The Changing World of Central Banks

It seems week by week that central banking institutions are only becoming more uncertain about what kind of actions to take in the current economic climate.

There is considerable hesitancy surrounding the choice of the FED to leave the base rate unchanged, this had considerable international repercussions with having to continue handling its deteriorating situation with no clear resolution, while the ECB and Bank of England are waiting in the wings taking a strategy of what seems to be follow the FED.

Mark Carney has begun his warning to expect monetary tightening in the near future, continuing with a vague timeline. While commentators in the United States who have been investigating the FED’s books that have a two week lag are beginning to hypothesise that there won’t be a rate rise in early 2016.

The key element here is looking at the behaviour of inflation over 2015 with targets regularly missed, while lacking concrete explanations for why. Both UK and US economies are experiencing growth albeit at low rates. Therefore, acting upon base rate may seem to extreme at the moment. The Bank of England has instead taken up to involving itself in politics discussing the impacts of leaving or staying in the eurozone, while they haven’t made their stance that abundantly clear as some saw it as euro skeptic and others as reasons to stay in.

We are entering a unique period where these critical financial institutions are struggling to grip with conventional policy practice, and potentially look for better ways to understand the economic climate.

CNBC have a great report on the FED actions that I recommend reading http://cnb.cx/1P0lM0k, while Krugman had a great post along similar lines on Saturday http://nyti.ms/1LNePeJ

Sweet Sensations?

Recently a report has been released considering the increasing amount of sugar in the average diet, and the problems that it induces in regards to health and especially obesity.

The report outlined that a tax between 10% and 20% would be the most effective, while also stopping supermarkets from offering special deals. The idea is to effectively price people out of consumption. The report outlines how this has worked in Mexico, which implemented a 10% tax on sugar based drinks, resulting in a reported 6% decrease in sales.

This can be viewed as a conventional case of a negative externality. As the costs that arise from these drinks are not integrated into pricing. This is due to the increasing cases of diabetes in developed countries, as well as the adverse health affects caused by sugary drinks as well as the no sugar substitutes.

The British Medical Association recommended adopting the measures in the report, but the Food and Drink Federation director stated “we do not agree that international evidence does not supports the introduction of a sugar tax”.

Now cynicism obviously points towards the fact that some friends of government ministers are not keen on such taxation. Let alone the fact that it would effectively be waging war over huge corporations such as Coca-Cola.

Aside from the issues in resolving this, it is interesting to look at consumer relationships with addictive products that are legal. While there is a wealth of information that supports the negative impact of sugar it is largely ignored by consumers. Similar to when the adverse effects of cigarettes had only started to be revealed.

The question I often face in these areas is should the government be managing our lives in these scenarios. While my usual answer is no, one has to take into consideration the fact that it is a burden on public healthcare services, which each taxpayer contributes to. The prevalence of Type-2 diabetes in the U.K. is indicative of resources being redirected to deal with diagnosis and treatment. This is a problem that can clearly be reduced by putting this tax forward as a starting point. While high sugar content in foodstuff can make that particular food addictive, causing similar problems.

The Economy, Money, & Politics

Three of our favourite things, well at least mine. The election is in full swing here in the United Kingdom, and there is currently the build up to the primaries in the United States.

In the case of the United Kingdom we are facing an election of considerable uncertainty, the outcome of a coalition is highly expected considering current polling. But it will undoubtedly come up to post election day to see who can craft this arrangement.

In the liberal air of university one may find incredible support for the Green party, on the premise that a vote for them is a vote for the beginning of change in parliament, even though they themselves have basically stated it will be near impossible for them to have a serious impact on decisions or push through any of their manifesto ideas. So the disillusionment with the two party system has become ever-clear. The general distaste for austerity based policy is also extremely clear.

