Friday, 16 December 2011

Europe isolated from UK

By co-incidence I was in Belgium and near Maastricht, the birthplace of the Euro, last weekend. This was a good opportunity to assess the aftermath of David Cameron’s decision to veto the proposed European treaty.

The UK media was pretty hysterical about it whether they were pro- or anti-, and they had been vocal about the treaty beforehand. In this relatively rich part of Europe people seemed much less concerned. There was some concern about the state of the Euro and the financial situation and disappointment that the UK had withdrawn from the discussions - but a resigned acceptance that the UK was always different. A much calmer reaction (which perhaps shows that the posturing in the European Parliament was just that, posturing) than in the UK.

I think Cameron had little choice. I think it was unfortunate because it’s always a shame to leave a discussion unresolved, especially because the topic (solving the Euro crisis) was pretty important. But Cameron was stuck: he had no support from his party (the largest party in Parliament) to compromise much; he had no support from other countries who were too scared of the Franco-German axis and he was caught in a disagreement between France and Germany. Had he put off a decision, he would have been criticised at home and more importantly would have been blamed for the eventual collapse of the talks and the weakness in the Euro. Now, the UK has stood aside so if anything goes wrong it’s the fault of the Euro countries – primarily France and Germany. There’s another point in his favour, spelt out by one of his most ardent critics: he played it straight. He didn’t stoop to the Euro sceptics stance of kicking Europe when it was down; he gave everyone warning of what was important to him and he followed through.

The short term winner of the summit was Sarkozy, who needed a win because of his Presidential election next year. He wanted a weak agreement without the EU being able to bind countries, unlike Merkel who wanted a strong formal agreement. The trouble for him is that it is clear, and increasingly clear, that the summit has not helped solve the problem of the Euro and that there will have to be more discussions. Even worse, and perhaps unsurprisingly, more and more countries are stepping away from what they agreed to. The summit may have been portrayed as the UK vs the rest, but the UK will soon be one of many who can’t agree to the plan. This will weaken Sarkozy’s position and strengthen Merkel’s.

As far as UK politics is concerned, Cameron’s position has been strengthened. Miliband had little useful to say and Clegg looked silly. There’s no doubt the Lib-Dems will be disappointed but fundamentally the coalition is about sorting out the UK’s financial position and it is unlikely (not least because of their weakness in the opinion polls) that the Lib-Dems will withdraw. It is more likely that the stupid part of the Conservatives will push for an aggressive stance in the next phase of European discussions. Even though this could damage the coalition, reduce confidence in the UK’s ability to sort out its deficit and therefore harm the UK’s economic situation, and disrupt sorting out the Euro problem – also damaging the UK’s situation. Hopefully a combination of common sense and party discipline will prevail.

As for the Euro: it really is a mess. There are only two solutions, full fiscal union with central budgetary control and Germany picking up the pieces (which in the long term might be unsustainable politically) or the exit or devaluation of the weaker nations. This would be very disruptive in the short term but better in the long term because the Euro could start again. From this side of the Channel it is unclear why the Euro elite are so wedded to a costly project – but they are, and they will do their best to keep the Euro going whatever the cost. The trouble is, it’s a cost to us as well as them.

So for those thinking the summit was bad:
- Most of the sensible politicians in Europe still want the UK engaged. They know we can’t help being straightforward, practical and outward looking. They value that. We will only be on the fringe of decision making if we choose to be.
- The package agreed at the summit will probably fizzle out, we won’t get too much of the blame and discussions will continue.

But for those thinking the result of the summit was a good thing, a couple of warnings:
- in the past we have done well by being slightly disconnected from Europe; we did not suffer from staying out of the euro as so many suggested we would. But that doesn’t mean we should be complacent. Things don’t always repeat themselves.
- The UK is benefitting from a very low interest rate because people still believe we are sorting out the deficit. But our ability to do so is harmed by the struggling European economy. It wouldn’t take much for people to take a hard look at our credit rating and think we too have problems so increasing our borrowing rate. Rather unpleasantly the Bank of France today suggested the UK should lose its AAA status before France. I don’t think we will but we mightn’t be far behind.

It is therefore in our interest to be good Europeans for a bit so we can help them solve the Euro problem –as long as we aren’t pushed too far, as we were last time.

We are, after all, all in this together.

Tuesday, 25 October 2011

QE or not QE?

