There follows the text of my recent spiked article on austerity.

It is widely accepted that Britain’s coalition government, like many of its counterparts across the developed world, is wilfully imposing harsh austerity on the public. In this view, the government is subjecting the population to an ideologically motivated squeeze on living standards in a desperate bid to balance its finances. Widespread misery and hardship are portrayed as the inevitable result.

Unfortunately, this version of events is seldom questioned. Its rare critics tend to be fiscal hawks who argue that current spending cuts are insufficiently severe. There is an urgent need to interrogate the notion of austerity to draw out its underlying assumptions more clearly.

This is not to deny that many people are suffering from a squeeze on their living standards. On the contrary, it is to argue that what is happening is in many respects worse than generally recognised. Many have suffered stagnating incomes for a decade or so, and, even worse, the public is becoming increasingly marginalised from the democratic process.

This is one of those times where it helps to start by defining terms. The Oxford English Dictionary website defines austerity as: ‘Difficult economic conditions created by government measures to reduce public expenditure.’ Although economists typically add more jargon, this gets to the heart of the matter.

The definition is generally taken to embody three questionable assumptions: that public spending is being cut; that this reduction is the main force behind falling living standards; and that the economic malaise is essentially cyclical or short-term. Let’s examine each premise in turn.

First, the assertion that the government is cutting public spending, although not entirely false, is grossly misleading. A little historical perspective helps put the cuts in their proper context.

It is true that the Conservative-led coalition was elected to government in May 2010 on a programme that included public-spending cuts. Only it preferred the coy language of reducing the deficit – that is, the amount the government borrows each year – and promoting fiscal responsibility. Nowadays, the preferred jargon often refers to fiscal consolidation.

It is important to remember that in 2010, the UK Labour Party did not oppose spending cuts in principle. Instead it argued that the government’s fiscal retrenchment was reckless and premature. In other words, Labour claimed it would have made its implementation of cuts more gradual if it had won the election. Indeed, the Labour government’s final budget, introduced in March 2010, was already promoting ‘savings’ in public spending. The differences between all the main parties in relation to economic policy are much smaller than widely assumed.

There was a consensus that recovery should not be far off. If there were differences, they focussed on exactly when it was likely to arrive. After the economic contraction of 2008/2009, all the main parties assumed the economy would be able to turn the corner before too long. From that perspective, it seemed that public spending, which had surged during the recession, could be gradually reduced from its 2009/2010 peak.

Just before the emergence of the recession in 2008, the level of state spending in the UK – what is technically called total managed expenditure – was running at slightly below 40 per cent of GDP (39.9 per cent in the 2007/2008 financial year, according to the official Office for Budget Responsibility data). With the onset of the recession, it rose to a peak of 45.3 per cent in 2009/2010, while the level forecast for the current financial year is 42.5 per cent. Public spending had surged during the economic contraction as more money was pumped into the economy. In addition, the amount spent on what economists call ‘automatic stabilisers’, such as unemployment benefit, also rose as the economic situation deteriorated. According to the most recent budget – and this assumes the government will be successful in meeting its plans – it will not be until 2017/2018 that spending will be lower in real terms than it was a decade earlier.

So the government has made cuts in its total spending if these are measured from its peak at the end of the last decade. But in historical terms, this year’s level of spending remains high. Leaving aside the exceptional period from 2008 to 2012, the last time public spending exceeded the current level in real terms was in 1986/1987. The first part of the definition of austerity – that the government is trying to reduce public spending – should be highly qualified.

Second, the implication that recent cuts in public spending are responsible for stagnating living standards is misleading. The relationship between these two factors is not clear-cut. Living standards in Britain have in some respects deteriorated for a decade or so – predating the recent surge and subsequent fall in public spending.

According to a study by the Resolution Foundation, a think tank, median wages flatlined and disposable incomes fell in every English region outside of London from 2003 to 2008. So for a large section of the population, the squeeze on living standards predated the talk of austerity by several years. The parallel trend in America and Germany goes even further back.

It is true that spending cuts in certain areas, such as local authorities, have hit living standards. This does not necessarily translate into a drop in individual incomes, but it often means that the quality of public services has deteriorated. Benefit cuts can mean falling living standards for many, too.

However, the key driver in stagnating living standards for the bulk of the population is the lack of earnings growth. According to official statistics, real wages have fallen in real terms since 2009. By last year they had dropped to their level of a decade earlier. This trend was already becoming apparent to many before the peak in government spending.

