Extraordinary monetary policy development:

Swiss banking group UBS will start charging customers a negative interest rate of 0.6%. The measure will apply to customers with deposits worth one million euros or more.

 That's quite chunky, especially if you consider that positive interest rates (it still feels a bit weird that we have to clarify this now) haven't been at 0.6% for a while now.

 As a reason for imposing the charge, UBS names the "continuing extraordinarily low interest rates in the euro area" combined with "increased liquidity regulations". It's a direct consequence of steps by the European Central Bank asking private banks to pay a small percentage for storing their money with them instead of lending it out or investing it.

Evaluating trade agreements

Done an essay on free trade, Brexit and Europe, Donald Trump, and want something to avoid the "lame conclusion"? Try these points:

Scrap Trade Agreements to Boost Free Trade

• It is widely believed that trade agreements are necessary to enable the UK to prosper in world markets. In reality, unilateral free trade is possible and offers many benefits.


• The UK’s exports of services to the EU owe little to the Single Market as national barriers to trade in services still dominate in Europe.


• Trade agreements typically involve substantial trade diversion as domestic interests exert pressure on governments to protect particular producers.


• In world terms, the UK benefits from the ‘importance of unimportance’. If any country or group of countries decides to erect trade barriers against us it cannot influence world prices and we can trade elsewhere.


• When the general equilibrium consequences are properly understood, trade agreements by small countries are seen to reallocate output, but do not alter world prices in the long run.

These bullet points are from a paper by Professor Patrick Minford, published in 2016. The short press release on this can be found here.

How timely - an article on trade & US trade policy

Almost as if it were written for Year 13:

7 March 2017

The spectacular economic ignorance of Peter Navarro

By Ryan Bourne @MrRBourne

 Shipping containers stacked in the Port of Los Angeles. Photo: David McNew / Getty Images

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•   Navarro thinks imports reduce GDP. They don’t
•   The new US trade agenda could lead to huge capital flight from America
•   Trump's chief trade adviser doesn't understand trade

Those who believed President Donald Trump’s trade policy couldn’t be as bad as suggested might want to reassess. For his adviser Peter Navarro has written a spectacularly economically ignorant article on the subject for the Wall Street Journal, fulfilling all of Robert Colvile’s fears.

His premise is simple: trade deficits are a drain on economic growth, and the capital surpluses necessary to finance them are also harmful to American interests.

Where to start?

1) Navarro does not understand GDP

He begins: “Growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports). Reducing a trade deficit through tough, smart negotiations is a way to increase net exports – and boost the rate of economic growth.”

But the GDP identity he talks of (think Y = C + I + G + X – M) is not a growth equation, and imports do not “reduce GDP”. The reason that imports are subtracted from the equation is because they are already embedded in the spending of households, businesses and governments. To leave them in there would mean GDP would be overstated by double-counting imports, when in fact imports are not domestically produced. In fact, higher imports tend to be associated with faster growth – they are not a drain on it.

2) Navarro seems to think exports of goods are more important than services

All the time, he refers to a persistent deficit in “trade in goods”. But the US exports services too. In fact, it runs a surplus in them of close to $300 billion. That Navarro has a fetish for manufacturing is a personal issue, but exports generate foreign earnings whatever you’re producing. whether it’s cars or selling insurance or producing a Hollywood movie. In terms of the actual totals, the composition of exports does not matter at all.

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3) Navarro implies that trade deficits are always a problem

Navarro simply points at accounting identities and at a trade deficit to imply that it engenders economic weakness. For sure, trade deficits can be a symptom of problems, but his mechanical view that they must be does not hold.

If a country imports more dollar-value goods and services than it exports, it is a result of the individual decisions of its population and the population of the rest of the world. Those imports can be paid for by export earnings, by running down savings or by borrowing. That’s why any trade deficit (net outflow of dollars) is matched by an investment surplus (net inflow of dollars).

