Some Free Economic Advice

I read an interesting thing about Cyprus on ZeroHedge today.

Following the improvised and very confused bail-in of the Cypriot banking system in mid/late March, one of the key requirements was to contain the liquidity within territorial Cyprus, and prevent the outflows of critical bank funding liabilities – i.e., deposits – abroad thus causing a waterfall cascade of ever increasing capital needs and bigger and better bailouts. Thus capital controls, which two months after the bailout, are still in place. Judging by just released Cyprus Central Bank data they failed. Because even though the deposit outflow in March, when the fiasco happened, was a moderate €3.8 billion, which the European politicians promptly pointed to as confirmation of a job well done, it was the April outflow that was the jawdropping number.

In a month in which deposit flight should have been largely contained, Cyprus banks saw a record outflow of 6.4 billion, or 10% of its entire deposit base, in one month!

So, despite having capital controls in place, what money people still have in Cypriot banks is pouring out of them even faster than it was when this particular crisis started. Which will mean, I guess, that Cyprus will need another bail-in/out in a year. And next time they won’t be able to rob the banks depositors like they did last time, because there’ll be nothing in them at all.

In the Telegraph, Ambrose Evans-Pritchard reports that HSBC sees another downturn beginning.

“We see building evidence of a cyclical downturn,” said Fredrik Nerbrand, HSBC’s global asset guru. “We find it highly troubling that the eurozone is still marred in a recession at the same time as our cyclical indicators appear to have peaked.”

The bank said there is a market “disconnect” between the world’s gloomy outlook and talk of tapering by the US Federal Reserve, the supposed moment when it starts to wind down its $85bn of monthly bond purchases.

AEP thinks that the QE money is ending up in the wrong pockets.

Should there be another round of QE/helicopters, we must surely find a better way to inject the money. Today’s method is enriching the uber-elites, with a painfully slow trickledown. The Gini co-efficient of wealth inequality is soaring. The better alternative is to stick the needle straight into the veins of the economy – building roads, railways or nuclear power stations; but that is a subject for another column.

Meanwhile,

After almost five years we are still in a contained global depression, struggling with a world record saving rate of 25pc, and a chronic shortage of demand.

So people are saving and not spending. I wonder why that might be?

One simple explanation is that, everywhere in the world where smoking bans are introduced (which actually happens to be almost everywhere in the world), smokers respond by staying home and stopping spending. And I estimate that in the UK, this has reduced demand across the entire economy by something approaching 10%. That’s what happens when you exile a quarter of the population (or more) to the outdoors, and tell them they’re no longer welcome anywhere.

It’s just as if the engine of the economy is firing on three cyclinders instead of four. No wonder it’s got so little traction.

My advice: repeal all smoking bans immediately. You’ll soon pull in the smokers again. It’ll be like sticking a needle straight into the veins of the economy. Not roads, railways, and power stations. But pubs, cafes, and restaurants. And close down Tobacco Control. And clear-cut all the Health and Safety rules and regulations.

Because if you don’t, the global economy will just keep on tanking, regardless of how low interest rates are slashed.

But, of course, they won’t take my advice, will they? They never do.

About Frank Davis

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9 Responses to Some Free Economic Advice

  1. cherie79 says:

    I wrote a few weeks ago about my friend whose money was trapped between the sale of his house and the financial crisis in Cyprus. He still hasn’t got his money yet! and no one seems to know what is happening.

  2. Junican says:

    I feel that the Government of Cyprus was conned into believing that the EU was trustworthy. It seems to have turned out that the EU is an empty vessel, which makes a noise when flicked with the finger. Cyprus should have grasped the nettle and bailed out. It would have come to no harm.

  3. Sheila says:

    What a coincidence Frank,
    You might be interested in this article today on John Redwood,s blog
    http://johnredwoodsdiary.com/
    A nation of shopkeepers does less shopping

    • Frank Davis says:

      He wrote:

      We also now as a nation buy more on the web and less in the stores. Love of hi tec gadgets on broadband and a love of holidays takes money away from High Street clothes shops and from homewares and other domestic goods. We are changing our spending priorities in ways which hit traditional shops, and changing the way we buy which diverts from the High Street.

      Well, I certainly buy stuff online. But it’s mostly computer stuff, and books. I’d say that 90% of my shopping is done the way I always did it, on foot. All my food buying involves walking around supermarkets or the high street of my local small town, where we have butchers, bakers, greengrocers, and so on.

      But these days, since the smoking ban, I tend to shop and go straight home, because I’m no longer welcome anywhere anymore. And the ISIS study (see right margin) suggests that a lot of smokers are doing much the same.

      And furthermore, if I was going to places like Spain until recently, it was increasingly because I could enjoy the simple pleasure of sitting in a bar drinking a beer and smoking a cigarette. i.e. getting away from this goddamn country.

      But John Redwood is no doubt completely unaware of this. He probably also thinks that pubs have been closing because of cheap supermarket booze. He inhabits, like most of the political class, an imaginary world.

  4. harleyrider1978 says:

    Oh too funny (in a good way). This will ruffle the antis’ feathers:

    http://blog.sfgate.com/science/2013/05/29/cigarette-butts-may-be-healthy-for-birds-study-says/

  5. cherie79 says:

    Slight update on the Cyprus house situation. My friend has now been told that his, and other cases of money held in the solicitors client account, The solicitors will have to show sometime in June that the money in their accounts is nor theirs so that it can be released, he lives in hope!

  6. smokingscot says:

    You venture 10%. That’s discretionary spend and the exact figure isn’t important.

    But you haven’t emphasized that it’s cumulative. That’s because it takes time to filter from the first closures all the way to the lawyers, accountants, estate agents and so on.

