dgwilkinson

January 9, 2016

Brexit & The Importance of CAP Payments to British Farming and the Countryside

Filed under: Agriculture, Brexit, CAP, Uncategorized — drderrick @ 1:29 pm

The upcoming referendum on UK membership of the European Union will be one of the most important decisions in a generation for British farmers. Passionate views are held on both sides of the argument, and many claims – both for and against – will be made. One thing we do know is that if the UK votes to leave the EU (Brexit) the European Common Agricultural Policy (CAP) will no longer apply to British farmers. Undoubtedly there would be benefits of leaving the CAP, but there would also be some potentially important losses as well. Chief amongst those losses would be the loss of the £3 billion CAP budget. Broadly speaking, from this £3 billion some £450 million is used to fund the agri-environment schemes, and the balance – £2.5 billion – supports farmers through the SFP It may well be that the HM Treasury will maintain the payments to farmers from the overall budgetary savings of Brexit, but they may not. Without clear unequivocal assurances from HM Treasury that the payments will be maintained, there is a risk that Brexit will mean the end of the Single Farm Payment (SFP).

What would British farming look like if the SFP ended? This is a complex question, and it is not possible to foretell exactly what would happen. The prosperity of British farming is influenced by many more factors than the SFP, and farm businesses will respond to the changes in the market that the end of the SFP would cause. Nonetheless, we can get a fairly good idea of the scale of the risk of losing the SFP by examining the latest Farm Business Accounts (FBS) for England alongside other official statistics published by Defra.

The FBS breaks farm business income down into four key areas: income from farming, income from diversification, income from agri-environmental schemes, and income from the SFP.

For All Types of farms, the latest accounts (2014/15) show:

FARMING income: £2100, down 69% yoy
PLUS
DIVERSIFICATION income: £9300, up 11% yoy
PLUS
AGRI-ENVIRONMENT income: £5900, up 13% yoy
PLUS
SFP income: £22,400, down 2% yoy
EQUALS
TOTAL FARM BUSINESS INCOME: £39,800, down 8% yoy

But these are aggregate figures for all farms of all types, and there is a wide range of size and business performance amongst the 103,000 farm businesses in England. Fortunately, the FBS also provides accounts for the different farm sizes and performance groups, as well as for the different types of farm, which allows us to examine more closely the consequences of different changes.

Assuming income from farming and from diversification remain unchanged, and that the agri-environment schemes remain fully funded by HM Treasury, by removing the SFP from the farm accounts we begin to get a picture of what would be at risk if the SFP ended.
Over 50,000 farms – over half of all farms in England – would be at risk of closing because their total farm business income would be negative. Unless income from farming and/or diversification improve significantly, all the lowest performing farms, except in horticulture, would be at risk, as would the medium performing farms in general cropping, mixed farming, and both lowland and upland grazing livestock. Overall, the end of the SFP would also mean farmland prices would fall significantly and seriously impair farm balance sheets.
• The farms at risk currently employ over 80,000 farm workers.
• The farms at risk currently manage some 7 million hectares of land – about 45% of all farmed land. To give this some perspective, currently around 50,000 hectares of farmland are marketed each year in England. While we have assumed that the agri-environment schemes are continued, it is unclear what would happen to all the environmentally-focussed land management regulations currently imposed through the SFP.
• The farms at risk currently produce over £10 billion – over 40% – of all domestically produced food. Some of this production will be replaced by higher performing farms, and some by imports, but it is a significant proportion of the domestic food supply

This analysis is not meant to suggest what will happen if the UK leaves the EU, but to provide an impression of the scale of the challenges that losing the SFP could cause. Some or all of the SFP may be maintained by HM Treasury after a Brexit, and there will be many other factors affecting what actually happens. But it certainly appears to lend support to the vital importance of the question posed by Meurig Raymond, President of the NFU, at this year’s Oxford Farming Conference: ‘How are we going to convince the treasury to support British farming?’

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February 23, 2015

Is Sterling Overvalued?

Filed under: Economic Crisis, Economic Forecast, Uncategorized — drderrick @ 10:10 am

Over the past five years trade weighted Sterling has appreciated by 8%. Over the same period, it has fallen against the US$ by 6%, and it has fallen against the Yuan by 15% – US$ and Yuan account for 17.5% and 8.9% respectively of the currency basket. The strength of Sterling is entirely due to the weakness of the Euro, which accounts for 46.2% of the currency basket, and against which Sterling has risen by 15%.

Over the past twelve months, while Sterling has fallen against both the US$ and Yuan by 11%, overall the trade weighted index has fallen by only 1%, due again to the weakness of the Euro, against which Sterling has risen by 3%.

Given its great importance, the strength of Sterling against the Euro will have contributed to the startling growth of the UK current account deficit, which now stands at some 6% of GDP – the worst ever! It will also have contributed to the weakness of UK inflationary pressure. Alongside low oil prices, strong Sterling should be seen as one of the temporary contributors to current low inflationary environment.

When the Euro eventually strengthens, the value of Sterling could fall significantly and, together with domestic political factors – discussed here: https://drderrick.wordpress.com/2014/12/29/the-sterling-crisis-of-2015/ – may lead to an overshoot, leading to an undervalued Sterling. While exporters might welcome this, it would also increase inflationary pressures, and the likelihood of the Bank of England raising interest rates.

When this happens the anaesthetising effects of the current interest rate regime will begin to wear off, and the economy will slow.

December 29, 2014

The Sterling Crisis of 2015?

By all accounts, the UK general election to be held in May 2015 is too close to call. On May 8th the nation is expected to wake up to another coalition government, quite possibly composed of three or more Parties. While the composition of the new government cannot yet be foreseen, it seems most likely that either the Conservative Party or the Labour Party will be the senior partner in whatever coalition government emerges from post-election negotiations. While for political pundits this election may well be one of the most interesting in many years, the economic risks are daunting; two very dark economic clouds are on the horizon. The first is the issue of government debt reduction, and the second is the question of UK membership in the EU.

A left-wing coalition led by Labour would put aside for now the question of UK membership of the EU, as Labour, Liberal Democrats, Scottish National Party, and the Green parties are all pro-EU, but they are expected to commit to a much slower pace of deficit reduction than is proposed by the Conservatives. Slower spending cuts, alongside any increased borrowing and higher taxes that they may propose to finance government efforts to stimulate economic growth, may lead to a significant risk that markets may well begin to lose confidence in the government’s commitment or ability to address its growing debt problem, with potentially serious repercussions for the value of Sterling.

If the Conservatives are the senior partner in a more right wing coalition their deficit reduction plans may prove politically difficult to implement, leading to politically expedient delays. The Conservative plan to eliminate a £90 billion annual deficit over the course of the next Parliament will seriously affect the well being of a lot of people, and will not happen without a great deal of political opposition. Of similar danger to the deficit problem is the question of UK membership of the EU. Responding to popular disaffection with the EU – amply demonstrated by the rise of UKIP – the UK Prime Minister David Cameron has pledged to hold an in-out referendum on UK membership of the EU by 2017, if he is returned to Office in 2015. This will cause great uncertainty amongst investors as to what the “rules of the game” will be post 2017. Such uncertainty will depress investment in the UK economy, which will further constrain economic growth and exacerbate the political difficulties of meeting deficit reduction targets. Such a reversal of fortunes would again put pressure on the value of Sterling.

Over the past four years, through a combination of luck and contrivance, the current government has enjoyed a fragile recovery from the market crisis in 2007/08. That economic growth has been due almost entirely to an accumulation of household and government debt, supported by historically low interest rates, that has been used largely to maintain high levels of current consumption. While some moderation in the growth rate of the economy should be expected over the coming years, the election in 2015 poses the greatest domestic challenge the economy has faced over the past seven years. Whichever Party holds the senior position in the government after the elections in May 2015, there is a real risk of a Sterling crisis. Such a crisis in confidence in Sterling might be welcomed by exporters, but it would also exacerbate the extremely high current account deficit, increase consumer price inflation, and necessitate an increase in interest rates faster and further than would otherwise be implemented. If this happens, significantly weaker economic performance than is currently foreseen can be expected, including a return to recession.

November 6, 2014

Outlook for UK Farm Incomes Increasingly Challenging

While the normal variance remains amongst individual farm businesses and between farm sectors, the graph below shows that, overall, income from agriculture provides a relatively small part of total farm business income.

The new CAP being implemented over the next few years creates a great deal of uncertainty for farm incomes. With support payments currently accounting for some 53% of total farm income, some decline in income seems likely.

Sources of Farm Business Income

Sources of Farm Income

Source: Defra

Over the past 10 years income from farming has doubled, and the longer-term outlook remains positive. Growth in world population and wealth, along with both technical and natural constraints on yield improvements, provide a good case for optimism about the longer-term commercial outlook for farming.

The shorter-term outlook, by contrast, looks quite difficult. Market prices, policy changes, and foreign exchange all present significant risks to farm incomes.

The latest figures show farm output prices are down 11% compared with last year, with both crop prices down (-13.6%) and animal products down (- 8.7%). Cereals prices have fallen by over 20% so far this year, and the NFU 2014 Harvest Survey, predicts average wheat yields will be the highest in 30 years – a “record high”. This suggests further output price weakness over the coming months. Input prices have also fallen, but by only 4.2%, leaving farm profitability under increasing pressure.

Changes to the Common Agricultural Policy (CAP), to be implemented from 2015, pose a number of important challenges for farm businesses. Three key challenges are:
• payment capping will greatly reduce the amounts received by larger farms
• new “greening” measures will have significant effects on land use & cropping decisions, with unknown effects on business profitability
• overlap with legacy agrienvironment schemes will impose a number of transitional and ongoing costs for farm businesses.

Compounding these difficulties are the ongoing problems in the eurozone that are undermining the value of the euro. Over the past year, the euro has weakened against Sterling by nearly 10%. Because CAP payments are denominated in euro, the Sterling value of CAP payments is will be lower in 2014 than in 2013, and further euro weakness over the forecast period is more likely than not.

UK MACROECONOMIC OUTLOOK ON 2015 to 2017

Filed under: Economic Crisis, Economic Forecast, UK Economy — drderrick @ 11:12 am

Ongoing and accelerating economic growth over the past 18 months has surprised most economists, and forecasts have all been revised up. 12 months ago the consensus of the economists surveyed by the Treasury was for growth of 2.2% in 2014. That has now risen to 3.1%. A closer look at the key elements of the economy may help to explain why we have seen this unexpected rise in growth, and provide some clues as to how that may develop over the next few years.

While the economy is on track to expand by some 2.5 to 3% over the course of 2014, suggestions in some quarters that “the recovery is now firmly established” are premature. Looking closely at the published statistics, the only substantial growth in the economy has been almost entirely in the service sector, which accounts for over 78% of all economic output. Although the first half of 2014 has seen some growth in the production sectors, after a long period of static and declining output, most remain significantly below their 2011 activity levels. By contrast, most industries in the services sector have seen, and continue to enjoy, good growth. This is especially the case with the wholesale and retail trades, with transport and storage, and with professional and administration services, which have led the expansion of services output. Given the size of the services sector in the economy, recent indications that the growth of services output may be slowing suggest the economic recovery may be encountering renewed difficulties.

In terms of expenditure, the growth over the past 18 months or so can be traced to substantially faster than expected growth in household consumption and government spending. While it has been encouraging to also see a substantial improvement in business investment, there has been a correspondingly large increase in inventories, which suggests that there may be some moderation in investment spending over the coming months. Similarly, with government continuing to run a £100 billion budget deficit, it is difficult to imagine government-spending continuing at recent levels over the course of the forecast period. With global economic conditions deteriorating, especially in the Eurozone, net exports are unlikely to make any positive contribution to growth for some time. That leaves, household consumption – accounting for some 62% of domestic spending – as the only significant potential source of economic growth.

Over the past few years, household spending has been remarkably buoyant and resilient, but it is increasingly unclear how much longer it can continue to grow. There are a number of underlying reasons for the growth in consumer spending, including wealth effects from rapidly rising house prices, and improvements in employment rates. With average real wages under continued pressure, however, of particular importance have been a number of government initiatives to encourage borrowing and spending by businesses and households, and by the extremely low interest rates that ease the burden of servicing large and growing debts.

Chart 1: Household Net Lending (+) and Borrowing (-) – £ millions

Household Credit

Source: ONS

Bank of England figures show that net consumer borrowing began to increase about 2 years ago and has been accelerating since. It is currently growing at an annual rate of 5.4%. As a result, as shown in Chart 1, household finances are deteriorating and reductions in spending may need to be made – especially when interest rates rise.

Households spend just over £1 trillion each year, and Chart 2 shows a breakdown of that spending by type. It shows that households spend almost as much on “enjoyment” alone (£257 billion) as all the spending on investment in the economy (£281 billion). While much household spending is non-discretionary in the short term, spending on “enjoyment” can be trimmed relatively quickly. Any such curtailment of household spending, possibly due to the deterioration in household finances suggested by Chart 1, would quickly arrest the growth seen over the past 18 months.

Chart 2: Household Spending by Type

Spending by Type

Source: ONS

In short, there are no signs yet of a sustainable recovery of the economy, and the growth that there is remains very vulnerable to the interest rate increases expected during 2015.

In light of the challenges faced by the UK, as well as by other economies around the world, the outlook for the next few years is especially uncertain. Continued high private household debts, further constraints on government spending, and an expected start to the normalisation of monetary policy during 2015, contribute great uncertainty to growth forecasts over the coming 3 years. Currently I expect the economy to continue to grow throughout 2014 but start slowing as we move into 2015, and continue to weaken over the course of the following months. Of course, it would not be surprising to see some modest growth in some quarters over the course of the next 3 years but, in my view, there is little reason to expect overall annual economic growth to accelerate beyond the end of 2014.

The median estimate for GDP growth in 2015 of the economists surveyed by the Treasury is 2.3%, slightly higher than my forecast of 2.1% growth. Looking further forward, most published economic forecasts see continued, if modest, growth being maintained.

UK Growth Outlook

GDP 14-17

These outlooks are usually based on a few key assumptions that are increasingly doubtful:
With the economy growing at nearly 3%, and the unemployment rate at a 6 year low and falling at the fastest rate on record, the assumption that interest rates will remain unchanged seems increasingly unsustainable. The Bank of England is now widely expected to begin increasing interest rates by the middle of 2015.
It is also assumed that the deteriorating current account deficit becomes a growing surplus, but the latest official figures show that in Q2 2014 it had deteriorated to 5.2% of GDP, which is the worst in recorded history in both cash terms and as a percentage of `GDP. With the Eurozone economy – the UKs largest trading partner – suffering from a wide range of serious problems, there is no reason to suggest a turn-around in the foreseeable future.
Business investment is expected to continue to grow strongly, despite the many risks and challenges faced by the economy. Given the current economic uncertainties, it seems unreasonable to continue to assume that strong private investment will be maintained for long, or to be a strong driver of overall growth over the next few years.
Above all, the more optimistic forecasts assume household spending will be maintained and continue to grow: an assumption about which there is increasing doubt.
As David Kern, Chief Economist at the British Chambers of Commerce has argued:
“Rises in sterling, making UK exports more expensive, and uncertainties around early interest rate increases are adding to the difficulties, and our excessively large current account deficit is posing risks. UK growth cannot rely permanently on rising consumer spending, which is driven by buoyant housing market and excessive household debt. Unless investment and net exports make bigger contributions to growth, the recovery will stall.“

Given these problems, I suggest that UK average annual GDP growth will be somewhat weaker than the consensus outlook. I expect the economy to grow by 2.6% over the course of 2014, by 2.1% in 2015, 1% in 2016, and 0.7% in 2017. Moreover, the possibility of an in/out EU referendum in 2017 add great uncertainty and means that the risks are mainly that the outturn will be worse than currently foreseen.

September 16, 2014

Ecosystem Limits to Sustainable Economic Output and the Use of Tradable Quotas – An Essential Lesson

A mistake often made in carbon markets and elsewhere is to impose predetermined permit/obligation prices, which have indeterminate effects on the environmental objective. The following stylised heuristic highlights the importance of setting quotas on externalities with reference to the environmental objectives that are to be met, and leaving the determination of a clearing price for such permits and/or obligations to the market. Provided property rights to the relevant factors of production are well defined and enforced, by establishing a quota on the production of externalities at or below the capacity of the ecosystem, and by providing tradable permits and/or obligations to produce those externalities, the market will determine a clearing price.

The following figure provides a simple representation of the relationship between economic output and the capacity limits of the ecosystem.

Ecosystem Limits Graph

The Transformational Efficiency Boundary (TEB) represents the most efficient available means of transforming natural capital and ecosystem services into goods and services.

T 0: Transformational Efficiency Boundary at time 0

T 1: Transformational Efficiency Boundary at time 1

An economy can function above the TEB, but not below it.

As an economy grows it moves along the TEB, while technical change shifts the TEB downward.

Technical change can include socio-economic and organizational improvements, as well as technological changes, that increase the efficiency by which natural capital and ecosystem services are used by the economy to produce goods and services.

The market price of permits and/or obligations will cause such technical changes to occur – T 0 shifts toward T 1 – and ensure the maximum level of environmentally sustainable economic output.

Conclusion: Rather than setting a price for permits/obligations that has unknown effects on the environmental issue, set the quota to deliver the environmental objectives and leave the market to find the clearing price for the permits/obligations.

August 2, 2014

Developing Businesses for Better Environmental Stewardship

Over the past few decades environmentalists have produced a great wealth of evidence of a growing range of environmental problems. As a consequence, they have often advocated a moral case to encouraged people to behave differently; appealed to their “better nature”. We have heard calls to respect the inherent values in nature and to improve intergenerational equity; to “save the planet”. Despite this, virtually all the growing body of indicators show continued deterioration of the natural environment. It is increasingly obvious that this strategy is inadequate on its own.
Although many in the environmentalist community remain suspicious, more recently it has been increasingly recognised that a business case for more environmentally sustainable behaviour, can also be made; that by appealing to people’s self-interest rather than to their sense of morality and/or the common good, a range of environmental problems can be successfully addressed. From this, three additional approaches are being developed: the valuation of ecosystem services to the economy and for individual businesses; the development and integration of natural capital accounting to enable better resource and environmental risk management; and the development of novel markets for the delivery of specific environmental outcomes.

The markets within which the private sector operates lead to particular outcomes because of the structure of commercial incentives and disincentives. In most markets there has been no incentive to consider the effects of commercial activities on the natural environment, and often there has been a disincentive to do so, in that doing so individually would raise costs and depress competitiveness. As a result businesses externalise environmental costs; they disregard them. Modifying these incentives and disincentives, so that the environmental consequences of commercial activities are internalized and brought into the commercial decision-making process, can create novel environmental markets. The creation of carbon markets is a simple case in point.
Presently, it seems to me that two issues need urgent attention to progress the development of the market-based approach, and of novel environmental markets in particular.
First more work needs to be undertaken on the theoretical underpinnings of the various novel environment markets and other market-based techniques to understand better which work for what sorts of environmental issues, and under what circumstances. Trading, offsets, caps and floors, auctions, payment for services, and others all have strengths and weaknesses that need to be better understood from both environmental and business perspectives. I suspect that we would find that there is a very wide range of environmental issues to which market-based techniques could make an important contribution. There will also be many significant issues for which they would be inappropriate, and we need to have a clear idea of which are which and why.
Second, to date much of the work done on the linkages and crosswalks between ecology and economics, between the natural world and the world of business, has been led by the environmentalist community, with increasing support from the legal and large corporate communities. As a consequence, this work tends to emphasise the potential environmental benefits and/or threats of market-based approaches; the strengths and weaknesses from an environmentalists perspective.
While the environmental consequences are critically important, if the wider business community is to engage more fully with this debate, it seems to me that it would be helpful if detailed examples and case studies were used to identify the specific benefits for businesses; to articulate the many and varied positive opportunities for businesses of delivering improved environmental outcomes. Most businesses are interested in exploring opportunities to improve their financial performance, and proposals that can be articulated in such terms will find a wider and more receptive audience. To do this, more firm-level case studies that show the detailed calculations of costs and benefits for the business that will deliver the environmental outcomes need to be made available. While large companies have the capacity to dedicate personnel to engage in this debate, most firms remain unclear about the “bottomline” benefits for them of undertaking their activities in a way that would benefit biodiversity and ecosystem services. This is all the more the case in the current difficult economic climate. In short, there is an urgent need for these issues and proposed techniques to be examined from the firm-level perspective of the businesses that will make them happen – otherwise they are less likely to happen at all.

I am certainly not advocating some sort of unregulated free-for-all, and more work needs to be done to ensure that the techniques employed are fit for purpose, but if we can harness the power of millions of private decision-makers we might get more done, more effectively, more efficiently, cheaper, and with more enthusiasm than programmes and schemes that are publicly financed and administered. It seems to me that it is a prize worth serious consideration and exploration.

December 13, 2013

UK MACROECONOMIC OUTLOOK ON 2014 to 2016

Filed under: Economic Forecast, UK Economy — drderrick @ 1:00 pm

Ongoing and accelerating economic growth in 2013 has surprised most economists, and forecasts have all been revised up. Overall, the economy is now expected to grow by about 1.4% in 2013. That said, in my view, suggestions in some quarters that “he recovery is now firmly established” are premature. Looking closely at the published statistics, the growth in 2013 can be traced to government programmes to subsidise bank lending, and to the Bank of England policy of maintaining interest rates at “life support” levels. The subsidised bank lending has done little to improve the finances of the small and medium sized businesses it was aimed at, and has instead supported increased mortgage provision. This, together with programmes directly aimed at subsidising house buying, have begun to inflate house prices, with some positive effects for the construction sector, and related business services. Rising house prices have also had a wealth effect on private consumers and current private consumption has also risen, despite falling real incomes. Productive business investment remains very weak, and the external trade balance continues to deteriorate. In short, there are no signs yet of a sustainable recovery of the economy, and the growth that there is remains very vulnerable to the interest rate increases expected by 2015.

In light of the challenges faced by the UK, as well as by other economies around the world, the outlook for the next few years is especially uncertain. Continued high private household debts and an expected start to the normalisation of monetary policy by 2015, contribute great uncertainty to growth forecasts over the coming 3 years. Currently, I expect the economy to continue to grow in 2014 but start slowing by the second half, when it will be growing at about 2.3%, and continue to weaken over the course of the following months.  Of course, it would not be surprising to see some modest growth in some quarters over the course of the next 3 years but, in my view, there is little reason to expect overall annual economic growth to accelerate beyond the middle of 2014.

The median estimate for GDP growth in 2014 of the economists surveyed by the Treasury is +2.3%.  Looking further forward, most published economic forecasts see growth accelerating toward 3% or higher. These outlooks are invariably based on the assumptions that interest rates remain unchanged, that business investment increases dramatically, and that the deteriorating balance of payments deficit becomes a growing surplus – that all the things that need to happen do mysteriously happen. The first of these seems highly unlikely – at least after the election in 2015 – while the latter two are unexplained and simply assumed to happen.

