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

Cameron's Sharia Bond and British Parasitism

To be the political leader of an imperialist power that has attacked a number of Muslim countries in the past decade, it takes a certain, how can one put it, chutzpah, to say:

"I don't just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world."

Yet that was British Prime Minister Cameron, talking to the World Islamic Economic Forum in London on Tuesday. Part of the plan is for the UK Treasury to launch an 'Islamic bond' worth £200m next year, presented as the first Islamic bond issued outside the Muslim world.

One UK financial lobby group report suggests that 'global Islamic finance assets' - namely those which are 'Sharia compliant' - already amount to some $1.5 trillion and are growing fast. Hence the UK wants some of the action. There are 22 Islamic banks in the UK, more than in all other western countries combined. The UK government has even established an Islamic Finance Task Force, but this one is not weaponised.

The contradiction between Britain's foreign policy and its financial policy is only apparent. Despite the invasions of Afghanistan and Iraq, and the bombing of Libya, not to mention other covert interventions, Britain is not anti-Islam or anti-Muslim. It just wants to see its interests protected. It has no problem backing jihadist rebels if they will serve that policy, as in Syria, just as it supported the Moslem Brotherhood against the nationalist threat from Nasser in Egypt from the late 1950s. Today British imperialism steadfastly supports Sunni elites throughout the Middle East, and most of the families were put in place by British policy. Further afield, in Brunei, 1000 British army Gurkhas are also paid for by the Sultan to back his 'security' - and the interests of Royal Dutch Shell plc. Brunei is not a big place, so if you had some doubts about the wisdom of the autocracy you would think twice about expressing it with these guys coming at you.

However, to return to the financial issues. Cameron's Sharia bond is planned as a sign that the City is 'open for business', to use Bank of England governor Carney's phrase (see below). The size of the planned bond issue is minuscule in terms of state finance, but it will show that the City is willing to do whatever is necessary to attract business from this previously untapped area. It will encourage other financial activity and it will give enterprising specialists in Islam a profitable role as arbiters of what is Sharia-compliant. From the City's perspective, dealing spreads can be important, not just interest rate returns. In any case, it will not be difficult to transform interest remuneration into something that does not look like interest and so be Sharia-compliant. Best of all, Britain's lack of capital controls will make it easy for rich foreign investors to put money in, and take it out, while there will be little fear of political moves against them. Well, perhaps less confidence these days, since Assad's wife no longer shops at Harrods and the Gaddafi family no longer have a residence in Hampstead.

Details of Cameron's bond are to be finalised, but early reports suggest that coupon payments will be based on rentals from government property. Will the rentals come from chemical weapons plants, MoD buildings, GCHQ, MI5/6, US bases in Britain or the leased bases around the world? That can be sorted out later, and the result will no doubt be deemed 'ethical' and compliant.

Two other issues are worthy of note related to imperial finance, but not to Islamic finance. The connection is that these two and the previous discussion all relate to a desperate attempt by the British state to boost the scale of financial dealing, with all the opportunities this offers for skimming off more surplus value from the rest of the world. My previous note (see this blog, 22 October 2013), showed that the balance of payments flows are worsening for the UK so, as one might expect, the focus of British policy now is on how to leverage what the Brits are best at in order to get more revenues in the future. No, not by marketing self-deprecating humour in BBC video exports, but by increasing financial deals to make money from other people's money.

The first is Britain's attempt to build on its already prominent role in the offshore trading of China's currency, the renminbi. It took a while before the People's Bank of China gave the Bank of England the currency swap line it wanted. It was delayed until June this year and was CNY 200bn, embarrassingly less than the CNY 350bn agreed with the European Central Bank in October. This may have been aimed to cast a deliberate shadow over the status of the City of London, although the swap is for sterling versus CNY not for the much larger euro currency. As if to ward off any further problems, the UK Treasury went out of its way to make it easier for Chinese banks to set up in London in October, lifting regulatory hurdles and risking annoyance from the Americans, together with embracing a pan-European visa deal - for Chinese tourists only.

