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Tsk Mr. Thaler, Tsk

The question comes down to whether we want a society in which the rich take an ever-increasing share of the pie, or prefer to return to conditions that allow all classes to anticipate an increasing standard of living.

They\’re not mutually exclusive Professor Thaler.

The rich could be getting an expanding share of an expanding pie: as long as the pie expands faster than the share of the rich then everyone gets better off together.

Making pensions work

Richard Murphy has a new report out, Making Pensions Work. And My God it\’s a stinker.

This is fun from The Observer.

Murphy, who is one of the country’s pre-eminent tax experts

We\’re screwed, aren\’t we, if Ritchie is the best the country has to offer.

Anyway, on to the report.

Using data for the most recent year available – 2007/08 – it shows that total pensions paid in that
year amounted to £117.6 billion. Of this sum £57.6 billion was state old aged pensions, £25 billion
was state employment related pensions paid to former civil servants and other former public
employees and £35 billion was private sector pension payments.
In the same year the total cost of subsidies to the private UK pension industry through tax and
national insurance reliefs on contributions made and from the tax exemption of income of pension
funds amounted to £37.6 billion. The result was that, albeit indirectly, the entire cost of private
sector pensions paid in 2007/08 was covered by tax reliefs given to the private sector pension funds
that paid them. To put it another way, every single penny of the cost of UK pension payments in
2007/08 was in effect paid by the UK government.

Err, no, sorry, but that conclusion is quite incorrect for two reasons.

The first is that the tax relief upon pension contributions is the tax relief upon saving for a pension: it\’s relief which needs to be accounted for against pensions which will be paid out in the future, not against pensions being paid out today.

The second is that tax relief upon pension contributions is not so much a relief as a deferment. Your pension that you get from your savings (yes, even the State Pension) is subject to income tax. Quite what the average tax rate on pension incomes is I don\’t know. Some people won\’t get enough to be paying any income tax, others will be getting the sort of sums that attract 40% (a very few will be in the new 50% bracket as well). If it\’s basic rate as the average, that\’s £23 billion coming back: if 40% (which it clearly isn\’t) then £47 billion.

Until we know that number we don\’t in fact know what the subsidy is. I\’d expect there to be some: tax reliefs being higher than income tax paid on pensions received but I\’m not certain about that at all. Anyone know?

Finally, I\’d love to know whether they\’ve accounted for the state employee pensions properly. I assume that contributions to these are similarly tax reliefed as private pension contributions: if so, how much of the £37.6 billion should be set aside the £25 billion of state employment pensions? A place where such a comparison would be appropriate given that most of them are pay as you go rather than fully invested funds?

Do note one lovely thing as well. Given that tax reliefs are for savings towards future pensions, Ritchie\’s assumption is that if more people save more for their own future, this is a bad thing. Because current reliefs will rise.

This isn\’t, to put it gently, the most sensible manner of considering the funding of pensions. More people saving more is bad?

Most importantly we suggest that if those pension funds are to attract tax relief in future they must
use a significant part of the £80 billion of contributions they receive each year to invest in new jobs,
new technology and new infrastructure for the UK so that the wealth that is needed to grow our
economy, to create jobs and to build the real capital base that must be passed to the next
generation is built on the back of pension fund investment.

Leave aside his ignorance of why we have secondary markets in investments at all and just consider what they\’re actually recommending here. Some portion of pensions savings must be in new things. New companies, new jobs, new products, new infrastructure.

Yup, they\’re insisting that part of your pension must be invested in venture capital. Might be a good or a bad thing but it\’s certainly an odd thing for someone like Murphy to be recommending.

Thirdly, we recommend that current pension deficits in final salary schemes be cleared wherever
possible by the issue of new shares in the companies responsible for those funds. This would stop
the current fruitless drainage of cash out of companies that should be used for real investment and
which is instead directed via pension funds into the stock market to buy shares in other companies,
the only benefit of which is to create a spiral of stock exchange boom and bust. We also suggest that
future contributions to such final salary pension schemes might also be paid, at least in part, by
issuing new shares in the companies responsible for those final salary pension schemes.

