Tag: Economics

The Magic Money Tree explained by @Worstall

All you wanted to know about QE, the circulation of money and why magic – at least as it relates to money trees – isn’t real, from Tim Worstall.

The magic money tree is permanent spending of the same invented money, it is not temporary – the effects are permanent – and it is not reversible without stinging tax rates. It is also known as the monetisation of fiscal policy, or the monetisation of spending. And it has everywhere and everywhen been a disaster from the point of view of subsequent inflation. Not inflation of a couple of percent here and there either, but of two and three digits a year sort of inflation.

There is also mention of the Hungarian pengő, which I understand to be a small and adorable penguin.

 

Photo by Adarsh Kummur on Unsplash

 

Lending and the gig economy

On EconomicVoice.com, the University of Edinburgh Business School’s Jonathan Crook highlights the risk to sovereign professionals caused by the misalignment between traditional lending and the gig economy.

As Crook observes:

while this in-the-moment working arrangement can be sustained in the short-term, only thinking about the now may lead to long-term financial issues.

because:

For years, traditional lending has focused on assessing stable consumer income to determine financial risk. Those with full time and stable jobs will fare better. But ‘gig economy’ workers clock up individual hours which – from a credit risk modelling perspective – may not be seen as joined up, consistent or predictable.

It’s an age-old problem. While the freelance / gig / sovereign professional economy has boomed in recent years, overly conservative bank, stuck to their risk-averse playbooks, have failed to move with the times.

Daniel Pink highlighted the problem in his book Free Agent Nation way back in 2001.

However, in many ways, the security of “”full time and stable jobs” is an illusion. An employee who loses their job has no network or process to fall back on. If a freelancer with a portfolio of clients loses a client, he or she has a basket of other clients to fall back on; the risk is spread. And, if the sovereign professional is an interim manager or “super-temp” they have an established network of agency relationships to help them towards the next project.

There is a clear market need for a solution. Crook suggests that:

it is possible some agile lenders will see this as an opportunity. Instead of examining the consistent hours an employee works, it’s not inconceivable to think they may begin tracking how many years someone has worked in this way and the overall hours they’ve been paid for.

Pink’s solution, at least at the higher earning / larger lending end of the scale was the issuing of shares or bonds, citing examples like Bowie Bonds and the fact that boxers (amongst other athletes) fund their own training by selling shares in “themselves”.

Whichever way it goes, the lending market needs to adapt and, in all likelihood, the solution won’t come from traditional banks at all. A player like PayPal – who have already disrupted small-business funding with their  PayPal Working Capital product – will take a sensible, reality-based view that recognises that a sovereign professional’s established free cash flows are at least as secure as the historic wages of an employee.

(Disclosure: PayPal is a client of my business, Burning Pine)

 

Photo by Tim Evans on Unsplash

Aging population and immigration curbs – Bloomberg @Business

Lessons we won’t learn?

A piece on Bloomberg about Singapore’s imminent labour crisis:

In Singapore, immigration restrictions can partly explain an expected drop in working age population growth from 2027, even as Kuijs [Louis Kuijs, Head of Asia Economics at Oxford Economics] credits foreign labor inflows for helping boost that pool over the last decade.

and…

The grim rule of thumb for the [Asia] region: A 1-percentage-point decline in labor supply growth in any of these areas would shave off a half-point to two-thirds of a percentage point in GDP growth.

Read the article, here.

 

Photo credit: Foter.com

Looking from left to right, and right to left

A couple of articles this week on perspective, and especially why those on the political left often state a marked distaste for those on the right.

The Adam Smith Institute’s President Madsen Pirie makes the case that the real difference between the two is not attitude but method:

The left typically favour the use of state power through high taxation, nationalization and the fixing of prices.  The centre-right typically favour relatively free markets, private enterprise, and prices that respond to changes in supply and demand.  Their case is that these usually achieve more sure and more rapid economic growth than can be attained by collectivist planning and state controls.  The left pursue greater equality, whereas the centre-right seek to promote greater opportunity.

In Wednesday’s Times, Daniel Finkelstein takes issue with the left’s disdain (“True socialism always ends with the Stasi”):

Hatred of Conservatives is common currency on social media, and at Labour conferences you can buy mugs with the words “Never kissed a Tory” on them.

… Not unreasonably, many Conservatives are quite hurt. It’s never nice to be thought evil by someone. And the misunderstanding, that Tories are like Mr Burns out of The Simpsons, is quite frustrating. There is also something quite amusing about people who check someone’s position on free schools before they kiss them.

Both worth a read.

 

 

Photo by Justin Luebke on Unsplash

Ronald Coase – hero of the Sovereign Professional

Eighty years ago, in The Nature of the Firm, Ronald Coase (1910 – 2013) explained why firms exist. His answer (transaction costs) both explains the recent rise in the number of sovereign professionals and highlights the challenge faced in building a high-value sovereign professional business.

