I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
The 'British Government is not alone .. the Scots are building this with Chinese steel as the Chinese can deliver the right quality and right on time .. something a spokesman for the Edinburgh mafia claimed on radio about two years ago .. if he's right, it is a big indictment that steel made thousands of miles away can be more reliably delivered than steel made a few hundred miles away on the same island http://www.forth-bridges.co.uk/queensferry-crossing.html
I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
Wasn't that Alastair Darling and the Labour government ?
I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
Wasn't that Alastair Darling and the Labour government ?
Yes they started it and the next lot continued it.
I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
Wasn't that Alastair Darling and the Labour government ?
Yes they started it and the next lot continued it.
Along with every other major government in the world trying desperately to shore up the imminent collapse of a flawed financial economic system. Flawed system being the operative word, got no ideas of an alternative of course.
I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
Wasn't that Alastair Darling and the Labour government ?
Yes they started it and the next lot continued it.
Along with every other major government in the world trying desperately to shore up the imminent collapse of a flawed financial economic system. Flawed system being the operative word, got no ideas of an alternative of course.
But hey, it was the wicked Tories right?
Just saying they have a history of selling off the country's assets but only seem to support a few industries. Don't know about wicked but like all our political parties the main interest is staying in power.
I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
Wasn't that Alastair Darling and the Labour government ?
Yes they started it and the next lot continued it.
Along with every other major government in the world trying desperately to shore up the imminent collapse of a flawed financial economic system. Flawed system being the operative word, got no ideas of an alternative of course.
But hey, it was the wicked Tories right?
Fuck me. I thought it was Gordon Brown what done it !!!
I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
Wasn't that Alastair Darling and the Labour government ?
Yes they started it and the next lot continued it.
Along with every other major government in the world trying desperately to shore up the imminent collapse of a flawed financial economic system. Flawed system being the operative word, got no ideas of an alternative of course.
But hey, it was the wicked Tories right?
All at it, you are right SJ. But there is no doubt whatsoever that Maggie Thatcher started it. That, unusually, can be stated as a fact.
I can't recall a Tory government supporting an industry in crisis except for the 100bn+ that was spent on banks. They have been known to sell a few bits of family silver though, British Steel one of many.
Wasn't that Alastair Darling and the Labour government ?
Yes they started it and the next lot continued it.
Along with every other major government in the world trying desperately to shore up the imminent collapse of a flawed financial economic system. Flawed system being the operative word, got no ideas of an alternative of course.
But hey, it was the wicked Tories right?
Fuck me. I thought it was Gordon Brown what done it !!!
Nah, he specialised in fucking over my parents generation with a smash and grab on their pensions... they are all at it.
There has been no real difference between either of the parties of government since the 1980s (and even the current Shadow Chancellor is promising to abide by similar policies). The only difference is that, prior to 2008, the Tories were in favour of deregulating banks even further.
The 'British Government is not alone .. the Scots are building this with Chinese steel as the Chinese can deliver the right quality and right on time .. something a spokesman for the Edinburgh mafia claimed on radio about two years ago .. if he's right, it is a big indictment that steel made thousands of miles away can be more reliably delivered than steel made a few hundred miles away on the same island http://www.forth-bridges.co.uk/queensferry-crossing.html
It's things like those pesky workers rights, minimum wages, health and safety regulations and environmental regulations forcing up costs and reducing productivity. With such unreasonable restrictions on our industries, how can they be expected to compete with the likes of the Chinese who can employ whoever they want, make them work as many hours as they want, pay them what they want, do what they like do what they like to their health and pollute what they like in the process.
I'm being facetious of course. It's not an indictment of our steel industry it's damning that, of all 'people', our governments can't look beyond just the bottom line cost and see the added value in supporting British industries when these large projects come up.
The 'British Government is not alone .. the Scots are building this with Chinese steel as the Chinese can deliver the right quality and right on time .. something a spokesman for the Edinburgh mafia claimed on radio about two years ago .. if he's right, it is a big indictment that steel made thousands of miles away can be more reliably delivered than steel made a few hundred miles away on the same island http://www.forth-bridges.co.uk/queensferry-crossing.html
It's things like those pesky workers rights, minimum wages, health and safety regulations and environmental regulations forcing up costs and reducing productivity. With such unreasonable restrictions on our industries, how can they be expected to compete with the likes of the Chinese who can employ whoever they want, make them work as many hours as they want, pay them what they want, do what they like do what they like to their health and pollute what they like in the process.