That is truly insane. Just about the one total certainty about pension investment is that you don\’t want both your job and your pension to be reliant upon the performance of the same company. This means that you absolutely do not want your pension fund to hold shares in your employer. We\’re trying to diversify risk here, recall, not concentrate it.

We really are truly fucked, good and proper, if \”one of the country\’s pre-eminent tax experts\” is going to recommend drivel like this.

Lastly we recommend that if enforced saving is to be required by the government then that
government has a duty to ensure that the funds so saved are invested for the common good.
Pension fund performance over the last decade has a been a history of almost perpetual loss making
despite the enormous subsidies that pension fund tax relief has provided to the City of London and
stock markets, all of which they have frittered away. Investment in local authority bonds for local
regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated
bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance
Initiative for funding public sector infrastructure projects would have prevented those losses –
because all of these would have paid positive returns to pension fund investors. It is for exactly this
reason that we recommend that such assets be the basis for any new state pension fund in the
future.

Snigger.

In another report that these two did (The Green New Deal) they insisted that long term bond rates should be lowered to 3%. Inflation is currently above 3%. So everyone holding such bonds would be losing, not gaining, money through holding such bonds.

Indeed, Murphy is on record as saying that we should have higher inflation targets: 5% I think he\’s mentioned. So everyone locked into 3% bonds gets screwed, don\’t they? For every £100 that a 25 year old puts in they get back £44.57 at age 65 in fact. What a great way to save for a pension!

It\’s also highly questionable to use a ten year time period to judge pension returns. Especially from the peak of a market like 2000 to the depths of a recession like today. Tsk, really, tsk.

To date pension funds have been an almost perfect example of what Keynes described as ‘the
paradox of thrift’ – saving that sucked demand and well being out of the economy. We need
something very different now. We need pension funds that can build economic will being for the
present and the future.

Oh dear. They\’ve not grasped the paradox of thrift at all. It isn\’t that \”certain types of saving are bad for demand in the economy\”. It\’s that at times, any sort of savings are bad for the economy, reducing demand. Whether such savings are made through bonds, shares, private pension funds or some new fangled method just devised by a retired accountant.

I mean, come on, if you\’re going to tout a long dead economist the least you can do is get this theories right.

What a perfect typo!

The misspelling of
personal pensions in the 1980s and early 1990s did not help either

Tee hee.

I think this is fun:

annual contributions exceeded
£80 billion

OK, that\’s the amount being saved into pension schemes each year. And from a document that they themselves reference:

Equity issues on the UK main market and AIm totalled £82.6bn in
2009, up on £70.7bn in the previous year.

So we seem to have some sort of balance then. The amount of new capital raised each year for companies is about the same as the amount being saved for pensions. Which makes all of their wittering about how pensions aren\’t being saved in productive assets a tad odd really. Perhaps pensions aren\’t being directly but the system as a whole seems to be directing that fungible cash to such activity.

This is simply nonsense.

As data published by the organisation promoting the City of London,
TheCityUK, showsxviii, the ten year rate of return on investment in UK stock markets was an average
loss of 2% per annum over the first decade of the twenty first century. This was also the global
average rate of return on shares in that decade.

They refer (again) to here. Where those promoters of the City of London give us the index returns for the major stock markets. That is, they give us the capital return (or loss) on holding shares. So, what is not included in their number then?

Yes, it\’s the dividend yield. Which, at least at some points for FTSE has been 3%. You know, enough to take total returns to equity positive?

The blinding stupidity of their argument here will be obvious if we apply it to bonds. We\’ll not count the yield at all, only the capital return? Which means that anyone and everyone ever investing in bonds will always make a loss for reasons of both inflation and that there\’s always some level of default.

Way to go guys, way to go.

The persistent purchase of shares by pension funds when the market was paying no return cannot

Twats.

We also know that notionally some of the
tax relief given to employees on pension contributions goes to those who appear to contribute to
state ‘pay as you go’ pensions schemes – but only because they have to enjoy a comparable relief to
that which goes to those making contribution to private sector funds to ensure that the latter
appear attractive savings mechanisms.

