"What's right about America is that although we have a mess of problems, we have great capacity - intellect and resources - to do some thing about them."
Henry Ford
Henry Ford launched Ford Motor company in a converted factory in 1903 with $28,000 from 12 investors. He was 40 years old when he founded the company, which would go on to become one of the largest and most profitable companies in the world, as well as being one of the few to survive the Great Depression. Ford had a global vision, with consumerism as the key to peace, and in a true reflection of America's "great capacity" he pulled in resources, fought hard, and ultimately succeeded in turning his vision into reality. He regularly reflected in his career that the capacity to do what he did, was made possible by the "great capacity" that existed in America at the time, and that perhaps didn't in large parts of the rest of the world.
It was 5 long years between the formation of Ford Motor Company and the time that it started to become scalable and economical. The vision that Ford brought to his investors during those difficult, unprofitable years was the idea that car travel was not solely to remain the privilege of the very wealthy elite, but that the "common man" could come to enjoy. He claimed:
"I will build a car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be low enough in price that no man making a good salary will be unable to own one - and enjoy with his family the blessing of hours of pleasure in God's great open spaces".
Even prior to the formation of Ford Motor Company in 1903, Ford had held this vision and had been working against the tide of opinion on his "whacky" idea that car travel could be for all. He had some success as an engineer in developing racing cars and managed to convince an old acquaintance, Alexander Malcomson (a Detroit area coal dealer) to form a partnership with him. "Ford and Malcomson, Ltd" would manufacture inexpensive automobiles. The duo leased a factory and contracted with a machine shop (owned by the Dodge family) to supply $160,000 worth of parts. Sales of Ford and Malcomsons cars were slow and a crisis arose when the Dodge brothers demanded payment for their supplies. In response Ford managed to convince another group of investors to reform and capitalise a new company and for the Dodge family to accept payment via ownership of a portion of this new company - Ford Motor Company.
The patience and vision that Fords investors shared with him during that decade long period without much success was a testament to a prevailing sense of "can do" that must have existed in each of their minds - "the great capacity" that Ford spoke of in the quote above. Surely there were plenty of moments when they questioned their own sanity.
In 1908 Henry Ford introduced the Model T. Earlier models were produced at a rate of only a few a day at a rented factory, with groups of 2-3 men working on each car from components made to order by other companies. The first Model Ts were built at the Piquette Road Manufacturing Plant, the first company-owned factory. In its first full year of production, 1909, about 18,000 Model Ts were built. As demand for the car grew, the company moved production to the much larger Highland Park Plant were they produced close to 70,000 and 170,000 respectively in the first 2 years on that site. By 1913, the company had developed all of the basic techniques of the assembly line and mass production. Ford introduced the worlds first moving assembly line that year, which reduced chassis assembly time from 12.5 hours to 2 hours and 40minutes (in just one month) and ultimately to 1 hour and 33 minutes. Annual output rose to 202,667 units that ear. Ford raised wages to $5/ day (almost double local rates), through a "profit-sharing" approach with employees and sales rose over 300,000 in 1914 and over 1/2million units by 1915. In 1920 production exceeded 1mm units. And the rest as they say "is history".
As of 2008 it is thought that the Detroit auto-industry employs directly and indirectly over 3mm Americans. Over the past century it has no doubt, created countless wealth for these people and changed the lives of many who enjoy with their families "...the blessing of hours of pleasure in God's great open spaces." As of today, the US auto industry stands on the precipice, however, as the last several decades have seen the industry become inflexible, unresponsive and badly managed. In fact it has probably moved about as far away from Henry Fords vision of the entrepreneurial economy as any set of companies in America.
Had that set of early investors in Fords vision been swayed a century ago, and pulled the plug on his ambitions, then its almost certain that the world auto industry would have come into being in some other form. Nevertheless, the thing that has made the US the economic powerhouse that it has been, was the likelihood that as individuals, as Henry Ford said "...they have great capacity - intellect and resources - to do something about them". Perhaps that "great capacity" has weakened over the years as the US has been struck by the "winners curse".
More probably, as the world has become a more competitive place, the "great capacity" is springing up from Bombay, Shanghai or Moscow.
This week has seen the National Intelligence Council (NIC), which is a center of strategic thinking within the US government, release a report called "Global Trends 2025: A Transformed World". They produce a similar forward looking strategic report every four years, with a focus on the changing position of the US in the world. This years report draws up 4 main ideas about where things are going.
The whole international system—as constructed following WWII—will be revolutionized. Not only will new players—Brazil, Russia, India and China— have a seat at the international high table, they will bring new stakes and rules of the game.
The unprecedented transfer of wealth roughly from West to East now under way will continue for the foreseeable future.
Unprecedented economic growth, coupled with 1.5 billion more people, will put pressure on resources—particularly energy, food, and water—raising the specter of scarcities emerging as demand outstrips supply.
The potential for conflict will increase owing partly to political turbulence in parts of the greater Middle East.
All pretty grand stuff. The projects primary goal is to provide US policy-makers with a view of how developments could evolve, identifying opportunities and potentially negative developments that might warrant policy action. In the context of the changing world, more competitive world it's seems pretty important to think of where the next Ford Motor Company is going to come from, and how to ensure that the next 3mm job industry is based in America and not in Taipei.
We can't race to an answer to that question, but there are impressive innovations happening in the US, some of which could hit the jackpot in this regard. What will the Model T Ford of the 21st Century look like?
