Given the poor track record of the UK economy since 1997, I'm surprised more people have't been questioning whether an independent Bank of England was a great idea. I've been addressing that in my Money Week column this week. Here's a taster....
All of sudden, everyone seems to want to claim credit for giving the Bank of England its independence in 1997. In his memoirs, Tony Blair rather surprisingly said it was his idea all along. Until then, Gordon Brown had always insisted he thought of it. In response to Blair, the Labour leadership candidate Ed Balls popped up to say that he had the idea before anyone else.
The debate is fairly infantile. The idea of an independent central bank had been around for decades, so there was never anything very original about it. The interesting point is how they all assume it was a triumph, a move of such brilliance that the only real debate is about is authorship, not about its effectiveness. But that isn’t nearly as clear as they seem to think.
In reality, thirteen years on, the record is, to put it mildly, mixed. The independent Bank has presided over catastrophic period of British economic management. Growth was disappointing. A debt bubble built up. The housing market went crazy. The banking system collapsed. The inflation target has barely ever been met. It has hardly been an unqualified success.
That hasn’t stopped the Labour tribe squabbling over it. “When I suggested it, he readily agreed,” Blair writes his memoir “A Journey,” published last week, of the decision to give the Bank sole control over interest rates. “I allowed Gordon to make the statement and indeed gave him every paean of praise and status in becoming the major economic figure of the government. In truth, too, as with the Bank of England independence, the broad framework of the economy, never mind anything else, was set by me.”
Gordon Brown has on countless occasions claimed credit for Bank independence as one of the triumphs of his ten years as Chancellor. And Ed Balls has been just as keen to claim it was all his idea right from the start. He points to a pamphlet he wrote in 1992 advocating independence for the Bank. "When I presented detailed proposals to Gordon and Tony in 1995, they both agreed in principle it was the right thing to do," he said in an interview with the Sunday Times last weekend.
In reality, there was never anything particularly original about the idea. Independent central banks had worked very well for a long time in the US, Germany and elsewhere. You could argue the UK already had one in the late 1980s when the then Chancellor Nigel Lawson was shadowing the deutschemark – it just happened to be the Bundesbank rather than Bank of England. Ken Clarke as Chancellor under John Major had increased its powers over interest rates. The decision was part of an evolving policy, rather than a sudden and brilliant innovation.
And yet the fact that suddenly in 2010 Blair was to take credit for the Bank’s independence is, in truth, confirmation that the man knows nothing about economics. After all, looking back at the last thirteen years, it is hard to conclude that Bank independence has been a great success.
Growth has been fairly modest. Over the years 1997 to 2009, the British economy grew at an average annual rate of 2%, according to calculations by the National Institute of Economic and Social Research. Under the previous period of Conservative rule, from 1979 to 1997, it grew by 2.2%. Between 1960 and 1973 it grew by an average of 2.9%. So it’s only compared to the chaotic years of the mid-1970s that the growth figures for the years of Bank independence look good. Judged by the whole of the post-war period, 2% is a slightly disappointing rate.
An enormous debt bubble built up. According to McKinsey data, over the last decade the UK saw the largest increase in the ratio of debt to GDP of any developed economy. Total public and private debts rose from 350% of GDP at the start of the decade to 449% at its end.
The hosing market went crazy. Admittedly, the UK has always had a fairly bonkers property market. But the problem got worse under an independent Bank. Between 1979 and 1997, house prices grew by 146%, according to Nationwide figures. Between 1997 and 2009, they grew by 230%. Housing was already very expensive. On the Bank’s watch, it turned into a bubble.
The Bank didn’t have control of the financial system – that was hived off to the Financial Services Authority. Even so, the fact that the UK saw the most catastrophic series of banking collapse in more than a century since it was granted its independence is hardly a great advert for its role.
Nor has the Bank even been particularly successful at meeting its inflation target. It is mandated to maintain inflation at 2%, with no more than a 1% deviation in either direction. But it has consistently failed to deliver that. This year, for example, inflation has been above 3% for more than seven months in a row, and shows little sign of coming down. Few ordinary people looking at their household bills would conclude the record on rising prices had been great over the last thirteen years.
