At the start of the year I made 14 predictions for 2013.
Here they are.
First, four forecasts for the economic movements of 2013.
At the start of the year I made 14 predictions for 2013.
Here they are.
First, four forecasts for the economic movements of 2013.
This week I’m travelling across Asia, soaking up the changes and developments here.
What’s intriguing is the first debate is about the ASEAN economies and how they are adapting to change.
The speaker is a highly respected Professor and Economist, and he talks about how the world is changing from a US-axis focus to a multi-geographic focus where Asia’s centrifugal point was Japan but is now China; Europe’s is Britain, France and Germany; the North Americas is America, whilst the South is Brazil; not forgetting an African continent dominated by South Africa; and a Middle East focused upon Saudi oil.
I was just analysing the Banker’s annual tome: the Top 1,000 banks.
It’s a serious piece of research and represents many years of trends and change (I’ve personally now been tracking the Top 40 banks from this list for the past twenty years!).
This year’s figures reinforce the things I’ve been expecting for some time: that China’s banks now rule.
This week is Asia week, with a brief jaunt to open the Terrapinn Cards & Payments Summit in Singapore, followed by engaging in the Asian Banker’s Annual Summit in Jakarta.
I always enjoy visiting Asia as you gain unique insights you don’t see elsewhere. Over the past years, Asia is where I first saw NFC/RFID (Octopus, Hong Kong), mobile wallets (Edy from NTT DoCoMo, Japan), mobile banks (Jibun Bank and eBank, Japan), virtual currencies (QQ, China) and QR codes (Tesco, Korea).
There’s far more that Asia shows me, so this will be an exciting week.
The week starts with the honour of being asked to cut the ribbon to officially open the Exhibit Hall at Cards & Payments ...
... and what I note straight away is a focus upon RFID chips and M2M (Machine to Machine) transactions.
Time to head home after a day in India at the launch of the new design centre for finance launched by Polaris Financial Technology in Chennai (Madras for the old folks out there).
As you walk into the Design Centre, you are greeted by a map of the world ... completely made out of Indian Rupees!
A fascinating trip, not least because Polaris has injected something into software development that I have not seen before: creativity.
This was clearly demonstrated by Michael Harte, CIO of Commonwealth Bank of Australia (CBA).
Over the past five years, he has replaced the bank's core systems, moved much of the banks services to the cloud, created many apps and innovations that have given CBA global recognition and more.
OK, OK, it’s time to get down to the real business of blogging, banking and bonuses. As per my usual form, here are four specific forecasts for the economic movements of 2013:
So what’s the year been like from an investment view?
Hmmm, well at the start of the year everyone said invest in America and, looking at the returns from the US markets, they may well have been right:
Closing prices 31 Dec 2011 17 Dec 2012 % change
Dow Jones Industrial Average 12,217.56 13,235.39 8.3%
NASDAQ 2,605.15 3,010.60 15.6%
S&P 500 1,257.60 1,413.54 12.4%
FTSE 100 5,572.30 5,932.96 6.5%
Gold 1,566.80 1,700.76 8.5%
Japan has so much culture, tradition, beauty and … downright weirdness.
I spent the weekend in Tokyo and noticed lots of unusual sights: kimonos, kabuki, maple trees and such like. Then there is the night life, the lights, the music and the karaoke.
People compare Japan to Britain: it's an island nation with a proud tradition that likes to get drunk at night. But there’s one big difference between Britain and Japan: there's nothing in the world like the adverts.
For example, I spotted this ad for consumer finance company Aiful on the subway and thought: “they look a bit weird and wacky”.
So here we are, a few of us anyway, at SIBOS 2012 in Osaka, Japan.
Many of us are gearing up for this year’s SIBOS – the big SWIFT jamboree that gathers all those involved in payments worldwide … whoops, involved in transaction processing worldwide.
This year it’s in Osaka, Japan, and I’m on my way over there at the weekend. As a result, the next week of blogging will bore some of you numb, as it will all be about Japan, innotribe, payments, regulations, SWIFT’s future etc … the usual stuff!
For those who are going to be there, I thought it might be useful to post a little planner to enjoy the place.
I was jut updating a presentation about mobile payments.
The presentation was from May 2011 and talked extensively about Google Wallet, Square and M-PESA.
One year on and the presentation still talks about the same things but I am shocked and amazed about how much things have changed in just eighteen months.
We had a great meeting at the Financial Services Club Clearing & Settlement Working Group (CAS-WG) plenary this month.
The CAS-WG is rocking and rolling forward, with four subject groups meeting regularly between the plenary meetings.
The four subject groups focus upon the challenges of clearing and settlement to deal with risk, regulations, standards and market infrastructure operations. Each group has nominated chairpersons:
and are moving forward with focus.
At the July plenary each Chair gave an update of their group’s progress, along with two panel discussions in between.
The first panel discussion debated the merits of the European Market Infrastructure Regulation (EMIR) which is now in consultation with the European Securities and Markets Authority (ESMA) through 5th August, before ratification by the European Parliament at the end of September for implementation in 2013.
The second panel picked up on the ISO17442 standards for Legal Entity Identifiers (LEI). These are agreed for rollout from March 2013, and should make it far easier to track and monitor OTC Derivatives and other financial instruments as they move between different clearing systems.
This area was discussed in depth by:
So I’ll start by writing up a little bit on this debate.
By way of background, Legal Entity Identification (LEI) is a new ISO standard (ISO17442) which will apply to all Financial Contracts from 2013, according to an agreement made by the G20 earlier this year.
