A slight change in focus can produce a profoundly different understanding

S&P 500: Correction or Crisis

There was a through the whole of 2017 a strong sense that a ‘correction’ was due. Now that something resembling a correction has materialised the debate has shifted to whether it is a correction or the start of a bear market. The answer is of course that no one knows and will only be fully clear in hindsight which is of no use to anyone. Moreover, from the point of view of investment strategy it is irrelevant and serves only to give the scribbler something to scribble about. So what do we actually know?

There has been an extended rally in the S&P 500. It has outperformed most other major markets in local currency terms. The rally has coincided with (been caused by?) and extended period of low-interest rates. It has encouraged short volatility investment strategies. The longer it has gone on the more complacent (desperate for yield) have become investors, and the greater the accumulation of short volatility trades. The prospect of rising interest rates and inflation has finally rattled the complacency and generated this ‘correction’. Why now? Same reason why a cumulative globule of water in a tap finally drips. No idea. One thing is certain is that once a tap starts dripping it does not stop of its own accord.

It is unlikely that short volatility investments have fully unwound so we can assume this ‘correction’ has some way to go. Fear is finally entering the system and countering complacency (and greed). Whether this ‘correction’ becomes a crisis rather depends upon the distribution of positions and the leverage associated with short volatility positions. Some people will find themselves wiped out and be surprised. Mis-selling claims will emerge as careless people try to blame someone else. Old dogs like me have seen it all before. The present situation most closely resembles the 1994 bond market collapse. Anyone remember inverse yield curve notes and power caps?

The important thing is that the immediate direction of stock prices at the moment has nothing to do with the economy, apart from central bank policy and inflation. It is largely to do with positions and expectations (fear). Central bank policy and inflation will feed the fear. In the past I have found that the only way to manage investments in these circumstances is to look at a chart. This is why I left you with one in my last blog. According to Finance academics (which I once was) charts contain no useful information. In my view they need to get out more. So let us revisit an updated monthly price chart of S&P 500 futures.

US 500_20180213_08.17

What do we know? The market is overbought. It has accelerated away from the long-term uptrend. The candle for February is signalling a top. The 0.382 retracement of the move from 1814 (the last time the price touched the uptrend) to 2877, the high, is 2471 and we have not yet got near it. The 50% retracement is 2346, and long way lower than 2644, the price of the futures as a I write. The price could fall as far as 2065 and still be consistent with the long term uptrend. The ratio of the high, 2877, to 2065 is 1.393. That would be a hell of fall and certainly qualify as a bear market. Yet the long term uptrend would be intact. Where does this leave us?

The ‘correction’ is not over. Whatever triggered the correction, the markets own momentum will take us down further. The 50% Fibonacci retracement of 2346 seems the minimum move to expect before this correction is over. I would assume this to be the likely outcome and plan accordingly. We can discuss it again if and when we get there. Of course we could just turn around and rally and make a new high from here. But I doubt it.


Beans and The Bear Market

Bear markets are popular with proprietary traders. You would imagine that proprietary traders have no bias. The important thing is that they get the direction, or lack of it, right over the relevant time horizon. In my first opportunity at proprietary trading ( I was still also head of research is those poorly regulated days) I discovered a marked preference. My education was at the hands of a colleague (and often drinking partner) nicknamed Beans. The name arose because of his often reference to Soya Bean futures as an indicator of the direction of bond prices. These were days of inflation and the CRB Index was closely followed as a leading indicator of (US) inflation. Soya Beans had a material weight in this index.

Coming from an analytical background I initially struggled with this love of the bear market. Indeed I had a preference for bull markets. This was just as well as this was the beginning of the great bond bull market which may only now be completing. Fortunately, markets do not go in a straight line so there were plenty of opportunities for my colleague to earn his corn, so to speak. It was some years however before I full grasped this preference for the bear market amongst professionals.

The prime emotion in trading is fear. Bear markets reek of it. Market price action becomes wild when fear takes over. If you have ammunition it is an easy environment to make a lot of money quickly by shorting stuff. Moreover, volatility is typically much higher in a bear market, both implied and realised, and this creates repeated opportunities and makes it easy to correct mistakes.

The second most important emotion is greed. Fear never quite leaves one but it can become overwhelmed by greed. In bull markets greed grows with every uptick. It sucks latecomers in at high prices. The longer the bull market continues the more likely greed will morph into complacency, overconfidence, and arrogance. You will hear expressions like ‘it is different this time’ and a lot of waffle about ‘fundamentals’. The reality is that when a price chart starts to resemble a parabola you ought to be careful. At this juncture a lot of people will convert the chart to log form and linearize it. If you were not using a log chart in the first place this is a form of denial.

