Christmas news

Panto politics

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Christmas time is panto season in the UK and that was on full display. Corbyn might (or might not) have called May “a stupid woman” (I could call her much worse things!…and he’s a fu*king moron since we’re talking about it) prompting the Tories to waste an entire day of parliamentary time playing “oh yes you did, oh no I didn’t” arguing. And recall May recently had an argument with Junker because he called her policy “nebulous” (again I could come up with worse descriptions, fu*king retarded for starters).

I mean seriously, one of the most important decisions in the UK’s recent history and they are wasting time because of  playground name calling. Are they grown adults or kids in a school yard?

In part this has to be blamed I’d argue on the UK’s broken political system. The first past the post voting system tends to lead to choice between Tweedledum or Tweedledee. And given their virtual monopoly on both the right and left it means they can waste time on silly things (panto debates like this, or in the US trying to ban abortion), without fear of losing votes.

Contrast that with the situation in many other European countries with proportional representation. Here the government generally ends up as a coalition. Its argued that this makes government’s less stable. I’d argue the opposite. Basically, such antics won’t happen in a coalition, because the coalition partners will just walk away, either forcing an election or crossing the idle, joining the opposition and forming a new government (as happened recently in Spain). This enforces a certain code of behaviour on the major parties.

The sort of open warfare we’ve seen in the Tory party over brexit, for example, just won’t happen in a coalition government. Not least because there would probably never have been a brexit vote in the first place. Furthermore, such two party systems are much more vulnerable to cyber attack, as we saw in 2016. So to my mind, if there’s anything we can learn from recent events its that need to reform UK politics and ditch the first past the post system.

Army to deploy for brexit

And as if to provide another example of everything wrong with British politics, we have the government’s no deal planning, which they were proud to announce includes deploying the army….who will presumably parachute in and distribute food….stuck in a queue in Calais (so what are they going to do, invade France!), or medicines (which presumably they’ll make themselves). And while they are at it, I assume they’ll be picking crops in the fields, taking up nursing and doctors jobs to meet NHS staff shortages. Hell, brexit’s left us short staffed in my uni, maybe we could get a few squadies in to give a few lectures.

What is it about the British and the army? I presume some politicians played too much with their action figures as a kid. In Ireland a politician calls out the army and the media spend the next few days taking the piss out of him. Deploying the army is expensive (hundreds more per soldier per day than it costs to keep them in barracks) Trump’s recent deployment to the US border for example, cost between $200-300 million in the space of a few weeks. And the army are kind of busy people, what with training, various ongoing security operations, aid missions, search and rescue, not to mention the small matter of protecting the country.

The whole doctrine of Western countries hinges on the fact that they have a smaller force of well trained full time soldiers, rather than a large force of poorly trained and badly motivated conscripts (read young boys and old men), as for example is Russia’s policy. This creates a force multiplier effect. That is to say a professional army can do a heck of a lot more damage with less troops and less equipment. Quite apart from the fact that a repressive regime can’t deploy its full strength at any one time (they have to hold back a significant number of troops to deal with the possibility of unrest on the home front).

Of course this military doctrine falls apart when politicians start using the army as their own private goon squad. So what the headlines should read is that the government has essentially admitted that no deal will be a disaster, which they’ll have to fix at great cost and by compromising the country’s national defence.

Nine lessons for brexiters

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The UK’s former EU ambassador, Sir Ivan Rogers, has unleashed a blistering attack on the UK government’s brexit policy. Its worth listening to the full podcast of his speech, nine lessons brexiters need to learn. One could roll out the standard counter argument, a point made about Stephen Fry’s recent podcast on brexit, that such intellectual discourse, with its reliance on “facts” might go down well in a lecture hall, but you try repeating that in a pub. Where no doubt some red faced gammon will shout you down with “brexit means brexit”….

