Tuesday, 21 February 2017

UK inflation and the oil price

Inflation is back.

Here is the change in the consumer price index (CPI) for January 2017, according to ONS:

Well, this doesn't look too serious. CPI is barely reaching the Bank of England's target of 2%. It has been much higher for most of the last decade, and yet the Bank of England has kept interest rates at historic lows.

But consumer price inflation - the prices that people pay for goods in the shops - is only one side of the equation. On the other side is producer price inflation (PPI), the prices that companies pay for the materials and energy they need to produce goods and services. The picture here is entirely different, as this table from ONS's January 2017 producer price inflation report shows:

Annualised producer price inflation has risen dramatically in the last six months. It reached double digits in October 2016 and currently stands at an astonishing 20.5%. Most of that is due to sharply rising import prices, of which by far the most important is crude oil, the price of which has risen by 82% in the last year. The dominance of oil imports in producer price inflation figures is evident from this chart:

Rising oil prices in the last year have added 9% to producer prices.

But inflation is a rate-of-change measure: it tells you how fast prices are rising, but not where they started from. Just over a year ago, we were looking at this chart:

In October 2015, ONS reported an entire year of double-digit deflation in producer prices, due to a 40% fall in the oil price and significant price falls in other imports:

So we could regard imports as simply returning to a more normal price level after the unwinding of the oil and commodities bubble. But what is a "normal price level"?

It turns out that import prices and the oil price are joined at the hip. So there is no such thing as a "normal price level" that ignores movements in oil prices. This chart shows producer price inflation since 2002:

And this chart shows the price of Brent crude since 2002:

Even just eyeballing these, the correlation is evident. For the whole of this century, the oil price has been the single biggest driver of producer price inflation in the UK. And judging by the CPI chart at the head of this post, it appears to be a significant driver of consumer price inflation too.

The other major driver of producer price inflation in the last 6 months has been the falling sterling exchange rate. Sterling is down by 13% against the US dollar. This explains the apparent divergence between the rate at which the oil price is rising and the rate at which inflation (PPI and CPI) is rising. Brent is quoted in US dollars per barrel, so its price in sterling is rising faster than its dollar price.

However, the rising oil price is evidently not being significantly passed through to consumer prices. A producer price rise of 20% is resulting in CPI of less than 2%. In fact the chart above shows that none of the swings in producer price inflation this century have been fully passed through to consumer prices - including the extraordinary speculative oil price spike just prior to the financial crisis and the QE-driven oil and commodity price bubble of 2010-14. Clearly, businesses have chosen to absorb the costs rather than passing them on to consumers. So where have the effects of these price rises been felt?

This is part of it:

Note the inflection point in 2007. For the next seven years, real wages fell, and they are still barely growing. Producer price inflation was not passed on to consumers - it was passed on to workers, in the form of wage growth that failed to keep up with consumer price rises.

Producer price inflation was also passed on in the form of poor productivity. Rising energy costs are particularly destructive to productivity, since rising productivity by definition increases energy usage. The picture is one of businesses trying to avoid passing costs on to consumers by restricting both wage growth and energy use. We would expect this to show up as lower output. And indeed, this is what we find:

 (source: ONS Gross Domestic Product time series January 2017)

UK output fell off a cliff in 2007, then tried to recover in 2009-10 but was clobbered by rising oil and commodity prices. I have previously observed that the UK in 2010-12 suffered double-digit inflation in energy prices, which in my view was the principal reason why the UK economy flatlined. If the QE-driven oil and commodity price bubble was the principal cause of the failure of the UK's recovery, then the prolonged use of QE by the US to restore its own economy has had terrible consequences for the UK. QE spillovers are known to be inflationary for emerging markets, but it seems that there was also an indirect inflationary effect in oil-dependent developed countries, which showed itself as stagnant output, poor productivity and flat wage growth.

If this is correct, then the falling oil price of the last two years has been the single biggest reason for the UK's improving output and wage growth. But now the oil price is rising and sterling is falling (which amplifies the depressing effect of the rising oil price on the UK economy). The little boom is over. If the oil price continues to rise, I expect wage growth to stall and output to flatline again. And if businesses do start to pass on these costs to consumers, then the Bank of England will additionally come under pressure to raise interest rates. This does not look promising to me.

However, the point of this post is not to remind everyone that my middle name is Cassandra. It is to highlight the critical dependence of the UK economy on the oil price, and to a lesser extent on imported commodities. The Bank of England's monetary policy is fairly effective at discouraging businesses from passing on import price rises to consumers. But we pay for this through inadequate wage growth, low productivity and poor output. Would it be better if businesses passed the costs on? Would significantly higher inflation in the medium-term be a reasonable price to pay for improved output and wage growth? Those who argue for a higher central bank inflation target are in effect saying that it would.

Of course, there are other moving parts in the productivity-wages-output puzzle. For example, I have not in this post discussed the effects of public sector wage freezes and the entry to the workforce of previously economically inactive people such as single mothers, sick & disabled and older women. And I have completely omitted the effect of damaged banks cutting back productive lending in order to repair their balance sheets. But the impact of the oil price on the economy is widely ignored, not least because the focus is entirely on consumer price inflation. Yes, a central bank can dampen the effect of oil price rises on consumer price inflation. But it cannot protect businesses from rising costs due to oil and commodity price rises. Perhaps, in future, we should pay far more attention to the direct effects of imported inflation on the supply side, rather than obsessing about consumer prices. After all, it is the supply side that ultimately drives economic growth and prosperity.

Related reading:

What derailed the UK recovery?
Inflation, deflation and QE
Inflation report, February 2017 - Bank of England

Monday, 13 February 2017

The end of the road for the Co-Op Bank

The Co-Op bank is putting itself up for sale. It announced today that it will offer all of its shares for sale, including the Co-Op Group's 20% stake and the shares currently owned by a consortium of American hedge funds, institutional investors and small investors. The decision follows on from last month's disclosure that it was facing a full-year loss for the third year running and would fail to meet capital requirements set by the Prudential Regulatory Authority (PRA) for some years to come. It has almost certainly been made under pressure from the PRA.

