Wednesday, 21 June 2017

Rethinking Economics


On Saturday 1 July, students of Goldsmiths’ Rethinking Economics Society and the Political Economy Research Centre are holding a conference on ‘Rethinking Economics in a Post Truth World’.

The venue is: Professor Stuart Hall Building, Goldsmiths,


9.30-10.15
‘The Limits to Unconventional Monetary Policy’, Maria Ivanova

10.15-11.30
Brexit Panel, Will Davies, Aeron Davis, Joe Earl and Jack Mosse

11.45-13.15
‘What can Economics Learn from Anthropology?’, Massimiliano Mallona

or
‘Deconstructing Finance – Deregulation of Finance as contributing factor to Post-Truth Narrative’

Johnna Montgomerie, Anastasia Nesvetailova, Clea Bourne and Daniela Gabor

14.00-15.15
‘Alternative Political Economy Panel: Reinvigorating Forgotten Perspectives’

Paul Gunn, Jamie Morgan, Sara Stevano and Marissa Conway

or
‘Platform Cooperative Workshop’, Jack Thorpe

or
‘New Forms of Labour’, Ozlem Onaran

15.30-16.45
‘Global Capitalism and Finance’, Tony Norfield

or
‘Democratising Economics’, with www.ecnmy.org

17.00-18.00
‘What does the “Future of money” actually look like’, Brett Scott


Tony Norfield, 21 June 2017










Tuesday, 20 June 2017

Twitter's Stubborn Facts

I sometimes add entries on Twitter, using @StubbornFacts. These may refer to articles or notes on this blog, but often they are links to points made by others that I find of value and which do not often hit the media headlines.

Recent Twitter entries include a note on the scale of the 18-24 youth vote in the 8 June UK general election and on developments in Middle East politics, particularly focusing on Saudi Arabian and US policy (the latest issue being their policy on Qatar). Incidentally, here is my analysis of the evolution of Saudi power in the Middle East.

Tony Norfield, 20 June 2017

Tuesday, 13 June 2017

The City, Brexit, etc


The paperback version of my book, The City: London and the Global Power of Finance, is released today. This edition contains a sixteen-page Afterword on the following topics:
  • Brexit and imperial power
  • The City, Brexit and world developments
  • Immigration and nationalism
  • Trump and the US hegemon
  • Shifting tectonic plates
These develop and update points raised before.
---
With a cover price of £10.99 and US$16.95 in the global book market, the paperback version of The City is currently available at the following prices:
Verso, £7.69
Amazon.co.uk, £9.98
Amazon.com, $11.52
An eBook is also available.
Do your own arbitrage!

