Good2Have a View

So, Spain has won the World Cup and the Golden Generation that was, allegedly, English football (Wayne Rooney, Steven Gerrard, et al) merely served to demonstrate that all that glisters is not gold. But does that make any difference to the parlous state Spain as an economy, and quite probably as a society, finds itself in? Well, yes and no!
Well actually it’s no and yes! No, because their paper thin economy, based on the mirage of property, was just that a, mirage and no goal in extra time is going to change that.
At the heart of economics lies the concept of utility – a sense of well-being. If Spain had produced huge amounts of properties that individuals sought to buy either by creating wealth that gave other Spaniards a sense of well-being, let’s say Ipods or cars of impeccable value for money, or that foreigners (producers of utility that Spaniards desire) desire ; then all would be well. The average Spanish builder might spend his money on some foreign product only for that foreigner to return the favour and buy the building our Spanish builder has built.
Unfortunately, far too many such buildings were built and far too many in circumstances where ownership of the utility such buildings might afford was seriously in doubt. It is hard to have a sense of well-being when the product is incomplete or likely to be demolished for a road due to Spain’s Kafkaesque planning laws.
But, it’s a yes, or rather a maybe, if the only information you have about Spain is the fact that its national soccer side won THE major trophy in the world of soccer. Or, as is the case with South Africa, one of the few facts you know about South Africa is that is organised and held THE major tournament in the soccer world, and that means the whole world outside the USA, without any of the anticipated problems either with crime or disorganisation.
Of course, scenes of jubilation upon the homecoming of the victorious team can be considered evidence of well-being but it is really euphoria. Being drunk or high on drugs conveys a feeling of temporary well-being or euphoria but it is not well-being in the true sense of the word – a continuing state.
The Spanish FA, as winners of the World Cup received $31 in prize money and allegedly the Spanish players were on a win bonus of 500,000 Euros each. So they certainly had a sense of well-being. The quite reasonable expectation of an improvement in South Africa’s image should also lead to greater well-being as tourism would be a major beneficiary of such an improvement. That, in turn, should lead to a greater sense of well-being for the average South African employed in the tourist industry. But the average Spaniard? No, I’m afraid not.

I was watching the Jeremy Kyle show the other day as I relaxed after a morning considering chord progressions. What better way to reflect upon harmony than by watching dissonance?

I only caught part of one little ‘show’ but it was very interesting. Basically, it was the age-old female genes seeking male genes show. An attractive, no great beauty but attractive, 20-something woman (I guess) was ‘upset’ that her 20-something (I guess) male ‘partner’ may have been having sex with other women. Which, of course, he was.

He in turn made similar claims about her, which were not totally ill-founded.

Kyle was berating both of them for not understanding what a relationship was. Quite natural, after all he does have ratings to consider and moral outrage never lost an audience.

Of course, economics and its biological equivalent – evolutionary psychology – tells us all we need to know really.

English society, and most likely others too, is three-tier cake. The top (the smallest section) and bottom (the largest) tiers are rule breakers whilst the middle is rule observant. The rich can afford not to observe the rules and, in any event, they are most influential in making them so there isn’t that many they need to break. Those at the bottom are obliged to break the rules in order to survive as the rule makers need and have always needed a large number of workers to do the every day jobs that, if not done, make life intolerable. But the top tier is not sufficient in number to control the bottom tier so they have the middle tier – the rule observers. Of course, by being rule observers they not only seek to control the bottom tier but, by definition, themselves as well, on behalf of the top tier – the real power in any land. In this way society works, always has worked and, in all probability, always will work.

The main rule by which means rule observation works is to observe the main rule – repeat, parrot fashion, that which you have been told. That is, to pass an exam. The public examination system, introduce into England in the mid-19^th century, provides access to large organisations. In other words, it mirrors their hierarchy.

That access provides financial reward that finances a lifestyle, which, in keeping with the concept of ‘rule observation’, has a rule-based approach to it – get married, buy a house with a mortgage, fund a pension, have children in a stable relationship. This is a highly effective way to obtain a stable lifestyle, it will have its ups and downs (some of the downs being quite deep) but it is, generally, very stable.  The key factor is that of stability in the relationship. The young man and woman on the Kyle show were being berated by Kyle for the lack of such an approach to life. The attraction of the young man was fairly obvious; he had a straight face typical of a testosterone well-endowed male. In addition, his success with women made him even more attractive to the young woman as this confirmed, at a sub-conscious level, the worth of those genes. So the young woman faces a dilemma, the man she has identified as being genetically desirable is desirable by others and, therefore, has the incentive to exploit that attraction. But that value in the genetic marketplace makes him unsuitable for the long-term objective, bringing a child to maturity. He is likely to pursue his genetic prowess elsewhere and a human child is both nature and nurture..

Of course, as I have already said, Kyle may be reacting genuinely or merely expressing the attitude of his audience both on TV and in the studio. And if the studio audience is typical of his audience in general, a scan of the audience seems – on the occasions I have seen it – to be overwhelmingly female, then relationships matter to women. But we already know this to be so from the popularity of ‘soap operas’ (or continuing dramas as they are now known), where pseudo-relationships form the plot lines. So why should women be more interested in relationships than men?

Human beings are mammals but do not give birth to a coherent human being. A dog or a cat will give birth to young that within 12 months are quite capable of fending for themselves. This is not the case with a human being. Walking upright, narrow hips, with a large brain, large head, necessitates that women give birth to immature, in the sense of being independent of the parents, individuals. It is unimaginable that a 10-year old child, much less a one-year old child, would be able to support itself. Indeed, only part of the environment humans inhabit is ‘natural’, they also inhabit a manufactured world called society.

In fact this dependency seems to be getting longer. Within the last 20 years we have seen in the UK a larger and larger number of young people, particularly young men, stay with their parents well into sexual maturity. Sexual maturity being, for most animals, the point at which parental ties are broken

http://www.guardian.co.uk/society/2009/dec/08/young-adults-living-parental-home-ons

The interesting point behind this news story is that the number of young men living with parents is twice that of young women. I just wonder how many of those young women have children and are living in social housing..

We know two things about men and women, other than the obvious genitalia issues, women earn less than men, more males are born than females and women can give birth. So to have twice as many women leading independent lives, that is independent of their parents, is extraordinary. I suspect we have here a condition where the state is acting as breadwinner.

My mother, born in 1920 and pre-welfare state, used to tell me that her mother, a miner’s wife, had a truism – any fool can make a baby takes a man to keep one. But that was pre-1945 and pre-welfare state. Pre the state as breadwinner.

Now, the young woman on the Kyle show had no children from this man and was simply willing to give this man access to her body, which, in an age of contraception and terminations, is not the same as access to her genes.

It is only supposition, but using the McClean triune model of the brain we can see that the sub-conscious attraction, the mammalian limbic part of the brain, of this man’s genes might well be counter-balanced by the cortex, almost uniquely human, which recognises that, long-term, this individual is plain useless. So whilst access to the female body maybe be driven by hot sexual attraction (limbic) the nagging reasoned doubt of suitability (cortex) may deny access to genetic material – she is happy to have sex but not get pregnant.