Naturally, it is unfair to blame the whole of that record on the Bank. The growth rate has more to do with the overall thrust of government policy than just interest rates. Against steadily rising taxes, and more and more regulation, the UK was always going to struggle to grow. The credit bubble was part of a global trend, even if the UK took part in it with even more enthusiasm than any other country. It is hard to disentangle where responsibility lies for the economic mismanagement of the last thirteen years between the government and the Bank.
But it is certainly possible that the Bank could have done better. Interest rates look to have been held too low for too long for the health of the economy. It fretted publicly about house prices, but shied away from doing anything about them. True, it’s hard to prick asset bubbles: but lots of things in life are hard, and that’s not really an adequate excuse for not trying.
Indeed, given the generally disappointing record of the British economy since the Bank was given its independence, it’s surprising that more people haven’t started to question whether it was really a good idea.
And it is even more surprising that so many politicians are so keen to claim credit for it.
Monday, 13 September 2010
Wednesday, 8 September 2010
Fact vs Fiction....
Fact vs Fiction:
I haven’t been writing very much on this blog, largely because I’ve been rattling out a quick book on the Greek crisis for Wiley. The book was written at huge speed – a couple of months – and will be out in November. That was exhilarating in itself. As most of us know, the process of writing can be pretty leisurely. It takes a long time to write a book, and just as long for the publisher to bring it out. This one will be about five months total from Wiley getting in touch about the idea to the book hitting the shelves.
For me, it was also a chance to reflect on the difference between writing fact and fiction. I wrote a couple of business books much earlier in my career, but this was the first one I had done since I took up writing fiction.
It is a very different process. Obviously, the non-fiction book involves a lot more research. On the other hand, the story is just there. You collect the facts, marshal them into a coherent argument, then tell the story.
In fiction, you have to create every detail of the story yourself. You have to create the characters, and make them real. You need twists and denouements. It’s far harder work.
The funny thing is, most people looking at ‘Bust’ would assume it was a far more serious book than, say, ‘Fire Force’. But a book like ‘Fire Force’ is far more difficult to write.
I haven’t been writing very much on this blog, largely because I’ve been rattling out a quick book on the Greek crisis for Wiley. The book was written at huge speed – a couple of months – and will be out in November. That was exhilarating in itself. As most of us know, the process of writing can be pretty leisurely. It takes a long time to write a book, and just as long for the publisher to bring it out. This one will be about five months total from Wiley getting in touch about the idea to the book hitting the shelves.
For me, it was also a chance to reflect on the difference between writing fact and fiction. I wrote a couple of business books much earlier in my career, but this was the first one I had done since I took up writing fiction.
It is a very different process. Obviously, the non-fiction book involves a lot more research. On the other hand, the story is just there. You collect the facts, marshal them into a coherent argument, then tell the story.
In fiction, you have to create every detail of the story yourself. You have to create the characters, and make them real. You need twists and denouements. It’s far harder work.
The funny thing is, most people looking at ‘Bust’ would assume it was a far more serious book than, say, ‘Fire Force’. But a book like ‘Fire Force’ is far more difficult to write.
Monday, 6 September 2010
Why Humans Are Better At Investment Than Computers....
In my Money Week column this week, I've been looking at why humans are better at investment than humans. Here's a taster.
Two years on from the start of the credit crunch, it is easy to observe that not a great deal has really changed. The banks have gone back to paying big bonuses, the traders and dealers are as speculative as ever, and the hedge funds are still raking in fortunes.
Still, one corner of the capital markets has been hammered hard – the so-called-called ‘quant funds’.
A few years back, the intellectually super-charged hedge funds that used mind-bogglingly complex formulas to trade assets and make huge profits for their owners were the hottest sector on both the City and Wall Street.
But now the combined assets of the quant funds are down from around $1.2 trillion at the industry’s peak to around $470 billion now, a drop of more than 60%, according to data from the research firm eVestment Alliance. Around a quarter of the quant funds have closed in the last two years, according to figures from Lipper Tass.
In part that tells us that investing styles go in and out of fashion. Sometimes people want gurus, sometimes charts, other times they want geo-political trends, and so on.
But it also tells us something more interesting.
Despite the best efforts of thousands of incredibly bright people, and despite the billions of dollars at stake, no one has ever really managed to mechanize the markets. They remain stubbornly human.
