Posts in category Buttonwood’s notebook


Business and financeButtonwood's notebook

Tony Blair is right on Brexit. Now he should get into the trenches or back off

TONY BLAIR’S speech on Brexit on the morning of February 17th has attracted a predictable storm of derision. The former prime minister has become a sort of Rorschach t`est for whatever the viewer thinks is wrong about Britain: to the left he stands for free-market capitalism and war, to the right he stands for a hyper-metropolitan internationalism, to some of his former acolytes he stands for how not to secure one’s political legacy after leaving politics. In parts of Westminster and Fleet Street nuanced opinions about Mr Blair meet with a mix of bafflement and distaste, like ordering veal at a vegan restaurant.

To be sure, some of the criticism is valid. Mr Blair presided over the build-up to Britain’s financial and economic crisis and the failure of the post-invasion period in Iraq. His globe-trotting, pro-globalisation breeziness clashes with the prevailing mood among electorates in much of the West. His money-making activities since leaving Downing Street (ten years ago this June, believe it or not) have done his domestic reputation significant harm.

Yet the shame of all this is that it detracts from the many things Mr Blair says that are worth heeding. He…Continue reading

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Business and financeButtonwood's notebook

Euphoria returns to markets

LIKE the weather in Chicago, you don’t have to wait long for a new trend in the stockmarkets. Just a few weeks ago, investors seemed to have second thoughts about their Trump-related euphoria (which itself was a contrast to the widespread nervousness ahead of the election). Now they have been recording new highs again.

While the spark for the rally seems to have been a Presidential comment about forthcoming tax cuts, the causes have been much broader; the MSCI World Index has also hit new highs. Commodity prices have perked up, which may be a sign that the Chinese economy is holding up (if you recall, a Chinese slowdown was the big worry 12 months ago). Asian trade has perked up after a long period of sluggishness (the exports of South Korea, a bellwether in this respect, have risen for three months in a row). According to…Continue reading

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Business and financeButtonwood's notebook

The problem that links business, finance and politics

THE problem is as old as mankind. The Roman author Juvenal encapsulated it into a phrase “Quis custodiet ipsos custodes” or “Who guards the guards themselves?” It was neatly illustrated in the classic BBC series “I, Claudius”. The infirm Claudius wants the return of the Republic. But the Praetorian guard, set up by his relatives, needed an Emperor to ensure their special status. So on the murder of Caligula, they drag Claudius from his hiding place behind a curtain, and make him Emperor.

Throughout history, dictators have faced this problem. They can surround themselves with men with swords or guns. But it only takes one guard with a sword or gun to turn into an assassin or to seize power for himself. The Shah of Iran had a huge army in 1979 but it did him no good; the soldiers had more sympathy with the revolutionaries than with the Shah himself. 

In business and finance, this is known as the “principal-agent” problem. Shareholders employ managers to run a company; investors use fund managers to look after their savings. That makes sense. It allows us to take advantage of the expertise of others, and of…Continue reading

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Business and financeButtonwood's notebook

Making protectionism unpopular again

BACK in 1906, an insurgent politician called Joseph Chamberlain (once known as Radical Joe, he had switched to the Conservatives over home rule for Ireland*) lured the government into a campaign in favour of tariffs. The result was a devastating defeat for the Conservatives. The opposition Liberal party recognised that tariffs were a tax on the goods bought by the poor, particularly on food, and warned that the policy would lead to a “smaller loaf”. They portrayed tariffs as “stomach taxes”.

A hundred years ago, then, it was easy to make protectionism unpopular. Despite the prosperity brought by 70 years under a more open trading system, it now seems that opinion may have changed: tariffs are favoured by “populist” politicians.**

The trick for modern populists has been to focus on the positive benefits to American workers in terms of jobs, rather than the adverse impact on consumers. In fact, protectionism is highly unlikely to restore American manufacturing jobs, which are under threat from automation as well as globalisation, as our Continue reading

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Business and financeButtonwood's notebook

The markets have second thoughts on Donald Trump

MARKETS are always full of surprises. In the run-up to the Presidential election, many investors were nervous about the possibility of a Trump victory. But on the night of the results, there was a dramatic turnaround. Within a few weeks, the market capitalisation of global equities had risen by $3trn and that of government bonds had fallen by the same amount. Markets were betting on “Trump lite”—that his tax cuts and infrastructure spending would be pushed through boosting growth and possibly inflation. By contrast, they downplayed the other “Donnie Darko” element of his policies—his threats to tear up trade agreements and heighten geopolitical risk in the middle east and Asia.

So far, however, we have seen more of Donnie Darko than Trump lite. First there was his “I have a nightmare” inauguration speech with its references to “American carnage” and protection. Then there were his early actions…Continue reading

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Business and financeButtonwood's notebook

You can’t be both a populist and a free-market conservative

IT WOULD be hard to find two more different characters than Theresa May and Donald Trump; the former a suburban vicar’s daughter, the latter a brash reality TV star. But they face similar problems—how to keep both the markets and their supporters satisfied.

