Another Torch classic from the golden era of Northern.
Saturday, 30 March 2013
Thursday, 28 March 2013
Capital I, Chapter 25 - Part 7
c) The Nomad Population
These are former agricultural workers who now undertake a variety of jobs that arise sporadically in different locations, such as road building, railway construction, brick making and so on. Those involved frequently live in their own encampments, just as today itinerants move around in their caravans. The living conditions of these workers made them prone to a whole range of diseases, which they spread, as they moved from one area to another.
In the same classification, Marx also details the living conditions of miners. Many of them lived in mining villages near the pit, in cottages provided by the mine owner. Marx comments,
“In the construction of the cottages, only one point of view is of moment, the “abstinence” of the capitalist from all expenditure that is not absolutely unavoidable.
'The lodging which is obtained by the pitman and other labourers connected with the collieries of Northumberland and Durham,” says Dr. Julian Hunter, “is perhaps, on the whole, the worst and the dearest of which any large specimens can be found in England, the similar parishes of Monmouthshire excepted.... The extreme badness is in the high number of men found in one room, in the smallness of the ground-plot on which a great number of houses are thrust, the want of water, the absence of privies, and the frequent placing of one house on the top of another, or distribution into flats, ... the lessee acts as if the whole colony were encamped, not resident.'” (p 623)
A further report detailed the way in which any complaints by miners led to them not being rehired when the annual contract expired, meaning they lost both their job and their house.
d) Effect of Crises on the Best Paid Part of the working class
Nothing much has changed substantially! |
Marx then details the effects on even these better paid and skilled workers, from a newspaper correspondent.
“In the East End districts of Poplar, Millwall, Greenwich, Deptford, Limehouse and Canning Town, at least 15,000 workmen and their families were in a state of utter destitution, and 3,000 skilled mechanics were breaking stones in the workhouse yard (after distress of over half a year’s duration)...” (p 626)
The Report goes on,
“Seven thousand ... in this one workhouse ... were recipients of relief ... many hundreds of them ... it appeared, were, six or eight months ago, earning the highest wages paid to artisans.... Their number would be more than doubled by the count of those who, having exhausted all their savings, still refuse to apply to the parish, because they have a little left to pawn.” (p 626)
Marx quotes from a Tory newspaper – The Standard – which even detailed the misery.
“A frightful spectacle was to be seen yesterday in one part of the metropolis. Although the unemployed thousands of the East-end did not parade with their black flags en masse, the human torrent was imposing enough. Let us remember what these people suffer. They are dying of hunger. That is the simple and terrible fact. There are 40,000 of them.... In our presence, in one quarter of this wonderful metropolis, are packed — next door to the most enormous accumulation of wealth the world ever saw — cheek by jowl with this are 40,000 helpless, starving people. These thousands are now breaking in upon the other quarters; always half-starving, they cry their misery in our ears, they cry to Heaven, they tell us from their miserable dwellings, that it is impossible for them to find work, and useless for them to beg. The local ratepayers themselves are driven by the parochial charges to the verge of pauperism.” (p 627)
Then, as now, of course, the apologists of capital proclaimed that the solution was even greater freedom for capital and further limitation of the rights of workers. Then they cited Belgium, even though as Marx has shown, Belgian industry was still unable to compete with its British rivals. But, the consequences for Belgian workers were even worse.
Marx details from official Belgian data the fact that Belgian families' income available for food intake, was not just below the minimum levels, but was below even the meagre rations provided for prison inmates!
“Of the 450,000 working class families, over 200,000 are on the pauper list.” (p 629)
e) The British Agricultural Proletariat
“It is then proved in detail that the real agricultural wages between 1737 and 1777 fell nearly ¼ or 25 per cent.” (p 630)
“His average wage expressed in pints of wheat was from 1770 to 1771, 90 pints, in Eden’s time (1797) only 65, in 1808 but 60.” (p 631)
“The Poor Law and its administration were in 1795 and 1814 the same. It will be remembered how this law was carried out in the country districts: in the form of alms the parish made up the nominal wage to the nominal sum required for the simple vegetation of the labourer. The ratio between the wages paid by the farmer, and the wage-deficit made good by the parish, shows us two things. First, the falling of wages below their minimum; second, the degree in which the agricultural labourer was a compound of wage labourer and pauper, or the degree in which he had been turned into a serf of his parish.” (p 631)
“In 1795 the deficit was less than 1/4 the wage, in 1814, more than half.” (p 631)
Marx also details how divisions amongst the exploiters played out in this regard. The Liberals opposing the Corn Laws sought to expose the extent to which the Tory Landlords exploited the agricultural workers, whilst the Tories sought to expose the poor conditions of the industrial workers.
Once again, the data showed that many of these labourers were living on less for food than was available for convicts in British prisons.
“John Smith, governor of the Edinburgh prison, deposes:
No. 5056. “The diet of the English prisons [is] superior to that of ordinary labourers in England.” No 50. “It is the fact ... that the ordinary agricultural labourers in Scotland very seldom get any meat at all.” Answer No. 3047. “Is there anything that you are aware of to account for the necessity of feeding them very much better than ordinary labourers? — Certainly not.” No. 3048. “Do you think that further experiments ought to be made in order to ascertain whether a dietary might not be hit upon for prisoners employed on public works nearly approaching to the dietary of free labourers? ...”“He [the agricultural labourer] might say: ‘I work hard, and have not enough to eat, and when in prison I did not work harder where I had plenty to eat, and therefore it is better for me to be in prison again than here.’” (p 635)
But, the situation in respect of housing and other necessary elements of life was even worse. One reason was that in 'closed villages' where a few large landlords dominated, they would demolish labourers' cottages because this reduced the amount of Poor Relief the village was committed to pay. The labourers would then move to nearby 'open villages' where a large number of small landlords prevailed, and where speculators would erect poor, but expensive, shacks for these workers to rent. As these workers moved to the poorer 'open villages' so the cost of Poor Relief in these parishes rose, putting more pressure on their inhabitants. A similar thing happens with Welfarism today, and with the Tories policies of "ethnic cleansing" of poorer people from the more expensive areas of London.
In the past, at least the rural labourers benefited from a generally healthier environment, but now, their poor diet and worse housing meant they were subject to all the same kinds of diseases as the town proletariat, caused by those same conditions.