The quants, as they became known in the markets, were obsessed with taking the human element out of their trading strategists. The scoured university campuses, taking astro-physicists and mathematicians blinking out of the library, and paying them hundreds of thousands to have a shave, put on a suit (or at least some Boss chinos) and sit all day in an office on Mayfair’s hedge fund alley.
Once installed, they came up with programmes that could trade on minute price discrepancies between different markets, and make a fortune on the results. Or the scoured the record books for past price relationships, and when they found them, built trading computers that could exploit them.
Sometimes they came up with interesting results. The price of oil, for example, expressed in gold has remained virtually static for generations: as soon as it deviated from that norm, there was a trading opportunity.
But, although they had some big successes in the bull market, the quants were undone by the crash. None of the complex mathematical models they built predicted the credit crunch. All the expensive computer programmes were about as useful as a bucket and spade in Birmingham. The quants reputation was largely destroyed. The reason the value of the funds fell so fast was because they preformed so poorly, and because disillusioned investors withdrew their money.
In fact, the markets remain impossible to mechanize. If you could build a programme that predicted the markets, you would make, quite literally, billions. Yet no one ever manages it. Indeed, the harder they try, the worse the results usually are. In the 1990s, another hedge fund, Longer Term Capital Management, which had more Nobel prize winners on board than Man City have expensive footballers, collapsed with vast losses and bought down the markets with it.
There are three reasons why the market remains so defiantly human – and so resistant to smart mathematical models.
First, the markets are chaotic. Computers are very good at capturing fairly straight-forward relationships. They are very bad at modeling complex ones. Chaos theory is one explanation for that. For example, a butterfly flaps its wings in China, and it causes a thunderstorm in Britain. There are so many complex inputs making up the way weather works, you can’t hope to capture them all. It’s the same with the markets. A mortgage defaults in Florida, and a month later The Royal Bank of Scotland is bust. They are inherently chaotic, and so incredibly hard to predict.
Secondly, computer programmes are very bad at capturing human reactions and emotions – and the more people are involved the worse they get. That’s why they are good at chess, but not very good at bridge or poker: both card games are essentially about judging what your opponent will do, whilst chess is mainly about crunching a lot of numbers. The markets are much more like a card game than a board game. Investment decisions, and hence the direction of the markets, are driven as much by emotion as anything else. Sentiment is strong some months, and weak in others, even if not very much really seems to have changed in the meantime. It is tough for any computer programme to understand that, let alone model it, and start building it into its predictions.
Finally, behavior changes. The way that investors behave and the markets respond, evolves all the time. It isn’t static, or predictable, like the way the moon revolves around the earth. It will be different today from yesterday, and different again tomorrow. The quant funds were building predictive models based on the way market behaved in the past. But, whilst interesting, they didn’t really discover anything very useful. Just because a price has moved in a certain way historically does not mean it will move the same way in the future.
The lesson is a simple one. The markets will remain an arena for great traders, with an instinctive feel for where assets prices are going. They can’t be predicted with any kind of precision by computer programmes, no matter how much brain-power has gone into creating them.
And all those astro-physicists who for a few years could drive around in Porsches as they got paid million by a hedge fund can go back to the dusty poverty of the university library.
Still, there is one comforting thought. You might find it fiendishly difficult to predict what any market will do in the next years. But the smartest brains from the best universities couldn’t do it either – the markets caught them out, the same way they usually do the rest of us.
Two years on from the start of the credit crunch, it is easy to observe that not a great deal has really changed. The banks have gone back to paying big bonuses, the traders and dealers are as speculative as ever, and the hedge funds are still raking in fortunes.
Still, one corner of the capital markets has been hammered hard – the so-called-called ‘quant funds’.
A few years back, the intellectually super-charged hedge funds that used mind-bogglingly complex formulas to trade assets and make huge profits for their owners were the hottest sector on both the City and Wall Street.
But now the combined assets of the quant funds are down from around $1.2 trillion at the industry’s peak to around $470 billion now, a drop of more than 60%, according to data from the research firm eVestment Alliance. Around a quarter of the quant funds have closed in the last two years, according to figures from Lipper Tass.
In part that tells us that investing styles go in and out of fashion. Sometimes people want gurus, sometimes charts, other times they want geo-political trends, and so on.