A visionary company based in Albuquerque, New Mexico, echoes Fords vision of a revolutionary mode of transport that would be "...low in price that no man making a good salary will be unable to own one - and enjoy with his family the blessing of hours of pleasure in God's great open spaces". Eclipse Aviation (http://www.eclipseaviation.com/#/eclipse500/style/gallery/) manufactures VLJs (very light jets). It was founded by one of the earliest employees of Microsoft, who i think it's fair to say were quite visionary. He had a vision much like Bill Gates did for personal computing at Microsoft - that jet ownership in the 21st century could be like car ownership was in the 20th century.
The company produces revolutionary 6-seater VLJs (very light jets), that travel at the same speeds as commercial jets (top speed >400mph), are much more fuel efficient, are extremely safe and are considerably cheaper to produce (about 1/3 cost) than the next best thing. Eclipse is not at the point where it can produce a jet that anyone earning a good salary can afford, but it has the vision that at some point in the future this will be the case. Notably, the price of a Model T only dropped to the "affordable level" of $440 in 1915, some 15 years after it was first conceived.
Eclipse Aviation currently finds itself in a similar position to that which Ford Motor Company found itself early in its life. Ford and Malcomson Ltd., you recall had to pay its suppliers (Dodge) in shares in a recapitalised company, because their car sales were slow in the early years. Eclipse is actually in a better position than Ford at that time in that they have an order book for over 2500 of the Eclipse 500 model, but through the usual teething problems in its early stage production process, now largely resolved, it was using cash faster than its production line could produce saleable planes.
As of last week, it was on the precipice of insolvency. This comes as a consequence of suppliers not getting paid on time - they stop supply of the parts that are key for Eclipse to make its planes, and you end up in a vicious cycle until everything stops. Here is a company with a fantastic vision, a fantastic product and an amazing order book of demand, that although it has made mistakes along the way could well be in possession of a truly transformational technology. Perhaps a mirror image of Ford Motor company in the period from 1900-1908, prior to the Model T production line really starting to work.
The question for Eclipse after several rounds of private financing, and an incredibly tough global market situation is: Where are the American investors with that "great capacity" that Ford spoke of?
Sadly for the US, is that they are being replaced in this case by a "greater capacity" from other parts of the world. Eclipse are likely to be recapitalised by 2 European companies, with the backing of 2 European governments. These two organizations are close to committing to recapitalise Eclipse which will enable suppliers to be paid, and the production line to start rolling. Much of the production will be moved to those countries, where job creation is the goal of the backing governments. The private investors involved in the deal share the vision of the idea that this is a transformational technology that they can profit extensively from. An order book of 2500 will hopefully be increased, and a large scale new market will open up. Not least the business that my brother helped found, Taxijet, based in Barcelona, that relies on the supply of Eclipse 500s for its business model to work will benefit hugely.
So on reflection: The Model T - designed in America, manufactured in Detroit and exported the world over. Tax revenue, job creation all to the credit of the USA. The Eclipse 500; designed in America, manufacture moved to Europe and, with time, used the world over. Tax revenue and job creation - not to the benefit of the burgeoning hole in the US finances. Is this a sign of things to come, as foretold by the NIC report?
It's been said before, but Barack Obama has a lot on his plate.
Monday 24 November 2008
Sunday 16 November 2008
The Big Opportunity...
This week has seen Barclays resolutely attempting to avoid coming into contact with a UK government bail-out package. Barclays have been determined not to follow the path of Lloyds TSB, HBOS, RBS and Bradford & Bingley, to the extent that they are willing to a) really annoy existing shareholders and b) offer what looks like a golden deal to a sovereign wealth fund from Qatar instead.
Why would they want to do this to avoid taking UK government investment?
In order to shore-up its capital position Barclays is looking at the following headline terms in the £7.3bn deal with the Qatar Investment Authority (QIA):
1) £3bn of paper issued to QIA and Abu Dhabi Investment Authority - paying a coupon of 14% over a fixed term running to 2019, accompanied by an issue of warrants, exercisable at below Thursday's closing share price at any time over five years. Given the volatility of Barclays stock, applying normal valuation measures, these warrants are worth at least £750mm to the Middle Eastern investors.
2) A further issue of £4.3bn of short-term convertibles, paying 9.75% until they convert (before next June). The conversion price into Barclays shares is at a 25% discount to the closing price on Thursday.
3) Assuming full conversion, the Middle Eastern investors will have 31.2% of the bank.
Now consider the terms on offer from HM Treasury:
1) 10-11% coupon on preference shares, no warrants (i.e. no gift currently valued at £750mm; that's a few schools/ hospitals)
2) Existing shareholders (many of whom are British taxpayers) would get the chance to buy new stock at historically depressed prices when according to management, the underlying business is holding up remarkably well.
3) Both shareholders and the rest of us would get a full fledged prospectus, given the London market as a whole some idea that Barclays balance sheet is as strong as the board insists.
Can the benefit of avoiding having the government on your shareholder register really be so great that you are prepared to effectively pay 50 per cent more for your capital? What the exact reasons are for this isn't clear, perhaps Barclays wants to ensure that there is no interference in protecting its compensation structure which along with its competitor banks has been so widely criticised, or they want to keep their books out of the intellectual scrutiny that might be applied by the Daily Mail if the British taxpayer was a big owner.
I'm not so much concerned as to why Barclays would choose to go down this route, as interesting as that may be. What is at issue is whether as a UK taxpayer the government is going to get the best deals for the taxpayer money they are investing. The sum total of global government sponsored bail-out packages amounts to $3.5 TRILLION so far. That's a lot of money. How it's spent can do a lot of good, and potentially a lot of harm.
