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Hedging bets on a eurozone debt crisis

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Stephanie Flanders | 12:52 UK time, Friday, 17 September 2010

Does Europe need more hedge funds? That was one of the more intriguing questions to come out of a one-day seminar on Europe's sovereign debt crisis I attended this week in Brussels.

The event was co-sponsored by the IMF and Bruegel, the respected European think tank, and it was held under the Chatham House Rule, which means I can't tell you who said what. But I can give you a few headlines.

The first is that George Osborne would have loved it. Everyone around the table - around two dozen senior IMF and European finance ministry officials, leading private sector economists and bond market investors - agreed that the mountain of debt sitting on governments' balance sheets was one of the biggest risks facing the global economy today.

Ed Balls would have hated it, for the same reason. No-one questioned the need for governments to rein in borrowing - and there was very little nervousness about the pace of tightening already in train. In fact, the worry was that higher debt ratios would prevent central banks from responding to the next downturn, by putting up pressure on interest rates. Their fear was that countries would get into a negative loop, where high public debt levels produce slower growth, and slower growth makes it that much harder to bring down debt.

And it gets worse: most of the economists at the meeting didn't think it was enough to simply stabilise government debt at a new, higher level, as has happened after most recessions since the war.

Much was made of recent IMF research showing that most European countries had costs coming down the track from ageing - higher pension and health spending - which could make the cost of bailing out the banks in 2008-9 look like a dry cleaning bill.

Related work by Roel Beetsma, an academic economist at the University of Amsterdam, concludes that, on average, EU governments need to run a budget surplus of 1.6% of GDP for the next two generations if baby boomers are going to come close to paying the cost of their extended old age.

Yes, you did read that right: a 1.6% budget surplus for two generations. In case you were wondering, a surplus is when the government takes in more revenues than it spends. We're not very familiar with them in the UK because they have only happened five times in the last 40 years.

This isn't the time to re-open the debate about austerity in the UK - the focus of the seminar was the eurozone, not the UK. But it was interesting that the mood of the room was so hawkish.

You might ask - where do hedge funds come into this? The answer is that the experts at the conference weren't only concerned with the long-term challenge of bringing down Europe's sovereign debt. They were also, understandably, concerned about governments' ability to finance their borrowing right now. And here, non-traditional investors like hedge funds could be more important to the eurozone in the next year or so than ministers realise.

How? Well, in the discussion about the state of play in the financial markets there was an interesting disconnect between the officials and the economists, on the one hand, and the asset managers and bankers who actually buy and sell sovereign debt.

As we know, the interest rate - yield - on government debt for problem countries like Greece, Ireland and Portugal has spiked up again over the last few months, even despite that gargantuan support programme for the eurozone announced in May.

By and large, the officials at the seminar thought this was because investors were worried about the fundamentals in these countries: their long-term growth rate and their basic ability to re-pay. But the players from the "buy-side" of the market suggested a more prosaic explanation.

Yes, they said, of course there are some concerns about Greece, and maybe Ireland's, long-term ability to avoid a debt restructuring. But the high level of the yields right now more than make up for that risk. This is doubly true of the likes of Spain and Portugal, where they judged the fundamental risks of a default to be very small.

The real problem all these peripheral governments are facing, they said, is that the big traditional buyers of government bonds - life insurance companies, pension funds, and the like - have got to the point where they can't or won't buy these assets at any price. (Or at least the foreign institutions won't - domestic institutions in these countries may continue to buy).

Sometimes it's regulation that's hurting demand for bonds: many institutional investors are simply not allowed to invest in assets after the credit rating falls below a certain level. But more often, these participants said, it's about image, and huge risk aversion. Institutions don't want to take the reputational hit of investing in a country that ends up restructuring its debt, even if it's a tiny fraction of their portfolio, and even if they actually make money on the deal.

The upshot is that even if an asset manager has got an elaborate econometric model showing that Portugal, say, is a good investment - if the client says they don't want Portugal, the manager gets out of Portugal. End of discussion. As one person said at the seminar: "it doesn't matter how high the yield is on Greek debt, if I can't sell it, why would I buy it?"

This is where the hedge funds and other non-traditional investors come in. Of course, they may not want to buy this debt either, but they don't have the same regulatory constraint to invest in super-safe assets; and, almost by definition, their clients want them to go for game-changing plays, not follow the herd.

So we could have a nice irony in the coming months. In the aftermath of this crisis, many eurozone governments have focused their rhetoric - and some of their regulatory fire - on hedge funds and short-term speculators. But if these market players are right, it's the traditional, "long-termist" investors that are now pulling out of peripheral European debt markets, causing officials in Lisbon and elsewhere so many sleepless nights.

One thing that everyone at the seminar agreed on is that the funding of European government debt over the next year or so looked pretty tight, with a massive supply of new and maturing debt chasing a limited amount of demand. That means there could be more scary market moments ahead for the likes of Ireland and Portugal.

If this great European sovereign debt train keeps running through 2010 and 2011 without some kind of funding crisis, it might have some evil hedge funds to thank.

Comments

Page 1 of 2

  • Comment number 1.

    Stephanie,

    Your article is very interesting, and I'm sure revealing to those that are interested in hedge-funds. Personally I found myself 'phasing out'.

    There is one fundamental point in all this about European debt. Europe currently operates under the French-Socialist system. It does not take into account the changes or demands from the international markets and is not in a position to respond. You and other economists can argue the requirements of international funding until the end of your days. It makes no difference.

    The whole point of Europe, economically, is that it is not viable in any real economic sense. It does not work economically, politically or socially. The European model is un-sustainable in the 21st century. Certainly not in the face of emerging economies like China, India and South America.

    You, and other commentors, can attend as many EU conferences in Brussels as you like (or your editor is prepared to pay for). The simple matter is that unless radical changes are made to the EU's social and economical structure (following the IMF's recommendations) the current EU will cease to exist.

  • Comment number 2.

    Stephanie,

    It's somewhat comforting to hear that the people in power are now starting to take some thought for the longer term. Realising at last that we need a paradigm shift in attitudes to saving and surplus versus borrowing and debt.

    However, I'm sure the difficult decisions that this will incur will prevent proper action and instead the rhetoric will all be about how do we get more growth so that we can have our cake, eat it, and then order another one.

  • Comment number 3.

    I don't know whether Stephanie is right on the irony of all this, but it's certainly good for a laugh. Hedge funds have made far stupider bets than this in the past (EMI springs to mind, and I don't care how much Guy Hands bleats that he was misled). Now all we need is the hedge fund equivalent of CDOs, where the risk of shaky government debt is spread across Greece, Portugal, Ireland and Spain -- throw in a couple of real basket cases, like Zimbabwe, just for fun -- and we're back to what passed for normal in 2007.

    I can't wait.

  • Comment number 4.

    And who will lend to the hedge funds? The conventional wisdom of cuts to public sector budgets is the same as cuts to the deficit appears to be universal. It is Micawber moneynomics and assumes that actions on the state finances has little influence on the wider economy. They think they are cutting a budget but in reality they simply adding to the demand on another public sector budget. This is particularly true in the case of mass redundancies in government and town halls and cuts in capital spending - the vast majority of which goes directly to the private sector. This is not taking into account the non-monetary loss of value in the reduced services. The current war dance of austerity must not be confused with efficiency arguments which hold regardless of the short term deterioration of the state debt.

  • Comment number 5.

    'Their fear was that countries would get into a negative loop, where high public debt levels produce slower growth, and slower growth makes it that much harder to bring down debt'

    There fear is not that it will be much harder, they fear it will be impossible. Once you tax past the rate of 50% of GDP ultimately the tax take must fall.

    And here’s why:
    Find a blank piece of paper and:
    Draw a vertical axis and name it ‘Gross Revenue Collected’.
    Draw a Horizontal axis and name it ‘Gross Domestic Product’.

    Where the two axis meet write the numeral ‘0’.

    At a point sufficiently distant from the numeral 0 on the horizontal axis write the numeral ‘100’, this equating to 100% of the Gross Domestic Product.

    Now assuming you tax at the rate of 0% of GDP, clearly you will get no money in.

    Now assume you tax at the rate of 100% of GDP, again you will get no money in.
    Why you may ask? Well, would you work all week to give all that you earned to the Government, and be unable pay for food, clothes or anything else for that matter?

    Consequently there is a point between 0% and 100% tax rate of GDP where the Government tax receipts will start to fall if the overall rate of taxation is increased.

    Given that the simplest answer is usually the correct one; that point is likley to be 50% of GDP.

    Therefore to connect the points 0 and 100 on your graph, get a suitably sized semi circle and draw the curve connecting the two.

    It stands to reason that when one attempts to tax at a higher rate than 50% of GDP, then tax revenue will gradually start to decline, and the father past 50% you go the faster the decline will be.

    At the current rate of debt accleration we will pass that point in the near future. And then the games up.

  • Comment number 6.

    SF '... by putting up pressure on interest rates. ...'
    -------------------------------------------------------
    Hmnn. Not sure what you mean, Stephanie. Pressure to put UP interest rates? Or putting up pressure to take rates down to zero?

    Logically, it would be the first. We are told (some) taxes are good for us and are in place to change our behaviour. But if all these people think debt is bad, should we not have higher tax (ie. interest rates) to discourage its use?

  • Comment number 7.

    #3 DrLoser wrote
    Hedge funds have made far stupider bets than this in the past (EMI springs to mind, and I don't care how much Guy Hands bleats that he was misled).
    =================
    This was private equity not a hedge fund

  • Comment number 8.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 9.

    The nations in the euro-zone are sovereign states but they do not have control of their currency. The events unfolding seem to me to be a sticking plaster that may, just, postpone the day when the one or more states have to leave the euro. Germany has bought them time, but how much longer will she continue? Not at all, judging by this report. So does the next crisis hit when the present tranche of money runs out and they have lost the hedge fund money? If the worst does happen and a country is on the point of defaulting its debt, where will they go next, the local pawn shop?

    More seriously, the fact that this is even being written about, here or anywhere, indicates to me that our leaders have run out of ideas. Their barrel is almost empty. Is this now their last throw of the dice before the system does collapse? Maybe; but maybe it will work. Whether it does or not, there is a need to start showing the people of Europe and the PIIGS in particular, how their economies will be rebuilt.

    The policies at the moment are ignoring the effect on the individuals in each country's population. Poor psychology, it will provide the seedcorn for dissent and worse. It where extremists thrive

  • Comment number 10.

    So all good then more hedge funds more astronomical bonus's all creamed off the sweat of the working mans brow.

  • Comment number 11.

    I am a little confused about whether naked short selling is or is not permitted in full and from when and to what extent it was permitted again (when was this)?

    [Naked Short selling = taking a position in a security without owning the security, or borrowing the security (and most likely without the money to pay for the purchase of the position!) In the hope/expectation that the position moves in such a way as to enable it to be liquidated before having to actually complete the transaction.]

    In the USA it was illegal under SEC and FSA rules for a while at the height of the crisis, but it seems that the rules have been subsequently relaxed.

    In a sense this activity is just a market mechanism - the problem only arises in a disorderly market. This activity is not really unusual or even new. It was possible to sell stocks that you did not own and then pay to hold over the settlement of the transaction to the next account decades ago even with account period settlement (see backwardation and contango) and not just stocks but I think the activity dates back to shipping and the expectation that a ship will arrive).

    Questions arise about financial institutions lending those engaging in these activities money that they (the financial institution) do not have this creating new (gambling) money sometimes secured on the deal.

    There are very good reasons to hedge in the commodity markets for example the question is should we permits banks to loan money (they have created for the purpose) to gamble in this way? My guess is that the lenders should suffer a financial penalty (Tobin Tax like) when they do so, to gently dissuade then from engaging in this just as a gamble.

  • Comment number 12.

    Stephanie i remember when you used to get several hundred comments every day. Well, at least that was before you took a month off in the summer and left that same out of date piece sitting there. Little by little most drifted away bored. Added to this you have just too often written pieces discussing the "surprise news" which almost everyone except you and the experts were expecting.

    This smacks of a lack of humility and devalues economics. Clearly its not a science. It has no theories and no way of testing anything. Just a load of dogma and graphs.

