Posts in category Buttonwood’s notebook


Business and financeButtonwood's notebook

Taxing the rich

FOR once, the Daily Mail and the Guardian, British newspapers of the right and left, agree. In the former, Alex Brummer says “IMF’s new line of thinking of tax should please Corbyn & co” while the latter says that the IMF “analysis supports tax strategy of Labour in UK”. Both are responding to the IMF’s fiscal monitor which does indeed say that

 there would appear to be scope for increasing the progressivity of income taxation without significantly hurting growth for countries wishing to enhance income redistribution.

The report details how income tax progressivity in advanced economies declined in the 1980s and 1990s and…Continue reading

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Business and financeButtonwood's notebook

The globalisation counter-reaction

WHEN the Archduke Franz Ferdinand (pictured right) was assassinated in 1914, there were few initial indications that world war would follow. In retrospect, many people have argued that the killing was a freak event that should not have resulted in the folly of war.

But was the subsequent war really an exogenous event? Or was it the near-inevitable consequence of the tensions resulting from the first great era of globalisation? If Franz Ferdinand had survived, maybe something else would have triggered the conflict. If the latter possibility is right, that may be a warning sign for the current era.

From 1870 to 1914, the first great era of globalisation saw rapid economic growth, trade grow faster than GDP, mass migration from Europe to the New World and convergence of real wages between the old and new worlds. In Europe, GDP per capita grew more than 70%; in the new world, (Argentina, Australia, Brazil, Continue reading

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Business and financeButtonwood's notebook

Britain’s political outlook seems toxic to investors

SUDDENLY Britain looks a lot less attractive as a home for international investors. The Conservative party under Theresa May gambled on a snap election to deliver a “mandate for Brexit”. It unveiled a muddled manifesto that alienated voters and was out-campaigned by the veteran left-winger Jeremy Corbyn. The party lost its overall majority and will now be propped up by the very odd ducks in Ulster’s Democratic Unionist party.

The markets reacted less severely than might have been expected. That seems to be based on the view that a “soft Brexit” looks more likely. But it is far from clear that this is the case. David Davis, Britain’s Brexit minister, seems to be ploughing ahead with plans to leave the single market and the Continue reading

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Business and financeButtonwood's notebook

Markets struggle to make sense of the election chaos

THERESA MAY decided to call a snap election on a walking holiday in Wales. History will regard it as the most disastrous ramble since Captain Oates wandered out of the Antarctic tent in 1912. Having failed to anticipate the result, investors (like everybody else) are struggling to understand what will happen next. 

It looks as if the Conservatives can carry on in power, with the support of the Democratic Unionists in Northern Ireland. This would give them a bare majority. But Mrs May’s position has been severely weakened ahead of Brexit negotiations. Another election later this year is possible.

For the markets, two factors are offsetting each other. On the one hand, there is uncertainty and the possibility that a left-wing Corbyn government could still take power in the near future. On the other hand, this result may change calculations about a hard Brexit. The Unionists backed Brexit but they will not want a hard border with the rest of Ireland; something that may require Britain to make concessions to the EU….Continue reading

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Business and financeButtonwood's notebook

Britain’s vote catches out the markets—again

SO AN election that was called to give Theresa May a mandate to negotiate Brexit looks like it has done anything but. The exit poll suggested that the Conservatives would have the most seats, but short of a majority with 314. Add in the Ulster Unionists and allow for the fact that Sinn Fein MPs don’t take their seats and Parliament would be a virtual tie.

This would lead to enormous uncertainty. Just before the polls closed, the pound was trading at $1.9950, while the euro was worth £0.866. Within minutes of the exit poll, the pound had dropped nearly two cents to $1.2768, while the euro was up to £0.8791.

If this poll is borne out by the results (and it was pretty close to the mark in 2015), there will be turmoil in the markets in the morning. The FTSE 100 index closed on Thursday down 0.3% at 7,449.98. Ten-year gilt yields rose three basis points to 1.03%. That left share prices close to a record high, and gilt yields close to a record low. That leaves plenty of scope for disappointment.