Marx then provides details of these conditions from official reports covering several counties.
The amalgamation of farms and introduction of new methods combined to produce a surplus rural population. That, plus the destruction of their cottages, produced a continuous flow of labourers from the country to the towns. These conditions led to the pauperisation of the rural labourers. Moreover, at the same time as a relative surplus population is created, the countryside becomes under populated, so that at times, when additional work is required, there are insufficient workers. As elsewhere this then leads to overwork.
“Hence we find in the official documents contradictory complaints from the same places of deficiency and excess of labour simultaneously. The temporary or local want of labour brings about no rise in wages, but a forcing of the women and children into the fields, and exploitation at an age constantly lowered. As soon as the exploitation of the women and children takes place on a larger scale, it becomes in turn a new means of making a surplus population of the male agricultural labourer and of keeping down his wage. In the east of England thrives a beautiful fruit of this vicious circle — the so-called gang-system, to which I must briefly return here.” (p 648-9)
Marx then details how new farms in these areas had been made possible by the use of steam engines for drainage. These new, large farms often had no cottages or workers of their own. Instead, the workers were shipped in from neighbouring open villages as gangs, recruited by Gang Masters, a phenomenon we see again today.
Along with the overwork, the long distances to walk to and from work, Marx also details the effects this life had on the young people born into the gangs, where frequently girls of 13 were made pregnant by boys of the same age.
Back To Part 6
Forward To Part 8
Tuesday, 26 March 2013
Capital I, Chapter 25 - Part 6
b) The Badly Paid Strata of the British Industrial Class
Marx details how low real wages had fallen in 1862. Using nutritional data provided by Dr. Smith, for the Privy Council, Marx indicates that in December 1862, the consumption level of the cotton workers had fallen to the minimum levels – 29,211 grains of carbon and 1,295 grains of nitrogen per week, during the Cotton Famine. The study, which selected the most healthy families, found that,
“in only one of the examined classes of in-door operatives did the average nitrogen supply just exceed, while in another it nearly reached, the estimated standard of bare sufficiency [i.e., sufficient to avert starvation diseases], and that in two classes there was defect — in one, a very large defect — of both nitrogen and carbon. Moreover, as regards the examined families of the agricultural population, it appeared that more than a fifth were with less than the estimated sufficiency of carbonaceous food, that more than one-third were with less than the estimated sufficiency of nitrogenous food, and that in three counties (Berkshire, Oxfordshire, and Somersetshire), insufficiency of nitrogenous food was the average local diet.” (p 613)
The worst affected were women and children. But, Dr. John Simon, who commissioned Smith's Report, comments,
“Yet in this point of view, there is, in my opinion, a very important sanitary context to be added. It must be remembered that privation of food is very reluctantly borne, and that as a rule great poorness of diet will only come when other privations have preceded it. Long before insufficiency of diet is a matter of hygienic concern, long before the physiologist would think of counting the grains of nitrogen and carbon which intervene between life and starvation, the household will have been utterly destitute of material comfort; clothing and fuel will have been even scantier than food — against inclemencies of weather there will have been no adequate protection — dwelling space will have been stinted to the degree in which overcrowding produces or increases disease; of household utensils and furniture there will have been scarcely any-even cleanliness will have been found costly or difficult, and if there still be self-respectful endeavours to maintain it, every such endeavour will represent additional pangs of hunger. The home, too, will be where shelter can be cheapest bought; in quarters where commonly there is least fruit of sanitary supervision, least drainage, least scavenging, least suppression of public nuisances, least or worst water supply, and, if in town, least light and air. Such are the sanitary dangers to which poverty is almost certainly exposed, when it is poverty enough to imply scantiness of food. And while the sum of them is of terrible magnitude against life, the mere scantiness of food is in itself of very serious moment.... These are painful reflections, especially when it is remembered that the poverty to which they advert is not the deserved poverty of idleness. In all cases it is the poverty of working populations.” (p 615)
Marx points out that the intimate connection between this poverty and the wealth of the capitalists can only be understood on the basis of the economic analysis he is undertaking. But, that is not the case in relation to the housing of the workers.
150 years after Marx was writing we now have thousands of workers living in garden sheds in London. |
That is not just a description which today fits the process of accumulation in Sao Paulo, Mumbai and Shanghai; it also fits with the situation in London, where clearances continue to make way for new palaces of capital, alongside workers living in sheds at the bottom of gardens. It leads to the price of property soaring way beyond what workers can afford to buy, and rents that can only be sustained on the back of large subsidies in the form of Housing Benefit, paid for by workers elsewhere in the country.
In the reports of the 19th Century, this kind of centralisation and overcrowding resulted in all sorts of sanitary problems and diseases. Ultimately, it provoked the bourgeoisie to introduce Environmental Health measures, and to promote the building of Public Parks. Later, it led to the creation of suburban developments as an escape from the misery of towns and cities. Today, with land prices having been sent through the roof, as a consequence of the house price speculation began in the 1980's, on the back of money printing and financial deregulation, capital seeks once again to squeeze workers into cramped, poor quality housing in the cities.
It does so by utilising environmental arguments about saving the countryside (despite the fact that existing urban areas are squeezed on to just 10% of the available land!) and promoting the idea of developing brownfield sites.
“'The result of this change is not only that the class of town people is enormously increased, but the old close-packed little towns are now centres, built round on every side, open nowhere to air, and being no longer agreeable to the rich are abandoned by them for the pleasanter outskirts. The successors of these rich are occupying the larger houses at the rate of a family to each room [... and find accommodation for two or three lodgers ...] and a population, for which the houses were not intended and quite unfit, has been created, whose surroundings are truly degrading to the adults and ruinous to the children.' The more rapidly capital accumulates in an industrial or commercial town, the more rapidly flows the stream of exploitable human material, the more miserable are the improvised dwellings of the labourers.” (p 618-9)
Back To Part 5
Forward To Part 7
Monday, 25 March 2013
Cyprus – A Solution That Makes The Problem Worse
What kind of a solution is
it that makes the initial problem worse??? According to the details
so far available, Cyprus is to effectively close one of its banks –
Laiki Bank – and transfer the deposits of its savers with less than
€100,000 to its other bank – The Bank Of Cyprus. In other words,
they will create a bad bank, using Laiki Bank. The deposits under
€100,000, therefore, now in The Bank of Cyprus, will be secured
under the European Bank Deposit Guarantee. Deposits in The Bank of
Cyprus over €100,000 will face a levy, possibly at a rate of 4%,
some time in the future. In the short term, the deposits in Laiki
Bank will face a levy of around 40%!!!!
