Failed policies keep repeating

There are three policies that are decidedly proven as failures.  Failure is measured in terms of making the financial / economic / social circumstances worse than they already were when the policy was applied.  Creating gross and widespread inequalities in wealth, education and income is a social example.  

The first is a trickle down policy.  That is, cutting the tax for the rich in the hope that they will spend more and give a boost to the economy.  The USA is the master at this so can provide decades of experience on which to test the policies success or failure.  

The second is austerity policies in times of economic contraction.  Well, there are more examples than you can poke a stick at:  Greece, Ireland, Latvia, Spain, England.  The outcomes are criminal in the effect this policy has on the population’s standard of living, the possibility for economic recovery, and long term decline in social cohesion.

And the third is self regulation.  A good example of this is the financial system.  Oh, you think it is regulated do you?  Nah!!  There are boundaries, such as Basle II (and soon (III)) and “rules”, but really it is then left up to the banks to monitor their own performance to these rules.  And then we have the global financial crisis in 2007 as a consequence.  So another example of proven failure with heavy costs to the communities continuing today around the world.  The grief in Ireland, Greece, Latvia, Spain etc etc would not be occurring if not for the monumental failure of self regulation in the financial system.

Now would you believe, even though these policies have proven to fail, in the last week I have come across new policies of each being implemented?  

Let’s deal with the last one first.  In Australia, the central government regulatory body – Australian Securities Investment Commission – chairman Greg Medcraft has done an interview that suggests that they are not really a regulator, but rather a co-regulator with the financial system.  He has a ''philosophical view that industry is generally best to self-regulate and, where possible, regulators can help to co-regulate''.  And gobsmackingly further “I've taken 'protection' out of our language because I think it's better to under-promise and over-deliver.  I think just saying you protect sends the wrong message; it's up to people to take responsibility for themselves, and we will certainly help to assist them in becoming confident and informed,''

Get it?  It is all your fault if you get spived. 

But we could have guessed that this would be his “philosophy” as he was Chairman of the American Securitisation Forum for the four years as they self regulated themselves into the GFC in 2007.  That’s right, the peak body overseeing the self regulation of the USA securitisation industry that blew up the financial world.  

We can deal with the first and second policy failures together.  Because, you guessed it, in the UK they are introducing both at the same time.  Both austerity AND trickle down tax cuts.  That is robbing the general population twice at the same time.

And as for robbing the poor to pay the rich, here it is – The Telegraph reports that GBP3 billion was taken from 5 million pensioners to pay (in part) for a 5p fall in income tax for high earners.  This despite a poll which showed that 2/3 of voters wanted to keep the top tax rate according to The Guardian.  

I have written before about the trickle down effect, how it creates massive disparity in wealth and income distribution as it gives to the rich, squeezes the middle class (downwards not upwards) in Trickle Up Trickle Down and Squeeze.  .  Further how it eventually leads to trickle up austerity, where Trickle up austerity is what you get when you unrestrainedly crush the middle class with trickle down policies and fail to restrain the rich with trickle up policies (taxing the rich and giving to the poor who will spend it and therefore expand the economy).  

And as for austerity policies in the middle of an economic contraction – the evidence this is wrong is wide spread.  And of course it flies in the face of the massive liquidity injections into the financial system that are intended to make its way into the economy but which are not.  Britain can expect its living standards to contract for another five years at least.  Especially as I have written that stagflation appears to have taken hold.  Rising costs of living against falling revenue / GDP. 

But it may be best written about in The Guardian with its six year scenario.  

This is what trickle down policies will achieve for the UK.  We know because it has already occurred in the USA.  Recent data from there is analysed in www.my.budget360.com – always an interesting read.  In 2010, the top .01% income was up 37% (or an average US$4.2m); the the remaining top 1% up 56% (US$105,637) and the bottom 99% up 7% (US$80).  And that was a good year.

Failed policies keep repeating themselves, and we let them.  Why?

Deluded on Wall Street

Yesterday's blog on Mr Smith goes to Wall Street, was very much about delusion.  How long can I overlook the bad stuff;  how long can I kid myself that I didn't hear or see that,  how long can I hang in so that I am financially secure before I decide to save myself?

