Fiscal austerity vs the life-cycle

Ohmigawd public sector debt! Ohmigawd! Pay it back or else, or else …… no much really.

The pro-austerity lot are funny about this because the way they approach it is so at a remove from well life really, including the businesses they love smearing themselves over.

Over the life-cycle, your own debt experience is ideally shaped like a bell curve. Simplistically, as you age you acquire more debt, say to pay for being a student, then to buy a car, then even more to buy a house. Time passes, grey hairs appear and the debt gradually reduces as you pay it back. And then you die.

When you adopt this perspective and apply it to government like a Maggie Thatcher, fer instance, then of course the deficit needs reducing and no wonder bods on the right talk about public sector debt as a destructive legacy that will harm future generations. Except “you” as a unit of analysis is pants. Government is a collective entity and does not have a finite lifespan, fundamental differences that really matter.  

So rather than “you” think of the collective entity you’re most intimately involved in, which is your family, over the same life-cycle; at a family level, as you’re repaying your debt there’s a good chance your kids are beginning to acquire it; on a net basis families continually carry debt because different members – particularly Uncle Nigel -  are simultaneously borrowing and repaying cash.

Even then, I don’t think the family is a sophisticated enough metaphor to use to understand government debt. Big corporations are and they have all sorts of debt. They borrow from banks, they issue bonds, they take shareholder cash via ordinary and preference shares, all to find the most financially efficient capital structure. The price of debt falls? Companies borrow more. Rises? They borrow less, but regardless of the specific amounts, company debt is never ending. And to add a touch of reality here, if a company had no debt whatsoever, chances are a private equity bod would snap it up so he could load it up with some.

Is it possible to have too much debt? You betcha cos there’s refinance risk and exposure to future interest rate movements. But, those are things to manage not avoid. Besides, too much of anything is bad for you.

However, the notion that government debt must be repaid NOW is stupid. It’s not how families work nor is it how terribly sophisticated companies complete with treasury departments work either. You might think that it does, but then that’s just you.

Right now, government is uniquely well placed to borrow at historically low interest rates to finance the kind of investment that would lessen the impact the credit crunch is having on innocent individuals and their families.Doing so would be morally right and would also lessen the damage fiscal austerity is doing to Britain's long-term economic prospects by destroying its productive capacity.

Arguments for Scottish independence part 3: Assets and practicalities

Picking thru the requirements of what an independent nation needs, Scotland is already very well placed thanks to devolution and stuff left over from the 18^th century

Here’s a brief list:

Legal system? Check.

Education system? Check (schools, universities and professional associations fer goodness sake)

Multi-party democracy? Check (plus independence would remove a tier)

National health service? Check

And so on and so on. Really, the existing infrastructure is so well developed and already sufficiently autonomous  as to render many of the practical arguments against independence redundant. Hence, much of the pro-union chat focuses on the softer benefits of the union, like how we’re better together just because we are really, and how being in the union meant Scottish people got to wear British swimming trunks at the olympics. Now that’s all lovely I guess, except the union also means being part of an electorate that voted in the ConDems and appears to support punishing the disabled.  

However, that’s another post. Getting back to the practical issues, there is one, glaringly big exception, which is the financial system and the economy more generally. This is accordingly where the more practical opposition to independence is going to town. Its also a big-big-biggie given the credit crunch and Scotland’s unfortunately disproportionate contribution to the British experience.

Except, the pro-union mentality on display really needs to get a grip. Following on from the HM Treasury propaganda, this blerk here has produced a less biased, more constructive analysis of “Scotland's currency options”. But, even then he just can’t resist the cute point scoring. Like when he talks about currency boards and describes the Irish experience as follows “Ireland chose to fix its exchange rates at parity when leaving sterling. The Irish central bank then spent the next fifty or so years defending the exchange rate until joining the ERM”, he forgot to mention sterling had a fixed exchange rate for much of the same period that HM Treasury also spent years defending i.e. the actual point here isn’t currency pegs are somehow intrinsically a bad thing, rather its what was ultimately a fixed exchange rates proved a serious constraint (by contrast a Sterling currency peg right now would be to a floating currency).