Outside China and Hong Kong, the City already manages some 60% of offshore trading in China's currency, with the US at just 15% and France at 10%. In October, the UK Treasury announced the opening up of direct trading of China's currency with sterling and that it had gained a (small) quota for accessing Chinese equities and bonds. These factors will increase the potential for City dealing, at least until China changes its mind.

The second is the latest policy change from the new Bank of England governor, Mark Carney. The theme of a keynote speech to a Financial Times anniversary event last Friday was that London was 'open for business'. So he introduced policies to boost the volume of financial dealing. He envisaged bank assets in the UK growing from some 4 times GDP at present to more like 9 (!) times by 2050. Then, in a squaring of the circle that was a wonder to behold, he argued this could be done with lower costs for private banks getting central bank aid while at the same time making the overall system more secure.

I am not one to make ad hominem comments, for example noting that he, like Mario Draghi of the European Central Bank, is an alumnus of Goldman Sachs. This is because, despite him being Canadian, and despite him being in the job only since July, last week he showed that he had the best interests of British imperialism at heart. This, together with the Sharia bond and China policies already discussed, is the clearest sign that the British ruling class knows how to adopt and to bring on board whomever and whatever policies look like having some upside in these difficult times.

Tony Norfield, 30 October 2013

Running Out of Rope

It is easy to dismiss the downgrading of the UK’s credit rating by Moody’s as yet another example of an agency stating the blindingly obvious. Indeed, so belated are such judgements that a Bloomberg report notes that bond markets ignore more than half of the agencies’ decisions on sovereign ratings.[1] Moody’s decision is an embarrassment for the UK Chancellor, oleaginous Osborne, as he promised to retain the coveted AAA status. It could also be a soundbite benefit for the opposition, but for the fact that their spokesmen cannot even pronounce the words ‘credit rating’ correctly. However, the significance of the decision is that it shows how the UK is running out of options to manage the crisis and that a more aggressive policy is likely.

Moody’s cited two related problems that result in a third: weak economic growth and high debt levels mean that the UK government is in a much worse position to manage further ‘shocks’.[2] Hence the downgrade. Moody’s assessment is that stagnant growth will hinder the reduction of the UK government debt, which it now expects will reach a level of 96% of GDP in 2016. This figure is high, but it would have been higher still had it not included the Treasury allocating to itself a surplus of some £35bn from the Bank of England’s emergency operations, and if it did not exclude the liabilities from the so-called ‘temporary’ financial interventions after 2007!

These latter items are extraordinary. The £35bn is the accumulated net interest from buying gilts that the Bank of England has gained from the Quantitative Easing programme. It has purchased a huge amount of government debt (£375bn) with monetary financing, got paid interest on the debt by the Treasury and then gave the interest back to the Treasury. This is a form of debt monetisation, one that is moderated only by the Bank of England buying debt in the secondary market and under a specific programme, rather than being open-ended, direct government financing by the central bank. As for the financial interventions to save the banking system, the ultimate scale of the liabilities is unclear, but, taking the cases of Lloyds and RBS, the UK government spent £66bn on their shares in a quasi-takeover. On the latest count it remains under water to the tune of £14bn just on the RBS holdings.

Moody’s analysis focuses on government debt because it is rating the UK government’s credit. However, it is well aware of the extreme levels of debt in the whole UK economy, levels that have also alarmed the Bank of England and underpin the widespread forecasts of stagnation. Some 280 people are declared bankrupt or insolvent every day in the UK, according to Credit Action data, while outstanding personal debt is close to the value of GDP and average debt per UK adult is £29,000, or 117% of average earnings.

The explosion of debt is a function both of the 2007-08 financial sector slump, and of the longer-term dependence of growth on credit expansion. Now the limits have been hit, more or less. This is the most important implication of the credit downgrade decision. Far from Moody’s assessment being an attack on government austerity policy, or endorsing more government spending to rescue the economy, as Labour party commentators like to imply, the agency makes very clear that a further credit downgrade would be in prospect if

“government policies were unable to stabilise and begin to ease the UK's debt burden during the multi-year fiscal consolidation programme. Moody's could also downgrade the UK's government debt rating further in the event of an additional material deterioration in the country's economic prospects or reduced political commitment to fiscal consolidation.”

