Financial and business news and articles
Posts tagged Economics
More money makes society miserable, warns report
Mar 14th
Economics experts argue that Britain’s thirst for status symbols harms our well-being
The national belt-tightening expected to follow next month’s budget could prove to be of more benefit to the nation’s sense of well-being than if wealth levels were to soar, according to a new study.
Complex economic formulas developed by two professors of economics, Curtis Eaton and Mukesh Eswaran, and published in the current edition of the Economic Journal, suggest that greater affluence can seriously damage a nation’s health. Based on their mathematical modelling, the economists advance the theory that once a country reaches a reasonable standard of living there is little further benefit to be had from increasing the wealth of its population. Indeed, it could make people feel worse off.
They believe their work shows that, as a nation becomes wealthier, consumption shifts increasingly to buying status symbols with no intrinsic value – such as lavish jewellery, designer clothes and luxury cars. But they warn: “These goods represent a ‘zero-sum game’ for society: they satisfy the owners, making them appear wealthy, but everyone else is left feeling worse off.”
Their work owes much to the economist Thorstein Veblen, who in 1899 coined the term “conspicuous consumption” in his book The Theory of the Leisure Class. Veblen argued that people seek status through conspicuous consumption, which derives its value not from the intrinsic worth of what is consumed but from the fact that it permits people to attempt to set themselves apart from others. As the economy grows, people increasingly choose status symbols or “Veblen goods” over other goods.
“Those with above-average wealth consume Veblen goods with a positive impact on their happiness,” the authors write. “But those with below-average wealth simply cannot afford these goods, so they have a negative impact on their happiness. This is known as ‘Veblen competition’. As average wealth rises, people grow richer but not happier.”
The pair believe their research helps to explain why empirical studies show that levels of happiness and feelings of community in affluent countries have stagnated, despite growth in real incomes.
There is another downside. As people yearn for more status symbols they have less time or inclination for helping others. This, the authors argue, damages “community and trust”, which are vital to an economy because they ensure the smooth running of society. They conclude: “Conspicuous consumption can have an impact not only on people’s well-being but also on the growth prospects of the economy.” The theory may go some way to explaining the public backlash against the louche lifestyles of the UK’s footballers, bankers and politicians.
It fits into a debate within economics about how to measure a nation’s true wealth. Many economists believe they need to focus more on measuring happiness. The belief that a focus on individual wealth creation can be divisive has spread around the worlds of politics, psychology and science. Clinical psychologist Oliver James has argued that there is an epidemic of “affluenza” throughout the developed world, with attempts “to keep up with the Joneses” triggering huge increases in depression and anxiety.
Last year a bestselling book by two epidemiologists, Richard Wilkinson and Kate Pickett, called The Spirit Level: Why More Equal Societies Almost Always Do Better, suggested that Britain and America were the countries with the widest gulfs between rich and poor in the developed world, and as a result had the most health and social problems.
Nevertheless, Eaton and Eswaran, from the universities of Calgary and British Columbia respectively, do not believe the developed world’s obsession with wealth shows any signs of abating. The pair predict that “it is likely that conspicuous consumption will become worse as time progresses”.
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
Recovery yields Alistair Darling a £12bn budget windfall
Mar 14th
Chancellor will cite state investment in jobs as key to lower-than-expected unemployment
Alistair Darling will claim next week that government action to protect jobs has saved around £12bn, as Labour uses the pre-election budget to spell out key economic dividing lines with the Tories.
In what is expected to be the most political budget in decades, the chancellor will cite government investment in jobs programmes as a major reason why unemployment has turned out to be dramatically lower than economists predicted. Last year’s budget anticipated that the level of unemployment, based on National Audit Office assessments of independent forecasts, would be 2.09 million people in the fourth quarter of 2009 and 2.44 million in the fourth quarter of 2010. By December’s pre-budget report (PBR), however, the government had revised the forecasts to 1.72 million for 2009 and 1.91 million for 2010, saying that this would save up to £10bn over five years from lower unemployment benefits alone.
Since then, the Observer has established that Darling’s officials have cut the forecasts still further. The latest projections for unemployment are for it to hit 1.72 million in the final quarter of this year and 1.75 million in the fourth quarter of 2011 – a further 200,000 lower than in the PBR plans, potentially freeing up an extra £1bn-£2bn.
The work and pensions secretary, Yvette Cooper, said: “In the 80s and 90s unemployment continued to rise even after the recession ended, because the government failed to put the necessary support and training in place and keep it there as the economy returned to growth.” She claimed that the Conservatives would cut back investment in jobs programmes and “put the economy at risk, even though the clear evidence shows helping people back to work saves money for the future too”.
This week Cooper is expected to announce that the government will subsidise another 7,000 jobs for young people, bringing the total created under the Future Jobs Fund to 117,000. The funding will pay for work at the national minimum wage, targeted at under-25s and people living in unemployment hotspots.
