Economics

Let’s talk VAT and Brexit, because it’s time we faced reality

Published by Anonymous (not verified) on Tue, 05/06/2018 - 5:30pm in

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Economics, Europe

No one wants to talk about VAT. I once turned that to my advantage: early in my career I did a lot of lecturing on VAT precisely because no one else wanted to do so: it paid well as a result.

Now no politician wants to talk VAT. They don't understand it. They should. It's going to cause Brexit mayhem.

VAT is in essence simple when it comes to borders, at least with regard to goods. There is no VAT on exports. There is VAT on imports. That's the principle. It's a bit more difficult when it comes to services. But let's just stick to goods for now. The simplicity is appealing. You just have to know one thing, and that's when the goods have crossed a border.

It has taken decades for the EU to work out how to do this. It's just about got there. Just about, I stress. Between VAT registered traders the arrangement has become relatively straightforward: it's pretty much automated and declarations can be cross-checked, at least in theory. We've finally got most distance selling to non-VAT registered customers sorted too, but only recently. And notorious abuses, such as the Channel Islands abuse of what is called low-value consignment relief have been largely eliminated. I am not saying fraud has ended: that would be wildly optimistic. But the abuse of old, where the same goods crossed borders time and time again until eventually a fraudulent claim for tax was made with no matching declaration of liability being made has been curtailed, at the very least. You have to be a somewhat more sophisticated now.

And then we get to Brexit. And the arrangements that exist within Europe to make sure that goods can be traced across borders precisely to make sure that this fraud - which cost billions a year to the UK - will be denied to the UK. They will have to be. The system depends upon the exchange of sensitive data. And sensitive data requires protection within and between states.  Which means that the court has to be involved. And in the case of VAT that is the European Court of Justice,  whose jurisdiction the UK is now refusing to accept.  And that means we will be outside the VAT system for Europe.

The consequences are enormous.  They are grim for our exporters: they will suffer a cost disadvantage as every export from the UK will be an import into Europe.  That will mean that every single one will have to be processed upon arrival somewhere on the continent, and VAT will have to be paid. That's a significant processing cost, and a cash flow disadvantage.   The VAT does not act like a tariff;  it would have eventually been payable anyway,  in some place by someone,  but the processing charge is a tariff.  And cash flow is always an issue.

For importers  the situation is as difficult.  According to the FT,  Heathrow alone handles more than 2 million parcels a day.  A majority of these come from the EU:  they just flow through the system right now.  But that will not be the case after Brexit.  Every one will need VAT paid. And a processing charge will be due: that's usually £8  on delivery, payable to the Royal Mail,  on top of the VAT owing, at present.

It is pointless to pretend that the free flow of goods will not be disrupted in this case:  it will be. We do not have the infrastructure to handle this at present.  Nor have many businesses got the margin to handle distance selling in these situations:  for many small UK businesses this will be deeply prejudicial:  import and export will be beyond their reach.  And let's not pretend that this is good news:  we simply cannot make everything ourselves. We will be worse off.

In that case the suggestion made in the FT yesterday that the UK is looking at staying in the European VAT system is good news. It will mean accepting ECJ rulings in this area, but we remain subject international courts on vast numbers of issues. And it will mean maintaining an EU compliant VAT system,  but given the length of time it has taken to make that system work, and it is now better than ever,  that make sense.

At least,  it most certainly does when the alternative is the creation of the most massive barrier to large parts of our trade.

On Brexit there is no debate required on VAT: we have to stay in. Quite literally, nothing else makes sense.

We’ve known what money is for more than a century and still we suffer from the myths

Published by Anonymous (not verified) on Tue, 05/06/2018 - 5:01pm in

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Economics

I liked this comment from John S Warren on the blog yesterday:

The most elegant, simple and useful short definition of money, and the purpose of banking I have read, was written by Alfred Mitchell-Innes, ‘What is money?’ (The Banking Law Journal, May 1913).

