Wednesday, 6 May 2015

Vote or Vote None

One motivational trick I learnt very early on in my career is the frame constraint trick. If you have an unpleasant/boring task ahead of you, a simple mental trick is to compare it to a task that is even more unpleasant or boring. So if you're struggling to complete a report you can say to yourself: "Shall I complete this report or file my tax return" and suddenly the report seems more appealing. (Of course I would rather file a tax return because I enjoy that sort of thing, but I admit I'm not typical).

If you have kids you can use the same trick: "You can clean your room, or clean the toilets". And it works because people struggle to break out of a constraint frame. We're just not that good at lateral thought.

And so it has been with this interminably dull election campaign here in the UK. Our once in five year opportunity to answer the perennial question: "Which colour rosette is most appealing to you". This time the choice of rosette colour is much wider than it has been previously, and that is supposedly a good thing.

It used to be more often than every five years, but that intensity of rosette choice was considered too much for ordinary people to handle.

However we still have a fair amount of democracy. The problem is of course that we have Hobson's Choice. "You must choose" say the politicians. "You must choose from this list of rosettes".

Well no you don't. You have another alternative available to you if you can just break out of the deliberate framing trap and think laterally. You can say 'I reject the pallet of neo-liberal inspired disasters on offer that are all just versions of insanity'. You can say: 'I reject leaders who I wouldn't trust to run a bath never mind a country". You can say 'I reject the vision of terminal decline for the UK'.

You can vote none. I would urge everybody to read the instructions on how you can do that before making up their mind.

Please vote and be heard, but don't be constrained by the rubbish on offer.

Or we might all end up cleaning toilets.

Wednesday, 1 April 2015

UK Private Debt Levels - Q4 2014

Q4 data is now with us and the resulting private debt to GDP ratios look like this:
And so the private sector continues to delever as GDP finally grows. Interesting to note where the money to allow this comes from - particularly given all the rhetoric about austerity. But the numbers don't lie. The only sector to increase its leverage is the government sector.

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

UK Sectoral Balances - Q4 2014

The Q4 2014 data from the national accounts is out and as we can see the domestic private sector is almost in balance again: The 'balanced budget' within the entire domestic sector continues although with a central point on the negative side. However all domestic sector can be considered balanced within the margin of error, leaving the government sector to provide the offset for foreign net savings in Sterling. Obviously it is important to point out that these are aggregate net figures, and that can hide a lot of the specific detail. Again you would have to delve deeper to find anything specific.

Source: Office of National Statistics, tables RPYH, RQAJ, RQBN, RQBV, RPYN, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Data and calculations are available online

Thursday, 19 February 2015

Could Greece sue the ECB?

One thing I've noticed about the European Central Bank (ECB) is that it likes to publish woolly worded documents and then brief its preferred interpretation of them to those who hang around in the lobby. Those then get written up and disseminated to become The Truth in the classic repeated assertion fashion by people who like to get paid and no doubt wined and dined, but not think too much.

Thus the ECB acts in a political fashion as the politically independent entity it is within the European Union.

But it is not legally independent. It is governed by statute and the treaty and importantly subject to the control and jurisdiction of the National Courts within each member state (ECSB Statute Article 35) and the European Court of Justice.

There is a provision within the Treaty (Article 340) that states: "the European Central Bank shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by it or by its servants in the performance of their duties."

So we come to the thorny issue of Emergency Liquidity Assistance (ELA) and the rules governing it. There is no lender of last resort function delegated to the ECB within the ECSB Statute, and that means that function is delegated to the National Central Banks (ECSB Article 14.4).

The preferred interpretation of the rules put out by the ECB is that the National Central Bank has to ask for permission before issuing ELA. That is not how the rules are written. Lender of last resort is a National Central Bank competency and  "Such functions shall be performed on the liability of national central banks and shall not be regarded as being part of the functions of the ECSB".

So when handing out ELA that is not something the ECB has any say over. What it does have say over is whether such an action interferes with the 'Objectives and Tasks of the ECSB'. So what the ECB asks for in this instance is data so that the governing council can decide if things are being interfered with.

