Friday, August 31, 2007

The Diana Effect

In April (which seems an eon ago, it was still the Blair era), 15 Royal Navy men got captured by the Iranians, and then proceeded to make fools of themselves, selling their stories and complaining about being "neck-flicked" by Iranians.

The Americans, who unlike the rest of the world, have held fast to an image of Britain set in the 1930's complete with stiff upper lips and butlers, were especially shocked. Time magazine rushed to explain what had changed:

How did Britain get like this? How did a society whose professed virtues were once those of duty, honor and discretion become a place of in-it-for-myself, let-it-all-hang-out emoting? Step forward those two women whose influence, combined — though one suspects they loathed each other — shaped a nation: Margaret Thatcher and Princess Diana.

Thatcher first. Her political party may have been called Conservative, but she was in truth one of the most radical leaders Britain has ever had. Thatcher could not abide the cozy and mildly corrupt arrangements that — as she saw it — had condemned post-1945 Britain to a managed decline, and was determined to blow them up. As one of her more waspish M.P.s once said, Thatcher could not see an institution without "hitting it with her handbag." But she never understood that once you removed the need to show deference to any institution — the BBC, the labor unions, the professions — you had undermined them all. If deference to the established order was so bad, why show it (for example) to the monarchy? Moreover — really for the first time in British politics — Thatcher placed market values, not abstract ones of duty and honor, at the heart of a social definition of success. In the 1980s, if you didn't make money (loadsamoney ... ), if you didn't cash in on your talents or luck, then you were worse than an idiot — you were somehow letting the side down.

Diana's contribution was just as subversive of the old Britain. In her later life — through the hugs, the tears, the riveting BBC interview of 1995 — and even more in her death, the Princess of Wales turned traditional British values on their head. It was all right to cry! It was bad to suffer in silence, repress your emotions, say, "Steady on, old girl," and generally act in a tight spot like Trevor Howard on the train platform at the end of Brief Encounter. In today's remake, Howard would be bawling like a baby; or — as we now know — like a young squaddie.

Taken together, Thatcherite and Dianist thought has given us the recent horrors: a situation in which not even members of the armed forces — hell, not even the leaders of the armed forces — seem comfortable framing military obligation in terms of duty and honor, and in which the media's badge of heroism is conferred on those who are merely victims (only for it to be ripped off again when the victims behave less like heroes than heels). It is a sad and miserable tale.

Britain chose the Thatcher effect by voting her in. The Diana effect though was imposed. If Britain didn't have a monarchy, Diana wouldn't have been thrust on the nation (she was just an averagely pretty girl who had no qualifications), and the Dianafication of Britain wouldn't have happened. Is it too late? Could we ditch them after the Queen dies and end the whole sorry saga?

NHS heads for £983 million Surplus

From the Guardian:

The report forecasts that by the new financial year in April the NHS will have a surplus of £983m, up from the £510m reported in April this year, and the £547m deficit in April 2006

.......[David Nicholson, NHS chief executive] said that the £983m surplus - 1.3% of the £90bn annual bill for the NHS - was the right amount to provide for any unexpected expenditure such as new drugs.

This is good for the public finances. A 1.3% surplus is very small of course - but it's a good sign that the NHS is at last beginning to get the hang of sticking to it's budgets (something it hasn't ever managed to do since it's inception). As people in the private sector know, the discipline of sticking to budgets usually leads to higher efficiency and productivity. It's best these skills are learnt now, while we still have a lot of money to spend on the NHS, rather than in 10 years time when the demographic crunch of an increasingly elderly and ill population starts to weigh on the NHS and the taxpayer.

Sunday, August 19, 2007

The Carry Trade Unwinds

One big result of the recent turmoil in the financial markets has been the unwinding of the carry trade.

The Carry Trade is where traders borrow in a low interest rate currency and invest the proceeds in a high interest rate currency. It can be extemely dangerous, especially if the currency you have borrowed in strengthens and ends up higher than it was at the point when you borrowed. Abu Nidal of Polly Peck fame, came a cropper in the 1980's when he borrowed in low-interest Deutchmarks and invested in high-interest Lira and got wiped out as the Deutchmark strengthened sharply against the Lira (the Lira was dropping due to inflation in Italy).