The decision to offer the bank for sale was undoubtedly very painful for the Board. But it has been obvious for some time that the Co-Op Bank's recovery plan was heading for the rocks. Both the 2014 and the 2015 reports contained warnings from the directors, endorsed by  the auditors, that the bank may not be able to continue as a going concern. There is little doubt that the forthcoming 2016 report, due at the end of March, will contain a similar warning.

In fact the Co-Op Bank has been living on borrowed time ever since it ignominiously failed the Bank of England's stress tests in 2015. The capital plan it agreed with the PRA was high risk from the start, relying on very favourable trading conditions and no major shocks. Unfortunately, the reality has been difficult trading conditions and a series of nasty shocks, culminating in the Brexit vote last June. Low interest rates were already squeezing its profits, making it hard to rebuild capital: in August 2016, when the Bank of England cut interest rates still further, the Co-Op Bank warned that uncertainty following the Brexit vote posed a serious risk to its recovery. 

But low interest rates and uncertainty are not the only reason for the failure of the Co-Op Bank's recovery plan. Speaking on BBC News, the new Chief Executive, Liam Coleman, admitted to two other reasons.

The first is the sheer scale of the repair work needed, which he said was much larger than had been expected. The bank has done a lot of work to clean up its balance sheet, cut its costs and improve the quality of its IT systems. But it still has unacceptably high levels of non-core assets and is struggling either to dispose of them or build the capital to support them. Despite a major cost-cutting and integration drive, its cost/income ratio remains unsustainable at over 100%. And although it has now migrated some of its IT systems to a more robust technical platform, it is still a long way from implementing the resilient, efficient and user-friendly IT infrastructure needed to deliver a strategy based upon a major move to online and mobile banking. 

 And secondly, the burden of fines, litigation costs and compensation for past misconduct. Relative to its size, its PPI mis-selling bill is nearly as large as that of Lloyds Bank, and it is the only bank to be censured by the FCA for breaking the Consumer Credit Act in relation to mortgages. In 2015 it was censured by the PRA for serious failings in risk management. And in 2015, its former Chief Executive, Barry Tootell, was personally fined by the PRA and banned from working in financial services, along with the former head of Corporate Banking, Keith Alderson. Tootell, an accountant who had acted as CFO as well as CEO, was subsequently barred from membership of the Financial Reporting Council as well.

The level of misconduct at the Co-Op Bank may surprise some people. But the truth is that the so-called "ethical bank" has been anything but ethical. Quite why its customers have been so loyal to it is a mystery. The bank systematically ripped them off for years.

The proposed sale amounts to an admission that the Co-Op Bank cannot grow out of its problems. It needs to find more capital, and it seems that its existing owners are not able or willing to provide it. The question is whether an external buyer would be willing to provide it. Frankly, this is a tall order. The market for distressed banks is decidedly thin at the moment, and there are arguably more promising candidates than the Co-Op Bank for anyone wanting to attempt a turnaround. Europe is littered with failing banks, many of which are in better shape than the Co-Op despite their problems. The Co-Op, after all, has already had one private sector rescue.

There have been suggestions that the TSB might be prepared to take it on - for the right price. The TSB's management probably know better than any other potential buyer just what a mess the Co-Op Bank is in: after all, it was the failure of the Co-Op Bank's attempt to buy the nascent TSB that exposed the awful state of the Co-Op Bank's own balance sheet. They will drive a hard bargain. The sale price of the Co-Op Bank is likely to be extremely low.

There could be some poetic justice in the TSB taking over the bank that tried to buy it - though of course the TSB itself is no longer an independent entity, having been taken over by Spain's Banco Sabadell not longer after its flotation. But it would need to be extremely careful. There have been too many cases of sound banks taking over distressed banks, only to end up in serious trouble themselves: the TSB will no doubt be mindful of the fate of its former parent Lloyds Banking Group, and indeed of the history of the Co-Op Bank itself. Taking on a distressed bank is not to be undertaken lightly. The TSB would no doubt like the Co-Op's customers (if it can keep them) and whatever good quality assets exist on its balance sheet, but it won't be nearly so keen on its costs and its debts. Even at a fire sale price, the Co-Op Bank may be too rotten a morsel to swallow.

If sale of the bank as a going concern fails - as seems distinctly possible, given the scale of the risks for any potential buyer - then it could be broken up. Currently, this seems more likely than an outright sale. The FT reports that challenger banks (including the TSB) and private equity firms are expressing an interest in buying parts of the Co-Op Bank's portfolio.

Breaking up the bank would leave a rump business with its reputation shot to pieces and little in the way of decent assets. It might be better capitalised, but from a business perspective it would have an even bigger mountain to climb than it had before. It would be unlikely to survive for long as an independent entity. However, it would probably be easier for the stripped-down and recapitalised bank to find a buyer.

The FT suggests that the Board might also try to restructure the Co-Op Bank's balance sheet by swapping debt for equity and raising additional capital from new and existing investors. I don't believe it. If that were a viable alternative they would have tried it before putting the business up for sale. I suspect they have already sounded out major shareholders about a rights issue and been firmly told "No". And without a rights issue, a debt for equity swap would still leave the bank desperately short of capital. It is not a solution.

As a last resort, the Co-Op Bank could be wound up by the PRA. In my view this outcome is only likely if a buyer for the whole business still cannot be found after a fire sale of assets.

Whatever the outcome for the bank as a business, the Co-Op Bank brand is likely to disappear. There are a number of reasons for this. Once the Co-Op Group no longer has a stake, it may object to the bank continuing to use its brand name. And if the bank ends up entirely in private sector ownership, the Secretary of State may revoke the bank’s right to describe itself as “cooperative”. If  the bank is broken up, the assets will be absorbed into the buyers' own brands: the rump business may retain the Co-Op Bank brand name, but unless by some miracle it manages to rebuild a distinctive franchise with a solid reputation, a future buyer would be unlikely to be interested in paying goodwill for what is by any standards a badly tarnished brand.