The consequences of this are
fairly predictable. Anyone who has lost 40% of their money deposited
in Laiki Bank, is going to remove the rest as soon as capital
controls are relaxed. That other 60% represents a considerable sum
of money still. It means the original problem facing Cypriot Banks,
of lack of liquidity will be made worse. Laiki Bank will then go
bust. That means any other banks with exposure to it will be hit.
British Banks are reported to have exposure of about €1 billion.
But, that also means that
Cyprus will then need to go back to the EU and IMF for even more
money to deal with the crisis that will ensue from that. Anyone,
with money in The Bank of Cyprus or any other Cypriot Bank, seeing
the inevitability of that will also be getting their money out in
full as soon as possible, because if the 40% haircut on deposits in
Laiki Bank is not enough, resolution of the further crisis will
inevitably mean coming back for more of depositors money, and it will
be unavoidable to take deposits under €100,000.
Given that one of the
problems identified was the fact that Cypriot Banks had deposits
equal to 8 times GDP, the consequence of such an inevitable large
scale capital flight are obvious. Cyprus GDP is $22.5 billion. That
means current deposits are around $170 billion. If we assume these
deposits are split fairly equally between Laiki and Bank of Cyprus,
then we would likely see $50 billion withdrawn from Laiki Bank, and
pretty much all of the $85 billion in Bank of Cyprus. Preventing
that means that capital controls would have to be in place for some
considerable time. The longer they are in place, the more a
lingering death will occur, as depositors take out what they can,
whilst no one in their right mind will put money in.
The continuation of capital
controls for any length of time will also cripple the Cypriot
economy, because it means business cannot function. What business
would risk having its payments paid into a bank account under these
conditions? In fact, if you were considering buying a house in
Cyprus why would you. If the house cost more than €100,000 you
would risk losing nearly half that payment simply during the
conveyancing process, as the payment went through the banks!!!! But,
it also means that uncertainty and fear is increased across Europe,
because the question must then be, who will be next, where next will
such capital controls be imposed?
The answer to those last
questions seems to be Luxembourg and other tax havens like the
Channel Islands, as I pointed out –
After Cyprus, Who's Next?.
But, if Cyprus then needs
around €130 billion to cover the capital flight, how is that a
solution for a problem that originally only required €17 billion?
In the meantime its likely to turn Cyprus into a pre-banking economy,
causing effectively a credit crunch of mammoth proportions, within
Cyprus. That may be capable of being contained within Cyprus, but
the contagion of fear, and the effect of large numbers of people
removing their money from banks across Europe, and particularly from
those tax havens cannot. Given the extent of exposure of Luxembourg,
nobody in their right mind is going to leave their money in its
banks, above or below the €100,000 limit.
There is no shortage of tax
havens around the globe, where the problems associated with tax
havens in the Eurozone do not exist. In fact, had Cyprus wanted to
really build its economy around being such a tax haven, it would have
been well advised to have stayed out of the Euro, and to have stuck
with the Cyprus Pound. A tiny economy like Cyprus, could easily on
that basis have dealt with its problems by simply printing the
currency it needed to meet immediate liquidity needs, in a way that
an economy like Greece could not.
It may be too late for
Cyprus to follow that route now, but that does not stop money moving
to those places that have. Apart from Switzerland, that is bad news
for many of the smaller EU economies.
Sunday, 24 March 2013
After Cyprus, Who's Next
So far, Russia has turned
down any offer to get involved in bailing out Cyprus. That could be
because Cyprus has not been prepared to offer Russia the things in
return it requires, such as control over the gas reserves, and a warm
water port, or at least not at a price Russia feels it has to pay
given the situation. In response, the EU and IMF have toughened
their stance to an extent that it looks like Cyprus may be forced out
of the Eurozone, because the changed conditions mean that any
bail-out is likely to be insufficient to deal with the now bigger
problem. Already, Cyprus is talking about 20% levies on deposits
over €100,000, but also the introduction of capital controls to
prevent large scale capital flight, if and when its banks do open.
Capital controls themselves breach EU rules, which insist upon the
free movement of Capital and Labour, though their introduction was
mooted last year in response to the potential capital flight from
Spain, Italy and Portugal.
A lot of the coverage of
events in Cyprus, and the complaints raised by other EU states are
hypocritical. Cyprus is not, after all the only EU country that is
host to large amounts of Russian money. The London property market
has been massively inflated upon a sea of Russian money, much of it
of dubious origin. The events surrounding the death of Boris
Berezovsky today are just one aspect of that. But, there are lots of
other property developments in London that have forced up property
prices on similar grounds. For example, their have been numerous
property developments that have occurred with no real intention of
providing immediate shelter for anyone, but instead have been
investment vehicles for foreign money, that is happy to simply allow
the property to remain empty, while the owners benefit from rising
prices, whilst paying no Council Tax even.
Britain is particularly
hypocritical in its criticisms over the use of Cyprus as a tax haven
given its role in that regard. Places like the Isle of Man, and the
Channel Islands only survive, because they are even bigger tax havens
than Cyprus. There can be little doubt that the same Russian money
that went into Cyprus, that goes into London property, will also be
tucked away in places like the Isle of Man, and the Channel Isles.
These purpose built tax havens created by Britain, so that its rich
can conveniently shelter their funds away from the tax man, have the
benefit of paying no tax to Britain, elect their own Parliaments to
keep those benefits in tact, and yet have all the benefits that
British residents have to pay for, such as defence against attack,
and so on.
Even less than Cyprus do
these tiny British enclaves of tax exiles, have anything they can
rely on other than the inflow of funds from the rich. If the
Russians and other global rent seekers, decide that after Cyprus,
their funds are not particularly safe anywhere in Europe, these tax
havens could also see massive outflows. Given that many of the banks
that operate there are themselves branches of British banks, that
could have a significant effect on them. No doubt, they too, will
then be looking to the British taxpayers once again to bail-them out.
Its time that Britain ended the charade with these tax havens.