    I think most of all though its just we know now that you economists know no more than the rest of us. It appears that it is personality, and political prejudices that largely dictate an economist's analysis and not the other way around. That is simply a function of self interest.

    Just last year the economists consensus was 'cuts bad' and 'print more money good' there is deflation now it is the opposite. So no its not "George Osborne that would love it" but another George; George Orwell.

    I'm not really interested in Hedge Funds unless its taxpayer money going in. Its not a question of need but the existance of enough opportunity to attract new investment in them. Need is a somewhat emotional word to use by an economist.

  • Comment number 13.

    Dempster

    I cannot fault your analysis above at #5. I hadn't thought of it like that. Many people will try and work to keep body and soul together for a long time after logic would indicate that they should stop. This would be particularly true if the state paid inadequate allowances for food etc. The rhetoric seems to indicate that they are heading in that direction.

    It all points to the need to change the system and reduce payments the state has to make. Everyone in the country is going to be poorer. So why should we not pay off our debt with debt free pounds and reduce the outgoings a little. With unemployment at the level it is, the economy is not working to capacity. The government seems to be the main source of inflation at the moment, putting up taxes etc. The underlying inflation rate excluding the government inspired changes, is, I believe really quite low. The government should be ensuring that its expenditure maximises the spend in UK to reduce the import bill. With so many other countries also taking austerity measures exports may not rise.

    At the moment, the government relies on monetary policy to control things; in my view a very blunt instrument. It should surely look to fiscal measures far more frequently to do this.

  • Comment number 14.



    Madam today you write or paraphrase:

    'EU governments need to run a budget surplus of 1.6% of GDP for the next two generations if baby boomers are going to come close to paying the cost of their extended old age.'

    My! my!
    Ms Flanders, is this yet not another swipe at baby boomers ?

    Do you mean to say that any group should be self financing as they pass through Life ? Or do you mean that all current and some future generations will have to finance greedy/needy baby boomers in their old age ?

    Look at both sides of the balance sheet! This generation paid in the main for WW2.

    This is the generation that leaves after the devestation of war:

    a legacy of roads, schools, universities and hospitals,

    a significant addition to the National Housing Stock,

    and an extensive development of Human Capital in medicine, technology and scientific progress.

    In Net Terms future generations are quids in/euros in. With perhaps the exception of a few countries such as Greece. Not the UK...surely not ?

    Anyone can produce a Willets-style parti pris CONJECTURED theory and dress it up as sound uneqivocal TRUTH.

    I thought back in an early August Flanders blog that you did not give a fair appraisal of David Willets' analysis. In MHO a real shame as he too is a boomer !

  • Comment number 15.

    Hedging bets on a eurozone debt crisis. Even your title alarms me!
    Europe may need more transparent & regulated hedge funds, the sort that can't hedge funds against sovereign debt.
    The event was co-sponsored by the IMF and Bruegel, a day-long event discussing possible improvements in government debt and risk management practices & policies in the face of higher sovereign risk (which was partially created by hedge funds betting against sovereign debt in the first place. I’ll bet this was never discussed at the meeting.).
    The conference consisted of four sessions with the final one ending with a keynote address by Dominique Strauss-Kahn, IMF Managing Director.
    In this Policy Brief, Bruegel Senior Fellow Reinhilde Veugelers and Michele Cincera, Professor, Université libre de Bruxelles, drew attention to young leading innovators (aka 'yollies'). They explain why the European Union's business R&D deficit, relative to the United States, can be attributed to the EU having fewer yollies, especially those that are less R&D intensive. (No one will ever convince me that the EU is behind the United States in Research and Development.)
    In this policy brief, the authors, Bruegel Senior Fellow Nicolas Véron and Stéphane Rottier, National Bank of Belgium, explain why now is the time to focus on building stronger global public institutions, creating globally integrated capital-markets, addressing competitive distortions...Sounds pretty baffling, but the one thing you will not see is: generating consistent financial reform & regulation?
    Getting the European economy back on track: This Conference will occur September 30, 2010.
    At an event chaired by Bruegel, Vince Cable, UK Secretary of State for Business, Innovation and Skills, will discuss the lessons learnt from the economic crisis and will look at the threats to and opportunities for growth in the global and EU economy. Cable will cover the role of trade, the single market and other EU policies in fostering equitable and sustainable growth. The session will be chaired by Bruegel director Jean Pisani-Ferry.
    To date, after all the prelim leading up to the Sept. 30th Conference, no-one has questioned the need for governments to rein in borrowing. There was much fearful talk, such as fear that countries would get into a negative loop, where high public debt produces slower growth, and slower growth makes it that much harder to bring down debt. And it gets more fearful: most of the economists at the meeting didn't think it was enough to simply stabilise government debt at a new, higher level, as has happened after most recessions since the war. Much was made of recent IMF research showing that most European countries had costs coming down the track from ageing - higher pension and health spending. Related work by Roel Beetsma, an academic economist at the University of Amsterdam, concludes that, on average, EU governments need to run a budget surplus of 1.6% of GDP for the next two generations if baby boomers are going to come close to paying the cost of their extended old age. Fear is a great motivator.
    Okay, where do hedge funds come into this? The answer is that the experts at the conference weren't only concerned with the long-term challenge of bringing down Europe's sovereign debt. They were also concerned about governments' ability to finance their borrowing right now. And here, non-traditional investors like hedge funds could be more important to the eurozone in the next year or so.
    But I maintain that these hedge funds absolutely must be regulated – no more free-wheeling, unquestioning betting against sovereign debt.
    The real problem is that the big traditional buyers of government bonds don't want to take the reputational hit of investing in a country that ends up restructuring its debt, even if it's a tiny fraction of their portfolio, and even if they actually make money on the deal, unless of course they have hedged their bets against the country to start with.
    Then, they're laughing!
    Hedge funds and other non-traditional investors may not want to buy this debt either, but they DON’T HAVE THE SAME REGULATORY CONSTRAINT to invest in super-safe assets; and, almost by definition, their clients want them to go for high-risk, big money. What this means is unregulated hedge funds will bet, bet, bet and bet...
    So we could have a nice irony in the coming months. In the aftermath of this crisis, many eurozone governments have focused their rhetoric - and some of their regulatory fire - on hedge funds and short-term speculators. Well, you can’t argue that their exotic investments (derivitives, negative default swaps, etc.) began all the trouble in the first place; so, is the answer to allow hedge funds unregulated betting all over again?
    What a play hedge funds are making, supported by the IMF and Bruegel, but THE EU has already given their approval to an overhaul of the way banks and markets in the region are supervised. The EU has warned that new pan-European Union watchdogs would need to exercise their powers. In Germany, Leo Dautzenberg, a member of Chancellor Angela Merkel’s ruling Christian Democratic Union, and one of its finance policy experts in parliament, hailed agreement on the EU financial supervision package as “closing an important gap in financial market regulation”.
    But he warned the three new EU-level watchdogs – for the banking, insurance and securities markets sectors – must use their powers over national institutions and markets with care. Under the proposals, these watchdogs will not supervise companies or markets directly, leaving this to national authorities. But they will be required to draw up common technical rules & standards and could acquire additional legally binding powers. Mr Dautzenberg also stressed the importance of the “fiscal safeguard” incorporated into the agreement. This prevents the watchdogs from imposing decisions that affect budgets in member states. UK government officials have already said they believe the final package, secured after months of negotiation, is “a very good outcome for the UK, BUT the UK was scrutinising the fine details.
    The European Central Bank is also likely to have been pleased by the outcome, which gives it a central role in assessing future risks to Europe’s financial system and allows the ECB president to chair a new European Systemic Risk Council for the first five years.
    The reaction suggested that the proposed legislation could get more formal backing when EU finance ministers meet in Brussels this Tuesday. The legislation could then be put to the European Parliament this month. EU officials were hoping to have the approval process completed by the end of September so that the new watchdogs can get up and running by January 1st.
    So, London, are you so nervous about supervisory powers shifting away from the UK that you will let the dogs loose? The dogs are called Derivative & Short-Selling. Beware these dogs. In my opinion, London, you let these dogs run loose and lots of people are going to get bit.

  • Comment number 16.

    The proposal is that the instruments that caused the crisis should be used to solve the crisis....now that is governmental thinking...probably a result of financial services arm twisting.
    Anyone reading demographic information a decade ago could see the coming issues related to an aging population, yet no provisions were made, or if made those funds were raided by the politicians.
    This remains a crisis of governmental mis-managment and too much influence by the bankers.
    All proposals will benefit the banks..they are in control. I guess we are supposed to be encouraged that proposals are being supported by economists...similar to steal interests advocating sales to Japan right before the war.

  • Comment number 17.

    #7 you beat me to it. Sadly #3 comment is about as well researched most EU politicians.

    Let see current EU proposals are effectively:

    1. Most hedge funds are in UK, that is bad
    2. Most hedge funds are independent and do not follow political dictats: that is bad.
    3. Private equity are either USA based or UK based: double bad
    4. Private equity does not listen to EU politicians; bad

    Therefore lets regulate them out of existance thereby (a) dragging down UK a notch or two (b) moving EU financial centre away from London to where it really should be which is of course Paris (if you are French) or Frankfurt (if you are German) - no other views counts.

    Latest reports private equity should not be allowed to sell assets or parts of businesses they buy - because that is Anglo-Saxon asset stripping.

    Once EU has dealt with private equity they will then turn their attentions to shareholders - after all ultimately who do these shareholders think they are trying to sell to someone the EU politicians have not annointed as the buyer?

  • Comment number 18.

    Good grief !

    Just close the tax loopholes and dodges. Raise the higher rate a bit.

    Allow a bit of extra Inflation.

    Build affordable family homes so the future generations will be born...

    And your problem is halfway solved.

    Next you need a credible policy regarding Imports, so local manufacturers can compete, re balancing the economy, and providing jobs.
    Or find enough exports to cover the cost of imports.

    Simples !

  • Comment number 19.

    #5 Dempster

    Like your limit state analysis for the tax take - but dont agree that 50% is necessarily the turning point -

    My reaction to Stephs latest blog is to ponder what level of public/private debt is optimal for the economy/society. Taking the limit state again - clearly its hard to envisage a zero level of debt for most individuals in a modern uk economy unless we all eat grass and live in cardboard boxes - but equally it wouldn't make sense for an individual to be loaned substantially more than his/her lifetimes (likely) total earnings - even though I believe that in Scandavia you used to be able to get a 100 yr mortgage to leave to your surviving relatives.......so again somewhere between the two is the right answer - but not necessarily 50%.

    I suppose that if we go back to a barter economy where everyone is trading immediate commodities and services (e.g. a haircut for a chess set) the rot begins to set in the moment we trade one hair cut a week for 10 chess sets at the end of the year. Even worse when we sell this contract to some bald guy - and then securitise and trade it for 20 electric hair dryers to be delivered in china in 2020. Perhaps thats what caused the crash ?



  • Comment number 20.

    The hedge fund industry is one of the best things about this country. We have some of the best asset managers from all across the globe in London, and hedge funds have historically been better performing and more stable than, supposedly safer, ordinary investment funds. It's a crying shame that we've started bashing them on the assumption that they are like investment banks (i.e. completely irresponsible), because they aren't.

    I'm not saying they are altruistic - it's just that when you are managing other people's money, and have money in the fund yourself (as they almost all do), then they spend a lot of effort keeping their assets safe and making profits safely. They are easily one of the most misunderstood sections of our economy.

    People thinking that Guy Hands runs a hedge fund is perhaps part of the problem - like I say, they are badly misunderstood.

  • Comment number 21.

    Whether Greece defaults or not is a purely political not an economic matter.

    Simply by overiding the rules that the ECB has to obey, and the Bank can be allowed to buy Greek bonds in whatever quantity is necessary to prevent the need to default. This probably would, of course, cause the exchange value of the euro to fall, but this might be welcome, especially for Germany as it trys to maintain the high level of exports it traditionally needs to keep employment high.

    The hedge funds are probably right to bet that the Eurozone leaders would not allow a Greek default, simply in order to obey arbitary rules agreed during the horse trading that was necessary before setting up the euro.

