Category: economics

Raspberry Pi Beta Boards Raise Over £16,000 in ebay auctions

The Raspberry Pi Beta Board auctions have now finished, raising a total of £16,336 for the Raspberry Pi Charity.

  • The lowest winning bid was £930 for board 9
  • The highest winning bid was £3,500 for board 1

You can view the full spreadsheet here.

Green Easing – Save the planet while saving the economy

So we are now 4 years in to the worst recession since the 1980s, 1970s, 1930s, records began? and it seems like we are going to be stuck this way for a long time. Governments, individuals and companies around the world have racked up massive debts during the boom years, but they are now struggling to pay them back. For years central banks have targeted price stability (low inflation), but there is a growing realisation that stable prices can also mean stubborn debts, and so the previously unthinkable is now becoming a reality – that central banks pursue a higher rate of inflation in order to reduce the real value of old debts. Although the BoE have continued to state publicly that their inflation target is 2%, the reality in the UK is that we have had nearly 5% inflation (RPI) since early 2010.

The Bank of England have already created £275bn of new money through their quantitative easing programme, which they used to buy Government bonds from private banks (asset purchases). The theory is that the banks will then have more cash to lend to small businesses. The reality appears to be that banks don’t really want to lend to the sort of companies that want to borrow. If a higher rate of inflation is now palatable, could there be a more effective route to injecting cash into the economy and encourage nominal GDP growth?

If we are going to print money, I feel it should be used to purchase assets that will bring long term positive benefits to the country. I think residential solar power plants are particularly well suited to this idea, and a green quantitative easing programme could replace the existing Feed In Tariff scheme (which has nearly run out of money).

Green Quantitative Easing

£200Bn Green Easing Target: Install 10GW of residential solar plants per year, for the 8 years to 2020. 

  • Use printed money to fund the installation of solar panels on the roof / open space of any household or community who wishes to participate.
  • Money goes directly to businesses who install the panels, avoids the relying on the banks.
  • Tangible assets with tangible benefits – homeowners would feel positive they are receiving something good (free electricity) as a result of the policy (can the same be said of normal QE?).
  • Easily administered through the MCS scheme – upon successful registration of an installation, the supplier could be paid by bank transfer by the BoE.
  • No additional debt for government, companies or individuals. Ownership of the panels could be retained by the BoE (with a long term lease on the roofs), giving them a real asset for their balance sheet. Free electricity would go to the household, export revenue could be collected by the BoE. Effectively the Bank would own a distributed network of green power plants, which generate an income through selling power to the grid. These could later be bundled off and sold to the private sector if that was deemed necessary.
  • Helps alleviate Fuel poverty. The poorest households would get free electricity during the day to run their appliances.
  • In rough terms, £200 billion would be enough to put solar panels on every house in the country (or in open spaces for shared community projects), and would give us a total installed capacity of 80GW (@ £2500 per KW). This would produce more electricity than total UK demand in the middle of the day during peak months of summer – so we would need to also invest in suitable storage techniques (batteries or running hydro power stations in reverse). The panels could be installed at a rate of 10 GW per year, which is achievable and would cost only £25 billion each year.
  • We would easily meet our 2020 targets of generating 15% of power from renewable sources.
  • Overall energy costs would be reduced as the huge supply of solar electricity comes online.
  • The scheme would easily support around 55,000 jobs (Capacity per employee: assuming 230 working man days per year / 1.25 man days per KW installed  = 184,000 W installed per person per year. Number of jobs = 10,000,000,000 W/ 184,000 W = 54,348)
The idea is still pretty rough around the edges, but I think in principle it could work really well to generate growth whilst hitting our climate goals. The solar sector has shown they already have the ability to hit this level of installations, by installing nearly 126MW in the week before the Feed In Tarrifs were cut. This is an annualised rate of 6.5GW, and not far from the 10GW which would be needed. What are your views on this? Disclosure: I have put my money where my mouth is, as I have recently invested in a Solar Panel business through my company, Fubra Limited.

Further Reading

Unemployment versus House Prices 1975-2008

The following graph shows the quarterly unemployment rate compared to real house prices. House prices have been adjusted for inflation and are given in 2009 Q1 prices.

unemployment-house-prices-1975-2008

Sources

Monetising the debt – BoE to buy UK Government Bonds

So it has happened: these extraordinary times have caused our Government to look to Zimbabwe for economic policy inspiration and so, as of last week, the Bank of England will begin a £150 billion programme of printing money.

Technically referred to as Quantitative Easing, it’s actually a lot easier than printing money, and more environmentally friendly too: the Bank just types a number into a computer to increase the balance of a customer’s account and, unless the customer wants to actually withdraw the money, no trees will be harmed.

