There is quite a catalogue of actual and potential man-made disasters. They include the risk of Greece defaulting on its debts, followed by Portugal, Ireland and the collapse of the Eurozone, the hollowing out of real economy firms particularly in the UK and to a slightly lesser extent the US, the explosion in inequality of wealth and income symbolised by the obscenity of financial trader’s and bankers’ bonuses, the credit crunch, hedging and short selling, the size and power of financial sectors, the failure to distinguish between investment in real economic activity and purely speculative investment, growth of structural unemployment, the explosion of ‘hatred and contempt’ among ordinary people initially in Greece and Spain, poverty in sub-Saharan Africa, ideologically based policies of the IMF, WTO and the World Bank and the whole unsustainable enterprise destroying earth’s resources and climate, and even threatening human existence.
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All posts by Gordon Pearson
How To Spend It
The bonuses earned by the bankers, hedgers and various fund managers arise as a result of making fast, smart decisions about price movements in currencies, commodity prices, food, energy and key resource shortages, mergers and acquisitions and the like. The quick returns from such deals ensure that mini speculative bubbles keep getting inflated, and the smarter fund managers make money when the bubbles burst as well as when they inflate. And the smartest and biggest fund managers are able to create bubbles and control their inflation and bursting, that is except the really big, conglomerate bubbles that gather once in a while. So speculative trading continues to grow and the problem of how to spend the resulting bonuses keeps on growing too. It really is quite a problem.
It’s not as though it’s a one off. And it comes on top of a basic salary which very much more than pays for living expenses at quite a generous level. You can do the Veblen thing and go for some conspicuous consumption – conspicuous waste is really not regarded as attractive today even if one was so inadequate as to find it intrinsically appealing. But conspicuous consumption is still seen as admirable. The Financial Times ‘How to Spend it’ Saturday supplement provides some ideas. For example, £81,000 for the Philip Treacy hat as worn by Princess Beatrice (??) at the royal wedding, except it looks so silly. Or £78,000 for the ex-Kate Middleton St Andrews dress. Or a wrist watch, amount spent depending mainly on the weight of gold and diamonds. But really such spends, even if one felt desperate to bolster one’s identity that way, could only provide relatively minor contributions to solving the problem.
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The Lesson of Southern Cross
(Originally posted 10.6.2011)On 1st September, 1976, Professor Milton Friedman of Chicago University, economic theoretician and Nobel laureate, addressed the Institute of Economic Affairs in London. The title of his talk was “The Road to Economic Freedom: The Steps from Here to There”. Friedman, being the quintessential free market fundamentalist, took a dim view of the mixed British economy with around 60% of national income then being spent by government. He prescribed the ‘shock treatment’ of low flat rate taxes and wholesale privatisation which a few years later Margaret Thatcher implemented.
His justification for privatising provision of education and healthcare was simplistic in the extreme. ‘There is,’ he argued, ‘a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.’ Friedman didn’t actually have any data to support this contention, but added that ‘My son once called my attention to this generalisation, and it is amazing how accurate it is’ (See Friedman, M, 1977, From Galbraith to Economic Freedom, London: Institute of Economic Affairs, p57).
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Change is in the Air
There seems to be a fresh realisation that people do not necessarily have to put up with the tyranny of authoritarian regimes, despite the apparent demonstrations of power by those who dictate their lives. Thus: Tunisia and Egypt. Thus perhaps, with blood and violence: Libya and Syria, with Bahrein and Yemen in the rear, signalling to the Saudis that change is circling the airspace near them. But the Arab Spring may only be a small part of the story.
Authoritarian rule of the many by a privileged few, is not restricted to primitive dictatorships. The anger of their populations is shared by those in the democratic, “free” West. People are on the streets in Greece and Spain where the talk is of revolution. The aims remain incoherent because the annoyances are so widespread, but the anger is palpable. And it appears to be growing through the EU, even though their governments have all been democratically elected.
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The Big One is Coming
Two brothers. One got a real job and lived modestly at home with his parents. The other got the gambling bug and got clever at it. He found all sorts of obscure forms of gambling and developed sophisticated new techniques and methods and made a lot of money and lived a wild lifestyle. Till he lost it all and more, much more. And had to go to his father and plead to be bailed out. The amount was more than his father could afford. So he started to charge the working brother for his food and accommodation, and explained to his wife that they would have to tighten their belts so as to pay off the son’s huge debts. The brother grumbled but paid up. The important thing was, what did the wife do?
She considered her options. She could just walk away, but she wanted to keep the family together. The really important thing was to make sure it never, ever, happened again. After much thought, she told her husband she would only stay if he made the feckless one stop gambling and made him realise he had been gambling with all their lives. In addition he would have to be made to get a real job like his brother. And he would have to repay all the money that had been spent to bail him out, both to the parents and to his brother. If the husband didn’t agree with all that, she would leave.