Providing that data however is a bureaucratic nightmare, so the rules provide an option to the National Central Bank to allow it to ask the ECB for ELA clearance. It has to refer itself to the governing council to ask for that clearance. What the clearance does is absolve the National Central Bank of the requirement to report ELA transactions until the value exceeds the determined amount.

So the ECB can only direct the National Central Bank to stop making ELA payments if it finds, by vote of the council, that the action would be in breach of the 'objectives and tasks of the ECSB'. Of course if they do that then they collapse the payment system in that member state. Yet Article 3.1 of the ECSB statute states that one of the 'basic tasks' of the ECSB is 'to promote the smooth operation of the payment system'.

It is not within the jurisdiction of the ECB to complain if commercial banks decide to purchase forms of government debt on the open market, or if a national central bank managing those commercial banks considers such debt to be perfectly sound for the purposes of its local operations even if the ECB doesn't for supranational purposes. Those are commercial decisions made by those entities.

IANAL, however I would submit that should the governing council of the ECB decide to withdraw ELA from any member state they are in breach of their duties under the statute of the ECSB and therefore liable for any damage caused to the member state. And they can be sued for that in the national court of the member state concerned.

Tuesday, 17 February 2015

Greece and the Art of Liquidity

The war of words with Greece is hotting up. The spin is so great I'm surprised nobody has been sick yet. It's like a fairground waltzer gone mad.

There have been at least six arbitrary deadlines that have come and gone all of which individually signalled 'The End' for Greece and all of which had no effect whatsoever.

Unsurprisingly.

Because it is all political rhetoric attempting to frighten the Greek people who, as usual for a people under threat, have doubled down and backed their elected government against the bunch of unelected bureaucrats who have got rather too big for their boots.

Let's look at the reality of the situation. The Eurozone is, at its root, a three layered hierarchy of liability pegs that make the liabilities of all the members the same effective value - which we call the Euro.

Firstly you have the commercial banks in each country. Those all clear their payments via the local National Central Bank. The National Central Banks (NCB) then have an account with the ECB on the TARGET2 system. In return for that they agree to follow the ECB's missives over interest rates and quantities.

In Greece's case the NCB is the Bank of Greece, and it is currently issuing Liquidity Assistance to the Greek banks as deposits leave the Greek banks and go elsewhere in the Eurozone - via the TARGET2 system.

Nothing will happen until the ECB takes a vote at the governing council to suspend Liquidity Assistance to the Greek banks, gets a two third's majority and the Bank of Greece obeys that instruction. There is no guarantee that it will, or will be allowed to by the Greek government, in which case the Greek banks can carry on clearing Greek payments like have before via liquidity assistance from the Bank of Greece.

The only actual sanction the ECB then has is to turn off TARGET2 clearance access and effectively remove the peg between German Euros (let's be honest about who is in charge here) and Greek Euros. At which point Greek Euros start to float.

And all that means is that for a Greek to pay a Spaniard they would have to exchange Greek Euros for German Euros via a third party transaction. Since the transactions are currently well matched, that's a nice little profit opportunity for some enterprising financial organisation.

Of course if the ECB pull the plug, then all the ECB imposed restrictions on the Greek central bank disappear at the same time. The Greek clearing system carries on as before and as we know from MMT a central bank issuing its own liabilities can maintain the banking system pegged to those liabilities for as long as it wants.

But I doubt that will happen. When it comes to pressing the big red button I suspect the bureaucrats will get very cold feet. Particularly if the Greeks are politic enough to assign a few names to that decision rather than allowing them to hide behind the decisions of a committee.

Which then leads to the other side of the whipping table. The so called 'running out of money' argument. Again this is so naive as to be laughable.

It helps if you realise that governments effectively spend bonds.  Then it all becomes clear. There is never an issue with Greece paying anything for as long as their paper is exchangeable for Euros. And there are a couple of very important drivers that make that likely to happen.

