Value chain TV

Back in the 90s, a colleague who’d joined our office from America demanded to know what, exactly, got made in Britain. Nothing got made or done here; that was his basic position. At the time, I thought the best answer was to point to things like aerospace, pharmaceuticals and chemicals. Not so many internationally recognised consumer goods, true, but then a sensible person surely has to realise that certain things such as washing machines – whatever the nationality of the brand – tend to get made and sold locally owing to transportation costs. Now if I’d been smart like Newsnight’s Evan Davis, I could have gone a bit further and eulogised stage one of the value chain: activities such as research and design. These things happen in Britain too. Davis has made a whole BBC television series that describes the value chain in the clearest, simplest terms. I wonder if his examples aren’t a bit dated (ARM, Glaxo) but it probably doesn’t matter: I think it’s good to have the idea spelled out.

Compare and contrast with another BBC series that’s supposed to be about business. Yes, that would be The Apprentice. Now you might object that this is really just an entertaining reality show that trades on the self-destructive antics of eager twenty-somethings, but I’d point out that there’s clearly a strong normative component to the show as well. Sir Alan is the voice of the no-nonsense business-minded serious person. His two advisors are practically schoolteachers. They hover over the apprentices and their default attitude is one of disapproval; you can see it in the set of their chins. Now, every few episodes the apprentices get sent to a Soho consultancy for twenty-four hours in order to get something made. Supposedly the apprentices design things during this time period. An iPhone app, say, or a new perfume. Of course, it’s actually the professionals at those consultancies who do the designing; the timescale being ultra-short, they roll out some basic, reheated product. This is as you’d expect: real design is much, much harder; the difficulty of it underpins the possibility of making money at it. The problem with The Apprentice is that there’s next to no recognition of the reality. The Apprentice view of stage one value chain activity is that you do it by marching into the design studio and ‘giving a steer’ to the creatives, who will then work all night. At the end of the all-nighter, the delegator gets to pluck the fruit; the designed product.

Perhaps it’s not surprising that Sir Alan’s company is not so much about computers these days.

Nine Reasons Why Spain’s Economy Is More Different Than You Think!

Spain, as those 1990s tourist brochures used to tell us, is different. And it certainly shouldn’t be confused with Greece. Even a cursory look at the most basic of maps should satisfy any doubts we might be harbouring in that regard. But being different is not the same thing as being economically sound. Which is what Societe Generale’s Klaus Baader has just tried to argue in a recent research note: “The Spanish bond market was hit hard in the wake of the quantum leap in the Greece crisis. But fundamentally the case for Spain remains strong”.

In singling out the nine points that Klaus advances in support of his thesis for detailed examination, I do not do so because I find the arguments particulary bad (or even especially “noteworthy” in the negative sense). He has a point of view, and he is doingh is job, and in neither case can I fault him for this.

The reason I have decided to single Klaus out for special treatment here is because he conveniently brings together, in a clear and succinct fashion, a number of arguments which are widely accepted and used by both analysts and policy makers. Unfortunately the fact that arguments are widely held does not make them valid, or in anything other than the most trivial conventialist sense “true”. Indeed it is precisely because I feel that these arguments are not well founded that I have decided to reply to them in this rather detailed way. Basically I don’t buy the idea that Spain is simply suffering from a crisis of confidence, one which, in its turn, puts pressure on the government bond spread. I think Spain has a problem in the fundamentals department, and unless this problem is first accepted and then addressed the wrong (inadequate) remedies will continue to be applied, putting the Eurozone and its citizens at risk of financial catastrophe in the medium term. Continue reading

Red Lights Flashing For Eurozone Growth

The June Flash PMI reports, which were out on Thursday, make do not make agreeable reading, in the sense that while the French and German economies both continued to expand during the month, their rate of expansion, and in particular in the leading manufacturing sector, seems to have dropped sharply, and for the second month running. In contrast, the economies on the Eurozone periphery moved closed to outright contraction. All in all the survey results only add to concerns about the global recovery which came into focus after the May PMI results (see my To QE3 or Not to QE3).