OK, so they do mention what I pointed to above….but then go on to dismiss it. Ho hum.

Adopting the alternative ‘macro perspective
offers the second reason for private sector pension fund failure. This is the consequence of there
being no obligation on those funds to invest in a way that creates new economic activity. As was
demonstrated at the time of a previous pension crisisxxiii, 99% of all investment in corporate shares
and bonds made by pension funds is in what might best be called “second hand” shares or bonds
already in issue. The purchase or sale of such shares or bonds provides the issuing companies
nominally responsible for these assets with no direct benefit at all from their purchase. It was of
course true that when first issued such shares and bonds would have provided funds to the company
that issued them, and whose name they bear, but thereafter whenever they are bought and sold –
as they are day in, day out by pension funds – not one penny of the money traded goes to the
benefit of that company. Instead all of it goes to the previous owner of the share or bond in
question. That may be a pension fund, of course, but the point is that none of this speculative
activity does in any way benefit the productive economy. As such a pension funds purchase of these
assets creates no new investment or employment opportunities. In economic terms these pension
fund “investments” are, therefore, savings activities and not investment activities.
In contrast only about £100bn, or about 12% at most, of pension fund holdings are in government
securities. This represents a considerable investment portfolio imbalance which fails to reflect the
proportionate roles the state and private sectors each play in the economy when the state as a
whole accounts for more than 40% of GDP.

Gnnargghhh!

The existence of the secondary market allows both people to cash out their savings so as to create, say, an annuity when they retire and also allows maturity transformation. That maturity transformation allows companies (and, of course, the government) to get the necessary capital at lower costs than would otherwise be the case.

Seven reforms are needed.
Firstly, the state has to guarantee an old age pension that keeps all older people in this country out
of poverty irrespective of their fortunes during their working life, their gender and their relationshipstatus. This means a commitment to increasing the basic pension and enhancing pension credits is
essential.

Wondrous. Pension credits dissuade people from saving for a pension. If you save and earn a low pension and the other bloke doesn\’t save and gets pension credits, then why would you save to earn a low pension?

Second, if tax relief is to be given to pension fund contributions then there must be conditions
attached to doing so. To secure this tax relief in future we recommend that a significant part of
those pension fund contributions (we suggest at least 25% of them, and maybe more) must be
invested in new economic activity and not in the buying and selling of shares and bonds which
provide no new money for the real economy. This means pension funds must be proactively used to
create new capital assets, infrastructure, skills and job. In addition, pension funds must be required
to invest for the long term and to minimise the transaction costs at present paid every time a stock
or bond is bought or sold. This means that funds should be required by law to invest strategically as
business partners and not speculatively for short term gain, a role that is in any case and inevitably
in conflict with their long term duty to produce returns for their members.

They\’re handing the entire pension industry over to private equity and venture capital. And, err, without that secondary market how do they cash out the value created in order to pay the promised pensions?

I mean, Murphy and Hines do know that an annuity eats the capital, don\’t they? That it isn\’t just the returns on capital, it\’s the very capital itself as well?

Fourth, in pursuit of these objectives pension funds must seek to undertake new forms of
investment. It is very obvious that the existing profile of their ‘investments’ (which are actually
savings) carry inherent speculative risk which makes them unsuitable for long term pension saving
purposes whilst providing considerable opportunity for excessive charges to be made by the City of
London, which is contrary to fund member’s best interests. If pension funds were instead genuinely
invested in local authority bonds for local regeneration, or in bonds or shares issued by a new Green
Investment Bank and in hypothecated bonds e.g. to provide alternative funding to replace the
inefficiently expensive Private Finance Initiative for funding public sector infrastructure projects then
this situation would be changed, quite radically. What is more these alternative investments would
not only create jobs in the UK economy, they would also have life spans that will suit the needs of
many pension fund managers and their members because the investments will earn revenue over
periods of up to twenty five years and more before returning capital when required by pension
funds to provide annuities.