On the plus side, this might lead to a softer Brexit than the markets feared. But another election, and more uncertainty, could follow. the blog will be updated during the night.

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Business and financeButtonwood's notebook

What will the markets do if Labour wins?

WHEN the British election started, a victory for Theresa May looked a nailed-on certainty. The Conservative lead was as high as 20 percentage points and the party was 1/20 on to claim the most seats. But a poorly-run campaign means that the gap has narrowed; the latest from Survation had the Conservatives with just a one-point lead

The betting markets still assume that the Tories will win, albeit with a majority of 70 or so rather than the 100 plus that was assumed earlier in the campaign. But what if the gambling markets are wrong, as they were about Brexit and Trump? Nate Silver, the US polling guru, argues that the Continue reading

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Business and financeButtonwood's notebook

May’s mandate melts

THERESA MAY, Britain’s prime minister, called a surprise election for June 8th arguing that she needed a strong mandate for negotiating Brexit. The pound rallied on the news, in the belief that a large Conservative majority would allow Mrs May the flexibility to do a deal with the EU, and see off the hard-liners among her party.

For a while, it looked as if the plan was going well. The Conservatives had a 20-point lead in some polls. But the party’s campaign, heavily reliant on the appeal of its leader and the repeated use of soundbites like “strong and stable”, has been misjudged. The manifesto launch was disastrous and included a pledge to charge the elderly (a key Tory demographic) for social care. That pledge was quickly reversed, but Mrs May’s refusal to admit to an obvious U-turn undermined her strong leadership…Continue reading

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Business and financeButtonwood's notebook

The “I’ve paid in all my life” fallacy

SOCIAL security is often described as the “third rail” of American politics—touch it and you die. Britain’s prime minister has just tied herself into a tangle over the way to fund long-term care for the elderly.

The problem is made more difficult because of the way that such benefit schemes were established and marketed to the public—as insurance schemes in which what you receive in benefits relates to what you put in. When pension schemes were set up by Franklin Roosevelt (pictured left) in the 1930s or in Britain, by David Lloyd George (pictured, right) in the Edwardian era, the insurance notion was something people could easily grasp (private schemes already existed) and could be seen as fair. 

This was fine in the early years of such schemes when the number of people contributing was far greater than the number of people taking benefits. But as our societies age, the costs rise and the inadequacy of…Continue reading

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Business and financeButtonwood's notebook

Not Maggie May, but muddled May

THE Conservative election campaign so far has been duller than an afternoon looking at Jeremy Corbyn’s collection of pictures of manhole covers. Blessed by an extremist opposition and a big opinion poll lead, the government is coasting, muttering platitudes like “strong and stable” and emphasising its newish prime minister, Theresa May, rather than its party name.

The odd thing is that the Conservatives are trying to develop a personality cult based on someone who (to put it politely) does not have a particularly fascinating personality. Perhaps that’s the point; people are looking for someone calm and competent.  Labour tried something similar with Gordon Brown—“Not flash, just Gordon” was the slogan—with little success. The Conservative strategy seems to be working for now but one…Continue reading

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Business and financeButtonwood's notebook

Old McDonnell has a plan. He eyes IOUs

WITH the Labour Party 17 percentage points behind in the opinion polls, it may not be worth analysing the tax and economic aspects of its manifesto. The belief that the party will lose is so widespread that you can get odds as high as 20/1 on a victory for the party; market indifference is such that its plans to nationalise the water industry have caused shares in the biggest provider, United Utilities, to fall just 1.6%. Still, the manifesto is such a mishmash of ideas that it is worth a look at the ideas of Jeremy Corbyn and John McDonnell (pictured), the shadow chancellor of th exchequer.