Finally, Britain’s economic weakness is primarily structural rather than cyclical. In other words, it is not simply a short-term glitch that will fade away as recovery materialises. Nor can it be explained in terms of malevolent government policy or the callous pursuit of neoliberal ideology. It reflects, instead, a lack of underlying economic dynamism.

Those who favour the term austerity often condemn those who advocate spending cuts as austerians. Behind this derogatory label is the Keynesian assumption that the drive to cut the deficit at this stage is ideologically driven. If only the austerians would wait until a recovery emerges, then, so many Keynesians argue, it would be the right time to impose cuts.

This ignores the deep-rooted character of the West’s economic malaise. As Phil Mullan argued in a spiked essay in June, the average rate of economic growth started to fall in the 1970s and has dropped in every subsequent decade. This has been accompanied by low levels of investment and a poor record on innovation.

The Keynesian response is essentially to keep trying to postpone initiatives to tackle these structural weaknesses into the future. Rather than work out how best to promote economic restructuring and expansion, the emphasis is on muddling through by pumping money into the economy. The result is that fundamental economic problems never get resolved. They simply reemerge at a higher and more destructive level.

One result of this failure is that future increases in average living standards are likely to be weak at best. Poor economic growth is generally translated into a slow rise in household incomes. The government’s muddling-through approach is a key factor underlying aneamic growth.

So, characterising the period since 2010 as one of austerity is misleading. Public spending remains high, incomes had already started to stagnate before that year’s election, and the economic malaise is structural rather than cyclical.

However, there is one additional and arguably even more important reason for refusing to describe the recent period as one of austerity. That is not because of what the label includes but what it excludes. Critics of austerity fail to see any problem with the increasing marginalisation of the public from the democratic process. On the contrary, it is often a development that they welcome as a necessary precondition for economic stability.

There are countless examples of public disenfranchisement, but in the economic sphere perhaps the most blatant is the move towards independent central banking. It is often forgotten that until 1997, an elected politician set interest rates in Britain: the chancellor of the exchequer. This was important, as it meant they were directly accountable to an elected parliament.

The shift to letting central bankers set rates was made with the explicit goal of insulating an important part of economic policy from public pressure. Advocates of central-bank independence argued that there was a danger that politicians might be tempted to keep interest rates artificially low. The underlying assumption was that they would be tempted to kowtow to a supposedly greedy and foolish public.

Yet since 1997, central bankers have come to play an ever-more central role in economic policy. Not only do such elite technocrats set interest rates – they also feel free to make public pronouncements on fiscal policy, too. Elected politicians seem to want to outsource as many decisions as possible to the technocracy.

The charge of austerity misconstrues the economic challenges facing Britain and the West more generally. Not only is the economic malaise more deep-rooted than generally assumed, but the public is routinely excluded from democratic debate.

This is not austerity

10 Nov 2014

My latest spiked article  disputes the claim that Britain, and the West more generally, is suffering from austerity. The malaise is deeper and wider than the A-word suggests. I will post the full text in the next few days.

For those who are interesting I have written just had an article on the economic and financial transition of emerging markets in IPE magazine (free registration needed to read). However, I have not pasted the text here as it reflects the views of the interviewees more than my own.

It was a surprise to hear Mervyn King appear on BBC Radio 4’s documentary series on Germany: Memories of a Nation. The former Bank of England governor is well known for his passionate support for Aston Villa FC and his interest in cricket but not his German expertise.

However, on closer inspection it made sense. King was appearing on an episode focused on Notgeld (emergency money) that discussed Germany’s hyperinflation of the early 1920s. His job was to explain how a vicious circle can develop when governments attempt to finance their budget deficit by printing ever more money. That was certainly the case in the early years of Germany’s Weimar republic when prices ended up doubling every three and a half days. With the national currency, the papiermark, rapidly becoming worthless many local institutions started creating Notgeld as an alternative.

Although that turmoil was almost a century ago it still has important echoes for today. The former governor explained how the fear of monetary instability underpins contemporary German economic policy and indeed that of the European Central Bank. In his view such anxiety should be understood as a reaction to the financial disaster of the Weimar republic.

Although King’s observation is accurate it does not tell the whole story. From a post-War German perspective the economic dislocation of the 1920s is seen as the backdrop to the rise of Nazism. Therefore the new federal state designed economic institutions to be insulated from what it saw as excessive political pressure. That explains why the German authorities set so much store by the independence of the central bank, the Deutsche Bundesbank, and still insist on the ECB’s autonomy from government.