Tony Norfield, 13 June 2017




Selections from some of the reviews for the hardback edition:
“It is not every day you read a book about global finance by a banker who quotes Lenin approvingly on page two. Unlike many of those who produce Marxist critiques of financial capitalism, Norfield writes from a position of experience: he has worked in the belly of the beast, and the book is the better for it...In The City, he has done the research and pulled together the financial statistics that explain how the bloodsucking works.” – Brooke Masters, Financial Times
“Tony Norfield has provided a strikingly original take on the international financial system by placing it systematically within the world imperialist structure of power. He rejects the currently fashionable path of interpreting the ascent of finance by looking at how the leading financial sector agents, operating by way of banks, hedge funds, private equity firms, and the like, manipulate the political-economic game to increase their own personal wealth, while downplaying any useful economic functions they might be fulfilling. He insists, on the contrary, that finance be understood as a form of power deriving from the economic-cum political capacity to compete at the highest levels of global capitalism, which simultaneously endows a limited group of countries and corporations disproportionate access to the world’s resources and operates as the system’s indispensable nerve center. Norfield’s unusual clarity as both an analyst and expositor is reflected in his ability to lay out for his readers an easy-to-grasp introduction to how finance works today in the process of offering a detailed historically-rooted account of the multiple hierarchies and privileged relationships through which global economic domination is constructed and reproduced. The City is a tour de force, which will soon be recognized as a formidable challenge to conventional wisdom and an essential contribution in its own right.” – Robert Brenner, author of The Economics of Global Turbulence
“This book does the seemingly impossible: rendering finance’s mysteries transparent to the average reader, and at the same time delivering a penetrating analysis of the global economic system that will enlighten even experts. Tony Norfield has written a truly exciting and important book.” – Paul Mattick, author of Business as Usual
“The City is a valuable addition to the critical analysis of the financialisation of our world. And Tony Norfield is an experienced and radical guide to London’s role in this process. This book should be required reading for both bankers and activists alike.” – Joris Luyendjik, author of Swimming with Sharks: My Journey into the World of the Bankers
“A timely and insightful book...It is an excellent read for anyone seriously wanting to consider the financial system” – Scottish Business Insider
“With heaps of empirical research and a clear style of argumentation, he demonstrates that the City isn't a "satellite of Wall Street" as many think, but its own beast, using Britain's imperialist privilege to extract value from the world economy. Much of the book is directed against bad arguments made by the liberal-left – the distinction between "productive" capitalism and "casino" banking; the populist vitriol against "the banks" – which Norfield believes aren't just analytically false but let capitalism off the hook.” – Yohann Koshy, Vice
“An invaluable book for anyone wishing to better understand the world of finance, how the City operates and how this relates to the broader capitalist system.” – Tom Haines-Doran, rs21
“Tony Norfield has had 20 years experience in City of London financial dealing rooms, for ten years as an executive director and global head of FX strategy in a major European bank. He went on to complete a PhD in economics at SOAS, London. Above all, he is a Marxist. It’s a perfect recipe for an excellent book on modern British imperialism and the features of global finance in the 21st century.” – Michael Roberts (author of The Long Depression)
“How many Marxists are at work in the dealing rooms of the City? Presumably they keep their heads well down. Tony Norfield is—or was—one. Twenty years a trader at the centre of the financial web, he has married the insights into the workings of the system he gained to a thorough Marxist understanding of political economy. The result is this fascinating book.” – Andrew Murray, Morning Star
“Tony Norfield's opus The City takes on a big subject and makes it, well—big … Casts a new light on a well-researched subject.” – William Clutterbuck, Financial Adviser
“As England and Europe prepare to set the terms of Brexit, Norfield’s historical perspective on how England has promoted finance is fascinating.” – Tom Groenfeldt, Forbes

