Blog resource for 6th Form, with contributions from teachers and students.
Tuesday 30 December 2014
Friday 26 December 2014
Tuesday 23 December 2014
Must-read for Exchange Rates topic coming soon (A2)
The US Dollar and the Cone of Uncertainty
By John Mauldin | Dec 22, 2014
"Currently we have an international monetary non-system. Nobody has to follow any rules. Everybody does what they consider is in their own short-term best interest. The real difficulty is: What is in their short-term interest – for example, following ultra-easy monetary policy – could well backfire somewhere. It might be not in their long-term best interest. And as the easy monetary policy influences the exchange rates, it influences other countries. Almost every country in the world is in easing mode, following the Fed, and we have absolutely no idea how it will end up. We are in absolutely unchartered territory here."
– William S. White, former Chief Economist, Bank for International Settlements, in an interview for Finanz und Wirtschaft
"I visualize this process [of forecasting the future] as mapping a cone of uncertainty, a tool I use to delineate possibilities that extend out from a particular moment or event. The forecaster’s job is to define the cone in a manner that helps the decision maker exercise strategic judgment. Many factors go into delineating the cone of uncertainty, but the most important is defining its breadth, which is a measure of overall uncertainty.
Drawing a cone too narrowly is worse than drawing it too broadly. A broad cone leaves you with a lot of uncertainty, but uncertainty is a friend, for its bedfellow is opportunity – as any good underwriter knows. The cone can be narrowed in subsequent refinements. Indeed, good forecasting is always an iterative process. Defining the cone broadly at the start maximizes your capacity to generate hypotheses about outcomes and eventual responses. A cone that is too narrow, by contrast, leaves you open to avoidable unpleasant surprises. Worse, it may cause you to miss the most important opportunities on your horizon."
– Paul Saffo, technology forecaster
Saffo borrows the term “cone of uncertainty” from weather forecasting. While you may not be familiar with the concept, you see it in use every time there is a hurricane forecast. The further away you get from where the hurricane actually is at the moment, the wider the “cone” predicting its possible paths.
For the past two letters we’ve been looking at the global scene and trying to figure out which issues will help us outline scenarios for 2015. We finish the series today by looking at the impact of the dollar bull market on the probabilities for various 2015 developments.
Let me say at the outset that I think a global currency war (kicked off by Japan last year and just now heating up) and a rising bull market in the US dollar are the big macroeconomic drivers not just for 2015 but for the next four to five years. I think all future economic outcomes pivot along with these two major forces – they are the lever and fulcrum, so to speak. As we look at all possible futures, as we map our own cones of uncertainty, it is certainly true that that our assessment could change with the emergence of important new trends at the outer fringes of the cone; but I believe (and have believed for some time) that we need to organize our forecasts around the currency war and the dollar bull market.
Currencies are not supposed to have large movements in short spans of time and certainly not violent moves such as we have recently seen with the Russian ruble. Relatively stable currencies – ones that make moves measured in single digits over multiple years – are what you want to see for stable trade and world GDP growth. Violent moves like the ruble’s signal that something is seriously wrong, so wrong that it may well precipitate a deep recession. You very seldom if ever see a similarly rapid upward move in a currency. (Off the top of my head, I can’t think of one, but surely somewhere in history… and if I said “never,” I would probably be corrected by my astute readers.)
Over the last few centuries, as the world moved away from the gold standard and gold-backed currencies, the valuations of fiat currencies began fluctuating, sometimes wildly, over time. Currency wars following the onset of the Great Depression certainly contributed to the length of the downturn. After World War II, the financial leaders of the nations of the world came together and created a monetary system called Bretton Woods, named after the mountain resort in New Hampshire where it was created. Basically it was an anchored dollar system, where the dollar was convertible into gold and the rest of the world used the dollar for their reserves and generally pegged their currencies to it. The linchpin of the deal was the understanding that the US dollar would remain a stable currency.
We didn’t live up to that deal, printing too much money during the Vietnam War; and the nations of the world, led by France, began to ask to convert their dollars into gold. Since that would have drained the gold out of the United States, Nixon closed the “gold window.” We won’t get into the argument about the propriety of his move here.
The chart below shows the US Dollar Index (the DXY, which is heavily weighted to a comparison with the euro) since 1967. Prior to 1967 the dollar was generally stable. As the value of the dollar began to slide in 1970 – a troubling development if you were holding dollars in Europe – the world began to wonder if perhaps the United States was taking advantage of its position. Note that after the closing of the gold window in ’73 the dollar continued to fall but with greater volatility. This was mostly due to the Federal Reserve’s allowing inflation and printing money.