Perhaps it should be sent to Faure and Gersbach; but better, read by the widest public:

“Money, then, is credit and nothing but credit. A’s money is B’s debt to him, and when B pays his debt, A’s money disappears. This is the whole theory of money. Debts and credits are perpetually trying to get into touch with one another, so that they may be written off against each other, and it is the business of the banker to bring them together. This is done in two ways: either by discounting bills, or by making loans. The first is the more old-fashioned method and in Europe the bulk of the banking business consists in discounts while in the United States the more usual procedure is by way of loans.”

What particularly struck me was the emphasis by Mitchell-Innes on ‘debits and credits’; it reminded me of Ch.3, Randall Wray, ‘Modern Money Theory’. It begins with accountancy; which non-MMT economists simply do not seem to understand.

Note when this was written.

Note also that most economists are utterly dismissive of accounting.

And note that it is accounting that actually makes money: no printing press is required.

Well, accounting and the fact that the resulting money is accepted in settlement of tax.

And yet we still suffer from the myth that it is the toil of the wealthy (almost singlehandedly) that pays for all we need in society.

And that the government has no money of its own when by a stroke of a key it can however much it needs to deliver all the economic activity the economy is capable of sustaining.

We have known that for more than a century. And still we suffer from the myths. It's time they were laid to rest.

Emerging market meltdown could undermine oil rally

Published by Anonymous (not verified) on Tue, 05/06/2018 - 10:33am in

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Economics

The evidence is growing by the day. Turkey's currency, the lira, has lost 20 percent of its value over the past two months. Argentina is seeking a bailout from the IMF.

42 Failed Predictions from Alex Jones

This is another video from AlexJonesClips debunking Alex Jones’ weird conspiracy theories and fearmongering. This piece collects 42 predictions made by Jones and some of his equally paranoid guests, which never actually happened. The vast majority of them come from the three years from 2008 to 2010, but there’s one piece from 1999 where he talks about the carnage in Grozny, Chechnya, and Y2K chaos in his home state of Texas.

As with the video documenting and debunking 26 of Jones’ lies, there are too many of them to individually catalogue each one, but generally they’re variations on a theme. These are that the government is going to devalue the Dollar, either by 90 per cent, 50 per cent, or they’ll just wipe it out completely. 15 countries are also going to have their economies collapse. Barack Obama’s approval rating is plummeting, so he’s going to stage fake terror attacks in the US. There is going to be a nuclear attack staged by the government in one of the major US cities, like New York, Chicago, Denver and so on; Barack Obama is going to invade Russia; World War III is coming. The government is training early teenage kids to act their militarised police. The US government is going to stage a series of small scale biological warfare epidemics, which will be halted with the imposition of martial law in those areas in order to get the population to accept military rule. They are then going to release a germ weapon which will kill 50 per cent of the American population.

At times, the narrator says, Jones comes close to racism. Like when he says that in 15 years time about half of the present American population will have been wiped out and replaced by people from Latin America. Actually, that sounds like real racism to me, and a very literal approach to the Alt Right/ Nazi view that the multicultural elites – which sounds to me very much like code words for ‘the Jews’ – are going to wipe out the traditional White populations of Europe and America and replace them with coloured immigrants. In America, this racist theory says that the replacements will be Hispanics from South America. In Britain and Europe, the Nazis pushing this theory say that the new arrivals will be Blacks, Asians and Muslim Arabs. Oh yes, and one of his guests also predicts that Israel will be nuked, and that’ll form the pretext for Obama to intervene once again in the Middle East.

And then there’s the occultism thrown in. Hillary Clinton has been chosen by the Illuminati to be the next president of the United States. Well, I’m sure Hillary Clinton believed that she was divinely appointed to be the next president, but she was severely disappointed. He also goes on about how the elite are doing everything through ritual magic, and have to stage their attacks on a small scale in front of people in order for the big attacks to be successful. Oh yes, and the fake terror attacks, like he believes 7/7 over here in Britain was, take place on certain dates, which are numerically important to the Illuminati/One World Government Conspiracy responsible for carrying them out.