However, its when he says (in the 3rd paragraph) “An independent Scotland would have to move swiftly to create the necessary institutions and capital markets. This would include a central bank, a payments system, deposit insurance, prudential and conduct financial regulators, a debt management office, an exchequer, a tax collection agency, a fiscal commission, equity and capital markets and, of course, a currency mint.” I’m left thinking cool the beans there a minute bawjawz, cool the beans.

This is because of how he chooses to discuss an independent Scotland’s assets and liabilities. In liability terms, its about how Scotland would need to take its fair share of UK national debt with it. Now, this is an important point to make, however, the discussion of Scottish assets is less good, because it focuses almost exclusively on oil.

Actually, though, Scottish assets also include Scotland’s share of UK level institutions, you know the ones Scottish taxpayers have paid into and been governed by. As with the divvying up of the national debt – incurred partly to finance the creation and running of said institutions – giving us a bit of them would only be fair.

To give a practical example drawn from bawjawz’s willfully intimidating shopping list, establishing “prudential and conduct financial regulators” – fine, we’ll have a copy of the PRA (was FSA) rule book we helped pay for please, some 12 month secondees to the existing Edinburgh office and we’ll advertise for new staff on Monday. And yes the job adverts will big up how existing PRA staff can transfer their existing skills to a city with more affordable housing and a better commute than London.

Oh and not having such a complex financial system as London to regulate means it could well be cheaper and potentially safer to do so here given there’s only the one Scottish bank with serious, but shrinking investment bank capabilities as opposed to the teaming hordes scattered across London. Bonus! (and another example of the positioning issues affecting the pro-union lot; they, rightly, say an independent Scotland would have a disproportionately large exposure to the financial services sector, but it would also be at a remove from so-called “casino” banking e.g. a Glasgow insurance company call centre poses less systemic risk to the Scottish economy than Mayfair's hedge fund bods do to the UK. And, they probably pay more tax!).

As for some of the other stuff on the list, well bawjawz is just being silly. Take “and, of course, a currency mint”; really? Again with the memory lapse given the EXISTING Scottish note issue and the fact the Royal Mint already makes coins to order for foreign countries.

Personally, I’m increasingly left wondering why the pro-union lot is placing sooooo much emphasis on the scare tactics even when it involves making basic factual errors. In the meantime, when you run thru the assets and infrastructure Scotland already has, from a practical perspective independence doesn't strike me as an especially daunting prospect. Saying that, the 2014 Commonwealth games mascot is an embarrassment.

Arguments for Scottish independence part 2: Oil

A thing that bugs me about The Economist is its bias. Like with Hugo Chavez, in what was effectively an obituary they still found time to go on about his recklessness and his “corrupt, oil-fuelled autocracy”, but failed to mention how in amongst the grandstanding, Venezuala has a soveriegn wealth fund worth $800m.

By contrast Scotland and the rest of the UK doesn't have one at all, which makes North Sea oil, so far, an incredible, missed opportunity. Sure, go to Aberdeen and you’ll see more new build executive villas, 4x4s and giant plasma screen tellies than you can shake a stick at. But, these belong to people who – like the UK government – are spending today what won’t, evenetually be there tomorrow.

This uniquely British approach to oil dates back to the 1976 UK financial crisis that saw Britain apply to the IMF for a bail out. In these circumstances the associated rush to bring oil on shore made sense as the new revenues then helped ease immediate and pressing financial problems (the "lax" approach to health and safety this also involved is somewhat less justifiable, but does strenghten the moral case for regarding North Sea oil as a distinctively Scottish asset). Over time the UK government’s fixation with spending every penny oil generated as soon as it could became less justifiable, something that made North Sea oil forward production curves increasingly handy.  