In any case King is not the only Brit suddenly showing an interest in Germany. A recent story in Der Spiegel, a German weekly newsmagazine, made headline news in Britain when it suggested that Angela Merkel, the German chancellor, would not accept the government’s demand for an upper limit on immigration from EU member states. It quoted unnamed “Berlin sources” as saying “that would be that” if Britain took such a stance.

Leaving aside the topic of immigration itself it is striking that Germany’s views are being taken so seriously in Britain. Gradually, almost unnoticed, German’s stance on financial, economic and political issues has gradually become viewed as significant.

This growing sense of Germany’s importance, at least among Britain’s elites, helps explain why there is an increasing interest in the country. The BBC Radio 4 documentary series on Germany and the associated British Museum exhibition are among several high profile manifestations. No doubt this year’s two big anniversaries have helped increase interest – its 100 years since the outbreak of the first world war and 300 years since the Hanoverian succession – but they are not the whole story.

Let us hope that this renewed interest in Germany is not confined to either the economic and financial sphere or the horrors of the Holocaust. There is much to be celebrated in the best of Germany culture including its art, music and literature.

At is happens German culture is something Mervyn King seems to have some appreciation of after all. He reportedly received a replica bust of Johann von Goethe, widely revered as the country’s greatest literary figure, when he retired as governor.

Understanding Germany is central to understanding Europe and indeed the world. Its history exemplifies both the best and the worst that humanity has to offer.

This blog post was first published yesterday on Fundweb.

This is the main text of my Fund Strategy cover story for November on the eurozone on the 25th anniversary of the collapse of the Berlin wall. I should emphasise that, given this is a piece for a financial magazine, I had to rein in my own opinions and quote experts from within the investment industry. The published text, including an additional box, can be read here.

 This month marks the 25th anniversary of one of the defining events of the past century. On 9 November 1989 protestors breached the Berlin Wall with sledgehammers and chisels. It marked the beginning of the end of a division of Berlin into a capitalist West and a socialist East. In less than a year, on 3 October 1990, Germany was reunited as a single nation under the auspices of West Germany. The old pro-Soviet state of East Germany was defunct.

The event was hugely significant not only for Germany but for Europe and indeed the entire world. Few people under the age of 40 are likely to remember that for over four decades a division between East and West scarred the continent. The states of eastern Europe – including Czechoslovakia, Hungary and Poland – were part of an Eastern bloc led by the Soviet Union. Trade, investment and indeed the movement of people between it and the Western bloc were heavily restricted.

Even less well understood is the economic impact of Germany’s subsequent reunification and the removal of the ‘iron curtain’ separating East from West. It is not possible to properly grasp the character of the European Union and the eurozone without seeing them in this context. Contemporary discussions of monetary policy or banking union, while they have their place, can never tell the whole story. The historical dimension is vital.

This article will therefore start by examining the impetus behind the creation of the EU with a particular focus on the eurozone. It will argue that the monetary bloc should be understood at least in part as a way of binding a united Germany into Europe. It will then examine what this has meant in terms of some of the key tensions within the eurozone: core versus periphery, Keynesianism versus anti-Keynesianism and integration versus populism. To conclude, it will consider the practical implications of these rifts.

The eurozone’s creation

It is easy to forget that the architecture of the eurozone was largely shaped by the perceived need to contain Germany. Although there were other factors at work – including maintaining competiveness with America and East Asia – the desire to curb the power of a newly reunited Germany was strong.

Indeed, official papers released in 2009 showed that two decades earlier Margaret Thatcher, then Britain’s prime minister, had forcefully opposed German unification. She took the view, common at the time, that a Germany combining its eastern and western parts would be too powerful. President François Mitterrand of France, who feared the consequences of having such a powerful neighbour, shared her view.

However, even these two leaders between them did not have the power to stop the impetus towards a united Germany. Instead, a consensus quickly emerged that Germany should be contained within a more integrated Europe. That way it could be part of a larger whole rather than a perceived threat to other European states.

As it happens, Germany was happy to go along with this arrangement. It exhibited no desire to pursue a unilateral path separate from the rest of the European Union. However, it was concerned that weaker and what it saw as more profligate European states could destabilise the new European institutions. For that reason it was always keen that the EU should have strict rules on fiscal policy as well as independent central banks.

This was the backdrop against which the EU’s 1992 Maastricht Treaty was signed. Before that the European Economic Community, as it was then, was focused on such matters as trade and agricultural policy. But under the newly created EU there was a drive for a far more thorough-going integration.

