Tuesday, 16 December 2014

Russian Roulette

The Russian authorities are following the neo-classical, 'sound money' playbook by the letter right down the drainpipe.

It didn't work for Argentina.

It didn't work for Turkey

So let's do the same thing all over again and expect a different result. What was that definition of insanity again? Something about truth by repeated assertion and thereby constantly misattributing a quote.

Currency markets are very simple. It's raw supply and demand. There are no market makers and every open trade has to be settled with delivery of the currency at 10pm GMT every day.

That means you have to get hold of the real thing and give it to somebody else or get out of the market. So the actual final liquidity in the market that allows things to move comes from people actually changing what they hold over a daily basis. Those playing Contracts for Differences and throwing 'forward next' are just greasing the daily wheels with liquidity. Overall net short positions from an aggregator still have to be delivered. You have to supply roubles and take US dollars. That means getting the roubles in the first place and is an obvious control point in the system.

The overall effect of the current crisis is that the rouble currency area is shrinking. Currency areas are not necessarily the size of the country that owns the currency. They can be bigger or smaller than an individual country. What size they are depends upon how the country uses the monopoly power of the currency to influence activity.

In Russia you are getting 'dollarisation' where people are giving up their rouble savings to hold USD. That expands the USD currency area into Russia and shrinks the Rouble currency area. And it is also the supply of those roubles the shorters need to cover their delivery positions.

As usual jiggling around with interest rates will not sort this situation out. This is now a quantity and qualitative situation that requires you to make the rouble more scarce. Paying people more interest from the central bank or issuing more bonds is not the way of making something more scarce. I find it bizarre that central banks cling to the jiggling interest rate myth when the evidence around them is clearly demonstrating that that particular lever is not connected to anything useful, and probably never has been.

Shrinking currency areas need to either stop shrinking or have less currency in them. You need more demand or less supply.

The insights from MMT show that exports are a real cost and imports are a real benefit. The sanctions in place are stopping imports coming into the country. So there is no need for the exports. Russia should just turn the taps off, which would bring Europe to its knees in a second. That they haven't done that suggests that Russia has the same problem as Argentina - the country is actually run by an Oligarchy that prefers to operate their export industry mostly in a foreign currency. So actually you can discount the entire oil and gas industry as a different country almost - operating largely outside the Russian currency area.

The shortage of food and basic items brought about by the sanctions should be solved using a simple wartime approach - rationing. If there isn't enough buckwheat to go around, then you can't use price to resolve the distributional struggle. You'll end up with starvation and riots and stockpiling of food. So assuming you care, then you'd ration the real goods for which there is a shortage and work at relieving the supply shortage. Set a price limit and a quantity limit. Start issuing ration coupons. And ban imports of Leah Jets, etc. You don't need luxury goods when the country hasn't enough food.

In terms of financing the Russian Central bank has to narrow the scope of Russian banks. Any lending to settle currency transactions in roubles should be banned. The Central bank should bar itself from directly intervening in the currency markets. And it should not be doing swaps into USDs, but offering to settle foreign debts for needed commodities - like buckwheat.

In addition it should be offering financing in roubles to pre-pack administration proposals for any important business crippled by foreign currency debt. That forces losses onto foreign creditors in foreign currencies - as well as Russian USD holders. If you get moaning from foreign creditors blame the currency war. Then perhaps they'll put political pressure on their own central bank to act and stem the losses.

Beyond that the fiscal authorities need to start taxing in Roubles more - preferably the oil and gas pipelines. And then turning them off if they don't get paid. The power play in Russia determines whether that is viable. Beyond that taxing USD accounts held at Russian Banks in roubles would help eliminate balances in those accounts as would a financial transaction tax on roubles (offsetable against real activity).

Get the supply of roubles down, and the demand up - using the monopoly power of the government over the currency area. There are probably other things that could be done just as soon as you take the correct viewpoint.

And please let's can this idea that if you just set the interest rate at a particular level everything will magically calm down. People are not robots.

Thursday, 11 December 2014

How to eliminate the UK deficit - the trick revealed.