I’ve seen loads of these production forecasts over the years, so many I just pulled the one presented above randomly off the internet without bothering to check when it was produced. This is because each one tells the same story; North Sea oil production has peaked, it’s now in decline and within a couple of decades it’ll all be gone. Given this (1) why bother setting up a soveriegn wealth fund and (2) Scotland had better stay in the union because when the oil runs out we’ll be fecked.

Except, every year when the production curves get refreshed they push the end date out another few years. The reasons why are straightforward. Well when I say reasons, I mean reason. So sure sure, technological advances are a factor, but really it’s about price. As North Sea oil is relatively expensive to produce, North sea oil production has a relatively high hurdle rate i.e. the price below which its not worth bothering about. Hence, every production curve is actually a forecast of how much oil it will be economic to produce, not how much is left. As prices rise more oil becomes economic to produce and the production curve shifts that bit further to the right. Globally, the most obvious example of this are the Canadian tar sands, which have gone from being well sand really to one of the world’s largest oil reserves.

Now, picking through the historic data what stands out is how in the past supply side shocks have driven oil prices to record highs. Now though its more to do with demand due to global economic development, most obviously Chinese economic growth. And as this isn’t going away any time soon, while oil prices will certainly move about in the future, they remain unlikely to fall back to the levels seen in the 1990s anytime soon.

This in turn means North Sea oil will be with us for a good while yet, which has obvious implications re: the Union. As no UK government has ever shown itself to be the slightest bit willing to view North Sea oil as anything other than an immediate cash cow to be milked as aggresively as possible, staying in the Union means when North Sea oil does eventually run out, the benefits of this once in a (nation’s) lifetime opportunity will already have been frittered away on tax cuts and London based legacy projects. Plus, the Scottish post-industrial experience suggests Aberdeenshire’s post-oil experience will not be pretty.

Given this independence is the only option if we want to establish a permanent, positive North Sea oil legacy. Leaving the union and establishing a Scottish soveriegn wealth fund will also address the volatility issue raised by the UK treasury in its scaremongering tosh about Scottish independence – in good years more money gets paid in, in bad years less. There. Sorted. Easy.

To put this another way, I’d rather North Sea oil revenues eventually funded the university I hope my grandchildren attend than had been pissed away putting up the millenium dome.

New Treasury study proves Scottish independence would kill the Scottish economy

Wow. No seriously, WOW. After the first Treasury paper on currency options for an independent Scotland I knew any other stuff they trotted out would be at least as annoying, but with the “Scotland analysis: Financial services and banking” paper they’ve really outdone themselves.

So lets start with the basics – in the executive summary they say “The Scottish banking sector would be exceptionally large compared to the size of an independent Scotland’s economy, making it more vulnerable to ­financial shocks than it is as part of the larger UK…. Scottish banks have assets totalling around 1254 per cent of an independent Scotland’s GDP”. They continue by noting “The banking sector in an independent Scotland would be dominated by the two largest banks – the Bank of Scotland and the Royal Bank of Scotland (RBS).”

Hmm. Can you spot the deliberate mistake there, can you? No? Here’s a clue – Bank of Scotland (BoS) merged with the Halifax to form HBoS in 2001. This was followed by a campaign to keep the HBoS HQ in Edinburgh, because well it wasn’t really a Scottish bank anymore. Then HBoS was taken over by Lloyds TSB in 2009 and is now a wholly owned subsiduary of the Lloyds Banking Group. There are, I’m sure, various Scottish registered Bank of Scotland related legal entitites, but there is no Bank of Scotland in an especially meaningful sense; other than as a brand, it is dead, it has ceased to exist. 

So yeah, sure RBS and BoS dominate Scottish banking markets, but if Bank of Scotland went phut howz that a Scottish problem? And the assets to GDP ratio is presumably utter tosh as well due to this (?). And and, lets be clear the bulk of “Scottish” bank assets are outside Scotland, like if RBS went phut the day after independence this would be an issue for the rest of the UK as NatWest savers and borrowers shat themselves in a cross-border bank crash lets learn from the Fortis example prompting new legislation/arrangements for managing bank failures kind of thing.

