17.12.09

Global Warming Climategate

Russia is becoming a focal point in the battle of ideas over climate change.

After leaked data from the University of East Anglia’s climate change unit were posted on a server in Tomsk, conspiracy theorists pointed to Russian hackers.

Yet how would a hacker have known the University of East Anglia had manipulated climate data? Or about the climate researchers’ decade-long history of using the peer review system to silence those who disagreed with the global warming hypothesis? And where to get the emails to prove it? An inside job remains most probable.

Now, however, Russia is back in the spotlight. Research released through Moscow’s Institute of Economic Analysis suggests the Hadley Climate Research Unit Temperature UK was selective and forgetful with data from Russian weather stations and exaggerated the scale of global warming in Russia.

The allegation is supported by one of the leaked  UAE emails, dated March 2004, from Phil Jones to Michael Mann.

"Recently rejected two papers (one for JGR and for GRL) from people saying CRU has it wrong over Siberia. Went to town in both (peer) reviews, hopefully successfully. If either appears I will be very surprised, but you never know with GRL. Cheers, Phil."


Copenhagen Doubts

It's well timed to weaken the resolve of global leaders at the Copenhagen Climate Change Conference. Russia would make more money from selling its pollution credits than any other country, so you'd be wrong to conclude that Russia is simply motivated by its oil and gas reserves.

Russia stands to benefit by $10s of Billions from carbon trading. And big oil will do very well out of the lucrative climate change business.

Russia is the world's biggest country and its got lots of climate data. Its researchers are simply puzzled how the Hadley climate unit managed to ignore so much of it.

The Russian research looks at the data from 121 monitoring sites that HadCRUT used and the at least 355 it did not use.  It plots the data, and finds the 121 sites tending to warmer weather reports than the 355 unused sites. If you want the document it is here:

The principal findings are that researchers cherry picked results based the stations that supported the hypothesis of global warming.

Supporters of global warming have already dismissed the IEA report as “the same old argument” that meteorological sites next to cities show warmer records than those in the wild.

But the IEA discovers much, much more.

Weather centres with records going back into the 19th century were ignored, in some cases, in favour of monitoring stations with less data, but which pointed to warming.

"Weather stations Uchur has a long and almost continuous serie meteorological observations from 1940, the station Toko - an intermittent series of observations from 1946 and continuous - only since 1957, however, the trend towards warming in the 20 th century was more pronounced according to the station Toko. In the calculations of global temperature HadCRUT predictably uses the data solely for the station Toko."

Hadley "Reduced" Data Series


Another excerpt from the Russian report:

"It turns out that the data not included in the HadCRUT sample and not used to calculate the global temperature is systematically much more extensive.Only one tenth of meteorological sites with complete temperature series are used. Sites with incomplete data series account for two-thirds of the HadCrut sample.

"Moreover, the processing of data Russian specialists HadCRUT sometimes exhibits an unexplained loss. For example, the Hadley Center reduced the temperature data series for the station Sortavala provided Roshydromet - See figure 5 and 6."

The Russian research concludes that HadCRUT's preselection of weather monitoring sites in Russia affected the scale of warming that it claimed to find.

The Russians try to reproduce HadCRUT's conclusions.

They do indeed identify a warming trend but it is 1.4 degrees C over the 130 years from 1870-2000, compared with the 2 degree estimate HadCRUT exhibited.

The new research suggests HadCRUT actively chose to use weather reports that backed its hypothesis of global warming:

    * Using incomplete records and ignoring longer, unbroken series from other monitoring sites in the same region.
    * Manipulating data or "losing temperature" from the sites they used
    * Choosing sites close to large, warmer, urban areas
    * Selecting sites concentrated in the north and east of Russia, even though Russia has significantly more sites in the warmer west and south. HadCRUT thus ignores 40% of the largest country on earth - not because it doesn't have the data (the data is publicly available) but for some other, unstated reason.
    * HadCRUT constructs a grid of Russia, some cells containing only no weather monitoring station, others as many as 8. In the case of the cells where weather stations are ignored, the weather stations tended not to support the hypothesis of global warming.

The conclusion is very polite (compared with the emails in which the head of the University of  East Anglia Climate Research Unit Phil Jones attacked the work and motives of those with whom he disagreed).

The IEA concedes that temperatures may have warmed but if errors of 0.64 degrees celcius are made in Russia (for the 130 year period), what errors are hiding in the data on other countries?

2.12.09

Tax and Spend

[Since this was written, the Irish government has shown its mettle in pushing through public spending cuts, despite greedy and ignorant resistance from the public sector. The Irish government is positively heroic compared with the UK, where The Bloat continues to fester like a huge turd beside the Thames.]

I’ve had it with greedy government workers! Sorry if it hurts, but sometimes you have to be direct.

Ireland has a lesson for all countries trying to stop recession turn into depression.

The public sector unions run Ireland. It’s the only explanation of how quickly the Irish premier Brian Cowen backed down when the unions threatened to strike in defence of their bloated pay.



Did I say bloated?

If you want to see fat, just look at this chart of Ireland's government spending as a proportion of its economy, compared with others in the EU. Government spending is a long phrase, so I'll just use the word bloat.

Ireland's bloat was already above the EU average in 2008, and in 2009 goes through the roof. Graph courtesy of Ronan Lyons.



Note that public services in Ireland and the UK (also above average bloat) - are far, far below the standard of the Netherlands which has less bloat. I'm speaking from personal experience of living in all  three countries and I'm talking about hospitals, schools, public transport, police service, cleanliness.

So why did prime minister Cowen capitulate to the public sector unions?

Instead of further pay cuts, the budget is likely to require each public sector worker to take two weeks of unpaid vacation.

It’ll have the same effect on their wage packets but wreak havoc on labour intensive services like heath, emergency and social services. The government is likely to look for greater savings from welfare, like cutting child benefit. So much for the “caring” public sector.

Cowen’s fallen for not one lie but three:
1. Public sector staff aren’t in it for the money. Think of them as walking charities.
2. Government spending can get us out of recession and should not be cut.
3. Instead, taxpayers should pay out even more to keep the public sector afloat. (Unions always say tax the rich but what they mean is tax the taxpayer)

The truth is: Public sector workers are paid more in Ireland than their private sector counterparts and public sector and welfare payments account for 71% of GDP. Public sector pay is 25% higher than equivalent private sector job. The Economic and Social Research Institute and the Central Statistics Office both back that up.

Unions say the public sector advantage is not so big if you take account of inflation or the influx of foreign workers depressing private sector pay. The fact is, the unadjusted, raw numbers are what matters and the unions don't dispute that. They say managers account for much of the increase in pay. That's also true in the private sector. However, for taxpayers, only the total wage bill matters.

The second truth is: A country cannot tax its way out of recession. That’s the view of economist Jim Power of financial services company Friends First.

Ireland’s government is adding €495 million to the national debt each week. Yet in its pre-budget discussions, Brian Cowen’s government backed away from facing down the public sector unions.

The same reason public spending got to 71% of national output is the reason it can’t be cut. The political interests that pushed public spending so high are resisting any effort to cut back.

The third truth is: Ireland has low tax on companies, but not on individuals. An analysis by the Department of Finance reveals that next year, 143,000 people -- 6.5 per cent of the workforce -- will earn over €100,000 a year, and pay 47.93 per cent of all income tax.

The analysis also shows that next year almost 1.8 million people -- 80 per cent of the workforce -- will earn under €50,000 a year, and pay 18 per cent of all income tax.


So increasing income taxes may actually hurt government revenues and would certainly hurt the economy. Any homeowner knows, the first thing you do when your finances are in trouble is borrow more cut spending.

The public sector was able to expand, and pay itself so lavishly, because government finances were boosted by a booming property and construction sector. Now that the over-reliance on the property sector has imploded, why should we regard the gains of the public sector as permanent and untouchable?

It defies common sense.

29.10.09

Madoff Pal Silenced

Even the dour Financial Times admitted the death of Bernard Madoff's partner in defrauding investors of at least $65 Billion is a bit of a 'setback' for investors.

Most newspapers and broadcasters have been utterly silent on the mystery of how Madoff went to prison for 150 years without speaking a word, other than to plead guilty.

