Wednesday, October 26, 2011

Blaming the Germans

In all financial transactions there are credits and debits. For the last few years there have been a lot of debits in Greece and the other, so-called, PIIG states. The converse has been that there have been a large number of credits in Germany.

Germany is not a paragon of fiscal rectitude- indeed it was Germany that first softened- by breaking altogether- the financial criteria by which the members of the Euro-zone are judged, but which they now insist must be applied strictly to other countries. Germany has amassed its credits by benefiting from a fixed exchange rate with the weaker economies of the south of Europe. The German economy has been out competing the rest of the Eurozone, which has been unable to balance their economies by either allowing their own currencies to depreciate, thus making their goods cheaper, or by allowing a German currency to appreciate, thus making German goods more expensive. This German free ride has caused considerable economic damage to those countries that are unwilling or unable to match the German policy of greater efficiency.

Now there is a bill to be paid: German industries benefited and provided capital to the German banking system, which in turn recycled capital into more loans to precisely those countries that were the debit to the German credit. Alas the capital can not now be repaid. The result is that the German banking system is now critically exposed to the southern tier of EU states.

Either the German banking system takes a major hit, and has to be recapitalized by the German state, or the debit states need to be rescued... by the German state.

The problem is that Germany refuses to do the one thing that would alleviate the crisis: backstop the rescue fund, the EFSF, with the full faith and credit of the ECB. This touches a serious nerve in Berlin, because such a policy carries with it a significant risk of inflation.

The problem, as always, is not that Germany wants to take over the EU, but that they definitely do not want to take over the EU.

Yet it is precisely the leadership vacuum that the Eurozone and the EU itself now faces that is creating an existential crisis. If Mrs. Merkel can not take decisive action, it will be taken by the markets. Then there will be debits amongst all the EU governments, and credits on a lot of trading desks, 

Wednesday, October 19, 2011

Time to overthrow the (tax) system

Yet another tax catastrophe is unveiled by the incompetents who control Her Majesty' Revenue and Customs service: over seven million people are paying the wrong level of tax. Though the story is reported as though it is a good thing that 4 million will get a repayment, the fact is the cost of fixing the problem will be in the millions.

The British taxation system is totally broken. As I have noted before, it is now 11,250 pages of mostly contradictory regulations. This is five times longer than the German tax code.

I is incredibly expensive to administer, and the costs of compliance- even a simple individual tax return often requires an accountant- are now running into tens of billions of Pounds, on top of an administration cost that is already around £ 20 billion every year.

This can not go on.

It is quite clear that simply tinkering with the system bequeathed by the OCD tinkerer, Gordon Brown will not get us anywhere. There most be a wholesale reform. Huge areas of tax must be eliminated, a simple, clear tax code is essential.

It shocks me that people in Britain are not out on the streets protesting at this shameful example of outrageous incompetence.

Tuesday, October 18, 2011

Asset shrinkage and the double dip

The latest stage of the Millennium depression is seeing political and financial leaders making one of the most dramatic policy mistakes yet.

The Banking system is being forced to boost its capital ratios by a combination of international (Basel III) and individual government legislation. Nothing wrong with that, you may think: the crisis has already proven that bank capital was too small to fund the holes that resulted from the collapse of the property bubble.

The problem is that global liquidity is already exceptionally tight: governments are seeking to tap the markets in order- among other things- to fund the banks that they have nationalized or to fund the European bail out fund, the EFSF. Of course those in the capital market that have liquidity are now exceptionally loath to invest it, unless in some haven deemed extra safe.

Banks cannot be considered particularly safe in the light of the crisis. As a result, even the strongest banks are not getting the amounts that they seek or, if they are, the terms are radically different- and far more onerous. 

The question has already arisen: what happens if banks can not get capital in the way they need? The answer is simple and brutal:if the banks can not improve their capital: balance sheet ratio by increasing capital, they must improve it by shrinking their balance sheets. In other words, banks are about to shut down lending again: a second credit crunch which may not be as severe as the first, but will be far more drawn out..

This is where the Millennium depression is about to get interesting. We have heard a great deal about the idea of a double dip recession based on a lack of liquidity: this is why central banks have been pouring liquidity into their currencies. However there is no escape from a double dip based on solvency. By adjusting the bank capital ratios at this critical point, the politicians and regulators have essentially guaranteed that the global economy will slow once more, and given the adjustments that banks are compelled to make, the second "dip"  will be much longer and more prolonged that the first.

We have already seen increasing political protest. I think that another three years of gathering austerity will cause some major political breakdowns. The UK already looks like a very fragile political construct, as does Russia, and political pressure on China, though hidden is still significant.... but all of that is a subject for another day.

