You can't fool all the people all the time...

The great icon of Rastafarianism, Bob Marley, used to sing - "You can fool some of the people some of the time, but you can't fool all the people all the time". Now Bob used to smoke a lot of fairly potent and illegal substances, but he was still capable of coming up with these sorts of reality bites amidst the purple haze. The esteemed Prime Minister, Gordon Brown, on the other hand apparently doesn't dabble with that sort of stuff, yet he and his band of cohorts are the living representation of Marley's sentiment. As his right hand man, Alistair Darling, delivered his Budget this week you would have sworn that he too had been "puffing the magic dragon", when coming up with the statistics that he claimed as his version of financial reality. This was not a one-off - we have passed through a long period of mass delusion of gross proportions, but with the tide now fully out economically you might have expected a bit more honesty.

There are two parts to this gross delusion. Firstly, the government doesn't seem to grasp where the money comes from, and secondly, it doesn't seem to want to understand where it goes. Both would appear to be fairly important. The sense has been for a long time that we could go on borrowing heavily to fund the creation of make-believe jobs in the public sector. This delusion was multi-faceted - that the private economy as strong enough to bear the burden of the bloated public sector; that the economy would never experience a severe downturn which would undermine tax revenues; that the tax-take could go on rising, even though it rested to a large extent on two of the most vulnerable bits of the economy, namely the housing market and the financial sector; and that all the extra jobs in the public sector were real.

Last week's Budget should have been the moment when it became clear that these are desperate times. On the contrary, there was an ongoing surreal delusion about the impending doom: most people are still employed and public spending continues to accelerate. The budget presented a statistical snapshot of the ugly shape in which Britain now finds itself, yet provided little genuine understanding of how bad things could get. With the financial heart shot out of the economy, tax revenues have fallen dramatically just as social spending has increased. The same situation exists in many countries, and is largely unavoidable - but the government's heavy borrowing even before the recession hit, was entirely avoidable. If this government was running a public company, the inefficiency of its spending would have seen the leadership sacked and replaced long ago. Yet they still stealthily try to delude the public.

As with all financial operations, the national balance sheet has to balance. Assets (the individuals and corporations) that generate the revenue need to be fostered in a way that the liabilities (government borrowing and public service commitments) can be afforded. GDP growth increases the revenue that comes from the assets side of balance sheet, and diminished public spending reduces the liabilities side of the balance sheet. In that context if tax revenues fall because of falls in GDP growth, then the liabilities side has to be reduced at some stage to balance the books, with borrowing filling that gap over some defined period of time.

The government plans to borrow £175bn through gilt auctions in the current fiscal year and the same the year after. In last year's budget, public net debt was expected to be 39% of GDP this year, now it is at 59% and is going to be close to 80% by 2013-14. In theory such borrowing should be sustainable if the assets side of the national balance sheet are likely to produce the tax revenues to pay these debts, or if the other part of the liabilities side - public sector spending promises - are reduced, or both. As Alistair Darling stood at the despatch box he had to reassure potential creditors that the government had a plan for tightening fiscal policy, and for creating the economic growth that will generate the required tax revenues. A tough gig, but one where you would have hoped for a degree of honesty.

Instead he continued the mass delusion with a string of over-optimistic economic assumptions and political gamesmanship. The raising of the top rate of income tax to 50% threw petrol on the fire that suggests that "the rich" are responsible for this mess and that taxing them a bit more would remove the need for a Reckoning that will come to the remainder of the population. Nonsense, but politically sound short-termist thinking.

As the Economist pointed out: "The fiscal plans are like one of those childish excuses that begin with a little exaggeration and morph into outright falsehood". The theoretical commitment to cut the growth of current spending to 0.7% a year from 2011-12 (after the election) is insignificant. In these circumstances, the squeeze on public spending doesn't go anywhere near far enough. There needs to be a complete freeze on public spending in nominal terms, implying cuts in real terms, to take effect over a multiyear period. It would be out of this world to expect this government to be so explicit about its intended cuts with an election due before next summer.

Where the biggest delusions lie in the projections for the size of the forthcoming budget deficits, however, is on the assets side of the national balance sheet - the assumptions about economic growth are truly "pie in the sky".