He named no names, gave no explanation as to where the money went, or how a few guys in an office could rip off hundreds of the world's richest people, with the help of the world's biggest banks.




Beijing artist Chen Wenling created this dramatic sculpture of the stockmarket bull goring to death Bernard Madoff. 
The first artist to address the mysteries of our Great Crash


At the same time, Bernard Madoff held powerful public positions among Wall Street's finest and the US financial regulator, the Securities and Exchange Commission, repeatedly ignored conclusive evidence of fraud delivered personally to its top officials.

So when Bernie's accountant, who has been revealed as the biggest winner from the Ponzi scheme, netting $7 Billion for himself, simply fell into a swimming pool aged 67, you might think some alarm bells might go off in the tiny minds of the world's press.

Boing! Wrong!

If you are not familiar with Jeff Picower's sudden death, here and here are some background stories.

And if you have any doubt the some very powerful people would quite like Bernard Madoff himself to meet with an accident in prison, here is some background to help connect the dots:

Madoff struck a deal in Feb 2009 with the SEC to neither admit nor deny guilt, and in return pay civil fines and penalties levied by the SEC.
At the same time Linda Thomsen, the agency’s top enforcement official, was resigning to “pursue opportunities in the private sector.”

This was separate from the criminal case, in which he opted for silence, refusing to answer any questions other than to admit his guilt. The 71-year old was sentenced to 150 years in prison.
Only just over $1 billion of between $50 billion up to $65 billion that he raised in his Ponzi scheme has been recovered.

Madoff was responsible for $50 Billion of losses, yet trillions in personal savings went up in smoke during the financial crisis. Where did the rest go?

21.10.09

Won't Retire, Can't Migrate

Western governments are so far in debt they are not going to let you retire and they certainly don't want you to migrate. Forget 65, try 70, or perhaps later. They need you to keep working and, unlike your ancestors, you won't be able to escape by migrating to sunnier climes.

From modest origins in Britain in the 1800s, my relatives became mining engineers in Australia, farmers in Rhodesia and followed in the steps of even earlier emigre relatives to Virginia. Today their descendants include hoteliers in South Africa, interior designers in Canada, while more recently, relatives have spread their wings from Brazil, through California to Switzerland.

HIGH TAXATION, MIGRATION CONTROLS


Just think of the contribution to global wealth from such migration but it's hard to escape the conclusion that governments are set against it. With no need for visas, quotas or proof of banks statements, my ancestors, Welsh miners, English merchants, went in search of opportunities.

Today, they'd be stopped at the border. Points systems and visa lotteries filter applicants. Overseas bank accounts (hard to avoid when you work between or have obligations in two or more countries) are investigated for tax avoidance. Money transfers are challenged for laundering. While the European Union removes obstacles to big business, cross border financial activities by individuals are widely presumed to be fraudulent.

The fact that the European Union has promoted a single constitution while failing to protect the rights of individuals is a key reason to oppose the Lisbon Treaty.

WHY MOVE?


Why would anyone want to migrate? For the same reason that governments would like to stop you.

A quick bit of background: The Times' headline put it like this: Government debt ‘nearly three times higher than official figure’.

The true level of UK government debt is equivalent to 157 per cent of national output and nearly three times as large as the £805 billion figure reported by the Office for National Statistics, according to a new book published by a centre-right think tank.

Well, it's the work of a Conservative MP (Brooks Newmark, the Conservative MP for Braintree) and I'd probably accept about half what he defines as debt. PFI is clearly off balance sheet financing. Unfunded public sector pensions? If that's counted, then what about the state pension? That's pay-as-you-go as well. What about loan guarantees to our insolvent banks?

FRAUD BUSTERS' GAME

Already, governments are talking about raising the retirement age while cutting down on benefits, from unemployment to sick leave. This is written up in the press as fighting scroungers but it's also about reducing entitlements.

Local municipalities, police forces, border patrols are all involved in this clampdown on benefit cheats. They seemed to turn a blind eye to cheating British MPs, though, with one claiming £100,000 in expenses to "pay" his girlfriend. That's because the 'fraud busters' have their own game. But let that be. We have even bigger worries.

YOU WORK, YOU LOSE

People might keep working rather than retire, but only if they feel they are working for themselves not in some serf-like bondage to the state.

And this is the problem with the way the government has structured welfare: You work, you lose.

Former investment bank Goldman Sachs offered to the UK government, back in the nineties, to rework the transition from unemployment to work, in order to remove the disincentive whereby a person loses more in benefits than the gain in income. The government dismissed the offer.

The government only KNOWS how to turn the screw.

It will try to do this by hiking taxes, cutting benefits and hammering gullible workers to subsidise the non workers.

Migration controls will be key to this. If they were as lax as they were in the days of my grandparents' grandparents, governments would not be able to raise taxes.

High taxation is a modern invention. It arrived hand-in-hand with migration controls.

THE BANKER AND THE ASYLUM SEEKER

Most people haven’t a clue that international migration controls are not applied to the great and the good. There are all kinds of exemptions, and not just related to money in the bank. Many governments have 'swap' arrangements for the staff of big banks and corporations, excusing them from the 'proofs' that smaller companies or individuals would have to provide in order to let people work or move abroad.

However, the majority of hard working, tax paying individuals, will find themselves in a queue at some foreign immigration office answering probing questions about how they plan to support themselves - struggling to move between countries.

I know, I have done it. And it took me a while to work out why other people in the queue, with not a penny to their name, were excused all these means tests in the name of “asylum”.

Immigration controls are about governments keeping their taxpayers hemmed in. It suits governments very well to have the tabloid newspapers bang on about illegal migration. The restrictions on legal migration are the real issue.

19.10.09

Economy: Anger Or Apathy?

If there’s a crisis, why do so few people seem worried? Sure, some people may be concerned for their jobs, or whether they’re going to find one. But the overwhelming reaction to this crisis – in relation to what happened - is apathy.
 
Partly because it was only very briefly that the leaders of the rich world faced a moment of truth.
 
For a few days back in October 2008, the voices of politicians and financiers trembled with fear. Even George Bush, the modern high priest of small government, stared earnestly into the television cameras, pleading for Congress to authorize the spending of 700 Billion dollars to save the big banks.
 
We don’t know what terrified the politicians and financiers. They are competent actors. Putting on a show is part of their job, but I don’t think any director could have choreographed such a reaction. So I assume the fear was real.
 
THE WEEK OF VISIBLE FEAR
 
They knew the state the banks were in, approximately, but there was something else which struck terror into their faces.

What is truly important to these powerful, wealthy people? What could keep them awake at night? I think they must genuinely have feared they were about to lose their fortunes. Investment bankers are often rewarded with Louis Vuitton suitcase-sized wads of shares in their bank and they borrow heavily against them to buy prestigious apartments and holiday homes. With that at risk, who would not be terrified?

Many banks were also trading on their own account, in other words, taking bets against their own investments, their own clients. When the market tanked, these trades imploded.

Several banks collapsed and many more were days from failure, including Goldman Sachs. There is no better illustration of the plight of the investment banks than this superstar of banking, bailed out with up to $30 billion of public money. Then, it converted from an aristocratic investment bank into a regular mom and pop bank so that it could start trading again with money borrowed from the government, at even lower rates than if it had remained an investment bank. The tale is well told by others.

SAVING FACE, SAVING FRAUDSTERS

As for the look of terror on bankers’ faces: there would have been many cases of fraud exposed by the falling markets. In the crash of 1929 these “bezzles” as JK Galbraith called them, were revealed when the tide went out. The two most common: unauthorised loans to board members and trading investors’ money without approval. See below*

You know the type:
"I will just take the money for a while, invest it in the market. I’ll make a huge profit, pay it back and no one will be any the wiser."
Until the market tanks, as it did in September and October 2008.

The governments’ quick action to support asset prices and banks with taxpayers money must have saved hundreds if not thousands of frauds from exposure. For politicians, as the regulators in charge of the financial system, saving face meant saving fraudsters.

Whatever it was, the week of visible fear passed and soon bankers and politicians were swaggering once again, confidently appropriating public money and deciding which banks and companies would live or wither.  