Then Paul Volcker came along and began to raise interest rates, and a major dollar rally ensued. The dollar doubled in value in less than five years. As interest rates came down from nosebleed highs in the late ’80s, the US dollar fell back to its original level and more or less drifted sideways for the next 10 years before once again climbing to 120. Then, in the early’00s, low rates and easy money took their toll, and the dollar fell to an all-time low in the middle of the credit crisis and has traded around the “80 handle” for the last six years. This is in spite of the Fed’s undertaking massive quantitative easing and flooding the world with dollars, which you would think would put downward pressure on the dollar. That is generally what happens when a central bank floods the world with its currency. Certainly, it is what is happening in Japan, and it is what we expect to happen in the Eurozone.
Something is different about the dollar, then. That difference can be explained mostly by the fact that the US dollar is the world’s reserve currency and the demand for dollars for global trade, which is growing at a rate the world has never seen, is stronger than ever. If the Federal Reserve had not entered into a policy of massive quantitative easing, it is entirely possible that we would have seen the dollar rise significantly over the last five years rather than languishing as it has.
Now that quantitative easing is finally done and the Federal Reserve is thinking about raising interest rates at a slow drip back to something that looks normal (possibly, maybe, perhaps, conceivably – we aren’t in any hurry and you may need to be patient for a considerable period of time and anyway everything is data-dependent), the coiled spring that is the dollar may be set free.
And since we are in background mode, we need to understand that there are many ways to measure the strength of the dollar. As I mentioned, in the standard US Dollar Index (the DXY), significant weight is given to the euro. To more accurately reflect the strength of the dollar relative to other world currencies, the Federal Reserve created the trade-weighted US dollar index (for more about it see here and here), which includes a bigger collection of currencies than the US Dollar Index.
The composition of the US Dollar Index (DXY) is
- Euro (EUR), 57.6%
- Japanese yen (JPY), 13.6%
- Pound sterling (GBP), 11.9%
- Canadian dollar (CAD), 9.1%
- Swedish krona (SEK), 4.2%
- Swiss franc (CHF), 3.6%
Thus a fall in the euro, as we’ve seen recently, changes the valuation of the index more than it might another index like the Bloomberg Dollar Index (BBDXY), which is composed of a broader basket, including emerging-market currencies, with less emphasis on EUR/USD:
- Euro (EUR), 31.4%
- Japanese yen (JPY), 19.1%
- Mexican peso (MXN), 9.6%
- Pound sterling (GBP), 9.5%
- Australian dollar (AUD), 6.2%
- Canadian dollar (CAD), 11.5%
- Swiss franc (CHF), 4.2%
- Brazilian real (BRL), 2.2%
- Korean won (KRW), 3.3%
- Offshore Chinese yuan (CNH), 3.0%
Note in the chart below that at times one index is stronger than the other. This is primarily a reflection of the strength or weakness of the euro and the fact that the Bloomberg Dollar Index contains a much higher proportion of emerging-market currencies.
So the takeaway here is that, when we say “the dollar is strong,” we are really talking about its strength relative to particular groupings of currencies. It’s a generalization. If an index included the Russian ruble or the Argentine peso, then the dollar would even be “stronger” as measured by that index.
In general, nature keeps a balance in a given ecosystem. There is a continual adjustment between the number of predators and the number of prey, but over time the system tends toward balance.
Just as nature has a way of forcing balance in the order of things, basic accounting (math is its own force of nature) has a way of forcing balance in currency flows and valuations.Quantitative easing and the developing currency war have created a great imbalance in the global economic order. The process of rebalancing the world monetary system is somewhat chaotic and crisis-prone in the best of times. Now, the massive amount of debt, both public and private, that has been created in the past decade is making that process even more chaotic.
It is usual in a crisis like the Great Recession that there is a resolution in the amount of outstanding debt, through a process called deleveraging. The process can take many forms, but in the past it has almost always meant that at the culmination of the process there is less debt. However, in recent months I’ve highlighted papers demonstrating that this time around there has been no deleveraging. Central banks and governments simply did not allow it to happen. That means we have pushed the inevitable process of deleveraging into the future. Debt cannot grow to the sky – at some point it has to be dealt with.