    The way it worked in Scotland was the low end places and bingo halls were the first to go. That killed off numerous part time jobs and that in turn lead to closures further up the chain.

    It’s a lengthy process and it’s been exacerbated by external events.

    You mention in the comments that people are moving to the internet for retail purchases. But that’s just one aspect of the web; people are using it for bingo as well as betting.

    Problem with these are they can be located anywhere. They keep their tax bill to a minimum and they certainly don’t need to employ people to cover for weekends or holidays. So less tax for them.

    And the external events has seen deposit interest rates plummet. What we don’t get they can’t tax.

    They are going through the motions of trying to shame the main beneficiaries (Amazon & Google) into paying more tax…. voluntarily! Yeh sure!

    Re bank depositors. If you absolutely have to keep your money within the EU, then best make sure you keep less than Euro 99,999 or the GBP equivalent.

    But if you have pots of cash, then it’s better to keep that in Singapore or Hong Kong or Dubai. No chance of ever having a bail-in with any of these centers, irrespective of your currency choice. Switzerland is still viable but you need to be in the top 0.5% to even get through the door of most of their banks.

    And brokerages are on line as well – and they too can be located wherever they wish. The choice of which to use is left to you.

    Point is every single little one means the same thing. Fewer employees and less tax for them.

    And there’s a learning curve here. What’s available, what’s reliable and how to “minimize” tax. Master that and you’ll start to look at other ways to “minimize” tax.

    Another tiny insignificant little point. Deposit interest rates should be inflation plus 1.5% (so about 5%). Despite that they cannot claim any growth at all. The simple truth is the real economy has been in free fall since 2007. The only reason it doesn’t seem to be because they’re printing money as fast as the presses can manage. It’s being paid for by robbing depositors and leaving a debt legacy that’ll be with us for generations.

    One point I’d take issue with is that we’ll flock back if the ban’s lifted. I doubt it Frank; those who have alternatives like smokies are very unlikely to want to quit. Why go back to paying full retail and missing out on real mates? And anything that happens will be miserable and grudging and is very unlikely to appeal to real ladies who’d never enter a pub in a month of Sundays. All they want is to be able to park themselves for a cuppa, a smoke, a bleather and perhaps a wee slaster (sticky biscuity thing).

    Just as well they never read your blog Squire. Do not f… with the free market!

  7. harleyrider1978 says:

    But of course Penn wouldnt ever have an honest open debate about the JUNK SCIENCE behind this Campus wide ban,for that matter neither would the state legislature for fear theyd all look like JUDGES AT THE SALEM WITCH TRIALS listening to a bunch of crazed young girls as professional anti-smoking/anti-witch EXPERTS! That my friends is what it tuly breaksdown to!

    A WITCH HUNT AGAINST SMOKERS!
    Matt Mantica | Don’t be a butt
    Inflam-Matt-ory | It is time to ignite a debate about implementing a smoking ban on Penn’s campus
    http://www.thedp.com/article/2013/05/matt-mantica-dont-be-a-butt

  8. jaxthefirst says:

    Not so very long ago I was listening to one of those radio phone-in programmes late at night in the light of one of the latest news stories about how the economy wasn’t growing fast enough, how the High Street was dying, how people weren’t spending money any more – yada, yada, yada … Needless to say, the suspicious timing of the smoking ban coinciding with the downturn was simply never mentioned (natch). However, one caller that I remember well was at pains to point out that in any economic recovery/growth situation it was the profitability/viability of small businesses which made the difference and that a growth in the market for large businesses rarely brought about much by way of change. This was because a growth of, say, 5% in sales for a large business – already being as they are chock-full of staff and resources – would very likely be absorbed by existing personnel and facilities. For most large businesses all this would mean would be slightly larger profits (most of which, as we know, would then be quietly secreted away abroad, thus avoiding excessive taxation) and slightly busier staff. Few of those staff would get a rise for their extra effort/hours (thus no increased spending power), little in terms of upgrading of machinery/technology would be necessary (thus no ripple-effect on supplier services) and thus few would need to move to bigger or better premises (thus no benefit to the business-property market, either). He estimated that most large-scale businesses would need an increase of something in the region of 20% before they would have to consider any change which might benefit the overall economy. A growth of 5% in a small businesses, however, employing only a small number of people and with possibly older technology/resources would inevitably necessitate an increase in staff and possibly an increase in machinery, premises, technology etc – all of which would be good for the economy.

    Presumably, therefore, the same works in reverse – adopt a policy which severely impacts small businesses and you damage the economy, possibly irreparably. Adopt policies which only dent the profit margins of big companies and the economy will probably remain buoyant. And what are little local, independent pubs, if not the epitome of small British businesses?

    One point I’d take issue with is that we’ll flock back if the ban’s lifted

    I have to agree with that one, though. Oh, for sure, some of the “guilty, swallowed-all-the-rhetoric drone-smokers” might start going down the pub again, but not me. And nor would I eagerly start doing all the other things that I used to do before the ban but no longer do. Why not? Because I’m angry with these people, that’s why! And, having discovered that it’s perfectly possible to live a perfectly enjoyable life without pubs, clubs, restaurants, theatres, cinemas, concerts, festivals, shopping sprees, weekends away, holidays, days out and parties (and discovered, to my delight, that living without them means a very, very healthy bank balance indeed), I’m not entirely sure that I now want to start giving all that money I’ve amassed to a bunch of “Yes sir, no sir, three-bags-full-sir” businesses who are only now allowing me to have a relaxing, enjoyable time (and paying them for allowing it!) because a bunch of bullies in Parliament have given them the green light to do so. I feel utterly betrayed by all fields of the hospitality/leisure industry and it’ll take a very, very long time (and a lot of concerted “smokers welcome” effort on their behalf) for me to trust them again.

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