I'm being facetious of course. It's not an indictment of our steel industry it's damning that, of all 'people', our governments can't look beyond just the bottom line cost and see the added value in supporting British industries when these large projects come up.
Agree with this and would add that it's a deliberate act by China to destroy the steel industries of other nations by selling it cheaply. Once we have no steel industry ourselves, they can charge what they like.
The 'British Government is not alone .. the Scots are building this with Chinese steel as the Chinese can deliver the right quality and right on time .. something a spokesman for the Edinburgh mafia claimed on radio about two years ago .. if he's right, it is a big indictment that steel made thousands of miles away can be more reliably delivered than steel made a few hundred miles away on the same island http://www.forth-bridges.co.uk/queensferry-crossing.html
It's things like those pesky workers rights, minimum wages, health and safety regulations and environmental regulations forcing up costs and reducing productivity. With such unreasonable restrictions on our industries, how can they be expected to compete with the likes of the Chinese who can employ whoever they want, make them work as many hours as they want, pay them what they want, do what they like do what they like to their health and pollute what they like in the process.
I'm being facetious of course. It's not an indictment of our steel industry it's damning that, of all 'people', our governments can't look beyond just the bottom line cost and see the added value in supporting British industries when these large projects come up.
The 'British Government is not alone .. the Scots are building this with Chinese steel as the Chinese can deliver the right quality and right on time .. something a spokesman for the Edinburgh mafia claimed on radio about two years ago .. if he's right, it is a big indictment that steel made thousands of miles away can be more reliably delivered than steel made a few hundred miles away on the same island http://www.forth-bridges.co.uk/queensferry-crossing.html
It's things like those pesky workers rights, minimum wages, health and safety regulations and environmental regulations forcing up costs and reducing productivity. With such unreasonable restrictions on our industries, how can they be expected to compete with the likes of the Chinese who can employ whoever they want, make them work as many hours as they want, pay them what they want, do what they like do what they like to their health and pollute what they like in the process.
I'm being facetious of course. It's not an indictment of our steel industry it's damning that, of all 'people', our governments can't look beyond just the bottom line cost and see the added value in supporting British industries when these large projects come up.
terrific and very relevant reply .. BUT my original point still stands, it is often/usually/sometimes (choose your option) more sensible to import products into the UK which are also manufactured here .. this is due to all that you mentioned, plus inefficient and outmoded plant and manufacturing facilities, poor management, a badly trained, demotivated and often belligerent workforce and bad salesmanship .. I often travel in the area of the huge Scunthorpe steelworks. Many of its structures are rusted and falling down, the place generally has an air of gloom and decay, it will take MANY MILLIONS to rectify this. Of course the world is littered with 'ghost towns' where times, tides, fashions and technologies have changed and rendered what was once in great demand, obsolete. Go to the USA and you'll see what I mean. From Detroit to Hollywood, a rot has set in. The same is happening in Europe and indeed in China at a greatly accelerated pace. There is 'silicon valley' of course and many 'happening' places around London, Oxford, Cambridge, all over the place, all over the world. However, a car, though more and more dependant on computer technology, cannot be manufactured from silicon, nor for that matter can a can to hold ones beer or tipple of choice.
Sold lie on lie on lie re privitisation. Tory-Labour. Level playing fields Privialisation=compition =greater choice+ lower cost. Utter bollox.
No level playing field---EU countries still "own" so called " private companies"---EDF 75% state owned.
The big boys take over there is LESS competition and higher costs re increased shareholder dividends
Under EU procurement law you can't push a bid towards a British product ( like steel) your open to fines from EVERY " failed" bidder if you do--- hence £700 million going to another non Brit company up in Scotland .the fact that the winning bid was probably won with a state subsidy (China) should have brought a challenge on itself ---- stinks that there wasn't a challenge----- maybe We Kranky in Scotland only takes on the UK Gov?
Corbyn says he will bring back public ownership ---- don't talk bollox---- not in EU you won't Jezza--- which u want to stay in. You will have to borrow the dish from the IMF or EU central back , look up restructuring under the IMF---- they want MORE privatisation not less.