Quantitative easing is not the easiest thing to understand, both in how it works and how well it works. It’s even harder to understand why the Bank of England wanted to spend another £75bn on another QE round. But they did, and the Governor defended the decision in Parliament today.
To me, it’s silly. More than that, it’s really silly.

The Bank of England gives banks and other institutions cash in return for certain types of assets they hold (primarily gilts). The banks and institutions are meant to do useful things with that cash, including (hopefully) lending it to businesses and maybe even individuals. Generally however, they use it to make short term financial gains trading in money markets. They already have lots of cash because they are deliberately reducing their size and increasing their capital (to be able to cope with forthcoming losses). They don’t really need more to increase productive lending.

Thinking of QE as a method of boosting the economy is like putting your foot on a car accelerator when someone has cut the cable. There’s no direct connection. It might work (if for example the car is going downhill) but it might not.

We need to improve growth and business confidence. Surveys show that lending to the engine room of the economy, small businesses, is drying up and the pressure on their working capital is damaging confidence and future investment – and employment. This is where action is needed, urgently, and QE does nothing to help.

Some think QE is inflationary; the Bank thinks it won’t be because it thinks we are about to get deflation. There’s also an argument that this isn’t new permanent money in the system because it is buying assets. However, a cynic would say that inflation is one way of reducing the country’s debt burden. They would note that an abnormally large proportion of the Bank’s pension fund assets are in inflation linked instruments; that could be a co-incidence but it probably isn’t.
Inflation is having a bad effect on household discretionary spending and on household confidence. A lack of confidence prevents spending, increases saving and harms the economy. I’d agree that deflation would also be bad, for different reasons, and it’s not definite that QE will create more inflation. But it might, and is that a risk worth taking?

What QE definitely does do is distort gilt yields, it makes them abnormally low. These yields are used in pension calculations and this distortion has two negative effects:
- New pensioners (unless they are lucky enough to be in the public sector or in defined benefit schemes) have to take their pensions when the annuity rates are low. This, other things being equal, gives them a lower income for the rest of their lives
- The deficits in company pension schemes are increased, so companies have to put more money aside to meet the deficit and have less to use productively in helping growth.

These effects are certain. The benefits of QE are not.

Even if there are some benefits, the effort is not being targeted where the economy needs help: working capital for the SME sector so that business confidence can gradually be built up.

So: it’s a lot of money; it has uncertain benefits (the only certain one being that it is increasing banks’ profits and therefore capital*); it may increase inflation; it will damage new pensioners; it will suck cash out of large companies; and it won’t provide help where it’s needed.

That seems really silly to me.

* See my post about predictions for 2011: the banks are being told to do contradictory things but primarily they are being told to increase their capital and reduce risk.

It's my party and I'll cry if I want to

So 80 or so Tories voted for a referendum in the next parliament.

Although they knew it could not happen: this parliament cannot bind the next.
Although they knew the European economy is in a bad way therefore harming the UK economy, and such a referendum would do further damage.
Although they knew such a referendum would weaken the Government's negotiating position at a time when real change could happen.
Although they knew each vote for the referendum would weaken the Government's negotiating position.
Although they knew that referendums aren't cheap, are a distraction and the focus at the moment should be on the economy.
Although they knew they are representatives meant to do the right thing rather than following the opinions of their constituency associations.

Why? Self indulgence.

It makes you wonder if the Conservatives can be trusted to govern if 80+ of them can behave in such a childish way. I am very occasionally ashamed to belong to the Conservative party; this is one occasion.

What's a bit depressing is that last week was another; what possessed those people on the Tory benches to be supportive of Liam Fox? He should have resigned earlier, and been suspended if he hadn’t. It seems that being on the right wing of the party is enough to offset breaking the ministerial code in a whole number of ways.

Westminster village commentators suggest Cameron did well to string things along until Fox was found out. Because the right wing wouldn't have accepted action until it was inevitable. In the real world people knew the whole thing stank.

Thursday, 1 September 2011

Hello again

It's been four months since I posted anything so there maybe no-one out there to read this... the trauma of being a golf club captain, and keeping that blog up to date, meant I didn't have time to maintain this one. But I'm no longer captain so hope to keep this up to date in future.

A lot happened while I was away - phone hacking, riots, Eurozone collapse of confidence, never mind Libya or Syria - and I'll comment on those issues now.

I think the main point of interest is how so 20th century they now appear. They seemed to be incredibly important at the time - headline after headline, lead item on the news for days - and yet once the news spotlight moves on no-one is really interested any more. That says a lot about the inability of news media to focus on what's important, and to keep focused even if its not topical. (I wrote that paragraph on the 1st of September, when the Eurozone crisis had slipped out of the headlines for a few weeks: I have come back to this post on the 24th October when it is certainly back in the headlines. It never went away but as far as the media is concerned, it did).