This means there will be a single, universal standard for identifying all parties involved in a financial contract, and will make it far easier therefore to see counterparty positions should another crisis occur such as the Lehman’s crash.
The standard has been established by the U.S. Treasury's Office of Financial Research following proposals by the Depository Trust & Clearing Corporation (DTCC) and SWIFT.
SWIFT will act as the registration authority, acting on behalf of the International Organisation for Standardisation (ISO) to assign the ISO 17442 LEI standard. The DTCC will act as the facilities manager which will receive, review and publish entity information.
The development of a single global standard for LEIs is a key element in the broader effort to understand and monitor systemic risk across banks and capital markets.
Furthermore, LEIs will allow Trade Repositories to keep a single record of a financial instrument, which will make it far easier to sort out a liquidity or counterparty collapse.
For a comprehensive background of the development of this standard, you can checkout this document: download LEI timeline of events.
Interestingly, in Virginie’s update on standards, she had picked up this chart from the Financial Stability Board’s list of recognised and approved trade repositories:
It shows the DTCC’s strength, which some are calling a monopoly, and a lot of discussion took place about concentration risk when so much dependency is placed upon one CCP.
On the other hand, some argued that concentration of monitoring is a good thing, as the more centralised a single record of risk, the easier it is to manage.
The general discussion however was the feasibility of implementing a single global standard for LEI’s.
James was adamant that this has been agreed and is being rolled out, no matter what other standards are mooted.
In the earlier panel:
discussed EMIR, the European Market Infrastructure Regulation.
EMIR has three objectives.
First, to reduce counterparty risks by:
Second, to create safe and resilient central counterparty systems (CCPs) by developing a comprehensive set of organisational, conduct of business and prudential requirements for CCPs.
Third, to increase transparency by:
The text of EMIR was issued on 25th June 2012 for consultation, and the consultation will close on 5th August. At this point it moves into Parliamentary submission for full EU endorsement on 30th September 2012.
That’s a rapid cycle regulation and led to a lengthy dialogue around the effectiveness of the rapid cycle consultation process taking process around EMIR, and whether with Basel III, Dodd-Frank, the LIBOR crisis and other issues, the regulatory framework was being too rushed and fragmented or whether it could actually work.
In particularly the whole notion of transparency was questioned as to whether it was a good or bad thing. Peter Randall was particularly dismissive, describing it as being like an airline security system. The idea of a secure airline is one where all passengers fly naked. You know you’re safe as everyone can see what everyone else is carrying with full transparency. However, there wouldn’t be many passengers.
That is the fear for the impact of EMIR: that it creates transparency but all trading and liquidity disappears.
Robin Poynder made the position clear when he said that you may not like the regulatory framework, but the regulators are pushing through their changes whether the markets like them or not, and are even willing to see markets collapse if that’s what it takes to make them effective.
In other words, whether liquidity is there or not after the regulatory process, they really don’t care as long as the markets are safe.
Kathleen responded by saying that this is more likely to result in a flight from the markets, where these regulations force full transparency and movements to other geographies. What that means in reality is that you see liquidity disappear in the markets where they are needed – Europe and America – leaving only higher risks for the pension funds and corporates trying to manage their collateral.
From the Subject Group updates, the main highlights were their progress in creating future agendas.
The Risk Subject Group was discussed by Shaun Cooke, and has four focus areas:
The aim is to develop these areas into working papers and recommended best practices to share across the Subject Groups and other interested parties.
The Regulations Subject Group update came from nominated Chair Rory Webster, a Director with trade repository CapitalTrack Ltd.
The Subject Group is working in two key areas today:
In particular, the group has initially focused upon EMIR and how it affects non-financial counterparties: will they be caught up or caught out by the regulation?
Bearing in mind the short-term focus for input to the consultation process by 5th August, the Subject Group asked for all input to be sent to the CAS-WG Chair by 2nd August 2012 to ensure our views are represented effectively to ESMA.
The group has also drawn up a matrix of regulations and how they impact different market functions, which is available from group co-chair Greg Caldwell of aSource Global Ltd if required.
The Standards Subject Group has focused upon trade repositories and the DTCC, and their slides – compiled by Standards Subject Group Chair Virginie O’Shea, Lead Analyst with Aite Group – can be seen below (from Slide 15):
The main activities of this group are to:
With the aim to:
The focus areas of the group include:
And the Group will identify:
In their on-going meetings.
Last, but not least, the Market Infrastructure Subject Group chaired by Kathleen Tyson-Quah of Granularity Ltd, are looking at the models for market complexity and are creating their own map of these structures to avoid any surprises.
The model the Group has developed will track the harmonisation of regulations and standard, and identify any overlaps or conflicts these create in the market infrastructures.
This is something I have advocated for a while now: we need a clear map of how the changes to system, structures, standards and regulations relate to each other.
Price formation is also on the group’s agenda, as the current LIBOR crisis will expand how pricing is set. Historically, prices have been set using mark-to-market reference rates, but self-certifying reference rates for derivatives pricing will now be called into question and change demanded. What will this mean for markets?
The group also recognises that there are 20 new CCPs being built today, with six in London alone. Does this mean too much concentration risk? It certainly means that there are changes to the way CCPs are capitalised.
Finally, the group is reviewing the impact of the new rules for clearing and settlement announced in April, when CPSS-IOSCO released three reports:
The new principles are designed to ensure that the infrastructure supporting global financial markets is robust and well placed to withstand financial shocks, with the new rules applicable to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively “financial market infrastructures” or FMIs).