Some people are not deluded about what is occurring around them on Wall Street and almost any other industry you wish to name.   They just keep going either perversely or intentionally as it suits their purposes.

Today Bloomberg has published from the blogs of two of Goldman's Sach's ex employees.  Both women.  And both having a view about Mr Smith. And as noted, both ex Goldman Sach. 

One :  "who worked at Goldman Sachs for 14 years, wrote that she’s heard from “many people” in the past few years that the firm is emphasizing profits over character."  In the old days that used to be called trasactional banking.  That is focus on the transaction and the profit.  The converse in management terms is relationship banking;  whereby the relationship with the client [up to a point] is paramount relative to gouging profits from the transaction.  Transactional banking has been around for decades.

The second:  "“By tossing a verbal hand grenade on his way out the door, he sullied the reputations of the vast majority of the people at the firm who work and live by the highest possible professional standards every single day,”  and “delighted” to become a Goldman Sachs client when she started an asset-management firm, XXXXXX Capital, in 1995."

Now I wish to return to delusion.  I have been writing about that quite a bit on this blog site.  Indeed, its by-line is "Looking through the noise to the real issues".   Subjects such as how we always believe governments when they say they will honour their debt; legislating for privacy then building vast banks of data about our lives in such intrinsic depth it is impossible to be your own person;  about carbon and climate change legislation - how much they care yet license companies to explore for more oil etc when we are already past peak carbon; and the peak food and water.  Actually, please just read through my list of blogs.  It is all there.

No, what I would like to point out that in the week that Bloomberg publishes the above piece by two women from Wall Street,  it also published research that illustrates that women on Wall Street have the largest pay gap to males of any industry anywhere (in 2010, but it would be consistent over time).   It reports "The six jobs with the largest gender gap in pay and at least 10,000 men and 10,000 women were in the Wall Street-heavy financial sector. "  As low as 55c in the $1 paid to men.

Now lets return to the topic of delusion.....whoops we are still there. 

I mean this behaviour, and all the other aspects of gross conduct on Wall Street has been around for a long time.  We are all born in the megalomanic belief that the world only existed from the moment we were born, like a psycho bubble fantasy.  But we are meant to grow out of that as our eyes adjust to longer vision (bonding with more than the people exactly 12 inches from our noses) at a few weeks old, and we eventually live long enough to go to school and uni, where the whole universe and its history becomes available. 

Were you tempted to pick up the book City Boy: Beer and Loathing in the Square Mile?  About the UK Wall Street equivalent?   How about Liars Poker?  That's three decades for you.

I do not have to write my experience of investment banking, it has already been written, albeit a slight step above the standards reflected therein:  Lord of the Flies   by Nobel winner, William Golding. 

Let's not delude ourselves.  It really is like that. 

All wrong about Goldman all wrong

Well this op ed piece of the young Mr Greg Smith and his resignation from Goldman Sachs published in the New York Times.  I hope someone paid him a lot of money to do it so publicly.  Maybe a competitor?  It has been all over the media, whether the edgy blogs or mainstream.  From reputational experts, the markets, to equity analysts, or just commentators on those big nasty banks.

And you know what?  Not a single commentator got it right.  Including Mr Smith.  Which is of course a perfect name for anybody wishing to go public with grievances.

Goldman is everything he said.  Mr Smith is absolutely correct in what he says, based on my experience in international investment banking.  No, where he is wrong, is he assumes it was different or that “something” has changed.  The behaviour of Goldman has been going on for centuries in various different fields:  think of the financial institutions leading up the great crash and depression in the 1920s, from the early oil fields of Texas, to the gold rushes of Australia, to the railway scams of early last century.  To slave labour, or child labour – over the centuries until this very day.  Property developers, lawyers, accountants, across the finance industry (just read this treatise on Bank of America and its systemic corruption and admitted fraud).

It is no different to what was happening decades ago.  Back then I recall bankers calling their clients stuffees:  a party into whom you stuffed as many rotten financial products as you could.  There is much more.

