Time for a change? August 14th 2016

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds…Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” – John Maynard Keynes, General Theory

It would be wonderful to have Keynes back in the 21st Century to get his take on the absurd contrivances of officialdom to translate his economic theory into practice. I suspect he would reserve a special place in the dungeons for a certain academic “economist” who wouldn’t recognise the real world if it bit him, but he would have the world’s central bankers and a raft of other “economists” and politicians to keep him company or in some cases to help the gaolers turn the screws in recompense for the duff ideas he sold them. Economics is now all about finding ways for governments to continue to borrow without anyone noticing.

Keynes urges us to be spontaneous and not turn to the “outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”. In other words, tear up the economic text books, bin modern portfolio theory while you are at it and let’s start managing the economy for the benefit of the greater good and not just the 1%, the banks, the global multi nationals, the oil companies and most of all the worlds politicians, who have not just given democracy a bad name they have pretty much destroyed it, aided and abetted by the mainstream media. This is not how Keynes has been interpreted by mainstream economists and it may not have been his intention either, but it makes a great deal of sense unless you are of course one of the aforementioned!

If you want to know what’s going on these days, it is quite simple, you just have to follow the money. Pork barrel politics is not a footnote in the history books; it is here, now and growing at a pace akin to that of the Fed’s balance sheet. It is hard not to wonder why global multi nationals and government officials would pay Bill and Hill three quarters of a million dollars for a couple of half hour speeches if there wasn’t a quid pro quo. The current president rules by executive order, by-passing the Senate and Congress, if he can’t get his way, and the politicians in those two august bodies are too busy, adding clauses to legislative bills to ensure that their own pet vested interests are catered for, to notice, or so it would seem.

Don’t think for a moment that UK politicos are whiter than white. Over here our fledgling oil fracking industry has been on the back foot, but Comewhat May has suggested that revenues that would normally come to the government should go to the land owners under whose patch the fracking will take place. In other words, a bribe to SHTFU when the planning consent gets “discussed” and to hell with the environmental consequences. Apparently this works very well in the US, but have you been to the parts of Texas and North Dakota where much of the fracking takes place? No I didn’t think so; they are both vast empty spaces where the frackers can get on molesting the water table pretty much undisturbed. In the UK you are talking about places like Lancashire from Blackpool to Burnley and in slightly more rural Dorset from Weymouth to Lyme Regis, just over the border in Devon. The UK water supply is fragile to say the least in the UK, especially when we have a dry summer (some of us will be able to remember what that is like…) and fracking will introduce a lethal cocktail of chemicals into the system. The oil companies and the politicos will tell you that all is safe and no harm will come to anyone, but given their track record in the truth stakes I wouldn’t even give them the benefit of the doubt.

Nor do we need a new nuclear power station, and much to the “surprise” of the French and the Chinese who are a) major owners of our utility companies and b) suppliers of outdated nuclear reactors, the government is actually having second thoughts. Given the “munnee” involved expect more bribes of one sort or another. We now have the technology to burn coal in a very efficient and environmentally friendly manner, but again we are not being told about this. Instead we are reminded of the London smog’s of the 1960s. Yes, I remember those days too, but back then all my school essays were written in ink out of an inkwell, computers we had none, TV was 2 black and white channels that shut down after the evening news and technology was getting a dial on your black Bakelite telephone which meant you didn’t have to speak to the operator to get put through to Aunt Dolly.

Would it be too much to ask the politicians to think beyond the next election and think about their children’s future and their children’s children who will have to live on this economically, as well as environmentally, blighted planet? Yes, unfortunately, it would seem it would…it is time for change don’t you think?

Clive Hale –The View from the Bridge – August 14th 2016

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The end of the beginning – July 8th 2016

“We are continually faced by great opportunities brilliantly disguised as insoluble problems”. Lee Iacocca

Having been in Spain for the last fortnight I count myself lucky to have been away from the gnashing and wailing; and let’s be clear that I am not talking about the footie, a competition that has always been a disappointment for England (but let’s hear it for Wales) and, for me, a metaphor for the EU and all its secretive machinations that drive a coach and horses through the democratic process; witness this week’s quote from Francois Hollande, “the City, which thanks to the EU, was able to handle clearing operations for the eurozone, will not be able to do them,” he said. “It can serve as an example for those who seek the end of Europe … It can serve as a lesson.”

At the end of the day the democratic decision of the British people is to leave the indubitably undemocratic EU; so how to grasp the great opportunity with which we have been presented? Trade agreements will of course be high on the agenda and the quicker this process starts the better. Comments from the more rabid EU bureaucrats, Juncker et al, suggest that some form of punishment is required “pour encourager les autres.” There is however something of a mellower tone from Germany where they understand that we consume a goodly percentage of their exports and imposing penal tariffs would be a shot in the foot; if not both feet. Europe is in fact declining in terms of trade volumes and it is more important that we look further afield, something, under the auspices of the EU, where trade agreements are negotiated en bloc, we have been unable to do on our own initiative for a very long time. After finalising a trade deal with China, Swiss exports quadrupled.

The weakness of sterling also gives us an advantage in our terms of trade and even a 4% EU tariff would be absorbed by the currency depreciation. After Norman Lamont’s unsuccessful battle with George Soros in 1992 the UK economy boomed as a result of sterling’s demise and there could be an equal opportunity here. The major winners may well be Britain’s young, who are not scarred by the experience of futile attempts to do business in places such as France. They haven’t been defeated by the pointless bureaucracy so endemic within the EU. They have a blank canvas. They carry no baggage and despite their protestations to the contrary I am reminded of Oscar Wilde’s observation that, “I am not young enough to know everything.”

Four key factors made Britain great. Democracy is clearly one; so the will of the people must prevail. If this result is “diluted” in any way, we really do have a more significant problem. Secondly and thirdly, rule of law and property rights are enshrined in our psyche, these are totally unaffected by this decision. Finally, as predominantly a trading nation we developed to what we are today and the referendum outcome enhances our ability to trade in the long run. Regardless of who leads this nation for the next few years, the entire population needs to throw off its depressive mind set. Change is upon us; let us again be a real example for what is good and democratic in this world.