The new arrangements included convergence criteria covering such matters as inflation targets, government debt and fiscal deficits. Later in the decade these rules were extended under a framework known as the Stability and Growth pact. In 1999 the eurozone was established, a monetary union comprising the original 11 member states. Notes and coins denominated in ‘euros’ were introduced in 2002. There are currently 18 member states in the eurozone, including several countries of the former Eastern bloc. Lithuania is set to join in 2015.

Before continuing, it is worth remembering Britain’s place in this arrangement. Back in 1990 the plan was for it to adopt the euro in place of sterling. In October 1990, as a prelude to this, the pound joined the Exchange Rate Mechanism, in which several European currencies were tied to each other. However, in September 1992 the pound was forced to leave the mechanism after it came under attack from speculators. After that, successive governments decided that Britain should stay out of the currency union. The subsequent eurozone financial crisis that emerged in 2009 seemed to confirm the wisdom of this decision.

Core versus periphery

The first tension arguably embodied in the eurozone is that between the core and the periphery. It is widely held that tying together economies with widely different levels of competiveness is a recipe for trouble. For example, interest rates that are appropriate for one area of the eurozone might not be appropriate for another. Yet under the auspices of the European Central Bank (ECB) all countries have the same level of policy rates.

Similarly the fact that all eurozone members share the same currency removes an important mechanism for economic adjustment. Greece or Portugal, for instance, could not allow their currencies to depreciate in response to growing imbalances within the eurozone.

Of course, it is true that many states outside Europe, such as America, do themselves have regional variations in economic performance. But America has well-established structures that enable it to shift resources from one area to another if necessary. In contrast, the eurozone is made up of member states that still retail a substantial degree of autonomy. As a result, the economically stronger states can and sometimes do veto the transfer of resources to weaker economies.

Josef Joffe, the publisher-editor of Die Zeit, a German weekly newspaper, is one of many experts who have argued that such arrangements are flawed. He expressed scepticism about whether the monetary bloc could work in a 1997 article in the New York Review of Books entitled: “The euro: the engine that couldn’t”.

In a 2010 interview with Deutsche Welle, Germany’s external broadcaster, he argued that his earlier case had been vindicated. “It didn’t take a PhD in economics to know that you can’t have a monetary union without political union. I used the image of taking 10 train engines and coupling them together. The idea is that they didn’t have a lead locomotive. Each of these engines had to move at the same speed at the same time; otherwise the train would derail … and that has exactly come to pass.”

Philippe Legrain, an economic adviser to Manuel Barroso when he was president of the European Commission, has argued a contrary view. In European Spring: Why Our Economies and Politics are in a Mess he says the competitiveness story did not hold for Greece, Ireland or Spain. The imbalances that emerged in the eurozone were in his view largely the result of bad cross-border lending by banks rather than variations in national competiveness.

Fund managers tend to be pragmatic on such matters. Although many acknowledge the structural weaknesses of the eurozone they tend to argue that these can be resolved or are outweighed by the advantages.

Andrew Milligan, the head of global strategy at Standard Life Investments, says the policy framework proved even worse than many had feared when it was established. “Having monetary union without having strong fiscal union and strong banking union clearly led to the Greek crisis of a few years ago,” he says. However, he emphasises that creating an integrated economic bloc is a long slow process. A key challenge is to put structures in place, such as banking union, to allow it to work more efficiently.

David Moss, the manager of the F&C European Equity fund, sees both positive and negative sides to the eurozone’s institutional arrangements. “Pre-crisis interest rates were largely set for Germany and France,” he says. “For the likes of Spain and Ireland interest rates were set at far too low a level. If they were set at a domestic basis they would have been far higher.”

On the positive side, says Moss, the support of the ECB and the whole euro system helped resolve the problems. He also points out that doing business across the eurozone was “immeasurably easier” with a single currency. For one thing, it saved a lot on hedging costs.

“Whether we can disentangle the positives and the negatives I don’t know,” he says. He speculates that if member states had abided by the Maastricht criteria many of the subsequent problems would not have emerged.

Keynesians versus anti-Keynesians

Although there are often vociferous debates within the eurozone’s elite, the competing views tend to fit into one or the other of two camps. On one side are the anti-Keynesians or what are sometimes called ordoliberals. These are most often German, although the viewpoint is represented in other member states such as Finland. On the other side are the Keynesians, who tend not to be German, although there are exceptions.

The ordoliberals emphasise the importance of having rules to keep inflation on a tight rein and curb public spending. They are also suspicious of anything that could be seen to compromise the ECB’s independence. For example, two senior German representatives, Axel Weber and Jürgen Stark, resigned from the ECB in protest against its bond purchase programme. Similarly, Germany’s powerful constitutional court is wary of any ECB actions that seem to be beyond its mandate.

