Tag Archives: George Osborne

Britain, Digital Economy, Financial Markets, Society, Technology, United States

A digital payments system is undermined by cryptos crash

DIGITAL CURRENCIES

Intro: Digital payments systems are taking hold in China and America, and the eurozone is chasing hard to set one up. The Bank of England’s lack of enthusiasm for a digital pound is a blessing in disguise

China already has one, and envious of the near monopoly American companies enjoy in European digital payments systems, the eurozone is chasing hard in setting one up.

Trump’s America has made it illegal for the Federal Reserve to pursue such a project, and instead has set its sights on privately sponsored stablecoins.

We’re talking here about so-called central bank digital currencies (CBDC) – in effect, digital versions of physical cash.

On this issue, the UK and the Bank of England stand pretty much nowhere. It might surprise you to learn that’s faintly reassuring. Digital money is not an issue to set the pulse racing, but what is amazing is how people are so exercised by it.

A Bank of England consultation on proposals for a digital pound provoked an unprecedented tidal wave of more than 50,000 responses, overwhelmingly negative in nature.

It wasn’t just issues over privacy posed by a digital currency that many respondents seemed to be upset about. Nor was it the complex and costly logistical problems in providing universal access to central bank money.

Still less was it the threat that a digital pound would pose to the future of fractional reserve banking.

Rather, it was the creeping encroachment on physical cash that people feared most.

Plain and simple, people still like the idea of notes and coins, even if they hardly ever use them.

No decision has yet formally been taken on whether to establish a digital pound, but the sense is that any appetite the Bank of England might once have had for such an enterprise has all but disappeared.

Nor does the Bank appear to be that eager on the supposed alternative of sterling-based stablecoins. Its proposed framework for regulating stablecoins has gone down in the industry like a lead balloon, and although the Bank has rowed back on some of the regime’s more costly features, is still widely thought of as too demanding to allow for the creation of a significant stablecoin presence.

George Osborne, a former UK chancellor, has claimed that Britain is in danger of being left behind in a payments revolution which is taking the rest of the world by storm.

But then, he would say that, wouldn’t he? Among a seemingly ever-widening portfolio of positions enjoyed by Osborne, he is an adviser to the US-based crypto exchange, Coinbase, which has a powerful vested interest in as lightly a regulated stablecoin environment as possible. Since Osborne went public with his concerns, Bitcoin and much of the crypto universe has crashed, and many so-called stablecoins – theoretically backed by the real-world, ultra safe, fiat currency assets – have faltered too.

At least half a dozen of them have “broken the buck”, or lost their dollar peg. Some have fallen to as low as a few cents in the dollar, resulting in losses running to hundreds of millions of dollars.

There’s plenty more damage still to come from that sell-off, so if the Bank of England has been asleep at the wheel in failing wholly to embrace the ecosystem of decentralised finance, we may have much to thank it for.

Instead, the Bank has focused its attention on its plain vanilla business of updating its systems for making direct, account-to-account payments between buyers and sellers.

It’s a kind of muddling through alternative to the European Central Bank’s (ECB) empire-building on the one hand, and Trump’s enthusiastic embrace of crypto on the other.

This should not be read as a derogatory view, but the Bank of England regards payments as a simple utility, not as either a way of maintaining the Central Bank’s grip on the “moneyverse”, which seems to be the ECB approach, or as a fintech opportunity for money-making, which is the current White House approach.

Critics complain that the Bank is further condemning the pound – and indeed the City – to the slow lane. Others would say that its safety-first approach is actually what you want out of a digital payments system.

Certainly, it needs to be faster, even instantaneous if possible, and to cost as little as possible. Above all, though, you want it to be robust, so that it acts as a wholly reliable means of exchange.

Four years ago, the House of Lords economic affairs committee concluded after a lengthy inquiry that a digital pound managed by the Bank of England was “a solution in search of a problem”.

Nothing has happened since then to change that verdict.

The vast majority of sterling transactions are already digital in nature, in any case, but they take place between commercial banks or on card networks, not via the central bank.