One eye-catching proposal is for a £250bn “National Transformation Fund”, spread over ten years, to invest in:

infrastructure—transport, energy systems, communications—scientific research and housing fit for the 20th century

There is an argument for borrowing to fund…Continue reading

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Business and financeButtonwood's notebook

Markets uninspired by Trump tax plan

REMEMBER why the “Trump bump” began, all the way back in November? The rationale for the surge in stockmarkets was that the new administration would cut taxes and allow American growth to accelerate. And so we waited for the details. When they came yesterday, it was only a one-page set of bullet points, containing around 200 words. If, as one expert pointed out, it had really taken 100 experts to come up with the plan, they averaged two words each.

The response from the markets was a yawn. Analysts at Clear Treasury said that

Much of yesterday was a non-event, markets were waiting to hear what came of Trump’s tax plans but there was certainly an air of disappointment when finally released.

The S&P 500 and Dow Jones Industrial Average were slightly lower on the day, and the European markets have fallen today. Of course that could be related to the other story floating around yesterday – that the US might withdraw from Nafta. With the US also reviving its trade complaints about Canadian lumber and imported steel, Citigroup has taken to issuing a “US Protectionism Round-Up”. But this is only a reminder that, in market terms, there has always been a “Trump lite”…Continue reading

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Business and financeButtonwood's notebook

Reports of populism’s death are premature

MONDAY was a day when, in the latest jargon, the markets went “risk on”. Equities rose, the spread between the yields of French and German bonds narrowed and the euro rebounded. The reason was the first round of the French presidential election. As the results emerged on Sunday night, it was clear that a) the nightmare of a second round between Marine Le Pen and Jean-Luc Mélenchon had been avoided and b) Ms Le Pen’s vote was no better than her poll rating, indicating there was no reservoir of shy, far-right voters. The centrist Emmanuel Marcon (pictured) topped the poll and is predicted to get more than 60% of the vote in the second round, far outside the pollsters’ margin of error.

So France will not follow the US and Britain down the path that led to the election of Donald Trump and the Brexit referendum. But it is way too early to say, as some do, that populism is in retreat. First, France has a much greater tradition of support for the far left…Continue reading

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Business and financeButtonwood's notebook

A market-related twist to the Dortmund bombing

WHEN three explosive devices hit a bus carrying the Borussia Dortmund football team on April 11th, it was immediately assumed that it was another Islamist attack. Notes were found at the scene of the crime alleging that Islam was the motivation, with the author claiming a link to the terrorist group Islamic State. But prosecutors in Germany allege a completely different rationale. They say that the suspect, a 28-year-old man, had borrowed money and taken out put options, which would benefit from a decline in Borussia Dortmund shares (which fell 3% on the day after the attack). 

As yet, the suspect has not been convicted. But if true, the story would seem to come straight out of Hollywood. In the film “Casino Royale”, James Bond (as played by Daniel Craig) foils a plot to blow up an airliner owned by the fictional firm Skyfleet, after villain Hugo le Chiffre had sold the company’s shares short (ie, bet on their price to fall). In “The Fear index”, a Robert Harris novel, a hedge fund’s trading programme shorts an airline’s stock just before a fatal crash. It was rumoured, after the September 11…Continue reading

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Business and financeButtonwood's notebook

The markets adjust their Brexit calculations

SOMETIMES the markets are genuinely surprised. On the morning of April 18th, news that the British prime minister was to make an announcement at 11.15am caused the pound to dip. What could the news be? Retirement due to ill health? Several pundits went on Twitter to proclaim their belief that it would not be an early election; after all, Theresa May, the prime minister, has said repeatedly that the poll would not occur until 2020. But the news was indeed that an election will happen on June 8th. The pound then stormed higher and is now more than $1.28, around its strongest level this year (but well below the $1.50 touched on the day of the Brexit referendum).

So what explains the switcharound? The hope is that the election will lead to a softer Brexit result and thus be better news for the British economy. Deutsche Bank, previously bearish on sterling, was the most prominent convert to this view.