The question is should we do a u-turn right now? Krugman says yes, undoubtedly. He was ferociously battling Austerity based policy 5 years ago, and in this last week released an article which is his parade lap of saying he was right and still is right.

http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

The only issue is, is that he is not necessarily right. We don’t get the opportunity to test out economic policy in isolated environments, he is basing his success by noting the apparent failure of austerity. Yet we lack an example of any economy which didn’t pursue austerity after the financial crisis. Fiscal based stimulus may have equally failed, but we will never be in the position to know for this occasion.

I am not defending austerity in any manner but I would be cautious to jump onto the other boat, Krugman himself noted while yes a deficit can be managed for a long time there is a point where it is undoubtedly damaging to the health of the economy. Austerian economics is by no means popular or in the post financial crisis economy that effective. However it does highlight a period in which we have explored unconventional policies. The main issue with austerity has been the inequality which it has helped perpetuate, this can be seen in regards to the year on year increase of millionaires and billionaires, but an increasing rate of poverty in developed economies. One may ask who the government is serving, the people as they should be? or the special interests of large corporate institutions? As it is clear that the growth that we have achieved has not been felt by the marginalised factions of society.

I mentioned earlier the upcoming primaries in the United States, I have taken this example specifically due to the data available in regards to where the money that supports candidates comes from. Take the sample below between two democratic primary candidates Hillary Clinton (who has just recently launched her campaign with an advertisement showing how she supports the “regular” American) and Bernie Sanders.

GovMoney

Hillary Clinton has received donations from Citigroup, Goldman Sachs, Morgan Stanley, J.P. Morgan, Credit Suisse, etc. The list goes on. Obviously this does not mean that she will enact policy specifically to disadvantage the people while supporting the financial industry. However, there is a distinct conflict of interest. In comparison to Bernie Sanders he has mostly received contributions from workers unions, and manufacturing related companies. If one was to argue who is more likely to serve the peoples interest, from a financial standpoint it would be Bernie Sanders. But even in this case I believe that campaign contributions to some degree cause a conflict of interest. How can we expect politicians whether they are in the United States or the United Kingdom to make economic policy decisions without an appreciation of the influence that arises from campaign contributions, party contributions, and the coaxing of lobbyists.

The reader will have no doubt that I lean towards the right in regards to political and economic policy. However, I believe that governments have betrayed their ultimate purpose – “serving the people”. With a smaller government I would argue there is less room for financial pressure on elected politicians. As well as the issue of career politicians who get to enjoy the warm cushion of contributions for their entire lives. This is not a comment on the lifestyle or pay of politicians, but how their position is compromised due to the nature of money in politics.

This is critical when we come to assess the type of economic policy whether fiscal or monetary that countries push through. Austerity can seem like a valid decision on the basis that the government would not be crowding out investment, while offering expansionary monetary policy on the side. This has not helped the integral strength of the economy, but specific sectors. While we clearly understand the failures of over-specialisation regardless of how developed the economy.

Cutting The Deficit

As we near the time of elections in the United Kingdom there is a greater focus on the condition of the economy, and what needs to done in order to return the economy to its previous strength. Austerity has been the way forward, and whoever wins the next general election will have to maintain the burden if it is to be effective.

Now austerity is often subject to ferocious attacks as to its actual benefit to society, and that cuts are never made in proportion to the people they are affecting. I am admittedly glad that I am not in the position of the Chancellor of the Exchequer having to make those unbelievably difficult decisions. There seems to be no way to please everyone, but that is not a new concept in the game of politics.

From an economic perspective we can note that in terms of policy its incredibly difficult to decide what extent a cut occurs, and the time frame for it to occur. If you protect the elderly it might mean putting the younger generation at risk of unemployment or a reduction in education. There are insurmountable opportunity costs that we may realise if we start looking at what to cut. The Financial Times have produced a UK budget deficit calculator, which brought me to frustration as no decision seems favourable to any extent (except cutting overseas aid, and freezing elements of the defence budget). I highly recommend having a go at the calculator, because I never cut enough to reach the required amount, with my best effort being £38 billion:

http://www.ft.com/ig/sites/2014/deficit-calculator/

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