The bear market trader does very poorly in bull markets, snatching a meagre living from periodic pull backs. The bull market sucks in more and more investors taking more and more risk, often unaware of the degree of risk that they have. When the bull market ends they are no match for the ravenous bears that come out of hibernation to feed on their folly. Has this bull market ended?

The striking aspect of the equity market correction of the last few days has been the fact that it was visibly led by the Vix index. Someone started buying a lot of (implied) volatility. The Vix index spiked and this triggered selling of the S&P 500. Other equity markets followed. The S&P 500 had become parabolic and so it was vulnerable to a sharp correction but getting the timing right on that is always tricky. The result is such a sharp correction in both volatility and price as to scare the pants off many. Is it a correction or the start of a bear market? No one really knows ex ante. I will leave you with this chart. However, there are a lot hungry bears so it could be painful before the bull market resumes.

US 500_20180207_14.50

The Economics of Migration

There is a popular myth that migration displaces natives from jobs and depresses pay. Economic dynamics are very complex and rarely do such simple linear processes apply. It all depends upon causality. If an economy that is in some steady state equilibrium is suddenly confronted with a large number of unexpected migrants (an exogenous shock) then the initial impact may well be to displace locals and depress pay levels. The long run outcome is as likely to be a return to a steady state equilibrium at higher levels of employment and similar real pay levels. The idea that long run growth is proportional to population growth and productivity seems to emerge from most steady state economic models. The point of interest in this blog however is that migration flows are not normally exogenous shocks but rather endogenous responses.

An endogenous migration flow is one motivated by domestic economic need. Labour shortages are normally the root cause. Otherwise profitable industries may find it difficult to fill jobs with the right skills at the right price. Labour flows in and makes such industries viable. The result is to also increase opportunities for native labour that would not have been there had these industries not been viable. Migration flows in these circumstances do not displace native labour but increase job opportunities. The corollary of this is that restricting migration in such circumstances will destroy rather than enhance native jobs. If native labour had been available in the first place the endogenous demand for foreign labour would most likely not have materialized.

Restricting endogenous motivated migration flows will have one of two effects. It may render certain industries unviable and thus destroy native jobs. Or it may motivate investment in automation and AI as labour substitutes. This will boost productivity, itself a welcome outcome, but may also result in a net reduction in native employment, at least in the short-term. Automation, once embarked upon, displaces all jobs and not just those previously taken up by migrants. The idea that restricting migration flows will enhance employment opportunities for natives is thus not rooted in any economic logic.

The single market requires free movement of labour. The logic is that as regions (states) experience excess demand for labour it moves to meet this demand. The single market facilitates endogenous migration. The flows are of course two-way and labour could flow from the UK to other regions. Leaving the single market will artificially restrict labour flows. If the UK economy needs labour then, as explained in paragraph 3, restricting flows will destroy jobs for natives. If the UK economy does not need the flows or has surplus labour it will lose the opportunity for this labour to move to more dynamic EU regions. The surplus labour could depress UK wage rates further at least in the short-term. The economics of migration do not support simple linear thinking except in special circumstances and even then only in the short-term. Brexit will hurt those that voted for it the most.

Farage and a Second Referendum

There has been universal surprise at Nigel Farage conceding the need for a second referendum. Perhaps the hypocrisy of his original position was weighing on his conscience. Before the referendum he had argued that a 52-48 result against leaving would not be sufficient to stop his demanding another referendum. Indeed, the nature of democracy is the right to change one’s mind. However, I do not think Farage is motivated by conscience. What would the second referendum ask?

The question might be to accept whatever May’s government has negotiated or a hard Brexit. It may be that Farage fears that pressure would be brought to bear on the government to agree a deal that includes much Farage dislikes (e.g. freedom of movement) and that he prefers a clean, painful, break through a hard Brexit. It is then logical and self-serving to argue for a second referendum. It is not about leaving in this case but how we leave.

It is unclear whether Farage would support a second referendum on whether we leave. I suspect not so it is best to wait for the question before one celebrates. Why would he support a referendum on whether we leave? Perhaps he feels there would be a greater majority for leaving and thus greater legitimacy. Perhaps he feels he could move the debate away from freedom of movement and onto more fundamental issues. Despite protestations of leavers it is clear it was immigration ‘what won it’. This presents the UK as a xenophobic insular country of ‘little Britons’. Perhaps even Farage baulks at this legacy. But what are these more fundamental issues?