Continue reading

India’s Economy Hits What Has To Be A Very Welcome “Soft Patch”

“If you look at the world, it would inevitably appear India’s growth is preordained. The world needs working hands. The world needs back offices. India seems to be a natural fit…We are producing a workforce which is not only for India, but a global workforce.”
Sunil Bharti Mittal, founder and chairman of New Delhi-based Bharti Enterprises

As the European Central Bank moves steadily and earnestly forward with its ongoing rate hike cycle – in so doing sending one fragile economy after another along Europe’s periphery drifting off towards recession – there is at least one prominent global central banker who must be feeling vindicated in the policy stance he has taken to try and bring the rampant inflation from which his country has been suffering back under control. Duvvuri Subbarao is Governor of the Reserve Bank of India, and under his stewardship the central bank has been hard at work over the last twelve months trying to credibly fight inflation. So far raised rates have been raised ten times, and the bank has managed to claw the annual rate of wholesale price inflation back from its peak of 10.9% to the current level of 9.06%. Hardly a level to be complacent about, but then Mr Subarrao seems far from complacent. Continue reading

Special Guest Contribution: A simple, repellent plan for Greece

Ed: At this critical moment for the European project, we have the honour to present a special guest contribution from Norman Strong, who has agreed in the light of the extreme circumstances we are facing to finally resume the occasional series of posts he began here in 2002. Like Duke Nukem Forever and the Stone Roses’ second album, it’s been a while.

The first thing to note is that there is, despite appearances, no urgency. Once one has accepted the fact that a restructuring of Greek debt will be needed, then it is no longer the case that “kicking the can down the road” will “only make things worse in the long run”.

Some simple arithmetic, from the point of view of Greece:

Say that the total sustainable debt burden of Greece is X, while its current debt burden is Y. If we were to reschedule tomorrow, the necessary markdown percentage would be X/Y.

But if we don’t reschedule tomorrow, and instead lend an extra amount Z, then the sustainable burden doesn’t change – the eventual writedown will now just be X/(Y+Z).

In other words, new net lending to Greece, from the EU, IMF and/or EFSF to finance the current deficit, is just pushing down the eventual recovery rate on all debt. The marginal rate of writedown on new credit extended to Greece is one hundred per cent. It is effectively a fiscal transfer, financed by either a tax on all bondholders (if the new debt goes in pari passu), a tax on pre-crisis bondholders (if the new debt were to go in on a senior basis), or a tax on the official sector (if the new debt is wholly or partially financing an exit at par for pre-crisis bondholders as they redeem). The Greek government should be trying to borrow as much as anyone will lend them, since the repayment terms don’t matter if you’re planning to default. It is analogous to the practice of “trading while insolvent” for a company; this is an illegal thing to do for a corporation, but countries aren’t corporations.

With that in mind, we realise we are under no time constraint at all, and we can organise the eventual bailout at our leisure and for our political convenience. Particularly, we can stick it out past 2013, by which time the German Presidential elections will be out of the way, and a raft of new European legislation will be in place with respect to sovereign and bank debt restructuring, allowing the whole business to be carried out on a more civilised basis.

(Academic economists and bond traders alike, by the way, always underestimate the need for legal certainty, while policymakers never do. Much avoidable misunderstanding results from this, and from the fact that I have never seen a “plan to save the world” from either an economist or a bond investor, no matter how otherwise sensible, which didn’t have a giant great lacuna in the middle where anyone with policy experience would immediately say “that’s the bit where a thousand lawyers suddenly pop out of the woodwork and start arguing with each other, resulting in something absolutely critical not getting done”.)

So with time on our side, and no real intention of doing anything until we have as much legal and political certainty as we need, what would be the least painful way to achieve our end? I am assuming that our objective here is to get Greece back to a sustainable fiscal position, without destroying the Eurozone banking system on the way, with as little pain as possible. That is the plan, isn’t it guys? I assume so, but I am often reminded of Enron’s legendary fixer, John Wing and his cry of “Everyone trying to do this deal, that side of the room – everyone trying to screw it up, over there!”. the easy way to do this is by using the equipment provided; a central bank. The ECB currently owns EUR62bn of Greek government bonds outright, via the Securities Market Purchase program. There is also a substantial debit balance on the part of the Bank of Greece at the ECB, reflecting payment imbalances in the Eurosystem. This is not a fiscal exposure (the Greek government has no use of the proceeds and the debt is collateralised). But if need be, it could be converted into one; one would only need the Greek banking system to sell their collateral to the ECB in an extension of the SMPP.