But it also tells us something more interesting.
Despite the best efforts of thousands of incredibly bright people, and despite the billions of dollars at stake, no one has ever really managed to mechanize the markets. They remain stubbornly human.
The quants, as they became known in the markets, were obsessed with taking the human element out of their trading strategists. The scoured university campuses, taking astro-physicists and mathematicians blinking out of the library, and paying them hundreds of thousands to have a shave, put on a suit (or at least some Boss chinos) and sit all day in an office on Mayfair’s hedge fund alley.
Once installed, they came up with programmes that could trade on minute price discrepancies between different markets, and make a fortune on the results. Or the scoured the record books for past price relationships, and when they found them, built trading computers that could exploit them.
Sometimes they came up with interesting results. The price of oil, for example, expressed in gold has remained virtually static for generations: as soon as it deviated from that norm, there was a trading opportunity.
But, although they had some big successes in the bull market, the quants were undone by the crash. None of the complex mathematical models they built predicted the credit crunch. All the expensive computer programmes were about as useful as a bucket and spade in Birmingham. The quants reputation was largely destroyed. The reason the value of the funds fell so fast was because they preformed so poorly, and because disillusioned investors withdrew their money.
In fact, the markets remain impossible to mechanize. If you could build a programme that predicted the markets, you would make, quite literally, billions. Yet no one ever manages it. Indeed, the harder they try, the worse the results usually are. In the 1990s, another hedge fund, Longer Term Capital Management, which had more Nobel prize winners on board than Man City have expensive footballers, collapsed with vast losses and bought down the markets with it.
There are three reasons why the market remains so defiantly human – and so resistant to smart mathematical models.
First, the markets are chaotic. Computers are very good at capturing fairly straight-forward relationships. They are very bad at modeling complex ones. Chaos theory is one explanation for that. For example, a butterfly flaps its wings in China, and it causes a thunderstorm in Britain. There are so many complex inputs making up the way weather works, you can’t hope to capture them all. It’s the same with the markets. A mortgage defaults in Florida, and a month later The Royal Bank of Scotland is bust. They are inherently chaotic, and so incredibly hard to predict.
Secondly, computer programmes are very bad at capturing human reactions and emotions – and the more people are involved the worse they get. That’s why they are good at chess, but not very good at bridge or poker: both card games are essentially about judging what your opponent will do, whilst chess is mainly about crunching a lot of numbers. The markets are much more like a card game than a board game. Investment decisions, and hence the direction of the markets, are driven as much by emotion as anything else. Sentiment is strong some months, and weak in others, even if not very much really seems to have changed in the meantime. It is tough for any computer programme to understand that, let alone model it, and start building it into its predictions.
Finally, behavior changes. The way that investors behave and the markets respond, evolves all the time. It isn’t static, or predictable, like the way the moon revolves around the earth. It will be different today from yesterday, and different again tomorrow. The quant funds were building predictive models based on the way market behaved in the past. But, whilst interesting, they didn’t really discover anything very useful. Just because a price has moved in a certain way historically does not mean it will move the same way in the future.
The lesson is a simple one. The markets will remain an arena for great traders, with an instinctive feel for where assets prices are going. They can’t be predicted with any kind of precision by computer programmes, no matter how much brain-power has gone into creating them.
And all those astro-physicists who for a few years could drive around in Porsches as they got paid million by a hedge fund can go back to the dusty poverty of the university library.
Still, there is one comforting thought. You might find it fiendishly difficult to predict what any market will do in the next years. But the smartest brains from the best universities couldn’t do it either – the markets caught them out, the same way they usually do the rest of us.
Wednesday, 1 September 2010
Zero Rates Have Lasted Too Long....
In my Money Week column this week, I've been discussing how almost zero interest rates have lasted too long. Here's a taster....
On March 5th last year the Bank of England cut interest rates to just 0.5%. It was the lowest rate in the Bank’s 315-year history. Accompanied by a package of asset purchases, it was part of an emergency package designed to shore up and economy which, at that point, appeared to be teetering on the edge of an abyss.
In the last few months, however, something very interesting has happened. Near-zero rates have started to become the ‘new normal’. Rates have stayed at that all-time low for 17 straight months now. No one thinks that they are about to rise any time soon.
