A recipe for economic crisis

Published by Anonymous (not verified) on Fri, 05/10/2018 - 1:08am in



The IMF thinks there is a risk of a new global financial crisis. These things do, however, require tipping points. Here are tow potential such tipping points in consecutive headlines in an FT email this afternoon:

Oil price rises and dollar interest rate rises, simultaneously. That's a recipe for crisis in large parts of the world's economy. If it's not the debt that will tip us over (as the IMF think) something else will.


Investors are on a high that the IMF thinks profoundly misjudged: only one of them is right

Published by Anonymous (not verified) on Thu, 04/10/2018 - 7:11pm in



Two headlines this morning. This from the FT:

And this from the Guardian:

Only one of these expressions of confidence or a lack of it can be true given the role of the US in the world economy.

Neither markets or the IMF have great track records. But I know which I am much the more inclined to believe.

International Financial Reporting Standards should be consigned to history

Published by Anonymous (not verified) on Thu, 04/10/2018 - 6:58pm in



Hans Hoogervorst, the chair of the International Financial Reporting Standards Foundation, has written in the FT this morning arguing that:

[Some critics of accounting standards now] want to require banks to make upfront provisions for all expected lifetime losses on loans and, presumably, a return to good old historical cost accounting, which values assets at the price they were initially purchased. Though superficially appealing, these changes would weaken prudent accounting, rather than strengthen it.

He proceeds to justify existing accounting standards on this basis, not least by claiming:

Critics also allege that IFRS has been too enamoured of fair value accounting. In fact, banks value almost all of their loan portfolios at cost, so the historical cost method remains much more pervasive.

There are a number of important things to note about this article, none of which are flattering to Mr Hoogervorst.

First, the issue he notes is only an example of the criticism I and others have made of the IFRS Foundation and its accounting standards. Our concerns are much more fundamental than he represents and he should know it. If he does not then he is even worse at his job than I thought. These criticisms actually focus on the fact that IFRS do not produce information of use to anyone. That's because they do not tell investors whether or not the returns that they supposedly enjoy are actually payable by the companies in question, or are in fact fraudulent,  as has too often been the case. Nor do they indicate the company's resilience,  and for the long-term investor that is critical. Nor do they provide information on how the company uses its resources. So, for example, country-by-country reporting is completely absent from current accounting requirements, because the IFRS Foundation has completely ignored it, and yet this is a key indication of how the company has acted as best steward of the funds entrusted to it. Despite this the IFRS Foundation claim that investors do not need this data. I could go on,  but the point is fundamental. The IFRS Foundation claim that the only users of the financial data produced by their standards are investors, and yet they fail even that group of accounting data users. It's a pretty damning indictment.

Second,  there is no public interest justification for the IFRS Foundation's choice to restrict their interest to those of investors: this is not what company law requires, and it is not what their public duty requires. It has, instead, been adopted to suit companies and auditors. In practice, it means that the IFRS  Foundation  is not only failing in its public duty, and so should have its public funding withdrawn;  it also means that it deliberately ensures that all other users of financial statements (from regulators, including those of banks, to tax authorities, to the public, to employees, to customers, and suppliers; let alone civil society) have no useful information on which to form their opinions. The IFRS Foundation say they must simply rely on the data that investors require, but that is absurd because they do not have interests in common and nor do they have the means to secure that information in any other way. In other words, the IFRS  Foundation has made it its  job to promote accounting opacity.

Third, and for me most tellingly, the article is wrong. Of course most bank loan portfolios are valued at cost. What else would you value them at? They are assets, and very few people choose to repay more than they are lent, in which case cost is the maximum value at which they might be stated in most accounts. The problem is not the fact that the loans are stated at cost.  The problem is that they should not be stated at less than cost because provisioning is entirely possible. And Mr Hoogervorst  is also wrong in his claim, made in the article, that loan provisioning cannot take place from the day on which advances are made. Given that it is known that a certain percentage of all advances will fail, even if specific detail is not known, general provisions against loans should always be made from the moment that a sum is advanced. Accounts do not relate to specific transactions in this sense: they represent a statement of portfolio risk, and since that risk is inherent in any portfolio the provision must take place. Mr Hoogervorst is being disingenuous to claim otherwise. Or maybe he simply does not understand what he's talking about?

