Cloud Cuckoo Land

(In which Tim investigates Data Centres. Platitudes himself into a mild eco-frenzy and then talks remediation strategies like someone who has spent probably less than a couple of hours half reading articles on the subject. I like it that way, throwing punches in the dark, masking ignorance with blind certainty. Sorta GenZish..)

Notice how our language can be subverted? Euphemisms abound. Real intent and actions are hidden by innocuous sounding words and phrases.

‘The Cloud’ for instance.

We all know have some shadowy idea that our data sits somewhere in this mysterious thing called The Cloud. TicToc. (what’s this?) Facebook (Hi Granddad!). Emails, pictures and texts. Banking, payments, networks, online shopping, they all flow seamlessly through this transcendental world. 

Sounds sort of fluffy, no?

Bullshit, actually. Behind each online transaction lies a very physical, non cumulus world located in vast server factories all over the world and supported by a complex infrastructure of pipes and fibre optic cables, often underwater.

These data centres are vast consumers of energy. As the world becomes more interconnected, as we carelessly scroll through TicTocs of dance routines and cats doing funny things, those naughty websites with adult videos on them (not me), the data centres become inextricably larger and more numerous.

More data. More data centres. More energy needed. Vast energy use.

In these data centres, servers sit row upon row, storing our photos, remembering our transactions, facilitating our messages. This all takes energy. But just as we know that overuse of an iPhone can heat it up, likewise these servers generate heat as they whir away continuously. So they need cooling, lots of it.

More energy use. Much more energy use. 

It’s estimated that data centres use upwards of 2% of all our worldwide energy and this is growing exponentially each year. Vast amounts of water are also necessary to keep the cooling systems functional so the servers don’t overheat.

So our picturesquely named ‘The Cloud’ is anything but our fluffy friend. Like steel production - which it is rapidly catching as a major energy user in the world - data centres are a necessary evil. Unavoidable. 

Please note, I’m concerned about energy use, consumption and composition - not greenhouse gases. I’ve been concerned for some time that our ability to produce sustainable, secure and economic energy has been sidetracked and compromised by weak governments and strong green lobbyists. The failure to update our nuclear fleet has been a major failure of not just the UK.

The energy use of data centres is frightening as we expand what we put in The Cloud from photos, to scrolling social media videos to new AI applications. All sucking energy. How is this to be sustained? Will our ability to innovate as a species be constrained by our inability to produce enough energy?

Mitigation

Clearly, the major players from Apple, to Google, to Meta, to Amazon, know this. Whilst the visible end of the internet spectrum hides from the general population, governments and business know the dirty secret behind The Cloud.

Mitigation strategies are many and include, localised renewable energy sources, carbon neutral strategies, clever uses of geography (cold areas for cooling for example, or hot areas for solar energy), water based cooling (in the sea for example), optimal server redesign, converting surplus heat into energy.

Many strategies but the rise of connectivity, AI, videos, and businesses moving to Cloud based solutions - for security, cost reduction, future proofing, speed - all contribute to the snowball hurtling down the mountain that is data centres. Best intentions sometimes aren’t enough.

Knowledge is Power?

Knowledge is power. Power, judiciously exercised can lead to change. Peaceful, incremental, beneficial change. The first step is to realise that the internet, our phones, our social media, The Cloud itself, is not cost free. All our actions, cumulated together, are creating a monster of environmental impacts.

Reluctantly, I admit that governments probably have to play a part. Holding the ring, not swinging within. Businesses who use ‘The Cloud’ can play a part by lobbying for cleaner, more efficient data centres, and by informing their customers of the environmental impacts of their data policies. However, I’m wary of ceding power to self certified experts/third parties who often seem to push agendas in the guise of ‘measuring ESG’. Who guards the guardians is a great liberal principle.

Ultimately though, we - the consumers - are also jointly culpable and so individually we must ask, what can I do?

Practical tips for individuals and businesses

For a start, gluing yourself to the road or vandalising works of art are not an option. Grow up! Prison is where you should be and you have no place in rational discussion. GAFJ. *

So, here’s some practical tips to help steady the growth of data centres and reduce the power that they use. It’s interesting what we can do!

• Delete emails, keep to inbox zero. It’s good practice anyway, isn’t it?

• Don't send unnecessary emails, keep the cc’s low. Go 1980’s on everyone’s ass - be mysterious, untraceable.

• Delete photos. Do you really need 28 selfies per night to get that one perfect shot. Bin the dross.

• Use Google docs and share them rather than use email (also good for security - we’ve all sent docs to the wrong person!)

• Type a website directly into the browser (or click on a URL). Searches use 4 times more energy

• Websites: lighter colours are less ‘heavy’, simple pictures are easier to load and use less energy. As universally recognised fonts, Arial and Verdana load faster. Use simple code - don’t overcomplicate things. Check your website’s footprint at Websitecarbon.com

• Videos and music on your phone. Download, don’t stream.

• Video /social media - disable autoplay

• If you’re listening to a song on Youtube, for example, but not watching it, stream or download the song from a music site.

• Read books. Slow burn knowledge. Builds resilience and patience and is a good habit.

• Quit social media. Conroversial but true. I did it years ago. From my off grid cabin in the wood, reading Appian, I don’t miss it.

It's an interesting list. Every individual plays a part. Each part adds to a whole. The internet is great advance for society, bringing benefits from access to knowledge, to instantaneous communication, fast payments, online shopping, and yes, videos of dogs playing the piano. But there is a downside. Nothing is cost free.

Knowledge of this should dictate behaviour. It won’t but it should. Otherwise demand of services will outstrip supply of energy. Our governments have been criminally negligent sleeping at the wheel whilst mouthing platitudes about solar energy. Yes, I’m back on the nuclear train again. Nuclear? Yes; the way we can safely add base load to meet increasing demand. One for another post !

• GAFJ: Get a Fucking Job. @Tim Robson 2024. Fetch.

Macro Trends: Picnicking on the Precipice

I have learnt that economists have the consistency of a stopped clock; the occasions when they are right tend to be overwhelmed by those where they are not.

Sometimes they make the right call but get the timing wrong. That’s the fate of theorists and those preaching underlying value; but being theoretically correct is no substitute for being actually right. Sometimes however, an economist's prognosis is so weak and equivocal that any temporary blip or slight statistical tilt can result in an undeserved victory lap. (1)

Obviously, a year spent working through macro economic equations at Sussex University does not qualify me to be a fully fledged economist. It did however train me in humility and fallibility. So, clown feet to the fore, here I go again, treading into the world of macro economic predictions.

Energy

The Ukrainian War brought into focus the fragility of supply chains but especially energy security. Previously, all conversations around energy concerned the rather lofty goal of eliminating fossil fuels and decarbonisation. Keeping the lights on through security of supply is now the new rock n’ roll for western governments. The Just Stop Oil morons are appearing not only wrong but passé.

The limitations of solar and wind power (intermittency, costly rare metals, storage) needs to be bolstered by a base load provider. I’ve written before about the emerging consensus that nuclear is the way to go. As nuclear has a predictable base load and - uranium aside - is domestically secure, there is an increasing trend towards building new generation IV reactors, increase use of small modular reactors whilst also extending the existing fleet.