    The excessive saving propensity of the Germans maybe needs the excessive spending propensity of the Greeks to keep the Eurozone economy balanced. If by some miracle the Greeks did manage to cut their deficit sufficiently to satisfy traditional bond buyers, the euro would probably rise to a level which would have a disastrous effect on German exports.

  • Comment number 22.

  • Comment number 23.

    Sometimes it's regulation that's hurting demand for bonds: many institutional investors are simply not allowed to invest in assets after the credit rating falls below a certain level.
    --------------------------------------------------------------------

    So lets find away to allow them to invest - is this what they are saying? Find a way to allow institutions to invest in junk on the chance that the 20/1 nag might come in help reduce the huge surplus needed to pay for the 60's babes?

    Under the "Peterskitchen rule" I cant reveal my recipe but can give you the headline - eat too many beans and flatulence can cause a problem

    You know? that deflating feeling

  • Comment number 24.

    Sept. 17 (Bloomberg) -- Treasuries rose while the cost to protect Irish debt surged to a record on concern about European government debt levels and an unexpected drop in American consumer confidence. U.S. stocks fluctuated and the euro fell.


    Full of beans?

  • Comment number 25.

    Get Ireland Portugal and Greece out of the Euro, and let the market produce and set a level for their own currency , apply the same medicine to any other country in the EEC that can' t balance it's books and they'll soon all find ways of doing so. Best cure of all however would be to dismantle the political wing of the EU and set up a free trade area within Europe where all countries would have to compete for trade and the EU would have no say over the running of any country.

  • Comment number 26.

    #10 bmac1 wrote

    So all good then more hedge funds more astronomical bonus's all creamed off the sweat of the working mans brow.
    ==========================
    How does that work then? I thought hedge funds made their profits by predicting whether financial instruments would go up or down.

  • Comment number 27.

    Here's a thought for some research. Europe should be big enough to be self-sufficient. Forget about money for a moment. What physical and manpower resources do we need to give the population a reasonable standarg of living, for different values of "reasonable". Make a sort of shopping list. Then ask if these models of resource consumption are sustainable with projected future demographic changes. If not, what, if any, level of resources diverted from today's consumption to captal investment would be necessary for a bearable sustainable future.

    Having looked at real resources, only then consider the management of money. Money is useless if the goods and services aren't available to purchase. Money, as an entitlement to goods and services, should be the servant and not the master. In a rational world, most of these financial gamesters would be redundant and irrelevant, but we will always need refuse collectors, farmers and doctors for example. People should be rewarded for being useful.

    Think the unthinkable and cut the Gordian knot!

  • Comment number 28.

    I think a supposedly neutral, publically funded economics commentator who declares today that Europe has a sovereign debt crisis, should be fired.

  • Comment number 29.

    Unfortunately this entire blog entry was doomed from the start. Not only is the original post a total nonsense, the first reponse is too.

    I do not like it when the BBC stoops to the level of Fox News. Stop it.

  • Comment number 30.

    @Dempster #5

    You are describing the Laffer curve, but it is a more elusive concept than you make out.

    There's actually little evidence that a tax take over 50pc of GDP reduces economic growth.

    There's little empirical evidence backing any of the assumptions behind a concept which Arthur Laffer concocted one night on the back of a napkin.

    What we do know, through observation, is that the ideological attempt to reduce tax has led to scanter public service provision, crumbling infrastructure and, paradoxically for its adherents, more volatile markets.

  • Comment number 31.

    The Euro devaluing dramatically would be great for the UK. It could stop having to pretend with tragic toys like 'austerity' that there was any hope of saving Sterling from a similar fate. Indeed, I hear that speculators are only waiting for the farce to play out a little further before those nasty hedgefunds start insisting that UK gilts go belly up.

    If I was a British convenience store, I'd start pricing my loaves in Euro now.

  • Comment number 32.

    30. At 8:05pm on 17 Sep 2010, smurfs75 wrote:
    @Dempster #5
    'There's actually little evidence that a tax take over 50pc of GDP reduces economic growth'

    It's not economic growth that I'm thinking about, its the amount of money the government can actually take out of the GDP. I reckon that once it aims for more than 50%, it will end up getting less, in essence more work is either not done, or done for cash/barter.

    Here’s another one for you:

    Current household debt is £1456bn.
    The Office for Budget Responsibility predicts that household debt will be £1,823bn by end 2015 which is a growth of around 5% per annum.

    National average earnings (wages) are currently increasing at 1.5% per annum.

    So why does it predict such growth when households are already hopelessly indebted?




  • Comment number 33.

    #29
    "Unfortunately this entire blog entry was doomed from the start. Not only is the original post a total nonsense, the first reponse is too."


    Agreed.

    A common leitmotif running through this blog is over amplification of a fairly routine set of problems in the Eurozone with the primary purpose of avoiding facing up to the very real problems that face the UK.

    It is the UK that has the biggest deficit in the G7. It is the UK that is about to suffer the effects of the biggest round of spending cuts for over 70 years inflicted on a class that had very little to do with the causes of the crisis by a political class hell bent on state reduction for ideological reasons. It is also the UK that has the most unbalanced economy of the major economies; over reliance on the City and the exporting prowess of a bannana republic.

    We have all been here before.

  • Comment number 34.

    So the story goes that we may need a) some of the clowns who got us into this mess to get us out of it (for avoidance of doubt the HF guys) and b) some of the even dozier clowns who didn't predict what was obvious, a debt bubble and criminally poor financial market regulation, but now are full of how to fix it (for avoidance of doubt, assorted ranks of economists).

    The politically laced comments of the BBC correspondent doesn't help fill me with any confidence that this blog amounts to a rather large and very very unfunny joke.


  • Comment number 35.

    28 and 29. Oblivion

    Thanks. Best posts on this blog.

  • Comment number 36.


    The hedge funds are not a cause of our problems more a sympton.

    Think of them as mere 'economic puss'(albeit complete with 911s and Rolexes).

    The real wound has long been caused by gutless politicians whose hunger for the trappings of power trampled all over any vision or principles they may have had.

    In pole position we had New Labour who bored with the dull shadow of opposition (and the absence of perks and ministerial limos) sucked up to middle England and sold the nation a dummy in the form of a credit and property bubble. The principal architect, a fresh faced rascal, was blessed with good timing and managed to hand over the shop to a Clumcey Scot just before the wheels fell off, but not before he had managed to sex up his CV for the primary purpose of marketing his other activities.

    Could'nt really make it up.



  • Comment number 37.

    #34
    The politically laced comments of the BBC correspondent doesn't help fill me with any confidence that this blog amounts to a rather large and very very unfunny joke.


    You could say almost a... Laffer minute.


  • Comment number 38.

    Sounds to me like everyone present at this event does nothing of any value to European society yet pontificates so eloquently about what others should be doing.

  • Comment number 39.

    Saving money to pay future pensions shows a fundamental misunderstanding of money. Ordinary folk can move wealth into the future through money, but that is a trick that works like this: When you put money in the money box it reduces the total amount of money in circulation, causing a miniscule amount of deflation, increasing the value of that money. Then when you later take money out of the money box the value gets into that money by causing a miniscule amount of inflation reducing the value of all the other circulating money. Society as a whole can't do that. Government does have a duty to prepare for a difficult future by trying to move wealth into the future. However it does this by stockpiling commodities (like Jacob and the Pharaoh) and by building infrastructure that will compensate for possible problems (like Nuclear Power in case of fossil fuel shortage). The trouble with Europe is that individual countries are only a part of the much bigger financial system. So it seems plausible that they can act like individuals do. But that only works if actions aren't correlated. Since actions will be, and need to be, correlated and coordinated, the project of real wealth into the future through money is just a way of creating a future crisis.

  • Comment number 40.

    5. At 2:08pm on 17 Sep 2010, Dempster wrote:

    Given that the simplest answer is usually the correct one; that point is likley to be 50% of GDP.
    -------------------------------------------------------------------------
    All in favour of keeping it simple. Seem to recall total UK tax take has bounced around the 36% to 45% bracket for decades, spending most of the last three decades under 40%. Memory could be defective so please feel free to correct me. What has changed is the balance of the burden of that tax take. It has been pushed down the income ladder.

    I take your point on incentive/disincentive to work and agree to an extent. But that assumes the increase above 50% is permanent. Again, I seem to recall a country that tried that 100% tax take around the end of the second decade of the 20thC. They managed to keep it going for 65 years, admittedly with the help of a major world war in the middle.

    I would have countered with the argument that the majority of the workforce work not just for money but out of commitment, engagement with what they do, the fulfilment work can bring but unfortunately I've had that lovely notion almost knocked out of me over the last three years.

    People would not give up or emigrate to more favourable locations straight away.

    So, how much would a temporary - say, three years? - tax hike to, say, 55%, with a massive increase on the higher paid bring in in deficit+debt expunging terms? About £360bn? Would it be worth selling it as temporary pain? And what deferred benefits could be dangled in front of the workforce and other taxpayers?

  • Comment number 41.

    Running budgetary surpluses for two generations would take even more aggregate demand out of the economy, driving down GDP year on year, so reducing the tax take and increasing unemployment and government welfare spending - i.e. it would in reality be self-defeating.

    But continuing to raise the debt spiral is also not feasible as borrowing costs take a larger and larger share of GDP, leaving too little to fund public services and social care.

    Karl Marx would be rubbing his hands together in glee - the ultimate contradiction of the process of extraction of surplus value has finally come to pass just as he predicted, with the system unable to cope with the vast sums being removed from the real economy every year in the end creating an unbearable weight of debt to be serviced that cannot be borne by today's workforce - indeed tomorrow's either, which has effectively be mortgaged by the current generation.

    The next part of the process will be the revaluation of monetary assets to reflect what they are really worth. This will mean the downrating of the national credit status of many countries and their currencies. Binding EU nations together does mean the market faces an all-or-nothing situation with the Euro, but as we have seen, even within EuroLand individual nations' ability to borrow can be severely curtailed and made a lot more expensive - indeed many nations are close to being trapped between spiraling debt cost and reducing their ability to generate surpluses to pay it, as cutting their own spendi ng drives down their GDPs even lower.

    The elephant in the room is not the Euro - it's the totally debased dollar, which continues to be printed like confetti and as the piles of dollars mount, in the end its power as the world's reserve/trading currency will wane - and as it does, the USA will come face to face with reality as living standards plummet.

    Money and money-related assets are going to get a lot more risky - so are equity investments dependent on financial activity. Solid assets like land and resources will increase in value as the paper economy self-destructs - this may take decades to happen, but there is no way out of Marx's analysis that at some point the weight of debt and capital formation simply cannot be carried by the real economy and a meltdown point will arrive. For the individual its call bankruptcy, for the company its called liquidation, for the nation it's called sovereign debt default and for the currency its called hyperinflation - they are all facets of the same longterm process that is the final irony of the market equalising itself - to destroy the value implied in money itself.

    Meanwhile the Chinese Communist Party in Beijing will be happy that they are keeping the faith by harnessing capitalism to develop their means of production whilst they retain political control over the country and its people sucking in investment, jobs and technology from the developed economies to position Communist China to have all the important cards in terms of resources and capacity in place ready for whatever replaces the dollar based trading system when it finally slips beneath the waves.

    We on the otherhand are sitting on our hands and failing to take the necessary steps to repatriate jobs to the UK by applying an active trade and industrial policy to decouple, derisk and consolidate our domestic economy from this global casino that is laughingly called "free trade", which in reality is anything but "free", in that it's rigged and costs everyone in the UK a huge price in welfare benefits for the unemployed and to fund our indebtedness, personal, community, commercial and national.

    The only way out of the debt trap is to end our dependence on imported goods and services and pay our way in the world. If that means import tarriffs to restore competitiveness of UK production, then so be it, but this needs to be done selectively with bilateral and multilateral agreements where there is mutual interest and balance in trade relationships. Those huge container ships docking every week from China must stop - its as simple as that.

    The idea that the hedge fund gamblers offer a solution to shifting sovereign debt is exactly the same approach as saying the way out of my own personal debt is to take what money that it left down the bookies and expect to back the right horse in every race. Bookies feed off the delusions of the rest of us - and we are deluding ourselves if we think hedge funds will do anything other than jack up the cost of using them to the point where they control the level of risk and they make serious money whilst doing so.