Erm, riiiight. So that 40 year old saving for his pension is fine. He\’s investing for 25 years. What about the 58 year old still saving for his pension? He\’s only got a 7 year horizon to invest before he purchases his annuity and, erm, in the absence of a secondary market he\’s screwed, isn\’t he?

Dingbats.

Murphy\’s ability to write reports hasn\’t improved, despite all the practice he\’s getting, has it?

When you retire, your income is reduced by quite a bit. A reverse mortgage is a special home loan that can help you enjoy retirement more. It will let you spend some of your home equity as cash during your retirement for whatever expenses you have. The exact amount you can borrow will be determined using an online calculator based on factors like government regulations. The difference between a reverse loan and a traditional one is a reverse mortgage pays you instead of you having to pay it back. It is a long-term method of borrowing money without immediately increasing your bills. If you ever move out of the home the balance must be paid, but you can also opt to allow the sale of the home at that time. There are not the same default and eviction risks you might have when taking out a regular mortgage.

Amusing, no?

Fears are growing of a \”gentrification\” of arts and humanities degrees as new figures reveal that the courses have become the preserve of wealthy students.

Statistics released to the Observer by the Sutton Trust, an influential education charity, show that 31% of those who graduated in 2008 with degrees in history or philosophy were the children of senior managers – the socio-economic group with the highest income. Across all English university courses, an average of 27% of graduates were from this group.

Language graduates were also disproportionately from the wealthiest homes, with 30% from the highest income group. In comparison, non-arts and humanities courses – with the exception of medicine and dentistry – had far fewer students from the highest-income group. Just 17% for education, 22% for computer sciences and 23% for business studies were from the wealthiest homes. For medicine and dentistry, the proportion was 47%.

So the plebs are doing the business stidies courses so that they can be senior managers and gain the highest incomes?

Isn\’t this the social mobility we\’re all told we should have?

Second silly question of the day

Speculation in food\’s bad, M\’Kay?

So, err, why was Lord Keynes such a fan of speculating in food then?

In this paper we address the subject of Keynes as a speculator. We look first at the primary sources of information, which are in the form of unpublished letters and broker’s statements. Secondly, we look at the theory Keynes sparingly presented in his writings, but which nevertheless is grounded on his first-hand knowledge of speculative behavior. Thirdly, we examine the focus on speculation in commodities, which had great weight in his portfolio, and have chosen a particular commodity -wheat- for our investigation. In particular, we examine some of Keynes’s dealings in wheat futures with the aim of shedding light on the underlying investment strategy.

Anyone?

Richard wants to abolish taxation

Didn\’t think I\’d see this:

I believe a large number value and want what the state supplies.

I believe a large number will be willing to pay for it.

I believe Labour has to give them that choice.

If you\’re to have a choice about whether you pay for state services then this inevitably means that state services cannot be paid for through the tax system. For the very point about tax is that you don\’t have a choice as to whether to pay it or not.

So, R. Murphy is arguing that tax should be abolished and state services organised upon a subscription basis. You want what the state provides you\’ve the choice of signing up and paying for it. And, obviously, the choice of not signing up, not paying for it and not getting it.

Amazing, Ritchie, even more neo-liberal than me! For I\’m just delighted with such a scheme in many areas but even I would insist that there are some things which only the State can do, things which can only be done if financed through compulsory taxation and which also, most crucially, must be done.

Capitalism: how not to do it

Cuba:

A leaked document from the Communist Party says that small businesses will pay between 10 to 40 percent of their gross income in taxes. On top of that, they will have to contribute 25 percent of their incomes to social security.

As PJ O\’Rouke quotes in Eat the Rich, the Cuban economy depends upon Castro\’s learning curve in economics. Problem is, Castro\’s a slow learner.

Silly question of the day

If customer mutuals are such a great idea, you know Building Societies, the Co Op, organisations owned and ultimately managed by their customers, why are schools run by parents (acting, of course, in loco parentis for the ankle biters who are the real customers) such a bad idea?

Anyone?