Last night Treasury sources insisted that most of the windfall savings from lower-than-expected unemployment would be used to cut the deficit, rather than for pre-election giveaways.
Darling believes the budget could spark a sell-off in government markets unless he stands by his pledge to halve the deficit within four years. Ministers believe that they have a credible plan to put the public finances back in order, through targeted investment in the economy, which they say will speed progress towards sustained growth; the introduction of tax rises such as the 50p rate for top earners (from this April) and national insurance rises from next April; and efficiency savings across government. But Darling is not expected to spell out any more details of specific departmental spending cuts so close to polling day.
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
How many economists does it take to sign a letter?
Mar 14th
Confusion over recent round robins that economists have sent to newspapers has revived all the old jokes, but it’s no laughing matter
There has been a spate of round-robin letters from economists to the newspapers recently, superficially suggesting there are huge divides between practitioners of the dismal science, and giving non-economists a field day. Thus we have had a revival of the old joke about economists being laid end to end; and any day now we shall be asked once again how many economists it takes to change a light bulb.
The old jokes are the best, but they come in various guises. One version is that if all economists were laid end to end, they would still not reach a conclusion; another is that if all economists were laid end to end they would reach a conclusion. I prefer the latter, which I think is subtler, and (I believe) was coined by none other than George Bernard Shaw. As for the lightbulb joke, anyone who has recently had a house rewired will tell you that changing lightbulbs these days requires a PhD in electrical engineering, and is therefore not a laughing matter.
But now for the real joke. It turns out that the letter from 20 economists to another Sunday newspaper that started the furore was originally intended as a demonstration of how united the economics profession was on the question of deficits and cuts – ie a return to budgetary discipline was required in due course, but not yet; not until it was safe to act without risking turning what even the prime minister calls a “fragile recovery” into a full-blown depression.
Unfortunately the letter was dressed up as backing for “savage cuts soon”, and presented as endorsing the Tory position – or, at least, one of the Tory positions, because Messrs Cameron and Osborne have been going around the mulberry bush on this issue , blowing hot and cold, sometimes, it seems, depending on the outside temperature.
The result was that a letter intended to demonstrate “consensus” provoked a furious reaction from Keynes’s biographer Robert Skidelsky and others, who highlighted the danger of “instant cuts” when the economy is so fragile.
The episode has revived memories of the occasion on 13 March 1981 when 364 economists wrote to the Times attacking the monetarist policies of the time, and in particular Sir Geoffrey Howe’s apparently deflationary budgetary stance. Since then the 364 economists have been the butt of endless jokes from the Conservative Party (although not its Wet Wing) for “having got it wrong” because eventually there was a recovery. But what the economists did not know at the time of writing was that the government had secretly changed its policy, and decided on a strategy to get the exchange rate down, thereby encouraging an economic recovery. Even so, it was not much of a recovery, because unemployment went on rising until 1986.
In an article entitled “Economists and Policy Letters”, the veteran economist Max Steuer of the London School of Economics takes his colleagues to task for writing such letters, and for causing confusion by signing up to letters using wording with which they are not always happy, but which help them to make a point or “stand up and be counted.”
Given that the recent letters have been concerned with the budget deficit, what especially irks Max Steuer is that “it is apparent that very few of those signing any of the letters have done work on the issues of United Kingdom public debt. What we really want from economists is careful work on this matter. It has to be pretty rapid work to offer useful guidance on current policy. And really good work will not only do that, it will help in improving the general body of knowledge on national debt, work which will be applicable in other situations.”
Well, I am all in favour of good work on the national debt, but, with due respect to Steuer, I think those familiar with their Keynes can be allowed to attack the idea of savage and instant cuts in the deficit when the recovery is far from secure. And this is not, pace a senior BBC political commentator, a “micro” issue of timing or detail. It is a very important macro issue. One of the worst macro economic policy mistakes made since the second world war was when the Japanese introduced a sharp increase in consumption taxes in 1997, when their recovery was still fragile, and knocked that fragile recovery for six, thereby consolidating the deflationary situation which became known as the “lost decade”.
An example of an economist who signed the letter that was presented as favouring instant cuts, but who does not favour them himself, is Roger Bootle of Capital Economics. In his new book, The Trouble With Markets, Bootle notes: “Bearing in mind the fact that the public debt is owed to ourselves, I believe that the greatest threats to economic wellbeing arising from the size of the public debt are posed not by the debt itself, but rather by how we might react to it; that is, by excessive early tax rises, which could have the effect of prolonging the depression.”
Bootle also has soothing words for those who, despite the way the financial sector brought the economy to its knees (and caused the deficit “crisis”), are worried that the British economy will somehow “lose out” from a contraction of that financial sector.
