Ragging on Ritchie

Ritchie\’s comments are open again

So, I\’m trying to, politely, get him to see my point:

“I’m well aware conventional economists do not agree – and they have provided not a shred of evidence, let alone logic, to support their case as yet. They simply say the cost will be passed on to others – but when the customer for more than 40% of all trades in this market is another bank and the number of customers overall is tiny there is no logic in that claim – the consumer is identifiable and able to resist the charge.”

You’re still not grasping the point about tax incidence. It isn’t that people attempt to pass on a tax charge. It’s not about intent, people trying to stick others with the bill.

It’s that changes in behaviour caused by the imposition of the tax have effects on other people.

Follow this logical chain for a moment. Tax is added to transactions. Transaction volume falls (you should agree with this so far as your report actually notes it). OK, what do we know about markets that have lower liquidity? They have wider margins, larger differences between bid and ask.

We very much do see this in financial markets. Shares with large trading volumes have lower spreads than shares with low trading volumes. Currencies with low trading volumes have higher spreads than those with large volumes. Futures, derivatives and so on. Non-standard transactions have wider margins than standard exchange traded ones. This link between volume and spreads/margins is both noticeable and entirely uncontroversial.

So, our tax reduces volumes and increases spreads. So, any and every user of these products ends up paying the larger spreads. Every farmer transferring the risk of his wheat crop via a future pays it, every remittance sent through the FX markets, every pension fund that’s invested in any financial product at all, yes, even people buying euros to pay for beer on holiday.

Sure, each and every one of these users is paying a tiny sum….that 0.5% to 0.005% tax….plus however much the margins have widened. As in my earlier comment, we don’t know how much those margins will widen but we’re, unless you’ve got some startling new result, certain that those margins will widen.

And thus the economic burden of the tax hits each and every user of any financial product at all.

No, not because the banks of the bankers are trying to stick people with the tax. But because the reduction in liqudity makes the use of the markets more expensive for everyone.

Depending upon how much the margins increase that burden of the tax could be higher, possibly many times higher, than the amount actually raised by the tax.

The only way this could not be true is by making the assertion that margins will not increase as a result of the tax. Now you can assert that if you like but it would be an hilariously odd thing to try and assert. And as ever, it would be one of those extraordinary claims that would require extraordinary evidence.

So, allow me to ask a question. Do you think that the imposition of an FTT will widen margins in the financial markets or not?

Ritchie changes his mind!

There\’s been something nagging me about R. Murphy\’s latest little essay for the TUC. It doesn\’t seem to mention his last little essay for the TUC.

Back in November he said that there should be a 0.05% tax on all interbank and CHAPS transfers.

I was among those who started shouting that he\’s just closed down the interbank markets in their entirety. Of course, I was told not to be silly, nothing of the sort and anyway, what\’s the point of interbank markets and Worstall, you eat boiled babies, don\’t you, yes, don\’t you!

Then there\’s his new report for the TUC about a financial transactions tax.

And I cannot find anywhere in it that tax on cash/bank transfers.

Which leaves us with a number of possible answers to the question why not?

My two favourites are, at present, that he\’s simply forgotten all about it or that an adult read the first report and promptly demanded that he stop being so silly.

I\’d much prefer it to be the latter: it would indicate that there is indeed an adult overseeing his reports, something hitherto unsuspected.

Ritchie gets worse

The major cost of trading in this market, which is largely undertaken between a very limited range of banks –
often, as noted on a pure inter-bank basis – or with a limited range of large commercial counterparties
operating what are, in effect, their own in house banks usually called treasury departments, is labour. Those
employed in this sector are relatively small in number and often very highly remunerated: the exact target of
many recent policies seeking to curtail excessive pay in the banking sector. If there are smaller volumes of
transactions and smaller profits made as a result both the number employed in the activity and the average
pay of those remaining in it are likely to fall to compensate for two things: firstly reduced volumes and
secondly the fact that out of margins on the remaining trades undertaken a tax of up to (on the basis
estimated here) one third of the margin might be paid. The impact of a fall in value and volume of 25%
followed by the loss of margin out of the remaining trade of up to 33% means that in combination cost
reductions of up to 50% will be required in this sector.

He thinks that a transaction tax will reduce margins.

Umm, no, we think that a transaction tax will, as he notes himself, reduce volumes. Liquidity. We know what happens when liquidity dries up in a market. Margins rise. In fact, we know what used to be true in financial markets when there was less liqudity. Margins were higher.

We think that more competition reduces margins….less competition means higher margins. Competition and liquidity are pretty much the same thing.

Jebus, and the TUC are proposing to change the taxation of the world\’s financial system on the basis of this gibbering?

What\’s worse, he entirely garbles the tax incidence argument. As and when margins increase then all those still trading such things pay more for their trading. And the more they pay for their trading is the incidence of the tax. It\’s bugger all to do with bankers getting lower pay.

I seriously and really don\’t believe it. Adam Lent must be horrified (assuming he\’s understood the point). Murphy has entirely garbled the tax incidence argument, so much so that this paper should generate loud guffaws among the economists who read it. And they\’ve paid Ritchie money to do this.

Really not the TUC\’s proudest hour. They had a technical paper written for them by someone who does not understand the technical issues he\’s writing about.

Yet even more on Ritchie\’s report on taxing the banks.

As the report notes, the short term alternative of an insurance charge that some promote as an alternative to
financial transaction taxes does not have any of the benefits flowing from adoption of these taxes as noted
above, nor can it raise equivalent revenues. In addition, whilst financial transaction taxes should only eliminate
marginal trades but leave markets intact with ample liquidity, the proposed rate of the US levy at 15 basis
points is well above margins on many of the trades noted in this report and is consequently likely to be
harmful to the operation of some markets.

Oh dear. He seems to think that the insurance levy has anything at all to do with margins on trades.

This is very much arse about tit.

The idea of the insurance levy is that liabilities of banks get taxed. Or rather, pay an insurance fee. So if Bank of Worstall owes $100 billion to other people then Bank of Worstall would pay that 0.015% in an insurance fee.

Size matters as it were. And importantly, those liabilities that are also covered by other insurance schemes, say, deposit insurance up to some fixed level as we\’ve got in the US and UK would be deducted from liabilities before the fee is calculated. So a bank that relies mostly or purely upon individual depositors, who we can assume will mostly be covered by other schemes, will not be paying the further levy while whose relying upon wholesale money markets, which are not covered by other schemes, will be.

All quite sensible really.

However, this is the bit that Ritchie seems not to get. It\’s a fee upon liabilities in aggregate. Not a fee on each liability. To explain: if Bank of Worstall borrows $50 billion from Bank of Ritchie for a week and then pays it back, then borrows $50 billion from Bank of Murphy, pays it back and so on for a year, Bank of Worstall is not paying the fee on 52 times $50 billion. It\’s paying it on the $50 billion.

So the levy has nothing at all to do with margins on what the money is put to use doing. If Bank of Worstall wishes to trade five times an hour in FX with the $50 billion at 0.005 % margins or simply lend the whole lot to GM at 15%, the levy makes no difference to that decision at all.

By stating that the levy will close down low margin areas of business Murphy has shown that he doesn\’t understand the basics of what is being suggested. It\’s not levied each time the structure of liabilities changes, it\’s levied on the average amount over the year.

And for today, Ritchie says!

On credit card interest rates:

In the meantime they ignore the real issue of incidence concerning banks – which is that the cost of rebuilding their balance sheets is falling on these least able to pay.

The time for regulation of interest rates has arrived, and is long overdue.

So, both banks and governments underprice risk in the past, leading to the system nearly falling over. Now that risk is being priced more appropriately, this is also wrong.

And, of course, government must have more power.

On Ritchie and comments

As you know, we cannot comment upon Ritchie\’s vapourings directly.

So we\’re doing so over at Giles\’ place.

Sample comment from the blog host himself:

I must admit the argument Richard used – “The LSE doesn’t warn people off using pensions. Therefore the tax incidence can’t really matter” – is one of the worst I have read in a while. I’m sure he can’t mean it.

Oh, but he did and does.

Yes, he really does.

Candidly, the theoretical economists can make al the assumptions they like to prove their case – the reality is that the world does not support their argument because in the real world the assumptions they make are simply untrue – and that’s bad economics, bad science and bad argument. It’s also a lousy basis for recommending policy.

Well, yes, obviously

Millions of savers are losing money as they are caught between poor returns and a rising cost of living, figures show.

If returns are below inflation then of course you\’re losing money.

Which brings us to our favourite retired accountant. He\’s been advocating for years that we should all be investing in \”green bonds\” to provide for our retirement. These would pay 3% he says.

More recently he\’s been agreeing that we should have a higher inflation target: 4% instead of the current 2%.

That is, setting up the system so that any and everyone who saves for a pension loses money while doing so.

Great, eh?

Today\’s Ritchies!

Whose sticky little fingers are all over mis-accounting in Greece? All the usual suspects, bar, it seems Barclays (what did they do to miss out?):

Wall Street’s role in the unfolding Greek debt crisis will be probed by  Eurostat, the EU’s statistical office, which has requested information from Athens about currency swaps. The transactions, undertaken from 2001 to 2008, may have allowed the Greek government to conceal billions of euros of new debt from regulators. Goldman Sachs, Morgan Stanley, Deutsche Bank and other investment banks arranged complex transactions that enabled Athens to raise cash for budget spending without having to classify as public debt.

Time to call the banks to account then: is there any point pretending that they serve any social function under their existing management any more?


Government lies, cheats, conceals and deceives.

This is all the banks\’ fault. Thus government should have more power over banks.

Most importantly, what it fails to note is that accounts are always political statements. No one can pretend otherwise. Capital is treated as meritorious, for example; labour is a cost to be minimised. Spending on replacing labour with plant and machinery is treated as creating an asset of value – the labour is just a loss offset.


Umm, look, when a company employs labour it does just that, employs it. Rents it. Neither the labour nor the labourers are owned by the company: if it were they would not be labourers for hire, they would be slaves.

A machine however, is indeed owned by the company.

Which is why one is treated as an asset of the company and the other not.

Try running this the other way around. We\’re going to say that the labourers are indeed an asset of the company (rather than their agreement to work for the company in return for wages being an asset). We really want our accounting system to be based on such slavery?

More on Ritchie\’s report

I will give him this: he\’s raised an interesting point:

My research shows that this may be the wrong question. The most important question is not the incidence of the tax on these transactions, but the incidence of the cost of these transactions. If, as the opponents of the tax argue, the tax charge will fall on ordinary people then it follows that the excessive charges made by banks to fuel their own profits and to pay the wholly unreasonable rewards of bankers also fall on ordinary people. That is something of an own-goal on their part. It is also somewhat simplistic.

He\’s right of course: profits do come from somewhere.

However, he\’s made the assumption that bank profits come from transactions which are either zero sum or even negative sum. Thus the fact that bankers get paid well and make profits must mean that consumers have lost something in the transaction.

Entirely ignoring the possibility that even though the bankers are well paid and that banks make profits, consumers are better off in total because the transactions themselves are positive sum.

And we do tend to think that voluntary transactions are positive sum: that\’s why people undertake them after all.

So, while it\’s a nice try I\’m afraid it\’s a fail. I would point this out to him but unfortuantely I cannot:

Note: This post is open for comments. Comments will only be accepted if they contribute positively to debate on this issue. Those that do not will be deleted.

What a report, eh?

Ritchie flags up this in the FT.

The report, entitled Taxing Banks, proposes a global 0.005 per cent tax on currency exchanges and derivatives.

The report, authored by the Trades Union Congress, Christian Aid, Tax Justice Network, Tax Research UK and the Task Force on Financial Integrity and Economic Development,

A hugely impressive list I think you\’ll agree.

Well, except…..

TUC: advisor on international tax issues: Richard Murphy.

Christian Aid. Advisor on international tax issues: Richard Murphy.

Tax Justice Network: main bod: Richard Murphy.

Tax Research UK: this is Richard Murphy.

TFFIED: not Richard Murphy directly, but their reports on international taxation all quote, draw upon and use the methodologies of the TUC, Christian Aid, Tax Justice Network and Tax Research UK. That is, Richard Murphy.

In short, the whole alphabet soup is a self-referential cobweb with, at the centre, a retired accountant whose speciality in the trade was advising self employed actors, musicians and artists on their personal tax returns.

Now I entirely agree that it\’s possible for people to flower, grow and learn: I\’ve no qualifications or work experience that justify my own propensity to adjudge matters economic. But if we\’re talking about changing the taxation system for the entire financial world, shouldn\’t we be looking for a slightly wider base, a slightly less individual source of information?

GFS report: tax losses due to trade fiddles. Sorry, valueless report

Or if you prefer, here\’s today\’s Ritchie!

Developing countries are losing approximately $100 billion dollars every year due to trade mispricing, according to a new report from Global Financial Integrity (GFI).

Ooooh, my! So, what does the report actually say?

Well, they measure the amount of trade they think is mispriced, then look at corporate tax rates, click the calculator and say multiply one by the other and you\’ve got the tax lost.

Now, umm, where have we seen a similar technique then?

Ah, yes, Richard Murphy\’s estimate of the tax gap, wasn\’t it?

And GFS do in fact say that their new report is based upon a Christian Aid one….which was written with the aid of Richard Murphy and John Christansen. And another one from the Tax Justice Network which is essentially the same two people again.

Let us remind ourselves of what the problem with Ritchie\’s calculation was. You cannot take headline tax rates and compare them to tax collected and then claim (or assume, assert) that the gap between the two is because people are being very naughty boys.

For governments deliberately and specifically put into the tax code allowances for certain activities they think desirable which reduce taxes legally owed from those headline rates. In the case of our domestic UK corporate tax system we\’ve got R&D allowances (125% of amount spent on R&D from memory), various odd depreciation thingies, training allowances and for all I know a turkey dinner for Tom Cobbleigh allowance.