  • Comment number 42.

    To 40. At 11:40pm on 17 Sep 2010, Up2snuff

    ASI reckon tax freedom day was 27th May in 2009, and 30th May in 2010

    ASI states:
    Tax Freedom Day answers the very basic question: ‘how much are Britons actually paying for government?’ It is calculated by comparing general government tax revenue with the Net National Income (NNI). The total of all government tax revenue – direct and indirect taxes, local taxes and National Insurance contributions – is calculated as a percentage of NNI at market prices. This year it comes to 40.9 percent. That percentage is then converted to days of the year, starting from 1 January. The first day of the year that Britons work for themselves rather than the taxman is Tax Freedom Day.

  • Comment number 43.

    Thanks for your insight into PIIGS bond yields and the explanation of the economic challenges facing Europe in the coming years and how we might pay for them. I'm quite surprise that more of your commenters aren't interested in:
    - 1.6% budget surplus, i.e. us REALLY paying for our parents mistakes.
    - The clear explanation of how bad borrowers of the world need investors who will accept a risk of volatile returns (loan sharks, hedge funds etc.)

  • Comment number 44.

    On a further note. It is often argued that hedge funds give a service to us by saying "hey the emporer has no clothes". If we're saying that hedgies kicked off this crisis by betting against spendthrift governments and national populations, isn't that rather like blaming the guy who tells you your house is on fire for setting light to it?

  • Comment number 45.

    #44 excellent point also 17 hits the nail on the head.
    There has been much discussion about whether it would be a good idea for hedge funds to solve the sovereign debt market problems. You could argue that we should be grateful for anyone to do it since the usual people seem incapable but I am sure that someone will point out that that is what people thought hen they elected Hitler (by proportional representation I believe).
    I suggest that this a futile argument. If the hedge fund were entrusted with the trillions of dollars to invest long term in the sovereign debt market they would no longer be hedge funds; they would have morphed into money market funds which are a completely different animal of which there are already many.
    The whole point of a hedge fund is that it is small and agile so that it can take opportunities before others notice them. Of course they do not always get it right, like when they shorted VW the day before Porsche made a takeover bid.

  • Comment number 46.

    44. At 09:13am on 18 Sep 2010, Sheflonken wrote: "On a further note. It is often argued that hedge funds give a service to us by saying "hey the emperor has no clothes".

    Some people had an inkling that the trends in housing were all wrong in the USA. Why didn't the powers that be see it? Here's an extract from a piece I read about Paulson, who made a killing betting against the trend i.e. Hedging!:-

    For Paulson, it all boiled down to one chart which Pellegrini produced showing the inflation-adjusted growth in housing prices over time divided by wage growth. The data clearly showed a rapid explosion upward away from the general trend starting in 2000. He assumed this trend would not continue indefinitely and revert (even overshoot). He was right.

    Perhaps we need a few ex-Hedgies assisting the BofE?

  • Comment number 47.

    re #42
    Good point. Always amuses me that we now use the American tax year for Tax Freedom Day. When I was a lad, before the war ... etc., etc., it used to be August or September something! Think this is because it was an American concept in the first place. They like their freedom over there.

    But back to the plot: we are proposing to shift it to 1 July (5 October in UK speak) or even further into the year.

    Would it work? How long would the UK workforce buy into it for paying off the deficit+debt? And how long before it had a negative effect in terms of disincentive and outward migration? And would it make a significant dent in that D+D total?

    And finally, (in Good News at Ten tradition) what would Governmental and fiscal life be like afterwards? Would we just go and make the same mistakes all over again because it was time for a change in apathy or Government or something ...?

  • Comment number 48.

    41. At 03:42am on 18 Sep 2010, richard bunning wrote:
    Running budgetary surpluses for two generations would take even more aggregate demand out of the economy, driving down GDP year on year, so reducing the tax take and increasing unemployment and government welfare spending - i.e. it would in reality be self-defeating.
    ------------------------------------------------------------------------
    Surely that depends on the size of the surplus? What about a near balanced economy, ie a slight surplus or slight deficit?

    We also need to remember that, until recently, we had a falling birth rate. This would normally take care of the unemployment situation to an extent in a continual surplus situation.

    Another thought. Would Karl's glee not be lessened by renewable energy, PCs, mobile phones, tourism, air travel, media, cars, etc [Fractional Reserve Banking, I suggest mischeviously as another way of 'making' money] all the things he could not even dream of that have come along for us to make and sell and use? There could be a shed more of these innovations to come along ...

    And then there are still hungry, thirsty people around the world ...

  • Comment number 49.

    RB in #41

    'The next part of the process will be the revaluation of monetary assets to reflect what they are really worth. This will mean the downrating of the national credit status of many countries and their currencies.'
    ------------------------------------------------------------------------
    Does that revalue a nation's monetary assets? Surely it just expresses a view as to their perceived worth for obtaining future debt and the possibility, increased or not, or default on existing debt?



    Binding EU nations together does mean the market faces an all-or-nothing situation with the Euro, but as we have seen, even within EuroLand individual nations' ability to borrow can be severely curtailed and made a lot more expensive - indeed many nations are close to being trapped between spiraling debt cost and reducing their ability to generate surpluses to pay it, as cutting their own spendi ng drives down their GDPs even lower.
    ------------------------------------------------------------------------
    I think I would want to introduce the word may before 'drives down their GDP even lower.'

    Every now and then we have debates about economics on the three major Blog sites and I make the point that one of the difficulties both with economics and the present situation is that what we think are the rules and principles and what has happened in the past may not apply this time. I would definitely agree with what you post if a Government chose to suddenly cut spending substantially. Yes, the economy would be likely to 'go over a cliff'.

    In our present situation, The Coalition has given notice. The private sector has a measure of advance warning. Whether it helps to smooth out the effect that would normally be expected remains to be seen.

  • Comment number 50.

    Hedge Funds simply use their back door access to the banks to borrow massive amounts of our money in order to gamble and speculate ... purely for the sake of creating extra winners and losers.

    Of course, the hedge funds are better at speculating than the other players so they are normally the 'winners' and ... Guess who the 'losers' normally are?

    Pension Fund managers frequently lose out to hedge fund transactions ... but this is all hidden from our view in the morasse of secret globalised financial transactions.

    Generally, the hedge fund managers are the 'bookmakers' in global money and other markets ... and if the bankers did not allow the hedge funds to gamble (and have access to 'our money' at the back door) with our money and create these extra winners and losers ... there would not be any hedge funds and our pension might be doing a bit or indeed a lot better in some cases.

    The government does not own any money ... all GBP's are held on trust for the British people by HM Treasury ... so when our exchange currency value has gone down 15-20% (against most currencies) as it has in the last few years ... remeber that much of this is due to our banks lending our money to hedge funds to speculate against and devalue our currency.

    The politicians do not want us to know this or appreciate this ... that is why they like us all to buy plenty of alchohol and pretend to be anti-drug use?

    The question 'do we need more hedge funds'? ... should really be ... 'do we need any hedge funds at all'?

    There has never been a definitive or reliable study to show that British citizens are in any way better off by having exposure to 'hedge funds' - I just thought that I had better mention this as the BBC are probably not aware of this important fact.

    Finally, most of the hedge fund 'profits'? Where do they go? ... Much of the profits go to gold bullion bank vaults in the Cayman Islands, Beijing, Monaco, Bermuda etc.

    Hedge Funds stink ... we do not need them .. and they are capable (some individually) of crashing down the financial roofing on our heads and taking us all back to the 'stone age'.

  • Comment number 51.

    Half a blog on hedge funds devoted to supporting budget cuts again, do the BBC (and Stephanie) have no shame?

    Just for the record the the argument isn't "budget cuts v status quo", it's "savage cuts v moderate cuts". Why do you insist on distorting the debate/arguments (and the people making them) again and again? In all of Ed Balls statements he makes it clear that he isn't against budget cuts, he simply believes a shallower reduction in government spending is a safer approach. It's easy to distort a persons argument by focusing on/creating a perception of a person rather than the actual content of statements, which is exactly what is being done here by saying "the focus here is budget cuts are good, Ed Balls wouldn't like it" creating the impression that he is against budget cuts as matter of fact, when the opposite is true.

    Back to the blog itself, it seems contradictory, on the one hand extolling the virtue of budget cuts, the main argument in support of which is that not sorting out the deficit now will mean the markets shun our bonds, and on the other hand saying the problems countries like greece and ireland are having aren't to do with risk aversion/market forces but regulation/image issues, something which the UK would have to go out of it's way to create given our central role in world finance.

  • Comment number 52.

    This used to be an interesting blog,although I mostly read it to see the comments rather than the articles. It did however provide a focus for a debate.
    Unfortunately these days it seems not to cover the events in the UK economy such as inflation and unemployment on which we received figures this week.Instead it seems to involve attending lots of conferences and following whatever was discussed there.In that way it has drifted off the subject matter of economics and moved more towards politics.

  • Comment number 53.

    #52 Amysmythe,

    Ok Amy, here's an economics question, how do you price an asset ?

  • Comment number 54.

    Sure Stephanie, Europe, the UK, the world, we all need many many more hedge funds. We all need to buy and sell houses, borrowing money from the Martians, driving up the house prices, to feed our bankers and to keep shopping and shopping in shops that employ millions and millions of low-skill workers on minimum pay, who then take out mortgage after mortgage and buy and sell houses and go shopping with what remains from the 125% loans and never ever produce anything at all. Yes Stephanie, you got it right, as usual. All we need credit!

  • Comment number 55.

    #50 Nautonier wrote
    ... there would not be any hedge funds and our pension might be doing a bit or indeed a lot better in some cases.
    ============
    some pension funds invest in hedge funds; more should according to your analysis!

    so when our exchange currency value has gone down 15-20% (against most currencies) as it has in the last few years ... remember that much of this is due to our banks lending our money to hedge funds to speculate against and devalue our currency.
    ==========================
    What is the evidence for this?
    Were they also responsible when the pound was worth two dollars not too long ago. Remember that when the exchange rate changes it may the pound going down or the dollar up or, most likely, a bit of each. You need to look at the rates against the Euro and Yen too. Also a low pound does benefit some people e.g. exporters and manufacturers competing against importers.

    There has never been a definitive or reliable study to show that British citizens are in any way better off by having exposure to 'hedge funds'
    ====================
    Or that they are not. It is difficult to see how this could be done on any scientific basis e.g. there are about 60 million British citizens with different interests. However, the fact that the French and Germans are against them is probably a clue. I doubt that any hedge fund manager would make this claim.

    Finally, most of the hedge fund 'profits'? Where do they go? ... Much of the profits go to gold bullion bank vaults in the Cayman Islands, Beijing, Monaco, Bermuda etc.
    ===========================
    normally 80% go to the investors (including pension funds) and the other 20% to the managers. There has recently been controversy about whether they should be taxed as income or capital gains.

    I have no particular views about hedge funds. They exist as long as they provide higher returns than average to investors, otherwise the investors will ask for their money back. Apparently a number have closed recently having lost all the investors' money.

  • Comment number 56.

    55. At 7:38pm on 18 Sep 2010, AnotherEngineer wrote:

    #50 Nautonier wrote
    ... there would not be any hedge funds and our pension might be doing a bit or indeed a lot better in some cases.
    ============
    some pension funds invest in hedge funds; more should according to your analysis!
    ................

    A) that also involves the mutual funds ... the pension funds are keeping away from the hedge funds having lost heavily with our pension contributions in recent years hence poor pension returns on many pension investments/ sectors in recent years

    so when our exchange currency value has gone down 15-20% (against most currencies) as it has in the last few years ... remember that much of this is due to our banks lending our money to hedge funds to speculate against and devalue our own currency, in some transactions/trades.
    ==========================
    What is the evidence for this?
    Were they also responsible when the pound was worth two dollars not too long ago. Remember that when the exchange rate changes it may the pound going down or the dollar up or, most likely, a bit of each. You need to look at the rates against the Euro and Yen too. Also a low pound does benefit some people e.g. exporters and manufacturers competing against importers.