….Which, oddly enough, is the first point he makes. Brexit does mean brexit. Out means out. The UK can’t leave the EU and expect to enjoy all the benefits of membership, not without paying some sort of price. This is something brexiters seem unable to grasp. The Irish backstop has been such an obstacle for the UK largely because they were blind sided by it. They didn’t expect the EU to back Ireland over the UK. But Ireland is in the EU, the UK is leaving. And, when during the trade negotiations, and Spain brings up Gibraltar, or the French bring up fishing, or the Poles immigration rights, guess whose side the EU will take?

On which point, as Rogers points out, brexit is a process not an event. And it will be a decade or two before its all sort out. If you don’t like the withdrawal agreement, you ain’t going to like the trade deal much either. And forget about “shutting the door” to migration, or having single market access which the UK doesn’t pay for. There is, as Roger points out, no possibility of a deal such as Norway+ or super Canada (well okay, I’m sure there’s a cocktail or something that a bar in Toronto sells called that), nor a “managed no deal. Inevitably the UK will be forced to make further concessions during the trade negotiations, more so again if they go for a no deal option.

And speaking of no deal, there is an obvious hypocrisy between claiming the UK can function just fine on WTO rules with its largest trading partner. But that they somehow needs to negotiate some sort of extensive trade deal with South American or African countries (which it already has trade deals with, which it loses at the end of March), nations the UK does significantly less trade with. And obviously other countries, such as the US, will prioritise their own interests in any trade talks over the UK’s. The idea that they’ll cut the UK some sort of special deal that screws themselves over is ludicrous.

However, its his final point which I think is most noteworthy, that of a lack of transparency with the whole brexit process. The brexiters have yet to be straight with the public. They’ve mostly focused on a few pro’s of being outside of the EU (many of which they are unlikely to actually get, and some which are just fantasy), yet they have steadfastly refused to acknowledge any of downsides (dismissing them as project fear). Hence the shock horror when many were confronted with May’s deal. And if, as noted, the trade negotiations go the same way, the anger among the gammon brigade is going to just build and build.

In short, if brexit is to continue, brexiters need to tell the public the awful truth and prepare them for the inevitable. Its ironic that one of arguments against a 2nd referendum (or abandoning brexit) is the fear it would enhance the far right. The opposite is true. A brexit, sold to the public as a short pleasant unicorn ride to sunlight uplands, that instead turns into a long hard unending trudge, during which the many issues that led people to vote leave get worse and worse, is exactly the sort of breeding ground in which the far right will flourish.

Economic hitmen circling

If you are looking for a book recommendation over the holidays, I’d suggest “confessions of an economic hitman” by John Perkins. It details how corporations would exploit the fact that so many developing world countries were (and still are) run by chest puffing populist autocrats, who could be manipulated into doing foolish things with the state’s finances, bankrupting the country and giving the corporations extraordinary leverage over these states.

Well I was reminded of it recently when I was talking to someone who works in stocks. Because, given that we’ve started to elect similar populists, who often either don’t understand how politics works, or are on the take themselves, corporations are simply copying these tactics and applying them in western states.

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Case in point, the reaction of many traders to brexit was to immediately draw up a list of UK firms and start shorting their shares. They had to be selective about who they went after in the early days (some companies would carry on despite brexit, others were doing badly for reasons entirely unrelated to brexit). But with the current political turmoil they go just as easily toss a dart blindfold and still get a bullseye.

The UK high street for example, has seen drops in footfall and a general slow down in trade. And with online retailers also suffering clearly its something more fundamental that changing tastes. In fact one study suggests that even despite all the closures we’ve seen over the last 18 months, only about half the shops the UK currently has are actually needed. Brexit has in short, presented the short sellers with an open goal.

Which is ironic given how many voted leave as some sort of a two fingered salute to the elites. But, to draw an analogy, imagine you live in a block of flats and hear your neighbours, who are angry with the landlord, plotting to burn the building down. Well the economic hitman’s reaction to that is to take out a massive fire insurance policy on the building….then provide the residences with cans of petrol and a box of matches.

This is the unfortunate reality. Angry ranting and raving just to make yourself feel better is counter productive. Because once you’ve finished bouncing off the walls you’ll likely find those who you were angry with have simply used the distraction to get even wealthier and more powerful.