Phone Hacking

I watched the furore about phone hacking, the demonization and closure of the News of the World and the criticism of the News International group (“NI”) with bemusement – especially as there were so many significant things happening elsewhere - and I’m not surprised that the issue has now largely gone away.

It seemed to be caused largely by a combination of jealousy and revenge at – two hypocritical newspapers, The Guardian and the Independent. Hypocritical and not particularly good selling as well. When the history is written, the News of the World will stand out as a great campaigning newspaper that did far more for the public good than the Guardian could ever dream of doing and Rupert Murdoch as someone who did more for media freedom in the UK than possibly anyone else.

And what would you expect a newspaper to do?
An important part of their job is to tell us things we don’t know. This includes things people don’t want known. Some of these things are justifiably private. The assessment of which those are is a critical part of a newspaper’s job, and there needs to be scope for proper appeal and compensation if a newspaper gets it badly wrong.

But most things people don’t want known should be known and we should be grateful that many newspapers invest time and money in digging into the truth. There is a right to privacy but most of the people investigated by the press lead public lives and use their image to boost their career or status.

Far more worrying is the growing attempt to muzzle the press by injunctions against publication, especially super-injunctions against reporting the existence of an injunction. Pre-hacking, this was the hot issue affecting the media. As most of the details leaked out it was clear that the injunctions had been brought not to protect privacy or other family members but to protect the value of the person’s image. A very few judges have been allowed to create a new branch of law to protect people with a lot of money from the public gaze.

Unfortunately the hacking scandal has allowed the focus to switch and has taken the pressure of politicians to protecting the press. The politicians will be pleased because so many of their misdeeds have been exposed in the past. And remember many of those exposures have used dubious methods but we have been grateful for them.

When I posted on this theme last time I mentioned the excellent BBC serial State of Play. I recommend watching it.

The Riots

Most people took support from the riots for their opinions about what is wrong with Britain today, from the left’s decades attack on family and responsibility causing a collapse in society’s moral fibre to the brutal impact of the cuts on the most vulnerable in society. As news trickled out about those involved, immaturity and the short term madness of crowds became more likely suspects, complemented by incompetent policing in two regards:
- Arrogant handling of a tense situation after police had killed someone, and
- Insufficient focus on stopping trouble before it started.

It was worrying to see how Sir Hugh Orde in particular, the head of ACPO, the self annointed trade association for police heads, was so keen to criticise politicians for their role in trying to resolve the issues when it was clear that the police had lost control. Fortunately he failed to get the job of heading the Met, and hopefully his influence is waning.
There is an investigation underway into the causes of the riots and it’s better to wait for that before commenting too much; there’s not enough information yet. But I take away two things:
- Whatever your position on social exclusion, the work being done by Ian Duncan Smith’s team is critical. If it is successful it will improve people’s lives immeasurably in the long term. If not, many will continue to be excluded from normal society.
- The current method of policing cities – hands off, CCTV, stepping as a final solution – has gone horribly wrong. Zero tolerance, involvement, visibility are words that should start being used.

The Eurozone

Where to start? The simple thing is that the Euro was a mistake from the beginning, at least in involving countries with very different economies. A "core Euro" of France, Germany and Benelux might have worked. But the differences between those countries and the other 12 were too great; things onluy worked for as long as they did because the lenders were happy to provide finance while the world was going through an economic boom - or a bubble. Once that confidence evaporated, the scale of Government debt (made worse in some cases by guaranteeing the debts of banks) meant that the question of who stood behind the Euro could not be avoided. And as we saw in Yugoslavia, if you put things together that should not be together the eventual parting will be painful.

So who does stand behind the Euro? Inevitably, Germany is the only country that can and the question is the price it will extract for doing so. It is inevitable that if the Euro is to be a stable currency that there has to be some form of political as well as economic union - without a common fiscal and central bank policy there cannot be a stable currency region. I think those who doubt the future of the Euro underestimate the willingness of the European governing elite to ensure its survival and the survival of the European dream.

It is inevitable that the Greek Government will default on its debts; hopefully others will not have to as well. But I think it very unlikely that they will leave the Euro: the cost to them and potentially to others would be too great.

The cost of the default will mostly fall on European banks, who will have to be bailed out to some extent by other countries. Mostly Germany.

