Liam Halligan has a reputation as a straight-talking, logical and insightful journalist and this piece is no different. In his piece in The Telegraph Halligan discusses the present banking system in place in the UK and more specifically highlights the link between Investment and retail divisions. He goes on to explain and clarify that only complete separation will ensure catastrophic government bail-outs will not occur in the future, which could potentially save taxpayers billions. I’ve touched on this issue here.
Hello world. This weeks read is from The Guardian and it confirms the unfortunate reality of long and sustained periods of austerity having an adverse effect on economies. This Red Cross study focuses on Europe and highlights a notion I have been writing about for a while now: austerity alone will not result in growth.
Technically we are no longer in a recession, but the slow economy, the stagnate demand and the prolonged miserable feeling in society does make it feel as if we are in one. In the likely event that there will be recessions in the future, follow these steps and you’ll have more than enough tools to make the most of what are difficult times.
1) Stay positive. Maintaining a positive mindset is critical to ensuring the negative economic activity does not have the desired impact. Yes one must be realistic and admit things like credit will be harder to obtain and jobs are more difficult to get. But staying positive about what you do already have, i.e. a good education and ambition should provide a solid foundation on which you could make yourself exempt from the negativity associated with a recession.
2) Work hard.Nothing can beat putting in a solid shift and few things are as rewarding as when you focus on a goal and achieved it through sheer hard work. Moreover, the difficulties of the current situation ensure that there has never been a more important time to work hard. It sounds a little condescending, but rest assured, it is a quiet and effective remedy that could set you apart from others. It applies to any field, any occupation and it has proven results. Working hard is even more important during a recession. Hard work always pays off.
3) Try to save for long-term gain. As there is less economic activity going on, the majority of society is simultaneously feeling the effects of less demand; therefore people’s consumption patterns tend to be the same. Therefore, now is a better time than any to put some money away. This idea may seem paradoxical in nature, the fact is when an economy has weak demand you want people spending, not saving. However, on a personal level, those that have utilised savings in the past often enjoy consumption more, mainly because they can afford more, because they have saved. This step does involve sacrificing certain goods or activities but if you think long-term, then it will prove to be an essential method of making yourself recession proof.
4) Invest in yourself. This is open to interpretation, but investing in yourself, i.e. increasing your skill set is a valuable way to make yourself more employable, make you feel better about being you and you’ll have a new skill/skills for life. People should always look at ways they can improve. There are thousands of free online courses, podcasts, ebooks and so on out there for people to utilise. Gone are the days where education was exclusive to classrooms. Make the most of it.
5) Pay attention to the media, but put issues in a personal perspective. Ensuring that you are well-read, clued up and know various facts about an issue will help you deal with it a lot better. However, there is a real danger that the media goes from informing to dictating certain views and on economic issues, this can be detrimental. So always remember to take issues on the economy with a pinch of salt as the news deals in aggregates and cannot accurately factor in individual households. You can however, so ensure to use the media to your advantage.
How did the global financial crisis result in large government sector cuts?
The events of 2007 are very well documented. There has been a plethora of texts published, journal articles, books, magazine articles etc. dedicated to covering the horrific downturn of several leading financial markets in 2007. The crash ensured that several billions worth of Sterling, Dollars, Yen and so on were given to numerous financial institutions that were deemed “too big to fail.” The term “too big to fail” is theoretically questionable to say the least, a point I shall discuss further as this piece develops. The significance of the bailout funds were the fact that they were generated from taxes. What was clear however about the government bailouts, particularly in the UK, was the fact that institutions such as Northern Rock (now Virgin Money) and RBS would have collapsed had the government chosen to ignore their pleas and let them fail. It is worth remembering that between 1995-2006 a period of unfettered market capitalism allowed substantial financial products to penetrate several economies. A brand new phenomenon that several households had very little exposure nor knowledge too. It would become clear in the years to follow that this imperfect information would have devastating effects on the entire global economy. This period where credit was “pumped” into the economy was truly unique.