These FMIs collectively clear, settle and record transactions in financial markets.
As mentioned, the Group’s deliverable will be a model that maps out all such changes, and makes clear the implications.
So there you have it.
Four Subject Groups and two Plenary Panels.
The Subject Groups will continue to meet through the summer and the next plenary meeting will be in September.
If you’re interested in joining in, just let me know.
I spent a bit of time reviewing ads for Australia’s banks today.
Not because I’m going down under – not that way! – but because National Australia Bank (NAB) keep sending me updates on their marketing efforts.
Their latest one is all about honesty …
Again, using guerrilla marketing techniques, this one is quite nice and interesting to watch the behind-the-scenes footage too (wait for the sting in the tail at the end):
So, being honest, the Aussie market for advertising gets straight to the heart of things.
I loved the breakup campaign but, to sustain its newness thereafter is hard. A bit like the fantastic ANZ campaign using Barbara, the Attila the Hen of banking.
Ah, she was great … but ANZ is now more business like using Patrick Jane from the Mentalist to give it a little celeb input.
No guerrilla marketing there then and they might learn a lesson from Barclaycard here in the UK on celebrity endorsements.
Whoever thought of the Hoff?
Anyways, back to Oz and Commonwealth Bank knows a thing or two about guerrilla marketing.
They’ve got this campaign all about you CAN with CBA.
They even get a few lollipop ladies to go out there and spread the news.
So, we have a market in Southern Hemisphere with four banks sinking good money into guerrilla marketing, celebrity endorsements and more.
Oh, did I say four?
Yes, there’s one more.
Who is it again?
Oh gawd, where’s the vegemite bag?
I was asked to keynote at the ISITC 18th Annual Industry Forum & Vendor Show in Boston this week.
Knowing that it’s always important to pull the chain a little bit, I put forward the title: “The next mega global financial crisis will be in 2045”.
This was based upon an earlier blog, where I talked about the tensions of China and India leading to another crisis.
Here is the slide deck:
Pretty much speaks for itself I think and to be clear, some of this I truly believe will happen, and some of it does not stand a cat in hell’s chance of ever happening.
You decide which.
There were a few questions afterwards about where Russia sits and what about Canada?
I answered that Russia is too unfocused to have a clear picture of its future, whilst it stays under the iron first of Putin, and what about Canada?
Anyways, hope you enjoy.
It’s Davos time, as usual.
In the last week of January, the great and the good of the world’s leadership from governments, business, academia and media all gather in Switzerland to debate the future of the world’s economies and the World Economic Forum, #WEF.
In the build-up to this year’s WEF, it seems that all the magazines, media and men are talking about capitalism, what capitalism means post-crisis and what the future of capitalism will be.
David Cameron made a speech about this last week, as did Nick Clegg and Ed Miliband, and much of the debate resonates with the speech of Amartya Sen that I attended last week.
The core of the debate is embodied in the quote by Winston Churchill that “capitalism is the worst form of economics, except for all the others that have been tried.”
The debate is then what form of capitalism you want: state capitalism or liberal capitalism.
A wholly state run economy fails, as demonstrated by communism; whilst a wholly liberalised, free market economy also fails, as demonstrated in 2008.
So there needs to be a middle ground, but how middling is that middle ground?
Somewhere between the extremes of Western and Eastern approaches to commerce.
Some believe that the West is crumbling due to over-excessive free market liberalism.
In a 2011 report, the Organisation for Economic Co-operation and Development figured that the level of income inequality in the 22 member nations it studied increased by 10% since the mid-1980s, with conditions deteriorating in 17 of them.
A recent report by the Institute for Policy Studies, a Washington-based think tank, found that CEOs at large U.S. firms earned, on average, $10.8 million in 2010, a 28% increase from the year before, while the average worker took home $33,121, a mere 3% more. At that level, CEOs’ paychecks are 325 times bigger than their employees’. In the 1970s, CEO pay rarely topped 30 times more.
Meanwhile, the average income for an American has reduced every year for the past three years.
On the other extreme, Asian markets are rising fast and taking over, using a more state-led capitalistic approach.
“The world’s ten biggest oil-and-gas firms, measured by reserves, are all state-owned … state-backed companies account for 80% of the value of China’s stockmarket and 62% of Russia’s.” [The Economist]
“The ten largest economies in Asia now spend roughly $400 billion a year on research and development (R&D)—as much as America, and well ahead of Europe’s $300 billion. China’s investment leapt 28% in a year, propelling it past Japan to become the world’s second-biggest spender … America’s share of global R&D spending is falling. In the decade to 2009, it tumbled from 38% to 31%, whereas Asia’s rose from 24% to 35%. But science is not a zero-sum game.” [The Economist]
So there is a new model rising which, according to Time Magazine, “is not so much between capitalism and another ideology but between competing forms of capitalism. The financial crisis, growing inequality and faltering economic performance in the U.S. have tarnished American ‘leave it to the markets’ capitalism, which is being challenged by ‘capitalism with Chinese characteristics’, eurocapitalism, ‘democratic development capitalism’ (India and Brazil) and even small-state entrepreneurial capitalism (Singapore, UAE and Israel). All these models favour a more significant role for the state in regulation, ownership and control of assets.”
The Economist furthers this debate, asserting that the winner is ‘state capitalism’.
“The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation.”