This 144-year-old institution seems set to disappear from Britain’s high streets. Many will mourn its passing. But there is a silver lining. The continued existence of a bank that is cooperative in name but not in nature has severely hampered the Cooperative Movement's efforts to promote cooperative banking. Once this albatross has been cast overboard (and regulatory obstacles overcome), they will be free to create new, vibrant cooperative banks. The death of the Co-Op Bank could, perversely, become the source of new life in cooperative banking.

Related reading:

The Co-Op Bank: too high a mountain?
Co-Op Bank Interim Financial Report 2016
The "ethical" Co-Op
A tale of two banks|

Image: "Wheatfield with Crows", Vincent Van Gogh. Courtesy of the Vincent Van Gogh Museum.  

Sunday, 12 February 2017

France's shame

Today, the Guardian has a report on conditions in the refugee camp at Dunkirk, just up the French coast from the infamous "jungle" at Calais that was cleared at the end of 2016. "Women and children 'endure rape, beatings and abuse' inside Dunkirk's refugee camp" proclaims the headline. This is of course the shiny new refugee camp, supposedly built to international standards, that was opened less than a year ago.

It makes harrowing reading. Here is an excerpt:
The witness statement from another volunteer, who could speak Arabic, describes how a 14-year-old from Morocco appeared to have been raped and could not sit down and kept repeating that he felt so “ashamed”. 
Their account stated: “He didn’t want anything, he was only crying and asking for his mum. He had been badly beaten."
The worker also described how a young child had been sexually assaulted on site, leaving her mother so shocked she had been rendered mute. “We have also seen in the past a woman holding a seven or eight-year-old girl by her arm next to GSF [the charity Gynaecology sans Frontières has a unit on site] and apparently this child had been raped just before, and the woman was afraid to report it to police. She was there, standing silent refusing to report it.”
But hang on. Let's just look at the last two sentences in that excerpt again, shall we?

"....the woman was afraid to report it to police. She was there, standing silent refusing to report it."

This is in France, remember. Women and children in a refugee camp in a supposedly civilised Western country are afraid to report serious crimes to the police. Rape of a minor is a criminal offence in France, as it is in the UK. It carries a long prison sentence. But if the camps are so poorly policed that sexual assault of children goes unreported because of fear, the perpetrators will never be brought to justice. They will continue to abuse vulnerable people with impunity.

Does the Guardian lead on the failure of the French authorities to ensure that women and children in the camp are protected from abuse? No. It blames the UK.

"The fate of those stranded by the UK’s decision to limit taking child refugees from France," says its sub-headline.

No doubt some of these children have been affected by the Home Secretary's decision to end the Dubs programme after resettling only 350 children instead of the 3,000 originally planned. There may well be a case for reinstating the Dubs programme: I for one think the Home Secretary's decision was appalling and would like to see it reversed. I wish those pursuing a legal challenge every success.*

But the stories in this article do not have anything to do with the UK's responsibility for resettling child refugees. They are about the fact that France treats its refugee camps as if they are not part of France. Policing is completely inadequate, and the residents of the camps are effectively deprived of the normal protections afforded by French law. The UK is not in any way responsible for the determination of the French authorities to make life extremely difficult for refugees in the hope that they will go away.

If this story were about the camps in Libya where torture, rape and execution is an everyday occurrence, I might think that it would be right to lead on the UK's responsibility to resettle children from the camps. Libya is ravaged by war and has no effective government. But this is a story about a camp in France. France, a rich Western country with a stable democracy. France, a signatory to the Geneva Convention on Refugees and the European Convention on Human Rights.

To my mind, it would have been a lot more useful for the Guardian to shout about the fact that neither the UK government nor the EU authorities have been able to force the French government to improve its treatment of refugees. The UK government was instrumental in getting the Calais "jungle" closed down: but this was to stop illegal immigration to the UK, not to ensure the welfare of refugees. After the "jungle" was closed down, humanitarian organisations expressed concern about the fate of unaccompanied minors evicted from the camp.

The Dunkirk camp is also under threat of closure, along with other camps throughout Northern France. But closing down refugee camps is not an adequate solution. In October 2016, Médecins Sans Frontières warned that dismantling camps simply condemned refugees to living as vagrants. It called on French authorities to put on hold all plans to evict camp residents and close down camps until suitable alternative arrangements could be made. It is hard not to conclude that "suitable alternative arrangements" are the last thing the French authorities want to provide. They want refugees to leave, not take up residence.

 If the Geneva Convention on Refugees (pdf) means anything at all any more - which is looking increasingly doubtful - the international community must pressure the French government to improve policing and conditions in its camps and detention centres. Denying refugee women and children the protection of the law flouts both the letter and the spirit of the Geneva Convention. France's treatment of refugees who have sought safety inside its borders is a national disgrace.

Related reading:

When the world turns dark
In the bleak midwinter
Europe's shame
Horror story
What have we learned from history?

* Legal challenge to the Dubs decision on behalf of the refugee children of Dunkirk is being crowdfunded. You can find out more and make a donation at CrowdJustice here.

The handy map at the top of this post comes from the Daily Mail. It dates from January 2016. 

Tuesday, 31 January 2017

Seeing through the smoke

The last week has been extraordinary, even by the standards of these extraordinary times. A flurry of Executive Orders from the new President of the United States has thrown the global order into chaos and sparked outrage throughout the world.

But he has only done exactly what he said he would do. There is nothing in the Executive Orders signed so far that was not announced during the Presidential campaign, repeatedly and to loud cheers from his many supporters. The President was lawfully voted in by the people of the United States on the basis of the promises he made to them, and he is now following through on those promises. Frankly, I find this hard to criticise. If his decisions are illiberal, discriminatory and racist, that is because a substantial proportion of the American people are illiberal, discriminatory and racist. The problem is not the President, it is those who elected him.

I do not understand why those who cherish liberal values and human rights convinced themselves that President Trump did not mean what he said. Not to follow through on his promises would have been a major betrayal of those who voted for him. How could anyone possibly respect or trust a President who made promises on the campaign trail that he had no intention of keeping once in office? Honesty, loyalty and trustworthiness are the foundation of civic society. What price "liberal values", if they can only be maintained through bad faith?

