Does the Bank of England Worry About the Cantillon Effect?

The empirical data is in. And it turns out that as I have been suggesting for a very long time — yes, shock horror — helicopter dropping cash onto the financial sector does disproportionately favour the rich.

The Guardian:

The richest 10% of households in Britain have seen the value of their assets increase by up to £322,000 as a result of the Bank of England‘s attempts to use electronic money creation to lift the economy out of its deepest post-war slump.

Threadneedle Street said that wealthy families had been the biggest beneficiaries of its £375bn quantitative-easing (QE) programme, under which it has been buying government gilts for cash since early 2009.

The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.

Although the Bank said it could not come up with precise figures for the gains from QE, estimates can be produced using wealth distribution data from the Office for National Statistics. These show the average boost to the holdings of financial assets and pensions of the richest 10% of households would have been either £128,000 per household or £322,000 depending on the methodology used.

Here are a few questions for Britain’s monetary overlords at the BoE:

  1. Are you concerned about the long-term social and economic implications of a monetary policy that enriches the rich over and above everyone else?
  2. Are you familiar with the concept of the Cantillon Effect whereby the creation and allocation of new money transfers purchasing power to whoever it is allocated to? Did you consider this effect prior to embarking on a program of quantitative easing to the financial sector?
  3. Given the financial sector’s awful track record in terms of blowing up the economy, fabricating LIBOR data for its own enrichment, and neglecting cash-starved small businesses, is the financial sector an appropriate allocator of new money?
  4. Now that the empirical record shows the policy of helicopter-dropping cash directly to the financial sector disproportionately favours the rich, have you considered changing course and adopting a different monetary policy that doesn’t favour any particular group?

Sadly, I expect to see the announcement of more quantitative easing to the financial sector long before I expect to see answers to any of these questions.

Military Keynesianism & Iran

From the Guardian:

Washington is stepping up attempts to isolate Tehran after accusing factions in the Iranian government of a plot to assassinate the Saudi ambassador to Washington on US soil.

The US announced new economic sanctions against five Iranians, including four senior members of the Quds force, the special operations unit of the Iranian Revolutionary Guards, which American officials have implicated in the alleged plot.

Sanctions were already in place but the US secretary of state, Hillary Clinton, said a “very strong message” needed to be sent to the Iranian regime.

She said she and Barack Obama want to “enlist more countries in working together against what is becoming a clearer and clearer threat” from Iran.

What was that someone said about war being the easiest way to wipe the debt clean? Instilling a sense of purpose in divided, angry and confused populations? Creating humungous profits for the military-industrial complex?

Oh yes!

From Marc Faber (via Zero Hedge):

The problem I have with the investment universe is that I find it difficult to envision how the US and western Europe can return to healthy sustainable growth without a complete purge of the financial system and some type of catalyst. Something that restores some measure of social cohesion among people;  it could be hyperinflation, a complete credit market collapse, widespread sovereign defaults, civil strife, major military confrontation.”

As I have continuously noted since the very beginning, America has a hell of a lot to lose through drift (not least the dollar-denominated status of energy and resources) — power is drifting Eastwards, and an increasingly indebted, self-doubting, nihilistic and stagnant population is shifting America from its cherished status as world policeman to that of a second-rate economic power.

Simply, all the capital that America has exported in exchange for the Nixonian energy and consumption free lunches will come back to buy up American productive assets.

No amount of nuclear weapons, and no amount of currency manipulation allegations can save America from this fate.

So Washington’s present rationale might well be that with Eurasia strengthening and uniting behind an increasingly untrustworthy, authoritarian and anti-American set of leaders (Ahmadinejad Putin, Wen), now might be the last chance America has to preserve American imperial hegemony (and the dollar as the global reserve currency). Throw the dice, sell some weapons, shake the barley, see where the chips land.

After all, if the people of Eurasia want (American style) democracy and capitalism, a regional war would be the best chance that they have of taking the Arab spring up an echelon, and onto the streets of Tehran, Beijing, and Moscow.

The problem with that great-American-hope is that it’s not the people of Eurasia who seem to have a problem with their government, but the people of America. For better or worse, Eurasian autocratic dirigisme seems to be yielding better economic results on the global stage than American-style liberal democracy.

After the dust settles and the debt is purged we can again walk the road to sustainable economic development. The problem, and the great worry, is getting there.

Europe to Geithner: “Go Away”

And what might put Europe and the global financial system to the sword? Recrimination. It’s not my fault it’s everyone else’s fault. Now former ECB policy-maker and Euro-hawk Jurgen Stark has weighed in to tell Euro-hopping U.S. Treasury Secretary Geithner (in less direct language) to shut up and go home.