Now mebbe the paper recognises this because it does refer to how much the RBS bail out cost, but not the  HboS related Lloyds one. Or mebbe it doesn’t because then it talks about how “First, if the large bankS (emphasis added) made no changes to their group structure and kept their existing headquarters, an independent Scotland would have an exceptionally large fi­nancial sector”. Err, why the plural? As it’s a wholly owned subsiduary HBoS i.e. BoS is already headquartered in London. Or perhaps its the Clydesdale they’re talking about, except that’s owned by the National Australia Bank headquartered in Australia of course. Handelsbanken is certainly growing its Scottish operations, but again I’m not convinced its especially Scottish.

It’s a shame this isn’t clarified because then the paper talks about how “where large fi­rms are faced with greater concentration or risk they may look to diversify or restructure themselves for example so that they were no longer headquartered in Scotland. If this were to happen it could undermine Scotland’s current status as an important financial centre”. Now, this confused me because other than RBS – singular - I couldn’t work out which “firms” they were talking about. Plus, with RBS, lets be honest, yeah sure the retail bank has big offices here along with group functions, but dear gawd they’ve got lots of people already based in London. Like in corporate banking, Scotland has been no more than a regional sales outpost comparable to say its Birmingham corporate centre for years now. And as for the head office stuff, a big factor is simply sunk costs and labour costs i.e. the offices are already there and Scottish labour is relatively cheap, things independence won't do do-hickey about

Am guessing the authors didn’t clarify this because they wanted to go off on one instead with stuff like “Scotland and the rest of the UK bene­fit from a large domestic market in ­financial services with no restrictions on buying and selling ­financial products across the UK. The Scottish ­financial services industry estimates that 90 per cent of its customers are located in the rest of the UK, and the market is highly integrated for most ­financial products”.

I guess, except, what are they actually saying here, like would the one remaining big Scottish bank no longer have access to English markets? Seriously? Like would independence prompt a car insurance trade war? OK, if that’s the case then stop implying and start stating – if Scotland votes for independence, then the UK Treasury view is that Scottish financial services providers would no longer be able to sell into English markets (Oh and lets just leave the example of Santander, that lovely British high street, I mean Spanish calle, institution out of it).

Ahh, but we need to think about bank regulations because “There is currently a single regulatory framework covering the whole of the UK, but this could not continue if Scotland became a separate state. “ I guess, except a dual approach has already been in operation for centuries now when it comes to banks and the law because of that cheeky wee thing called the Scottish legal system. Hence, when they start out Scottish bankers learn about taking security over a company’s assets via a bond and floating charge whereas English ones talk about mortgage debentures.

Back to risk though; “Creating an international border would reduce fi­nancial fi­rms’ ability to spread risk, and potentially drive up the cost of ­nancial products for Scottish household” – well yes it certainly would if the UK Treasury is seriously claiming a firm headquartered in an independent Scotland would be locked out of England post ballot results. Thankfully, RBS ALREADY HAS exposure to overseas climes including the US via its Citizens Bank subsiduary i.e. WTF are they talking about with this “spread risk” tosh?

I wonder if they’re just blinded by how good they think they are as when they say “The competitiveness of Scotland’s fi­nancial sector is aided by its location within the UK. Industry and international bodies view the UK as a strong tax and regulatory regime, building customers’ and partner organisations’ trust in UK fi­nancial ­firms. The Global Financial Centres Index (GFCI) rates London as the most competitive international fi­nancial centre, scoring particularly strongly on regulation and the quality of people. International investors know and value the fact that large financial fi­rms based in Scotland will share the City of London’s UK-wide regulatory framework, in which banks are overseen by the Bank of England under UK law. “

I guess, I mean as I understand it AIG blew itself up multi-multi billion style doing trades out of its London office it couldn’t have got away with in the US due to London’s lax regulation. That aside, what the AIG example – along with the hundreds of foreign banks with London offices - really proves is so utterly fucking what? You don’t need to be part of the UK to have London based banking operations regulated by the City of London and so on.