Either they are part of the British State or they are not. They
should be asked to either be governed by the British Parliament, pay
British taxes and so on, or else separate themselves entirely. That
would mean them having to pay for their own defence, their own health
service and so on.
But, for Europe there is a
much bigger problem. Much has been said about the fact that the
deposits of the Cypriot banks amounted to 8 times its GDP. But, of
course, Cyprus' GDP is tiny. Its less than the annual income of a
large company like Apple. Apple, with its $140 billion of cash
sitting on its Balance Sheet, could have bailed out Cyprus 20 times
over! A country with a much bigger GDP, and with a much bigger
proportion of deposits to its GDP is –
Luxembourg.
In 2011, according to this IMF document,
“Luxembourg’s
financial sector is exceptionally large and globally interconnected (Table 1). It represents
about one-fourth of Luxembourg’s GDP, one-third of its tax
revenues, and 12.5 percent of its
labour force. It comprises the banking industry, with total assets surpassing 20 times GDP;
the investment fund industry, with assets under management equivalent to around 50
times GDP; and the insurance industry, with an aggregate balance sheet of about four times
GDP. Luxembourg’s international financial centre has strong
linkages with France,
Germany, Italy, the Kingdom of the Netherlands, the United Kingdom, and the United States (Box 1), and is driven by private banking and investment fund activities (Figures 1 and
2). Its monetary and financial institutions (MFIs) intermediate about 16 percent of total
cross-border exposures among Euro area MFIs.1”
Cyprus'
GDP is $22.5 billion, whereas Luxembourg's GDP is $55 billion, which
means the total exposure is that much greater in Luxembourg than in
Cyprus. But, the problem for Luxembourg is that much greater,
because of the interconnectivity of its financial system with that of
the rest of Europe.
According
to the IMF,
“Luxembourg’s banks
are mostly foreign-owned and net providers of liquidity to their parent groups. The
banking sector accounts for about 28 percent of total financial sector assets. As of June
2010, there were 149 banks operating in Luxembourg. However,
most banks and 90 percent
of total bank assets are foreign-owned. The majority of these groups operate through
both subsidiaries and branches in Luxembourg, which provides flexibility to accommodate clients’ needs for financial services and to optimize
funding operations with parent
groups. Indeed, reflecting the liquidity generated by treasury
management for
institutional customers, as well as private banking and custody
activities, the local banking system is a
net provider of liquidity to parent banks (“upstreaming”).
Overall, interbank positions
represent about half of bank assets and liabilities (compared to an
average of about 28 percent in
the euro area), two thirds of these interbank positions are
cross-border exposures, and
intra-group exposures account for about 40 percent of total bank
assets.”
And,
“Luxembourg is the
world’s second largest centre for investment funds after the United States. Investment
funds domiciled and marketed in Luxembourg account for about 70 percent of its total
financial sector assets, and about 30 percent of total assets under management by European
funds. Fund sponsors mainly originate from Europe and the United States. Funds
domiciled in Luxembourg are generally managed from other international financial
centers. Fund shares are distributed in other European countries through an extensive use
of the European passport, as well as to investors worldwide (particularly Asia). MMFs
represent a fifth of Luxembourg’s investment funds and more than 25 percent of total
European MMF assets under management.”
The tiny Northern Rock was the canary in the coal mine. |
In other words, Luxembourg
represents a much bigger threat to European, and therefore, global
financial security than Cyprus ever could. But, the measures
undertaken in Cyprus, in particular the expropriation of Cypriot bank
funds, and the reneging on the Bank Deposit Guarantee, must now mean
that this foreign money must be removing itself from Luxembourg as fast
as it can! All eyes are currently on Cyprus, and from there to Spain
and Italy, but the real focus should be on these other tiny
economies, where contagion is likely to spread to first, but which
represent a much bigger systemic threat than does Cyprus.
Many more could be asking the same question - "Where is my money?" |
That is not to say that if
you have money in Spain, Italy, Greece, Portugal, or Ireland you
shouldn't be getting it out as soon as you can find some alternative
safe home for it. A rush for the doors in Luxembourg, the Channel
Isles, Isle of Man, and other small states like Malta, will crush
their banks and their economies even more severely than in Cyprus,
but because those banks are largely foreign owned, and tightly
enmeshed in the European, and global banking system, the
ramifications will send shock waves around the globe, and the first
banks to get swamped by the tsunami will be in those weaker economies
like Spain, Italy, Portugal, Greece and Ireland. Far better to move
to higher ground well in advance of any potential flood than to wait
until its lapping your ankles.
But, Britain would not
escape such a situation. Nigel Farage has called on the government
to give a public statement saying that the existing Bank Deposit
Guarantee will not be infringed, and Government Ministers have come
out to say that of course there is no chance that they would renege
upon it. Well, given that the EU and IMF called for it to be
scrapped in Cyprus, we now know how much such government backed
guarantees are worth! In fact, of course, the British Government is
already imposing such expropriation on British savers via Financial
Repression.
On the one hand, money
printing by the Bank of England is crushing the value of the pound,
thereby pushing up inflation. On the other hand, that same money
printing means that savers are able to get nothing in interest on
their savings. With inflation at real levels way over 3%, and after
tax interest rates at around 1%, British savers have already had
around 10% of their bank deposits taken from them over the last 3 or
4 years. Those that have been encouraged to save for a lifetime in a
pension fund now find that this same money printing means that the
annuity they can get on their pension pot is virtually worthless.
Given that the British Government has already been filching money
from savers in this way, there can be little doubt that if push comes
to shove, and they need to save the necks of their friends in the
banks, they will take even more arbitrary action to do so.
Apparently, sellers of safes
are doing good business at the moment. But, as the Foreign Office
pointed out in recommending that British tourists take plenty of
Euros with them to Cyprus, beware of thieves. There again deciding
exactly who the thieves are now, is not that clear.
Saturday, 23 March 2013
Northern Soul Classics - Out On The Floor - Dobie Gray
The original Northern Soul dancer. From the man who gave us the class "In Crowd", and "Drift Away" - Dobie Gray
Friday, 22 March 2013
Housing Policy Is Damaging and Dangerous - Part 1
There has recently been a
a series of mass divorces
in China. The reason had nothing to do with people suddenly becoming
disenchanted with their partners. It was all down to a change in the
law, which meant that people no longer were able to sell second homes
free of Capital Gains Tax. So, they divorced, and then divided the
two houses between them! That is always the danger of unintended
consequences resulting from State intervention, particularly
arbitrary state intervention, of which most is.