Tuesday, 30 May 2017

Theresa May, Jeremy Corbyn and the Turing Test


Last night on UK television there was an audience question time and an inquisitor interrogation time (from the supposedly formidable Jeremy Paxman) for both Theresa May, UK Prime Minister, and Jeremy Corbyn, leader of the Labour opposition. These were held separately, not as a debate, owing to May’s risky ineptitude and her increasingly evident weakness. Somewhat to my surprise, they showed that Jeremy Corbyn had managed to learn from his previous grillings how to handle himself much better. In particular, he passed the Turing test easily.
Alan Turing was a British mathematical genius hounded to his death by the UK authorities in 1954. As part of his contribution to understanding science, he proposed a test to judge whether the answers to questions posed could be judged as coming from a human or from a machine/computer. If the answers from the machine were answers that an observer could distinguish from those a human would give, then it had failed the Turing test. These days, many establishment politicians would fail too, as was seen most embarrassingly in the case of Marco Rubio in the US presidential election campaign in 2016, which led to his nickname ‘Marcobot’.
Theresa May, unelected UK prime minister, has also failed to pass the Turing test since her time in office. She is desperately seeking to find legitimacy in the 8 June UK general election and, in the past month especially, her PR advisers have given her a small set of vacuous phrases to use safely and not risk tripping up. So much so that a growing portion of the electorate wonders whether it is hearing a corporate answering machine: ‘Press 1 for Strong and Stable Government, press 2 to Get the Best Brexit Deal Possible, press 3 to oppose a Labour-led Coalition of Chaos’. In the TV discussion last night, Theresa May continued to fail the Turing test.
By comparison, Labour leader Jeremy Corbyn looked convincingly human. The UK media attacks on him have been so relentless – a supporter of terrorists, willing to abandon nuclear weapons, not supporting the Queen, etc – that this has raised some popular scepticism about media bias. As a result, Corbyn’s steady message in favour of national welfarism paid for by higher taxes on ‘the few’ seems to have gained some traction in an electorate worried about continued austerity. From a deficit of some 20 percentage points compared to the Conservative party a month ago, Labour is now more like 5-12 percentage points behind, according to the latest set of varied opinion polls. The Conservative message of needing a ‘Strong and Stable Conservative Government’ to lead the UK into the sunny uplands post-Brexit now looks less plausible.
This narrowing lead ahead of 8 June, compared to the previously expected devastating Conservative victory, was one factor that forced Theresa May (unconvincingly) to renege upon a manifesto commitment to curb welfare payments on older generation people who were more likely to be Conservative voters. An electoral lead of some 5%+ might still translate, although far from precisely, into a decent majority of seats for the Conservatives. But it would be far less than they had thought, and so will look like a problem for them. It would also be another stage in the disintegration of traditional UK politics.

Tony Norfield, 30 May 2017

Monday, 29 May 2017

Warming Up

After the mixed martial arts Handshake[1] bouts between The Donald and France’s new president, Emmanuel Macron, there have been further signs of strain between the US and Europe. Speaking after last week’s NATO and G7 meetings, Germany’s Chancellor Angela Merkel called the G7 meeting ‘six against one’. You can guess who the latter was. In a separate speech, Merkel also remarked:
‘The times in which we could completely rely upon others are more or less over. That’s what I have experienced in the last few days … We Europeans have to take our destiny into our own hands … of course in friendship with the US, in friendship with Great Britain, also with Russia and other countries, but we have to know that we fight for our own future as Europeans, for our destiny.’
Notably, this was an ex-UK ‘Europe’.
Trump’s America First policy questions how far the US can still pretend to act both as the referee and as the biggest player in the imperial game. But the election of Trump is not the only thing that has called into question the ‘western alliance’ of major powers. Britain’s rejection of EU membership is also a big worry for the European members, ironically including Britain itself. While Brexit does not quite hurl the UK into the mid-Atlantic, the Brits are finding it difficult to keep a happy family together by using anti-Russian propaganda and posturing at NATO. Not surprisingly, since Brexit has upset the European institutions established over decades.
Merkel’s call for Europeans to take charge of their own destiny basically means that the major continental European powers need to prepare for the breakdown of the former international order from which they had benefited. It is a striking comment from a German conservative leader, and one that fits well with a more general European concern about Trump.
Things are warming up in the oven of imperial rivalry, not just on the fringes of the imperial system.

Tony Norfield, 29 May 2017


[1] Macron won on points. The Handshake is a relatively new sport in diplomatic circles. It blends a rictus smile, white knuckle grips and macho, fake bonhomie arm slapping. The player with steadiest stance and gaze, showing the least perturbation throughout the 1-2 minute contest, wins. Points are given by the international news media and on Youtube. See here for example.
https://www.theguardian.com/world/2017/may/28/emmanuel-macron-my-handshake-with-trump-was-a-moment-of-truth