Stock crash
Austerity policies have been discussed in some depth on this blog, my pieces here and here are pieces I wrote, I attempt to ask certain questions about government policy and question the notion that government policy could actually be having an adverse effect on the UK economy. The UK (much like the rest of the areas affected heavily by the global banking crash) have adopted a set of rigid public sector cuts, designed to reduce the large dependency on government for goods and services and also because the current government deem the current debt-to-GDP too high. (86%)
If one were to assess austerity in the UK so far could anyone deem the set of policies a success? Of course, the government intends for their policies to have much longer effects, a legacy effect if you will, but that should not come at the peril of current generations, for governments should dictate policy for both now and the future. Moreover, economists such as Stiglitz, Krugman, Solow, Diamond, Sharpe, Skidelsky and several others all warned against excessive fiscal cuts. There is no empirical evidence of any large economy cutting its way to prosperity. Yet what could easily be described as a gamble or the set of ideologically driven policies have ensured that in the UK and much of the developed world have had their economies remain flat since 2011, having slumped from 2009-2011.
In 2009 the rhetoric around fiscal policy changed. If you go back to Tony Blair’s premiership I do not remember anybody on either side of the House quibbling about government spending, in fact the opposite. The then Shadow Chancellor of the Exchequer George Osborne stated that he would match Labour’s spending. Spending he would later tirade about once he became Chancellor. Moreover, Labour made several economic mistakes one of them was the heavy deregulation of the financial markets that actually allowed a steady and then volatile flow of cheap and available credit to flood the economy. Too many people binged on cheap and available credit and several institutions capitalised on this and were making substantial profits as a result. Making profits is part of our societal fabric and that is not my issue, but in the business world, if a firm does not make profit, eventually that business is driven out and replaced by one that will. This to me that is the essence of capitalism. Why then was RBS, Northern Rock or Lloyds bailed out? Okay, anybody with an account with those firms would have lost their money, which is very unfortunate, but in a market economy, an economy In which proponents of free-market capitalism constantly bombard against government interference, where more than happy to accept taxpayers money. Some clarity would be great because these are the same institutions that support, lobby and advocate for laissez faire policies yet accept the ultimate form of government intervention. This anomaly still baffles me and it is unfortunate that we are still paying the heavy price for the actions of a few financial institutions. Moreover it was the substantial bank bailouts, not excessive government expenditure that caused such a sharp rise in the high levels of public sector debt. Debt that is being tackled with austerity policies. Nothing should ever be “too big to fail” because that is the antithesis of a competitive free market, the kind of market that is encouraged in the UK. The government should have let the failing banks fail so other banks could learn that reckless and irrational behaviour should not be tolerated. It would have been a message of biblical proportions. Without bailing the banks out we would not need austerity and six years and more of lost or flat output. It appears that policy has not favoured the majority of the population who are still readjusting to the large structural changes that have taken place since 2009. The graph below is an economic outlook for the UK and makes for miserable reading.
My main qualm lies with blaming government spending. I have maintained from the outset that some government cuts are good, just like in a household or with your personal consumption; you assess what you are spending and cut what is not required. Fair enough. The extent at which the government in the UK and in several nations in the Euro Zone has undertaken huge public sector cuts and perhaps more importantly, the rate at which they have penetrated society is likely to have long lasting negative effects. So far they have proved highly ineffective in producing genuine economic growth as the graph above displays. It should be noted that anything above zero is “growth,” however, in reality people need what I call tangible growth. If more buildings go up, more roads are finished, more bridges and so on are completed then people up and down the nation will actually see growth for themselves. Obviously all those examples require large labour input. We have not had enough of that in the UK. Those examples also highlight investment and investment has what we call in economics a multiplier effect. Simply put, the government spends £1, that £1 generates more that the initial £1 invested say another £1, then the additional £1 can be reinvested on top of the original £1, so the good or service can generate a much higher multiplier, say £3 in the future. What is important is that it comes from the initial £1 investment. This period (2007-period day) of flat economic activity has needed and needs fiscal investment.
Even with an extremely accommodative monetary policy in the sense that the interest rate has been 0.5% since March 2009 the government’s reluctance to deviate away from an ineffective set of policies is detrimental to the economy. Now is as good a time than ever to undergo strategic and logical investment programmes. Instead, the large public sector cuts have actually been damaging to the government’s deficit reduction plan because unemployment is rising, therefore, transfer payments in the form of Job Seekers Allowances and Unemployment benefits have increased. If the government were to run public sector cuts with substantial investment programmes and run them simultaneously, shifting resources away from areas deemed to be wasting government funds and invest in areas with high returns this would be a better set of policies. Instead, we just have the negativity associated with public sector cuts, which has made the private sector less responsive as a result of the lack of economic activity and weak demand from majority of the public.