Keynesians, in contrast, tend to be more relaxed about both fiscal and monetary matters. In times of economic difficulty they argue that deficit financing is appropriate. They are also much more ready to support unconventional monetary measures than the ordoliberals.

Of course, the real world tends to be messier than these neat labels suggest. For instance, the Germans have broken the eurozone’s fiscal deficit target on several occasions. However, breaking the rules themselves and allowing others to do so are different matters. Germany’s big fear is that it will become the paymaster for what it regards as spendthrift eurozone states. The typical ordoliberal view is that excessive public spending by southern European states was the root cause of the crisis.

Germany’s view matters because it has the largest and strongest European economy. Although it tends not to play a proactive role it is willing to block moves that it sees as detrimental to its interests. Jens Weidmann, the president of Germany’s central bank and an ECB board member, is a tough critic of Mario Draghi, the ECB president.

The outcome of these conflicting views within the elite is a process of muddle through that never fully satisfies either side. Although both generally favour further economic integration, they have different visions of what it means. The ordoliberals oppose any measures that they see as too lax while the Keynesians are frustrated by what they regard as the rigidity of their opponents.

Integration versus populism

While eurozone’s leaders are split between ordoliberals and Keynesians, there is another important fissure to take into account. Much of the region’s population is wary of the EU, and in some cases it is actively hostile. This tension has manifested itself in different ways over the years. In 2005 the French and Dutch electorates refused to ratify an EU constitution. Britain’s Labour government had promised a similar referendum on the matter but decided not to proceed. In the event the proposed constitution was abandoned, but the EU’s 2007 Lisbon treaty included many of its provisions. In 2008 the Irish electorate rejected the adoption of the Lisbon treaty but this decision was overturned in a second referendum in 2009.

More recently, eurosceptic parties have gained significant support in many European countries. These include Britain’s United Kingdom Independence Party (Ukip), France’s Front National and Italy’s Five Star Movement. Even Germany with its Alternative für Deutschland (Alternative for Germany) now has a significant eurosceptic force.

Eurosceptic parties vary enormously in character. Some consider themselves on the left and others define themselves as conservative. Some, such as Greece’s Golden Dawn, are openly fascist, while mild-mannered technocrats lead others. What they all have in common is that they have become repositories for popular resentment against the EU in particular and established politicians in general.


The existence of all these tensions helps explain why the eurozone’s economic policy never seems decisive. There is a constant process of negotiation that never entirely satisfies either side or suits all countries. Muddling through is even more prevalent than in American or British policy circles.

Most recently the policy mix has been described in terms of ‘Draghinomics’. This is the combination of monetary easing, short-term fiscal stimulus and structural reform advocated by the ECB president. But even if these elements are accepted in principle, the devil, as always, will be in the detail. There is enormous room to debate the type of monetary easing, the extent of fiscal stimulus and the appropriate structural reforms.

It is particularly notable that an unelected technocrat, Mario Draghi, is taking the lead on such matters. A similar economic package in Japan, dubbed ‘Abenomics’, was introduced by the prime minister. But the eurozone’s politicians often prefer to leave key initiatives to senior officials.

The progress of banking union will be another key process to watch. In June 2012 the eurozone’s leaders agreed to have a centralised set of rules for banks in the region. The first element of this arrangement, the Single Supervisory Mechanism, is coming into force this month. Under it the ECB will directly supervise the largest institutions while it will have ultimate responsibility for all banks. In 2016 the other main plank of banking union, a Single Resolution Mechanism, is due to become fully operational. It will determine how banks that get into difficulties will be restructured.

Whatever tensions exist within the eurozone its leaders are united in their determination to keep it together. As Stephen Macklow-Smith, a portfolio manager within the European Equity Group at JP Morgan Asset Management, says: “The strength of will to keep this [eurozone] show on the road is way higher than anyone in the US or the UK thinks.” The Anglo-Saxon world has “underestimated the glue that holds the whole thing together”.

Whatever flaws the eurozone may have, it is here to stay for the foreseeable future.





The extent to which inequality has come to be blamed for most of the world’s economic problems is astounding.

Will Hutton, principal of Hertford College, Oxford, summed up the charges in an Observer article earlier this year: “It’s inequality that is behind poverty, ill health and the growth of the welfare bill. It’s inequality propelling the escalating demand for credit. It’s inequality that has created our fragile banking system and its still feral proclivities. It’s inequality that has provoked the collapse in productivity and the stagnation in innovation and investment… This is the truth that cannot yet be spoken.”