“A good deal of what has gone on in financial markets has been positively harmful,” he writes (and he has observed those markets at very close quarters over the years). “The release of resources from the financial sector and their re-employment elsewhere will bring no net loss and may even bring a net gain.”
This, as he says, requires an end to the recession and the re-employment of those resources. Meanwhile, I should add, if what we are witnessing now is a “recovery”, then we need a recovery from that recovery.
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
The wisdom of recycling trade surpluses | George Irvin
Mar 13th
Look to Keynes for a way to rebalance the world economy – force surplus countries to spend money in deficit countries
How is the global economy to be rebalanced? Is there a distinction worth making between Chinese and German mercantilism? One can argue that China’s astonishing growth has sucked in other countries’ imports while lifting millions out of poverty. But growth continues to be export-led, and the Central Bank of China has accumulated the world’s largest stash of dollar-denominated assets. Germany runs an even larger current account surplus, but much of it is recycled into buying companies in the US and elsewhere.
Is exchange rate adjustment the answer? While the US Congress seems to believe so, a large revaluation would in practice serve nobody’s interests. Chinese export-driven growth rate would slow, and Americans would find themselves poorer in real terms having to buy dearer goods at Wal-Mart.
In the EU, things are slightly different because the euro has appreciated strongly against the dollar. But appreciation has had only had a marginal effect on Germany’s surplus; Germans have accepted slower wage growth as a price worth paying for the prize of being the world’s leading exporter. By any measure, exchange rate adjustment – even allowing for lags – seems to have done little to rebalance the world economy.
The financial crisis has complicated matters, with fiscal deficits growing alarmingly. The German response to resulting downward pressure on the euro has been to insist that all countries should balance the books like Germany. But as Martin Wolf correctly observes: “Germany is in a trap of its own devising. It wants its neighbours to be as like itself as possible. They cannot be, because its deficient domestic demand cannot be universalised”.
In macroeconomics, the basic savings identity says that the sum of the private sector surplus (of savings over spending) and of government’s fiscal deficit must equal the current account (or external) balance. Thus, if a country is in approximate external balance, but an external shock like the credit crisis leads to a sudden increase in the private sector surplus, this must be mirrored by a similar increase in the fiscal deficit. In plain English, as the private sector pays off its debts by spending less, this is reflected by an increase in public sector spending.
There are only two ways out: the first is getting the private sector to start spending again and the second is for net exports to expand rapidly. The problem with the first solution is that, by definition, private consumption falls in a credit crunch; in consequence, business confidence falls dragging down private investment.
The problem with the second solution is slightly more complex and involves what philosophers call the “fallacy of composition“. While one country may be able to boost its exports, all countries taken together cannot. Because my exports are your imports, everyone trying to boost their exports simultaneously by means of, say, currency devaluation leads to a 1930s style “beggar my neighbour” result. This is broadly the logical flaw of those who argue that Britain was fortunate in not joining the euro and retaining its own currency.
What of the weaker members of a currency union, eg Greece and the “Club Med” countries? The German solution, currently dressed up as a debate about the merits of a European Monetary Fund (EMF), is for all countries to adhere to strict fiscal discipline and slash the public deficit. The EMF in its present guise is simply another version of the EU stability and growth pact. This “solution” only works through cutting the real wage and driving down national income to such a degree that the private sector surplus falls and imports contract drastically – ie though expenditure cutting rather than expenditure switching. The rub is of course that were a number of eurozone countries forced to adjust in this way, Germany’s current account surplus would contract.
Is there another answer? John Maynard Keynes proposed a perfectly sensible solution at Bretton Woods in 1944, namely, forcing surplus countries to spend their extra money in deficit countries, thus both their private spending and export capacity. The “Keynes solution” as is has been dubbed by the US economist Paul Davidson, was unfortunately vetoed by the Americans. In fairness, one must add that America rechannelled part of its surplus at the time into the Marshall Plan, thus enabling Europe to grow and to overcome its deficit.
Under such a scheme applied to the eurozone, the EMF would use the German euro surplus to create new sources of income and jobs in the Club Med countries, thus raising their ability to buy future German exports. In the absence of an EMF, a new eurozone economic structure which provided it with a Federal Treasury could capture such surpluses and direct them towards an ‘extended’ solidarity fund.
Too idealistic? Not at all. Just as Keynes and Marshall recognised that the failure to reflate Europe after the war might be catastrophic for the west as a whole, so Germany should draw the same lesson today – just as China now seems to be recognising that the new mercantilism leads nowhere. Recycling trade surpluses is a win-win game. Alternatively, insisting on budgetary balance will almost certainly lead to prolonged recession with high social costs.
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
Unthinkable? Hiring more tax inspectors | Editorial
Mar 13th
Improve the public finances in a fairer and more imaginative manner than slashing spending. What’s not to like?