Much of the public seem happy with that. The personal finance writer Cliff D’Arcy talks of his verbal bruising on Yahoo, in which ordinary people posting on the Web called him a doom monger and blamed him, along with professional journalists, for creating the crisis: Comments along the lines of: All we want to do is enjoy our property wealth in quiet and people like you are talking down the economy, talking down the stock market, dissing property as an investment.
 
THE GREAT CORRECTION
 
My first reaction when I read such stuff is that they’re the uninformed comments of people who don’t want to question their betters but that explains nothing.
 
In the financial markets, they call a sharp change in values a correction. While our countries may not be facing a depression, they were facing a great correction in asset values. Even that has halted in its tracks. Governments cut interest rates to near zero and flooded the markets with taxpayers’ money. When they ran out of cash they began printing it (actually they create it electronically in the form of bonds).
 
For many, the fact that asset prices have stopped or paused in their fall is evidence the crisis has passed. Newspapers feast eagerly on green shoots whenever a politician spots them – even if they seem to sprout only where politicians walk.
 
While no one disputes it was the acts of financiers and compliant politicians that brought the world to crisis, the cost of which we are only beginning to estimate, in the media they’re off the hook. Angry customers briefly queued outside banks a year ago, but predictions of protests, let alone revolution, proved wildly inaccurate.
 
PSYCHOLOGY AND REACTION
 
So why do we so readily forgive those individuals who were prepared to distort the financial system to earn huge riches, and who were saved from bankruptcy by politicians who are instead bankrupting the public treasury?
 
Perhaps it’s the way we react to events. The Harvard psychology professor Daniel Gilbert writes that we overreact to intentional actions and underreact to those we think are accidents, natural or abstract.
 
Understanding what caused the financial crisis needs great conceptual skills. It is uncertainly abstract.
 
But what about moral indignation? According to Gilbert, we overreact to things that offend our morals. If we ever so slightly suspect politicians and financiers of being a cabal looting the economy we should, by this view, be protesting in our millions. Yet there is little evidence that moral outrage is spurring people to action.

STEAMROLLERS AND TESTOSTERONE

Perhaps that’s because we overreact to immediate threats and underreact to things that threaten our long term interests. We underreact to changes that occur slowly over time like the gradual, rumbling, approach of a steamroller.

Some economists have taken seriously the role of testosterone in the huge bets and reckless gambling that led to the financial crisis. But what about our reaction to it? Do men more easily shrug off the crisis? Is that why our newspapers feed greedily on news of the first banks to announce profits since the crisis - even though those profits are just a fraction of the losses and frauds piled up around us?

My friend Tanya suggests that it is better for our mental health to believe that something grotesquely painful was not a deliberate act of evil but an accident or somehow inevitable.

My friend Maria suggests it’s about the difference between women and men. Women confront their feelings and their fears. It is scary to analyse your thoughts and your actions and men are usually to scared to do it.

BLAME THE MEDIA

As a journalist I’d like to think that newspapers and broadcasters are independent. However we can blame the media and that is whole article to itself. Briefly, two points stand out. Few journalists know enough about business or the economy to formulate a sensible question, let alone write an article. That is especially true of television, where business journalists are the poor relation to political correspondents.

Political coverage is often no more than gossip with a dollop of self importance: who’s up, who’s down the greasy pole of politics, to quote what the nineteenth century British prime minister Benjamin Disraeli. Or as teens on social networking sites put it: hot or not?

It’s perfectly possible to pithily explain what’s going on in the economy but try to do it on television and you’ll get barged out of the way by an overweight political correspondent, fresh from another dinner, who wants to tell the audience who he’s just spoken to and what he thinks it means.

As for newspapers, it’s hard to have a lingering moist handshake with financiers and politicians one minute and print a full and true report the next.

UK MPs asked the top UK financial editor why his newspaper had not revealed it knew HBOS bank to be insolvent in the autumn of 2008. My newspaper, he declared, “is not in the business of putting British companies out of business”.

Well, what about the business of reporting the facts as they affect the interests of shareholders and savers?

The writer’s hypocrisy lies in claiming his pen is his sword, while urging others to pick up the real thing. I know that. I’m a writer, a hypocrite.

But how about a little outrage?



* To the economist, embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or even years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in — or more precisely, not in — the country’s businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression this is all reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.
 John Kenneth Galbraith, The Great Crash.

See also, The Bezzle, 2008 version.

10.10.09

Brand Obama

"I'll take a bottle of the Obama. It's smooth, isn't it?"

At least we can all now be open about the fact that Obama's election was essentially marketing.

"Hope" is promise, not delivery. Offering "change" without specifics is like stamping "new" on  washing powder.

By awarding a prize for essentially expressing hope, the politicians behind the Nobel Peace Prize have aligned themselves with advertisers, who play to our hopes and aspirations, rather than whether the product actually does anything.

Like an advert for Benetton or Coca Cola, the face is neither black nor white. No character, just charm with a flash of smile. Not you, not me, but he doesn't offend anyone. 

When Ford developed the Mondeo, marketing gurus sent the car's design through a series of focus groups, where they monitored consumers' reactions, removing any edge, grit or individual character from the car that could irritate potential buyers.

When marketers have to sell a bulk wine that has nothing identifiable or tasty about it, they call it "smooth". They add a homely story on the back label to provide some heritage.

As you can see, it's a joke. But that is what the Nobel Peace Prize committee has found worthy of its award.

9.10.09

Nobel Winner Obama Shock

A selection of surprises:

Nobel Committee:
Says it made the award to Obama “for his extraordinary efforts to strengthen international diplomacy and cooperation between peoples. The Committee has attached special importance to Obama’s vision of and work for a world without nuclear weapons. He has created a new international climate”.

Enduring America
A Reader: How can Obama get the Nobel Peace Prize hours before the US is supposed to bomb the Moon?!

Daily Telegraph, UK
Nobel prize for President Obama is a shocker. He should turn it down.

President Obama remains the barely man of world politics, barely a senator now barely a president, yet in the land of the Euro-weenies (copyright PJ O’Rourke) the great and the good remain in his thrall. To reward him for a blank results sheet, to inflate him when he has no achievements to his name, makes a mockery of what, let’s face it, is an already fairly discredited process (remember Rigoberta Menchu in 1992? Ha!).

And, amazingly from some air head in South Africa who should have heard of Morgan Tsvangirai this fluffy comment:

The Times, South Africa
Wow. This is a surprise: a fabulous one. And he gives hope to the people of the world that there may be a better future for us and our children. Have a lovely weekend!



Newsbusters
If Al Gore can win the Nobel Peace Prize for just being liberal, why not Barack Obama? This is not a joke, apparently:

Nobel Peace Prize

The jokers in Oslo have given the Nobel Peace Prize to President Obama. Were they bribed or are they patsies?

Noun. Patsy - a person who is gullible and easy to take advantage of
chump, fall guy, gull, soft touch, sucker, mug, fool, mark
dupe, victim - a person who is tricked or swindled

Reuters reports: The first African American to hold the country's highest office, Obama has called for disarmament and worked to restart the stalled Middle East peace process since taking office in January.

So the Peace Prize is awarded for talking? The man has barely been in office long enough to do anything.

UNELECTED LEADER OF THE WORLD

Why would you give someone this award at the start of their tenure, not after? Or are the string-pullers aiming to install Obama as Unelected Leader of the World.

Who were the alternatives for the Nobel Peace Prize?
Morgan Tsvangirai. Zimbabwe’s Prime Minister and long running opponent of the dictator Robert Mugabe.

Tsvangirai has withstood the murder of his wife and his own near death in a suspicious car crash, yet goes on trying to change a regime that has starved and tortured its own people.

That assumes the Nobel Patsies don’t have the balls to confront the Chinese.

It’s the 20th anniversary of Tiannanmen Massacre and the 60th anniversary of the communist revolution . There are dissidents aplenty if you want to recognise brave warriors for peace.

6.10.09

Premature Dance On Dollar's Grave

The media jumped on the dollar-is-dead story, after Britain’s Independent newspaper reported plans by oil producers to stop selling in dollars within nine years.