The ratings change will likely have little effect on UK bond yields, at least in the immediate period. It is only a one-notch downgrade from the top rating by one agency, and similar downgrades of the US in 2011 and France in 2012 had no measurable impact – one that would indeed be difficult to measure, given the extraordinary crisis policies followed by all central banks. Furthermore, Moody’s points out that the UK is in a robust position in its debt financing, given its freedom in monetary policy and the relatively long maturity of its outstanding debt. So, the end is not nigh yet.

Neither is any abrupt UK policy change likely to follow from Moody’s downgrade. Instead, the background default policy remains as before: a remorseless squeeze on living standards. In the five years to early 2013, average weekly earnings rose by 9%, but retail prices (RPI measure) rose by 17.2%, resulting in a fall of 7% in real earnings. More of the same is in prospect, with a variety of price hikes in the pipeline and little effective resistance from workers.[3]

However, this squeeze is showing no sign of recreating conditions for renewed economic growth. This is not because austerity curbs demand, as Keynesians like to argue, but because conditions for profitable accumulation remain stubbornly absent. Boosting ‘demand’ through more government spending would only make the debt dynamics worse, yet limits on spending have obviously done little to encourage investment. By the third quarter of 2012, the volume of business investment had recovered somewhat from the trough of 2009, but it remained 8% lower than at the beginning of 2008. At the end of 2012, the GDP measure of output was still more than 3% below its level four years earlier. Official interest rates are the lowest on record, both in the UK and elsewhere, but the rates at which companies can borrow do not make investment attractive. Stagnation persists.

A striking fact is that while there have been many reports of cuts in government spending, and plans for more cuts in future years, the latest data to January 2013 show no reduction in central government spending on social benefits or other expenditure (outside debt interest). Nominal spending has risen roughly in line with inflation.[4] This suggests that the complaints over ‘cuts’ are more about the cuts that are in prospect, while the real austerity is yet to come.

With a desperate economic situation at home, it was no wonder that Prime Minister Cameron recently took the largest ever delegation of companies, more than 100, to India to tout for business. The main items up for sale were British military hardware, and Cameron extolled the virtues of the Eurofighter jet, partly built in Britain, over the decision India looks already to have made, to buy 126 French-made Rafale fighters in a multi-billion dollar deal. Aside from exports, Cameron also represented the interests of British companies that wanted to invest directly in the Indian domestic market, one that looks more promising than Europe in coming years.

Another policy that is ripe for conflict with other struggling powers concerns the exchange rate of sterling. Over recent months the Bank of England has continued to endorse a fall in the value of sterling on the foreign exchanges to ‘rebalance’ the economy. Since mid-December, sterling’s value has slumped by close to 7% versus both the euro and the US dollar. That will do little to boost exports in a world economy where output growth remains weak and where many other countries also toy with devaluation policies. However it is another point of tension, to complement the debates over Europe’s proposed financial transactions tax and other populist initiatives.

Tony Norfield, 23 February 2013

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[1] Fergal O’Brien, ‘UK Loses Top Aaa Rating From Moody’s as Growth Weakens’, Bloomberg News 22 February 2013.

[2] “Moody's believes that the mounting debt levels in a low-growth environment have impaired the sovereign's ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody's has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.” The UK report is on their website: www.moodys.com

[3] Note that the Bank of England’s monetary policy committee is not bothered about ‘above target’ inflation when real earnings are falling and the rate of inflation has not (yet) become too embarrassing. This is especially when they are in no position to raise interest rates to curb inflation, as the old policy stance would have it, because of the still disastrous levels of debt.

[4] Total current central government expenditure rose by 6.3% year-on-year in January 2013, and for the period from April to January, the rise was 3.6%. ONS, Public Sector Finances, January 2013, Table PSF3A.