Four years ago in Endgame and in speeches since, I’ve been proclaiming that the dollar is going to get stronger than anyone can possibly imagine. I was saying this even as the yen and the euro were strengthening at times against the dollar. Those who have been proclaiming the destruction of the dollar are just seeing one small part of the equation: quantitative easing. There is a far larger and more complicated process going on in the world, and the rebalancing that is underway is going to mean that the dollar will increase in value against most currencies, and against some currencies by a great deal.
The beginning of a bull market in the dollar has multiple consequences, many of them not benign. Let’s start with the BIG one, the USD breakout and unwind of the USD-funded carry trade.
The yen and euro are dropping fast as the USD strengthens. As of today, the EUR/USD is below 1.23, while the USD/JPY has climbed to nearly 120. This is a function of central bank policy divergence… which in turn is a function of economic divergence among the major developed economies… which in turn is a function of debt divergence in those various economies. Total debt-to-GDP is approximately 334% in US, 460% in the Eurozone, and 655% in Japan, according to Lacy Hunt’s latest note.
With such divergence comes the major macro risk that the US Dollar Index (DXY) is breaking out in a big way. To anyone who believes in technical analysis (and skeptics should keep in mind that a lot of macro and currency traders DO), it looks like the USD is ready to break out of a 29-year downtrend that began with the Plaza Accord way back September 1985. The reversal of a trend that has been in place for that long is going to catch a number of people offsides. Unfortunately in investment and economics, you get more than a five-yard penalty for being offsides on a trend this big.
We are now going to look at a number of charts in rapid-fire fashion. As noted above, the dollar bull trend is exacerbated by debt. Global debt-to-GDP has been rising over the past several years.
The pool of developed-world financial assets is still growing, after a minor decrease in 2008. Again, there has been no deleveraging.
Even though debt and financial assets have been growing in the developed world, the real explosion in debt and financial assets has occurred in emerging markets, where the unwarranted flow of easy money has fueled a borrowing bonanza on the back of a massive USD-funded carry trade.
These QE-induced capital flows have kept EM sovereign borrowing costs low and enabled years of elevated emerging-market sovereign debt issuance, even as many of those markets displayed profound signs of structural weakness. I’m seeing estimates for the USD-funded carry trade around the world ranging from $3 TRILLION to $9 TRILLION. Raoul Pal believes it is roughly $5T, with nearly $3T of that going directly into China. (Other estimates for China suggest a somewhat lower number, but whatever it is, it is massive.)
Earlier this year, Bridgewater argued that total portfolio flows into emerging markets had doubled between 2008 and early 2014, from $5T to $10T.
Their study gave us some very specific data on flows into the larger EMs.
The following slide from Hyun Song Shin, head of research for the Bank for International Settlements, estimates that total USD-denominated credit to non-banks outside the United States is more than $9T.
What I’m getting at here is that a reversal in flows from a forceful unwind in USD capital flows could have disastrous effects on emerging markets... and there are a number of ways the unwind could blow back on the USA and other developed markets in coming quarters. The crazy thing is that EM currencies as a group have already given back more than 10 years of gains… and their losses can get a LOT worse.
Companies and governments in emerging markets have borrowed in dollars because of the ultralow interest rates available, but they earn the money to pay those loans back in local currencies. If the local currency is dropping significantly faster than the dollar, then no matter how profitable a business is, it is sinking deeper into debt with every tick up in the dollar. That’s what happened in 1998, and it’s happening again today.
Moving on in our survey of the world, we see the Japanese yen continuing to fall as the Bank of Japan engages in the most massive experiment in quantitative easing the world has ever seen. And they are doing it at the time when Japan’s current account and trade balance are both deeply negative.
These three realities combined mean that the yen is going to fall much further. The fourth, unstated, poison-tipped arrow of Abenomics is the launching of a major currency war, the consequences of which are now starting to be felt, as we can see in the next chart.
The potential for policy mistakes or monetary crises on the part of other Asian nations is very real and very troubling. We could see a country lose control of its currency as it tries to respond to Japan, and it is not altogether unlikely that at some point Japan itself will lose control, which would bring about a whole different set of problems and crises. Meanwhile, the US dollar’s rise will go on creating further problems for dollar-denominated debt in emerging markets, including China, which may decide that it needs to respond by devaluing the renminbi.
China’s investment boom is cooling; its competitiveness is eroding; and markets may already be pricing in a renminbi devaluation. China’s boom was largely a result of foreign direct investment and a massive increase in debt in a short period of time. Even though bank lending has grown substantially, the real growth in debt in recent years came through an explosion in non-bank loan funding. China has created a shadow banking system that is staggering in size.