In order to "fix the numbers", the Treasury assumes that the economy will start growing at the end of this year and expand by 3.5% in 2011. The rest of the world outside the drug takers in government, such as the World Bank and the IMF, expect further declines in GDP next year and only moderate recovery when it comes. No self confessed "prudent" prime minister would have allowed these aggressively positive assumptions - too much is at stake if they are overoptimistic. The Treasury also forecasts that next year consumers' expenditure will rise by 0.25%, despite what will probably be high and rising unemployment and average earnings growth that is unlikely to be positive. Similarly the savings rate will still be at very low levels and people are likely to want to rebuild their financial strength before starting to increase their spending again.

In this context, what is the government actually doing, or proposing to do, to foster these proposed levels of economic growth that will sure-up the assets side of the national balance sheet?

Sterling's relative weakness should help bolster exports, which should help economic growth and tax revenues as a consequence. In this regard, I suppose the government did its bit by devaluing sterling when they mismanaged the economy for long periods, so we'll give them indirect credit for that one. Aside from that there is little else that the government can do quickly. The real contribution they can make is by boosting confidence - which wasn't helped by the Budget. The Chancellor did manage to retain his predecessor's tendency to see the UK as leading the world in a variety of fields, including green technology and digital media. He talked of developing offshore wind, though perhaps with the amount of wind coming from himself and his boss, the onshore market should be the best place to start. As Roger Bootle commented: "We seem more likely to be leaders in red technology, with the Debt Management Office issuing umpteen squillion of gilts in the morning and the Bank of England buying them in for more in the afternoon. Talk of recycling."

What is fundamentally missing is any sort of long term game plan for truly adjusting the British economy to the new world order where significantly lower tax revenues from financial services will permanently diminish the assets side of the national balance sheet, and where inefficient public services will become an even bigger drain. The long term health of this economy is down to the capacity of it to produce truly world class businesses in high margin fields. Sadly it seems that the government is determined to foster a resentment of those who aspire to such endeavour, the 50% top income tax rate a fitting case in point.

Where are the Silicon Valleys of the UK, and what is being done to create global leadership in the fields like green technology and digital media that the government falsely claims leadership in?

A simple example of how this government and their predecessors have got the process wrong is in their attitude to third level education - which has rapidly become "a right of passage" in this country as opposed to a well thought out privilege. In February this year, after a 18 year experiment, the universities secretary John Denham began to acknowledge that the turning of the polytechnics into "new universities" has backfired. Instead of providing hands-on vocational skills training for the less academically inclined, this switch created the opportunity for those with lower grades at A-level to go on and study "academic" degrees, and in doing so burden both themselves and the taxpayer with high debts and impractical skills. "The truth is that a classics degree at a traditional university is not the same as a degree in mining and engineering at another." Mr. Denham is clearly no Sherlock Holmes.

The old polytechnics should be brought back and strengthened in their approach to teaching practical, vocational courses that allow their students to have a fighting chance of a job upon completion. The elite academic universities should take to the forefront of Britain PLC's attempt to become leaders in the fields that the government aspires to. A point which Mr. Denham did acknowledge - which would signal a move away from the Labour attacks on so-called Oxbridge "elitism". "We aim to encourage the advancement of a handful of academically excellent institutions. They will receive the lion's share of research funding, £1.5bn this year, although 'pockets of excellence' in the new universities group would also get some funds." he said.

By comparison to our global competitors the £1.5bn investment is an absolute pittance. It represents a fraction of what is available for research and development at individual US universities, and is almost laughable in the context and size of the British economy, particularly when you consider the scale of spending within the inefficient public services.

When all is said and done, without dramatically addressing the competitiveness of the UK economy with serious investment in the efficient parts of the system, the level of borrowing predicted over the coming years is completely unsustainable. The consequences will mean higher taxes all round, further weakened public services and potentially a decision for entrepreneurs to take their ambitions and the jobs that they will create elsewhere. The Chancellor talked warmly this week, of grandparents caring for their grandchildren. In the circumstances this was appropriate, for it seems that the grandchildren will still have to live with the consequences of what had to be endured by their grandparents.

Robbing Grandma to pay Goldman

There are plenty of galling things in the financial world today, but the theatrical performance of the US investment bank Goldman Sachs as it manages its way through the economic crisis creates a kind of vomit inducing nausea that is tough to top. Last week GS recorded "super" earnings in the 1st quarter of the new fiscal year, announcing Q1 earnings of $3.39 per share, well above the markets expectations. They used the occasion to claim the moral high-ground with US taxpayer by suggesting that they would be the first to repay the $10bn worth of loans they have received from the US government, via TARP funds.