I am delighted that the chair of the IFRS  Foundation thinks it appropriate to answer his critics.  I'm shocked that he does so quite so ineptly. It suggests that not only should the role of the big four as the sole auditors of large companies come to an end, but that their chosen accounting standards, biased as they are solely to the interests of those firms, should also be consigned to history.

How to Succeed in Business Without Really Trying

Published by Anonymous (not verified) on Thu, 04/10/2018 - 5:00pm in

A formula for a self-made man

Suffering the Gramscian moment

Published by Anonymous (not verified) on Thu, 04/10/2018 - 4:30pm in



I enjoyed my debate with Arthur Laffer yesterday.

I admit I enjoyed winning. If this was tax competition then I was in it for only one outcome.

And I have to also say I was hardly surprised I did win. Arthur provided an insight into the still present mind of the right wing that has for too long had excessive influence on the economic agenda of the world.

What do I mean by that? I mean that in his first session he argued that competition works because we know the world is optimal when businesses trade at the point where their marginal revenues equal their marginal costs. Arthur had assured me that he has been the director of real companies. That’s hard to believe when he can think this equation has ever held true. I’d suggest that if it does it can only ever by accident. There is good reason for that: no company can really know what it’s marginal revenue is. It has little better ability to calculate its marginal cost, and if it could the cost of doing so would not be worth the effort expended, literally by definition (think it through and I think you will find I am right). In other words, what Arthur argued was based on something a long way removed from real-world conditions.

Now I do not pretend that I did not play to his arguments, because I clearly did. That was always my intention. I deliberately put the case that if he believed in the theory of markets then he could not also believe in tax competition since the true cannot co-exist. I happen to believe that is true, and think I made the case for it.

But I also made other real-world arguments for my opinion. And that is what I hope won the day. It was interesting to hear Pascal St Aman, head of tax at the OECD, then follow up in a discussion of tax competition and make other arguments that I have in my time made. He argued, for example, that there is a case for minimum tax rates. I think that true now.

But the real point is something more important. Laffer is one of a literally dying breed of economists who helped hustle in the neoliberal era: he was a Reagan adviser, just as he is now a Trump adviser. And that generation is ceasing to have the influence they once had: Arthur Laffer must be one of the few still really active, and he is a sprightly 78. Those that have followed lack the conviction and the zeal. More importantly, in their hands the ideas seem tarnished and irrelevant.

I am not saying that, MMT apart, there are many new shows in town, although when it comes to tax the tax justice agenda has largely prevailed. What I am saying is that the old guard is passing. As one person said to me in Paris, with Trump, Kavanaugh and Brexit they might leave decades of turmoil behind them as their last gasp legacy. But that does not mean the era is not ending, because it is. We just have to suffer the Gramscian moment until the new might emerge. That could be very painful, and too prolonged. But I look forward to it. I want to see it well before my own time is up.

Murphy – Laffer Tax Co-op Debate

Published by Anonymous (not verified) on Thu, 04/10/2018 - 12:28am in

I mentioned this morning that I was debating the faults of tax competition with Arthur Laffer in the appropriate environment of the OECD today.

That debate has now taken place and I am pleased to say that I won the vote, 58% agreeing with me that tax competition was harmful, 31% agreeing with Arthur that it was beneficial and the rest being undecided.