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Merger Arbitrageurs: Corporate Rapists or Just Plain Thugs
The financial world uses all sorts of obscure language to hide their shabby activity from the public gaze. If the general public was aware, it might demand laws to make much of the action illegal, or at least terminally taxable. The phrase, merger arbitrageurs, is a typical example of such obfuscation. It sounds fairly technical and sophisticated, but is really nothing of the kind. It’s simply making money betting on the outcome of takeovers, either succeeding or falling apart.
A lot of money can be made. For example, hedge fund manager, Tyrus Capital, launched by someone referred to in the Financial Times as a “star trader”, raised $800m on its first day and doubled that in a matter of months. Imagine a humble manufacturer of widgets, employing real people, attracting such support. And the activity is expected to grow further. Tim Beck, a senior research analyst at the Stenham hedge fund told the FT. “Corporations have improved their balance sheets and cut fat. They have a lot of cash now. To grow in the difficult economic environment, they will have to purchase or merge with other companies.”
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Glencore and their ilk are screwing the world
The system is wrong, not the people. The financial sector is out of control and is screwing the rest of us. We know traders will trade in anything that looks like making a profit. We know they make profits out of rising prices, and falling prices, it’s just a matter of betting correctly. And we know, if they’re big enough, or close enough to one that is, they can start stories going which affect prices and then bet accordingly. Though we might have thought that was illegal. This month the Financial Times has run a series of articles on Glencore showing how they influence commodity prices for their own profit and everyone else’s loss, and how they are expected to increase their stranglehold in key areas.
Glencore, the world’s largest commodity trader, is in the news because its initial public offering of shares to the London Stock Exchange, scheduled for late May, is expected to value the company at between £60 billion and £73 billion, putting it comfortably in the FTSE100 index on its first day of trading. It may be big but the FT reports that Glencore has paid “almost no corporate taxes on its trading business for years in spite of bumper profits.” That may be no surprise since that’s how these financial sector firms are allowed to work, but the way it trades, revealed in relation to Russian wheat and corn, is more interesting.
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Why Don’t We Make the Bankers Pay?
In the United States, Goldman Sachs, hugely profitable out of the financial crisis, still rules the roost. According to Senator Carl Levin, chair of the senate permanent sub-committee on investigations, in the report on Wall Street and the Financial Crisis, it’s a “sordid story” of a “financial snake-pit, rife with greed, conflicts of interest and wrongdoing.” Levin said he would be recommending Goldman executives be referred for criminal prosecution. But that’s barely news. Goldman have paid for their criminality before. In the UK this startling story is hidden away in a few short paragraphs on page 26 of today’s Guardian (15th April). It hardly qualifies as news. Because everybody knows.
Economy Life Cycles
In 1914 UK owned 45% of the world’s foreign direct investment. America’s peaked at 50% in 1967, but is now less than half that, with the UK nowhere. Today China has just 6% but growing fast. America’s manufacturing productivity gains were in decline since 1970s (2.8% pa), well behind Germany (5.4%) and Japan (8.2%). American R&D expenditures in absolute decline. In relative terms the America’s real economy is following UK into absolute decline.
In a forthcoming book – ‘The Road to Co-operation: Escaping the Bottom Line’ – these various economies are identified as on different positions of the economy life cycle: UK and US being post-industrial, Japan and Germany, industrial, and China and India, industrialising. But what does post-industrial mean?
Capitalism without bankruptcy: too big to fail
Industrialisation is what fired capitalism. Prior to that most capital was held in the form of land and buildings with not a lot of spare cash lying around waiting to be invested. Nor any pressing need for it. But when industrialisation began in the eighteenth century, it required major infrastructural investment in things such as canals, turnpike roads and subsequently railways. These huge projects took years before producing any return and the sums required were way beyond the capacity of wealthy individuals. Dispersed shareholding and large scale credit finance were brought into existence to enable the massive capital investments of industrialisation.
Contributory sums from large numbers of relatively small investors were multiplied by the bankers new found capacity for lending a proportion of deposits lodged with them for safe keeping. Even Marx acknowledged the ‘capitalistic system’ worked, having ‘created more massive and more colossal productive forces than have all preceding generations together.’ That was years before joint stock companies were allowed to provide the luxury of limited liability to their shareholders. When Marx was working on the Communist Manifesto, shareholders responsibility for their companies was total. If the company went bankrupt, they were liable for its debts and would in all probability go bankrupt with it. The possibility of bankruptcy was what gave the ‘capitalistic system’ its edge. As widely asserted, capitalism without bankruptcy is like religion without hell.
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Fighting for Fairness by Remaking the Real Economy 