A case for Brexit; the EU’s seven deadly sins

Whether your main interest is equality, liberty, democracy, economic survival, sovereignty, debt reduction, increased export potential, encouraging entrepreneurs, fiscal independence, social fairness, overpopulation, community mutualism or calling leaders to account, it has become abundantly clear since 2008 that you will have to forfeit every one of these aspirations if your preference is to stay within the European Union. John Ward blogger at The Slog https://hat4uk.wordpress.com/ 

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“When it becomes serious, you have to lie”.

“We all know what to do, we just don’t know how to get re-elected after we’ve done it”.

Both quotes by Jean-Claude Juncker, Luxembourg politician and President of the European Commission.

These quotes provide a fascinating insight into the psychology and intentions of the EU leadership. These people have a profound impact on our everyday lives, but that may be about to change. “It” just got “serious”; the UK is about to make a decision that could alter the course of history, not just for the UK and Europe, but for the rest of the world too. It was no accident that Obama recently visited these shores and gave us an ultimatum to toe the line, vote to remain and sign up to the Transatlantic Trade and Investment Partnership – by doing so, quite unintentionally, he started to tip the balance in favour of an out vote. The text of the secretly negotiated TTIP document has been leaked, exposing it for what it is; a license for big business to drive a stake into the heart of the democratic process. As the Brexit camp is now ahead in the polls it seems that the EU President Jean-Claude Juncker is poised to make another unwelcome contribution to the debate. Were he to do so the fate of the Remain camp is probably sealed; Brits as a rule don’t like being told what to do especially by non-Brits…

An EU remain vote will shackle the UK to a fundamentally flawed experiment in cooperation that, as a result of overly politicised economic mismanagement and policy error, combined with outright political incompetence, is, at best, highly likely to condemn Europe to a Japanese style economic stagnation for at least generation. At worst, total failure and acrimonious disintegration. Throwing off the shackles with a Brexit vote probably guarantees a recession, but from which the UK will emerge, almost certainly, financially stronger and definitely more independent; able to trade more openly with the most dynamic nations on earth.

We are told repeatedly that we will have more influence inside the EU. The reality is that we have very little influence unless we follow the lead set by Germany and France. Ask the Greeks how much influence they think they have. They recently asked the undemocratic, unelected Eurogroup of finance ministers for a meeting to consider ways of helping them to deal with their debt burden, but Dijsselbloem, the chairman said, ‘there is nothing to discuss.”

In a week’s time the UK electorate has an opportunity to shape this country’s economic and political destiny for generations to come. This momentous event at the ballot box is not the traditional one between left, centrist and right, or, depending on your political view point, good and bad outcomes. Much of the public referendum discussion has so far focussed on either emotive issues, where deeply held personal opinions are not going to be changed, or self-interests, which again are unlikely to be swayed. Most voters will cast their vote according to their own prejudices and self-interests. That’s simply human nature and totally understandable. Few will think of what outcome is best for the average person on the street. Even fewer will think forwards to what is best for our children, or even their children! As a group the young are more like to vote to stay in as I did in 1975 in the belief that we were joining a free trade zone when in fact Ted Heath, who took us in two years earlier, knew full well that political integration was the long term goal, but kept very quiet about it. If I had taken the trouble to read the Treaty of Rome that fact would have been clear, but I didn’t, and very few today are well informed enough to make a decision that will stand the test of time either.

The key issues are not debated by the main stream media and there are more than a few corporate and political vested interests hoping that no one will. The EU leadership has committed seven deadly economic sins.

Deadly Sin 1: Currency Manipulation:

“For a small, open economy like Cyprus, euro adoption provides protection from international financial turmoil.”

A quote from Jean-Claude Trichet, then President of the European Central Bank, in January 2008. After the provision of a number of emergency loans to Cyprus throughout 2012/13, on the 25th March 2013 a €10bn ECB bailout of the entire Cypriot banking system was undertaken. To fund part of the bail out savers deposits (above €100,000) were seized and used to bail out the bankrupt banks. To this day, capital controls, restricting the amount of money that can be taken out of Cyprus, are still in place. Contrary to Mr Trichet’s comments, adoption of the euro has simply been an economic disaster for Cyprus. And the worst part of this story; it was all entirely predictable. Why?

All rational economic justification for the EU went out of the window the minute that the single currency became a fact of life. Currencies act as the pressure valve for an economy. They weaken when economies are weak, thus encouraging increased capital inflows and inwards investment, therefore cushioning the economic fall, and eventually promoting recovery. The opposite is also true for booming economies, where currencies appreciate and ultimately dampen the euphoria, before the boom ‘overheats’ and becomes too destructive. The minute you block that pressure valve, by artificially fixing the value of currencies, as the advent of the euro has done in Europe, internal pressures begin to build. History is littered with examples of financial crises where official currency manipulation is a major symptom. Arguably, there has never been a totally successful currency union anywhere in the world, as the internal pressures always result in unbearable economic and/or social distortions. The euro is clearly no different; today social discontent and expanding economic disparities are plain to see and they are getting worse. When will the pressure become too great? And when will that valve blow?

Deadly Sin 2: Ignored History and Common Sense:

“Facts do not cease to exist just because they are ignored.” Aldous Huxley

A precondition of a ‘one size fits all currency’ is a ‘one size fits all interest rate’. You can’t have different interest rates within a single currency regime, as this would cause destructive internal capital flows, as money rapidly gravitated towards the highest interest rate.

