Economics as humour

Jokes are very common  among native English speakers but can be a bit difficult for those not brought up in the culture. Telling a joke and then trying to explain it rather spoils the point of it; never-the-less, and following on from my piece “money as comedy” I will try.

It goes like this. “If all the economists in the world were laid end to end they wouldn’t reach a conclusion”. If you understand, that’s great and I hope you find it amusing. If not, you need more lessons! Basically it is predicated upon the belief that no two economists agree about economics, something of a generalisation, but based upon the great number of economic theories that exist, none of which seem to work in the long term.

Being a simple sole myself I rather support the ideas of the economist John Maynard Keynes and his proposition, proposed following the  great depression of the 1930’s, that the world adopt a new reserve currency which he called the Bancor. Effectively this meant that there would be a currency made up of a basket of national currencies and commodities, (such as gold). Instead of this and following the economic victory they won in the second world war, the US dollar took the role, a role which seemed to have worked fine until the US inflation rate accelerated due to the Vietnam War. When European government complained they were famously told by John Connally, the  US Secretary of State for the Treasury, “It may be our currency, but it’s your problem”, which strikes me as somewhat arrogant, but who am I to judge.

This “Bancor” idea keeps on popping up, latterly in Russia, prior to that in China but it seems to me that as long as people (mostly Americans) still think that their national currency actually has some real value, its chances of actually happening are remote.

“Predicated upon” may be new to you. For clarification I give a dictionary definition here:-

(Predicate something on/upon) found or base something on: the theory of structure on which later chemistry was predicated.

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Money as comedy.

Since the death of the great comedian and humanitarian Danny Kay (who he, I hear you ask) the works of that great Danish philosopher Hans Christian Anderson have rather faded from popular view. Understandable perhaps, popularity is a crowed place. Anderson’s great treaties, which translates in English as “The Naked Emperor” perfectly defines the basic operating mode of our modern society.  Fortunately, and thanks to Mr Kay, a simple yet accurate version of this work is available on Youtube, simply search Danny Kay Emperors New Clothes. Though appearing to be a simple children’s story, a fairy story, sung to a catchy little tune to a group or rosy cheeked children, the short narrative is in fact a perfect parody of our modern economic state. We believe that the paper money we have in our pockets has some real and intrinsic value. And so it does, until somebody rather naively questions the accepted view of value, and then the whole structure collapse. The Emperor is without cloths, paper money has no value.

Of course we are all, almost without exception, so invested in the idea that our money has value that we go along with the fiction for, though fiction it might be, it works, and works rather well. No longer do we have to measure the value of oranges against goats or cheese to songs, which we would have to do if we operated a “barter economy”. Instead we can use the simple and effective concept of paper money to guide as through these tricky questions.

A simple but rather old joke about the amount of money going around serves to highlight the current problem of what the economists call “liquidity” but which the former British Prime Minister Harold Wilson humorously referred to as “ the pound (yen/mark/dollar/ euro) in your pocket|  It goes like this:- “ if the ancient Phoenicians (Egyptians, Persians, you have a free choice here) invented money, why didn’t they invent more? Good question. And now we know the answer. This ancient concept of money was based on the rather crazy idea that money in itself had value. They found a substance which everybody valued, and worked out the price of everything against that. They chose gold, though it seems that at other times and in other places other people selected other much sort after commodities such as salt and  even, though hard to believe, Conch shells. What ever turns you as those lovely Californians like to say.

Now most people have at least some hazy idea about supply and demand. Maybe the don’t vocalise it as such, but they vaguely understand that if there is a lot of it about, the price is low, and if it is in short supply and people want it, the price is high. Until quite recently that was the accepted wisdom since what worked for salt worked equally well for money. If there was too much money about, goods such as cars, clothes and food, were worth more. This applied very strongly to land since, with the current state of science being what it is, we are unable to grow more. There are lots of historic examples of this phenomena the most famous example of which is probably the hyper inflation which occurred in post great war Germany where a loaf of bread required a whole barrow load of paper money. After all, you can’t eat money.