Magic RabbitIn the UK Labour has revealed how the trick will be done. How they will eliminate the deficit in the UK.

They will do it in the classic Labour fashion by...

...redefining the term deficit.

From now on when they refer to 'deficit' they mean the deficit on the current budget. Which of course means that any shortfall caused by private sector excess saving will be matched by government spending that can be classified as 'investment'.

A clever trick - if it can be pulled off. The problem of course is with the definition of 'investment', which generally doesn't include investment in human capital.

And that means that the expenditure will be on capital assets and intellectual property (or yet another fudge to redefine the term 'investment').

The increase in investment spending should bring down unemployment and increase the tax take which will close the deficit unless there is a sudden change in savings behaviour.

Of course as MMT warns, that approach is 'pump priming' at the high skilled/high capital usage level of the economy, which, if there isn't sufficient taxation or planning controls to free up those construction and development resources, will lead to supply-side shortages and wage spirals.

Given that we are in a mini building boom and you can currently earn a king's ransom as a bricklayer then there might be some rocky roads ahead.

And once you have invested in something you generally have to do something with it - which often requires an increase in the current budget to staff out the service. Of course if you limit the investment to capital replacement and stuff used solely by the private sector (roads and council houses spring to mind) then you can avoid a current budget impact.

But I will give Ed Balls his due. He did slip this into the speech in January if you look hard enough.

And I missed it.

Wednesday, 3 December 2014

Why not lower the retirement age?

Randy has put up a great post calling for more jobs under a Job Guarantee. This is in response to Dean Baker calling for more paid vacation time as a solution to joblessness. Over here in Europe we have statutory paid vacation time on the books already (a maximum statutory requirement of 28 days here in the UK) and we still have an unemployment queue. Big unemployment queues in lots of countries.

It is clear it still doesn't create enough jobs. But that got me thinking about the interaction between an income guarantee and a job guarantee. Full income guarantees are only sustainable if they are considered justified by the rest of the population. Economists struggle with this concept clearly, even though it is blisteringly obvious to most people.

The UK already has an income guarantee in place. It's called the State Retirement Pension and it is about the only bit of the social security budget that no politician seems to like to attack. In fact when the politicians start issuing propaganda via the tax authorities they separate out state pension spending, spinning it as something different from your run of the mill 'welfare'.

So the obvious tinkering-around-the-edges solution seems to be there - reduce the state pension age to 60 for all. 

Yet pretty much all the literature and the general thinking is pushing the age in the opposite direction as well as removing mandatory retirement ages across the world. A lot of this is clear propaganda based on the usual "we can't afford it" nonsense plus a clear belief that equilibrium will sort everything out. Mostly though it just doesn't make any sense. Why push to increase the people who have to work when you have unemployment?

If you look at political manifestos across the spectrum, none of them suggest lowering the state pension age as a goal - even those backing citizen's income ideas. I really can't understand that. It seems like a sure fire vote winner particularly if you sell it as a way of freeing up space so the young can get a job.

Monday, 24 November 2014

The Sovereign Money Illusion

"Because a good magician can do something shouldn't make you right away jump to the conclusion that it's a real phenomenon." —Richard Feynman
I've always been fond of magic. I love the stuff Derren Brown does particularly where he demonstrates the same 'powers' as so-called psychics. Professor Richard Wiseman, originally a professional magician, has some excellent You Tube videos on the science of persuasion. And of course I've been a fan of James Randi for many years now - arch skeptic and debunker of myths everywhere. Those in the UK should take the opportunity to watch his biopic. Everyone else should read the NY Times article. It's very enlightening.

One of the key points that comes out of all this is that humans have a tendency to be easily fooled and they love simplistic solutions - particularly if it is mixed up with a lot of fancy sounding hocus pocus.   There are whole sets of channels on TV designed solely to part you from your money with the most amazing claims about all sorts of things - from jewellery to jesus.

As Randi himself points out, and discovered with his work to expose Uri Geller, the more you highlight and debunk nonsense, the more popular it tends to become. And that's the main reason I've largely stayed away from the Sovereign Money debate.