The UN on speculation in food futures

This is a right dog\’s dinner of a document. First, the good news:

Traditional speculation in agricultural commodities markets
is based on market fundamentals – above all on the demand
and supply for any particular commodity. Thales purchased
his option on the oil presses because he expected the supply
of olives to increase. The farmers sold him the option because
the were hedging against the risk of a poor olive harvest. This
form of speculation is generally considered necessary and
useful in the market: it facilitates commercial hedging against
risk, and it allows for price discovery, assisting farmers and

buyers in discovering the reasonable price for a particular
commodity in individual trades and on spot markets27. If the
buyer is willing to offer a higher price for a future than before,
it means that she expects the eventual price of the commodity
to increase further. As such, if the price of commodity futures
goes up, it signals to sellers on spot markets to raise their
prices. Indeed, the grain futures prices quoted by the Chicago
Mercantile Exchange28 tend to be incorporated directly
into grain trade contracts the world over. Moreover, it is
conventionally thought that such speculation reduces price
volatility, because speculators provide a market for hedgers,
and because they buy when the price is low and sell when the
price is high, thus evening out extremes of prices29.

So, the conventional economic view, one we can trade certainly back to Adam Smith, is correct. Speculation in food commodities is a good thing. So all those ignorants in this Guardian comment section, those who are demanding the banning of such speculation, can fuck right off.

Banning speculation will kill people, capisce?

However, they then go on to talk about the rise of the commodity index funds and how they, using momentum trading, have upset this beneficial process and thus brought higher volatility.

Sadly, there\’s a horrible intellectual error here. Truly horrible.

They\’re right of course, in that lots of money did enter the markets. That many of the funds were long only. That they used only futures, not involving themselves with the boring stuff like grain elevators and warehouses.

However, they\’ve entirely missed the point that the futures market is, for those inside it, a zero sum game. By simple definition, by accounting identity, for every long position there must be an equal and opposite short position. It isn\’t possible for me to agree to sell wheat in 6 months at price x without there being somone else on the other side agreeing to purchase wheat in 6 months at price x.

So, the existence of large long only funds is irrelevant: by their very existence we know that there must be equal and opposite large amounts of short speculation going on.

This the UN entirely ignores thus making their analysis of the effects of the commodity funds and momentum investing wrong. No, not arguable, simply wrong.

Which is something of a bad bit.

Another bad bit:

The sudden massive entry of index funds into commodities
should be placed against the background of developments in
the broader financial markets. Following the passage of the
U.S. Commodity Futures Modernization Act in 2000, Over The
Counter (OTC)43 derivatives were exempted from the oversight
of the U.S. Commodity Futures Trading Commission (CFTC).

Nope, that\’s flat out wrong. The CFMA simply confirmed pre-existing regulatory matters. There was no major change in regulation: only confirmation of what was already the case.

So, what should we do about it all?

In general, certain steps could be taken to prevent improper
speculation in the commodities derivatives markets.
n Certain important regulatory bodies comprise too few
experts in commodity markets65: a first improvement could
be simply to begin remedying this imbalance.

Yes, that sounds sensible. We could start by getting the UN Special Reporter on the subject, the writer of this report, up to speed on the subject perhaps?

Once the distinction is made, access to commodities
derivatives markets could be restricted to traders and
specialist brokers. A number of proposals could be
considered, such as an outright ban on momentum-based
speculation, and the compulsory registration of actors
trading on commodity futures markets, in order for such
exchanges to exclude financial traders69.

Cretin. The financial traders provide the liquidity that everyone else is using. The entire point, in the wider world, of having futures markets is to transfer risk. To transfer it from the farmer and the baker to the wheat speculator. We want the \”financial traders\” to be there so that the financial traders end up holding the risks. This is the whole point of the entire system!

Aside from these regulatory changes, strengthening of
spot markets may be brought about by investing in better
warehousing facilities, communications services and in
transport infrastructure72. Such steps will not only reduce
the influence of non-commercial commodity futures traders,
and increase the participation of farmers on such markets,
but will also improve the ability of commodity futures to act
as price signals.

