Sunday, 31 May 2015

Does Government Debt Actually Harm Future Generations?


Tom Goldsworthy
The USA's national debt, visualised if it were in stacks of cash.


Does government debt harm future generations, as it is often argued? Government borrowing is argued to be immoral because of the supposed burden it places on our children, and our children's children, and so on.  Higher debt-financed consumption today makes future generations poorer tomorrow, so the argument goes.  An article in the Telegraph last year entitled, 'It's time to come clean about our national debt' used this very same argument.  Liam Halligan, the article's author, said:

"Why should we borrow so much, foisting our profligacy on our children and grandchildren...A spiralling national debt isn't only bad economics, but is also morally repugnant."

Unfortunately, many would point out that the economic logic behind the above argument does not completely hold.  In theory, government debt need not necessarily leave future generations any worse of at all overall - net.  This is because, for every pound the government borrows, there must be someone on the other side lending that money.  So, assuming all government debt is held only domestically, the 'burden' on future generations will be zero.  While some parts of the population will pay higher taxes to service the debt, another section will receive interest payments for lending the government that money in the first place (and these two groups are likely to overlap).  Of course, there are many other reasons that excessive government debt may be undesirable in terms of its effects on future generations, not least the distributional consequences, but in terms of the question of a net burden on society, the case does not hold.

Having said that, around 1/3 of government debt is in foreign hands, and so there will be a net 'burden' on society in the future to an extent.  The assumption that all government debt is held domestically is not completely accurate in Britain.  

Although, even then the argument over whether government debt burdens future generations is not settled.  It depends on how the government spends the money it borrows.  If it is being used to finance short-term consumption, then, yes, the fact that around 1/3 of our debt is foreign owned will mean that we are enriching ourselves at the expense of future generations. But, if the money is used to finance vital, beneficial long-term investments in, say, infrastructure, then future tax payers will feel the benefits of that spending, as well as the costs, and so not necessarily be worse off overall.

So, while in theory government debt needn't leave a net burden on future generations, in reality it probably will to an extent.  However, as shown, when government debt is domestically held (as 2/3 of British government debt is), hyperbolically stating that government borrowing is 'morally repugnant', irresponsible and so on, is clearly a huge exaggeration.  As the economic logic shows, the majority of British government debt will, in fact, not leave future generations worse off.


Tom Goldsworthy is the founder and editor of The Economic Viewa blog that aims to provide the 'economic view' on current events, analysing topical issues with the economist's toolkit. 
Mohammad Lone Editor

Friday, 15 May 2015

12 Ways A Stronger US Dollar Affects The Global Economy


During the last few years, the US dollar has grown in strength. Uncertainty about the world economy has led many investors and others to turn to the US dollar. Because the greenback is backed by what many consider the most stable tax base in the world, it is considered very safe. On top of that, the US economy is still the largest, and the greenback is still the de facto global currency. It’s hard to argue against the viability of the US dollar, and with all of the uncertainty right now, it’s not surprising that many turn to the greenback for a reliable investment.

However, a stronger US dollar has very real impacts. For decades, the dollar was weakening relative to other currencies. But now, the situation has changed.Even  if the change ends up being only temporary. here  are some of the ways a stronger US dollar affects the economies of the United States and Europe:

1. US Domestic Industries Struggle with Input Costs

For US companies with foreign workers in developing nations, a stronger dollar means input costs related to labor are smaller, since a stronger dollar can buy more of a weaker currency. That’s not the story in the United States, though. With a stronger dollar, it means that US domestic labor, paid for in US dollars, is more expensive. There isn’t a lot of flexibility for these types of companies to compete on price without seeing thinner margins. As ISM falls, there is potential for GDP growth to slow as well.

2. US Exporters Likely to See Losses

Earnings season once again reminds us that US companies exporting to other countries are likely to see problems related to a stronger US dollar. With the dollar stronger relative to other currencies, it means that exporters have to lower their prices in order to prevent buyers in other countries from turning to less-expensive alternatives. This impact on US company earnings can mean a lower stock market, as well as other economic consequences.

3. European Companies Can’t Raise Prices

The ECB has been trying to keep the eurozone economy on life support since the sovereign debt crisis. Recently, the ECB instigated a quantitative easing program to help stimulate the economy with the help of inflation. However, a stronger US dollar means that it’s going to be harder for European countries to raise prices, even with the help of a policy that encourages inflation. This means a difficult time for European companies and earnings, even if eurozone countries gain a little help in the realm of export.

4. Some European Exports Might be More Attractive

With a stronger dollar on tap, some European exports might be seen as more attractive. However, this may not happen to a significant  extent unless EUR/USD actually reaches parity – or the dollar strengthens to the point that it is worth more than the euro. If the dollar’s rally continues, the eurozone might get a little export help as more buyers turn to more moderately priced goods from a weaker currency. That could help the eurozone economy recover a bit, and be useful in the event that European companies can’t raise domestic prices.