UK firms seek post-brexit EU regulation

And to further the point above, May has told UK companies to prepare for a no deal brexit. And the reaction of many of them? Well aside from crapping their pants, some have stepped up their efforts to register their companies in EU states. Hundreds of UK manufacturers, in particular aerospace, airlines and other manufacturers are seeking EU jurisdiction before the UK leaves the EU. This means that they will be regulated by the EU rather than the UK.

Why? Well because the EU is their biggest customer and if they aren’t in compliance with EU regulations, they can’t sell into the EU. Furthermore, there’s also the matter of legal action. Let’s suppose you are a UK airline, or a manufacturer of aircraft parts. A plane crashes and you get sued because it is claimed the plane was unsafe. Now at the moment you can claim that your aircraft was fully complaint will all EU regulations and safety standards. This reduces the odds of the case going against you. And furthermore, even if it does, there are legal limits to how much you can be sued for per passenger. Outside the EU (and your aircraft could well crash in some distant country not just in the UK, hence UK law is no fall back in this case), this defence doesn’t work and the claim limit is unlimited (which means nobody’s going to insure you or give you a line of credit!).

Of course this immediately contradicts one of the key points made in the referendum, that corporations would be flocking to the UK, to escape the EU’s burdensome regulations (you know laws that stop flammable materials being used in buildings or prevent toxic paint being used on children’s toys). Instead the opposite is proving to be true. And it also means many UK firms will now have one foot out of the country. So if things do go to pot, its going to be very easy for them to simply relocate.

Cinque merda

You may recall that tragic bridge collapse near Genoa (which in fact I’d passed under a few months prior), which the Italian Horseshoe government of 5-star and the League promptly blamed on the EU. Well I stumbled on this article which reveals that a report back in 2013 warned that the bridge was a risk of collapse, only for that report to be dismissed as a “fairy story” by the 5 star party, who were then in opposition.

This is the problem with populists, its easy to say no to bridge repairs as a waste of people’s taxes and gather popular support in the process, but actions have consequences. And those consequences include bridges collapsing due to lack of repair and people dying. The irony is that one of those 5 stars is transportation….and this is the same party who also can’t get the buses to run in Rome because they keep catching fire!

In fact, very few of those 5 star promises are being met. Human rights have inevitably gone to pot, thanks to their decision to go into government with a bunch of fascists. Their anti-vaccine tendencies has resulted in a measles epidemic breaking out. Renewable energy? Word is they are negotiating a deal involving Russian gas and a new pipeline to carry it. Corruption? Their Mayor in Rome has been battling allegations of corruption and cronyism for some time now.

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In seems to be that anything positive they try to do, they screw it up. You wonder if they should just change the party’s name to “cinque merda” (five turds) instead.

That sinking feeling

On of the problems with climate change is that we can’t really predict its consequences. Yes we know that its going to get warmer, which will have various consequences (more heat waves, melting polar ice and thus sea level rise, possibly colder winters). But the real danger is the X factor. The unexpected consequences of climate change, the stuff that will just come out of left field. These are problematic given that we can’t really predict them and hence can’t plan ahead.

Case in point, this story from the UK. The recent hot weather and drought sparked a large number of claims for subsidence. Subsidence has many causes, but a not uncommon cause is a change in moisture level in the soil. If the soil gets too dry, it can soften and crack. And naturally the long dry summer we’ve just have, particular worse given that it was followed by very heavy rain, has let to this rash of claims. Yet another example of the economic price we’ll pay for climate change.

The Heist

Finally an interesting video here on the most important unsolved robberies, you’ve probably never heard about. In March 1971, several anti-war activists managed to break into an FBI office and made off with a large number of files. They were suspicious that the FBI was (illegally) spying on the peace movement. And not only did they find evidence of this, but they’ll also exposed COINTELPRO a secret FBI surveillance programme, of the sort we’d normally expect from the KGB.