For Mrs May, the problem is her dissonant rhetoric. On the one hand, she has used what was once known as “one nation” Tory rhetoric, arguing against the worst excesses of capitalism and the need to help those who are “just about managing”. So here she is in her Davos speech saying of her new approach that 

It means businesses paying their fair share of tax, recognising their obligations and duties to their employees and supply chains, and trading in the right way;
Companies genuinely investing in—and becoming part of—the communities and nations in which they operate, and abiding by the responsibilities that implies;
And all of us taking steps towards addressing executive pay and accountability to shareholders.

In practice, however, she has already retreated from a proposal to put workers on boards, plans to push ahead with…Continue reading

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Business and financeButtonwood's notebook

Are big infrastructure projects castles in the air or bridges to nowhere?

IF THERE is a consensus right now in American politics, it must be that infrastructure spending is a good thing. It employs workers, improves economic efficiency and, at the moment, can be financed at rock-bottom bond yields. So why don’t governments get on with it?

The problem is multi-faceted. Although people tend to be enthusiastic about infrastructure in general, they are more critical of specific projects. If they are in the country, then they ruin the currency; if they are in the town, then they ruin neighbourhoods or impinge on private-property rights. When it comes to public infrastructure projects, the benefits are long term but the costs are short term. The politician that authorises the project is rarely the same one that opens it. So an elected leader gets all the flak from those who oppose this white elephant/blot on the landscape but none of the praise for the reduced traffic jams or cheaper power that ensue. Occasionally a leader might be tempted into authorising a big scheme (like Britain’s high-speed rail) but, as the Continue reading

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Business and financeButtonwood's notebook

Attack of the zombie firms

WHY has economic growth been so sluggish in the developed world? The previous post showed that productivity in the global economy had been flat or falling in the last three years. And it suggested that the existence of “zombie” firms—uncompetitive survivors—might be one explanation.

As it happened, the OECD published a new paper yesterday which showed that might indeed be the case. The paper concludes that

the prevalence of, and resources sunk in, zombie firms have risen since the mid-2000s, which is significant given that recessions typically provide opportunities for restructuring and productivity-enhancing allocation

and that

a higher share of industry capital sunk in zombie firms tends to crowd-out the growth—measured in terms of investment and employment—of the typical non-zombie firm. 

All in all

a 3.5% rise in…Continue reading

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Business and financeButtonwood's notebook

The global slowdown

WORK smarter, not harder. It is one of the more irritating things that a boss can tell you. But at the macroeconomic level, it is important. Growth can come from having more labour (recruiting more workers, or making existing employees work for longer hours), more capital, or from using that labour and capital more effectively—something known as total factor productivity (TFP). It can be the kind of brilliant innovations devised by Thomas Edison (pictured) or the less-heralded but equally important improvements such as the adoption of the moving conveyor belt to speed up assembly work. Since there are limits to the amount of additional capital and labour, productivity is key to long-run growth.

Measuring productivity is far from easy; it tends to be the residual left over when all other factors have been accounted for. The OECD says it “can often be a measure of our ignorance”. Still, the attached table is very striking. It comes from the American Chamber of Commerce (here’s the link, with thanks to Gervais…Continue reading

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Business and financeButtonwood's notebook

Dorothy meets the Mnuchins

DOROTHY was unhappy. Life on the Kansas farm seemed dull, and her pocket money hadn’t risen in real terms for years. It was time for a change; time to make Kansas great again. Then, as she was sitting in the farmhouse with her dog Toto, a tornado came along, sweeping them up and taking her away, far from reality.

With a bump, the farmhouse landed on a woman. As Dorothy emerged, she saw a crowd of cheering little people.“You have killed the wicked witch of the east wing” they shouted. “We could not abide her charitable foundation or lax e-mail security procedure. But you have saved us.”

“Who are you?” asked Dorothy.

“We are the Mnuchins” they proclaimed “and we raise all the finance for the Wonderful Wizard of Oz, who lives in a giant tower with his name on the side.”

“What’s it called?” asked Dorothy.

“Ozterity” came the reply.

“Can the Wizard of Oz restore prosperity to my Kansas farm?” she asked.“Of course” they cried.

“Can the Wizard help me and my dog Toto?” she asked.

“It depends. Is Toto a Hispanic name?” said one Mnuchin. “And where…Continue reading

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Business and financeButtonwood's notebook

Dow 20,000?

SOME time soon, the Dow Jones Industrial Average seems likely to break through the 20,000 barrier, an event that will be greeted with banner headlines and a sign that capitalism is flourishing again. In fact, the Dow is a flawed measure, which uses the odd approach of weighting its component companies by share price. The biggest stock in the Dow is Goldman Sachs and despite its prominence on the campaign trail (and among Donald Trump’s new team), it is hardly the most important company in America; its weight depends on its near-$240 share price. Like other financial shares, it has shot up in the wake of Mr Trump’s election; boosted both by hopes of bank deregulation and of potentially higher interest rates, which tend to boost bank profits. William Wright of New Financial estimates that Goldman staff’s wealth, in the form of options and shares, has risen by $2.3bn since the polls; not exactly a “revolt against the elite”.

The Dow is up 9% since November 7th, well ahead of the more broadly-based S&P 500’s 6.6% gain. The S&P uses a weighting by market value—its…Continue reading

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