Bingo! A particularly unpopular notion at an especially unlikely time. For the popular image of tax inspectors, one could do worse than turn to Lennon and McCartney’s song-cum-professional assassination, Taxman: “If you get too cold, I’ll tax the heat / If you take a walk, I’ll tax your feet.” And it is true that eye-watering cuts in public services lie ahead. Yet hiring more inspectors would be a smart move in these straitened times – the kind of spending that could pay for itself. Most companies see the men and women who bring in revenue as being vital to their business. But at Her Majesty’s Revenue and Customs there is a chronic shortage of staff, which has got far worse in the cuts. The Guardian’s Tax Gap investigation last year quoted an HMRC source’s estimate that there were “less than 100 inspectors actually tackling avoidance, against thousands of professionals advising companies on how to do it”. Which is precisely the point: the government is outnumbered and under-resourced compared to the City accountancy firms that help businesses and wealthy individuals to reduce their tax bills. Inspectors still in public service know that they could almost double their salaries by turning private-sector poacher. Hiring more tax inspectors is about improving the public finances in a fairer and more imaginative manner than merely slashing spending. Governments often talk about getting more cash by tightening up on tax collection; but they can’t do that without the people.
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
The full-price strategy that is making bookshop Foyles thrive
Mar 12th
New chief executive Sam Husain has focused on providing a unique customer experience and catering for niche groups
In an age of buy-one-get-one-free and half-price stickers, it is rare that a store earns shopper loyalty by selling goods at full price. But Foyles, one of the world’s oldest and best-known bookshops, is doing just that.
Few industries have been more ransacked by discount culture than bookselling but the family-owned Foyles has proudly published a Christmas top 10 sellers list in which all but one title was sold at full price.
And that is not all that sets it apart from the pack. While its rival Borders was holding closing-down sales and Waterstone’s suffered a slump so deep it cost the boss, Gerry Johnson, his job, Foyles enjoyed a bumper Christmas. The 19% festive sales jump capped off a year when its chief executive, Sam Husain – only the second non-family member to run the business – took Foyles back into the black.
“It was just keeping our nerve,” says Husain. “One way a lot of customers look at it is that an author has put a lot of time and effort into a book, and so why would you want to commoditise it to that extent?”
So while the Borders superstore across the road was running its cut-price clearout, Foyles’s Charing Cross Road shop in central London was selling Hilary Mantel’s Wolf Hall at £18.99 and Andre Agassi’s autobiography at £20. For Husain, who has steadily improved Foyles’ bottom line since he took the helm from the founder’s grandson Christopher Foyle in May 2007, it is a strategy that is paying off. It is also one that rival booksellers, not least the ailing Waterstone’s chain, will want to take a look at as they reassess their strategy of battling supermarkets and online retailers with their own steep discounts.
Husain says of the full-price policy: “If you sell too cheaply you are going to have to compromise somewhere else. And we thought, ‘Well, you can’t compromise service, you can’t compromise information, you can’t compromise your display because that’s all about making it a special place for your customer.’ So our customers, I think, appreciate that. Some of them have even said, ‘We are glad not to see those outrageous discount signs.’”
Husain’s strategy for the 107-year-old bookseller is to make the Charing Cross store and new shops at London’s Southbank, St Pancras station and west London’s Westfield shopping centre pleasant places to be. “It’s so important to have a bookshop where it’s about people coming to browse. Otherwise we’ve got competition online. It’s so important for it to be the right environment.”
For children, the right environment means a piranha tank among the kids’ shelves. For jazz fans, it’s a section selling second-hand vinyl, books and films about music, CDs and sheet music and putting on free live jazz shows in the shop’s cafe.
It is a world away from the Foyles of just 10 years ago when Christopher Foyle, grandson of the founder, took over. The store, run for 54 years by his aunt, the eccentric and autocratic Christina Foyle, was shunned by the public because of its intimidating aura, and ridiculed by the book trade. One rival advertised: “Foyled again? Try Dillons.”
Husain recalls: “You had to queue three times to buy a book. It was quaint but quite intimidating. Books were arranged oddly, they were arranged by publisher. The booksellers were not that helpful because mostly they were not employed for over a year.” (Christina Foyle refused to give them staff contracts.)
The transformation began under Christopher Foyle, who rearranged the books, refurbished the main store, opened an outlet at the Festival Hall and introduced proper accounting.
But in 2007 Foyles was still losing money and Husain, with whom Christopher Foyle shared a mutual acquaintance, was approached. He had known about the sprawling bookstore since he was a child in India and Pakistan and decided to give it a shot. “We agreed we would try it for six months. Christopher liked the way I operated and we built up this management team.” At the end of the trial, Christopher felt comfortable enough to move to Monaco and become a non-executive chairman. From there he chairs monthly board meetings via videophone and regularly speaks to Husain.