One thing that is difficult to grasp is why national leaderships don’t study history before undertaking grandiose ideas. If the Europeans had looked across the channel to the UK, they would have realised this currency and interest rate point. In the UK, since the demise of the industrial revolution, we have needed multiple interest rates. Clearly as we live and work within a currency union known as Pounds Sterling this is obviously out of the question. Consistently the UK has needed lower interest rates and a weaker currency in the north, to stimulate that part of the economy, the “increased capital inflows and inwards investment” point, and higher rates and stronger currency in London and the South East to dampen down a booming economy there. So the UK has ended up with a highly skewed economy of economic and social distortions; simultaneous stagnation and continuous boom, or, known locally as the North / South divide’.

The only reason that the Pound Sterling union has held together for the past hundred years or so is that we have a highly developed central taxation system that redistributes wealth from the South to the North. And the only reason that this fiscal discipline has endured, is that the UK is on the whole a fully integrated population of only 65 million people, mostly of the same religion, speaking the same language, critically with much the same mind-set and attitude, and a 1,000 years of history binding us all together. In short, we are a homogeneous nation. Compare and contrast the UK’s dynamics to that of Europe, with 28 nations, 500+ million residents, from countless tribes and belief systems, speaking hundreds of dialects and having vastly different attitudes on European integration to name but one point of disagreement.

The cooperation and willingness simply isn’t present in Europe to allow wealth redistribution via a united fiscal regime. Without one, the distortions created by the single currency will continue to multiply until the pressure proves too great. Until we reach that juncture, expect periodic crises in countries like Greece as the pressure builds to the point where the powers that be feel compelled to fudge yet another solution.

Commentators have suggested that the EU is just a re-run of the founding of the United States of America. This is an inherently flawed argument. The US was a very young, sparsely populated country struggling to expand and survive when the dollar was adopted and the fiscal wealth redistribution structure was created. This is a very different scenario to that of trying to merge together 28 already mature and independent nation states. The United States of America is exactly that, “United”. Europe isn’t. The fiscally disciplined German tax-payers aren’t going to be persuaded to continuously send money to nations that they see as financially reckless and lazy!

Deadly Sin 3: A Refusal To Accept That They Might Be Wrong:

“More dangerous even than delusions of grandeur, are illusions of control.” Peter Warburton, Economist

Between 1999, when the euro became the de facto currency, and 2007, It looked like the above mentioned flaws were totally irrelevant. The European economy appeared to be doing very nicely; there was virtually full employment and wealth was being ‘created’ at a previously unprecedented rate. However, this was predominantly a debt-fuelled illusion. The Greeks, Irish, French, Spanish, Italians and Portuguese found that for the first time ever they could borrow money at German, Dutch and Austrian interest rates – the “one size fits all” interest rate that everyone loves in this scenario. However, economic prosperity generated by debt is only temporary in nature, as the debt ultimately has to be repaid, constraining future growth at the date of repayment. All debt achieves is to pull economic activity forwards to today, at the expense of the future growth. We have now reached the “future”.

The European banks were more than willing to lend to the garlic belt nations and the Celtic Tiger during the early noughties, as despite dire historic financial track records of these countries, the assumption was that Germany was back-stopping the whole system. So they borrowed; and on a truly heroic scale. That capital was “invested” – mostly wasted – in unproductive assets. Hence, the ghost estates of Iberia and Ireland that were only built because financing could be obtained very cheaply; there was no fundamental demand for such assets. The start of the US credit crisis laid bare the fact that we had witnessed the largest misallocation of capital that the world had ever seen, much of it in Europe and it was predominantly financed via debt.

Those outstanding debts obviously have to be serviced and repaid, or defaulted upon. The result today is that the European banking system is not only the most leveraged in the world, it is also in many instances saddled with eye-watering levels of bad debts that simply can’t be financed. Worse still, the European debts are often secured on assets that are in many cases virtually worthless. The banks are too weak to stomach the necessary write offs, so the game of pretence that all is fine continues for a while yet. See Deadly Sin No. 4

Deadly Sin 4: Ignored Obvious Problems and Blamed Everyone Bar Themselves For The Situation:

“Banking establishments are more dangerous than standing armies.” Thomas Jefferson, US President

The Anglo-Saxon nations, and Spain up to a point, are probably the only countries in Europe that have recognised, and then done a sufficient job of cleaning up their banks’ balance sheets, by forcing debt write-offs, asset sales and recapitalisations. With regard to their non-performing loans, the other Europeans have generally deployed their usual policy of ‘extend and pretend’. Basically, they “extend” the duration of the loans by continuously rolling them over, and all concerned “pretend” that everything is OK, in the hope that somehow the loans are eventually repaid. Hence, removing the immediate need to account for losses. (Side note: The Japanese deployed this policy extensively when they had a banking crisis in the early 1990s. They are still suffering the negative economic consequences today). But many of these loans are unlikely to be repaid. “Hope” is the most expensive word in finance and economics! Today, the Italian banking system alone has €360bn of non-performing.

This amount is equivalent to 17.1% of 2015 Italian GDP. It is a monumental number, and is a huge millstone around the neck of the Italian economy. Is Italy the new Japan? The Italian banking system simply doesn’t have the capital to offset such a colossal amount of losses; “extend and pretend” is their only option. The Italian government have just raised a €5bn bailout fund to offset investors’ angst about this issue; a sum that covers less than 2% of the problem…

It might surprise readers to know that the Italian banking system isn’t the most worrying case within the EU. That honour, somewhat surprisingly falls to Germany; and one bank specifically. That bank’s balance sheet is still 33 times leveraged on some capital ratio measures; an equivalent US bank would be about 12 times. It’s share price has just hit an all-time low, 90% down from the pre financial crisis peak. No prizes for guessing…

When the contrarians stand up to the authorities and point out that amongst other things that the European banking emperors are wearing no clothes, they are bullied into silence, usually via increased regulation and ridicule. The hedge fund community has been just such an example; they have been fall guys since 2008. This is an incredibly dumb position for the authorities to have taken, as with the right encouragement they could have been a very large part of the solution for the current economic malaise, not to mention the cleaning up of the banking system. Our economic leaders were too short sighted to see that.

So why hasn’t the European banking system yet collapsed under its own problems?

