Might we suggest that knowledge comes first, then thinking, then plans?

The “Onward” groupuscule has decided to favour us all with their plans for how the economy should be. We would, gently and in a very friendly manner you understand, suggest that knowledge comes first, then thinking about what is known, plans being the final stage in the process?

Around 60% of UK-listed equities are foreign owned, indicating inadequate deployment of Britain’s capital pools, with investment income accruing overseas.

Erm, yes.

As is well known - for we and everyone else write the same article when the pound falls and FTSE rises - some 75% of the revenue of FTSE100 companies comes from outside the UK. Some 50% for the FTSE250. And the two combined, the FTSE350, are by far the majority of the London market capitalisation.

So, yes, true, 60% of the market is owned by foreigners but something around that same 60% - -ish, -ish - is in fact foreign business. We’re not sure we’re worried about foreigners owning foreign business to be honest and we think it’s not a bad idea at all that we get to skim the transaction fees off their doing so.

And, well, if we were to look at that second fact alone we’d probably be suggesting that yes, there is an imbalance there, but it’s that too much of the London market is in fact in foreign. Not foreign hands, actually in foreign.

Now yes, this is partly mere pedantry. But we do think it betrays a certain woolliness of thinking - to be very polite and gentle about it. And we really are very certain that we’re only going to end up with a decent plan - for anything at all - if we start from facts and knowledge then do some real thinking.

The need to finance the current account deficit leaves Britain dependent on selling overseas investors its housing stock, its equities and its debt.

Entirely true, a curret account deficit always is, by definition, offset by a capital account surplus. But how important is this? Last time we looked national wealth had increased by some 50% of GDP over a year (pensions and houses had gone up by a trillion) and as this report says, the trade deficit that must be financed by selling assets to foreigners is 3.1% of GDP or so. At those sorts of rates foreigners pump money into the UK and end up owning an ever smaller fraction of our nation. We can’t see this as a problem.

So, our advice - know stuff first, then think about it, only then make a plan.

Took them 35 years to get there

But more joy in heaven and all that.

The Climate Damages Tax Report claims that we can solve climate change by adding a tax - related to the CO2-e content - to the extraction of fossil fuels:

The Climate Damages Tax report, published on Monday, calculates that an additional tax on fossil fuel majors based in the wealthiest Organisation for Economic Co-operation and Development (OECD) countries could raise $720bn (£580bn) by the end of the decade.

We’ve had to look to an earlier version for the details as they’ve done that naughty thing of issuing the press release before the report, thereby making sure that no independent can analyse. But that earlier version:

A tax on the extraction of fossil fuel: per barrel of oil, tonne of coal, cubic litre of gas, global rate based on CO2e.

Starting at $5 per tonne of CO2e in 2021, increasing $5 each year until 2030 to $50 a tonne, $10 annually after that to $250 a tonne by 2050.

They’ve a few things wrong here. They insist that this would be paid by the fossil fuel companies, which it wouldn't be. Collected by, yes, but the actual burden would be on one of two people. Consumers, if market prices move in lockstep with the tax. Or, more likely at first at least, a reduction in the royalties paid to the governments who currently tax such output.

So, not so much new tax revenue as a diversion of extant.

They say that this should be spent on lovely projects no doubt advised upon, for a fat fee, by the usual suspects. That might not be the way to spend a few hundred billions.

But there’s something we love about this. Which is that this is the Nordhaus proposal for a carbon tax. True, it starts at $5, not that Nobel Prize winning $10, then it grows to $250 not the Nobel $240, but we think it’s fair to say that’s trivia. But it really is that proposal. Solving climate change by a progressive tax upon CO2-e, collected at the well- or mine- head.

Took them 35 years to get there which, given the claimed urgency of the matter seems a long, long, time.

For true piquancy, this is also the proposal supported by Exxon. A progressive carbon tax.

Which does leave us all with something of a question. Given the shrieking that has accompanied the Nordhaus and Exxxon proposals why is it now radical and progressive to suggest exactly the same thing?