Examples of state capitalism include:
“The 13 biggest oil firms, which between them have a grip on more than three-quarters of the world’s oil reserves, are all state-backed including the world’s biggest natural-gas company, Russia’s Gazprom, China Mobile and Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies. Russia’s Sberbank is Europe’s third-largest bank by market capitalisation. Dubai Ports is the world’s third-largest ports operator. The airline Emirates is growing at 20% a year ... State companies make up 80% of the value of the stockmarket in China, 62% in Russia and 38% in Brazil. They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones.” [The Economist]
“State-Owned Enterprises (SOEs) make up most of the market capitalisation of China’s and Russia’s stockmarkets and account for 28 of the emerging world’s 100 biggest companies.” [The Economist]
“France owns 85% of EDF, an energy company; Japan 50% of Japan Tobacco; and Germany 32% of Deutsche Telekom. These numbers add up: across the OECD state-owned enterprises have a combined value of almost $2 trillion and employ 6m people.” [The Economist]
The Economist believes the trend for the next decade will be towards state capitalism based upon the Chinese model, albeit with caveats and issues along the way, and concludes that “the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller companies to merge to form national champions. South Africa is also flirting with the model:
But note that, unlike America where CEOs’ paychecks are 325 times bigger than their employees, state capitalism is fairer in terms of income disparities: “in 2009 the average SOE boss earned $88,000 and the highest-paid, the chairman of China Mobile, $182,000.” [The Economist] China Mobile has 600 million customers and is one of the largest telecoms in the world.
FYI, I debated these points a couple of years ago, and concluded that the future is one where capitalism is heavily influenced by the influence of the Chinese and Islamic principles.
Seems to be coming true?
Link: The World Is Not Enough
The main reading behind this blog post is inspired by two cover page stories:
I attended an interesting lecture last night from an economic legend: Professor Amartya Sen of Harvard University.
If you haven’t heard of him, he’s known as the Mother Teresa of economics in his native India, and has spent a lifetime fighting poverty with analysis rather than activism.
Awarded the Nobel Prize in Economic Sciences in 1998, for his contributions to welfare economics and interest in the problems of society's poorest members, Sen is best known for his work on the causes of famine.
He is currently Professor of Economics and Philosophy at Harvard University, as well as being a senior fellow at the Harvard Society of Fellows, distinguished fellow of All Souls College, Oxford and a Fellow of Trinity College, Cambridge, where he previously served as Master from 1998 to 2004.
An impressive guy.
Amartya delivered his speech as part of the London Stock Exchange Group series of lectures on the future of global finance, and the evening was hosted by LSE Chairman, Chris Gibson-Smith.
Here’s a brief summary of Amartya’s sentiments (I say ‘sentiments’ as this is not a record of his speech and incorporates my own spin on his words).
Some people say we live in interesting times, but I think we live in baffling times.
We live in baffling, rather than interesting, times because it is very hard to get any clarity about the future.
The only thing that is certain is, in the words of George Bernard Shaw, “the greatest of evils and the worst of crimes is poverty”.
Shaw wrote this in the Preface to his brilliant play, Major Barbara, published in 1907.
The tragedy of poverty is, of course, obvious to all - whether in Latin America, or in Asia or Africa, or in Europe and the United States.
The calamity of deprivation and penury can hardly be missed by those who have bothered to think about the subject, no matter whether they are themselves poor or not.
Lives are battered, happiness stifled, creativity destroyed, freedoms eradicated by the misfortunes of poverty.
But Bernard Shaw was not talking, on this occasion, about the hardship of poverty, or the misfortune that goes with it.
He was commenting, in a rather unusual way, about the causation and consequences of poverty - that it is bred through evil and ends up being a crime.
If poverty is indeed an evil, not to mention “the greatest of evils” as Shaw puts it, then there must be some wickedness, or at least some culpability, behind poverty - some wrong-doing that allows such human tragedies to occur and persist.
This raises the immediate question: who, then, are the wrong-doers?
If you look to protesters today, such as the Occupy Wall Street movement, the wrongdoers are represented by the corporate greed of capitalists and the banks.
You can just as easily take the opposite view however, and look to the Tea Party movement who see the failure being that of government and government policies.
The Tea Party align with Adam Smith, the guru of capitalism, and believe that free markets should rule.
Who is right and who is wrong?
Or is this the right question?
In thinking about strategic issues, we cannot but go into the question of culpability and the failure of duties and obligations.
We have to ask: how can things be done differently so that the evil of poverty is ousted?
We have to identify the nature and genesis of the wrong-doing that is responsible for the affliction.
That is not, however, the same as trying to identify the wrong-doers?
The identification of wrong-doers is not our task and trying to identify the evil-doers is not the right strategy since the responsibility for creating an evil is very widely dispersed in the society.
We have to see how the actions - and indeed inactions - of a great many persons together lead to this evil, and how changing our modes of actions - our policies, our institutions, our priorities - can help to eliminate poverty.
Our focus definitely has to be on removing evil-doing, as part of our strategies and programs, rather than going on the wild-goose chase of catching the hugely dispersed collectivity of evil-doers, who may not even fully understand how their actions can be seen as part of an evil state of affairs.
In fact, we should eliminate the discussion of wrong doers completely, and focus our efforts more on how to stop poverty full stop.
This is why strategies such as closing sweatshop labour factories in poor countries, or arresting those who employ children in the making of carpets, would fail to eliminate the poverty of the victims if such action is separated from a general economic and social program.
In the vast majority of cases the employees are there in those terrible jobs because they have very few options - none that are particularly good.
This is because there has been a failure of the state and the society to create opportunities for decent employment, which makes it possible to recruit labour to do terrible jobs as the alternative may be unemployment and starvation.