The treaty changes necessary to implement a co-ordinated form of economic governance in Europe provide the UK with the best chance in years to re-negotiate its involvement in Europe. I have long thought that the solution to our difficulties in Europe is to recognise a two-speed Europe, or an inner and outer core. We should welcome the creation of a more harmonised Europe for those who want it and we should take our proper place in the slow lane.


The intervention has worked. Despite a lot of criticism of Cameron and Sarkozy at the beginning, their humanitarian instincts have helped successfully depose an evil man and we should be grateful to them (as should the Libyans, who should now get on with running their country). Syria seems to tied up with Russia and Iran to be given a similar level of help. Its hard to understand why Russia doesn't want to get on the right side of history, but hopefully Libya will motivate Syrians go continue their struggle.

Tuesday, 26 April 2011

AV scam

Quick update on AV; thanks to Guido I saw this article about the serious conflict between the yes campaign, the referendum and the profits people hope to make out of a change to the system.

Wednesday, 20 April 2011

AV or not AV?

I haven't posted on the referendum for two reasons: first because my focus has been on posting about life as a golf club captain and second because I hadn't fully made up my mind.

AV has a whiff of fairness about it, but it also brings with it complexity, a change to something that doesn't really need fixing and an increase in the power of parties over individuals.

The more I've thought about it - and have looked at the respective campaigns - neither of which have been impressive - the more I think the flaws of AV outweigh the benefits and will vote no.

There are problems with most forms of democratic voting systems (where the area is bigger than an area where people know each other well); problems of not identifying with the MP, not having equal representation (Labour need many fewer votes per MP than Tories or Lib Dems), under-representation of extremists (many would see that as a good point), MPs not being selected by more than 50% of the votes, MPs being selected by small groups of people because they are good party people (eg MEPs); and so on. Volumes of words have been written on the subject. AV solves none of them - not even being selected by more than 50% of voters, because you don't have to cast more than one vote.

Which is why, until the yes campaign kicked off, most of its current suppporters did not support it.

There's another reason some of the current supporters changed their minds having previously been negative: money. The cost of running an AV election will be substantial (£250m+). A main financial promotor of the AV campaign is an organisation (the electoral reform society) that will profit from the change.

Many supporters say that although AV is not perfect, it is at least a change from the current system. These tend to be LibDems - although there has been research into the effect AV would have had on past elections, it's hard to work it out accurately. The effect seems to be that when there's a significant swing in mood (eg to Thatcher or Blair) AV would emphasise that swing and when there isn't it would emphasise the middle. But the party that would do best out of it in general seems to be the LibDems. The result is therefore likely to be less effective opposition or coalitions based on party negotiations.

I don't really accept the "no" campaign's argument that the system is too complicated to explain - and yet: remember the significant number of spoiled ballots in Scotland in the 2007 election? Complexity really did have a negative impact.

Our current system is one of the better alternatives. There has to be a clear reason to change. AV doesn't solve most electoral problems, it will cost a lot and is likely to lead to more power for political parties rather than less. (I will always remember the photo of Nick Clegg's coalition negotiating notes showing he was mostly concerned with the Lib Dems status rather than policy).

I have another problem with the vote: I think important changes should be carefully considered. I don't like the idea of referendums deciding something unless there are some safeguards: a certain % of people should vote; the majority should be more than 50% to take account of the fact that some people won't vote; ideally there should be two referendums for major changes, say 5 years apart, so the result isn't swayed by short term issues. The thing about change is you can't put it back. But you can always change in the future.

So in the absence of clear reasons to change - and because there are some good reasons not to - I'm voting no.

Wednesday, 9 February 2011


Predictions are best made after the event so (even with the advantage of being 8% of the way through the year) I will instead highlight what I think will be the important issues of 2011.

In the UK:

The AV Vote

Although most people have given this topic little thought, the vote in May will be very relevant to the future of the coalition. And future Parliaments.

If there is a no vote, then proportional representation will be unlikely for many years. This would be a hard blow for the LibDems and would make many wonder what they have got out of the coalition (apart of course from helping to salvage the economy). Given that the coalition will be at its most unpopular the temptation for some to bail out will be high. Even if they don’t, many will be sullen and uncooperative. The opposite would be the case if there’s a yes vote: a lot of Conservatives will be fed up and see yet another (as they see it) LibDem victory. So whatever the result, the tensions on the back benches will increase. I think it’s most likely that the coalition will continue but there’ll be more discontent which will make it harder to achieve its aims.