Hutton has a left-wing reputation but of his questionable claims the most absurd is the last. Many senior figures from Barack Obama to the Pope and David Cameron to the head of the International Monetary Fund have condemned excessive inequality. They are not necessarily correct but it does indicate, contrary to Hutton’s claim, that such criticisms are thoroughly mainstream. Even the Guardian’s economic editor has belatedly acknowledged this is the case.

Indeed, I wrote a Fund Strategy cover story on the topic two years ago but have returned to it because it has become so prevalent. Several of this year’s most prominent economics books have covered it, including Thomas Piketty’s Capital In The Twentieth Century. Martin Wolf’s The Shifts and the Shocks blames inequality for weak demand and lagging educational standards. Atif Mian and Amir Sufi’s House of Debt links inequality to debt by arguing that borrowing by those with low incomes was a key cause of America’s recession.

There are many problems with these arguments but let us take three for now.

First, there are big issues with definition. What kind of inequality is being discussed? Wealth or income? If the latter, is it wages or entire income? And should the focus be on individuals or households?

The choice of definitions is not trivial. Although inequality has widened by many measures in many countries, it has not done so universally. For example, according to a study by the Institute for Fiscal Studies, the Gini co-efficient for income inequality in Britain is lower now than in 1990.

Next is the question of the appropriate measure of inequality. Perhaps the Gini co-efficient, the Theil index or a comparison of different percentiles?

And what about cause and effect? Just because inequality rose in the run-up to a crisis, it does not always follow that it is the cause. It could be that crisis tendencies caused a widening of inequality. Or it could be that a third factor caused both. Or it may simply be a coincidence.

In the hope of untangling these factors, I was interested to read a study by the Washington Center for Equitable Growth. Although the authors of How are Economic Inequality and Growth Connected? are partisan, it is a reasonably comprehensive literature review.

To its credit, it raises the question of causality but its conclusions are guarded, such as “more work is needed to fully understand the specifics of how inequality affects growth”. It notes most studies have argued there is a statistically significant negative correlation between inequality and growth.

To the extent there is an insight, it is that the relationship tends to hold over the long term rather than the short term. The study also argues that income growth is particularly disappointing for those not at the top. However, the paper comes nowhere near establishing that widening inequality causes low growth.

Finally, mainstream critics of inequality do not advocate equality of either income or wealth. On the contrary, they typically go to great pains to say they are not against inequality in principle – their concern is that the degree of inequality could be reaching extreme levels.

In many cases there is little emphasis on the redistribution of income. Their main concern is for more government regulation to mitigate the effects of widening inequality.

It is hardly a spectre that will haunt the rich and powerful.

A slightly abridged version of this article was published as my November Polemic column in Fund Strategy magazine.

There is something profoundly disturbing about the reaction to Russell Brand’s rants but it has nothing to do with his garbled slogans or juvenile demeanour. It is rather that many influential people seem to respect the middle-aged comedian’s views.

His recent appearance on the BBC2 Newsnight programme was more of a tirade than an interview. Much of it consisted of him stringing together catchphrases such as “creative direct action”, “corporate hegemony” and “built-in obsolescence”.

He evaded questions more shamelessly than any politician. Instead of engaging in reasoned debate he simply shouted down Evan Davis, the interviewer. Such behaviour points to a profound intolerance on Brand’s part.

It would perhaps be naïve to expect anything else since he is a comedian and he is trying to promote his new book on Revolution. But the fawning response from Davis was truly cringe worthy. The interviewer conceded that Brand “has a lot to say”, had written “a very interesting book” and had “engaged more people in thinking about these issues than any politician”.

Jeremy Paxman was more negative in his Newsnight interview with Brand a year earlier. The TV veteran called him “facetious” and a “very trivial man” but also said he agreed with many of Brand’s preoccupations.

Nor is it just the BBC which has indulged the comedian. The Paxman interview was prompted by Brand’s stint as guest editor of the New Statesman, one of Britain’s best-known weeklies. The Guardian newspaper has also fawned over him. Even the Financial Times has indulged him with an interview by Lucy Kellaway , one of its leading columnists, in its weekend “Lunch with the FT” slot.

No doubt some readers will argue that some of these outlets represent the usual left wing suspects but that is the wrong way to look at it. As I have argued extensively elsewhere there is nothing inherently radical about complaining about extreme inequality or the destruction of the planet. On the contrary, both are compatible with conservative views.