Deadly Sin 5: Employed Purely Short Term Thinking:

“A banking system is an act of faith. It survives only for as long as people believe it will.” Michael Lewis, Author

The main reason that the European banking system hasn’t yet collapsed is down to the European Central Bank’s negative interest rate policy (NIRP), and money printing largesse which has been extended to allow the purchase of European corporate debt nearly 10% of which is trading at negative interest rates as currently is the 10 year German bund. Mario Draghi famously said that he would “do whatever it takes” to save the euro. He simply can’t afford another banking crisis. Europe has had zero interest rates for roughly four years now, and recently they have actually become negative. All in an attempt to reflate economies by forcing savers to spend and consumers to borrow more, generating inflation in the process. Handily, ZIRP/NIRP also keeps debt servicing costs, on the monumental outstanding and growing debt mountains, to a minimum. The ECB is also betting that this makes debt defaults less likely so the weak banks do not have to recognise their losses.

The other major beneficiaries of the ECB’s current policies are governments. To fill the gaping holes in European governments’ finances that stagnating economies have left, their leaders are running huge budget deficits (i.e. borrowing more money, in the absence of sufficient tax receipts, to fund social commitments). To finance these, sovereign debt is being issued, but a very dangerous situation, commonly known as the “doom loop”, is developing.

The ECB creates €80bn per month out of thin air, with which it buys up assets (mostly bonds) from the banks and markets; hence injecting €80bn of new liquidity into the European financial system. The theory (dream) is that this liquidity is then lent to corporations and consumers generating a pickup in economic activity. In reality, very little new lending is happening as intended. The new liquidity is being used by the banks to buy up the very same sovereign debt that the governments are issuing. Hence the banks in countries like Spain are now holders of massive amounts of Spanish sovereign debt issues. As it’s issued by governments it is perceived as risk free. The governments need this process to continue to finance their ongoing commitments, and the banks are happy to proceed as they arbitrage a risk free gain, and give their balance sheets a veneer of strength.

However, if a highly indebted government gets into financial trouble, the banks are going to be imperilled as the debt that they hold will fall dramatically in value. And if the banking system has problems, governments will have to rethink their financing requirements; or face up to their voters and renege on over-generous past promises. That would cost votes, as Jean Claude Juncker’s second quote implies. European Central Bank financing of European governments, directly, is illegal under EU law, so this backdoor process via the banks circumvents the rules quite nicely. The fiscally prudent German Bundesbank (Germany’s central bank) are known to be livid at the whole scam, but Draghi knows that there is nothing that they can do about it, if they wish the EU to hold together.

How is a crisis, initially caused by too much debt, solved by issuing even more debt? See Einstein’s quote below for the answer.

Deadly Sin 6: Failed To Adjust Policies That Are Clearly Counter-Productive:

“Insanity: doing the same thing over and over again and expecting different results.” Albert Einstein, Scientist

The ECB’s monetary policies of the last eight years have been a dismal failure. Economic growth across Europe is generally stagnant, consumers aren’t spending and savers are still saving. Yet the ECB desperately carries on down the same route regardless. The central bankers’ holy-grail is to create inflation of around 2%pa, but this has failed to materialise. Exactly in whose interests is it to have a certain level of inflation? Virtually the entire population spend their weekends looking for bargains, i.e. lower prices (deflation), not higher ones (inflation)! The answer of course is politicians, who run consistent budget deficits with which to bribe the population, and indebted bankers. Both need inflation to reduce the future value of the outstanding debts that they are accumulating. There are a number of reasons why these policies aren’t just failing; they are now dangerously counterproductive.

Firstly, extremely low and now negative interest rates are a disaster for the banking system, as it forces depositors, the most dependable source of increasingly scarce bank capital, out of the banks. If the depositor is charged to keep their money in a bank, as they are under a negative interest rate regime, they are likely to withdraw it and keep it under the mattress. Have you wondered why governments are increasingly mentioning the abolition of physical cash in favour of electronic currencies? It would force you to keep your money in a bank as you wouldn’t be able to take it out in physical format Then you can be fleeced at will! Or you could buy some gold bars…now there’s a good idea!

Secondly, low and now negative interest rates are a disaster for the banks themselves, as it erodes their profitability. Lower interest rates reduce the margins that the banks can earn on lending. This weakens the banks’ balance sheets and constrains their ability to lend more. It also prevents the banks paying dividends, which weakens their share prices. It is worth noting at this point that the banking industry is highly inter-related. The banks don’t work in isolation, rather they all have multiple business dealings with each other. They are economic dominoes; one fails others will fall. The banking industry really is only as strong as its weakest link; and parts of the European banking chain are in a perilous state.

Thirdly, low or negative interest rates are simply robbing savers of spending power. This is especially evident amongst the silver-haired generation. When savers’ income is supressed, savers tend to save even more to replace the lost income, consumer spending falls as a result and we end up with deflation.

Fourthly, the Japanese have consistently employed ZIRP over the last 25 years. And by doing so have condemned their economy and population to economic stagnation. Capitalism only works efficiently if you allow ‘creative destruction’ to thrive. (Read the truly great economist Joseph Schumpeter’s works on creative destruction, I sincerely wish that our leaders would. Schumpeter, like all “great” economists never won a Nobel Prize). Businesses that can’t cover their cost of finance ultimately should go bust, but they are then replaced by more modern, better managed, more creative and more efficient businesses. Bad businesses should be allowed to fail, they shouldn’t be kept alive purely by central banks’ ridiculous monetary policies, they crowd out dynamism and creativity! If new businesses are allowed to flourish, they boost employment and productivity, and therefore GDP and wealth creation. The ECB’s policy of supporting “zombie corporations” is now suppressing wealth creation. They might not like it, but if we are to enjoy the undoubted benefits that the capitalist system provides, our leaders also have to allow the corrective consequences when things go wrong.