The same can be seen as far
as Housing Policy, in the UK too. Housing Policy should be designed
to facilitate a number of things.
- The supply of adequate housing to the population in the most efficient manner.
- The creation of sustainable communities.
- Protection of the environment.
- To facilitate the mobility of labour.
Government policy under this
government more than under the last not only fails to meet these
requirements, but it is actually damaging and dangerous to the
economy. The current and previous housing bubbles, and their effect
on the wider economy are just one small aspect of that.
The supply of adequate housing to the population in the most efficient manner.
Government policy clearly
fails to provide adequate housing to the population in the most
efficient manner. It is neither adequate, nor efficiently supplied.
It is clearly inadequate to meet need as opposed to demand. In fact,
at the moment, because house prices are in a bubble, supply is
considerably in excess of demand, outside possibly London, because
few people can afford to buy, for the first time, whilst many more are
unable to make up the difference in price, between their current
house, and the more expensive house they would like to move to. Look
down any street in the country, and you will see a forest of for sale
signs that have been there for a year or more, even though the
sellers have often reduced their initial asking prices by anything up
to 30%. The only reason prices have not collapsed further is
because, banks are following a policy of “extend and pretend”
that allows borrowers to go into arrears, even with near zero
interest rates, without being foreclosed upon.
Providing for need, however,
is a different matter. There are lots of people who need housing in
one form or another, but who are not being provided with it. The
bubble in house prices is one reason for that, but even at much lower
prices, there would be a considerable number of people for whom
buying is not a viable or the right solution. The main reason, these people are not being provided for, is the
lack of rental property. The extent of that lack is demonstrated by
the attempt to fill the gap, by people renting out garages and garden
sheds!
The main reason for the lack
of rental property is the high price of land, which in turn is a
result of two things, a) a monopoly of land ownership, b)
astronomical house prices. In the past, during the 20th
Century this was resolved by state intervention. Large amounts of
state owned housing was produced, and the land the houses were built
on was compulsorily purchased by the State. From the 1980's onwards,
virtually no state owned housing was produced, and the other forms of
social housing, provided by Housing Associations, declined also.
That policy was needed as part of the attempt to build a low-wage,
high debt economy, because rapidly rising house prices, were the
bedrock of the desire to stimulate borrowing. If sufficient low cost
housing was available, house prices could not be inflated, and so
borrowers could not be persuaded to go more into debt, borrowing
against their homes. That was the main economic strategy of
Thatcherism.
The monopoly of land arises
from the fact that, unlike many other countries, Britain's bourgeois
revolution was a fudge. Large amounts of land remain in the hands of
the same feudal landlords that have owned it for centuries, having
stolen it from the peasants. The Crown is one of the largest of
these. They are not the only monopoly owners of this land. In the
18th and 19th Centuries, the rising Capitalist
Class also bought large amounts of land, to turn into capitalist
farms.
The extent of this monopoly
can be judged by the fact that all of the residential property in the
UK is squeezed on to just 10% of the land mass! When the racists
oppose immigration, by saying that we are overcrowded already, they
are, as usual talking through their arse. We are only overcrowded,
because government policy has led to housing being squeezed into
unnecessarily cramped areas. In Staffordshire, which has a large
amount of industrial and commercial development, for example, 75% of
the County is still designated rural. Britain has lots of available
space to enable people to live in decent sized houses, in pleasant
and sustainable communities, at a fraction of the current costs.
As with any other commodity
if a monopoly prevents its supply being increased to meet higher
monetary demand, its price will rise. The Thatcherite economic model
of high debt and low wages, based on easy money, ensured that monetary
demand must increase. Landowners believing that there is only one
way for land prices to go, and that is up, will always have an
incentive to hold on to their land, rather than make it available for
development, as long as possible. There will always be a higher
price to be had tomorrow.
From 1982, two trends were
set in place. Firstly, a secular down trend in interest rates, and
secondly a secular rise in asset prices. The two things are not
unrelated. They are both a function of increased money printing.
There was a short blip in the mid 80's, when that policy was
reversed. It caused the Stock Market Crash of 1987, and the house
price crash of 1990. Between 1982 and 2000, the Dow Jones Index rose
from 1,000 to over 10,000. Partly, that was due to the fact that the
Rate of Profit rose during this period, but mostly it was simply
money fuelled asset price inflation. After 1987, every time the
Stock Market sneezed, Alan Greenspan reduced interest rates, and
another upward twist in the spiral was brought about.
That “Greenspan Put”
gave speculators the idea that there was only one way for share
prices to go, and that was up. That then tends to be a
self-fulfilling prophecy until such time as it isn't, and then the
consequence is a massive stock, bond and property market crash. Each
time the state has intervened to blow up those bubbles again, they
have had to print ever larger amounts of money in order to do so.
There comes a point, as happened with Keynesian intervention in the
1970's, when that no longer works. We seem to be at that point now.
Astronomical amounts of money have been printed, but struggle to get
into circulation, because no one wants to borrow, other than those
who will not pay it back, and despite all of the liquidity, Stock
Markets are flat, Bond prices cannot go any higher, and property
markets outside a few exceptional places have either already crashed
or are, as in Britain and Spain, on the Liverpool Pathway themselves.
The same trend has meant
that landowners, and property owners have come to the same false
conclusion that the only way for prices to go is up. Alongside the
monopoly ownership of land, and other restrictions on supply such as
legislation on the Green Belt, etc. that means that increased
supplies of land do not match demand. Artificially high house prices
mean that landowners are encouraged to continue in that view. High
house prices then feed into higher than necessary costs of building
new houses, which means that house builders tend to be only
interested in building very expensive houses, where those costs
form a smaller proportion, and where their profits are then bigger.
Moreover, there is no point house builders producing cheaper houses,
because the majority of potential buyers cannot afford to buy them at
these inflated prices. The result is that house building continues
to fall, reducing the supply of houses.