On May 29, 2016, immediately before the fateful first referendum I published a blog entitled, The Real Case For Brexit . The thrust of the argument was that whilst migration was an effective strategy for mustering support to leave the real case lies in the direction of the EU. In short, do we wish for ever closer union culminating in political union? The immediate next step for the UK would be to join the eurozone. The UK cannot have a permanent opt-out.

The eurozone, as presently structured is an accident that already happened. The cost has been high and has emphasized that within an integrated EU, German hegemony rules. It is conceivable that with the UK a full member of the EU and eurozone that the system could be reformed and German hegemony diluted. It would however require the UK to fully embrace the EU ideal and vision and with enthusiasm. To move forward without enthusiasm could be disastrous for the UK and not so good the EU. It might result in strengthening German hegemony.

German hegemony is a problem in two related areas; fiscal policy and attitude to inflation. It is a world in which balanced budgets and strict prioritization of price stability would prevail. In colloquial terms it is a world of constant austerity for some. Given the structure of the EU sovereign economies this would condemn many countries to constant suppressed activity and population outflows to the stronger economies. For those that find this hard to grasp just look at the UK, the position of London and the South-east in relation to the north and west, and then map onto Europe with Frankfurt, London, and Brussels as the epicentre. It is not pretty when some of the ‘north’ constitutes sovereign states ( Wales and Scotland?).

Staying in the EU means either embracing full political union with enthusiasm or finding a more distanced political relationship albeit with close economic ties. Do we want to be British or European? This is the true referendum question. The first referendum revealed that the old, poorly educated, and those that identify as ‘English’, preferred to be British. The young, the educated, and those that do not identify as ‘English’, displayed a preference for being European.

The Norwegians confronted this issue some time back. They decided they wanted to be Norwegian and accepted a deal that allowed political autonomy but close economic ties. Of course, close economic ties have a price. Membership of the single market requires freedom of movement. The question the UK should ask the EU is what is the closest economic relationship we can have without conceding freedom of the movement? This is the best deal we can hope for. The alternative is hard Brexit (no relationship on exit) or staying in and becoming Europeans.

There are thus two questions that a referendum needs to answer. Do we wish to be British or European? If it is put this starkly I suspect ‘British’ will win. This leads to the second question; do we prefer the best deal available without freedom of movement or hard Brexit? In this case I suspect we will choose the best deal. I am assuming no compromise on freedom of movement. If compromise is possible then it is simply the Norwegian arrangement.

Farage may have worked this out and realised that his own abuse of the immigration issue has confused the situation and that this might backfire. If he can restate the choices in the above form he may get a stronger backing and a less disunited UK. If he can facilitate this process it might not do him any harm personally. After all, his conversion does coincide with his not getting a Knighthood and being visibly peeved by this.

The Currency Overlay

If you look at 12 month equity index changes you will notice wide disparities. The S&P 500 increased by 18.87%. Add the dividends and your return, in USD, is just over 20%. Nice. The FTSE 100 increased by 7.97%. Add dividends are you returned just over 10%. Not bad but half that of the US index return. Or is it? It rather depends upon your base currency. Sterling appreciated by 9.34% against the USD over the same period. This means that the USD return on FTSE 100 was about 20%, much the same as the USD return on the S&P 500. Put differently, in sterling terms, the return on the S&P 500 was about 10%. International investing is as much about currency as it is equity performance.

The returns do not always equalize of course. The Nikkei increased by 19.1% over the last year which we can also round to 20% or so with dividends. Sterling appreciated by only 5.39% against the Yen. The sterling return from investing in the Nikkei would have been around 5% better than the FTSE 100. Sterling depreciated against the euro and this would have enhanced any returns arising from European equity investment. This is not a new phenomenon. My career has centered this currency overlay issue. It is however far more complex than one might imagine and I suspect that the average punter has little idea how currency effects returns.

If you are invested in a managed fund then you may have to search quite extensively to find information on currency overlay. The manager may have a great reputation as a stock picker but who is managing the currency risk? More important how is it being managed?  It is just as important as choice of market and stocks yet rarely informed or discussed.

There are two types of risk. Translation risk is the most obvious and refers to the impact of currency changes when you come to value your foreign currency asset and dividend in your home currency. Economic risk refers to the impact of currency on relative economic performance which feeds directly into the value of the asset in the currencies of operation. Global corporations may have multiple currencies of operation. When you invest in a global corporation you are investing in multiple economies influenced by many currencies.