So yet again, rather than provide any particular insight or meaningful analysis, the UK Treasury's contribution to the independence debate is to shit out some disgraceful, tax payer (English, Welsh, Northern Irish and Scottish) funded propaganda. I mean come on, it doesn’t even appear to get the basic facts right, it engages in dumb scare-mongering by implying some kind of post-independence trade war/financial services isolation, it ignores how financial firms not headquartered in London are already key to the UK financial services sector (and post governmental politicial careers/personal fortunes) and insultingly fails to even acknowledge the existing legal differences between Scotland and England (and Wales) that have been integral to the business of UK banking for hundreds of years.

P.S. A thing that always struck me about RBS was its commitment to being Scottish, something that helps explain why say Tom McKillop was made chairman prior to it imploding. Its ironic that Mr Fred Goodwin’s legacy now appears to be being used as an argument against independence.

Arguments for Scottish independence part 1: Politics

I wasn't for Scottish devolution because I believed a devolved parliament would simply transfer the grubby, intercine politics that characterised (and characterise) West of Scotland local government onto a larger, more expensive and more embarressing stage. And I was right, for a time.

Picking through the Scottish election results/wikipedia you see Donald Dewar winning for Labour in the first election in 1999. Then, following Donald’s death, Henry McLeish took over as the stop Jack McConnell candidate, sitting as first minister until some unfortunate expenses got in the way. Finally,  Jack got his chance in 2001, even going so far as to wear that gawdawful kilt in America. Except, as the years went by it turned out the electorate were getting a tad fed up with Labour and in 2007 Alex Salmond took over for the SNP. Brilliant.

No, not in an aren’t the SNP great kind of way, because they patently aren’t, rather it turned out Labour’s vice like grip on Scottish elections wasn’t actually vice-like i.e. after 8 years or so it turned out multi-party democracy actually works in Scotland (this despite all the warnings about how proportional representation would prevent this).

This is especially interesting because it provides a useful yardstick for assessing the growing pro-union bollocks we’re getting fed. Like, what currency should Scotland have? Err, that’s actually a hugely complex question, so howzabout we see how things develop over a couple of years, you know, possibly 8 even because the notion of everything being sorted out on day 1 is just plain stupid (e.g. do the nuclear bombs get dumped the other side of Hadrian's wall the instant Scotland votes for independence? No of course they don't). 

During this time I also reckon you could expect the quality of Scottish politics to significantly improve with Labour, funnily enough, most likely to be the winners. Right now its perfectly reasonable to characterise Labour in Scotland as an utter joke, like have you read any of Johann Lamont’s speeches? Or do remember anything Iain Gray actually said? Thought not. One big reason why is straightforward; for the ambitious left of centre Scottish politician, Westminster is where its at as the former MSPs Cathy Jamieson and Margaret Curran prove in spades.

Take away that option and allova sudden they’ve no choice but to pursue their political careers here. Now this isn’t saying either of those former MSPs is much cop compared to say an Alastair Darling, but if Margaret had stood against Johann for the leadership of Scottish Labour who do you think would (hang on make that “should”) have won?

So right now Westminster effectively siphons off enough Scottish political talent to render much of twhat's left behind a joke. By contrast, I reckon its perfectly reasonable to expect that in an independent Scotland with the Scottish parliament an aspirational end in itself, not only would we have more power, we’d also, in time, have politicians more capable of exercising it. I reckon that would be a good thing.

Fiscal austerity finale meme

Expansionary austerity was always an implausible contradiction in terms that fitted right-wing political sensibilities better than the facts. Now though a run of events have made its increasingly (oxy)moronic nature indisputably clear.

Here, cutting spending to retain the UK’s AAA rating – and by so doing holding down borrowing costs – largely defined ConDem economic policy with the rating to provide a benchmark for assessing George Osborne’s success as chancellor (remember that?). Well, the UK is AAA no longer AND borrowing costs remain at record lows i.e. Osborne couldn’t do something he shouldn’t have been doing in the first place.

