Buying shares isn't the same as investing

Tweet

 

For most people, the reduction announced in the budget yesterday to the limit on cash ISA’s, from £20,000 to £12,000 per annum, is an academic question. There can’t be many on an average salary who have even £12,000 available to save, let alone £20,000. The tax-free status of interest on such accounts is effectively a subsidy to those who do have that sort of money to put aside. As ever, the taxation system in the UK works to promote the flow of money from those who have less to those who have more. Who ever said that Conservative politicians – of whatever stripe – don’t believe in redistribution? They do – just in the wrong direction.

The argument for that subsidy was always that ‘saving’ was a ‘good thing’ for people to do, and should be encouraged. Reeves has effectively being saying for some time that ‘saving’ isn’t such a good idea after all – what we really need is investment. She’s right in principle, but utterly wrong in the implementation. She is arguing that those who are in a position to put aside the full £20,000 must put the remaining £8,000 into stocks and shares, but defining that as ‘investment’ is just plain wrong. Certainly, if someone buys shares in a start-up, that is an investment: the money goes into the company and is used to pay the initial costs. In return for that, the investor owns a chunk of the company in the form of shares and can expect dividends paid out of profits if the company is a success. But when they sell those shares, even if the person buying them pays two or three times as much for them, not one penny of the payment for those second-hand shares goes into the company for further investment. That doesn’t mean that the new owner doesn’t own a chunk of the company, nor that (s)he won’t receive dividends, merely that the transaction doesn’t represent a new investment in anything. It creates no added value at all.

It might, though, lead to an inflated share price. If Reeves’ approach leads to more ISA monies being used to purchase existing stocks and shares, the price (and therefore the apparent value) of those stocks and shares will increase, in line with the basic rules of supply and demand. That in turn has two effects: firstly, it increases the disparity between the ‘value’ of the shares and the underlying value of the company and its assets, and secondly it makes it more likely that those shareholders will lose some of their apparent wealth if the shares crash. And the greater the disparity, the more likely it is that there will be a crash, or at least a ‘market correction’ at some point, probably as the result of an external shock. Reeves is not only trying to force more people to risk their capital by saving in ways where the price can go down as well as up, she’s also increasing the level of that risk. All because of a dodgy definition of investment.

She’s right, though, in saying that the UK needs more investment. But if we define investment as being the creation of new assets – for instance, new companies, new equipment, new infrastructure – there are better ways of doing it than persuading people to put their money in the hands of market speculators and gamblers. Public sector investment in infrastructure is one of those, but you wouldn’t know that from listening to the Chancellor.

What about the digestives?

Tweet

 

A Labour MP has produced a short video which has gone viral in an attempt to explain the so-called government debt crisis in terms of the ratio between bourbon biscuits (debt) and custard creams (GDP). I’m not sure whether he’s fully thought through the possibility that, for those of us (count me in) who prefer bourbons, this might make the idea of bigger debts more attractive. More worryingly, it made me wonder whether the budget to be announced by the Chancellor later today might itself be based on biscuit mathematics rather than economics, although that might help to explain the odd choices she seems determined to make. One thing that was clear, as the MP piled up his biscuits, was that there was a remarkable lack of crumbs. I suppose that might well be another accurate budget prediction.

What biscuit-based economics skates over, however, is that underlying it is the same set of assumptions as are used by government and opposition alike in their own money-based economics. Treating the amount of money which savers queue up to place on deposit with the government as though it’s a serious debt problem, pretending that the UK has a maxed-out credit card, and ignoring the fact that a goodly chunk of the interest payments being made by the government are actually paid to, er, the government itself so that that element of expenditure immediately also becomes income, are all signs of a commitment to the ridiculous household analogy for government finances. Doing the accounts in biscuits might be mildly entertaining, but it is still economic nonsense.

The number of custard creams and bourbons isn’t actually the limiting factor on what we can do. As Keynes would probably have said, if he’d decided to base his major works on biscuits, if the biscuit factory has the capacity to produce more biscuits, if the materials are available, if there are enough available workers, and if the environmental impact of making biscuits can be met, then we can make as many biscuits as we want. Although, speaking personally, I’d opt for a nice chocolate digestive.

There's nothing just about Trump's plan - or even Europe's

Tweet

 

In response to the ‘Trump’ plan for peace in Ukraine (which according to some was actually drawn up by Russia rather than Trump, although its precise provenance remains in some doubt), Keir Starmer has said it needs more work in order to turn it into a “just and lasting peace”. Fine words, but whether they’re any more meaningful than a standard Trump word salad is open to question. To be ‘lasting’, it has to provide cast iron guarantees of no future aggression against Ukraine, and the version published to date offers no more than wishy-washy words.

