Sunday, 2 October 2016

Pictures of Trouble

Two charts from the Bank of England sum up interesting aspects of capitalism's problems today.

First, the decline in long-term government bond yields. These have been on a steady downward trend since 1990 (actually, for even longer, since the mid-late 1980s), as shown in the following chart which gives GDP-weighted average 10-year yields for the top 20 countries. It is not only that nominal yields have fallen alongside lower inflation, but 'real yields' have also fallen and are now negative. The estimate of real yields is only approximate, but the picture is clear enough.

Chart 1: 10-year government bond yields, 1990-2016

The drop in yields has been accentuated by central bank asset purchases under 'quantitative easing' (QE) policies, but not fully explained by them. Outside Japan, QE only got going from 2008. Lower yields are a problem for pension funds and other bond investors, while making the huge debts accumulated by borrowers (see earlier articles on the blog) somewhat easier to service and pay back. This delicate, unstable balance results from the difficulties the capitalist economy has had producing enough profit, or growing enough to produce anything extra at all.

Chart 2: Central bank balance sheets, 2006-2018

The second chart shows the shows the rise in central bank balance sheets as a percentage of GDP. This has come about as a result of QE policies, and the Bank of Japan (note that only Japan is measured on the left hand axis), the Bank of England and the European Central will add to their accumulated assets in the next few years. Only in the US has the share of GDP not gone up recently, and is not projected to under current policies. Even for the US, the absolute holdings of Treasuries and mortgage-backed securities are not likely to fall by much.

Tony Norfield, 2 October 2016

Tuesday, 27 September 2016

Capitalism, Imperialism and Finance

Here is a link to the video of the launch of my book, The City: London and the Global Power of Finance, at SOAS in London on 19 May this year.

The presentation, together with a Q&A session, takes a little over one hour, and it is possible to scroll through the presentation file used. (The only amendment I would make is that early on in my talk I wrongly said that Carlsberg was a Netherlands company, when it is Danish, and I should also have noted that Anheuser-Busch InBev/SAB Miller also had a US connection. I had other things on my mind at the time and got a little confused.)

Tony Norfield, 27 September 2016

Monday, 19 September 2016

Le Monde Diplomatique

Next week, on Monday 26 September, I will be presenting a discussion on 'The International Financial Markets and the City of London' at one of the regular Cafe Diplo meetings held by Friends of Le Monde Diplomatique.

Event details are:

Monday 26 September
Time: start 6.45pm to finish around 8.30pm, with plenty of time for discussion
The Gallery, Alan Baxter & Associates LLP
75 Cowcross Street
London EC1M 6EL

Entrance fee: £3 (£2 concessions)

Wine and fruit juice are available.

The nearest tube/overground station is Farringdon. Walk into Cowcross Street, away from the station, and past The Castle Pub on the corner. Further along, on the right hand side you pass the Three Compasses Pub and about 50 metres later you will see some iron gates with a small Cafe Diplo sign. Inside the gate you will find the reception area on the lower ground floor.

Tony Norfield, 19 September 2016

Wednesday, 14 September 2016

'Humanitarian Intervention' in Libya

The UK parliamentary report on the 2011 intervention in Libya and its aftermath gives an interesting summary of events. The whole thing, in President Obama's words, became a 'shit show'. However, the real lesson that comes from reading the report is how calls for 'humanitarian intervention' are a cover for big power interests. In this case, it turns out that even these interests were not fully thought through by the key advocates for intervention, first France, then the UK and the US.

The Libya report is published today, now that a certain David Cameron is not in the embarrassing limelight. One note in the report, however, sums up the general stance taken by British politicians: the House of Commons voted by 557 to 13 in favour of British intervention. Of the 13 opposed, just 8 were from the Labour Party, two were from the Conservative Party, two were from the SDLP and one was a Green MP.

Such parliamentary reports aim to identify problems ... so that they may be avoided next time. This report has been relatively prompt in the making, but during the five and a half years since the Libyan intervention, the major powers have not been slow to get involved in plenty of other mischief and destruction.

A concluding note on France's rationale for intervening in Libya (the report spends little time on the UK's), taken from a US State Department report of a meeting in April 2011 with French intelligence agents. President Sarkozy's plans in Libya were reported to have been driven by:

a. A desire to gain a greater share of Libya oil production,
b. Increase French influence in North Africa,
c. Improve his internal political situation in France,
d. Provide the French military with an opportunity to reassert its position in
the world,
e. Address the concern of his advisors over Qaddafi’s long term plans to
supplant France as the dominant power in Francophone Africa.

So much for Bernard-Henri Levy and the humanitarian 'public intellectuals'.

Tony Norfield, 14 September 2014

PS: For those interested, the Parliamentary debate on intervention in Libya was on 21 March 2011. Details of who said what are available in the Hansard report here.