Husain has narrowed losses by encouraging managers to focus on the bottom line rather than just sales, and by cutting waste. He cleared 15% of shelf space when he joined and replaced the books with items he knew would sell.
All this coincided with the recession, but even when the low point came in the autumn of 2008, Husain refused to lay off staff. Nor would he slash the marketing budget, or the prices of the books. “The value of a book is not in price. Price is one element but it’s about service, information, the booksellers’ passion for books. All this must be engendered and developed.”
So Foyles’ new management team held its nerve throughout the downturn that claimed rivals Woolworths and Borders. By last year it had swung back into in the black with a pre-tax operating profit of £80,625. That compared with a loss of £115,491 the previous financial year to June 2008 and like-for-like sales grew 7.2% in a market in which spending on books fell 5%.
Husain is hoping to more than quadruple profits this year and wants to do so by building on the drive to sell to groups of people who will be loyal and see Foyles as their perfect destination.
London’s large Polish community enjoys a growing range of Polish titles in Foyles’ foreign language department, which also stocks Harry Potter in 20 languages and Stephanie Meyer’s Twilight vampire books in Russian.
Just below is one of the wackiest and most unexpected sections. What could have been a dry medical textbook section has medical equipment with skeleton-themed pens and Betty Boop blood-pressure kits for paediatricians, doctors’ bags, scrubs and “starter” skeletons.
One floor up the focus moves to servicing the film and theatre communities in surrounding Soho with books on cinematography and scripts for every show running in the West End. Husain also sees an opportunity to provide for the neighbouring Chinatown community.
But still Husain is uncertain about what the future holds and surprisingly pessimistic. He says: “If the digital revolution takes off, you may be talking of five, 10 years down the line, it could change very quickly. There will always be people who want physical books so we may have to shrink down, we may have to be more specialised, we may have to think of niche strategies, but we will definitely be there as booksellers online as well.”
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
‘Clients don’t pay me to feel sorry’: bond vigilante Bill Gross talks tough
Mar 12th
The world’s biggest bond investor doesn’t watch Fox News and votes for Obama, but don’t expect Bill Gross to take a soft line on Greece
Bill Gross, the world’s biggest bond investor, has not been in Greece for 15 years. Yet the welfare of millions of Greeks could improve with only a few kind words from him. Even so, he chooses not to.
From the LA offices of Pimco, the investment fund he co-founded nearly 40 years ago, Gross is sorry for the Greeks but is zealous about separating his investor from his global citizen self. He also feels sorry for millions of Britons, whose government has to pay higher interest to lure investors after he said in January that gilts were “resting on a bed of nitroglycerine”. Despite his sympathy, while in his office, which has a view of the Pacific, the investor always prevails.
“My clients don’t pay me to feel sorry, they pay me to bring them money. I am tough but I have a soft side,” Gross says. “When I go home, I don’t watch Fox [the Murdoch-owned right-wing news channel] and I vote for Obama.”
Given the choice, he would vote for Labour in the forthcoming UK election. People need jobs and the economy needs to grow, he says. “I would vote Labour. Favouring employment versus the financial markets is a decent policy; certainly not beneficial for the currency or the gilt market but beneficial for the people,” Gross says. “Good for you, go for it – but beware of the consequences.”
The prospects of low interest rates and inflation, as well as a potential fall in sterling, could lose bond investors a lot of money. These scenarios could be considered a “default” in Gross’s view – hence his comparison of Britain’s debt to volatile nitroglycerine.
Devaluation
“The UK will try to get out of 16 tonnes of debt by reflation [low rates and high inflation] or devaluation,” Gross says. “The pound is going down and they will have to keep policy rates under 1% for a long, long time because of the housing market, and because many mortgages have a floating rate.”
Gross, however, gives credit to the government for having left the door open to continuing the gilt-purchasing programme – quantitative easing – as a way to re-ignite the financial system. Despite his ferocious criticism of British finances, he admits he holds some short-term UK bonds as they are less vulnerable to inflation.
At 65, and with $2bn (£1.3bn) to his name, Gross’s idea of a fun weekend is to have a $12 dinner with Sue, his wife of 25 years, in the local El Torito Mexican chain, and dedicating time to golf, stamps and his three children. All of them are artists, encouraged by their father, who thought his big shadow might bring them more pressure than help. Son of a steel sales executive who moved from Ohio to San Francisco when he was 10, Gross landed in bonds by chance – he was unemployed after finishing an MBA at UCLA, when his mother found an ad for a junior credit analyst at Pacific Mutual in Newport Beach and encouraged him to apply.
Forty years and some $1trillion under management later, Gross still works from 4.30am to 6pm and has a small circle of friends. He doesn’t like to socialise and hates cocktail parties. He admits he is not a “people person”, although he declares himself anything but a “stuffed-shirt Wall Street-type”.