    ....................
    A) The evidence is in the financial press ... reams and reams of articles and data ... when Britain had its banking crisis (2008) the nature of the movement in Sterling showed that the hedge funds (and other funds were moving money speculating on the price) this tends to exacerbate currency movements ... this is putting an extra element into market outcomes ... and creating more risk and more losers (even if we don't know who these losers are or how much they are losing)

    The higher pound value would also have been influenced by hedge funds and other speculators also.
    .......................

    There has never been a definitive or reliable study to show that British citizens are in any way better off by having exposure to 'hedge funds'
    ====================
    Or that they are not. It is difficult to see how this could be done on any scientific basis e.g. there are about 60 million British citizens with different interests. However, the fact that the French and Germans are against them is probably a clue. I doubt that any hedge fund manager would make this claim.
    ......................

    You make my point for me ... the effect of hedge funds is to create extra transactions ... if someone goes into a bookmakers and places a bet ... they had a choice whether to do this ... when a bank provides our money to hedge fund managers and who then put it at risk ... we have not been consulted over the risk to our money and our economy. The point about hedge fund (investors) is that the extra momentum that they add to currency movements is not measured or quantified and as they win most of the time ... who are the losers?

    Finally, most of the hedge fund 'profits'? Where do they go? ... Much of the profits go to gold bullion bank vaults in the Cayman Islands, Beijing, Monaco, Bermuda etc.
    ===========================
    normally 80% go to the investors (including pension funds) and the other 20% to the managers. There has recently been controversy about whether they should be taxed as income or capital gains.

    .......................
    A) The profits made by hedge fund managers are someone else's loss ... whether it be British holiday makers ... do you think the 80/20% profits go back into British banks ... the point I made is where does this money go that is taken from the losers as including pension contract holders like myself after my banker has provided money to hedge funds and my pension fund manager has also invested and lost ... most of the time.

    I have no particular views about hedge funds.
    .........................

    A) Blimey ... you're not kidding!

    ........................
    They exist as long as they provide higher returns than average to investors, otherwise the investors will ask for their money back.
    .........................

    A) They exist because no one has thought that we might be better shutting them down and'r making sure their operations are transparent and properly regulated. Full or proper 'Transparency' would probably shut most if not all of them down anyway

    ..............
    Apparently a number have closed recently having lost all the investors' money.
    ...............

    A) That is why they are an excessive risk and parasitical and dangerous and with regard to losing investors money ... the hedge fund gambling money is taken from different investors ... but funnily enough those that put most at risk as an investor ... that may include my banker and pension provider ... lending out my savings and pension contributions ... are the one's getting the least out of the hedge fund transactions.

    Hedge fund operations are very dodgy and downright seedy ... are you getting the picture?

    Many issues here ... most pension and bank account holders are unaware of the high risk and dodgy delaings carried out by this racket and if pension companies were required by law to risk rate their pension transactions and be transparent on their pension provider's activities ... most would wish to transfer their pension ... but with the lack of information, transparency and trust ... there is no where safe to hold our monies whether at the bank or in a pension ... because much of it get's into the hands of the same vultures and parasites.

    Thank you for your comments!

  • Comment number 57.

    Stephanie,

    Balanced as ever in your analysis. However, pension funds are more responsive to oppertunities than your article suggests. Most are in the busieness of providing long term value and will accept short term risk management if the analysis supports such an approach (even reputational risk will be taken into account as the managers will remain confident of explaining thier rational to thier clients). If potential reward outways the risks in seeking such reward then PFs should take the "risk".

    As ever the probabilty of risk is not adequately analyised by anyone it seems.

    Namara

  • Comment number 58.

    re: 49.

    There is something fundamentally different about running surpluses than from the traditional debate about shifting the balance of of government budget activity from tax cuts to spending, or vice versa.

    Running a surplus takes money out of circulation completely. It removes purchasing power from the government in the first instance, but then because that money would have circulated, passing from customer to supplier until it lodges back on deposit somewhere, the impact on the economy is to reduce aggregate demand typically by ten times the value of the surplus, that's why the proposed cut of £100 Bn translates into a reduction in demand of £ 1 Tn.

    This is the mechanism that Keynes identifed as the main cause of the 1930s slump and led to the concept of demand management being the job of government to act counter-cyclically by running surpluses during booms and deficits during recessions. Therefore if the government puts short term debt reduction above all else and makes a sharp reduction in spending during a recession or too soon coming out from one, this will be dramatically amplified through the recessionary impact on aggregate demand and doing this in a sustained way over the medium term is very likely to lead to the whole economy shrinking and stagnating for a long time - this happened in Japan - 12 years of a stagnant economy and falling living standards.

    Monetarists also accept the impact of reducing the money supply is deflationary and advocate controlling it to put a brake on inflation.

    We are currently both cutting aggregate demand through the impending spending cuts, but also running a large increase in the supply of money via the BoE through Quanitative Easing (replacing bonds and gilts with hard cash) and additional bank lending, as well as by taking major equity stakes in the banks, so rasing their core capital which is then leaveraged through commercial bank lending.

    This combination would seem to offer a balancing effect overall, but the key issue is whether the private sector is able to exploit the hole left by cutting public spending to generate sufficient new jobs and aggregate demand to sustain the economy and keep it from going over the cliff into long term decline. Despite an effective negative base lending rate, the banks are now pricing in their risk factors and rebuilding their balance sheets, so QE has had quite a muted effect. Indeed there is evidence that the additional liquidity is being used to deleverage company debt and by speculators and hedge funds to bankroll their commodity futures trading, not jobs and capacity.

    The scale of the performance requirement from the private sector is dramatic - a NET increase in new jobs of 2M+ as well as replacing the lost public jobs (c. 1.2M) , investment in new capacity of c. £400 Bn and an increase in exports of a third by the end of the parliament. (See the OBR forecast.)

    If these figures are not met, the likely outcome will be to simultaneously increase government debt through falling tax receipts and increased unemployment welfare payments, as well as creating a sharp recession in the whole economy through the impact on aggregate demand of running the spending surplus.

    As we would then be between a rock and a hard place - i.e. unable to afford a debt-financed stimulus or grow our way out of the double dip recession, there is a very real prospect of a longlasting depression setting in that would only be addressed through a large devaluation, which in turn would risk triggering hyperinflation, as the cost of imports would skyrocket.

    I simply do not see anyway that the private sector will get anywhere near these numbers, which by the way would require UK PLC to outperform even the very best growth performances of other countries during the boom years in the 80s and 90s.

    Think of a large lever - at one end the government moves it a relatively small way - but at the other end this movement is hugely amplified by the leverage effect applied - that's the effect of running a surplus on aggregate demand, so a surplus of 1.6% would equate to 16% reduction in aggregate demand flowing from government spending, which o/o/m equates to 50% of economic activity, so a fall of 8% in GDP seems very likely - Eire's GDP fell by 7.1% last year and unemployment spiked when they followed a very similar debt reduction package as is being proposed here.

    What Stephanie's post raises is the idea that if hedge funds were to take on a much larger amount of government debt rather than banks or pension funds, then this would reduce the cost of servicing the debt through competitive price pressure, so creating a little more breathing space for governments to rebalance their debt and spending over a longer time, as they are less risk averse than "normal" financial institutions.

    I'd say go for it - hedge funds are private investment companies, not banks. Once they hold most of the debt, governments will be able to restructure or even default on their sovereign debt without the risk of taking down the banking system - those who live by the sword need to be prepared to die by it!

  • Comment number 59.

    richard bunning

    Nice one. Great post.

    I wonder, can hedge funds short themselves? If yes, they'd be indestructible, no? ;-)

  • Comment number 60.

    re #58

    and what would happen with the surplus?

    If this were to be invested for future gain (i.e. actually invested not spent) it would just be like saving more for people's pensions.

    It always intrigues me when people think borrowing to spend will generate growth; it needs to be effectively invested to achieve real growth (rather than speculative bubbles).

    If we don't invest to pay for our own future the welfare state is nothing but a giant ponzi scheme which will inevitably fail.
    (It was in many ways fundamentally flawed, to maintain balance pension ages should have moved over time to ensure time in working life and retirement remained in proportion).

  • Comment number 61.

    #49
    "...hedge funds are private investment companies, not banks. Once they hold most of the debt, governments will be able to restructure or even default on their sovereign debt without the risk of taking down the banking system - those who live by the sword need to be prepared to die by it!"


    A nice idea. But don't hedge funds borrow from the banks (as well as rich individuals) to maximise leverage. Given that the banking system is still in the 'recovery ward' such a gambit might prove interesting.

    "I simply do not see anyway that the private sector will get anywhere near these numbers, which by the way would require UK PLC to outperform even the very best growth performances of other countries during the boom years in the 80s and 90s

    A masterful display of understatement.

    It is debatable whether 'excessive' (?) state spending in the last 10 years 'crowded out' the private sector or was the only option given the inability of the private sector to step up to the plate. Of course the private sector will protest that they are only held back by high taxes and faceless EU bureurcrats but they would wouldn't they; funny how these same EU bureaucrats and an even higher tax burden don't hold back the German economy (2.2% GDP growth in the last quarter) - but they do have the advantage of a huge single currency market.

    No, a succesful private sector in this country is predicated by a revamped education system, higher R&D spend and consistent investment, as well as a cultural shift towards making high added value artefacts. All this takes time which is in short supply. Hence the role of the state.

    By the way I am not a socialist. I believe in a thriving private sector (with social responsibility aka 'stake holder philosophy') but alas I don't see one on this side of the ditch.

    As for the banks, the nations favourite whipping boy, what have they really done wrong. They do what they always do and leverage financial opportunity. They pay their top people huge bonuses but that is there business and no one elses so long as they can afford to do so. This last bit is the crux and takes us to the bailout. The banks couldnt believe their luck when governments pushed the market to one side and bailed them out. That was the real tragedy of the last few years.

    The real deficit is not a money one, it is a political /leadership one.

    A brave correct albeit unpopular political act would be to take this country into the Euro. A system where the pros far outweigh the cons.

    Prediction: This country will join the Euro in the next 5 years and not under a Labour administration. Stanger things have happenned.

    As for economists, poor souls, what else can they do, teach ?

  • Comment number 62.

    60.

    There wouldn't be any surplus - the whole amount would be used to redeem existing debt - so no return, no investment - all it would do is to return a large amount of money back to add to the HUGE piles of capital already stacked around the world, looking for something to invest in and make a return.

    The problem is not that there is too little capital available - around the world there's far too much stacked up in oil exporting countries' vaults and offshore banks, all looking for a return. We created these huge piles of money through our trade deficits through importing more goods than we export. We need to stop letting money leach out of our domestic economy to enrich overseas governments and companies and start rebuilding our own industries, but given the rigged foreign exchange market (NB China) and the rigged energy market - (NB OPEC) there isn't anything remotely resembling free trade going on, so we can't compete.

    Our level of food and energy imports is unsustainable and the government needs to drive change towards renewable energy and to shift food policy away from industrial beef and chicken production using imported grain that is about to become unaffordable anyway.

    A supine approach based on libertarian dogma of "free markets" is pure economic masochism - we need to implement targeted import taxes over three years and develop our industrial base, but that''s not what the ConDems are doing - Cameron is off wandering around the world wittering on about free markets to people who play hardball by protecting their domestic industries, NB India.

    The only ray of hope is that Obama gets really tough on the Chinese currency rigging operation, but thie runs the risk of ending the game of the chinese getting economic growth by producing goods to dump in western markets in return for tons of freshly printed dollars that are hardly worth the paper they are printed on.

  • Comment number 63.

    61. At 10:57am on 19 Sep 2010, Richard Dingle wrote:

    #49
    "...hedge funds are private investment companies, not banks. Once they hold most of the debt, governments will be able to restructure or even default on their sovereign debt without the risk of taking down the banking system - those who live by the sword need to be prepared to die by it!"

    A nice idea. But don't hedge funds borrow from the banks (as well as rich individuals) to maximise leverage. Given that the banking system is still in the 'recovery ward' such a gambit might prove interesting.

    ...........................

    So you reckon that hedge Funds only use their investors' own private equity in order to transact?