The solution to this problem
is fairly straight forward. As Fathom Consulting have pointed out
for several years, and repeated on TV again yesterday, the price of
houses is too high given the state of supply and demand. That is why
houses are staying unsold on the market for more than a year, and why
there is about a 30% difference between asking prices and final
selling prices. Instead of trying to keep house prices inflated to
satisfy the Daily Express and its readers who reflect the core
membership and support for the Tory Party, the Government needs to
facilitate a crash in house prices, as happened in the US and
Ireland. It is unlikely to do so, because of the above, and because
it would mean the banks would collapse, because they only survive on
the basis of the fiction of their balance sheet valuations. If
anyone wants to know what is damaging and dangerous about such a
policy, however, just look at what happened with the US Sub-Prime
crisis, or what is happening today in Cyprus. Sooner or later, you
cannot hide the grim reality, however much money you print, however
much you encourage people to pauperise themselves with debt.
According to the IMF and
OECD, house prices in the UK are 40% overvalued. Valuation indices
produced by the Nationwide, based on inflation adjusted prices, show
a similar bubble. In the past, whenever such bubbles have burst, the
correction is, and mathematically has to be, double the
over-valuation. That means that prices need to fall by around 80%,
before they can begin to recover sustainably. Such a fall in prices,
would immediately mean that millions of first time buyers would be
able to easily provide a 25% deposit on a house without any
Government subsidy. They would be able to meet their monthly
mortgage payments without impoverishing themselves, and without
mortgages on huge multiples of their income. It would mean that
existing home-owners, with equity in their homes, or only a small
amount of debt, would be able to buy a more expensive house,
unblocking the log-jam in sales.
But, that fall in house
prices, if it was accompanied by measures to end the monopoly of land
ownership, and with getting rid of the restrictions of the Green
Belt, would also bring about a similar reduction in land prices,
thereby reducing massively the cost of building new homes. That in
turn would mean that increased supply would prevent prices rising
again sharply. The increased supply of houses, and much lower prices
would mean that rents would also have to fall, because large numbers
of people currently forced into renting, could instead choose to buy.
The economic consequences of
this are fairly obvious. Housing comprises a major component of
workers expenditure. High house prices and rents, thereby increase
the Value of Labour Power, and so wages. That means that British
industry has a competitive disadvantage against other economies where
housing costs are lower. Reducing the price of houses, and level of
rents dramatically would increase British economic competitiveness.
Construction itself,
comprises a large part of the UK economy, but because no one can buy
houses at these astronomical prices, there is no demand for new
houses, and so construction has all but stopped. A huge fall in
house prices, that made them affordable, together with the freeing up
of building land, would facilitate a major house building programme
that would create large numbers of high value, skilled jobs, and a
consequent amount of tax revenue, both increasing growth, and
reducing the Government deficit.
Lower rents would mean that
the current distortions caused by the need to pay out Housing Benefit
would be removed. Massively lower rents, and house prices would mean
that no such subsidies would be required. That means that the
current transfers from better off workers wages to cover these
subsidies would no longer be required, again reducing the value of
labour power, and increasing efficiency.
Instead, Government policy
does the exact opposite. The policy of money printing helps prevent
the property bubble bursting, for now. Instead it feeds through into
inflation, as the value of the pound falls, thereby raising the value
of labour power, putting pressure on for higher wages, and thereby
reducing competitiveness.
The “New Buy” programme
can never work under current conditions, precisely because it does
nothing substantial to reduce the price of houses. By the Government
providing a further loan to buyers, it merely encourages people who
cannot afford to buy a house at current prices to recklessly go into
excess amounts of debt in order to do so. That is precisely what
happened with the sub-prime crisis in the US, and the Government is
simply following the same mistakes that were made by Fannie May and
Freddie Mac, the privately run, but state guaranteed mortgage firms,
there. The reality is that if someone cannot save for themselves,
more than 5% of the price of a house as deposit, they cannot afford,
and should not be buying that house.
It is not a matter of
whether such a person can meet the current monthly mortgage payments.
It is a matter of whether they have sufficient equity in the house
to cover changed circumstances, and whether their income is able to
cover such changed circumstances. If someone can only just cover
their mortgage payments today, when interest rates are at
unsustainably low levels, how will they manage when those interest
rates rise? Its possible to take out a fixed rate mortgage, but they
usually only last for up to five years, and can cause problems when
they come to an end, particularly if the value of the house has
fallen, and if interest rates have risen.
Its possible to insure
against the possibility of being unable to pay your mortgage due to
illness or unemployment, by taking out payment protection insurance.
That has become unpopular as a result of PPI mis-selling, but it is
the mis-selling that was the problem not the principle. At the
moment, however, it is the Government, that is taking on the role of
providing the insurance, through things like the “New Buy”
Scheme, because it is providing 20% of the equity in the house, so
that if the buyer defaults on the mortgage, it is the taxpayer who
will pick up the bill, so as to bail-out the bank that made the loan.
That is rather like the way
the State intervenes to bail-out the builders and insurance
companies, who build houses in flood plains, and provide insurance
for them. If people knew that the State would not bail them out when
such houses were flooded, they would either not buy such houses,
meaning builders wouldn't build them; only be prepared to pay a
substantially lower price for them to cover such eventualities; have
to be prepared to pay huge insurance premiums to cover such
eventualities.
But, its precisely because
the “New Buy” scheme does nothing to bring down house prices that
means that few people are able to take it up, and few banks are
prepared to lend under it, other than to people they would have lent
to without it. It was intended, when it was introduced last year, to
help 150,000 people buy houses. In fact, only 1% of that number,
just 1,500 people have taken it up!
The second part of the
Government's new housing policy, to guarantee 20% of the loan made by
banks for the purchase of any house is much worse. It is a direct
copy of the experience of Freddie and Fannie in the US, that led up
to the sub-prime crisis. As I pointed out recently -
Osborne's Big Budget Boo-boo
– its immediate effect might be the opposite to that intended,
because no one in their right mind would buy a house now, when they
can get this guarantee in a year's time, and no bank would lend now
for the same reason. Its immediate effect is then to reduce even
further the level of current demand for houses, which is already at
rock bottom levels.
But, as Labour have pointed
out the other side to that is that, as with the New Buy Scheme, the
people who will likely benefit, are the people who do not need it.
The banks will still gear their lending to the people who are most
likely to pay them back. With this government guarantee, it means
that multi-millionaires will be able to follow the example of the
Chinese referred to at the beginning. They will be able to divide up
their household, so as to justify buying several state subsidised
houses. In doing so, if house prices have not crashed by then, it
will give a further twist to their inflationary spiral, leaving them
even more overvalued, even more exposed, even more likely to come
crashing down with more devastating effect.