First, it makes the deadline to deliver a “clean” Brexit, without a lengthy transitional arrangement, by 2019 far less pressing given that no general election will be due the year after. Second, it will dilute the influence of MPs pushing for hard Brexit, strengthening the government’s…Continue reading

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Business and financeButtonwood's notebook

Donald Trump, trade and the new world order

TWO months into the Trump administration and we have had more sound and fury than concrete proposals about its economic agenda. The most alarming sign so far is that America forced the G20 to drop a pledge about resisting “all forms of protectionism” from a joint statement but this may be purely symbolic.

Nevertheless, Mr Trump’s determination to shake up the status quo may yet have global consequences. In a research note, Chris Watling of Longview Economics suggests that

Trump’s policies might inadvertently bring about a new international monetary order as the administration struggles to fulfil campaign promises in the light of the original misdiagnosis of the ‘trade deficit’ problem.

The current monetary system emerged from the downfall of Bretton Woods in the 1970s. Under the Bretton Woods system, devised in part by John Maynard Keynes (pictured, left), currencies were fixed to the dollar (with scope for occasional devaluations or revaluations) and the dollar was fixed against gold. But this required America to act as the anchor of the system; other…Continue reading

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Business and financeButtonwood's notebook

The hole in Western finances

HAVE western governments, faced with angry voters, lost the ability to raise taxes? The question is raised by a farcical U-turn by the British government over a budget measure announced a week previously. The government retreated in the face of backbench opposition and the right-wing press. It seems eerily reminiscent of America, where Republicans have an absolute abhorrence of tax-raising measures.

The planned British increase (aligning the tax rates of the employed and self-employed) was perfectly sensible. Unless closed, this gap will erode the tax base over the long run. Most economists agree that differential tax treatments tend to distort behaviour for no long-term gains. But the government had promised at the 2015 election not to raise income tax, national insurance or VAT—three taxes that raise around two-thirds of revenues—and this (foolish) promise was used against it.

As the graph shows, British tax revenues have…Continue reading

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Business and financeButtonwood's notebook

The hounding of Owen Jones

IN THE big scheme of things, the retreat of a Guardian columnist from social media is not a huge event—it will be drowned out by the latest antics of Donald Trump, the extraordinary diplomatic dispute between the Netherlands and Turkey, the triggering of article 50 by the UK and Scotland’s push for a second independence referendum.

Actually, though, I think that it’s possible to tie all these events together as evidence of a much wider trend; one that is corrosive to both global politics and economics. Let us start with the specifics. Owen Jones (pictured) is a left-wing writer; initially a great enthusiast for Jeremy Corbyn, Britain’s Labour leader, he has become disillusioned. Those who previously agreed with his columns have denounced him on Facebook and Twitter. As he wrote in one final post (complete with language that may offend some)

On a daily basis I have angry strangers yelling at me, on the one hand, that I’m responsible for the destruction of the Labour Party, and on the other, I’m a right-wing sellout careerist who’s allied to Tony Blair and possibly in the pay of the Israeli government (and that I’m a Blairite cunt who needs to go fuck myself,…Continue reading

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Business and financeButtonwood's notebook

The ouija-board theory of democracy

EVER since the June 2016 referendum vote in Britain on membership of the European Union, there has been a battle over the terms of departure. The government, and right-wing press, are averse to there being any kind of scrutiny over the process by either the courts or Parliament. Judges who ruled that Parliament should approve the triggering of Article 50 (the technical start of negotiations over exit terms) were dubbed “enemies of the people” by the Daily Mail, a term that has since been taken up by Donald Trump.

But the referendum posed a very general question—“Should the United Kingdom remain a member of the European Union or leave the European Union?”—without setting out the manner of departure. Britain could have remained a member of the single market and customs union while being outside the EU (as was suggested by some members of the Leave campaign); the Conservative manifesto of 2015 (from which the government owes its legitimacy) talked about Continue reading

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