The only point I’m trying to make here is that, in stage 1 of my plan, I can get the ECB into a position where it is as big or as small a creditor of the Greek state as it needs to be. (Stage zero, helas, involves getting Greece to a position of primary fiscal surplus, and that is going to hurt. Fundamentally, fifteen years ago, Greece faced a choice between being the kind of country that doesn’t collect taxes on the middle and upper class, or the kind of country that pays generous benefits and public sector salaries, and chose both. There is no financial whizzkid trick in the world that will let you get over that one).

But my flexibility in making the ECB the largest creditor in stage 1 is important, because stage 2 involves the EFSF providing a special loan facility for the Hellenic Republic to make an open market tender offer for its outstanding bonds at a discount to face value. My guess is that few private-sector holders would tender into such an offer, but the ECB certainly could, as long as it was given an indemnity for the costs of doing so by its shareholders. The ECB actually holds a substantial proportion of its GGBs at a significant discount to face in any case, as it bought them in the market, while any further transactions would take place at current market price, so the indemnity would not necessarily need to be huge. In actual fact, the ECB could do this solo, without any indemnity – the losses would wipe out its capital, but under the ECB treaty, this would immediately be replaced by its shareholders (the fiscal authorities of Euroland) in proportion to their holdings of the ECB’s initial capital. But that would be an example of the kind of “bright idea with an obvious legal black hole” I was talking about earlier, whereas the provision of fiscal indemnities for central bank rescue operations is very orthodox practice.

What about “private sector participation”? Well, the private sector would have already participated in this one, by crystallising their mark-to-market losses on sale of their bonds to the ECB. It is true that the scale of private sector participation might be less in total than one might wish (as the market price would presumably rally if the ECB were a large buyer), and certain kinds of unpopular players like vulture funds might not bear as much of the burden as policymakers might wish. But if you don’t like this, Euroland, then remember that you have the power to tax. There are all manner of fiscal instruments that can be used to equalise and spread the pain about – the ratings agencies would presumably regard such fiscal rough justice as equivalent to a selective default, but come on – you didn’t really think we were going to get out of this without defaulting, did you?

The idea is so simple (as JK Galbraith said about the creation of money in a fractional reserve banking system) that it repels the mind. To repeat – all we need is the existing Euro, the existing EFSF, and a legal opinion that this would not constitute monetisation of the Greek national debt, which as far as I can see it wouldn’t. But there is no rush.

Highly leveraged

A quote from a Wall Street Journal article about the standoff over how soon Lorenzo Bini Smaghi should resign from the ECB board:

“Our understanding is that Mr. Bini Smaghi wants to know where he would work next if he were to voluntarily resign from the ECB,” one French official said.

 Mischievous suggestion: Greek trades unions should send a letter to the IMF, ECB, and European Commission saying that “our understanding is that our members want to know where they would work next if they are to voluntarily accept cuts in their current positions.”  Anyway, it’s good to know that the minds of our European Council betters are on the big issues.

Enter transition, Exit conditions

Compare and contrast: IMF statement on Egypt —

“A number of fundamental structural reforms, including the transition to a VAT-like consumption tax and reform of the highly inequitable and costly system of subsidies, are needed to improve the efficiency of public spending and help reduce the fiscal deficit in the medium term. We share the government’s view that immediate implementation of such reforms is not feasible in the context of this arrangement as additional preparatory work is needed to ensure that an effective safety net is in place to protect the low income households. The government intends to prepare a road map to facilitate implementation of these reforms in the future.”

IMF statement on Belarus

“We have also initiated discussions on a possible IMF program. This has only been the beginning of our discussions and we still have a long way to go. We need to have further negotiations on macroeconomic policies. We will also need to agree on structural reforms to improve the efficiency of enterprises and the financial system so that in future growth will be strong and durable. Above all, the authorities have to be committed to macroeconomic stabilization and structural reforms. We will have to agree on strong stabilization and structural measures which would be implemented prior to the program and would demonstrate their commitment.”

To spell it out, Egypt and Belarus are both looking for around US$3 billion.  Egypt gets it with an explicit deferment of structural reforms as long as there is an “action plan.”  Belarus will have to do reforms before there’s a loan.  Does anyone else see a political version of moral hazard here?

