November 5, 2009
The predictions about the economic impact of swine flu are enough to make you sick. A group of consultants working with Ernst and Young estimated that if swine flu reached pandemic proportions – 50% infection rate in the UK – it could reduce economic growth by 3.0% of GDP. That’s A LOT. Given that they were already predicting a negative growth rate for this year of 4.5%, that means that the UK would finish the 12 month period 7.5% down.
If you are a loyal reader of this blog (and have put up with the fact that the frequency of my posting has recently hit an all time low – sorry), you might recall that I was quite sceptical about the depth and severity of the ongoing financial crisis. I’m also sceptical about the potential adverse economic impact of swine flu, in part because I think that pessimism in both cases are partially attributed to obsessive media reporting that influence people’s expectation of crisis. Let’s think through it for a second: what are the mechanisms through which swine flu could cause a downturn in economic growth?
The first, and most important, would be lost working hours due to people being sick, or having to take care of sick family members (especially children). It could also suppress demand for some types of products, like travel, or in general because people stay home instead of venturing out to Oxford Street to shop in fear of catching swine flu. Third could be the behavioural link I hinted at above: a swine flu pandemic on top of all the bad news about the economy convinces you that this is the end of the world as you know it, so you stop spending money, investing, etc. Fourth and finally, all of these things could have an impact on the government finances (thanks to this blog for the list of mechanisms).
I believe the first. But I don’t think that it would lead to a 3.0% decline in GDP. While lots of studies got these numbers by assuming swine flu would keep people out of work for two weeks, amongst the people I know that think they might have had it already (and how do you know if you have or are suffering from some other flu or cold?), they’ve missed a week or less of work. And of course infection rates are not as high as the doomsday scenarios in some studies’ model.
The second, in turn, one seems to me to have a critical flaw: the amazing capacity of capitalist economies to turn anything into a market for new products. The first and most obvious source of economic growth from swine flu is the market for H1N1 vaccines and drugs like Tamiflu -revenues for Roche, the maker of Tamiflu, were up almost 10% in the third quarter of this year. Pretty impressive given the overall economic conditions.
Additionally, I noticed today on my commute into work on the London Underground (a breeding ground for swine flu if ever there was one, I note between two sneezes), that there was, all of the sudden, a huge proliferation of advertisement for products claiming to “capture and kill 99.9%” of germs. Including those pesky swine flu ones. Kleenex has a tissue that kills germs. Liquid hand soap companies are claiming to kill germs. And there are some kind of wipes now that do the same.
That means that a) there are more companies seeking ad space than would otherwise be the case in a recession (especially because lots of ad space on the tube is being taken up by the above pictured series of government adverts showing you how germs spread), b) there are new “anti-flu” consumer goods out there (think increased R&D and marketing budgets) and c) that there may actually be some growth in all of these anti-germ products. To add anecdotal evidence to anecdotal evidence, I’ve now been given 2 bottles of anti-germ hand gel by the Department at LSE I work for. Someone paid for those bottles.
Perhaps, you might think, this potential marginal uptick in income is just putting lipstick on the pig of any otherwise gloomy economic picture. But as the third transmission mechanism above suggests, a dose of optimism (and Tamiflu) might be just the antidote to feverish predictions about declining GDP (I just can’t resist the plethora of easily available puns for this topic).
October 20, 2009
I’m collecting oddities and ironies from the financial crisis, and yesterday I came across another great one. Citibank is in trouble in Mexico. Not because Mexico has been taken down by the financial crisis – Citibank’s operations in Mexico are in fact generating 15% of the bank’s global profits – but because the Mexican Supreme Court is likely to rule that Citibank’s ownership of Banamex is illegal. Why, you might ask? Because Citibank is partially owned by the US government, and the Mexican constitution does not allow foreign governments to own Mexican banks.
The history of Mexican financial institutions in the 20th century swung back and forth between government and private ownership, landing firmly on the side of private ownership by the 1990s as Mexico prepared for further integration with the US and Canadian economies via NAFTA. Banamex, Mexico’s largest bank, has been at the centre of debates about money and politics in Mexico since the Revolution, when Pancho Villa took it over to prevent it acting as the Central Bank to dictator Porfirio Diaz. It was privatised, nationalised, privatised again and then recapitalised by the government in the wake of the 1995 Tequilla Crisis. In 2001, Citibank purchased it. Now, less than a decade later, Banamex has been renationalised by the back door by the big neighbours to the north. The same neighbours which advocated for privatisation so vociferously in the 1990s? The ones whose economic model the Mexicans were imitating when they re-established private financial companies? Yes, those same ones.
October 8, 2009
The casualties from the financial crisis keep rolling in, in the most unlikely of places. I’ve mentioned in previous posts that there are a number of unexpected losers from this financial crisis: the Venezuelan government, who given their anti-American rhetoric had a surprising amount of money invested in the failed investment bank Lehman brothers, and sovereign wealth funds in countries like Singapore, who were initially singled out as posing risks to the countries they were investing in.
Today, however, I read about the most unlikely candidate of all to be suffering big from the collapse of modern capitalism: the Church of England. It turns out that the Church of England’s investments have lost almost £1.5 billion of value since the onset of the financial crisis, mostly because they had their money invested in hedge funds. Seems that the CoE has moved beyond the typical investment portfolio of religious institutions (property, jewel-encrusted chalices and gold relics) to something much more modern.