This kind of volatility and
uncertainty is very damaging for the economy, and can as has been
seen in 2008, and more recently in Greece and Cyprus have dangerous
consequences. Government policy exacerbates it.
In Part 2, I will look at
how Government Policy is damaging and dangerous for the development
of sustainable communities.
Thursday, 21 March 2013
Cyprus – The Mouse That Roared
In the last week tiny Cyprus
has become – The Mouse That Roared.
It has dared to say no to the combined might of the EU, ECB and IMF,
and refused, so far, to agree to expropriate money from the savings
of its people. It has dared to challenge their right to impose the
same kind of disastrous policies of austerity that have crippled the
economies of Greece, Ireland, Portugal, Spain and Italy, and which
are threatening to keep Europe in recession, even as the global
economic cycle turns up, and brings growth in China, the US and
elsewhere back to the levels prior to the North Atlantic financial
crisis of 2008.
In doing so, as Paul Mason
reported recently on Newsnight, it has set social networks across
southern Europe alight with chatter about following their example.
That is dangerous for the EU bureaucrats. But, much more dangerous
has been their own stupid decision to impose these policies on
Cyprus, particularly the decision to confiscate people's savings,
because that now means that no one in Europe, particularly in the
periphery can consider their money safe in the banks.
As I write, the EU is still
trying to play the strongman in imposing its conditions on Cyprus.
The ECB is threatening to withdraw financing unless Cyprus
capitulates by Monday. But, again as Paul Mason pointed out, the EU
and ECB have little in the way of bargaining chips. It is them not
the people and politicians in Cyprus who are sweating. At the end of
the day, if Cyprus decides, it can simply withdraw from the Euro,
print Cyprus Pounds, and use them to recapitalise its banks and pay
off its debts. The repercussions of that across Europe would be many
times the size of the event. It is a huge bomb in the possession of
Cyprus, sitting in the heart of the European and global financial
system.
That is pretty much the same
kind of position that Grand Fenwick found itself in. It started out
seeking a financial boost in war reparations, similar to the Marshall
Plan, by declaring war on the US. But, its development of the
world's most powerful bomb, by Professor Kokintz, played by the
wonderful David Kossoff, in the film, changes the whole game plan.
But, Cyprus also could utilise a similar scenario as depicted in the
sequel – The Mouse On The Moon.
In it Grand Fenwick plays
off the US, and USSR to obtain resources for a space programme, that
in reality turns out to be being used to provide it with a heating
and hot water system. As we speak, the Cypriot Finance Minister is
in Russia, trying to secure a deal for finance, as an alternative to
finance from the EU and IMF. Russia is unlikely to simply hand over
the money, and has its eye on Cyprus' newly found gas fields.
But, following Grand
Fenwick's example, it has another bargaining chip. Russia has always
wanted a warm water port for its navy, similar to those enjoyed by
NATO. Cyprus provides it with a perfect opportunity. Cyprus is a
member of NATO, but it could quickly withdraw its membership, thereby
saving itself a certain amount of money. It could then rent out its
facilities to Russia, for a sizeable up front payment. A large
Russian naval base on Cyprus would be great for Russia. It provides
it with the warm water port it has always wanted; it provides a
strategic base in the Mediterranean with quick access to the Suez
Canal, as well as a strategic position off the Middle east and North
Africa.
At the moment, Britain has a
large naval base on Cyprus, which brings it in a certain amount of
income, but Britain is a rapidly declining economic and military
power, whilst Russia is a rapidly rising economic and military power.
In addition, Russia is making closer ties with the other rapidly
rising economic and and military power, China. From a longer term
perspective, it would make much more sense for Cyprus to tie its
interests to Russia than to the EU, especially considering the way
the EU has failed to provide it with any kind of solidarity when it
was required.
In fact, given the support
given to Greece, that is ironic. A large part of Cyprus' problems
arises not from the actions of Cyprus, or of its banks, but of the
actions of Greece, and of the Troika. Cyprus' banks had invested a
large amount of money in Greek Bonds. When Greece went bankrupt,
part of the rescue package organised by the Troika, involved
bondholders taking an 80% haircut on those bonds. That meant Cypriot
banks lost 80% of their investment. Had, Greece actually defaulted,
then bondholders would have been able to claim compensation under
their bond insurance. But, part of the Troika deal meant that
although Greece had in reality defaulted, it was not treated as such.
Why, was it done that way? Because it would have set off a massive
series of claims that would have bankrupted much of the global
banking system.
Cyprus has suffered as a
result of that deception, and having done so, those that perpetrated
it, have then decided to play hard ball in refusing Cyprus a measly
€7 billion to resolve the situation. They may live to regret that
decision. They certainly deserve to.
Government & Media Economic Illiteracy
I've been getting
increasingly irritated by the Government, and some of the media's,
repetition of the same inane question, to Labour politicians, around
the question of debt, but also of Labour's inability to provide a
simple answer to it. The question is based upon the premise that
you can't reduce debt by taking on more debt. But, of course, that
premise is nonsensical. Of course you can reduce debt by taking on
more debt! It depends on the type of debt, and it depends on the
reason for the debt. The fact, that some of the people in the media
who pose the question in this way, seem not to be able to understand
it, or claim not to understand it, are people with degrees in
Economics, makes me wonder about the the recruitment policies of the
media companies!
Let me explain it in terms
that someone who understands basic maths can grasp.
Suppose you have a firm that
produces widgets. It produces 1 million of them a year, and the cost
per widget is £1. However, it can only sell these 1 million widgets
at £0.90, so it makes a loss of £0.10 per widget, amounting to
£100,000 a year. To stay in business, it borrows this £100,000
from the bank, at a rate of interest equal to 5% p.a.
If the business continues in
this vein, it will continue to lose £100,000 a year, and each year
need to borrow an additional £100,000, plus it will also rack up a
further debt of £5,000 a year in interest payments. It is certainly
obviously true, that continuing to borrow more on this basis has no
possibility of reducing the firm's debt.
However, suppose the firm
could borrow an additional £20,000, and use it to buy a machine.