As far as the future is concerned, it seems to be hard to predict the impact of AV – especially as there’ll be fewer and hopefully more consistent constituencies. Some think it’ll have little impact, but it’s more likely to increase the chance of coalitions. This one has worked surprisingly well so far. But it’s not obvious we need lots more.

The slight reduction in the growth of public expenditure (aka The Cuts):

The impact on the economy

The key is confidence.
Acting quickly to get the deficit under control was good. It gave investors – the people who fund our deficit – confidence in the country. It has allowed us to keep funding the deficit without paying high interest rates, the costs of which would add to the deficit. It allowed business to feel that the Government was getting a grip and that they in turn could invest to re-balance the economy to one of wealth creation rather than public waste.

Although the scale of the cuts is small, changing the trend from massive growth in public spending to a standstill or slight reduction is like turning an ocean liner. There will be unemployment, projects will stop (although infrastructure investment is continuing) and people will be nervous. As the global economy has picked up, so has inflation especially in raw materials, exaggerated in the UK by a weaker pound which complicates the reaction of the Bank of England’s monetary policy committee. Nervousness – a lack of confidence - could constrain spending and investment and therefore damage growth.

As the cuts start to come into effect this year, the interplay of these two impacts on confidence will be critical to whether we see growth returning in the UK in 2011/12.

The impact on social cohesion
Many people will be using the cuts to ferment trouble: ultimately the cuts threaten an end to all those who live off the culture of dependency, especially Labour. But the degree of change requires a broad public sympathy – not necessarily a majority agreement, but some respect that the right things is being done. Initially, that sympathy is there. Will it stay as the cuts bite?
The first sets of demonstrations, about changes to the funding of university students, were if anything beneficial to the Government. The sight of privileged youths creating a mess on the whole increased support for the proposals. And the public sector unions run major risk if they inconvenience the public too much by what are perceived to be political demonstrations.

But: if the cuts impact too much on front line staff then public sympathy could shift. There’s a growing feeling that there is total lack of joined-up thinking to the cuts, with every arm of government looking to its own interests, in particular with councils cutting charity and voluntary funding much more sharply than their own, because it preserves their empires and saves them redundancy costs. Coupled with silly things like the sale of woodland and rushed changes to the NHS, all this could change attitudes and make it impossible to implement the cuts effectively.

2011 will tell.

The Royal Wedding

This is a good news event; it’ll give a feel-good factor. The sales of commemorative tea-towels and mugs will all help boost the economy as will the influx of tourists. It’ll also be good for our national image increasing tourism on a longer term basis.
I think in fact it’ll be much more useful than the Olympics in the following year, which will probably be an expensive damp squib. The happy couple have chosen a good time to increase our national morale and – hopefully – confidence.


London is one of the two major financial centres in the world – probably the major international one. The financial services business generates substantial employment from those who support it ranging from lawyers and accountants to restaurants and builders. It is the driving force of the UK economy, one of the few businesses where we are world leaders. It is also much wider than just “banks”.

Yet popular opinion seems to despise bankers, far more than in any other country – even the US, where the devastation from the house price collapse was worse than the UK. As regular readers know, I think the banks made major mistakes in the last few years and that as a country we did not exact enough reward for bailing some of them out. However, the banks were neither wholly or primarily to blame for the “credit crisis”, and it is likely that we will make a profit on the bail outs we did make. The US investigation into the causes blames a number of factors, primarily lax Government policy; the best explanation I have seen came from Michael Geoghegan, ex-CEO of HSBC (with JP Morgan one of only two Western banks that truly did not need help; he can therefore be dispassionate):

"The financial crisis was a heady cocktail of western governments voted in on consumer agendas, and financed by banks in the western world that didn’t have domestic savers’ deposits to fund the growth in consumer lending and then relied on foreign wholesale deposits which were quickly withdrawn when doubts about the western financial system arose”.

So why do we hate bankers so much more in the UK than elsewhere? I think there are three reasons:
- Our Government was more to blame than most for the crisis in the UK (because of its uncontrolled public sector expenditure, the lax regulatory system it set up and the inadequate responsibilities of the monetary policy committee). It therefore made much more effort to blame the banks than other Governments, and in the heat of the crisis the opposition had to follow suit;
- The UK has a limited number of big banks, which most people bank with. And often have bad consumer experiences with. These banks are involved in wholesale international markets as well. In the US, the banks involved in international markets tend not to be those most people bank with and so the issues are more distant.
- The disadvantage of a vibrant press in the UK is that they rarely let facts get in the way of a good story.