That is why exploited labourers are led to soul-destroying work today in the poorer countries, and closing down sweated-labour factories without giving the victims alternative opportunities for employment or education - the latter is extremely important in the case of child labour - is not an adequate solution to the problems and predicaments of the precarious poor.
There is, of course, moral merit in restraining the pursuit of profit of businessmen through exploiting vulnerable and freedom-less labour, but a fuller solution can emerge only through positive opportunities of alternative employment and occupation, and that demands societal action.
So the first action to address poverty is to expand labour opportunities and assist in education, and not to just shutdown existing sources of income.
My argument so far has been based on seeing poverty as lowness of incomes.
Is employment with income a full solution to all problems of poverty?
To believe that would be to underestimate vastly the complexity of poverty, particularly the nature of persistent poverty.
By way of example, lowliness of income is the primary cause of starvation rather than the lowliness of the availability of food.
Is employment for income in order to buy food the answer to everything therefore?
No, as this misses the point of why there is persistent poverty
Strategic examination about eliminating poverty, or even reducing its burden, has to go more deeply into the nature of poverty.
Poverty is about the inability to lead a decent, minimally acceptable life, and while low income does make it difficult to lead a life of freedom and well-being, an exclusive concentration on seeing poverty as lowness of income misses out a great many important connections.
What are the other non-income factors that contribute to poverty: a lack of education, availability of work, investment in infrastructure and more, and capitalism addresses these issues by providing an insurance.
For example, all affluent societies have addressed extreme poverty issues through public policy programs, such as the public pension, the provision of school education, the availability of healthcare and more non-market non-commercial arranged facilities.
The economics of these areas are not obvious except that an insurance system run by the state or by some other social support system, not by profit-oriented private firms, may be a necessary part of the elimination of poverty.
Affluent societies focus upon profit maximisation and the unrestricted search for profit, but if they only relied on profit maximisation they would not function.
As a result, they balance between market mechanisms and state activities.
There is no strategic formula as to the correct balance between market mechanisms and state activities – the contrast between China and Taiwan or America and Sweden are good examples of how approaches differ – but we need to understand these balances in order to create a better world that addresses poverty with finance.
Does this mean arguing against Adam Smith’s principles for free markets?
That view is a result of a huge misunderstanding of Adam Smith’s principles, and my position is strongly influenced by his.
Adam Smith clarified how markets work and how they can work exceedingly well. He believes that you need a well-functioning market economy and clarity of why you want such efficient markets to be.
The task of politicians in managing the economy is then to search for two distinct objectives: first, to provide plentiful revenue to cover the basic subsistence needs of the people before the subsistence needs of the state; and second, to provide the state with enough revenue to finance public services.
The financial focus of public services is a critical part of Smith’s work and Adam Smith had an overwhelmingly clear view about support of the poor and undersupported in his market view.
Within his free market principles, he clearly defended the role of the state to fund public services, such as education and poverty relief.
Adam Smith was deeply concerned about the inequality of society and never used the word capitalism.
The word capitalism does not appear in any of his books or any other writing, and it would be hard to carve out anything in his works on market economies that were based purely upon capital.
For example, he specifically argued about protections from unlimited usury practices.
So how should we think about the wrongdoers that need rectification, and how should we address poverty?
According to Adam Smith and my own thinking, the key is increasing employment.
Increasing employment must remain a worldwide priority and China, Brazil and India are doing much better at this than America and Europe.
As employment and economic welfare rises, the state must use such employment to improve public services for good living and public welfare and, in this respect, India is not doing this as well as China and Brazil.
Finally, for the West in general and Europe in particular, the crisis of 2008 was created by the malfunctioning of market economies – the result was the state had to create support for their economies and this is the reason for rising sovereign debt.
But the cause of this malfunctioning is clearly what was thought of as lack of accountability of governments, but governments are accountable and this is what we are seeing today.
What we are seeing is that, in order to pay back their debts, governments have far more accountability. However, they are addressing this accountability in the wrong way.
It’s hard to see how massive austerity drives, which cuts demand and growth, can therefore be supported,
Just look at Japan and learn from what happened there over the last 20 years of austerity, which is still biting.
What these governments need is fast economic growth.
Economic growth creates resources to address unemployment and poverty.
This is the key to addressing issues in Europe and the West, and it is the indiscipline of governments that has failed the markets, not the markets themselves.
Europe needs a better form of economic accountability and management of their economies, rather than austerities which decimate human lives and economic growth.
In conclusion, I end by affirming that George Bernard Shaw was right, a hundred years ago today, to point to the connection between poverty and evil and crime. The fact that this insight came not from an economist but from a dramatist and literary giant fits in well with my general thesis that the economics of poverty involves much more than just economics. Human lives in society are interlinked through economic, social, political and cultural associations. The nature, causes and consequences of poverty reflect the richness of those connections. We have no reason to be surprised by that elementary understanding.
Amartya then took Q&A from the floor and was asked a few interesting questions.
Q: You appear to be saying that in this current crisis, it is the failure of states to regulate markets effectively that failed, rather than the markets themselves. Is this your view?
You cannot separate markets and state, and this crisis was a failure of both, but you also have to be aware of the relationship between free markets and state influence.
For example, Adam Smith argued against usury, but was convinced to change his thoughts on interest after reading the works of Jeremy Bentham.
The core of how markets and state should work is that free markets is the most efficient model of economic management, but free markets need states that set efficient regulations to avoid failure in order to be truly workable.
As this shows, free markets and the state are two separate entities that are interdependent.