The revelation of COINTELPRO had a significant effect on the FBI and US politics in general. Indeed, it wasn’t until post-911, under Bush that the US federal agencies ever dared to do anything similar again. Anyway, what is perhaps interesting is that the people who pulled this off (and got away scot free) weren’t Russian trained agents, or sleuths of some kind, they were just a bunch of highly motivated amateurs. Yet they managed to outwit the FBI for decades, only revealing their involvement recently, well after the statue of limitations had run out.

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The Yellow submarine tries to polish a turd – May’s political obituary

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So at the eleventh hour Theresa “the yellow submarine” May pulls the plug on her own deal (and undertakes a characteristic crash dive). Her deal was the inevitable consequences of caving into pressure from the various factions in her party and trying to deliver the undeliverable. With backstops for the backstops the inevitable result of her unruly party trying to argue that the rules didn’t apply to them (in accordance with the Ferengi brexiter rules of acquisition 17a deal is a deal but only between Ferengi brexiters”). In fact, her deal is eerily similar to what I suspected a post-brexit deal would look like many years ago.

As one academic points out, you could argue her deal gives the majority of leave voters what they asked for in the referendum. In effect, what they voted for was some form of immigration controls, at the expense of being made a little poorer. And that’s pretty much what May’s deal does. But there’s an old saying in politics that you should never give people what they want, because most people are mad and what they want is undeliverable, plus you’ll never please everybody.

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Every proposed brexit scenario leaves the UK worse off, worse still if any further immigration controls are imposed

In fact, lets run the numbers. 37% of electorate voted leave, which drops to 25% support when we factor in those who couldn’t vote (EU citizens, UK overseas citizens, students away from their term time addresses, etc.). Let’s assume 70% supported leave because of immigration. Well that means that support for May’s deal runs at about 18%, while pissing off the remaining 82%. And even that’s assuming all of that 18% supported it knowing it would make them poorer! Plus in reality any immigration controls will be on paper only. The labour shortages at present means if anything, leave or remain, her hostile environment will have to be reformed or scrapped. And the open Irish border will negate any controls in practice. So is it any wonder her deal is about as popular as a pile of dog doo.

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Even the dogs don’t seem to like May’s deal

And her solution? Go to Brussels and see if they can polish a turd for her. Her plan seems to be to get signed assurances from certain key players such as Junker and Merkel (who are both due to retire shortly), return triumphant to the UK waving a piece of paper with their signatures on it as she steps off her plane….now where have I heard that before? Does she seriously think that’s going to placate the hard brexiters in parliament?

Which is what really worries me, the fact we need to accept is that May is clearly delusional. Like Trump, she is living in a fantasy world. A smart PM would have had a vote and then begin the process of political ping pong as the different options (Norway for now, 2nd referendum, no deal, Canada model, revoke article 50, etc.) are gradually eliminated until one with majority support is identified (which could well be her deal).

Indeed, I even considered this a clever ploy by the PM, pushing forward something truly awful, which everybody would hate, then reluctantly backing the option she really wanted after someone else proposed it. But she’s not going to do that. Up until 24 hrs ago she was deluded into thinking she could force her deal through parliament. My guess we’ll have a vote on her deal all right….probably around about the evening of the 28th of March!

This has been Theresa May’s style of government from the beginning. Needless to say they don’t call her the yellow submarine for nothing! Her brexit policy driven not by any long term strategy, but by her saying and doing whatever it took to stay in power to the end of the week (or increasingly the end of the day) and avoiding any awkward confrontations. Recall that for quite sometime (as in over a year after triggering article 50) it turned out that there had been no cabinet level discussion as to the government’s brexit strategy. Hence, the expression brexit means brexit…without telling us what brexit means…which they’ll no doubt carve on her tombstone.

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She delayed the roll out of her deal until a few weeks ago, no doubt because she knew it would be so unpopular. Then she toured the country adamant that this was the only option. She urged the public (who she plans to deny any vote on the deal) to go to their MP’s and pressure them into supporting her. She even proposed a pointless TV debate with Corbyn that would have been a PR disaster. She flip flopped like crazy. Telling remainers the only other option was no deal, the hard brexiters that it was remain and her party rebels that it was Corbyn….all the while failing to consider what would happen when they compared notes. In effect parliament now seems united in its dislike for her deal. Only when faced with humiliation does she back down. And its clear she took this hasty decision to call the whole thing off without consulting her cabinet colleagues first.