If the task is impossible then don't try doing it

People, en masse, can be Hell as that French philosopher chappie once said. This produces a problem on the internet where there’s a mass insisting upon just being people. Moderating their behaviour might be nice if it’s possible. But what if it’s not?

There are really only two ways to deal with it (unless you’re Elon Musk, who has decided not to even try). One is to choke off the supply. But if you do that you undermine your business model – which is to have everyone on your platform – and you will also be accused of “censorship” in the land of the first amendment. The other is to amplify your internal capacity to cope with the torrent – which is what “moderation” is. But the scale of the challenge is such that even if Meta employed half a million human moderators it wouldn’t be up to the task. Still, even then, section 230 would exempt it from the law of the land. Beating Ashby’s law, though, might prove an altogether tougher proposition, even for AI.

So, either people get to say whatever - in all its glorious vileness - or the internet doesn’t work. Which does rather solve the problem for us, doesn’t it? As it’s impossible to have the internet without the classically liberal free speech stuff then we’ll just have to have the internet with the classically liberal free speech stuff.

Glad we’re able to sort that out for everyone. Much effort can now be saved.

If only our rulers understood QE

Sadly, that headline could also be “If only our rulers understood (insert issue of your choice)”.

Here it’s about losses on quantitative easing:

In 2012 Osborne transferred profits from the scheme to the Treasury, lowering the Exchequer’s borrowing requirements – but agreeing, as part of this deal, to also bear the weight of any losses in future.

However, higher interest rates and lower bond values mean the Bank is now losing money on the scheme.

As a result, in the past year the Treasury has transferred £44bn to the Bank to cover the losses. The Office for Budget Responsibility (OBR) expects an overall net cost to the public purse of more than £100bn.

Of course, £100 billion here, £100 billion there, pretty soon you’re talking real money. It is also possible to think that £100 billion as a once off cost for avoiding another Great Depression is a bit of a bargain.

But the specific that is being whined about here. The difference between holding a bond to maturity and selling it off so as to crystallise the loss.

Conservative MPs are demanding that the current chancellor, Jeremy Hunt, reassesses the system and pushes the Bank of England to stop selling bonds at a loss.

Greg Smith, chairman of Conservative Way Forward, said: “It’s not at all clear why the Bank is choosing to sell billions of pounds worth of bonds a year into the market, taking larger losses than would be incurred if they simply held them to maturity.

Selling the bonds doesn’t - barring a slight margin because of uncertainty about the future - change the loss. The loss exists, it is there. For currently the Bank is paying 5.25% on those central bank reserves the banks hold. And is receiving perhaps 0.5% or whatever in interest on the gilts it holds as part of that QE. The difference, that 4.75% a year, is the loss.

It’s possible to take that loss as a cashflow between now and the maturity of the bonds. It’s possible to take that loss as a capital sum right now - and the loss is, by and large, the difference between 0.5 and 5.25% over the remaining years of the life of the bond.

That is, the loss has happened because interest rates have changed. How it’s recognised makes no difference to the fact that it has happened.

We tend to think it would be helpful if those who ruled us grasped this. Money printer go brrr has its costs.

Of course, it is possible to reduce the amount of those central bank reserves held by the banks and thus the amount that the Bank is paying 5.25% upon. Something which is achieved by selling the QE bonds back to the banks…….which crystallises the loss. For the loss exists, it’s real, it has already happened.

Don't worry about intellectual property in poor places

One of our unfashionable ideas is that we shouldn’t worry overmuch about intellectual property in poor places.

Yes, IP like patents and copyrights is vital for some solution is necessary to that public goods problem. If anyone and everyone can just copy then little profit can be made therefore no one invests in the initial creation. When a new drug can cost $2 billion that’s a problem that has to be solved.

But this has also led to an insistence, in some quarters, that everywhere should have to obey those same IP rules. And, well, no.