The majority of this money will be used to purchase Government bonds, but some will also be used to buy high quality company bonds. You might think that using Central Bank money to buy government debt is illegal under EU law, but, as long as they go through an intermediary (even if that is a bank like Lloyds or RBS, who they majority own), it’s allowed:

Article 101 of the Treaty establishing the European Community states:

Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

The Government and the Bank of England are side stepping this law by purchasing Gilts (UK Government bonds) from Commercial Banks indirectly in the secondary market. However, in the long run, the effect will be exactly the same: The Central Bank is printing money to lend it to the government.

Lorenzo Bini Smaghi from the European Central Bank highlighted the potential consequences as follows:

Central bank independence: from theory to practice

It is beyond doubt that conducting an independent monetary policy, aimed at the achievement of low and stable inflation, is made significantly more difficult by the existence of large budget deficits. This is true for two related reasons.

First, when deficits and public debt become unsustainable, the incentive for the government to force the central bank to monetise its deficit, thus eliminating public debt via inflation, increases substantially.

Second, the larger the budget deficit and the accumulated debt, the more market participants become aware of the risk of monetisation.

In addition, they may believe that the central bank will be forced to “bail out” the government by assuming its liabilities, even if Article 103 of the Treaty explicitly prohibits this.

This may jeopardise the anchoring of inflation expectations and make the control of inflation more costly. In this case, fiscal policy may become dominant over monetary policy, thus undermining, de facto if not de jure, the functional independence of the central bank.

The government is taking on so much debt, that it will take many generations to repay. It’s therefore looking more likely that at some point it will need to be eroded through a period of high inflation, which is affectively another stealth tax – the inflation tax.

The Bank of England says this Asset Purchase Programme is temporary and they will look to sell any assets purchased under the scheme back to the market when the economy recovers. Let’s hope they resist the temptation to dramatically expand it, and are serious on their commitments to low inflation.

Stability versus Flexibility aka Euro versus Pound

For the past 10 years I’ve been undecided as to whether Britain should join the European single currency, the Euro.

At first I was leaning towards the Euro, thinking that a level playing field of prices across Europe would encourage competition, making prices more transparent across a larger market, and therefore bring down prices in general.

Then, for a period, I felt that being constrained by a single interest rate for such a large and diverse economy would be harmful and having the flexibility of our own national currencies would assist us in adapting to any challenges we face.

However, since the start of the credit crisis and as the pound falls against a basket of currencies, I’m now leaning back towards the Euro. I’ve realised that governments (particularly our current one!) are too often tempted to print money to inflate their way out of a debt crisis, thus punishing the thrifty and rewarding the reckless.

I think that stability should be the most desirable attribute of a currency. It allows good businesses to concentrate on what they do best, rather than having to worry about the constantly fluctuating value of their imports / exports / savings. It allows people to plan knowing that they can buy a fixed number of goods with their income, and that they can set aside enough for retirement.

So the decision between the Euro and the pound, it would seem, boils down to a simple choice: Stability versus Flexibility.

As Britain and our European neighbours deal with the recession, it’ll be interesting to see which performs best. Countries such as Ireland, Spain and Greece may prefer lower interest rates than the Euro affords them, but if they perform relatively better than Britain does in the medium term, it would suggest stability is more important than flexibility.

Cash is king (and always was in my opinion!)

There is an interesting article in this week’s Economist, All you need is cash, which talks about the new rush by businesses to accumulate cash in contrast to the massive leveraging that has taken place over the past few years. Of course, not all companies took on huge loans to expand, and the ones who hoarded cash are now in a much stronger position relative to their debt-laden counterparts. Just to look to Japan where their cash rich companies are on target to make a record year in acquisitions. So far they have spent $78 billion on foreign takeovers, as they snap up other firms at knock down prices.

It has always been my view that companies should aim to keep a reasonably large cash buffer. It means that other people will want to deal with you as you have a strong credit rating and you can pay your bills on time, that there’s money in the pot for a rainy day, but most of all, it means that you can be ready to invest in value opportunities when they occur, without piling debt on to your balance sheet and being at the mercy of the credit markets. As Warren Buffet says, be fearful when others are greedy and be greedy when others are fearful.

At my company, Fubra, we prefer to leverage our knowledge and intangible assets rather than our balance sheet by seeking investments where we can add a lot of value for both parties at little marginal cost to our existing commitments. We look for companies who are a good fit to our current operations, and who have realistic valuation expectations, but if they meet those criteria we can act fast. This is the advantage of having strong working capital.