Commentators have said it will hurt Goldman’s rep; it won’t hurt Goldman’s rep; they will lose clients; they will gain more clients.  You know what?  Nothing.  A big fat nothing.  Until they trip up in the money making stakes, absolutely nothing will happen to Goldman.  Okay, it lost $3b in market cap – but that is just pretend.  It will come back.  I mean, if the greatest financial crisis since the great depression, caused by Wall Street, causes a slap on the wrist, some young 33 year old hasn’t a chance.  

What this story is about is the arch of personal and professional maturity.  It is reported that Mr Smith is 33 years, but it is not clear when he finally came to this conclusion before resigning.  He may have concluded this three years ago and has been planning his resignation some years out when he was financially stable.  It seems highly unlikely that he concluded Goldman was a pile of manure (which it is) on Wednesday and resigned the next day.  No this has been planned for a while, and he has waited until he is in a position to do so.  

This apparent revelation is something that happens with every employee in the highly paid finance / legal / accounting worlds.  It usually occurs about late 20’s early 30’s depending on socialisation, intellectual maturity, and emotional intelligence.  If Mr Smith only came to it at 33, then he is weak in all three of these measures.

We start out all bright and shiny and hopeful.  Our ideologies are wanting to change the world, to contribute, make truck loads of money [which does not usually come until your thirties anyway unless you are a ‘star’].  We believe the employee codes of conduct, dutifully sign them, and conduct ourselves appropriately and work like Trojan horses.  Well most ambitious young people do – statistics suggest only about 10% at this level are corporate psychopaths, although that percentage rises the higher up the food chain you go.

We watched cowboy movies where the sherrif rode into town and ran out the bad guys.  Or Star Wars and the wise Jedi.  We believed them.   We were altruistic.

As we rise up the ladder [if we are lucky] we start to notice that the pats on the head do not come as quickly, if at all.  That it is increasingly not about merit but politics – who you know, who’s your patron, your connections.  By the time we hit our 30’s, merit as a measure of success is eroding and politics takes over.  And soon it is overwhelming.  And, as the above article on Bank of America refers:  it is about measuring penises.

Certainly by then you would have recognised that if you wish to stay you have to play.  If you want to be in the game you have to be on the field.  If you want to be on the field you have to abide by those rules and the ref. We start adjusting our personalities, overlooking things we do not agree with or push out the ethical boat until we become inured to it.  Or it is lost over the horizon.  We conform, conform conform. 

And in the end it depends on our threshold of success.  Mr Smith reached his threshold of financial success.  Some people need more money so play the game longer, and some play it to the end.  But the latter are very very few.  Maybe 2%?  I am guessing.

I think all we can conclude is that Mr Smith maybe just finally grew up, looked around, and opted out.  He was in any event on a losing team:  selling derivatives to Europe in 2011?  Please.  I mean it is not just the financial institutions Mr Smith, have a look at what someone once referred to as the murder belt.  Life is tough.  The sherrif isn't coming, and Jedi was make believe.  There is nothing new here.  I just hope you saved your pennies.  

PS Mr Smith.  Companies in America can sue for defamation.  So I hope you have your pennies in a tax haven where Goldman's has no influence.  Good luck with that. .  

Inflation in shelter also

A passing reference was made in yesterday's blog as to the cost of shelter, and its inflation in the face of revenues and income not rising as quickly.  This included rent increases, and mortgage spreads for purchasers.

As part of the commentary on stagflation, and referring to the critical issue of measuring the essentials of living to understand what is occuring in the world.  Whether it is for financing purposes, acquisitions, investment or just surviving, it is our position that stagflation is occuring in many countries around the world and should influence decisions.

Stagflation is when the cost of living inflates faster than GDP growth (on a per capita basis would be helpful). 

Then this is reported for the UK.  Through The Guardian, it is reported that homelessness has risen 14%.  Charities then argue that this does not measure all those people stumping up at home or staying with friends, but only the very lowest level of those requiring assistance with shelter.

And the Royal Institute of Chartered Surveyors also overnight reported that rental increases continue, as they have for a number of quarters, but fortunately at a slower pace.  10%. 