But even with these reasons I don’t understand the depth of dislike. It has two bad consequences for the UK:

- If you don’t understand what went wrong, the remedies will also be wrong; we won’t put in place the right structures to minimise the risks in future. This is particularly worrying because the world has not by any means finished working its way through the debt problem.
- Over time, the negative feelings will cause international financial services to drift away. Most other countries are putting in place favourable tax and regulatory regimes to take the business away just as we are doing the opposite. Good riddance, people cry. But in ten years or so time, when our tax and employment base is much less, and the centre of international commercialism has shifted so our influence and involvement in the world economy is less, we will suffer. Not the ex-bankers by the way – they’ll be fine. The general public.

Will 2011 be a year when banker bashing becomes less emotional? I doubt it. But for the long term future of the UK I hope so.

Briefly, elsewhere:

Freedom of information

Wikileaks' publication of a mass of stolen emails from the US Government caused split views: a bold campaigner for truth and freedom of expression? Or a careless exploiter of stolen information?

The thing that worried me about Wikileaks’ supporters was their conflation between freedom of expression – and important right that people should be able to say what they think – and freedom of information, defined as the right to have all information even if it is private. Or, to repeat the point, stolen. The right to take and use what isn’t yours isn’t a good thing and labelling it as freedom of expressions does not make it so.

We live in a world where people are more and more inclined to make information about themselves public, even if they later come to regret it. This attitude will permeate society and generally this is a good thing. Transparency especially over Government activity is a good thing. But not to an unlimited extent. People have to have private discussions and thoughts before they make decisions. As we put more of our information into databases we don’t control we will lose control of our information. I don’t know the end game, but I am sure that the trend will continue in 2011 and I am nervous about the consequences. I think we’ll be more manipulated than free. And the distinction between private and public remarks will diminsh to the loss of all of us.

The Euro

Will it survive? There were many doubters last year as investors in various countries’ government debt lost confidence in their ability to repay, demanding higher interest rates and eventually causing bail-outs. Each country had different reasons for the problem, from Greece’s original unsuitability to be a member of the Euro-zone to Ireland’s decision to fully guarantee its banks. All highlighted the problems of the original Euro project: to have a common currency amongst countries with insufficient economic convergence, with no proper assessment of the extent of the convergence and no common governance process to monitor each other’s economies and to transfer money from one country to another. If things were left alone, almost certainly countries would have to leave the Euro-zone and the project would be damaged (although had the Euro originally just been a core group of about four or five countries aligned with the German economy it probably would have not come under strain).

However, it is unlikely that they will be left alone: there is a tremendous political pressure in Germany and France to keep the Euro going and the effectiveness of that pressure should never be doubted. It does seem that the two countries will force through governance changes which will solve some of the original problems, with mechanisms for transfer payments in return for tighter central controls over countries’ economies. And there may be a partial default or two. The long term result should be good for Europe’s economies.

I don’t think we should be part of this process, I think as a result we will shift to an outer tier of European harmonisation but I think that will be very healthy. We needn’t integrate as closely as others would like, but we needn’t be a drag on those who want to. We will always be a large player and therefore with influence.


Just as last year, this region is at the heart of the problem of terrorism driven by Islamic fundamentalism. Pakistan has a massive population, problems of poverty, a poor education system, corruption and a military whose paranoia over India and Kashmir has caused it (mostly indirectly) to be a prime sponsor of terrorism. It also has nuclear weapons. I don’t think anyone knows what to do: I think the only hope is that Pakistan’s educated middle class can act as a calming influence to bring aspects of the country together over time, and in the meantime there are no regional outbursts that that add to the tension.

Historic links with Saudi Arabia, which has funded most of the extremist schools, bring the problem closer to the Middle East where Israel continues to have a short term view of the situation: its oppression of the Palestinians continues to breed longer term problems.

I write this as the situation in Egypt remains uncertain; and what happens there will affect other Arab dictatorships. As well as Israel. 2011 doesn’t seem like a calm year in the Middle East.


Economically, only one country counts: China. Its economic growth, the size of its savings which are largely funding the US and the increase in average wealth of the population are the main things that will determine the world’s economy in 2011. That’s not to diminish the importance of other emerging economies, or the likely recovery in America, but China will dominate the out-turn.