There have been a number of studies on the relationship between the rapidity of growth of debt and subsequent financial crises. Even if we look to a broad sample of 48 instances over the last 50 years where total social finance expanded by as little as 30% over five years (less than half the magnitude of China’s credit explosion), history suggests there is still a 50% chance of a banking crisis or an abrupt fall in growth during the post-boom period. My point is that there is a clear relationship between the intensity of a credit boom and the subsequent adjustment (downward) in GDP growth rate. There are no cases in modern history where an economy has managed to avoid a banking crisis or outright bust after experiencing rapid lending growth anything like China’s ongoing credit boom.
The world is simply not prepared for a major China slowdown, let alone a hard landing. And gods forbid that the Chinese have a problem at the same time that Europe slides back into crisis.
The big question is, what happens next in China? Personally, I think it will be very difficult to avoid a real fall in the Chinese growth rate in the next 3-5 years. The reforms required to rebalance China to a more sustainable growth model will be very painful, and there is a real chance they could bring on a banking panic in the short term; but without those reforms, China literally has no chance. The Chinese Dragon is attempting a very intricate and delicate dance. The world needs China to succeed, but we must recognize that a Chinese hard landing is very much within our cone of uncertainty.
I want to close this letter with a quote from William White, who recently did an interviewwith Finanz und Wirtschaft, perhaps the leading business and economics newspaper in Switzerland. White is the highly regarded former chief economist of the Bank for International Settlements. Longtime readers may recall that I have quoted him at length over the years, as his writing is some of the most thought-provoking in the economics world.
The interview focused on the decision by the Swiss National Bank to go to negative interest rates on January 22, 2015. Not coincidentally, the European Central Bank will be meeting that day to decide whether or not to implement its own quantitative easing program. The Swiss are quite concerned about the massive capital inflows that are pushing their currency to very uncomfortable levels. In a highly unusual move, they are going to start charging banks for the privilege of holding Swiss currency accounts.
For the Swiss to enact such a move means that they must be convinced that the ECB is actually going to do something on January 22. Technically, it is against the rules for the ECB to buy sovereign debt, and the Germans are adamantly opposed. But my highly connected friend Kiron Sarkar asks:
What if the ECB does introduce a QE programme, involving the purchase of EZ government debt, though only on the basis that the relevant countries meet pre-agreed targets? You have provided a massive incentive to introduce structural reforms, dealt with the German's/Bundesbank objections, and those countries that play ball will benefit from lower interest rates and a weaker euro. On the other hand, if EZ countries do not cooperate, yields on their bonds will blow out massively – just the right stick to wield. It's the classic carrot and stick approach. Too fanciful? Well, maybe, but...
I guarantee you just such a solution is being talked about. We will see what actually gets implemented. Now let’s turn to the conclusion of White’s interview (emphasis mine):
The SNB has to follow the ECB in its monetary policy. Is it not dangerous when the monetary policy of one country affects another?
Currently we have an international monetary non-system. Nobody has to follow any rules. Everybody does what they consider is in their own short-term best interest. The real difficulty is: What is in their short-term interest – for example, following ultra-easy monetary policy – could well backfire somewhere [else]. It might be not in their long-term best interest. And as the easy monetary policy influences the exchange rates, it influences other countries. Almost every country in the world is in easing mode, following the Fed, and we have absolutely no idea how it will end up. We are in absolutely unchartered territory here. This worries me the most. The Swiss National Bank has been doing well in what it was forced to do by this international monetary non-system. The Swiss have to do the best they can, because that is what everybody else is doing.
What are the risks of this non-system?
There is no automatic adjustment of current account deficits and surpluses, they can get totally out of hand. There are effects from big countries to little ones, like Switzerland. The system is dangerously unanchored. It is every man for himself. And we do not know what the long-term consequences of this will be. And if countries get in serious trouble, think of the Russians at the moment, there is nobody at the center of the system who has the responsibility of providing liquidity to people who desperately need it. If we have a number of small countries or one big country which run into trouble, the resources of the International Monetary Fund to deal with this are very limited. The idea that all countries act in their own individual interest, that you just let the exchange rate float and the whole system will be fine:This all is a dangerous illusion.
A little snippet from history
22 December 1973: Opec more than doubles the price of oil
[That Jag in the picture has TWO fuel tanks; I can remember someone with one of these wincing as he filled it up - 6mpg or thereabouts. Way to go carbon footprint!]