This is, pretty much, what I said:

1 Be it resolved that: Tax competition is harmful

  • Good morning.
  • I am here to put to you the idea that tax competition is harmful. I do so with conviction. I am utterly convinced that it is.
  • But when saying that please do not think I am saying that all competition is harmful: it is not. As a chartered accountant, a serial entrepreneur, a user of venture capital, and someone who has unashamedly made profit, I have no difficulty with the concept of competition. In the right place, at the right time, and subject to the right regulation so that all can partake on a level playing field that works for the benefit of all in society competition motivates genuine business activity and can enhance our mutual well being.
  • I’ll return to those conditions. But I really want to stress another one. That is that this all competition is predicated on the idea that failure is acceptable.
  • And we know that failure is acceptable in business. That said, because of the scale of modern business, we have also accepted that it is so risky that we developed the concept of limited liability to socialise its consequences. The state puts us all at risk from competition amongst those in the business community because we think that a price worth paying. And that’s the case because we assume that there will always be plenty of other entities to take the failed one’s place when a corporation goes bankrupt.
  • That assumption is usually fair if there are effective markets. It means we can afford competition.
  • But there is no such protection in the case of states. The state that fails does so completely.
  • And there is no alternative or parallel state that replaces the failed state: there is just economic, social and humanitarian disaster.
  • And the risk of tax competition is that states will fail. Indeed, in its rawest form, that is almost exactly what tax competition is designed to induce by denying to the state the tax that is the lifeblood of its existence.
  • Tax competition does not then come in harmful and benign forms as might have been implied by the OECD’s 1998 report on this issue: it comes in just one harmful variety.
  • But it’s worse than that. Tax competition also undermines free, fair and competitive markets. Such markets requires that all companies compete on a level playing field and have equal access to capital. Tax competition is explicitly designed to undermine these conditions by providing some companies with an unfair and wholly artificial competitive advantage by reducing their tax rate by arbitraging tax legislation and regulation. Doing so lets them pay a higher return to capital, so distorting their access to funds, which creates an outcome where abuse of legislation can result in the determination of winners and losers in the marketplace rather than such matters being decided on the basis of who can serve the best interests of customers. Tax competition is, then, the enemy of effective market economics.
  • In that case tax competition is necessarily harmful. It:
    • Undermines the state;
    • Undermines democracy by denying electorates the right to determine what taxes shall be paid and by whom;
    • Undermines the rule of law by encouraging some to exempt themselves from that laws reach;
    • And undermines free markets;
  • Put those factors together and tax competition is always, and necessarily, harmful. Nothing can redeem it.

2 Be it resolved that: The cost of controlling tax competition is justified by the benefits it delivers

  • There is, of course, a cost to controlling tax competition. It is, however, modest. What is more it is a price we have paid since almost time immemorial. If in doubt just read about the workings of the Temple in ancient Jerusalem. It was the regulator of markets as well as a centre for devotion. We have always known that both markets and tax can be abused. And we have thought it a price worth paying to prevent both.
  • The costs of controlling tax competition relate to:
    • The cost of securing international agreement to do so.
    • The cost of monitoring the agreement to do so.
    • The cost of exchanging information to evidence the process of doing so.
    • The cost of enforcing regulation, both domestically and internationally, against those who persist in anti-democratic, anti-social, anti-market and anti-state behaviour.
  • Whilst these costs are not insignificant I suggest that whatever they might be they are much lower than the gains to be made from regulating tax competition.
    • The gains from regulating tax competition are based on the fact that doing so:
      • Means that markets that can more effectively allocate capital to those best able to use it to meet end users need. Effective markets are, therefore, reinforced and most believe that this is a proper basis for organising large parts of most economies;
      • The rule of law is upheld, with the example set reinforcing behaviour throughout society both nationally and internationally, which is why this issue has come to have such significance when much of the abuse from tax competition that has been witnessed has been by those in the public eye;
      • The ability of states to deliver services to those who need them is maintained – and for the avoidance of doubt, we all need the services of states;
      • Market failure – including in the mispricing of externalities – is prevented;
      • Income and wealth can be redistributed, which we know leads to better societies;
      • Fiscal policy becomes an option for governments, which is vital when zero rates are going to stay at or near the zero bound;
      • The value of local currencies – which are always supported by the requirement that taxes be paid in them - are upheld;
      • Democracy is supported.
    • To put it another way, defeating tax competition is a necessary condition for effective economic management.
      • To misquote Oliver Wendell Holmes:
        • The cost of defeating tax competition is the price that we pay the living in a civilised and prosperous society.