5. Germany Likely to Benefit From Exports

The German economy is likely to be the biggest winner from increased exports. German exports will be cheaper and more attractive, thanks to a strong dollar. While this is likely to help the eurozone economy overall, the fact of the matter is that it is also likely to continue to widen the gap between German economy and the eurozone economies on the periphery.

6. US Consumers See Cheaper Fossil Fuels

During the last few years, as oil prices have risen and fuel has become more expensive in the United States, strides toward an economy less dependent on fossil fuels have been made. However, now that the greenback is gaining strength, oil, which is denominated in dollars, is lower in cost. With cheaper fossil fuels comes a shift away from the development of the sustainable energy economy, and that could impact the overall economy down the road if oil prices rise again.

7. Oil Doesn’t Fall as Much for Europeans

While oil prices are lower in Europe, because of a stronger dollar, the difference would not be so  great. The currency difference means that the drop wouldn’t allow European consumers to keep as much money in their pockets (for spending on other things) as US consumers have.

8. European Tourism Industry Grows

Eurozone countries are seeing increases in their economies thanks to tourism from the United States. US tourists are visiting eurozone countries because it’s cheaper for them to do so, with the value of the euro down relative to the value of the dollar. European economies might see a little extra boost in tourism, as long as the dollar remains strong.

9. Fewer Tourists to the United States

Of course, the flip side to a growth in tourism in eurozone economies is a decrease in tourism to the United States. A stronger dollar means it’s more expensive to visit the United States, something that might pinch the American hospitality industry.

10. Cuts to US Imports Could Keep Inflation in Check

The Federal Reserve has a target inflation rate of 2.0%.. Right now, the inflation rate is nowhere near that level, and it’s not likely to do so anytime soon., because the cut to import prices (a stronger dollar means that imports to the United States appear cheaper to consumers and others) will keep inflation in check. While the Fed has said it will look at a range of factors – including unemployment – before raising rates, there really isn’t much reason to raise rates as long as other factors keep inflation in check.

11. United Kingdom Acts as an Economic Bridge

Even countries not involved in the eurozone are feeling the impact of a strong US dollar. The United Kingdom has been a sort of “go between” since the dollar has strengthened. The pound has weakened relative to the dollar, but remains strong relative to the euro. Britons can add to the rise in tourism seen in the eurozone, and continue to act as an economic bridge between the United States and the eurozone.

12. Russia Sees Mixed Results

Another European country impacted by the strong US dollar, but that isn’t using the euro, is Russia. Russia sees mixed results from a strong dollar. On one hand, a strong dollar means better export numbers for the relatively weak ruble. On the other hand, though, the strong dollar is driving down oil prices, and that hits Russia in one of its biggest economic supports.


This article was written by Miranda Marquit, and provided by Andriy Moraru- editor at EarnForex. Check out EarnForex if you want to gain a better understanding of how currencies and economic indicators work together, and how you can benefit from global currency moves.
Mohammad Lone Editor

Saturday, 9 May 2015

5 Reasons To Be Worried About The Next 5 Years


He's done it. David William Donald Cameron and the Tory party have successfully gained a majority in a shock result to an election that was hyped up to be the closest in recent memory. Much of the country will of course be celebrating, but perhaps Britain should be cautious about how these next 5 years of Conservative government (potentially more) will pan out to be. Here are 5 major causes concern for Cameron's next term in government.


EU 
A significant point of discussion over the next couple of years will certainly be that of Britain's European Union membership. Cameron and the Conservatives, influenced no doubt by the wind of Euroskepticism on the right (à la Nigel Farage), have pledged to hold a referendum on EU membership by 2017. Of course, the public could vote yes and perhaps little will change, but should a no vote be the result, we could see some devastating results.

3,445,000 British jobs are dependent upon exports to the European Union, and many of these will come under threat as a result of the decrease in trade with the EU that an independent Britain would experience.. Of course trade with EU countries would not totally cease should Britain leave the EU, but we would become a far less attractive trade partner if we could not be a part of the EU trade concessions programme. As a non-EU country, it would cost more for France, Germany and the rest of Europe to trade with us; making us a less attractive trade partner. Furthermore, the price of our imports from Europe would be very likely to increase.

Cameron's consideration of an EU exit poses a real threat to the Britain, not just economically but socially. Britain enjoys numerous privileges as a result of its EU membership- such as the freedom of movement it grants and the advantages it brings for students wishing to study abroad. And let's not forget the clout of the EU on the global stage. We are no longer the Empire that the Sun never sets on- Britain would lose a great deal of global prominence should it leave the European Union.

Green Troubles
The Tories don't have the greatest record on Green energy, and it seems that environmentally the next five years may not be all rosy for Britain. David Cameron's reported remarks from 2 years ago that he wanted to get rid of the "green crap" that are the green levies on energy bills pretty much sums up the party's attitude to the environment.

Goodbye Wind Power- hello Fracking?
The Conservative Party Manifesto, however, tells us more about the energy policy Cameron seeks to pursue in office. Despite the party's pledge to invest in green energies that "represent value for money", plans to scrap subsidies for onshore wind farms (the cheapest form of carbon-neutral energy) are soon to go forward. The controversial fracking program is also to continue, despite the possibility it brings of contaminating water supplies and also releasing harmful methane and ozone gases.