Marketing and PR clearly work. People who are good at talking and writing can hoodwink pretty much anybody if they choose to. They may even believe it themselves - who knows. You can't really ascertain that from watching them.

What I can do though is show you how the illusion is done. Because it is just an illusion. Nothing fundamental changes, but a few unpleasant things are cleverly hidden that are worth highlighting.

The Fundamentals


Sovereign money stimulates the economy by increasing the price of and therefore reduce the level of bank lending and then replaces that in the economy by increased government spending or tax cuts. Essentially the government does the borrowing from its own bank so you don't have to. 

And that's it. 

We can do that with the current arrangements. We already do of course, but we can do it more if we choose to. 

The basic theory is that increasing the price of bank lending automatically selects the correct projects to receive bank lending. Unfortunately what it is likely to do is encourage ponzi schemes since those are the ones with the returns necessary to pay the higher price.

The correct approach, as highlighted by the MMT view, is to reduce bank lending by banning its use for anything that isn't constructive. Bill Mitchell regularly suggests that 97% of financial transactions should be illegal. You should narrow banks directly by taking action rather than indirectly by 'influence'.  Then you can leave the price of loans low - allowing those projects with a low marginal efficiency of capital to receive funding. In a world with ever decreasing returns on useful projects that is important.

The Tricks


Beyond that there is a lot of bamboozling going on.

Let's start with the "stopping banks creating money" myth. 

Here's a model of the current UK bank structure. 


When a bank makes a loan, and the payments made with it, savings have a tendency to drift to National Savings (because they pay an interest rate and are 100% secure - since it is part of government). That drains the cash buffer of the bank. So you would get this. 


A bank can't continue to operate like that as it would quickly run out of cash. So all banks have a Treasury department who have the job of maintaining the buffers and ratios of the bank at the required levels. So they compete with National Savings to attract back the deposit (or more likely prevent it leaving in the first place) by paying the required interest rate. This, plus the running costs of the other liabilities on the balance sheet, determines the bank's funding costs which in turn determines the price of the loans the bank makes. 

And that dynamic feedback process across assets and liabilities maintains the usual static image of a loan creating a deposit and the bank balance sheet expanding:


Essentially modern commercial banks are always 'fully funded'. They have to be to counteract the persistent drains towards National Savings and into Gilts. 

The plain money version of the Sovereign Money system simply changes the focus of your attention to National Savings. The difference is that rather than holding the Banks reserves directly on the balance sheet of the central bank (in the banking department), they are held in the equivalent of National Savings (a new transaction department). Effectively National Savings moves from HM Treasury to the Bank of England and starts doing white box current accounts. You haven't changed anything here. Just moved things between balance sheets. 

So the process is the same. Here's the starting position:



When a bank creates a loan the cash buffer of the bank would tend to shrink without further intervention as the bank transaction a/c drains,  ending up as 'deposits':



Again a bank can't continue to operate like that as it would run out of cash. So the bank's Treasury department does what it always does to maintain the necessary buffers and ratios of the bank. It attracts back the deposits by offering savings at an appropriate required interest rate. And you end up like this. 




Which is exactly the same as the current situation. Hardly surprising since banks are always fully funded in the current system as well. 

So where does this "banks won't be able to create money" come from - when clearly the balance sheets will expand and contract just as they do now? The sleight of hand is quite clever. You just redefine 'money' to only mean that which is held in the transaction department. 

Well I can do that in the current system. I hereby declare that all accounts unable to accept debit card instructions are 'not money' because you have to do stuff to those accounts to make them 'money'.  Job done. 