Yep and also the Chinese steel is not as good as the steel we produce either. According to my mate who specialises in metal beam installations.
They can produce any quality you spec. I had some stainless steel parts made there last year. Made just as well as anywhere else in the world and from traceable material with certification. The only real difference was the price, we cannot compete with them. If it were a level playing field they would be pretty much the same as us. Labour and energy costs they beat us hands down. They will be dictating the price of everything in the near future (if the are not already) and we have to pay whatever they say.
Sold lie on lie on lie re privitisation. Tory-Labour. Level playing fields Privialisation=compition =greater choice+ lower cost. Utter bollox.
No level playing field---EU countries still "own" so called " private companies"---EDF 75% state owned.
The big boys take over there is LESS competition and higher costs re increased shareholder dividends
Under EU procurement law you can't push a bid towards a British product ( like steel) your open to fines from EVERY " failed" bidder if you do--- hence £700 million going to another non Brit company up in Scotland .the fact that the winning bid was probably won with a state subsidy (China) should have brought a challenge on itself ---- stinks that there wasn't a challenge----- maybe We Kranky in Scotland only takes on the UK Gov?
Corbyn says he will bring back public ownership ---- don't talk bollox---- not in EU you won't Jezza--- which u want to stay in. You will have to borrow the dish from the IMF or EU central back , look up restructuring under the IMF---- they want MORE privatisation not less.
EDF 75% state owned but we can't have state ownership in the EU? Slight contradiction there, me thinks. State ownership is perfectly possible in the EU, the government just has to have the will do it. The French in particular do, successive governments here haven't.
Sold lie on lie on lie re privitisation. Tory-Labour. Level playing fields Privialisation=compition =greater choice+ lower cost. Utter bollox.
No level playing field---EU countries still "own" so called " private companies"---EDF 75% state owned.
The big boys take over there is LESS competition and higher costs re increased shareholder dividends
Under EU procurement law you can't push a bid towards a British product ( like steel) your open to fines from EVERY " failed" bidder if you do--- hence £700 million going to another non Brit company up in Scotland .the fact that the winning bid was probably won with a state subsidy (China) should have brought a challenge on itself ---- stinks that there wasn't a challenge----- maybe We Kranky in Scotland only takes on the UK Gov?
Corbyn says he will bring back public ownership ---- don't talk bollox---- not in EU you won't Jezza--- which u want to stay in. You will have to borrow the dish from the IMF or EU central back , look up restructuring under the IMF---- they want MORE privatisation not less.
While it is true that the EU specifies open tender competitions for government procurement, I think that you will find that the World Trade Organisation rules are equally damaging. At least with the EU formula, the tender competitions are reasonably transparent - with the requirements and specifications for major procurement having to be published in the Official Journal of the European Union.
However, these rules are applicable to public sector procurement only. Private companies are free to specify and purchase what they want.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the Financial Conduct Authority. FCA number: 191609. Registered office: 6-10 Whitfield Street London W1T 2RE UNITED KINGDOM. Registered in England: 03850593
It's very early days for this one. So far it seems to be generating as much heat as light. I'm impressed by the number of people on Twitter who've managed to turn themselves into instant experts on offshore tax havens.
As the dust starts to settle, though, this promises to be an intriguing ride. I'll leave it for today, as this will run and run.
Instead, I want to jot down some thoughts about the declining returns on Britain's overseas investments, something which could have serious implications for UK investors.
An abstract story with real world impact
As you may have read towards the end of last week, Britain ran a record current account deficit last year.
There were some scary headlines. And there were others saying it's all a fuss about nothing.
Who should you believe? We'll get to that in a second. First, let's nail down what this is all about.
What does it actually mean to have a current account deficit?
In broad terms, it means we earned less from abroad last year than foreigners earned in the UK.
Part of that is down to our trade deficit, trade being one component of the broader current account. We spend more on imports than we receive for our exports.
But that's hardly a new thing. And it isn't really the story here. The trade deficit stayed reasonably stable.
No, the smoking gun was what's called the primary income account, another subset of the current account.
This too is broken down into smaller components: earnings from direct investment (e.g. businesses and factories owned abroad/owned here by foreigners), earnings from portfolio investment (e.g. bonds and shares) and earnings from other investment (none of the above).
Of those three, it's the first – earnings from direct investment – that has taken the big hit.
