Tuesday, 8 February 2011

British Banks–The Gift That Keeps On Giving

The news that Mr Osborne intends to make the bank levy more stringent than originally planned. Needless to say, the apologists from the financial economy are crying ‘foul’ and warning of a mass exodus from these shores. The trouble is that they did exactly the same last year – with the introduction of the one off tax on bank bonuses – and here they are again, still trading in London.

Two aspects of the proposals need highlighting. First, there is a view prevalent in the country at the moment that whilst the banks caused the mess that all of the taxpayers are having to clear up, the banks are not enduring a fair share of the pain. At a time when libraries are closing, essential social services are being cut back, and education spending is being reduced, we are also seeing the prospect of record profits in the banking sector and a return to stellar bank bonuses. The banks will gain little sympathy beyond the circle of sycophants over these proposals. Many will feel that they may not go far enough.

Second, there is the question of how the economy should be balanced in the future. Many question the wisdom of returning to an economy that is top heavy in the financial economy. A reduction in the reliance upon the banking sector would actually make the economy a bit more resilient to the shocks within the global economy. Those of that view point to Germany as an example of a balanced economy that has weathered the recession quite well. This addresses the issue of bank exile. If the risky, toxic, bank operations were to be driven away from the UK – say to New York or Hong Kong – would it be such a bad thing?

To me, this seems like something of a turning point. Until now, Mr Osborne had appeared to have been a captive of the banking fraternity and the financial economy. Only recently did he say that the ‘Banker Bashing’ had gone too far. Now he is bashing banks himself. Does this represent a major change in policy? Does he realise that for his gamble to pay off, he needs to rebalance the economy away from financial services and towards manufacturing exports? Let’s hope so!

© The European Futures Observatory 2011

Increased bank tax to raise £2.5bn - UK Politics, UK - The Independent

George Osborne levy attacked by banks and Ed Balls - Telegraph

Monday, 7 February 2011

North African Dominoes

First Tunisia, then Egypt, and on to Jordan and Yemen. Ought we to have been surprised by recent events in North Africa and the Middle East? No! Despite the timing of the revolutions now under way, I don’t think that we ought to be surprised at all. Some futurists have been pointing to the fragile nature of this region for some years. In his book “High Noon: 20 Global Problems, 20 Years To Solve Them” (published in 2003), J F Rischard warned us of the potentially volatile and toxic mix of a growing cohort of young men in North Africa and the Middle East, who are impoverished (yet live on the fringe of unimaginable wealth), unemployed (who see their corrupt elders lining their own pockets), and bored.

At a seminar at the World Future Society conference in Chicago in 2009, as a demonstration of the International Futures computer simulation model, Professor Jay Gary and Dr Tom Ferleman showed us that a combination of economic and demographic trends, in conjunction with a number of social and political trends, were leading to the possibility of a significant event in North Africa and the Middle East in this decade. For a reasonably sustained period, the warning bells have been ringing and those investors and businesses that have been tuned into this potential hotspot are now able to deploy their contingency plans.

It is easy, one might object, to be wise after the event. The important factor now is to consider what might happen next – to look to the future rather than to the past. To my mind, the most significant future factor is that the ‘youth bulge’ in North Africa and the Middle East has yet to peak. Over the course of this decade, even more unemployed, impoverished, and bored young men will reach the age when they might be pre-disposed to action in changing their world. If this cohort can be fulfilled, then the prospect of the future (growth, employment, and prosperity) is very bright. If, on the other hand, nothing changes, then the prospect is quite dim.

The question with which we should be concerned is how we move from the default setting (unemployed, impoverished, and angry young men) to a better setting – both for the young men and for us. It seems obvious that such a transition is unlikely to occur without a great deal of external assistance. A consideration of the origins of that assistance is quite instructive. Let us first consider the two Asian superpower wannabes – China and India. North Africa and the Middle East is important to both China and India, not only as a source area for oil and gas, but also as part of a key trade route between their home markets and Europe. This importance to China is underlined by the region seeing the only area of naval deployment outside of the Pacific Ocean (combatting Somali pirates on the trade route). India also sees the western Indian Ocean as part of its vital national interest and has deployed its navy accordingly. The Arab world is important to both China and India, and yet both are unable to influence events there. This suggests that if this is the ‘Asian Century’, then it still has a very long way to go before it becomes apparent.