And so the accepted and dare I say logical conclusion was that the amount of money going around had to be carefully controlled by the government. This fine balance ensured that prices remained roughly stable and that inflation, the state where prices and wages constantly rose at an unpredictable rate, was kept under control.  So far, so good.

Now let us enter the new world order which came into existence as a result of the financial crisis of 2008. For those who had better things to do than to try to understand this crisis let me just say that suddenly a lot of major banks around the world found that their assets, the stock of money they had laying around, had suddenly disappeared. They no longer had any money. And somebody (just like the little boy in the Anderson story though in this case it seemed to be a quite large group of somebodies) shouted large and long that the what had previously be considered to be as good as money was in fact not just without any value at all but was actually a large negative value since these banks would have to find some real money to compensate the people who had believed the fairy story of value in the first place.

In times past the answer would have been to actually print more money, just at the German government did in the 1930’s but through the perfect vision of hindsight this was rejected. What was needed was a new and improved idea to produce more money but in a way which nobody would recognise as the old trick of speeding up the presses to print more. And for this magic trick governments turned not to economists or accountants but to the new creators of fairy stories, the marketing men. And so was born the idea of “quantitive easing”, an impressing sounding concept which was the same as printing more money, but didn’t actually sound like it. Brilliant. Hans Christian Anderson would have been proud.

Too many words, not enough time.

Patents, that wonderful legal process which protects inventors from having their ideas stolen, is pretty important today, and especially so in the field of technology. As something of a technology refusenik, mostly rejecting such things as Facebook (though clearly not blogs) these patents are of little interest; it is a young mans game I think.

You might imagine my surprise then to discover that not only is the head of the patent office in the USA is an 84 year old man, one James Bilington but that he recently changed the existing policy to make “unlocking” a cell phone illegal and subject to a $500,000 fine and five years in prison.  Just in case you didn’t get that, I’ll say it again, a $500,000 fine and five years in prison.

Let’s just get this straight. You buy a phone on a 2year contract and at the end of that period you have one of three choices. Either to have a new contract with the same supplier, you throw the phone away, or you risk the fine/prison option, unlock the phone and go to a different carrier.

It is reckoned that there are some 30 million unlocked phones in the USA so clearly this would be good news not only for the two controllers of the cell phone business in the USA, AT&T and Verizon, but a big boost to the privatised prison system. A win win as some might say. But now OBAMA has stepped in to spoil the party siding with the 114,000 petitioners who thought this idea was bad for rest of the USA population. It looks like the policy will be overthrown.The above is 286 words. The original article of 1100 words which inspired me can be found here, if you have the time.

http://www.theguardian.com/commentisfree/2014/feb/28/stupidest-law-illegal-to-unlock-your-phone

Difficult days in the Ukraine.

As Winston Churchill said, jaw jaw (talking) in better than war war, so that fact that President Obama spent 90 minutes talking to President Putin about the Crimea issue is to be welcomed. Perhaps not so is the reported outcome, “Obama warns Putin” for warn is a poor choice of words. It suggests that Obama is speaking down to Putin, like a father might speak to a son and that is not, in my opinion, the way to go.

That Russia has significant interests in the Crimea is clear and these have to be protected, as does the welfare of the many Russian citizens and speakers living in the Ukraine. But these genuine concerns must not be permitted to undermine the ability of the Ukrainian people to  govern themselves, without outside interference from any quarter.

What is strange is that any in the Ukraine would demonstrate in support of the ousted President, representing as he does a kelptocracy rapped up in the national flag. I suppose they would say, “he may be a thief, but he is our thief”.

Kleptocrates:-
Rulers who uses their power to steal their country’s resources.

Pollution in China

This is again big news so I thought I would mention my own experience. Three or four years ago I visited a brand new factory in China which was producing very high quality textiles with a weldable coating. It is the sort of thing used in inflatable  mattresses. The process is quite elaborate and highly technical comprising of a row of cabinets side by side and extending over about 30 mtrs. Each cabinet had flashing control panels reminiscent of early computer systems. It really was a quite  impressive example of state of the art fabric lamination.

I notices the heating pipes running through the plant and asked if they were steam or hot oil. “Hot oil” the boss replied. “Interesting” I said, “how do you heat the oil”. “Let me show you” he replied, and took to the back of the facility where there was a man shovelling coal into a furnace. “This is the cheapest way to heat”, he said.

Of course the amount of pollution added by this factory is just a drop in the ocean. Unfortunately, there are so many drops that we are sure to drown! Or perhaps not. As a child I did survive the great London Smog of 1953 where the air was so bad that I couldn’t see my extended hand in front of my face and found my way home from school by following the edge of the pavement.

Trans Atlantic tit for tat

It often amazes me that the captains of big, really big companies get things so spectacularly wrong. Of course taking risks is part of an entrepreneur’s task, and some failures are to be expected but three cases in the recent past stand out since they perfectly illustrate Americans getting it wrong about Europe and Brits screwing it up in the USA.

The first case to consider is that of the Ford motor company of the USA which, in 1989 purchased the iconic Jaguar and Land Rover cars for $2.3 billion. $10 billion of investment later and in 2008 they sold them both to the Indian car company Tata Motors for, yes you’ve guessed it, $2.3 billion.

What took them so long, you might ask since by 2004 commentators were asking, “How could Ford have got it so wrong? Is this the end for Jaguar or does it still have a future? What might become of it and what will it take to revive its fortunes and once again be the car that one day every small boy would aspire to own?”

How they got is so wrong is, in my opinion the a perfect example of an concept I have developed over the years, “Accountants know how to save money, but they don’t know how to create wealth”. Creating wealth takes vision and imagination. If your aim is to save money, and maximise revenue from what you currently have, you are not in the game.

Though not of the same scale, the decision by Tesco, the third largest food retailer in the world to enter the USA market with the concept store “Fresh and Easy” was a disaster waiting to happen. Knowing nothing of food retailing myself I had visited the USA enough times to realise that this is a highly competitive and professional market with very few “gaps” to exploit. £150 million later and Tesco are out.

But perhaps Tesco should feel itself lucky to get out so cheaply. The worlds leading food retailer Wal-Mart is thought to have lost $1billion in the German market between 1997 and 2006 before it too gave up.

And how has Jaguar/Land Rover faired with Tata? “Losses in 2009 were reversed as turnover trebled by 2013, and Jaguar Land Rover has recorded billion pound-plus annual profits for the last three years, adding around nine thousand employees to date with plans to recruit 1,700 more.

Trouble ahead for Turkey

Ukraine in flames, Egypt in the hands of the military. Why? Both former governments seem to have adopted the commonly held misconception among those new to democracy that when a government is elected it represents the people who elected it. In fact a Government has to represent the overall interests of the entire population. Ignoring these interests is the path to civil disorder.

In Egypt the Morsi government  choose to pursue a strongly partisan agenda by the imposition of an Islamist code yet only 52% of the electorate voted and of these only 51.7% voted for him. So with only 26.88% true supporters of his policies is it any wonder that it “ended”, as we say to children, “in tears”.

The situation with Yanukovych in the Ukraine is a little different in that it may have been in the best financial interests of the Ukraine to be close to Russian, but clearly a substantial part of the population disagreed, and given the history of the past 100 years, probably correctly so. Financially they may come to regret it but sometimes money alone is not enough.

Next to watch could well be Turkey where the conservative government of Abdullah Gül and Recep Erdoğan seems set on eroding the secular principles of the state as established by the founder of modern Turkey Kamal Ataturk. A lot of young Turks (there is a pun here but a bit obscure) and indeed some older ones, seem to disagree with him. We have already seen one protests, more could well follow, inspired by the recent events in the Ukraine and Egypt.

English in Vienna