In recent years the Carry Trade has involved the Yen. In 2001 the Japanese cut interest rates to zero, which meant that people borrowing in Yen paid no interest (i.e. it was "free" money). In addition, the Bank of Japan, under pressure from the Japanese government and Japanese business, started intervening in the currency markets to hold the yen down everytime it got close to $1:Y100. The notion that you were going to be protected from a strengthening yen by the Japanese authorities made the Yen Carry Trade irresistible - free money and no currency risk. In the last year the Japanese authorities have increased interest rates to a high of 0.5% - still way too low to deter carry traders. It hasn't just been hedge funds attracted to this trade. Japanese citizens have also been borrowing in their own currency and then selling yen to buy whichever currency has high interest rates. Australia and New Zealand have been favourite destinations.

Everytime they sell the yen to invest abroad, the Yen weakens, which makes Japanese business very happy. But it creates problems for the rest of the world, which has had to cope with a wall of Japanese money seeking a home and bidding up everything in sight. Without the Carry Trade, the Yen would be much stronger as Japan runs a huge trade surplus, has non-existent inflation (which means that the currency is holding it's purchasing power), has come out of it's decade-long recession and has low unemployment.

However in the last week, there are signs that the institutional investors are unwinding the carry trade. Australia's currency slumped 8.8% against the yen, as money rushed out. The New Zealand dollar slumped 9.6% against the yen. Indeed the Yen has strengthened against all 16 major currencies in the last week including the dollar, the euro and sterling. Carry trade money has flowed into emerging markets and commodities too - therefore as the trade unwinds all these should fall as investors sell assets in order to go back into the yen and pay off their loans.

Obviously people invested in these falling stock markets will squeal, but the unwinding of the carry trade should be a good thing for the real economy. A major source of current world-wide inflation has been commodity prices rising (the tradtional souce of inflation, wage demands, has been subdued by contrast). The world will be a healthier place if the price of oil, copper, nickel and the rest fell. We are all better off with a more realistic Yen exchange rate too. Japan has enjoyed an unfair advantage exporting into Europe and the USA due to the artificially depressed Yen. Japanese companies will suffer from a rising yen though - and this is why the Nikkei slumped more than any other exchange last week.

Central bankers are starting to make noises about the yen too. According to Bloomberg,

``It's fundamentally a distortion'' to have Japan's interest rates as low as they are, Stevens [Glen Stevens, Governor of the Reserve Bank of Australia] said. ``The sooner the Japanese interest rates are able to be normal again the better from the point of view of the global-financial system.'' ......South Korea's Finance Minister Kwon Okyu said this week carry trades based on the Japanese currency threaten global markets.

It's believed that Japanese interest rates would have to rise to 2% to kill the carry trade. The big question is will the Japanese allow normalisation? In the mid 1980's they were persuaded by the Reagan administration to allow the yen to strengthen very sharply to help America sort out her trade deficit. It resulted in Japan going into a deflationary recession that lasted a decade. As a result the Japanese don't see any value in co-operating with the rest of the world - they see "co-operation" as an euphemism for getting screwed and they prefer to concentrate on their own needs and let the rest of the world get screwed instead.

Saturday, August 18, 2007

Thursday, August 16, 2007

How Influencial are the Media?

The Economist published a very interesting graph (see left), showing the breakdown of newspaper readership by region. The most eye-catching statistic is how the readership of the broadsheets is concentrated in London and the South-East - nearly 60% of the readers of The Guardian, Independent and Times are in London and the South East, the figure for the Telegraph is about 50%.

The 2001 Census shows the population of London to be 7,172,091 and the population of the South-East to be 8,000,645, making a total of some 14 million out of a population of circa 60 million - in other words just 24% of the UK population lives in these regions.

Which means we should rethink our beliefs about how important these papers are. For instance when Matthew Parris does another of his anti-Labour pieces in The Times, he is mainly talking to Tories in Surrey, rather than influencing the national conversation.

In addition, the readership of these papers is not that large. According to the NRS, the average readership of newspapers is currently as follows:

The Sun 7,840,000
Daily Mail 5,253,000
Daily Mirror/Record 4,937,000
Daily Telegraph 2,117,000
Daily Express 1,742,000
The Times 1,730,000
Daily Star 1,620,000
The Guardian 1,239,000
The Independent 767,000
Financial Times 394,000

The conclusion has to be that the most influential papers in terms of spread of readers around the country and numbers sold are The Sun, The Mail and The Mirror. Of these only The Mail is increasing readership (thanks to giving out free CDs). The rest (including the broadsheets) are dwindling. Regional newspapers are also shrinking.

Television isn't doing that well either. While OfCom confirms that 73% of the population gets their news from television, viewing figures are plummeting. In 1995, BBC1 commanded a 32% audience share, it was down to 22.7% in 2005. ITV went from 37% in 1995 to 20% in 2005. Sky News is trying it's best but managed to reach just 0.5% of viewers in 2005. My guess is that people listen to the first couple of items on the 6 O'clock news, and then switch off.