Robert Fisk’s article in Britain’s Independent newspaper, embracing theories about the origins of the Gulf Wars, unnamed sources and a flawed analysis of how global trade works, was a step too far for the respected Middle East correspondent.

Secret meetings? Transition from the dollar by 2018? Evidence?

There is no secret about the desire of Russia, China and other countries to reduce their dependence on the dollar. Russian President Dmitry Medvedev openly called for an alternative to the dollar at the G20 meeting in London in April. They’ve pushed the topic, along with France and Brazil among others, on the sidelines of every meeting since.

Iran has long been pushing for an international oil bourse that accepts payment in currencies other than dollars since at least 2006. Russia is opening an oil products derivative exchange in St Petersburg with much the same aim.

LIFEBLOOD AND VIRUS

Fisk links the second Gulf War with US desire to keep the oil trade in dollars. That story is a totem of the anti-war, indie media. They may be right. It’s just odd to see their clothes nicked by an old school newspaper.

If a hedge fund had wanted to profit from planting a story, it couldn’t have done better than this: The substance of the story is not new. The global financial crisis was transmitted through the dollar, which is simultaneously lifeblood and virus to the world economy. Spice up the story with geopolitics, the anti war movement and some conspiracy theories, however, and you can move the markets long enough to sell the dollar before the story’s printed, then buy it back cheap.

Sure enough, the dollar moved back up when the Saudi central bank governor refuted the central plank of Fisk’s article, denying any talks involving oil producers and dumping the dollar. He would say that, wouldn’t he? Sure, a central bank governor certainly would not admit to such talks even if they had happened.

Still, it must be a bit frustrating for the grown up financial media when a story they report day in, day out, only grabs world headlines when it gets reported by a non-financial journalist. That’s because the Independent has used the age old newspaper technique. Don’t let the facts stand in the way of a good yarn.

PACT WITH THE DEVIL

Since this crisis began, and the dollar surprised investors and governments by strengthening even as the US economy slowed sharply, the obvious question has been: when will the dollar falter?

Fisk’s territory is the Middle East, however. He envisages the oil producers unilaterally deciding to ditch the dollar, replacing it with a basket of currencies, from gold, the yen, yuan and euro to a new Gulf currency.

He fails to indicate who would manage the basket and assumes the birth of a new currency would be as painless as that of the euro in 2000. And mystically, Fisk predicts “an extraordinary transition from dollar markets in nine years,” with no further information.

Fisk argues the dollar’s future – and that of the US economy – depends on pricing oil in dollars. But there's a much bigger story: the role of China and Japan in supporting the US dollar, its economy and its lifestyle.

Neither of the two biggest holders of dollar reserves are oil exporters, quite the reverse. If the dollar truly is evil, China and Japan are in a pact with the devil, earning dollar profits on their exports to the US, then lending the money back so Americans can buy even more goods.

The dollar is their friend in another way. It is the most liquid and available currency. That’s why it’s used to buy and sell commodities. You can always lay your hands on the green stuff. Trading in other currencies could well push up the price of oil.

The dollar may ultimately decline, along with the status of the US economy but it’s a matter for the long term. Sterling remained the world currency for half a century after the US eclipsed the UK.

For a broader view on the outlook for the dollar, I’ve reposted some of my articles on the topic below.

Financial Reforms Rust By The Roadside

US banks were returning to their old ways within months of their bailout by the US government.

This is a reprint of my article from 25 June, 2009.

So the bankers are back to their old ways. The financial reforms, that three months ago politicians told us were urgent, are rusting by the roadside.

Regulation of derivatives, moral hazard, regulatory reform.. barely a single meaningful step has been taken in the US, UK or Europe.

The US banks claim they are repaying the government bailout money (their accounting is fraudlulent as ever) and bankers are toying with mergers, acquisitions and.. bonuses.

GIVING IN TO THE BANKS

Why did the governments give in to the banks? How did a small group, mostly politicians and bankers, convince their nations that saving the banks was so important that they could ignore the real economy?

Indeed, the real economy didn't just get ignored. It has to pay for the bank bailout. Industries, exporters, small businesses and the people who work for them, now face an even longer recession because of the cost of government borrowing – mostly to bail out the banks.

BUYING A LIFESTYLE

Why is the UK so obsessed with remaining a financial centre? Does it replace manufacturing? No. As we're discovering, a bloated financial sector makes for an unbalanced economy, as well as a distorted society. However it does boost the inflows of foreign capital that pump up the pound, with the result that sterling buys a better lifestyle than it ought to (based on what the UK produces).

The reason UK and US government statistics excluded housing costs to make inflation look low; The reason monetary policy on both sides of the pond encouraged corporate and consumer borrowing; The reason the UK and US pursued a strong pound/dollar policy... was to give their citizens a higher living standard than they deserved based on their work outupt or earnings.

AMERICAN DREAM

The US does this by borrowing from Asia so it can import more than it exports, so that its currency remains overvalued and so that Americans can afford to buy the dream.

Ask yourself, why is the US dollar a "better" currency, one that buys more, than other currencies? Because the US makes more? Nope. Apply the same questions to the UK.

Can you imagine a government having to tell its people that they actually don't have the birthright to be richer than Portuguese or Finns or Canadians. What if Britons had to stop flying around Europe in huge numbers or buying up entire villages on the continent? What if they still could, but they had to work a lot harder to do it?

That's not a message any politician would like to deliver.

A PRICK, POSTPONED

That's why those governments cannot reduce the government-corporate-personal debt binge. Their lifestyle is built on it.

The UK and US governments would have to sanction a fall in the buying power of their currencies and a big adjustment in their citizens' living standards.

No politician would do that. So they'll continue to live beyond their means. The governments will pay off the old debt, allowing the banks to focus on creating new debt. And the prick of the bubble will be postponed.

U.S. Pulls The Plug On The World

In October 2008 the role of the US dollar as, simultaneously, lifeblood and virus to the world economy was illustrated dramatically.

Reprinted from 27 October, 2008, 16:59

The U.S. administration has prompted a huge surge in the U.S. dollar, which may help refinance its financial sector. The cost is a currency whirlwind that threatens the collapse not just of banks and companies but entire countries.

In the past week the financial crisis, which began in banking and spread to stocks, has careered into the currency markets. The U.S. actively decided back in September 2008 to shut down the investment banks that lend to the biggest professional investors. This has caused those investors to sell anything and everything and to settle their trades.

The result was a whirlwind of liquidation. Korean won, Turkish lira, Brazilian real, British pounds and commodities from oil and metals, all were sucked into the downdraft.

FLIGHT TO THE DOLLAR

Like a speeding truck heading home, dollar investors left a vacuum in their wake, a vortex of dust, where there had been steadily growing emerging market economies.
And you thought the U.S. authorities were doing their best to prop up asset prices?

As the economic lights go out and the U.S. administration fumbles in the dark, maybe it's accidentally cut off the hand that feeds it. Or has it deliberately prompted a shakeout of asset values and a flight to the dollar?

On October 3 the $US 700 billion bailout of banks' bad bets was signed into law, after U.S. Treasury Secretary Henry Paulson assured U.S. Congress it was the only way to avoid financial Armageddon. The stated aim was to support asset prices.

But on September 22, with less publicity, Morgan Stanley and Goldman Sachs gave up their investment bank status, which had allowed them to borrow and lend much more than traditional banking companies. That was just seven days after another investment bank, Lehman Brothers, filed for bankruptcy protection.

These prime brokers, or investment banks, provided the loans that allowed America's professional investors to hunt worldwide in search of ever-bigger game. While U.S. investors earned profits, foreign countries benefited from U.S. investment in their bank, retail and property sectors.

All this dates back to September 2004, when the U.S. Securities and Exchange Commission gave in to pleading from the big five investment banks, who wanted to borrow more heavily against reserves that served to cushion against losses. This allowed them to raise their leverage up to 20, 30 or 40 times, in other words, to borrow $US 30 against every dollar of assets – and lend it on.

They certainly lent it! For mortgage-backed securities, collateralised debt obligations, credit default swaps and dangerous stuff with even safer sounding names. As the New York Times writes.