And yet, the evidence is starting to emerge that the market is beginning to be seriously distorted by money that is virtually free. An M&A boom is bubbling up, created by cheap money. The housing market is kept buoyant by bargain-basement mortgages. Savers are abandoning deposits accounts for corporate bonds.
If rates stay at these levels much longer, behaviour will have changed so much that the shock once they start to get back to realistic levels again is going to be huge.
In the three centuries that it has been in existence the Bank has never pushed rates as low as this before. As a temporary, emergency measure, it was perfectly understandable. The credit crunch had tipped the global economy into a deep recession. There was plenty of talk of the threat of deflation (even if there was not much actually evidence of it). Something had to be done. And pushing rates down to almost zero was about the only weapon the Bank had available.
But now that low rates have been maintained for nearly a year and half, they are starting to be accepted as completely normal. For the first few months, people realised they were exception. Now they just think that is what money costs.
There is little sign of rates rising soon. At the last meeting of the Monetary Policy Committee, only one member, Andrew Sentence, voted for a rate rise, and that was only by a quarter of one percent. The rest of the MPC seems happy enough to keep rates on hold for the foreseeable future.
And yet at these levels, money is not just cheap: it is, in real terms, effectively free. Inflation remains stuck stubbornly above 3%. The real interest rate is negative, and has been for more than a year now.
A basic rule of economics is that once you change the price of something, you change behaviour as well. With money now virtually free, three things are happening.
First, there is a big upsurge in M&A. BHP Billiton’s $43 billion bid for Potash is only one example. This August has seen more takeover deals than any August since 1999, at the height of the dotcom boom. No doubt the autumn will be even busier.
It makes sense. If a company can borrow money at less than 1% and go out and buy a business yielding 6% or 7% a year, then it isn’t very hard to make a deal stack up financially. When chief executive’s thought 0.5% rates were temporary, they held their fire. Now they are looking permanent, they are starting to do deals based on very cheap money.
Likewise, the housing market remains suspiciously buoyant despite the slump in the economy. Again, it is being propped up by ultra-cheap money. There aren’t any mortgages available at 0.5%, but there are plenty of trackers available at less than 3%. Initially, record low rates were a windfall for home-owners. Their monthly mortgage payments came down dramatically. By now, however, we should assume that many people have bough properties on the assumption they will be paying about 3% a year interest on their mortgage forever.
Savers, too, have started to change their behaviour. There isn’t much point in putting your money into an account paying 0.25% a year or less. It’s hardly worth the trouble of filling in the form. There are plenty of anecdotal reports that savers are switching to corporate bond finds, or high-yielding equities, in record numbers. It is hard to blame them. There isn’t any point in collecting practically nothing on a deposit account when you could be making 5% or more on a bond fund.
The trouble is, as near zero rates come to be accepted as completely normal, behaviour is changing in all sorts of ways. People are starting to act as if those rates will remain indefinitely.
But, of course, they won’t.
The one thing you can say for certain is that if a price is at a three century low, there is nothing normal about it. It’s clearly exceptional. The think tank Policy Exchange predicted last weekend that interest rates could be back up to 8% in two years, as the impact of the huge expansion of the money supply fed through into prices. That may or may not be accurate. Whether it is or not, however, a return to a more normal rate of around 5% is guaranteed at some point in the next two or three years.
When it happens, it is going to be a huge shock to the system. Companies will have made huge takeover deals based on free money. People will have bought houses thinking they would only have to pay 3% on their debts. Savers will be invested in bond funds that may well fall sharply in value once rates start to rise again. The economy will have adjusted to near zero rates – and it will be extremely painful to have to start paying for borrowing again.
The Bank of England probably made the right decision in slashing rates close to zero. The economy did need rescuing. But by allowing that rate to remain in place so long, it is taking a big risk – that companies and individuals get so used to free money, they won’t be able to cope once rates do finally start to go up again.
On March 5th last year the Bank of England cut interest rates to just 0.5%. It was the lowest rate in the Bank’s 315-year history. Accompanied by a package of asset purchases, it was part of an emergency package designed to shore up and economy which, at that point, appeared to be teetering on the edge of an abyss.
In the last few months, however, something very interesting has happened. Near-zero rates have started to become the ‘new normal’. Rates have stayed at that all-time low for 17 straight months now. No one thinks that they are about to rise any time soon.