For example, both Barack Obama and Warren Buffett, one of the world’s richest men, have used the spectre of extreme inequality to promote the idea of “shared sacrifice”. In other words they have tried to persuade the public to accept curbs on their living standards on the grounds that wealthy people should too.

Similarly calls to tackle climate change are also often used to promote popular sacrifice. Ordinary people are hectored to use less energy, eat less meat and rein in consumption more generally for the sake of the planet. There is nothing radical, let alone revolutionary, about campaigns to lower popular living standards.

In any case there is nothing coherent about Brand’s diatribes. He simply rushes from one cliché to another like a petulant teenager.

The earnest acceptance of such statements by prominent individuals speaks to deep intellectual disarray. It shows a lack of confidence even in basic norms such as an attachment to the importance of prosperity.

In a way this is reminiscent of Hans Christian Andersen’s tale of the Emperor’s New Clothes. It is about time that Brand is called out for spouting gibberish.



The next scapegoat

14 Oct 2014

Fund managers may not realise it but they are already being set up as scapegoats for the next financial crisis. Banks got most of the blame for the 2008-9 crisis, and were severely criticised for their role in the eurozone’s troubles, but it looks like asset managers could be next.

Just look at the latest edition of the twice-yearly Global Financial Stability Report from the International Monetary Fund (IMF). Although the discussion is under the heading of shadow banking, with a whole chapter devoted to the topic, it makes it clear that this includes asset managers. It leaves no doubt that fund management is seen as a potential source of future financial instability.

For those unfamiliar with the jargon the term shadow banking is defined as credit intermediation outside the conventional banking system. Sources of such credit can include investment funds – particularly bond funds and money market funds – and insurance companies.

Shadow banking has become more important recently at least partly because of the tightening of bank regulation. If banks are less able or willing to lend it is not surprising that corporates turn to other sources. For example, firms can circumvent traditional borrowing by issuing bonds that are in turn purchased by investment funds.

By some measures this trend is particularly pronounced in Britain. The IMF estimates that shadow banking assets account for more than twice the share of GDP than in any other area.

From a regulator’s perspective the rise of shadow banking is a problem as it is less tightly regulated than conventional banking and lacks a formal safety net. New forms of credit intermediation therefore increase systemic risks. As the report argues: “Continued financial risk taking and structural changes in credit markets have shifted the locus of financial concerns from the banking system to the shadow banking system—particularly to asset managers— thereby increasing market and liquidity risks.”

The inevitable conclusion drawn from this discussion is that shadow banking needs to be more tightly regulated. Collecting additional data is posed as the first stage of this process but there is no doubt it will go further.

Much of this may sound like common sense but it would be wise to be more wary. Bankers were in many ways set up as scapegoats for the last financial crisis. Politicians in particular were keen to one-sidedly focus on the role of banks in the inflation of the preceding financial bubble.

This is not to argue that bankers were entirely innocent. Clearly they played a role. But what has become the conventional narrative focuses far too much on them and far too little on the role of government and central bankers. For instance, easy credit also played a role in the creation of the bubble. More fundamental structural weaknesses of the economy also tend to be downplayed.

Recent history should put the current discussion of the dangers of shadow banking in a different light. Technocrats and politicians are keen to get their retaliation in first rather than accept any blame for future economic difficulties.

Fund managers have been warned.

This blog post was first published today on Fundweb.


This is my column for the October issue of Fund Strategy.

Few seem to have noticed how the role of mainstream economics has changed in recent years. In many cases it could reasonably be called the art of making excuses for poor economic performance.

Until a few years ago, many policymakers were congratulating themselves on how the world economy was doing. There were claims that technocrats trained in economics could guarantee economic stability. It was widely argued that by pursuing prudent policies and targeting inflation, the world’s central bankers could make crises a thing of the past.

Reality begged to differ. With the emergence of the economic crisis in 2008, growth numbers plummeted and the excuses for the poor performance of the developed economies multiplied. Some talked about a “new normal” of slow growth while others claimed the low-hanging fruit of technological innovation had all been picked. The most recent and probably most influential explanation is secular stagnation hypothesis.

Larry Summers, a former US Treasury secretary, coined the term at an International Monetary Fund (IMF) forum in November 2013. Many other influential figures have taken it up, including Paul Krugman (Nobel laureate in economics) and Martin Wolf (chief economics commentator of the Financial Times). It also had the IMF’s implicit support in its April 2014 World Economic Outlook. The 19 July edition of the Economist illustrated the idea with a cover image of a frustrated jockey trying to giddy up a giant tortoise draped in the American flag.