    Ha Ha Ha ... that's a good one ... Barclays and others are, in effect, 'direct hedgies' ... are you trying to tell us that Banks always keep depositors' money separate from their hedge fund activities? Ha Ha Ha!

    My pension fund has unit trust investment funds in hedge funds and I suspect that it's ordinary 'do nothing' cash unit trust is heavily invested in hedge funds as well.

    The real answer is that hardly any persons outside of the hedge fund transaction ring knows what the balance of funding for Hedge Funds is because Hedge Funds are deliberately secretive and non-transaprent as they not intended to be within the public insight and knowledge of ordinary taxpayers ... for obvious reasons ... as they are the preserve of the extremely wealthy and exist solely to create surplus winners and losers as money making, tax avoidance mechanisms for those with direct interest in tax havens and family trusts, Non doms like e.g. some members of Parliament and some of those in the House of Lords.

    Tts called corruption ... transactions for the sake of extra 'winners and losers' and more 'losers' than 'winners'!

    Vast false profis do not emerge from nowhere ... they are other persons losses ... often without their knowledge, involvement and consent due to the massive seedy indirect/direct effects of hedge funds on everything that exists monetarily i.e. GDP, inflation, interest rates.

    Hedge funds affect everything and I mean everything ... and every penny in our pockets (for those that have some pennies left)!

  • Comment number 64.

    A supine approach based on libertarian dogma of "free markets" is pure economic masochism - we need to implement targeted import taxes over three years and develop our industrial base, but that''s not what the ConDems are doing - Cameron is off wandering around the world wittering on about free markets to people who play hardball by protecting their domestic industries, NB India.

    One of the things Cameron is correct on '..wittering on about free markets..'.

    'External world conditions' holding the UK back ? Look inside the UK not outside for the answer. These same 'externals' affect the German economy but they still manage to significantly increase market penetration in the BRIC economies. Why, because they make quality goods that people need.

    Import tariffs will just increase inflation, all things being equal. Cheap TVs from the BRIC undercutting UK TVs (I use TVs as an example) should be solved by the UK pulling out of TV manufacture and replacing with high added value products, that is the beauty of free trade.

    Countries at the lower end of the added value greasy pole can implement tariffs without a net world economic loss; a country like the UK should not be in that position. To put it bluntly what are we doing competing with the BRIC countries; we should have put ourselves in the postion (education, R&R, investnment) of competing with the likes of Japan and Germany.

    The UK should have pioneered 3D TV technology and then when that becomes commonplace hand it over to the BRICS and then move a notch up the greasy pole (4D TV perhaps, get the picture) - that is how it works.

    The idea of the UK imposing tariffs is sad. Using the 'added-value greasy pole analogy' it is akin to keeping your position on the pole by kicking the guy coming up behind you.

    Being at the bottom of said greasy pole is not the worst that happen. The worst is not being on the pole at all - the UK is heading in that direction and trade protectionism will accelerate the journey.

  • Comment number 65.

    63. At 11:53am on 19 Sep 2010, nautonier wrote:
    61. At 10:57am on 19 Sep 2010, Richard Dingle wrote:



    Oi Nautonier - not my post.

    I wrote...

    "A nice idea. But don't hedge funds borrow from the banks (as well as rich individuals) to maximise leverage. Given that the banking system is still in the 'recovery ward' such a gambit might prove interesting."





  • Comment number 66.

    65. At 12:07pm on 19 Sep 2010, Richard Dingle wrote:

    63. At 11:53am on 19 Sep 2010, nautonier wrote:
    61. At 10:57am on 19 Sep 2010, Richard Dingle wrote:

    Oops sorry ... 'Herr Dingle'

  • Comment number 67.

    25. At 7:15pm on 17 Sep 2010, kaybraes wrote:
    Get Ireland Portugal and Greece out of the Euro,...


    I'd put it another way. Greece, Portugal, Ireland. Get out of the Euro as soon as you can.

    Walk away and rebuild !

  • Comment number 68.

    64.

    The tripartite industrial model in Germany means that state involvement and partnership between the private sector and its workforce has ensured that German industry has been nutured and developed with the right investment, the right workforce and a strong domestic market for its products.

    As to imports tarrifss in principle, I'd much rather not have them, but the state of our asset stripped, offshored and denuded manufacturing base is so dire we now have no choice but to create a walled garden to allow it to develop safe from offshore competition.

    We need to substitute imports as rapidly as possible and accept that the cost to the consumer will rise, because thae self-same consumer will then not have to pay as a taxpayer to keep people on the dole and to fund the deficit - a price worth paying if it solves our deficit problem.

    5% increase in prices -but a 10% cut in the welfare bill and tax take - BARGAIN!

    As to your opinion that the UK should be pioneering high technology, fine, but I don't see thsi happening - we need to produce what we consume and so have a sudtainable economy - so we need to produce bread and butter gods here.

  • Comment number 69.

    RICHARD and others,

    If we accept that we have been living beyond our means in terms of consumption, then deflation of our economic bubble is unavoidable surely?

    We must spend and consume less. The key is to manage this deflation to ensure we facilitate an economic shift towards a sustainable way of life and work. Key considerations must be the following:

    1) Do and source much more locally. This will reduce our energy consumption, if properly organised, and provide work in real jobs locally.

    2) Only go into debt for investment in improvements and new innovations.

    3) Governments to think before getting involved in doing something whether it couldn't be done by the private sector instead. Competition and customer power keeps private companies efficient and innovative.

    4) Defence of the realm (conventionally and nuclear) to be carried out in collaboration with near geographic and political allies in Europe (France, Germany, Benelux, Scadi, Spain etc). After all we don't seriously envisage life with Europe conquered and us isolated on our little island fortress as in 1940 do we?

    5) Invest publically and heavily in R&D on developing new energy sources and food production without so much energy and soil degredation. Again in cooperation with geographically close allies.

    6) Roll out an education program about the dangers of over population and where it is taking us all with our inevitable drop in quality of life. Remove all financial support for parents for children born on or after 1 August 2011.

  • Comment number 70.

    Thread is probably dead, but maybe someone can enlighten me?

    If it is true that 'governments have run out of long-term investors from which to borrow money', and are likely to turn to the hedge funds as lenders of last resort...and

    If it is true that short-term investors need an unstable market in which to make their gains?

    Then, can't I expect a rash of valuations and re-evaluations of bond yields and sovereign debt "crises" from the movers and shakers?

    i.e. Is political destabilisation the price to pay for getting short-term investors to pay for public spending?

    Or is that where we already are...because the traditional owners of bonds (banks?) got into bed with the short-termists and lost their shirts as well?

    Its very dim in the mushroom farm today.

  • Comment number 71.

    64. At 12:02pm on 19 Sep 2010, Richard Dingle wrote:

    Import tariffs will just increase inflation, all things being equal


    A. I thought the rampant increase in money supply was what caused inflation. Import tariffs are just one of the factors that will wake us up to the reality of it.
    ================================
    The UK should have pioneered 3D TV technology and then when that becomes commonplace hand it over to the BRICS and then move a notch up the greasy pole (4D TV perhaps, get the picture) - that is how it works.

    A. You still seem to think ever increasing growth in consumerism and transporting stuff all over the world is a good way forward for the world. I thought the Greens had a louder voice in Germany than that.

    If the sheep had not been driven down the lane of "bigger TVs" every two years, some of them might not have maxed out on their credit cards. And some of the technological investment might have been in sustainable ecosystems, rather than "Espresso-makers" and indoor snow-domes.

    Besides which, as has been noted elsewhere, the high-flying Indians or Chinese are educated to a higher technological level than the youth of Britain. Hardly puts us at the forefront of technology.

  • Comment number 72.

    'The event was co-sponsored by the IMF and Bruegel, the respected European think tank'

    So, Stephanie, what's in it for the IMF and the 'respected European think tank'

    Who funds the 'respected European think tank'? Who are its members?

    Who funds the German Marshall Fund who have concluded a strategic partnership with Bruegel. Who funds them? Who are their members and board members.

    Whats the membership of the IMF and voting rights and who influences these.

  • Comment number 73.

    PUZZLEDMUSHROOM

    I couldn't agree more.

    The world economy of the past generation or more has become a giant pyramid scheme built on largely unnecessary and unwise consumption. A decent TV should last for 15 - 20 years like they used to do. Modern electronics and LCD's should be good for many more years than an old CRT.

    We seem so reluctant to wake up and smell the coffee of reality.

  • Comment number 74.

    70 PuzzledMushroom
    I have one solution which the BoE has already done...

    The banks only buy UK gilts if they think they can sell them on for a profit. Selling them on is called the 'secondary bond market'. There is nothing preventing the BoE from purchasing the gilts on this market - the BoE have already purchased about £230Bn in this way, so there is no real crisis here. It also means that much of this money effectively comes back to the government (I think, though I'm not sure about this), which would mean the government is simply borrowing from itself in the future.

    But then that's what goes on even when gilts are purchased by say pension funds, as when future pensions starts to be spent into the economy, the government can raise taxes to suck it back again - macroeconomics does your head in!

    Eitherway, there is no need for the UK to issue debt to 'pay' for its spending when it is a monopoly issuer of its own currency. It should just issue enough currency itself and spend this into the economy with no interest to pay and nothing to pay back. If there is too much money in the economy, the government can simply tax more and burn the revenue.

    Kind Regards
    Charlie

  • Comment number 75.

    #69 Sage,

    Much of what yo have written I agree with. However, there are some other thoughts that i feel need to be presented as well:

    "living beyond our means". This often trotted-out cliche is very rarely challenged. So perhaps we should take a closer look and see what it really means. If you are meaning that we as a nation can no longer afford to participate in globalisation whereby short term profit for a few is only achieved at the strategic expense of the many then I totally concur. If, however, you mean that we must reduce our standard of living by forgoeing the kinds of services and facilities of a civilised society then I do not agree.

    "we must consume less" In what way?

    Source locally. See my comments regarding globalisation

    Debt. Essentially I agree. However, whilst we change to local sourcing and re-employ our population we need to borrow in order to sustain ourselves.

    Private Sector. I cannot share your enthusiasm and confidence here. The vast majority of our SMEs fail in comparison with their European counterparts on productivity, our multinats have a long history of being divorced from their home economy, and our utility companies are majorly in foreign hands. Whilst efficiencies in our public services are to be welcomed I cannot condone sacrificing them to the alter of cost efficiency when effectiveness should be the watchword.

    Defence. I agree that we should stop 'punching above our weight'. It is time for others to shoulder the burden of international peace-keeping. However, the review of our miltary needs for the future should not be based purely upon cost savings.

    R&D investment. agreed. This cannot be left to the private sector.

    Education. It is essential that we create an education system that is 'fit for purpose' and places more emphasis upon vocational educational value. Over population is a world issue and cannot be rectified within our borders. But I totally disagree with your last point.


  • Comment number 76.

    FOREDECKDAVE,

    It seems we are in agreement on most points, except unfortunately the most important one about taking steps in our own country to do something about our over-population.

    Let me take the points one at a time:

    We agree on the over-globalisation aspect of over consumption. But take a look in most peoples wardrobes at all the unnecessary clothes and shoes worn once or twice. Look at most kids unwanted and unplayed with toys. Look at the miles driven per individual now in the UK compared with only a generation ago. How old is tha average person's TV? Not to mention ready meals and takeaways versus home cooked dinners etc. The list is endless.

    My point is that much we consume does not enhance our quality of life it is often merely a substitute for our loss of community and relationships. All brought on by over population and over consumption and the over-riding economic ethos that material possessions and consumption are the be all and end all of a life well lived.

    So it's what we define as our standard of living that counts. I would argue that more time to spend with family and friends in an environment not spoiled by over population and it's associated pollution and consumption would be right at the top of my list of life qualities.

    Local sourcing will happen as the cost of transport escalates anyway and I don't see the need for a factory to feed the population with a new TV every couple of years as being desirable whether it is located in China or Birmingham.

    Private sector versus public sector. We largely agree except I would say that it is virtually impossible to compete against the public sector in business. If private firms do a poor job someone else can and will step in to take their place. This does not happen in the public sector and engenders lethargy and a lack of dynamism.