Mild mannered and shy, he is proud that his trading room is quiet, far from Wall Street’s tension and aggression. Interested in people above all, he studied psychology at Duke University – although he never thought human behaviour would affect finance so much.
“It gave me a window of interest into ‘animal spirits’ [Keynes' phrase for naive consumer confidence],” he says. “I am not a quant [quantitative analyst], I don’t have a 150 IQ, so you behave according to where you are, and I tried to put an amount of suspicion in the modelling of anything. The model could get broken by animal behaviour.”
He did not trust the investment bank models that so hugely overvalued toxic assets – one factor leading to the credit crunch. But now the worst recession since the second world war will put an end to the financial extravagance, he says. “It was a terrible display of excess and greed. Wall Street has had it too good for decades, it’s time for Main Street to go on the ascendancy.”
Time for people
Markets will be downsized by regulation, even if governments are slow in applying new laws. “The sun is not setting on Wall Street – there will always be sunshine on financiers – but high noon is in the past. It’s time for ordinary people to benefit.”
Governments should raise taxes on bankers, who “don’t deserve all this”, Gross says, including himself. “I don’t need so much,” he says. Economies such as the UK and the US should look to making “things, rather than paper” to prosper. “The bubble was reflective of wealth as a function of house prices and derivatives – that’s not wealth. The Chinese are showing us what wealth is: transforming creative and well-trained work into exportable goods.”
Gross says speculative products, such as the instruments that investors buy to protect themselves against a sovereign default, should also be withdrawn, backing a recent call by Germany and France, whose leaders have criticised speculators who use this market to bet against a country, most recently, Greece.
But Greece, as well as Spain, Britain and Portugal, have a bigger enemy than speculators: the bond vigilantes, or activist bond investors, of whom Gross is an arch-exponent. With funds worth almost half the size of the UK economy, high-deficit European countries need Gross, and the 15,000 investors who follow his podcasts, to buy their bonds.
This year alone, Britain is due to raise £220bn to pay for bailed-out banks, rising unemployment and falling taxes. Calling Britain a “must avoid” area, and one of the highly indebted countries that Gross calls the “ring of fire”, doesn’t help governments market their bonds.
Asked whether he’s tempted to show some sympathy for Greece to help the country regain investors’ confidence, he is adamant: “No. We’ve seen this game before – politicians talk it up and it’s back to normal; they want to bring the vigilantes to their money. I’ve seen this in California over the past 20 years – it has been the biggest chiseller of all for a long time. Why should we be willing to jump into this water tomorrow? I feel sorry for the people because their standards of living will be affected. But Greece has stretched to the extreme.”
Gross wants action. “Governments want to convince lenders they’ve been to rehab and now they’re going straight,” he says. “But like in the AA [Alcoholics Anonymous], just because you’ve been to a few meetings I’m not going to give you a full-time job.”
In the small office he only uses when not sitting in the trading room, Gross has a picture of the US banker JP Morgan, with a quotation about lending on character, not assets. He’s had it for 25 years and still follows the principle: he won’t buy gilts and Greek bonds until he sees real budget cuts. Still, his much-admired Germany, “the literal head” of the European Central Bank, could help by “loosening up its monetary policy, or giving up its dream of union,” he says.
Allowing Greece to default “would be like Lehman … it would destabilise the UK and other sovereign markets”. A blackjack player, he says the Germans are “talking a good game [but] Pimco isn’t buying it. Europe is all caught up in politics. Europe is a family – but a dysfunctional one.”
The world’s ultimate vigilante, he can smile as he says: “Our money is directed to countries where fiscal conservativeness is valued over growing deficit financings – you couldn’t expect a bond person to think otherwise.”
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
Forbes rich list is Slim pickings | Richard Adams
Mar 11th
Only lack of ability, inheritance and money keeps the rest of us off the Forbes list of world’s billionaires. It’s not fair
There’s a scene in the satire How to Succeed in Business Without Really Trying in which two workers are vying for promotion. When their manager tells them he will award the promotion on the basis of merit, one of the workers – who is the chief executive’s nephew – complains: “That’s not fair!”
Similarly, looking at the latest Forbes list of the world’s billionaires, it’s just not fair that rich lists should be confined to only those with the most assets. What about the rest of us?
Looking at this so-called “list” of billionaires, there’s a strong theme in that all of them appear to be very rich indeed. But what else sets them apart? And how did they get to be so rich? More importantly, how can the non-billionaires among us get some of that action?
1. Invent something
Inventing things seems to be an aid to acquiring shedloads of cash. Hence, Bill Gates, who invented the computer with Al Gore and Alan Turing, is second on the list. Also, Warren Buffett, who invented the buffet style of dining, is number three.
