Christmas books

With each succeeding Christmas, the number of presents diminishes, but the quality improves. This year I received two books. The first is “Vanished Kingdoms” by Norman Davies. There’s a good review in the Telegraph. This is the kind of book that wouldn’t translate very well to a kindle as it has quite a number of colour photos and it is a book that benefits from a skim before reading. It looks fascinating. At over 800 pages, it’s going to need a bit of time and I’m still only half way through “The Fabric of the Cosmos” by Brian Greene.

The second book I received was Chris Townsend’s “Scotland”. Again, I’ve only skimmed it so far, but it looks excellent. Andy Howell has written a comprehensive review on his blog. So far I’ve only dipped into it, but I’m impressed. There’s some lovely photos. I’ve identified all the tents except for the one on page 65 :)  . Seriously, it’s a very useful guide and pen picture to the Highlands. The layout is very clear. I’m looking forward to many hours of pleasurable browsing. I’m also looking forward the Chris’s next book “Grizzly Bears and Razor Clams” in 2012. If it’s the same standard as his books on his treks in Arizona and the Yukon, we’re in for a treat!

Renting music

When I was a teenager I bought records. I still miss the sleeves and the pride of ownership. I held out against owning a CD player for a long time. In the end, I relented. The only way I could match the quality of a record was to buy a top end Arcam transport and DAC. As CD players improved, I bought an AVI one box player. The next step was to buy an SACD player. SACD was a bit hit and miss. Some SACDs were superb, others indifferent. SACDs never really made the mainstream, though.

Then I progressed to a Denon player that would play every kind of disc from CDs through SACDs to DVDs, although I routed the digital feed through the DAC of my Lyngdorf amp for decoding CDs. The next step was to go network server based distributed through a Sonos wireless network. It took ages to rip about 700 odd CDs. I carried on buying and ripping CDs, though. All this time I owned the music.

This year I started subscribing to Napster. For £100 a year I could stream as much music as I wanted plus store tracks on three mobile devices to play offline. I was now renting music. However, I still bought some CDs as the 128k bit rate on Napster is a bit low for decent HiFi. It’s ideal for the rest of the family who are not so bothered but not quite good enough for me.

I was going to try Spotify as they stream most (though not all) at 320k. Unfortunately they require a Facebook account which I don’t have and don’t want. Along comes Deezer. For £5 a month, they stream at 320k. The difference between 320k and 128k is noticeable to my ears, but the step up to CD ripped FLAC files is subtle.

320k services are going kill the CD market. For most people the quality is more than adequate. Even for people like me with expensive HiFis, it’s pretty good. For me it’s a huge paradigm shift to rent music rather than buy it. The only downside to Deezer is the catalogue is more limited than Napster (and probably Spotify) and it has very little classical music. Other than that, it’s great and you don’t have to sell your soul to Facebook. Buying a CD is likely to be a rarity for me from now on.

Rohan Equator Shirt

OK, returning from our little diversion into economic policy, in common with many retailers, Rohan have been bombarding me with pre-Christmas offers. Looking through their offers, there was nothing that particularly appealed, but I spotted their Equator Shirt, which was still full price (£55). I’ve been looking for a lightweight shirt for a while and thought this fitted the bill so I ordered one.

I’ve been wearing it off and on for the past three weeks and really like it. The material feels like a very soft cotton (actually a mix of Supplex polyamide and CoolMax polyester). Although it the material is thin, it still feel quite substantial, which is odd given that it weighs just 168g (M). It also manages the trick of feeling both warm and cool at the same time.

Although it’s probably the lightest shirt I own, it has two decent sized zipped chest pockets and a natty microfibre lens cleaning cloth sewn into the hem. The styling is a neat compromise between technical and casual. Personally I like to have a shirt for hot sunny days rather than a conventional base layer. It looks like the Equator Shirt might be ideal. Judgement will have to wait until I’ve taken it on the trail and tested how it works when I’m sweaty and whether it is smell resistant. However, early impressions are favourable.


