Making sense of it

November 16, 2016

How did Trump become President? Here are some attempts to unravel this very unusual election.


The BBC stats and maths program More Or Less had some interesting analysis of the US elections results, including the fact that Hilary Clinton received 5 million less votes than Obama.

The More or Less episode is called “US election, stray cats and puzzles”


Bernie Sanders on “CBS This Morning” explains how he thinks Donald Trump won presidency and why he thinks Democrats failed to appeal to the working class in the 2016 election.



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Against pessimism

November 9, 2016

On the Left, and amongst what might be called liberal opinion, there is a prevailing sense of pessimism. Pessimism is the default condition for most progressive commentators. Events like the Brexit vote, the refugee crisis and now Trump’s win can all make it seem as if the world is in a bad way and that things are getting worse.

That view is entirely wrong.

Even a cursory glance at the data shows that not only has the condition of humanity improved vastly in the last couple of centuries but that the improvement is accelerating and that there has actually been huge global social progress in just the last few decades.

Here are five slideshows that demonstrate that astonishing progress in the areas of reducing violence and war, poverty reduction, nutrition and hunger reduction, health improvements and the progress being made in Africa.

The Visual History of Decreasing War and Violence

The Visual History of World Poverty

The Visual History of Hunger and Food Provision

The Visual History of Global Health

Progress in Africa

Click through them and celebrate the great times we live in.

Pessimism finds its most acute expression in the form of Green ideology. The Greens claim that the very things that have so improved billions of people’s lives (cheap fossil fuel energy, travel opportunties for ordinary people, mass industrial production and consumption, urban living, industrialised farming) are actually terrible because they are causing some sort of existential environmental crisis.

That is not true.

As just one example here is a link to page of data about forest coverage in Europe, a continent that has hosted for the longest time the very modernising trends the Greens hate. On the bottom right of the page the third diagram is an animated historical map of tree coverage in Europe. If you click it you can see that since 1900 the number of trees in Europe has actually increased significantly. In fact it is modernity and economic development that makes the environment better.

The growth in European forests since 1900


The Mountain to Climb

September 28, 2016

As the Labour Party conferences winds down and the left is confirmed securely in control of the party it is worth taking a moment to consider the task ahead. And it’s a very big task. A new Fabian report, ‘The Mountain to Climb‘, reveals that victory for the Labour party will be more than twice as difficult to achieve as in 2015.

The report looks at the likely effects of scheduled boundary changes and concludes that Labour will need to win 106 seats to secure a majority, reaching deep into middle England. It lists the ‘target’ seats Labour will need to win (prior to boundary changes) and suggests that the ‘victory line’ could be Harlow in England and Kirkcaldy and Cowdenbeath in Scotland.
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Berlin blinks

July 31, 2016


The leaders of the EU know they are skating on thin ice. The eurozone is mired in a deep and prolonged economic stagnation that has caused the worse mass unemployment in the periphery of Europe since the Depression. Of the big economic member states only Germany is doing remotely well (if you consider a growth rate of 1-2% doing well) as the current currency system ensures German manufacturers can continue to export at a discount rate all over the world. The eurozone banking system is in a very fragile state and systemically important parts of it will need to be recapitalised (i.e pumped full of public money) to prevent a disastrous financial crisis. Numerous eurozone countries, including big nations like France, Spain and Italy, are persistently breaking the eurozone fiscal rules on government deficits. The migrant flows into Europe are quite likely to accelerate if Aleppo falls and Assad wins, and the Turkish turn towards authoritarianism intensifies. Across the EU radical populist parties of the left and the right are growing in support, and many of them want a radical rethink of the entire European project. Some even want to dismantle it. The entire European project seems now to be stuck in an impossible place, where it cannot go back to a pre-Euro federation, and it cannot move forwards to a new pan-European democratic polity, so none of its deep structural defects can be rectified. And Brexit, which if mismanaged could easily deliver an economic blow to the weakened europzone economy, has shown there is an exit door.

So things are little fragile. Perhaps its time for some pragmatism from the Ordoliberals in Berlin. And that’s what we seemed to have got in the last week when the German government decided not to push the European Commission to impose a punitive fine on Portugal and Spain for their persistent failure to comply with their budget deficit targets, leading one Eurogroup minister to declare that the euro zone’s Stability Pact is “dead.”
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What is Trump?

July 30, 2016

Six months ago Donald Trump looked like the method the Republican Party was going to choose to commit suicide. Now Trump looks like he might actually win the Presidency. How can we understand Donald Trump? The American writer Michael Lind has been writing a series of interesting articles analysing the Trump phenomena and situating it inside a bigger process of radical realignment that is taking place in US politics.