"The increase in the current account deficit in 2015 marks the fourth consecutive annual deterioration since 2011," says the Office for National Statistics, "more than 80% of which is attributable to falls in net foreign direct investment (FDI) earnings."
To sum up, then, the basic story is this: Britain's current account deficit continues to widen because overseas investors are making more on their long-term investments in Britain than vice versa.
Should you worry about this?
There's a plausible case to make that this is nothing to worry about. In fact, it could be a positive story.
Overseas investors are making decent returns on their UK investments. That's a sign Britain's economy's doing OK.
Yes, it would be nicer if British investments overseas were doing as well. But, as the ONS points out, the big decline in our direct investment earnings owes much to the slump in commodities prices, especially oil.
So if these recover, the current account deficit should narrow. It's a temporary blip, not a structural feature.
That's the optimistic case.
Pessimists point to the fact that a nation's balance of payments must, as the name suggests, balance.
That means a deficit in the current account needs to be offset by a surplus on the capital account.
The capital account tracks, among other things, how much we borrow from abroad. So to run a surplus we need to borrow more from overseas than we lend.
It's a surplus because more money flows into Britain than flows out.
(NB while these loans are tracked by the capital account, any returns they earn, such as interest payments, are tracked through the current account. Just to make it a bit confusing.)
So the bigger the current account deficit, the more we have to borrow from abroad. That's basically the argument for being concerned about the current account deficit.
It's not really a problem so long as overseas investors keep lending us money at low interest rates. But will they?
And should we be so reliant on the answer to that question being 'Yes'?
It's not all about Brexit
Some are concerned that the Brexit referendum has them spooked. It's a valid concern, but I want to leave it one side for today.
My reason is I can see a scenario in which Brexit happens but it's not the doomsday scenario some suggest. I can also see a scenario in which the referendum's a non-event but the current account still matters.
It is of course plausible that Brexit – or fear about Brexit as the vote gets closer – does indeed spark a drop in foreign buying of UK bonds and a broader 'run on the pound'.
But the referendum on its own may not be a sufficient condition for this scenario to play out. Especially if we vote to stay in and the market quickly forgets the whole thing.
In addition, Brexit may not even be a necessary condition for any current account-related pain.
What if oil and commodities don't recover? What if overseas investors decide they're less keen on Britain for some other reason? Maybe if our economy starts to look weaker?
In broad strokes, here are four current account scenarios you need to be thinking about:
• It carries on as it is, or widens further. This could in theory go on for a long time, so long as foreigners are happy to lend to cover the gap. If they start getting nervous, though, they may need higher returns to tempt them. That means rising interest rates;
• It narrows because the UK economy tanks, dragging down what foreigners earn on their UK investments. Our earnings on overseas investments are still less than they used to be, but the gap has narrowed;
• It narrows because oil and commodities recover, boosting UK earnings on overseas investments;
• It narrows because the currency adjusts. The pound weakens to make earnings from abroad worth more in sterling terms, bringing them closer to the number of pounds foreigners are earning here.
This last one is especially interesting with the pound trading close to historic lows. If it gets pushed much lower it'll be in territory not seen for a generation.
See this recent piece for more on that.
So the current account deficit could be a load of fuss about nothing. But it could be followed by higher interest rates (to compensate nervous foreign investors), a fall in the currency and a lot of volatility.
Looking at the scenarios above, it makes sense for investors to have an eye on when and how the current account deficit will adjust.
That means being positioned for a commodities recovery and for a weakening of sterling. Neither is nailed on, but both are highly plausible.
More on this to follow.
In the meantime, Glenn's just sent me a link to the latest Talking Money podcast, all about why we should leave the EU.
By the way, I'm not saying whether nationalisation is or isn't the answer in this particular case. Personally, I'd go with punitive import taxes on Chinese steel until their state subsidies are removed, especially as they've just slapped a 46% tax on EU premium steel.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the Financial Conduct Authority. FCA number: 191609. Registered office: 6-10 Whitfield Street London W1T 2RE UNITED KINGDOM. Registered in England: 03850593
It's very early days for this one. So far it seems to be generating as much heat as light. I'm impressed by the number of people on Twitter who've managed to turn themselves into instant experts on offshore tax havens.
As the dust starts to settle, though, this promises to be an intriguing ride. I'll leave it for today, as this will run and run.