Fifth, and related to the above point of creative destruction, if incumbent companies can borrow at an artificially low interest rate, they use that to their apparent advantage. They don’t generally borrow and invest in risky projects such as research and development, or new plant and machinery, as the ECB hopes. They expand their businesses by buying up already established enterprises; a much more risk averse way to grow a business and purely because the cost of finance is so cheap. The impact of this is that the nation’s productivity collapses, as only new investment, and not purchases of existing businesses, are included in the nation’s productivity calculations. The Bank of England recently ran a competition amongst economists to come up with the answer as to why UK productivity was falling, despite their generous monetary largesse. It was because of their monetary largesse that productivity was so disappointing! Unsurprisingly, the powers that be refused to accept this point; it’s far too much common sense for them to contemplate – see Deadly Sin No.2.

Finally, and related to the productivity point above, the absence of GDP growth, so much desired by politicians and central bankers, is causing them to make other even more desperate decisions. GDP growth is simply the combination of two factors; the change in the size of the population and the increased productivity of that population. What happens if a region’s productivity is falling? Either, the region has to ramp up productivity, and, as we’ve seen above, EU monetary policy is directly counterproductive to this, or the population has to expand. If the indigenous population is shrinking, as it is in many European countries, immigration is the only alternative, which opens up a whole new set of issues.

What ultimately brings the European banks to their knees? Apart from Brexit how about Italian non-performing loans? Another Japanese crisis? An economic crisis in China? Bad debts in the global energy sector? Simply the next European recession? The longer the policy-makers dither and delay, ignoring the real issues hoping that something turns up, the worse the ultimate situation becomes. The banks are probably too weak to survive another major crisis and tax payers won’t stomach another big banking system bail out although if the bail in strategy is invoked they won’t have any say in the matter! See Deadly Sin No.7.

Whether we like it or not, the banks are one of the cornerstones of our complex societies. Without them, nothing gets made, moved or consumed. In the EU they are generally too weak to fulfil their traditional role of funding future development and economic growth. And even if they could, having just survived an existential crisis, banks remain unwilling to finance the most significant drivers of future economic development, entrepreneurial start-ups.

Deadly Sin 7: Kept The Proletariat in The Dark:

“So long as they (the Proles) continued to work and breed, their other activities were without importance. Left to themselves work, the care of home and children, petty quarrels with neighbours, TV, football, beer and gambling filled up the horizon of their minds. To keep them in control was not difficult.” George Orwell 1984

It is often observed that people hate the way that new EU legislation is brought in via the back door. In reality, new EU legislation isn’t totally hidden from view, you just need to know where to look for it, and then you’ll require a lawyer to decipher it for you!

How many European and British investors and savers today realise that cash held in a bank is potentially one of the riskiest assets that they own thanks to recent changes in EU law? Historically cash is seen as the opposite; a ‘safe’ investment. My guess is that very few people realise that on the 1st of January 2016 all deposits held in any EU financial institution became potential “bail-in” assets. I.e. if a financial institution fails, depositors’ cash can now be legally seized and be used to “bail out” the bank (as happened in Cyprus in 2013). As incidentally can all forms of debt instruments issued by a bank. And if you think that it can’t happen; it just has, in Austria.

Bank bondholders should shoulder the burden ahead of the tax payers if their institution fails, as they are actually being paid to take the risk. Blair, Brown and Balls let them off scot free, at the expense of taxpayers, after the 2008 banking crisis in the UK; a terrible mistake. So this legislation correctly lessens the burden on tax-payers in future. But for deposit holders, who currently earn virtually no return, to now be treated effectively as ‘bank capital’, is a fundamental change in rights. What is most frustrating about this, is that there has been no education on the subject, indeed no £9m leaflet campaigns to inform us!

How many other pieces of EU legislation have been passed, without our knowledge, which could impact our lives as seriously as seeing your life savings taken? The outright theft of assets, as this is how many would see it, is now the default option across Europe for bailing out banks. And it is all perfectly legal.


“We cannot solve our problems using the same thinking we used to create them.” Albert Einstein

1. A one size fits all currency and interest rate regime is a disaster waiting to happen in such a mature, diverse and inflexible European economy.

2. Successful countries, like successful companies, adapt and adjust as situations dictate. The EU is too dogmatic, views are too entrenched and attitudes too varied. There are twenty-eight separate voices around the same table to be heard; ‘decision stalemate’ is the only possible outcome.

3. The global economy suffered a near death experience in 2008, Europe’s leadership, as is their way, have completely failed to do anything about the causes of it.

4. Economic policy in the EU is not only failing, but it is exasperating the problems that it is meant to solve. Yet the ECB plough on regardless.

5. The banking system is the EU’s Achilles heel and it is in dire straits. One can’t be absolutely certain of another banking crisis in Europe, but all the signs are there. Draghi may yet pull further white rabbits out of his hat. If he does, they will serve to exasperate the more fiscally conservative nations of Europe. At what point does Germany say enough is enough?

6. The EU is now driving nations apart. For the UK, leaving the EU now will be economically painful; staying in, quite probably more so. What the “in” politicians fear most, is that the UK leaves, and does just fine! How likely is that? History would suggest very! The most obvious initial casualty of an ‘out’ vote is sterling, it is likely to fall in value on the foreign exchanges, and possibly quite a long way. Certainly against the dollar and yen although the problems it would bring to Europe as a whole might hurt the euro too. Ironically, the Bank of England has been trying to engineer a weakening of the currency over the last eight years but to no avail. A significant devaluation would probably generate a boom in the UK economy similar to that experienced after our ERM exit in 1992.

Someone is going to pay for the crisis that has been growing in Europe since 1999. Unlike the US and UK, the Europeans have mostly chosen to ignore their issues, rather hoping that they would just go away. Financial crises are historically paid for by a stealth confiscation of wealth, i.e. inflation, but that policy has clearly failed this time. So this crisis will ultimately be resolved by another form of confiscation; taxation, hyperinflation or outright theft.