There is a distressing tendency in the mainstream press to dismiss the election of an illiberal, discriminatory and racist President as "populism", as if that is somehow different from, and inferior to, democracy. The liberal elites that have been in the ascendant for the last half-century or so cherish a reified concept of "democracy" in which informed people choose their government on the basis of frankly altruistic principles. The good of all, not their own narrow self-interests, determines their choice: and for liberal elites, the "good of all" is self-evidently the open, tolerant, inter-connected world in which they believe. Thus, "democracy" must mean the triumph of liberalism. Anything else is not "democracy", it is something lower, something primitive, even animal. If only we could perfect "democracy", there would never be another fascist government, never be any more despised and ill-treated minorities, never be any more government-sponsored atrocities.  

But populism is democracy. Democracy does not guarantee liberalism, tolerance and respect for human rights. Democracy can elevate both saints and monsters to power. The fact is that the American people democratically elected this President. They voted for illiberalism, intolerance and racism. And not for the first time, either. 

Nor are they the only ones to do so. The global, integrated world order is unravelling fast, as country after country turns to fascist authoritarianism. I choose my words carefully. The Fascists of the past will not return: but the values and beliefs that they espoused live on. For seventy years, they have lain hidden, dormant like a volcano: and like those who live on the slopes of a dormant volcano, we have fooled ourselves that they were extinct. We are now learning how wrong we were. 

Except.....we are not. We are still focusing on the wrong things. The world erupts in outrage over the Executive Order temporarily banning refugees from the United States and imposing additional checks on visitors from certain countries. But this is a smokescreen. The Executive Order was clearly designed to create chaos and confusion. It is entirely malevolent, yes: it peremptorily removes long-established rights of movement and residence from certain minorities, chosen on the basis of an an entirely mythical "threat": it is discriminatory on both racial and religious grounds. It may well turn out to be unlawful under the American Constitution. But its primary purpose is to distract attention from what is really going on. And in that, it has succeeded all too well. 

On the same day as the immigration ban was imposed, the President signed two Memoranda. 
The first changed the composition of the Principals Committee of the National Security Council (though not the Council itself, whose composition is governed by law), removing the Chiefs of Staff and adding the President's Chief Strategist, Steve Bannon.

Bannon's world view makes fascinating reading. He frames America's relationship with the rest of the world as a religious war in which America bears primary responsiblity for marshalling the forces of the Judaeo-Christian West against a growing Muslim threat:
But I strongly believe that whatever the causes of the current drive to the caliphate was — and we can debate them, and people can try to deconstruct them — we have to face a very unpleasant fact. And that unpleasant fact is that there is a major war brewing, a war that’s already global. It’s going global in scale, and today’s technology, today’s media, today’s access to weapons of mass destruction, it’s going to lead to a global conflict that I believe has to be confronted today. Every day that we refuse to look at this as what it is, and the scale of it, and really the viciousness of it, will be a day where you will rue that we didn’t act.
It is not hard to work out what US national security policy is likely to look like, if these are the views of the man now driving it. 

In reality Bannon has been driving security policy for some time. The Memorandum merely legitimizes his authority. He had the President's ear from the start. And it is Bannon's world view that underlies the second Presidential Memorandum signed last Friday. That Memorandum requires the Defense Secretary, in conjunction with other members of the Cabinet and advisers, to come up with a plan to defeat Islamic State. The draft plan must be produced within 30 days. 

Also on the day of the immigration ban, the President had a phone call with President Putin of Russia. The Kremlin helpfully summarised the content of their phone call in a press release. This was their discussion of international affairs: 
Mr Putin and Mr Trump had a detailed discussion of pressing international issues, including the fight against terrorism, the situation in the Middle East, the Arab-Israeli conflict, strategic stability and non-proliferation, the situation with Iran’s nuclear programme, and the Korean Peninsula issue. The discussion also touched upon the main aspects of the Ukrainian crisis. The sides agreed to build up partner cooperation in these and other areas. 
The two leaders emphasised that joining efforts in fighting the main threat – international terrorism – is a top priority. The presidents spoke out for establishing real coordination of actions between Russia and the USA aimed at defeating ISIS and other terrorists groups in Syria.
Russia, remember, was instrumental in the recent destruction of East Aleppo at a huge cost in civilian lives. The Obama administration stood by, wringing its hands, while the city was flattened. That was bad enough. But the Trump administration, it seems, would have joined in the bombing. And will, in future.

The final piece in the puzzle is this Presidential Memorandum signed the day before the immigration ban. It directs the Defense Secretary to conduct a 30-day "readiness review" of the armed forces, and in conjunction with that, produce an amendment to the 2017 fiscal budget for "military readiness". And within 60 days, he is to submit a "plan of action" to rebuild America's armed forces to the level of "readiness" he considers necessary. Of course, rebuilding the armed forces was another of President Trump's campaign promises, so there are no surprises here. But this paragraph should give everyone pause for thought:
Upon transmission of a new National Security Strategy to Congress, the Secretary shall produce a National Defense Strategy (NDS).  The goal of the NDS shall be to give the President and the Secretary maximum strategic flexibility and to determine the force structure necessary to meet requirements.
No-one in their right minds would deny that a new National Security Strategy is desperately needed. But just look who would be driving it. The Chief Strategist now has a key role in national security. It is beyond doubt that Steve Bannon's views will significantly influence the new National Security Strategy.

So America is rearming, in anticipation of a new war in the Middle East. A much larger and wider-ranging war than the previous inadequate and inconclusive incursions in Iraq and Libya, which probably did more harm than good: removing the dictators simply left a void into which Islamic State stepped. The immigration ban on seven Middle Eastern countries should be seen as the precursor to the coming conflict. It is ostensibly "temporary", but then so is a war. And if the National Defense Strategy concludes that those countries pose a sufficiently grave threat to the US to justify military intervention - which to me looks like a racing certainty - then the ban would obviously be made permanent, for reasons of national security. You don't allow immigration, or even casual visitors, from countries you intend to invade.

Nor should we imagine that the coming war would be limited to those countries.The White House has already indicated that more countries could be included in the immigration ban. Personally, I would regard inclusion in the immigration ban as a statement of intent.