The Robin Hood Tax – The Congressional Budget Office agrees with blogpackinglight

While it’s not my intention to turn this blog into an economics blog, a lot of my readers have expressed an interest in economic matters, particularly where comment from the mainstream media is deficient. My last post on the “Robin Hood Tax” (Financial Transactions Tax/Tobin Tax), garnered some favourable comments. To show that it’s not just little old me, below I produce some commentary that appeared on the Zero Hedge website today on a recent US Congressional Budget Office report on the impacts of a Tobin Tax.

I think the implications are obvious in terms of the recent spat in the EU. If the EU imposes a Tobin Tax, most of the transactions will migrate to New York. London property prices would collapse. The UK banking system would implode and the UK would face a depression. Perhaps that’s what Sarkozy and Merkel really want.

Next time someone in the pub spouts on about what a great idea a Robin Hood Tax is, you might want to politely point out that the idea doesn’t even get past first base. Anywhere or anyhow.

From Zero Hedge:

CBO on Tobin Tax – “Don’t do it!’

The Congressional Budget Office (CBO) explored the consequences of a Tobin tax, after it was asked to throw in its two cents in regarding proposed legislation, H.R. 3313 / S. 1787. The proposed new law has a very catchy title:

 “Wall Street Trading and Speculators Tax Act”

 Who wouldn’t like something like that? For a country that (A) is desperate for revenue and (B) whose populous hates financial fat cats, speculators, monstrously paid bankers, and ridiculously paid hedge fund execs, a transaction tax is an easy sell.

 I’ve taken grief on these pages with my position that taxes are a necessity. “Zero” is not the right number. The only questions are who pays and how much. With that said, it’s hard for me to push against a transaction tax. But I’m against this. The costs will outweigh any benefits that are created. I think the CBO agrees. Some bits from the report (Link):

 For a transaction involving a stock, bond, or other debt obligation, the tax would be 0.03 percent of the value of the security.

 Gee! Only .03%! Hardly worth noticing! Actually it is. Based on recent turnover the cost of the tax would be $1.7mm every day for those trading AAPL. For GE and BAC, it comes to a rake of $327k and $425k, respectively. That’s real money.

 The argument will be put forth that the tax is only a few pennies. A long-term buyer of AAPL would have to pay a total of only 24 cents to buy/hold/sell a share. For BAC, it’s only 3/8th of a cent (.0032).

 The transaction tax on Government bonds will only be applied to maturities over 100 days and not applicable to any new issuance. So if you were looking to park $100k in T notes for a year, you could avoid the tax by participating in the government’s auctions. That’s stupid. No one will do that. People will call their brokers and it will cost them an extra 30 bucks to own the Note.

 The US bond market is very complex. It has nothing to do with retail demand. A substantial portion of the $10T of Treasury plus $7T of Agency paper is in perpetual float. I estimate that at least one-third of the outstandings have no permanent home. It sloshes about the globe based on a variety of macro forces. How many times do they “slosh” in a year? Much more than you might think. The number is a minimum of 5Xs. (I think it is around 7Xs, it could be as high as 10Xs) Using the low estimate, the annual float turnover impacted by the tax equals $25T. That teeny weeny tax would therefore suck $8 billion out of the market. That’s a very big deal. The CBO sees this pretty clearly:

 Securities that are traded frequently, such as Treasury securities, would be more affected than securities that are traded less frequently.

 The proposed transaction tax would lay waste to the HFT (High Frequency Trading) crowd. Their spreads are far too small and their volumes too high, to not have their business models get crushed by a Tobin tax. Many will cheer, myself included. But a sudden death of the algo computers would be very destructive.

 The tax would also decrease the volume of transactions and would make some types of trading activity—such as derivatives transactions to manage risk and computer-assisted high-frequency trading—unprofitable.

 This is about the money and how much one keeps. So every effort will be made to divert trading activities outside of US tax jurisdictions.

 Traders would have incentives to avoid the tax either by trading offshore or by creating new financial instruments that were not subject to the tax.

 As the trading activity goes outside of our borders, so will all those traders and their high paying jobs. Also would go the thousands of back office/ support staff that goes with this.