A key question in the last crisis however is whether globalisation killed that interdependency to cause the spiral of crisis we see today.
Globalisation may have undermined national states, as government can no longer effectively regulate the free markets?
There may be some truth in this statement, and this is why the G20, G8 and other global activities – the World Bank and IMF included – are key to solving these issues this time around.
Q: Do you think the euro will survive?
When the euro was created, I didn’t see why it was needed and didn’t believe it made sense. I am a fan of Europe, don’t get me wrong there as my late wife was Italian, but to start a European integration without a fiscal foundation meant that it was never going to work.
You can see this today as many parts of the EU are not served well by a Europe that has no fiscal union. Greece is a good example.
Now however the loss of a country would be very destabilising for this European Union.
This is why Germany is being forced to bailout Europe.
Could they retreat out of it? Yes.
Is that the right thing to do? I think so.
Postnote: some of Amartya’s speech is taken from a write up of an earlier presentation he made in 2007. These words of wisdom are integrated in parts of this article to ensure more accuracy of content.
I’ve been debating some future presentations with various folks today, and a little ray of light went off in my head.
The light was triggered by a comment: “can you talk about what impact regulatory change may have on bank to corporate relationships using examples historically?”
The question was really asking about the unintended impact of regulatory change in the past and what it might mean for their future, but it made me think about something else.
Each time we have seen a major bubble burst, the cause has been a coagulation of several forces of change.
Forces for change come from four major directions: Political, Economic, Social and Technological (PEST).
These forces for change are used in many ways, and can be seen in my banking history discussions (and soon to be published book) which talks about many historical periods including the Italian Renaissance, the Great Depression and the Credit Crisis.
In each of these, we can see Political, Economic, Social and Technological forces working together at the same time to drive change.
In the fall of the Renaissance Italians, it was a mixture of change between the break from the Catholic Church with the Protestant and other movements (Political), mixed with the ruin of the Italian banks due to over-extension of credit to overseas Royal Houses (Economic), along with expansion of merchant shipping and colonisation (Technological).
In the Great Depression, we saw the end of the Industrial Revolution (Technological) combined with post-war wrangling over the gold standard (Political and Economic).
Right now, we see a major world of change too.
We have the rebalancing of power between America and Asia/China (Economic) combined with an internet revolution that is connecting everyone on the planet (Technological), leading to changes in society, where a Molly Katchpole can reverse a bank’s policy and an #Occupy movement can change global thinking (Social).
The Political outcome of all of this is what is driving bank regulations right now.
And the outcome of all of this will be a massive change.
A New World Order?
We already have a New World Order as China is expected to be the world’s largest economy by 2018 (ten years ago, it was estimated to be 2047).
But we will see a restructured playing field and one that is not level.
We can see this already as one major economy (America) bans prop trading whilst another (UK) just separates prop trading from retail bank operations.
Even more pronounced are the differences between the US and EU on OTC Derivatives regulations and how to define and regulate Systemically Important Financial Institutions (SiFi).
From CME Group in October 2011:
“In an ideal world, global financial regulators would function something like a team of horses, with policymakers in the United States, Europe, Asia and elsewhere all pulling at once in the same direction, and moving toward a common goal.
“Reality is turning out be far more chaotic, however. Regulators and lawmakers are having a tough time forming a consensus even within their own national borders, let alone across international boundaries. The result is turning out be a patchwork of overlapping and often inconsistent approaches to regulation in the aftermath of the financial crisis that gripped global markets in 2008 and 2009. Many financial experts fear that the inconsistent global regulatory framework will alter the flow of capital around the world, as trades are directed to the cheapest jurisdiction, a process known as regulatory arbitrage.”
So we end up with a world where the politicians are trying to react to the implosion of markets at the end of another revolution – Globalisation – and find that they are seriously lacking consistency, vision, leadership or agreement.
The Eurozone is one of the best illustrations of this, although America and China aren’t guaranteed to come out of this stainless as the American elections will change ground again, as will China’s challenges of a property market bubble and inflationary pressures.
All in all, the PEST approach to the world today says that we are going through a momentous change from all angles – Political, Economic, Social and Technological.
Where will it end up?
Probably in a place no-one expects and one which, on this blog, I’m going to avoid predicting decisively.
“By 2020, the workforce in western Europe will shrink by 2.4 percent, including a 4.2 percent contraction in Germany, according to a Boston Consulting Group study.
Looking further ahead, HSBC projects that Germany's working population will shrivel by 29 percent by 2050, Russia's by 31 percent and Japan's by 37 percent.
Over the same period, the population of many African countries will double. Nigeria will log a rise of 3 percent a year in its workforce - in contrast to a 1 percent decline in Russia and Japan - and will have as many people as the United States by 2050.
On current projections, Pakistan will be the sixth most-populous nation by the middle of the century. And the Philippines could be the world's 16th-biggest economy, HSBC reckons.”
2012 is here and we all hope it’s better than 2011. Sure, some of you may have had a very good last year, but most thought it pretty dire with job losses, austerity measures, civil uprisings, protests, a second financial crisis in the Eurozone and more being the name of the day.
Time Magazine named their Person of the Year as a collective Protestor, rather than an individual …
And the Times named Mohamed Bouazizi - the young market trader who set fire to himself outside the government offices in Tunisia as a martyrdom act that fuelled the Arab Spring - as their Person of the Year.
Is this a time when societies worldwide change their world or will media, finance and government, continue to control and direct?
Probably a mixture of both.