Of course, as economics teaches us, individuals pursue their objectives logically, So becoming pregnant by one, genetically well-endowed, man and having the child raised by another, reliable, man makes perfect sense. After all, it’s a wise child that knows its father.

Economics also describes opportunity costs. In a given market, where consumers have large amounts of the means of exchange (money), the price of commodities rise.  This was first recognised by Milton Friedman  – Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

The case of Vanessa Peroncell and Wayne Bridge serves as testament to this.

As can be seen from the photograph below, Ms Peroncell is an attractive women. She has the natural attributes of  attraction, a curvy shape and round face indicative of being fertile and able to bear children. However, and with no direspect, not a great beauty.

Mr Wayne Bridge, a professional footballer, has many desirable attributes. Patently good genes, as a professional sportsman, and the earning capacity that puts him in the mega-attractive range. So for Ms Peroncell to be willing to allow access to her genes, she is the mother of Mr Bridge’s son, requires both significant  genes and money supply.  The ‘cost’ of access to Ms Peroncell’s genes is vastly out of proportion to their value (as indicated by her physical appearance) as a result of the supply of money. She produces no more eggs and those eggs are not of a better quality but command a higher price due to the money supply in her ‘economy’ (her social circle being highly paid footballers) – i.e. inflation.

So in the environment in which Ms Peroncell operates, a lingerie model and VIP hostess, the Friedman analysis is all too evident.

The above may seem like mere philosophical meanderings; but no. Wthout the middle class core society implodes. There is nothing to keep the three-teired cake in place, the middle tier being at its centre. Without young middle-class men able to meet the ‘costs’ of access to the genes of young women (women look for men of at least the same status as themselves) then the middle-class, rule observing family diminishes in numbers.

Rule observation is at the heart of any society, without rule observation there is no society, and no one observes rules or causes rules to be observed as well as the middle class.

With a dearth of jobs for those who have observed the educational rules (pass exams, go to university – and become indebted, get a good job) such that they are unable to demonstrate the value of such rule observance – nice wife, nice children, nice mortgage nice pension – all funded by a regular wage, the value of rule observance begins to collapse and society with it.

In the run-up to the must-win game between England and Slovenia, and the distinct possibility of an early flight home having exited the World Cup early and to a reception of much analysis, Wayne Bridge might well have been grateful that he ruled himself out of the England team.

Nick Clegg might well ponder that taking part in a catastrophe is not a great honour.

That the UK structural deficit needs to be eliminated is without dispute, see Look out, Look Out There’s a Deficit About. The question is, of course how? Is it to spend less or tax (earn) more? George Osborne’s body aims to do this mainly by the former but with some of the latter. But is it ‘fair’?

Of course, first define ‘fair’. Pretty nigh impossible, since it’s a word human beings use to justify that which they wish to do and politicians are past masters of that. If this budget is ‘fair’ then the wealthier you are the ‘fairer’ it is to dump on others.

Osborne has sought to reduce the spending by a combination of benefit cuts –freezing child benefit, and linking benefit rises to the CPI rather than the RPI – and pay freezes in the public sector. In one area the influence of the Lin Dems can be seen in restoring the link between earnings and the state pension that Margaret Thatcher removed. However, whilst in the last 20 years earnings have outstripped inflation whether that is likely to continue in a world where a return to the economic conditions of the last 20 years looks most unlikely remains to be seen.

It is frequently claimed by those trying to protect public sector pay and conditions that the current economic state is caused by greedy bankers. This is not the case, the structural deficit, by definition, existed before any banking crisis, again see Look out, Look Out There’s a Deficit About. The banks made a global system of smoke and mirrors work. Basically, the global trade imbalances whereby countries like China, S.E. Asia in general and Germany exported whilst countries like the UK and (especially) the USA imported was only made possible by consumer and government debt in the likes of the UK and the USA. Debt poses a risk for the lender. Banks were the lender and they thought they could manage risk by some sophisticated manipulation of mathematics that was flawed not in the manipulation but in the underlying philosophy.  We do not live in a world of independent trails in the financial markets. Black Swan events are much more common than is expected.

That system of money management, money flowing from savers in the exporting countries to spenders in importing countries to but the goods from exporters, has ended and there is no sign of anything to replace it.  Frugal German taxpayers were not minded to bail out spendthrift Greeks. Even though, the Greeks, I bet, buy lots of German goods. In 2005 German goods accounted for 13.4% of imports by value into Greece and was the basis of their imports. The Greeks buying more from Germany than they sold to Germany.

http://www.mfa.gr/www.mfa.gr/en-US/Policy/Geographic+Regions/Europe/Relationships+with+EU+Member+States/Germany/

In the absence of this flow of money, if trade is to continue it has to be a trade in goods and service. That restructuring of trading arrangements does not happen over night. It takes a long time for goods and services to be designed that others wish to have.

The last 30 years has seen that the Regan-Thatcher paradigm of low taxes causing entrepreneurs to be entrepreneurial and create new businesses that produce new goods and services to the benefit of all has simply not worked. There is possibly no country on earth as entrepreneurial as the USA yet they run and yet as the following graph shows their trade deficit has got worse not better since the Reagan years.

The UK has a similar story, at least in goods. Despite a deliberate policy to reduce the value of sterling, which has fallen by some 20% since 2007, the UK still has a  massive balance of trade imbalance. James Dyson originally built his vacuum cleaners and washing machines in Malmesbury, Wiltshire. In 2002, the company transferred vacuum cleaner production to Malaysia. Planning permission to expand the Malmesbury site had been refused, effectively leading Dyson to look elsewhere. A year later, washing machine production was also moved to Malaysia.

Although nearly 800 manufacturing jobs were lost, Dyson states that the cost savings from transferring production to Malaysia enabled investment in R&D at Malmesbury head office, and that the company employs more people in the UK than before the move to Malaysia.

That entrepreneurship has resulted in jobs overseas not in the UK or the US. Gordon Brown’s decision to cut capital gains tax as an incentive to entrepreneurship and George Osbornes’s refusal, or inability in the face of Tory back-bench pressure, to meet the LibDem desire to put it back where it was in 1997 under the guise of being a stimulus to entrepreneurship is not backed by the evidence. Whatever the reason for the demise of manufacturing jobs tax incentives are not one of them.

As for the tax perks the really rich are able to negotiate for themselves, being a non-dom or living in a tax haven, quite what value that has brought the UK overall is hard to determine. If you carry a UK passport you pay UK tax, making allowance for any reciprocal arrangements

Much is made of the Tories leaving a budget in surplus in 1997. But that was against a back-drop of high unemployment and crumbling public infrastructure. Budget deficits are not always bad things. After the Second World War European governments ran deficits due to the necessity of re-building a shattered continent. The way to judge the value of government spending is as with a company, what effect does it have on the balance sheet. Since 1995 the New Zealand authorities have produced such a balance sheet and one has been promised in the UK since 2003. One was supposed to have been produced this year but no sign yet.

But we don’t need one to understand Brown’s folly. His approach to public finances was two fold. First, to address the infrastructure issue he massively extended the Private Finance Initiative (PFI) introduced by the Tories. Private sector companies build a public asset (school, hospital, etc) and the government rents that for a period of time. In this way the initial capital is provided by the private rather than the public sector so causing less initial government spending. It is a natural progression from the privatisation of the 1980s whereby private rather public capital is used and so reducing the pressure on taxes and government borrowing. But it does mean that, just as with borrowing, there is a negative cashflow due to those payments to th eprivate sector. It is not a free lunch.

Secondly, in order to soak up the excess labour (the unemployed) that the tax-incentivised private sector had been unable to do there was a massive increase in public sector employment. Which means a massive increase in th epublic sector wage bill. This was made even worse by unbelievably generous salary increases, especially in those areas that are politically sensitive – education and  the NHS. And really to no effect.  Between 2003 and 2006 GPs saw their income rise by 58% whilst their productivity fell, according to the National Audit Office in the same period by 2.5% per year. Doctors add most value by the drugs they prescribe. However, since so much money is spent on doctors themselves the drugs are frequently un-affordable. According to the King’s Fund 70% of NHS spend goes on wages

http://www.bbc.co.uk/radio4/today/reports/politics/nhs_emails_20070131.shtml

When Nye Bevan spoke of stuffing doctor’s mouths with gold he didn’trealise that included members of the RCN and Unison as well!

So having saved some money on capital projects Brown splashed it around on wages. This did have a beneficial effect during the recession following the bursting of the dot.com bubble but such spending should stop when the economy recovers. With capital projects it can, once the hospital is built you stop paying for it to be built, with wages, as we saw in Osborne’s budget, such spending is difficult if not impossible to curtail.

The wage freeze news was taken badly. How much worse would a wage cut have gone down? This is where inflation steps in.

Sterling haven fallen and the UK importing so much results in inflation. This is likely to get worse as the era of cheep Chinese products looks like ending. The Yuan has been re-valued and Chinese workers are demanding higher wages. Osborne stated that inflation would be just on target by year-end at 2.7%. He expects it to move closer to the target 2% in the ‘medium term’, i.e. he doesn’t know when but hopefully in the next couple of years.  By inflation rising the value of money falls so a nominal pay freeze results in a real pay cut. It should also make paying interest on government debt easier as nominal gdp rises due to increased prices and increased nominal profits. That is as long as people continue to buy and shops continue to sell. Or that the magic export led boom, that so far has failed to materialise, cuts in. But the UK’s major market is the Eurozone, which is going through its own growing pains, and inflation in the UK is likely to result in the increased price of exported goods. So we end up still on square one with higher inflation but no export boom.

The rise in VAT is seen as the main revenue earner. But how well will spending hold up. Especially as people are going to feel poorer, not least due to the almost inevitable fall in house prices. The LibDems, despite opposing such a rise, seem to have won a minor concession in raising the personal tax allowance. However, the objective of the LibDms to  raise it to £10,000 and so make it more likely for people to come off benefits by making work worthwhile has become a long-term objective. Patently someone on the minimum wage requires less incentive to get out of bed than a millionaire.

A tax was announced on bank’s balance sheets. So the more loans you have (assets, matched by liabilities) the bigger your balance sheet and the more tax you pay. The governor of the Bank of England in his Mansion House speech made reference to banks holding more capital. So less money to lend and if you do lend it more tax to pay. And where do the banks get the money to lend from? Well the governor did mention that the Bank can still use monetary means to boost the economy. Since interest rates can’t be cut further that implies yet more quantative easing and yet more monetisation of government debt (the Bank already owns 25% of outstanding UK debt) and yet more inflationary pressure.

The other side of the quantative easing coin should have been to take money out of the economy by raising interest rates when inflation rises. The Monetary Policy Committee has argued against this due to there being ‘special circumstances’ – the rise of VAT from 15% to 17,5% in January 2010, for example. Presumable they will say the same in January 2011.

So what we can expect is more inflation and the budget deficit largely untouched. It may not grow as fast (if at all) but it is unlikely to shrink either. Although I suspect the structural deficit will be pronounced fixed and the deficit morphed into a cyclical one due to recession.

Because the central problem of excessive wage growth in the public sector has not been addressed. And after two years of pay restraint with inflation being higher than is desirable what wage pressures then build up as another election approaches.

Neither has the implications of the pension payments that derive from those wage rises and will increasingly kick in as the baby boomers retire. An increase in pension contributions to help address that cashflow matter would have been very helpful. Remember, one of the issues over his deficit is the interest payments. Money that rather than being spent on services being spent on payments. The same is true of pension payments.  The public sector may whinge but they have got off incredibly lightly.

And of course, no budget is ever going to address the central problem of those global imbalances in trade.

And so we come back to ‘fairness’. The best I ever heard concerning this was froma friend of mine, who told me ‘You don’t get what you deserve, you get what you negotiate.’ Those benefiting from low capital gains tax have obviously negotiated well. Similarly the public sector, although you would never get them to admit that. It’s those in between, workers in the private sector, those who are supposed to bring about this new re-balanced economy who need lessons in negotiation

Supping with The Devil

The shores of the UK are warmed by the Gulf Stream that flows from the Gulf of Mexico. How ironic that this same Gulf is now causing an increasing flow of warm air due to an oil spill.

The oil spill from Mississippi Canyon block 252, otherwise known as the location of the Deepwater Horizon, is a manifestation of the global big picture. It has resonances with both the global banking/economic crisis and the global political map.

In order to satisfy the global economy’s need for oil, and not least in that the demands of the world’s biggest economy – the USA, it is desirable to find oil reserves in politically acceptable areas. And so BP found itself searching for oil in the Gulf of Mexico at depths that stretch engineering knowledge and techniques.

In a similar vein, up until the doubts that arose over US sub-prime mortgages, the banking system, primarily based in New York and London, used the limits of its knowledge and techniques in order to fuel an element even more important to the global economy than oil – money, or rather debt.

Fundamentally, the global economic system is flawed. Countries such as China, Germany and those in S.E Asia  produce a great deal and consume little (i.e. they save). Those in the West, predominately the USA and UK, produced little and consumed a lot (i.e. spent). The savings of one were funnelled to the pockets and cash registers of the other by the banking system. This process resulted in debts being incurred by the spenders. The risk of that debt seemingly being managed by financial engineering. That financial engineering being as problematic as the oil engineering that is now ‘pushing the envelope’ in the Gulf of Mexico.

When you have processes that are at the limit of human understanding mistakes happen and problems arise. It happened with financial engineering and it has happened with oil engineering. In both cases the electorate are impacted and that requires a political response. The more so since both endeavours, banks and oil companies, earn huge revenues and incur huge profits that their employees enjoy.

This is a toxic mix.

Indeed it happened with aero engineering. The world’s first jet airliner, the Comet, suffered three catastrophic crashes in the 1950s that were the result of the shape of windows. Had jet airliners been banned due to the loss of life (35 people) travel would be very different nowadays. Lessons were learnt and it wasn’t. But that was a different time.

So, as with the banks, the ‘greedy’ oil company must be brought to book. But the electorate is fickle. If you bring all parties to book that impacts American firms and American jobs. Not a good idea with mid-term elections due in November, a President under siege due to his cobbled together health reforms (one of his main domestic policies) , a jobless economic recovery and a war in Afghanistan that is going nowhere and has many of the attributes of another lost war in Vietnam. Then along comes his ‘Katrina’ Moment, ironically enough in the same part of the USA.

He has to show himself to be no George W. Bush. In fact this seems to be his most potent ‘brand’ – I’m not Dubyah. So hyperactivity replaces no activity, or rather hyper-rhetoric replaces no activity . But Bush could have helped the residents of New Orleans. The Army Corp of Engineers could have built better levees. The US governemnt cannot help stop the flow of  oil. But all politiains respond to the electoral clamour that ’something must be done’.   

Furthermore, the matter is complex. Not only are we dealing with real engineering and its complexities at the limit of human understanding, but also judgements and the fact that not one but several companies are involved. Lehmans may have taken bets on many financial products developed by many companies but only Lehmans made those decisions.

In this case, the oil spill from Deepwater Horizon, the issue revolves around that of completing the well.

What seems to be known is that a production casing (a tube to seal off the formation) was run prior to the rig leaving location, This casing has to be cemented in place. The cementation job is not performed by BP but by an American firm, Halliburton, and supervised by BP. The formation being sealed off was problematic when being drilled in so far as drilling fluid (mud) used to balance pressures and prevent blow-outs (amongst other things) had been lost into a formation that was obviously very porous. This required that the cement used for the casing should be specialist in nature so as not to be lost also and the bond between casing and formation weakened. In addition, a cement plug was placed within the casing to add to the prevention of a blow-out.

The casing was run but then it seems that a casing bond log, performed by the oil-field services company Schlumberger was not run. Schlumberger had run a number of logs and had been asked to stay on board the Deepwater Horizon for 5 days following their last test. They departed, according to a statement issued by them, on the day of the blow out without performing further tests.

From this it can be assumed that the tests they had run were in ‘open’ hole, i.e. without any casing. It should take only two or three days to run such casing and cement it so if no more logs were run it would seem to support the assertion that a casing bond log was not run.

The casing bond log tests the all-round (360 degree) quality of the cementation of the casing using sonic techniques. It produces a chart that needs to be interpreted and despite being described as a ‘gold-plated’ test still requires analysis since it is rarely shows a job so bad that it is an obvious failure.

However, in addition to the casing, Halliburton also installed a cement plug*. Whether this was done at the same time as the casing cementation is not known (if so a casing bonding log would have not been possible as no casing of interest would have been exposed to the Schlumberger tool).

 Furthermore, in order to obtain a decent casing log the casing would have had to run through the whole pay zone (reservoir). Since Deepwater Horizon was drilling an exploration well that may not have been the case, although unlikely as it is important in delineating the oil reservoir to gain some idea as to how thick the producing formation is at this point.

After installing the plug two tests were run however. One was an over-pressure test whereby pressure above the plug is increased. If the pressure then falls the plug is leaking.

In addition, a negative pressure test was performed. This reduces pressure above the plug so that if pressure rises the plug is leaking.

These are pass/fail tests that require no assessment. Pressures are either as  expected (pass) or not (fail). There is no indication that these tests were anything but successful.

So, having (apparently) completed the well steps were taken to leave the location. This meant pumping out mud from the riser ( a tube that connects the blow out preventor to the rig floor) and replacing it with sea water. This replaces the hydrostatic pressure of the mud with the normal (lower) pressure of sea water.

At this point the blow out occurred and the blow out preventor failed. Hence the destruction of the rig and the subsequent leak. The kill lines from the BOP {used to operate it)  have been retrieved but not been made to work. This is a feat in itself. Also an initial report from a Congressional committe has it that the BOP was operated a number of times befoe the incident to control pressure and bleed off the fluid.

The initial test report of the BOP, which would have been conducted when the well was started, can be seen here (http://energycommerce.house.gov/documents/20100512/Transocean-Deepwater%20Horizon%20BOP%20Test.pdf ) and was signed off by all parties. 

So, questions surround the work of Halliburton (an American company) and BP’s supervision of that but even more profound questions surround the failure of the blow out preventor made by the American firm Cameron Ironworks. Yet it is BP, or rather British Petroleum, that has bore all the brunt of US political outrage.

If you had a car accident and the safety belts or air-bag failed, wouldn’t you want to ask the manufacturer why? Why isn’t Obama so interested?

The fact that the US political establishment has felt able to do this says a great deal about the calculation it has made between its own electorate and its relationship (special or otherwise) with its closest ally, the British.

But it should come as no surprise. The UK dispossessed the inhabitants of Diego Garcia and, despite court rulings in favour of the dispossessed, continue to do so in order that the US may have an air base.

The UK suckered itself into an invasion of Iraq that was ill-prepared and ill-conceived. It continues to delude itself that, by buying the US Navy three submarines and incur the running costs in order that the US Navy may install its Trident missiles, it (the UK) has an independent nuclear deterrent. Faced with such a sucker would you not think they were easy meat to cop the blame?

The bigger, global question, concerns the way in which the US treats perceived foreign business leaders compared to its own.

The Bhopal disaster claimed the lives of an estimated 10,000-20,000 people. The CEO of Union Carbide was arrested after the disaster but allowed on bail and subsequently fled to the US where he has enjoyed the protection of the courts that refuse to extradite him. This is despite the fact that the Bhopal facility was totally under the control of Union Carbide and with no involvement of contractors.

Indeed, the US is currently lobbying the Indian government to limit the liability of the nuclear industry in India. Not dissimilar to the way in which Dick Cheney organised a limit to the liability of oil companies for oil spills – a limitation BP is willing to forego. If the Indians agree to that they are insane, although it is highly likely any US company falling foul of that would have the US government pressure the Indian government for a dispensation.

Whereas the CEO of BP readily accepted responsibility for the clean up yet has been torn apart by President Obama’s rhetoric, despite the involvement of other (American) firms.

The lesson is clear – when dealing with hostile, unfriendly and pernicious environments have a long spoon.

*Addendum: A statement by Halliburton has it that this second plug was not set

http://www.halliburton.com/public/news/pubsdata/press_release/2010/ProbertTestimony2.pdf

the well is obviously flowing due to a lack of casing/cementation integrity so the lack of a second plug is significant. Despite successful pressure tests the abscence of a casing bonding log and this second plug do combine to make the judgement to empty the riser somewhat optimistic.  The nature of the formation (porous and prone to fluid loss – hence the specialist cement), the use of less centralisers than recommended by Halliburton (not necessarily a problem as Halliburton may have been over cautious), the lack of a CBL do combine with the lack of a second plug to make a more problematic mix than each on its own.

Government spending, and the subsequent deficit, is very much in the news at the moment. All the major political parties are engaged in a Dutch auction, in which they vie with each other to be the toughest cutter of spending. Although only the Lib Dems seem to be serious about this as both Tories and Labour want to protect ‘vital’ services. Vital, in this context, meaning the ones the electorate value most, have the most spent on them and therefore are the ones most eligible for cuts particularly as the early years of the last decade saw money woefully mis-spent on these electoral sweeties.

Of course, the electorate will not return a Lib Dem government so the deficit will be handled in the time-honoured British way of fudging the issue. The process of quantative easing (QE) has already monetised part of the debt. That is, the Bank of England has printed money to buy up, and therefore eliminate, part of the existing government debt. QE in the US was used to buy corporate debt, in order to allow business to start re-investing and therefore revive the economy, and government debt.

The monetising of debt is outlawed under the Maastricht Treaty. Germany has a characteristically disciplined approach to finance. Its folk memory of the inflation of the 1920s, as the Weimar Republic sought to print away the debt burden of the Treaty of Versaille, and the subsequent catastrophe of the Nazi period focuses its mind wonderfully. But extraordinary times call for extraordinary action. The European Central Bank (ECB) has also engaged in QE, but has bought corporate debt. Whilst no one is suggesting that the British are going down the same route as the Germans in the 1920s it does show a similar mindset.

Of course, default is always the nuclear option and one not spoken of in polite company. However, the UK government has already defaulted on some of its debt liabilities but no one seems to have noticed.

When the government nationalised Northern Rock and part of Bradford and Bingley it took on all of NR’s liabilities (retail and wholesale) and some of BB’s (wholesale). The wholesale debt is in the form of Permanent Interest Bearing Stock (PIBS) a form of corporate bond. For a time, it maintained interest payments on these bonds, although the market didn’t expect this to continue as they were trading at massive discounts. Then it stopped. It simply defaulted. They didn’t have the ring of gilts but the government had taken on these liabilities and it had demonstrated its obligations by making the interest payments.

Both of these actions, QE (monetising debt) and PIBS defaults, shows that if the government can get away with something it most definitely will try.

The third fudge is almost part of the British way of life – inflation. This is the most likely tool that the next government (be it Tory of Labour) will go for, After all, the Treasury ministers will change but not the Treasury senior civil servants.

Inflation increases (nominal) tax receipts and whilst benefits are also linked to the RPI, if benefit cuts are introduced (presumably under the euphemism of  ‘focusing’ benefits on the really needy) then there is a net gain. This then eases the pain of servicing debt – departmental budgets don’t need to be under so much pressure to provide debt servicing payments.

 Of course, it does rely on foreigners (who buy a lot of UK debt) not noticing. But if no, or very little, further debt needs to be sold and maturing debt re-paid in devalued pounds it will work – for a time. But then in politics everything is about toady’s interview and tomorrow’s headlines; the end of the week is a long, long, way off.

There is a down side that index-linked gilts won’t be impacted and public sector unions (the only ones having any semblance of power nowadays) may make angry noises over wages – but nothing’s perfect. Worst case scenario, from the government’s point of view, is that what they gain on the roundabouts they lose on the swings but they have a good chance of pulling a fast one.

At the moment, politicians are competing with each other over public expenditure. The Tories and Labour making noises (nothing new there) whilst the Lib Dems have actual proposals (again, nothing new there). This all arises as a result of the massive expansion in borrowing due to the recession and bank bailouts. However, there is a much more serious public finance issue that revolves around the levels of government borrowing that existed before any bank bailouts occurred and the UK economy was still growing strongly.

Normally, it is the bond markets that take a serious view of such matters but this issue does have serious consequences for the ordinary citizen, as today’s sale of GM’s European operations to a the Canadian parts firm Magna demonstrates.

In the fiscal year 2006-2007 government spending was £555bn and tax receipts were £518bn (see. http://www.global-vision.net/facts/fact15_6.asp).

That is, the government was having to borrow £37bn. During a period of substantial growth governments should be running surpluses. This has two effects. First, it takes money out of the economy that might otherwise be stoking demand and so causing inflation. Secondly, it puts the government in a position to run a deficit if the economy stumbles.

The fighting in Iraq and Afghanistan might be thought to be an exceptional scenario causing this process to be de-stabilised, a sudden need for excessive spending. But, the deficit is bigger than the entire defence budget of £32bn. According to the Operational costs in Afghanistan and Iraq: Spring Supplementary Estimate 2007–08,  the cost budgeted for those operations was  £1.4bn. So we have a deficit of £35.6bn due to the normal operation of the UK government when there should have been a surplus.

If to this is added the debt arising from PFI projects (thought to be around £20bn in 2007) the truly awful state of public expenditure can be seen.

In fact, PFI (in a sense) lies at the heart of this matter. Following the dot com bubble bursting in 2000, the UK did manage to weather the economic fallout better than most countries due to government spending. However, when growth reappeared in 2003 that spending should have been cut back. The private sector was now growing so the public should be shrinking. The problem was that the bulk of the spending had gone on public sector wages. Had that spending gone on capital projects (the sort of thing PFI was meant to deliver) then, once the project is complete, the spending can stop. Reigning back public sector wages is much more difficult, if not impossible, for governments.

Consequently, when the bank bailouts were required and the subsequent recession brought its own costs and loss of tax revenue the borrowings were starting from a poor position and so making a difficult position an impossible one.

Germany, on the other hand, went into the 2007 banking crisis in surplus. So it had the room to borrow and spend the UK government had denied itself. This meant it could offer Magna financial support the UK government could not offer its car firms; the UK having reached the end of the borrowing road.

To cut spending in the middle of a recession makes no sense. Will there be the political will to do it once the recession is over (bearing in mind the amount to cut represents 10% of entire government spending)?

There are only three ways to deal with this deficit

1)            Increase taxes – There is some scope here,

2)            Cut the public sector workforce – but that increases government spending due to unemployment

3)            Cut wages in the public sector– either in nominal terms or relatively by allowing inflation to erode their real value.

The first option does have some possibilities. Anyone who owns a British passport should have to pay UK income tax, no matter where they live. Obviously, where tax treaties exist, tax paid in the place of residence can be offset against this liability. However, taxation for those on low wages is far too high and makes many jobs not worth the pay. So the first priority is not to boost tax revenue so the government can spend it but so those on low wages can be taken out of tax. No one on the minimum wage should pay tax. By making these jobs worthwhile, there are possible savings in a variety of benefits.

However, taxing ex-patriates alone is not likely to achieve the desired end to taxing the low paid or reducing the budget deficit.

The Reagan-Thatcher paradign that low taxation encourages entrepreneurship, wealth creation and a ‘trickle-down’ effect that benefits society in general has been proved wrong, If we take the USA, the country with the highest reputation for entrepreneurship, the ratio of median to average wages has reduced since 1990. That is, the last 20 years has seen any increase in wealth go largely to top-earners

http://www.ssa.gov/OACT/COLA/central.html

The following calculator shows that the rise in the median wage has only kept pace with inflation

http://www.halfhill.com/inflation.html

In fact government inflation figures (any government) are notoriously subject to manipulation as a variety of products are often ignored. The USA removes food and energy from its ‘core’ inflation calculation. If food and energy aren’t core to an individual’s life I don’t know what is.  So, in reality, the median wage has probably fallen in real terms. So much for trickle down.

That, therefore, gives greater scope for increases in both capital gains and income tax.

However, it is unlikely that reversing the tax environment developed during the 1980s will pay for tax cuts on the low paid and reverse the structural budget deficit. That means that the last option has to be a major feature. If high rewards in the private sector haven’t achieved the desired end then high rewards in the public certainly haven’t.

Education is a prime example. For 27 years, both GCSE and A level have shown consistent improvement. One of the features that indicated Bernie Madoff’s invetment schemes wre fraudulent was the lack of volatility. There are always good years and bad years. The 27 years of there being only good is a scam. Some trick is being pulled somewhere.  

That means pay cuts have to be focused. The question needs to be asked of a great deal of the public sector: Are you providing a public service or simply satisfying political  whimsy?

  Pay restrictions are preferred to job losses since it doesn’t cause a rise in unemployment and a subsequent increase in government spending. Taxes from public sector workers fall due to smaller wage packets. However, tax in the public sector is simply the government taking back a little of what it has previously given so it has a net benefit. For example, a person earns £100 and pays 31% (income tax and national insurance) back to the government making a net outlay of £69. If wages are cut by 10%, the gross wage falls to £90 and the tax take to £27.90; making a net outlay of £62.10. The government has saved £6.90.

The so-called leaders in the public-sector are no such thing since, by definition, they merely carry out government dictate. They do not have to face the risks and pressures of the private sector so do not justify the rewards.

Without this cut in the structural budget deficit, the UK‘s finances will always be on shaky ground and the UK economy vulnerable to external shocks that leave any UK government impotent.

We live in an age of two dangerous desires – the desire for sensation and the desire for simplicity. The media, ever mindful of the need to satisfy a highly competitive market for these desires, therefore latches on to everything as being dramatic and then presents it in the starkest (simplistic) terms possible. So it is with the current state of economic ‘recovery’ as manifest in house prices.

Statistics, being mathematical in nature, despite coming with a health warning in the form of the mantra ‘lies, damn lies and statistics’, seem to be taken as fact. The important attribute of any statistic is to first understand just what it is being measured. For example, let’s say we have a 3-month average of widget production (where would we be without the widget). In the first 3-month period we see production fall from 100 a month to 80 a month and at the same time the stock level  falls from 10 to 5. This arises due to a recession and a fall in demand so less production and less of a need to have a stock to act as a buffer to demand. The production occurs during the course of the month at 25 per week as demand may average out at 25 per week. But some weeks can be busy, so as not to turn custom away stocks are required. But if demand falls stock levels can also be reduced. Stock also costs and its level is never predictable so a judgement call is needed  - to lock up cash in stock or to have it available.

During the course of the next 3-month period it turns out that the level of 5 was perhaps too conservative and at the end of the period it is felt that 6 would be a safer level. So production is ramped up, slightly. There has been no extra demand but all judgements need to be re-visited from time to time and if there is a little more confidence or things haven’t worked out as bad as was suspected perhaps we should ramp up production, just a little, to give us a slightly bigger buffer.

This increase in production in one statistical period is then jumped on by the media as an indication of end to recession. It offers a dramatic and simplistic headline – ‘Production Up, Recession Over?’

 Of course, the next period, due to demand still being unchanged, we decide to ramp production (slightly) down now as the target of 6 has been reached and there is no evidence that any higher level is required. Indeed worries may have crept into management’s mind, for no particular reason, and production is cut (further) to reduce stock levels back to 5.

So it is with the recent apparent ‘surge’ in house prices.

In its latest house price survey, Nationwide building society reports a 1.3% rise in house prices in July. This follows a 1% rise in June. When expressed as 3-month moving average, the rise is even more dramatic – a rise of 1% in June but 2.6% in July. A level they report as being the fastest since February 2007. It is at this point that foreheads should become furrowed.  It is not to be expected that we are suddenly back at the height of the pre-credit crunch craziness.

Of course, the real clue lies in what is being measured. The Nationwide maintains an index based on a representative sample of properties. However, what it doesn’t do is to allow for volume. So, if 10 properties change hands and those properties attract an unrepresentative set of buyers (people with particular requirements and the money to satisfy them) it is quite possible that such prices could occur.

People buy houses for all sorts of lifestyle reasons – the area is one they’ve always wished to live in, gardens are bigger, traffic is less, schools are more appealing, etc. With a fall in house prices it is quite understandable that such people might well now move, as long as they have sufficient equity to find an attractive loan. In such cases waiting for house price falls is not an option. They have no real interest in finance per se, as long as the mortgage is affordable that is the extent of any financial interest. They are unlikely to put their lives ‘on hold ‘ whilst house prices fall further.

It is also possible that there are a few brave souls who, faced with poor returns on savings, have decided to enter the buy-to-let market.  But this would be a HUGE mistake.

The following chart, taken from the Nationwide report shows house prices over the last 30 years. The trend rate of price increase is 2.9%. pa Of course, that doesn’t allow for any of the costs of home ownership  - insurance, maintenance, borrowing costs, property taxes.

Nationwide House Price Figures

I took a look at buy-to-let earlier this year simply to run the numbers as to what sort of business being a landlord is. By looking at the rents available for 3-bedroomed semis and the costs that arise my calculation was that only figures around £80,000 would provide value. The properties providing such rents were being sold (in small numbers) for around £140,000. So vastly over-priced from an investment perspective.

This ties in with other aspects of home ownership. My dad used to tell me that home ownership was ‘enforced saving’ and he was right. Houses do not create wealth they soak it up – as my calculation showed. At the end of a period of ownership, however, a house may then release some of the wealth it has soaked up as down-sizing occurs.

The above curve shows that around the trend line there are periods of above trend activity that are followed by below trend activity. Since Q2 2009 is on the trend line it would reasonable to expect that, despite (the statistical anomaly of) recent house price rises, further declines should occur.

Furthermore, banking crises tend to follow a particular pattern. On average, 1.9 years after the start of the crisis GDP starts to pick up again. I’m sure this average is being used by the government to predict a rise in GDP by the end of 2009 – the crisis having started with the problems at Northern Rock in late 2007. This is then followed by a rise in share prices. This makes sense since a rise in GDP means a rise in business activity, profits and dividends – so making shares more attractive. This is then followed by a rise in employment. An initial recovery will see a rise in productivity as measured by output value per worker, but, eventually, confidence returns to the market and business bites the bullet of hiring again. Only once employment picks up do we see a rise in house prices as individuals now have money to spend. So house price rises reflect wealth creation not cause it. The gap between GDP taking off and house prices doing likewise of the order of 3 years.

Indeed, the following curve from the Office of National Statistics shows inflation from 1750 until 2000. The interesting section is from 1974 to 2000 where prices really took off rising by 7.8% pa. Investment in index-linked government bonds would have produced a much better return than a house with no risk and no extra charges.

Inflation From 1750 to 2000

However, averages are meaningless unless something is normally distributed (the bell shaped curve) with as many large items as there are small ones. And nothing is actually average. So we know that recovery (as measured by GDP) hasn’t occurred yet. Indeed the Purchasing Managers Index still shows decline going on, albeit at a slower rate. So, this recession must be skewed towards the high-end of recessions. That means I would not expect any increase in GDP by the end of this year. And no increase in house prices overall until several years hence.

Psychology matters, especially in economics, but talk of recovery in the economy just doesn’t add up.

In the 1989 film Field of Dreams, Kevin Costner plays a farmer who hears voices that command him to build a baseball diamond in one of his fields, with the immortal lines “If you build it, he will come.” A similar approach seems to being taken with the whole idea of re-vitalising the economy – if the banks have the money to lend consumers and businesses will come and borrow. I think this is as fanciful as Field of Dreams.