Voters in the UK are about to decide if they want a seat at the table when this banquet of consequences is served to the EU. Is the UK better off seizing the initiative now, and putting the nation in control of its own destiny, rather than hanging around waiting, and then one morning waking up to a terminal crisis and the inevitable breakdown of the “Union”? Whatever you do on June 23rd please make sure you vote and think carefully before you do. It is unlikely that there will be another such opportunity in your lifetime.

Clive Hale – June 15th 2016 -The View from the Bridge

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Brexit Butterfly logo thanks to The Spectator click here to read their piece entitled “Out and into the World; why the Spectator is for exit”

Would you believe this? – April 24th 2016

It’s bad enough having to put up with lies and misinformation from our current European bedfellows, but to be lectured to by some American shows the extent to which the US thinks it rules the world. His admonition over Brexit and the threat of a 10 year “delay” before any trade negotiations can be entertained disguises the real purpose of his visit other than to pat his pet lap dog at No 10 on the head. If we leave the EU, the TTIP – the Transatlantic Trade and Investment Partnership – is dead in the water. His visit to Europe is expressly to ensure that the EU signs up to this trade “agreement” as the legacy of his Presidency – he hasn’t done much else of note to earn himself a lasting place in the history books has he? TTIP? You may be a bit short on details about this little scam, but that has been the deliberate ploy from the outset so pin your ears back, here’s the lowdown courtesy of the Independent.

The Transatlantic Trade and Investment Partnership is a series of trade negotiations being carried out mostly in secret between the EU and US. As a bi-lateral trade agreement, TTIP is about reducing the regulatory barriers to trade for big business, things like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations. It is, as John Hilary, Executive Director of campaign group War on Want, said: “An assault on European and US societies by transnational corporations.”

Since before TTIP negotiations began last February, the process has been secretive and undemocratic. This secrecy is on-going, with nearly all information on negotiations coming from leaked documents and Freedom of Information requests. MEPs may have sight of the wording, but only after signing the equivalent of the Official Secrets Act, not being allowed to take notes and not being given sufficient time to read the treaty in full. A truly undemocratic process; even if the Treaty is signed, parts of it will still be withheld from the public gaze.

The covert nature of the talks may well be the least of our problems. Here are six other reasons showing how the democratic process is being hung out to dry.

The NHS – Public services, especially the NHS, are in the firing line. One of the main aims of TTIP is to open up Europe’s public health, education and water services to US companies. This could essentially mean the privatisation of the NHS. The European Commission has claimed that public services will be kept out of TTIP. However, according to the Huffington Post, the UK Trade Minister Lord Livingston has admitted that talks about the NHS were still on the table.

Food and environmental safety – TTIP’s ‘regulatory convergence’ agenda will seek to bring EU standards on food safety and the environment closer to those of the US. But US regulations are much less strict, with 70 per cent of all processed foods sold in US supermarkets now containing genetically modified ingredients. By contrast, the EU allows virtually no GM foods. The US also has far laxer restrictions on the use of pesticides. It also uses growth hormones in its beef which are restricted in Europe due to links to cancer. US farmers have tried to have these restrictions lifted repeatedly in the past through the World Trade Organisation and it is likely that they will use TTIP to do so again.

The same goes for the environment, where the EU’s REACH regulations are far tougher on potentially toxic substances. In Europe a company has to prove a substance is safe before it can be used; in the US the opposite is true: any substance can be used until it is proven unsafe. As an example, the EU currently bans 1,200 substances from use in cosmetics; the US just 12. Irradiated food is another example not mentioned by the Independent. In the US the label “electronically pasteurised” is used to describe this function; more economy with the truth would be difficult to find…

Banking regulations – TTIP cuts both ways. The UK, under the influence of the all-powerful City of London, is thought to be seeking a loosening of US banking regulations. America’s financial rules are tougher than ours. They were put into place after the financial crisis to directly curb the powers of bankers and avoid a similar crisis happening again. TTIP, it is feared, will remove those restrictions, effectively handing all those powers back to the bankers.

Privacy – Remember ACTA (the Anti-Counterfeiting Trade Agreement)? It was thrown out by a massive majority in the European Parliament in 2012 after a huge public backlash against what was rightly seen as an attack on individual privacy where internet service providers would be required to monitor people’s online activity.  Well, it’s feared that TTIP could be bringing back ACTA’s central elements, proving that if the democratic approach doesn’t work, there’s always the back door. An easing of data privacy laws and a restriction of public access to pharmaceutical companies’ clinical trials are also thought to be on the cards.

Employment – The EU has admitted that TTIP will probably cause unemployment as jobs switch to the US, where labour standards and trade union rights are lower. It has even advised EU members to draw on European support funds to compensate for the expected unemployment. Examples from other similar bi-lateral trade agreements around the world support the case for job losses.  The North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico caused the loss of one million US jobs over 12 years, instead of the hundreds of thousands of extra that were promised.

Democracy – TTIP’s biggest threat to society is its inherent assault on democracy. One of the main aims of TTIP is the introduction of Investor-State Dispute Settlements (ISDS), which allow companies to sue governments if those governments’ policies cause a loss of profits. In effect it means unelected transnational corporations can dictate the policies of democratically elected governments.

 ISDSs are already in place in other bi-lateral trade agreements around the world and have led to such injustices as in Germany where Swedish energy company Vattenfall is suing the German government for billions of dollars over its decision to phase out nuclear power plants in the wake of the Fukushima disaster in Japan. Here we see a public health policy put into place by a democratically elected government being threatened by an energy giant because of a potential loss of profit. Nothing could be more cynically anti-democratic.

Do you get a say about whether this treaty gets signed as Obama wants? No you don’t and neither do our MPs nor any MEPs. This is all about BIG powerful corporations getting BIGGER and more powerful. This is why the leader of the “free” world, in thrall to BIG business, the banks and the mainstream media, is here telling us to be good chaps and toe the line.

If you want only one good reason to vote for Brexit, then the TTIP is it. Make sure you vote on June 23rd.