Sunday, October 16, 2011

Adding Value

The economic problem about jobs is a bit like a game of football. A football game needs a certain number of referees and linesmen to keep the game going. However the point of the game lies in the skills of the players, not of the officials. Small children do not generally have pictures of the officials on their walls, even when a poor decision by an official may have substantial impact on the result of a match. 

The same issue arises with state sector jobs.

The fact is that poor regulation can kill an economy just as it would kill a football match.

To my disgust, my own party was proud to announce the hiring of 2000 new tax inspectors at the Lib Dem party conference. The fact that Britain now has more tax inspectors than soldiers is a matter of shame. The fact that we have the largest and most unworkable tax code in the developed world is a national scandal.

Imagine if FIFA, or some other criminal organisation, decided that there should now be 25 definitions of the offside rule and insisted that there be a single official for each interpretation, and that official must be paid more than any single player and you can begin to see the crisis that we have brought upon ourselves. There would be more officials than players, and the whole point of the game would be lost.

The Capitalist world is in grave danger of doing something similar. By failing to think about what kind of jobs are being created, political leaders have begun to believe that it doesn't matter. "A job is a job".  Yet that isn't true. A tax inspector is ultimately a net economic cost to society, an entrepreneur is a net economic profit. One is an official, the other is a player, whose taxes pay for the officials. 

Over complicated regulation is destroying the whole point of capitalism, which is that entrepreneurship can make money by adding value in services or products that can pay for benefits across society.

Watching the "Occupy" protests, I wearily understand the sense of injustice that these people feel. However it is not a question of more regulation of business, it is a question of sane regulation: 

We say that as a general rule, the rich should pay more tax than the poor, yet we then over regulate so much that the precise opposite happens, and many of the richest end up paying no tax at all. 

We say that we want to promote investment so that anyone who has the energy and the courage can become an entrepreneur. We then make it so fiendishly complicated to set up on your own that early-stage entrepreneurs spend more time complying with regulation than trying to build a business. 

We say we want a more open society, and then put so many obstacles in peoples way (including public ridicule and contempt) that only the most hardened party political cynics are likely to make it into our Parliamentary systems.

Meanwhile the political-regulatory complex reinforces itself: The politicians boast of their disasters, and apart from the deification of Steve Jobs, entrepreneurs as a group remain reviled. 

I can only assume that our political leaders were a lot of very strange kids who had Pierluigi Collina on their wall, instead of David Beckham.

Wednesday, October 12, 2011

Hunting the Fox

In the current blitz of publicity I am not sure I should say that I have met Adam Werritty a few times, and the Defence Secretary a few less, usually on pleasantly social terms.

The stories that the press are running today bear no resemblance to anything that I could recognize.

They are certainly not gay- so far as I can tell- and I think the innuendo is childish and rather unpleasant.    

Neither are they crooks. Adam Werritty is not some Svengali making millions out of his connections: far from it. It seems to me that out of principle, he refused to go on the government payroll as a special adviser, even though, for several years (as the world now knows) Adam was Liam Fox's SpAd. So, Defence contractors spoke to Adam Werrity? He is the Defence minister's closest adviser.

Is that what people hate? That Mr. Werritty would not sign up for the SpAd junketing? 

I can see that they should have signed up for more government oversight, but this press witch hunt is just plain nasty.

At the risk of seeming naive, I do not understand this storm of vague innuendo and misrepresentation. In fact it shows the press in one of their worst moods. If I was Liam Fox I would demonstrate the Boris Johnson approach:

Show no fear, and tell them to go to hell.

Of course Boris is usually guilty. Ironically I don't think Liam Fox or Adam Werritty are actually guilty of anything at all.

As for the story planted by "friends of Dr. Fox" - namely the whips office- that Adam is a "Walter Mittty" character: that, truly, is beneath contempt.

The Real Tax Scandal

The news that 98% of FTSE companies use tax avoidance is being reported in the usual "shock-horror" terms of corporate greed. However those protesting are aiming at very much the wrong target. When even the HMRC itself- never mind the corporate sector- uses tax avoidance structures, it is clear that something fundamental needs to change.

The UK tax code is the largest in the world. It currently stands at an astonishing 11.250 pages. This is five times longer than the German code. Many of the provisions of this code  are contradictory. It is impossible for a single person to understand, still less comply, with all of the provisions. The creation of the Brown system of tax credits has also made it incredibly expensive to administer: an estimated 3% of revenue or an astonishing £18 billion. That, of course, does not include the costs to the tax payer in complying with the code, and even for an individual that can be several hundred pounds and for a company many thousands. We can see that the British taxation system is sucking tens of billions out of the productive economy. There is no added value in jobs enforcing tax compliance.