Russia remains a significant force in the world, but, once again, seems unable to influence events in North Africa and the Middle East. Perhaps this reflects a scaling back of Russian geopolitical ambition? Perhaps it reflects an inability to project influence in the Middle East? Either way, Russia now seems less of the force that it once was during the Cold War. This naturally leads on to a consideration of the other contestant in the Cold War – the United States. America is still suffering from the legacy of the Bush years (perceived as anti-Muslim, pro-Israel). The current President has done little to allay that view and may come to rue his disregard of the Middle East. Whilst the US may have sufficient hardware to guarantee the peace of the Middle East, it does not really have the trust of many in the Arab world. It will continue to suffer from this lack of trust until its support of Israel is less uncritical.

We could almost stylise the situation as America having the hardware to guarantee a solution, but not the software to do so. The vital software could be provided by the European Union. There are key post-colonial cultural links between North Africa and some of the EU member states. Europe has started to spread its influence southwards in recent years and may be tempted to accelerate the pace of this trend. North Africa has a ready source of young people that Europe needs, whilst Europe has an abundance of opportunities that would go some way to absorb the energies of the young people in North Africa. There is the potential for a very agreeable relationship here. Indeed, one could argue that if European jobs don’t go to North Africa, then North African workers – either legally or illegally – will come to Europe.

For this to happen, prosperity and the chance of self-actualisation that democracy promises needs to spread across the Mediterranean. There is an opportunity for the UK and France (the two primary former colonial powers) to take the lead here, followed by Spain and Italy (two secondary former colonial powers). Backed by the EU, underwritten by the US, the Youth Bulge could become quite a positive feature. If not, then we open ourselves to the spread of fundamentalism and radicalism that would be harmful to western interests.

By happy coincidence, France is now due to chair the G20. Let us hope that their tenure is used wisely!

© The European Futures Observatory 2011

Thursday, 3 February 2011

Manufacturing To The Rescue

Signs that Mr Osborne's Gamble is paying off. This seems to be down to the weakened exchange rate. Now that Sterling is strengthening again, I wonder if the gamble will continue to pay off?

Of course, there is a threat to this rosy picture. As factory gate prices are rising, so are the calls (mainly from the financial economy) for interest rate rises to stave off  the inflationary threat. Not to actually reduce inflation, but to show that we are serious about inflation. This is a bit like cutting off your nose to demonstrate a capacity to bleed. Anyway, if interest rates were to rise, we would expect Sterling to strengthen as well. That would damage UK manufacturing as UK goods became more expensive overseas. It would also reduce the prospect of Mr Osborne’s Gamble paying off.

I wonder if the Bank of England does want to choke the recovery, weak as it is?

© The European Futures Observatory 2011

BBC News - UK manufacturing growth at fastest since records began

Wednesday, 2 February 2011

Can Interest Rates Control Inflation?

As the titanic struggle between the real economy and the financial economy intensifies, the question has arisen about using interest rates as a tool to reduce the current bout of inflation. We have argued that they would be rather a bunt instrument simply because they would address the symptom and not the cause of the disease. The current bout of inflation is the result of the rising world price of commodities. This has mainly been caused by the recovery of the Icarus Economies in Asia, it is a demand led inflation.

Raising interest rates work by dampening demand to such a point that, as sales fall, companies respond by cutting their prices (or, at least, not raising them as fast). Demand is reduced by taking money out of the economy. That money doesn’t disappear though. Instead, it acts as a wealth transfer out of the real economy and into the financial economy. No wonder that it is the banks and financial institutions who are leading the charge for higher interest rates.

Which leads us back to the politics of the current situation. For Mr Osborne’s Gamble to pay off he needs the real economy to deliver growth through investment and exports. These are not helped by higher interest rates. Which creates a dilemma. In order to collect from his gamble, Mr Osborne has to turn his back on his natural constituency in the City.

We live in interesting times!

© The European Futures Observatory 2011

FT.com / Comment / Letters - Raising interest rates is a poor tool to fight inflation