Saturday, 11 July 2015

The Age of Migration - debt, migration and flawed architecture

With Eurozone Finance Ministers discussing suggestions ranging from a temporary Greek exit from the Euro, to a request for the Greeks to come up with 'more' (more austerity, more evidence that proposed measures actually will be carried out?), there's a long day of negotiations ahead in Brussels. But that Greek debt crisis has now opened up a debate on the notion of debt restructuring within the single currency area.

There is growing pressure for Greece's creditors to allow more formal restructuring of Greek debt, which would inevitably lead to acceptance that debt restructuring, re-profiling or relief may need to be seen across the Euro Area at times. Many people who have been looking at the mountains of debt accumulated by Eurozone governments in recent years have long believed repayment of that debt is unlikely, so what's the big deal? Even a casual glance at the history of sovereign debt shows that defaults happen more often than many people realise, often occur in clusters, and the risk of them is underpriced. Furthermore, default is, by and large, forgiven faster for sovereigns than for others, understandably.  A defaulting individual or company can be cast away, never to be seen again. Literally, in the case of debtors the English sent to the other side of the world in the 19th century. But a country won't go away. Russia defaulted and then sat there on the same bit of land as before until we all decided to do business with it again.

History, furthermore, tells us that punishing a country's people too harshly and demanding they repay the debts accumulated by their parents, leaders or even themselves, is counter-productive. At worst, it builds enmity. At best, it means an economically weakened trading partner.

So if we accept that default is occasionally necessary, why be bothered about doing it in Europe? The answer, I think, is that the idea that sovereign default is impossible in the Euro Area is a big part of the architecture of the system, put there to cope with one of its very biggest structural flaws - the fact that while national central banks do not have the ability to run independent monetary policies, national governments have a lot of autonomy over fiscal policy. This is a huge flaw, 'managed' with the rules on deficits and debt. Weaken those and the flaw is exposed, and will either bring the system crashing down or be resolved itself through adoption of a new fiscal structure.

Here's a description of the conditions for a strong monetary union, which I took from the late Victor Argy:  "A strong monetary union is assumed to have a common currency and a common central bank. Capital markets are unified and independent monetary policy becomes impossible. Some independent fiscal policy continues to be feasible. And he goes on to list the conditions which make the costs of joining a union smaller, or the benefits larger. They are 1) that differences in growth rates and labour productivity are not large; 2) that intra-union trade is large; 3) that there is no long-run trade-off between inflation and unemployment; 4) the differences in propensities to inflate are relatively small; 5) differences in degree of domestic instability are relatively small; and 6) there is a significant degree of labour mobility." Grapes of Wrath. A better read on currency unions than anything I've written can be found here, in a discussion by Milton Friedman of the Euro in 1997. Some of the weakness he outlines have been tackled since then, but not all. 

'Some independent fiscal policy continues to be feasible'.  That is absolutely not what European fiscal policy looks like. Consider this. US State and Local debt totals 1/6th of Federal debt and less than 20% GDP.  So when California over-borrows, despite being the biggest state, it still doesn't cause a huge national crisis. Imagine California having a debt level of 120% GDP, and then asking smaller states to forgive a share of that debt based on their own share of US GDP. It doesn't happen because the US allows 'some independent fiscal policy'.

This problem of local control over debt and Federal control over monetary policy is a really, really issue. When I write that sovereign debt default is relatively common, I should differentiate between default on domestic debt, and default on foreign debt. There's a brief discussion of the top in this week's Economist here, Buttonwood. Domestic debt default is often counter-productive because of the damage it does to the domestic banking system, so default usually happens via the means of inflation.  Historically this was done through the effortless means of debasing the currency, more recently it's been done with the help of a monetary policies than boost inflate and weaken the currency. And most recently of all, global disinflationary forces have made it hard to do at all. Defaulting on foreign currency debt is more straightforward, and therefore more common. But in Europe, the domestic routes to de facto default through devaluation and inflation, simply don't exist. All debt is foreign because no single country controls the Euro printing press. And worse still, since more and more of any single country's debt is now held by that country's banks, this is now de facto foreign debt but defaulting will still cause havoc in the domestic banking system.

I still don't know how this weekend will play out, let alone how long the Greek debt can can be kicked down the road before we're back talking about debt. But I do know that Greece isn't the only European country whose debt won't ever actually be repaid in full and I know that changing the rules to accept that reality will either bring about the collapse of the Euro system or lead to a change in the way that European fiscal policy is operated.

Finally, a quick word about Puerto Rico. A very different debt crisis but one which really is a sign of the times. Puerto Rico's $72bn of debt is close to 3/4 of GDP and either huge compared to any US State (which Puerto Rico isn't) or manageable if it were an independent country with (which it isn't either).

What really makes Puerto Rico's debt unsustainable, and is both a cause and result of GDP shrinking in 7 of the last 8 years,  is the fact that its population is falling. Faced with a weak economy and poor prospects, people, especially young workers, are leaving the country. Check out this link  from the Pew research centre if you want some scary charts of where this is heading. When I first wrote about the Grapes of Wrath, I thought that labour mobility in the US in the 1930s (which resulted in huge numbers of displaced Oklahoma farmers heading down Route 66 in search of jobs in California) was both a sign of a monetary union working properly and yet, evidence that even in the US there was huge social strife caused by migration. I wasn't really wondering what would have happened to Oklahoma's ability to repay debts if it had been an independent country. Nor was I thinking forwards to a world where would have the degree of mobility in people, job and technology that we have now. In a technologically joined-up world, skills will spread globally and people will move to where those jobs are, as well as moving away from places with political or economic problems. This may 'the Age of Migration'. The politics of migration/immigration are increasingly important and for the countries they leave, while the economics of debt with shrinking populations will be equally important.