In an article in Politico Magazine in March this year entitled “Donald Trump the Perfect Populist: Why the GOP front-runner has far broader appeal than his predecessors going back to George Wallace“, Michael Lind tries to situate Trump in the long history of American populism.

“Is Donald Trump the Perfect Populist, one with broader appeal to the right and the center than his predecessors in recent American political history—so much so it could put him in the White House? In Trump, many of the kind of white working-class voters once called Reagan Democrats have found a tribune who represents their views and values more consistently than conservative populists like the Dixiecrat George Wallace, the Old Right paleo-conservative Pat Buchanan or the “theo-conservative” Pat Robertson, all of whom faltered in their bids for the presidency.

Trump, in fact, has more appeal to the center than the conservative populists of the last half century. Before Trump’s rise in this year’s Republican primary elections, the best-known populist presidential candidates were Alabama Governor Wallace and tycoon Ross Perot, along with Buchanan. Yet none of these past figures had broad enough appeal to hope to win the White House. Despite his folksy demeanor, Perot was more of a technocrat than a populist and did poorly in traditionally populist areas of the South and Midwest, where Trump is doing well. Wallace was an outspoken white supremacist, while Trump tends to speak in a kind of code, starting with his “birther” campaign against President Obama, and his criticism of illegal immigrants and proposed ban on Muslims may appeal to fringe white nationalists even if it has offended many if not most Latinos. Nor has Trump alienated large sections of the electorate by casting his lot with Old Right isolationism, as Buchanan did, or by adopting the religious right social agenda of Robertson.

Indeed, the best explanation of Trump’s surprising success is that the constituency he has mobilized has existed for decades but the right champion never came along. What conservative apparatchiks hate about Trump—his insufficient conservatism—may be his greatest strength in the general election.

[In the year ] 2000, and Trump, encouraged by his friend Jesse Ventura, then governor of Minnesota, was considering a run for the presidential nomination of Perot’s Reform Party, on the grounds that the Republican Party of George W. Bush and Karl Rove had “moved too far toward the extreme far right.” Trump and Ventura hoped to rescue the Reform Party from the conservative allies of Buchanan, of whom Trump said: “He’s a Hitler lover; I guess he’s an anti-Semite. He doesn’t like the blacks, he doesn’t like the gays.” Trump floated the idea of Oprah Winfrey as his running mate . In his 2000 manifesto The America We Deserve, Trump proposed a platform that included universal employer- based health insurance, gays in the military and a one-time 14.5 percent tax on the rich that would reduce the federal deficit and help eliminate the shortfall in Social Security.”

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IMF admits disastrous love affair with the euro and apologises for the immolation of Greece writes the always interesting Ambrose Evans-Pritchard in the Telegraph

“The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.

This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions.

It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.

In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located.”

Needless top say Yannis Varoufakis has a commentary on the IMF reports entitled “The IMF confesses it immolated Greece on behalf of the Eurogroup”.

The full IMF report can be downloaded here.
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The problems of the eurozone banks have escalated sharply this year, reflected in the collapse of their share prices, and the window of opportunity for another round of publicly funded bank bailouts is closing fast. The most serious banking problem is in Italy but there are also severe problems in Portugal, continuing weakness in Spain and the largest German bank, Deutsche Bank, is in real trouble.

The issue of the banking problems will come to a head this week as the EU-wide European Banking Authority (EBA) releases the results of its annual ‘stress test’ on 51 large eurozone banks. This years round of stress tests will only test 51 banks, compared with 124 in 2014, and they will not be given a pass or fail mark as in the past. Hardly a vote of confidence.

A lot of concern is focussed on the Italian, and world’s oldest surviving, bank, Monte Dei Paschi. Some observers are predicting that unless there is spectacular bail out Monte Dei Paschi could soon be out of business, its shares have lost lost 78% of their value this year, and the fear is that if it falls into insolvency then it could bring down other vulnerable banks and start a chain reaction of bank failures.

Last week saw two out of three of the members of the institutional triad known as the Troika — the ECB and the IMF — lend their support to a taxpayer funded bailout of Italy’s banking system. So, too, did the biggest U.S. bank by assets, JP Morgan Chase. This was followed quickly by a similar call by New York-based Goldman Sachs, the finance house that has been at the centre of every major part of the banking crisis for the last ten years, the company that engineered the falsification of the Greek government accounts in order to facilitate its massive borrowing prior to the 2010 crisis, and the company which seems to operate a revolving door for so many top EU bureaucrats.
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After the turmoil of the 1970s, when the combination of the collapse of the international system for managing exchange rates and the oil price shock of 1974 combined to produce rising unemployment and high inflation, the global economy seemed to enter a far more tranquil period. This period of relative tranquillity and reasonably steady growth became known as ‘The Great Moderation’. Economists and politicians came to believe that they had solved the old cycle of boom and bust, mostly through what became known as the neo-liberal package: liberalisation of trade and finance, deregulation, and increased labour ‘flexibility’ through the weakening of trade unions.