It is impossible to cut your way out of a recession; nations need to invest wisely in order to grow. America pulled itself out of recession because their production levels in the late 1930s and early 1940s substantially boosted their economy. The point is, they invested. There was an economic crash and the government invested. The New Deal (America’s recovery plan) took several years to have a noticeable effect on the economy, but it was investment that helped aid their recovery.
The government’s gamble still has not paid off and the UK does not appear to be changing any time soon. Governments need to spend in order to get a return. Without it, our economy shall remain sluggish for some time and this is a direct result of the aftermath of the global banking crisis, not excessive government expenditure.
Another great piece from Quartz.com. This piece highlights the fall in UK manufacturing. The UK economy has shifted substantially from manufacturing to that of one that is more dependent on services. In terms of a mulitplier effect, manufacturing tends to have a greater effect on the economy, in the sense that manufacturing requires more investment and generally speaking, it creates more jobs.
Although this interview was conducted some twelve months ago Professor Krugman’s arguments about how to end the Great Recession are more potent than ever. Professor Krugman is a well known Keynesian and he has been advocating for more government expenditure. Although the government in the UK are extremely unlikely to change from its programme of fiscal consolidation, empirical evidence does suggest that substantial government spending is the most effective method to restoring economic growth during a recession. Krugman used the example of America post 1930 and Roosevelt’s “New Deal,” an economic plan designed to boost the American economy through government spending.
Hello world. As I mentioned in a previous piece I wrote in October 2012 the Euro zone is in a precarious economic and social position. Having said that, some of the highest earning CEOs reside in the nations most affected by the fiscal consolidation polices being adopted within the area. These policies have contributed to the huge levels of unemployment and led to high levels of social discontent.
This piece is from global economic website Quartz. Take a look.
Globalization has ensured that international borders are heavily relaxed so large and profitable domestic firms from one nation can pursue business interests in other nations without compromising domestic business interests. Several large multinational firms conduct business in several nations and this has become normality in today’s world. It should be noted that large market share of the respective market and large profits are usually strong motives for large firms to pursue business in other nations.
Culture is a complex, multidimensional concept that is crucial to conducting global business. It is a learned, shared, interrelated set of principals that bind members of a certain society. These principals, beliefs, symbols and so on are often embedded into the fibre of that area and amongst certain people, so you could suggest that business must be pragmatic and adopt a polycentric approach in order to fit in as opposed to trying to dictate or impose itself on that culture, especially during the preliminaries of entering a new market. Regardless of firm size, experience, or product or service, cultural implications have a huge impact on longevity and reception to a new brand and failure to understand will almost certainly lead to an exit.
TESCO is the largest supermarket in the UK and they had to pull out of the US market due to “disappointing” performance levels. From 2007 to 2013 TESCO had operated under the brand name of Fresh & Easy. They decided to close some 199 stores across the US. This was also the case for Wal Mart, whose attempts to penetrate the German market ended woefully back in 2006. No matter the size of the firm, or profit levels, a concise and accurate understanding of the cultural differences of the market one wishes to enter is fundamental when conducting global business. TESCO and Wal Mart’s failure to recognise this has led to their respective exits.
McDonalds understand the importance of serving your hosts.
Wal Mart is the largest supermarket in the US, when they wanted to expand into the UK they acquired the well-established firm ASDA. ASDA is still one of the largest supermarkets in the UK and business has been a moderate success. However, Wal Mart’s attempts to enter the German market proved that their myopic and frankly arrogant approach demonstrates that large profits in one market do not always translate to another market. Despite huge levels of revenue and profit, global business cannot function if one domestic firm tries to impose its values onto another culture. It is simply not compatible. Even though Wal Mart has stores in Argentina, Brazil, Mexico, China, Japan, Canada and Puerto Rico, their failure to break into the Europe’s largest economy will have damaged morale amongst senior members of their board.
Acquisitions provide several benefits and the ASDA case proves this, but When Wal Mart tried the same approach in Germany it impeded rather than aided their business. They purchased two second-tier stores, Interspar and Wertkauf. Both of these stores were mainly located in poorer areas and were geographically dispersed, it made business far from easy.