Now, a policy portal set up by the Centre for Economic Policy Research in London, has published a free e-book on the topic ( Secular Stagnation: Facts, causes and cures Edited by Coen Teulings and Richard Baldwin ( 2014). It pulls together many of the main proponents of the hypothesis, including Summers, Krugman and Olivier Blanchard, the IMF’s chief economist.

There are different versions of secular stagnation but the editors identify three main points of consensus. The first is worth quoting in full: “A working definition of secular stagnation is that negative real interest rates are needed to equate saving and investment with full employment.”

The second concern is that secular stagnation makes it hard to achieve full employment with low inflation and official interest rates close to zero.

Finally, there is agreement that under the new conditions the old economic toolkit is inadequate. There is no consensus on the solutions needed but there is a widespread implication that mass unemployment may become a permanent scar on society. Summers suggests inflation targets could be raised. Krugman and others imply that fiscal stimulus may need to become a permanent feature of the West’s economic life. Many others favour conventional prescriptions such as increased investment in public infrastructure, improving education and simplifying procedures for establishing businesses.

The first thing to notice about the secular stagnation hypothesis is its limited character. Claiming that negative real interest rates are needed to equate savings and investment with full employment is merely an observation. A rough analogy is the fact that an earth day lasts about 24 hours. Although it is true it does not explain why the earth rotates on its own axis.

The contributors recognise that low real interest rates need to be explained but their arguments are not convincing. Summers points to a variety of structural factors such as slower population growth and possibly slower technological growth. But it is not clear why such variables are necessarily fixed or as influential as he describes.

There is not an adequate explanation of why so little weight is attached to such key economic indicators as profitability or investment levels. Nor is there a discussion of the extent to which the structure of the eurozone is itself contributing to low growth in continental Europe.

The secular stagnation hypothesis is a one-sided reaction to the economic crisis of recent years. Just as there was an overstatement of the world economy’s strength in the years leading up to 2008, so there is an exaggeration of its weaknesses today. A proper explanation of the plight of the global economy would need to probe the subject far more deeply.


The world’s economic fortunes depend more than ever on China’s performance. So when an expert claims that the Asian giant is facing formidable challenges his arguments should be considered carefully.

Fraser Howie certainly qualifies as a specialist in Chinese finance. He has written three books on the subject including most recently Red Capitalism:The fragile financial foundations of China’s extraordinary rise. In addition, he was worked in Asian stockmarkets for two decades, is fluent in Chinese and is married to a Chinese woman. I was therefore particularly interested to hear him speak at a recent Lombard Street Research seminar.

The thrust of his argument is that China’s growth model is changing. “China for many years was a miracle growth story has now become a debt story,” he says. ‘We’re just at the beginning of the problem of bad debt in China”.

Despite a laudable reform agenda relatively little has changed over the past 18 months. The Chinese authorities recognise the need for extensive legal and regulatory change but its implementation is painfully slow. One notable exception is the tie-up between the Shanghai and Hong Kong stock exchanges.

Even the liberalisation of the currency is going far more slowly than many breathless headlines suggest. The renminbi is still relatively little used for international transactions considering the size of the Chinese economy.

Howie draws a vivid analogy between Beijing’s Forbidden City and the country’s financial system. The huge grounds of the former imperial palace are divided into numerous distinct palaces and courtyards. In a similar way the financial markets are segmented into multiple isolated areas. For that reason he regards the system as “dysfunctional”.

Charles Dumas, the chairman of Lombard Street Research, also discussed China at the event but from a macroeconomic perspective. He described the economy as “wildly out of balance” with its extremely high levels of investment – accounting for almost half of GDP – and low levels of consumption.

Dumas also pointed to the likely impact of a Chinese slowdown on the global economy. For example, Germany’s bonanza from selling capital goods to China is likely to come to an end.

China’s economic slowdown is a huge subject and it would be unfair to expect too much to be crammed into a single morning’s session (which covered other topics in the global economy as well). However, it was surely right to ask awkward questions on the subject rather than embrace the orthodoxy that China is enjoying an orderly slowdown.

Nor is the common assertion that China is coming to the end its catch-up growth phase as helpful as is often assumed. The same claim could have been made a few years ago and will still probably be plausible in a few years’ time. After all China is still far poorer in terms of income per head than the advanced economies. The challenge is to substantiate the argument if it is indeed true.

Perhaps the most difficult task is to divine what exactly is happening on the productive side of China’s economy. Unfortunately conventional economic measures are of even less use here than in the developed world.

Understanding these trends is perhaps the single most urgent task confronting those who want to understand the global economy.

This blog post was first published today on Fundweb.