The FTSE 100 is an interesting index in this respect. Around 58% by value of this index is accounted for by 16 companies all of which are global in their operations. The total global influence is clearly much higher. This means that the performance of this index is dominated by the world economy and not simply the UK economy. It is not a bad vehicle for gaining exposure to global economic activity except in one respect; it contains little exposure to the high technology world of Apple, Amazon, and Facebook. Nevertheless it is not a bad place to start.

The FTSE 100 involves no direct translation risk (all companies are listed on the LSE and quoted in sterling) but there is indirect translation risk. Earnings of many corporations are in foreign currency so corporate earnings translation will be affected by currency. This may partly explain the relatively poor index performance as earnings may have been depressed by sterling strength vis-a-vis the USD. It is hard to deconstruct because each corporation has its own currency overlay strategy as well as different distributions of operations over the world. The point is even the FTSE 100, a UK index, involves currency risk for the sterling based investor. It is hard to avoid.

So what is the best way to proceed in this complex situation? The answer, as always, is keep it simple and minimize costs. If you want a global equity portfolio that includes exposure to the Facebook’s of the world then a low-cost fund that tracks the MSCI global should do the trick. This will however leave you directly exposed to sterling moves. Alternatively you could include the FTSE 100. There is no direct sterling exposure but as we have seen there is indirect translation and economic exposure. More important, FTSE 100 does not offer exposure to exciting technology stocks. Maybe some combination of the two would work.

One of the reasons I was motivated to write this blog was that when I looked at two funds in which I invest, neither of which hedges risk, I noticed that my 12 month return on the UK fund is 11.42% and my return on the global fund is 11.35%. Moreover, when I check the FTSE 100 chart I like what I see even though I find it hard to explain in terms of the component stocks. The FTSE 100 is making new highs. Despite the unexciting component structure it may offer a solid, low-cost, investment that is not bounced about by the vagaries of sterling in quite the dramatic manner of other investments. It may also be telling us something about the global economy. Steady positive global growth is on the cards favouring global banks, mining stocks, oil stocks, alcohol stocks, tobacco stocks, consumer staples, mobile phone companies, insurance, and big pharmaceuticals. Not the most ethical group of stocks mind you…

FTSE 100_20180101_09.50


The Transgender Debate

The transgender debate is one of the most interesting and potentially productive debates. Transgender arises when an individual identifies with a gender other than the one normally associated with the biological form. The two standard or normal forms are male and female. A transgender woman is someone with a male form that identifies as a woman. A transgender man is someone with a female form that identifies as a man. The two standard forms are not the only possibilities. Moreover, the identification says nothing about sexual orientation. A trans man or woman need not be heterosexual or indeed have any recognisable sexuality. It can become complicated so the focus here is on standard physical forms and the gender identities, ‘man’ and ‘woman’. Sexuality is not of interest.

Transgender is not a new phenomenon but recognition is recent. The issue is controversial but the premise of this blog is that it is quite possible for someone to feel like a man trapped in a woman’s body and vice versa. This is presumably a special case of an out-of-body experience to which so many aesthetics aspire. Their idea is that by deprivation and meditation one can achieve a plane of existence outside of the body. It would seem transgender people are born with this (involuntary) capacity. They experience existence as woman (man) inhabiting a man’s (woman’s) body.

The notion that we can experience a consciousness outside of our physical form is rather exciting. Neurobiology is busy explaining consciousness as electrical impulses and chemical flows in the physical brain. They can map brain activity, and can influence our state of consciousness by altering the chemical flow across synapses. The thrust of neurobiology is to root us ever close to our physical existence. The idea of a conscious experience that transcends our physical existence is thus rather interesting.

Neurobiology may eventually be able to explain transgender experience in terms of electrical impulses and chemical flows. It must however also explain why these configurations arise in a specific individual and not another individual. Is consciousness generated by electrical impulses and chemical flows or does it generate them in order to guide the body? Perhaps it is an interactive process. Deprivation and meditation may create physical conditions in the brain that generate the out-of-body experience much like fasting and prayer may generate spiritual experience, another form of out-of-body sensation. Neurobiology has yet to explain, however, why individuals seek these out-of-body experiences. What motivates the aesthetic or pious believer? Nothing it seems motivates the transgender person. It is just the way they experience life.

Transgender people offer us insights that people have always sought through discipline, deprivation, and meditation; an opportunity to understand the relation between our conscious experience and our physical existence. If society can embrace the concept of transgender then it has embraced the separation of body and consciousness. The two must be connected but understanding in what way may well enhance our experience of living. Transgender people are born with a form of (involuntary) separation and alienation. Normalization is not only important to those that are born this way. It may  also contain the clue as to who and what we all are.