But how would such a war play out? After all, Islamic State is hardly your usual tinpot dictatorship. It is not even a coherent country. It is a diffuse network of enclaves in multiple countries, and its terrorist tentacles extend even into developed countries such as Belgium and France.

Clearly, strikes against IS strongholds would incur a terrible civilian price, which is unlikely to be remotely palatable to Western populations. Security is one thing, but genocide is another. And because IS does not hesitate to use civilians as shields, genocide would be necessary. So I hope - I really hope - that those now planning the defeat of IS can find another way.

This interesting piece in the FT might give a clue as to a possible strategy. Islamic State is critically dependent on oil. If Western forces, including Russia, can break IS's grip on the oilfields of Iraq and Libya, it might be possible to starve them out. Thousands would die, of course, but the US could blame IS for their deaths. President Trump's comments about "seizing Iraq's oil" should perhaps be seen in this light, though their acquisitive tone suggests there is another agenda too. After all, he is a businessman: takeovers are his daily bread.

So flatten anywhere in the Middle East where IS has a foothold, seize control of oil production in those countries and hand it over to Western oil companies (starting with Exxon Mobil - Rex Tillerson's appointment is no accident). Russia would need a cut, of course - probably the Caspian oilfields currently belonging to Iran.

The accommodation with Russia might require a larger sacrifice too. President Trump has already said he wants to reform NATO, and President Putin has made no secret of his preference for recovering the territories of the former Soviet Union. It is not beyond the bounds of possibility that the price for Russia's cooperation with the US would be that NATO withdraws from the former Soviet states, leaving them at Putin's mercy. The Baltic states clearly fear this.

President Trump has also made no secret of his intention to break up the EU: the EU's Guy Verhofstadt sees the President as one of three major threats to the bloc, the others being Islamic State and President Putin. If the EU fails, then Europe could perhaps end up being divided into a Russian zone and an American zone: where the line falls would be decided by a summit, rather than a Cold War. There would be some poetic justice in this: the continual conflicts in the Middle East and much of Africa are themselves to a considerable extent the long-run consequence of the former European powers deciding colonial claims by drawing lines on a map. And like their former colonies, the countries of Europe would pay tribute to their new overlords in the guise of "defence contributions" or "economic contributions". Such is the fate of vassal states.

It would be a mistake to imagine that US aggression would be limited to the Middle East. The White House's website cites North Korea as a serious risk justifying the development of a completely new, state of the art weapons system: it is telling that the President discussed Korea in his call with President Putin. And a few days ago, the White House warned China that it would not allow it to seize "international territory"in the South China Sea. Whether this develops into a full-scale war, or simply a simmering standoff like the Cold War, remains to be seen.

The present turmoil is the prelude to a major redrawing of the global political map and realignment of powers. In the past, such realignments have always involved war, as resurgent tribal interests fight to restore historic territorial claims: even the dissolution of the Soviet Union in 1991 was not conflict-free. There is no reason whatsoever to assume that this time is different.

Related reading:

Currency wars and the fall of empires - Pieria
Austerity and the rise of populism
What have we learned from history?
The immigration ban is a headfake and we're all falling for it - Medium

Also read Heather Richardson's Facebook post on the "shock event" and how important it is not to play the game.

Image from CNN.

Thursday, 19 January 2017

President Trump's Triffin problem

In many eyes, President-elect Trump is a loose cannon. He says things that upset people the world over. Many of these things perhaps should not be taken too seriously - after all, he is a showman. But it would be a mistake to dismiss his rhetoric on trade. There, he is in deadly earnest - and it does not bode well either for America or for the world. 

Trump's trade agenda was set out in Peter Navarro & Wilbur Ross's paper (pdf) of September 2016. Peter Navarro's most famous work is the documentary "Death By China" which essentially blames China for all America's woes. Wilbur Ross is a businessman who made a fortune from buying up and restructuring manufacturing businesses, some of them protected by George Bush's trade tariffs. Both of them are unashamedly protectionist, labelling countries running large trade surpluses as "cheaters" and "manipulators" and demanding that the rules of international trade be changed to benefit America at their expense. Both of them have been appointed to top trade jobs by Donald Trump. 

Navarro & Ross identify three causes for what they describe as "America's economic malaise". Two of them - high taxation and over-regulation - are long-standing complaints by America's right-wing business community. But the third is new. Navarro & Ross explicitly blame America's trade deficit for poor GDP growth. And they claim that the trade deficit is entirely due to unfair practices by America's principal trading partners:  
Trump views America’s economic malaise as a long-term structural problem inexorably linked not just to high taxation and over-regulation but also to the drag of trade deficits on real GDP growth. Trade policy factors identified by the Trump campaign that have created this structural problem include: (1) currency manipulation, (2) the equally widespread use of mercantilist trade practices by key US trading partners, and (3) poorly negotiated trade deals that have insured the US has not shared equally in the “gains from trade” promised by textbook economic theory.
They name China and Germany as currency manipulators, China as the biggest "trade cheater" (i.e. mercantilist), and Canada, Mexico and South Korea as benefiting from unfair trade deals.

Many people have pointed out the gross economic errors in Navarro & Ross's analysis. At Vox, Matt Yglesias explains how imports contribute to exports: imposing high tariffs on imports simply raises business costs, reducing business profits and threatening people's jobs. The economist Greg Mankiw notes that they fail even to mention the effect on the capital account (foreign investment in America) of closing a current account deficit. Paul Krugman describes their discussion of VAT as "utterly uninformed". And Larry Summers says Trump's global economic plan is based on a "misunderstanding of how the global economy works".

I'm with Larry Summers on this. Navarro & Ross have failed to understand the nature of the US's relationship with the rest of the world. And they have therefore disastrously misinterpreted the cause of its trade deficit. There may well be currency manipulation, mercantilism and skewed trade deals. But these are not the principal cause. No, the main reason for the US's trade deficit is the US dollar.