In Estonia, the simple tax code costs around 0.07% of revenue to collect and is so simple that 95% of people complete their tax return online. The burden on the economy is a fraction of that on UK.

There is a serious problem in the UK taxation system, but it is not that of corporate tax avoidance. The fact is that the current system has become so unwieldy as to be simply unenforceable. 

Fair taxes must start from the effective abolition of the current code and a return to a system based on Adam Smith's four principles of taxation: Equity, Certainty, Convenience and Efficiency. As the great man himself put it:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

IV. Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

Tax reform in the UK is now long overdue.

Monday, October 10, 2011

The Quantum Revolution leading to Politics 2.0

"The fault, dear Brutus, is not in our stars,
But in ourselves, that we are underlings

Shakespeare, Julius Caesar

There come times when a strange conjunction appears in human affairs. Times when, in the words of WB Yeats:

"Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity."

The Millennium Depression, which has been with us now for nearly four years, is testing the apparatus of government to the utmost. The party conferences in Britain demonstrated a lack of vision that might have been predictable but was no less shocking for all that. It is quite clear that politicians across the world do not understand the scale of the convulsions that are gripping the global economy. In short the putative leaders of the world look powerless.

This happened before. Although Yeats wrote his poem in 1920 to describe Europe in the aftermath of the First World War, it gained an even wider currency during the period of the Great Depression and the rise of Fascism and Communism. The breakdown of the world economy after the Wall St. Crash of 1929 created a sense of disillusion and anger towards the institutions of democratic rule that then- as now- seemed powerless to cope.

That same sense of futility has already hollowed out much of the democratic debate in Europe.

Party politics have been largely abandoned to a coterie of cynics and idealists, who fail to convince even each other, let alone engage with the wider world.

Yet, paradoxically, there is even greater pressure on the non-democratic world. The fall of North African Arab tyrants is not automatically leading to worse regimes. More open government and with it greater freedom of ideas is making progress. Even in Russia, the "renewal" of Putin's Presidency is asking more questions than it answers. The Chinese leadership too is facing challenges from within that have been unimaginable since the Tian-an-Men massacre.

It is not a given that the economic crisis will lead to the return of fascism, or its twenty-first century analogue, though that threat exists.

The world wide web is creating a global and highly egalitarian forum for discussion. There is a greater global level of education than has ever been seen. That education is rooted in the scepticism of the scientific method, not the hierarchy of authoritarian diktat, whether Communist or Confucian. There are greater communications and more connections across more borders than have ever existed in the history of our species. 

The emergence of the inchoate and ad hoc "Tea Party" or "Occupy Wall St" citizens action groups, to my mind is the shape of things to come.

The point is that if we want a more open, tolerant, humane and decent society then we have to take the responsibility ourselves. The Murdoch scandal demonstrated how opinion and politics have been manipulated in the past. Now we source our ideas from a widening circle of information- and there is a clamour of opinion that can not be silenced.

Humanity may not have a high percentage of original thinkers, but those that exist are now more likely to educated and more likely to be connected to the global Agora- as a result they are likely to have a greater chance to make a contribution that will make a difference.

As a result, I believe that we are on the brink of a quantum leap in the way that our species interacts and governs itself, and one that will eventually lead to a far more pluralist arrangement than the state-based government systems that we have largely inherited from the Enlightenment.

The emerging Politics 2.0 that I dimly discern is own rooted in individuality. The population of humans is set to peak in the the late twenty-first century and then decline thereafter, and it is another paradox that the weight of numbers undermines the ability of global rulers to enforce conformity. Indeed Politics 2.0 will involve far greater individual autonomy and responsibility, as it becomes clear that state based welfare systems can not be relied upon. 

That recognition of the limited economic power of the state may force greater pluralism, and perhaps greater tolerance of difference, as we understand that solutions for our immediate problems can not be delivered by government, and may, indeed be bound up in areas far from our own doorsteps. This awareness of our own relative weakness- both as individuals and communities- will require greater global debate, since no state has the ability to fully impose their will on others for more than brief periods. Communities on the web are blind to passports in any event, and political debate will reflect a diversity that more accurately reflects our differences of view- for good and for bad.