And the UK is reported to be entering a mild recession this year.  Oh dear!!

Essential Inflation Essentials

Stirring the inflation broth.  Riffling through its drawers.  And conclude the official inflation reporting regime is now irrevocably broken, and at best irrelevant.

And I do not mean as in Argentina, where the numbers are simply false.  There, they are reputedly reporting inflation of 10% and the real number is closer to 20%.  Or as the Telegraph reported, its inflation may be 2-3 times greater than that reported.  And it is not alone in my view. 

Official inflation is a critical number, more so than almost any other in economics.  It is used to determine “real” returns or growth in economies, stocks, bonds, property and households.  Investors, pensioners, savers and spenders all need to know the official inflation rate.  Evan when it is disinflation or even deflation. 

It has been about 15 years now that my view has been growing stronger that there is a problem with official inflation reports.  I wrote here about the difference between headline inflation and underlying inflation (sometimes called “core inflation”).  Put simply, underlying inflation seems to be becoming mainstream; as investors strip out the volatile items in official inflation to better assess the economy.  In their view.

Well that may be okay with the elites, but for the mums and pops, those “volatile items” are the day to day bread of life, literally.  The volatile items, usually include fuel, food, increasingly energy, you know, basic living requirements.  

Some could argue education is one as well.  Well all over the developed world there are millions of young graduates who can’t get a job as a cleaner.  

And it is my view (see previous blog) that many western economies have been suffering through stagflation.  Defined as, high inflation, low economic growth, and high unemployment.  It may not be rampant yet, but on a relative basis it appears to be everywhere.

And when I mention inflation, I mean inflation of the essentials:  food, shelter, water, warmth, health services, and of course air.  Availability of air, or oxygen, is certainly deflating in aggregate, as we pump ever more amounts of carbon into the atmosphere.  So that’s proven.  It is the critical cost of living issues that seem to be out of inflationary control. 

Please click on any of the graphs for a larger view. 

“The FAO Food Price Index (FFPI) averaged 214 points in January 2012, nearly 2 percent (4 points) up from December. The rebound represented the first upturn in the FFPI since July 2011 but the index remained 7 percent below its corresponding value last year.”  So says the FAO.  But any glance at the graph shows there has been a structural shift in the price of food of epic proportions.  And it remains around all time highs.  Indeed the index has risen 61% since the beginning of 2007 (where it was at a high, the ceiling of a previous two decade volatility range).  That is an average of 12% per annum over the past 5 years.  

 Hamburger anyone?  This is the price of feeder cattle in the USA. And I have published this graph before.  There has been a structural change in the price of beef.  By my estimate, 10% per annum over the last five years.

And the point here is that very very few people anywhere in the world have been achieving a 10-12% increase in revenue / earnings over the last five years.  Let’s call them the 99%ers.  Indeed, in the USA the growth of income is now below the rate of growth in spending (which itself is also way down relative to pre GFC).

Unless you invested in food commodities of course, as I wrote previously.

It is not just food:  price of crude oil continues to bubble.  In both the UK and USA, the price of fuel / petrol / gas (all very confusing) are at near all time highs.  That will also be a drag on the economy – one side of the stagflation equation.  Indeed HSBC have suggested that the “fragile economic recovery in the developed world could quickly be derailed”.  

As Ambrose Evans-Pritchard reports  in the Telegraph “The West has the disquieting experience of watching crude soar even as we languish in stagnation. This never used to happen…..  Rising utility costs have already raised the numbers of UK households in poverty from a fifth to a quarter.”

And the cost of shelter is rising as well.  Whether the cost of the home or rent.  Rents are high in many places around the world, and mortgage spreads are expanding if you can get finance at all.  Historically, in the decades before the GFC it was a rule of thumb that credit in developed economies grew at double the rate of GDP.  Today, in the credit crunch being experienced everywhere, and as banks attempt to improve profits, the spread between borrowing and lending has widened.  In the UK, and Australia, they are at highs not seen since deregulation decades ago.  And even if there is some credit growth, it “feels” like a crunch relative to those times.