Then down at number 11 is Ingvar Kamprad, who invented flat-pack furniture, a simple idea of selling sawdust-planks encased in cardboard. Just buy enough of those “packs” and stack them on a floor and you have a bench. Put a mattress on top and voila: a dining table. Kamprad’s genius was to sell these planks with random assortments of screws and brackets, along with keys belonging to a guy named Alan and “instructions” – or to use the Swedish term, “Rappakalja Ikea dumheter” – that show a man smiling with a screwdriver and then a line drawing of the finished product without any intervening steps. He gave them exotic names such as SKRÄP and GOJA … and the rest is history. Also, excellent meatballs.
2. Come from a rich family
Coming from a rich family appears to be a useful encouragement to becoming rich yourself. Extraordinary. Maybe all that money rubs off on you? Yes, nothing helps like being able to say: “Hey mom, pop, can I borrow the car? And $500m?”
That doesn’t mean that some of the wealthy families on the rich list didn’t start from humble beginnings. Look at the list’s entries for billionaires 12, 15, 16 and 18: the Walton family. Many readers will recall how the Waltons struggled during the Depression and the saw-mill business that Paw and Grandpaw worked so hard on to make ends meet. Well, the family turned that reality TV show into mega-bucks thanks to founding a chain of cut-price mega-stores known as Wal-Mart. (One question: why doesn’t John-Boy appear on the list? He always seemed like the clever one.)
3. Be American
There’s been some concern among American bloggers that the US has lost its No 1 billionaire spot, now that Carlos Slim, the legitimate Mexican businessman, is top of the Forbes list for 2010. Many of them blame Barack Obama’s socialist regime of crippling public healthcare for this. And yet, being American still seems to be a big help nonetheless, based on the fact that Americans make up the single largest billionaire nationality: 400 of the roughly 900 billionaires in the world (measured in US dollars, naturally). Also, Carlos Slim, being from Mexico, is North American (true fact) and that’s practically the same as the US, and anyway President Clinton signed that secret treaty known as Nafta which merged the US, Canada and Mexico into one country. USA, still number one!
So here’s our recipe for billionaire success: get born into a rich family, invent something and sell it to Americans. Win.
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
The economy: Bad tidings | Editorial
Mar 11th
Gordon Brown’s best chance of winning the election is to keep warning that the Tories would rein in spending too soon
Warning: what follows will depress you. When Gordon Brown said yesterday that “there are still real risks to the recovery” he was if anything understating the hole the economy is in. As chancellor, Mr Brown was often surprisingly accurate in his economic forecasts (it was the tax revenues he overestimated, but that is another story); yet this rather gloomy prediction – an extraordinary statement to make for a party leader going into a general election – may if anything prove to be not gloomy enough.
Consider a few scraps of recent economic news: over two years of the pound dropping like a stone – and exports in January suffered their worst drop since the summer of 2006. Yes, the medium-term outlook is slightly better – but it is still not healthy. What about the housing market, that traditionally go-go area of the UK economy? Well, the mini-boom of last year appears to have puttered out, going by the recent slide in approvals for mortgages. Again, that may improve – but low interest rates are not working their usual magic (something to do, surely, with the high-street banks not passing on the easy credit they have been getting from Threadneedle Street). Look too at the results from Northern Rock yesterday which indicate that without record-low rates and a lot of forbearance by the mortgage lenders home repossessions would be a lot higher.
As for the rest of the world, in the former powerhouse economy of the US, Wall Street is enjoying more stable banks and a tearaway stockmarket – but the housing market (which is where the global economic crisis began) is in deep trouble. Repossessions are at an all-time high; home sales are plunging (again, despite a record-low Fed funds interest rate) and the house-building industry is on its back. Consumers in Germany have gone awol. One can point to explosive growth in China, and a relatively healthy Indian economy – but these are not major markets for British exports. The brute fact remains that unless and until the western economies pick up, the UK’s best hope is to continue on state life support.
The recent spurt of relatively good economic news (the confirmation that the UK is out of recession, a few positive business surveys) may now be followed by a stream of bad tidings as the various bits of fiscal stimulus are suspended and banks continue to be miserly with their loans. For Mr Brown, this means his best chance of winning the election is to keep warning that the Tories would rein in spending too soon and too unfairly and hurt the worst-off. That is broadly true, but Labour should lighten the gloom with some proposals for how it will rebuild a shattered manufacturing base and an economy still too dependent on the City.
guardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds
Don’t celebrate these billionaires, be horrified by their existence | Will Hutton
Mar 14th
Posted by Will Hutton in Business
No comments
It’s just accepted that more billionaires of any hue is a sign of economic vitality. Wrong
Last week offered a chance to collectively gawp at the super-wealthy. Mexico’s Carlos Slim and the US’s Bill Gates were in a run-off to be the world’s richest billionaire in the Forbes list of the 1,011 people with personal wealth in excess of a billion dollars. In the event Slim’s $53.5bn just pipped Gates’ $53bn. It was a moment of symbolism, opined the global commentariat. The economic baton was passing from the US to countries in Asia and Latin America. And we all could relax; the numbers of billionaires was growing again – proof positive that the global economic machine was picking up.