Except, as so always seems to be the case with these guys, that's not exactly the full story. Buried in the small print of their financial statements, it appears that as the Easter Bunny was delivering chocolate to the worlds children, he also deposited a small, albeit well-hidden, turd in the GS income statement. This little ruse along with a litany of other legal, but morally bankrupt undertakings, puts GS into a class of their own. It appears to me that correcting this type of crony capitalism would be pretty important in the re-regulation of the financial world, but with well placed lobbyists and effective sleight of hand, GS is helping to take steady steps in the opposite direction.

Getting into the nitty-gritty: As a consequence of GS becoming a bank holding company last year so that it could access deposit markets, it switched its reporting period from its own fiscal year to the calendar year - in keeping with other bank holding companies. Previously Goldman's fiscal year had ended on November 30th and now it ends December 31st. As a result, December 2008 was not included in the wonderfully stage-managed 1st quarter 2009 numbers.

This "orphan month" as it turns out is where GS decided to place some very significant write-downs - they lost over $1bn, after writedowns related to "non-investment grade credit origination activities" - i.e. poor quality, and very leveraged, loans to companies. A further $625mm writedown was taken on their commercial real estate loans, which when balanced against some meagre profits elsewhere means that GS actually has lost $1.5bn in the last 7 months. That wasn't how the numbers were reported last Monday, which is typically convenient. In reality, instead of earnings of $3.39 per share, the real figure is closer to a loss of $2.15 per share. As the stock price rose sharply on Monday, how many market participants were wise to this cloak and dagger approach to financial reporting?

At its low point last November, GS's share price closed at $52, which was close to 80% below its high of around $250. At that stage, many of its chief competitors - Lehman Brothers, Bear Stearns, Merrill Lynch and UBS - were either dead or mortally wounded. Somehow, less than five months later, on the back of the "surprisingly profitable" first quarter of 2009, the share price is back up at $115 per share. Are they really that much better than the competition, or are they successfully playing a bad hand in the most Machiavellian of ways? The more I observe, the more I see the latter.

Aside from this recent example of GS pushing financial laws to their limits, many point to Goldman's expert "management" of the levers of power in Washington. Since Robert Rubin, GS's former chairman, joined the Clinton administration in 1993, initially as the director of the National Economic Council and then as Treasury secretary, Goldman Sachs has come to be known, as "Government Sachs". After a highly paid investment banking tenure, the graduation class from GS has moved from Wall Street into to the corridors of Washington - first you get the wealth, and then you need the power.

The conspiracy-theorists point to the crucial role that Henry Paulson (who succeeded Robert Rubin to the top at both GS and the US Treasury) played in the demise of Bear Stearns and Lehman Brothers, and his insistance that Bank of America buy Merrill Lynch at an inflated price. These machinations changed the competitive landscape for GS - a point which was acknowledged by their CFO, David Viniar on their recent 1Q results conference call. "Many of our traditional competitors have retreated from the marketplace, either due to financial distress, mergers or shift in strategic priorities."

Within the same conference call discussions about Goldman's relationship with the battered US insurance group AIG, were somewhat muted. As William Cohan in the NY Times puts it, this relationship "is the canvas upon which the bank and its alumni have painted their great masterpiece of self-interest". Days after Hank Paulson refused to save Lehman Brothers last September, at an estimated cost of $45 billion or so, he bailed out AIG, to the tune of $170 (and rising). He then installed Edward Liddy - another GS alumni - as AIGs chief executive. Since then GS has received some $13bn in cash, collateral and other payments from AIG - that is, direct from the US taxpayer.

In deciding to rescue AIG, the US government was understandably worried that if it did not bail out the company, its collapse could lead to a cascading chain reaction of losses, jeopardizing the stability of the worldwide financial system. Goldman Sachs could easily have become the next Lehman Brothers, if their capital base was eroded by the full expected loss on their counterparty exposure to AIG (i.e. the $12bn mentioned above). The flipside, however, is that they jeapordized the financial system by letting Lehman Brothers go bankrupt, and Lehman's creditors will be lucky to pennies back on their loans to that company. GS (and others) however have been "made-whole" - i.e. they have received full and complete compensation for their massive exposure to AIG.

In another conference call he held last month, the CFO David Viniar made the interesting claim that Goldman “had no material exposure to A.I.G.” because the firm had “collateral and market hedges in order to protect ourselves.” If so, then why did they need the government’s help in the first place?

The truth is that Goldman had paid for insurance against a default of AIG, totalling around $100mm, according to the head of public relations at GS, Lucas Van Praag. In a letter to the NY Times last week he wrote: "If AIG had failed, we would have had both the collateral and the proceeds from the credit default swaps and therefore would not have incurred any economic loss." He goes on: "In order to collect under a credit default swap, there has to be an event of default. No event of default means no payout. By supporting AIG, the government prevented the company from defaulting."

