China faces ‘acid test’ over credit bubble

Article by Michael Mackenzie:, 19/05/2017

This is a Financial Times Long View piece on China’s debt bubble, summarising a discussion I led with an audience at the FT on 15th May.

Investors shouldn’t take their eyes off China as the 19th Party Congress looms

For global investors and, indeed commentators, China remains a fascinating subject and one that carries a health warning. Nearly a third of fund managers say the recent tightening of credit by authorities in Beijing, who are taking aim at the shadow banking sector, is now the biggest tail risk for markets, according to a Bank of America Merrill Lynch survey released this week. Not since January of 2016 has China ranked above the threat of a eurozone break-up as the biggest worry for investors. The catalyst has been Beijing’s belated effort to bring an enormous credit bubble under control. As a result, interbank lending rates have shot up, while five-year bond yields have risen above those of the 10-year sector — both signs of financial tension that reflect the crackdown on leverage….Read more:

Posted in China Tagged with: , ,

Time for honesty on tax: we will all need to pay more

First published:, 8/05/2017

Labour’s plan to raise income tax on £80,000 earners doesn’t cut it

It’s not going to happen before the election, but one of these days, politicians will have to level with voters about tax.

Over the weekend, the Labour Party pledged to introduce higher rate income tax on people earning over £80,000, if it gets into office. That’s about 1.6m people. The party says 95 per cent of people will not pay higher income tax, and there won’t be a rise in VAT. This might make good politics for the beleaguered party, but the proposal is dishonest. So too is the Conservative Party—though for slightly different reasons. The party had previously pledged not to raise taxes, but Philip Hammond has now said that he doesn’t want to be bound by this, and it is thought that while VAT would not rise under the Tory government, income tax and national insurance contributions might, for some people….Read more:

Posted in Europe + UK Tagged with: ,

Trump’s tax plan: having a laugh on Laffer

First published:, 2/05/2017

Posted in United States Tagged with: , , ,

Trump’s tax plan: having a laugh on Laffer

2nd May 2017

In the National Museum of American History, there is an exhibit of a white cloth napkin taken from a Washington DC restaurant in 1974. The reason it is there because it is adorned with a graph and some scribbling that came to have a profound effect on economic thinking. The diners were Dick Cheney, Donald Rumsfeld, Jude Wanniski, and a 34 year old economist called Art Laffer who gave his name to the curve on the graph, the Laffer curve. It was the core thinking behind the economic policies of Ronald Reagan, both George Bushes, and now President Trump. The Laffer Curve basically says that significant cuts in taxation are self-financing because of the galvanising effect it has on economic growth and jobs. Discuss.

Let us just remember that Laffer’s reasoning was used to justify Reagan’s tax cuts in the early 1980s. In the event, Reagan tripled the Federal deficit from 2 to 6 per cent instead of balancing the budget in four years as he had promised, and added more to the stock of Federal debt than all the Presidents from George Washington to Jimmy Carter combined. He tripled debt outstanding from $900 billion to $2.7 trillion. The debt to GDP ratio had tumbled from 117.5 per cent in 1945 to 32.5 per cent when Reagan took office. By the time George H Bush left office in 1993, it had doubled to 66 per cent. Under Bill Clinton, it dropped back to 56.4 per cent, but George W Bush, pursuing similar fiscal policies to his father and to Reagan, pushed the ratio back up to 73 per cent. It is true that President Obama left office with debt to GDP at around 100 per cent but remember this includes a pile of debt owned by the Federal Reserve not the public, and is attributable mainly to the financial crisis and what followed, not a belief in self-financing tax cuts. Read more ›

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May’s election call was well-timed: the economy will soon run out of gas

First published:, 24/04/2017

“The household savings rate has already slumped, consumer credit and instalment debt are rising, employment levels look maxed out, and real incomes are flat or falling”

In announcing the June General Election, the Prime Minister assured the nation that the economy is in good shape and in good hands. She cited in particular growth that was coming in above expectations, and high consumer confidence. The March retail sales data published last Friday will not make much of a dent in the government’s election narrative, but they do warn, from an economic perspective, that Theresa May has probably timed this election to perfection. Things can only get worse.

The retail sales data themselves are not conclusive. They measure only 30 per cent of total household consumption, which, in turn, makes up 60 per cent of GDP. What they showed was a 1.8 per cent fall in March, revealing the February rise of 1.7 per cent to be a blip after three consecutive monthly falls. The 1.4 per cent fall in the first quarter is the biggest since 2010, when there was one-off drop related to a rise in VAT. What they indicate is that the decline in Sterling that is pushing up in inflation (2.3 per cent in February and poised to climb still higher), is eating into low wage and salary increases, leaving real incomes flat or falling….Read more

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