 As foreign holders of U.S. securities moved their transactions abroad, more of the market could go with them, which could diminish the importance of the United States as a major global financial market

 All taxes have consequences. A Tobin transaction tax would be no exception:

 In the short term, imposing the transaction tax would probably reduce output and employment.

 Beyond the first few years the tax’s net impact on the economy is unclear.

 Unclear? This is pretty clear:

 The transaction tax would raise the costs of financing investments to the extent that it made transactions more expensive, financial markets less liquid, and management of financial risk more costly.

 A net change in the amount of investment would in turn affect GDP and employment. In the short term, a decrease in investment would lower demand for goods and services and thus reduce output and employment.

 Reduce output and employment? Just what we need.

 These consequences are not the ones that worry me. I’m concerned with liquidity. What will happen when 50% of short-term trading is eliminated? The CBO has an answer for that:

 The tax might discourage short-term speculation, which can destabilize markets and lead to disruptive events (such as the October 1987 stock market crash and the more recent “flash crash,” when the stock market temporarily plunged on May 6, 2010)

 How might the markets welcome a transaction tax? I say this would get a huge thumb’s down. If you believe that wealth in 401Ks drives the economy (I do), then this will bring (another) recession. The CBO agrees, sort of.

 Initially, the transaction tax would reduce the value of existing financial assets, because investors would not be willing to pay as much for assets that had become more costly to trade. That reduction would produce an immediate—though probably small—decline in wealth for people who owned financial assets when the policy was enacted.

 Note: The CBO are a bunch of bean counters. They have not the slightest idea what the markets may do if this tax was enacted. When they say the consequence to assets values will “probably be small” they are making it up. (A Wall Street broker is not allowed to say things like this. The outcome is not predictable)

 This is not a tax on speculators and guys who wear white spats on Wall Street. This will impact all the pension and savings plans:

 The transaction tax would also affect the funding of state and local pension plans ($3 trillion as of June 2011). Besides initially reducing the value of their existing assets slightly, the tax would raise transaction costs for pension plans. Both of those effects would increase required contributions to the plans.

 Note: There’s that “slightly” thing again. Shame on the CBO for soft peddling the risks.

 I wouldn’t be surprised to see that a transaction tax becomes a political football in the next election. Obama will support it. The Republican candidate will oppose it. If the election were tomorrow, Obama would handily beat either Newt the Fool or Mitt the Suit. Unfortunately, I think a transaction tax, and all the bad things it will bring, is in our future.

Copyright: Zero Hedge

Cutting through the twaddle: The Robin Hood Tax

Having been a professional economist for the last seven years of my career until I retired, I am continually frustrated by the disinformation and dissembling of politicians on matters of economic policy. It is also disturbing that the press coverage and analysis is so poor in the non-specialist press, especially the broadsheets, who should know better. In an attempt to counter this lack of proper information and analysis I am starting an occasional series on this blog to help readers who do not have any specialist knowledge in economics. I will try to keep these relatively short and simple and apologise if topics are not always covered in the depth they deserve.

Today, I want to look at the so-called Robin Hood Tax or Financial Transactions Tax (FTT). In economic circles, this is also known as the Tobin Tax, after the economist who first proposed it. Initially it was proposed as a transaction tax on foreign currency deals to dampen volatility and deter speculation. Later this idea was extended to other financial transactions.

The fact that it has been dubbed the Robin Hood Tax gives it a spurious legitimacy as it implies that it applies to the rich and benefits the poor. At best this is disingenuous and at worst deception. It is also worth bearing in mind the standard “economic” tests for a good tax. It must be fair, easy to collect, difficult to avoid or evade, transparent (i.e. obvious to the payer) and not produce perverse effects. The FTT fails in almost every respect.