From Zero Hedge:

Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans.

Of course, Stark has a point. Europe is a complete mess, European policy makers are stumbling and slumbering forward to the gates of Hades. But America? The American economy is a jaundiced sham; where Europe has maintained a sliver of its former industrial might (i.e. supply chains, heavy & light industry, consumer manufacturing) in Germany, Scandinavia and the Netherlands, America prefers to ship a significant majority of its consumption (and even a lot of its infrastructure) from China (and subsidise the shipping costs through massive military deployment).

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Why I Love and Hate Apple

Yes, by pressing alt+shift+k on my Macbook Pro, I can write the Apple © logo. This is surely the only company in the world whose logo is a unicode character. According to the Guardian, Apple’s brand is now the world’s most valuable on Earth. While I am highly sceptical of such rankings, Apple recently became the second most valuable company in the world, and has a larger pile of cash than the US Treasury, and its brand plays a huge role in driving sales.

So why hate on success? Well, I don’t. I use Apple products every day.

My first Apple purchase was this:

A 2003 15GB iPod: beautiful, minimalist and functional. Nothing Apple has produced or designed since has quite lived up to the sheer, stark beauty of the 2003 iPod. Prior to that, I remember using Apple products and feeling baffled and wrong-footed. There was no way to right-click, I thought. The circular iMac mouse felt clunky and unintuitive. The interface felt strange, unfamiliar and cloudy. All of these thoughts melted away when I got a 2006 CoreDuo 15″ Macbook Pro with Logic Express:
I still have it; the Logic board burnt out after four years, and it no longer turns on. But it was the thing that has since left me a Mac-only user. I am locked in: my music software of choice is Mac-only, and I am deeply familiar with the interface. Mac and Windows do not really compete with each other: they are both monopolies catering to separate audiences with a small overlap. If I want to use Logic Pro, or GarageBand, or FaceTime, or Mac OS X, then I have to use Apple’s hardware. Switching over would require me to ditch my work-flow, purchase an expensive batch of new programs, and spend years learning them in depth, and simply the premium I have to pay for Mac hardware is not enough to make me consider that. But the thing that really makes me uncomfortable about Apple is its cultlike following, and the way in which Apple cultivates this. The cult wail:

“But Apple just works! It never crashes or gets viruses!”

Well, that’s a steaming pile of horseshit. Yesterday my iPad crashed twice, and I’ve had innumerable software faults, kernel panics and hardware failures. Apple is a computer company like any other; they use the same basic hardware, the same processors, the same memory manufactured in the Far East by the same near-slave-labour-camps at Foxconn. Being part of the evangelical cult of Apple is bad for your philosophy, bad for your individuality, and bad for your bank balance. The manner in which Apple controls the user experience smacks of techno-fascism. True, I am not being prevented from typing this screed into my Macbook Pro (although Apple its customers movements through their iPhones). But what if I want to use Adobe’s Flash on my iPad? No, says Apple. What if I write an App that Apple finds objectionable? No, says Apple. What if I want to upgrade to OSX Lion via DVD, as I have done for Leopard and Snow Leopard? No, says Apple. What if I want to record a video of a concert on my iPhone? Apple has software that can prevent that. There are many more examples. But the highly addictive OS X and iOS user experience keeps customers rolling in, and coming back for more. John Naughton° wrote last year:

In Stephen Fry’s words: “No YouTube film, no promotional video, no keynote address can even hint at the extraordinary feeling you get from actually using and interacting with one of these magical objects.”

Which is where I begin to think of Aldous Huxley and Soma, the hallucinogenic, hangover-free drug in Brave New World that makes users contented with their (subjugated) lot.

Apple has a more sinister side still in the way it treats its (non-unionized) Apple Store employees‡:

Workers at Apple’s tech support ‘Genius Bars’ are not allowed to use the word ‘unfortunately’ to customers as it is considered to have negative connotations.

Instead they are encouraged to use phrases like “as it turns out.”

One former employee interviewed by the WSJ says that he was forbidden from correcting customers when they mispronounced the names of Apple products.

The notion of well-oiled blue-shirted brigades of lanyard-wielding corporate minions dancing, speaking and thinking in line to the beck and call of Steve Jobs goes beyond running an efficient operation. It’s obsessive-compulsive, and downright creepy. In my view, the sooner a competitor arises that delivers minimalist, solid and sleek computers at a similar price and without all this peculiar control-freakery, without the backdoor surveillance, and without the cultlike undertones, the better. I will jump ship as soon as I possibly can. But right now? Apple has no real competitors.