Opec’s recent decision not cut production sent massive shock waves causing the price of oil to plummet, but on this day in 1973 Opec took, an arguably even more shocking decision.
Overnight, Opec more than doubled the price of oil from $5.12 a barrel to $11.65. The initial price was in fact a hike of its own a few months earlier on a price of $3. The price increase caused the legendary 1973 oil crisis, and was a major shock for the western world economy.
The reason behind the price hike was political. Israel had just won the Yom Kippur war against Egypt and Syria. The two Arab countries launched a surprise attack on Israel during the Jewish Yom Kippur festival. The aim was to reverse the losses of the Six Day War in 1967 and reassert Arab claims over the region.
However, the Opec move was not designed against Israel. It was meant to hurt the United States who had quickly and heavily supplied Israel with military equipment to fight the war, as well as providing political support.
Richard Nixon, the US President at the time, created a new short term Energy Office to deal with the crisis. It implemented price controls which forced ‘old oil’ to stay at a certain price, while newly discovered oil was allowed to be sold at market rates.
It was meant to reduce dependence on Arab oil by opening up new suppliers. However, the result was an artificial shortage in fuel because ‘old oil’ disappeared from the market. To tackle this, the government introduced a rationing programme and even reduced the speed limit to 55mph to cut consumption.
Eventually, the crisis ended through a negotiated settlement between Israel and the Arab countries. Israel came out on top overall but relinquished some of the new land it had taken during the war.
Interestingly, if the increased price of $11.65 in 1973 is adjusted for inflation to 2014 it comes to $63.88. In the last few months the price of crude oil has plummeted from $110 a barrel to around $60.
On a separate but related note, Fathom Consulting was on the radio this morning pointing out that the falling oil price is more likely due to falling demand rather than rising supply (though it is a mix, not either/or). The reasoning given is the slowing growth in China - they put the annual growth rate at 4%, not 7.4% - and [with all the other posts on China I have given you] you should by now see how all these elements are beginning to fit together. I hesitate to use the term "perfect storm" but a lot of people I know are increasing the cash element of their portfolios (insurance).
Quick article on tax vs spending cuts
Thatcherites need a better song on spending cuts - Moneyweek
If the Tories win the next election, then by 2020 the state will probably have shrunk to its smallest size relative to GDP for 30 years. So declared the Office for Budget Responsibility in the wake of the chancellor’s Autumn Statement, says Will Hutton in The Observer. That means spending per head will have dropped by a third in ten years.
“This is the most dramatic change in state capability that any British government has ever engineered.” The authors of this “massive” experiment insist there is no alternative, but there is: the government has not lifted a finger “to compensate for the haemorrhaging of the UK tax base”. If we want the “scale of public activity congruent with a civilised society, it has be paid for”.
Centre and left-wing politicians must be honest about this and argue the case. Lifting taxes by 3% of GDP to 38.5% (for example, via property taxation and broadening the VAT base) will still leave Britain below the “crucial 40% benchmark, thus undertaxed by comparison with most advanced countries”.
There is an “honourable case for a net increase in taxation”, says Janan Ganesh in the Financial Times, but taking it directly would not be easy. While public spending has “oscillated wildly in recent decades, tax receipts as a share of national income have hovered between 30% and 37% since the 1960s”.
Politicians sense that voters have a “breaking point when it comes to tax”. Osborne will be hoping that his political enemies will try and test it. As for Osborne’s cuts, they may be “politically incendiary”, but they are not impossible.
There have been four “reimaginings” of the state in roughly a century; “two extending the role of government, two rolling it back”. We are due another. This “historical context was absent” from some of the reactions to Osborne’s statement.
The more hysterical made “excitable allusions” to George Orwell’s chronicle of 1930s poverty, The Road to Wigan Pier. In truth, the government has “cut £35bn from departments since 2010 without Britain regressing into a desolate pre-modernity”.
We are not about to return to the 1930s, agrees Matthew Parris in The Times. But we might “be going back to the 1980s”. The Thatcher-Major years proved it is possible to cut public spending below 40% of GDP. But by the end of the last Labour government, Gordon Brown had pushed it back above 47%.
It’s hard to retrench, but a smaller state isn’t necessarily a bad thing. The Tories “shouldn’t have to scare voters” into backing cuts. Have we forgotten the “near-permanent apoplexy at the inefficiency of the public sector”, pre-Thatcher’s privatisations? “Believers in smaller government need… a better song.”