Politics 2.0 will be non-hierarchical, even anarchic, but will be rooted in a social autonomy of citizenship that may be more genuinely free than any of the government systems we have tried so far. The claims advanced by the practitioners of religion have been tested to destruction in the scientific world we actually live in- and the role of those who claim divine mandates to control other humans is already declining rapidly. Religion, once a fundamental basis of ideology and community, will probably become an exclusively personal matter, since the power of coercion fails in the new world.

We live in a time of crisis. This is a crisis that will reform our political as well as our economic  relationships. In the twentieth century such a crisis led to National Socialism and then to the Second World War and then cold war confrontation with Soviet Socialism. These confrontations rallied pluralists around the conventions of democratic politics. 

Yet this crisis may not lead to the failures that Yeats writes about so eloquently. If we, as individuals make choices in favour of tolerance and pluralism, then we can not only avoid the abyss of global war, but also create a new forum for political discourse.

It may be idealistic, that does not mean it is impossible.   

Something I thought I should add: Christopher Hitchens:

"There are no final solutions, there is no absolute truth, there is no supreme leader, there is no totalitarian solution", 

Friday, October 07, 2011

So, what is the BBC actually for?

The BBC in the late sixties created a second TV channel, BBC2 and it gave the responsibility for that channel to David Attenborough. Under his leadership the BBC created programmes like Civilisation, The Ascent of Man and Monty Python's Flying Circus. The channel did not broadcast all day, and when it did not, it showed the test card (see above). There were two TV channels and eventually four radio channels. Attenborough was not only a talented broadcaster himself, he was an inspiring leader in television innovation. 

Now, decades later, the BBC has a huge number of TV channels and even more radio channels, plus a vast website and a plethora of broadcast formats, from HD to DAB.

Why is that?

Doubtless some BBC mogul would say that the Corporation was "responding to the needs of its customer base", "Reflecting the diversity of Modern Britain" or some other horseshit. Actually the Corporation has become a massive boondoggle at the expense of the British taxpayer and license payer. Every news story, from an earthquake, to the death of Steve Jobs (shock report: Steve Jobs still dead) to, God help us, the Oscars, requires tens or even hundreds of staff to travel round the world, premium class, to give the waiting world the details. 

The latest nonsense of shifting large parts of the corporation to Manchester, Salford and (despite denials for the past decade) to close the BBC TV Centre, reflects an organisation that long ago lost touch with what it was supposed to be doing.

This is a metastasized bureaucracy that can not deliver even what it was successfully doing forty years ago. Now we are supposed to feel a certain sympathy because the BBC needs to impose "cuts". Of course those cuts will not be to the bloated salaries and insane costs that the Corporation has racked up over the decades. In the same way that the Navy now has many more Admirals than it has ships, so the BBC no longer cares about programmes, and indeed these will be the first thing that get the chop. 

The time has come to sell or close much of the BBC and to slim it and its cost base back to a sensible level. Indeed, given that the private sector is now eating the BBCs lunch in terms of quality of programmes, including news programmes, I am tempted to ask, whether we even need the Corporation at all.

Of course nostalgia for the time of David Attenborough, when the BBC genuinely created programmes that "Inform, educate and entertain" will keep the larded expenses of the bureaucrats in business for a while yet, but like footballers or bankers it is hard to care any more.

Thursday, October 06, 2011

Putin jokes

(Source: Getty Images)

It has already almost gone beyond parody: Vladimir Putin's spokesman actually said, when Putin was compared to Brezhnev, that is was GOOD!  Brezhnev, far from being a brutal and doddery old autocrat, was actually a very positive leader in Russian History. Well compared to Putin, he certainly is: Brezhnev is now dead and can do no further harm.

No wonder that there are now quite a few Putin jokes doing the rounds, my favourite is:

The Federal Guard Service protecting President Prime Minister Vladimir Putin and Prime Minister President Dimitri Medvedev arrests an activist who is handing out leaflets on Red Square.

The man is taken by the KGB FSB to the Lubyanka for a search when they notice that the leaflets are blank.

"Why are they blank then?" The man is asked

"Why bother to print? Everything is clear anyway"

Wednesday, October 05, 2011

A Twit tweeting a Twitter

OK. I said I was not going to join Twitter, because hey, who needs a thought that can only be developed in a few characters.

However after a few requests and the fact that of course those few characters can be a link to a blog post, I have decided to finally join the ranks of the twitterati, albeit with bad grace.

Thus you can now follow this blog @CiceroBlog, and you are quite free to tweet up up a storm should you so wish.

The buttons are now installed.

Putin's Soviet nostalgia

Vladimir Putin has made a speech proposing a new Soviet, Eurasian Union for the countries of the former USSR. He suggests that working together will enhance the prosperity of all the countries of the region. Perhaps it will but, as usual, Vlad the Bad gets important details really wrong.

