Tag Archives: Gordon Brown

It has been nothing short of a wild ride in the world’s capital markets of late, as fears that a double-dip recession is on the way, have shaken investors’ naturally bullish predisposition.  The optimists discount such concerns and, argue that the slowdown in economic momentum is nothing more than a typical mid-cycle pause.

However, whether the developed world double-dips or not misses the point completely; the fact of the matter is that economic growth is not sufficiently strong to accommodate the necessary deleveraging of overstretched private and public sector balance sheets, whilst simultaneously allowing for a reduction in the large and persistent economic slack.

Indeed, most developed economies have yet to surpass the pre-recession peak in economic activity, while private and public sector debt relative to GDP, are either close to or at an all-time high.  With years of sluggish growth in the offing, it’s hardly surprising that the world’s stock markets exhibit little, if any, upward progress and suffer periodic bouts of painful indigestion.  In such a volatile climate, the buy-and-hold mantra that held sway a decade ago is dead.

It all seemed so different to policymakers in the not too distant past, but their hubris in the lead-up to the global financial crisis three years ago, is unmistakable.  Indeed, back in the year 2000, Gordon Brown, the then U.K. chancellor, confidently declared that there would be no return to boom and bust, as if the Scotsman had somehow singlehandedly eradicated the all-too human characteristics of greed and fear.

Alan Greenspan, the former chairman of the U.S. Federal Reserve, marvelled at the perceived stability later in the decade and, argued that financial innovation has, “contributed to the development of a more flexible and efficient financial system.”  The so-called maestro was oblivious to the fact that the new financial products, which sliced and diced low-quality debt to the nth degree, represented a house of cards that was simply waiting to be blown over.

Even our own Bertie Ahern, the then Taoiseach, got in on the act in 2007 and, poured scorn on those who talked down the economy.  He proclaimed that, “Sitting on the sidelines, cribbing and moaning is a lost opportunity.  I don’t know how people who engage in that don’t commit suicide.”  Mr. Ahern, like so many others, couldn’t see that the rapid build-up of household debt to fund either conspicuous current consumption or investment in unproductive assets such as housing, has never been – and never will be – the road to long-term prosperity.

The accumulation of household debt in the years preceding the crisis was simply staggering.  Household leverage in the U.S., as measured by the ratio of debt to personal disposable income, vaulted by more than 40 percentage points to circa 130 per cent from 1997 to 2007.  In the U.K., the ratio jumped by more than 50 percentage points to about 130 per cent over the same period.  Meanwhile, household leverage in Spain and Portugal doubled to 110 and 115 per cent respectively.  The Irish however, outdid everyone in the reckless borrowing spree, as the ratio jumped by 85 percentage points to more than 190 per cent.

The growing mountain of private debt went unnoticed by many, as bankers, investors and policymakers were seduced by what appeared to be never-ending tranquillity.  Indeed, Gerard Baker of the Times of London wrote at the beginning of 2007, “Welcome to ‘the Great Moderation.’  Historians will marvel at the stability of the era.”  Unfortunately, cracks in the increasingly fragile financial structure were already beginning to appear and, all it took was ripples in a seemingly inconsequential segment of America’s mortgage market, to bring the entire edifice to its knees.

The world economy slipped into the most severe recession since the 1930s and, the cyclical deterioration in public finances – alongside bank recapitalisation costs and stimulus packages of unprecedented magnitude – precipitated the sharpest deterioration in public sector balance sheets across the developed world since the Second World War.  The data reveals that gross public debt ratios across the G7 jumped from 82 per cent in 2007 to 112 per cent in 2010 and continues to edge ever higher.

More than three years on from the previous business cycle peak and, the state of public sector balance sheets across the developed world has caused alarm among the so-called bond market vigilantes and the credit rating agencies alike.  Sovereign risk is no longer considered negligible in nations that were traditionally considered risk-free, while the prospect of defaults among the weaker eurozone countries looms large.

Meanwhile, near-zero interest rates and unconventional monetary policies have failed to ignite an economic recovery that is sufficiently robust to result in a fall in aggregate debt levels.  Combined private and public sector debt ratios continue to rise in most developed countries, while the extent of the deleveraging in others has been minimal so far.

The private sector’s debt addiction in the developed world in the years leading up to the financial crisis – alongside the subsequent leveraging of public balance sheets to absorb the shock once the crisis struck – means that the world’s major economic centres face years of subdued growth, as previous excesses are unwound.

The real question facing investors today is not whether the Western world will double-dip but, whether the ‘Great Recession’ ever really ended.  The secular bear market in stocks rolls on.

Originally posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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While the smoke clears from the worst of the financial crisis and regulators investigate new regulation to prevent another financial meltdown, it isn't surprising that talks of enacting a Tobin Tax are resurfacing. The Tobin Tax was proposed back in 1971 when the United States first went fully off the gold standard, and has since been frequently discussed, but never enacted.

Gordon Brown Tobin Tax

During November's meeting of G20 finance ministers, Gordon Brown, the British prime minister, presented the idea once again of a Tobin Tax on financial transactions. A Tobin Tax would place a small tax, between 0.1 percent and 0.25 percent, on all currency transactions. Considering the currency markets have an average daily volume of $2-$3 trillion, we are talking about netting $2-$3 billion per day - a pretty hefty sum.

The idea behind the Tobin Tax is simple. It would discourage short-term speculation in the currency markets in favor of more long-term, stable transactions. Regulators believe that by placing a small tax on each transaction, it will discourage speculators in the market, and therefore lead to a more stable financial system.

Proponents of the Tobin Tax see it as a way to create a buffer and prevent a future financial crisis. Over time, a reserve can be created that, in the event of a future crisis, can be used to bailout corporations and governments, and stem the spread of a crisis. It would essentially act as an insurance policy to prevent a future financial crisis.

Some proponents see a Tobin Tax as a way to redistribute wealth. Tax revenue generated by a Tobin Tax could be used towards humanitarian efforts, saving the environment, and in aiding developing nations. Other proponents have a simpler agenda. They see a Tobin Tax as a way to make the large corporations that caused the financial crisis, who are now paying record bonuses, pay for their excess and greed. There are many motives out there to enact a Tobin Tax, but what does it mean for the individual Forex trader?

Impact on the "Small Guy" Forex Trader

If a Tobin Tax were to be implemented, barring they don't exclude individual retail traders, it would dramatically impact the retail trader and possibly even wipe-out the entire industry. Forex traders already have to fight for every pip and surmount broker fees. If you tack on an additional 0.1 percent tax to each transaction, it would make it nearly impossible for the "small guy" to compete.

The good news is that it isn't likely that a Tobin Tax will be implemented. First, the Tobin Tax is an all-or-none deal. To be successfully implemented, it would require all governments to be onboard; otherwise funds would funnel through countries that don't have the tax. Second, the U.S. is against a Tobin Tax. U.S. Treasury Secretary Timothy Geithner has expressed his disapproval of the tax. Finally, it doesn’t really make sense to tax retail traders out of the market. Retail Forex traders were not the cause of the financial crisis, but rather serve an important role of providing liquidity to the markets. Liquidity does not come from a high turnover ratio, but rather from a large diversity of traders with different views. By looking at the social indicators and reading the discussions on Currensee, it is pretty clear we have a large diversity of traders with different views.

If you would like to read more about the Tobin tax, the Financial Times has a couple good articles titled EU Leaders Urge IMF to Consider Tobin Tax and Tobin or Not Tobin. Dani Rodrik also wrote an interesting piece on the Tobin Tax on the Project Syndicate website.

How do you feel about the Tobin Tax? What do you think the chances are that something like this would be passed?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.