It’s all rubbish, though when he talks about the carnage in Chechnya, with 100,000 being killed, tanks hit and so on, I’m prepared to give him a bit of a pass. He’s almost certainly exaggerating, but the war there was terrible, and Putin’s forces were responsible for some truly horrific massacres, such as that of the people of Grozny. The invasion was launched under the pretext of combating Islamist terrorism, after some truly horrific Islamist terrorists had entered South Ossetia from Chechnya. However, the real reason to me simply seems to have been to punish the Chechens for having defeated the Russians in the war of independence a few years earlier. Oh yes, and give Putin himself the image of being a great military strongman.

As for the situation in Texas in 1999, Jones goes on about how the petrol stations have run out of fuel, the stores are running out of water and its all due to the Y2K bug. Or something like that. I don’t know if there were supply problems like that in Texas, but if so, they weren’t due to Y2K. Despite truly apocalyptic predictions of computers everywhere freezing up and breaking down, planes falling out of the sky, the global economy going belly up, in actual fact very little happened when the 20th century turned into the 21st.

It’s amazing to think that Jones has been making these completely bogus predictions on the airwaves for nearly ten years or more, and all of them have proven false. But his show goes on, and there are people still calling in to him, listening and believing the complete rubbish he utters. And as the narrator points out, when his predictions don’t come true, he never apologises, never remarks on them.

In fact, Jones isn’t unique in this, nor was he remotely alone in ascribing to Obama all kinds of nefarious schemes to kill off the American people. Secular Talk did a piece about a pair of extreme right-wing Christian pastors, who also ranted about how the country’s first Black president was going to be ‘worse than Mao’ and would set up camps to kill White Christians. Which is another of Jones’ predictions, along with ‘God’ being taken off America’s currency. And Kulinski, Secular Talk’s host, remarked about them that the extreme right-wing nutters, who make these bloodcurdling predictions aren’t bothered when their predictions don’t come true. They simply carry on, making more of them.

But this video does show how accurate Jones is when predicting the dire future he sees coming for America. It’s another excellent debunking of him and his weird conspiracy theories.

Krugman’s modelling flimflam

Published by Anonymous (not verified) on Tue, 05/06/2018 - 2:38am in

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Economics

Paul Krugman has a piece up on his blog arguing that the ‘discipline of modeling’ is a sine qua non for tackling politically and emotionally charged economic issues: You might say that the way to go about research is to approach issues with a pure heart and mind: seek the truth, and derive any policy conclusions […]

Rees Mogg Senior’s Support of Pinochet’s Fascist Coup in Chile

Jacob Rees-Mogg, the rising Tory star and archaic ‘minister for the 18th century’, as he’s been dubbed, last week seemed to show very clearly the extent of his ambitions. He bought a townhouse overlooking Downing Street. Despite his denials that this showed his intention of occupying No. 10, everyone else took it as a clear sign that he very definitely does have his sights on becoming Prime Minister.

Rees-Mogg is a true-blue Tory aristo, who began his career by campaigning to keep the unreformed, and unelected House of Lords. He has consistently voted to increase spending, tax cuts and other privileges for the rich, and to cut and deny state aid, welfare benefits and spending on the poor, the unemployed and the disabled. He has a vast income provided by his investment firms. And he’s also the son of William Rees-Mogg, the former editor of the Times and later columnist for the Independent.

I found this passage quoting and commenting on a piece Rees-Mogg senior wrote at the time, welcoming the Fascist coup by General Pinochet which overthrew Salvador Allende, in Colin Sparks’ article, ‘The Media and the State’ in James Curran, Jake Ecclestone, Giles Oakley and Alan Richardson, eds., Bending Reality: The State of the Media (London: Pluto Press 1986). Allende was a democratically elected Marxist, who enraged his country’s ruling elite by wishing to expropriate land from their estates to give to the peasants. He was also a danger to the American-led global campaign against Communism, simply because his regime had taken power through popular elections. It contradicted the view that Communism could only gain power through very undemocratic means, like revolutions and coups. And so the CIA backed Pinochet’s coup against Allende, which plunged the country into a brutal Fascist dictatorship that lasted from c. 1974 to the early 1990s.