And it was the same with her Chequers plan, a dead parrot she dragged around for months, even though it was DOA before the ink had even dried. It was only the embarrassment of her being practically walked out of the Salzburg summit by security that led to her moving on. And technically, she’s never actually admitted that Chequers is dead. Don’t be surprised if she whips this festering Norwegian Blue out of her pocket at some point in the future.

And so it was on other issues of the day too. Recall her expertise with the dead cat strategy early in her reign (to distract people long enough for her to make a bolt for the door). Recall her disastrous election strategy of basically running away from journalists and people in general. Then her decision to go into power with the DUP knowing full well how difficult it would be to agree a brexit deal and square the circle of the Irish border. All to avoid having to make a tough choice today, even though it meant tougher choices tomorrow.

And further back there’s her hostile environment and all the problems that this has built up. The Windrush scandal was an all too predictable consequence of a flawed, overly bureaucratic system run by officials who simply don’t have a clue what they are doing, are understaffed and working to fulfil unrealistic targets. Like I said, its likely the whole thing will have to be reformed or scrapped.

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Yet Theresa May carries on in blissful ignorance, until confronted by reality, upon which she makes a hasty decision, often just doing something for the sake of doing something and generally what will ever get her out of the room as quickly as possible. One can scarcely think of a worse person to have in charge of the country at this time. There were many words we could use to sum up Cameron…although Danny Dyer managed to get it down to one word. But the words we’d have to write on May’s political obituary are “deluded”, “indecisive” and “running scared“.

The logic that at some point she’ll blink and do what’s right for the country and stop a no deal brexit, I’d argue that’s wishful thinking. She’ll keep on doing what she’s been doing for the last 2 and a bit years, whatever it takes to hang on for another day and defer difficult decisions till another time (probably right up to or beyond the end of March). This woman is literally going to ride the country off a cliff just because she’s too scared and too incompetent to make a decision.

More worrying, is that Corbyn ain’t likely to be any better. In fact his actions suggest he’s probably as bad if not worse. Its just as he’s not PM he gets away with it. Leadership of the opposition comes with the perk of being allowed to live in a glass house and maintain a rock throwing habit.

I mean think about, his plan is that he’s not going to call for a 2nd referendum as he wants brexit to go ahead has to “respect the original decision” taken in 2016….so instead he’s going to disrespect the decision of voters in the 2017 election, try and bring down the government and force an election at probably the most inconvenient time to have an election in the UK’s history. Consider that in Ireland we’ve got a minority government and have had one since 2016 because with brexit talks ongoing, its seen as a bad idea to try and have an election right now.

And even if he can become PM, Corbyn would then have to confront the fact that his brexit plan is only slightly less bonkers than May’s, is probably undeliverable in the short time that remains, and will piss off 90% of his party who voted remain. Odds are if he takes over, sometime in late March 2019, he’ll trying to get something similar to May’s deal through parliament.

Is it any wonder that the hedge funds, or the likes of Steve Eisman (of big short fame) are piling in to bet against the UK. Never in recent history has there been a surer think than to bet against post-brexit Britain, so long as this pack of clowns are in charge.

Reality bites for Trump’s tariffs

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Both GM and Ford have recently announced a new round of job cuts. Both companies, and the media, blame the cuts on changing technology, the rise of electric cars and driverless vehicles and the need for them to diversify away from traditional vehicles. Well if that’s the case why is one of the vehicles being cut the Chevy Volt? In reality this is probably more a consequence of Trump’s ill conceived policy of trade tariffs.

There is an element of truth to these claims, but competition from electric and driverless vehicles is more of a long term issue. As I’ve discussed before, its going to be some time before driverless cars are on the road and its going to take time to install the charging infrastructure to allow full scale conversion to electric cars. Plus some market for hybrids, FCEV’s or biodiesel vehicles will still always exist.