Instead, I want to jot down some thoughts about the declining returns on Britain's overseas investments, something which could have serious implications for UK investors.
An abstract story with real world impact
As you may have read towards the end of last week, Britain ran a record current account deficit last year.
There were some scary headlines. And there were others saying it's all a fuss about nothing.
Who should you believe? We'll get to that in a second. First, let's nail down what this is all about.
What does it actually mean to have a current account deficit?
In broad terms, it means we earned less from abroad last year than foreigners earned in the UK.
Part of that is down to our trade deficit, trade being one component of the broader current account. We spend more on imports than we receive for our exports.
But that's hardly a new thing. And it isn't really the story here. The trade deficit stayed reasonably stable.
No, the smoking gun was what's called the primary income account, another subset of the current account.
This too is broken down into smaller components: earnings from direct investment (e.g. businesses and factories owned abroad/owned here by foreigners), earnings from portfolio investment (e.g. bonds and shares) and earnings from other investment (none of the above).
Of those three, it's the first – earnings from direct investment – that has taken the big hit.
"The increase in the current account deficit in 2015 marks the fourth consecutive annual deterioration since 2011," says the Office for National Statistics, "more than 80% of which is attributable to falls in net foreign direct investment (FDI) earnings."
To sum up, then, the basic story is this: Britain's current account deficit continues to widen because overseas investors are making more on their long-term investments in Britain than vice versa.
Should you worry about this?
There's a plausible case to make that this is nothing to worry about. In fact, it could be a positive story.
Overseas investors are making decent returns on their UK investments. That's a sign Britain's economy's doing OK.
Yes, it would be nicer if British investments overseas were doing as well. But, as the ONS points out, the big decline in our direct investment earnings owes much to the slump in commodities prices, especially oil.
So if these recover, the current account deficit should narrow. It's a temporary blip, not a structural feature.
That's the optimistic case.
Pessimists point to the fact that a nation's balance of payments must, as the name suggests, balance.
That means a deficit in the current account needs to be offset by a surplus on the capital account.
The capital account tracks, among other things, how much we borrow from abroad. So to run a surplus we need to borrow more from overseas than we lend.
It's a surplus because more money flows into Britain than flows out.
(NB while these loans are tracked by the capital account, any returns they earn, such as interest payments, are tracked through the current account. Just to make it a bit confusing.)
So the bigger the current account deficit, the more we have to borrow from abroad. That's basically the argument for being concerned about the current account deficit.
It's not really a problem so long as overseas investors keep lending us money at low interest rates. But will they?
And should we be so reliant on the answer to that question being 'Yes'?
It's not all about Brexit
Some are concerned that the Brexit referendum has them spooked. It's a valid concern, but I want to leave it one side for today.
My reason is I can see a scenario in which Brexit happens but it's not the doomsday scenario some suggest. I can also see a scenario in which the referendum's a non-event but the current account still matters.
It is of course plausible that Brexit – or fear about Brexit as the vote gets closer – does indeed spark a drop in foreign buying of UK bonds and a broader 'run on the pound'.
But the referendum on its own may not be a sufficient condition for this scenario to play out. Especially if we vote to stay in and the market quickly forgets the whole thing.
In addition, Brexit may not even be a necessary condition for any current account-related pain.
What if oil and commodities don't recover? What if overseas investors decide they're less keen on Britain for some other reason? Maybe if our economy starts to look weaker?
In broad strokes, here are four current account scenarios you need to be thinking about:
• It carries on as it is, or widens further. This could in theory go on for a long time, so long as foreigners are happy to lend to cover the gap. If they start getting nervous, though, they may need higher returns to tempt them. That means rising interest rates;
• It narrows because the UK economy tanks, dragging down what foreigners earn on their UK investments. Our earnings on overseas investments are still less than they used to be, but the gap has narrowed;
• It narrows because oil and commodities recover, boosting UK earnings on overseas investments;
• It narrows because the currency adjusts. The pound weakens to make earnings from abroad worth more in sterling terms, bringing them closer to the number of pounds foreigners are earning here.
This last one is especially interesting with the pound trading close to historic lows. If it gets pushed much lower it'll be in territory not seen for a generation.
See this recent piece for more on that.