Friday, 26 May 2017

The Libyan Connection


Time and again Western security services have been shown to be up to their necks in promoting, training and giving operational support for Islamists to do their dirty work. It started in the 1950s as a strategy to mobilise the most backward and conservative sections of society against nationalist, independent and mostly progressive currents in the Middle East. They managed to destroy every single one of these currents, leaving a politically barren landscape dominated by political options that have no future and, despite their ultra-anti-Western rhetoric, which cannot fight against Western imperialism.
Then came the CIA’s war in Afghanistan in the 1980s, with the US funding Osama bin Laden’s group and other jihadis to fight the Russians. Then there was the training and deployment of thousands of jihadis to fight Serbia in the war in the former Yugoslavia. Then the training and deployment of thousands of jihadis to fight in Chechnya with the sole purpose of destabilizing Russia. Many of the latter had previously fought in Serbia. Then came Libya, where the security services sent hundreds of these operatives to undermine Gaddafi in 2011. Then came Syria, where the security services sent in hundreds of armed Libyan jihadis to fight Assad.
Not a lot of people know that many of the detainees held at Guantanamo Bay’s US military prison was or is a former CIA- or MI6-trained fighter. They sent them there because they knew they were committed jihadists, as opposed to the less dangerous Iraqi or Afghan nationalists who were just fighting to oust foreigners from their countries and had no global or ideological pretensions.
Now the web site MiddleEastEye lifts the lid on the Libyan connection to this week’s Manchester bombing that the British authorities do not want to talk about. It explains why, within hours of the attack, the security services were already declaring that a network was involved. They knew whom they were dealing with!

Susil das Gupta, 26 May 2017

Wednesday, 24 May 2017

Apple’s Core: Moribund Capitalism


Apple Inc is the world’s largest company by market capitalisation, with a value of nearly $800bn on 19 May 2017. It does not produce most of the world’s smart phones, coming in a poor second behind Korea’s Samsung, and it is not that far ahead of China’s Huawei in terms of market share. Neither is it necessarily the biggest player in other consumer electronics markets. But so far it has managed to corner the premium section of these markets, managing to get enough loyalty from customers who will pay a lot more for a product that is not so different from the (much) cheaper ones that are not quite so ‘cool’.
That is principally why Apple, with fewer than 120,000 staff and itself producing very little of the final product that it sells to consumers, can be worth in capitalist markets so much more than Foxconn. Also known as Hon Hai Precision Industry Co, the latter Taiwan-based company is its main assembler, employing more than one million workers, and is currently valued at a relatively minuscule $60bn in terms of market capitalisation. In 2016, Apple’s operating income was $60bn compared to some $4bn at Foxconn, endorsing the market valuation ratio ($800/$60bn).
These points are another sign of the distortion of social value by imperialism, and another day I may write more about the social and economic mechanisms behind this. For now, though, I want to focus on the financial aspects of Apple’s business, mainly using information from its latest annual report.
Most radical, critical commentaries on Apple focus, reasonably enough, on how it uses cheap labour in Asia to boost its profits. What I want to deal with instead are the details in Apple’s accounts that show how its close integration with the world of finance complements and reinforces its commercial power. For example, its use of bond market issuance and equity buybacks to boost revenues for its investors; its huge investments in financial securities, ones that rival the holdings of major investment funds; its use of financial derivatives for both hedging and speculating in financial markets; and its large cash holdings, which are explained both by the nature of its business operations and by developments in world markets.