Firstly the IMF needs repaying. When you repay the IMF you have to pay them in their currency - the SDR. So what you do is take a bunch of Euros and ask the IMF for some SDR. The IMF then ring around those countries who hold the SDR in issue and get somebody to sell some for Euros. They always can because there are 'market making' requirements in play. The end of that transaction is that some countries have Euros, and the paying country has a deficit which it fills by selling bonds for those very same Euros (possibly via intermediate transactions within the Eurozone).

The IMF has its own liability back and the asset and the liability disappear in a puff of accounting logic (onto the allocation list on the IMF balance sheet in this case). Along with the income stream attached to that asset.

Secondly the ECB is about to undertake €60bn of QE every month starting 'no later than March 5'. What that means is that the overall system will become short of income earning assets as government bonds are drained by the central banks. Greece may be excluded directly from this process for the time being, but importantly it is the only government in the Eurozone that is on an expansion footing. Everybody else is busily digging their own graves by reducing deficits and other such nonsense and so is issuing as little as possible.

So that leaves new Greek government bonds as pretty much the sole source of anything resembling an interest rate in the whole Eurozone. It will be a very interesting test of 'liquidity preference' to see whether all this money that costs banks money to hold on deposit will stay there or whether they will be tempted by the Greek offering.

In other words it ain't over until the Fat Lady fails to show up at the bond auction.

Plus there has to be somebody prepared to press the nuclear button at the ECB - which is very likely to result in the end of the organisation and everybody's job there.

If I were Greece I'd push them all the way this time. There is nothing more to lose other than the chains that bind the nation.

Let's see how brave the bureaucrats are when their job is on the line rather than the countless millions in Greece and across the continent.

Thursday, 22 January 2015

Eurozone QE - making a bad problem worse?

So after much gnashing of teeth the ECB has finally capitulated and is going to start buying government bonds from the market in a desperate attempt to be seen doing something useful.

Of course they have swallowed the line that somehow this is going to increase bank lending across the continent and generate a 'wealth effect'. Of course it isn't because they have their causalities completely the wrong way around.

However the string pushing will no doubt continue until morale improves.

But there is an 'interesting' artefact about to happen due to the way they are planning on structuring their purchases.

The ECB is going to purchase €60bn of government bonds per month "on the basis of the ECB’s capital key". Which is the amount subscribed by the various national banks. In other words on a strict market value basis, the percentage of funds allocated to each country's government bonds will be determined by the capital share ratio.

Similarly the income of the ECB, which will quickly include a very large amount of bond income, is also distributed by the capital key.

The problem is that 10 year German Bunds are at a yield of 0.54% and Greece is 9.22%, with the others in between. And that means that when you add up the income from the bonds Germany will be contributing relatively less to the pot and Greece relatively more. Which when it is split out again as a distribution according to the capital key means that Greece will get back less income than it paid to the ECB in bond income and Germany will get more.

In other words the design of the ECB QE scheme will remove interest income from the private sector paid for by the tax revenue of the member states and then move that tax revenue from the smaller states to the German state - who will then save it.

That means the Germans are likely to have to issue less bonds, whereas the smaller states have to issue more and the dynamic may magnify as the months progress.

Whether the effect is significant I don't know. But it certainly isn't the correct way around.

Friday, 2 January 2015

UK Sectoral Balances - Q3 2014

I've updated the spreadsheets with the latest UK Q3 data from the national accounts and as we can see the domestic private sector is almost in balance with a greater %age of GDP in the error residual than net saved by the domestic private sector:
Even more strongly than last quarter each sector within the domestic economy is running a 'balanced budget' - leaving the government sector to provide the offset for foreign net savings in Sterling. Obviously it is important to point out that these are aggregate figures, and that can hide a lot of the specific detail. Because the aggregate is so enigmatic at the moment we would have to delve deeper to see what is going on.

Source: Office of National Statistics, tables RPYH, RQAJ, RQBN, RQBV, RPYN, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Data and calculations are available online