The Great Moderation came to an abrupt end in 2008 when the largest financial crisis since the Great Depression erupted. But nevertheless the last quarter of the 20th century and first decade and half of the 21st delivered some truly stunning increases in the material well being of the human race. In particular it has allowed billions of people to escape acute poverty, and live longer, healthier and richer lives.

However the benefits of the Great Moderation were not evenly distributed. The populations of the emerging economies, particularly in Asia, benefited hugely, and the richest elites of the West saw their wealth grow significantly, but the increase in incomes for most working people in the west was far less spectacular. Then came 2008 and again it was the working people of the west that carried most of the costs of the crisis in the form of the longest period of income stagnation in modern economic history.

As the graph below clearly shows the big winners from the growth, globalisation and trade expansion of the last 30 years has been the people of Asia and the wealthiest 5% of the population in the western liberal democracies. Most of the people in the liberal democracies have seen their incomes largely stagnate.

At the same time western social democracy finds itself largely immobilised. In the eurozone the institutional design of the single currency system actually works to systematically and drastically reduce the space for social democratic action, and bereft of purpose the traditional parties of the centre left have fragmented and declined. In the UK the New Labour project, which actually delivered the most sustained period of progressive social democratic government policy since WWII, was built on the premise of continuing growth and was completely disorientated by the sudden arrival of economic stagnation. New Labour was also an intentionally top down project and never really worked to transform cultural and political discourse, or galvanise enthusiastic and active political support for social democratic values, so when its material base was destroyed in 2008 it suddenly evaporated politically.

Given the circumstances the rise of populist parties of the left and the right (mostly the right) in the western liberal democracies is hardly surprising.

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The pain in Spain

July 19, 2016


The EU has threatened Spain and Portugal Tuesday with huge fines for failing over many years years to reduce government budget deficits that exceed the limits stipulated by the eurozone treaties and regulations. This is the first time Brussels has formally announced proposals to use its disciplinary powers over member states’ budgets to fine eurozone governments for excessive deficits. Other countries, including France and Italy, have all received warnings in recent years after missing targets on deficit or debt, but no country has so far been sanctioned. Until now.

This year is going to be the eighth consecutive year that Spain has overshot its fiscal target. Originally, the Spanish government was supposed to get its deficit back below the EU’s sacred limit of 3% of GDP by 2013, from a staggering 11% in 2011. When it became clear that the large recession caused in Spain by the financial crisis and the collapse of the property bubble would make it impossible to quickly reduce the deficit the deadline was extended by a year. A year later, Madrid had made so little progress that it got a further two-year extension, to 2016.

Now, with no sign of Spain reducing its defict the EU is threatening to sanction the country, as well as Portugal, with fines of up to 0.2% of GDP for failing to bring their deficit under the targets set by the Commission. If implemented this would be the first time that the EU has adopted such punitive measures.
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Italy has been trying, with no success, to get the ECB and European banking authorities to allow it to rescue its banks with a bail out package that may be as big as €40 billion of public money. Unlike banks in most other European countries, Italy’s got sick the old fashioned way by lending to businesses in its own market, and then having the loans go bad because of business failures caused by Italy’s never ending stagnation. Italy’s economy is still slightly smaller than it was in 2000.

New Euronzone-wide banking rules took effect in January. They require bank bail-ins as the remedy for sick banks, with only narrow exceptions. “Bail-in” means wiping out shareholders, and then wiping out bondholders and converting bondholders to equity holders to the degree that you now have a bank with a decent equity cushion. So under the new EU rules, if a bank gets into trouble, before it can get state funding it must convert some of its bonds to almost worthless shares, thus wiping out the value of the bonds owned by third parties.

That might sound sensible, except in Italy, many banks effectively cheated depositors by persuading them to buy bonds that are junior enough to put them first in line in a bail-in, by telling them those bonds were just as good as deposits. So bail-ins would hurt and potentially wipe out a lots of ordinary savers. That would not only damage the economy in a serious way, but it would also create political havoc. Premier Matteo Renzi is already at risk of losing to Beppe Grillo’s Five Star movement in elections this fall. Bail-ins would seal his fate. Five Star has vowed a referendum on exiting the Eurozone. Given that the currency union has become an economic straight jacket for Italy, a pro exit win in a referendum is seen being a distinct possibility. One would think the foregoing would motivate the Eurocrats to cut Italy some slack, and Renzi has made several cases as to why Italy should get a waiver but has been meeting much resistance from the Germans who argue that rules are rules..

