Monday, November 25, 2013

Micro-payments, Major impact on banking, unemployment, education and the middle classes

British Bank Barclays will be removing 1700 jobs from their branch network. These include personal bankers, cashiers, operational specialists, assistants and branch managers. See The major reason is that mobile payment technologies are no longer requiring such personal interactions as consumers reduce their transaction costs of commuting to banks and waiting in queues.

The growth of the mobile payment industry has been talked about for quite some time. Although the impact on developed economies may be new, we know that mobile payments are making a major impact on transaction costs in developing countries where distances travelled for making remittances can be huge and unsafe.

The impact of this news is certainly known to bankers. However, educational institutes would do well to start preparing for a change in the nature of jobs that bank managers will be required to undertake. There is probably a greater need for accountants reconciling millions of tiny payments and less for operational managers. Evidently, software for bank reconciliations will find a growing use.

Creative destruction à la Schumpeter is certainly good news for those who believe in capitalism. Certainly, new kinds of jobs will be created in developing, maintaining, and perhaps even hacking competitor payment sites.  Jobs in website security are therefore another new area of developement. However, the changeover from one kind of technology to another may have a time lag as far as unemployment is concerned. The soon to be unemployed bankers would need training and education. But to do what?

In today's world, it is easy to keep a watch on jobs which are threatened. It is far more difficult to predict and prepare for new opportunities which will reflect tomorrow's needs.

Since the bankers who are laid off are likely to be from the middle classes, and since the unemployment may not be temporary, it is possible that these people will fall into poverty.

Thursday, November 21, 2013

Cooperative Group Limited: An image tarnished

The Rochdale Society, one of the earliest experiments in cooperatives in the 1840s, fawned many cooperatives either directly or indirectly. In the last few decades, we have been watching the merger of many of these cooperatives in Britain. A reading of these mergers reminds one of the external acquisitions for growth necessary for the continuing survival of worldcom and other catastrophes. There is no reason why cooperatives cannot be badly managed, and it is evident that they can easily grow astray. Bigger players may wreck greater havoc.

Is big bad? The Cooperative Group Limited in Britain has sales and other income of over £ 12 billion to over 7 million members. Its businesses include food, travel, banking, funerals and many other businesses. It has a profit of £ 180 million pounds, just 1.5% margin on sales. This is about 27 pounds per member.

The businesses of the cooperatives includes banking. Cooperative banking laid the foundations of the microfinance movement. While customer satisfaction with cooperative banks seems to be high, the rating agencies have been downgrading the Cooperative Group's bank because of inadequate capital. This comes from having absorbed an over-leveraged cooperative bank a few years ago. A lack of due diligence means one bad apple can spoil the barrel.  Mergers and acquisitions often lead to poor returns, and they often hide the fact that one, perhaps both the firms, need to merge to hide past failures, including the failure to generate internal growth, a mantra which justifies high salaries.

The CEO of the Cooperative Group Limited may earn over a million pounds a year, while other top executives earn closer to £360,000 per year. Certainly, managing large cooperatives pays as well as managing large businesses of any kind. The competition to get these jobs and the kind of people they attract may also be similar to those running any other kind of company. Undoubtedly, these top executives are the political organs reflecting cooperative beliefs. If they are earning 28 times the minimum wage which is paid to many of the 100,000 employees, they must be believing more! The table below shows the calculations and assumption.

Hours per month
Minimum wage
Minimum wage per month
Minimum wage per year
A Salary of £360,000 compared to minium wage
A Salary of £1,000,000 compared to minium wage

The Cooperative Group Limited is also linked to the Cooperative Party, one of the largest supporters of the Labour Party. Business and politics are closely intertwined. Big players in business can have a lot of influence on how we shape our society. Their beliefs and image are therefore crucial to the belief in cooperation.

The recent scandal of a top executive of the Cooperative Group buying crack is similar to the Mayor of Toronto buying crack. Therefore, at the least we can say that top executives and politicians are as human as anyone else. Should they therefore earn thirty to seventy times the minimum wage? Or should there be a ceiling to reflect that they are imposing risks, which greater potential downsides than those of people earning less because the image of the co-operator is at stake.