It faces three broad questions: how it controls the economy without an excessive boom leading to bust (many think this is inevitable); how it balances a growing middle class and personal wealth with state control and a lack of political freedom; and how it chooses to use its influence in world politics – whether it continues to be largely impartial to world events or whether it seeks to use its influence – and if the latter, how. We will all be impacted by those questions.

To close: a quote from Warren Buffet: forecasts are a better guide to the forecaster than the future.

Sunday, 30 January 2011

One quarter doesn't make a recession

But it's half of one.

The fall in GDP in Q4 2010, coupled with more aggressive PR from Labour because of Ed Balls' appointment as Shadow Chancellor and Tom Baldwin's appointment as director of strategy (aka press manager) has changed the mood music around the coalition's attempt to get public finances in order. There's a bit more questioning of the approach: previously there was sympathy for the view that the priority was reducing the deficit, now there seems a bit more concern about growth. Mood music matters for two reasons:

- confidence is an important driver of growth. It's not enough on it's own, but it's necessary. The more nervous people (including companies) are about the future the less they will invest, spend, consume.

- although the "cuts" aren't big in themselves. they do change the direction of public expenditure. Big changes need some form of public acceptance to work. The coalition did get more votes than the opposition and has a mandate but it is fragile. It doesn't need to top the opinion polls to implement its policies but it does need at the least a grudging respect and acceptance. So far, it has this. But if we were to move into recession and there was much more questioning this respect and acceptance could disappear.

There are two problems for the coalition:
- One quarter of negative growth was always possible - but no-one expected it to be this one, the quarter before VAT increased, when people should have been out spending. The weather does seem to have made the difference, but the reason isn't relevant. The trouble is that if this quarter (Q1 2011), when there is a VAT increase as well as bad weather, also has negative growth then we are into two quarters of negative growth and a recession.

- They have not sold their approach recently, in fact for the last few months. They need to get on the front foot. I don't think it's enough to simply say, we must see the cuts through, we will not change course, The headlines need to explain why the approach is good for the economy. Even the Guardian (or at least one of their columnists) agrees that the state cannot do much to improve things. It's the private sector that will.

There are some positive points for the coalition:
- We won't know the final Q4 2010 figure until Spring, and it may improve;

- Subject to coalition breaking up, they won't face re-election till 2015. This is plenty of time for their policy to work. And if the world economy has recovered by then, the coalition will get the credit in Britain.

- Their approach is funadmentally right. They are at risk from external events - but fundamentally the interest burden (which I covered previously here) on our borrowings means the deficit has to be got under control, and the quicker that happens the quicker the recovery will come.

State of Play

I've just finished rewatching State of Play - the original TV series not the disappointing film. I thought it was (apart obviously from 24 series 5) the best thing I've seen on TV. A brilliant twisting tale about how the journalist heroes uncover details of political deceit and corporate corruption, even murder.

It made me ponder the phone-hacking scandal. The press is very powerful. I'd hate to be on the wrong side of it, especially if I didn't have the resource to protect me or the opportunity to benefit from any resulting publicity. It also doesn't always decide to follow things up and it can focus on irrelevancies. But there's no doubt that a free cynical and aggressive media keeps the body politic honest.

And is hacking into voice messages really different from rooting through dustbins? Or pretending to be someone else to get an interview? Or misrepresenting information to get hold of incriminating documents? (Things I admired in State of Play). No; this is a case of the end justifying the means. If a story is good enough then we should accept journalists have to overstep the mark to get the results.

There is a question about whether the News of the World's hacking (and I am sure most other papers do this as well) is focused on good stories; it's hard to imagine Kelly Hoppen, Sienna Miller, John Prescott or Gordon Brown having interesting messages, and the saga supposedly began with as tory about Prince Willaim's knee. But I suspect the underlying theme of such celebrity stories would be hypocrisy; they all benefit from publicity but they all complain when it's not good.

Hypocrisy underlies the News of the World story. The Guardian has made the most running; had it not been for the ex-editor being Cameron's press adviser, would they have bothered? They are after all the paper that linked with Wikileaks, relying on stolen information broadcast without care, to sell papers. Phone hacking is minor misbehaviour compared to theirs.

Monday, 3 January 2011

2010 reprise

Last year I avoided making predictions but set out a few issues I thought would be important, and promised to review them at the end of the year.

Should you cut Government deficits in a recession?