In most cases around the globe it's questionable as to whether it's in the hands of those who know what they are doing. Those funds are being put on the credit card of the next several generations, and if current governments can't secure good deals in these negotiations then taxpayers globally will be paying the price for it at some stage in the future. This commentary is prevalent across the press currently - full of scare-mongering about how this $3.5trillion is going to 'disappear'.
Personally I sit on the other side of the fence. As I see it, there is an unbelievable opportunity here to generate great returns for taxpayers if governments invest their money wisely. If I had the opportunity to invest in the Barclays deal that QIA is getting i would take it...14% fixed return, warrants, cheap convertibles; i can borrow 5.5% from Barclays right now...time to bring back the leverage! I would like my taxpayer money spent on this, rather than spent on some inefficient public sector job creation scheme to create 'new' unsustainable jobs to fill the void of job losses in the private sector.
What is worrying though is that there is an understandable fear from these private sector institutions that government sponsorship will turn them into inefficient public sector organizations. I notice today that the government appears to be getting that message in the UK. The £37bn worth of direct equity investments by the UK government into UK banks will be "held at arms length with no direct boardroom representation". The 2 men who have been handed responsibility for managing these investments, have said "We must operate on a commercial basis at arm's length...our job is manage the taxpayer's investments, not to manage banks." I look forward to the Daily Mail commentary on this: "Scumbag bankers who stole our money, won't be made to pay, in government climbdown" etc. etc.
What is more worrying for the rest of the world is that the UK actually appears to understand things better than any of its peers, even though they still aren't getting the best terms available for taxpayer investments. In the USA, the myriad bailout packages that have been touted all seem to be confused in what they are trying to achieve. It's surprising, as if Hank Paulson had run Goldman Sachs with such confused thinking he would have been out of his job pretty quickly. The same sort of deals mentioned above are available to the US government from US banks. If they want to shore up the financial system, they should be taking these sort of deals and not spending taxpayers money on the sort of weak assets that the TARP plan was aimed at.
Banks who made mistakes, and have poor assets on their books should suffer through their share prices. The government should take preference shares in these institutions so that further writedowns are attributable to existing shareholders first, and as these institutions start to recover gains will be attributed to taxpayers investments in the form of these preference shares.
The TARP program that has now been thrown out, to me was not dissimilar to any plans to bail-out the US auto industry. The "Big 3" (General Motors, Ford and Chrysler) have been problem children of the capital markets for a long time; they only survived the past 10 years because credit market conditions were as crazily good as we now are fully aware. Instead of fixing the roof while the sun was shining they embarked on crony capitalism, lobbying government for artificial support for visionless business plans...and getting it. As Thomas Friedman of the NY Times writes "The blame for this travesty not only belongs to the auto executives, but must be shared equally with the entire Michigan delegation in the House and Senate, virtually all of whom, year after year voted however the Detroit automakers and unions instructed them to vote. That shielded GM, Ford and Chrysler from environmental concerns, mileage concerns and the full impact of global competition that could have forced Detroit to adapt long ago."
As Friedman also points out there are sustainable business plans within the auto-industry: from www.autochannel.com - "ALLISTON, Ontario, Canada - Honda of Canada Mfg. officially opened its newest investment in Canada - a state of the art $154mm engine plant. The new facility will produce 200,000 fuel-efficient four-cylinder engines annually for Civic production in response to growing North American demand for vehicles that provide excellent fuel economy".
That could have been a tale about General Motors, but is not. Don't waste taxpayers money on these guys. Do something powerful, innovative and profitable with that money now that there is this big opportunity.
Why would they want to do this to avoid taking UK government investment?
In order to shore-up its capital position Barclays is looking at the following headline terms in the £7.3bn deal with the Qatar Investment Authority (QIA):
1) £3bn of paper issued to QIA and Abu Dhabi Investment Authority - paying a coupon of 14% over a fixed term running to 2019, accompanied by an issue of warrants, exercisable at below Thursday's closing share price at any time over five years. Given the volatility of Barclays stock, applying normal valuation measures, these warrants are worth at least £750mm to the Middle Eastern investors.
2) A further issue of £4.3bn of short-term convertibles, paying 9.75% until they convert (before next June). The conversion price into Barclays shares is at a 25% discount to the closing price on Thursday.
3) Assuming full conversion, the Middle Eastern investors will have 31.2% of the bank.
Now consider the terms on offer from HM Treasury:
1) 10-11% coupon on preference shares, no warrants (i.e. no gift currently valued at £750mm; that's a few schools/ hospitals)
2) Existing shareholders (many of whom are British taxpayers) would get the chance to buy new stock at historically depressed prices when according to management, the underlying business is holding up remarkably well.
3) Both shareholders and the rest of us would get a full fledged prospectus, given the London market as a whole some idea that Barclays balance sheet is as strong as the board insists.
Can the benefit of avoiding having the government on your shareholder register really be so great that you are prepared to effectively pay 50 per cent more for your capital? What the exact reasons are for this isn't clear, perhaps Barclays wants to ensure that there is no interference in protecting its compensation structure which along with its competitor banks has been so widely criticised, or they want to keep their books out of the intellectual scrutiny that might be applied by the Daily Mail if the British taxpayer was a big owner.
I'm not so much concerned as to why Barclays would choose to go down this route, as interesting as that may be. What is at issue is whether as a UK taxpayer the government is going to get the best deals for the taxpayer money they are investing. The sum total of global government sponsored bail-out packages amounts to $3.5 TRILLION so far. That's a lot of money. How it's spent can do a lot of good, and potentially a lot of harm.