And yet, the evidence is starting to emerge that the market is beginning to be seriously distorted by money that is virtually free. An M&A boom is bubbling up, created by cheap money. The housing market is kept buoyant by bargain-basement mortgages. Savers are abandoning deposits accounts for corporate bonds.
If rates stay at these levels much longer, behaviour will have changed so much that the shock once they start to get back to realistic levels again is going to be huge.
In the three centuries that it has been in existence the Bank has never pushed rates as low as this before. As a temporary, emergency measure, it was perfectly understandable. The credit crunch had tipped the global economy into a deep recession. There was plenty of talk of the threat of deflation (even if there was not much actually evidence of it). Something had to be done. And pushing rates down to almost zero was about the only weapon the Bank had available.
But now that low rates have been maintained for nearly a year and half, they are starting to be accepted as completely normal. For the first few months, people realised they were exception. Now they just think that is what money costs.
There is little sign of rates rising soon. At the last meeting of the Monetary Policy Committee, only one member, Andrew Sentence, voted for a rate rise, and that was only by a quarter of one percent. The rest of the MPC seems happy enough to keep rates on hold for the foreseeable future.
And yet at these levels, money is not just cheap: it is, in real terms, effectively free. Inflation remains stuck stubbornly above 3%. The real interest rate is negative, and has been for more than a year now.
A basic rule of economics is that once you change the price of something, you change behaviour as well. With money now virtually free, three things are happening.
First, there is a big upsurge in M&A. BHP Billiton’s $43 billion bid for Potash is only one example. This August has seen more takeover deals than any August since 1999, at the height of the dotcom boom. No doubt the autumn will be even busier.
It makes sense. If a company can borrow money at less than 1% and go out and buy a business yielding 6% or 7% a year, then it isn’t very hard to make a deal stack up financially. When chief executive’s thought 0.5% rates were temporary, they held their fire. Now they are looking permanent, they are starting to do deals based on very cheap money.
Likewise, the housing market remains suspiciously buoyant despite the slump in the economy. Again, it is being propped up by ultra-cheap money. There aren’t any mortgages available at 0.5%, but there are plenty of trackers available at less than 3%. Initially, record low rates were a windfall for home-owners. Their monthly mortgage payments came down dramatically. By now, however, we should assume that many people have bough properties on the assumption they will be paying about 3% a year interest on their mortgage forever.
Savers, too, have started to change their behaviour. There isn’t much point in putting your money into an account paying 0.25% a year or less. It’s hardly worth the trouble of filling in the form. There are plenty of anecdotal reports that savers are switching to corporate bond finds, or high-yielding equities, in record numbers. It is hard to blame them. There isn’t any point in collecting practically nothing on a deposit account when you could be making 5% or more on a bond fund.
The trouble is, as near zero rates come to be accepted as completely normal, behaviour is changing in all sorts of ways. People are starting to act as if those rates will remain indefinitely.
But, of course, they won’t.
The one thing you can say for certain is that if a price is at a three century low, there is nothing normal about it. It’s clearly exceptional. The think tank Policy Exchange predicted last weekend that interest rates could be back up to 8% in two years, as the impact of the huge expansion of the money supply fed through into prices. That may or may not be accurate. Whether it is or not, however, a return to a more normal rate of around 5% is guaranteed at some point in the next two or three years.
When it happens, it is going to be a huge shock to the system. Companies will have made huge takeover deals based on free money. People will have bought houses thinking they would only have to pay 3% on their debts. Savers will be invested in bond funds that may well fall sharply in value once rates start to rise again. The economy will have adjusted to near zero rates – and it will be extremely painful to have to start paying for borrowing again.
The Bank of England probably made the right decision in slashing rates close to zero. The economy did need rescuing. But by allowing that rate to remain in place so long, it is taking a big risk – that companies and individuals get so used to free money, they won’t be able to cope once rates do finally start to go up again.
Tuesday, 24 August 2010
How to Read the Uk Economy....
In my Money Week column this week, I've been discussing how we need to look at a different set of indicators to get a feel for how the UK economy is doing. Here's a taster....