But the bigger issue is defining a “just” peace. If we’re seriously talking about ‘justice’, then any agreement has to include a return to the internationally-recognised boundaries prior to the seizure of parts of Donetsk, Luhansk, and Crimea, an agreement on reparations for damage caused by an illegal invasion, a system of trials for war crimes committed, and agreement that any future changes to boundaries will be negotiated, not imposed by force. Such a ‘just’ outcome, realistically, isn’t going to be on the table – it could only ever be an option if other countries were willing to use their own military forces to impose such an outcome. What Starmer is talking about is not whether the outcome is ‘just’ or not, but whether the degree of injustice is acceptable to Ukraine and to those countries providing Kyiv with armaments and other support. He's just not honest enough to say so.

The question for the UK becomes one of deciding just how much injustice it should ask Ukraine to accept in the cause of peace. A ceasefire along the current lines of control whilst negotiations on the longer term continue (but without formally recognising the occupied territories as Russian) is a big ask for Ukraine (and utterly unjust), but without external military support it’s probably as good as it gets. But given how much ground Trump has already conceded to Putin, he may already have made even that an impossible outcome. Since Putin knows (not least because Trump appears to have told him so) that Trump will support him in asking for much more than that, it’s hard to see why Putin would back down significantly on what he thinks Trump has already agreed, namely the handover of even more of Ukraine, the formal recognition of Russian sovereignty over the occupied territory, the forgiveness of all Russian war crimes and the reintegration of Russia into a US-led global kleptocracy.

Starmer is doing his best to look like some sort of global statesman from an age where the UK’s opinion counted for something, but it really doesn’t. The truth is that, if they jointly so decide, the two dictators, Trump and Putin, have the power to impose their will. I don’t like that, but me not liking something doesn’t make it untrue. The biggest obstacle to a Trump-Putin accord is not a gang of European middle-ranking powers pleading with Trump, it is that Trump doesn’t actually know what he wants from one day to the next. He certainly loves being flattered, and it’s easy to see why so many have concluded that flattery might be the best way to influence him, but how long that influence lasts after they’ve left his presence is a different matter.

Assuming that the world order will return to what was previously regarded as ‘normal’ once Trump goes is a dangerous starting point, not least because we don’t know when he will go or what will follow him. It’s an unstated assumption, though, which seems to underpin Starmer’s stance – which means that there is no planning going on for the new world in which we may be living for some time to come.

Where do you want to be shot?

Tweet

 

When ‘news’ papers have a space to fill, one common response is to report the results of some survey or other listing the world’s favourite **** (insert item of your choice here). The extent to which the findings are meaningful is an open question. Passing through Heathrow a few weeks ago, I spotted this advert urging people to vote for Heathrow as their favourite airport.

And there was a similar message (for a different airport, obviously) at the destination. Respondents are self-selecting (none of this demographic weighting stuff), and are not required to have actually visited any other airports – or, even, the one for which they are voting. And the appeal of the message is a clear one – vote for ‘your’ airport. More of a loyalty test than a scientific survey. It's a reminder that we should always be questioning the context and methods used in any survey, even professionally conducted opinion polls, before blindly accepting the headline summary.

Which brings me to a report in yesterday’s Sunday Times about a More in Common opinion poll which suggested that 67% would prefer the Chancellor’s budget this week to fill the fiscal black hole by cutting spending rather than increasing taxes on working people. It’s hardly a surprising result – as a general rule, people seem to naively believe that spending cuts somehow affect ‘other people’ whereas tax cuts impact them directly. But, in reality, it’s a bit like an assassin asking whether you’d prefer to be shot in the head or in the heart: it avoids the much more important question about whether you really want to be shot at all. The existence of Rachel Reeves’ black hole isn’t questioned, and nor is the need to fill it by balancing the budget. In effect, the reporting of a simple opinion poll (which I’m sure was conducted professionally in terms of its methodology) manages to confirm and reinforce the Overton window for debate around government finances, confining it to the assumptions made by the UK’s three right-wing parties (Tories, Reform and Labour), all of which are signed up to the ridiculous household analogy for government finances.