Thanks to this internet age, the individual can change things and change things fast – the Arab Spring, Occupy Wall Street, Anonymous and Wikileaks prove this – but those in power will still direct, as far as they can.
The question may be who is in power, as demonstrated by the Eurozone issues of 2011.
Where are we going in 2012, is therefore a key question.
To put this question in context, I said three years ago that the next resurgence in the economy would be in 2014, after plateauing in 2012.
I still believe that.
This year is going to be a tough one, as things haven’t finished yet, but things are stabilising.
Europe’s going to a have a mild recession, America is going to revive and Asia is going to wonder where it’s going.
So here are the four key things that reflect the economic times of 2012:
Asia’s light continues to shine, but not quite as bright
Asia, particularly China, continues to astound.
From Urban Times, 2010
Ten years ago, China had more mobile phone users than America, and last year it manufacturer more and registered more patents. In 2014, its retailers will sell more too and the day that China becomes bigger than America is getting ever nearer.
In 2003 – when Jim O’Neill coined the term the BRICs for Brazil, Russia, India and China – he estimated that China’s economy would overtake America’s by 2041. Last year, that estimate had moved fourteen years nearer, to 2027, thanks to the economic crisis. As the crisis has continued, the estimate is now that 2018 will be the year China gets to be bigger than the USA, according to Emma Duncan in the Times.
Nevertheless, with the American and European market demands contracting, China is not sailing a static sea. For example, Reuters Breaking Views blog states that China’s growth may dip under the magical 9% this year – even falling under 8% – as multiple challenges hit: falling house prices, a slump in property investment, and slowing exports. Add to this that salaries surged 40% last year – admittedly to just $160 per month – and we can see that global growth and stability will not be plain sailing at all in 2012.
Source: PhilSTAR / Bloomberg
So where should you invest?
American equities is the place to invest
In a bout of good news for Barack Obama, in the year where he fights for his political future against Mitt Romney, the US looks to be a safe bet for investments in 2012.
Terry Ewing, head of US equities at Ignis Asset Management, believes the US can continue to surge, as its economy has differentiating growth characteristics that will underpin both earnings growth and the stock market.
Mr. Euwing has expectations of 2% GDP growth, compared with the 'inevitable European recession' this year. By way of history, US industrial production rose by 8% between 1993 to 1995 whereas Europe's shrank by 5% and he believes a similar divergence could well happen again.
He lives with good company, with Jim O’Neill of Goldman Sachs saying that American equities could rise by as much as 20% this year, and Paul Frank agrees. John Paulson promotes buying US stocks over US government bonds, whilst James Paulsen sees this year as the ‘gear year’.
Source: PhilSTAR / Bloomberg
With all those “Pauls” behind it, something’s gotta be right and so yes, invest in America is the message in 2012.
Unfortunately, that means don’t in Europe.
There will be a major European bank failure
In July 2011, the European Banking Authority (EBA) issued its summary of how fragile the European bank system was after stress tests on 90 European banks. Eight failed that test – nine if you include the German Helaba Bank that dodged it – and a further 16 were in the danger zone.
However, the tests did not include a sovereign debt default, such as the issues we now see in Greece.
And with the ECB lending €500 billion it should stabilise the system, except that the ECB is receiving a similar amount back in overnight deposits and European banks still have to face almost €2 trillion of toxic assets on their balance sheets.
I said a third of European banks would fail two years ago. It won’t be that many, due to the €440 billion European Financial Stability Facility, but there will still be some major failures with Commerzbank already in the frame.
It should be noted that this is not unique to Europe however, as 92 banks failed in the USA in 2011. It’s slightly down on 2010 (157 failed) and 2009 (140) but it’s still high and will continue as an analysis by The Wall Street Journal suggests that failures are down because troubled banks aren't failing as quickly.
A country will leave the Eurozone
Due to fragility in the European banking system continuing, along with a lack of confidence in Europe’s leadership, one or more countries will be forced to leave the euro.
There’s already been lots of speculation that a Eurozone member will need to breakout of the euro. Greece is the usual one cited, but Italy and others are also regularly debated. There has been lots of simulation and planning for such an event and so, when it does, it won’t cause any major ripple in the markets at all.
It will be a disaster for the country concerned of course, but the idea of continuing the Eurozone where a third of the members – Portugal, Italy, Greece, Ireland, Spain and more – are being propped up by Germany, and to a lesser extent France, is just not workable long-term.
And I’m not the only one saying this.
But what does it mean if it happens?
Well, it ain’t good, but it doesn't mean the end of the Eurozone. Just that Europe has to rethink a lot of the Maastricht Treaty, and come up with a new Economic & Monetary Union approach.
Peter Sands, CEO of Standard Chartered, puts it succinctly:
“I think the probability of countries leaving the Eurozone has increased because we have had several successive plans announced to solve the problem of the Eurozone which simply haven't convinced the market.
“Nobody should underestimate what a big deal that would be, because it would be very difficult to manage the contagion risk, even if it was only Greece. The disruption from that would really be quite significant.
“That will have ramifications all over the world . . . because the simple maths is that the Eurozone is a very large part of the global economy and if it is going slower, then economic trade will be slower around the world.”
So there’s a short guide to the 2012 economic outlook:
This is one of three 2012 outlook pieces:
So today marks the start of the bank reporting season in the UK which, based upon last week’s results in the USA and Europe, will be pretty bleak too.
First, we have HSBC which is a mixed bag of news.
According to the Telegraph, HSBC will report “a profit for the first six months of the year of $10.9 billion, becoming the first of the UK's major banks to announce its interim financial performance.
