government, and they get massive bang for their buck!
“For every $1 spent on lobbying, these 50 companies collectively received $130 in tax breaks and more than $4,000 in federal loans, loan guarantees and bailouts.”
So not only do they not pay tax on their profits, and keep vast reserves in tax havens, they get enormous handouts from the government, and have massive influence over govt policy in their own favour. A company with vast reserves of cash should not get government subsidies.

You think America is a democracy? It clearly is not a democracy, it's an oligarchy with an entertainment wing. While everyone is distracted by Trump & Co. the corporations are stealing all the money.


2 Apr 2016

Cameron Defends

David Cameron defended Britain’s decision to reject higher EU tariffs on Chinese steel on Friday as the business secretary faced the anger of Port Talbot workers whose livelihoods have been undermined by cut-price imports. - Guardian
So Cameron thinks that destroying the UK steel industry was the right thing to do. And nationalisation is the wrong thing to do.

And so we're looking at 40,000 people on the dole?

Meanwhile China slaps a 46% tariff on  ‘grain-oriented electrical steel’ produced in UK. They claim we are dumping it, while they are selling their steel in Europe at well below the cost of making it.

I think we have to say that Sajid Javid wins the prize for the best April Fools prank of the century.

1 Apr 2016

British Steal

So it turns out that the UK business secretary, Sajid Javid, knew all along about the impact of China dumping steel in Europe at below cost. Chinese steel production is heavily state subsidised. But given an opportunity to provide some relief to the UK steel industry he declined saying:
“The responsibility of government is to look at the overall impact on British industry and jobs,” the Business Secretary said. 
“If duties get disproportionate it would have an impact in Britain and elsewhere on consumers of steel. Those businesses tell us it will cost jobs and exports if duties got out of control. 
“It’s important to be led by evidence and get the right balance of duty required to correct the harm being done to the domestic market. 
“To go further might in the short term look the right way to go to protect industry but you have to remember in Britain there are also companies that consume steel as part of the production process.” - Telegraph 10 Feb 2016

Blogger Craig Murray says
On Javid’s instruction, last year the British diplomatic mission to the EU (UKREP Brussels) was lobbying the EU commission against higher punitive tariffs on Chinese steel than the 13% the UK supported – even though the Commission found that dumped Chinese steel had an effective state subsidy of up to 72%. I have this from a British diplomatic source.

And adds:

There are no steel mills in Tory constituencies.
So this collapse of the British steel industry is part of a plan by Javid and the other Tories it seems. No one is quite sure how the plan will work. We want to export more to China, hence we keep them sweet by allowing them to torpedo our steel industry and put 40,000 people out of work and then we send them all the stuff we manufacture from Chinese steel? Only the Chinese seem to benefit from this. So is Javid in the pay of the Chinese government? Or is he a moron? Or a socio-path? Or what?

31 Mar 2016

British Steel

This morning I am puzzling over the UK steel industry. Our Indian overlords, Tata, are selling up British Steel (making plans for Nigel!) because it is losing £1 million per day. That's not a viable business.

But there are many calls from the left to "save our steel industry". Petitions and so forth. How does one save an industry that is losing £1 million per day? At the very least this means spending £1 million per day.

The alternative is that about 40,000 jobs will be lost and a massive blow to manufacturing in the UK at a time when we're teetering on the verge of recession again. When the Tories came into power they were promising to rebalance the economy and create a "northern powerhouse" that would produce "export-led growth" (merchantilism 101). Now it looks like the North is going to be gutted, again. And Wales too.

The global economic slow down is not going to go away. Steel consumption will continue to be at much lower levels than the peaks of the last few years. China is not going to boom again any time soon. China subsidise steel production and sell it on the world market at below cost. It keeps Chinese steel workers in jobs.

So is this what we need to do? Basically this would be a different kind of welfare payment. Instead of paying the dole to unemployed steep workers, we subsidise a failing, unprofitable business to keep them employed. Keeping the steel industy costs about £350 million per year. Average welfare payments would be about £20,000 per year, times 40,000 = £800 million. So it would be much cheaper to keep the steel industry going - though I've plucked that figure out of the air.

And of course 40,000 people in work is probably better than 40,000 people on the dole. The spinoffs are hard to calculate. In some places whole towns would more or less cease to be economically viable if we lost these jobs.

But will EU laws allow govt to act to prevent the closure? Are we allowed to subsidise steel production? I'm not sure. Will government ideology allow them to even consider it? Loads of unknowns.

18 Jan 2016

Economics humour

Mainstream economists predicted none of the last five recessions.