In most cases around the globe it's questionable as to whether it's in the hands of those who know what they are doing. Those funds are being put on the credit card of the next several generations, and if current governments can't secure good deals in these negotiations then taxpayers globally will be paying the price for it at some stage in the future. This commentary is prevalent across the press currently - full of scare-mongering about how this $3.5trillion is going to 'disappear'.
Personally I sit on the other side of the fence. As I see it, there is an unbelievable opportunity here to generate great returns for taxpayers if governments invest their money wisely. If I had the opportunity to invest in the Barclays deal that QIA is getting i would take it...14% fixed return, warrants, cheap convertibles; i can borrow 5.5% from Barclays right now...time to bring back the leverage! I would like my taxpayer money spent on this, rather than spent on some inefficient public sector job creation scheme to create 'new' unsustainable jobs to fill the void of job losses in the private sector.
What is worrying though is that there is an understandable fear from these private sector institutions that government sponsorship will turn them into inefficient public sector organizations. I notice today that the government appears to be getting that message in the UK. The £37bn worth of direct equity investments by the UK government into UK banks will be "held at arms length with no direct boardroom representation". The 2 men who have been handed responsibility for managing these investments, have said "We must operate on a commercial basis at arm's length...our job is manage the taxpayer's investments, not to manage banks." I look forward to the Daily Mail commentary on this: "Scumbag bankers who stole our money, won't be made to pay, in government climbdown" etc. etc.
What is more worrying for the rest of the world is that the UK actually appears to understand things better than any of its peers, even though they still aren't getting the best terms available for taxpayer investments. In the USA, the myriad bailout packages that have been touted all seem to be confused in what they are trying to achieve. It's surprising, as if Hank Paulson had run Goldman Sachs with such confused thinking he would have been out of his job pretty quickly. The same sort of deals mentioned above are available to the US government from US banks. If they want to shore up the financial system, they should be taking these sort of deals and not spending taxpayers money on the sort of weak assets that the TARP plan was aimed at.
Banks who made mistakes, and have poor assets on their books should suffer through their share prices. The government should take preference shares in these institutions so that further writedowns are attributable to existing shareholders first, and as these institutions start to recover gains will be attributed to taxpayers investments in the form of these preference shares.
The TARP program that has now been thrown out, to me was not dissimilar to any plans to bail-out the US auto industry. The "Big 3" (General Motors, Ford and Chrysler) have been problem children of the capital markets for a long time; they only survived the past 10 years because credit market conditions were as crazily good as we now are fully aware. Instead of fixing the roof while the sun was shining they embarked on crony capitalism, lobbying government for artificial support for visionless business plans...and getting it. As Thomas Friedman of the NY Times writes "The blame for this travesty not only belongs to the auto executives, but must be shared equally with the entire Michigan delegation in the House and Senate, virtually all of whom, year after year voted however the Detroit automakers and unions instructed them to vote. That shielded GM, Ford and Chrysler from environmental concerns, mileage concerns and the full impact of global competition that could have forced Detroit to adapt long ago."
As Friedman also points out there are sustainable business plans within the auto-industry: from www.autochannel.com - "ALLISTON, Ontario, Canada - Honda of Canada Mfg. officially opened its newest investment in Canada - a state of the art $154mm engine plant. The new facility will produce 200,000 fuel-efficient four-cylinder engines annually for Civic production in response to growing North American demand for vehicles that provide excellent fuel economy".
That could have been a tale about General Motors, but is not. Don't waste taxpayers money on these guys. Do something powerful, innovative and profitable with that money now that there is this big opportunity.
Monday 10 November 2008
Cristiano Ronaldos of the Economic World
Last week in Ireland the results of a public sector pay and performance review were announced. The consultancy group Mercer had been mandated by the government in 2004 to create a performance measurement system that would lead to pay rises for best performers. Mercer had created 5 point "Performance Management and Development System" scale, with 5 awarded for outstanding performance and 1 for poor performance. In designing the system the estimate was that 20% of staff who were rated would be a 1 or a 2 on the scale, and consequently would not receive a pay rise. (This would be a pay rise on top of 5% increase under social partnership agreements, and on top of 70% pay increases over the past 7years). Perfect, you might think - here is a great opportunity for real reward for performance - a chance for the Cristiano Ronaldos of the Civil Service to get their just rewards and the chance for the Ali Dias (who? Google search him) to be sent back to the Rymans league.
As it turned out, it appears that due to managers within the civil service ignoring the schemes guidelines, virtually every (98.4%) staff member was given a pay rise of 6000 Euros last year. The 18 employees who received the 'one' grade got no pay rise, while the 285 who were ranked '2' received an increase but were denied a promotion. So essentially an extra 111mm worth of tax payers money was 'self allocated' to all but 1.6% of the 19000 workforce...but because that money was allocated in a socialist fashion; i.e. because everybody was included this was OK.
There is no doubt that there are true "5s" working within the civil sector in Ireland. There is also without any shadow of a doubt plenty of "1s". The problem for the "5s" is a big a problem for the rest of us as the existence of the "1s"...if they feel that their organisation cannot distinguish between doing a good job and doing a bad job, then what's the point of trying. And if truth be told the performance of public sector organisations in the UK and Ireland has been questionable at best from a "value for taxpayer investment" over any time period you could choose, so we might feel reading the above that managerially they are a shambles.
The sort of faulty reward culture mentioned above, is at least as big a problem as the private sector "bonus culture", that is being criticised so heavily in the media currently. At the very least within the private sector there are attempts (perhaps veiled) to attribute pay for performance...often-times in the private sector though when performance is at a 1 or 2 standard the business that the employer works for does not survive.