Clive Hale –The View from the Bridge – April 24th 2016

“Three dollar bill” courtesy of William Banzai http://wb7.hk/

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Postscript – April 12th 2016

Following up from our previous post, both the Fed meeting and the Presidential debrief were “Closed to Press” so we are all none the wiser except to say that central bank activity is “hotting” up and we can expect more of the unexpected, despite “guidance” to the contrary.

In Germany, Schauble has blamed the ECB’s cheap money policy of fomenting the rise of the anti-EU AfD party, which now polls at 14%. In Germany’s proportional voting system, a party needs at least 5% to be allocated seats.

“The ECB’s policy was already unpopular in Germany and the idea of helicopter money was the straw that broke the camel’s back,” said Joerg Kraemer, an economist with Commerzbank in Frankfurt. “People feel that ideas like this are dangerous.”

While one can debate how much of Germany’s public stance is posturing, the tide is clearing turning against Draghi in Europe’s most prosperous and powerful nation. And as Reuters adds, this weekend’s scandal marked a new low in the often fraught relations between the euro zone’s biggest country and the central bank’s Italian chief, who has recently bemoaned what he described as the “nein zu allem” – “no to everything” approach – a deliberate swipe at Germany.

The combatants will have a chance to settle their differences or continue to beg to differ at the IMF’s spring conference in Washington later this week and then on the 20th at the meeting of the 19 eurozone central bankers. We live in interesting times.

Previously at the “View” – Hold the front page

Hold the front page – April 10th 2016

Latest BBC business news headlines – “Martha Lane Fox joins board of Twitter” –  “Brighton Pier sold for £18m” – Cameron “I could have dealt with the tax question better”. All quite fascinating and totally irrelevant compared with the piece of news that the main stream media (MSM) have chosen to miss completely and that is that the Fed is to hold a closed, unexpected meeting under “expedited procedures”, on Monday, to discuss interest rates. Now that is news!

The question is, “Why?” Fortunately, we don’t have long to wait to find out as they will publish their discussions immediately after the meeting finishes. The rumour mill is of course in full swing. Over the past week almost anyone with a Fed lapel pin has been wheeled out to discuss the economy and to a man (and a woman) they fall into the camp that sees the glass half empty. More and more data is coming in below expectations. The first stab at the GDP number for Q1 is not released until the 28th but the Fed will already have a pretty good idea as the latest Atlanta Fed GDPNow forecast is just 0.1%.

The inference from all this dovish chattering is that they have realized that the rate rise was a big mistake and are about to execute a U-turn – Janet Yellen is no Maggie Thatcher! Their central bank colleagues in Europe and Japan followed the Fed’s rate rise by cutting rates into negative territory and announcing further QE. In both cases, and in particular in Japan, the initial euphoria evaporated very quickly and instead of their currencies weakening in response to such monetary debasement, they did just the opposite!

Now along comes the Fed on Monday knowing that having announced an “expedited” meeting, the markets are going to expect something pretty unusual. A cut back to zero, or even negative, plus perhaps a fourth version of the totally discredited economic gamble known as QE, would send the markets into raptures. Bond yields would fall and equities would soar perhaps taking the S&P 500 to new highs. But how long would the party last? The last two iterations of QE had far less effect than the initial blast, which had more to do with bailing out the banks than trying to boost the economy.

Talking of banks…It is not as if the Europeans didn’t have enough to worry about and then along comes Mario with negative interest rates. This is supposed to be good news as the banks can borrow at next to nothing and lend to willing corporates desperate to partake in the dynamic economic upswing. The only issues being that borrowers are neither willing nor desperate and the economy is far from dynamic. It is however cutting into their margins and the only way out is to further penalize account and deposit holders by charging them for looking after their money. This is not how banking is supposed to work is it? No!

At the press conference in December following the rate rise, Fed chair Janet Yellen said: “This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.” She said the economy “has come a long way”, though normalization “is likely to proceed gradually”, and “inflation continues to run below our longer-run objective”. With hindsight this was just plain rubbish; the economy has come a long way…she should have followed up saying and it’s looking very tired and now needs a good rest.

Could they be thinking of actually raising rates again? Highly unlikely. Inflation has ticked up, but is still below the long term trend and over 10 years barely above it. The jobs data is as confusing as ever but not so strong that a rate rise would be a foregone conclusion. There would also be the galvanising effect higher rates would have on the dollar exchange rate.US Inflation

The odds favour more QE, perhaps allowing the Fed to buy high yield debt where there is more than a little stress right now, and maybe a cut. Either way Janet’s credibility is looking a bit suspect and we wait with “eager” anticipation for Monday’s announcement.

Previously at the “View” – Central bank omnipotence is on the wane

The narrative is changing…central bank omnipotence is on the wane

Central banks have held the aura of omnipotence for some time now. Alan Greenspan was the first to have a “put” named after him, but the current incumbent is not so sure that she wants that title. She does not appear to be “sure” about many things within her remit, unlike her European counterpart who will do whatever it takes. However, both he and the governor of the Bank of Japan must be wondering, privately, just what the hell is going on. The more they push on their “piece of string” the less inclined are markets to take the bait. One of my favourite commentators, The Slog, sums up the recent spate of central bank pontifications and their true meaning for markets with his exquisite lack of deference.

·         Last week, it was Mario Draghi’s turn to boldly go where only idiots like Abe go, and he grasped the opportunity with both hands. It delivered about 25 minutes of effervescence to the European markets, after which the default position returned to enervation. You might say that the ECB boss had promised not just to pay the crowd to watch Christians being eaten in the Coliseum, but also totally wild and unpredictable lions to do the deed. Instead, a little bloke with a bald head shuffled into the arena and shouted, “Wait, wait – you’re making a terrible mistake, already”. At which point, a fat ginger Tom wobbled in and licked his hand.