Debt issues, equity buybacks

Apple has been one of the corporations that has found it more advantageous for its shareholders to raise cash via issues of bonds and other debt securities rather than to issue new equity. Issuing new equity means that a given amount of profit has to be shared between a larger sum of shares held by investors, potentially reducing the rate of return for existing investors, and also their percentage holding in the company unless they buy more shares. However, with interest rates on corporate debt so low, it has made sense for Apple to issue debt, pay the interest and use the new funds to buy back existing equity. Assuming that the rate of return on its regular business was higher than the yield on the bonds, this also helped to keep the payments to shareholders buoyant.
Apple repurchased common stock in each of the 2014-16 financial years: 489 million shares in 2014, 325 million in 2015 and 280 million in 2016. Share issues also took place in those years, but they were small scale, only some 10-15% of the buyback totals. The net effect was for the total number of outstanding shares to fall from 6.3 billion in September 2013 to 5.3 billion in September 2016, a significant drop of 15% in just three years.
Funds for the share repurchases should be seen as principally coming from the debt issues, including short-term commercial paper, although the numbers for the whole gamut of business operations are interlinked. For example, Apple reports that in its 2016 financial year funds worth $29.7bn were used to repurchase common stock, $12.2bn were used to pay dividends and the net proceeds from issuing longer-term debt were $25.0bn.
The scheme of share buybacks continues and, as of September 2016, ‘only’ $133bn out of a total of $175bn authorised by Apple’s board had been completed – a total that was raised from $140bn in April 2016, and could be raised yet again. In addition, Apple has another element of this plan, something it calls a ‘capital return programme’, which is expected to reach $200-250bn by March 2018. The missing element is the (strongly implied) promise to boost dividend payouts. In 2013, total dividends paid were $10.6bn, rising to $12.2bn in 2016. So, with the falling number of shares, earnings per share have been rising rapidly: from $6.49 in 2014 to $8.35 in 2016, a rise of nearly 30%.
This helps explain the astronomical stock market valuation for Apple, one that has increased by some 60% over the past year. It can use the financial markets to boost the returns to its owners, quite apart from the other commercial and political means available to it as a leading corporate power. But what this really reflects is the nature of moribund capitalism today. Having got in a pickle with a big drop in operating income (down 16% to $60bn in 2016), and with net sales declining by 8% in 2016 – led by a 12% slump in the value of sales for Apple’s main product, iPhones – the company adapts to these setbacks more by financial operations than by innovation or investment.

Investment in securities

While iPhones do not generate for Apple as much revenue as before – just $136.7bn in financial year 2016 compared to $155bn in 2015 – the company has been able to depend upon its financial investments to try and fill the gap. As of September 2016, it held $20bn of cash, $47bn of short-term marketable securities and a massive $170bn of long-term marketable securities, including US Treasuries and corporate bonds. In 2016, these generated $4bn of interest and dividend income. In the same year, Apple’s accounts also benefited from an extra $1.6bn of unrealised gains on marketable securities it held.
Apple uses its subsidiary, Braeburn Capital,[1] an asset management company based in the low-tax US state of Nevada, to manage its vast security holdings. These assets rival those of the biggest financial companies, and Braeburn has been called ‘the world’s biggest hedge fund’,[2] and also the world’s biggest bond fund.[3] Another angle on Apple’s operations in this area is shown by considering its financial dealings: in its 2016 year it bought $142bn of marketable securities, received $21bn of funds from those it held that had matured and also sold another $91bn of securities, no doubt keeping Braeburn’s dealers busy.
Compare these numbers to Apple’s investment in research and development. In 2016, it spent $10bn, up from $8bn in 2015 and $6bn in 2014. Big money, and big increases, but still pretty small for a so-called IT company, given that it was less than 5% of total net sales revenue.