They also need courage, says Janet Daley in The Daily Telegraph. Osborne presumably avoided admitting what cuts on this scale really mean in the “interests of short-term electoral safety”. (Labour was similarly muted on its plans to borrow more, fearing the charge of profligacy, says The Observer.)
However, a “fundamental reimagining of the state” is inevitable, given the “dead end” to which an ever-larger state has brought us. “In their hearts, the people know this and might well reward the political leader who admitted it openly.”
A data-rich source for A2s to dip into
Things that make you go hmmm... last edition
You don't have to read it all - and indeed, some of it is only really of interest to me - but take the time to try and absorb some of the information it contains, particularly re the following:
Credit and debt (particularly re China & EMs)
Gold and central banks adjusting reserves using gold
Japan and Abenomics
Many useful charts showing some interesting changes underway.
If this does not give you a sense of impending major structural changes you should not be studying economics...
You don't have to read it all - and indeed, some of it is only really of interest to me - but take the time to try and absorb some of the information it contains, particularly re the following:
Credit and debt (particularly re China & EMs)
Gold and central banks adjusting reserves using gold
Japan and Abenomics
Many useful charts showing some interesting changes underway.
If this does not give you a sense of impending major structural changes you should not be studying economics...
Negative interest rates, tax changes and more - A2 material
Swiss take interest rates negative - well, not until 22nd January... what happens on 22nd Jan?
Govt mulling tax cut for oil companies - check out the potential job losses
How the poor end up paying the most tax
David Smith on deflation - good or bad thing?
Short article on falling capital inflows - problem for growth in future?
If the links do not open (because The Times doesn't allow it) post this in the comments section, and I will put the articles up individually. There is plenty more to come, and I expect EVERYONE to make the effort to keep up to date.
Govt mulling tax cut for oil companies - check out the potential job losses
How the poor end up paying the most tax
David Smith on deflation - good or bad thing?
Short article on falling capital inflows - problem for growth in future?
If the links do not open (because The Times doesn't allow it) post this in the comments section, and I will put the articles up individually. There is plenty more to come, and I expect EVERYONE to make the effort to keep up to date.
Tuesday 16 December 2014
Some useful revision material on taxation
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Saturday 13 December 2014
Some very current material on tax:
As this is our topic at the moment, very timely indeed. I'd like you all to start putting some comments on the posts so I can see who is taking the time to read this material:
Allister Heath on corporations and tax:
Plus ratings agency S&P looks at our deficit position:
S&P says taxes will have to rise:
Moving on, looks like France is heading for very difficult times; read the last few paragraphs for a recap on problems with deflation:
France slides into deflation:
Allister Heath on corporations and tax:
Plus ratings agency S&P looks at our deficit position:
S&P says taxes will have to rise:
Moving on, looks like France is heading for very difficult times; read the last few paragraphs for a recap on problems with deflation:
France slides into deflation:
Friday 12 December 2014
Thursday 11 December 2014
Essential reading on UK economy
Several lessons ago we talked about consumer spending leading growth; this article fills in the gaps:
Telegraph/OBR
Telegraph/OBR
Wednesday 10 December 2014
An article for Exchange Rates topic
Jasper, this is what you brought up - and it is looming as we speak:
Mauldin Economics on $ strength and potential crises resulting:
Mauldin Economics on $ strength and potential crises resulting:
Monday 8 December 2014
Interest rates since 1700
good to see how extraordinary current rates are:
Historical interest rate chart
Sunday 7 December 2014
Sunday reading material
Effect of exchange rate changes, using Japan as an example; this contains the information you need for any essay about exchange rates & exports vs imports. Maybe you should think about compiling short notes with key points on for your folders (in the relevant sections) to help you avoid making those broad generalisations that are often wrong:
Weak yen increasing rift between importers & exporters
Impact of falling oil prices on one country; plenty of meat in here for the ripple effect across an important oil exporter:
Malaysia-faces-fiscal-shortfall-as-tax-revenue-dwindles
Continuing the Pacific theme, here is a piece on the development of the Thai auto industry. This contains useful information on how it has developed, the role of technology-transfer, and how (why) Japan is heavily involved. I expect you all to be able to spell the Summit founder's son's name...
Thailand-takes-over-from-Detroit
Time for some home-grown material: HSBC looks at the role of imports in building up companies that then grow our exports. Really good, concise and simple article - AS to read this too please in view of recent essay on imports (there are many other useful articles from these guys):
imports-driving-uk-growth?