Before quoting Rees-Mogg senior, Sparks also describes how the elite will try to bring down any government genuinely trying to create a more democratic, equal society, and eliminate poverty using ideological as well as other weapons, one of which will be the establishment press. He writes

Any government which seeks to get rid of poverty and inequality will come up against the opposition of those whose life has been built upon the fruits of poverty and inequality. Any government which seeks to establish democracy as the common norm for the conduct of human affairs will come up against the opposition of those whose whole life has been built upon the exercise of irresponsible and unaccountable power. The people who run the state, the media, industry and the banks will not just let us get on with changing the world because a temporary majority in the House of Commons tells them to. They will fight us with ideas and with weapons. It was, after all, that organ of ruling class opinion, the Times, then edited by the shameless Rees Mogg, that welcomed the bloody overthrow of Salvador Allende and the Chilean government with the words:

The failure of the Presidency of Allende was also a tragedy for Chile herself, not because the coup put an end to a government which never had a majority either in the country or in congress, but because it marks the end of a long period during which Chile’s peaceful and democratic political traditions were the envy of her neighbours. To apportion blame for this is no easy matter. Many Chileans will argue that the Unidad Popular government had itself made the coup inevitable by its hopeless mismanagement of the economy leading to a breakdown in public order, and at the same time had provided justification for it by its own unconstitutional acts. On the whole this would be our judgement; there is a limit to the ruin a country can be expected to tolerate…
At this state what a foreign commentator can say is that, whether or not the armed forces were right to do what they have done, the circumstances were such that a reasonable man could in good faith have thought it his constitutional duty to intervene.

No doubt Rees Mogg had discussed just such ‘circumstances’ with ‘reasonable military men’ at Pirbright and Aldershot. (Pp. 94-5).

The last sentence presumably refers to the attempts various members of the elite, including the Times and the then editor of the Mirror, to organise a coup in Britain against Harold Wilson’s minority Labour government in 1975. If this had gone ahead, the result would have been the mass internment, not just of MPs, but also of other political activists and journalists. The proposed location for their imprisonment was either in the Shetland Isles or the Hebrides. Ken Livingstone discusses this in his 1987 book, Livingstone’s Labour, as does Francis Wheen in his book about 70’s paranoia, Strange Days. As for Pinochet’s coup, this resulted in the mass imprisonment, rape, torture and execution of 40,000-60,000 people. Parents imprisoned and murdered by the Fascists had their children taken away, to be raised instead by members of Pinochet’s Fascists, who were childless.

And Sparks is absolutely right when he states that those, whose power and social position is built on poverty and inequality will try to bring down those governments trying to end it. The Conservatives’ entire economic strategy, and that of the ruling elites they represent, is based on increasing poverty through austerity, welfare cuts, the privatisation of the NHS, and the creation of insecure, low paid work with little, if anything, in the way of workers’ rights like pensions or sick pay. And he’s also right about the way the same elite uses the press in this. We’ve seen the way the British press and media has consistently vilified Jeremy Corbyn and his supporters as everything from Trotskyites and misogynists to anti-Semites, in order to prevent a genuinely reforming Labour government coming to power.

And the quotation from Rees-Mogg senior also shows how Jacob Rees-Mogg turned out the way he is. He’s the child of privilege, whose family owed its position to inherited wealth and inequality, and whose father dutifully supported the same establishment elite with his ideas and editorship of the Times. And Rees-Mogg senior’s approving comments about Pinochet’s coup also shows how easily other parts of the Tory party supported other Fascist thugs in Latin America. Like the Libertarian group, of which one Paul Staines, now Guido Fawkes, was a member, which invited the leader of one Central American death squad to be their guest of honour at their annual dinner.

The absence of customers with money to spend is going to change the economic order

Published by Anonymous (not verified) on Mon, 04/06/2018 - 5:06pm in

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Economics

Andy Crow suggested why neoliberal austerity might end in a comment posted on the blog overnight. He said:

Businesses need customers with money to spend. They are getting thinner on the ground by the day.