Truly poor places have, by definition, no money. So, if they have to obey all the IP laws they’ll not buy any of the IP. The impact of IP laws on the revenue of those who developed the IP is zero. If those same poor people then steal the IP instead the impact upon development incentives is also zero. But, clearly, the poor people are made better off. This is a Pareto improvement and therefore we should do that. It makes absolutely no difference to those incentives and people still become better off.

But we then get to that problem of when’s the dividing line between poor and steal and rich and pay?

Chinese authorities have targeted a major online sales platform accused of supplying counterfeit goods, raiding warehouses holding millions of packages destined for overseas buyers.

Earlier this month police raided the Hangzhou office and several warehouses of Pandabuy after reported legal action by 16 brands over copyright infringement. More than 200 public security branch officers, 50 private sector investigators and local police were involved, according to reports.

This is not an exact claim but a general one. This is something that can be left to the market. Everyone has the same nominal rules, obviously. But they require enforcement by those domestic authorities to be effective. When will those domestic authorities enforce?

When that place is creating IP that it would like other countries to also enforce rights to. Which is a useful definition of being richer rather than poorer too - a place that is creating IP is going to be richer than a place which is not.

As we say, not an exact rule but a useful general guide we think. Mutual recognition of intellectual property will come when places are rich enough to be creating IP they want protected. A place that is poorer than that likely doesn’t have any money to buy IP anyway. Yes, obviously grey areas at that interface and dividing line but still, we insist, a useful guide.

Yes, this does mean we’re rather against TRIPS. Oh well, if that’s where logic leads us….

Prices are information - critical minerals edition

Just a little note from the frontlines of the real economy.

We’re oft told that the world is running out of metals and minerals. That’s why we need to recycle everything at whatever the cost. Simply because if we don’t then we’ll run out.

This is not true.

A circular economy is a very fine idea if the resource consumption - that is, the cost - is lower doing it that way. But it’s not necessary for the reason that we’re going to run out if we don’t recycle everything.

Australian miner Lynas posted a slump in third-quarter sales revenue on Wednesday, missing analyst expectations on the back of a plunge in prices for rare earths, ……"There's a general consensus that the current price is below cost for many Chinese producers.” …. The firm's quarterly sales revenue fell to A$101.2 million ($65.64 million) in the three months to March 31, down from A$242.8 million a year earlier.

Rare earths prices are, as above, below production prices. That’s not quite and wholly true, in mining we make the difference between mere operating costs and all in costs. It’s entirely possible to be below those all in costs - covering those capital costs - and still rationally producing if prices are above mere operating costs.

But rare earth prices are as above. Further, the lithium price is below the operating costs of some to many mines, including recently opened ones. The cobalt price is below that all in cost for many producers.

Rare earths, lithium, cobalt, the three we need from that critical minerals list for this electric revolution. There’s so much out there that they’re not worth the cost of digging them out of the ground. Which does rather kill off that idea that they’re in such short supply that we must, at whatever cost, recycle them all.

As we say, if it’s cheap to recycle them then do so by all means. But prices really are information - we’ve not got a shortage of them.

Has the Bank of England Just Landed a Section 166? : Reflections of Bernanke's Review

A letter to the editor of the ASI blog

Dear Sir,

I was interested to read the findings of Mr Benanke’s independent review into the Bank of England’s forecasting and related processes during times of significant uncertainty.
 
It was a detailed analysis with all recommendations accepted by the Bank of England.
 
Within this detail, was a list of shortcomings which focused on the deficiencies of the Bank’s forecasting infrastructure. These included: out-of-date software, insufficient resources to ensure the software and models are adequately maintained, significant shortcomings in COMPASS (the baseline economic model), makeshift fixes, over-complication, and unwieldy systems to highlight a selection of Bernanke’s findings.
 
As I read this list of points, it struck me that the Bank of England via the Prudential Regulatory Authority (PRA), regulates some of our largest financial institutions.  If one of these institutions received similar points of note post a PRA review there would be consequences and certainly remedial action required.
 