Now that is a good idea, although not quite for the reasons they give. Warehouses, comms and transport enable more farmers to enter the system, more farmers to transfer their risks. This is good, we are expanding the system and moving risk from those who do not want it to those who do…..or rather, are willing to accept it for a price.

As they go on to say:

This is to be desired even if one rejects the speculationbased
explanation for the food crisis. It may be noted that
the Abhijit Sen Committee Report to the Indian Ministry of
Consumer Affairs, Food & Public Distribution called for such
strengthening of spot market73, even though it found that
speculation in commodity futures did not fuel inflation in food
prices74.

Quite. Speculation in foodstuffs is good, risk transfer is good. So let\’s have more of it please.

Just to give you an idea of the limited level of knowledge of this paricular report writer, how about this?

Petrol
is an integral component of modern food supply chains,being used for fertilizers, food processing and transportation,
and the rise of bioenergy leads to an increased merger of
the food and energy markets42.

Yes, oil derivatives are indeed important: although I have a very strong suspicion that it is diesel, not petrol, which is used in both processing and transportation. But apologies to the numpty that wrote the report, fertilizers are not made from petrol or any other oil derivative. They are made from natural gas.

Guess what Caroline Lucas has to say about this?

Green MP Caroline Lucas called for tighter regulation of the food trade. \”Food has become a commodity to be traded. The only thing that matters under the current system is profit. Trading in food must not be treated as simply another form of business as usual: for many people it is a matter of life and death. We must insist on the complete removal of agriculture from the remit of the World Trade Organisation,\” she said.

Agriculture must be removed from the WTO? Seriously? An organisation which is one country, one vote (thus giving everyone, even the smallest, an absolute veto), an organisation which is, in reality, only there to ensure that governments do live up to what they\’ve promised to live up to: this should be removed from the market for food?

This stuff is bad is it?

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy games.[34] Five principles are of particular importance in understanding both the pre-1994 GATT and the WTO:

  1. Non-Discrimination. It has two major components: the most favoured nation (MFN) rule, and the national treatment policy. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these areas. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members, i.e. a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members.[34] \”Grant someone a special favour and you have to do the same for all other WTO members.\”[35] National treatment means that imported goods should be treated no less favorably than domestically produced goods (at least after the foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards et al. discriminating against imported goods).[34]
  2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise because of the MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a nation to negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral liberalization; reciprocal concessions intend to ensure that such gains will materialise.[36]
  3. Binding and enforceable commitments. The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions. These schedules establish \”ceiling bindings\”: a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.[35][36]
  4. Transparency. The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO. These internal transparency requirements are supplemented and facilitated by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM).[37] The WTO system tries also to improve predictability and stability, discouraging the use of quotas and other measures used to set limits on quantities of imports.[35]

The mind boggles, truly.

  • Safety valves. In specific circumstances, governments are able to restrict trade. There are three types of provisions in this direction: articles allowing for the use of trade measures to attain noneconomic objectives; articles aimed at ensuring \”fair competition\”; and provisions permitting intervention in trade for economic reasons.[37] Exceptions to the MFN principle also allow for preferential treatment of developing countries, regional free trade areas and customs unions.[citation needed]
  • Yes, Mandy\’s still getting EU money

    After leaving his Brussels job in Oct 2008, the Labour peer is still receiving a \”transitional allowance\” of £103,465 a year, which is funded by the taxpayer. The payment of £8,622 (€10,139) a month is set at 50 per cent of his former salary as European trade commissioner, a stipend paid at low rates of \”community tax\”.

    Something I have been shouting about ever since he left Brussels.

    It really does gall that while he was a Minister, while he was in the Cabinet, he was getting this huge payment. Ministers just aren\’t allowed to have such outside incomes….unless it is this payment from the EU.

    And it is extremely galling to know that he wasn\’t even paying UK tax on it.

    Seriously, a member of the Cabint not having to pay the same taxes he imposes on everyone else.