He’s right. They are. And not just in the UK. That’s true pretty much everywhere.

This is going to hurt. New money gets its value from markets. And markets get their value from the belief that there will be future profits which people (call them pensioners and others whose funds are directed by witless pension companies) will buy into now in the hope of securing a share of that profit at some time in the future when they might need to live on it.

New money has, however, been heavily associated with neoliberalism and all that goes with it. Including austerity.

But neoliberalism and austerity have downsides. One is that, as Andy notes, people don’t have enough to spend. And, second, they don’t have enough to save. The deregulation of pensions was exacerbating this. The sole reason for enforcing new pension contribution payments in the UK was, in my opinion, to defeat this trend for the gain of capital markets, again in my opinion. Pension provision has nothing to do with it.

And if Andy and I are right then all we need to know about the reasons for neoliberalism collapsing, as any Marxist will predict it should, are laid out before you. That’s not because of a rising proletariat: it’s because neoliberal economics has sucked the life and the income out of too many markets and too many lives.

The result is that the husk that is left is based on a belief that the system can continue as it has and yet the foundations that made exponential growth to date possible are being dug out by the very politics that this system promoted.

The creation of value has been substituted by the desire of the wealthy to secure a rent that exploits others. That is what is sucking the life out of neoliberalism.

But remember, neoliberal economists are just hired hands. They have shaped politics, the economy and austerity. I do not for a moment pretend otherwise. But let’s also be clear: they were funded to do so. As Nancy MacLean has suggested in Democracy in Chains, the Koch brothers funded neoliberalism to suit their own goals. And now neoliberalism is going to fail its paymasters.

What then? In a world where the paymasters realise that they need prosperous people, to what creed will they then subscribe?

Or will they give up on the pretence of supporting democracy at all, and simply ignore the need for consent?

I don’t know. But I do know that the absence of customers with money to spend, let alone save, is going to change the economic order.

We are in for an interesting ride.

From Wicksell to Le Bourva and MMT

Published by Anonymous (not verified) on Sun, 03/06/2018 - 8:24pm in

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Economics

Comparing the limited work of Wicksell, Le Bourva, and MMT, we find that they share many similarities. Obviously, the institutions and issues being discussed have changed during the decades these scholars were writing, yet all three views agree on some fundamental issues. The methodology is quite similar, with a strong focus on balance sheets opposed […]

It’s time the world’s economists woke up to reality

Published by Anonymous (not verified) on Sun, 03/06/2018 - 8:03pm in

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Economics

Martin Sandbu wrote two articles in the FT last week (very paywalled) that look at issues arising from this weekend's referendum in Switzerland on banking reform.

Let me be clear: I oppose the proposed reform because I think it embraces all the  worst features that Positive Money propose for the banking system and if adopted this would, firstly, be harmful to the Swiss economy and, secondly, be prejudicial to the necessary real monetary reforms that are required in most countries at present. I explain why in some detail, here.

Bizarrely, Sandbu has, despite his obvious overall sympathy with reform, managed to write the pieces without the slightest reference to modern monetary theory. It is as if he, like so many economists, thinks that money exists as a phenomenon separate from the economy as a whole. I've already noted similar traits from The Economist and John Kay in the last few days. And it is as if he, like they, thinks, quite erroneously, that money can have a value as if it is a commodity in its own right.

Sandbu gets this wrong. Money has no value of its own, and it never has. Both physical cash and ancient and modern intangible forms of money (to cover all forms of ledger based monetary creation - which are in essence identical however the record has been maintained) get their value from recording debt. A currency achieves that by being issued into existence by a government that accepts it back in settlement of legally due tax obligations. Bank created money, which because it is always denominated in a government created currency is always a derivative of it and so of secondary standing, exists because of the debt that exists from a lender to the bank that extended them credit.

Sandbu, and those suggesting banking reform in Switzerland, ignore this reality. Alternatively, they are saying that a central bank must decide the quantum of monetary debt denominated in a state’s currency that should exist in an economy. This is deeply dangerous for three reasons.