The truth is that I suspect these jobs cuts are more about short term issues. Changing tastes means less conventional small to medium sized cars are being sold in America. Low fuel prices are encouraging Americans to buy more crossovers and SUV’s. Hence why both GM and Ford are planning to focus more on them. Also, they sense an economic slow down coming and its always important for manufacturers, particularly of things like car’s (which have long supply chains and take years to plan and develop) to try and be ahead of the market (otherwise they could end up churning out cars nobody wants when the economy is flat lining).

And a long standing problem with many American made cars is that they represent a very narrow specialised market. Almost nobody here in Europe buys an American car (outside of the more high end luxury models), as they are too big and awkward to park on our narrow European streets, give lousy mileage and are expensive to maintain. Which is of course why both GM and Ford have separate divisions (and car plants) overseas churning out cars suitable for foreign markets. So there’s no reason why, should petrol prices rise in future, GM (or Ford) can’t simply import cars from these plants back into America. Or in other words, both companies are responding to Trump’s tariff’s by quietly moving production overseas.

Protectionist tariffs rarely if ever work, as they simply encourage companies to move production around any trade barrier, which is pretty much what US companies have been doing. Particularly when you consider how globally diversified modern supply chains are. Parts of the iconic British Mini for example cross the English Channel multiple times before final assembly into a car…which might then cross the channel again! This is why any kind of a trade barrier, even a sudden increase in checks at the border (as might result from brexit) can have a huge negative impact.

This is not to say that government’s shouldn’t fight the corner for their workers (be it their rights or their jobs). In fact that’s kind of what we pay politicians to do. However, there’s a world of a difference between a government sticking up for its home industries and engaging in blatant market manipulation and central planning.

For example, the Irish government (under various parties from across the political spectrum) has long had a policy of encouraging Irish industry as well as inward investment in Ireland, trying to smooth over any problems that may occur and fighting for Irish jobs. But without getting all clingy and Trumpish about it. In short the Irish government policy has long been to be more like that of a coach and less of a helicopter parent. This is one of the reasons why Ireland’s GDP is higher than that of the UK and the US. And why manufacturing represent a third of Ireland’s economic output, compared to roughly 20% for the UK or the US (for now!). Because, oddly enough, going around the world insulting world leaders and starting trade wars is a good way to get people fired.

So effectively, by blaming electric cars for their woes, GM and Ford have been engaging in a bit of Trump whispering, knowing he’ll blow a gasket and wail away at electric cars, Musk and Tesla (who makes his cars in the US and far more of his components than GM or Ford). As opposed to facing the consequences of admitting their plan is to now move production overseas. Or in other words, much as with his tax cut, Trump’s being played.

Not that I suspect he’d care, I mean do you honestly think he cares about American workers? So long as he can plead ignorance (which given the low attention span of most Trump voters isn’t difficult to achieve) that’s fine by him. A week or two more and he’ll have moved on to the next self imposed crisis.

As is so often the case with populism, its the most vulnerable who suffer. The car company and steel workers who were promised by Trump they’d be so busy they won’t have time to spend all of their money, well now they are looking at a Christmas and new year unemployed. In the UK too, it will be those communities who voted strongly for brexit who are going to get hammered. Job vacancy numbers are going down at the same time as HR managers say they are struggling to fill vacancies. Which is inevitable, because much like trade tariffs, strict immigration controls are a form of trade barrier and inevitably all you’ll succeed in doing with them is create an artificial shortage.

And who looks set to profit from brexit? Well hedge funds (some of them run by brexiters) are now betting against the UK high street. And the data seems to back them, as UK high street sales flatline. Which is perhaps another point, if you think that threatening to burn the house down (by electing populists like Trump or for things like brexit) is going to scare the spiv’s and speculators in Wall street, think again. They’ll just take out fire insurance on the house before you torch it, make a ton of money and then do a weasel dance as you fish your stuff out of the ashes.