Sunday, 14 June 2015

Over 50s, the new thirty-year olds

I've been reading about the "older" (over-50) worker - something I've been for a few years now. 

A recent paper by the Institute of Leadership and Management  which got a fair amount of coverage in the press week starts with the encouraging observation that "Baby Boomers (aged 51–70) are seen as loyal, skilled and knowledgeable members of the workforce – but they aren’t viewed by their colleagues and managers as the ‘organisational stars’ of the future and they are perceived as having little potential for further progression or development in their organisations". Well, isn't that nice!

I recognise some of the things written in the paper although in the world of finance, I'm not sure it's all about oldish workers being seen as lacking in leadership potential. In the latest flurry of redundancies at a variety of firms, I know a number of over-50s who have lost their jobs. Nothing too shocking in that perhaps  - I know more over-50s than under-30s so the sample of my acquaintances is biased - but I do remember being surprised when I was told me over 15 years ago that there only three over 50s left on the Bishopsgate  trading floor of NatWest Markets.

What happened 15 yrs ago still happens now - when numbers need cutting, the older worker is a prime candidate. The justification is usually that organisations get too top-heavy: the number of people with  business cards that say 'Managing Director' is high relative to those who cards read 'Associate'. The management pyramid is inverted and better to lose someone who is not seen as 'an organisational star of the future' than  some bright young thing. And why not? This is the City, where dog eats dog and so on.  Mind you, if more and more people are living longer, having families later and working into well their 50s or 60s, I can't help feeling that a decade-long flow of workers from sell-side investment banks to buy-side fund managers means there's a role for the fifty-something sales-person who has known these clients for half a lifetime.

Separately, I was signed up a fortnight ago by a colleague to participate in a '100-day journey' measuring how much exercise people take. It's a team event, run by some people called GCC and my employer has decided that this would be good for the staff, or fun, or something. I was handed a step counter and sent on my way. I dutifully fill in the number of steps every day, with the intention of making sure that I take more exercise than the average. No problem there, the global GCC average is a little over 12000 steps a day. My (erratic) round of golf yesterday morning ran my total up to 16000 before lunch. Looking at average steps for various cohorts on the website I find that men step more than women and that 50-54 year-old men step more than the average man.

This isn't a complete surprise.  By and large, my generation of late baby-boomer over-50s is pretty motivated to stay in decent-ish shape. We got the message about smoking ages ago and even if the one about alcohol has been largely ignored, we have gym memberships and we force our 'dad bods' into luminescent lycra cycling clothes with far too much enthusiasm. We're (mostly) no longer taking children to the Pirate's Playhouse or the zoo on Saturday mornings - or even to football/skating/ballet.   Instead, we have time to get some exercise in before we take the children to the Oval to watch T20 (where £8 for Pimms makes the prices for ice cream at the zoo seem almost reasonable).

Another thing I recognise in my age group is that they turn up for the morning meeting.
The average age of people in a dealing room is in the 30s, but at 6:45 a.m, it's a good bit older. The young worker finds getting out of bars and clubs in time to get enough sleep and make it to the morning meeting hard. The young parent is sleep-deprived. A decade ago, when asked how long I would go on working I said I couldn't imagine stopping, but I could easily imagine giving up morning meetings. Yet I find it easier to wake up now than I used to and travelling round London after 7 a.m is almost too hideous to contemplate. Nowadays, the choice is between being at my desk early, or connecting to it from a computer far away from London.

Of course, the fact that I'm a fan of the over-50s work ethic and would happily employ them if I were an organisational star (future or present) won't change employers' attitudes towards them. But what will go on changing is the number of older people who are still working. It's going to go on growing. I may not take the children to Alexandra Palace ice rink on Sunday mornings any more, but they're not likely to be financially independent any time soon. My generation can't afford to stop working even if it wants to. But if "having little potential for further progression" means we aren't competing for the top jobs, "loyal, skilled and knowledgeable" has its merits. The over-50s I know who've lost their jobs mostly seem to find new ones pretty quickly, even if they have to take a cut in pay. In the process, they act as an anchor on wage growth across the pay scale (except for CEOs, but that's another story).

The changes in the workforce aren't limited to the over-50s male of course, it's just that this is the group I know best. If I were a woman, I might be inclined to think about the number of women who either have, or want to return to the workforce and have a deep pool of skill as well as a huge amount of motivation after taking some time away. If I were bit older, I'd point to the desire to shift the work-life balance around, without actually stopping work. Thoughts on the world from members of these groups can be found here (from @LadyFOHF on twitter) or here from (@georgemagnus1).

Mostly, I think too many employers are woefully out of touch with the way the labour force is changing and are  still wedded to an antiquated understanding of what 'work-life balance' means. They regard surfing the internet in your office as 'work' and reading The Global Economy in transition at home as 'life'. And if they think older workers are loyal, skilled and knowledgeable but have little potential, they'll end up finding out how much they have in common with dinosaurs.