Then there’s been the Reinhart and Rogoff debacle were an apparently empirical justification for cutting government debt turned out to be based on a sloppy methodology, bad arithmetic and wishful thinking.

Except, this only followed on from the debunking of the notion that government spending in response to a downturn had only a limited multiplier effect i.e. why bother spending more and anyway cutting spending wouldn’t be that painful. Paul De Grauwe's work carried this critique a step further by setting out the “strong negative correlation” between “austerity measures introduced in 2011 and the growth of GDP over 2011-12” i.e. funnily enough the countries that've cut spending the most have suffered the sharpest reductions in GDP etc., And no them doing so didn’t put a cap on their borrowing costs, that was the ECB stating it was “ready to do whatever it takes”.

Really, picking thru the above, rather than apologise Professor Ferguson should be applauded for setting out the one remaining argument spending cut supporters appear to have as to why Britain should not adopt an actively counter-cyclical fiscal policy. 

Increase government borrowing by say £25bn to finance a 3 year social housing programme? Ha .......

Blue Steel

Niall Ferguson’s latest outburst makes for an interesting intellectual experiment; what kind of drivel will do the most damage to a fella’s position as one of the most “influential people in the world”:

Is it (1) making short-term economic forecasts that turn out to be profoundly and fundamentally wrong and in the process convey a deep misunderstanding of the economy?

Or (2) proposing a retrogressive flat tax that would work on the basis of raising indirect taxation i.e. ones that disproportionately hit lower earners, to fund tax cuts on wealth and incomes that would disproportionately benefit the rich?

Mebbe its (3) misrepresenting evidence in the aggressive support of an extreme political agenda?

Or finally (4) using references to someone’s sexual orientation to explain the supposed limitations of their thinking?

Actually, its (5) none of the above.

Professor Ferguson, after all, has good hair, is a charismatic communicator and can rock the blue steel. That his articles frequently read like they're dashed off using pithy prose instead of analysis is by the by; he gives good quote.

Even better, he takes clear, polemical lines making him easy to understand and a useful talking head. So again, he gives good quote.

Then there are all his academic and class based honours; the elite university professorships, the fellowships and so on that reassure us that he is indeed a credible communicator (give or take (1), (3) and (4) above, (2) being open to debate I guess) or why else would he be getting interviewed at Davos?

Because he gives good quote innit; he says what the rich and powerful want to hear and looks cool staring thoughtfully into the distance on that history series you got as a Christmas box set. So while the Keynes outburst leaves him sounding even more like the kind of muttering, mentalist reasonable people cross roads to avoid, Fergusson is too convenient and too useful to have his supposed “credibility” seriously questioned by any commissioning editors anywhere really; they've developed too much of vested interest in him to reflect on what he says let alone rethinking paying him to appear on next week’s show.

One last thing I find funny are the repeated references to Eric Hobsbawm thinking Fergusson was quite the fella as if smearing a dead Marxist’s reputation over right wing Ferguson somehow legitimises the latter. Any Hobsbawm stuff I've read (notably the Jazz Scene and the Fabians reconsidered), always left me thinking he was a ragingly arrogant snob.


A May 9th P.S. and so it begins. Following Professor Fergusson’s unqualified apology about his stupid comment, his open letter on the subject takes a different tack wherein the fool repositions himself as the victim of evil forces; “one of the things I learnt from my stupidity last week is that those who seek to demonize error, rather than forgive it, are among the most insidious enemies of academic freedom.”

Even better, as the post allows comments and with the idiot magnets* cranked up to 11, what follows Professor Stupid’s “wise” words will presumably make his case for him meaning any time he's asked about it in future he can quickly acknowledge his mistake, then spend much more time going on about all the nasty things people said. Bish, bash bosh, job’s a good ‘un, lets move on/back to trotting out the usual mendacious, pro-elite tosh he makes such a good living from.

All feels like something Kerry Katona would do except her mea culpa would be via Hello/a Lorraine Kelly interview. Plus, she’s got a better economic forecasting track record than Professor Stupid.

* © Charlie Brooker