In February of this year, the Economist reported that 10 ears ago, British households were the fourth most indebted among the G7 economies. By the end of 2007 they were the most with a debt burden equal to 185% of disposable income. In 2007 the accountancy firm Grant Thornton reported that for the first time outstanding UK personal debt exceeded GDP

http://www.grant-thornton.co.uk/press_room/amount_of_uk_consumer_debt_exc.aspx

In 2008 they reported that it had actually got worse

http://www.grant-thornton.co.uk/press_room/uk_personal_debt_exceeds_uk_gd.aspx

To get that debt back to even 2003 levels requires some massive saving. That debt amounts to £1.444 trillion. The chart below shows that in 2003 UK debt was around 130% of disposable income. If debt at 185% of disposable income equates to £1.346 trillion (2007 GDP), then disposable income is £727.5 bn (£1346bn/1.85). If debt was at 2003 levels, still much higher than the ‘profligate’ US consumer, that would make outstanding debt £945.8 bn. That means at least £400 bn (probably nearer £500 bn) of savings or foregone consumption.

Last year a net £4bn was repaid. So at that rate it will be a good many years before the level of debt is anywhere near where it should be.

Other than reducing the actual level of debt, the other way to reduce the debt/disposable income ratio would to be to increase the level of disposable income.

The attitude of the Bank of England and most economists is that deflation is bad because it make the debt burden worse. The money spent servicing debt would be able to buy an increasing amount of goods and services as their price fell, so it is more expensive. However, deflation expands the purchasing power of disposable income whilst inflation decreases it in a world of pay freezes or pay cuts. At the Tesco Express near me the cost of petrol has risen 13% in the last 6 months. This situation of inflation, high debt and low or no pay rises simply makes debt default more likley for both companies and individuals.

So whilst interest rate cuts may help in servicing the debt it is extremely unwise to take on yet more debt. This is further compounded by the collapse in private sector pension schemes. So even without the need to pay off this horrendous debt, individuals would be advised to save for a retirement that threatens penury.

But there is a bigger problem, why did it get like this in the first place?

The chart below from the Office of National Statistics shows UK disposable income from 1971 to 2003. It shows how the disposable income of the top 10% of earners rose much faster from the early 1980s than for the bulk of the population. But it is the bulk of the population that constitutes a market. Ford made money by making cars that were affordable to the general population not those who can afford a Rolls Royce.

The experience of the 1980s onwards shows that the broad market (that section of the market not comprising the top 10% of earners) has suffered a decreasing trend in disposable income, as the following graph for the US shows.

disposable income trend

The past twenty or twenty-five years look to have come to an end and there is no sign of any means of replacing them.

I have to admit that, whilst I adore music and find it a great solace, I am not really an arty person. Having a technical education and degree, no affinity for novels (with a few exceptions, the ones I have read never seem to have any insight into the human condition) combined with 30 years of reading the Economist doesn’t really set you up for Newsnight Review. However, it seems to me (in so far as I understand the plot?) that the Samuel Beckett play Waiting for Godot offers some parallels with the current state of the global economy.

The financial system that has so spectacularly hit the buffers, despite its many faults, did at least do what it was supposed to do – consume global production. It did this in the time-honoured fashion of connecting savers (China, Far East, Germany) with borrowers (US and the UK, in the main part). This is what banks do so no problem in that. In so doing, it allowed the borrowers to consume the producers’ output using the producers’ money.

This is not the free-lunch for borrowers that it may at first appear. The Chinese and other South-East Asian exporters to the US bought US T-bills (US government debt) in order that by exchanging their currency for dollars their exports might be maintained due to their currencies not appreciating against the dollar. The plus-side was that the US government’s deficit spending (yes, the US also spent wantonly like the UK one) was easily funded. This in turn led to money in consumers’ pockets as the US government spent money with either its own employees or the employees of states whose projects it funded or the employees of businesses whose products and services it bought.

The downside was that the US, like the UK, ran a huge balance of trade deficit (especially with China) that prompted calls from members of Congress to call for the imposition of duties on Chinese goods that undermined employers in their constituencies. Not everyone got a bite of the lunch.

Economics, despite its liking for mathematics, is all about psychology. Using mathematics is a very good way to influence a person’s thinking since mathematics is a language of logic (arithmetic is not mathematics) and therefore a proposition supported by mathematics must be a sound one. Of course, logic is only as good as the premise on which it is based.

So mathematics can be as much a psychological tool as status, greed, envy or any other emotion. By using the complex packaging of debt, supported by even more complex mathematics, banks were able to persuade everyone (including themselves) that risk had been reduced maybe even eradicated.

This packaging matters because it is a way for those owning the debt to reduce their risk. The debt is an asset, a series of cashflows stems from the debt just as much as a series of cashflows stems from the output of a piece of equipment in a factory. However, by selling the debt on you remove risk. Since the borrower can default you can never guarantee that those cashflows will continue. Furthermore, the concept of discounting those cashflows over time means that, if you get the discount rate wrong – for example, inflation is higher than you expected and interest rates on risk-free government bonds greater than expected – you will have over-valued that debt. By selling the debt, you now have a bird in the hand rather than two in the bush. You have made a decent profit (historic cash from the debt plus a price that reflects future cashflows) and if the buyer can do the same with those future cashflows, then good luck to them. Of course, the buyer now carries the risk.

With the money from the sale of existing loans new loans can be made. And of course the buyer of this debt, in an age of global finance, could just as easily be a Chinese or German bank as a US or UK one. So if you can’t lend easily in your own country then lend by proxy in another. Thus we have producers helping in the financing of debt in consuming countries. Savers’ funds being channelled to spenders.

When doubts arose over the risk-level associated with some of these packages the psychology unravelled. Are we the bank holding ALL that risk? Is the bank wishing to borrow from us holding too much of that risk? If so, we need to hold on to our cash. Lending becomes a bad idea.

The hedge funds preyed on this psychology. Warren Buffet’s mentor, Ben Graham, described Mr. Market as being a manic depressive – excessive elation followed excessive depression. Mr Market being so disposed, it gives hedge fund managers the opportunity to make a killing by betting share prices in banks and other financial institutions would fall and then making it a reality either by waiting for a sensationalist media to do their work for them or by letting their actions be known and rely on their reputation in the market to do the rest. If Joe Superstar is doing this then it must be true. A study of investment decisions in the wake of the market becoming aware of Warren Buffet’s investment decisions shows exactly the same thing. His reputation for getting investments right becomes a self-fulfilling prophecy.

 See http://www.fma.org/Chicago/Papers/Imitation_Is_the_Sincerest_Form_of_Flattery.pdf section IV. Empirical Analyses  sub-section B. Market Reaction to Initial Public Disclosure of Berkshire Hathaway Investments

So the confidence in the system falls and with it the function it performs – hence global recession.

