Ragging on Ritchie

Why’s Ritchie being pissy?

Sixth, there are much bigger issues tax justice should be looking at. Start with the national insurance increase; link them to universal credit cuts; build in the failure to effectively tackle wealth inequality by taxation; add in the need to tackle an austerity narrative and then tax justice would be hitting new targets, instead of raking old muck.

I very much doubt that tax justice can use this old material again. It is out of date. The real question now is not what did happen, but whether it has changed? The current reports are not addressing that question well enough.

And the second current issue is that it really is time for tax justice to move on and talk about what might well be more important in tax now. Tax haven reform is important. So is UK corporate reform. But I am not sure that these revelations are going to make much difference to either of those agendas now, and that’s why I am hoping for better campaigning in the future.

What could have brought on this petulance?

From The Guardian:

The Tax Justice Network

Ah, yes….

Just a little thought

These emissions are what are called Scope 3 emissions from the gas companies. They are responsible for them because they are the foreseeable emissions that result from their sale of gas. That’s what Scope 3 means – they are the emissions caused by what you sell rather than what you do yourself. They should as a result account for them and the cost of their removal within the supply chain they manage under what I call sustainable cost accounting. If they had to do so then they would be starting to sell heat pumps now.

Gas companies should be selling the heat pumps which don’t use gas?

BP should be selling you the shoes you’ll need for Shank’s Pony? The butcher should be selling you the beans for your vegan diet? Ryanair should be selling train tickets?

Whut?

This is fairly simple

Nor can anyone suggest how public debt purchased by a central bank might be ‘paid off’ when the credit balance on the central bank balance sheets after that debt repurchase does not relate to public debt anymore, but does instead represent bank deposit accounts from clearing banks, the redemption of which requires the cancellation of the money created that these balances represent.

By collecting then cancelling the money of course. The BoE sells the debt into the public markets. It collects the money from having done so. Then feeds it back into the computers that first generated it.

Simples.

The reason for paying off such QE created debt being to destroy the money that the QE created, of course. If you don’t want to reduce the narrow/base money supply then you don’t reverse QE. If you do then you do.

To expand in this, that tax is used to cancel money creation (which, as a matter of fact takes place) to limit inflation

Precisely, sometimes you do want to cancel some part of the money supply.

That is deeply telling. Using reductionist, rather than systems thinking, the authors reveal a profoundly Cartesian view of economics, using a faux-scientific approach which denies the integrated reality that the observable economy actually is coupled with a denial of the political reality of all economic decision making, including their own.

What should be made of this paper in that case? It is best seen as little more than a puff-piece presented as if an economic argument that is intended to support the status quo against a truth so apparent that those seeking to maintain their grip on power must quite literally make up arguments to support their case that are so shallow they do in the process reveal the hollowness of their own ideas.

Maybe we do actually have a lithium shortage?

You’d think an accountant would understand VAT

Thinking about the Sage of Ely’s Sustainable Cost Accounting. He insists that each and every part of the supply chain should be responsible for their own Scope 1, Scope 2 and Scope 3 emissions. Anyone having any of those three must be declared carbon bankrupt unless they’ve the capital to wipe those out.

Now think of the difference between VAT and sales tax. A sales tax is a tax on the selling price of whatever. There’s a problem with this. If it applies to every part of the chain then longer chains get charged more. It’s a strong incentive to have entirely vertically integrated companies. This is not known to be useful. Therefore a sales tax regime does not charge that tax upon the supply chain. Instead it’s a once only tax at the retail point of sale.

A VAT regime instead says that we’ll tax each part of the value add at each point along the chain. This implies being able to claim back against suppliers’ VAT and charging to customers. We now do not have that incentive to vertical integration because there is no tax difference dependent upon the number of transactions in the chain. Cool.

It’s also possible to charge more in VAT than it is in sales tax. Because that entire supply chain is now – somewhat – self-policing in order to be able to reclaim input VAT.

Of course, the value add at any specific point in the chain is the same as the Scope 2 emissions. This is the value add/emissions of this particular part in the chain. The value add/emissions of Scope 1 is embedded into the prices paid for supplies.

Think on it. “He” is my supplier, I am me, you are my customer. His Scope 1 and 2 emissions are my Scope 1. My Scope 2 and 3 emissions are his Scope 3. Your Scope 2 and 3 emissions are my Scope 3. My Scope 1 and 2 emissions are your Scope 1.

We are in the same place as we are with VAT and sales tax. We can have a sales tax, sure we can. But that then rests upon every transaction. And we’re double to triple counting at each transaction point because we are adding Scopes 1 through 3 each time. Think of supplying jet fuel (what I persist in calling avgas). Saudi Aramco pumps up the oil. Some refiner, BP, turns it into avgas, some airport fueler buys that and sells it to the airline, Ryanair uses it. We’ve now four sets of Scope 1 through 3 emissions, we’re counting and taxing them all. The logical end point is that Saudi Aramco owns Ryanair so that we’ve only the one set of transaction taxes on that set of Scope 1 to 3 emissions.

Or, of course, we do what we do with sales taxes and charge it only on the ticket of the consumer at the final retail point and we charge it the once.

Equally, we can adopt the VAT idea. Each pays VAT on the value add of each stage of the transaction. Or our carbon fee, or our carbon bankruptcy, on only Scope 2 emissions. Scope 1 is dealt with at the level of the supplier, Scope 3 the purchaser.

If we charge at each stage then it has to be as with VAT, only on Scope 2. If it’s to be as a sales, tax, as with Scope 3, then it has to be on the final retail point only.

Anyone who now says that avgas doesn’t pay VAT an be derided as an idiot – this is an analogy, of course. We can also dismiss as a drooling moron anyone who says that any such tax won’t be large enough to change behaviour like this. But if that’s true then what the hell use will it be anyway, the entire point is to try and change behaviour.

Sustainable Cost Accounting tries to adopt the sales tax approach and then apply it at every transaction stage. But sa any accountant should be able to grasp, there’s a reason why w don;t do that. Either it’s sales tax at the retail point or it’s a VAT only on Scope 2 emissions.

Or, of course, they’re the Sage of Ely.

A little tutoring on sectoral analysis

The Sage is fond of telling us about sectoral analysis. If people wish to save and business, foreigners and households do not wish to borrow then government has to borrow. For the four sectors must, in their borrowing, equal the savings of the populace.

in aggregate businesses are repaying loans now……At the same time savings….They are still running at way above pandemic levels……People are only just borrowing again, and at much lower than pre-pandemic levels.

Now the thing about identities is that they are indeed identities. But they don’t show causality.

All of the above is entirely consistent with the explanation that government is borrowing so much that private sector borrowing is being crowded out. We’ll not expect to hear that explanation from the Sage though, will we?

Really quite astonishing

It also matters for another reason. These emissions are what are called Scope 3 emissions from the gas companies. They are responsible for them because they are the foreseeable emissions that result from their sale of gas. That’s what Scope 3 means – they are the emissions caused by what you sell rather than what you do yourself. They should as a result account for them and the cost of their removal within the supply chain they manage under what I call sustainable cost accounting. If they had to do so then they would be starting to sell heat pumps now. But they’re not required to do so, and the accounting standards that are likely to be adopted at COP 26 will not demand that of them, so this problem will continue.

The answer is simple, If only we changed the accounting rules and made the companies selling gas responsible for the emissions resulting from its use they would have to change their behaviour very rapidly. And that is exactly what we need.

OK. So, how much should the gas companies be charged?

The social cost of carbon, obviously, the damage being caused by their Scope 3 emissions. That’s $80 per tonne CO2-e. So, we charge the gas companies $80 per tonne CO2-e in the gas they sell.

That is, Ritchie has just reinvented the carbon tax. Which is, of course, entirely and wholly different from the neoliberal carbon tax – just so you know that.

Isn’t this a lovely thought?

Central banker suggests raising interest rates:

So, a man cocooned from the real world by a career in an exceptionally highly paid and very largely risk-free occupation that will provide him with income security for life behaves as if all are in the same place because he simply cannot comprehend that there might be those who do not enjoy his privilege. As a result he suggests that they must have their inflationary spending habits (which do not exist) kicked out of them by an interest rate rise.

Entirely different from retired accountant determining which parts of the global economy might be allowed to continue. Entirely different.

Gonna make sustainable cost accounting difficult (reprise)

The failing on display is a suspect commonplace, not just in Grant Thornton, but in many of the mass of audit failings noted by the FRC amongst the major audit firms each year.

There is an expectation that we should have cheap audits. Firms deliver them using, very largely, quite junior staff who are in their early twenties, who have almost no experience of accounting, very little on the job training, and who have never done any actual accounting because opportunity to do that is almost unknown in larger audit firms. The primary goal of these staff remains what it has been throughout their lives to date, which is to pass exams and then move on. Audit is for them little more than a ticket to a right of passage, which is qualification as an accountant and the financial rewards that brings. Their interest in audit is marginal, at best.

These are the people that sustainable Cost Accounting depends upon to decide the costs of going emissions neutral, to decide whether a company is carbon bankrupt or not. The entire economy is to be delivered to peeps 12 months out of university who aren’t actually interested anyway and who have no particular skills either.

What could go wrong?

Rather a blow to sustainable cost accounting

Grant Thornton and Patisserie Valerie:

In another case in 2016, nearly three-quarters of the group’s entire annual revenue was received in one payment from a third party company three days before the end of the financial year. The regulator said the size of these receipts at year end should have been questioned but weren’t.

Large cash receipts from traders called Market Pete and Browm [sic] Bread should also have raised red flags but didn’t.

Err, yes. The full glory is here.

Now consider what El Jefe Tuberoso’s insistence is about climate change. That the auditors – these same folks – should examine every company in the country and decide whether it is carbon bankrupt or not. Whether Ryanair is to be declared bust depends upon, say, Grant Thornton’s (they use other auditors, this is just an example) knowledge of synthetic avgas production by Siemens in Abu Dhabi from solar power. Because success in that venture clearly reduces the costs of a company running jet airliners becoming carbon neutral, doesn’t it?

It’s one of those ideas that just isn’t going to fly, isn’t it?

Plus, obviously, there’s that insistence from The Great Tater himself that auditing has to be entirely reformed. You know, we could use auditors if only we reformed auditors so that we could use auditors.

Arrogant, ignorant, tosser

The true believers are on the right wing of politics. In their opinion the only reason people exist is to function within markets. Everything else in life is secondary as far as they are concerned.

The actual insistence is that markets enable people to exist as they wish to. Except, of course, in those instances where they don’t. Markets are, that is, a tool and often the appropriate one and sometimes not.

The right-wing think that this market information is readily available, free, and always enough for anyone to make all the decisions that they need to make.

Libraries just full of pondering upon imperfect information.

However, the most important thing about the right is how they think markets work. They believe that markets work instantly. So long as we all have the information that market pricing delivers because we have no other priorities in life we supposedly react to it instantly.

Which is why just everyone believes that the long term elasticity is the same as the short term – idiot.

So for the right-wing economist the answer to every failure is not that the market got anything wrong, or failed, but that the government intervened to prevent the market getting things right. So less regulation, less government and less tax is always their cure.

Amazing, isn’t it? For he screams that the carbon tax – greater tax in order to correct a market failure – is the right wing solution.

The resulting low tax, low government, light regulation agenda has let wealth flood upward for forty years

Amazing how this has coincided with the greatest reduction in absolute poverty in the history of the species, isn’t it?

It gets worse as it goes along too.

Good advice

Labour, however, has to participate in the real world and not the sandpit where the NGO activists now running tax justice campaigns play,

That does rather limit the Sage’s influence which is why it’s good advice.

Bond investing in green projects

Oh Aye?

Holders of “mini-bonds” issued by Future Renewables Eco, a wind farm investment company, are braced to lose more than half their investments after it collapsed into administration on Sept 17.

It owned 10 wind turbines across Britain and was funded by 750 bondholders who ploughed £24m into the company between 2015 and 2017.

There might be the occasional problem with investing, via bonds, in renewables projects. As I’ve been telling the Sage for a decade now. Where’s the risk equity?

You know, not all projects actually work. So, there needs to be someone carrying the risk of the adventure. That’s what equity is. And if folks are investing through bonds, but there’s no risk capital there, then the bonds are carrying that risk, aren’t they?

But of course equity is that bastard capitalism and we shouldn’t have anyone investing their pensions with that sort of protection, should we?

The detailed knowledge here is remarkable

So therefore I am remarking:

All those who now suggest that people would not want to save in the Green New Deal bonds that Colin Hines and I have promoted have this uncomfortable evidence that there is massive demand f0r green savings products to contend with.

£10 billion of green gilts sold. But one should never reason from a manipulated price:

The Bank of England said on Friday that it intended to buy new green gilts which will be issued by Britain’s government later this year as part of its asset purchase programme, treating them similarly to other government debt.

Britain’s government plans to issue at least 15 billion pounds ($20.6 billion) of new debt this financial year which is specifically designed to capitalise on investor demand for bonds whose proceeds are ring-fenced for environmental investments.

“In response to questions from market participants, the Bank of England confirms that green gilts will have equivalent eligibility to existing gilts in its market operations,” it said in a statement.

The Bank of England buying green gilts is not great evidence of wider market desire for green gilts.

Ask the Sage

If you asked the Sage of Ely whether free movement of labour reduced wages you would be told not to be so silly. If you insisted that immigration might, under certain circumstances, be the reason for low UK wages you’d be called a racist fascist:

What there is, yet again, is a breakdown in the supply chain due to a shortage of lorry drivers. And the reason why there is a shortage of lorry drivers is that Brexit and government intransigence has tipped what was already a delicate labour market into crisis.

There is no short term resolution to that crisis. The UK government has decided to alienate and even expel a significant part of a labour force on which the country has relied and has, despite warning being given, chosen to do nothing to ameliorate the situation until it is now too late for anything it might do to relieve that labour shortage. So, like it or not, we do not have the drivers that we need, and nothing can now be done about it.

The absence of free movement of labour increasing wages is not proof that you’re not a racist fascist.

Sigh

Why does this matter? First, this is a potential default by, as the FT note, the world’s biggest property developer. What that obviously implies is that property might not be worth what people thought it was. The financial obligations has might be expressed in renminbi (although this debt seems to be secure, at least for now) or dollars (which is the part currently at risk) but the underlying asset is a real thing – a building – and that is no respecter of monetarily recorded value attributed to it, which is only the expression of an opinion at a point of time.

Except it’s not a bond issue secured against a specific property. It’s a general bond supported by, at most, a floating charge against the company.

Sigh.

But that there is massive asset overvaluation on corporate and bank balance sheets is to me obvious: low-interest rates, financialisation, over leveraging and exuberance in the face of reality has left markets and property over-valued as supposed stores of value for the excess of global savings that now exists, and which will surely be subject to a serious price adjustment and a haircut for the wealthy sometime soon.

But that’s cool, isn’t it? Because it means we don;t have to go tax that wealth off them, the market is going to solve the problem for us.

A blow for Elynomics

Truly. something of a blow:

The Bank of England has been forced to revise up its inflation forecasts as surging energy costs, labour shortages and chaos in the supply chain hold back Britain’s recovery from Covid.

Inflation will rise above 4pc and stay there into the middle of next year, the Bank of England warned, meaning prices will be climbing more than twice as fast as its 2pc target.

It suggests that policymakers may raise interest rates faster than previously expected in a bid to tame rising prices.

Just, for a moment, assume all this is true. Inflation is to move to 4%.

Firstly, this tells us that real interest rates are indeed changing. As opposed to the recent insistence that interest rates haven’t changed in yonks.

But more fun here. So, the MMT view, as from the Sage, is that interest rates cannot rise as everyone will go bust. It’s not possible to reverse QE to suck money out of the economy because that would be to, umm, suck money out of the economy. The only correct response is to increase taxation.

Which gives us two questions. The first is, well, what tax rate, upon what, reduces the inflation rate by 2%? We’d like to see the calculation please. Second, do the political incentives work? We all know that politicians love to spend and hate to tax because that’s the way electors like it. So, given the three choices, reverse QE, increase interest rates or increase taxes, which will politics deliver to us?

My bet is that if taxes are the only possible solution then politics will leave the inflation to run.

But Sage, what say you?

One of those little problems with Sustainable Cost Accounting

SCA means that a retired accountant from Wandsworth will be evaluating businesses to see how much it will cost them to become carbon neutral. This poses certain problems:

And clean steel is just a pipe dream right now.

Clean steel is produced right now. Actually, the largest US producer makes nothing but clean steel. Nucor only ever recycles scrap.

Even if you mean clean virgin steel that’s also both possible and happening right now. DRI is just that. It’s not just that plants are being built around the world at least one is in production.

Along with all the other idiocies about it SCA depends upon the knowledge and technical judgements of someone with no knowledge and incapable of technological judgement. It’s not likely to work out well, is it?

But why doesn’t he just read the Stern Review?

At a theoretical level (which is where I will be starting my own input, which will continue for four years) the focus is on the need to reverse the normal idea that a cost deferred is a cost saved because of the use of fair value discounting within International Financial Reporting Standards. We suggest that the exact opposite is true in the case of climate accounting. What is required is upfront accounting by provisioning for costs, and because the costs of tackling climate change increase if not tackled early we are looking at accounting without discounting, because the costs of transition need to be incurred as soon as possible.

All of this is addressed – and disagreed with – in hundreds of pages of the Stern Review. Why go over it again in order to get it wrong?

Or, umm, hand on, is the P³ actually going to talk about discounting and climate change without having bothered to read Stern?

This even before we get to the idea that technological change is makes it cheaper to do things in the future. Sometimes at least. Is solar cheaper now than a decade back? So, the costs of installing solar now are less than they were….

Yes, there’s more, and it’s glorious

Richard Murphy says:
September 19 2021 at 8:22 pm
Cite them

And in the world of near zero interest rates explain how that now works?

Real world evidence please

And note Krugman on this and what he says influences long term rates… https://www.nber.org/system/files/chapters/c6948/c6948.pdf

Rajiev says:
September 19 2021 at 9:41 pm
Richard,

As in Krugman’s paper, many factors affect real and nominal exchange rates – interest rates being one of them.

One factor he specifically does NOT mention in this paper you link to is productivity. As is well known, productivity has little or no effect on exchange rates.

It might be worth you reading papers before you link to them in future, as this one does not help your case. Real world examples have also shown, repeatedly that productivity is simply not a factor for driving exchange rates. It is very much the other way around, if anything, with exchange rates driving productivity.

You also ask for real world evidence, yet seem utterly unable to provide any yourself.

Richard Murphy says:
September 19 2021 at 9:46 pm
Have you read the paper?

I suggest you do so and see what he discusses when looking at long term equilibrium exchange rates

Interest rate changes are short term factors and – you might like to muse in this – really do not happen any more

You are, politely, ignoring the evidence

And I note but a single citation again

No more comments like yours will appear

Interest rate changes do not happen any more then? Oh.

And there was me thinking that real interest rates are the combination of the nominal interest rate and the inflation rate. And given that the inflation rate is bouncing around all over the place then the real interest rate is constantly changing. Which might be one of those reasons the FX dealers are still in business, as relative currency rates change?

Rampant, asinine, stupidity

The first is that this move shows how rigged the supposed UK energy market is. If this supposed market can only work on the basis of regulation and government support it is not a market at all. Why we have to suffer the cost of this sham is hard to work out when at the end of the day there is, in effect, a single national gas supply and the so-called market never actually changes what come out of the pipe we are connected to. The sooner utilities were nationalised to recognise this reality the better.

What comes out of the pipe might come from the N Sea, from a couple of small onshore UK fields, arrive in LNG tankers from abroad, through pipelines from Russia, or parts of Europe. Just because it’s all CH4 (roughly enough) the idea that the market doesn’t change what comes out is asinine to a remarkable degree.

Also, obviously, it’s not the pipelines about to go bust.

But love that nationalisation idea.

Currently we’ve got a substantial part of the domestic user base covered by a price cap. This means that retail prices do not, are not allowed to, vary when wholesale prices do. This is what is driving those intermediaries, the retailers, into bankruptcy. OK, not nationalise everything. Wholesale prices are still what wholesale prices are. Because our sources of gas are still that world market – LNG, pipelines and so on – because we’re not about to do the sensible thing and go fracking.

So, what can happen now? Either that retail price cap has to go – which solves the current problem – or all of that gap between high wholesale and low retail prices has to be covered by the taxpayer. Which is what is being complained about, that the taxpayer is going to have to cover the gap between high wholesale and the capped retail prices.

Nationalisation doesn’t even solve the problem being complained about. Which is asinine, rampant, stupidity.

Second, even though some consumer facing energy companies will be facing bankruptcy in the situation that has developed this does not mean that there isn’t profiteering going on. There clearly is. The cost of producing gas has not risen. All that is happening is that increased demand as the economy reopens is being reflected in increased prices and gas producers are profiteering from it. Of course, in the largest cases these producers also have consumer facing supply companies as well. The exploitation will be very obvious in their accounts, but the abuse is permitted by UK regulators. The question as to why that is has to be asked.

So, we must deny the price system then. Oh, and also extend UK price controls to LNG cargos on the High Seas, to pipelines out of Russia and…..have I said asinine stupidity already?

Fourth, in that case the need for a windfall tax is significant. And it could be done. All the major gas producers will be producing country-by-country reports for tax purposes. These could readily be adapted to indicate appropriate profit allocations to jurisdictions that could then be subject to excess profit taxes. International agreement is not required in that case. Political courage would be though.

British Gas already pays 75% of profits in tax – profits from gas production that is. The Crown owns all gas domestically produced. Our biggest import sources is Norway and we’re to go tax their state owned oil and gas company through country by country reporting, are we?

Eighth, this feels like another part in the systemic failure I mentioned a few days ago: we have constructed a wholly artificial market in energy that cannot manage the world we now live in, and the consequences are real as the failure imposes cost. How many times must we now suffer this?

What the hell’s artificial about a market where when demand rises in the face of short term static supply the price rises?