They arrived in Germany in 1997 and established firms such as Lidl, Metro and Aldi already posed a threat, but their board members assumed that their high profits would be sufficient and they could simply expand and take their competitors market share, consumers were loyal to their competitors however. They also tried to import many American traits into the German market and it was not understood. An example of this was 24/7 and Sunday shopping, although ASDA was the first to adopt the 24/7 model, culturally, the UK and the US are extremely similar, so the UK’s acceptance of this came as no surprise, in Germany however it was not the case. It was tremendously unpopular and highlighted a waste in resources.
Culturally German consumers prefer to bag their own goods, a simple study of behavioural traits prior to entering the market would have identified this, but their insistence on bagging their customer’s goods had an adverse effect, often putting people off their stores. Also, when Wal Mart managers insisted that their staff should smile at the customer again this put off many customers. And again, simple preliminary market research would have alerted them to this. According to Peng (2009) they left the German market with just 2% of the overall market share.
Wal Mart also hired an American to head their operations in Germany. Speaking English was a requirement and it damaged morale amongst senior members of the workforce. Productivity suffered as a direct result of the low morale.
Blockbuster Videos also ventured to foreign markets, they entered the Japanese market in the early 1990s and hired several Japanese senior managers to oversee the transition of the new venture. This enabled business to be cohesive and allowed their American counterparts to learn about the new market, Wal Mart’s approach was clearly wrong, one of several mistakes they made and highlights the need for a true understanding of cultural differences.
The TESCO led venture ended in failure for the UK giant
Despite having monopoly power in the UK TESCO could not gain any significant market share in the largest single market in the world.
According to BBC, Ajay Bhalla, professor of global innovation management at Cass Business School, said that at the root of Tesco’s US problems was a failure to understand that the US retail landscape is different from the UK’s.
“The falling star of Tesco in the US is a harsh reminder that scale [economies of scale] is not the recipe for sustainable value creation. For years, Tesco managers paid attention to perfecting the mix of supplier driven cost efficiencies with low prices.
Tesco’s exit from the US is a reminder for managers of the dangers of going blindly for scale and cost leaders, the wheels of which are difficult to reverse if you need to change course to becoming a retailer known for first-class customer experience.”
Understanding and appreciating cultural differences is critical to conducting global business. Without a sound understanding of the new market any firm, regardless of size, product or experience will find it almost impossible to conduct business in that market, hence knowing how deal with potential cultural barriers will alleviate several problems and ensure business can go on.
This is an excellent piece relating prostitution and the public sector cuts. This blog is intended to highlight how significant economics and economic decision making is and how it affects every aspect of society. Thus, no part of society is exempt.
Learning from the past is often the best way to prevent future tragedies but the similarities between the EMS crisis of the early 1990s and the current Euro zone crisis is uncanny. I think there are certainly lessons that should have been learnt from that episode that should have reduced some of the damage the Euro zone is facing today. This is part one of a two part special on the lessons the EU should have learnt from the EMS crisis.
The fundamental aim of the European Monetary System (EMS) was to consolidate the process of monetary integration amongst member states through monetary stability. Increased economic stability would ensure relatively smooth movement of capital, goods and services that would lead to increased intra-national trade. Additionally, the EMS was devised in order to establish a coherent system in which exchange-rate fluctuations were centralized and reduced in order to promote and maintain stability within the European Union. EU members were advocating for a system of governance that would establish economic cohesion, minimalize exchange-rate uncertainty and safeguard themselves from external shocks. The EMS system could be seen because of the failure of the Bretton Woods system that left many European nations somewhat disillusioned with a scheme that placed international monetary fundamentals in the direct control of the United States.
The EMS comprised of two main mechanisms, firstly there was the creation of an artificial unit of account named the European Currency unit (ECU) and a fixed exchange-rate system named the Exchange Rate Mechanism (ERM). The ECU was a unit of account rather than a medium of exchange, although, it shared the similarities of a common currency, no coins or notes were issued. In effect, it was an accounting unit, which all member currencies were expressed. Nations were allowed to fluctuate within the specific limits of ±2.25%. Additional features of the EMS included the Divergence Indicator and The System of available Credit Facilities. The Divergence indicator was measured in terms of ECU to enhance economic coordination. Hence, it measured the divergence of a nation’s given market rate with the central rate. Despite the system of available credit never coming to fruition, the ECU, ERM and the divergence indicator were mechanisms designed to enhance economic integration and more specifically exchange-rate stability amongst member states.