    The exception is R&D on long term projects. Here I do agree that public is definitely best on this via our excellent world renowned universities.

    Finally if we want to get serious on population we must stop state funding people to have kids. In particular those that do it as a way of life and income/housing etc, and have done for generations, living off the state. It makes no sense and propagates irresponsibiliy in parenting and creates huge problems for us all in our schools, our city centres, and our neighbourhoods.

  • Comment number 77.

    http://www.businesslink.gov.uk/bdotg/action/tariff?r.l1=1078549103&r.l2=1078549168&furlname=tariff&furlparam=tariff&ref=&domain=www.businesslink.gov.uk

    RE. IMPORT TARIFFS

    The UK already has import tariffs as can be seen from the above web link ... the issue being that some of the tariffs cost more to collect than the revenue received and the tariffs themselves are sometimes years out of date and some could be cancelled altogether for partner friendly countries i.e. 'our friends' if we have any left.

    The sensible, careful and proper management of all tariffs for all UK imported and exported goods is long overdue and can make a huge difference to the prospect of the UK maintaining e.g. reasonable overall living standards and cretaing new jobs and business opportunities.

    All countries have them ... most countries manage their import and export tariffs much better than we do in the UK.

    If any given tariff is not 'needed' ... then don't charge it ... Simples!

    Yes ... I know ... our politicians are scared to do this as probably not allowed by the EU?

  • Comment number 78.

    To reply to the question I was asked in comment53 I think it would depend on the asset I guess. However I do notice this in Stephanie's post.
    Even if an "asset manager has got an elaborate econometric model showing that Portugal, say, is a good investment" then the customer will turn it down.

    Well the way Portuguese bonds have gone since Stephanie was at the seminar it would appear that the customer was right and the seminar attendees wrong.

  • Comment number 79.

    #76 Sage,

    "This does not happen in the public sector and engenders lethargy and a lack of dynamism."

    I have to disagree with your comments regarding lethergy and dynanism. The biggest problem across the sector is the regulations under which they are forced to operate and the beaurocratic nature of much of the work that they have to perform. Let's take a classic example - job promotion interviews. Why, when a suitable candidate is available within the organisation does the job have to be advertised universally and interviews undertaken? Now don't tell me that this is the same in the private sector! It really isn't the people.

  • Comment number 80.

    Stephanie mentions that Ed Balls would have hated it - because the concensus of opinion from this IMF/Bruegel meeting is diametrically opposite to his view.

    Ed Balls, as Gordon Browns chief technical advisor decided it would be a really good idea to remove 'an anomaly' - the ability of pension fund mangers to reclaim Corporation tax credits.

    Ed Balls assisted Gordon Brown in running up an additional £400Bn deficit between 2002/7.

    Ed Balls and wife Yvette Cooper had a bad experience when buying a home so when in Government, they introduced HIPS.

    Some might conclude that Ed Balls is dangerously clever.

  • Comment number 81.

    @ 74. Charles
    Someone who used to post on here, but has been rather quiet of late, said "Loans are tomorrow's earnings spent today."

    That makes a lot of sense to me.

    Now, as to gilts. If they are as simple as they might be, the government writes a "promise to pay, n% per annum, and 100% in m years' time." And if the banks lend them money against that promise...it assumes two things:-

    1. The government doesn't have the cash today to cover its proposed expenditure, and
    2. The government believes that it will be able to find the cash to cover the loan in 10 year's time.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    Several things seem obvious from these two assumptions.

    1. As exceptional, rather than normal behaviour, I can understand, since such a loan levels out the bumps in the road, and facilitates investment in growth. However, as normal behaviour, it seems unwise to rely on borrowings to finance day-to-day expenditure.

    2. Either requires the growth to materialise (tomorrow's earnings) or else the government has to roll over the debt by making another promise to pay to raise the cash to pay off the first loan.

    Now, the government can only raise the cash by itself by running a surplus of income over expenditure over the life of the loan. How it achieves that, given currency fluctuations, CPI changes etc. is complicated. But apart from "sovereign default", the government MUST raise the promised repayment, in cash, on the due date.

    However, if a government did manage to pay back its borrowings, and thus not have to pay interest, it would be substantially better off in cash terms, and could increase its expenditure on the day-to-day (welfare) by the amount that it currently pays in interest, without having to raise any extra revenue. Alternatively, it could use teh existing surplus to fund investment, even via a loan. The key issue is, the governmnet MUST run a surplus to pay back its borrowings.

    The Banks, however, in that situation, would lose the n% per annum that they are collecting (indirectly) from the taxpayer, and would have to find someone else to borrow the money from them.

    Consequently, Banks are probably very happy to lend money to the government, believing that the government will never miss a payment on their n% per annum.

    Unless I am mistaken, it would be a good thing for the general population and a bad thing for the Banks if the Government were not in debt. 'Tis a consummation devoutly to be wished.'

    There are two ways of rapidly unravelling this situation. Government surplus, or sovereign default. Government surplus keeps the banks happy, and hurts the people, but has a certain justice of "payback time" for the 'lifestyle lived but not payed for'. Sovereign default keeps the people happy (see Germany) and hurts the banks, but has a certain justice of "payback time" for the practice of 'profiting from usury'.

    Between this rock and a hard place I favour fiscal policy which redistributes the wealth in a more controlled manner (Tobin tax or something very like it.) Benefitting the careful and the prudent at the expense of the profiteers and feckless.

    In mushroom's little utopia, it is not just the deficit that has to be reduced, but the debt, or else the taxpayers are enslaved to the banks forever.
    ~~~~~~~~~~~~~~~~~~~~~~~
    Now, to your favourite subject of sovereign money. Does the BoE buy gilts? With what money? In what way did the BoE get the title to that money? If a loan is 'tomorrows earnings spent today', then money in the bank is 'yesterdays earnings not yet spent'.

    As a store of value, you cannot simply print money without thought for the value it represents and the ownership of that value. If all the sovereign money in state "belongs" to the state, then the BoE as a nationalised bank is part of the Communist State Apparatus. (Marx did recommend nationalising the banks). Every time you are paid in sovereign pounds you are paid by the state and can only spend that money in the state outlets. It is a truck shop.

    If however, the value represented by sovereign money in the BoE belongs to those who 'earned' it, then the government has no obvious right to 'nationalise' it and is restricted to borrowing from the deposits of individual investors and paying them back at agreed rates, like any other retail customer.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    This train of though has been brought to you by what is sometimes disparagingly called Micawbernomics.

    Mushroom thinks that government borrowing be this simple, but will probably be enlightened by morning.

  • Comment number 82.

    73. At 11:45am on 20 Sep 2010, Sage_of_Cromerarrh wrote:

    We seem so reluctant to wake up and smell the coffee of reality.
    =============================
    Perhaps we did not buy the latest, essential "Wake-you-up-and-smell-the-espresso" machine. (It was big, bright and green according to Simon and Garfunkel).

  • Comment number 83.

    79 Foredeckdave,

    I agree with what you say about burocracy and the hamstringing effect it has on organisations funded by public money. This is I think the main problem with the public sector. Too much micromanagement from government tying professionals up in red tape. I agree it's not the people it's the culture created by ridiculous levels of accountability. However, when you don't have competitors to keep you in check you do under-perform, it's human nature.

  • Comment number 84.

    Oh Dear - just listened to Nick Clegg's speach. He's confusing microeconomics and macroeconomics again (how embarassing). Government spending and issuing debt, is nothing like private households or local government borrowing and spending. Last time I checked, households / firms / local governments don't issue their own currency!

  • Comment number 85.

    84. At 5:43pm on 20 Sep 2010, Charles Jurcich

    Hi Charles

    i've decided to stop banging on about the delusion.
    Not even the clever bods on here seem to get the distinction between Govt spending and issuing debt.

    I'm going to re-enter the Matrix as Morpheus and destroy it from within.

  • Comment number 86.

    81 PuzzledMushroom

    With regard to government 'borrowing', my understanding is that it is more correctly called issuing debt, and the reason for this subtle change in language reflects the fact that technically governments do not need to borrow to spend. The reason why government debt is referred to as "risk-free" (quite legitamately) is because if the government chose to, it could simply create new money to pay this debt off.

    So why do governments issue debt £ for £ to match its deficit? I understand that it is actually the BoE that issues the debt in response to a budget deficit, but it does so not to 'fund' the spending, but to help it control its 'target rate'. Further, to maintain that rate, only a 'part' of that deficit needs to be matched by issuance of debt. That's the only proper reason to issue debt, but the reason why they issue all the deficit as debt is a hang-over from the 'gold standard', and this £ for £ debt issuance is no longer necessary and makes no sense.

    You asked how the BoE 'payed' for the gilts on the secondary bond market. They created the money from nothing to pay for it as part of Quantative Easing - the Americans also use this methodology.

    If you worry about the fact that governments 'could' issue their own money then consider this - the BoE are unelected and yet can create money at will - banks are unelected yet can create money when ever they issue a loan to a customer. These things are done under license from the government. It does not make sense to me that a bank can create money, but its government, which gives it the permission to do this cannot. This 'gold standard' voluntary constraint must be removed in my view.

    As to the value of money - creating money only devalues a currency slightly, and much less than people think, and only relative to other currencies. This shows up in CPI inflation. If we lived in a world where deficit spending by government happens mostly by creating money to spend (and only some debt issuance), then it is obvious that a government should not deficit spend if inflation goes above say 0.5% of the inflation target - so that would be 2.5% for example, and above 3% the government might have to contract the money supply.

    Caution should be excercised in understanding CPI because VAT increases directly cause CPI to go up. If you strip-out the VAT changes from our current 3.1% CPI (measured by the CPIY rate) then CPI would be just 1.4% at present. Neither this government, nor the last should have put up VAT, as it ties their hands with respect to increasing the money supply. I would lower VAT and pump new money into the bottom of the economy to increase aggregate demand.

    Kind Regards
    Charlie

  • Comment number 87.

    81. At 5:16pm on 20 Sep 2010, PuzzledMushroom wrote:
    Now, as to gilts. If they are as simple as they might be, the government writes a "promise to pay, n% per annum, and 100% in m years' time." And if the banks lend them money against that promise...it assumes two things:-

    1. The government doesn't have the cash today to cover its proposed expenditure, and
    2. The government believes that it will be able to find the cash to cover the loan in 10 year's time.


    There is a third assumption. That the Govt believes it cannot just create the money for deficit spending because of the dangers of inflation if too much money is floating around..

    But who decides the reserve requirements of the banks which directly affects the level of money in the economy?

    So why pay 4% when it could borrow from Lloyds or RBS for 0% ?

  • Comment number 88.

    84. At 5:43pm on 20 Sep 2010, Charles Jurcich wrote:
    Oh Dear - just listened to Nick Clegg's speach. He's confusing microeconomics and macroeconomics again (how embarassing). Government spending and issuing debt, is nothing like private households or local government borrowing and spending. Last time I checked, households / firms / local governments don't issue their own currency!
    ----------------------------------------------------------------------
    Charles,
    Must be the shock of being in Government for the first time in decades. Danny Alexander got into a muddle over tax evasion and tax avoidance yesterday. Any more thoughts on alternative tax systems?
    Best wishes,
    Snuffy

  • Comment number 89.

    85 Morpheus,

    "Hi Charles

    i've decided to stop banging on about the delusion.
    Not even the clever bods on here seem to get the distinction between Govt spending and issuing debt.

    I'm going to re-enter the Matrix as Morpheus and destroy it from within."


    Good on you brother Morpheus - I have forgotten which pill is which, but I think we took the right one.

    Charlie

  • Comment number 90.

    re #58
    Richard, Thanks for the extensive post. Agree to an extent. For example:

    'If these figures are not met, the likely outcome will be to simultaneously increase government debt through falling tax receipts and increased unemployment welfare payments, as well as creating a sharp recession in the whole economy through the impact on aggregate demand of running the spending surplus.'
    -----------------------------------------------------------------------
    We are there now and have been even in a time of unprecedented prosperity. With the TUC conference finishing last week, it was the first time in thirteen years that they expressed substantial concern over jobs. Yet we maintained 1.5m unemployed for most of those tirteen years and a whole lot more for some of them.