The banks were Merrill Lynch and Bear Stearns along with Morgan Stanley, Lehman Brothers and Goldman Sachs headed at the time by Henry Paulson. Treasury Secretary Paulson knows very well who lends to the hedge funds, how shutting down the prime broker system would force them to liquidate their trading strategies and cause a broad sell-off of all kinds of assets.

But what was he, along with the administration, trying to achieve? As professional investors dump foreign currencies and pile the dollars into that homeward bound truck, they're pushing up the U.S. currency.

CHINA FINANCES BAILOUT

The U.S. needs its currency to be strong. The U.S. is a debtor nation, spending more than it earns, dependent on foreign loans. Foreigners like the Chinese are financing the bailout of U.S. banks.

If the dollar were to crash in this environment the U.S., reliant as it is on borrowing, would struggle to raise the debt funding it needs to buy its way out of this crisis.

You would expect the dollar to fall as one state after another tips into recession and for gold to rise in times of uncertainty. Instead the reverse is happening.

Gold was approaching $US 700 in the last week of October, down from about $US 1200 just months before. It's a big leap to suggest the U.S. may be shorting gold as a way of supporting the dollar, but causing distressed hedge funds to sell gold amounts to the same thing.

DEBTORS NEED DOLLARS

There are other arguments for the rampant dollar. Some people argue that the U.S. entered this financial crisis earlier than other countries, that its housing market has been falling since 2006, and that the U.S. will recover before other countries. Traders may be anticipating interest rate cuts in the UK and Eurozone, while in the U.S. rates have less far to fall.

Companies are certainly buying dollars in order to pay off their debts. However, none of this explains the role of the U.S. administration in driving down asset prices.

I have argued before that governments should focus on supporting the real economy, on saving jobs and less on bailing out the banks. It is certainly not the job of governments to support asset prices at a particular level – and certainly not to spend $US 700 billion buying them off their banking chums.

Maybe Paulson's seen the light but, in that case, may the U.S. taxpayers have their $US 700 billion back please?

30.9.09

IMF Gets High With Its Friends

The IMF is in high spirits, for the first time cutting its estimates of the money lost in the financial crisis.

But in a blow to Britain, the IMF has restated its view that the banks and government face losses of £180 Billion or more from the near collapse of the financial system.

Back in April, on the eve of the G20 summit in London, the IMF said Britain faced losses of up to £200 Billion. Howls of protest from Downing Street forced the IMF to recant, cutting its forecast to £130 Billion in what The Times called a "huge embarrassment". The sheer cost of Britain's bailout remains stubbornly high.

IT'S A MONEY CIRCUS

The IMF says asset prices have gone up so the bad debts are smaller. For the first time since the crisis began (excluding its temporary backtrack on the UK), the IMF has cut its estimate of losses from the financial crisis, from $4 Trillion to $3.4 Trillion.

Huge sums of government bailout cash, up to $3 Trillion from the US government alone, have supported asset prices. That has led to a sharp rally in asset and share prices over the past six months.

News that the previously gloomy IMF is getting a little high with its friends is likely to boost the markets even further. It's a virtuous circle but the world's only going round because governments are printing huge amounts of cash. It's a money-go-round, a money circus.

Something’s not quite right.



It's not just about assets versust debts. It’s also about the worth of those assets to companies, individuals and the economy. And whether the price reflects that worth.

Until asset prices (office blocks, plant, equipment, goods, and the securities based on them) reflect their ability to produce value, the economy is not going to function effectively. Companies simply won’t be able to borrow against them.

The government bailouts have stopped that happening. With printed money, they are trying to hold asset prices as close as possible to where they were in the boom, instead of letting asset prices adjust to the future productive needs of the economy.

FRAUD, POWER AND INFLUENCE

The IMF admits this. While “systemic risks have been substantially reduced,” it says “credit, however, remains strained, while household and financial sector balance sheet pressures and ongoing market dysfunctions remain drags on the recovery.”

Why are governments and banks reluctant to unravel the tangled web of overpriced assets? Partly because they cannot. The banks and ratings agencies inflated the value of assets (said they were worth more than they truly were) but to do that they required very complex mathematical jumbles (that's what some securities are) and they simply cannot unravel them.

Partly, they dare not unravel them because to do so would reveal fraud. And some of the people involved, even unknowingly, with these frauds have power and influence.

LOSSES STILL TO COME 

Since mid-2007 banks have written off $1.3 Trillion. That’s the fall in the value of loans and other ‘assets’ based on sub-prime mortgages and other securities they created, lent and bought. The IMF says there’s another $1.5 to 2.1 Trillion still coming in “actual and potential writeoffs”.

Surely, if that had been written off, asset prices would not be where they are? Well, that’s where the bailout fraud comes in. Governments have bailed out banks with huge sums of taxpayer money without requiring the banks to come clean on how much money they lost and where they lost it.

UNPRICKED AND REFLATED

Former investment banks, or FIBS, like Goldman Sachs are claiming to have returned to profit without having to account for the tens of millions they lost with giant insurer AIG, because the US Federal Reserve paid off those losses.

Now if this isn’t the definition of a bubble, unpricked and reflated, I don’t know what is.

At some point the losses on unproductive assets, priced way above their value to the economy, and now largely owned by the taxpayer, will have to be accounted for.

You cannot hide that debt forever. The financial sector has succeeded in concealing the extent of its own losses – admitting to less than half - and blatantly refusing to acknowledge that the rest exist.

Governments, in providing the bailout cash while failing to ask questions, have aided and abetted in covering up the scale of the fraud.

It’s the beauty of off-balance-sheet financing. After all, if you don’t count what you lost, you didn’t lose anything, did you?

29.9.09

Opinion

Don't like uncomfortable ideas? Prefer to play “Let’s Agree”?

Or perhaps your loud opinions put a damper on the party and send guests scuttling for the exits?

This book could cure both ills.

Harry Stein’s “I Can’t Believe I’m Sitting Next to a Republican” is a lifestyle guide for those who outrage.

Yes, it’s published by Encounter Books, which was partly founded with CIA money. But that would put a self-styled "progressive" in good company with half the Third World’s English-speaking leaders, who went to schools financed by the CIA.



Years ago I found myself at an intense gathering of the British Trotskyite group Militant, a cocktail party without the cocktails. At the time Militant was trying to infiltrate, suborn and control the Labour Party. Later the same week friends invited me for drinks with the Monday Club, sort of a Conservative Militant group except they weren't Trots and they liked Champagne.

Friends, at opposite ends of the political spectrum? Quelle horreur! But then I've never been able to understand, much less stomach, political correctness.

Politics is a freakshow and there's as great a variety of political animals as there are beasts in the jungle. So why is mainstream political journalism so po-faced?

Perhaps, journalists should read this book too.

The interview:


It is not fun to be a social pariah. It's so much easier to keep your mouth shut and get along with everyone. So that's certainly a large part of it. But, too, in many professional realms -- academia, the arts, media, social work, mental health, to name a handful -- it is nothing short of dangerous to be openly conservative. I deal with this quite a bit in my book, citing heroic (or, perhaps, if this is one's view, fool hardy) souls who've been open about their politics and dealt with the consequences. I have enormous admiration for these people. As one guy in Hollywood, a line producer, put it to me when I asked him whether his views had hurt him professionally, he said he guessed that they had. But, he added, at the end of his life, "I honestly can't see myself saying 'Gee, if only I'd kept my mouth shut, I could've worked on Spiderman 7."

The book:
The fact is, in key ways, those of us living and working among such people often know them better than they know themselves. Unable as we are to avoid the media they take as gospel—NPR, the networks, The New York Times or its local equivalent—we’re on intimate terms with their most passionately held beliefs and convictions. We know who they admire and who they despise; we know in advance how they’ll react to every controversy, every utterance by a public figure; we anticipate, politically and public policy-wise, their sighs, their frowns, their ups, their downs.

But that's the point: The people he describes also know how their fellows will respond to a set of predefined views on a limited range of issues deemed, in that 60's phrase, "relevant".

This provides a ready supply of safe topics of conversation, much like the previous evening's television soap operas. Nobody says anything off-script in the game of Let's Agree.

They ape a set of stylized responses, masquerading as belief. Yet they reject belief on the pillar of relativism.

Far from radical or progressive they make the Victorians look like firebrands. More tea, vicar?