So what are the downsides of the change? What is hidden under the deluge of marketing and PR?
  • deposit protection disappears, so 'savings' with banks become unprotected. What that does is put the price up and reduces the supply of savings and banks will be able to loan less due to the increased cost of funds. That is intentional. Restricting bank lending through higher prices is the aim as I mentioned earlier.
  • safe savings that earn interest disappear. Your only option other than saving at risk with banks is to store your money. National Savings stops being a savings entity and starts being an electronic wallet - storing cash in 'dematerialised' form. Essentially all your savings get forcibly stuffed under an electronic mattress and rot quietly at the pace of inflation. 
  • free banking disappears. One of the great innovations of the British system has been free transactions while in credit and free withdrawals from ATMs. That came about for historical reasons - largely the great number of mutuals that came together to create the LINK system, which allowed all British cash cards to be used in pretty much any ATM machine, plus Tony Benn's creation of National Girobank which created free banking while in credit.  It was and remains a magnificent achievement of co-operation that I don't think would happen today now that the mutual sector has been decimated. 
What we really need from an electronic money system is free transactions for everybody and hard enforcement of drawdown limits without charge. In a computerised system the marginal costs of doing that are negligble and should be absorbed by the system. It is sheer profiteering to suggest otherwise. 

Rather than dismantling the co-operative achievements of LINK at sharing the infrastructure costs, we should be building on it so that all electronic transactions in the banking system are free to all users and instantly cleared. That eliminates frictions and cash flow issues that discourage real transactions - a real boon to business efficiency since it helps reduce the overall amount of working capital required.  The transaction system should be seen as a public utility and provided as such. Charging for it is as daft as charging tolls on roads - particularly as it can scale and handle congestion much better. 

The next myth is the "magic of time deposits"

The suggestion here is that if you just stop deposits being instant, then magically all will be well because then they are 'not money'. It's a really silly idea when you stop to think about it for a second. 

At any point in time, on any given day there will be, in any material sized bank, some 7, 30, 90 and 180 day savings maturing and requiring rollover. If the bank can't rollover that money then it runs out of cash and goes bust due to 'cash flow problems', regardless of how its loan book is performing. That is the case for any structure where the assets and the liabilities are not perfectly maturity matched - i.e. the bank acts as principal in the transaction and stands in the way rather than agent matching two third parties and charging an agency fee. 

So bank runs will still happen, and the lack of deposit protection will likely make them more severe and certainly just as disruptive.

This boils down to the 'bond fallacy': the idea that if you wrap money up as some other instrument you change something fundamental. You don't. People holding savings and bonds still feel wealthy. It takes time to sort out any material transaction of any size that requires access to savings - nearly all of which would be longer than notice periods. If the world starts locking assets up, then those selling things will start offering credit periods equivalent to the notice periods to get the punters through the door. The world of Tabs simply reappears. 

This leads onto probably the most zombie like myth which is the belief in "loanable funds"

Loanable funds is based on the idea that you reduce somebody's purchasing power before increasing somebody else's. It's an ordered notion, and economic types love it. It forces the world into their Newtonian clockwork view and they cling to it like starving rats. 

The problem is that it is impossible. The world endogenously creates credit all the time as a function of trade. In fact we don't actually ever really buy things with 'money'. We always buy things on credit and then settle with 'money', although we can settle with anything that the seller deems acceptable. The time between credit and settlement is indeterminate, as is the time between initiating a sales process and the granting of any credit.

If you invest in a bank, or open a time deposit with a bank you get a receipt for your investment. That becomes part of your wealth. You are still wealthy and feel wealthy, which means that you will likely spend like a wealthy person - safe in the knowledge that the system is very keen on making sure you have the liquidity to transact as long as they can see evidence of your wealth. 

It's the very basis of the 'wealth effect' - the very same one lovers of monetary policy get so excited about. All of it alters expectations wildly. 

AFAICS Loanable funds really only works if you become less wealthy when you save; where you materially cannot transact because you don't think you can settle; where you never even enter into negotiations to buy something at some point in the future so you don't affect expectations. 

And you must don the monk's habit prior to anybody else getting access to spending power. Yet the very application for a loan alters expectations. You start lining up things to buy in expectation. Those expectations of sales alters buying behaviour down the line, etc. 

The failure of the loanable funds model is very clear indeed in the work Steve Keen has done on dynamics. I would go further than he has and suggest that there can never be a loanable funds mechanism construct that generates the dynamics the theory requires. People project into the future in time too much and transact over time rather than in an instant. It doesn't work out.