Friday, 9 September 2016

Shifting World Corporate Power

Those who like international comparisons that highlight the shift in global power will be interested in the following table. It is from research by Paul Kellogg, University of Toronto, published in 2015, and shows the geographical breakdown of the 2,000 largest public corporations, ie those whose shares are quoted on stockmarkets.

There is a striking decline of the US, Europe and Japan over this period, countered by a rise of the BRICS countries, but mainly China. To some extent, China's data will also have been boosted by the stockmarket bubble in 2014, which burst in 2015. But the underlying trend is nevertheless clear, and China's stockmarket in 2016 has since recovered to and beyond 2014 levels. As Kellogg puts it: 'In 2004 there were just 50 corporations from China on the full list of 2,000 (25 of which in Hong Kong). By 2010, the Hong Kong total had jumped to 49, the total in all of China to 162. In 2014 the Hong Kong total stood at 58, the total for all China at 207.'

My only quibble with the table is that he would have better shown only one decimal place in the numbers!

Tony Norfield, 9 September 2016

Thursday, 8 September 2016

Trends in World Debt

The reality of a global economy is shown by close connections in trade and investment, and is reflected in similar trends that affect many key countries. One of these trends is the rise in debt held by governments, households and corporations, as borrowing grew to provide the funds to maintain economic activity. After the acute phase of the economic setbacks in 2007-08, the world is now in the chronic phase of stagnant growth. Occasional blips higher look good, and the patient goes for a walk, but the economy is never far from stumbling back into a ditch.

There are individual deviations from the average picture, but each country's details express the evolution of a world economy. Even though one country may be impacted less, or more, that deviation usually reflects its position in the hierarchy of world economic power. Higher debt levels, or ratios of debt to GDP, are common among the richer countries, especially those that have a privileged position in world finance. After all, they can raise funds from the world market fairly easily since they are the guys in charge and, in the market's 'wisdom', are likely to remain so. Poorer countries have what is called a 'less developed' financial system and tend to hold less debt, at least in relation to the size of their economies. This general point is borne out by the data on debt/GDP for those the Bank for International Settlements considers the 'advanced' versus the 'emerging' countries, as shown in the next chart for the period 2000-2015:

Two features of the previous chart stand out: first, the much higher debt ratios for rich countries, but, second, the faster rate of growth of debt in the poorer countries in recent years. This reflects how much more the poorer countries attempted, from a lower base, to keep their economies ticking over in the wake of the acute phase of the crisis by accumulating more debt.

Country details bring out some other points. First, here is the chart of the total financial sector debt for some key emerging market countries, to add to that already given in a blog post a few days ago for the major advanced countries:

Clearly, China and South Korea have had the biggest growth of debt in the past 15 years, and have the highest ratios of the main 'emerging market' countries. China's rise in debt has been most dramatic after 2008, but, as a later chart will show, this has principally been on the back of the extra debt burden taken on by non-financial corporations (both private and state-owned).

This China development is similar to the results for many EM countries. It contrasts with the picture for advanced countries, where the extra debt has been mainly held by the government sector. This reflects the ability of the major states to borrow and alleviate the burden of the crisis in the corporate and household sectors via government liabilities (debt), while the emerging market countries and their governments, with less access to world markets, are far less able to do so. The breakdown of EM debt in BIS data only goes back a few years, compared to the longer time series for advanced countries, but the next two (different) charts below indicate what has happened:

While advanced countries have seen the debt burden (debt/GDP ratios) of the household and corporate sectors decline in recent years, emerging market country debt ratios have increased sharply, especially for the corporate sector. Government debt ratios have not changed much for emerging market countries.

Now to some country pictures for the breakdown of debt, starting with the major powers. Every picture tells a story, so my comments will be brief. Take care to note the y-axis scale in each chart. A taller bar in one chart compared to another chart does not necessarily mean that the debt ratio is higher.

The US: total debt has stabilised around 250% of GDP. Government debt has doubled to 100% of GDP, but household and corporate debt ratios have declined. As mentioned in an earlier blog post, these data ignore the US Federal Reserve's 'assets' in the form of mortgage securities that they have bought. Also, the data only cover 'non-financial' sector debt, so exclude many other liabilities of the financial sector, not least pension funds.

The UK: similarly, the UK has seen household and corporate debt shrink somewhat, while government debt ratios have also doubled to around 100%. Total non-financial sector debt in 2015 was a touch lower than in 2012, at 266% compared to 277% of GDP, but again, this ignores the many extra liabilities of the Bank of England apart from other obligations.

France: this country is in a worse debt position than the UK. The increase in government debt has been similar, but household debt, and especially corporate debt has risen further in recent years, rather than declining. The total debt ratio in 2014-15 was 290%. In the past five years, annual economic growth in France has been below 1% and often close to zero. This picture gives the backdrop for worries about French banks.

Italy: traditionally having a relatively high government debt ratio compared to other major countries, that debt grew still further after 2007. Total debt stabilised at close to 275% of GDP in 2014-15. Economic growth has been lower even than in France.