The European Union was constructed by states that were previously bitter enemies. As a result it insists on strict adherence to democratic values and forms. The so-called Copenhagen criteria include a deep commitment to the rule of law and human rights.

The Eurasian Union would be constructed by countries with little or no adherence to the rule of law and little or no respect for human rights. With the sole exceptions of Ukraine, Moldova and Georgia all of the putative members of the Union are rated Not Free by Freedom House, and are some of the most brutal tyrannies on the planet,

The fact is that having undermined human rights and democracy in Russia, Mr. Putin seems to be seeking to impose his will on the rest of the former Soviet Empire. In fact, as we know from his previous speeches, Mr. Putin deeply laments the passing of the former Soviet Empire.

Yet Russia lacks the capacity to impose its will inside its own borders, still less in other states that have been getting used to making decisions without reference to Moscow. As the upheaval in the North Caucasus grows, the outlook is not that Russian power will straddle new borders, but that it will shrink even inside the current Russian borders.

The reason is not hard to find: you can see it in the London High Court this week, where two of the more egregious criminals among the Russian Oligarchs are fighting it out. The fact is that the Russian regime is based upon a network of patronage and almost complete disrespect for law. The government and the oligarchs are the same people, while the lack of an viable opposition renders the regime incompetent and increasingly unstable.

The Russian veto of sanctions against the murderous Syrian regime reminds me that we should judge a man by his friends, and Putinista allies tend to be precisely such illegitimate regimes as Bashir-al-Assad, or Muamar Gaddafi, Islam Karimov, Robert Mugabe or Hugo Chavez. In the end, like them, he is building the foundations of his regime on very sandy foundations.

We can not say that we have not been warned: Vlad is an enemy of everything that the democratic West stands for and those such as Gerhard Schroder, Jacques Chirac, or Silvio Berlusconi who have been so accommodating to Russia should be regarded with dark suspicions.

Monday, October 03, 2011

Scottish Tories show their Colours

The election for the next leader of the Scottish Conservatives has become increasingly rancorous. Murdo Fraser, the current deputy leader has put forward an interesting and brave idea that the "Conservative" brand in Scotland is so toxic that it needs to be changed. The remaining four candidates reject his analysis and suggest that the way forward is simply to be more vehement about where they stand now.

The fact is though, that the Conservatives stand nowhere. They long ago lost the support of the urban proletariat, then the Kirk, then latterly even industry, and now farmers. Without renewal, they are condemned to die out- and the greatest part of this renewal is to stop reminding the Scottish people how much they opposed the new constitutional arrangements. 

A huge number of erstwhile Conservative voters have defected to the SNP, and yet the message does not seem to have come home to the party as to what this means.

The backbiting, both in public and in private against Murdo Fraser's stand suggests that he is facing an uphill task to say the least. However, if he does not win, the outlook for the Scottish Tories is even more terminal than if he does. The backward looking nature of the whole debate shows how far some Tories still have to go in order to recognize that much of their predicament is down to their own political choices. As old dinosaurs such as Michael Forsyth or light-weights like David Mundell emerge to "defend the Union", it is hard to even recognize what kind of Union it is that they want to defend.

While the Scottish Liberal Democrats begin to lick their wounds, it is possible to see where and how they can address the incredibly strong hostility to the Lib Dem participation in the coalition- the Lib Dems are toxic by association, but the Tories are just toxic. It requires the  kind of thinking that Murdo Fraser is putting forward for the party to even arrest its decline, never mind to make progress at the next Holyrood election or defeat the referendum on Separatism that Alex Salmond wants to time for maximum political advantage in a couple of years. 

Yet the SNP- lead by "His High Excellency" (allegedly Salmond's preferred form of address after any independence was established)- are far from invulnerable, even if Labour may lack the ability or desire to land the killer blow. A rejuvenated Progressive Party (or whatever brand that the Conservatives choose) could reanimate a new Federal relationship with the rest of the UK, which is what opinion polls repeatedly tell us that the Scottish People would prefer instead of SNP-style separatism. 

Of course if Murdo Fraser is defeated, the risk is that the Conservatives remain in the cold and can not participate in, let alone lead, a drive to overturn the dead-end socialism that has dominated and stagnated Scottish politics for half a century.

Murdo Fraser has demonstrated the kind of courage that is needed to lead his party out of the desert- the question is whether the Conservatives still choose to worship the dead idol of "Unionism" or to embrace the new political reality that can lead them back to the political heartland, and coincidentally rescue the common state from the risk of total dissolution.