Financial derivatives dealing

It is also worth noting Apple’s involvement in financial derivatives to give an example of how all major capitalist corporations use these, not just the supposedly peculiarly evil banks. Apple, like other corporations, uses financial derivatives to hedge against unfavourable moves in interest rates and exchange rates, and also for more speculative purposes. Accounting rules try to separate the two uses, but in reality there is no distinct dividing line.
In the case of derivatives used for hedging, they may make gains or suffer losses. But these should roughly balance the losses or gains on the underlying assets, liabilities or cash flows that are being hedged by the derivatives. For example, if Apple owns a fixed income asset (a corporate or government bond security), then its market price will fall if interest rates rise. However, it could use financial derivatives to hedge against this risk. It would take a derivative position (in swaps, futures or options) whose market price will rise as interest rates rise, so that it would generate a gain in its derivative position to offset the monetary loss on the bond. It is a similar thing for foreign exchange exposures. Simply put, if Apple’s US dollar-based accounts would be hit badly if the value of the US dollar rises against the Chinese renminbi, the euro, or sterling and the Japanese yen, then it makes sense for Apple to hedge the risk with derivative contracts. It would take derivative positions whose value would rise as the dollar’s value rises in the market, thus offsetting, or at least reducing, the potential loss on its underlying business.
The basic idea behind hedging is to offset the likelihood of a loss, but this usually also means giving up on any further potential gains beyond what the existing structure of market prices allows. For example, interest rates or the US dollar’s value might fall, but the extra gains for Apple from these developments will be lowered or eliminated if it hedges against their rise with financial derivatives. The underlying business would gain, but the derivative contracts being used as a hedge would show a loss, cancelling this out.
On 24 September 2016, the notional value of foreign exchange derivatives contracts held by Apple for hedging purposes was $44.7bn. There was also $24.5bn of interest rate contracts. This gives a measure of the scale of the financial risk that was being hedged.
So much for hedging. Speculation with financial derivatives is also a possibility for large corporations. It is one they often use, since their finance departments are commonly seen as profit centres that also have to make a dealing profit in addition to playing their financial function for the firm. Here the word speculation is not used for these derivatives transactions, and they are put under the more polite designation of ‘derivative instruments not designated as accounting hedges’. As of 24 September 2016, Apple held a notional value of $54.3bn of foreign exchange contracts under this heading.
In Apple’s 2016 ‘consolidated statement of comprehensive income’, the accounts record that while it lost $734m on its financial derivatives positions, net of tax, it gained a greater $1,638m in the unrealised extra value of the marketable securities that it held. The balance is not always positive – it was a negative $424m in 2015 – but that’s just one of the risks of dealing in capitalist markets.

Big cash assets, but many liabilities

Apple’s huge cash holdings have gained a lot of attention. Not surprisingly, since at the end of its 2016 financial year it held a little over $20bn in cash and cash equivalents (meaning cash and securities with less than 3 months to maturity), and another $47bn in short-term marketable securities (less than 12 months). The other big chunk of assets held consists of its long-term (more than 12 months) marketable securities, at $170bn. These figures make Apple’s ‘property, plant and equipment’ asset value of $27bn look like a very small part of its overall business. More than six times the value of Apple’s ‘production’ assets is held in financial securities!
But let us not ignore Apple’s various liabilities. An implicit one, an obligation for survival not an accounting item, is the need to keep shareholders happy with dividend payments and share buybacks, as noted above. Then there is Apple’s formal accounting liability resulting from its issuance of debt, valued at $75.4bn on 24 September 2016. These debts have to be serviced and eventually repaid. It also had a ‘non-current’ liability of $36bn (mainly tax that was owed) and total current liabilities of $79bn for accounts payable, accrued expenses, commercial paper outstanding, etc.

Moribund Capitalism

It looks like Apple has a lot of cash available, something that, in another universe, might enable it to reduce its premium prices from their near-absurd levels or to pay more taxes. However, when the full scope of its operations is understood, the constraints of the capitalist market can be clearly seen. Apple’s business is not only one of trying to secure its position in a segment of the consumer technology market. More and more it has become a major financial player, and one that has run out of ideas to develop its formerly core business. Instead it keeps its investors happy with share buybacks and a ‘capital return programme’. It remains the biggest capitalist corporation by market value, although as a monopolistic player it has a lack of incentive to expand production. These features illustrate the moribund nature of contemporary capitalism.

Tony Norfield, 24 May 2017


[1] The name seems to have been chosen because it sounded better than Granny Smith, Cox, or other varieties of apple.
[2] http://www.zerohedge.com/news/2015-07-23/worlds-biggest-hedge-fund-30-billion-bigger-bridgewater-remains-mysterious-ever
[3] https://www.bloomberg.com/news/articles/2017-05-04/apple-buys-more-company-debt-than-the-world-s-biggest-bond-funds