More people are also likely to be getting their news from the web. Before bloggers and their ilk get excited, note that most people who log on arn't interested in news at all. So the news they get from the web in the main depends on what home page the net user sees when they first log on - eg Yahoo, Orange, Google News etc. These pages will list a mix of brief headlines, plus lots of celebrity gossip and lots of tech news about the latest gadget (iPhone, Wii etc). The net user will cast a swift eye over this, and then go on to their main business, whether banking or shopping. Some people will have logged on to actively seek out a news site such as the BBC or the online version of the national newspapers. For political parties, this may mean that they should be trying to get their items onto Yahoo, or Google News.

It may also mean that old fashioned methods of campaigning such as leaflets become important, especially when trying to get local issues across, as these arn't covered anywhere else and pushing something through someone's door may be the only way to get their attention.

Saturday, August 11, 2007

Part-time Tories

Interesting article in the FT, exposing how much outside work Tory MPs do:

David Cameron’s front-bench MPs and peers hold more than 115 paid directorships and other outside jobs, in addition to their political roles, research by the FT has revealed.

The sheer scale of outside interests is sparking concern within the party that the Tory “part-timers” lack the discipline needed to defeat Labour.

..........The front bench’s secondary sources of income range from farming and property to consultancies, speeches, journalism and – in the case of Robert Goodwill, shadow transport minister – running a “green” cemetery.

Some activists worry that the number of top Tories doing extra, non-political, jobs means the party is adopting an amateurish approach to attacking Gordon Brown, rather than replicating the focus displayed by Labour in the run-up to its 1997 victory. Almost half the shadow cabinet – 12 of the 27 MPs and peers disclosing their relevant interests – have at least one directorship or other external job

..........Senior Tories admit privately that the opportunity to supplement their £60,675 MP’s salary, plus expenses and allowances, is a factor in accepting outside jobs. “I’m not going to be disingenuous. One of the reasons why people do this is to boost their income,” a shadow cabinet member, who did not want to be named, told the FT. “But you don’t want a political class where all you have is narrow political experience and the only people who can afford to do it are those who are privately wealthy.”

The last remark reveals how far the Tories diverge from the general public. Most voters consider that an MP's salary of £60,675 plus expenses and allowances, to be very generous. Particularly as they get a good pension as well. The idea that it is too low and that you can't "afford" politics on it is extraordinary. As is the belief that the only people who would bother to be an MP on a £60k salary without extra directorships are the "privatly wealthy". Most of the Labour MPs manage on it, and most are not privately wealthy.

If the Tories came to power, the members of the cabinet would have to drop their outside interests, plus they'd have to do a thousand times more work (government is no picnic). Perhaps this is why the parliamentary Tories keep sabotaging themselves. Secretly they want Labour to win, and carry on with the hard work of governing, while they do a bit of token opposition and moonlight.

Tory voters should think hard about this - I'm sure this is not what they intend when they cast their vote. If they want a real opposition, perhaps they should switch to the LibDems?

Friday, August 10, 2007

Credit Crunch

Following yesterday's injection of €95 billion in emergency credit by the ECB into the money markets, other central banks rapidly followed suit: The US Federal Reserve put in $24 billion, the Bank of Japan put in 1 trillion yen ($8.5 billion), the Reserve Bank of Australia put in A$ 4.95 billion and Canada's central bank put in C$1.64 billion ($1.55 billion). Central banks of South Korea, Phillipines and Indonesia all signalled willingness to inject money if necessary, and the ECB has followed up this morning with more money. Central Banks are lenders of last resort, and essentially what they are saying to the market is, if you need to borrow money, we will lend it, at the base rate.

What has caused the crunch? Simply, investors who had borrowed money to finance their securities found their credit lines drying up, so they went to the money markets for cash, and the additional demand caused the inter-bank rates to shoot up way above base rates.

The root cause behind all this is the the sub-prime lending debacle in the USA, but that of course has been simmering for months. The immediate cause of the current crunch was Tuesday's US Federal Reserve statement, where Fed Chairman Ben Bernanke signalled unwillingness to cut interest rates to bail out financial investors in distress and put more emphasis on inflation. The markets had been hopeful for a cut, and it caused lenders everywhere to rethink and tighten and in some cases close credit lines.

What does this mean for the real world? The last time something like this happened was 1998, when the hedge fund Long-Term Capital Management went bust, casuing fall-out among those in the financial industry who were exposed to their fund, and whose who had lent to it. Alan Greenspan, who was US Federal Rererve Chairman at the time, not only supplied liquidity to the markets, he cut interest rates three times that year, and didn't raise rates again till May 1999. Cutting rates turned out to be a mistake. The real economy had not been affected by the hedge fund bust, and cutting rates simply stimulated a massive boom, with the tech/telecom/ sectors soaring. Then came a massive bust in 2001. It was the cutting of interest rates that had affected the real economy, not the collapse of Long-Term Capital Management.

My guess is that this time Central Banks will play it cool. They will continue to supply as much liquidity as is needed to the market, lending at or slightly above the base rate, but they will not cut the base rate. If turmoil continues to roil the markets though, they may be persuaded to stay their hands in continuing to raise rates till things calm down. They'll cut only if they are persuaded that the real economy was suffering. Given that global growth is at it's strongest for decades, cuts look unlikely.

Monday, August 06, 2007

Open Primary for Tory Nomination for London Mayor

The Tories are going to have an open primary for the nomination for London Mayor in September, where Boris Johnson is up against a bunch of Tory nonenities and everyone knows Boris is going to win. So why bother with an open primary? According to conservative activist Jesse Norman, "an open primary promises to reach out to new and untapped voters in London, and to start to re-engage them not merely with the Tories, but with politics itself."

Or it could just be a means of raising money. According to Boris Johnson's website, Conservative members are automatically registered to vote, but everyone else must phone a premium rate number that costs £1.00 per minute from a BT Landline. If Tories really wanted to reach out to untapped voters, they wouldn't have used a premium rate phone number.

My advice to non-Tories, is Don't Bother. Boris will win the Tory nomination anyway, so wait till the actual election for London Mayor to vote against him free of charge. And if you have £1 spare, give it to Ken.

(Thanks to my sister for alerting me to the above).

Income Inequality

We hear a lot about "the gap between rich and poor" but how big is it in reality, and how large is it compared to other major European nations? There are two ways to judge the gap - the gap in income between the top quintile and the bottom quintile, and the gap in capital assets between the top quintile and the bottom quintile.

Eurostat monitor the income inequality gap across Europe, calculating the ratio between the total income of the 20% of the population with the highest income (top quintile) to that received by the 20 % of the population with the lowest income (lowest quintile). Income is defined as disposable income, i.e. after tax income. The last figures they have are for 2005. The higher the ratio, the higher the income gap - eg a ratio of 5 means that the top quintile has 5 times more income than the bottom quartile. The EU 15 countries in the following table comprise the old Western Europe prior to enlargement.

Income Inequality
ratio in

EU 25 countries 4.9
EU 15 countries 4.8
Germany 4.1
France 4.0
Ireland 5.0
Italy 5.7
Spain 5.4
Sweden 3.3
UK 5.5

The UK isn't that far off the EU average, and the gap hasn't
really grown much - the ratio was 5.2 in 1994. Sweden's ratio is low - but is a reflection of how hard they tax the rich, as the ratio is based on disposable income. The income gap between rich and poor in the UK isn't as drastic as popular mythology would have it.

Thursday, August 02, 2007

Can a new Anglo-German axis supplant the Franco-German axis as the main driver of the EU?

London has always dreamed of breaking up the Franco-German partnership that has dominated the EU from it's inception. Every time the leaders of the three countries change, there are high hopes that the relationships between the three can be re-made. Blair, Chirac and Schroeder all came to power within a few years of each other, and there were expectations that Britain under the charismatic Blair, could muscle in on the relationship especially as Chirac and Schroeder didn't initially like each other. Unfortunately the Iraq war threw France and Germany back into each other's arms again.

But the relationships are again in state of flux. Angela Merkel became Chancellor of Germany two years ago and France acquired Sarkozy and Britain acquired Gordon Brown within the space of a few months this year.

And the initial signs are that that Sarkozy, just two months into his presidency, is seriously irritating Berlin. De Spiegel ran an article a few weeks ago titled, "Sarkozy Wrestles with Merkel for European Dominance" where they detailed a myriad of disagreements from economic policy (Sarkozy is protectionist and wants to renege on the EU's free movement of capital rules that allow any company to take over any other company within the EU), disagreements over EADS (who operate Airbus) to foreign policy disagreements (eg over relations with Libya) to the ECB (France wants politicians to be able to interfere with interest rate decisions, Merkel's icy response was "I don't think very much of that at all. I won't allow it to happen").