And the left needs to take notice. Adopting similar populist policies, just without the racist rhetoric isn’t going to be effective. Yes governments should be pro-business and pro-worker, but only up to a point (that point being where you are jetting around the world insulting allies and alienating trade partners). Any private firm that can’t stand on its own two feet isn’t a private firm any more. Your options are to either nationalise it (because its that vital to the national interest) or let it fail and help cushion the blow for the local populace.

But ultimately it is necessary to recognise the globalised nature of trade. Whether you like or not, this is the new normal. The aforementioned strong position of countries such as Ireland has come about because we’ve adapted to this new normal, while countries like the US, who have tried to fight it, are worse off as a result. Yes we can tweak the rules of globalisation a bit (e.g. on issues of workers rights or environmental impact) but only with the consensus and support of other partners (hence why being a member of things like the EU is so important).

But trying to fundamentally change this reality is not a realistic option (unless you plan on becoming North Korea of course!). Hell, even Trump seems to have caved in. While you can defy the laws of economic gravity for some time period, eventually they will re-exert themselves.

The impact of brexit on the UK’s energy supplies

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nuke-crop Figure 1: Brexit presents many challenges to the energy industry [FP, 2017] With brexit negotiations more or less complete and the post-brexit landscape a little clearer (well as clear as its going to get anyway!), it might a good time to review the likely impact of brexit on the UK’s energy supplies. In a nutshell, the UK, assuming May’s deal stands, will be leaving the single market for energy, ending freedom of movement and leaving Euroatom. No deal essentially means the same but with no negotiated replacement and the UK at odds with Brussels over unpaid bills.

In the short term the UK may face various challenges. For example balancing the grid in the event that say, we are cut off from European energy supplies (due to a no-deal brexit, or because of a disagreement over the UK’s exit bill). Longer term there is the issue of…

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The Founding Fallacies of Privatisation – University bankruptcies loom

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For sometime I’ve been speculating about the consequences of the Tories/New labour defacto privatisation of universities. As a result, some universities haven gotten in way over their heads financially and its just a matter of time before one goes bust. But the government’s official policy is that there will be no bailouts of third level institutions. And, as can probably guess, the other week we learn that, contrary to this policy, a university WAS bailed out to the tune of nearly a million pounds.

As I’ve mentioned before, several universities in the UK are in dire financial straits. At least three uni’s were recently reported as being close to bankruptcy (living hand to mouth on short term credit), with one (presumably the one that was bailed out) already in talks with insolvency lawyers. This should not come as a surprise. Universities were encouraged by the government to expand and market themselves aggressively, in particular overseas. As well as to seek out research funding, both private and public, with the EU being a major contributor.

Now however, international students are shunning the UK, thanks to Theresa May’s hostile environment. And both EU students and EU research money is drying up thanks to brexit. Furthermore a demographic necking means less home students being recruited (quite apart from the fact that quite a number are going to university in the EU, where they can, at least for a few more years, get free tuition). Some uni’s are now so desperate for students that they’ve dropped their entry requirements considerably. A third of UK applicants last year got unconditional offers (meaning they were effectively guaranteed a place regardless of their A level grades).

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On the spending front, some uni’s borrowed quite heavily in order to expand. And, in line with government policy, they did not allow salaries of staff to rise with inflation, which means all lecturers in the UK have taken essentially a 12% pay cut since 2009. Now with post-brexit inflation pushing up the cost of living yet further, staff are demanding higher salaries (and with less international staff coming in, uni’s will likely have to cave in to those demands eventually). Interest rates are rising too, pushing up loan repayment costs. So universities are facing a perfect financial storm. Thus it should be no surprise that some have gotten in trouble and this bailout is unlikely to be a one off.

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University campuses in the UK have recently been rocked by strikes

That the government was forced to blink first in its stand off with university vice-chancellors should also hardly come as a surprise. A university represents a significant economic entity. It collapses that’s tens of thousands of well paid jobs lost to the local economy, many times more of indirect employment (shops, bars, restaurants, etc.), a crash in local house prices and of course a lot of disgruntled students who’ve just blown tens of thousands on a degree they can’t finish. Indeed, given the drop in council tax revenue and business rates resulting from a uni collapsing, its likely many councils (given the less than healthy state they are in) would also go bust as well if their local uni went down. In short, for any politician to let a university fail would be political suicide.