As today’s FT reports (on the front page, no less, some editor must have found the news as amusingly ironic as I did) that the Church has submitted a letter to the UK Parliament advocating that new EU legislation regulating hedge funds take a light-touch approach. To quote Voltaire: when it’s a question of money, everybody is of the same religion.
July 26, 2009
It’s well known that the US / Western spending splurge that proceeded the current financial meltdown was largely financed by China, along with other Asian and developing economies. By investing in US debt, the Chinese financed a period of low interest rates and high credit, while at the same time plunking their massive trade surplus and foreign exchange reserves into what seemed to be a safe asset. Now the fragile edifice has collapsed, but the Chinese are still holding more than two trillion dollars of, well, dollars. Which means the US is indebted to China (for a humorous take on this, see this link which I discussed in my last post).
All of this spending and borrowing has generated the first signs that the future monetary order might be dominated by the Chinese instead of the Americans. Chinese officials have on several occasions (including at the recent G8 meeting in Italy) said that they are interested in a future monetary system where the dollar plays a less dominant role, and have agreed with Brazil to denominate trade between the two nations in their own respective national currencies. All of this has caused people that study the things that I study to wonder if the transition has already started towards a future in which China plays an equal, if not larger, role in the international political economy of money than they do now.
Given all of this context, and the fact that M. and I are actively looking to buy a house in London, this morning’s news that the Bank of China (the world’s third largest bank) is planning on offering mortgages to UK home buyers really caught my attention. Just think, I could be personally indebted to China, rather than just generically indebted to China through my government’s (and my adopted home government’s) borrowing habits!
In fact, the article mentioned that Bank of China mortgages would have two advantages vis-a-vis those offered by more traditional UK outfits: they would be more conservative, and therefore less risky (for the bank and for the borrower); and they would be cheaper. Sounds like a great combination.
I was so taken with the idea of personally contributing to the up and coming dominance of Chinese finance (being the Sinophile that I am), that I suggested to M. that we check it out. He agreed, and I’ve requested an appointment with our local Bank of China – located where else but in London’s Chinatown! – to discuss mortgages. If the Bank of China manages to woo us away from our current bank, HSBC – otherwise known as the Hong Kong Shanghai Banking Corporation, established by the British colonisers in the 19th century to finance Chinese / European trade – it will be a transition from one monetary hegemon to another in more ways than one. And whether banking with (and therefore on) the new hegemon is scary or reassuring, well… that sort of depends on your point of view.
May 21, 2009
In July 2006, I landed in Caracas, Venezuela around 10:00pm on a flight from Managua via Panama City. I was in Caracas to meet with some government officials, and the Ministry had arranged my hotel reservations and flights, and I had figured everything else would work itself out (my general travel philosophy). I didn’t have any bolivars, so I went to the ATM, and then remembered that I was going to be paying a high premium on the money I was taking out: the Venezuelan exchange rate had been fixed against the dollar for a number of years at the same rate, and overtime had become artificially high. As a result, there was the official exchange rate, and the unofficial one, which was of course much more favourable to holders of dollars. But as I had forgotten to look up the latest black market rate, I didn’t want to risk my luck with the informal money changers on the street.
Armed with my expensive cash, I hoped in a cab, and immediately struck up a conversation to ask what the going rate for dollars was. As anyone who’s been to a new city knows, a taxi driver is exactly the right person to ask this question, seeing as they always seem to be on top of all social, economic and political trends based on their unscientific sampling of the opinions that pass through their backseats. On the long trip into the centre of town, we talked about the state of the Venezuelan economy, Bush and Chavez. He had been an avid supporter, until a bridge connecting the city to the airport collapsed, increasing his journey time to and from by more than two hours, with no corresponding increase in fare. The conversation was the perfect brief introduction into the realities of Venezuelan life that I needed to keep a critical eye on what I was to hear and discuss with the government the next day.
I mentioned in my last post that I was shocked to find out on my recent trip to the US that a not insignificant percentage of Americans are so unhappy with Obama’s economic policies they would prefer to succede from the United States. Sadly, I didn’t get the chance to take the pulse of any cab drivers about this. Not because I didn’t take any cabs while in the US – I took a number of them while I was in New York for a long weekend – but because every cab I got into was driven by someone who talked throughout the entire trip on their mobile phone… or more precisely, into their mobile phone earpieces.
There’s no more taxi talk in New York City. I don’t know who all the cabbies are talking to (each other?), but the art of taxi banter is fading fast. Not only are the Big Apple’s cabbies on the phone, there are small television screens built into the panel of the seat in front of you, like on an airplane. The cabbie no longer wants to talk to the passenger, and the passenger is distracted by a replay of that morning’s “Regis and Kelly” (that is if they are not talking on their own phones). No informal political or economic banter is exchanged, and thus everyone’s a bit poorer.
I’m only slightly exageratting when I say that I think that this is the largest loss social science has ever suffered. If taxi talk vanished altogether in other cities across the globe, I’m pretty sure that political analysts would do less well in predicting electoral outcomes. That economists would have fewer hunches about the differences between the official inflation statistics and the reality on the ground. And at a stretch: maybe if New York City cabbies had been talking to the bankers, trader and investors who hoped into the back of their cabs over the past year, more people would have been aware that the financial system and the global economy was on the brink of collapse.