Of course, thorium reactors and molten salt processes could (should) be way forward but as with everything concerning nuclear, politics and inertia will get in the way. Reusing nuclear waste also suffers from underinvestment but, with investment, nuclear could go nuclear in a big way in the next few years. (2)

Fossil fuels are not the way of the future but they are the bridge. Prematurely hacking at the supports of this bridge and shutting off financing is a poor policy as new oil fields are becoming harder to find, and harder to exploit. Let’s hope sense prevails as we transition from one energy paradigm to another.

How we pay for energy might however be at an inflection point.

De-dollarisation / Blockchain

The status of the dollar as the world’s reserve currency is under attack. The recent moves of the BRICS nations to explore global payments (especially oil) in currencies other than the dollar is a major development in the last couple of years and was on the agenda of their annual meeting in South Africa recently. (2)

Put simply, if demand for dollars - and inter alia dollar debt - wanes then this will have a major impact on both the system of world trade but particularly the US’s ability to print its way out of trouble. However, there is no agreed alternative medium in sight, for example, none of the BRICS currencies are able to play this role. (3)

The eventual alternative to the dollar will, I’m sure, involve blockchain technology. Potentially the solution could be an exciting amalgamation of both old and new, blockchain technology linked to physical gold. Back to the future indeed!

Could the dollar make a comeback? Let’s look at debt and bond yields.

Debt and Bond Yields

Congress recently raised the debt ceiling and US debt now stands at $33T with no clear path to lower this inexorable rise. Taxes won’t be raised, spending won’t be cut, and so the only solution will be the further issuing of debt to a market increasingly backing away from dollars (see above). Therefore bond yields are rising, forcing the contribution of debt interest to the federal budget to rise concomitantly (currently on a clear and short path to $1T per annum). And those cheap COVID era bonds are having to be refinanced at much higher rates.

The Fed has been trying, weakly, to shrink its balance sheet in 2023. But if demand for USD bonds declines it will have to pivot and start firing up those printing presses again to monetise a growing debt that is both hard to sell and expensive to service. (4)

But QE - as we now know, and should always have known, leads to inflation.

Inflation

The entirely predictable spike in inflation rates over the last couple of years has been lowering over the last few months. This lays bare the real underlying question; what proportion of the increase was due to supply side shocks caused by COVID and what proportion was caused by QE?

So whilst global supply chains have been - to some extent - normalised, what is the residual after effect of printing money? It could be that inflation has been secularised within our system regardless of the price shocks and that higher base levels will be the norm for some time.

And so, to fight inflation, interest rates will remain high, cutting off investment and freezing the housing market. Could this lead to a recession?

Recession?

The primary question over the last year is whether we are heading into a recession and, if we are, will it be a deep recession or a mild one? Most economists thought there would be a recession in the second half of 2023. That seems unlikely but the signals are mixed. Employment numbers remain high, inflation is dropping but above target and COVID hysteria has - mostly - stopped. China opened up this year and supply chains have re-orientated despite the shock of the Ukrainian War and the concomitant sanctions imposed by the West on Russia.

But, inflation remains high, real estate in the US and China is looking precarious (5), western government debt keeps rising along with yields, the banking system has been rocked by the banking collapses, oil prices are rising once more…

I predict a mild recession in 2024. But my longer term view is that unless western governments get to grip with the twin issues of debt and energy, recessions will appear more frequently with lower lows and lower highs.

Coda - Are You Not Entertained? AKA - what do I really think?

I circle around and but finally come out punching. Yes recession next year. Yes, more recessions to come, maybe not huge but more frequent and tracing a downward path unless we sort out energy supply and our governments stop spending money they do not have. I understand Keynesian counter cyclical pump priming but why do our governments always spend more than they have even in good times and either monetise the debt and so cause inflation, or borrow and pass on the liability to future generations?

Well Tim, they do it because they can. What stops them? Fiat currencies have no earthly bounds beyond market tolerance. And that market is broken. We have the current perversity of US analysts right now living in a topsy-turvy world where good news is bad news and bad news is good news. So if employment figures are healthy then markets are depressed because analysts think that tight labour markets mean that the Fed will not lower interest rates. They want BAD news so the Fed will pivot and lower rates and maybe print more money. But QE, as we know, tends to inflate asset prices and so apart from being wrong in so many others ways, also tends towards pushing money to those that have at the expense of those who do not. You don’t have to be a redistributive socialist to be angry about that.

Was it always like this? Did everything depend on central banks and whether funds rates are a half point up or a quarter point down? I suspect not. Maybe, maybe, in the past we produced products of value and investments were made on real value and not cheap money. Maybe.

The answer seems to take away the punch bowel from politicians. Every crisis is met by spending someone else’s money and if that isn’t available, just conjuring it up anyway and causing inflation. But perhaps that’s too easy an answer. Maybe the fault lies in the mirror - our politicians only bribe us with our own money because we let them, want to be convinced they have the answers.

Maybe economics is like salvation; true grace starts from within. And that, my friends, is a much harder journey.

NOTES

1) Which prompts me to relate the old joke about the economist who predicted 15 of the last 2 recessions. Maybe Keynes had it right when asked about what will happen in the long run - “In the long run we are all dead.”

2) I feel a little smug that my (tiny) investments in uranium companies have shown decent growth in 2023. If only all my stock picks were as prescient. More seriously, the 1970’s decision to drop the thorium programme in favour of uranium, seems increasingly dumb. Maybe I’ll explore this further at some future time.

3) The loud discussions in the macro community about de-dollarisation obscures the reality (so far). Whilst central bank reserves of USD have dropped 7% to 59% over the past 7 years, worldwide trade in dollars - according to ING, has hardly moved in that same period. The BRICS conference recently tasked the countries to investigate local and alternative currencies by next year. A related but out of scope issue for rivals to the dollar, is the huge Euro Dollar market which facilitates dollar trades outside the US.

4) Remember the BoE was forced to buy bonds last autumn to prop up the UK pension market.

5) Evergrand crashing and the Chinese real estate market, built on debt and speculation, may cause a large crash of the Chinese market (30% of all activity is real estate related). US real estate may get hit by mortgage rate inertia where people with a low existing mortgage decide it’s not worth moving when the incremental cost of a more expensive mortgage is factored in.

Why the UK Gilts Market is like the Schleswig–Holstein question

"Only three people have ever really understood the Schleswig-Holstein business – the Prince Consort, who is dead – a German professor, who has gone mad – and I, who have forgotten all about it." Lord Palmerston, British Prime Minister 1859-65

The machinations of the various Danish duchies, their relationship to the burgeoning German Confederation and wider nineteenth century European power politics was famously obtuse; no one beyond the three mentioned by Palmerston ever understood it.

 The Schleswig-Holstein question has become synonymous with a situation too complex to understand. Which is an oblique lead into my main topic today; what on earth happened to the UK economy at the start of October?

 We all know the story. On September 23rd the short-lived Truss government announced several tax cuts and increases in expenditure but neglected to explain how to pay for them. The markets went crazy, and the interest on British government borrowing (gilts) rose exponentially. The Bank of England stepped in to reassure the markets by announcing they would authorise up to £65B of gilt purchases over the next two weeks to stabilise the cost of British government debt.

Then the story kind of went away as other stuff intervened to entertain the media. There were background noises about Quantitive Tightening, pivots, and something Schleswig–Holstein ish about UK pension funds but, it was complicated and so not part of any mainstream narrative.

So, I decided to do a little research as I’m intrigued by the story behind the narrative. I’m going to use a list format below as the story is somewhat complicated, but I’ll try to simplify.

 1)     Pension funds take money in from members. They invest this money and, as pensions become due, they hope that the income from the investments will be sufficient to pay for those pensions. (1)     

2)     This is the ‘matching assets’ process where projected money out is matched by future revenue streams.

3)     Obviously as we’re dealing with many variables and long periods of time, complicated assumptions are made by pension companies to ensure they have the funds to meet their pension obligations. A range of investment options are used (equities, cash in hand, government and private bonds, property investment and a type of derivative known as (LDIs – Liability Driven Investments).

4)     Sorry Tim. You lost me on that last one. LDIs?

5)     LDI’s are basically a hedge. As pension fund projections of income are heavily dependant on interest rates, the pension funds take out what is effectively an insurance policy against interest rate movements. The collateral for the hedge is often government gilts. If the value of these gilts goes down, more are needed (a margin call). 

6)     When interest rates go down – which could adversely affect a pension company’s revenue stream, the policy kicks in and provides funds to smooth the pension company’s revenue.

7)     When interest rates go up – which should in theory be a good thing as more income will come in – the pension funds however need to pay the insurer (I want to use the word counterparty here, but it tends to confuse rather than illuminate). (2)

8)     So, when in September / October the interest rates on UK government gilts dramatically shot up and the underlying value went down, UK pension funds found that their collateral was worth less and that they were suddenly liable to pay their counter-parties lots of money.

9)     This forced pension companies to make fire sales of liquid assets – for example, UK Government gilts.

10)  But, at the same time two other things were happening:

a.     The Bank of England had finally started to unwind its balance sheet of the government gilts it had on its balance sheet (£450B of QE for COVID expenditure for example).

b.     The UK government’s mini budget promised a lot of spend, less government income because of tax cuts and no plan how this was going to paid for. The assumption is that they would have to borrow more by issuing more gilts to finance the new commitments.

11)  So, we have pension funds and the BoE both dumping UK Government gilts at the same time as the UK Government wanted to issue more.

12)  Too many gilts. Not enough buyers. The UK state simultaneously selling off and issuing more gilts. Supply increased, the value went down, the interest rates went up. A doom loop crisis! (3)

13)  Bank of England steps in and reverses itself in a week and goes from Quantitive Tightening (i.e., selling gilts and tightening the money to supply) to Quantitive Easing to prop up the bond market and protect the pension companies from going bust.

 Are we all clear now? Yes, the proximate cause of the issue was the government being opaque about financing of their fiscal plans. But behind the scenes we had a derivative driven pension market (shades of 2008’s crash perhaps) and a Bank of England both restricting and then growing the money supply and being forced to do so by an unwelcome cash-call in the pensions market.

What is the takeaway?

-       Governments need to publish their spending & borrowing plans at the same time. As they are subject to the markets themselves, they need to convince the markets of their plans.

-       QE and loosening the money supply has long term effects.  Interest rates have been so low for so long, LDI’s offered a (it seemed) low-cost way of hedging this whilst freeing up cash to invest in riskier assets with greater returns.

Extraordinary monetary policy should remain just that – only to be used in a crisis and not as an expedient to meet the spending plans of governments who won’t raise finance in more normal ways (tax, borrowing, spending cuts, efficiencies).

-       Complex financial instruments can obscure risk. Until a risk happens. And then they unravel. Regulators need to be stress testing institutions more regularly and with greater supervision. Although the market movements following the 23rd Sept were large, they were not implausible and so needed to be stress tested

And - I hear you ask - what happened to the Schleswig–Holstein regions of Denmark and Germany in the end? Wars happened. The question of who owned the duchies was finally resolved by the macro forces of war and of peace treaties and, sometimes, plebiscites. The complexities resolved themselves by blunt instruments and rough solutions.

Is this how the gilts, QE & pensions markets will work out with market forces playing the role of war?

  Notes

1)     Historically the UK had Defined Benefit pensions organised through employers. What this meant was that employees put money into a pot during their working life and the company guaranteed that when the employee retired, they would get x% of their final salary. Therefore, the company & the pension fund employed to manage the funds have to always make sure the fund is adequate to meet obligations. This is the type of pension fund affected by the recent chaos in the UK gilt market.

As Defined Benefit pension funds are expensive and complicated to maintain, the UK has gradually been moving towards Defined Contribution pension schemes in the last twenty years. Here, employees and employers both contribute towards a pension fund with a pensions company. The pensions payable to the employees when they retire are based on the fund performance in future – i.e., the future benefit is not guaranteed.

2)     “To mitigate the risk, of the bank counterparty defaulting on its payments when the contract matures, the bank would post additional collateral as surety against the contract. Typically collateral is posted by whichever party is ‘out of the money’. It is considered good practice and is becoming standard market practice to minimise risk by posting only cash or high-quality government bonds as collateral”  An Introduction to Liability based investment. Can you see the last sentence? This is what happened in the UK Sept / Oct.

3) Like all equities, government bonds follow the same rules; the yield (interest payable) has an inverse relationship to the value. A doom loop happens when – in order to generate cash – institutions are forced to sell their assets thereby lowering the price of those assets. This lowering price degrades their existing assets making them sell more. Lowering the price again.

UK Economy: What the hell is going on?

(I wrote this on 3 Oct - nearly a month ago. Apart from a few edits it’s substantially the same as written.)

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The more one studies macro economics - the way our financial institutes and government work - the more one becomes depressed.

On the surface, credentialed bankers and politicians, project a veneer of competence; that they know what is going on and that by pushing certain levers, dialling up or down certain controls, they can smooth our economic landscape.

My revelation - probably long overdue - over the last few years is that actually we have incompetents in charge at best, bad actors at worst.

Like the contemporary study of history, economics seems to take perverse delight in ignoring the received verities of the past and acting like everything is new. That there is only now. Now will be different from thousands of years of human history.

So, we - the general public, the uneducated masses - knew instinctively that printing money was bad. Printing money is a childish response that clearly provides a short term relief at the expense of long term stability. We used to look at the cautionary tales of the Weimar republic, Zimbabwe, Venezuela, Argentina, and be thankful we lived in Western democracies where such idiocy couldn’t happen here.

It happened here…

To focus in on the UK. The closing of the economy - needlessly, foolishly - in March 2020, prompted the Bank of England to print £450B of money. Money that was given to government via monetarisation of the government debt (gilts). “How much do you want?” asked the Bank of England. And they printed it and used these funds to finance the governments COVID policy. Money was flying around the stagnant economy not backed by productivity or activity.

So we’ve got inflation. This isn’t a surprise. I’ve been signalling this eventuality for the last couple of years and I’m not that bright. I’m not credentialed. I don’t tend to talk in bogus imperatives. The future is always unpredictable but, based on this writer’s experience and judgement, the fact that inflation was coming down the track seemed obvious.

I’m not a Johnny come lately. I’ve written publicly that inflation was on its way due to crazy policy ideas of the Government / central bank nexus both here in the UK and elsewhere. I went public with my fears. Privately, I re-mortagaged six months early in January of this year because I knew rates would soon go up. So I’m personally very smug about that and glad that I did. But not everyone studies macro economics like I do. The general public look to our governments and financial institutions to look after their interests.

They didn’t.

Proximately, the Conservative government did two things and forgot two other things.

What it did: One, it underwrote the energy costs for both consumers and businesses by introducing an average price cap. As energy is very expensive (due to many factors, some, all, due to actual government policy on fossil fuel withdrawal and elective sanctions on Russia), this policy is very expensive (£100B a year? More? Slightly less). The second decision the government made was to lower taxes or cancel recent tax rises.

I’m generally in favour of lower taxes. I spend my money better than any government. Corporation tax is paid for by everyone and the higher it is, the less companies wish to remain or relocate to the UK. So the cancellation of the corporate tax rise from 19p to 25p was a welcome, and sane move. Lowering income tax. Yes, sure, why not. Cancellation of the National Insurance Tax rise was also welcome. Give me more money to spend in what I deem essential (home, heating , kids, and yes, that dreadful word, savings).

The government also abolished the 45% tax rate for those on over £150K a year and did away with the EU inspired cap on bankers’ bonuses. These two I have a hard time defending. The less tax, the better, always but this is a moment of national crisis with energy costs going up and the cost of living getting out of control. There is an argument of trickle down and the Laffer curve (where lowering taxes brings in more revenue) but this was the wrong time to test this out. The government would have been better to increase tax thresholds and do away with the pernicious fiscal drag we’ve been suffering for years.

But onto the two things missing. Firstly, if the government is spending more via energy support but also simultaneously lowering the tax burden, where does the money come from? It was bloody unforgivable and amateur hour for the government not to address expenditure and financing in the mini Budget. Shocking in fact. Interest rates and bond prices were rising already - worldwide. The Bank of England had finally got around to unwinding their bloated QE inspired balance sheet by embarking on Quantitate Tightening (ie, selling government bonds back onto the market). And then the government announced a major leap in expenditure and tax cuts. These commitments would require MORE borrowing at exactly the wrong time.

The second thing the government forgot was not to get the finance world on its side. Finance works off certainty and the British government seemed to relish in surprise. Pulling in the opposite direction to the Bank of England was a foolish move. Not to engage the Office of Budget Responsibility was equally stupid. Also, the markets were surprised and reacted accordingly. Sell the UK! Inflation and the general rise in interest rates are a worldwide phenomenon. The Uk Government’s stupidity meant they became the poster child for a wider movement and got blamed for all the sins of the financial world.

And onto the final piece. It seems that the rise in the yields of gilts uncovered some murky creatures at the bottom of the swap; pension companies. To improve income flow our pension companies were borrowing money in order to buy more gilts. So not just investing their funds but using those funds to borrow money to make further investments. Shades of 2008 all over again. The fall in UK government bonds left the pension funds exposed and on the verge (it’s alleged) of defaulting on their obligations.

So what did the BoE do? It pivoted and moved from a position of selling government bonds to buying them again. Using printed money. Up to £65B more of QE. Yes, in a time of high inflation, the BoE used its firepower to blast itself in the foot. They blinked and chose (maybe rightly, maybe not) to prop up the nefarious pension companies and abandoned their fight against inflation.

To summarise. Too much QE. Stupid COVID policies. Dreadful energy policy. Out of control government spend with no plan to curtail it. Too much government borrowing. Dodgy financial practices of the pension companies unsupervised by a BoE asleep at the wheel. Resumption of QE leading to more inflation down the track. And finally - maybe the worse sin of all; weakness, U-turns, uncertainty at the top.

And who suffers from this shambolic mess? The public who put trust in short termist politicians (of all stripes, Labour have NOTHING to shout about - they would have spent more during COVID in particular and anyway, because that’s what they do). The public trusted our financial institutions who have, again, let us down. The culpability of our betters leads to recession. Lost jobs. Blighted lives.

I used to think money was amoral. I don’t anymore. It can be immoral.

Inflation - Roman Style

On his deathbed in York, Roman Emperor Septimius Severus (193-211) gathered his two sons and co-heirs around him to give them some advice about running the vast empire when he was gone:

 "Be harmonious, enrich the soldiers, scorn all others"

A bit harsh but Severus had been a successful Roman soldier/emperor – leading the imperial armies to defeat multiple foes both internally and externally whilst expanding the Empire in Africa, Persia and Scotland (1). He’d enlarged the army during his reign and given them a substantial pay rise. But where did the money come from to pay for this?

Answer: He debased the currency by reducing the silver content in the Roman coinage – the denarii – from 78.5% to 54%. This enabled him to cheaply expand the money supply to meet his priorities (pay the troops). In the years that followed his death, the Roman Empire was, predictably, racked with inflation.

Let’s pause here and ask a question…

Is there anything instructive to be learnt now - in 2022 - from the example set by Septimius back in 211? Something that perhaps addresses the issue of governments thoughtlessly expanding the money supply to meet some perceived emergency need?

My contention is, whether you wear a toga or a smartly tailored suit, the lessons of economics apply equally and always. The same rules apply. There is nothing new under the sun. And yet in our arrogance and ignorance, we forget. “Things are different now,” we bleat pathetically as the waves - commanded to cease - roll remorselessly past our gilded thrones. (2)

To meet increased expenditure all governments - ancient or modern - have the same list of choices to finance that expenditure. The options are as follows:

• Don’t do it

• Cut expenditure elsewhere

• Raise taxes

• Borrow the money

• Debase the currency

The order I put these five options is - of course - often inverted by politicians. The first three are hard and have real time accountability. The latter two postpone the pain and push it into the future. Guess which options politicians increasingly favour? (3)

Back to the Third Century

Septimius unwittingly set in motion a series of disasters for the next seventy years as short-lived Roman emperors grappled with both inflation but also with invasions, plague, and endless civil wars. Whereas English historian Edward Gibbon might say the mid second century AD was the best time in history to be alive, the third century most certainly was not (4).

The 3rd century story is a depressingly familiar one.

Following Septimius’ death, his two sons didn’t live harmoniously together, quarrelled, and Caracalla killed Geta going on to become one of Rome’s worst emperors. His decision to expand citizenship to all peoples of the empire – sometimes painted as a noble and liberal move – was brought on by his excessive spending. More citizens equalled a larger tax base. (5)

And so, with wearying predictability, emperor followed emperor, crisis follow crisis, rebellions drew troops from frontier defences which, in turn, allowed multiple barbarians invasions through the gaps this created. At one point the empire even split into three. And all whilst inflation wrecked the economy.

The third century’s equivalent of a central bank was the Imperial Mint where the empire’s coins were created. Whereas modern day governments Quantitive Ease billions into existence at the touch of a button, their ancient predecessors debased the currency by adding increased amounts of base metals to the coinage. The consequence of this was the same as QE; lots of inflation caused by a prior expansion of the money supply. Same as now.

So how did the Romans deal with this issue? Badly, to be honest.

Extract from The Edict on Maximum Prices

 Enter Diocletian (though hat tip to Aurelian)

Militarily, the Emperor Aurelian (270-75) put the empire back together with a series of lightening victories from East to West before he was tragically murdered (5). He started the process of dealing with inflation by producing higher value and higher worth coins not affected by debasement. However, it was his eventual successor Diocletian (284-305) who really tried to get to grips with inflation.

His most famous economic policy was the Edict on Maximum Prices of 301 where he laid down the maximum prices for over 1000 goods and services. However, like the Labour government’s Prices and Incomes policies of the 1970’s or the Tory government’s disastrous energy price cap from 2017 onwards, artificially holding down prices never works. As a wiser UK Prime Minster once said “you can’t buck the markets.”

Despite a harsh penalty for transgression (death), the price controls collapsed quickly into a heap of shut shops, food scarcity and rioting. How can businesses or agriculture survive if the input costs are higher than the costs of sale? There was also a strong element of misdirected blame in the Edicts’ preamble that labelled high prices immoral and unpatriotic and that people who sold at high prices were enemies of the Empire.

Obviously, Diocletian confused the causes of inflation with its results. The causes - debasement and a flooding of currency - were not addressed but the consequences - increased prices - were instead blamed. In the modern parlance, Diocletian claimed businesses were ‘gouging’ their customers. Yes, governments distancing themselves from the consequences of their own actions was alive and well back in ancient Rome.

But there was a second policy of Diocletian that is also relevant here; inherited jobs leading to forced labour immobility. The economic activity of the empire had reduced markedly over the dismal third century. If land was depopulated and unworked, not only did the food supplies decline but so did the tax yield. Tie people to the land and make them work in their father’s professions, then yields - both agriculturally and financially - would, in theory, go up. What was the loss of liberty for the individual if the greater good of the empire was served?

Practically speaking, the citizens of the Empire weren’t allowed to move and were compelled to follow in the footsteps of their parents for jobs. Thus if your father worked on the land, so you did too. If he was in the army, you also had to join. Ditto shopkeepers, tanners, blacksmiths, bankers etc. Arguably, this marked the beginnings of serfdom in Europe and the Middle Ages. (6) Michael Rostovtzeff, writing in 1926, put the tolerance of this loss of liberty down to a general weariness with the proceeding years of lawlessness and destruction, years where armies (internal & external) had taken crops forcefully and commerce had dried up as the Empire’s internal networks became dangerous to traverse.

“Force and violence were both the motto and the practice. Law and order were dreams. Besides, by a long evolution... the population of the Roman Empire had lost the habit of self-help and initiative, and had become accustomed to be ruled, and to be directed. It was no wonder then that in such conditions as these the residents of the Roman Empire had no force of resistance left and submitted blindly, though reluctantly, to the reforms of Diocletian and Constantine...”

— Michael Rostovtzeff The Problem of the Origin of Serfdom in the Roman Empire (1926)

So the liberty to move around and pursue one’s own course in life was severely curtailed. Life became smaller and meaner for the general population as Diocletian and his successors grappled with inflation & taxation using regressive and authoritarian means. Interestingly enough, as the population at large became less free, the fourth century emperors (though not Julian) became more remote, their courts more formal and the Emperor more unapproachable. This marked the moment when the empire switched from a Principate form of rule to what became known as The Dominate. The Emperor was no longer first among equals, he became a godlike figure. Naturally, the bureaucracy increased exponentially, as did the army. The wider elite solidified their position. Inflation didn’t affect them too much as they often managed to evade paying taxes. (7) Payment in kind - food for the army, services - was always an option in those inflated times.

So, what are the parallels - or warnings - from then to now, from the economic woes of the later Roman Empire to 2020’s style inflation?

The first point is an obvious one; don’t debase the currency. It doesn’t end well. Secondly, efforts to manipulate prices have a bad habit of failing and lead to supply issues. Thirdly, be aware of those who threaten to trade your liberty in order to meet some perceived emergency. Travel restrictions, a creeping control over freedoms and appeals to the collective over the individual are all potential signposts on the road to authoritarianism.

The Roman Crisis of the Third Century is traditionally dated 235-285. The Empire in the West lasted until 476. In the East 1453. But the Empire - of both East and West - was radically different following the crisis. It was still the Roman Empire but the compact between citizen and state had changed completely. Inflation hasten this change.

 References

1) After his death, all of these gains were later lost.

2) This of course references King Canute - proving to his courtiers in the 11th century that nature will not bend to the will of kings. "Let all the world know that the power of kings is empty and worthless, and there is no king worthy of the name save Him by whose will heaven, earth and the sea obey eternal laws." One might also add the eternal laws of economics. 

3) There is a sixth option which is plunder. To be fair, this was a more acceptable option back in Roman times. An equivalent today might be a special ‘one off’ tax on corporations (oil companies / pension funds / banks). Basically a fiscal raid.

4) Decline and Fall - Part One. I’m currently reading this epic tome.

4) More citizens also meant - in theory - more people to join the army, engage in civic activities sand share the responsibilities of the Empire. But taxes too. However, one of the perversities of universal citizenship was a decline in army recruitment. Previously citizenship was the reward for twenty years service in the auxiliaries. That inducement was now gone.

5) Aurelian’s achievements were legendary; all the more so due to the brief time period he achieved them. The Goths were repelled, Zenobia and the Palmyrian Empire were defeated and the East reabsorbed back into the Empire and the breakaway Gallic Empire was similarly demolished and reabsorbed. He also took the time to commission - yes you guessed it - the Aurelian walls in Rome.

6) These policies were reinforced and built on by Diocletian’s eventual successor Constantine.

7) Diocletian also reorganised the administration of the empire into more numerous but smaller districts. He split the control of taxes and administration from army command for the local governors. One consequence of this was that large local landowners were able to more easily evade taxes by bullying or ignoring these less important adminstrators.

Inflation: Useless Politicians and Bankers

“And I will destroy your high places, and cut down your images, and cast your carcases upon the carcases of your idols, and my soul shall abhor you.”

— Leviticus 26:30

Who knew?

Print £440B of new money and you get, subsequently, inflation.

And yet we're all supposed to act like we're surprised. "Wow! Where did that come from?"

Exactly a year ago I compared inflation to Voldemort - the evil that dare not be spoken about. Something that had been vanquished back when Reagan and Thatcher were in office and we were all into Adam and the Ants and driving Mini Metros.

But with current inflation rates of 7% in the UK and 8.5% in the US, here we are again. Again. Learning economic truths anew. One almost wants to get Biblical on the ass of those in power who wilfully, stupidly, created this mess. The standards of public life - I’m afraid have declined. Or perhaps they were never that high. But this goof seems akin to a blindfolded man throwing darts at a dartboard framed by balloons and getting shocked by the the resulting bangs.

"Inflation is cause by prior expansion of the money supply." This dictum was drummed into us during mid 80's economics classes.

What about another old favourite from the dusty book of forgotten economic laws? "Inflation is caused by too much money chasing too few goods."

(There is another contributory cast of characters in this 70's revival; the knock-on effects of hysterical Government COVID measures which shut the economy down for nearly two years, the concomitant increase in the prices of commodities, oil price rises (COP26 & ESG), sanctions against Russia and the disruption in the world economy caused by the war with Ukraine. These latter two however just exacerbated an existing trend. Any politician who tells you otherwise is lying.)

"Why did no one see this coming?" the Queen famously asked professors at the London School of Economics in 2008 after the credit crunch - so obvious retrospectively - was completely missed by the world's financial authorities. Perverse incentive structures, complicated instruments and misdirected regulations would be the answer. And venality.

This time though, what were they thinking - printing money and then being surprised when this debasement did its destructive thing on the currency?

Inflation is a tax we all pay as I have pointed out previously. Currently this tax is - officially - 7% in the UK. Real rates of inflation - ie, what you and me actually pay, run to double digits. This is before - of course - any tax hikes our governing classes are belated throwing at their whipped populations. The answer to the errors of too much government is never, ‘more government’.

So, to return to the Queen's question, why did no one see this inflation coming? Some did (me! me!) but the dominant riff from central bankers, until recently, is that the return to inflation was transitory. How’s that working out for ya? That rhetorical construction seems wilfully, and conveniently, blind. My contempt for those in power grows.

Printing money is a very dry subject made all the more so by its modern nomenclature - Quantitative Easing. The sums involved are too high for most of us to imagine. The monetary authorities all have impressive credentials behind their names, and occupy the high places of financial respectability. If they say that Quantitive Easing is really okay, and we’re not going to get screwed, who are we - the poor population - to disagree?

Inflation and cost of living are becoming the next grand conversation and perhaps already are - if we can absorb more than one meta-narrative at a time. There’s a cynical edge to the media I realise more and more as I get older. The MSM push one meta narrative at a time and everything is seen through this distorted - and temporary - lens. Brexit. Trump. Covid. Ukraine. Everything is about this one issue. Until it’s not. Meanwhile, central banks roll the printing presses and none of us wonder how the hell anything is paid for.

Interests rates must rise to curb inflation. Similarly treasury bond yields must, and are, rising. The alternative - more QE - beyond the craziness of the ECB - must surely out of the question this time. Even in the thickest skulls. You can't fight a fire by dousing it with £1.62 a litre petrol. Weimar Germany, 70’s Britain or Mugabe’s Zimbabwe are not to be aspirational models of good stewardship.

And if someone - whether politician or central banker - suggests in the future that printing money is a good thing we'll know, perhaps - and again - that inflating a currency is a quick fix that carries long term, and destructive, consequences.

Won't we?

However, the cycle time it takes to forget stupidity in our society is diminishing. So, at the present rate of forgetfulness, I’d give it five years before some highly remunerated moron will suggest, pompously - like they know what they’re saying - that increasing liquidity in the economy by QE to stimulate investment is the way to go.

And they’ll be wrong but we’ll do it anyway.

Is QE the New OPEC: A Return to 70's inflation?

Opinions of decades change over time. I remember back in the 80’s the 1970’s were regarded as, well, a bit shit really. People wore flares, brown suits and spent most of the time on strike or huddled around a candle burning five pound notes to keep warm. The 70’s reputation was one of strife and bad clothes.

Punk, disco, glam, these were antiquated things to be laughed at. I remember Abba being so out of fashion in the 80’s it was an actual crime to own one of their records. Hard to believe that now. But I continued playing them. Yes, I was the person who made Mama Mia possible. Thank you.

The 80’s were shiny and the 70’s were dull. The 80’s were a time of renewal, the 70’s a time of decline. And so went popular opinion.

But as time passes, an inevitable reassessment takes place; distance really does add depth. The 70’s were also the decade when the spirit of the 60’s was democratised into the population as a whole, not just the illuminati. 1976 was a blisteringly hot summer. There are some great films (Dirty Harry, Star Wars, Grease) and some classic music. And the styles themselves, once so derided, seem more in tune with now than the shoulder pads and mullets of the 80’s.

Which is all a long way around to introduce the topic of inflation. Because, one thing that the 70’s really own, really can claim as their ‘thing’, is inflation. And with our government(s) creating money like Robert Mugabe spinning the printing presses of the Weimar Republic, inflation is back on the agenda.

We seem to have forgotten about inflation. Since the early 1980’s when Thatcher’s government set out to conquer it, we’ve not really experienced its effects. This may have bred some complacency - or simple ignorance - amongst our central bankers and politicians. “Inflation?” they might intoned using ill merited superiority, “That’s not going to be a problem. We’ve printed money for more than a decade with no inflation. Theres no inflation around here.”

But, like Voldemort, is it ever really dead? *

Tim flips to the serious bit

What is inflation? Inflation is the rate of price increase in goods and services over a defined period of time. So, if a pen costs £1 in Year 1 and £1.10 in Year 2, the inflation rate (for pens) is 10%. Add in everything else in an economy and you get the aggregate rate. We all know this. But what causes prices to rise?

“Too much money chasing too few goods” - Demand Pull Inflation

If you are a monetarist - Milton Friedman being the most prominent here - inflation is caused by a prior expansion of the money supply. This was a lesson that was drummed into all of us in the 80’s who studied economics (I did). Too much money causes inflation. Why is this? Well, if you you increase the supply of something, the price will fall; the falling price of money being inflation. The obvious landmark event in the 70’s was Nixon coming off the gold standard in 1971 and tearing up Bretton Woods. This de-anchored currencies allowing governments to dabble where angels had previously feared to tread.

Further to this, if there is more demand than the supply of goods, the price of those goods will tend to rise. This is evidenced in the long -form economic seminar we call Jingle All The Way where the lack of supply of the kids’ toy jacks up the price discomforting Arnie’s character.**

True, perhaps. But what about other causes? Some (Binder et al) argue that there were two types of inflation in the 70’s - underlying inflation and price shock inflation. The argument goes that the 70’s was a period of price shocks - oil, of course, but also food and the perverse affects of prices and incomes controls in the Western World. If you hold something back you not only suppress supply but create pent up demand for when those controls are released, creating a surge in inflation. Hello 1974 and, perhaps, rebonjour 2021 as lockdowns are finally lifted.

Yes, 1974 was the big year of inflation. The mother of all inflated years (though inflation peaked in the UK at 24% in 1975). So, the big question on everyone’s lips is; is QE the new OPEC? Or is QE the new decoupling from the gold standard? In other words, are we heading for a short and bracing bout of one time inflation or several years of systemic inflation?

Beyond my pay grade, I’m afraid to say. It’s interesting to note wage pressures. The 70’s were a time of powerful unions, industrial actions and wage increases (which, in turn, led to further inflation). Through Thatcher’s reforms, this seems to have gone away in the UK though the nurses’ recent 12.5% wage increase is perhaps the first salvo in the inflation battle to come. I don’t get the sense of labour shortages (yet).

However, as we all know, although inflation is a bitch to the common, working, person it’s much kinder to those with large debts. The biggest of these debtors is, of course, the government borrowing like crazy at the moment. Talk about a fox being in charge of the hen house!

But what can we do?

How can we adopt some defensive strategies? Well, here’s some I pulled out of my arse:-

• Real assets tend to increase in value as a currency devalues. My numismatic hobby might just turn golden, if you get my drift.***

• Other real assets, land, property tend to do well. When the currency is being flushed down the toilet, possession of tangible stuff is key.

• Is this finally the time for digital currencies?

• if you’re on a variable interest rate mortgage, perhaps this is the moment to consider (or increase) overpayments. Go long in fixing your mortgage payments.

• Savings. Savings. WTF can we do about savings? One would assume that if inflation starts to take off the BoE will need to raise interest rates. It will be interesting to see if this finally triggers a commensurate rise in the savings rates banks offer. It’s been so long since there was a decent rate. Would any potential rise in deposit rates keep pace with inflation however?

• Equities. I’ve not been able to discern much sensible information about stocks and inflation. The twin crashes of the 70’s had different outcomes for the FTSE - 1973/4 a massive crash, 1979/80 a modest increase. There is a theory that value stocks do better in periods of high inflation whereas growth stocks do not. But there’s too much noise to discern any clear pattern. As ever, playing the stock market is a matter of judgement, experience and timing. And luck. But on average, and over time, it tends to increase despite periods of inflation. ****

A parting thought. We’ve never really lived in a time when a government has deliberately crashed an economy and then used massive money printing to foot the inevitable bills. How much supply has been eroded in the last year, to soak up the QE, will soon be put to the test. Inflation is perhaps one outcome. When furlough finishes, unemployment will be another. My discredited Phillips Curve used to suggest there was an inverse relationship between these two evils. I fear we’ll get both again.

And on that sombre note, let’s play Rod and Faces, one of the better memories of the 70’s. It merits a longer entry - which I’ll get around to - but they were sloppy, they were loud, they were drunk but the Faces had swagger and were one of the best live bands ever! Ronnie’s guitar tone. Wow!

NOTES (How pretentious, I am!)

*I know, I know. Harry Potter references now. I’ve slipped. Must up the quotient of better references.

** I’m really going for it now - an Arnie reference no less!

*** Numismatics - collecting coins. UK gold sovereigns are a good - and tax free - way of wealth protection, I’m told. But there again, the guy who told me this was Gordon Brown.

**** The FTSE was 289 in 1970 and 620 in 1980. Go figure.

Shake The Magic Money Tree!

There comes a time, sometimes later, sometimes sooner, when you realise that much of what underpins the modern world exists because we choose to believe it exists. Primarily, but not solely, I’m thinking about money here. (1)

You see, money may be experiencing an existentialist crisis.

This year, the Bank of England has created, almost unremarked upon, £450B of new money. This is in addition to the £445B already created in the last ten or so years. Printing money has become increasingly the go-to policy for government / BoE financing. (2)

But what the hell is the Bank of England - and other central banks - doing printing money? We all thought - until recently anyway - that printing money was the preserve of failed states where a richly embroidered President for Life might fire up the state money machine to pay for his next golden toilet whilst his people ate shit from garbage heaps?

In other words, what is the difference between the infamous hyper inflation of the Weimar Republic or Zimbabwe, and a modern, oh so sophisticated, economy like the UK?

One hundred years and a new terminology frankly.

We don’t print money anymore, we ‘quantitively ease’ (QE). Lofty economists hide money creation behind high sounding phrases designed to obfuscate. They distain the commonly held view that printing money is generally a bad thing. “Don’t you know,” they will pontificate - probably with half moon spectacles sliding down their nose in the manner of clever people everywhere - “Commercial banks create money all the time? What do you think fractional reserve banking is?”

Good point. We all know, via the credit crunch of 2008, that banks - sometimes recklessly - take a pound and lend out ten. Hence fractional reserve banking. The argument for QE is that, in bad times, banks lend less and so the creation of money is tightened. Hence the need for quantitive easing, i.e. creating money to persuade banks and others to lend money to get the economy moving. At some theoretical date in the future - never defined or realised - central banks will unwind their position and pass back their holdings from their balance sheet. This is to avoid the perils of hyper inflation.

And what are those centrally held holdings on the BoE’s balance sheet? What do they buy with all this new money? Well - since you ask - mainly government debt.

Oh.

So, this is quantitive easing; a government wants to inject money into the economy, they issue debt, the banks and insurance companies buy the debt, the central bank buys it back, the markets make a small ‘turn’ on this as the price is rising due to demand, meaning the yield falls on those bonds so servicing the debt is now cheaper for the government. Happy days! Doubles all round. Some corporate bonds are bought, but, not so much. Mainly government gilts. (3)

Well, that’s ‘vintage’ quantitive easing.. We’ve progressed since the good old days of the credit crunch. Now, in 2020, the central banks and government can’t be arsed in issuing and re-purchasing gilts and so just think - ‘fuck it’ - and go route 1 and cut out the middle man. So the BoE directly buys government debt with their newly created money.

Think about that for a moment; the government spends like a pissed up sailor on leave with a stolen credit card and, fearing the usual methods of raising income - boring stuff like raising taxes, borrowing or, here’s a novel one - growth - just prints the money it needs.

It’s a bold strategy, an ‘unconventional monetary approach’ in the jargon. These are unprecedented times, okay? But, erm, tap tap on the shoulder, is this right? Legal? Even moral?

Personally, I don’t like short cuts. We all know state fiat currency is make believe - it exists because we choose to believe it exists. But you like to comfort yourself that behind the mist there are real things dimly in view - productivity, innovation, balance of payments, demand. You know, the stuff of the actual economy. It’s why we get up in the morning and work.

But what’s the point if you can just fire up the printing presses and create money? It’s easier than actually earning the money. And who doesn’t like free stuff? This is a shortcut that undermines the real economy. As we all trade in the same currency (money) the actions of the government must surely degrade the productive part of the economy.

The classical economic view is that if you increase the supply of something, the price will drop. For money, we call this inflation. Inflation is a tax that we all pay. Print loads of money and you get hyper inflation and we all have to get out the wheelbarrows to buy a loaf of bread. The economy falls apart causing real and sustained damage.

So I’ll end with two scenarios and a comment:-

1) We have entered a new norm. Inflation has been conquered. The masters of the universe have defied the economic gravity and are floating above what used to be held as a truism; that printing money is bad and will cause hyper inflation and crash the economy. We are truly living an age of giant economists who shame those pygmies Keynes, Friedman and Hayek.

2) We are living on borrowed time. The poison is acting slowly but will eventually start to work. It’s only a matter of time before the inflation kicks in and then we’re all screwed.

2020, we all appear to be living through scenario one. But I fear scenario two is our ultimate destination. QE, printing money, is a fool’s shortcut. Intrinsically, we all know this. Why don’t our political and financial masters know it too?

NOTES

1) Big Tech, Elections, Fractional Reserve Banking, MSM News

2) UK Government / Bank of England. I use the terms interchangeably. They are, in effect, one and the same thing.

3) Governments - and oppositions - have been talking up the advantages of cheap interest rates on state debt for a good ten years. The argument seems to go, it would be irresponsible not to borrow when money is so cheap. These typically tend to be same people who say, governments can run large debts because a country is not like a household. Said with a sneer. We shall see.

How Negative Interest Rates Are the New Flares

Economists are herd creatures. Admittedly there may be more than one herd but they like to get with their fellow economists and chew the cud.

Like all social sciences, it has fads, fashions and theories that, like flares, come and go. So, why do I say negative interest rates are the new flares?

Well, for a start, it’s an exciting phrase, one that allows you to visualise some long haired loser from the 70’s nodding along earnestly as some prog rock group embark on a twenty minute keyboard and drum solo on the theme of The Hobbit. But extend that zoom focus; all the kids are wearing flares. Yes, these flappy trousered kids are the economists.

And negative interest rates are Emerson, Lake and Palmer?

Er, no. Yes. Perhaps. I know. I took the analogy too far. It happens.

Anyway, the thing is, what I really mean, yours are the sweetest eyes I’ve ever seen. No, what I mean is, economists follow fashions like 70’s kids bopping to progressive rock. And today, the fashion has turned to negative interest rates.

In my Linkedin article I write (though not as I do now, yes I’m versatile) about the growing cult of negative interests rates. How banks, companies and people might be charged for storing balances within the financial system. To be fair, this idea has been around for a while. Following the central bank responses to the last recession - aka The Credit Crunch - interest rates were left on the floor. Real screw the savers territory.

So what to do? The central banks, by bringing rates to zero, had effectively got rid of one of the two arrows they have in their economic quiver (the other being printing money. They like that one too - it’s so virile. Of course, the viagra soon wears off and leaves just a headache. I’m told).

But, some bright spark might have said, what if zero wasn’t the end? What if we, like, took rates to negative? “So we’d charge people for giving us money?” his boss might have asked afraid of not getting down with the kids. “Yeah, exactly! We’ll make money a hot potato. Pass it on on quick!”

And so, the theory of negative interest rates was born.

For me though, big theories of economics - from the General Theory, counter cyclical demand management, The Austrian School, Monetarism, The invisible hand, the incomes augmented Philips curve, return to the Gold Standard, baggism, shaggism, thisism, thatism - they’re all a bit ‘theoretical’. Grand theories are a parlour game played without reference to life outside the cosy prism.

But it reduce it to the micro level. You and me.

Economics is about incentives. If you charge people to store their money you will dis-incentivise them from doing so. Some people will put money under the mattress. Others though will buy holidays and spend their savings and so be vulnerable should they get old, or sick or lose their job.

Money is amoral. It is a means of exchange. No more. No less. However, I'm not sure debt and consumption are wise replacements for prudence and deferred gratification. Negative interest rates seem to tip monetary policy from amorality into immorality. And that can’t be right.

Now. Where’s my flares?

The Sage of Sussex dissects Interchange Regulation

Like a stadium filling rockstar playing an after-hours gig in a small club, here I am again, writing the freeform and loosed-jam version of my recent LinkedIn article on the EU’s Interchange Regulations.

I know. I know. I spoil you. Bring back the 4th century Roman history, I hear you cry. No, today we must discuss interchange caps, the power of loyalty and where the money goes after you purchase something. I’ll maybe throw in some ill-researched but heartfelt swipes at the unintended consequences of legislation. Literary donuts of wisdom, sweet, moreish but empty, so empty.

I should declare an interest here…. I work in the finance industry. A hall of fame type position of veneration and respect in the world of payments. When middle managers get together at industry shindigs, delegates hang onto my every word, analysts attempt to interpret my utterances, stock markets fall or rise on the twitch of my eyebrows and my thoughts on the future of payments are listened to with hushed awe, due reverence and appropriate levels of obeisance and fawning.

Yeah; back to the narrative, Tim.

So, three years ago the EU lowered the amount of money card issuers can carve out of each transaction you make with a debit or credit card. This doesn’t apply to Amex who, like a greased otter, managed to slip the grasp of the regulations.

What this meant - dear readers - was that notional prices should have come down as retailers weren’t getting stung so much by deductions in the amount of money they paid for accepting cards.

Has this happened?

What do you think? The retailers passed on Jack. Of course. The card issuers facing a huge loss of revenue, hiked up card prices, interest rates and - this one hurts - reduced rewards and loyalty points.

So lose:lose for consumers. Well done legislators, another theoretical victory.

Naturally, my LinkedIn article is more nuanced, tempered as it is with ‘on the one hand and on the other’ corporate equivocation.

But I’ve lost my fucking Tesco Clubcard points! Bastards. Yes, they’re baubles paid for by a permanent rise in general prices but dammit! - where’s my points? I like choice and I like being savvy and I liked going to Chessington theme park courtesy of my Clubcard redemptions. Has anyone seen the prices these places charge using, like, real money?

I should point out here that the issue is more nuanced and involves many actors and the adoption of new technology to increase competition and choice in the medium term but, where’s my fucking points?

More sober financial analysis next week when I explain why running an economy on debt is both morally wrong and annoys my cat who’s a strict feline of the Austrian school.

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Bollocks in, Bollocks out

It's a little known fact that I trained as an economist at Sussex University. The economics department in those days of peak Thatcherism were all zealots of econometrics which, in layman's terms, means bastard sized equations to estimate outcomes like aggregate demand or inflation. We'd all go along to our tutorials quaking in our buckled boots fearing we'd have to go to the blackboard and write one of these algebraic monsters in front of our peers, or worse, our tutor. Our tutor, a man of Delphic persuasion would puff on his pipe and raise a quizzical eyebrow at our pathetic efforts to prove by mathematical formulas why the demand curve slopes downwards to the right and the supply curve the reverse.

"Are you sure?" he'd say as I hadn't a clue whether I was proving an incomes augmented philips curve or the half life of a hangover. 

Happy days.

Anyway, I raise this nostalgic ghost from the graveyard of dead Tim stories to illustrate that I have some background in economics. As I've grown older - and wiser - my scepticism towards the dismal science has grown.*

For part of my life I used to dream up models to enable a global corporation to justify multi million dollar investments. You know, if we spend X amount on hiring extra sales-people, they will produce Y amount of extra revenue in Z amount of time. Behind these three outcomes would be legions of assumptions. Some pretty robust - seasonality perhaps, some grounded in observable fact from incomplete data - the time historically it takes from a contract being signed to revenue coming in perhaps and some, absolute guesses - maybe how much a new salesforce will sell after six months or customer attrition rates. I just plugged in numbers, hit the return key and answers would spew forth! Scientific, yeah?

Now could I control the state of the economy? No. Could I control the exchange rate? Of course not. What about simple stuff like hiring the right candidates? No. Would they all be ready to go on a certain date? Never. How many would stay after the first month? Less than 100%. How many would we fire for being shit after six months? Twenty five percent? Gawd knows. All this had to be factored in with - you guessed it - assumptions.

Was I right? Of course not. Only God knows the future and my deity muscles are a bit rusty. Us mortals merely adjust as we go along based on the observable data you have at the time. Everyone who works in models and predictions knows this.

So, by training and by experience, I have some idea about models, about how models work and about how much humility anyone who peddles versions of an unknowable future should display. The future is inscrutable. The only facts are historical. And they can be argued.

So, George Osborne's Treasury released the findings of a model this week which stated, in broad terms, that in 14 years time, if we stayed in the EU, each household in the UK would be about £4500 a year better off than if we left the EU.

What does that mean? Well it means that across the millions of decisions made by companies and individuals, and not knowing what technology will throw up, not having a clue about the state of the economy in 12 months let alone 14 years, the Treasury built two scenarios which said that Scenario 1 (Remain) will be better than Scenario 2 (Leave) in more than a decade.

The hubris would laughable if the useful idiots of the press didn't repeat the model's findings as gospel. Either the people who repeat this guff are stupid or knowingly pushing an agenda. Either way, it stinks. Not everyone has my experience of how these numbers are created and might therefore believe what they hear as a fact, not as opinion, for opinion it most undoubtably is.

We all know the truism garbage in garbage out, of course. And that is perhaps the greatest truism about models one can repeat for it is ridiculously true. But what about cognitive bias where we seek out the answers we want and discard those we don't. Now imagine someone sat in the Treasury inputting literally thousands of variables and assumptions. They know the answer their political masters want from the model. I don't believe I'm being paranoid to state that I suspect all the assumptions go in one way, and not the other.

It's a human instinct but don't for a minute call it science.

There have been many claims in this Brexit referendum. Most are totally shameless and self-serving but I think that the Treasury report this week stands out as the most shocking in a crowded field. It's not as though they have a great record on predictions. It's too wearisome to go through them all but weren't we supposed to have eliminated the deficit by now, George. What we haven't? But you predicted that just six years ago. You mean predictions can be wrong? Really? I'm shocked. Shocked, I say!

The economic term for this is 'bollocks'. 

Next week we'll go through mal-investment and the Austrian School.

Cheers ears

Tim

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