The ups and downs of capitalism

EET your TEE, George

ELECTION promises, they are so hard to keep, aren't they? On April 11, the Conservative party said in a pre-election briefing that

we believe that the pensions tax relief system will be fair and affordable and we will not propose any further changes to the system during the next
Parliament

But times change. The election came and went and three whole months elapsed before the Budget on July 8, when George Osborne consulted on a massive change to the pensions tax system. Given that the consultation document must have taken a month to prepare, George's conversion was positively Damascene. The proposed change would be to remove upfront tax relief for pensions contributions. That kind of change will doubtless come under fierce attack from, er, the Conservative party which said in February that

the principle that the vast majority of pensions contributions should be free of tax is fundamental to our whole pensions and savings system and changing that would do huge damage to our savings culture and our economy

To call recent British pensions policy a dog's breakfast would be an insult to canine palates. Governments have struggled to reconcile a desire to encourage saving for retirement, particularly among poorer workers, with a desire to control the cost. In 2006, pensions simplification was...Continue reading

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China knocks on the reserve-currency door

RARELY in their 46-year history have Special Drawing Rights commanded quite so many headlines. SDRs play a mostly arcane role in the global financial system. Technically they constitute an international reserve asset that helps maintain balance between countries with big external liabilities and those flush with cash. In practice, they are more marginal, as countries largely rely on capital markets and hard currencies to cover their obligations.

Now China, eager to make the yuan go global, has placed SDRs in the spotlight. The International Monetary Fund, which manages the SDRs, is conducting a five-yearly review of the basket of currencies that form its value. China wants it to bring the yuan into the basket.

That would be a big decision, meaning that the IMF has in effect recognised the yuan as a reserve currency, despite China’s extensive capital controls. It would not suddenly turn the yuan into a rival to the dollar (as we lay out in this week’s issue, that is still a long time off). But it would be a symbolic boost to its international standing, giving countries more confidence to add the yuan to their currency reserves. In a newly published Continue reading

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LIBOR prison blues

A TRADER is sentenced to 14 years in prison for rate-rigging, armoured cars enter the luxury goods market and the British government sells down its stake in Royal Bank of Scotland

The people's QE and central bank independence

ENTHUSIASM for political outsiders is not confined to Donald Trump, Greece's Syriza or France's Marine Le Pen. In Britain, a formerly obscure leftwinger named Jeremy Corbyn seems on course to be Labour leader and thus potentially the next prime minister. There is plenty to be said about his foreign policy views, such as withdrawal from NATO; read this profile in Labour's in-house magazine, the New Statesman, for the details. 

But the enthusiasm for Mr Corbyn seems driven by his economic policies, notably his opposition to austerity. His maths look shaky as has been pointed out by Jolyon Maugham; he thinks the 50% tax rate would raise £5 billion when £3.5 billion is the maximum even if one assumes there are no effects on behaviour from the higher tax rate. And he assumes that £120 billion can be collected in higher taxes by eliminating evasion and avoidance when £34 billion is the theoretical maximum if one assumes, heroically, the government could collect all potential revenues (this "tax gap" has fallen, not risen, in recent years).

Perhaps the most interesting policy is that of...Continue reading

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Is mining as bad as asset-stripping?

We received the following response from Professor Paul Stevens of Chatham House, a think-tank, about a recent article in The Economist

On January 10th 2015, The Economist published an article entitled "African economic growth: The twilight of the resource curse?" The article argued that the economic outlook for many African countries looks promising despite falling commodity prices. This, it was claimed, reflected growing economic diversification by these countries away from dependence on commodities, and lessons learned about the power of good governance. It was argued that, "with better education systems, investment in infrastructure and sensible regulatory reforms, the continent could completely break the spell that has held it back so often in the past". The article concluded that countries with natural resources should encourage their development and not be concerned about the threat of "resource curse".

This view reflects a growing consensus away from the idea that...Continue reading

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Why aren't companies spending?

ONE of the justifications for low interest rates and quantitative easing is that reduced borrowing costs will encourage companies to invest more money - building plant, buying equipment and hiring new workers. But the record has been pretty disappointing. A survey by Standard & Poor's funds that global capital expendiure by non-financial companies is likely to decline in 2015 for the third year in succession, even though the corporate sector has an estimated $4.4 trillion on its balance sheet, earning very little.

Admittedly, the problem this year is focused on one particular sector - energy and materials. Falling commodity prices have led to big cutbacks; S&P estimates the decline will be 14% this year. If you exclude commodities, the rest of industry will grow capex by 8%. But that is only of limited comfort. The commodity sectors were helping to keep global capex propped up - they accounted for 39% of the total in 2014.

S&P is dubious of the view, taken by Andrew Smithers and others, that the cash has been diverted to share buy-backs; this is a largely American phenomenon. In 2014, North America was the only region delivering capex growth. This year, it is the only region expected to report a decline and...Continue reading

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