What I find interesting about this story however, is the covert manner in which the university was bailed out. According to the government, they only “lent” the money to the university in question for a week or so. This sounds somewhat dubious. A uni that was in talks with insolvency lawyers manages to find a million pounds down the back of the sofa around the same time the government lends it money. Ya sure! And if you believe that, I’ve got some magic beans I can sell you. More than likely what actually happened is that the government used the money to arranged a line of credit with the banks, with it taking on the uni’s debts, in return for them lending money to the university.

And these cloak and dagger tactics should come as little surprise. The situation with universities mirrors the difficulties the government faces with local councils (bankrupted by LOBO loans), ex-state owned utilities (rail, water and power companies) with similar large debts, as well as the £300 billion in PFI debts the country owes. Then there’s the +£100 billion in student debt, that’s unlikely to be paid off in full.

The truth is that the Tories policy of austerity has just been smoke and mirrors. Yes the cuts in welfare spending are very real and creating lots of hardship, but they don’t save a lot of money, given that only a tiny fraction of public spending is on welfare (compared to what is spent on pensioners for example or the NHS or the MoD).

Also its questionable whether such cuts save money at all. Sack a civil servant and replace him with a private contractor, whose employer charges three times the amount, well that’s hardly value for money. Less so if our ex-civil servant starts claiming benefits. Cut his benefits, that leave it up to food banks and local councils to pick up the pieces. And this has been the problem with austerity, its just moving numbers around a ledger to hide the fact that the Tories haven’t reduced anything, in fact they’ve made things worse. Tory economic policy since 2010 has been little more than a set of Enron style accounting tricks to hide debts, rather than reduce them.

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Even the UK’s official debt is higher than it has been for decades

And, much as with our unnamed university, once one of these quango’s gets in trouble, despite government protestations to the contrary, they will quietly bail them out. Recall how East coast rail was bailed out as were the creditors of Carillon. The government has to bail them out (same as our unnamed uni), because if they don’t they risk a very damaging unravelling of firms in a similar position. Its likely that if one uni goes down (or one rail company or water company) in the UK, several more will quickly follow (as nobody with a lick of sense will lend money to any other UK uni’s nor sign up for their courses). Which is of course exactly the problem with public services, they are by definition too important to be allowed to fail. So one has to question the wisdom of making them part of the private sector, as all you are doing is privatising profit and socialising risk.

And this isn’t just about saving the Tories ideological blushes. Basically what the government is doing is legally questionable. If any company or an individual did the same we’d be led away in hand cuff’s to the tune of inner circle.

The danger for the government is that at some point the rating agencies and banks are going to argue that these hundreds of billions of public debt that the government is essentially responsible for, needs to count it as part of the UK’s public debt. Which would leave the UK’s public finances looking worse than they did when the Tories took over (and Gordon Brown was dealing with the worse economic crisis in a century, while the Tories have essentially created an economic crisis). In fact they’d look worse those of Greece (which is now well into recovery and growing faster than the UK)…..and they want to at least wait until labour takes over before dropping that bombshell (so they can blame it all on Corbyn).

Of course the trouble with this Tory strategy is that events might be taken out of their hands. For example, a uni’s creditors decide to force it into liquidation, regardless of what secret offers the government makes, as they’d prefer to get their greedy paws on its billions worth of city centre property. A quango running a public service goes to illegal lengths to hide its debts, meaning the police get involved and force it into insolvency. And recall many of the UK’s public service quango’s are owned by foreign companies (many based in the EU), so its not necessarily a matter the UK government can influence.

But either way, we get the uncontrolled meltdown of a public service, council or university, with all the negative consequences that brings (as again, once one goes down, several more will likely follow). So its a case of watch this space and expect fire works in the future.