The machine enables the firm to increase its production of widgets
from 1 million to 1.2 million, but also in the process to reduce the
cost of production from £1 to £0.80. Now, in year 2, the firm will
produce 1.2 million widgets, and each widget will produce for it a
profit of £0.20, or a profit of £240,000. So, at the end of year
2, having increased its borrowing by 20%, from £100,000 to £120,000,
the firm is able to not only pay off the £120,000 it borrowed, but
also to accumulate a further £120,000 as savings! In each
subsequent year this extra borrowing means that rather than racking
up debt, the firm racks up increasing amounts of savings.
That is precisely how
borrowing more enables you to reduce your debt! The Government
policy is like that of the firm in the first instance. Instead of
borrowing money to put people back to work, to invest in things that
would reduce the production costs of Britain, and thereby increase
its income, and more importantly its surplus income, it is simply
borrowing to finance unemployment, and trading losses. It is the
same failed economic policy that squandered Britain's North Sea Oil
wealth in the 1980's on paying Unemployment Benefit, as the jobless
total soared to around 5 million, rather than investing in
rejuvenating the country's infrastructure and skills, to prepare it
for the new global economy. Tory policy then led to the
de-industrialisation of the economy, and the rise of the banks that
has caused the problems the country faces today. Tory policy now, is
taking the economy down the same disastrous route.
The Tories are supposed to
be the party of business, but they are in fact the party of only
small business, and their outlook is that of the small businessman,
whose only answer to such problems is to look to penny pinch, to
squeeze a bit more out of the workers, a bit more out of their
existing machinery, and so on. The consequence of those short term
measures is always negative. A firm that tries to squeeze more out
of its workers sees their productivity fall not rise; it sees them
demoralised; it sees them look for some other job whenever the
opportunity arises; it sees its costs associated with high turnover
of staff increase. A firm that tries to squeeze the last bit out of
its machinery sees a similar thing. The machine breaks down more
often; it causes them additional costs in maintenance; it reduces
productivity because while it isn't working, neither is the worker;
it tends to produce poorer quality goods and so on. A firm that
tries to save money by buying cheaper materials suffers in the same
way. It loses customers because the quality o its own product
declines; it suffers increased wastage, because more of the poor
quality material has to be thrown away; it suffers lower
productivity, because the poorer quality material causes problems in
production and so on.
The Liberal-Tories have
taken that small capitalist mentality into Government, and it is
reflected in their economic policy. Its also the mentality of that
other section of society on which the Tories are based, the sections
of the middle class with an accountant rather than an entrepreneurial
or economists outlook. The former only has their eye on the bottom
line, on what can be cut to save money. The latter base their
outlook on the idea that “you have to speculate to accumulate”,
in other words, precisely that to make money you have to spend money,
and that means money you have borrowed if you don't have enough
yourself!
In fact, the period of
greatest entrepreneurialism in Britain was at the time of the
Industrial Revolution, and that was a time of huge borrowing in order
to invest both at the level of the firm and at the level of the
State. The ratio of debt to GDP rose to 250% compared to today's
level of around 70%.
Looking at the Liberal-Tory policy of cutting back it would be like the firm producing widgets failing to maintain its machines, or buy new ones when needed. It would be like them buying cheap material that broke when it was processed. It would be like them reducing their workers wages, and finding the workers felt demoralised, and sluggish. The firm might then find its costs rose from £1 per unit to £1.10, so that instead of reducing its debts, they increased, now needing to borrow £200,000 a year. That is what is happening with Government policy. It is having to borrow more money, not to increase production and productivity, by investment but merely to finance its own economic failure!
A look at the figures for GDP and Employment demonstrate that. GDP is a measure of income, and it is declining. But, the figures for Employment are rising. By simple mathematics that means that the income of each person in employment is declining. If 100 people's total income is £1 million, their average income is £10,000. If total income falls to £0.9 million, but the number of people employed rises to 110, then their income has fallen to £8,181, a fall of nearly 20%. That is what is happening in Britain. Behind the Government's flag waving over employment is the stark truth of most of those in that employment suffering significant falls in their income as they are employed on zero hours contracts, in part-time rather than permanent jobs, in self-employment that is really disguised unemployment, as people scrape a living doing a few hours a week as a gardener or window cleaner.
The other side of that is that GDP is also a measure of the value of output. So, if the value of output is falling, but the number of people employed to produce it is rising then that means that the value of output per person is falling by an even bigger percentage. At a time when around the globe in places like China and India, productivity is increasing at a rapid pace, because of the introduction of new technology, because increasingly better educated and trained workers are being employed in every higher value production, that in Britain productivity levels are falling is a disgrace. Its akin to the kinds of labour hoarding policy that was used in the USSR and eastern Europe to disguise unemployment, and which in the process set in train ever declining levels of productivity.
Again, the way to reverse that, is to do what countries like China have done, which is to plough large amounts into investment to raise productivity, and to train workers to take on high value jobs.
But, its also possible to
reduce your debt by borrowing more for other reasons. For example,
suppose you have credit card debt of £10,000 with an interest rate
on it of 30% p.a., which is not uncommon. If you can borrow instead
£20,000 on a mortgage at 5% p.a. you can most certainly reduce your
debt, and your repayments of it. Borrowing on the credit card means
you will accumulate, an additional £3,000 a year of debt. Within 3
years, your debt will be £20,000. But, borrow £20,000 against your
mortgage, and you can pay off the £10,000 credit card debt, and have
£10,000 left over, but be paying only £1,000 a year in interest.
That is precisely the kind
of option that is open to Government's because they borrow by issuing
Bonds of different durations. So, if the interest they are paying
currently is high, they can issue bonds of a different duration, and
use it to buy back the high interest bonds. Given that at the
moment, half of all newly issued Government Bonds are bought by the
Bank of England, which is why interest rates are so low, it would be
sensible for the Government to issue such new debt, and use it to buy
back all of those Government Bonds currently in circulation, on which
they are paying higher rates of interest! That is particularly the
case given that the Bank of England is in any case handing back the
interest it receives to the Government.
If Government Ministers do
not understand these basic elements of finance its no wonder they
decided to embark on a career in politics instead of in business.
The problem is that in the latter it would have been only their only
money they would have been wasting, in Government it is all our money
they are wasting, and all our lives they are damaging. As for the
media, the economics correspondents and editors ought to do a
refresher course, and the media companies should examine their
recruitment policies.