In another De Spigel article that got reprinted in the American magazine BusinessWeek, the Germans spell out the problem in detail:

At the European Union summit in Brussels in June, he convinced the stubborn Poles to support the simplified European Union treaty. German Chancellor and then-EU Council President Angela Merkel and her foreign minister, Frank-Walter Steinmeier, may have done most of the legwork to bring about the agreement but Sarkozy behaved as if bringing Poland's ruling Kaczynski brothers on board was entirely his doing. The way Sarkozy described it, he was the one who had managed to rescue the EU from one of its many, great historical crises.

The small-statured Sarkozy has assumed the role of the great statesman. Slapping shoulders, patting backs and distributing kisses, he leaves the impression of success in his wake. His approach is allowing the French to breathe a collective sigh of relief. After many years of near-paralysis, the country is assuming the leadership of an increasingly lethargic EU.

This, at least, is the impression Sarkozy would like to make. His European partners can only look on in speechless astonishment as Sarkozy rushes ahead. The crowing of the Gallic rooster is replacing the European anthem as Europe acquires a leader who has shown himself willing to flaunt tradition. His will, it appears, is the road to success.

There is only one problem: Sarkozy's victories are stolen victories. He is steadily co-opting successes which, in some cases, others have spent years diligently preparing. His policies are intended to radiate dynamism and energy. But in reality, he jumps from one issue to the next -- with apparently no system or coherence, but with a great deal of fanfare and fireworks.

His European counterparts are witnessing this spectacle with increasing annoyance. Instead of being a team player, Sarkozy likes to take the lead, even when he has contributed little to the team's successes.

All of which opens up opportunities for Britain. France can never be the driver of the EU, this is pure fantasy on Sarkozy's part, their economy is too weak. While Germany is strengthening and German unemployment has fallen sharply, France is stagnating and Sarkozy's hyperactivity doesn't seem to have addressed things yet. Britain is of course serenely knocking out quarter after quarter of growth. Respect in Europe depends on and follows economic performance. By rights it should be an Anglo-German leadership of Europe.

It's telling that Gordon Brown's first visit to a foreign capital after becoming PM was to Berlin - not Washington or Paris. Merkel was said to have been pleased at the honour and pleased too that Brown merely shook her hand rather than ostentatiously hugged her (Sarkozy) or tried to massage her shoulders (Bush at the G-8 summit last year). Merkel is temperamentally much like Brown - both children of vicars, both very intelligent and cerebral, both with a restrained manner. Plus they agree on fundamentals, such as that protectionism is stupid. Of all the photo-calls with foreign leaders in the last month, Brown looked most comfortable with Merkel.

If Brown and Merkel can forge a good relationship, and Sarkozy continues to irritate the Germans, there could be a massive opportunity for Britain, for the first time since we've been in the EU. A very strong Anglo-German partnership could crush the French resistance to reforming CAP for instance. The possibilities are endless.

Wednesday, August 01, 2007

The Ali Miraj Business

Labour people will have been watching the Cameron-Miraj row with some astonishment. Ali who? will have been the first reaction of many. Ali Miraj appears to be a Tory councillor who had some hopes of being selected as a parliamentary candidate (unsuccessfuly to date). And he appears to have made some criticisms of the Tory leadership. So far so normal - isn't this normal sport among Tories?

So what on earth was Cameron doing attacking Miraj personally for his criticisms? Surely it was beneath his dignity to even respond. He should have refused to be drawn and left it to the party chairman (or some such enforcer) to have a quiet word. Instead he attacks the man personally, on the BBC no less, and in the process made Miraj and his criticisms important.

It's a sign of weakness. If Cameron can't take a bit of criticism from a mere councillor, he won't last five minutes in government, where you get absolutely pounded by the press and vested interests, and have to be able to withstand things without losing your cool.

Both Blair and Brown have taken tremendous flak in their time from both within the party and from outside. Brown has never responded to any of the personal attacks people made over the last few years. And Blair was a past master at taking flak on the chin. Matthew Parris has a telling anecdote in his autobiography where he runs into Blair at a restaurant after he'd written a particularly vitriolic article about him. And instead of Blair giving him the cold shoulder, he came up to him, said hello without any sign of rancour, and then went on to his guests, leaving Parris feeling guilty.

The only time in his 13 years as leader that Blair responded personally to criticism was last September, when Tom Watson and 6 others resigned from the government. Blair fired off a statement saying "I had been intending to dismiss him anyway". It was a childish expression of weakness, the reaction of a man whose back is to the wall and is hitting out without thinking. A day later, Blair conceded to his critics and gave them what they wanted - he announced he would be stepping down before the next conference.