Freedom of Expression

There is a popular myth that Freedom of Expression is an unrestricted human right enshrined in a convention on Human Rights, the constitution etc. It is not. The myth arises because there is a tendency to focus on the first paragraph of, say, the European Convention on Human Rights (which has nothing to do with the EU). Article 10 of the ECHR states:

1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This Article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises.

There is of course a second paragraph.

2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.

The right to Freedom of Expression carries with it responsibilities. Moreover, the Convention recognises the right of the state to exercise such responsibilities on our behalf by defining the limits of FoE. The extent of the right to FoE clearly will vary from society to society and this is entirely consistent with Article 10. So at best we have a restricted right to FoE. After completing a course on this subject I came away with the conclusion that FoE is only unrestricted in so far as it gives offence. You have the right to say things that others find offensive. Not quite what most people understand.

So philosophically, to how much freedom of expression should we aspire? The first thing to note is that paragraph 2. implicitly requires the protection of a democratic society. So if someone wishes to speak of removing democracy (and presumably removing the right to freedom of speech) the democracy is entitled to deny this person the right to express the view. There is a problem with this. Not all democracies are the same. Someone may wish to restrict some democratic freedoms without removing democracy in its entirety. The essence of democracy is that the citizens of the state have some peaceful mechanism whereby they can change the governing order. How easy it is to do so can vary widely without removing the possibility.

The second thing to note is that expression is a source of power. This was mentioned in my previous blog on defining norms. Narratives are the mechanism whereby norms are removed and replaced. Narratives are not simply about law, facts, and logical reasoning. They appeal to and stir emotions. It is through their grip on emotions that they can exercise the most power and reform what people internalize as norms.

Finally, an idea, once expressed, is validated. This may sound odd but it is the real problem with freedom of expression. It does not matter how outlandish, horrific, or offensive an idea might be, once expressed, it is legitimized in the sense that it has to be debated and refuted. If you agree to debate an idea then you validate it. You recognize it as within the set of ideas that people can hold and that it is amenable to logic and facts. You give it oxygen to thrive and flare and stir emotions.

This is one of the main weaknesses of social media. I regularly receive retweets of objectionable ideas. They are retweeted by those that disagree and believe they are refuting these ideas and ridiculing them. In practice they are feeding oxygen to these ideas and extending them to a wider audience. They are validating the ideas by acknowledging them and attempting to refute them. These people are part of the problem but see themselves as part of the solution.

My response has been to block tweets from those that express toxic ideas ( e.g. Farage and Trump) in order that their toxic ideas do not appear on my feed, retweeted by the well-intentioned but misguided people who I follow. I do not listen when toxic people speak and do not repeat their ideas. Imagine a world in which Trump, Farage, and others of their ilk are denied oxygen for their ideas not by banning but simply by a refusal to repeat, retweet, or debate. The existing approach, repeat, refute, and ridicule, is clearly not working. Might be worth a try.


Defining the Norm

Studying psychology or psychiatry one will come across the Diagnostic and Statistical Manual of Mental Disorders ( I believe we are incarnation 5) and/or the ICD-10 Classification of Mental and Behavioural Disorders. The difference is that the former is US derived and the latter from the WHO. The fact that there can be two implies some differences, which is in itself interesting. Mental health disorders are always, too some extent, nothing more than deviations from the current acceptable norm of social behaviour. This is not say they are not real or distressing and cause for concern. It is merely an observation that without a norm, you cannot define a deviation from the norm.

Sexuality is an interesting example of how norms and definitions change. Homosexuality was once considered a mental health disorder and a suitable case for treatment. In some countries it is apparently still so viewed. In the west it has been elevated to a norm. Transgender people were also once considered mentally ill but are now almost recognised as a norm (this debate is ongoing). It has always puzzled me how people who commune with God are deemed pious and worthy of special treatment in society but people that hear voices need treatment. The line between crazy and spiritual seems a little ill-defined.

Of course the mental health professions will be cross at what they see as my trivializing their work, which is not what this blog is about (nor does it believe the work is trivial). People that may harm others or self harm and people who find it hard to cope with the norms of society may well need help. If you cannot attend work on a consistent basis it is a problem, but only because attending work consistently is expected. Somewhere embedded in our view of mental health there is a, often unstated and unchallenged, norm. In Japan’s Samurai society suicide was a requirement under certain circumstances. In Spartan society infanticide was a requirement under specified circumstances. In my youth what today is deemed to be sexual harassment was often understood as flirting (by men at least). Things change.

