Bellerbys Economics - Mr Stephenson

Sunday, April 30, 2006

Enron - Corporate Governance

A great new movie has just been released - "Enron - the Smartest Guys in the Room". This movie's a must-see for all Economics, Business Studies, Law and Accounting students (that's just about everyone!)

In the 1980s, in the US and UK, all the great state utilities - water, has, telecoms etc - were privatised. Philosophically, this was justified as a step towards supply-side policies, breaking up 'inefficient' state monopolies and creating more competition. In practice, this often led to large private monopolies instead - particularly in the distribution of the service, the network infrastructure. Paradoxically, this then required the creation of strong state regulators to keep them under control.

In the US, regulation was weaker than the UK and Enron dominated electricity distribution, becoming the world's seventh biggest corporation. Then, in the early 90s, President Clinton made a big mistake, making share option schemes legal. A share option scheme works like this: In order to encourage your executives, you give them the option of buying shares in the company at a later date but at today's price. If the company is successful and the share price goes up, they make a big profit by buying the shares at the old price and then selling them at the new price. If the share price has gone down, they simply don't follow through on their option of buying the shares. It's a win-win situation for the executive.

The problem with Enron was that the executives (led by Chief Executive Ken Lay) simply focussed entirely on increasing the share value of the business - so they could maximise their own personal profit. They did this by manipulating the accounts - for example, recording revenue expenditure as capital expenditure, thus increasing the net profit and the asset value of the business at the same time - making the company look more successful than it was. Another trick was to transfer electricity out of California, reducing supply and thus pushing up prices. And there were many more tricks.

Watch the movie and find them all out!

This is not a difficult or dry movie - although a documentary, it's played as a drama - the actors are good and it's full of breathtaking exchanges and good direction. A really fun way to spend 90 minutes - and of course a warning as to what can happen if companies are allowed to get out of control.

Friday, April 28, 2006

Economics, economics everywhere......

This week's been a busy week in economics - every week's a busy week in economics - the study of everything!

I know some of you went to see Hilary Duff (isn't she great? Though not as good as Stephanie Sun or Group 666 I guess) at the Brighton Centre on Wednesday - but the material girl who really understands the economics behind rock music is Madonna - read how she does it here:

Oil prices are rising - the USA is the world's biggest importer of oil - what effects will this have on the US economy? That's right - inflation and lower growth as the aggregate supply curve shifts left. Ben Bernenke at the Federal Reserve has 'expressed worries'. The situation has been made worse by speculators in the US stockpiling oil reserves to force up the price further hoping to make a kill.

President Hu has been in Africa all week. This is the continuation of China's 'New Africa' policy which they have been pursuing for five years now. In terms of natural resources, Africa is very rich - newly discovered oil reserves in countries as diverse as Gabon, Guinea, Nigeria and Somalia - are very tempting to China. For historical reasons, these countries are not too friendly with the developed countries, so China has an opportunity here to act as big brother in the Chinese sense. In exchange for the oil and access to African markets, China is trading experience in infrastructure development, machinery and cheap consumer products. This strategy also fits nicely into the new BRIC and A7 strategies that have been developing over the last two years (BRIC - Brazil, Russia, India, China) and A7 (BRIC + S.Korea, Malaysia, S.Africa) which argues that developing countries should trade more with each other and not just act as a source of cheap products for the developed world.

This is what Pres HU said:

"Africa has rich resources and market potentials, whereas China has available effective practices and practical know-how it has gained in the course of modernisation. China's development will not pose a threat to anyone. On the contrary, it will bring more development opportunities to the world." Nigerian parliamentarians gave the Chinese president a standing ovation at the end of his speech.

Gazprom is rapidly becoming a major player in Europe. The Kremlin-controlled company (the Russian government has a 51% stake) managed by Economics genius Alexei Miller has its eyes on Centrica - the British gas supplier. The British government is worried. Centrica provides 25% of the UK's electricity (likely to rise to 40% in the next few weeks) through gas-fired power stations - and also 90% of the UK's domestic and industrial gas supply. Rumour has it that the government will prevent Gazprom from taking over by using the Competition Commission to argue that it would create a monopoly in the UK - but Pres Putin is annoyed because this is clearly an excuse - if the government was worried about monopoly, it would already have moved to break Centrica up.