The benefits of a central bank digital currency are far from obvious, yet there are clear cut risks to financial stability, privacy, credit provision and security, to name just some of them.

Why then is the European Central Bank fixated on establishing a digital euro? In the main, it’s about monetary sovereignty and parallel fears of US dominance.

All the main card networks are American-owned, while existing systems for direct bank-to-bank settlement in retail transactions are clunky and inefficient in many euro-dominated countries.

And it’s about the threat posed by dollar-denominated stablecoins as an alternative means of payment.

The ECB and its political masters do not want this particular Trojan horse at the centre of the eurozone payments system.

Indeed, Scott Bessent, the US treasury secretary, has openly admitted that part of the purpose of the Genius Act, which sets out a regulatory framework for stablecoins, is to attract money into US treasuries, thereby underpinning dollar hegemony in international markets. Financing the US treasuries market is not what Frankfurt has in mind when thinking about the future of money.

Instead, the digital euro is proposed as part of Europe’s wider, statist approach to “strategic autonomy”, or making the continent less dependent on rival jurisdictions for core industrial, agricultural, and monetary functions.

The idea that money can in some way be reinvented is what really lies behind developments such as CBDCs and stablecoins.

So here’s the truth: it cannot. The Bank of England is no doubt guilty of many failings, but it does at least properly understand this basic maxim. Its overarching responsibility is to ensure that a pound is worth a pound, no more, no less.

Like cryptocurrencies, stablecoins are at root just another mechanism for rent extraction. And as long as there is scope for improving existing pubic infrastructure for digital payments, which is where the Bank of England is focusing its efforts, it is also hard to see the point of digital cash.

Paul Volcker, a one-time chairman of the Fed, had it about right when he said that the only socially useful innovation to come out of finance in the past several decades was the ATM.

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Britain, Economic, Finance, Government, Politics, Society

An alternative to the Chancellor’s plan to permanently shrink the state…

 ECONOMIC MANAGEMENT OF THE PUBLIC FINANCES

George Osborne’s plans delivered within his Autumn Statement last week lays bare the neoconservative strategy. Hidden amid the plethora of all the other numbers, the Treasury has announced a further year of austerity spending for 2018/19 – the ninth in a row. This Autumn Statement, however, was different, because it was the first where the Chancellor has called for a permanent, structural shrinking of the state.

Since 2009, the Treasury has sought to return the public finances to roughly where they were before the crash. Now, though, out of political choice, Mr Osborne is proposing that government spending should fall, as a share of national income, to far below its pre-crisis level.

In 2007, public expenditure equated to 40.5 per cent of national income. It increased rapidly to 47 per cent by 2009, mainly due to the economy shrinking, rather than rising spending. Since then, the Treasury has been clawing its way back towards Labour’s level of spending, and in March Mr Osborne’s plan was to reach the pre-crisis benchmark by 2017. Within this year’s Autumn Statement everything has changed – without any announcement, the Chancellor pencilled in a cut of 38 per cent of GDP for 2018.

Historically, when public spending slipped this low it was because the economy was extremely buoyant. In the late 1990s, for instance, Tony Blair’s government were caught off guard, with inherited Conservative spending plans and a booming economy. This time is different; despite a recovery that is helping to move the country out of recession the economic projections are far from impressive, and the strain of shrinking the state is to be borne solely by spending restraint.

Examining the detail will reveal that, in 2016 and 2017, the plan is ‘more of the same’ – total real spending is to fall at a similar pace to that from 2011 to 2015. Then, on top of seven years of cuts, spending in 2018 is to be frozen, even though economic growth is predicted to be 2.7 per cent.

If implemented, there is only one conclusion that may be drawn – the end of public services as we know them. By 2018 spending on services would be almost 20 per cent lower, and that’s on a comparison with today. And if the government remains adamant in protecting areas like the NHS, international development and schools, other government departments would face cuts of up to 40 per cent. In reality, this will mean many services spending less than half what they did a decade previously. The only option in limiting this damage would be more severe cuts to welfare. It is difficult not seeing pensioner benefits, which form the bulk of welfare spending, not being affected in some shape or form.