Wednesday, November 13, 2013

EU interest rate cuts: Impact on the middle classes

The EU Central Bank has decided to cut interest rates. 

The European Central Bank (ECB) has cut its benchmark interest rate to a record low of 0.25%, down from 0.5%. The move came as a surprise to many analysts.

Why? We know that in the USA, they want to increase them. Why? What do interest rates do? Here is a simple, perhaps simplistic, response.

Interest rates determine whether you should invest or not. For most projects, interest rates are a cost that projects must cover. If your project is getting more than the interest cost, it's worth investing. Obviously, if interest rates are high, only very highly profitable projects will be taken up. So, investment will be very limited and therefore growth and new employment would be limited.

When interest rates are decreased, it is hoped that less lucrative investments are now worth investing in. So, more projects materialize. As investments increase, it is hoped that there will be growth and increase in employment.

Now, here is the catch. If there are bottlenecks, then instead of increasing employment, interest rate cuts cause inflation.

So, low interest rates can lead to high employment and high inflation.

High interest rates should lead to lower employment and lower inflation, even deflation.

The question in each country is what the employment situation is. If it's close to full employment, it's advisable to keep interest rates up to keep inflation in check.

If there is a lot of unemployment, it is advisable to lower interest rates because there is less risk of inflation.

Therefore, one can assume that if the US is increasing interest rates, it's because they feel either that unemployment is not a problem or that inflation is the greater of the two threats.

In the EU, with its vast unemployment in most countries, it is clear that there is little risk of inflation. In fact, the news reports say that the Central bank is afraid that inflation is less than 1% and we may go in for deflation, thus hurting growth prospects. In other words, the European Central bank is reducing interest rates to raise prices.

ECB president Mario Draghi said the decision to cut rates reflected an outlook of low inflation and economic weakness in the eurozone. Inflation in the eurozone fell to 0.7% in October - its lowest level since January 2010, stoking concerns of deflation in some countries.

This obviously merits further analysis.

Why do people not like inflation? Why should it be controlled? This is because it distorts the meaning of money. Partly. Partly also that it's a tax on fixed income workers and retired pensioners. Inflation erodes their purchasing power. Business people are able to raise prices and therefore profits. So, in fact, inflation usually takes away wealth from fixed income people, usually middle class and poor, and provides it to richer business income people.

The ECB's target is to keep inflation just below 2% - seen as a healthy level for economic growth.

To some extent, minimum wages and doles are increased in periods of inflation. However, very few countries have adequate indexation for inflation. And what indexation does occur, follows with a time lag of a year or six months.

This lowering of purchasing power eventually leads to strikes, protests and loss of valuable time and lower economic growth. So, inflation is not a tool that governments like. Yet with the growth mantra being so important to the rich (they always want more), when they find they cannot tax any more the middle classes, they try to usher in inflation.

Having understood that monetary policy is a risky tool, and there is no certainty of what it will really achieve, the task becomes even tough in federal country where different States have different levels of deficit financing. It becomes even more arduous in an economic union where each country has even less synchronization of economic policies.  

Prices in Greece – one of the urozone members worst hit by the economic crisis – have not risen since July. Some economists are also worried about deflation in Spain.

What is clear is that the lack of price increase is probably a source of solace for those in the middle classes who still have jobs, and so too for those on the dole.

Note : all italics are quotes from BBC, 7 November 2013

Tuesday, November 12, 2013

S & P downgrades France: What François Holland needs to do now

In a bid to raise French deficits, the rating agency, Standard's and Poor's has reduced France's rating to AA. The impact of this is that interest on government debt will rise, especially that taken at variable interest rates. This rise in interest payment will offset any reduction in public spending that the Finance Minister, Pierre Moscovici could have proposed. Such deficits and increased interest rates are pleasing to  those who earn more money as a result (guess who gives loans to the government?).