Britain has seen terrible flooding problems in the past years, and many have claimed this to be partly attributable to a lack of spending on the part of the government building sustainable flood defences. Despite, this, the Conservative government have already cut spending on flood defences, and are seeking to further minimise spending on the flood issue in their next term- meaning parts of Britain are likely to suffer hugely yet again next time the flooding comes.

Cuts, Cuts and More Cuts
A signature of post-Thathcher Conservatism, we will undoubtedly see in the coming years a series of ruthless cuts made to government spending made in the name of streamlining the economy, reducing dependency on the government and cutting this 'deficit' that Chancellor George Osbourne has often milked for political points in the past 5 years.

In the past 5 years, many of the governments' austerity plans (such as scrapping housing benefits for young people) have been opposed and thus halted (or at least watered down) by the presence of the Liberal Democrats in the coalition.

With the Conservatives now in command of a majority in the House of Commons rather than being in coalition, they hold almost total autonomy over government policy. Now, they are set to go on an aggressive slimming down of public spending, according to the Office of Budget Responsibility, with a 'rollercoaster ride' of £30bn of cuts lined up for the next five years.

These cuts include a reduction of the annual benefits cap by £3k to £23,000 and a removal of the youth housing benefits (the ones eanumber of food bank users doubling to 2 million a year.
rlier mentioned, that the Lib Dems prevented being passed through). In total, the Conservatives have £12bn of welfare spendings cuts planned out that will hit the working class, poorest of society almost exclusively. The impact will be devastating: an Oxford University study claims this £12bn of social welfare cuts will result in the

Austerity arguably doesn't even work- the Economic Policy Institute (see graph) are just one of numerous organisations that have highlighted that Austerity impedes economic growth. That's primarily because austerity increases poverty, meaning demand is also shot down. Think of economic growth as a table, supported by consumer spending. Squeezing the public squeezes consumer spending, effectively chopping of the legs of the table and leading the whole thing to collapse.

'Flexible Hours'
The government have claimed to reduced unemployment during their last five years in office, which is in fact true: but as with most things, when it comes to jobs quality is just as important as quantity. According to the ONS, between October and December 2014, 697,000 people were working on 'zero-hour contracts'- a highly controversial form of employment in which there is no guarantee whatsoever of the employee being able to work a certain number of hours. People have often described turning up to work to find out they aren't needed, before having to head back home for a day without pay.

The uncertainty of a zero-hour contract creates problems for workers- not only does it waste time that could be spent being productive, but it creates huge instability for families that are most likely already riding the poverty line. It leaves hundreds of thousands of people unsure whether they will be able to afford their housing, their heating for the winter, or even their food.

Labour promised to put a ban to zero-hour contracts, and so did the Tories. Well, kind of- Iain Duncan Smith, the Tory Work and Pensions Secretary promised simply a paltry rebranding, to call them 'flexible hours'. So on this front we will see change- but unfortunately where it really matters to the poorest in Britain the status quo will continue under the Conservatives. 

A Government Run for the Wealthy, By The Wealthy
Amidst all the cuts that will devastate the poorest in British society, the following 5 years will probably be rather rosy for the upper-middle and upper class of British society.
£1.2bn could have been raised by a 'Mansion Tax' that would increase the contribution of the wealthiest to society, but it was ignored by the Tories, who chose to instead tax people on welfare with spare rooms in their house. This is just one of the many examples of the Conservative Party working for the wealthy elite, against the interests of the impoverished in Britain, those who really need the government's help.

This is where we come to the National Health Service, where perhaps the Conservatives will have the most devastating effect. Areas of the cherished national institution are already losing funds and being privatised. In the past five years, payments from the government to the NHS for each patient that is treated has been cut in effect by 10%, leading to problems that have already arisen such as a lack of beds and the infamous A&E waiting times. The government's response to this is, rather than taking the blame, often to criticise these areas of the NHS and push for their sale to private 'more efficient' hands. Just in the past month, the Tories signed off a £780m sale to a group of private companies that with dubious past records. 

Take one of these companies, Vanguard, that was previously given the responsibility for eye treatments in Musgrove Park Hospital, Taunton. The contract was terminated just 4 days after beginning, with HALF of the 60 patients it had treated facing post-treatment complications as severe as a complete loss of sight

This highlights the illusion that private companies provide the best results for the consumer. Of course, this is indeed often the case (no one would argue to nationalise Apple, for example), but health is a completely different ball game. As is clear in the United States, a profit-driven health sector is against the public's interests, but it is indeed in the interests of those big businesses that these services are handed to. 

And these are just a few of the results of the Tory squeeze on the NHS. Between 2010 and December 2014, 4000 nurses had lost their jobs. Those who haven't lost their jobs to the cuts have seen their pay frozen for a number of years. For the patients and the staff of the NHS, the next few years are not looking rosy. 




Mohammad Lone Editor