    But the big question is: are the Coalition planning and expecting our economy to be in surplus in five years? We may never reach that position in ten or fifteen. Some people are saying that even with a helter skelter cut in Government spending and borrowing together with tax rises, it would take a generation to rid us of the debt and deficit and get us back to square one.

    'I simply do not see anyway that the private sector will get anywhere near these numbers, which by the way would require UK PLC to outperform even the very best growth performances of other countries during the boom years in the 80s and 90s.'
    -----------------------------------------------------------------------
    On past record, agreed. There are some differences this time round, not least accumulated experience of the 1980's and early '90's, greater workforce flexibility, more entrepreneurial opportunities, new technologies appearing constantly plus, perhaps, more fresh thinking in Government. Interestingly, the recessions/downturns/slumps that occurred then were created or exacerbated by the sitting Government and had to be cleared up by them.

    I do not underestimate the scale of the problem. It is colossal. I await the Conservative conference with interest to see what is in their manifesto. That is, the one we did not see in April!

    'I'd say go for it - hedge funds are private investment companies, not banks. Once they hold most of the debt, governments will be able to restructure or even default on their sovereign debt without the risk of taking down the banking system - those who live by the sword need to be prepared to die by it!'
    -----------------------------------------------------------------------
    Agreed! AGREED. Attracting investment capital is often the one thing that holds back both new and established businesses. Hedge funds are not the usual ones to provide this, it would normally be venture funds, along with the banks. But a goodly number of people have made shed loads of cash in the last thirteen years - not just bankers - and investing some of it in new and SME business should be thought of almost as a patriotic duty.

  • Comment number 91.

    re #61
    Herr Dinkel, welcome back. You've been very quiet for a while. Some very good debates on the three main Blogs in the last few days but things have gone a bit downhill on RP's Blog yesterday/today with a bundle of banker bashing.


    you have attributed this to me at #49 ...
    49
    "...hedge funds are private investment companies, not banks. Once they hold most of the debt, governments will be able to restructure or even default on their sovereign debt without the risk of taking down the banking system - those who live by the sword need to be prepared to die by it!"
    ... but I plead not guilty, although I agree with the first, partial sentence!

  • Comment number 92.

    91. At 7:33pm on 20 Sep 2010, Up2snuff wrote:

    Apologies it should have read #58 not #49.

  • Comment number 93.

    88 Up2Snuff,
    "Any more thoughts on alternative tax systems?"

    I don't have strong views about different systems of taxation per se, as taxation is mostly used to take money out of the economy and to induce a flow of money around the economy as efficiently as possible.

    Off the top of my head, taxes should be applied to numerous parts of the economy, even if at low rates so that the government of the day has many ways to influence the flow of money to support their public purpose and control inflation. Governments should be free to institute a windfall tax on just about anything if inflation needs to be constrained, and such taxes need to be targetted (indirectly) at the inflating resource / commodity or area of the economy. This would not mean taxing the resource itself, but taxing something which indirectly affects its price.

    Hand-in-hand with new laws which prevent essential resources being used for speculative gain.

    Taxes should always be targetted more at the rich than the poor because money flows from the bottom of the economy to the top, and it is usually the rich who distort the economy (e.g. house prices in rural areas).

    I do think a Transaction Tax on the banks would be an excellent system, as well as a tax on empty residential properties. Both would give governments substantially more control over the economy I suspect.

    Kind Regards
    Charlie

  • Comment number 94.

    "#73
    We seem so reluctant to wake up and smell the coffee of reality."



    A grip on 'reality' and changing / ignoring human nature seem a strange combination.

    The combination of innovation and free-trade are the best option we have because of the way we are. Even those who choose the idyll of a cottage existence make sure they have everything they want first (bankers taking early retirement for example). Those who are born into it cant wait to leave.

    Then there is individual choice. If you want keep the same TV for 15 years but dont force such a policy on everyone else.

    Imagine if anti-consumerism took hold suddenly. It would lead to deflation, mass unemployment, protectionism and eventuaaly wars.

    Changing tack, even if it is proven that consumerism is 'of the devil' how would it be stopped. By diktat and compulsion. Human nature is the ultimate 'oil tanker'; slowing it down and changing direction will take probably (based on the last 15 million years) rather more time than we have.

    Science, innovation and the 'comparitive advantage of trade' are the way to reduce world poverty and deal with the planets environmental challenges.

  • Comment number 95.

    Some historical context :

    ‘For at the same time financial deregulation was propelling a dramatic increase in credit-financed consumer spending’

    ‘As a result, the country is in an unsustainable position. It is running a chronic trade deficit, financed increasingly by bank lending.’

    ‘Although Britain’s service sector is held up as the industry of the future, world trade is still predominantly in manufactures.’

    ‘Manufacturing investment as a proportion of national output had continually fallen over the decade- intensifying a trend discernible since 1960. Since then, Britain has suffered the largest fall of manufacturing employment of any industrialised country, and the switchback ride of the 1980s intensified the rate of job loss.’

    ‘The great surge in lending and borrowing that had characterised the 1980s came juddering to a halt’.

    ‘For the Conservative government re-elected in 1992 found that the mushrooming budget deficit required drastic action.’ (What happened to all the money from privatisation?)

    This was written in 1994 by Will Hutton.

    I am afraid that I must disagree with the idea that the private sector is efficient and the public sector is inefficient. Some in both sectors are efficient and some are inefficient. Competition does not guarantee efficiency and some of the biggest and oldest private sector companies are very inefficient.

  • Comment number 96.

    Clegg's speech did at least tell the truth about some of the key issues:

    "We will take risks in government. But we will never lose our soul. We haven't changed our liberal values. Our status is different but our ambition is the same."

    1. RISK - the planned cuts will reduce aggregate demand by A TRILLION POUNDS, whilst the government's economic plan requires at least 2m+ new private sector jobs, £400 Bn+ investment in British industry and our export growth up by a third by the end of the parliament - but if this target is missed all the cuts, the job loses and the fall in living standards will have been for nothing and our debt won't fall, it will GET WORSE.

    So without any doubt this is risk-taking on the grand scale, a huge gamble with all our futures and those of our children. The downside on the risk is identified by the OECD's view that UK house prices could fall by over 40% and the Treasury's leaked projections of 1.2M job loses in the public sector alone - add to that a run on the pound as the debt mounts - say a 40% devaluation (No EuroZone lifebelt for us, we're on our own!), plus a similar fall in GDP that has happened in Eire where similar cuts have been made - that's an 8% annual GDP fall in 2009. We end up with 5M+ unemployed, the £5 litre of petrol and the £2.5 loaf of bread and the prospect of year-on-year falls in living stands. RISK??? This is HARDCORE GAMBLING!

    2. "NEVER LOSE OUR SOUL" - no, that's your inalienable essence, that which those with supernatural belief claim makes us spitural beings - no, it's your MIND you've lost - how can anyone be prepared to see the ConDem's economic policy as anything other than as an act of Faith? This is ideology, it's libertarian claptrap not sane, rational economics.

    3. WE HAVEN'T CHANGE OUR LIBERAL VALUES - the LibDems have always been a broad church of libertarians and social-progressives - Clegg and his fellow-travellers hijacked the LibDems and haver moved their party from being to the left of New Labour to the ideoligical right of the wetest members of Cameron's one nation Tories. Clegg hasn't changed - he has simply dragged his party across the political spectrum, facing down internal dissenters. And that's exactly what Tony Blair did with New Labour - we've been sold the same pup twice!

    4. OUR STATUS MAY BE DIFFERENT BUT OUR AMBITION IS THE SAME - Although a truism, Clegg isn't an uneasy bedfellow in the ConDem coalition - this is a coalition of the willing - Clegg & Cameron are true believers - Clegg isn't "doing the right thing for the Country" through gritted teeth - he's a true believer - and his comment reveals this plainly - Clegg sees the coalition as the vehicle for his beliefs to be given substance and he is on the record as saying he believes in reducing the size of the state - so he is completely at home in a Cameron Cabinet - so Mrs Thatcher's acid test would see him as "one of us".

    His other rhetoric about fairness is no doubt heartfelt, but in truth we can clamp down on as many workshy benefits cheats as we want - but it's all going to be pointless if there aren't jobs for them to go to. We can cut the tax rates for low income families, but if your income is so low you don't pay taxes anyway, it's irrelevant. Government can slash and burn public spending and services to cut public debt, but it's pointless doing this if all it achieves is to drive up the level of private debt instead.

    Ask anyone involved in the current cuts process and they will tell you that this is being done on an unplanned, emergency basis that will see programmes that have already incurred substantial costs being binned - the money spent is therefore being wasted. The 1.2M public sector jobs being axed will all incur real redundancy costs - the net saving is therefore only going to be about £2k per job in the first year, but we are then going to have to pay these people to be unemployed well into the future.

    Wasteful, ideologically motivated vandalism pure and simple. I'm not defending every public sector job or policy - what I am criticising is the way this is being done that does not allow any form of responsible planning and budgeting on a reasonable timescale.

    The enemy are not at the gates - we are not about to see our economy destroyed overnight - there is scope to plan and manage correctly. Nick Clegg uses the EuroZone crisis to justify his acceptance of the scale and pace of the cuts we are about to get in the Autumn statement - cuts he publically opposed right up to polling day then accepted but somehow failed to mention to the electorate at the time.

    Our verdict at the election was not a vote for the complete restructuring of the British economy - it was a loss of faith in Gordon Brown and an acceptance that Cameron's Tories had stopped being the Nasty Party - and yes there was a lot of noise around the LibDems, but this did not translate into votes for them.

    There is no electroal mandate for what is happening - Labour & the LibDems both ran on an economic platform of a slower pace of cuts phased over a longer period. Clegg's claim is now that there was an emergency and he has had to back Cameron's accelerated programme to save the British economy - what will he say next year if the economy has gone off the cliff?

    I'd suggest he books a London cab for the day after the next election - then he can hold the first meeting of the Parliamentary LibDem Party in it on the way to Westminster, because the five seats London cabs have should be ample.

  • Comment number 97.

    96 richard bunning

    Yes, yes, yes.

    I'm sure we would disagree about a good many details, but we are about to learn how wrong this neoliberal experiment is!

    I think that the UK economic recovery has been quite strong so far, so my optimistic guess would be 2.8Million unemployed by September 2011, and 3Million by the end of 2011. However, if the cuts cause a double-dip, it might be much worse than this, and 3.5 million by the end of 2011 is entirely possible. Though this would be a terrible thing, perhaps it would spell the end this neoliberal austerity rubbish once and for all (though the loss to the real economy, and peoples' lives would be horrendous).

    Given that the UN Congress on Trade and Development (UNCTAD) have also expressed serious concern about Europe's prediliction for austerity (and this is backed up by a 204 page report based on empirical evidence), I suggest a revolution in thinking will be at hand.

    Kind Regards
    Charlie

  • Comment number 98.

    All Nick Clegg needs is a red frizzy wig, a red nose, and big pair of floppy shoes!

  • Comment number 99.

    How can I get in touch with the BBC to encourage the publication of a thorough analysis on INFLATION? Particulalry how this coalition just like the labour party before it are allowing rampant inflation to effectively reduce goverment debt over the longer term as well of course appearing to increase goverment income as taxes rise. Meanwhile inflation erodes peoples savings and real purchasing power whilst appearing to also reduce personal debt. That is of course until Dear Merv is forced to increase interest rates when inflation really takes of and Clegg, Cameron and co start to panic! PLEASE LET'S HAVE A DEBATE ON THIS ISSUE AS ITS GOING TO BE THE TOOL OF CHOICE USED BY MOST WESTERN GOVERNMENTS!

  • Comment number 100.

    99. At 07:38am on 21 Sep 2010, ObserverinMonmouth wrote:
    PLEASE LET'S HAVE A DEBATE ON THIS ISSUE AS ITS GOING TO BE THE TOOL OF CHOICE USED BY MOST WESTERN GOVERNMENTS!

    I think you will find Geoffrey that WAR (What is it good for? Its good for defaulting on your currency) will be the tool of choice once the dollar goes belly up.

    The UK Zombies will once again go along for the ride.

 

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