The key French problems highlighted by S & P (with our comments in brackets) are
1.       Too high taxes already and unwillingness to pay more (don't we agree?)
2.       Too much unemployment (it's a social choice: some relax so that others can work…)
3.       Too much debt: over 80% of GDP (unnecessary political handouts)
4.       Lack of reforms in product, services, and labor markets (unclear vision of the future, present)
5.       Lack of medium term growth prospects (this is S & P's obsession, not ours)
6.       A trade deficit of $ 5.8 million (poor tax choices).

Besides reducing social security charges on employers, the Holland government seems to be clueless on what to do.

Should we give them advice or should we let them sink? Being realistic, we do not think that our party can be in a position to make changes directly today. And if these changes are not made, it may be a bit late.

A simple first lot of suggestions for Mr. Holland would be to do the following. These suggestions could also be taken by the Greeks, the Spanish, the Portuguese and any others who may want them.
1.       Increase the VAT on manufactured goods to 25% and VAT on services to be reduced to 15%.
a.       Services are provided locally and this boosts employment
b.      Goods are often imported and this will finance the reduction on VAT on services.
c.       Note, Scandinavian countries are on a 25% VAT and doing quite well.
d. Germany, who for decades was on a 15% VAT finally got wise and increased its VAT to 19% a few years ago.

2.       Alternative/ variant of above would be to increase the VAT on manufactured goods to finance the reduction on social security charges of employers.
a.       Again, following the Scandinavian model
b.      You are welcome to have your own model, but if it doesn't work, try copying someone who is respectable.
c.       There is nothing wrong with French productivity: its just the wrong taxes which are making the French seem less productive.
d. Note when Germany increased its VAT rate to 19%, it used a part of the increased taxes to reduce social security charges on employers.

3.       Reduce / eliminate all subsidies to business. Yes, including subsidized employment
a.       These subsidies are only postponing the problem.
b.      Solve these problems today.

4.       Share work: reduce the working week to 32 hours (4 days of 8 hours each).
a.       With seven working days, this provides a half-day overlap on each side for people to communicate to each other. Otherwise, with six working days, there can be a two day overlap (one on each side).
b.      To set an example, François Holland needs a co-President. And this should go all the way to the bottom, for every minister in the country.
c.       When everyone has jobs, effective demand will go up, public destruction will go down, the spirit of solidarity would increase.
d.      Managers who cannot manage people in a 32 hour week should be made redundant and replaced by managers who can. Appropriate training courses can be provided by schools such as the Burgundy School of Business to redundant managers.

5.       Postpone retirement: If France has insufficient people, retirement age should be increased unilaterally to 65 with no obligation to retire till 70.
a.       An opt out could be allowed for health reasons.
b.      The retirement age increase works only if there are enough jobs. So, it has to be part of the integrated 32 our week.

6.       Exclude Germany and Scandinavia from European Union or form a closer circle of Social European Union with similar legislation on minimum wages.
a.       Germany and Scandinavia, with no minimum wage, do not have the same social democratic concerns as the rest of Europe. If they don't care about their own poor, they certainly won't give two hoots for Greeks, Spanish or French. (Note: these countries do not have a national minimum wage, but they have sectoral agreements; but not everyone is covered by sectoral agreements).
b.      The alternative would be to scrap France's own minimum wage and behave like Germans. I don't think the French are ready for this, despite Standard and Poor's desires.
c.       The German trade surplus and lower prices in Germany for French goods, clearly indicate that lack of minimum wages are what is keeping German industries competitive. (The Germans are indeed talking of introducing a minimum wage of 8.5 Euros per hour, significantly lower than in France, but then again one doesn't know when the talk will lead to a walk).

7.       Scrap all subsidies to illegal immigrants. France has immigration laws on one hand and it provides subsidies to those who violate these laws. Either change the laws or stop providing incentives to violate the laws.

8.       Encourage micro and small scale local industries by providing infrastructure necessary for them to succeed.

The problem with François Holland is that he will promise these for his second mandate rather than do this for 1st of January 2014. By then, he may be captain of a ship that has already sunk.If the Spanish, Greek or Portuguese react faster, they may give him lessons which he may not be willing to take from us directly.