Spain: there has been a sharp rise in total debt since 2000, but some recent reduction. Corporate and household debt ratios have fallen in recent years, largely offset by a rise in government debt. In 2015, total debt was 283% of GDP.

Germany: this is the outlier country, with a steady reduction of the total debt ratio in recent years, hitting 184% of GDP in 2015, and with the ratio staying below 200% even in the acute phase of the crisis. German annual economic growth has been weak, at less than 1% in recent years, but Germany's government debt ratios increased by much less than in most other major countries. This may be related to the liability that Germany takes on for the eurosystem via the Bundesbank, and this is not counted in the data here.

Emerging Market Countries

Interesting emerging market countries from a debt perspective are China, South Korea and Brazil. The total debt picture for these was given in the second chart above.

China: historical details for China's debt data are patchy, so for 2000-2006 the following chart only gives the total and the government number (with the black bar indicating the difference). After being fairly stable from 2000 to 2008, China's total debt rose sharply, principally through the rapid debt accumulation of non-financial corporations, both state and private. Household debt has also risen, but not by much. In 2015, the total debt ratio was 255% of GDP, with corporate debt at 171%, up from 99% in 2008. This rapid debt accumulation has led to worries about bad loans, but against this one has to take into account some important mitigating factors. While corporate debt has risen rapidly, the average leverage of corporations is low. Furthermore, the government has an ability to allocate funds between different sectors in the case of emergency, apart from still holding more than $3 trillion in foreign exchange reserves.

South Korea: there has been a steady rise in debt ratios for all three non-financial sectors from 2000 to 2015. In 2015, total debt was 235% of GDP, which nevertheless remains well below the figure for most of the major countries shown above.

Brazil: the debt picture for Brazil would seem to belie the crisis the country faces. Total debt rose from close to 100% of GDP in the early 2000s to 149% in 2015, but not by much in the scheme of things, and to a level that remained below all the other countries shown, even below Germany's debt ratio. As in China, Brazil's debt ratio only started rising after 2008. This indicates that the debt ratio is far from giving a full summary of economic conditions. Brazil's economy has been in decline for several years, hit by weaker commodity prices and a slowing of world trade. Government debt started at a relatively high level, but has hardly changed. The increases in household and non-financial corporate debt has accounted for the rise in the total.

Debt and Interest Rates

If you were wondering why interest rates remain at very low levels, with central bank rates negative in Japan and in many European countries, the debt burden is the clearest answer. Huge debts have been accumulated in most key countries in response to the crisis. Now they stand as a mountain of liabilities, payments on which can only be serviced - and defaults avoided - if interest rates remain low. Higher levels of interest rates would threaten to collapse the edifice that has been erected to shore up the world economy.

Tony Norfield, 8 September 2016

Sunday, 4 September 2016

The Debt Mountain

Financial debts are obligations to pay back the creditor. This may not happen, either because the debt is 'forgiven' (rarely) or because it otherwise gets written off in a deal to restructure future payment obligations in a way that looks more plausible to the creditors, who may be banks, insurance companies, pension funds or other private sector asset managers, or another government or public sector organisation. For the major powers, being in such a situation is a little tricky. They are meant to be on the disciplining, creditor end of the balance, even if they also happen to be in a lot of debt themselves. However, a recent set of data from the Bank for International Settlements indicates that, despite the much-vaunted recovery of the world economy from its acute crisis phase, debt ratios to GDP have generally gone up in recent years in the key countries. Even where the debt ratio appears to have fallen a bit, this hides a wide range of other, not-counted obligations (implicit debts) that may be hidden off budget, or are deep in the details of the relevant central bank accounts.

The following chart for five key countries shows the picture for the 2000-2015 period. Japan remains an outlier, with far and away the highest debt ratio of 388% of GDP in 2015. Having had such a long deflationary depression, even an earthquake and tsunami leading to dreadful nuclear radiation fallout from the Fukushima plant could not induce the comatose economy (and political class) to wake up.  The UK looks in a slightly better position, although its recent lower debt ratio ignores the run up of Bank of England liabilities, plus many other off-budget items. The US debt ratio has stabilised in the past five years or so, but this has been despite the supposed recovery of the economy, and also ignores the post-2008 accumulation of Federal Reserve 'assets', including nearly two trillion dollars of mortgage securities bought from banks. France's debt ratio has continued to rise. Germany's has fallen, helped by the stronger economy. But the latter calculation ignores the liability of Germany, at the heart of the eurosystem's finances, where endless volumes of dodgy 'assets' have been accumulated by the European Central Bank, whose main shareholder is the German state.

So, following my usual caveats about what data really cover and what is ignored, here is a chart of how the total debt ratio of the non-financial sector (including governments, households and non-financial companies) in five countries has developed in the past fifteen years:

Tony Norfield, 4 September 2016