Banks work conceptually with two departments - a lending department and a treasury department. 

They are linked together with a cash buffer and a price. Beyond that they operate asynchronously and autonomously - because that is the only way they can possibly work when there are thousands of payments and transactions going through the books on a daily basis, all coming in at different times from across the globe. You can see this clearly in the simple dynamic models Steve Keen put together. The Assets and the Liabilities move in different circles in different ways at different speeds. 

The process of lending actually takes a long time - several weeks - during which time the sales pipeline and the statistical level of completion of all those loan proposals informs the treasury department so they can line up the funding to backfill the buffer. Funding generally take a lot less time - a few days at most. After all you only need the money at very final moment of the lending process. Up until then the loan proposal is just useful information that again informs 'expectations' internally.  

So there is no real concept of prior or after at the core of the banking process. Only asynchronous. 

There's nothing particularly unusual about the process of course. It is the same system used to deal with government spending and funding since the government sector overall tends to act like a bank.

Endogeneity is innate within the transaction system and no amount of wishing really hard will make it go away. You have to come up with control processes that work with it.

The final myth is by far the most pernicious and the most disturbing.  And that is the "Solomon Fallacy"

If you centralise the creation of money, then you need to initially create it. The question then is who decides how to do that and how much? It's not a problem in the current system, since it is dynamically created and destroyed on demand by the lending and spending system according to price and an interest rate target. In other words it is 'automatic' - ideally allowed to grow and shrink as required to ensure that all real transactions that are worth doing get done. 

Arguably it would work better if you dispense with the interest rate target. That is the weak spot in the system since it is set by a group of human beings who frankly haven't got much more of a clue that the rest of us. So it doesn't really work, is largely just a point of theatre and it was entertaining to see how wrong they got it in 2008 because they were reading the wrong set of tea leaves. At least until you lost your job because of it. 

And that is the main issue. The Very Serious People that sit on these committees do not have the Wisdom of Solomon. They make mistakes. They suffer from groupthink like the rest of us.  And yes they are subject to being lobbied by those in wealth and power however much they have 'trained their souls'.

Just because they have awarded each other prizes doesn't make them any more effective. Credentials are no predictor of success. They are just tickets to bamboozle - like the terms 'Amazing' and 'Magnificent' magicians use in front of their names (and often followed by the suffix 'Master of Illusion'). 

So, of course, the Sovereign Money idea is to use one of these failed committees of Very Serious People, but give them authority to restrict what parliament can spend. If you thought the Debt Ceiling farce in the US was bad, then this is the next stage up. At least with the Debt ceiling it was the members of Congress that were tying themselves in knots, rather than allowing somebody else to apply the ropes. 

Those with a knowledge of parliamentary history will have heard of the People's Budget from 1910.  This implemented taxes on the wealthy and extensive spending on social welfare. At that time the House of Lords, who are appointed not elected, could veto the budget of the elected house. So they vetoed the Budget as passed by the House of Commons. This caused a constitutional crisis which eventually resulted in the removal of the Lords veto over Finance Bills.

The Sovereign Money proposal reinstates the veto by committee - effectively by a new 'House of Lords'. It is exactly the same as giving the 'Lords Spiritual' veto over a Finance Bill passed by the Commons. A small number of no doubt very moral and very learned individuals that believe some, frankly, odd ideas, given final say over the future of the country!

That is simply not acceptable in a modern democracy. 

It's a disgraceful idea that should be abhorrent to anybody who dares to call themselves a democrat and any political party supporting such an idea I feel has lost the right to call themselves a democratic party (particularly if at the same time they are proposing an elected second chamber to replace the House of Lords!)

Now of course it may simply be a piece of political theatre designed to make it look like something is being controlled when it really isn't (The old Wizard of Oz trick). But that again is more bamboozling when we really need honesty. 

It is the job of parliament to decide how much needs to be spent in the economy, over and above that injected by the auto stabilisers. If we take just the Commons, that's a committee of 650 people able to take advice from anybody they choose. If they spend 'like drunken sailors' then we-the-people can kick them out at the next election. The banks and bankers who spent 'like drunken sailors' up to the crash in 2008 are often still in position! As Tony Benn famously said the important question is "How do you get rid of them?".

