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Showing posts from April, 2013

Apple's Bond Issue

Following announcements that it was increasing its dividend and launching a $60bn share buyback scheme, Apple announced today that it was hoping to raise $17bn by selling corporate bonds. Why does a company with $137bn  of cash on its balance sheet want to borrow? The explanation being given by analysts is that $100bn of Apple's cash pile is overseas and it would have to pay a 35% tax on it if it wanted to repatriate it. In addition, borrowing is very cheap at the minute for AAA-rated companies such as Apple. In other words, in order to return cash to shareholders, Apple is going to finance a proportion of it with debt! It seems that Apple is desperate to hold unto its cash pile for a while yet.  

Lessons from the Euro Crisis

Arvind Subramanian has a nice piece at Project Syndicate about lessons for economists from the Euro crisis. One lesson which he highlights is that Germany has in some ways benefited from the crisis. First, as the safe haven in the euro-zone, their borrowing costs are really low. Second, because their currency is hitched to their southern neighbours, they have a weaker currency than they if they had retained the Deutschemark. But are the Germans willing to make the fiscal transfers necessary to keep the euro-zone going?

Scottish Currency

HM Treasury has produced a paper which explores the currency and monetary implications of Scottish independence, which is being put to a referendum in September 2014. HM Treasury have stated in the paper that the current system could not continue if Scotland became independent, and it lays out four options for Scotland: (a) join the euro; (b) enter a formal sterling currency union; (c) continue to use sterling with no formal agreement (sterlingisation - akin to dollarisation); (d) introduce a new Scottish currency. 
Financial history suggests that there may be a fifth option. In the eighteenth and nineteenth centuries, there was a competitive currency system in Scotland, with competing banks free to issue their own notes and no central bank. Bank notes were redeemable for specie (gold coins).  This system worked well in terms of  producing a stable currency and stable banking system. Larry White's famous book on this free banking system can be downloaded for free at the IEA websi…

Squeezed Middle?

Click here to see a new ONS study which tracks the economic status and income of the middle fifth of the income distribution from 1977 to 2011. Since the downturn starting in 2008, the income of this group has fallen by 8.8%.

This Data is Different

Carmen Reinhart and Kenneth Rogoff's This Time Is Different has been an extremely influential book. Their even more influential work on the relationship between economic growth and indebtedness has recently come under attack for major data errors and problems. A team of economists at University of Massachusetts Amherst find coding errors, selective data exclusion and unconventional weighting techniques in the Reinhart and Rogoff study (click here for paper), which contradicts their claims that debt levels above 90% of GDP reduce economic growth. 
This is not just a debate amongst academics.This debate is important because governments around the world have used Reinhart and Rogoff's work to justify their austerity policies. You can read coverage of this debate and the Reinhart and Rogoff data problems at the Economist, FT, and Harvard Business Review.

Gold Slump?

On Monday the price of gold bullion fell by 7.7%, the largest one-day fall in its price since 1983, and the third biggest fall on record. Analysts are somewhat puzzled by the fall in gold prices over the past few weeks (it is down about 30% from its high) as there have been no significant changes in underlying fundamentals. Could it be that there was a gold bubble? Click here to read more.

HBOS Failure

I have just finished reading the report on the HBOS failure by the Parliamentary Commission on Banking Standards. It is a fascinating report into why HBOS failed and the extent of the bank's risk taking in the years leading up to the crisis. The press has focussed on how the report criticises the bank's former executives and chairman. However, the FSA (the UK's financial regulator at the time of HBOS's failure) also comes in for heavy criticism. There is also a suggestion in the report that the Government's ring-fence proposals to make the banking system safer would not have prevented HBOS from failing as it had no investment banking activities. Unsurprisingly, there is no criticism of the politicians who allowed (and encouraged?) banks to pursue aggressive asset growth in the 2000s!     


Last week I was reading about Bitcoin, the open source peer-to-peer digital currency, in a technology magazine. It was predicted that Bitcoins would become an alternative to central bank issued currency as they circumvent the traditional banking and payments system. As a result, their value against the dollar had surged from $20 at the beginning of 2013 to $266 dollars yesterday. However, yesterday, after reaching this high, the price of a Bitcoin fell back to $150. Click here to see price and trading history of Bitcoin. Some experts think that these price patterns signal that there is a Bitcoin 'bubble' - see here and here.    

Margaret Thatcher

Margaret Thatcher died today. She was Britain's first female prime minister and the longest-serving prime minister of the twentieth century.  She became PM in 1979 and was forced out of office in 1990. I was sitting in a first-year economics lecture in November 1990, when someone burst into the lecture theatre to tell the class that she had resigned. Most people of my generation can remember where they were when we heard the news that the Iron Lady had resigned. You can read more about Margaret Thatcher here and an obit is here. Below is video clip from her last appearance in the House of Commons as PM, which gives one a flavour of this unique lady.
I admired Thatcher for four reasons. First, she was a conviction politician who stuck to her principles and would not be 'turned' by popular opinion. All British PMs since Thatcher have lacked this quality. Second, her radical economic reforms, although hated by many, helped to transform the UK economy. You can read about the …