So the current account deficit could be a load of fuss about nothing. But it could be followed by higher interest rates (to compensate nervous foreign investors), a fall in the currency and a lot of volatility.
Looking at the scenarios above, it makes sense for investors to have an eye on when and how the current account deficit will adjust.
That means being positioned for a commodities recovery and for a weakening of sterling. Neither is nailed on, but both are highly plausible.
More on this to follow.
In the meantime, Glenn's just sent me a link to the latest Talking Money podcast, all about why we should leave the EU.
Have a listen here.
Until next time,
Ben Traynor Editor The Daily Reckoning
Lincs, I was seriously impressed by your analysis, and then I saw the by-line at the end.
Comments
They have been known to sell a few bits of family silver though, British Steel one of many.
http://www.forth-bridges.co.uk/queensferry-crossing.html
But hey, it was the wicked Tories right?
Don't know about wicked but like all our political parties the main interest is staying in power.
I'm being facetious of course. It's not an indictment of our steel industry it's damning that, of all 'people', our governments can't look beyond just the bottom line cost and see the added value in supporting British industries when these large projects come up.
Of course the world is littered with 'ghost towns' where times, tides, fashions and technologies have changed and rendered what was once in great demand, obsolete. Go to the USA and you'll see what I mean. From Detroit to Hollywood, a rot has set in. The same is happening in Europe and indeed in China at a greatly accelerated pace.
There is 'silicon valley' of course and many 'happening' places around London, Oxford, Cambridge, all over the place, all over the world. However, a car, though more and more dependant on computer technology, cannot be manufactured from silicon, nor for that matter can a can to hold ones beer or tipple of choice.
Level playing fields
Privialisation=compition =greater choice+ lower cost.
Utter bollox.
No level playing field---EU countries still "own" so called " private companies"---EDF 75% state owned.
The big boys take over there is LESS competition and higher costs re increased shareholder dividends
Under EU procurement law you can't push a bid towards a British product ( like steel) your open to fines from EVERY " failed" bidder if you do--- hence £700 million going to another non Brit company up in Scotland .the fact that the winning bid was probably won with a state subsidy (China) should have brought a challenge on itself ---- stinks that there wasn't a challenge----- maybe We Kranky in Scotland only takes on the UK Gov?
Corbyn says he will bring back public ownership ---- don't talk bollox---- not in EU you won't Jezza--- which u want to stay in. You will have to borrow the dish from the IMF or EU central back , look up restructuring under the IMF---- they want MORE privatisation not less.
I had some stainless steel parts made there last year. Made just as well as anywhere else in the world and from traceable material with certification.
The only real difference was the price, we cannot compete with them. If it were a level playing field they would be pretty much the same as us. Labour and energy costs they beat us hands down. They will be dictating the price of everything in the near future (if the are not already) and we have to pay whatever they say.
However, these rules are applicable to public sector procurement only. Private companies are free to specify and purchase what they want.
Monday, 4 April 2016
Why we're more reliant on overseas investors
It looks like the news has plenty to get its teeth into with this Panama Papers thing.
The leaked documents from Panamanian law firm Mossack Fonseca are reported to show how its clients round sanctions, evade tax and launder money.
This one's just getting started, but already there have been a flurry of stories connecting world leaders to the scandal.
Vladimir Putin, Iceland's prime minister and David Cameron's dad have all been linked to the law firm.
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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the Financial Conduct Authority. FCA number: 191609. Registered office: 6-10 Whitfield Street London W1T 2RE UNITED KINGDOM. Registered in England: 03850593
--------------------------------------------------------------------------------
It's very early days for this one. So far it seems to be generating as much heat as light. I'm impressed by the number of people on Twitter who've managed to turn themselves into instant experts on offshore tax havens.
As the dust starts to settle, though, this promises to be an intriguing ride. I'll leave it for today, as this will run and run.
Instead, I want to jot down some thoughts about the declining returns on Britain's overseas investments, something which could have serious implications for UK investors.
An abstract story with real world impact
As you may have read towards the end of last week, Britain ran a record current account deficit last year.
There were some scary headlines. And there were others saying it's all a fuss about nothing.
Who should you believe? We'll get to that in a second. First, let's nail down what this is all about.
What does it actually mean to have a current account deficit?
In broad terms, it means we earned less from abroad last year than foreigners earned in the UK.