Sexual harassment is not of course a mental health issue though I have noticed some alleged male accused are using it as a sort of defence. Those that predate on children are deemed to have a mental health issue though the definition of a ‘child’ seems to vary across societies and across genders in some cases. Sexual harassment is simply a crime. It is a form of bullying and coercion. It is commonly thought to be committed by men on women but it is also a crime of men on men, women on women, and in some cases women on men. In order to eliminate it we must establish new norms of behaviour especially with respect to flirting and foreplay. Once new norms are fully established and understood then residual serial offenders will no doubt be classified as having a mental disorder leading to criminal behaviour. Many if not most would argue (and I am inclined to agree) that these new norms are already fully established, but then this implies the defence of mental illness may be valid already. We are just waiting for DSM and ICD to catch up.

Of course there is another way of looking at all of this (there always is on Gestaltz). Norms are essentially arbitrary so mental health definitions based on norms are also too some extent arbitrary. The role of norms in society has to do with power. Power sits with those that can set the norms and is exercised through such norms. This idea is at the heart of the work of modern french philosophers such as Michel Foucault. Narratives play an important role in getting control of norms. Those that set the norms hold and exercise power. For many centuries it has been held by middle-aged men. One norm that was commonly used to control women was the pregnancy out-of-wedlock. It could lead to incarceration in some form of mental health facility.

Society it seems needs some form of order, and power operates to ensure an order. Power is not exercised by individuals but rather it operates through individuals. The individual that is king is less important than that there is a king. The king is dead, long live the king. If one understands that norms are instruments of power, then one’s view of the world becomes clearer but somewhat unanchored. More or less anything is possible in human social organization provided enough people can be persuaded it is acceptable, necessary, or even desirable. In Spartan society what today would be deemed child abuse (severe) was the norm, yet Spartan society is regarded by scholars as ‘heroic’ in many ways. Things change.

The last 50 years has witnessed a rapid and dramatic attempt to change the social norms in western society. It can be viewed as an attempt to wrest power from middle-aged men. The pace and intensity of the effort is revolutionary and with all revolutions there is a reaction. The Brexit vote and election of Trump, the rise of the right in europe, are all symptoms of this power struggle. Whatever form of order and set of norms you think should apply ask yourself why you think this. Is it your choice or something someone has persuaded you is appropriate. The issue is comparable to fashion. Did you choose that blouse or shirt or did someone make you think you selected it? After all, you chose from what was presented and not from all possible presentations.

It would be nice to sit here and attempt to define some utopian society to which we might all aspire. In reality it is very hard to unambiguously define let alone achieve. So what do we do? Rationally we aspire to norms that suit us now and in the foreseeable future. I have often pondered how difficult life would be walking around if everything was geared to everyone sitting in a wheelchair. It is an interesting exercise. Ceilings could be so much lower.

Saving the Planet

The Planet is not of course under any threat. It is organic life on earth that is under threat. The climate is changing and the evidence points to a significant contribution by man. The problem is that human activity is generating more CO2 than the Planet can process. The CO2 is causing the Planet to heat up with various potentially catastrophic consequences for organic life on earth. This much is pretty well understood by everyone though there are still those that deny this consensus view. Given the potentially catastrophic consequences it is probably best to proceed on the assumption that the consensus is correct whatever your actual view.

So to save the Planet ( shorthand for saving organic life) we need to drastically reduce CO2 emissions. This makes sense. Trees and other foliage (and some bacteria) remove Carbon from the atmosphere through the process of photosynthesis. This chemical process converts water and CO2 into glucose and Oxygen. Glucose is made up of Carbon, Hydrogen, and Oxygen. The Carbon atoms form the body of the plant. A tree is a kind of Carbon storage facility. In the past many trees and other organic matter were converted to what we now call fossil fuels. By burning these fuels we have released millions of years of stored Carbon back into the atmosphere in a couple of hundred years. Not difficult to see what has gone wrong really.

The first need is to stop burning fossil fuels. This cannot happen overnight because we need energy and must generate alternative sources with comparable capacity, or so the story goes. We certainly need alternative sources but why do we need comparable capacity? The purpose of this blog is to explore the unquestioned ‘comparable capacity’ assumption. Can we not perhaps reduce our energy consumption until non-CO2 releasing forms of energy can take over? The question is interesting because it highlights the problem with economics and human social practices that might also usefully be addressed.