  1. Easy to collect but easy to avoid. Adding a percentage to a financial transaction is not technically difficult but unless every tax jurisdiction in the world adopts a uniform FTT, transactions will migrate to lowest tax or tax free jurisdictions. This is because financial transaction are electronic and can be executed almost anywhere. It is extremely difficult to force transactions to be made in a location. In a sense this makes it difficult to collect as well. The only exception is property transactions, for obvious reasons, which is why property taxes tend to be high in most countries.
  2. Makes financial regulation more difficult and increases the risks in the financial system. If transactions are driven away from the “home” jurisdiction, then efficient regulation becomes much more difficult. One of the lessons of the financial crisis is that regulation was deficient and uncoordinated. A FTT would probably make it worse and risks would accumulate hidden away from regulators.
  3. The customer always pays. Proponents always seem to claim that somehow it is the banks that will pay. The sad reality is that it always the customer who pays. The banks will always pass on the costs either explicitly or implicitly. Almost always, this will be hidden from the customer who will be charged a gross price for a product without the underlying costs broken down.
  4. The goals of deterring speculation and raising revenue are irreconcilable. The more successful a tax is in deterring transactions, the lower the revenue generated.
  5. A FTT never raises anywhere near the revenues projected. Allied to the previous point, experience suggests that a FTT often raises a small fraction of the hypothetical revenue. The best example is Sweden in 1984, which imposed a FTT and saw bond market volumes decline by 85% within one week. The tax raised 3% of the projected revenues and eventually was abolished.
  6. Doesn’t deter speculation anyway. For example, stamp duty on property has never prevented property bubbles. There are much better ways of deterring speculation, for example through margin requirements.
  7. Raises transaction costs and reduces liquidity. A FTT is often pitched at a very small percentage of the face value of a transaction but this is deceptive. It widens the gap between buying and selling an instrument (technically the bid/offer spread). In many cases this spread is tiny so even a small percentage tax has a huge impact on trading costs and negatively impacts liquidity (because it is more expensive to trade). For example on a Eurodollar futures contract of $1m, a 0.02% FTT increases the cost of trading from $13 to over $400. This might not seem much, but it would dramatically decrease trading and liquidity. Before you say that this might be a “good” thing, futures were not a cause of the financial crisis and are a vital ingredient of the commercial world helping producers and manufacturers hedge all kinds of currency and commodity exposures.
  8. Reducing liquidity raises volatility. Anyone involved in markets knows this. A FTT, which is designed to dampen volatility, is likely to have the reverse effect by lowering liquidity.
  9. Reduce asset prices by raising the cost of capital. It has the same effect as raising interest rates. Asset prices fall. Who cares? It’s only the rich that suffer. Well, no, actually anyone who has any saving does. If you have a funded pension or a life policy or indeed any savings that are linked to asset prices you will be worse off. Unfortunately the real impact is usually worse on those with modest savings than those with large savings. The wealthy have a sizeable cushion of excess savings in contrast to poorer citizens to whom every penny is important. Raising the cost of capital also deters investment and growth in the economy.
  10. Reduces growth and raises unemployment. Allied to the above, slower growth usually raises unemployment. On figures produced by the European Commission, the proposed FTT would reduce long-term growth by 1.75% and increase unemployment by just under 500,000 in the EU.
  11. Favours public sector pensions over private sector pensions. Because private sector pensions are funded and dependent on asset values, any decline due to a FTT would have a detrimental impact on pension values. Public pensions generally are unfunded and so unaffected by asset values, hence public sector workers would be protected at the expense of private sector ones.

That’s quite a long list and I could include some more technical reasons, but you get the idea. It is not surprising that FTT taxes are rare and often repealed. They are ineffective and have perverse effects. It is a reflection of the economic illiteracy of Merkel, Sarkozy and Barroso that they have persisted with this idea long after countries like the US have rejected it. It certainly won’t work unless it is adopted globally and even then has significant drawbacks.

From a purely UK perspective, it is estimated that an EU FTT would raise approximately 80% of its revenues from London. It would wipe out the derivatives market in the UK and cost £25.5bn. Ask yourself whether Merkel or Sarkozy would agree to an additional tax on Mercedes or Citroen cars. Further you might question Sarkozy’s motives when not long ago he was trying to woo HSBC to relocate its HQ to Paris with tax incentives.

Lastly, even interest groups as wide apart on the spectrum as the IMF and the Socialist Worker have admitted that a FTT is unworkable.

Hopefully, you can now exercise a bit of scepticism when you encounter some of the twaddle about a Robin Hood Tax.