I thought that the contrast between Eire - which had take action to sort out it's deficit but was constrained by being in the Euro - and the UK - which could devalue its currency but had out of control public spending - would be interesting. In the event the situation reversed: the UK got a new Government which took firm action that increased its credibility allowing it to continue borrowing and at lower interest rates. Eire got in a mess because its banks were in a much worse state than people thought and the Government provided a guarantee for all their debts. This has seriously damaged their credit rating - initially, things were looking reasonable but as the full horror of their banks unfolded they needed help. I suspect they would have been better allowing the banks to default (although protecting depositors) rather than hurting taxpayers, but that would have badly hurt banks in other European countries - especially Germany. And that would not have been popular.

So the question is unresolved: I remain convinced that sometimes you should cut deficits, and both the UK and Eire were right to do so, and will benefit compared with other indebted European countries. 2011 should show the result.

Does the public sector serve us - or is it the other way round?

I suggested that the public sector - and I really mean the management of the public sector - had forgotten why it existed, which is to provide efficient public service. (See last year's post for links to examples). I hoped that 2010 would be a year when the public started to take back control., accepting that the culture of low productivity and indifference to the public had taken years to create and would take years to disappear. I'm not sure there has been much progress on this; the flurry of press interest in this topic has largely disappeared and there will be a major media push by public sector unions about the unfairness of expenditure cuts, which will probably become the new story.

However, there is hope: Eric Pickles, the "Communities Secretary", has pushed for much more openness about Local Authority spending and the coalition has reduced the number of quangos if not had a bonfire of them. The philosophy of most of the coalition is to support localism, the Big Society, community involvement. Little things like giving local areas the power to determine housing needs rather than having them set by distant regional development agencies all help the trend towards reducing the power of the public sector. And a lack of money helps. So although there's been little progress the change of Government has kept the pressure on.

Is global cooling the new global warming?

I wondered if 2010 would become a year when it became respectable to be a climate change denier. I think it did: there has been an increasing realisation that the statistics and climate readings have been over-exaggerated by those with an interest in promoting expenditure on yet more research or in developing businesses on the back of fear of temperature increases. (Micheal Crichton wrote an interesting book "State of Fear" which suggest that Governments also wanted to promote the concept because by making people worried it allowed them to increase their control over the public. He also cautions about the politicisation of science - a timely caution many scientists ignored). As other topics which allow them to increase public worry - the economy, terrorism - come to the fore, Governments are less interested in climate change.)

I still think it sensible to invest in energy efficiency, and in the reduction of the use of coal, oil and gas, but for economic, environmental and energy security reasons. The hijacking of the debate by climate scientists has devalued these worthy objectives.

Labour or Tory?

I did make a prediction here: I thought there'd be a hung Parliament (because the swing to the Tories would have been to much to realistically expect) but I also thoiught the LibDems would support Labour. In fact, thanks to a focus on the importance of sorting out the UK economy by senior Tory and LibDem leaders, the coalition agreement was put in place and has lasted well so far. Selfish MPs on both the Tory and LibDem side like to rock the boat from time to time but absent a really serious disagreement on an unexpected item, the agreement looks likely to stick. Probably because the electorate would punish those who caused any break-up.

It's a relief to see a Government that cares about the economy in charge. Cameron has settled into the job - and where is Gordon Brown? It's interesting how quickly important people fade away if their bubble is burst (in all fields not just politics).

Internationally, I noted the importance of:

US Mid-Terms

I wondered whether Obama would have made progress in dealing with the mess Bush's team left behind, and whether that progress would be accepted by the US electorate. I think he did, but the electorate certainly didn't accept he had. However, I suspect he will do well over the next two years because the Republicans will either have to co-operate or be shown to be bankrupt of ideas. In either case, as the global economy picks up Obama will get the credit (probably unfairly, but that's fair as he's being unfairly blamed for things going wrong now).

I also said: "It usually takes two or three years for a change of Government to have any impact – so the problems in the first two or three years of a Government are usually those of the last one." Still true.


I wondered if a new regime to emerge. It nearly did. But the old one relied on the armed forces and brute force to keep it in place. I still hope that this basically civilised country can re-emerge as a force for good in the region: rebellion remains in the air and needs to be softly encouraged by the West.


My closing thought for 2010 was that it is hard to see a good outcome here. And that remains my thought: Pakistan continues to have deep divisions, an unsuitable Government, an intelligence service that faces two ways and an unnatural distrust of India fermenting its desire to see a destablised Afghanistan. Which in turn has a dodgy Government that doesn't control most of the country. The West has wasted billions here, has made itslef deeply unpopular and has no real plan for a constructive escape.

Thoughts for 2011 will follow shortly.