28.9.09

Lisbon: No Means No

The European Union this week forces itself upon a country that has already rejected its advances.

Just over a year ago the Irish rejected the Lisbon Treaty, which was itself a vaguely named rehash of the EU Constitution already rejected by the French and the Dutch.

At the end of this week, the Irish will be asked if no still means no.

A constitution is supposed to be the guarantee of citizens’ rights. The rights of the individual are supposed to balance the powers of the state.

NEW NAME, SAME GAME

If the Lisbon Treaty, which contains the essence of the European Constitution, strengthened individual rights that would be one thing.

However, it greatly increases the powers of a state, not the nation state in which you were born, but a new super state. And it provides no balancing increase in your individual rights.




The EU is expanding too fast... time for a pause

It has failed to deliver the individual freedoms that the EU claims are "fundmental". While it's broken down the barriers to (especially big) business, the EU has lied about its supposed benefit for individuals.

That's why talk of a constitution, renamed the Lisbon treaty, is a sham.

1) The Free Movement of Goods
Judged on what the EU has done since its origin, it exists to make life easier for big corporations.

Decades after the EU established freedom of movement for goods by companies, it still has not enshrined the same freedoms for individuals. The EU has been slow to consider the problem of double taxation which often affects hire-purchase cars or the house contents when people move jobs across borders.

2) A Single Market for Services
While multinational corporations, politicians and EU bureaucrats move freely around the EU, individuals often can’t pay into their pensions from a second country, or even open bank accounts in their native country while they are living abroad.

3) The Free Movement of Capital
Expat workers with bank accounts abroad are considered “offshore tax cheats” by EU governments. The EU thinks all countries should have the same tax rates because different rates distort the free movement of capital.

Irish EU Commissioner Charlie McCreevy has said the EU’s long term agenda is to “take control of taxation”. If Mr McCreevy is right, small countries will be forced to match the high tax rates of core European countries like France, Germany and Italy.

To really tax people hard, you have to stop them moving to where the tax is lower.

4) The Free Movement of Persons
Our great-grandparents had much greater freedom of movement than we have, hemmed in by visas, work permits, taxes and restrictions on moving our meager wealth and possessions. Again, the EU’s actions show that it aims to keep workers under the thumb, with their movements, banking arrangements and personal information regulated and monitored.

The EU’s idea of free movement is cheap migrant labour for companies.

For middle class professionals working abroad, the EU’s failure to harmonise financial services means individuals face a minefield of conflicting legislation. Strangely, this has been smoothed away for large corporations.

5) The Free Movement of Knowledge
The European Commission started talking about this fifth "freedom" in 2007. However, far from removing barriers to freedom of thought, the EU is creating new ones.

The EU is funding the development of mass surveillance techniques on a European scale, which Shami Chakrabarti, director of human rights group Liberty calls “positively chilling”.

MERCANTILIST

From the above you can see that the EU is not against regulation. It is against regulation that it doesn’t control. It is not for a free market, but very much the opposite: a regulated market in which Brussels will decide who are the winners.

TOO MUCH CREDIT

People mistakenly think Brussels created the Celtic Tiger. Brussels fosters this misconception.

Ireland’s rapid growth followed the deregulation of the late 1990s, as politicians saw the benefit of liberating business rather than harnessing it for their own ends.

Corporate tax rates were cut to 12.5%, very low by international standards, and income tax to a maximum of 41%. The service sector boomed, especially finance, because it became much easier to do business.

This was not the EU’s doing. In fact, the EU wants to harmonise taxes, which would forbid the low corporate tax rate that drove Ireland’s boom in the first place.

Just last week EU Commission President Jose Manuel Barroso flew to Limerick to offer €14 million in aid, after PC maker Dell closed its plant. Yet, Dell is getting €54 million in EU aid to shift the plant to Poland!

BARROSO MUST THINK WE'RE DUMB


Where you can thank the EU, is for the single currency. The single interest rate, set by the European Central Bank in Frankfurt, was too low for the red hot Irish economy.

Rates were set to levels which favored the sclerotic economies of France and Italy and southern Europe.

In Ireland, cheap loans went in search of a fast buck, driving the real estate bubble.

EU SHARES BLAME FOR BOOM

Even during the downturn, the EU continues to push for a standard minimum wage which would, if adopted, keep unemployment higher than it needs to be.

An economy needs flexibility, so that asset prices can adjust, falling to the level where asset prices reflect the value they produce. That needs a flexible exchange rate, flexible wages.

Europe and the United States were brought close to a second Great Depression by the failure of politicians, regulators and international institutions, the EU among them.

This is not the time to reward failure by giving even more power to those who brought us to this pass.

25.9.09

G20 To Fix The World

The G20 group of developed and emerging nations will become a permanent body to guide the global economy. Fine words from Pittsburgh but what do they mean?

The US and China are leading this round of talks. They’ve got most influence on the two key topics: the dollar (meaning bailout the US and trying to stop Americans living beyond their means) and climate change.

The European Union is largely ignored, with nothing new to say and Germany distracted by elections at home.

A BIT OF HISTORY

The G6 back in the late 1970s represented the leading currencies: The dollar, the yen and the mark.

Other countries, like France, the UK, Italy, Canada, and most recently, Russia, gave the group more relevance but only the financial crisis that began in 2007 challenged the authority of the core founders.

In Pittsburgh, the US effectively declared it won’t try to run the world on its own. So what’s the plan?

MORE MEETINGS

Washington welcomed the final communiqué: “The G20 leaders reached a historic agreement to put the G20 at the centre of their efforts to work together to build a durable recovery while avoiding the financial fragilities that led to the crisis.”

In plain English, the G20 leaders promise not to be so blind to the financial bubble or whatever it was that messed up their re-election plans.

HOW VERY MBA!

Under the “global compact”, the leaders will set an agenda for the economy. Then, at meetings once or twice a year, leaders will give peer reviews in which they assess how their colleagues are doing.

How very MBA! The G20 ran out of ideas so they called in the consultants. “Er, we’ve got to look like we’re running out of ideas on the economy. What should we do?”

Peer review is how they do it at modern companies like Google. Colleagues assess and critique each other, thus raising the performance of the group.

However, staff at such companies are selected for high educational achievement, practical and analytical skills and, above all, common goals.

Secondly, peer review only works when colleagues have common goals. The US cannot behave as if it has a right to a higher standard of living than the rest of the world, and ask China to subsidise it.

CHINA RUNS OUT OF PATIENCE

What common interest can there be when the US devalues the dollar, through the electronic creation of new currency, and then tries to hand $3 Trillion of electronic bonds to the Chinese in return for more loans?

So far, the US has called its bluff. It thinks when China’s dollar holdings fall in value, Beijing will simply buy more US bonds (buying US bonds = lending money to the US).

However, China has run out of patience. A senior economic adviser Cheng Siwei warned “if they keep printing money to buy bonds, it will lead to inflation”.

Siwei was talking about quantitative easing, the latest wheeze in London and Washington. They say it’s to avoid deflation, to stimulate the economy but it’s just another way to bail out the banks.

Governments order the central banks to print money (actually, they do it electronically) and use it to buy assets from the banks for more than they are worth. The banks are supposed to lend the money to the economy but actually put it back in the vaults of the central bank and earn interest.

WHY ARE BANKS STASHING CASH?

The banks would rather earn 0.5% interest in the central bank than risk lending money to companies and individuals.

If the price of property, business, investments and loans keeps falling, how can anyone say the recession is over?

There are multiple ways to determine recession but one measure, two succession quarters of decline, is simple enough for headlines. Many indicators show the western economies still deep in recession, but by mid-year that decline had slowed.

It certainly doesn’t feel like the recession’s over:
• Lending by US, UK and Euro zone banks to the real economy has fallen every month for about the past six months
• Company defaults, like individual bankruptcies and mortgage defaults, are expected to rise sharply as they exhaust their reserves
• Consumers are spending less, on a narrower range of goods
• The dollar has fallen to its lowest for more than half a year, gold has jumped
• Another 10 million people in advanced economies will lose their jobs next year, on top of the 15 million who lost their jobs since the end of 2007, says the Organisation for Economic Co-operation and Development

Economics Student: “Wait, we’ve got the OECD. So why is the G20 creating another body?
Professor: “You stupid boy. Go to the back of the class”.