This means that the observed gap between headline rate as a percentage of profits and the amount collected cannot be assigned to naughtiness. We have to strip out those entirely legal, legitimate and just as Parliament intended, allowances first.

Which Murphy, you might recall, did not. Indeed, he gets very touchy when you point out this to him.

So, what do GFS do? Yes, they look at headline rate and tax collected and assume the gap is because someone\’s being a naughty little girl.

They entirely ignore that some countries have tax subsidies (even rebates in some places) for exports. Entirely ignore that some (indeed, many) countries have tax free holidays for exporters and new companies.

In short, they make Ritchie\’s mistake. They do not account for the things which governments deliberately put into their tax codes in order to encourage behaviours they deem desirable.

As such their report is as value and content free as Ritchie\’s original was. No surprise that he praises it then and insists that this requires action, eh?

Click here to download a full copy of the report, which adds to the growing literature on this subject and stresses the urgent need for action to tackle this abuse.

Me personally I\’d like to see action against people who lie to us for political and ideological reasons….

On the stranglehold of neoclassical economics on the Nobel

Ritchie says we should look at this.

So we do.

And the example given of how neoclassical economics has a stranglehold on the Nobel is Gunnar Myrdal.

Since our societies claim to be democracies, the exclusion of competing perspectives at university departments of economics means that such departments take a stand for some ideological orientations in society and against others and indeed acquire a role as political propaganda centers.

One of the economists who at an early stage took an interest in value issues in research and education is Gunnar Myrdal. He argued that “values are always with us” in social science research; in the problems we choose to study, in the choice of conceptual and theoretical frame of reference; in the choice of method and in the choice of ways of presenting results.

You cannot choose without referring to some values. It can be added that Myrdal left the neoclassical camp to become an institutional economist.

That\’s the Gunnar Myrdal who won the Nobel in Economics in 1974 along with Hayek.

Genius, eh?

Ritchie Elsewhere!

From his Forbes column:

Secondly, and more importantly, the idea of discounting the future is fundamentally subversive.

Net present value is subversive now, is it?


Wherever there’s been mark-to-market or fair value accounting, executives in the financial world have used this technique to book profit and pay the bonuses made for themselves.

Sorry, NPV, mark to market and fair value accounting are all synonymous are they? Instead of being rather at odds with each other?

For example, your NPV might tell you that your holdings of option ARM mortgages are just fine and dandy. But the market might tell you that they\’re near worthless.

Which is correct in the long term is moot for this point: to claim that both valuation processes are exactly the same thing is absurd.

I have a feeling that what he\’s done is take the theoretical (and obviously true) point that the value of something today is the value of all future returns to it discounted at the appropriate interest rate and assume that prices in markets are exactly this.

Entirely missing out his hero Keynes\’ points about animal spirits.

How did he get a column there?

Ritchie stops blogging!

He\’s banned comments.*

Thus it ain\’t a blog anymore, it\’s a website.

Ho hum.

This did amuse me though:

It  is increasingly, and unfortunately,  clear that the vast majority of those who do seek to comment come  from way beyond the fringes of political electoral credibility and seek only to harm and undermine society. It is not my duty or desire to assist them.

I am one of those who seek to comment on his pieces, as you know. Indeed, there are constant (well, some) references to myself and my views on his blog.

But this beyond the fringes of electoral credibility bit….hasn\’t anyone told him that I stood as a candidate for UKIP at the last national election we had? You know, UKIP, the party that came second? Beating the Labour Party into third place? Lib Dems to fourth?

That sort of beyond the fringes of electoral credibility?

* His post was brought to my attention in an email headed \”You made Ritchie cry\”. Dib dib dib, I\’ll try and think up another good deed to perform tomorrow.

How civil society works

The modern day civil society that is.

So what will we get? Bankers talking to bankers and saying stakeholders want what bankers want.

I despair.

The EU / EC should:

a) Allocate seats to stakeholder groups

b) Fund them

c) Make clear they can issue minority reports if need be

d) Provide them with technical support.

There was a time when civil society meant what was done outside government. Now it seems to have morphed into what those with bees in their bonnet can get government to pay for. This is how we end up with Friends of the Earth Europe getting 50% of their funds from the European Union for advising the European Union.

And yes, that is our favourite retired accountant making a pitch for a cushy seat on an unaccountable tax funded quango.

You may have noticed that I\’ve got opinions on lots of things. I\’ve never quite had the effrontery though to demand that those who aren\’t interested in them pay for the privilege of being forced to listen to them.

Others seem less reticent.

From our favourite retired accountant

And I know that not all his clients will be balancing their books – many of them will borrow, for years at a time.


Sorry? Any company, individual or organisation that has borrowings has not balanced their books?

Are we absolutely certain that this man worked as an accountant?