I couldn't resist this one; disruptive or adaptive tech? Fiscal policy or supply-side? Jobs growth or jobs destruction? Toyota will put its first fuel cell car on sale this month. Not only does this have implications for fossil fuel consumption (which is good), it will also require considerable investment (producing and delivering hydrogen) - and government subsidies - yikes! Useful for AS & A2 as a case study:
The-age-of-fuel-cell-cars-dawns-in-Japan
Finally, have fun with this forecasting tool looking at [forecast] trading patterns out to 2030:
tools-data/trade-forecast-tool/uk
Weak yen increasing rift between importers & exporters
Impact of falling oil prices on one country; plenty of meat in here for the ripple effect across an important oil exporter:
Malaysia-faces-fiscal-shortfall-as-tax-revenue-dwindles
Continuing the Pacific theme, here is a piece on the development of the Thai auto industry. This contains useful information on how it has developed, the role of technology-transfer, and how (why) Japan is heavily involved. I expect you all to be able to spell the Summit founder's son's name...
Thailand-takes-over-from-Detroit
Time for some home-grown material: HSBC looks at the role of imports in building up companies that then grow our exports. Really good, concise and simple article - AS to read this too please in view of recent essay on imports (there are many other useful articles from these guys):
imports-driving-uk-growth?
I couldn't resist this one; disruptive or adaptive tech? Fiscal policy or supply-side? Jobs growth or jobs destruction? Toyota will put its first fuel cell car on sale this month. Not only does this have implications for fossil fuel consumption (which is good), it will also require considerable investment (producing and delivering hydrogen) - and government subsidies - yikes! Useful for AS & A2 as a case study:
The-age-of-fuel-cell-cars-dawns-in-Japan
Finally, have fun with this forecasting tool looking at [forecast] trading patterns out to 2030:
tools-data/trade-forecast-tool/uk
The good and bad sides of debt & borrowing
At least once a week I explain to you that you need wider context, and it was clear from your essays on inflation/deflation & central bank policy that this is still very limited, and is something you should be trying to overcome. All of you wrote good technical answers, with basic explanations of both causes and outcomes, and applied broad CB policy to this. However, not one of you differentiated between different groups in terms of policy impact, or applied the current situation in terms of the changing shape of our economy and demography in your explanation of why CBs should be focusing on deflation. This would be where you would lift your answer to a higher grade - from simple explanation to more complex development of a theme using the current context.
I understand that when we cover a topic in class you get the material to write technical essays - the "bones", if you will; it is up to you to read around a subject to put the meat on the bones. I spend a lot of my time reading across the spectrum of commentary on the current context; I post the best & easiest to grasp articles here. I can tell who is taking the time to read this and who isn't. If you believe that, having learned the material from class, and demonstrated the ability to regurgitate it in an essay, you will achieve your target grade, you are mistaken. Your target is set at the upper boundary of what you showed us you could achieve; you are unlikely to coast to that grade. If you take this point seriously, and start to read the material I post here - and other articles - you will get a much wider grasp of each topic. This will help you hit your target, and possibly lift you up a grade.
With regard to the issue of tackling deflation, the key point you all missed is not just debt-deflation issues; it is the nature of our economy (and all consumer-driven economies) as being demand-led, driven by debt. Debt is not a problem if it is used wisely - but it is a problem now; you can read about this in an interview with Russell Napier in the 28th Nov issue of MoneyWeek. As you know, there is a copy (usually unopened) in the library. I know some of you read it online, but many of you don't. We are more than half way through the course, and while all of you have shown improvements in your writing, many of you are not adding the depth through reading as we go along; you will NOT be able to add this during the last few weeks before the exam; "economics" is happening all the time - and every week something significant is happening. You ignore this at your peril.
You all need to be getting serious about your exams now; your Saturdays and Sundays need to contain both school work and extension reading. The Unit 4 exam probably needs more extension reading than anything else. In future I will be marking your essays for their context; if they are a rehash of class material alone do not expect better than a C.
I understand that when we cover a topic in class you get the material to write technical essays - the "bones", if you will; it is up to you to read around a subject to put the meat on the bones. I spend a lot of my time reading across the spectrum of commentary on the current context; I post the best & easiest to grasp articles here. I can tell who is taking the time to read this and who isn't. If you believe that, having learned the material from class, and demonstrated the ability to regurgitate it in an essay, you will achieve your target grade, you are mistaken. Your target is set at the upper boundary of what you showed us you could achieve; you are unlikely to coast to that grade. If you take this point seriously, and start to read the material I post here - and other articles - you will get a much wider grasp of each topic. This will help you hit your target, and possibly lift you up a grade.