A current account deficit is really just an aggregate decision to spend more than your income – the wisdom of doing so really depends on what that borrowing, or the inward investment associated with it, is used to finance.

In the late 19th and early 20th century, for example, the US ran current account deficits as money poured in to invest as industry expanded to the west.

In fact, the US has run trade deficits for the past 41 straight years. As my colleague Dan Ikenson has outlined, this is “a period during which the size of the American economy tripled in real terms, real manufacturing value quadrupled, and the number of jobs in the economy almost doubled”.

Now, current account deficits can be caused by excess demand, as loose monetary policy leads to rising prices at home and more purchases from abroad. But Navarro provides no evidence for this being true today. If it were, we’d expect it to put substantial downward pressure on the dollar, which doesn’t seem to be happening.

Elsewhere on CapX

• Robert Colvile: Trump's trade guru is the most dangerous man in the world
• Alex Massie: In praise of the liberal elites
• Margaret A Boden: The machines won't take over just yet
• Chris Deerin: I'll eat my sporran if there's another Scottish referendum
• Connor Lane: We need the classrooms of tomorrow, today
• Write for CapX and win £1,000

4) Navarro seems confused on how a trade deficit interacts with investment

As Tim Worstall has noted, Navarro is desperate to say that America’s trade deficit is in part caused by offshoring, and lower domestic investment. But he then acknowledges, as outlined above, that the flipside of current account deficits is capital account surpluses and thus investment into the US from abroad.

This can manifest itself in purchases of equities or physical assets, or government or corporate debt. Only a portion of these, though, are really generalised debts owed by the American public to foreigners – and that is the portion associated with financing of government borrowing (which could be reduced if the federal government decided to rein in its borrowing).

But one simply cannot imply, as Navarro does, that trade deficits are associated with lower investment, unless one thinks American investment is more worthy than investment from abroad.

In short, Navarro thinks imports reduce GDP. They don’t. He thinks some overseas earnings (those from goods) matter more than others (services). They don’t. He thinks a current account deficit is automatically a problem. It isn’t. He thinks that domestic investment in the US is somehow better than foreign. It isn’t. He thinks that pointing at accounting identities is economics. It isn’t.

If used to inform policy, such an agenda would lead to huge capital flight from the US and deeply damaging new trade restrictions, raising prices and reducing choice for US consumers.

Ryan Bourne occupies the R Evan Scharf Chair for the Public Understanding of Economics at Cato

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Material to help you question the value of GDP as a measure:

GDP is not enough: economists and businesses demand new measure of inclusive growth

National figures on economic growth fail to take into account of regional variations and ignore quality of life, such as the gap in life expectancy between Surrey and the north east of England, the Inclusive Growth Commission warned Credit:  ANDREW YATES/AFP

• Tim Wallace

7 March 2017 • Daily Telegraph

The quality of economic growth needs to be measured, not just the quantity, if the government is to understand exactly how GDP growth affects people up and down the country, economists have proposed.
Growth varies across the country with jobs and wages distributed unevenly, so the Inclusive Growth Commission (ICG) and the Royal Society for the encouragement of Arts, Manufactures and Commerce want the Office for National Statistics (ONS) to publish figures on quality of life alongside GDP numbers.
“Traditional metrics of economic performance, such as GDP or at a regional level gross value added (GVA), are a poor guide to social and economic welfare,” said the ICG’s report.

“They also do not tell us anything about how the opportunities and benefits of growth are distributed across different spatial areas and social or income groups. Nor do they do a good job of tracking structural economic change, the sustainability of growth, or the human impact of shifts in the labour market.”

Local productivity, local incomes, the distribution of earnings, pay changes for the lowest paid and levels of regional economic inactivity could all form part of this new inclusive growth metric, said the ICG which is chaired by Stephanie Flanders, JP Morgan’s chief market strategist.

The Commission also includes former Rolls-Royce chief executive Sir John Rose and London School of Economics professor Henry Overman.