So effectively he's claiming that GS were indifferent between AIG defaulting or not - and that it would have been "unfair" of the government not to pay the monies that AIG owed GS, as the government prevented a default which would have seen an equivalent payout to Goldman on its hedging contracts. This is complete rubbish - they lost $100mm on hedging, but gained over $12 billion from Grandma, and the rest of the US taxpaying nation. They weren't fully hedged, and they messed up in a big way, but aren't paying the price.

As part of its busy day last Monday, GS also announced it was raising $5 billion of equity capital and that it intended to pay back the $10 billion from the Treasury’s Troubled Asset Relief Program that Hank Paulson "forced" on the bank last October. The media management of that news, no doubt raised GS up in the estimation of the average US taxpayer, which is a pretty amazing achievement. Furthermore, being free of the government will give Goldman yet another competitive advantage: the ability to pay its own talent and new recruits whatever it wants without government scrutiny. This is significant, since it is unlikely any of Goldman’s remaining competitors will be able to make a similar move anytime soon.

On a slightly more amusing note, I see GS is in the process of suing a blogger who set-up the demonising website www.goldmansachs666.com. Goldman Sachs has taken legal action against the site, alleging it infringes a trademark in the phrase “Goldman Sachs.” The owner of the site, an investment adviser called Mike Morgan of Jensen Beach, Florida, has promised to contest the litigation.

"Everyone is entitled to their opinions and to share views," GS's spokesman Lucas van Praag said in a interview, "...but this is blatant trademark infringement". In response to this Matthew Lynn, a Bloomberg news columnist, has just registered the website www.goldmansachsislovely.com.

As of yet he hasn't had any word from the GS legal eagles. He says: "I suspect that if I fill that site with examples of Goldman Sachs executives being kind to small animals and how the bank brings joy and happiness to the capital markets, I might even be offered a job in their marketing department." Now that is Machiavellian.

A reserve currency for the 21st century...

The 15th of August 1971 passed by as a largely normal summers day in the northern hemisphere. The main news focus within the British media was on the controversial British horse rider Harvey Smith. He had been stripped of his British Show Jumping title and £2,000 winnings for allegedly making a two-fingered "up yours" gesture in the direction of the judges after winning the British Show Jumping Derby. A big deal it seemed, breaking with the expected decorum of the British summertime.

A more significant break from decorum that the general public, the media and most financial observers were largely oblivious to also took place on August 15, 1971. The implications of that event, however, have had an enormous impact on global financial conditions ever since. On that date, US President Richard Nixon “closed the gold window”. In essence, Nixon had given his own two-fingered salute - in his case to the Bretton Woods Agreement established in 1944, which made the US dollar the world’s reserve currency and allowed other countries to convert their US-dollar holdings into gold. Those who may have glanced at the announcement buried within the pages of their daily newspaper were unlikely to have understood the implications for their financial future. In simple and realistic terms, the US government had defaulted - they could no longer sustain the established link between the convertible price for gold and their currency, so they defaulted on the agreement.

Under the Bretton Woods agreement, there was some control over the world's money supply since other currencies were convertible into US dollars, and the dollar itself was convertible into gold. With the demise of Bretton Woods, the entire world found itself on a monetary system backed by nothing more than the faith and credit of individual governments for the first time in history – what is termed a pure "fiat" system. This meant there were no longer any restraints on the amount of money that individual governments could create at will. As a direct consequence, a flood of paper money was unleashed globally, a trend that has increased exponentially over recent years.

Without the fiscal restraints that are part and parcel of a gold-backed currency, politicians worldwide were able to promise social programs and expand government bureaucracies that could be delivered through borrowing money created by the central banks rather than through direct taxation. They could embark on military campaigns and other "extravagances" with borrowed dollars that future generations would have to repay. And borrow they did, particularly in the US. In 1971 the total US federal debt stood at $436 billion. Today, that number exceeds $11 trillion. The increases in the 2009 annual deficit will, in nominal terms, be many multiples of the entire US debt in 1971. Worse still, when calculated in accordance with Generally Accepted Accounting Principles (GAAP), and taking unfunded Social Security and Medicare obligations into account, the total federal debt is actually in excess of $50 trillion. Taken on that controversial basis the US deficit is running at around 400% of GDP, which makes Ireland's government spending look positively thrifty.