Economics is obsessed with growth and maximizing things. Unemployment and excess capacity are sins and we must grow as fast as we can and always have available resources fully utilized. It is wasteful not to do so. This is because the CO2 effect is not built into the maths. Let us assume scientists can tell us how much CO2 we can risk releasing into the atmosphere in the next x years. Given existing energy technology we can calculate how much global growth is consistent with this CO2 constraint. If we could police this constraint, then growth would become a function of the introduction of new CO2-absent technologies. But of course we cannot police this constraint. The reason is parochialism.

How does one divide the CO2 constraint among the many nation states? And if we can answer this question, how does one enforce this division? You see the problem. Human society is not optimally organized to resolve the CO2 problem. The matter becomes even more problematic within nation states. If a country’s growth is capped it has implications for living standards, employment, military strength etc. The political problems are too huge for our present generation of politicians. The temptation to ignore the constraint is overwhelming. So what do we do?

We could cross our fingers and hope that the introduction of new energy technologies accelerates. The problem is that whilst CO2 is the pressing issue of the day, economic growth creates other ecological problems as well. Some problems may not even be apparent yet. Underlying the CO2 problem may be a more fundamental concern; our obsession with material consumption and growth of material consumption. It is certainly true that our obsession has driven the material advances that we have achieved and many technological innovations. But perhaps it is time to introduce another variable into the economic equation; quality.

The quality of existence is not always enhanced by material growth. I worked in an industry in which people kept ‘score’ by annual pay. These people worked incredibly long ours, took enormous risks, and sacrificed family life, in order to exceed the previous years bonus. This process continued long after they had achieved what any sane person would have considered ‘enough’. Some become obscenely wealthy as a result. Lesser mortals like myself could never get into the habit of keeping score by annual pay. I always had a concept of ‘enough’ and so long as it was met I was happy. For some like me work and pay was a means to an end and not an end in itself. Capitalism thrives on wealth being an emd in itself. Only then is the drive to accumulate always at full throttle. Herein lies a problem; the Capitalist imperative is quantitative growth not quality.

Ironically, the socialist imperative is also growth, at least in all incarnations of socialism that I have encountered, including Marxism. The essential difference between Socialism and Capitalism is in the distribution of growth (of wealth). There may be some loss of growth through enforced redistribution, but this is a side effect not an objective. Moreover, it is not proven that enforced redistribution lowers the long run growth path. It may simply smooth the process as Socialism is less prone to recession. The point is growth is important to both mainstream political ideologies. Arguing that growth is a ‘bad’ is limited to cranks and tree-huggers, or so it is claimed. The CO2 problem suggests otherwise.

The most effective way to slow our CO2 emissions until new technologies provide a sustained alternative to fossil fuels is to slow our growth of consumption. Everybody can do their bit. Do you really need that long-haul holiday, another pair of shoes, to drive to school, etc? Even christmas cards need to go. You have the option of Facebook, Instagram, text, Whatsapp, Facetime, Skype etc, so why send a card? Just because it is traditional? Traditional Chinese medicines are wiping out African wildlife so screw tradition. Let us live in the present and deal with pressing current issues rather than hiding ourselves in nostalgic, anachronistic, practices.

Of course, an anti-growth approach will, in the short-term, have implications for jobs. This is a non-trivial problem. Work is how humans gain the means of existence and for many it adds the only meaning to their lives. The resource savings should be used to cushion the blow for the structurally unemployed. The bigger problem may be in substituting new forms of meaning to lives. Perhaps this is long overdue and needs to be done for those still employed as well. A job need not define who you are. The question is which political party would be willing to offer an anti-growth, pro-quality, agenda?

The only grouping that consistently speaks to this type of agenda is the Green movement. This group seems to combine a socialist economic agenda with an ant-growth bias. It is not yet very popular, though it has grown. One of the potential risks in this movement is the organization around national boundaries despite its, in principle, global perspective. The organization of essentially socialist economic programmes, whether pro or anti-growth, on national grounds gives rise to nationalist socialism. The socialist economic agenda aims to look after all citizens and draws democratic political strength from this.  However, inevitably it must then define who the citizens are, who they can be, and who can produce more of them. We know where this has led in the past and need to be ever vigilant on what we allow to happen while solving other pressing problems. In the last analysis, the human problem may be simply nationalism.

Digital Cash

The Cryptocurrency revolution may be getting conflated with the need for digital cash. The important feature of cash transactions is that they are person-to-person. Holding large amounts of cash in order to make P2P payments has storage and security implications. Similarly receiving cash in payment has storage and security implications. Holding wealth in cash is not normally advisable owing to inflation but in recent years the advent of negative interest rates has meant even holding wealth in cash form has made sense. The real problem is cash is not useful in a digital age. Enter the need for digital cash.