The US dollar is the world’s premier currency for international trade and investment. More trade is done in U.S. dollars than any other currency. More trade finance is issued in U.S. dollars than in any other currency. More business investment is financed in U.S. dollars than in any other currency. Global markets price oil, metals and commodities in dollars. Even currencies are priced in dollars. The world relies on dollars to lubricate the flow of goods and services around the world. 

The "quantity of money" equation MV=PY tells us that the quantity of money in circulation should be sufficient to maintain steady output. In a closed economy, when there is too much money in relation to output, there is inflationary pressure: too little, and there is risk of deflation. But because the US dollar is so widely used in the global economy, the quantity of dollars needed to support global trade far exceeds the US's productive capacity. We could say that there need to be sufficient dollars in circulation to maintain steady global output. This does not cause inflationary pressure in the US, as the equation might suggest. Rather, it creates a balance of payments problem. 

How global demand for dollars creates a balance of payments problem for the US was first described by the economist Robert Triffin. Testifying before Congress in 1960, Triffin explained how the US's trade deficit was essential for the global economy, but potentially disastrous for the Bretton Woods fixed exchange rate system:
If the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage of liquidity could pull the world economy into a contractionary spiral, leading to instability
If U.S. deficits continued, a steady stream of dollars would continue to fuel world economic growth. However, excessive U.S. deficits (dollar glut) would erode confidence in the value of the U.S. dollar. Without confidence in the dollar, it would no longer be accepted as the world's reserve currency. The fixed exchange rate system could break down, leading to instability.
Triffin's Dilemma, as this came to be known, played out throughout the 1960s and eventually led to the Nixon Shock in 1971, when President Nixon suspended the convertibility of the dollar to gold, effectively ending the Bretton Woods system.

From that time on, the US has been able to run persistent trade and, often, fiscal deficits without risking a damaging run on the currency. Indeed, such is the global demand for US dollars that until the era of central bank intervention and QE, the US was able to fund its growing pile of government debt at lower interest rates than any other country. The US Treasury is the world's premier savings product, and the interest rate on US T-bills is regarded as the nearest we can get to a risk-free rate in the real world.

The US's ability to obtain very large amounts of debt at very low interest rates is known as the US's "exorbitant privilege". But it could also be regarded as an "exorbitant burden". The role of moneylender to the world means the US must be a net exporter of dollars. There are two ways of exporting dollars: one is to lend them, and the other is to buy goods and services. The US does both. Its banks -including the Federal Reserve banks - lend dollars to the world, and its citizens buy imported goods and services from the world.

As this chart shows, the era of globalisation has been marked by a rapidly increasing US trade deficit.

Navarro & Ross wrongly blame this on the trade practices of other countries, failing to recognise its true origin in the US's responsibility for maintaining global dollar liquidity as global trade increased during this period. And consequently, they have come up with a policy prescription which, by closing the trade deficit, would cause a crisis of dollar liquidity, potentially leading - as Triffin warned over half a century ago - to a global contractionary spiral. We have a name for such a spiral. It is called a Depression.

I suppose Trump and his team of voodoo economists would say that they don't care if the rest of the world goes into a Depression, as long as America is ok. But there is no way that America could be insulated from the effects of such a severe global monetary contraction. To show this, we have to look at how such a monetary contraction would play out.

In the first stage, banks lend less to the world. In fact, this has been happening ever since the financial crisis of 2008. Tighter capital requirements mean banks are effectively penalised for lending to higher risks: this is causing a credit crunch for businesses (pdf), especially small and medium size enterprises and particularly in developing countries. In part due to banks' reluctance to provide trade finance, and in part due to poor demand in developed countries, global trade volume has declined significantly since 2008, though a rising dollar has helped to maintain global trade value:

(chart from David Stockman)

The US's trade deficit has already reduced significantly, which indicates that there are fewer dollars in circulation than there used to be.

For much of the period since the 2008 financial crisis, the Federal Reserve's QE programme maintained or even increased global dollar liquidity. But that is now ended, and the Federal Reserve is progressively raising interest rates. This has the effect of tightening global monetary conditions. In response to this, the dollar's exchange rate is rising.

A rising dollar exchange rate makes America's exports less competitive and encourages imports. This is entirely the opposite of what Navarro & Ross want: they want to reduce imports and increase exports. So, to the next stage of the process. To counteract the effect of the rising dollar, businesses are penalised for importing, and citizens pay higher prices for imported goods because of those penalties. What effect does this have?

Clearly, America's imports would fall, reducing the trade deficit. This is of course exactly what Navarro & Ross want. But the flip side of reducing the trade deficit is global dollar liquidity shortage (and, as Mankiw pointed out, a squeeze on foreign investment in the US). This would reveal itself as a sharply rising dollar exchange rate, especially in relation to the currencies of developing countries. If the Federal Reserve did nothing to counteract it, then the effect of the Trump team's protectionist measures would be to put upwards pressure on the dollar, impeding America's exports.

The worsening global dollar liquidity shortage would force China and other holders of US Treasuries to sell down their holdings. Such sales would be likely to raise yields on USTs, to which the Fed would most likely respond by raising the Fed Funds rate. So the tightening effect of the rising dollar could be compounded by faster monetary tightening from the Fed.

Closing the trade deficit when the dollar is rising would require progressively harsher trade controls - larger penalties for importers, price rises for citizens, perhaps outright import bans for some products. Because restricting imports raises costs for businesses, we would start to see business failures, resulting in falling GDP and rising unemployment. This is exactly the opposite of the effect that Navarro & Ross claim that closing the trade deficit would have.

Not that they would succeed in closing it, though. Other countries would inevitably respond to America's protectionist measures by imposing tariffs on American goods and services.  This, in addition to the rising dollar, would make America's exports prohibitively expensive. So the effect of Navarro & Ross's protectionism would be a severe contractionary spiral in global trade, with America at the epicentre.  It is not hard to imagine what the effect on the American economy would be.

It is, of course, possible to close a trade deficit by initiating a severe recession. Indeed, it is probably the ONLY way of unilaterally closing a large and persistent trade deficit. Navarro & Ross's protectionism would not improve prosperity in America. On the contrary, it would be a severe economic decline, perhaps even another Depression. And as always, the worst hit would be the working poor - the very people who voted for Mr. Trump in the hopes of a better life.