It's pretty clear from US and other G20 country's plans to address the current economic crisis that increasing the size of their debts is not an obvious concern for policy makers. Much of the discussion in the media, is about whether the debts that are being increased will be affordable for future generations. Perhaps as the Chinese are starting to mutter about the need for a new reserve currency, the real concern may be that the US doesn't actually care about degrading their currency to the point of effective default - their current needs are even more pressing than that. As John Paul Getty once said: "If you owe the bank $100, that's your problem. If you owe the bank $100mm, that's the bank's problem." Given the size of the foreign debts of not only the US, but many other countries, the lenders/ savers like China may ultimately be the ones with the problem. This situation is not dissimilar to the unfortunate pensioners of the world, who tried to prepare thriftily for their retirements, only to see their funds dramatically eroded by excessive risk taking by those who were managing their monies.

Terry Smith of the London interdealer broker Tulletts commented recently: "Two thirds of the world's assets are denominated in a fiat currency issued by a country whose authorities are taking policy actions which seem inevitably to lead to its debasement - it seems the Chinese have now concluded that this is not acceptable. The logical conclusion of where we will end up eventually is with some type of gold standard," he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.

The growing discussion about a return to a gold standard is understandable, but at this stage not really viable or logical. UBS, the investment bank, has calculated that the US reserves of gold are so small, relative to its monetary base, that the gold price would need to rise more than sixfold to above $6,000 per ounce for a "standard" to be re-implemented. Furthermore to implement the standard in Japan, China and the US, the price would be more than $9,000. The truth is that none of these governments would want to follow this route - replacing the fiscal shackles of 40 years ago is beyond unpalatable.

Gillian Tett in the FT points out, however, the fact that this debate is occurring at all shows just how much "cognitive dissonance and utter uncertainty continues to stalk the markets". In the interest of continuing this cognitive dissonance - a few thoughts: What about alternatives to a dollar reserve, or to the gold standard? As I've discussed on a previous blog, there is no real reason for either of these being "the standard" as they only retain value if everybody believes they are good stores of value - faith which should be disappearing in the case of the dollar. In the case of gold - it was only a credible store of value because of a historical trend, not because of any long term practical value.

What about a standard based off something that we will all need for all time, the three most obvious things being food, air and water. Drinking water or wheat, for example, or even at some later stage something like carbon emission credits, might suffice? All of these retain a long term value that stretches far deeper than gold or the US dollar - they are literally crucial to human existence - so could not be so easily degraded by policy action in the same way. Moreover, as expectations of future shortages of water, food and breathable air are major global concerns, perhaps these are compelling reasons to make one of them a real centerpiece of our economies as their preservation and production would be all the more important.

A wild and outlandish suggestion perhaps, but nothing seems beyond the pale given where we have put ourselves.

Destructive creation or creative destruction?

It's amazing how quickly a billion dollars has become insignificant. Apparently, if you stacked $100 bills on top of eachother $1 million would be a measly 6 inches high, $1 billion would be slightly more consequential at 555 ft high, which would scale roughly 2/3rds of London's highest building (One Canada Square in Canary Wharf at 771ft). If you want to be taken seriously, though, these days you really need to work in trillions. With $1 trillion, stacked in $100 bills, you literally could build a bridge directly from One Canada Square across the Channel to Calais to make up the required 92 mile distance. That's a lot of dough.

Represented in that physical form, the easy transition the world has made from dealing in millions and billions to trillions is truly staggering. But that seems to be a transition that we have firmly made. The decision by the G20 leaders this week to build the proverbial "money bridge", and agree to spend another $1.1 trillion in the effort to exorcise the current economic demons, was hailed as by Barack Obama as a "historic moment", and was lauded widely as the worlds leaders claimed their piece of political capital. It could well be historic alright, but not in the way that he means. The equivalent tale here might be that after a particularly large monthly credit card bill calling it an achievement that you managed to convince your wife that next months bill should be at least twice as large.

That is essentially what the G20 leaders have agreed; spending on the credit card is the only way out of this mess. The world is interconnected, and we all rely on each other, they concurred. In order to protect jobs and to secure future growth we need to facilitate a return to the trade flows, and export led growth, that heralded 'the good times'. We need to stimulate or protect, via the IMF, the emerging market countries whose economies have embraced free trade, and opened up export markets creating domestic growth and prosperity.