I wrote in February that with the enormous quant easing occurring in Europe, UK, and the USA, and despite my comments above there will be significant increase in inflation as the money eventually rolls out of the banks into the general economy.  It is inflation delayed not averted.  And the global debt continues to balloon – as this graph shows.  And as global GDP continues to fall, the ratio is ballooning also.  

Since that blog others have also written of the dire warnings about forthcoming inflation; especially in the UK, they are commenting on hyperinflation.  And how dangerous the quant easing is to the economy.  And there was a call for it to end.  You see we haven’t been here before.  What happens if the inflationary genie really takes off?  Pulling all the excess money out of the system in response would create an economic shock.  Maybe worse than we have already seen. 

This excellent article in particular speaks of the significant increase in “essential items” in the UK and makes a farce of the reported inflation figure.  Water, fuel, etc have been in double digit growth for a number of years.  Ian Cowie’s article is called “Inflation ‘falls’ while the cost of living continues to rise: which planet are these economists on?”  Exactly my point. 

There is another way to measure stagflation:  with the unemployment rate plus CPI.  It is called the misery index.  However first you have to include the correct unemployment rate, and also the “true” inflation rate.  We can’t produce the graph because we cannot find that data.

Inflation should be changed to measure the real cost of the essentials of life.   Until then don't believe a word they say. 

At last…..Spain

There’s that song, you know, it starts with “at last”….I can never remember the rest, but the tune gets in your head.  Those are the words that came to mind with this article.  As I have written extensively on this blog, the EU austerity policies are a disgrace for those imposing them, and a travesty for the depression era living standards being experienced by the millions in Europe at the receiving end.  These policies are nothing more than a wealth grab by the wealthy.  All credit to the author. 

Ambrose Evans-Pritchard is one of the better writers on issues in Europe.  Less so elsewhere.  Pithy, insightful, and old enough to know what’s best.  

In this article, about as clear as you can get on the macro issues in Euro zone, he writes of the statements of the Spanish Premier Mariano Rajoy.  In that he “point blank” refuses to comply with the Euro enforced austerity measures.  

Ambrose E-P writes in The Telegraph:

In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.

With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.

He is surely right to seize the initiative. Spain’s economy will contract by 1.7pc this year under his modified plans and unemployment will reach 24pc (or 29pc under the 1990s method of counting). To compound this with manic fiscal tightening – and no offsetting devaluation – is intellectually indefensible.

There comes a point when a democracy can no longer sacrifice its citizens to please reactionary ideologues determined to impose 1930s scorched-earth policies. Ya basta.

What is striking is the wave of support for Mr Rajoy from the Spanish commentariat.

This one from Pablo Sebastián left me speechless.

My loose translation:

"Spain isn’t any old country that will allow itself to be humiliated by the German Chancellor."

"The behaviour of the European Commission towards Spain over recent days has been infamous and exceeds their treaty powers… these Eurocrats think they are the owners and masters of Spain."

"Spain and other nations in the EU are sick and tired of Chancellor Merkel’s meddling and Germany’s usurpation – with the help of Sarkozy’s France and their pretended "executive presidency" that does not in fact exist in EU treaties."

"Rajoy must not retreat one inch. The stakes are high and the country is in no mood to suffer humiliations from a Chancellor who is amassing all the savings of Europe and won’t listen to anybody, as if she were the absolute ruler of the Union. Merkel and the Commission should think hard before putting their hand into the sovereignty of this country – or any other – because it will be burned."

This then is the fermenting mood in the fiercely proud and ancient nation of Spain in Year III of depression, probably the worst depression the country has seen since the 1640s – or have I missed a worse one?

As for the "Fiscal Compact", it is rendered a dead letter by Spanish actions.

Gracias a Dios. If the text were enforced, the consequences would be ruinous. It enshrines Hooverism in EU law, and imposes contractionary policies without the consent of future parliaments – including any future Bundestag. Indeed, it probably violates the German constitution.

But it won’t be enforced in any meaningful sense because the political realities of the EU are already intruding, and will intrude further. A president François Hollande of France will rip it up.

The Latin Bloc is awakening.

All hail the hero!!  Both the Premier and A E-P.