The recommendation comes at a time when the ONS is looking for ways to beef up its capabilities.
Other official bodies including the Bank of England are also trying to improve their forecasting models.

One problem linked to the idea of inclusive growth is that the economy has been growing and unemployment has been falling, yet wage growth has remained muted.

Bank of England officials are studying the problem closely, recalibrating their theories of slack in the economy and examining sources of wage growth.

Extra detail from the ONS on inclusive growth could help to shed light on the variance in pay and jobs in different parts of the country and the labour market.

The IGC also recommends the Chancellor merge a series of initiatives including the Local Growth Fund and the Life Chances Investment Fund into one Inclusive Growth Investment Fund, with a combined budget of £3.8bn per year.

As a result it could better coordinate investment to target the proposed new measure of inclusive growth, the IGC suggests.

Europe, costs & the sale of Vauxhall to Peugeot

With its sale of Vauxhall, GM is pulling out of Europe, not Britain - it may not be the last big multi-national to do so

• Matthew Lynn

6 March 2017 •  Daily Telegraph

Vauxhall is being bought by PSA, owner of Peugeot

Jobs are under threat. Investment is disappearing, the currency is hitting profits, and the world’s mightiest multi-nationals are turning their back on us. In the wake of the of the announcement that General Motors is selling its Vauxhall unit, manufacturer of the Astra, the Remoaner headlines almost write themselves.

True, the decision to get out of the British market after almost a century is hardly a vote of confidence in this country. But hold on. In fact, it is Europe that GM is quitting, not the UK. Plagued by high costs, mass unemployment, a hostile political class, and a deflationary currency, the auto manufacturer has decided that it simply is not worth the hassle of trying to do business over on this side of the Atlantic. The really worrying thing is this. It may not be the last. In truth, global multi-nationals are losing interest in the euro-zone.

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GM has deep roots in Europe. Arguably the template for the global manufacturing conglomerate, under is visionary creator Alfred Sloan, the American company first entered the British market when it bought Vauxhall way back in 1925. Three years later, it acquired a majority stake in Germany’s Opel brand, and massively expanded it, becoming the first manufacturer to make 100,000 cars a year (it lost control, inevitably, during WWII, but took it back soon afterwards). For most of its history, owning a major slice of the European market was a core part of GM’s global strategy. It had to be here.

Over the years it has made some classic cars, and some of its vehicles remain formidable competitors in the market. In this country, the Vauxhall Astra has long remained one of the most popular on the roads – only this week, figures released by the Society for Motor Manufacturers and Traders ranked it as the third best-selling model in February (after the Ford Fiesta and the Volkswagen Golf, in case you were wondering). The Corsa came in at nine. In Germany, the Opel Asta – in effect, the same car – came in at fifth place. But in neither France nor Spain did it make the Top Ten. Opel and Vauxhall were very much German and British brands, which struggled to make any impact worldwide.

Even if it shifted a lot of units, GM couldn’t find a way to make money in Europe. It has lost money consistently on the continent since 1999, and has managed to blow the best part of $20 billion over those years (more than a third of its current market value of only $57 bn). It has gradually scaled back. The Opel brand has been steadily taken out of the Chinese and Russian markets, concentrating only on Europe. A few years ago, it closed its plant in the German city of Bochum, with the loss of more than 3,000 jobs, the first time an auto plant has been closed in that country since the end of WWII. It has re-organised, re-focussed, re-branded and re-launched its lines a dozen times, and none of it has managed to move it into the black. It was probably not great surprise then that it finally gave up, and this week sold the whole unit to France’s Peugeot-Citroen for £1.9 billion, a mere fraction of the billions it has lost over the last decade and a half.

The UK’s decision to leave the EU certainly didn’t help matters. The sharp devaluation of sterling threw GM’s recovery plans off course (although in time, it will make the cars made in Ellesmere Port and Luton a lot more profitable in Europe). The threat of tariffs if there is a ‘hard Brexit’, and Brussels decides to inflict maximum damage on everyone after we leave, presented another round of potential challenges, although if that does happen, none of it will impact Vauxhall’s healthy sales in the UK market.