This has been a tough period for the MPC and this report will make difficult reading for the Bank of England. The Bank of England is owned and ultimately regulated by the UK Government, and I hope they will take a similarly direct and stringent view as they review the report and action plan to fix. We have been reminded this week, with the Post Office enquiry, that taking “an arm’s length relationship” with wholly owned UK Government entities is not advisable.

Charles White-Thomson
Senior Fellow Adam Smith Institute

It worries that people get their economics from The Guardian

Perhaps not as much as the idea that The Guardian employs economic journalists who manage this:

What’s behind the record FTSE 100 high?

Hopes of a UK interest rate cut and easing geopolitical tensions are not the only reasons for the intraday peak reached this morning

Indeed, not the only reasons at all.

We did read through the ideas offered and were most surprised (well, this is The Guardian so perhaps the “most” is not wholly true) to find that the most obvious reason was not mentioned.

The FTSE100 index is not inflation adjusted. Therefore as money becomes worth less - because people insist on producing more supply than there is demand, obviously - therefore that index rises.

The FT had the good grace to point this out even if only as an afterthought.

There is also this:

Paul Marshall, the boss of the £40m ($55bn) hedge fund Marshall Wace

If that was the current exchange rate then that would produce a record high in the FTSE100, yes. But then those glory days when the subeditors knew more than the journalists are long, long, gone.

What austerity?

Polly Toynbee has made a career out of shouting that we must be more like Sweden.

UK public spending grew from 38pc of gross domestic product (GDP) in 2019 to almost 50pc at the height of the 2020 pandemic after Rishi Sunak as chancellor announced huge taxpayer subsidies to pay people’s wages during lockdown.

Spending has since come down to 44pc of GDP but remains far higher than its pre-pandemic level.

And:

Sweden has one of the largest public sectors among OECD countries. Government spending was 49.2% of GDP in 2019, the fifth highest in the OECD

We have, in these recent years, become very much more like Sweden. It doesn’t seem to have made us - or anyone actually - any happier. So, having tried the experiment we find that it doesn’t work.

At which point that science thing comes into play. Theories are all very well but they must withstand experimental evidence - if they don’t then they’re failed theories. We have tested this, will being more like Sweden make Britain happier and the answer is no.

Ho Hum.

It’s also possible to wonder about something else. If government spending has risen by 6% of GDP - which is a lot, even a lorra lots - then what is this story about austerity? Seriously, what austerity?

Renewables aren't so cheap then

Useful information today:

The switch to net zero risks driving up household energy bills by £400 a year after a jump in interest rates, a leading think tank has warned.

Higher borrowing costs will massively inflate the cost of the green transition, the Resolution Foundation said, with families set to spend an extra £29bn annually on energy by 2050 if rates do not return to 2019 levels.

This shouldn’t be a surprise. As with nuclear, the vast proportion of the costs is the financing expenses. Fuel costs are pretty much zero for either, there are some operating costs but it’s the capital costs that make up the vast bulk of the total, those capital costs must be financed. Therefore returning to positive real interest rates - as we have just done, even though only marginally so - means a change in the costs of renewables.

Shrug, obvious, innit?

At which point we can leave it - but we shouldn’t. The entire concept of net zero - or even dealing with climate change at all - is based upon the idea that not dealing with climate change is more expensive than dealing with it. Now we’ve just got evidence that dealing with it through renewables - those oh so cheap forms of energy collection - is more expensive than we’d thought. 25 million households, £400 per, that’s £10 billion a year. That’s also £10 billion a year forever.

So, dealing with climate change is now more expensive than we’d thought it was. The benefit of dealing with it is exactly the same as before. That changes the balance of how much dealing - rather than suffering from - climate change we should be doing. We should leave be more and do less to head it off that is.

No, there is no way out of this logic. For the logic is that preventing climate change is cheaper than suffering it. But the costs have changed, so the amount of preventing/suffering also changes.

A useful guide to who is being realistic - scientific even - on the subject is who makes this point. Those who ignore it aren’t.