For all the leaks, briefings and speculation, we don’t yet know what Reeves will announce this week, but whether she opts for spending cuts, tax rises, or some combination of the two, the effect will be much the same: she will be reducing the purchasing power (and therefore the standard of living) of millions of people in pursuit of an ideological position which imposes upon her an entirely arbitrary set of rules which she herself has designed. And the post-budget debate will revolve around whether the totals she’s arrived at are correct and whether there’s a better combination to achieve the same outcome. But who will be asking whether we really want to be shot at all?

What sort of Wales?

Tweet

 

In a curiously contradictory article on Nation.Cymru yesterday, Labour MS Mike Hedges started off asserting very strongly that Wales is neither too small nor too poor to be independent before launching into a list of reasons why we can’t afford it. We're too poor and we can't afford it sound remarkably similar propositions to me. Those reasons are all based, naturally, on a set of assumptions that most independentistas would challenge, but his underlying point that those supporting independence should produce some sort of budget showing how independence would work is not entirely without merit. Working out what it actually means, though, is a lot more complex: as is usual from those making such a demand, it seems to start from an assumption that independence would happen tomorrow and people should understand the implications of that before voting.

In truth, of course, independence will not happen tomorrow. There will be no referendum on the question unless and until there is a majority in the Senedd in favour of holding one (and, as Scotland has shown, even that doesn’t guarantee one). None of the polls for next May’s Senedd election suggest such an outcome, and even if they did, the largest party in favour has, rather strangely, already ruled out holding one for at least four years. So, the earliest that a Welsh government will even start a process of trying to hold a referendum is 2030, and the earliest date for a referendum is perhaps a year or two after securing agreement – optimistically around 2032. Assuming a positive vote, there would then need to be a period during which negotiations on the details take place – not just with the government of the soon to be ex-UK, but also with international organisations. There would also need to be a period during which the organisations, institutions and processes of an independent Welsh government were created – tax collectors, for instance. Some will see this as unduly pessimistic on my part, but I can see that interim period lasting for perhaps 5 years, meaning that independence would be in or around 2037. But a vote for independence is a vote for a different future, and the reality is that change will take some time even after that. So, while Hedges has a point in saying that people voting (in say 2032) should know what they are voting for, what they need is not an independence budget for 2026, it’s a budget for an independent Wales in around 2042. And for the sake of a decent comparison of alternatives, they need to be able to compare that directly with a budget for continued participation in the UK in 2042.

The problems in providing that comparison are large and obvious; both sets of figures would be based on a huge range of assumptions, all of which would be challenged by the ‘other’ side. It is, of course, possible for any independentista to produce something of an indicative budget for a future independent Wales without specifying to which year it would apply. It would take an amount of work and would be subject to the same caveats around the assumptions made. It would not, though, be a budget for ‘independence’; it would be a budget for the sort of independence favoured by those drawing up the budget. As one obvious example, some independentistas favour continuing to use sterling; others favour a new Welsh currency. The difference between the two in terms of the implications for decisions by the Welsh government is enormous.

The point is that what makes the difference isn’t independence as such. Independence isn’t the magic bullet that some supporters would like it to be, nor is it the millstone which opponents claim it would be; it’s merely an enabler which can be used in a variety of ways. When looking at the finances of a future Wales, what matters is what sort of Wales we want to see. Instead of making impossible demands for clarity and precision from those who support independence, opponents should be setting out how the union will solve, rather than perpetuate, Wales poor economic performance. Given their abject failure to date, it’s easy to understand why they don’t do that.

Assuming honourableness isn't always wise

Tweet

 

Once upon a time, I found myself managing part of a large outsourcing contract, with a customer who turned out to be, shall we say, a little difficult. The approach to anything they didn’t like was a combination of shouting and threats, and there was a lot they didn’t like and on which the contract was either silent or vague. In an internal meeting, I asked the guy who had negotiated the contract how on earth we’d got ourselves into such a situation where there was so little clarity on the detail, and his response was along the lines of, “We thought we were dealing with honourable people”. An interesting, if less than entirely helpful response.

I wonder if the framers of the 22^nd Amendment to the US Constitution may have been suffering from a similar degree of trust in the integrity of individuals. It seems to me to be crystal-clear that Trump is ineligible to stand again, yet he repeatedly holds out the prospect of serving a third term. But what’s not clear from the amendment itself is the actual mechanism for preventing him from standing. Can the US equivalent of the Returning Officer refuse to accept his nomination? Can the Chief Justice refuse to swear him in? Or was it just assumed that making his ineligibility clear was enough in itself? The issue would probably end up before multiple judges at some point. It’s probably academic, though. I don’t think that Trump has any intention of fighting another presidential election, even if the ravages of time (he’s not a young man and is clearly deteriorating both physically and mentally) throw at least a degree of doubt on whether he will be able to. He was quite taken with what Zelensky told him some months ago about not holding elections during a period of martial law – his preference is likely to be for a third term without the bother of an election.