Waiting for Godot, in so far as I can determine, seems to start with the failure of a simple action (removing a boot) and then descends into a complete mess that is open to many interpretations. All the time salvation is hoped for by the arrival of Godot, whom no one admits to being able to recognise or when and where Mr.Godot may actually appear. So it is with the global economy. The simple action of consuming world output (there is certainly demand for lots of things) seems to require the most convoluted of thinking. The fact that such a process has not arrived leads to all sorts of interpretations as to the future shape of the global economy – there being no agreement on what this would look like and when and where it may turn up.

Neither the play (presumably made to be performed in somewhere other than a small room) nor the actions by governments to save the banking system seem to address the other side of the footlights. I cannot imagine that the audience for this play come out feeling enlightened, exhausted yes but not enlightened. Similarly, a loan requires two to tango – you save, I borrow. 

The US and especially the UK are not savers, as the chart for UK savers below shows; US savings ratios have behaved similarly. If they were then the Chinese and the Germans would have to become bigger spenders and borrowers if that output was to be consumed.

UK Savings Ratio

So for the global economy to revert to anything like it was pre-2007 those waiting for Godot need to devise a way to either change the mentality of both current borrowers and savers or devise a new means whereby the psychology of savers in Germany and China can be persuaded to pass their hard-earned savings to the spendthrift Brits and Yanks. Could be a long wait.

My son has a small part-time job that boosts his income, as a university student, slightly. When I was a university student, back in the early 1970s, I knew no one who did this but then I had a full grant, albeit means-tested, and whilst I left university with no money I had no debt either. My son will not be so lucky. The (financial) value of a degree is highly dubious anyway (see the Emperor’s Clothes) and with what looks like a severe recession (if not depression) on the way he needs to do all he can to keep this debt to a minimum. It also serves another purpose.

He works for a company in the leisure and service sector. It charges very high prices for its services but, of course, pays the minimum wage. It also (probably) breaks employment law as my son regularly (in fact it seems invariably) works a 12-hour shift without a break. In other words, my son is part of a ‘flexible’ labour market. Flexibility being a one-way street as management will, naturally enough, regularly seek to get him to do more hours than he wishes or can do due to his studies. It has provided him with a sobering lesson in, what are for many, the harsh realities for a very large number of workers, if not most.

I say (probably) most because the sector of the economy that has grown since the eighties has been the service sector. Of course some services deliver high added value and high wages – the law, medicine, marketing, finance, etc. – but these are confined to a few. The bulk of service sector is the ‘McJobs;, low-skilled, low added-value, jobs such as a hamburger flipper at McDonalds; retail being the most common example. I always think it is note-worthy that all the participating dragons in the Dragon’s Den run service industries and that, of the five, only one operates in the high added-value range. All the rest rely on these sort of jobs.

In addition, another area of employment growth has been that of the self-employed. Not out of entrepreneurial vigour but out as the only means of achieving a decent, if sometimes irregular, income.

What the present economic turmoil boils down to is the failure of what I would describe as the Reagan/Thatcher paradigm. This concept was that by taxing high earners lightly and having light regulation wealth would be created. This wealth would then ‘trickle down’ the economic pyramid (few at the top, many at the bottom) bringing wealth to all. The wealth creation process being driven by entrepreneurial types. If this paradigm is not dead it certainly is severely (perhaps critically) wounded.

Certainly in the US we have seen a degree of technical innovation mostly in and around the IT and telecommunications industries. In the UK innovative services in telecomms (particularly mobile phones) have arisen. However, most of the manufacturing jobs arsing from that technical innovation have gone to such places as China. Innovative services till result in most jobs being retail jobs. This means the wealth has not trickled down. And the most glaring demonstration of this is the indebtedness of the average American and Briton, who is even more indebted than his American cousin. This indebtedness is then reflected in bad loans made by banks. Those loans would normally form part of a bank’s assets and as the loans turn bad so do the assets. That in turn drives the need of the banks for extra capital. The loss of asset value can only be made good by depositors loosing some of their money  (the risk causes the sort of run seen at Northern Rock) or by the banks raising fresh capital as with the rights-issues from Bradford & Bingley, RBS, HBOS and Barclays and, ultimately, part-nationalisation.

This indebtedness will arise in some cases out of individual greed, stupidity, etc. But I doubt that is the bulk of the problem. The demise of manufacturing has seen the demise of the regular, well-paid job. I can remember interviews with ex-Rover employees a year after the collapse of Rover. Most had found new jobs but none as well paid as at Rover. Of course, that, in part, reflects on Rover’s problems – paying wages not justified by its output.

Patently, globalisation is at the heart of this matter. Benefits most certainly arise from this. Otherwise poor countries can become wealthier. Consumers benefit from competition and cheaper goods. In economics there is a poser – export jobs or import labour, although both the US and the UK seemed to have managed both. The reason being that manufactured goods can be moved around the globe. It is more difficult to move services. Indeed, the irony is that it is the high value services in IT and the law that are more easily moved rather than those of having your lawn cut. As a result, low wage services that can’t be out-sourced rely on immigrants willing to accept low wages.

Karl Marx always believed that productivity would cause the fall of capitalism. As productivity improved the demand for workers would fall causing unemployment, social disruption and, eventually, revolution. Of course, what Marx had failed to appreciate was that those workers formed a market for the sorts of goods even wealthy Victorians could only dream of. The innovation in products and production methods of first America and then Japan stayed Marx’s forecast. However, to sell those products and create the jobs to make them, consumers needed money.

In an ideal world most of that money would arise from the goods and services those consumers produced, with the only loan of any significance being a mortgage. That mortgage being, in turn, financed by the goods and services the individual produced. In fact this is the world I occupied as an employee. I have only ever had one loan other a mortgage and never have had any credit card debt. But, in a world of low wages arising from ‘McJobs’ the only means of keeping the system going is by debt. Even now as we look at the remains of a debt-induced financial disaster there are calls from government and commentators to keep the lending going. Lending for investment in business and the resulting wealth that can create is one thing but lending for consumption is obviously not a sustainable practice.

So where are people to get this money for consumption from? If globalisation is the problem why have it? Because it benefits everyone from producers to consumers – although what long-term damage to the planet will be done by everywhere being like Gravelly Hill or Los Angeles is worth considering.

The only answer I can see is that of re-distribution. Not through the highly inefficient benefits system. Tax credits only apply to people with children and involve huge bureaucracies. The best form is to accept that low taxes on high earners do not deliver the goods and that taxing low earners at all causes chaos due to indebtedness. So tax rates of 50% plus do need to be levied on high earners (£100,000 plus) with no income tax (or the return of the 10p band??) for those earning less than £20,000. Probably coupled with a wealth tax on millionaires and billionaires. Some will move on but then remove their rights to UK citizenship.

It also means recognising that a good deal of public spending is in the wrong place. Being tougher on the likes of doctors (particularly GPs) and judges. Being tougher on contracts, particularly with IT and management consultancies.

When I left university in 1973 things seemed bad. Oil prices were going through the roof but due to the politics of the Arab-Israeli problem. Governments were trying to stave of unemployment by keeping interest rates too low to control inflation. These problems were bad but not systemic. Industry learned to live with high oil prices by using less of it. The US applied itself to some of the politics in the Middle East. Interest rates were eventually raised.

What we have now is a fundamental problem with the way people live their lives and the ability of economies to deal with that.