Essentially, Coase argued that firms exist where the cost of contracting individual tasks becomes too burdensome. It is relatively cheap and easy to contract simple tasks in the open market, such as taking a taxi or paying a window cleaner. However, the myriad subtle responsibilities of, say, a personal admin assistant are more effectively met by hiring someone on a contract of employment.

The rise of technology, especially smartphones, the web and cloud computing, has dramatically reduced transaction costs on both sides. Size matters less and it is easy for an individual to market themselves, to be found, engaged and for all the requisite admin to take place. Those relatively concrete transaction costs are clearly lower as a result. One could imagine such relationships reaching a new equilibrium where it is now economical effective to contract out a larger set of “tasks” to sovereign professionals.

However, building on Coase’s work, Sanford Grossman and Oliver Hart described two types of rights over a firm’s assets: specific rights, which can be contracted out and residual rights which cannot. The more a sovereign professional works on a client’s strategic projects, the closer he or she comes to those residual rights. At that point, as The Economist describes in Coase’s Theory of the Firm “a merger would make more sense” – i.e., that work may be better done by an employee.

The challenge for the sovereign professional is to build the sort of “trusted adviser” relationship that gives access to strategically important (and therefore valuable) projects while maintaining independence.

Both papers are worth reading and digesting;

The Sanford and Hart paper, The Costs and Benefits of Ownership:
A Theory of Vertical and Lateral Integration, (which is on my “to read” pile) is here
.

 

Image: GNU

Atlas and Albion – @TheEconomist

The Bagehot column in this week’s Economist contemplates an Atlas Shrugged-like future for Britain.

The combined result of Brexit and Corbyn could be the dystopia that Rand warned about: a stagnant society driven by resentment of the successful. The flight of talent will not only have a knock-on effect on the wider economy, as high earners who would have spent money in London or Leeds start moving to Paris or Frankfurt. It will also reduce the state’s revenues, since the top 1% of earners pay almost 30% of income tax and the top 10% pay nearly 60%.

 

Image source: https://commons.wikimedia.org/wiki/File:King_Alfred_Statue,_Winchester.jpg

 

 

Taxes hurt people, not just “business” – @ASI

The Adam Smith Institute’s Eamonn Butler posts a useful reminder:

But taxes, tariffs, quotas, regulations, licences, trade restrictions and all the rest do not cost business. They cost people. People like you and me, even those of us with no business interests. And they cost us far more than the £x price-sticker suggests.

It’s too easy to assume that “business” or “the rich” or just simply “they” can afford it, or even deserve it, whatever the “it” of the moment happens to be.

As Butler says,

Most businesses are small businesses, as small as one person, and most of a country’s commerce goes through these small operations. Something that costs “business” in fact costs millions of these same people, from the local farmer to the budding software developer.

Read the full post, here.

 

Photo by rawpixel.com on Unsplash

Self-employed drive UK public finance surplus

The UK’s accounts had an unexpected monthly surplus in July – the first July surplus since 2002 – driven by unexpectedly large tax receipts from self-employed individuals (see The Telegraph, here).

Such news helps highlight the growing importance of self-employment and the Sovereign Professional.

Of course, because of the B2B nature of their work, many Sovereign Professionals will actually be employees of their own limited companies and related tax payments will not form part of these figures.

 

Photo by Lauren Mancke on Unsplash

Immigration, facts not fiction – Adam Smith Institute, @ASI

The Adam Smith Institute’s Executive Director, Sam Bowman, summarises the facts on UK immigration in this useful post.

It is a response to an article that misquotes the ASI’s position, but Bowman’s point-by-point tear down makes for a useful reference in its own right.

It troubles me that the UK is where it is because of misinformation, miss-selling and misunderstanding. Generations of politicians (on left and right) have failed to make the case for immigration, just as the right has failed to make the case for free markets.

This chart is particularly telling: the lower our net migration, the higher our national debt.

 

 

Photo by José Martín on Unsplash

Rebooting the Conservatives? – @RuthDavidsonMSP

There are some great points in this essay from Ruth Davidson, leader of the Scottish Conservatives.

I’m not sure if I agree with absolutely everything, but she is eloquent on the case for free-market,liberal democracy:

Extreme poverty is being routed. Infant mortality has halved. Literacy rates are climbing. After two centuries of increasing global inequality, developing world growth has reversed the trend. In short, the world is a richer, healthier, better educated and more equal place than at any time in my lifetime.

And, she makes a compelling plea for our government to get its act together and start leading:

It is not enough for government to facilitate a discussion about where next for Britain, it has to actually lead.

Definitely worth a read and a ponder.

Here’s Wikipedia’s article on Davidson.

Image: Getty