Part of that is down to our trade deficit, trade being one component of the broader current account. We spend more on imports than we receive for our exports.
But that's hardly a new thing. And it isn't really the story here. The trade deficit stayed reasonably stable.
No, the smoking gun was what's called the primary income account, another subset of the current account.
This too is broken down into smaller components: earnings from direct investment (e.g. businesses and factories owned abroad/owned here by foreigners), earnings from portfolio investment (e.g. bonds and shares) and earnings from other investment (none of the above).
Of those three, it's the first – earnings from direct investment – that has taken the big hit.
"The increase in the current account deficit in 2015 marks the fourth consecutive annual deterioration since 2011," says the Office for National Statistics, "more than 80% of which is attributable to falls in net foreign direct investment (FDI) earnings."
To sum up, then, the basic story is this: Britain's current account deficit continues to widen because overseas investors are making more on their long-term investments in Britain than vice versa.
Should you worry about this?
There's a plausible case to make that this is nothing to worry about. In fact, it could be a positive story.
Overseas investors are making decent returns on their UK investments. That's a sign Britain's economy's doing OK.
Yes, it would be nicer if British investments overseas were doing as well. But, as the ONS points out, the big decline in our direct investment earnings owes much to the slump in commodities prices, especially oil.
So if these recover, the current account deficit should narrow. It's a temporary blip, not a structural feature.
That's the optimistic case.
Pessimists point to the fact that a nation's balance of payments must, as the name suggests, balance.
That means a deficit in the current account needs to be offset by a surplus on the capital account.
The capital account tracks, among other things, how much we borrow from abroad. So to run a surplus we need to borrow more from overseas than we lend.
It's a surplus because more money flows into Britain than flows out.
(NB while these loans are tracked by the capital account, any returns they earn, such as interest payments, are tracked through the current account. Just to make it a bit confusing.)
So the bigger the current account deficit, the more we have to borrow from abroad. That's basically the argument for being concerned about the current account deficit.
It's not really a problem so long as overseas investors keep lending us money at low interest rates. But will they?
And should we be so reliant on the answer to that question being 'Yes'?
It's not all about Brexit
Some are concerned that the Brexit referendum has them spooked. It's a valid concern, but I want to leave it one side for today.
My reason is I can see a scenario in which Brexit happens but it's not the doomsday scenario some suggest. I can also see a scenario in which the referendum's a non-event but the current account still matters.
It is of course plausible that Brexit – or fear about Brexit as the vote gets closer – does indeed spark a drop in foreign buying of UK bonds and a broader 'run on the pound'.
But the referendum on its own may not be a sufficient condition for this scenario to play out. Especially if we vote to stay in and the market quickly forgets the whole thing.
In addition, Brexit may not even be a necessary condition for any current account-related pain.
What if oil and commodities don't recover? What if overseas investors decide they're less keen on Britain for some other reason? Maybe if our economy starts to look weaker?
In broad strokes, here are four current account scenarios you need to be thinking about:
• It carries on as it is, or widens further. This could in theory go on for a long time, so long as foreigners are happy to lend to cover the gap. If they start getting nervous, though, they may need higher returns to tempt them. That means rising interest rates;
• It narrows because the UK economy tanks, dragging down what foreigners earn on their UK investments. Our earnings on overseas investments are still less than they used to be, but the gap has narrowed;
• It narrows because oil and commodities recover, boosting UK earnings on overseas investments;
• It narrows because the currency adjusts. The pound weakens to make earnings from abroad worth more in sterling terms, bringing them closer to the number of pounds foreigners are earning here.
This last one is especially interesting with the pound trading close to historic lows. If it gets pushed much lower it'll be in territory not seen for a generation.
See this recent piece for more on that.
So the current account deficit could be a load of fuss about nothing. But it could be followed by higher interest rates (to compensate nervous foreign investors), a fall in the currency and a lot of volatility.
Looking at the scenarios above, it makes sense for investors to have an eye on when and how the current account deficit will adjust.
That means being positioned for a commodities recovery and for a weakening of sterling. Neither is nailed on, but both are highly plausible.
More on this to follow.
In the meantime, Glenn's just sent me a link to the latest Talking Money podcast, all about why we should leave the EU.
Have a listen here.
Until next time,
Ben Traynor
Editor
The Daily Reckoning