Heterodox economists predicted all ten of the last five recessions.

9 Jan 2016

Economic Metaphors

This is an idea that could do with expanding on, but I've been reading Mark Johnson's book The Body in the Mind about the mechanics of metaphors and it occurred to me that economists are using a metaphor drawn from biology for the economy, i.e. homoeostatic regulation of an organism. Hence the focus on equilibria and and growth. An organism has a number of internal systems that are used to maintain our internal milieu within an optimum range: for example blood glucose, oxygen, and carbon dioxide levels, blood pressure, temperature etc.

At the moment we're hearing a lot about "external shocks" and the potential impact of them. This language is consistent with seeing the economy as a self-contained system that relates to other self-contained systems.

Heterodox economists (effectively) argue that the economy is not (metaphorically) an organism whose goal is homoeostasis, but (metaphorically) a complex inorganic system, like the climate which is subject to chaotic behaviour and has not goals. The economy must therefore be treated as though it is a large complex system like weather rather than an organism like ourselves.

Of course climate is also directly mediated by living things as well. If we had no biosphere the climate on earth would be very different. This idea has long been established by the independent chemist James Lovelock in his Gaia Hypothesis, but also in his work for NASA designing experiments to detect life on Mars. The easiest experiment according to Lovelock would be to look at the atmosphere of Mars through a telescope and use spectroscopy to determine the chemical composition of it. A sign of life would be a composition incompatible with a simple chemical equilibrium. For example mere chemical processes would not allow the earth's atmosphere to sustain its 21% oxygen content. Oxygen is highly reactive and would quickly disappear from our atmosphere if photosynthesising plants and bacteria were not constantly replenishing it. A chemical equilibrium would look very different from the biological equilibrium that we currently experience.

Free Market enthusiasts argue that markets would be self-regulating if only we left them to it. Of course markets are usually only partially free because governments interfere with their functioning. Large corporations also manipulate markets, for example by ganging up to set prices instead of competing. In fact any market participant with any power seeks to distort the market to their own benefit as a matter of course. So the Free Market is really only a superficial Newtonian view of markets. We need a relativistic view in which each player in the market distorts the local fabric of the economy proportionally according how much wealth they hold and/or create. In this view no market is free because to be a participant in a market is to distort it, in an analogous way to the distortion of spacetime by masses in Einstein's description of the universe.

As it happens we've seen a number of free market experiments, one of the most remarkable was Iraq where the post-invasion economy was set up according to pure Free Market doctrines. And Iraq is now a failed state, because all the players sought actively to distort the market from the get-go and some were dedicated to destroying it. Similar failures all around the world have yet to deter Free Market ideologues from their belief system.  Ironically the Free Market proponents in Europe and the UK are also dedicated to anti-liberal regulation of the lives of citizens and using campaigns of psychological manipulation (aka nudging) to try to change behaviour in directions they approve of. It one accepts a government handout it seems to be assumed that one gives up all claim to liberty and hands over responsibility for one's life to the government.

Heterodox economists argue that no sensible physicist would treat a system as complex as an economy as homoeostatic (my word) because nowadays they have sophisticated methods for dealing with complex inorganic systems via the mathematics of complexity and chaos. This is quite a good argument until one reflects on just how complex the average cell is. Cells are made up of millions of large molecules, including tens of thousands of different kinds of proteins, produced and distributed by a highly sophisticated logistical system, powered by little power-plants (mitochondria) which are former free-living bacteria, and all to a blue print of nuclear DNA containing complex instructions in molecules folded for space saving most of the time. And all this is capable of reproducing itself. Trillions of these cells make up our body and its various systems - 80 billion neurons in the brain, plus another 100 million in the gut for example. No physicist would treat the body as a complex inorganic system because living organisms defy the physics of complexity and maintain themselves at or around an equilibrium.

In fact a homoeostatic organism, such as ourselves, is not such a bad metaphor after all. We circulate various commodities and currencies, process imports and exports, and do everything that an economy does, all with the aim of individual homoeostasis which leads to growth and reproduction. There is an isomorphism, as Johnson puts it, between an economy and an organism that allows the metaphor to work. In this model wealth is energy, it is exchanged in the form of tokens (e.g. glucose or ADP molecules), and circulates around. Debts can be created, for example, by anaerobic metabolism, but must be repaid. And so on.

So it is really madness as economists like Steve Keen suggest to think of the economy as tending to equilibrium? After all that is exactly what our bodies do. Why not model the economy as though it were an organism?