The importance of the ERM cannot be understated because the very nature of the EMS was to strengthen monetary integration by enhancing stability for member nations. Thus, the systemic failure of the mechanism is arguably the most significant factor contributing to the EMS crisis. The ERM adopted an asymmetrical system in which the Deutsche Mark became the reserve currency, in effect, the members of the ERM handed substantial monetary control to the German monetary authorities. Germany assumed a role similar to that of the United States in the Bretton Woods arrangement. Because monetary authority was effectively concentrated with Germany, when its own domestic interests conflicted with that of other ERM members, it caused severe economic shocks. Both Jones (2001) and Copeland (2005) concur to the suggestion that the domestic economic issues in Germany caused the greatest threat to ERM stability and thus the EMS came under severe threat.
“Because the DM was the linchpin of the system, the fate of the ERM was greatly influenced by developments in the German economy.” (Jones 2001, 56)
The reunification of both German states had severe economic consequences on the ERM members. Firstly, the amalgamation of a large and wealthy nation with a small and less economically developed one had an impact on West German current account. In order to make the transition function, the West German government transferred savings revenue to the East, and the government budget deficit rose from 5% to 13.2%. (Weerapana 2004, 4). This reduction in economic power as a result of the increased structural deficit forced the Bundesbank to increase interest rates in order to reduce inflationary pressure. Unemployment in the UK in 1990 (the year in which they joined the ERM) was 7.1% (Eurostat 1990). Because the UK had effectively handed monetary control to the German authorities in the sense that exchange-rates were determined by the ERM as oppose to the UK government, there was very little in terms of expansionary monetary policies that the UK could adopt.
Moreover, it is likely that the Conservative government at the time would have opted to devalue the Sterling in order to stimulate export demand, which would have increased economic growth through high levels of investment and thus job creation. However, this was not the case and it highlights one of the main problems with the ERM, conflicting monetary interests from nations with contrasting monetary agendas. The dominant German authorities had no incentive to reduce interest rates; the reunification process meant that saving revenue had to be released in order to bring the East German economy to a competitive level, hence high interest rates in order to reduce the internal government deficit. Furthermore, this is a clear example of one of the mechanism’s fundamental macroeconomic failures; it was created in order to establish economic cohesion through marginalizing exchange-rate fluctuations but it left the UK facing high levels of unemployment and high interest rates, due to the lack of economic stability because of a conflict in economic agendas.
On Wednesday 16 September 1992 the UK was forced to withdraw it’s currency from the ERM. Not only did this event drive market confidence extremely low, mainly because of the interest rate fluctuations, which in turn lead to speculative attacks[1] on the currency, it also had severe economic consequences for the domestic economy. McDonald and Dearden suggest the UK currency was increasingly vulnerable to speculative attacks:
”For the UK, international investors watched as growing political pressure to address the recession forced the Government into a series of interest-rate cuts between October 1990 and September 1992.” (McDonald and Dearden 2005, 90)
There are various similarities with the present crisis. If Greece were to leave the Eurozone and affectively the EU, the costs of such a decision may be politically detrimental, but economically beneficial. When the UK left the ERM the decision damaged their economy in the short-run, unemployment levels were high and investment confidence was low, the years following however, saw the economy recover rapidly. Figure1.1 displays the steady fall in unemployment after 1992.
Eurostat.
Monetary integration had always been an objective for European nations. In order to establish and maintain economic stability within Europe and particularly the EMS zone, domestic nations had to merge monetary policies in order for their goals to be achieved. Hitiris suggests that four fundamental principles were adopted in order for this process to occur; “free trade in goods and services and free mobility of capital and labour.” (Hitiris 2003, 128)Domestic currencies could therefore be viewed as a barrier to achieving these economic goals. The realization of an economic monetary union was perhaps best formulated in Jacques Delors[2] report of 1989. The report made several recommendations to improve the efficiency of European monetary affairs through the convergence of macroeconomic affairs. The general theme of the Delors report was clear, the extension of a united economic European union, with little or no barriers preventing the flow of capital between member states.
[1] The most famous example of an individual profiting on short-sell Sterling was George Soros who profited just over $1billion on ‘Black Wednesday.
[2] Jacques Delors was the President of the European Commission from 1985-1995. It was under his premiership that a proposal for a common European
currency and more importantly, a European monetary union was to established. He was the first President to serve three terms.
The Conscience Blog 