Desert dialectic

Rowan Williams:

[we have seen a] quiet resurgence of the seductive language of ‘deserving’ and ‘undeserving’ poor”.

Iain Duncan Smith:

With respect to the Archbishop of Canterbury I have never ever spoken about the deserving or undeserving poor. I don’t believe in that concept. All I say is that the system itself has created an undeserving group, that’s what it has created.”

I’m struggling to understand what IDS is saying here. One way we might read him is this: nothing intrinsic to a population group makes that group undeserving; welfare allocation on its own – and nothing else – determines desert. But this takes away desert as a justification for policy: people are going to be getting pie – or not – just because IDS says so. Imagine if this were the stance with respect to taxes: George Osborne says the top rate is going to go up to 60%, well … because, that’s why. And when it does, you’ll deserve it. Or how about this: low Conservative tax rates have created a deserving group: the low taxed. You wonderful people, you.

In response, IDS might say: yes, of course our policies need to be justified, but that justification needn’t have anything to do with who gets what. When I say that welfare recipients are ‘undeserving’, I’m only saying that people oughtn’t to receive welfare because welfare has bad consequences. It has bad consequences if fifty people receive it or if fifty million people receive it. But what are the bad consequences of welfare? Here, IDS might say that when people choose welfare instead of work, they become apathetic and unhappy: welfare erodes self-esteem just as cigarettes and delta 8 vapes erode your lungs. But someone making this sort of argument has to face the possibility that all kinds of unearned wealth have similar bad effects. Inherited wealth, for instance, or windfall profit. And that’s not a place any respectable Tory wants to go. But perhaps IDS can steer the discussion away from such difficult topics by arguing that welfare is bad because it, uniquely, has bad consequences for everyone. Our over-generous handouts are making the public debt unmanageable, and we won’t be caring about who gets what if the entire country goes under. However, if welfare is rejected for a reason like that, then it’s open for people to argue that welfare should be increased as and when things change for the better. Who knows what the future will bring. Take Alaska’s Permanent Fund, for instance. The Alaskans never saw that coming. Yet somehow I seriously doubt that IDS envisages a future of share and share alike, should the nation be so lucky as to run into big patch of oil, or something.

So what else could IDS say when it comes to explaining his position on welfare? All that’s left – it seems – is an argument that appeals to justice. That is, it’s simply unjust that some people get benefit when they’ve never had any intention of working: the responsible people lose out; they’ve lived carefully, they’ve never been slackers, they’ve carried the load. But then Rowan Williams’s accusation sticks.

Flight of Fancy

If there are, famously and waggishly, only two places in France — Paris and the provinces — what of other European countries? In the common imagination, the literary tradition, in culture as a whole, and of course for a fanciful exercise like this, in gross stereotype. For the UK, which I do not know very well, maybe there’s London, England, Wales, Scotland and Northern Ireland? Germany seems much trickier to me, perhaps because I do know it well. Berlin of course, and Bavaria, and then? German Suburbia? In the case of Germany, The Past, and specifically that part of the past from 1933 to 1945, looms largest in the world’s imagination. But I am not sure whether that fits with this scheme. Russia, fittingly, has more: Moscow, St Petersburg, the Caucasus, Siberia, the Gulag, the Provincial City, the Rural Provinces and maybe the Far East. Smaller countries, I will rashly opine, waver between one and two: the Capital City and Everywhere Else or just the Capital. What do you think?

Let Our Fame Be Great by Oliver Bullough

Review in brief: Encounters between Russia and the peoples of the Northern Caucasus have not been happy ones, and have generally ended badly for the smaller nations involved. From the Nogai driven into the Black Sea in the 1700s to the Circassians mostly slaughtered or removed to the Ottoman Empire in the 1860s to the Chechens, who fought for 30 years in the 1800s, were deported en masse to Central Asia in 1944 and subjected to two wars since 1994, the overall picture is bleak. The individual stories are full of spirit and life, and Bullough goes to great lengths to find people and paints deft portraits. He’s a better reporter than analyst, but overall Let Our Fame Be Great: Journeys Among the Defiant People of the Caucasus is a splendid book.