But, aside from some short-term noise, the sale has nothing to do with Brexit. And it has everything to do with the daunting challenges facing any multinational trying to build a business in a continent that has high taxes, fearsome regulations, and a currency that has locked it into permanent depression.
The first and most important factor is the dire state of the European economy. Car sales across the continent collapsed after the crash of 2008/9. From 16 million vehicles in 2007, the total went all the way down to 12 million in 2013, a two-decade low. Helped by a tidal wave of cheap money from the ECB, sales have clawed their way back since then, but they are still well below their peak.

What else would you expect in a continent where 15.6 million people are unemployed? In the countries where economies have been destroyed by the euro, the outlook has been especially dire. There aren’t many Greeks who can afford a new Astra anymore – and it will hardly come a shock that new vehicle sales dropped from 33,000 vehicles in January 2008 to just 3,000 in February last year, a fall of a staggering 90pc. Italian sales hit a peak of 310,000 way back in January 1990. By August 2013, that had fallen to slightly over 50,000 – a fall of more than 80pc. These are catastrophic numbers for a mid-market manufacturer focussed on the European market.

Next, costs are out of control. GM had plants right across Europe, concentrated in Germany and Spain, but with units in Poland and Hungary and elsewhere. Only 4,000 of its 25,000-plus workers were in the UK. Trying to rationalise that has been a nightmare. It took a $866 million hit for closing that one plant in Bochum. When a package was finally worked out with the unions and the government, which included early retirement and re-training support for younger workers, it cost the company 125,000 euros for every person it got rid of . It is virtually impossible to slim-line a company when you face costs like that. The German Chancellor Angela Merkel, a politician who has abandoned every free market principle her Christian Democrats once championed, has already intervened to protect the 18,000 workers Opel has in her country. Peugeot won’t find it any easier to squeeze costs than GM did.

Against that backdrop, the real question is why GM stuck it out so long, not why it finally gave up. The harsh fact is that global multi-nationals are turning their backs on Europe. With mass unemployment, a deflationary currency, crippling costs, and a political culture that is obsessed with protecting declining industries rather then encouraging new ones, the continent has become less and less attractive – and already it is slipping in the world rankings for investment.

In the 1920s, when Alfred Sloan, was building GM into the first global manufacturing colossus, expansion into Europe was the most crucial part of that strategy. It needed a presence in Germany, France, and Spain to be a  world-class player. Nine decades later, that is no longer true. GM is one of the first multi-nationals to give up on the continent. It is unlikely to be the last.

Great article on US Trade current & outlook:

Great article looking at Trump's plans and reality. Really useful essay material:

Don't let friends miss this compelling insight— share it with your network now. March 6, 2017 The State of US State Exports By George Friedman and Jacob L. Shapiro A domestic political battle is brewing in the United States between President Donald Trump’s administration and the Republican Party over the president’s economic plans. Trump’s key economic positions during his campaign included his opposition to free trade deals, his promise not to cut Social Security and Medicare, and his support of large-scale infrastructure spending. These are all positions that have clashed with general Republican orthodoxy. They were also the reason that some Bernie Sanders supporters found themselves nodding in unexpected agreement with Trump’s proposed policies. We can bring one key insight to this conversation as the battle lines are being drawn. It is extremely difficult to speak of the US economy as an undifferentiated whole. The US has varied economic interests at both the regional and state levels. This makes it extremely difficult to find a one-size-fits-all policy that can fix every problem. This is not only true for the US—almost all large countries (and even some small ones) are highly regionalized. It is also not to say that national economic statistics are useless—they can be used to make important observations about the overall performance of a national economy, especially in terms of the economic power of a given country. But too often, discussion of the US economy focuses disproportionately on the national level and not enough on the regional. What Export Patterns Tell Us One way to illustrate how regions differ from each other is to look deeper at US exports. Readers of Geopolitical Futures’ work will be familiar with this concept: the US is the largest economy in the world by far, and yet exports account for just 12.6% of US GDP. In absolute terms, US exports are still worth more than in most countries, totaling $2.2 trillion in 2016, according to the US Census Bureau. The only other country that comes close to or surpasses the US in terms of export value is China. The latest World Bank figures put the total value of Chinese exports at $2.4 trillion. But on the whole, the US is a massive consumer economy that is not highly dependent on exports. This is true at the national level, but when US trade statistics are broken down by state, the situation is more complex. Click to enlarge Only 10 US states derive more than 10% of their state GDP from exports: Indiana, Kentucky, Louisiana, Michigan, Mississippi, South Carolina, Tennessee, Texas, Vermont, and Washington. Eight of these states are located either in the Mideast or the South and voted for Trump in November’s presidential election. Of these 10 states, four derive more than 4% of their GDP from exports to just one country. Michigan and North Dakota are highly dependent on exports to Canada. Texas is inordinately dependent on exports to Mexico, and Washington is heavily reliant on exports to China. Views on NAFTA and China Each state’s approach to trade agreements and negotiations will be defined by its own trading practices and economic focus. For states like Texas and Michigan, NAFTA is going to be a major economic and political issue. A large portion of these states’ economies—and a significant number of jobs—relies on trade across their southern and northern borders, respectively. These states also view the rise in China’s share of global manufacturing production as a potential threat, since they are manufacturing centers and China can produce goods at lower costs. On the other hand, a state like Washington, located on the Pacific coast, will be less concerned with NAFTA and more concerned with policies that would open new potential trading markets in Asia. For example, stricter trade policies with China could affect Washington’s access to the Chinese market. As such, Pacific-facing states will have different priorities than Atlantic-facing states… and these regions will have different interests than the heartland. Even states with similarly sized economies can have vastly different approaches to trade and economic policy based on their specific economic activities. Take South Carolina and Connecticut as examples. These states have similar GDP totals. However, as a percent of total US exports, South Carolina exports twice as much as Connecticut. In Connecticut, exports account for about 6% of GDP, and the state’s top trading partner is France. In South Carolina, exports account for over 15% of GDP, and the state’s top trading partner is China. South Carolina is a manufacturing state and has been affected by globalization in a much different way than Connecticut. Ironically, a study by the Mercatus Center at George Mason University ranks Connecticut dead last in terms of fiscal solvency of all US states, whereas South Carolina is ranked 18th. But such statistics observe dependencies each state develops and, therefore, speak to the individual states’ policy priorities. A Lesson for Washington It is extremely difficult, if not impossible, for a policymaker in Washington, DC to design a plan that will benefit both South Carolina’s manufacturing industry and Connecticut’s financial services and insurance industry. And these are just two of 50 states. Any federal official attempting to make plans at the national level must think in terms of 50 different states, or eight different economic regions, or a number of other divisions that reveal shared interests. The map below indicates the vast differences between regions just in terms of GDP. This is not a novel observation. The US Civil War was fought, in part, because different systems of economic production in the North and South created not just economic fissures, but also social and cultural gulfs so great that the country went to war. Earlier still in US history, John Adams and Thomas Jefferson lived in different economic universes, and the arguments between Federalists and Jeffersonian Democrats (and their views on economic policy) shaped and continue to shape the US’s development. The fault lines may have shifted, but the fundamental issue—the relationship between the federal government and the individual states—has never been settled. The coming battle over economic policy will feature much grandstanding and sincere promises, some of which may be fulfilled. To understand what is at stake and why certain politicians advocate certain positions, it is not necessary to parse tweets or examine individual ideology. At the international level, we always argue that imperatives and constraints shape individual leaders as well as state actors. This is just as true at the subnational level, and even more so in a republic like the United States, where representatives who do not act in the interests of their constituencies can quickly find themselves out of a job. George Friedman Editor, This Week in Geopolitics

An anlaysis of monopolistic tendencies via Uber & Snapchat

Have a look at this commentary on the economics and business models of tech firms; useful context and evidence for micro, plus a couple of juicy snippets for macro - NB CapX is a great source of analytical comment, across a wide range of topics. Use this link to have a look, and [perhaps] subscribe to the weekly recap:

The new titans of tech?