My Dad told me that this week he was listening to a radio program in Ireland, where Joe Higgins, a socialist senator, explained to the listening Irish public that the last 12 months prove that "capitalism doesn't work". The alternative that Joe is advocating is unclear; but the sound-bite culture that he exists in makes this compelling listening, even though what he really advocates is represented by the tale above.
Anyway, back to Dad (and Mum)...who witnessed both the economic boom in Ireland in the past 15 years, but who also lived in Ireland before the tide started rising: "My perception is that in the last 5, 10, 15 years in Ireland, for all its shortcomings - capitalism has raised incomes and wealth in orders of magnitude beyond any alternative system. It has raised many - though not enough - out of poverty...not enough boats were lifted on the tide, but there was a tide and it lifted many people and many public services. But politicians are trapped in the short-term...no one seems to do the 'hang on mate'...House prices are down 30% - but hang on; they went up 300% in the past 15years...I have a wage freeze this year, when inflation is 4% - but hang on, your salary if you're a public servant has gone up over 70% in the last 7years...I won't get to the Maldives for the new year - but hang on, I can remember when the problem was that I couldn't afford the bus fare to Donaghadee*"
*exotic beach 'resort' near Belfast - also known as a 'contradiction in terms'
The world is a competitive place. Denying that this is the case would mean that watching Arsenal play Manchester United with an 'equal opportunities' policy in place might not make compelling viewing...but i might get to play at Old Trafford. In the context of Neill playing centre forward for Arsenal, and others of my ilk filling the rest of the positions, I suspect gate receipts would fall to nil quite rapidly. This makes for a good analogy as to what would happen to tax receipts in Ireland or the UK, or anywhere else for that matter if we don't differentiate properly between the Ali Dias and the Cristiano Ronaldos within both our public and private sector organisations.
So whether we choose to call this socialism or capitalism doesn't really matter to me, but the gist is that the best outcomes come from 1) realising that the world is a competitive place 2) empowering and encouraging people with talent to make a difference to themselves and those around them and hopefully as a happy consequence 3) a desire amongst those empowered to bring along the Ali Dias in society, without necessarily giving them an outing at Old Trafford.
To that end, the Premiership Allstars of Economic society for me are the likes of Mohamed Yunus from the Grameen Bank in Bangladesh and Martin Burt who developed Fundacion Paraguaya. There are plenty more out there, but these 2 are known better to me than others.
Firstly Mohamed Yunus, who won the Nobel Peace Prize in 2006, for essentially creating a viable banking system to the poor that has been annually profitable and has paved the way for 7 million borrowers (mostly women) in Bangladesh to pull themselves out of poverty through their own hard work and enterprise. On a cumulative basis the bank has given out loans totaling about USD $6bn with a repayment rate of 99.3%. Current deposits and own resources of Grameen Bank today amount to 143% of outstanding loans. Accordingly, 58% of all of the Grameen borrowers have crossed the poverty line as a direct result of the opportunity that this "capitalist" endeavour has presented to them.
The Grameen Bank was born as a tiny homegrown project run with the help of several of Yunus' students at Chittagong university where he was an economics professor. Three of these students remain as senior management within the bank over 25 years after they started the project.
Big fan of this. It is sustainable, self sufficient and economically viable without public sector hand-outs.
Secondly, Martin Burt who set up Fundacion Paraguaya; which is essentially a rural business school set up in one of the poorest countries in South America. It aims to transform its students into rural entrepreneurs and increase the relevancy of the education they receive through their participation in a profit-making school business. This microcredit program has supported 35,000 small entrepreneurs and created 18,000 jobs.
The key focus of both Grameen Bank and Fundacion Paraguaya has been on sustainability; neither undertaking requires the 'charity' of socialists and those 'capitalist' enterprises that have been funded by either Grameen Bank of Fundacion Paraguaya have gone on to become important sources of jobs and revenue, and a means by which families have been able to pull themselves above the poverty line in many cases.
This isn't an attempt to deny the ease with which the free market approach can go wrong, but just to clarify that if the likes of Ireland choose not to compete then the alternatives truly are unsustainable. With the big news of Barack Obamas victory this week representing a truly epoch making event for many, one of the small point aspects that struck me most was where some of the votes came from. Obama throughout the campaign pledged to take 10million of the lowest paid out of taxation, paid for by taxing those earning more than $250,000. Whether that is the right thing to do or not remains to be seen, but what is impressive is that 52% of those in the high income bracket chose to vote for Obama thus saying (although not categorically) that their interests are may be better served by choosing to help others more than themselves.
As it turned out, it appears that due to managers within the civil service ignoring the schemes guidelines, virtually every (98.4%) staff member was given a pay rise of 6000 Euros last year. The 18 employees who received the 'one' grade got no pay rise, while the 285 who were ranked '2' received an increase but were denied a promotion. So essentially an extra 111mm worth of tax payers money was 'self allocated' to all but 1.6% of the 19000 workforce...but because that money was allocated in a socialist fashion; i.e. because everybody was included this was OK.
There is no doubt that there are true "5s" working within the civil sector in Ireland. There is also without any shadow of a doubt plenty of "1s". The problem for the "5s" is a big a problem for the rest of us as the existence of the "1s"...if they feel that their organisation cannot distinguish between doing a good job and doing a bad job, then what's the point of trying. And if truth be told the performance of public sector organisations in the UK and Ireland has been questionable at best from a "value for taxpayer investment" over any time period you could choose, so we might feel reading the above that managerially they are a shambles.