What if the Bank of England made digital cash holding possible? You could buy a card from a newsagent for cash, produced by the BoE. It would have up to date security features and cost whatever it cost to produce. Recall you used to buy Oyster cards for £3 (perhaps you still can?). You need not identify yourself and can then deposit cash on to this card. The deposit can be made at the newsagent, or a bank, or via an online bank transfer. The card would have a unique identifying reference code (hard but probably never quite impossible to forge) and this could be used by banks to identify the transfer online. The Bank of England would need to add software to enable these cards to be so connected but this is a simple exercise.

You now have a cash card. This card can be used to make online payments. It can be used to make cash payments just like a debit card (assuming supporting software operated by the BoE). It can also be given an app (again provided by the BoE) which sits on your smart phone. You can make P2P payments using this app by entering the recipient’s unique reference. There is some software and maintenance development required by the BoE but this can be recouped via ‘in app charges’ or card purchases. The system is as secure and possibly more secure than using cash but allows large amounts to be accumulated in these essentially numbered accounts. It does not require blockchain technology to operate. The key is it allows P2P transactions using fiat money. Moreover, the fiat money is the currency of the jurisdiction. There is no exchange rate risk (though there is an inflation risk).

Why might the BoE consider such an enterprise? It might simply recognise that in a digital age, with so much quite legitimate commerce going on via the web, that a digital cash is required. Of course this can be carried out quite easily via an online bank account so why not settle for this? Banks are commercial enterprises and need not make facilities available to anyone they choose not to, so there are those that do not have a bank account or find it difficult to get one. However this is not a large proportion of the population so not compelling. The only compelling argument is that if we have cash, then why not digital cash?

One side effect is that during times of bank instability it may be easier to get out of dangerous bank deposits and into BoE cash via an online transfer. It has been argued that this will make bank runs more likely. I would argue the opposite. Most bank deposits are within the insured amount (85K) and one can hold deposits with as many independently licensed deposit takers as one wishes. Moreover one can hold up to £2m in national savings (which now offer competitive interest rates). So bank runs are not more likely. Indeed by making transactions possible during unstable financial times it may diminish the economic impact of such instability (during the Cyprus banking crisis the inability to transact had an enormous short-term economic impact). This may be a good reason for the BoE to consider digital cash.

A more serious drawback is that it enables the black economy. At the moment the black economy is limited by the storage and security problem of cash. Digitally there are no storage issues though security is debatable. Providing money launderers with anonymous places to keep large amounts of cash is not likely to be politically acceptable any more than making large denomination notes available. If the card and app holders can be identified then it is not digital cash but a transaction account with the BoE. This is most likely the reason that CBs have not gone this route and the impetus for Cryptocurrencies.

This does not mean that all Cryptocurrency transactions are black economy (aka dark web) transactions. It does however mean that such black economy transactions are facilitated by Cryptocurrencies. The functional characteristic is that they are P2P and linked to a numbered account (or folder). In my previous blog I highlighted how such functionality might also serve the grey web. This I defined as locally legal or legitimate transactions that are difficult to put through the conventional banking system. The two examples that are most obvious are Cannabis transactions where Cannabis use is locally legal (e.g. Uruguay) and politically motivated sanctions. Both essentially arise out of the global reach of US federal law via the financial system.

Although the back economy issue might deter the BoE from introducing digital cash the balance of needs may see it introduced in other jurisdictions. This might arise because of the disruptive effects of Cryptocurrencies or because local needs become pressing. For example, the Uruguayan central bank could introduce digital cash to support the government’s decision to allow Cannabis use by locals (not tourists, so don’t all rush). Countries that do not agree with politically motivated sanctions might see an advantage to introducing digital cash facilities to enable their citizens to carry on trade with sanctioned countries, P2P as it were. Offshore centers might see an opportunity here as well.

The only time I have used cash in the last few weeks is to buy donuts at Wembley. It was the only outlet not accepting cards. Otherwise carrying a card means I have essentially got £30 on me all the time (and obviously much more if I use a pin). Very soon I will be able to buy and transact in Bitcoin on a card (Revolut) though I have no idea why I would need to do so. US hegemony, the advent of Cryptocurrencies, changing social attitudes, and the growth of digital trade and transactions, are all combining to move us towards the introduction of digital cash which will in itself have far-reaching and many as yet unseen consequences. The financial system is being reinvented.

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