First, it assumes that the central bank is capable of accurately forecasting this. I have to say I have absolutely no such confidence.

Second, it assumes that the market will adapt and that there will be no resulting shortages or excesses of available credit money for settlement of obligations due within an economy. Again, I do not share that confidence.

But, most importantly, and third,  this assumes that recourse will not be had to alternative currencies. I can think of no better way of promoting their use than the adoption of this reform. Far from a central bank, and so a government, having control of their macroeconomy as a consequence of this reform they would instead, I suggest, lose it as a result: no country where two currencies are in widespread common usage can ever be subject to effective macroeconomic management in my opinion.

Sandbu seems to recognise the issues he is addressing, saying:

The most generous way to interpret this objection is as a worry that a full-reserve system will not, in practice, generate as much credit as the fractional-reserve system. (This worry is expressed by the Swiss central bank head in his opposition to Vollgeld.) Even this is not obviously bad for growth if credit supply is only moderately more tight-fisted but much less volatile. But the broader point is that there is no inherent reason why a full-reserve system should lead to less credit creation (over time) than the status quo. That depends entirely on the policies pursued by the central bank in the new system.

What those policies should be deserves its own debate. One thing that is clear is that central banks would have a wider range of tools — and so the range of possibly policies is correspondingly broader (including policies that would mimic today’s system). It would be surprising if something better than the status quo could not be found.

It's hard to disagree with the conclusion: we all know the status quo is not working. But complete credit control is no solution at all. I have no problem with directing credit, and controlling its excesses. But handing all credit creation to the central bank is not only technically impossible in a modern economy, it's a dangerous folly. Modern monetary theory provides a better answer (so long as tax is a fully integrated policy issue). It's time the world's economists woke up to that.

John Kay is wrong: currency is very definitely tied to nationality

Published by Anonymous (not verified) on Sun, 03/06/2018 - 7:35pm in

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Economics

It takes some ability to write what I suspect will prove to be the fatuous economics comment of the year as early as May, but I suspect John Kay has achieved it.

Writing in the FT on Scottish independence he seeks to dismiss the currency issue, saying:

This time, the currency question is sensibly dealt with by noting that there is no need for an independent Scotland to do anything at all. The world has moved on from the days when money was distinguished by the head of the sovereign — or perhaps has gone back to the days when gold was a medium of exchange that knew no boundaries. Currency is no longer tied to nationality.

I confess I reeled a little when reading that. John Kay has written some decent things: I have bought books by him. I don’t always agree with them, but by and large his opinion is informed.

This comment is not informed. It is just wrong. I would love to know which currency Kay thinks is not linked to a sovereign state. He could try Bitcoin, but most would laugh at that, as they would at gold. And please don’t suggest the Euro: Germany might laugh if you did.

And this is no laughing matter. What Kay is effectively saying is that a financial commodity can exist independent of the underlying quality that gives it value. I would remind you of the last time that happened. Markets thought sub-prime debt had value independent of the quality of the mortgages that underpinned them. They were wrong. We paid an enormous price for that mistake.

So too is Kay wrong on currency. There is no currency that exists independently of the fact that a sovereign state will accept it in settlement of tax owing. The looser the connection, the weaker the currency, by and large. It is literally this fact that gives money its value in use: nothing else does because nothing else requires that it be used in exchange in a location.

This is why gold and bitcoin will always be commodities now, and not money.

And this is why Scotland needs its own currency. No state can have control of its macroeconomy, monetary policy, taxes and so fiscal policy without its own currency. This is the European nightmare. This is the nightmare Scotland has to avoid.

And Kay is an impediment to achieving this. Kay is a member of the first minister’s standing council on Scotland and Europe. That's worrying. Not least when he concludes, saying:

The report falls short of presenting an economic case for independence. But it demonstrates that if other arguments led to a second, successful independence referendum, economic issues would not prevent a “yes” vote, and describes a possible more prosperous route ahead.

He's wrong again: the currency issue would most definitely do that.

The Scottish First Minister needs some new advisers, I suggest.

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