The sort of faulty reward culture mentioned above, is at least as big a problem as the private sector "bonus culture", that is being criticised so heavily in the media currently. At the very least within the private sector there are attempts (perhaps veiled) to attribute pay for performance...often-times in the private sector though when performance is at a 1 or 2 standard the business that the employer works for does not survive.
My Dad told me that this week he was listening to a radio program in Ireland, where Joe Higgins, a socialist senator, explained to the listening Irish public that the last 12 months prove that "capitalism doesn't work". The alternative that Joe is advocating is unclear; but the sound-bite culture that he exists in makes this compelling listening, even though what he really advocates is represented by the tale above.
Anyway, back to Dad (and Mum)...who witnessed both the economic boom in Ireland in the past 15 years, but who also lived in Ireland before the tide started rising: "My perception is that in the last 5, 10, 15 years in Ireland, for all its shortcomings - capitalism has raised incomes and wealth in orders of magnitude beyond any alternative system. It has raised many - though not enough - out of poverty...not enough boats were lifted on the tide, but there was a tide and it lifted many people and many public services. But politicians are trapped in the short-term...no one seems to do the 'hang on mate'...House prices are down 30% - but hang on; they went up 300% in the past 15years...I have a wage freeze this year, when inflation is 4% - but hang on, your salary if you're a public servant has gone up over 70% in the last 7years...I won't get to the Maldives for the new year - but hang on, I can remember when the problem was that I couldn't afford the bus fare to Donaghadee*"
*exotic beach 'resort' near Belfast - also known as a 'contradiction in terms'
The world is a competitive place. Denying that this is the case would mean that watching Arsenal play Manchester United with an 'equal opportunities' policy in place might not make compelling viewing...but i might get to play at Old Trafford. In the context of Neill playing centre forward for Arsenal, and others of my ilk filling the rest of the positions, I suspect gate receipts would fall to nil quite rapidly. This makes for a good analogy as to what would happen to tax receipts in Ireland or the UK, or anywhere else for that matter if we don't differentiate properly between the Ali Dias and the Cristiano Ronaldos within both our public and private sector organisations.
So whether we choose to call this socialism or capitalism doesn't really matter to me, but the gist is that the best outcomes come from 1) realising that the world is a competitive place 2) empowering and encouraging people with talent to make a difference to themselves and those around them and hopefully as a happy consequence 3) a desire amongst those empowered to bring along the Ali Dias in society, without necessarily giving them an outing at Old Trafford.
To that end, the Premiership Allstars of Economic society for me are the likes of Mohamed Yunus from the Grameen Bank in Bangladesh and Martin Burt who developed Fundacion Paraguaya. There are plenty more out there, but these 2 are known better to me than others.
Firstly Mohamed Yunus, who won the Nobel Peace Prize in 2006, for essentially creating a viable banking system to the poor that has been annually profitable and has paved the way for 7 million borrowers (mostly women) in Bangladesh to pull themselves out of poverty through their own hard work and enterprise. On a cumulative basis the bank has given out loans totaling about USD $6bn with a repayment rate of 99.3%. Current deposits and own resources of Grameen Bank today amount to 143% of outstanding loans. Accordingly, 58% of all of the Grameen borrowers have crossed the poverty line as a direct result of the opportunity that this "capitalist" endeavour has presented to them.
The Grameen Bank was born as a tiny homegrown project run with the help of several of Yunus' students at Chittagong university where he was an economics professor. Three of these students remain as senior management within the bank over 25 years after they started the project.
Big fan of this. It is sustainable, self sufficient and economically viable without public sector hand-outs.
Secondly, Martin Burt who set up Fundacion Paraguaya; which is essentially a rural business school set up in one of the poorest countries in South America. It aims to transform its students into rural entrepreneurs and increase the relevancy of the education they receive through their participation in a profit-making school business. This microcredit program has supported 35,000 small entrepreneurs and created 18,000 jobs.
The key focus of both Grameen Bank and Fundacion Paraguaya has been on sustainability; neither undertaking requires the 'charity' of socialists and those 'capitalist' enterprises that have been funded by either Grameen Bank of Fundacion Paraguaya have gone on to become important sources of jobs and revenue, and a means by which families have been able to pull themselves above the poverty line in many cases.
This isn't an attempt to deny the ease with which the free market approach can go wrong, but just to clarify that if the likes of Ireland choose not to compete then the alternatives truly are unsustainable. With the big news of Barack Obamas victory this week representing a truly epoch making event for many, one of the small point aspects that struck me most was where some of the votes came from. Obama throughout the campaign pledged to take 10million of the lowest paid out of taxation, paid for by taxing those earning more than $250,000. Whether that is the right thing to do or not remains to be seen, but what is impressive is that 52% of those in the high income bracket chose to vote for Obama thus saying (although not categorically) that their interests are may be better served by choosing to help others more than themselves.
Monday 3 November 2008
Statistics are like bikinis...
Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital. (Aaron Levenstein)
Average pub discussions over the past 20 years have probably involved the odd commentary on how the price of a pint has changed over that time. "A lot" would typically be the consensus opinion; and that opinion would be correct. The Good Pub Guide celebrated its 25th anniversary in 2007 and as part of the celebrations managed to convince a series of pubs to sell pints on the 28th of September 2007 at the same price as they were selling in 1982. The Drunken Duck in Hawkshead, Cumbria for example were selling pints of "Cracker Ale" (named after the pub dog from 1982) from their own micro-Brewery for only 62p. 2007 prices were £2.65 for the same. That represents inflation of 427% over that time. Needless to say a lot of the increase is due to tax increases justified by a greater awareness that Guinness is not as good for you as the old adverts would have suggested. Nevertheless, inflation was unquestionably substantial.