Related reading:

Safe assets and Triffin's dilemma
When populism fails, tragedy prevails - Manchester Policy Blogs

Image from the LA Times. 

Friday, 13 January 2017

It's not an NHS crisis, it's a social care disaster

You've probably all noticed that I haven't been writing much lately. Well, not on this site, anyway, though I have been doing rather a lot elsewhere.

In the last couple of months, my life has been upended. I suppose I should have seen this coming - the signs have been there for a long time - but the speed at which this has happened has shocked me.

At the end of October, my father suffered a fall at his home on Sheppey, where he has lived alone since my mother went into a nursing home in August 2014.  He was found - after several hours - by the taxi driver he had booked to take him to see her. I didn't find out for another two days that he had been taken into hospital.

When I went to see him, I was horrified. He couldn't talk, and when I spoke to him he just stared at me. I thought he had had a stroke. But the hospital thought otherwise. They decided it was his heart, fitted him with a pacemaker (for which he had previously been recommended, but no-one had got round to fitting it), and discharged him. Unable to talk and unsteady on his feet, he went back to his home, to live alone with no support.

He tried to carry on as before. The day after his discharge, I had a phone call from his taxi driver saying that he had just taken my father to see my mother. "He shouldn't be living alone", he said. "He's not well".

How right he was. A few days later, my father was back in hospital after a fall in the street. This time, the doctors decided that he had post-stroke seizures, though they didn't know exactly when the stroke had been. They gave him epilepsy medicine. He stopped falling over, though he still had frequent small ("petit mal") seizures during which he temporarily lost the power of speech and purposeful movement. They didn't have a solution for the small seizures, so they referred him to Kings College Hospital in London, and discharged him. Yes, you got it - discharged him back to his home to live alone without support.

Both my father and I resisted his discharge on the grounds that as his epilepsy is clearly not under control and he has a number of additional health problems, it is unsafe for him to live alone and we needed time to arrange accommodation and care. The doctors told us that there would be a care package for 6 weeks consisting of visits twice a day to ensure his safety, and the ward nurses said that he would not be discharged until the care package was in place. The discharge nurse amended this slightly - she said the care package would not kick in "for a few days". So I - rashly - agreed to cover.

Two weeks later, there had not been a single visit. Clearly, something had gone wrong. I didn't know whether the failure was at the hospital, which requests care, or in the local council, which provides it. Fortunately, I was able to enlist a spy.

About ten days after his discharge, my father had been telephoned by a community occupational therapist. Telephone calls are difficult for my father, since he often loses the power of speech during the call - this is one of his (so far unresolved) care needs. So, as my father was unable to speak, the occupational therapist decided to make a personal visit to assess his care needs.

I was not present for that visit. Later that day, when I arrived to help my father with his shopping, he said "They can't help me". The occupational therapist had concluded that since my father doesn't need help with personal care, he doesn't need any help. I spoke to the occupational therapist the following day, and he confirmed that the decision was to provide no care. I pointed out that the hospital had promised 6 weeks of twice-daily visits to ensure my father's safety, and that the NHS was paying for these visits. He said he didn't think any such request had ever been received, but he agreed to find out what care had actually been requested.

A few days later, he rang me. No care request had ever been received. All that had been requested was district nurse support for my father's permanent catheter, and follow-up by the GP regarding routine EEG as part of epilepsy management.

I am not one to take such hospital malpractice lying down. We had only agreed to my father's discharge on the basis that a care package would be provided. Had we been told the truth, my father would not have left hospital until I had been able to organise private sector support for him, which could have taken quite some time. So I registered a formal complaint with Medway NHS Trust and copied it to mine and my father's MPs.

That stirred things up nicely. Within a few days, I was contacted by the sister of my father's ward at Medway Hospital. She investigated what had happened, and discovered that somewhere in the labyrinthine administrative nightmare that is the NHS's relationship with community care providers, the doctors' request had disappeared. Despite the assurances the ward staff and discharge nurse had given us, my father had in fact been discharged  to live on his own with no support.

The hospital apologised, of course. But there is still no care. And this time, it is not the hospital's fault. It is the fault of the local council.

The occupational therapist said that even had the care request from the hospital been received, Kent Social Services would still have provided no care. This was confirmed by a social worker a few days later. "We don't do safety visits," she said.

So the local authority will provide absolutely nothing for my father. No care in his own home. Nothing to ensure his safety apart from assistive technology which requires him to be able to speak - which he cannot, when he is having a seizure. No sheltered housing (he fails the means tests). Apparently the local authority has no duty of care whatsoever to an 83-year old frail elderly man with multiple health problems who is living on his own. What kind of society have we become?

Not only has the local authority refused to provide care of any kind, it won't even help us to find self-funded private sector support. The best the social worker could offer was a referral to Age UK. Age UK say they can probably provide someone to accompany my father on trips out of the house, but they don't do safety visits, and nor can they provide an on-call service as backup to the assistive line to avoid unnecessarily calling out the emergency services. So it is now left entirely to me to find a private sector care agency that can meet these needs. Until I do, my father is on his own, and I am his sole carer despite working full-time and living 30 miles away. We have been comprehensively dropped in it.

By failing to provide care, the hospital and the local council between them have effectively forced me to become my father's carer, without my agreement and - more importantly - without any respect for my own needs. I am not in a position to give up work to become my father's carer. I still have a dependent child, whom I must feed and house (though thankfully I don't have to clothe her any more - she pays for that herself). So I am now trying to manage my father's needs in addition to working full time and looking after my own family. There are only 24 hours in a day, and they are not enough. Sleep is for wimps.

Whoever failed to organise care for my father clearly didn't give a stuff. All they cared about was getting him out of hospital. Such is the pressure on beds these days that hospitals will discharge frail elderly people into unsafe environments with no attempt to ensure that appropriate care is in place. And they will also wilfully mislead the families of frail elderly people to get their agreement to an inappropriate discharge.