It is the ultimate degeneracy of the age. There is little critical appraisal of billionairedom. It is just accepted that loadsamoney, capitalism, jobs and economic progress are indissolubly linked. More billionaires of any hue is a sign of economic vitality. Lucky Mexico for coming up with the winner. But wealth is not connected to economic progress in a linear way. Wealth can come from productive or unproductive entrepreneurship. Society wants the former and deplores the latter. If you want to be seriously wealthy the message from the Forbes list is clear. One way or another you need to have played the system, played the financial markets, been born to the right class or manipulated government to have got rich. This is a list of expropriated wealth on a Midas-like scale. Marx will be grimly smiling in his grave.
Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list. But a depressingly large number constitute a ragbag of monopolists, oligarchs gifted assets and profits by the state, mega-financial engineers or just family plutocrats. And once on the list you tend to stay there; there is little churn. The arteries of capitalism are hardening.
Sixty-two of the 1,011 are Russian oligarchs. Twenty eight are Turkish oligarchs. Even Carlos Slim made his fortune from being the monopolist who controls 90% of Mexico’s telephone landlines and 80% of its mobile phone subscribers. The OECD notes that he charges among the highest usage fees in the world. But hey! He is a billionaire and what matters today are his riches – not the manner in which the money is made. He may have started out as a productive entrepreneur. Today he is using his power to expropriate wealth on a mega scale.
The contrast with his rival Bill Gates could hardly be greater. Microsoft may have had its head-to-head confrontation with the EU Commission over anti-competitive practices, but Gates built his company by innovating around one of the great historic general purpose technologies. Information and communication technology is like the railway, internal combustion engine or air travel – a technology with massive spill-overs and implications for society. It is a classic example of productive entrepreneurship. Gates may not deserve $53bn, he was lucky to be in the right place at the right time with a great university system around him, but he undoubtedly deserves to be rich. Both Gates and Slim are exploiting their market position to get above average profits, but one is more overtly political than the other. Put another way, Gates has grown the economic pie. Slim represents a tax on it.
The good news for the US is that even if its share of global billionaires has fallen to 40%, a disproportionately high share are still productive entrepreneurs. There are figures on the list – like the Walton family riding high on Walmart – who have inherited their money, but most have made their fortunes from socially and economically useful activity and whose profits and market position are being actively challenged in the market place. A large proportion of the Indian entrepreneurs are in a similar position, although the relationship with the Indian state is sometimes more murky. Mukesh Ambani, complete with his 70-storey home in Mumbai, may be extravagantly wealthy at number 4 in the list, but like the number 5, Lakshmi Mittal (who has British residence) he has spawned an industrial empire that is generating jobs and wealth. The productive entrepreneurship spells long-term good news for the US and India – less so for the countries whose billionaires are politicised oligarchs and monopolists.
But strangely not even Forbes magazine makes much of an effort to distinguish how the billions are made. The great truth of capitalism is that it took off only once the European Enlightenment created the great institutions that kept it honest – the rule of law, a free press, accountability mechanisms, ways of forcing monopolists to give up their ill-gotten gains, creating competitive markets and elections. Before that there was tax-farming and the buying and selling of monopolies – rather as in China today. The Enlightenment offered the means, however imperfect, to challenge all that. The great mistake of the free-market revolution was to argue that all that was needed to make capitalism work was free, lightly regulated and flexible markets – and that institutions imposing ethics, transparency, accountability got in the way. We now know better.
Britain’s representation in the Forbes list is particularly depressing. Our members include a bunch of property developers, tax-avoiding retail magnates, the Duke of Westminster, a hedge fund manager and Richard Branson. Branson is probably the closest we have to a billionaire productive entrepreneur, but his companies are hardly at the forefront of technological innovation or employment generation. He glamorises – but does little to grow the economy. We do not have one genuinely productive entrepreneur on the list.
In many respects this forms the heart of the British crisis. Our political class bought the proposition that whatever the source of wealth economic progress would follow, celebrating the Mayfair hedge fund manager more than the genuine innovator. Watch the British government now fight on behalf of hedge funds against EU regulation. Only at the eleventh hour, with some of Lord Mandelson’s speeches and initiatives, together with David Cameron commissioning a useful report from the entrepreneur James Dyson, Ingenious Britain, is there any sign of change. But it is a deathbed conversion. The electorate, angry and bewildered, want a conversation about creating wealth and jobs, rewarding those that do rather than those that speculate and rig markets. Instead they are offered platitudes and bromides.