Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Monday, 10 December 2012

Crediting the wrong Italian

Technocrats come and technocrats go but the Eurowreck skids on. The false belief that Mario Monti was responsible for the improvement in Italian bond yields has led to worries about his impending departure. The 200-basis point drop in yields credited to him by august publications and pundits is reflective of the cognitive bias which makes us endow our leaders with superhuman qualities (which is why leaders win or lose elections based on events which are clearly beyond their control).

The good news is that his absence or presence doesn’t really make much of a difference. The great rally at the start of the year was based on hopium and took place across asset classes. It was not confined to Italian bonds. As the hopium wore off, yields started pushing wider despite Monti. It took Mario Draghi’s OMT threat to start the next rally (Graph below).

So don’t cry for Monti, Italy.

Graph: Italian 10-Year Yields

Source: WSJ, Market Data Center

Tuesday, 4 December 2012

UK’s Grand Experiment

This FT piece shows that a grand experiment in bastardised capitalism is underway in the UK. This is capitalism where plutocrats are magically endowed with automatic economic growth giving power. It is capitalism where politicians worship at the altar of wealth without understanding how it is created. It is capitalism where Adam Smith is quoted without being read and understood. UK’s idiotic immigration policy of welcoming wealthy migrants while turning away skilled but penurious labour is a shining example of this brand of capitalism. The best which can be said about this policy is that it is consistently retarded.

UK promptly gives long-term visas to individuals with at least £1m to “invest”. Now there is nothing wrong with encouraging investment in the economy. Unfortunately, the investment for the purposes of a visa is not necessarily required to be in productive assets. Property (upto £250k) and secondary market assets such as shares and bonds qualify. The message is clear: For no hassles, quick visa processing boost up house prices (owned by the elite), boost up shares (consequently their pension and investments) and help the UK government fund cheaper. Also, recently changed rules mean that the more one “invests” the faster the award of a visa.  The government takes five years for £1m, three years for £5m and just two years for £10m. For the third-world isn’t this sanctimoniously labelled as “grease money”? Maybe legal sanction and institutionalisation subtly change things.

Alongside the red-carpet laid down for sterile money, a barbed wire fence is being put up for skilled migrants by the same economic geniuses who cover their lack of intellect with passionate support for failed ideologies. Toughening up on student visas is not only a surefire way to hobble UK universities in an internationally competitive market and negatively impact an already weak economy (foreign students account for 32% of universities fee income and contribute £5bn a year to the UK economy) but it is also a great way to damage future growth. One reason for the rise and continuation of USA’s international power is the worldwide pool of talent which gravitates (so far) towards its universities and then contributes to the wider economy (Silicon Valley is just one example).

In the UK, foreign student arrivals fell by 8% in the year to March 2012 according to official statistics. Meanwhile visas for the rich jumped 78% in the year to June 2012. (The bases are vastly different but they are clearly going to be given the number of global rich versus the number of global students).

This is a grand experiment in the field of policy and one whose results would be interesting to watch.

Monday, 3 December 2012

Tale of Two Corrupt Countries

My latest column looking at the India-China story from the viewpoint of corruption:

Wealth can empower change

The Indian politician’s dismissal of public outrage over corruption goes back to Indira Gandhi, who trivialized it as being a global phenomenon. She was right, but what she glossed over was that the extent and type of corruption differ greatly between nations. It is this difference that translates into development and the quality of life for a country’s citizens.
Usually when we complain about corruption, it is the extent with which we are bothered and its intrusion into our daily life. The correlation between the extent of corruption, captured by Transparency International’s rankings, and economic development is well known (Graph 1). Unsurprisingly, New Zealand, Denmark and Finland are at the top of Transparency International’s rankings, while North Korea and Somalia languish at the bottom. However, this is not the whole story. Over the last 14 years, despite a relatively small difference in Corruption Perceptions Index (CPI) rank, China has left India far behind in economic development as measured by per-capita gross domestic product, or GDP (Graph 2).
China’s faster development can be explained not by the extent, but by the type of corruption prevalent there.
For the rest of the article (including graphs) go here.