Elsewhere in the world of the man on the Clapham omnibus, or in current parlance an individual from the "real economy" there is plenty of anecdotal evidence of substantial price inflation across our monthly regular purchases, over whatever time horizon you might choose. In 1982 the price of a gallon of petrol was £1.59 (35p/ litre) and the average house price was £23,644. 25 years on in 2007 as the Good Pub Guide celebrated their 25 year anniversary those figures were just over £5/ gallon (111p/ litre) and average house prices were just shy of £200,000. Those are price increases of 214% and 747% respectively. The latter in particular would form the bulk of monthly outgoings, through mortgage payments, for the average home owning Brit. For those across the pond the average house price in the USA in 1982 was just over $82,000. In March 2007 it was $324,000. A 295% increase.
The centerpiece of economic policy in the UK, the USA and many other countries over the past 20 years has been clearly stated as targeting of inflation, through rigid observance of monetarist economic policies. The UK ceded control over interest rates in 1997 by making the Bank of England independent and in theory removed from political decision making. Their strict and only charge was responsibility for keeping inflation below it's target rate (below 2%), through monetary policy and interest rate management. The gist here is that if prices are kept stable then it makes it easier for individuals and businesses to make sounder, more long term decisions about savings and investment.
So given that statistics about inflation directly affected (in fact were the only thing that affected) the rate of interest set by the Bank of England it might be fair to say that the accuracy of that statistic was fairly important. The same is true in the US, and in the European Union, albeit that both the Federal Reserve and the ECB have a slightly wider mandate than just inflation targeting.
Consequently if inflation calculations failed to truly recognise properly the extent of inflation in the "real economy" we might end up in a situation where interest rates were not at the right level, and money supply would be out of whack with what was required to the right balance between savings and investment.
According to the Bank of England and the IMF inflation in the UK between 1982-2007 was 112%, based on the Consumer Price Index. In the US according to the IMF that figure was 114%. "Hang on a second" - you might reasonably say, "the cost of my house and the price that i pay for petrol have risen by loads more than that during that period...and they are pretty important aspects of my monthly outgoings".
So how do the central bankers get their inflation figures?
It depends on the "market basket" which is chosen. In the United States, the price of food, fuel and purchasing a home are excluded from the "core" inflation rate. That is why the price of food, fuel and buying a home can rise so rapidly without being reflected in the official "rate of inflation". Which seems fairly ridiculous, as the value of your home plays a pretty key role in your approach to discretionary purchases and the amount of credit that a bank might lend you to make those discretionary purchases.
In China the price of food is included, so they started showing a sharp rise in inflation as soon as food prices started rising. In India the price of fuel is subsidized by the government, as is wheat too. So that makes things appear different than they actually are. Somebody is paying the real price somewhere. In the case of imported oil, that has been a hefty bill, which is why upward adjustments are being made now.
Perhaps most disturbingly, if you look into the details of how the Bureau of Labor Statistics (BLS - or potentially just BS) calculates its CPI figures for the USA there has been clear political manipulation over the past 20 years pushing this office to portray the US economy as strong and inflation free. As a case in point, during the early 1990s during the Clinton era there were significant budgetary issues with the rising costs of Social Security, Medicare and government pension provisions - the cost of which was indexed off CPI. Perhaps it's cynical to connect these to the changes in inflation calculations that followed, but it's clear that they had the effect of reducing that CPI figure considerably, and consequently the outgoings from the Treasury.
Three main changes were made to CPI calculations: 1) hedonic quality adjustments, 2) calculations of housing costs via owners equivalent rent and 3) geometric weighting/ product substitution. Running through these - Hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durable goods - a dubious assumption belied by the experience; as your new model MAC or PC was going up by a hundred dollars or so it was actually going down according to CPI calculations because it was twice as powerful. As regards 2) it was claimed that a measure of housing base on what an owner might get for renting his house would more accurately reflect the real world - dubious again. The average cost of homes has appreciated 3 times the annual pace of substituted owners equivalent rent, which would have raised the total CPI by around 1% had the change not been made. Regarding the third change, product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburgers/ less filet mignon when beef prices were higher etc. Proven untrue also.
As a consequence of these changes some estimates suggest that the inflation figures used by the US government and the Federal Reserve may have been 3-4% too low. Some might say, well what difference does it make. IT MAKES A MASSIVE DIFFERENCE.
The correct measure of inflation matters in many areas, not least in the calculation of social security payments and wage bargaining adjustments. The number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. It seems pretty evident now that interest rates in the US/ UK were way too low based on the real evidence about inflation. Credit expansion of close to $23 trillion between 2000-2008 in the US was driven by a complete imbalance between the relative costs of savings and investment. Most of that credit was "created" or "asset backed" by rising property prices, which as i've explored above were completely misrepresented in terms of the inflation figures being published. Manipulation is less obvious in the UK, but the "basket" calculation still unrepresents hugely the housing boom which we've seen in the last 15 years, and on which much of the credit expansion has been based.
If people are looking for places to point a finger of blame, the statistics would be a good place to start. 98% of statistics are made up apparently.