Walkers Crisps (60% of the market) have responded to public pressure and reduced the fat and salt contents of their crisps to almost safe levels - a good example of property rights being exerted through pressure groups in the community.

China has increased interest rates from 5.58% to 5.85%. Inflation is not really a problem, but it is worried that economic growth of 10.2% a year is becoming uncontrollable. This seems more like a political decision - the central government showing who's in charge - rather than a strictly economic decision.

Module 3: Disposing of nuclear waste is the big problem isn't it? How do you dispose of something safely for 25,000 years? Find out how the Finns are planning on doing it here:

Richard Branson is one of the UK's ten richest people. I met him once at a reception and - being the sort of person I am - I mentioned a business idea I had to him. I expected him to walk away as quickly as possible. After all, people must be always doing this to him, but he didn't. He listened to what I said, replied that it could just work, and gave me an email address to contact in his organisation - which I did. The quality of his response impressed me. Although it's always difficult to tell what someone else is really like, I did get the impression that he was an honest, straightforward sort of person - you can find out what he is trying to do to help Africa here:

Thursday, April 27, 2006

World's Biggest Companies

51 of the biggest 100 economic entities in the world are companies - not nations. In fact, the nation state is rapidly becoming redundant. By the year 2100, it's quite likely that people won't describe themselves as British, Kazakh or Chinese - but instead we will say, I'm Microsoft or I'm Citigroup.

There's even an excellent satire - a novel - that looks at this idea called 'Jennifer Government' by Australian author, Max Barry - it's really very funny. In the book, people have begun taking on the name of the company they work for - so I would be Andrew Bellerbys, for example, and my sister might be Linda Plymouth Airport. This is not as ridiculous as it sounds - names, after all, were often used to show someone's profession in the past - like Butcher, Baker and so on. In the story, Jennifer is one of the few people who still works for the government and expects to be made redundant at any moment when the government is bought out by a chainstore. Sounds ridiculous until you realise that the UK government is actively pursuing a policy of allowing schools and hospitals to be run by businesses - it's a slippery slope.

Anyway, the world's biggest companies are:

1) General Electric
United States

2) Microsoft
United States

3) Pfizer
United States

4) ExxonMobil
United States

5) Wal-Mart Stores
United States

6) Citigroup
United States

7) Johnson & Johnson
United States

8) Royal Dutch/Shell Group

9) BP
United Kingdom

10) International Business Machines
United States

11) American International Group
United States

12) Vodafone
United Kingdom

13) Intel
United States

14) HSBC Group
United Kingdom

15) Merck
United States

16) Procter & Gamble
United States

17) GlaxoSmithKline
United Kingdom

18) Cisco Systems
United States

19) Coca-Cola
United States

20) Bank of America
United States

Notice how nearly all of the businesses are in theory American. They started life in America and have grown steadily over the last 100 years. They are in a very powerful position - it will be another 50 years before businesses in other countries are able to generate the same levels of market value as these long-established companies. However, a good question to ask is - just how loyal are these 'American' companies to America? Many of them now carry out most of their manufacturing, investment and business overseas. Many of their shareholders may also be from overseas - with only a small percentage of final profits being repatriated to the USA. These are truly multinational companies in a globalised world.

The three dominant themes are electronics, oil and chemicals/domestic drugs. These are the central industries around which the modern world turns.

Wednesday, April 26, 2006

Go watch TV!

It's not often that I direct my students to watch television. TV in the UK has declined dramatically since the 1970s and is now little more than a procession of reality, gardening and lifestyle programmes presented by an eager array of vacuous young media studies graduates.

However, this Saturday, Channel 4 are presenting just about the best thing they've done in five years - and it's surely just a coincidence that the government is discussing the new budget for Channel 4 next week(!) - it's a movie documentary called 'A World Without Water' - that's on at 7.35pm on Saturday, April 29th - don't miss it!

People are finally beginning to realise that the world is running short of water - and there are many economics issues surrounding this problem - this documentary will be a goldmine for those of you currently revising module 3.

Is water a basic human right which should be provided as a public good? If so, why have so many countries - including the UK - recently privatised their water companies?

How does water differ from food as a commodity? Food is a private good and yet traditionally water is a public good? If having to work to find money to pay for food is an economic driver, than why shouldn't water be the same?

But what do you do if people cannot pay their water bills?

And how can you avoid the development of local water monopolies?

How can an industry like this be regulated?

How can we encourage investment - or even maintenance - when the price is regulated and companies can only make a profit by reducing their expenditure on investment or on labour - as in the UK?

Do we need a world water authority to manage supplies to hotspots such as the Middle East and East Africa (where there is on this very day a drought and people are dying)?

You can see how important this topic is - go and think about it.

Tuesday, April 25, 2006

Clocks and Counters

Clocks and Counters are a good way of demonstrating how quickly things are changing. Here are a few that you might find fun:

This is probably the most scary - the world population clock:

As I write, it's 6,511,884,404 - no, wait, that's 407, no - no, it's 413

This one's quite fun - if a little scary too - how long do you have left to live?:

This one's cool - it's the American National Debt clock - that's the total amount of money that the American government is in debt:

Typically, a government pays about 5% interest on it's national debt, so you can work out for yourself how much the American government is spending each year on interest alone - it's about $400 billion.

And here's something to think about - time is a resource - how can we use it most wisely?

Monday, April 24, 2006

Rich List

This weekend saw the publication of the annual UK Rich List and here are the top twenty:

1 Lakshmi Mittal
2 Roman Abramovich
Oil, industry and football
3 The Duke of Westminster
4 Hans Rausing and family
Food packaging
5 Philip and Tina Green
6 Leonard Blavatnik
7 Sri and Gopi Hinduja
Industry and finance
8 David and Simon Reuben
9 Sir Richard Branson
Transport and mobile phones
10 John Fredriksen
11 Charlene and Michel de Carvalho
Inheritance, brewing and banking
12 Kirsten and Jorn Rausing
Inheritance and investments
13 Bernie and Slavica Ecclestone
Motor racing
14 Mahdi al-Tajir and family
Oil, investments and water
15 Earl Cadogan and family
16 Joe Lewis
17 Russell De Leon and Ruth Parasol
Internet gambling
18= Poju Zabludowicz
Property and hotels
18= Sean Quinn and family
Quarries, hotels and insurance
18= Simon Halabi

It's easy to spot trends isn't it. Property is king. If you own property, you not only gain from increases in property values - which in the long-term always rise more quickly than GDP - but also from the rents gained on those properties. If you are lucky enough to own property in hot spots of economic activity such as the centre of London, property prices accelerate even more quickly. Once you own these assets, it's possible to then borrow more money against the value of these assets to invest in even more projects that generate profit. Not only that, but you can offer the value of your assets as surety against insurance deals through Lloyds of London and similar reassurance companies eg Swiss Re. Can you see what's happening here - the same asset (property) is gaining profit in FOUR different ways!!

The Duke of Westminster, by the way, owns most of central London (I bet you thought it was the government!) including the land on which Oxford Street, the West End, Mayfair, Belgravia, the Houses of Parliament and even Buckingham Palace stands. The Duke of Westminster doesn't play the board game 'Monopoly' - he IS the board game 'Monopoly'. Legend has it that this dates back to the time of William the Conqueror in 1066. The first Duke of Westminster was given the land by the king to say thank you for lending him his horse to go hunting. You can see now why it's important to be kind to your friends!

Secondly, there is indeed monopoly. The Lakshmi steel family have almost achieved monopoly-power worldwide on steel production AND distribution. This is partly because whole sections of the market are heavily-subsidised by national governments eg USA and France and are uncompetitive. Mittal's latest deal in Romania is currently being investigated by the EU - and his bid for Arcelor, the world's second-biggest steel company is being bitterly fought by the French government. Also, Mittal are a truly global enterprise - most of their production is in India and other developing countries with low labour costs - but most of their sales are to developed countries such as the USA, Japan and EU. Almost as an afterthought, Mittal recently bought about a third of the Chinese steel industry - including chunks of the two most famous names - Baoshan and Hunan - and gobbled up the Ukrainian industry. Lakshmi Mittal also spent £30m on his daughter's wedding and promised her a pension-for-life of £1m a year.

The Hinduja's have a similar tale to tell.

A third trend is oil - need I say more?

A fourth trend is the UK's very generous tax regime for foreign 'guests'. People live here in order to escape taxes from their own countries - also there is less business regulation in the UK than in many other European countries - also, we have a number of offshore financial centres, such as the Channel islands and the Isle of Man, where even the British rules of tax do not apply. Abramovitch, the Rausings are Blavatnik are examples of this. The two Russians are also an example of the growing influence of Londongrad - the community of 20,000 very rich Russians who live in London but whose businesses operate mainly in Russia. It's not unusual for many of these to leave their families in London and to commute to work from Mondays to Fridays - Moscow is only four hours away by plane.

Phillip Green is someone who it is quite easy to admire. Starting life by selling fabrics in a London market, he has worked his way up through the retail sector so that he now owns most of the clothing stores in the UK. Of course there are many different brand names - Debenhams, Bhs, Top Shop, Dorothy Perkins and so on - but they are all Phillip Green - a good example of the illusion of choice that we talk about in modules 1 and 5.

Notice also, the new influence of internet gambling. In 48 of the 50 American states, it is illegal to gamble, and Americans love to gamble - so they have turned to internet gambling. The first fortunes on the Internet were made from pornography, the second wave has been gambling. Most economists are predicting that the third wave will be drugs - legal drugs - as people turn away from expensive privatised healthcare systems and turn to self-medication by buying cheap but powerful painkillers and antidepressants produced in India, South Africa and Brazil.

I predict that the fourth wave will be Economics textbooks - invest in my company now while you still have a chance!!

Finally, if you think British people are rich, just look at this list of the World's richest people:

The Top Ten
William Gates
Warren Buffett
Carlos Slim Helú
Ingvar Kamprad
Lakshmi Mittal
Paul Allen
Bernard Arnault
Prince Alwaleed
Kenneth Thomson
Li Ka-shing

The last time I checked, Bill Gates was worth $50 billion. Carlos Slim Helu, by the way, owns most of the mobile and fixed-line phone companies evrywhere in South America - people love to talk!

Friday, April 21, 2006

What's the best way to organise society?

One of the great things about the Internet is that you can attend lectures without actually being there! And you can get to hear the most important lecturers in each field instead of the overblown idiot at your local college.

Here's a lecture from one of the world's leading Economics theorists - Jared Diamond.

His view is that societies progress most quickly through a process of competitive collaboration. The EU and China may be good examples of this. The EU's 25 states and China's 27 provinces - in Diamond's view - should act and compete independently but information should be allowed to flow freely between them, so they all share the benefits of scientific development and innovation.

How societies can regulate this situation to make sure it works is an interesting puzzle - but anyway, here's his lecture:

Thursday, April 20, 2006

Russia - the Great Sheikhs of the North

Most economists agree that Russia is about to enter a golden period. Money has been flooding into the country since the price of oil moved up from $30 a barrel last year to $70 a barrel. (A barrel of oil is the same as 159 litres or 35 gallons).

This has led to inflation which has the Government worried, so it has very sensibly created a separate fund - the Oil Investment Fund which now stands at about $60 billion. The government plans on using this money in a way that does not increase demand too quickly in the Russian economy. Some of it has been used to pay off Russia's international debts early; some has been used to help Russian businesses to invest overseas - such as Gazprom; some is being used on supply-side measures in Russia.

I visit Russia frequently and I have seen the money being invested in schools, roads and housing - especially in the Moscow region. There is a short-term problem with this type of infrastructure development because at first it acts as a demand-led policy as demand increases for building materials and labour - but in the longer term (provided the money is invested wisely) it converts into a supply-side policy, improving the overall economic efficiency of the country.