Is Britain about to face a double-dip recession? The media and the economic forecasters in the City have been in a flap about that much of the past month. House prices have stalled, and may be falling again. Consumer spending is sluggish. There are big cuts in government spending coming down the track. It isn’t hard to make the case that the reasonably robust bounce back from the collapse of 2009 we are witnessing right now might be about to go into reverse, and that another recession is just around the corner.
Then again, perhaps we are looking in all the wrong places for signs of life from the British economy. Over the last twenty-five years we became used to watching house prices and the retail sales figures to get a sense of where the economy was going. That worked perfectly well during a property, debt-fuelled bubble. But that economy has vanished forever. The British economy of the coming decade will have to be based on exports, small businesses, and making things. And to get an idea of how that is going we will need to get used to a very different set of indicators – the trade balance, the savings ratio, company formations, and private sector job creation. Those are the numbers that will tell us whether the economy is showing signs of life or not.
For most of the past couple of decades, you could get a pretty good idea of where the economy was going just by looking at the monthly mortgage approvals figures. If people were borrowing more money, pretty soon they’d be buying a new house, and a few weeks later house prices would go up. All the people who’d bought new houses would soon be loading up their credit card with all the stuff they needed to put into it. And everyone else would see how much their house had gone up in value in the past year, book themselves a winter holiday to celebrate, then head down to the shopping mall to buy some new clothes for the trip.
The sequence was pretty simple. In an economy based on property and ever rising levels of debt, if you just kept an eye on house prices, and the sales figures from a couple of the big high street chains, you’d have a very accurate idea of how the economy was doing.
But along with the rest of the developed world, the UK has reached the end of that road. The easy-money days are behind us. The credit has all dried up. The British economy might do well or badly in the next decade, but the one thing it won’t do is go through another house price, retail spending led consumer boom. If it is to have any chance of prospering, it needs to create real wealth in the private sector instead.
So what indicators should we be looking at instead?
The trade balance is good place to start. It used to be headline news every month, but has been largely forgotten about in the last twenty years. But with a big depreciation of the pound, the British should be making things and selling them around the world. They should be importing a lot less as well, as they tighten their belts and concentrate on repairing their balance sheets rather than getting a bigger flat-screen TV to put on the wall. Both should result in an improving trade balance.
The savings ratio might be another good indicator. The UK needs to save more and spend less, and much of that saving needs to be directed towards re-building the economy so that it is less reliant on financial services and government spending.
So too is the rate of company formation, and the rate of bankruptcies. Again, the numbers of new small companies getting started, and the percentage of them that fail or flourish, will be a clear measure of whether a fresh wave of entrepreneurs are establishing new industries. The rate of private sector job creation will be important as well. For most of the last decade nearly all the new jobs were in the public sector. In the next ten years, it will be private companies, and mostly small ones, that have to create the jobs.
As it happens, most of those figures are looking pretty good right now. The trade gap is indeed starting to narrow. Last month, exports rose by more than 4%, and imports by only 1%, producing an unexpected narrowing of the deficit. Exports to non-EU countries were the highest on record. Our car exports were up 11% month on month. That’s pretty encouraging.
Manufacturing is currently up 4.1% year on year, with the biggest increases in the machinery and equipment industries. Company formation figures are not regularly produced (and many new companies are just tax reduction vehicles). But company winding up orders in the court s are down 17% year-on-year, according to the latest figures from the Office for National Statistics. That’s a good sign as well.
Unemployment is down slightly, and more jobs are being created. Most importantly they are in the private sector. The numbers of people employed in the public sector fell by 7,000 in the first quarter of this year, whilst private sector employment rose by 18,000. It is a small step, admittedly, particularly when you remember that 29 million people have jobs in the UK. But a small step is still valuable when it is in the right direction. Britain needs a lot more private sector job creation in the years ahead.
The important point is not whether those numbers are looking good or bad. Sometimes they will be up, and at other times down. They are, however, the numbers that count.
None of the pundits writing about house prices or retail sales or government spending are adding anything to the debate. They are referring to an economy that’s vanished. There are a whole different range of indicators we need to pay attention to now.
Is Britain about to face a double-dip recession? The media and the economic forecasters in the City have been in a flap about that much of the past month. House prices have stalled, and may be falling again. Consumer spending is sluggish. There are big cuts in government spending coming down the track. It isn’t hard to make the case that the reasonably robust bounce back from the collapse of 2009 we are witnessing right now might be about to go into reverse, and that another recession is just around the corner.