Average pub discussions over the past 20 years have probably involved the odd commentary on how the price of a pint has changed over that time. "A lot" would typically be the consensus opinion; and that opinion would be correct. The Good Pub Guide celebrated its 25th anniversary in 2007 and as part of the celebrations managed to convince a series of pubs to sell pints on the 28th of September 2007 at the same price as they were selling in 1982. The Drunken Duck in Hawkshead, Cumbria for example were selling pints of "Cracker Ale" (named after the pub dog from 1982) from their own micro-Brewery for only 62p. 2007 prices were £2.65 for the same. That represents inflation of 427% over that time. Needless to say a lot of the increase is due to tax increases justified by a greater awareness that Guinness is not as good for you as the old adverts would have suggested. Nevertheless, inflation was unquestionably substantial.
Elsewhere in the world of the man on the Clapham omnibus, or in current parlance an individual from the "real economy" there is plenty of anecdotal evidence of substantial price inflation across our monthly regular purchases, over whatever time horizon you might choose. In 1982 the price of a gallon of petrol was £1.59 (35p/ litre) and the average house price was £23,644. 25 years on in 2007 as the Good Pub Guide celebrated their 25 year anniversary those figures were just over £5/ gallon (111p/ litre) and average house prices were just shy of £200,000. Those are price increases of 214% and 747% respectively. The latter in particular would form the bulk of monthly outgoings, through mortgage payments, for the average home owning Brit. For those across the pond the average house price in the USA in 1982 was just over $82,000. In March 2007 it was $324,000. A 295% increase.
The centerpiece of economic policy in the UK, the USA and many other countries over the past 20 years has been clearly stated as targeting of inflation, through rigid observance of monetarist economic policies. The UK ceded control over interest rates in 1997 by making the Bank of England independent and in theory removed from political decision making. Their strict and only charge was responsibility for keeping inflation below it's target rate (below 2%), through monetary policy and interest rate management. The gist here is that if prices are kept stable then it makes it easier for individuals and businesses to make sounder, more long term decisions about savings and investment.
So given that statistics about inflation directly affected (in fact were the only thing that affected) the rate of interest set by the Bank of England it might be fair to say that the accuracy of that statistic was fairly important. The same is true in the US, and in the European Union, albeit that both the Federal Reserve and the ECB have a slightly wider mandate than just inflation targeting.
Consequently if inflation calculations failed to truly recognise properly the extent of inflation in the "real economy" we might end up in a situation where interest rates were not at the right level, and money supply would be out of whack with what was required to the right balance between savings and investment.
According to the Bank of England and the IMF inflation in the UK between 1982-2007 was 112%, based on the Consumer Price Index. In the US according to the IMF that figure was 114%. "Hang on a second" - you might reasonably say, "the cost of my house and the price that i pay for petrol have risen by loads more than that during that period...and they are pretty important aspects of my monthly outgoings".
So how do the central bankers get their inflation figures?
It depends on the "market basket" which is chosen. In the United States, the price of food, fuel and purchasing a home are excluded from the "core" inflation rate. That is why the price of food, fuel and buying a home can rise so rapidly without being reflected in the official "rate of inflation". Which seems fairly ridiculous, as the value of your home plays a pretty key role in your approach to discretionary purchases and the amount of credit that a bank might lend you to make those discretionary purchases.
In China the price of food is included, so they started showing a sharp rise in inflation as soon as food prices started rising. In India the price of fuel is subsidized by the government, as is wheat too. So that makes things appear different than they actually are. Somebody is paying the real price somewhere. In the case of imported oil, that has been a hefty bill, which is why upward adjustments are being made now.
Perhaps most disturbingly, if you look into the details of how the Bureau of Labor Statistics (BLS - or potentially just BS) calculates its CPI figures for the USA there has been clear political manipulation over the past 20 years pushing this office to portray the US economy as strong and inflation free. As a case in point, during the early 1990s during the Clinton era there were significant budgetary issues with the rising costs of Social Security, Medicare and government pension provisions - the cost of which was indexed off CPI. Perhaps it's cynical to connect these to the changes in inflation calculations that followed, but it's clear that they had the effect of reducing that CPI figure considerably, and consequently the outgoings from the Treasury.
Three main changes were made to CPI calculations: 1) hedonic quality adjustments, 2) calculations of housing costs via owners equivalent rent and 3) geometric weighting/ product substitution. Running through these - Hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durable goods - a dubious assumption belied by the experience; as your new model MAC or PC was going up by a hundred dollars or so it was actually going down according to CPI calculations because it was twice as powerful. As regards 2) it was claimed that a measure of housing base on what an owner might get for renting his house would more accurately reflect the real world - dubious again. The average cost of homes has appreciated 3 times the annual pace of substituted owners equivalent rent, which would have raised the total CPI by around 1% had the change not been made. Regarding the third change, product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburgers/ less filet mignon when beef prices were higher etc. Proven untrue also.
As a consequence of these changes some estimates suggest that the inflation figures used by the US government and the Federal Reserve may have been 3-4% too low. Some might say, well what difference does it make. IT MAKES A MASSIVE DIFFERENCE.
The correct measure of inflation matters in many areas, not least in the calculation of social security payments and wage bargaining adjustments. The number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. It seems pretty evident now that interest rates in the US/ UK were way too low based on the real evidence about inflation. Credit expansion of close to $23 trillion between 2000-2008 in the US was driven by a complete imbalance between the relative costs of savings and investment. Most of that credit was "created" or "asset backed" by rising property prices, which as i've explored above were completely misrepresented in terms of the inflation figures being published. Manipulation is less obvious in the UK, but the "basket" calculation still unrepresents hugely the housing boom which we've seen in the last 15 years, and on which much of the credit expansion has been based.
If people are looking for places to point a finger of blame, the statistics would be a good place to start. 98% of statistics are made up apparently.
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