A shrinking state. Graphical variations between the Autumn Statement, the March Budget and proposals put forward by the Fabian Society post-2015.

A shrinking state. Graphical variations between the Autumn Statement, the March Budget and proposals put forward by the Fabian Society post-2015.

The Treasury plan is wilfully counterproductive in terms of the government’s proposals for public investment. Following the Autumn Statement, the Office for Budget Responsibility (OBR) revised down its expectations for business investment as a driver of recovery, but this suggests by implication that public investment is needed more than ever. Yet, for two years after the election it is to be flat in real terms. This can only amount to a further decline (as a share of GDP), and will become a further restraint on growth.

In October, the Fabian Society Commission proposed another way with its Future Spending Choices. It argued for a significant boost to public investment and for overall spending to rise after 2015 by one per cent a year for two years. This, the Commission says, would take spending as a share of national income to the pre-crash benchmark of around 41 per cent of GDP. After that, expenditure should return to trend and match annual rises in GDP.

The Fabian Society’s proposed spending path is compatible with sustainable public finances but diverges hugely from the government’s spending plans. By 2018, there would be almost £40bn more to spend, enough to turn the Chancellor’s massive cuts to public services into a freeze. This still assumes tough spending decisions to be made, but public service meltdown could be avoided. Mr Osborne’s plans should thus not be interpreted as inevitable or even necessary.

Labour should take the opportunity in delivering post-2015 plans. They should define an alternative, so that the Conservatives do not set the terms of the fiscal debate as the general election draws near.

George Osborne’s ideological cuts are just one route to sound public finances, but many others are also available. Many will say that we do not need to deliberately shrink the size of the state to such levels that the government now seeks. Overshooting pre-crisis spending should not be the objective of any future Labour government.

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Britain, Energy, Environment, Government, Politics, Society

Concern over energy firms refusing to pass on price cuts…

ENERGY BILLS

Intro: Millions of energy consumers on fixed deals will lose out

Millions of energy consumers with fixed price energy tariffs will not get a £50 reduction in utility bills as promised by David Cameron and George Osborne. A pledge was given this week in the Autumn Statement that electricity bills would be cut following the decision by the government to roll back some green levies.

The energy giant E.ON has announced that more than one million of its customers will get a reduction of only £12 – or 23p a week.

EDF is taking the same line with its one million fixed rate customers, who include many pensioners and families. Npower, SSE and Scottish Power may follow suit.

The Prime Minister, Chancellor George Osborne and Energy Secretary Ed Davey have made repeated pledges in their efforts to protect customers by rolling back environmental charges.

Mr Osborne said this week: ‘There’s going to be an average of £50 off people’s bills … We are absolutely insistent that this is going to be brought in.’

The smaller reduction of £12 covers the Government’s decision to switch funding of the Warm Homes Discount – a subsidy for poorer families – from energy bills to general taxation. The rest of the decrease was expected to come from changes to the Energy Companies’ Obligation Scheme, a levy applied to all bills to raise money for energy-saving measures for poorer households.

However, the element of the reduction is not being passed on to customers on fixed tariff deals by some companies.

In contrast, British Gas, the largest of the ‘big six’ suppliers, announced that all tariffs and payment methods will get a reduction of £53 from January 1.

A spokesperson for Consumer Futures, a campaign group, said: ‘The message has been that people were going to save £50 on their energy bill, but it seems a fair chunk of people will not get that. This sort of behaviour is not going to do anything to reassure customers … People feel confused and angry about their energy bills. This latest development just adds insult to injury.’

The spokesperson added: ‘I think in the current climate, bearing in mind how people are struggling, the right thing to do would be to apply the full reduction across the board. That is the expectation that the Government has created.’

Following the Autumn Statement, E.ON immediately announced a price rise of almost £60 a year for customers on standard tariffs. The changes will take effect from January 18.

The provider says that cutting the bills of fixed price customers by only £12 was justified because many of these people were already on relatively good price deals and tariffs.

EDF took a similar line and said its short-term fixed deal is some £90 a year cheaper than its new standard prices.

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