But has the European Court of Justice may have given Italy a reprieve having just ruled that EU member states are not obliged to make shareholders and junior creditors pay before intervening to rescue a bank.

EU rules imposing losses on bank creditors before a bank bailout were considered legal by the Luxembourg-based European Court of Justice in its ruling over a Slovenian banking rescue.

However, the rules are not binding on member states, the court said in its ruling that slightly limits the European Commission’s antitrust powers amid talks for an Italian banking bailout. The court said that burden-sharing by shareholders and subordinated debt holders was not a precondition for granting state aid to a troubled lender.

German Finance Minister Wolfgang Schaeuble has warned against a discussion about support for Italian banks before the European Central Bank publishes stress test results on July 29, although many investors want to see a solution before then.

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This chart explains the various zones, pacts and treaties aound which the Brexit negotiations will pivot.

Click it to see a larger version.

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The Italian banking system is in trouble and there are big economic and poltical implications for the eurozone.

Italian banks are facing the same sort of problems that’ some American banks faced in 2008. They made a lot of loans to people who aren’t paying them back — a situation that’s been made worse by years of weak economic growth in Italy. Yesterday the IMF released an assesement of the Italian economy in which they said the country faces “two lost decades”, that any recovery in the Italian economy was likely to be “fragile and prolonged”, adding that the authorities faced a “monumental challenge”. “The recovery needs to be strengthened to reduce high unemployment faster and buffers need to be built, including by repairing strained bank balance sheets and decisively lowering the very high public debt.” Italy has an unemployment rate of 11% and a banking sector in crisis, with government debt second only to that of Greece.

Prime Minister Renzi is worried that the large qunatity of Non-Performing-Loans held by the Italian banks, rendering many of them technically insolvent, could lead to a collapse of several major banks, which could trigger a broader financial crisis in the country. So he wants to organise a government bailout of Italian banks, injecting $45 billion into the banks to provide the cushion they need to ride out a wave of loan defaults.
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Devil’s advocate

July 9, 2016

I am going to be the devil’s advocate here. The Brexit vote has produced a paroxysm of horror amongst Remainers and has resulted in a tidal wave of news stories about how the sky is falling and we are all doomed. It is however possible to look at the immediate consequences of the pro Brexit vote in another light. It is possible to actually welcome some of what the Leave win has already wrought.

One could, for example, argue that seeing lots of speculative capital fleeing the London property market is actually a good thing. It also possible to welcome as a good thing the fall in the value of the pound, especially given the very large trade deficit the UK is currently running. A large sustained deficit is a sign of an unbalanced economy, and the usual way to adjust an external trading imbalance is via currency exchange rate adjustment. Being able to devalue ones currency is precisely the main advantage of staying out of the euro.

The worst performers in the stock market falls since the Brexit vote were: construction, property investment, life insurance, property trusts, retailers, financial services, and tourism. But almost all of this is explained by a combination of exchange-rate depreciation (tourism, retail) and a deflating property bubble. Britain’s property sector has blown into a massive bubble, a bubble deliberately engineered so as to generate growth under Osborne’s ‘austerity lite’ program, and Brexit had the effect of deflating that bubble. Deflating a property bubble is a good thing, especially if it is a deflation and not a sudden stop collapse.

Another effect of Brexit, and perhaps the most important, has been to kill off Osborne’s aim of a budget surplus by 2020: Both he and (more relevantly) Theresa May, have abandoned that target. And there is substantial space for this relaxation of fiscal policy. Yet another impact of the Brexit vote was to push down yields on UK government debt, and this was from a starting position where government borrowing costs were already at historical lows. Twenty year index-linked gilts now yield minus 1.4 per cent, which means that, left to itself, government debt will fall over the long run. To put this another way, it implies that the government could run a significant budget deficit and still stabilise the debt-GDP ratio.

Simple maths shows that, if we assume a trend real GDP growth rate of 1.5 per cent and real yields of minus 1.4 per cent, the UK could stabilise the debt-GDP ratio at its current 88 per cent with a primary budget deficit of 2.5 per cent of GDP. This contrasts to a surplus of over two per cent of GDP in 2020 foreseen by the OBR in March. That allows a fiscal easing of 4.5 percentage points of GDP. A fiscal easing of 4.5 percent is a significant stimulus package. It means an additional £80 billion plus in public spending per year.