BANKS ARE STILL INSOLVENT

So much for the strategy in Washington and London, but why should they care about the Chinese? The Chinese are worried about the west inflating away its debt.

The US and UK chose to prop up asset prices, allowing banks to avoid bankruptcy. Even today, those assets do not cover their debts. The banks are reported to have confessed to $1 Trillion of losses worldwide, only a portion of the estimated $2-3 Trillion that they lost. Many leading western banks are still insolvent. To keep them afloat, the governments have to go on printing more and more money.

Even in the biggest recession since the 1930s, the US continues to spend more than it earns. By mid-year, the US trade deficit was growing again as imports overtook exports. The US only manages that by borrowing from creditor countries like China.

MOVING APART

If China decides to cut its losses and switch from dollars into other currencies, the dollar will fall faster. That will present another huge risk to other nations who rely on dollar loans and investments, or whose currencies are closely-influenced by the dollar.

Economists agree with the G20 leaders when they call for reserve-rich countries and oil exporters to boost consumer demand, while over spenders like the US and UK reduce their deficits. That would bring the world economy closer to balance.

However the near term interests of the two biggest players at the G20 are moving further apart, not closer together.

24.9.09

Guinness 250

As Guinness marks its 250th anniversary, lets look at the price of beer.

Actually, let's also look at the fate of pubs. Because 250 years ago Arthur Guinness signed a 9,000 year lease on the St James' Brewery in Dublin.

That gave him freedom to pursue his business, something that's denied to pub tenants today.

PRICE OF A PINT

According to website SaveAFewBob, the price of a pint in 1947, was the equivalent of 4 euro cents. Today that pint will cost you somewhere between 4.50 and 5 euro.

Well, the Irish Central Statistics Office seems correct in its view that Ireland is the second most expensive country for consumers in Europe.

However, as a percentage of weekly pre-tax pay, the price of a pint has been relatively stable since 1970.

Yes, you earn about 140 pints of Guinness a week.

WHY DO I EARN SO LITTLE BEER?

One reason is the huge investment bank-backed PubCos which are running the business into the ground.

These companies bought up old banks over the past two decades, giving them town centre properties from which they could maximise revenues. This is how the old pub gave way to the modern beer hall.

It would have been a very profitable business if the PubCos had not been greedy, taking huge loans to buy ever more properties. Now, struggling to pay their debts, they're driving pub landlords into the ground.

The UK, for example, faces a wave of pub closures as major investors call on Punch Taverns to sell its pubs and settle its debts.

"END THE TIE"

Seven pubs close every day in the UK, or 2,300 in the past year. Of 600,000 people working in pubs, 24,000 have lost their jobs in the past year. And the reason for this, according to the tenants themselves, is the tie.

PubCos enforce high beer prices. They also charge penal rents, extracting more profit from the pubs by forcing tenants to pay extortionate rents.

The Federation of Small Business called for an end to the tie, saying 67% of managers of pubs that turn over more than £500,000 a year earn less than £15,000. That’s not even the minimum wage.

Stupidly, the UK government three decades ago forced small brewers to choose between owning tied pubs or selling them beer. Ministers decided that for brewers to sell their own beer through their own pubs was anticompetitive.

"DOWNRIGHT BULLYING"

The legislation led to the collapse of many small brewers and the buying up of pubs by PubCos. Cheap-to-make lager replaced handcrafted ale at, you guessed it, the same price.

UK MPs on the Business and Enterprise Select Committee this May accused PubCos of "downright bullying".

Sadly, this is largely the fault of civil servants and their poodle MPs. If the UK bureaucracy had intended to hand the industry on a plate to international mega-brewers and investment banker property magnates, they couldn't have done a better job.

Back in 1931 Lady Astor said in the House of Commons, speaking of the political influence of the wealthy brewers: "You might as well call it the beerage as the peerage".

The PubCos have indulged in price gouging and extortion on a level the brewers never did. At least it's not the fault of Arthur Guinness.

Happy Guinness Day!


17.9.09

Politician In My Pocket

That could be the title of Ireland's next entry to the Eurovision Song Contest - if its government persists with proposals to massively overvalue property assets as it bails out the banks.

Trouble is, it won't be the politicians singing for their dinner. They're saving that pleasure for the taxpayer, who'll be picking up the tab.

In plain terms, the higher the value placed on the property assets of insolvent banks, the bigger the bailout for the banks. That is a good thing if you think it will, once and for all, stabilise the Irish banks. However, if asset prices fall further, it puts a bigger hole in the taxpayers' pocket.

Note that NAMA, the National Asset Management Agency, has implications well beyond the nation's borders. Only 2/3 of the loans it holds are Irish, the rest depend on property prices elsewhere.

DO THE BUMP

The government takes 'current values' and bumps them up to a 'plateau value' which it deems more consistent with longterm prices.

If that weren't enough, half the Irish loans represent land, which has declined up to 95% in some places with rezoning.

As for yields, it bases them on Dublin, which represents a small fraction of the loan book.

The politicians then manage to capture residential property prices based on a current yield of 3%. As for prices plateauing at a higher level, not much chance of the sunny uplands says the man behind the research.

Which begs the question why use this methodology in the first place?

All credit to Ronan Lyons.

Ronan Lyons has since published his findings in the Irish Times.

15.9.09

Lehman Coverage Ignores Crisis

Absolutely gobsmacked by the media coverage of the anniversary of Lehman Brothers’ collapse.

This has been a classic diversionary tactic, drawing attention away from the plight of the real economy.

Lehman’s collapse was not the trigger for the global financial crisis, and its dangerous practices, such as dependence on short term loans, were shared by other investment banks.

Yes the anniversary of its collapse has been an excuse for politicians from President Obama downwards to voice their platitudes in broadcast and print.

MEDIA GAG THE MAN ON THE STREET

The media have dutifully spun the anniversary into fake significance – fake because their coverage has successfully avoided any mention of the real economy.

BBC World’s coverage at 1200 GMT started with and interview with one Singaporean MP, followed by a UK government adviser saying the economy may be recovering. The reports ignore the real economy. Not one interview with a real person reflecting the job losses and pay cuts, no lives from real businesses, not one reporter "out there". The media effectively gagged the man on the street.

Reporters were safely protected from the people on an empty floor of the New York Stock Exchange, on an empty floor in London’s City Hall overlooking Tower Bridge.. safely away from the real economy.
  
COVERAGE IGNORES REAL ECONOMY

The BBC spent tens of thousands on live links to Asia and the US, talking to no real people except a report from India saying that consumer spending is back where it was before Lehman’s collapse. Reporter Nik Gowing had to go to a diamond trader saying international demand is even higher than it was a year ago (which is patently untrue if you know anything about the diamond market).

The media festival over Lehman’s collapse shows it still hasn’t learned that banks are just a part of the economy. And it reflects the cosy view espoused by politicians that banks are the be all and end all. Pumping trillions of dollars into the banking system is enough, even if it fails to reach the real economy.

Lehman: The Real Story

Tuesday 15th September is one year since Lehman Brothers filed for bankruptcy.

What we’ve learned:

• Politicians and Bankers have an approximate grasp of how the economy operates.
• Very few politicians have a clue about the financial markets.
• Banks don’t understand derivatives so how can the regulators?
• Leaving investment products and trading systems to the IT guy and the math wiz is extremely hazardous.
• Pay for short term results makes that even more hazardous.
• Politicians and the media are wrongly convinced that banks are the most important part of the economy.

1) Remind us. Why did Lehman collapse?
The banks was hugely dependent on short term money but they expanded away from their advisory business to trading on their own account, in derivatives giving them exposure to long dated (and more volatile) securities.

Regulators demanded that banks buy insurance against their derivatives defaulting, but that insurance was with AIG. As author Andy Kessler writes, “The "default insurance" was in the form of credit default swaps (CDSs), often from AIG's now infamous Financial Products unit. Never mind that AIG never bothered reserving for potential payouts or ever had to put up collateral because of its own AAA rating. The whole exercise was stupid, akin to buying insurance from the captain of the Titanic, who put the premiums in the ship's safe and collected a tidy bonus for his efforts.”