“The profit figure, which means HSBC made nearly $1.7 billion of profit in each of the first months of the year, is slightly down on the same period in 2010 when the bank reported a before-tax profit of $11.1 billion.
“HSBC currently employs 335,000 staff around the world and the redundancies would equal about 3pc of its total workforce.
“Mr Gulliver wants to reduce HSBC's cost income ratio to between 48pc to 52pc. In the second half of last year the bank reported a cost income ratio of 60pc and in the first six months of this year analysts at Credit Suisse estimate this has fallen to 57pc.
“Profits from HSBC's personal financial services business are forecast to have more than doubled to $3.2 billion compared with the same period in 2010, largely as a result of reduced losses in the bank's North America business, which lost $1.5 billion in the first half of last year …
“Global banking markets, HSBC's investment banking division, is expected to have recorded about a £1 billion fall in profits compared with the first six months of 2010 at £4.6 billion.”
One point of note is how HSBC is restructuring, started with the sale of its 195 branch network in upstate New York to First Niagara Bank for $1 billion (£609m).
HSBC also recently sold its Russian business and further sales of international retail banking businesses are considered likely, though the bank has ruled out selling any of its UK, French or German operations.
One point to note in HSBC’s globality is the retrenchment of operations, and the refocusing from shrinking markets – the USA – to growth markets – Asia. For example, although profits were boosted by growth in emerging markets, there were still write-downs in the USA of around $3 billion, two-thirds the figure of last year and adding to the cumulative pot of near $70 billion losses on Household since its acquisition in 2003.
This is why Stuart Gulliver announced in May, that HSBC would slash costs by up to $3.5 billion by 2013 with the savings “ploughed back into fast-growing markets around the world, especially in Asia. The lender has already said it would be hiring at least 2,000 extra people in mainland China and Singapore over the next five years, as it seeks to tap the fast-growing Asia Pacific market.”
Apart from HSBC, and looking around the other banks, the outlook is also grim.
Lloyds and RBS have seen their shares plunge 30% and 17% respectively in the last six months alone, while Barclays' shares have plummeted 26% and HSBC has lost 14%.
Much of this is down to severe downturns in trading, with some bulge bracket firms reporting that year-on-year trading was down by over 25% in June.
At Barclays Capital, the investment banking arm of Barclays, analysts estimate that profits could have fallen by about 40pc to just over £2 billion in the first half of the year compared with the same period in 2010. In 2009 the division reported revenues of £13.7 billion, up nearly 90pc on 2008. A year later revenues had dropped by more than a third to less than £9 billion and this year the forecast is for a fall of another 8pc to around £8.1 billion.
Taxpayer-backed Lloyds Banking Group is expected to report pre-tax profits of £1 billion on Thursday, a steep reduction on the £1.6 billion reported a year earlier. Losses in Ireland and Australia, although still high at £2.2 billion, will be £1.4 billion lower than the second half of 2010.
Royal Bank of Scotland closes the week with its results on Friday, which are expected to reveal £611 million in reported profits, down 19% on the previous year. Much of this will be due to disappointing investment banking results, down 31% over the same period last year. This represents a more than halving in profits in its global banking and markets business to £1.3 billion. Nevertheless, RBS will show overall business lending is up, driven by increased borrowing from large corporates.
Analysts estimate the combined pre-tax profits of the so-called "casino banking" divisions at Barclays, HSBC, Royal Bank of Scotland, Standard Chartered and Lloyds Banking Group fell from £11.1 billion in 2010 to £9.1 billion in the first six month of this year.
All of this means lots and lots of job losses.
Apart from the 10,000 at HSBC, there were 15,000 job losses announced in June by Lloyds Banking Group, taking the total number of redundancies at the bank since its rescue by the taxpayer to about 40,000. Royal Bank of Scotland has already shed 28,000 staff since the financial crisis started.
Barclays has been shedding staff for months, with Barclays Capital, its investment banking arm, cutting about 600 people worldwide since January and its retail business losing almost 2,000.
At UBS, as many as 5,000 jobs are set to go across the group, including the bank’s wealth management arm. Credit Suisse is eliminating about 2,000 positions, largely in its investment bank.
Goldman Sachs, the US investment bank, was the first to announce a substantial cull of jobs last month, saying it was trimming 1,000 posts after a poor performance by its fixed- income trading division.
The overall expectations are that as many as 15,000 City-workers, or about 5pc of London-based financial services staff, will lose their jobs before the end of the year, resulting in a drop of more about £1.3 billion in lost income tax revenues for the Exchequer.
This is based on an average salary of £150,000 and income tax of 50pc, employer national insurance of 2pc and employee national insurance of 2pc, this works out an average lost tax income per lost City job of £81,000, or a total loss of about £1.3 billion in tax revenue.
To put this into context, financial services workers paid a total of £18 billion income tax for the tax year 2009/10, or 15pc of the UK total, so this year's redundancies alone could lower the sector's income tax contribution by about 7pc.
It’s not all bad news however, as Standard Chartered is set to announce pre-tax profit of around $3.5 billion, up from $3.1 billion in the first half of 2010. Again, this reflects the strength of Asia.
Also, the taxpayer “made a net profit of £339.8 million pounds in the first half of 2011 from the assets they still hold in Bradford & Bingley Plc and Northern Rock (Asset Management) Plc.” So that’s not so bad then.
Meanwhile one Spanish Bank, Bankia, has offered the ECB Cristiano Ronaldo as collateral for their loans. What is the world becoming?
The above is an amalgam of a variety of articles as follows: