Tweets ahead (or not as the case may be)

I’m a huge fan of Property Week and read it religiously every week.  Excellent journalists, great leader and all round best-of-breed publication – it ranks alongside the Sunday Times for me as one of the only two papers I read every week.

… so please consider this constructive criticism and of the broader, corporate, industry rather than the publication itself. 

For the most part it’s good that social media has been highlighted at all (I haven’t seen anything in other property press yet).  The article below demonstrates to me how far away from ‘getting’ social media the mainstream UK property industry is at present.   Disappointing when you consider just how much networking is involved in the sector.  I didn’t really drink before I got into property; that quickly changed, and how, when I fell in love with residential – my excuse is/was that it requires so much great networking.

I’ll pick out the key points that should stir further discussion:

  • Knight Frank has 440 followers; Savills 100 (and have never tweeted) and JLL 10 – only Knight Frank is even off the starting line.  Most people I know that have been using this [5 year old] service for a year or so have 5,000 or more followers.
  • The story centres around marketing – social media experts agree that the real value is in knowledge gained and introductions made.  Listening  & helping others should come before overtly marketing or selling – in social networking business generally comes by way of attraction to centres of influence & by referral.
  • Facebook (FB) is described as a purely social medium whereas many authors of business pages on FB will describe their search engine and networking success upon establishing an active one – it’s far from purely social.

Meanwhile Claer is absolutely right when she says the personal touch is as important as ever – this should be in relation to the way people & business communicate through social media however.  Don’t just give it to one person in the marketing team; the principals of the business need to really get involved and be consistent and transparent in their communication; frequently.  And look long and hard at how they need to adapt their business and routine to suit the new, online economy.

That’s not to say real-life activity is unimportant – people buy people both online and offline and if anything offline networking activity needs to be increased rather than sacrificed in favour of online.  Time online needs to be spent ‘smarter’ and time needs to be invested in learning the ropes – because it’s not just a new rule or two; it’s a an entirely new, virtual world and it’s influencing the real world at an accelerated pace; for the better I might add.

For more information I suggest readers start by buying the excellent Know me like me follow me by Penny Power – creator of the first online social network (Ecademy) more than 12 years ago.  And check out some of our free social media resources.

For those in any doubt Thomas Power has a great explanation “it takes 3 years to adapt and succeed online – a year to be known, a year to be liked and a year to be followed.  It also takes about 30 years for a new technology age to become embedded in the economy (and for the economy to become dependent on it).  Bearing in mind the internet was created in 1973 by DARPA (US defence).  Tim Berners-Lee and Robert Cailliau invented the World Wide Web in 1990.  Therefore we’ve more than 35 years of ‘internet’ and almost 20 years of ‘web’.  The clock is ticking – adapt … or die.

Major players in property should be beginning their 3 year learning process now (if not before) if they intend to survive and thrive – and the opportunities are plentiful.  As Clay Shirky said ‘The group gets better together’.

by Martin Skinner

Source article from Property Week by by Claer Barrett below.

Are social networking websites time-wasting distractions, or can they help business? Claer Barrett finds out how many property companies are plugged in

Knight Frank has 440, King Sturge has 23, DTZ boasts 165, Savills has 100 and poor old Jones Lang LaSalle only has 10.

What are we talking about? The number of followers these firms have on Twitter.

Popular opinion suggests that social networking and the workplace do not mix. Many big firms have blocked access to internet sites such as Twitter and Facebook in their offices, believing they are a time-consuming distraction for their staff.

However, there is increasing evidence that big bosses should embrace social networking as tool for driving business, building their brands and winning clients. One property company has revealed that Twitter has doubled its profitability.

Networking has always been an essential part of the property industry. We are a sociable bunch and the perpetual search for the next deal means gossip is our lifeblood.

No surprises, then, that Facebook was an instant hit with the younger property crowd. Online groups were quickly set up, but served little purpose other than to exchange office gossip, circulate drunken pictures and organise leaving dos. Their purpose was firmly social. The novelty has since worn off.

A gap in the market emerged for professional sites for older users who wanted to advertise their business acumen. The most popular of these is LinkedIn, on which members create detailed profile pages in their real names.

“Friends” become “contacts” and, once you have joined, you can nose through an individual’s network to see just how well connected they are. You can even upload your CV.

Many older professionals admit they use LinkedIn in the hope of securing a lucrative non-executive directorship, or board position in an industry group or charity that will enhance their reputation.

It is not just jobseekers and the promotion-hungry to which this site appeals. As a result of the downturn, it is an invaluable publicity tool for professionals who have set up their own businesses.

LinkedIn appeals to the mainstream, but Twitter is a different concept entirely. Known as microblogging, users can post short messages, or “tweets”, which can be about anything at all, as long as they are less than 140 characters — the SMS or text message limit. These are sent to “followers” who have opted to track that user’s online musings. Reading the site’s strapline, “Share and discover what is happening right now”, one can conclude that Twitter is the future of news delivery. Certainly, reports of the demise of the newspaper ring loud and true when browsing through Twitter’s detailed collection of news feeds.

Popular follows for property professionals include Telegraph Property, Times Property, London Evening Standard Business News, Property Week and Estates Gazette.

So how do you get a news story into 140 letters? Simple: follow the headline and hyperlink approach so that users need only click through to the website. The news finds you, and there is none of the tiresome bother of actually reading a paper.

As one might expect, the retail and residential worlds are leading the property industry’s charge into cyberspace. Follow Westfield London on Twitter, and you can receive notice of sales, new openings and the latest fashion trends.

Down in Bristol, Cabot Circus is tweeting news about promotions, competitions and online discount vouchers. Glance at the icons and you will notice that the malls are “following” individual retailers, such as H&M and Monsoon, which quickly spotted the marketing potential of social networking sites.

The residential world has a different sort of presence. The rise of online estate agency portals has already pushed the home-search industry online. But the fear of receiving thousands of irrelevant tweets about homes for sale means sites have had to rethink their consumer appeal.

A very popular follow, Property Porn, is not as dodgy as it sounds. The news alerts direct users to marvel at unspeakably expensive properties they will never be able to afford. This useless, albeit fascinating, information is collated by online estate agency Globrix, which is cleverly driving web traffic and brand loyalty to its main site in the process.

Another special case is the Landlord, who uses Twitter to post his hilarious and outrageous blogs. Having commanded a huge following within the buy-to-let community, his website carries adverts from all kinds of property services firms that are happy to pay to grab the attention of his fans.

To date, this kind of innovation has been lost on the commercial property industry. All the big agents have a presence on Twitter, but their most exciting tweets are press releases from the research team.

In fact, Savills — which has 100 followers — has yet to make a single tweet. A company spokeswoman confirms the situation is “under review”.

Whatever Savills comes up with, it is likely to be directed at clients, rather than employees of the firm. As a guess, tweets about wealth management, “super-mortgages” and the high-end residential market will appeal to a well-heeled audience.

Easy as B2C

Business-to-consumer strategies on Twitter are easier to dream up than business-to-business ones, but that is not to say they will not work. For example, take the case of Needofficespace.com.

“We started using Twitter three months ago and it has changed our business model and more than doubled our profits,” says James Welch, director of Needofficespace.com, which has 200 followers.

Welch started a Twitter news feed to bring traffic to his website, a portal for serviced office and management business space. The stories are aimed at occupiers and those working in the serviced office leasing industry, and he invested in a full-time member of staff to make the posts.

“The exposure has got us on to other people’s areas, who are following us on Twitter, and it’s grown from there,” he explains. “We get hundreds of serviced office leads a week, but now we are getting demand for traditional leases, too, which are more profitable. We never got these before at all. The only reason we’re getting them now is Twitter exposure.”

The RICS, which has nearly 1,000 followers, is surprisingly ahead of the game. It used Twitter to promote this month’s launch of Surveying-360, an online resource for graduates who are considering a career in surveying.

Property Week launched Property Network a fortnight ago and its users are already busily blogging, joining groups and sharing information, experiences and pictures (network.propertyweek.com).

And executive search agency Kerr Ingram has set up its own social networking tool, Kerr Ingram Direct.

“It’s very clubby and it’s just for property professionals,” explains founder Patricia Kerr. It is also unusual because users’ profiles are anonymous and accessible only by clients who pay Kerr Ingram a search fee. Although their level of experience is listed, clients do not know their identity and so can only use the service to blindly send job specs and request interviews. Since its launch, the database has attracted nearly 400 profiles.

There is no doubt that online social networking is a popular and fast-evolving trend. But one drawback is that the medium through which it is provided is subject to constant change. So to neglect traditional networking skills would therefore be absurd.

In fact, with the increasing background noise of technological innovation, the personal touch has gained added currency. When it comes to winning your next piece of work, a simple phone call could end up being the best route to your client’s heart — and cheque book. (Claer Barrett, Property Week) http://www.propertyweek.com/story.asp?sectioncode=274&storycode=3151797

Advertisements

News Review: MP Wife Swaps

MP Wife Swaps
Some 200 MP’s affected by the ban on employing their wives are considering defying the ruling by employing each others’ wives.  Eve Burt said “We have had the conversation about swapping jobs endlessly, they are water-cooler conversations.  It would be an option.  We did work out a very complicated ‘giant wife swap’ where you all move one husband along.  It would be an option.“  What a fantastically bonkers idea; who said politics was boring !

Recession
The unexpected, dare I say shock, -0.4% GDP growth figures for Q3 2009 showing the UK is still in recession against average expectations of +0.2% has led to an interesting mix of disbelief from some quarters, calls for desperate measures from others and in some areas (including here at Inspired) comfort that this is likely to lead to a stronger and more sustainable recovery in time.  It should in fact increase the chances of a V-shaped recovery.

The Monetary Policy Committee (MPC) is unlikely to be able to argue against increasing the quantitative easing program now and the Pound is likely to continue to plumb the currency exchange depths needed to boost exports, economic activity and eventually some inflation.

It is also likely that the figures will be revised up as more detailed and accurate data arrives at the Office for National Statistics (ONS) – by then the average Joe in the street is unlikely to notice.

City Strength
According to headhunters ‘every bank is hiring’ again.  Where bonuses are under scrutiny salaries have been increased.  Morgan Stanley has raised basic pay by 50% for its middle managers and similar moves have been seen by Bank of America Merrill Lynch, UBS and Citigroup.  Bankers are demanding much higher salaries in compensation for the reduced bonuses on offer.  And estate agents are finding city buyers are back in the market with a vengeance.  Knight Frank have seen the number of City buyers as a proportion of applicants has risen to 38%.

Observers may see this as unfair considering the harm caused to the economy by the banking collapse.  Rightly or wrongly however our economy is highly dependent on the financial sector and to see it expanding again can only be a good thing in the long term.

Public Finances
Karen Ward, UK economist at HSBC, has reviewed the assumptions made by the treasury in their last forecast (in March) and has concluded that cumulative borrowing from 09/10 through to 13/14 will be £131 billion less than expected.  This is because unemployment has not been as bad as expected and share & oil prices have recovered.  Her forecast is still for £153bn borrowing this year though so it’s still pretty grim – nowhere near as grim as another great depression however so we should be counting our lucky stars.

On the subject of real cuts in spending everyone and their dog seems to have a list of ways of bringing costs down.  In my view activity should be focused on:

  • of assets (privatizations) where monopolies & inefficiencies exist, particularly in healthcare – with a view to correcting the faults
  • tearing up dubious regulations and quango’s – HMO licensing and HIPS for example
  • cutting back guaranteed benefits for public sector staff – where the equivalent to guaranteed bonuses in the banking sector are much broader based
  • simplifying benefits & tax credits – to make it easier for people to see & benefit from a link between productive activity and income
  • reforming employment legislation – the nanny state’s gone way too far and it makes employing staff too risky & expensive

The Dollar
Currency commentators and US economists are still vigorously considering the threat of a declining Dollar to its position as the worlds reserve currency.  With vast deficits forecast to continue for another 10 years under Obama’s guidance and expensive new healthcare reforms and green energy bills the currency is likely to continue to weaken considerably in the next few years.  A resumption of strong growth (annualized 3% recently reported for Q3 2009) seems to be the only hope for stability here.  A burst of inflation to erode government borrowing would probably be quietly welcomed.  Steps do need to be made in the US to reduce spending however and until that happens the Dollar is likely to fall further.

Industrial Disputes
The three day Royal Mail postal workers strike led by the TUC union is due to go ahead next week if last ditch talks fail tomorrow.  It’s just one of a number of impending strikes.  Thousands of drivers with FirstGroup (bus & rail) go on strike tomorrow.   Swissport staff (Stansted) and British Airways staff are both represented by the GMB union and are balloting members next week about strike action.  Bin men in Leeds also represented by the same GMB union are now eight weeks into their strike.  The RMT union is balloting 10,000 workers over Christmas strike action on the London Underground and may take similar steps at Network Rail.

At a time of recession these unions can only damage the businesses that pay their members incomes.  ‘Job for life’ doesn’t exist any longer and particularly in cases like such as the Royal Mail customers will switch to alternative technologies and competitors – and quickly.  At the same time a number of union leaders have been receiving discounted loans to buy houses.

In Other News
Weird but wonderful, The Sunday Times:

  • Mohammad Al Fayed has declared his ambition to become the first president of an independent Scottish nation.  He’s urging his “fellow Scots” to detach themselves from “the English and their terrible politicians”.  He recovery, city strength, every bank is hiring, public finances, the dollar, industrial claims to share his ancestry with the Scots based upon a medieval legend that suggests Scotland’s founders journeyed from Egypt and hopes to be offered citizenship if a planned independence referendum next year leads to the breakup of the United Kingdom (Mark Horne, The Sunday Times).
  • Dimwit of the week.  A suspected shoplifter called in for questioning by police stopped off on his way to the station to commit a robbery with an associate.  Police, who had detailed descriptions of two men who held up a supermarket in Blomberg, Germany, were surprised to find one of them in their waiting room.
  • Hopping mad.  A town has been forced to cancel its annual rabbit-throwing contest after a campaign by animal lovers.  The contest normally takes place in Waiau, New Zealand, to mark the town’s annual pig hunt.  Children see how far they can throw a dead rabbit.  The RNZSPCA, the animal welfare group, said the event sent the wrong message: “Do you throw your dead grandmother around for a joke at her funeral?”.  Jo Moriarty, the organiser of the pig hunt, said the decision was political correctness gone mad.
  • Foiled fraud attempt.  Two conmen got away with A$160,000 (£90,000) after convincing businessmen they could double the value of money by soaking it in special chemicals – a mixture that later proved to be nothing more than bleach, baby powder and hairspray.  The business men, from Melbourne, Australia, handed over cash and later received pieces of paper wrapped in aluminium foil.  They were told to leave their “money” wrapped for 24 hours while the chemicals worked.  Two men were arrested when one victim became suspicious and opened the packet.
  • Parking ticket?  Oh XXXXXXX!  A driver with the registration number XXXXXXX has run up $19,000 (£11,000) in parking fines in Birmingham, Alabama – even though he has been there only once and left without a ticket.  Traffic wardens in the city enter seven XXXXXXXs on their forms when they issue tickets to cars without numberplates.  Scottie Robertson, 38, of nearby Huntsville, chose the vanity plate to mark his days building custom cars, when his nickname was Racer X.

Borrowers face the squeeze

David Smith: Home Economics

How big a threat to the housing market is the proposed clampdown on mortgage lending by the Financial Services Authority (FSA)?  And is there a bigger immediate problem?  Nobody thinks that irresponsible lending should be allowed to continue, and it would help if lenders know their customers better.  Thought we never really had 125% mortgages, even from Northern Rock, anything approximating to a 100%-plus mortgage should be discouraged.

Looking at the “table of shame” in last week’s FSA mortgage market review though, I am not sure how irresponsible lenders were.  It includes the striking statistic that 49.3% of mortgages handed out in 2007 (the market peak) were given without proof of income.  Yet not all of these were self-certified mortgages, wrongly disparaged as “liar loans”.

The other figures in the table suggest that the FSA may be overdoing the “irresponsibility” bit.  Fewer than a third of mortgages were interest-only, fewer than 14% were on a loan-to-value basis of more than 90%, and fewer than 4% were genuinely sub-prime – loans to people with impaired credit histories.

Regulators, by their nature, tend to lock the stable door when the horse has bolted.  To the extent that lenders were irresponsible, and I don’t dispute that some were, things will change.  The new guidelines will make it harder for some buyers to get mortgages, particularly the self-employed.  But nothing will change before the second half of 2010, so the deserving self-employed should make loan arrangements now.  In the long run they will be squeezed.

The new guidelines will take the edge off the housing market in the long term.  In the short term, there is another danger, identified by David Adams, head of residential at Chesterton Humberts estate agency, following Rightmove’s report that asking prices rose 2.8% in the past month.  “This is an agency-induced increase that is not sustainable,” he says.  “There is a huge stock shortage in much of the country, and agents desperate for instructions are giving unrealistic quotes to prospective sellers.”  He is right.  The best way to kill off the market is if prices rise too rapidly. (David Smith, The Sunday Times)

Why bankers love the people’s recession

David Smith, Robert Watts

The estate agent knew he had struck gold. He was showing an £8.5m flat in Belgravia, central London, last week to a client looking for the perfect bachelor pad. Sporting an expensively tailored suit and a Swiss watch, the 42-year-old banker had all the swagger of the boom years.
“The flat was immaculate, yet he wanted to rip it apart and do it up from scratch,” said Charles McDowell, who runs his own estate agency. “He said he wanted to throw an extra £1m at it, including installing a cinema room. People are scattering the cash again.”

Figures from Knight Frank, a top-end estate agent, show the number of City buyers as a proportion of applicants has grown to 38% — the highest since March last year.

“The bonus effect is only just beginning to be felt,” said Liam Bailey, head of residential research at the agency. “The hitherto weak £5m market has sparked into life.”

Vintage champagne is also flowing again at Coq d’Argent, near the Bank of England. For years a favourite of the Square Mile’s bankers, the wallets and belts of its clientele tightened when the credit crunch struck. That has changed.

“In the last few months we’ve seen more people happy to spend a few thousand pounds on wine with a meal,” said Sean Gavin, the general manager. “Even during the bad times champagne continued to flow, but there’s a good deal more vintage bottles being drunk now than a few months ago.”

The restaurant’s 48-page wine list offers bottles of 1982 Bollinger for £505. Those feeling more flush, or who prefer claret to champagne, can sample the 1982 Château Lafite Rothschild at £1,975.

It appears to be win-win in the City. Some bankers are benefiting from big bonuses and those who are not are benefiting from higher salaries. Every bank is hiring, according to headhunters. Jobs that were left vacant at the peak of the crisis are being filled again.

With bonuses under public scrutiny, basic salaries are being increased instead. Morgan Stanley has raised basic pay by 50% for its middle managers. Similar moves have been seen by Bank of America Merrill Lynch, UBS and Citigroup.

A former investment banker starting his own City firm said the “witch hunt” against bonuses had had perverse effects. “Those who are interested [in joining his firm] are demanding double the salaries of a year ago — largely because of this government hate campaign against bonuses,” he said. In many cases they were succeeding in getting the extra money.

The contrast with the wider economy could not be greater. On Friday grim official figures dashed hopes of an early end to Britain’s downturn. Instead they confirmed that the recession the bankers had caused is both deep and very long.

The 0.4% drop in GDP in the third quarter was the sixth fall in a row, making this the longest continuous slide since records began in the mid-1950s. The economy has shrunk by 6% since the spring of last year, putting the recession on a par with that of the first Thatcher downturn of the early 1980s.

The economic numbers are a severe blow for the government. Amid rising public anger, it now has to explain why the people who caused the recession appear to be the ones doing best out of it and what it intends to do about this perverse situation.

Last week the critics found a powerful champion in Mervyn King, the governor of the Bank of England. King makes what he describes as four “big” speeches a year. He chose his latest one — delivered in Edinburgh where both Royal Bank of Scotland and HBOS failed spectacularly — to deliver a broadside at the banks and the government.

“The sheer scale of support to the banking sector is breathtaking,” he told Scottish business dignitaries. “In the UK, in the form of direct or guaranteed loans and equity investment, it is not far short of £1 trillion (that is, £1,000 billion), close to two-thirds of the annual output of the entire economy.

“To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”

While calling for further reforms to make the banking system safer, King will have been aware that one of the reasons the City is making money again is that it is benefiting from the action being taken by his organisation and other financial authorities.

The Bank’s programme of “quantitative easing” — effectively creating money — has lifted the price of the stocks and bonds the banks hold and trade. The Bank has spent £175 billion buying bonds with money created at the flick of a computer switch. As well as adding to bank reserves, this money has helped to fuel the surge in global stock markets in the past six months.

The huge volumes of debt issued by governments in an attempt to boost their flagging economies have also created windfall profits for banks. Governments pay the banks to act as salesmen to find buyers for their debt among the world’s pension funds, insurance companies and other national governments and central banks.

With dealing houses like Lehman Brothers and Bear Stearns out of the picture, and other banks crippled by the losses they suffered on sub-prime investments, there has been a big reduction in competition. That has allowed the surviving banks to charge higher fees.

They are also making money out of companies. The global downturn has forced some of the world’s biggest companies to restructure their finances. Globally, firms have raised about $700 billion (£430 billion) from investors. The banks earn fat fees on this business.

With this background the renewed row over bonuses is embarrassing for Alistair Darling, the chancellor, who last month struck a deal with Britain’s five biggest banks to limit their bonus payments this year. Shortly afterwards Lord Myners, a Treasury minister, came to a similar agreement with investment banks based in London.

The fear among ministers is that if they go too far, City firms will move to Switzerland or other countries, taking with them a portion of the estimated £70 billion that the financial services industry contributes to the exchequer every year.

Although the Treasury has denied plans for a windfall tax on the banks, the increase in the top rate of income tax to 50%, due next April, has already led to some hedge funds and other businesses deserting London.

Some believe the backlash against bankers’ bonuses has already gone too far. Yesterday the Duke of York caused controversy by saying bonuses were “minute” in the wider scheme of things.

Lord Griffiths of Fforestfach, vice-chairman of Goldman Sachs International and a former adviser to Margaret Thatcher, said last week that he was not ashamed of the bank’s bonuses and people should learn to “tolerate the inequality” implied by such payouts because they were for the greater good of the economy.

Such tolerance will be difficult to find among people who are struggling with their own finances as the wider economy remains in recession.

Critics will note that in America, which is instinctively averse to state intervention in financial markets, the government is proposing direct action to clamp down on the swollen salaries and bonuses of firms bailed out by the government.

Last week Kenneth Feinberg, President Obama’s “pay czar”, announced that the top 25 executives at the seven firms that received the most government help will, on average, have their total compensation cut in half this year. The cash portion of their salaries will be slashed on average by 90% and the rest will be replaced by shares that cannot be sold for years.

There are some in the British financial community who, like King, recognise the extent of the problem. The Financial Services Authority, the City regulator, is targeted for abolition by the Tories if they win power next year, but its chairman, Lord Turner, does not intend to leave without making his mark. The banks, he said last week, had a duty to build up capital as protection against future crises, not fritter their “exceptional, post-crisis profits” away in pay and bonuses.

“We will be talking to the banks as to whether those bonus pools they are making at the moment are compatible with the level of capital build-up that we believe is appropriate,” he said. “If it is not, we will be engaging in frank discussions with them.”

Frankness is the least an angry public will expect. In an article for today’s Sunday Times, David Cameron promises action against banks that channel profits into bonuses rather than new lending. “If that doesn’t happen, then we reserve the right to take action to ensure that it does, including through the tax system,” he writes.

Just as pressing a concern for the government is the state of the recession. Labour ministers were banking on positive news to give them a boost in the opinion polls. But while Japan, Germany and France came out of recession in the second quarter, and figures released this week are set to show that America did so in the third quarter, Britain has yet to escape.

Gordon Brown will once again be reminded of his claims that the country was better placed than others to weather the financial storm.

Although Darling has stuck to his script in recent months, insisting he expected the economy to recover only at the end of the year, the Treasury was bemused by the figures, which it had expected to be flat. So was the Bank of England, which had pencilled in a small rise.

The Tories yesterday made hay with the new figures. “There is now no confidence in Gordon Brown’s economic policies: he has no banking plan, no debt plan and no growth plan,” said George Osborne, the shadow chancellor. “The whole country is suffering from this lack of leadership.”

Vince Cable, for the Liberal Democrats, said Britain was suffering because of the failure to fix the banks and kickstart lending again. “For all that has been thrown at the economy to try to stimulate a recovery, it is clear that massive structural problems remain, particularly in the banking sector,” he said.

Although economists questioned the accuracy of the data — Goldman Sachs put out a research note on them headlined “Unbelievable. Literally” — they rekindled the political debate on the economy ahead of Darling’s pre-budget report, due in late November or early December.

The Treasury had hoped to present new projections for cutting the budget deficit, knowing that the economy was growing again. Now it will have to take the recovery on trust. (David Smith, Robert Watts, The Sunday Times) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6888924.ece

Global economy has no substitute for falling dollar

Irwin Stelzer

Let’s see. The Chinese are cross because the falling dollar means the stacks of American IOUs they have in their vaults will be paid back in a devalued currency. The Americans are cross because the Chinese refuse to allow the renminbi to rise in value and this means goods made in Chinese factories will continue to displace made-in-America products, and provide jobs for Chinese rather than American workers. The Europeans are cross because the strong euro aborts the export growth on which they are depending to fuel their economic recovery. The British are cross because the weak pound makes it expensive to buy anything abroad, and suggests that a spurt of inflation is just around the corner. In short, everyone seems to be terribly unhappy with developments in the currency markets.
Well, not terribly. The Chinese might be unhappy that the dollar is declining in value, but are delighted that their policy of pegging the renminbi to the dollar is keeping their export machine humming — they need millions of new jobs to prevent their poor masses wondering whether some other form of political organisation might provide a better life. The Americans might be fearful that further declines in the dollar will dethrone it as the world’s reserve currency, but the Obama administration is hoping that a cheap dollar will make imports more expensive and exports more competitive, creating jobs. European exporters might be groaning about the growth-stifling effect of their high-flying currency, but eurocrats are secretly delighted that the euro is proving a source of strength in these difficult times.

Other players are also trying to cope with the falling dollar. Brazil has tried to stem the rise of its currency, which has appreciated more than 40% against the dollar since March — to no avail. Oil and other commodity producers are raising prices to make up for the declining value of each dollar they receive. But these are minor players compared with the geopolitical players who see an opportunity to replace the dollar as the currency in which the world does business, to cut America down to size — think China, Russia, Venezuela, Iran.

It is one thing to want to replace the dollar, quite another to find a suitable substitute. The renminbi cannot be the chosen currency so long as it is pegged to the dollar, for its value will move with the dollar. The rouble is not a candidate, since there is not enough of the currency around to handle the volume of world trade and, besides, it is not the sort of money on which you can rely to hold its value, especially if oil prices collapse. Which brings us to the euro.

As has been pointed out by Jean Pisani-Ferry, director of the Brussels-based Bruegel think tank, and Adam Posen, a fellow at the Peterson Institute for International Economics in Washington: “There is no sign of a move to the euro as a global currency. The share of dollars in global reserves remains almost three times that of the euro.”

The reasons for this failure of the euro to advance further as a global currency seem to be rooted in the failure of the EU to encourage economic growth and to develop better systems of economic governance. Talk about pricing oil in euros instead of dollars remains just that — talk. And in the recent crisis it was the Federal Reserve Board that was called on to provide currency to meet emergency needs for liquidity — that means dollars.

Still, doubts about the dollar’s future persist. Its recent decline may be consistent with its performance in previous currency cycles. And the drop might be due to a willingness by investors to take on more risk now that the recession seems to be ending, rather than to a lack of faith in the safety of the dollar. But investors remain worried that the dollar’s decline, so far acceptably gradual, will turn into a rout, perhaps not next year, but in 2011.

Ben Bernanke, Federal Reserve Board chairman, says that this can be avoided if two policy steps are taken. First, the American government must make “a clear commitment to substantially reduce federal deficits over time”. Second, Asian countries must boost domestic demand so that they don’t have to rely so heavily on exports to America, and allow their currencies to appreciate against the dollar so that the US trade deficit continues to fall as a percentage of American GDP.

What Bernanke did not say, perhaps because he was playing the discreet central banker, is that neither of these things is likely. The Obama administration has already pencilled in eye-watering deficits for a decade and more, and is in the process of adding perhaps another $1trillion to the US deficit by “reforming” healthcare — claims of savings are somewhere between delusions and lies. It will then turn its attention to the energy sector, and the subsidies required to fund its green revolution.

Meanwhile, the Chinese are unlikely to allow their currency to appreciate in value, and other Asian nations will continue to intervene to prevent their currencies from rising against both the dollar and renminbi. Trade imbalances will, therefore, persist.

Which puts the ball right back in the Fed’s court. Unless Bernanke drains liquidity from the financial system, and shrinks the Fed’s balance sheet by winding down $2 trillion in support programmes — and does so precisely when the recovery takes hold so as not to cause a relapse by moving too early — the dollar’s decline will accelerate, shattering confidence in its long-term value. One well-respected expert tells me that in two to five years the dollar will no longer be considered safe enough to be the currency in which the world does business. Its replacement: separate deals in local currencies — the Chinese paying for Brazil’s oil in renminbi, which the Brazilians use to purchase stuff made in China — and the International Monetary Fund’s drawing rights, bits of paper backed by a basket of currencies, including but not limited to the dollar. That would mark the end of an era which has seen world trade flourish and millions emerge from poverty. Sad. (Irwin Stelzer, The Sunday Times) http://business.timesonline.co.uk/tol/business/economics/article6888848.ece

Deficit may undershoot despite GDP setback

David Smith

Shooting the messenger is never a good idea. Even so, on Friday the Treasury must have thought about getting up a posse and heading down the M4 to the Office for National Statistics in Newport.
Time and again in this recession, the ONS has come up with gloomier gross domestic product numbers than anybody expected. It did so again on Friday. The debate had been whether GDP would be flat or show a small rise. Government and opposition were gearing up for a political spat on what the end of recession meant.

The Bank of England’s monetary policy committee said in its minutes last week that GDP in the third quarter appeared to be in line with its August forecast, which was for a rise of nearly 0.2%.

Instead, we had a 0.4% fall on the quarter, making this the longest continuous period of falling GDP on record, though not yet the longest recession. The official statisticians have proved, at the very least, they are no propaganda machine. Other than that, we should treat these early estimates with a huge pinch of salt because they are so out of line with survey evidence.

In time the GDP figures will be revised but, when they are, it will not be news, merely of interest to number-crunchers. Meanwhile, we have seen some consequences of the weak numbers for sterling, which fell, and in expectations that the Bank will extend its programme of quantitative easing.

What about the public finances? Let me take you back to the recession’s start, and Alistair Darling’s first budget in April 2008. It included a forecast for public borrowing for 2009-10 of £38 billion, 2.5% of gross domestic product. The government’s net debt would remain below 40% of GDP, the official ceiling, through to 2013.

A year later, the picture was shockingly different. The borrowing forecast shot up to £175 billion, 12.4% of GDP. That’s right, borrowing equivalent to 10% of the economy, in a single year, added to Treasury projections in just 12 months. Debt, by the way, is now 59% of GDP and rising.

Treasury officials are working hard on the appetiser for Darling’s third budget, the pre-budget report (PBR), to be released in late November or early December.

It is very significant, not least because many feared another big upward revision of borrowing. That and the absence of new measures could have got the rating agencies sharpening their pencils to downgrade Britain’s AAA sovereign debt rating.

The numbers are not yet complete but the Treasury suggests things are broadly on track to meet the budget forecast. Dave Ramsden, its chief economist, set himself the goal in the budget of not having to revise the borrowing figures up again. It looks as if he may have succeeded.

At least one independent economist thinks the Treasury could go further. Karen Ward, UK economist at HSBC, has gone through the assumptions the Treasury used in doing its forecast in April.

Those assumptions, some of which have to be approved by the National Audit Office, were made at the time of deepest gloom, in March, when shares were low, the oil price was weak, and economists were at their gloomiest about unemployment.

Ward has gone through these assumptions one by one and concluded that there is a small pot of gold for the Treasury in them. The higher stock market, for example, should give the Treasury an extra £3.1 billion of revenue this year, the higher oil price £4.2 billion, lower-than-feared unemployment £1.8 billion, and so on.

The result is that she expects this year’s borrowing to be £153 billion, 10.8% of GDP, more than £20 billion below the Treasury’s forecast, with the improvement running through to future years. Under her projections, cumulative borrowing over the period from 2009-10 to 2013-14 will be £131 billion lower than the Treasury expects.

There are a couple of caveats. The first is that, as Ward points out, these only change the public finances “from appalling to merely very bad”. Most other independent economists still think, moreover, that the risks to borrowing are on the upside.

The second caveat is that I would not expect big revisions from the Treasury in the PBR in either direction. The important part of the borrowing story will not be known until the final months of the fiscal year — January, February and March. The Treasury would not want to revise down now only to have to revise up later.

Even so, the HSBC forecast reminds us it is too easy to fall into the trap of believing things can only ever get worse. The experience of the 1990s, when Britain moved from a budget deficit of 8% of GDP to a surplus of 0.5% in five years should be one that guides us through these dark days.

In the meantime, there is no shortage of ideas for getting the deficit down. My wish is that we should stop expressing every tax change in terms of how many pennies on income tax it would be equivalent to.

The National Institute of Economic and Social Research, for example, said last week that the government could raise the basic rate of income tax by 7p in the pound — which is not going to happen — or bring forward even more the raising of the state pension age, and to aim for 70.

I like the approach of Reform, the think tank, which identifies £31 billion of “middle-class” welfare, including child benefit, tax credits, maternity pay and the state pension, and say half these outlays should be cut immediately, whatever the squeals. Even if the public finances improve, these debates have a long way to run.

PS: How do you solve a problem like Mervyn? For many months intelligent people have been working hard on how to make banks more risk-averse and less prone to excesses. Then along comes the Bank of England governor.

The days of a gentle raising of the eyebrows are gone. These days, though he was in Edinburgh, Mervyn King used a Glasgow kiss, warning that moral hazard in the banking system is worse than ever and that there has been “little real reform” nationally or internationally.

Though speeches like this make great copy, they trouble me. Either King is showboating, which is entirely possible, or he is right out of the policy loop, which is worrying. We are in a pre-election limbo. If The Tories win and transfer banking regulation to the Bank, King would have the opportunity to mould the system, including a bank break-up, in the way he apparently wants. His fear may be that by then it would be too late.

I am not convinced by the argument that we need to break up banks. Britain has a heavily concentrated banking system — too few banks — but a better answer is competition, including international competition, and new entrants. Banks should be restricted from engaging in dangerous, “socially useless” activities, as Lord Turner of the Financial Services Authority suggests.

Paul Volcker, former chairman of the Federal Reserve, now head of Barack Obama’s economic recovery board, knows what he wants. Commercial banks receiving government guarantees should not own or sponsor hedge funds and private-equity funds and their proprietary trading — trading their own funds in the markets — should be restricted.

King, however, is vague. In Commons Treasury committee evidence earlier this year he said “narrow” banks would not work because people would favour riskier banks offering higher rates for savers. Even without explicit guarantees, no government would let millions lose their savings, which is true. If there is a King blueprint we have yet to see it. (David Smith, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6888846.ece

MPC told: don’t panic over recession figures