Of course, having cash has some downfalls. While Barclays are happy to pay Abu Dhabi and Qatar 14% interest on their cash, they only pay their sterling business savers 2.5%! All the more reason why you need to be ready to spend it when the right opportunities arise.

The Obama Apollo Project

Although I’m fundamentally a capitalist, and a strong believer in the power of free markets to allocate capital effectively, I’m not an absolute market libertarian. So whilst I’m convinced that an economy based on competition and creative destruction is far more able to generate productivity growth and technological advance than one that’s centrally planned, I do recognise that there are certain areas of industry that are often neglected or even avoided by the private sector.

Companies are bound by their shareholders to seek a profit, and so they are less inclined to invest in areas of ambitious scientific research where returns are neither immediate nor guaranteed, or in blue sky projects where the route to profit is not even apparent. It is in these areas, where the private sector is unwilling or unable to invest, that a government can in a way that’s beneficial to the long term success of an economy.

Although there have no doubt been many failures, there are numerous examples of government-led research projects that have changed society for the better, e.g.

  • The Internet (US Government – DARPA)
  • Moon Landings (US Government – Apollo Program)
  • Radar (British Air Ministry in World War 2)
  • GPS (US Government – Department of Defense)

It’s because of this, that I’m optimistic that if (when?) Barack Obama becomes President he is going to support a government-led, apollo-like, energy project to rapidly accelerate the world’s transition to renewable fuels, whilst turbo charging the economy and weaning us off our dependancy for cheap credit at the same time. And I’m optimistic that it could succeed.

According to Time Magazine:

He wants to launch an “Apollo project” to build a new alternative-energy economy. His rationale for doing so includes some hard truths about the current economic mess: “The engine of economic growth for the past 20 years is not going to be there for the next 20. That was consumer spending. Basically, we turbocharged this economy based on cheap credit.” But the days of easy credit are over, Obama said, “because there is too much deleveraging taking place, too much debt.” A new economic turbocharger is going to have to be found, and “there is no better potential driver that pervades all aspects of our economy than a new energy economy … That’s going to be my No. 1 priority when I get into office.”

If Obama really does make it his number one priority when he gets into office, and he has the electoral mandate behind him, then that political will could make a huge impact.

The New Apollo Program from the Apollo Alliance

The idea for a new Apollo program to build a new energy economy has been around since the Apollo Alliance was founded in 2004. According to their website, the program calls for investing $500 billion over 10 years on steps to:

  • Generate clean power (25% from renewable sources by 2025)
  • Improve energy conservation and efficiency
  • Cut energy bills
  • Improve US technological and industrial capabilities
  • Create 5 million green-collar jobs

These are pretty ambitious targets, particularly as they want to cut energy bills at the same time as raising the amount of power from renewable sources, but so was putting a man on the moon!

So how much is $50 billion a year?

10 Years, $500 Billion, 5 Million Jobs
The program would generate and invest $500 billion over 10 years. An annual investment of about $50 billion a year, the Alliance notes, is a smaller share of the gross domestic product than what was spent on the Apollo space program, about one-third of current spending in Iraq, and roughly half of what was just lent by the federal government to insurance giant AIG.

Could it be that by backing this project, Obama has the answers to see us out of the financial crisis and solve global warming simultaneously? If we can put a man on the moon, we can certainly hope so.

References:

– Time.com: Why Barack Obama is Winning

– Apollo Alliance: The New Apollo Program

Runaway Inflation

The Bank of England released it’s quarterly inflation report today, and it paints a pretty gloomy picture. Inflation is set to exceed 3% for most of the rest of the year, obliging the Bank of England’s governor, Mervyn King, to write a series of explanatory letters to the Chancellor.

As part of their report, The Bank release a fan chart which projects the likely probabilities of a given inflation rate in future years. I thought it would be interesting to look back a few years and to see how accurate their projections were.

Thanks to the emergence of China as the world’s biggest manufacturer of goods, inflation was kept at bay during the late 90s and early 2000s, but at the beginning of 2005 it began to move upwards. The Bank’s central projection showed inflation rising above 2% during 2005 but falling back to below 2% in 2006.

Sure enough, it did do this. The Bank then projected a couple more blips above 2% before falling back to it’s 2% target in 2007…

Unfortunately, this time the Bank got it wrong, and rather than blip above 2%, inflation soared to 3%. The Bank thought this was only a temporary problem, and predicted that inflation would fall back to 2% by 2008.

Inflation did have a brief drop below 2% during 2007, but it now seems that’s its back well on its way toward 3% and beyond…