That fiscal relaxation could, for example, allow the government to increase spending on the NHS by around one per cent of GDP – roughly £350 million per week – and still stabilise public debt.

Time for some caveats. Some of the fiscal space created by the abandonment of Osbornomics will be eaten up in the near-term by a counter-cyclical rise in borrowing as the economy slows. In the very long run, the fact that GDP will be lower means we have less to spend on anything than we otherwise would. If bond yields rise then the maths because less nice. And if our big current account deficit causes a “sudden stop” then all bets are off.

Nevertheless the abandonment of austerity will allow the government to increase spending, and that would mean it would be possible, within government spending limits, to increase spending on the NHS. If I was a calculating Tory politician I would do just that leading up to the 2020 election just to wrong foot the Labour Party. Although frankly the Labour Party seems perfectly capable of wrong footing itself.

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The Italian banking crisis, and the emergency political manoeuvres to avoid a financial crisis, have escalated in the last few days. There is a lot at stake.

Two days ago Lorenzo Bini Smaghi, Chairman of Societe Generale SA the French multinational banking and financial services company, said Italy’s banking crisis could spread to the rest of Europe, and that rules limiting state aid to lenders should be reconsidered to prevent greater upheaval. Germany has been leading a bloc in the EU that has been insisting that the Italian government cannot use public funds to recapitalise the insolvent Italian banks because such a move would break EU state aid rules.

“The whole banking market is under pressure,” the former European Central Bank executive board member said in an interview with Bloomberg Television on Wednesday. “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”

The statement from Smaghi was swiftly followed up by a statement from the Italian Prime Minister Matteo Renzi who said on Wednesday that the difficulties facing Italian banks over their bad loans are minuscule by comparison with the problems some European banks face over their derivative exposure.

Renzi’s comments appeared to be directed at Deutsche Bank, which has outstanding derivative positions running into trillions of euros, and marked an escalation in his war of words aimed at securing an EU deal over Italy’s troubled lenders. Speaking at a joint news conference with Swedish Prime Minister Stefan Lofven, Renzi said other European banks had much bigger headaches than their Italian counterparts.

“If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred,” Renzi said. He did not directly name Deutsche Bank, but he has singled it out for criticism in the past, including last December, when he said he would not swap Italian banks for their German peers.

Rome is in talks with Brussels to devise a plan to recapitalise its lenders, including Italy’s third-largest lender, Banca Monte dei Paschi di Siena (BMPS.MI), whose share price has dropped some 75 percent this year. Italian officials had argued that volatility caused by Britain’s vote to leave the European Union meant it should be given greater flexibility to prop up struggling banks.

However, German Chancellor Angela Merkel slapped down the suggestion, saying new rules for bank rescues, which reduce governments’ room for manoeuvre, had to be respected. Renzi told reporters that a solution was being found for Italy’s non-performing loan woes and said savers had nothing to worry about. But he said Europe had a wider credit problem that needed to be tackled.

“I am certain that the European authorities will think carefully about this in the coming days,” he said.
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Wynne Godley was right

July 7, 2016

In 1992 the great British economist Wynne Godley who died in 2010 (his Guardian obituary written by William Keegan is here) wrote a short article in the London Review of Books entitled “Maastricht and All That”. The article is an astonishingly prescient critique of the deep design flaws in the plans for European Monetary Union […]

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Perspectives on the Chinese economic adjustment

July 7, 2016

  What is going to happen to the Chinese economy? That’s perhaps the biggest question, and largest unknown, regarding the global economy. Some observers, such as George Soros, think that a ‘hard landing’ is going to happen. He believes that the build up of bad debt within the Chinese financial system is now so great […]

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The Japanese economy is in uncharted territory

July 4, 2016

While Brexit has taken all our attention across the globe Japan continues to stumble into uncharted territory. In many ways Japan is the pioneer for the rest of the global economy, its on the same journey just much further along. Now Japan is having to cope with an influx of hot money fleeing post Brexit […]

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Pro EU parties could face big losses in the next election

July 3, 2016

There is an interesting and detailed analysis at Buzzfeed on how the referendum votes map against parliamentary constituencies. Its worth a look with plenty of interactive maps to play with. Although the referendum result was close nationally, Remain piled up many of its votes in a relatively small number of constituencies (London and Scotland being […]

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Brexit aftershocks and the roadmap for negotiations

July 3, 2016

  The immensely complex Brexit negotiations will intersect with the internal tensions in the UK and inside the EU. Here is some thinking about this complex historical episode that has only just started to unfold.

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