Lehman was heavily dependent on the short-term money market. This is how it works: Imagine you are a big financier. You borrow lots of money on a day-to-day basis. Your house is the security. You get a super low interest rate. You use that money to borrow even more. You build office blocks, shopping centers. You’re a tycoon.
Then your properties drop in value. Your creditors panic and demands all the money back at once.

You go from big businessman to insolvent in 24 hours. The trouble is, so do the people who lent to you. That’s the Lehman story. It was a huge borrower of short term money.

The trouble is, the Fed didn’t understand that. The timeline shows that the Fed and the US Treasury did not realize the impact that Lehman’s collapse would have on the US financial system.

2) Why did Lehman matter?

Lehman traded lived on short term money, called commercial paper. This is money that companies, municipalities, churches, insurers don’t need right now. It could be a company’s payroll. They don’t need the money for two days so they lend it to a money fund that lends it to investment banks.
Now, Paulson didn’t appear to understand the consequences. When he was discussing the possibility of Lehman’s bankrupty the weekend before it happened, he was talking purely to investment banks. The likes of General Electric, which has a huge money market arm, were not in the picture. Yet on the day of Lehman’s collapse, Paulson and Tim Geithner, then head of the New York Federal Reserve, hurriedly met with Jeffrey Immelt, head of GE.

The government issued state guarantees for GE Capital’s borrowings, totaling $126 Billion.
As the commercial money market ground to a halt, investors panicked. Several money funds came close to collapse.
Lehman was also a broker to the hedge funds. They lost confidence in other prime brokers like Goldman Sachs and Morgan Stanley, pulling their money out.
They money exited emerging markets, hammering economies in Russia and eastern Europe.

3) Why did the US government let it fail?

Days before the Federal Reserve and US Treasury had saved Fannie Mae and Freddie Mac. Half a year earlier it had bailed out Bear Stearns.
Former US Treasury Secretary Henry Paulson says he had NO POWER to save Lehman. Remember that.
When the US government refused to extend a loan to Lehman, its chief executive Dick Fuld told his lawyer “I don’t understand.” He repeated the phrase again and again, “It doesn’t make sense.”

Two days later, the Fed bailed out American Insurance Group for $85 Billion. The Fed had no regulatory authority AT ALL for AIG. It was an insurance company. Not a bank. That didn’t stop the Fed and US Treasury taking unprecedented steps.
Yet former Treasury Secretary Paulson says he had NO POWER to save Lehman.
Weeks earlier, records show he thought bailing out Lehman was not “acceptable”. That’s very different. Paulson now insists he was fully aware of the consequences of letting Lehman collapse.

Well, look at those consequences:

A) The dollar jumped when investors panicked. Money that had been flowing into emerging markets, pushing up the oil price, property prices, shares – suddenly that cash was pulled out, stuffed into the cattle trucks and hauled back to the United States.
Result: the dollar shoots up. As companies rush to repay their dollar loans, the USA experiences an INFLOW of cash. Very useful when the banks won’t lend.
Other currencies from the British pound to the Russian Rouble are pushed down, their economies destabilized. Soon they will be deep in recession.

B) The world’s biggest insurer AIG owed $15 billion of that to Goldman Sachs, so when AIG was bailed out two days after Lehman’s collapse, that was effectively a bailout for Goldman Sachs. Former US Treasury Secretary Paulson was the ex-boss of Goldman Sachs.

C) Competition. Lehman was a formidable competitor in its day. With Lehman gone, banks like Goldman Sachs and JP Morgan would get a greater share of both business and fees. Goldman executives conceed this is precisely why the bank was able to report record revenues in the second quarter.

D) After Lehman, banks were considered “too big to fail”. Bankruptcy was ruled out, even if they were crooked. No banks would fail. The taxpayer would pay, and keep paying.
It also was used to justify the $700 Billion bank bailout – the Emergency Economic Stabilisation Act, passed two weeks later.

4) So what was the real story with Lehman?

The surviving big banks are very profitable. Especially the one that both previous and current Treasury Secretaries worked for: Goldman Sachs.

They’re profitable and they haven’t changed. They’ve avoided any massive new regulatory oversight and they’re trading with the same short term borrowings, in the same instruments as before the crisis.
Lawrence MacDonald, whose book A Colossal Failure of Common Sense came out in July 2009, says the bank was not in substantially worse shape than other major Wall Street banks.

But rivals succeeded in pushing Lehman out of the market. Short selling shows this.
When you borrow shares and sell them, you must have shares lined up to replace them. Otherwise it’s called naked short selling – manipulating the share price by driving them down too low. This happened with 32 million Lehman shares – a very suspicious number that the Securities and Exchange Commission has not investigated.

The Wall St Journal did investigate the short selling and found the major short sellers were the other banks. With friends like investment bankers, who needs enemies?

Since the collapse of Lehman, banks like Goldman Sachs have seen profits jump, mainly because there is less competition.

But, throughout this crisis, central bankers and politicians have overestimated the importance of the investment banks. Even when former Treasury Secretary Henry Paulson allowed Lehman to go bankrupt, the record of whom he met with and talked to shows he thought it was an investment banking issue.

He missed the importance of the money market beyond the investment banks, the network of school districts, hospital trusts and companies whose cash flows support the economy.

Those corporate cash flows account for 70 per cent of US corporate credits, compared with just 30 per cent from banks.

Ironically, when politicians steeled themselves to let a big bank collapse, they chose the wrong bank.


5) Could Ben Bernanke be telling the truth?


If the Fed has not lost much money, it is because it has not lent to basket case banks.
Federal Reserve Chairman Ben Bernanke has argued that the Fed didn’t have to tools to save Lehman Brothers. The bank had no collateral, no assets against which to lend. The Federal Reserve’s total lending reached $1.5 Tln at the height of the crisis. Former Fed governor Alan Blinder thinks it could lose up to $30 Bln of that. Much less than the $700 Bln of money that politicians secured for the Troubled Assets Relief Programme, much of which has not been accounted for.


6) So what has changed since Lehman?

There was supposed to be a new banking model – more dependent on taking deposits and doing bank things like lending to business.

However the government bailout money – and state guarantees that are even more important – have allowed US investment banks to go back to their reckless ways. The appetite for easy riches hasn’t changed on Wall Street. It’s why people work there.

Wall Street has lost 10% of its workforce or 30k jobs in the past year. Moody’s expects another 20k over the next 2 years. So its been streamlined but the bonuses have not declined.

If there is less business, there is significantly less competition.

The bundled loans and so-called insurance – the junk that Wall Street traders knew was junk (they coined the phrase toxic waste) – is harder to market because the consumers that Wall Street sold it to, the pension and investment funds, have been badly harmed by the previous toxic explosives offered by Wall Street. Their fingers weren’t burned. They were blown off.

The structured credit market has shrunk. Despite battered prices, investors are still scared. Banks won’t lend to each other.

Mortgage loans packaged by WS fell to $169 Bln this year less than a quarter of the $775 Bln this time two years ago.

THE REAL ECONOMY

In Europe the credit crunch actually worsened over summer. Bank lending shrank for the 5th month running. This will hit small firms who cannot issue bonds. Banks insist it’s because of falling demand. No one believes them. Money that the governments are pumping into the economy is being deposited at the central bank. Banks think that earning 0.5% at the central bank is less risky than lending into the fragile economy.

It was unfair that Wall St got bailed out, just as bad that the incompetent US car giants got bailed out. But now loads of people expect someone else to subsidise their purchase of a new car, and university leavers are complaining they have to compete with people who have more skills and they want the government to create jobs of suitable status. It’s what one US writer calls a Confederacy of Wusses.
That’s the entitled. Spare a thought for those who don’t get to claim something for nothing.

More than 16 per cent of working age Americans find themselves on the US Bureau of Labour Statistics broadest measure of unemployment. In states like Oregon, that rises to 22%. Even in Silicon Valley, home of the IT industry, the number of jobs was already down 16% so far this decade BEFORE the crisis struck.

There is a huge story about the real economy, wholly ignored in the media coverage of Lehman’s anniversary.