3 Be it resolved that: It is possible to develop a framework to control tax competition

  • The question has to be asked: can we defeat tax competition?
  • My answer is yes, but we have not succeeded as yet.
  • There is good reason for the fact that we have not done so: we have not as yet really comprehended the scale of the problem that we face or thought about it holistically.
  • Tax competition is both created and suffered by many jurisdictions, because it comes in many forms:
    • It is international;
    • And as importantly, it is domestic;
    • But perhaps just as significantly, it is not just about corporation tax or taxes on mobile capital. We have made the particular mistake of thinking it is mainly about corporate tax competition;
    • The reality is, however, that all taxes can undermine each other and that tax systems do not suffer bilateral risk, but instead suffer multilateral failures as a result of tax competition, both domestically and internationally.
    • What is more, it is not just the taxes themselves that are a threat to each other. The way in which they are operated also creates risk. So, we need to take into account:
      • Political attitudes towards tax in jurisdictions.
      • And the way in which tax administrations are resourced and cooperate;
      • As well as the risks created by company and trust administrations
      • And the effectiveness of the international agreements, so many of which are rooted in the OECD.
    • In other words, to really beat tax competition we need effective multilateral, domestic and international qualitative as well as quantitative measures of tax spillovers. As yet such a system does not exist, although with my colleague Andrew Baker I am working on this issue.
  • And we are doing is for good reason. It was in February this year that the United Nations, the World Bank, the IMF and the OECD all jointly committed to tackle tax spillovers. That can only be because they all perceive the threat of tax competition. We believe that a framework of the type we are creating can address this issue when as yet there is no system in place for doing so.
    • It is my belief that if we increased the ambition of governments who do believe in democracy, the rule of law, effective markets and the rights of the states that they govern then we could create and deliver these tax spillover assessments that would truly reveal where the threats to international taxation stability really are.
    • And it is my belief that this would transform the stability of the world markets; focus international business on their true goal of meeting customer need to generate long-term sustainable profit for the benefit of all in society, including their owners; and it would generate the secure basis of financing that so many countries, particularly in the developing world are in desperate need of.
    • That is why the cost of beating tax competition is worth paying.

Give the public debt some respect and end austerity!

Published by Anonymous (not verified) on Wed, 03/10/2018 - 10:05pm in



The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why … Britain’s […]

Keynes als Investor

Published by Anonymous (not verified) on Wed, 03/10/2018 - 9:31pm in



Lange prägten Legenden das Bild des Investors Keynes. Sein Biograf Donald Moggridge etwa berichtet, dass Keynes das Volumen der King’s Chapel, der weltberühmten gotischen Kapelle des Colleges, schätzen ließ, in der Absicht, dort Getreide einzulagern, um es später mit Gewinn zu verkaufen. Wie Keynes wirklich für das College investiert hat, haben kürzlich zwei Ökonomen untersucht. […]

An evening at the OECD

Published by Anonymous (not verified) on Wed, 03/10/2018 - 5:49pm in



I had dinner at the OECD last night. I was told there were prime ministers and billionaires in the room. They all looked like human beings in business wear to me.

Various talks were given. Chatham House rules applied. But five things became clear about the OECD.

They are committed to economic growth as the cure for all ills.

They are incredibly worried about populism.

They see the failure to tackle inequality as the threat to the existing system.

Inclusive growth is their answer to this.

They believe that a change in business attitudes to include all more broadly in the benefits of growth as vital.

And that last one is their problem. Look at the outrage at the Labour Party's proposal to share some prosperity and you will see how far the business community is from taking action to save itself.

Capitalism is at a crossroads. It really is reform or bust time. And right now I'm not sure that bust isn't the better bet. Marx might get the last laugh, after all.

Breakfast with Arthur Laffer

Published by Anonymous (not verified) on Wed, 03/10/2018 - 5:43pm in



I have just had breakfast with Arthur Laffer. You know of him: he's the creator of the Curve. And most amusing it was too. We agreed on a few things. One, in particular: that you can't do macro without understanding double entry.

We're debating later this morning in Paris. I confess this should be fun. I will post my speaking notes later today.

If I am distracted for a while, now you know why.