To go against the tide here and to pose the counter-argument:
What ever happened to creative destruction? What if much of what has been established over the extended period of 'globalisation' post Second World War world is untenable - an interconnectivity that is incredibly fragile? Will these 'saving' gestures - the biggest fiscal stimulus the world has ever seen - just sustain a flawed system in a way that will create an even bigger bushfire in the future? And furthermore, when we do spend this stimulus money, what evidence exists to suggest that it will be done efficiently, fairly or usefully? It will be an incredibly expensive mistake if it is not.

The recent bushfires in Australia, may be a fitting and similarly tragic metaphor. Small bushfires are part of Nature's process - they happen naturally from lightening strikes and they play an important role in the regeneration of the land. When perfectly understandable human interference led those areas in and around Melbourne to seek to avoid such fires because of the potential risk to their homes, there may well have been unintended consequences. By preventing the small bush fires that naturally occur, over many years a very large area of land had not been "regenerated" and consequently the scope for a one off massive fire was increased. And, as we saw at the start of this year, it came with devastating effect. As the Australian government now considers what went wrong, the interference with the "Natural Process" of destruction and regeneration is certainly one of the issues on the table.

In a similar vein, there are those who suggest that the aid flows that powered into Ethiopia in the late 1980s, to address the immediate impact of famine and widespread starvation, may have only solved part of the problem - and in doing so created an even bigger risk in the future. As politically incorrect as it may be, those same voices quietly suggest that more people may end up dying in Ethiopia as a consequence of the massive influx of aid - on the basis that the real issues that cause famine there have never really been addressed, and the risk is that while the aid sustained the current generation the risks of a 'mega-famine' in the future were increased. Not a particularly palatable subject for discussion.

I would like to think that the protections that we put in place today do act to reduce the risk of a system malfunction like the current economic crisis, the bush fires in Australia and famines in Africa. There is a real risk, however, that if we interfere with the natural destructive and regenerative processes of the world, that we just fan the flames for a bigger catastrophe in future. Fiscal stimulus on the scale that is being discussed certainly would not have been part of the world order envisioned by a Darwinian "survival of the fittest" mindset, and may as an unintended consequence make us weaker and more vulnerable in the future. While our pressing needs - of employment and financial survival - may be soothed by fiscal policy, what are the long term consequences of the decisions we are making so "historically" today?

The $1.1 trillion needs to be an investment that pays the worlds taxpayers back, and not a handout to sustain a system that can't sustain itself. Maybe it will be, but celebrations about the achievements of the G20 meetings are politically charged - Gordon Brown's for one has been 'enhanced' in the media coverage, but he will be long gone when the consequences of these decisions have fully played out. It may be politically unpalatable to see the destruction of previously successful enterprises, and significant unemployment as a consequence, but the longer term consequences of sustaining the unsustainable may be a very significant price to pay for future generations.

The notion of creative destruction is originally found in the writings of that old black humorist Friedrich Nietzsche - who is often seen darkly for his willingness to address tough questions with unsavoury, but credible answers. The Austrian economist Joseph Schumpeter popularized and used the 'creative destruction' term to describe the process of transformation that accompanies significant innovation. In Schumpeter's vision of capitalism innovative activity by entrepreneurs was the force that sustained long-term economic growth even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

Creative destruction can hurt. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

Last week I attended a reunion (read 'fundraising') event for the London based alumni of my old university - Trinity College, Dublin. In an attempt to reconnect with the gathered group, the Dean of Research from the university outlined some of the significant projects and discoveries that the university had pulled off in recent times. Some incredible progress was outlined in fields such as nano-technology and bio-sciences, particularly impressive when compared to achievements of some of the big-name US universities, who have research endowments hundreds or thousands of times the size of the TCD budget of 300mm Euros. In Irelands case, it is clear to me, that the long term health of the economy is dependent on the capacity to create meaningful value added based off these innovations. Such innovation forms the foundations of the creative destruction process that ultimately fuels real economic growth and improves prosperity both locally and globally. Nonetheless, the capacity for government to understand how important this process is tends to be swayed by pressing needs - wage bargaining with unions, sustaining inefficient public sector workers, and most critically, winning elections.

The fiscal stimulus around the world desperately needs to be directed away from these areas, and into the sort of innovation that will lead to longer term prosperity. While ensuring that the worlds financial system does not completely break down is really critical, a by-product of the process should not be attempts to sustain jobs in industries or areas where innovation is not forthcoming. Large scale job losses now may be a price that needs to be paid, in order to insure that the whole system goes through the appropriate regeneration process. If we don't allow these difficult things to occur, then the longer term consequences may be the mother-of-all bush fires where there aren't enough hoses to go round.