The Oil Investment Fund is getting bigger and bigger every day - some estimates suggest it may reach $1.3 trillion by 2030 even with the current level of investment. Of course, some Russians are getting impatient and they ask the question - "Why is it I am still relatively poor when the country is earning so much money?" and it will be interesting to see whether the government is able to maintain this long-term investment approach when the political pressure to release more of the money now begins to build.

Wednesday, April 19, 2006

US Economy Cooling Down

The US trade deficit with China fell slightly last month as Hu Jintao begins his tour of the US. This followed a series of interest rate rises in the US that reduced demand from American consumers - this should also help reduce the US inflation rate which was 3.4% last month - but this month's figures are not in yet. It should also reduce US economic growth which will frustrate the Americans when growth in China is now in excess of 10% a year. However, the reduction in US demand will also slow growth in China as demand for Chinese products fall.

Recent events have illustrated even more clearly how closely the American and Chinese economies are now linked - China could be considered in effect as the 51st American state (or perhaps America is the 28th Chinese province?)

Tuesday, April 18, 2006

China & USA

This week sees the visit of President Hu Jintao to the USA to meet George Bush - they have much to discuss.

The USA's current account deficit is now 7% of GDP which many economists would argue is unsustainable - although the USA appears to be sustaining it - or rather it is being sustained by an ever-extending credit line from Japan, China and Germany, amongst others!

Half of this current account deficit is with China and the Americans are arguing that this is because the renminbi is undervalued. It's true that China has a large current account surplus but this may be because it has a policy of developing export-orientated products and domestic demand is low. It could equally be argued that the dollar is overvalued as it is still seen as the world's reserve currency and is used in most oil transactions - therefore demand for the dollar is unreasonably high.

This period in history may be coming to an end with the first non-dollar oil exchanges opening up in Syria and Iran and a number of countries central banks broadening their foreign exchange reserves into other currencies.

My own view is that the dollar may be overvalued by as much as 30% and a managed fall would do the US economy a great deal of good - as well as showing the average per capita earnings of Americans in a more realistic light.

China is now the 4th biggest economy in GDP terms and the 2nd largest in PPP terms. It appears to be demonstrating a Kondratiev long-range 50-year economic cycle (or thereabouts) and has seen a period of accelerating growth since about 1989. At the moment, GDP growth is 10.1% a year and this may accelerate even further up to about 2014 before the rate of growth begins to decline reaching a more sustainable level of about 2-3% a year by about 2039 - at which stage, China may well have the world's biggest economy.

Saturday, April 15, 2006

Web Resources

Remember, you don't study Economics, you become an Economist!

Attending Economics lessons can only really give you a shallow overview of the exciting world of Economics (which remember means 'the understanding of everything!'. Economists are very ambitious in the task they set themselves!)

There are some great resources available for Economics students on the web - many from the USA - including free online textbooks. You should surf through the following links. The more you read, the better the economist you will become. If you have any questions about what you read, I would be pleased to answer them:

Wednesday, April 12, 2006

Great Summer Reading

The summer doesn't seem to be quite here yet as I sit in my igloo in Newhaven wrapped in three pullovers and a fur coat - got to cut done on heating bills somehow - but I'm warming up my brain with a great new book - 'The Undercover Economist' by Tim Harford. I've asked the Librarian to get a copy so you can borrow it - but why not buy your own copy - it's a sensible investment.

Tim explains in a light and humourous way many of the important themes that underlie new economics - how is it China has risen from the point of famine to being the world's second biggest economy in just fifty years, whilst the standard of living in Africa has actually fallen during the same period; why owning the land and the means of distribution is far more important and profitable than the end-products that are sold in retail outlets on that land and at the end of those distribution channels; how the radio spectrum has also become a form of land and also a means of distribution; the importance of 'crowding-out' a market; why housing and health are markets that cannot operate freely in the interests of the poor and so on.

This book will give you a flying start to the second year A-level programme - especially for module 5 - but don't take my word for it, find out for yourself.