Then again, perhaps we are looking in all the wrong places for signs of life from the British economy. Over the last twenty-five years we became used to watching house prices and the retail sales figures to get a sense of where the economy was going. That worked perfectly well during a property, debt-fuelled bubble. But that economy has vanished forever. The British economy of the coming decade will have to be based on exports, small businesses, and making things. And to get an idea of how that is going we will need to get used to a very different set of indicators – the trade balance, the savings ratio, company formations, and private sector job creation. Those are the numbers that will tell us whether the economy is showing signs of life or not.
For most of the past couple of decades, you could get a pretty good idea of where the economy was going just by looking at the monthly mortgage approvals figures. If people were borrowing more money, pretty soon they’d be buying a new house, and a few weeks later house prices would go up. All the people who’d bought new houses would soon be loading up their credit card with all the stuff they needed to put into it. And everyone else would see how much their house had gone up in value in the past year, book themselves a winter holiday to celebrate, then head down to the shopping mall to buy some new clothes for the trip.
The sequence was pretty simple. In an economy based on property and ever rising levels of debt, if you just kept an eye on house prices, and the sales figures from a couple of the big high street chains, you’d have a very accurate idea of how the economy was doing.
But along with the rest of the developed world, the UK has reached the end of that road. The easy-money days are behind us. The credit has all dried up. The British economy might do well or badly in the next decade, but the one thing it won’t do is go through another house price, retail spending led consumer boom. If it is to have any chance of prospering, it needs to create real wealth in the private sector instead.
So what indicators should we be looking at instead?
The trade balance is good place to start. It used to be headline news every month, but has been largely forgotten about in the last twenty years. But with a big depreciation of the pound, the British should be making things and selling them around the world. They should be importing a lot less as well, as they tighten their belts and concentrate on repairing their balance sheets rather than getting a bigger flat-screen TV to put on the wall. Both should result in an improving trade balance.
The savings ratio might be another good indicator. The UK needs to save more and spend less, and much of that saving needs to be directed towards re-building the economy so that it is less reliant on financial services and government spending.
So too is the rate of company formation, and the rate of bankruptcies. Again, the numbers of new small companies getting started, and the percentage of them that fail or flourish, will be a clear measure of whether a fresh wave of entrepreneurs are establishing new industries. The rate of private sector job creation will be important as well. For most of the last decade nearly all the new jobs were in the public sector. In the next ten years, it will be private companies, and mostly small ones, that have to create the jobs.
As it happens, most of those figures are looking pretty good right now. The trade gap is indeed starting to narrow. Last month, exports rose by more than 4%, and imports by only 1%, producing an unexpected narrowing of the deficit. Exports to non-EU countries were the highest on record. Our car exports were up 11% month on month. That’s pretty encouraging.
Manufacturing is currently up 4.1% year on year, with the biggest increases in the machinery and equipment industries. Company formation figures are not regularly produced (and many new companies are just tax reduction vehicles). But company winding up orders in the court s are down 17% year-on-year, according to the latest figures from the Office for National Statistics. That’s a good sign as well.
Unemployment is down slightly, and more jobs are being created. Most importantly they are in the private sector. The numbers of people employed in the public sector fell by 7,000 in the first quarter of this year, whilst private sector employment rose by 18,000. It is a small step, admittedly, particularly when you remember that 29 million people have jobs in the UK. But a small step is still valuable when it is in the right direction. Britain needs a lot more private sector job creation in the years ahead.
The important point is not whether those numbers are looking good or bad. Sometimes they will be up, and at other times down. They are, however, the numbers that count.
None of the pundits writing about house prices or retail sales or government spending are adding anything to the debate. They are referring to an economy that’s vanished. There are a whole different range of indicators we need to pay attention to now.
Wednesday, 18 August 2010
The City's Fresh Challengers....
In my Money Week column this week, I've been lookig at the fresh challenges the cuty faces from financia;l centres in the emerging markets. Here's a taster....
Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.
Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.
Friday, 6 August 2010
Lethal Force - A Short Story
The Red Bull magazine has published a short story that features Steve from the 'Death Force' series. You can read it here.
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