Two tech companies, two contrasting trajectories. Snap (formerly Snapchat) hit the headlines this week when a post-IPO bidding frenzy saw it soar to a $34 billion valuation.

Uber, meanwhile, saw its reputation and potential valuation plummet after a blog about workplace sexism unleashed a firestorm of criticism, culminating in grovelling promises from the CEO to be a better leader and a better human being.

Yet beneath the surface, there are actually striking similarities between the two firms. Both are enormously valuable. Both are losing money hand over fist. And both manage to reconcile the two because they promise investors untold riches, delivered via monopolising the market.

Let’s take Uber first. Its price advantage over the cab firms, it turns out, doesn’t just come from the fact that its drivers aren’t formal employees or that it escapes much of the traditional regulation (both of which have been and will be the subject of innumerable court cases). It comes from subsidy: overall, Uber’s customers only pay 41 per cent (£) of the cost of their trips. Effectively, its investors are giving us a handout every time we use the service.

The idea, of course, is to gain market share and at some point make a profit - either because of efficiencies of scale, or because of whizzy new technology such as self-driving cars, but more probably through driving enough of its rivals from the marketplace to ratchet up prices again. Indeed, a widely read series of articles by Hubert Horan recently argued that this is third option is the only one that makes any kind of sense - but also that it is doomed to failure.

I’m much more charitable than Horan when it comes to Uber’s worth - it has definitely exposed and exploited inefficiencies in the marketplace, not to mention saved me quite a bit of cash. But he’s right that its ultimate goal is monopoly. Because that’s how the tech world works.

Take Snap, for example. It justifies its sky-high valuation by promising that it will have a monopoly (or very significant share) of an entire generation’s attention span - that generation being those who are actually able to understand what the hell it does, apart from producing terrifying face-swapped images of Jeremy Corbyn.

But in Snap’s case, its main obstacle is another, much larger company which has a very similar goal: Facebook.

Recently, Facebook’s Instagram subsidiary launched an unashamed clone of Snapchat called Stories. The aim was to cut Snap’s growth off at the knees - and it seems to have worked. Talk of Snap as the next Facebook has given way to worried discussions about whether it is in fact the next Twitter - that is to say, a breakthrough firm with millions of customers but no monopoly position, and therefore no profits, rather than an advertising-hoovering, attention-devouring leviathan.

I’ve written before on CapX about how the structure of capitalism is increasingly tending towards monopoly, or at least oligopoly. But because of the network effects involved, this tendency is particularly pronounced in tech. Indeed, the more ambitious your plans to disrupt and dominate, the greater the market opportunity, and the more eager the venture capitalists.

For capitalism to best serve the consumer, it needs the level playing field that permits cut-throat, relentless competition. But how to achieve that in markets which increasingly operate on a winner-takes-all basis?

Ben Thompson of Stratechery, one of the most consistently interesting analysts of the digital ecosystem, recently argued that Facebook has become too powerful for anyone’s good, not least given its additional control of WhatsApp and Instagram, and would - in an ideal world - be brought down to size.

For policy-makers and regulators, this is going to be one of the great challenges of the coming years. Snap and Uber may fulfil their founders’ lofty goals, or come crashing down to earth. But the question of how big is too big will continue to vex the would-be trustbusters for many years to come.

Below you'll find our top five stories from the past week - and remember to check in with CapX for our exclusive coverage of the UK Budget this coming week. We've got some great pieces lined up for you.

Robert Colvile

Editor, CapX