By comparison, my model of the UK macro-economy suggests that UK GDP growth will be 1.4% in 2013;  2.0% in 2014; +1.0% in 2015; and +0.9% in 2016.  Consequently I would argue that planning for slowing overall GDP growth of not more than 4% over the course of the whole of the next 3 years would be prudent.

 

December 9, 2013

Dangerous New WTO Ruling

Filed under: World Trade, WTO — drderrick @ 1:34 pm

As Ministers and officials were gathering in Bali for the recent WTO Ministerial conference that agreed the historic accord described by the EU Trade Commissioner as “saving the WTO”, a WTO Dispute Settlement ruling had just been published that could undermine the entire multilateral trading system.
That ruling looked into complaints about the EU import restrictions on seal products – the EU Seal Regime – and has received comparatively little public attention.

The ruling concluded that EU restrictions on the import of seal products do not violate WTO rules because they “contributed to a certain extent to [the] objective of addressing the EU public moral concerns on seal welfare”. The lack of attention given this historic ruling by the European media is a measure of the priority this “moral concern” is for Europeans.

Moreover, the dispute panel concluded, “the alternative measure proposed by the complainants was not reasonably available to the European Union given inter alia the animal welfare risks,” even though “the European Union never submitted in this dispute that the protection of seal welfare as such was the objective of the EU Seal Regime”.

Aside from such logical inconsistencies – and there are many points in this ruling that are unconvincing, illogical, and/or incomplete – there is a much bigger issue at stake here. This ruling undermines one of the key tenets of the rules-based multilateral WTO system.

One of the key benefits of the multilateral trading system – a reason why states of all persuasions have lined up to join the WTO – is the predictable, unbiased application of the rule of law. As with domestic law, it may not be perfect, but fair and unbiased adjudication based on common rules is seen as better than “rule by the biggest and strongest”.

Unless this dangerous ruling is overturned at appeal, henceforth countries will be able to cite the precedent of the EU Seal Regime whenever they want to impose trade restrictions – they need only refer to some “public moral concerns” for justification. The implications for trade in agricultural and natural resource based products are obvious and frightening.  More generally, this would mean that any and all specious restrictions could be justified on the grounds of “addressing public moral concerns”. It would effectively mean the end of a predictable “rules based trading system”.

The agreement in Bali was one step forward, but the ruling on the EU Seal Regime is two steps back.

October 14, 2011

We were warned 25 years ago

Filed under: Economic Crisis — Tags: , — drderrick @ 10:21 am

The current crisis in financial markets should have come as a surprise to no one.

In April 1986, the Bank for International Settlements published a study titled “Recent Innovations in International Banking”. With remarkable prescience, it warned that:

“in a world financial system with many imperfections. there can be no guarantee that increased efficiency in financial intermediation at the individual firm level will necessarily improve economic welfare overall.   Many innovations have been designed to exploit existing imperfections in the financial system. Some of the ‘imperfections’ around which innovations are manoeuvring their way represent official measures, such as capital adequacy requirements imposed in the interest of safety and soundness of the financial structure, or measures to deal with liquidity problems or to promote market stability.  Others constitute regulations designed to meet the needs of domestic monetary and credit policy objectives; and still others are meant to serve investor protection needs.”

The report identified a “major source of concern to be  that “many new financial instruments appear to be underpriced, “that is, that gross income from the transactions is insufficient, on average, to compensate fully for their inherent risks.”

Also in 1986, the late Professor Susan Strange of the London School of Economics published a book titled “Casino Capitalism”. It begins:  “The Western financial system is rapidly coming to resemble nothing as much as a vast casino.”  She argued that those who should be in charge rarely know what is going on, while those operating in it are often doing so in the dark. “Yet none of us could escape the disastrous consequences were the precarious edifice to collapse.”

We were warned.

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