I find the move towards unelected committees of Very Serious People, who are appointed specifically to 'restrict' elected politicians, a disturbing trend. We're amassing quite a few - the European Commission and the Office of Budget Responsibility to name but a couple.  However it has a long philosophical lineage that goes right back the Plato's Republic, where Socrates proposed a class of people who believe a 'nobel lie' and are compelled to rule by virtue of their upbringing and training. 

He called this class of people the 'Guardian Class'. Those of you in the UK who know the type of people who tend to propose these ideas will find the irony in that name delicious. 

Later the Roman poet Juvenal wrote the famous phrase: 'Quis custodiet ipsos custodes?' - Who guards over the guardians? 

In a democracy the ballot box guards over the guardians, and that should always be the final arbiter. Guardians must be directly elected. 

Conclusion


The Sovereign Money proposal is an implementation of a particularly political philosophy known as 'The Currency View'. It's just a way of looking at things but, as I've shown, it offers no more systemic control value to the banking and monetary system than the existing view, which is a reasonably pragmatic mixture of the centralised 'currency view' and the decentralised 'banking view'.

The proposal is, ultimately, an illusion - however well performed and attractive. And obsessing about it detracts from creating a systemically useful control structure for the banks and a modern payment system that encourages and enables real transactions in the UK.

There may be value in pushing the current account clearing system completely under the auspices of UK Payments Administration (UKPA), and possibly nationalising that function (i.e. bring it under the ownership of the Bank of England). But that would primarily be a way of implementing electronic money that would be available free to all entities transacting in Sterling, and taking that cost out of the commercial banks. Something I feel the banks would appreciate, but it should be done in return for accepting permanent regulated restrictions on lending.

Beyond that the existing balance sheet structure is probably fine, as long as the Bank of England fulfils its regulatory function and operates as policeman to, and not best friend of, the banks. That means putting them into administration and forcing losses onto bank investors when the bank makes bad loans. This is a solved problem that FDIC in the US does on a regular basis. Yes, it might mean that the BoE balance sheet gets a bit hammered, but as we know that doesn't really matter. Or it might mean that we need to have much smaller banks to make the political process of resolution that much more palatable. But perhaps it shows that we need a public owned 'resolution partner' - a commercial bank of last resort that maintains the standards of all the others via competition. We used to have one of course. It was called National Girobank.

Additionally economists of all colours, and I include most of the Post Keynesian influenced groups here as well, are rather too fond of Solomon Fallacy solutions. Clearly many economists don't like and don't trust politicians. That's fine: I don't either. But what that means is that the system has to have a good automatic balance element in it - the MMT school uses the Job Guarantee as its counter-cyclical flywheel for example. However at any point that you require a human decision on anything impacting that control structure, that decision must be made directly by elected officials. Otherwise you are actually proposing a political system that is something other than a democracy.

And for those of us who are mere members of the 'demos' we need to watch out for illusions and tricks from political parties and lobby groups that undermine our democracy. We might be too busy to engage. We might find the whole thing completely boring.  But remember: "no one with power likes democracy and that is why every generation must struggle to win it and keep it – including you and me, here and now."

To that end I'd recommend watching a few Derren Brown shows. Each one has a subtle message about the nature of reality in them. They really are very good.

Friday, 31 October 2014

How Labour can solve the immigration conundrum

It's very simple really.

Implement a full Job Guarantee - create enough jobs and pay a living wage. Take people as they are and let them show they can produce something of value to society - working for the public good.

Of course with open borders that would mean you would likely end up with an awful lot of unemployed on your doorstep from the entire open borders area and, much as we'd like to help everybody, the country and the infrastructure can't cope with that.

Firstly there is the ecological footprint of the population on the country to consider, and then the impact on the social infrastructure - which takes time to augment even if you invest properly.