·         It was the same old circus and the bread was stale, but come last Wednesday I doubt if anyone really expected anything different from Osborne or Yellen. The British Chancellor is like Presley’s Colonel Parker: a Barnham figure peddling half-truths while he switches the pea from one walnut shell to another. Janet Yellen offers not so much bread and circuses as Fed speak and courtesies…a weather-girl manqué forecasting that one day soon the rain will stop, and all those Arks really aren’t necessary at all.

·         But above all, these people are just waiters overpromising on the cuisine in a crumby restaurant: the restaurant has a quality problem, and their strategy is to increase the size of the menus. As the café is in a poor neighbourhood, they’re offering to take credit cards that none of the locals qualify for. Nothing works, and it’s obvious to everyone that it never will; everyone, that is, except them.

The mainstream media, notably the Racing Pink and the WSJ, are still plugging the line that central bank infallibility is on a par with that of the Vatican’s main resident. Until that view wavers the market’s belief system remains intact. We have seen some impressive rallies across a diverse range of markets as complacency about the central bank put overrides the fear factor. Just in time, we suspect, for the retail investor who cashed in his chips last year and has missed the rally, to climb back on the bandwagon of hope. Good luck!

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Brexit – where do you stand?

It will come as no surprise to regular readers that your scribe is firmly in the “Leave” camp. As a twenty something in 1975 I voted for the UK to join what was then the European Economic Community. At that referendum the vote was two to one in favour and the EEC was seen in Blighty as more of a trading bloc than the full blown “Union” that it has attempted to become. Few people remember that our first application to join the club in 1963 was vetoed by Charles de Gaulle, who said, prophetically, “that the British government lacks commitment to European integration.”

In 1979 we had the beginnings of the march (down the slippery slope) towards a single currency with the establishment of the European Monetary System (EMS), the introduction of the European currency unit (Ecu) and the exchange rate mechanism (ERM). The Ecu was a unit for the community’s internal budget and also took on some of the features of a real currency; it was used for travellers’ cheques and bank deposits. The ERM gave national currencies an exchange rate band denominated in Ecus. All EC members joined except the UK.

In 1981, before even Spain and Portugal, Greece joined the EC and then in 1985 Jacques Delors, who along with Helmut Kohl, the German Chancellor, was the driving force behind the euro and a rabid campaigner for political integration, became President of the European Commission. In 1987 the Single European Act abolished national vetoes and in 1990 the UK joined the ERM only to leave unceremoniously in 1992. It was clear to anyone paying attention at the time that a one size fits all currency union could never work…

In between we had the signing of the controversial Maastricht Treaty. It paved the way for monetary union and included a chapter on social policy. The UK negotiated an opt out on both, as well as on the 1995 Schengen treaty on border controls, which was at the core of EU values in allowing freedom of movement across Europe; another example of generating significant unintended consequences as we are now witnessing.

In 1999 there was something of a crisis of confidence as Jacques Santer, the President, and all 20 commissioners resigned after revelations of fraud, nepotism and mismanagement. Romano Prodi became President promising radical change in the way the EU is run. It would be safe to say that he didn’t make much progress on that front as it is now over 20 years since any firm of accountants has been willing to sign off the Commission’s accounts. It was also in 1999 that the euro became the official currency, but it was not until 2002 that euro notes and coins were introduced. Since then the debate over closer fiscal and political union has raged and we have had some very close encounters with disaster although the Greeks and Cypriots will tell you that “disaster” would have been preferable…

Now the debate focusses on the UK. Does the EU need us and do we need the EU? It would be a huge blow for the EU were we to leave, but they will no doubt continue on their cozy (crazy?) undemocratically elected path to eventual currency oblivion and the UK will do very well thank you very much, watching from the other side of the Channel. Woodford Investment Management commissioned Capital Economics to produce a report detailing the pros and cons of in or out. Their conclusion, which you can read about here, is that it makes little difference to the UK economy, but to my mind the choice matters a great deal. The following passage (my emphases) taken from a statement by Michael Gove, making his reasons for going against his cabinet colleagues and voting to leave the EU, is an excellent summation of the reasons for us to go our own way.

The EU is an institution rooted in the past and is proving incapable of reforming to meet the big technological, demographic and economic challenges of our time. It was developed in the 1950s and 1960s and like other institutions which seemed modern then, from tower blocks to telexes, it is now hopelessly out of date. The EU tries to standardise and regulate rather than encourage diversity and innovation. It is an analogue union in a digital age.

The EU is built to keep power and control with the elites rather than the people. Even though we are outside the euro we are still subject to an unelected EU commission which is generating new laws every day and an unaccountable European Court in Luxembourg which is extending its reach every week, increasingly using the Charter of Fundamental Rights which in many ways gives the EU more power and reach than ever before. This growing EU bureaucracy holds us back in every area. EU rules dictate everything from the maximum size of containers in which olive oil may be sold (five litres) to the distance houses have to be from heathland to prevent cats chasing birds (five kilometres)…

Individually these rules may be comical. Collectively, and there are tens of thousands of them, they are inimical to creativity, growth and progress. As a minister I’ve seen hundreds of new EU rules cross my desk, none of which were requested by the UK Parliament, none of which I or any other British politician could alter in any way and none of which made us freer, better off or fairer.

It is hard to overstate the degree to which the EU is a constraint on ministers’ ability to do the things they were elected to do. I have long had concerns about our membership of the EU, but the experience of Government has only deepened my conviction that we need change. Every single day, every single minister is told: ‘Yes Minister, I understand, but I’m afraid that’s against EU rules’. I know it. My colleagues in government know it. And the British people ought to know it too: your government is not, ultimately, in control in hundreds of areas that matter.

We are the world’s fifth largest economy; an economy that is more dynamic than the Eurozone, we have the most attractive capital city on the globe, the greatest “soft power” and global influence of any state and a leadership role in NATO and the UN. Are we really too small, too weak and too powerless to make a success of self-rule? On the contrary, the reason the EU’s bureaucrats oppose us leaving is they fear that our success outside will only underline the scale of their failure.

Does this matter to you? I do hope so. I’ll be “leaving” on the bus on June 23rd; will you come and join me?

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