    Err, no, not really

    But it’s also wholly irrational;. You see, a god is usually assumed to be a higher order of being, possessed of powers beyond the human. Usually that will involve omnipotence. That is, the power in this case to see the future – something economists believe we all have when building their models which is, however, untrue, and which is a good reason why they do not work for us mere mortals.

    Or, alternatively, the bond god is a myth created by humans to serve their own purpose – a crux for their own beliefs. The sort of belief that we’re seeing acted out in Ireland. The sort of mythical belief that underpins neoclassical economics. The sort of myth that is confounded continually by evidence, but to which the true believers adhere none the less.

    Sigh.

    No, neo-classical economics does not believe in a \”Bond God\” nor does it make the claim that we can see into the future.

    The claim is that we all, each and every one of us, have opinions about the future. Some of those opinions will be correct, some will be incorrect. Some will be correct given the information to hand today, some incorrect by that standard. Some will be made incorrect by events in the future that we don\’t know about (uncertainty, or Rumsfeld\’s unknown unknowns) and some that are incorrect by current knowledge will be made correct by the same.

    All the bond market is, just as is true of any other market, is the aggregation and averaging of these opinions about the future.

    That aggregated and averaged set of opinions may well be wrong: but it\’s the best that we can do. Blimey, you\’d think that Ritchie had never heard of Galton\’s Ox or the Wisdom of Crowds (and yes, I do know the conditions under which they don\’t work well).

    Ritchie and macroeconomics

    I\’ll admit openly, as I have done a number of times, that I\’m not all that good at macroeconomics. Mostly because I tend to regard it as akin to voodoo: as the man didn\’t say, in the long run it\’s all microeconomics.

    However, I am still able to spot the occasional error in macro elsewhere.

    That’s what’s happening in Ireland.

    That’s what could happen here.

    Umm, no, you see there\’s this rather important point, rather important difference, between Ireland and the UK. One which Ritchie is usually quick to point to.

    You see, we have our own currency, Ireland does not.

    That means that we have open to us other methods of stimulating the economy, other than simply turning on the spending firehose.

    As Keynes, who was after all at root a monetary economist, would have pointed out. Did in fact. It\’s only after you\’ve tried all the monetary tricks available to you and found that they don\’t work that fiscal expansion becomes the only thing that you can do.

    So, what might you do if you have your own currency?

    Allow the currency to depreciate, that\’s a good start. We\’ve done that, haven\’t we? This makes our exports to others cheaper in their eyes and increases demand for them. It also makes their exports to us, our imports, more expensive in our eyes and thus reduces our demand for the (after the inevitable J Curves) and the two of these together are indeed expansionary.

    Having your own currency also means that you\’ve got your own monetary policy, if you should so wish. So you can go out and buy your own debt, increasing the money supply substantially. As we have done with quantitative easing.

    Ireland can\’t do either of these because they\’re locked into the insane euro-project. Nor can Spain or Greece. And that\’s why they\’re fucked of course, because they cannot do exactly what Keynes and every other rational economist would tell them to do in the middle of a deep slump. Devalue the currency and increase the money supply.

    Interesting career move

    My grandfather’s stepfather, Bill Wilcox, “shot” oil wells in West Virginia and Southeastern Ohio from the 1890s to the 1920s.  Back in the day, fracking meant drilling a hole, filling a coffee can with nitroglycerine, lowering it very carefully down the hole, and then detonating it (hence the term “shooting” the well).  We have family pictures of the process, including an honest-to-God gusher that Wilcox blew.

    Obviously, this was a very, very hazardous occupation.  My grandfather said that Wilcox told him that for 16 Februaries in a row, at least one of his fellow shooters was blown up.  The rapid fluctuations in temperatures typical for that time of year made the nitro unstable, and put that together with icy and rutted mountain roads in West Virginia, or the hills of Ohio, and well, use your imagination.  As a result, Wilcox eventually spent every February dead drunk, or so my grandfather said.  It must of worked, as he survived into a ripe old age (although his liver was probably twice as old as that).

    Any modern analogies anyone can think of?