With regard to the issue of tackling deflation, the key point you all missed is not just debt-deflation issues; it is the nature of our economy (and all consumer-driven economies) as being demand-led, driven by debt. Debt is not a problem if it is used wisely - but it is a problem now; you can read about this in an interview with Russell Napier in the 28th Nov issue of MoneyWeek. As you know, there is a copy (usually unopened) in the library. I know some of you read it online, but many of you don't. We are more than half way through the course, and while all of you have shown improvements in your writing, many of you are not adding the depth through reading as we go along; you will NOT be able to add this during the last few weeks before the exam; "economics" is happening all the time - and every week something significant is happening. You ignore this at your peril.
You all need to be getting serious about your exams now; your Saturdays and Sundays need to contain both school work and extension reading. The Unit 4 exam probably needs more extension reading than anything else. In future I will be marking your essays for their context; if they are a rehash of class material alone do not expect better than a C.
Saturday 6 December 2014
Friday 5 December 2014
Real supply-side policies
Helping redress the balance, North v South
New £200m science institute for the north
George Osborne with Professor Sir Paul Nurse (right) at a topping out ceremony at the Francis Crick Institute
Sean Dempsey/PA
A multimillion-pound science institute in Manchester will be announced by George Osborne tomorrow as the next step in his plans for a “northern powerhouse” to rival London’s thriving economy.
It can be revealed that the research and innovation centre will mirror the Crick Institute, due to open in London next year. It will cost more than £200 million, but the chancellor has been negotiating for months with private investors to secure extra funding.
The centre, which will focus on materials research, will have satellite hubs in cities including Sheffield, Leeds and Liverpool, in an attempt to attract world-class scientists and technicians to the north. It may also have links to Cambridge and Imperial College London to enable their researchers to contribute to work in Manchester.
Sources in Whitehall said that Vince Cable, the business secretary, had worked on the proposals for months. “Vince has long pushed for improvements in science capital spending in the north for long-term growth and it is good news that Mr Osborne has recognised and rewarded this with extra cash,” one said.
The chancellor’s autumn statement, which will confirm big spending cuts for the next Parliament, will set out the details of 1,400 flood defence projects to provide better protection for 300,000 homes, although funding for the six-year scheme was announced last year.
Nick Clegg was forced to deny that the projects included in the statement were being chosen to help the coalition in the general election. Mr Osborne will confirm big road and rail programmes for the north and is likely to reveal that more powers may be devolved to cities such as Sheffield and Leeds. A new Transport for the North authority, to oversee buses, rail and metros, is expected to be confirmed.
Last month the chancellor gave approval for a high-speed rail link — HS3 — across the Pennines, ultimately linking Hull to Liverpool, via Leeds and Manchester. He later announced new powers, money and a directly elected mayor for Manchester as part of the government’s response to the Scottish referendum. After new tax-raising powers in Scotland were announced last week, local government chiefs have demanded devolved rights over council tax, business rates and welfare spending.
Some local government figures expect that Mr Osborne may also signal new powers for the West Midlands, including Coventry and Birmingham.
Labour council leaders have openly praised the chancellor for tackling concerns that they had have held for decades over a lack of infrastructure investment and Whitehall centralisation.
Even John Cruddas, the party’s head of policy, said last week that Mr Osborne had “been agile enough” to make a land grab of Labour’s agenda to solve the English democracy question through devolution to cities.
The Manchester research institute will have a “commercial arm” to ensure that innovations in technology and manufacturing are sold to businesses in Britain. Jim O’Neill, chairman of the City Growth Commission, which has campaigned for more power in the north, said that too often technology inventions in laboratories in English universities were sold abroad before the potential was recognised in Britain.
Mr O’Neill, who has been helping the chancellor to broker a deal with the northern local authorities to give them extra powers, said that Mr Osborne’s announcement about HS3 and faster rail links would be vital to ensure that scientists would be attracted to the north.
Charlotte Alldritt, secretary to the commission, said that the research funding “will help to make the northern powerhouse a global economic force to be reckoned with”.
Ed Balls, the shadow chancellor, said yesterday that Labour would be “tough on the deficit and tough on the causes of the deficit”, if it won power, but he acknowledged differences with the Tories by promising to get the deficit down in a “fairer way”.
Andrew Tyrie, the chairman of the Treasury select committee, said that detailed plans to give the Office for Budget Responsibility, the independent watchdog, the power to scrutinise election manifestos should be drawn up in the next Parliament.
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