So as part of implementing the Job Guarantee you restrict the open borders to other parts of the world that have an equivalent Job Guarantee programme and social infrastructure. If you don't come from such country then you have to apply for a visa and be assessed.

It's quite difficult for a foreign leader to argue against that position, because if they do then they are essentially saying they want to dump their unemployment in the UK rather than deal with it themselves. The push back would be: Implement a Job Guarantee and we'll gladly remove the restrictions for your country.

So as well as solving the unemployment and poverty problem permanently, you make the Job Guarantee a viral requirement for open access to your advanced economy. At a stroke we have a positive reason for a temporary restriction on free movement.

The Job Guarantee could very easily become the GPL for the people - guaranteeing you a job and an income wherever you go.


Wednesday, 22 October 2014

A little light on the UK productivity puzzle?

The October Economic Review from the ONS has a section in it on productivity that is perhaps worth  highlighting.

The UK recovery has been puzzling people, because although we have not had the unemployment of other countries we have had a major impact to productivity that has been difficult to explain. Productivity has been flat to declining since the Financial Crash.




The review breaks that down by industry composition and that highlights the impact of a few sectors on UK productivity.

Part of the explanation for the weakness in productivity growth relates to the UK’s industrial mix, and in particular to the productivity performance of mining & quarrying. Productivity in this industry, which is dominated by the extraction of oil and gas from the North Sea, has been on a long-term declining trend, as the remaining reserves demand more factor inputs to reach and extract. As a consequence, while the level of productivity in this industry remains relatively high, it has fallen by more than 50% since 2008.
The drag on productivity growth is then shown in a graph showing change in output per hour.

*ABDE includes all non-manufacturing components of the production industries. This is dominated by the extraction, energy and water industries.
Looking at the change in productivity before the crisis and afterwards leads to this change graph:

Which shows a productivity decline across pretty much all the industrial sectors, with the biggest decline ex. oil and gas in the old bubble sectors - Finance and Pharma.

There is still no comprehensive explanation for what is going on here, but clearly retaining staff (contrary as that is to standard economic theory) and the return to rational pricing from bubble mania will have had some impact.

The atypical response of the UK to the crisis is a natural experiment - after all retaining staff while productivity falls is essentially a privatisation of unemployment benefits which would stop demand falling as far as it otherwise would - and a comprehensive analysis from the ground up would show some theories of the way firms work in aggregate are incorrect.

Hopefully we'll see an adaptation of ideas that can explain what has happened, rather then the usual filtering of facts to fit pre-conceived beliefs.


Thursday, 2 October 2014

UK Private Debt Levels - Q2 2014

As I mentioned in my sector post, this week's National Accounts release represents a complete review of the framework in the UK too bring it up to date with the latest European Standard - ESA 10.

This affected my private debt and credit accelerator calculation and I've had to go back to basics to rebuild it. The good news is that the review has simplified the calculation - since derivatives have been moved out into their own section on the balance sheet.

Additionally ONS now publishes a flow of funds presentation which gives a much clearer view of the interactions between the sectors, and between the UK and the Rest of the World. As usual with the ONS it isn't really indexed anywhere in the release calendar! You can find it though with a bit of perseverance

So now the private debt levels in the UK look like this:

Still the same picture really. The UK is deleveraging - mostly in the commercial sector. This shows the benefits of GDP growth and how it shrinks the percentage of debt very quickly. What is really interesting, though, is that the debt isn't just growing more slowly, it is actually shrinking in nominal terms.

All this means that the 'Credit Accelerator' has been negative now for four quarters, which suggests - if the concept still stands and my calculations are correct - that we probably have the brakes on. Debt reduction is weighing down on aggregate demand. It will be an interesting test of the idea to see if things start to slow up and everybody begins looking around puzzled wondering what happened, or if borrowing restarts with a vengeance to keep the party going, particularly with an election brewing.

Here's the chart:



Source: Office of National Statistics. Private sector debt based on tables NLBC, NKZA, NNQC, NNRE, NNXM, NNWK, NLSY, NLUA, NJCS and NJBQ (Lending and securities per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted). Data and calculations are available online