But the bigger issue here is the comprehensive failure of the local authority safety net. Local authorities have cut social services to the bone. Even for those who are poor enough, or needy enough, to qualify for social support, the provision is dangerously overstretched, with inadequate care homes and carers who are poorly trained, poorly paid, insufficiently supervised and seriously overloaded. And for those who can afford to pay for their care, or whose care needs simply don't meet the extremely narrow criteria to which local authorities have restricted their care provision, there is very little provision at all.

Importantly, it is not just the public sector that is desperately short of capacity. I was advised not even to try to contact private sector care agencies over Christmas because they were so overstretched. As I have said previously, this is a massive market failure. Neither the public sector nor the private sector are able to provide the care that elderly people living in the community increasingly need.

Ring-fencing the NHS budget protected it from the worst of the cutbacks in recent years, but because the NHS was protected, other areas were cut even more heavily. Local authority budgets have been cut repeatedly: many local authorities are struggling to provide even basic services. No wonder they interpret their remit so narrowly that many vulnerable people are left without care. But I don't understand why they won't act as an enabler for people who are able and willing to use private sector care support, but need help finding providers. Surely it doesn't cost much to provide a signposting service?

The really stupid thing is that the NHS ends up paying anyway. Elderly people remain in hospital far longer than they need to, because there is nowhere safe for them to go. Or, worse, elderly people are discharged from hospital into unsafe environments with no care in place, and quickly end up back in hospital after emergency services are called out by family, neighbours, assistive line call centres or voluntary services. The NHS then has to treat them for wholly unnecessary injuries, hypothermia, dehydration, and the consequences of failing to take medication.

And it's not just elderly social care that has been cut. There are widespread cuts to other social services, such as community mental health. These local authority cutbacks don't really save any money, they simply push the cost somewhere else, increasing it along the way because of the distress this causes to those affected. And when the music stops, the cost inevitably falls on NHS Accident & Emergency departments. No surprise, then, that NHS A&E is in crisis.

When social services fail, it is the NHS that picks up the tab. This, not underfunding of the NHS itself, is the main cause of the crisis in the NHS.

Like all crises, this one has been visible on the horizon for years. There have been repeated warnings about the effect on social services of severe cuts to local authority budgets. But of course now the crisis is here, everyone will say "why didn't we see this coming?" There is none so blind as those who only see money, and none so deaf as those for whom listening is more than their political job is worth.

Related reading:

Market failure
The sandwich generation
Broken windows, broken lives

No, I'm not going to respect your opinion

What does "discussion" mean?

According to the Oxford Dictionary, there are three definitions:

  • the action or process of talking about something in order to reach a decision or to exchange ideas
  • a conversation or debate about a specific topic
  • a detailed treatment of a topic in speech or writing

Well, this is a pretty wide brief, isn't it? Lots of opportunity for misunderstanding there.

I recently joined a discussion group. There are lots of these on social media, some open, some closed. Some have clearly defined topics, others are much woollier. Most do not specify what they mean by "discussion".

I expected a friendly debate in which differences of opinion are welcomed and there is no intention of reaching any conclusion. But there is no particular reason why I should expect this. Another person might expect discussion to be focused entirely on obtaining general agreement to a particular course of action. And someone else might simply be wishing to air their views on a particular topic without those views being challenged. All of these fit within the dictionary definition of "discussion".

So I asked the members of my group what they meant by "discussion". Of course, there were different views. So we are now having a discussion about the meaning of discussion. The question is, should this discussion lead to mutual agreement about what we mean by discussion, or should we "respect each other's opinions" - by which most people seem to mean "agree to differ"?

To me, the answer in this case is obvious. We cannot possibly "agree to differ". If we don't agree on what we mean by discussion, no discussion is possible. We end up talking past each other, or worse, getting angry with each other because people who want friendly debate challenge people who just want to air their views.

When there is no agreement about what "discussion" means, a "discussion group" tends to become merely an echo chamber for the majority who substantially agree with each other. Dissenters are silenced, not by moderators but by abuse from the majority. Although the group has never "agreed" what it means by "discussion", the majority view inevitably prevails.

So in order for there to be discussion, we must in the first instance agree on what we mean by "discussion". In an unmoderated group where there is no agreement about what "discussion" means, the dominance of the majority amounts to a coup. Moderation is necessary to prevent the majority becoming tyrannical.

But we don't have to agree about anything else. Indeed, discussion is more constructive if we don't. Dissent is creative. We learn from those who disagree with us. Silencing dissent is the hallmark of totalitarian regimes. Those who see "discussion" as opportunity to air their views in a supportive environment, and abuse those who provide reasoned challenge to their views, are essentially fascists.

We can, and should, disagree with each other's opinions. Discussion does not have to mean agreement. We can take the same set of facts and reach opposite conclusions, as my father and I did over the Brexit vote: I was more positive about the future for the UK in the EU than he was. We were simply attaching different weightings to the available facts and assessing the best course of action based upon our weighted view of the facts. And we will never know which of us was right. As Aslan said to Lucy, "To know what would have happened? No. No-one is ever told that. But anyone can find out what will happen." The choice was binary and irrevocable, and we now know what will happen, though we do not yet know exactly how. The path we now walk is that which leads out of the EU.

However, dissent over facts is not reasonable. If I know there is overwhelming evidence that your opinion is based upon a wrong understanding of the facts, I am not going to "agree to differ": I am going to present the evidence and expect you to change your opinion. There is not, and will never be, £350m per week to be saved by leaving the EU. There is not, and never has been, a "pension pot" containing your NI contributions. Banks do not lend out reserves, or deposits.

You may decide not to change your opinion, of course: there are plenty of people who continue to believe that the earth is flat despite overwhelming evidence to the contrary. But I am not going to respect your opinion. It is not respectable.

So I will continue to correct factual errors and challenge ill-founded opinions. And if that is disrespectful, so be it. You are entitled to your opinion, but don't expect me to agree with you. If I think your opinion is fantasy, I will say so. And if you don't like me correcting your facts, get them right.

Related reading:

The snake oil sellers
Dangerous assumptions and dodgy maths
Banks don't lend out reserves - Forbes

Image is a still clip from the feature film "Prince Caspian", showing Aslan and Lucy.