The framers of the 25^th Amendment may have suffered from a similarly touching degree of faith in the integrity of individuals. Whilst they wisely foresaw the possibility that a president might need to be removed from office if he was no longer able to discharge the duties, including by reason of insanity, they don’t seem to have allowed for the possibility that those given the responsibility for deciding that the president was insane might be even madder, just better at completing an occasional sentence. Those US citizens – to say nothing of the rest of the world – resting their hopes on Vance and the Cabinet eventually deciding that enough is enough should be careful what they wish for. There is absolutely no reason for anyone to believe that the removal of Trump would end the nightmare.

The whole approach of governments the world over, including Starmer in the UK, seems to be predicated on an assumption that there will be an end to Trumpism in a defined electoral timescale. They need to be preparing a Plan B.

Peas in a pod

Tweet

 

Yesterday, the owner and proprietor of Reform 2025 Ltd revealed that he thinks the national minimum wage is too high for younger people and should be cut.  He has also previously talked about cutting benefits. With their shared determination to reduce the income and spending power of those on the lowest income in society, in purely economic terms Reform, Labour and the Tories are increasingly looking like peas in a pod. There is another thing they all share as well – a belief that the answer to everything is economic growth. How they reconcile that desire with the desire to reduce the purchasing power of millions of people is one of life’s great mysteries. Because here’s the thing – if you want consumption-led growth, people have to be able to consume, and that means having the wherewithal to buy goods and services.

Instead, they share a strange belief that enabling employers to reduce wage costs and freeing them from regulatory concerns will enable them to cut prices, thus making their goods and services more affordable. They simply don’t understand that making the lives of more people more precarious is a restraint on growth. They also seem to be blind to the experience that shows that employers reducing costs are more likely to simply declare larger profits than to cut prices.

It goes to the heart of one of the big contradictions of capitalism itself. Whilst individual capitalists want to keep their labour costs as low as possible to maximise their own profits, they also need other employers to keep wages as high as possible so that people can buy those things from which the cost-cutting capitalists wish to extract their profit. The idea, which seems to be deeply imprinted into the capitalist brain, that workers and consumers are two entirely separate groups and that impoverishing one of those groups has no impact on the other is sheer madness. It’s also what drives UK economic policy.

Poverty - a price worth paying?

Tweet

 

The military mind, to the extent to which that phrase is not an oxymoron, is a strange beast. It sees threats on all sides from people who want to invade and conquer, and the solution is always the same – more military hardware and personnel. To dismiss the conclusions of that strange beast is not the same as denying that there is any threat, it’s more that the threats aren’t the ones they want us to believe in. It’s true, of course, that some dictators actually want to expand the territories over which they rule – Russia’s dictator probably has eyes on more of his neighbours, although he’s almost certainly not mad enough to have learnt nothing from his costly behaviour in Ukraine. The USA’s dictator probably is mad enough to learn nothing from anything he does, and he too has designs on neighbouring territories.

There is, though, no serious threat from anywhere to invade the UK, and there is no country in the world which has enough resources to carry out a successful invasion and then to control and rule the territory afterwards. That particular threat is completely illusory – and it’s worth noting that there is little in the UK’s current military posture which is actually geared to prevent or resist a land invasion anyway. The threats are more subtle than that, and more guns and bombs will do little to prevent them. The question we should always be asking is why, exactly, would anyone want to attack the UK, and the only rational answer to that question is that they might be led to believe that the UK might otherwise attack them. Defence, in that context, implies an understanding of what might look to others like a threat and considering how to avoid that perception. As Simon Jenkins put it in the Guardian this morning in relation to China, soft power is more important than military power and “It is therefore absurd that the British government is planning to splurge billions more on defending Britain from a purely notional third world war [while] slashing the budget of its overseas cultural institution”.

There is another question which we should be asking ourselves, which was provoked by, even if it wasn’t quite the intention, the words of a retired general who said this week that we should reduce welfare spending to devote more resources to the military; and that question is very simple – who or what is it we are trying to defend? Reducing the spending power of the poorest in society to spend more on weaponry – clearly the implication of his words – means that he sees keeping some people in poverty as a price worth paying to defend us against his imagined threats. It illustrates clearly a dramatic difference in priorities. The problem we face is that most of our politicians seem to agree with him in principle – it’s guns before butter all over again.