Where has all the money gone?

This is so simple that I thank god the people that run the economy don't try to become brain surgeons or rocket scientists.

Some basics (apparently little understood)

Today over 97% of all the money used in the UK economy is created by banks, in the form of electronic bank deposits, with just 3% being created by the state in the form of notes and coins.

Banks are able to create money through the accounting process they use when they make loans.

When banks extend loans to their customers, they create money by crediting their customers’ accounts.

Conversely, when a loan is repaid to a bank, the bank deposits that were used to repay the loan disappear from the economy, as a result of the accounting process used.

The fact that the vast majority (97%) of the UK’s money supply is created by private commercial banks, when they make loans, means that there are certain simple rules that determine the amount of money in the economy:

1. If banks are making new loans faster than old loans are paid off, the money supply will increase.

2. If the public pay down old loans faster than they take out new loans, the money supply will shrink.

In short, as debt increases, money supply increases, and as debt is reduced, the money supply shrinks.

For most of the last 40 years case 1, above, has applied, and the money supply (and level of debt) increased consistently from 1970 until late 2008.

Following the onset of the financial crisis, banks panicked and severely restricted the amount of new loans they made. However, existing loans had to continue to be repaid.

Banks were not creating money by making new loans to compensate for the money that was disappearing from the economy as it was used to pay down old loans. This lead to a shrinking of the money supply, a fall in spending in the economy, and a more severe recession.

From September 2008 (the start of the financial crisis) and November 2012, £89 billion of money was withdrawn from the economy as businesses paid off debts and were unable to refinance existing loans. In addition, £35 billion of money was destroyed as consumers paid down existing personal loans (mortgages not included).

Quantitative Easing was a means of injecting new money into the economy to replace the money that was disappearing as old loans were repaid.

The flaws in this approach to QE

There was a critical flaw in the implementation of QE. The money created via QE was intended to replace the money that was disappearing from the real economy, as individuals and businesses paid down their existing debts.

Instead the Bank of England injected the money into the financial part of the economy, by buying bonds from pension funds and insurance companies. The Bank of England increase the quantity of money (bank deposits) in the hands of these financial sector firms and investment companies, and therefore increase the amount of money circulating in the financial markets.

In order for the money creation to lead to an increase in spending (growth) in the real economy, the deposits created through QE would need to move from the financial markets to the real economy. But Pension funds could not simply pay all this newly created money to their beneficiaries (pensioners), as to do so would have run down the value of the fund and left insufficient assets for future beneficiaries.

QE has pumped new money into the financial markets, where it has stayed circulating and inflating prices of financial assets (stocks, bonds etc.).

It was not realistic to think that this newly created money would ever reach the real economy or have an effect on employment, economic growth or inflation. The lack of any significant improvement in economic growth, despite the creation of such huge sums of money, shows that the money created has not reached the real economy.

But the value of stocks and bonds has increased to new heights?

Injecting QE into the real economy

If the money that was created via QE (a total of £375 billion) had been spent directly into the real economy, then GDP would have been boosted by up to 6% a year.

Would this injection of newly created money into the real economy have been inflationary? Initially, no, because it would have first created new demand that would have ‘soaked up’ the spare capacity in the economy (the 2.5 million unemployed workers, under-worked staff, part-time workers who want to be full-time, half-empty restaurants, factories working four days per week instead of five, etc.). The impact of this extra spending would have been, quite simply, a recovery from the economic recession.

Eventually the creation of money in this way would have become inflationary. However, the very point of QE is to create inflation. A rise of inflation in the real economy would have shown that QE was successful, but also that it was time to halt further QE.

How could QE have been injected into the real economy?

Four of many potential options are laid out below:

1. Through funding new government spending: for example, large planned infrastructure projects could have been brought forwards, schools could have been rebuilt, flood defences could have been built. All of these would lead to additional employment, further spending in the real economy and economic growth, as construction workers spend their salaries into the real economy and this money circulates.

2. By using money from QE to cover existing government spending and reducing taxes. For example, VAT raises approximately £100bn a year. By suspending VAT for 3 years, at a cost of £300bn, an extra £300bn would have been left in the hands of consumers and businesses. Assuming this was split evenly between consumers and businesses (a 10% fall in prices, and an additional 10% margin to the business), this would have increased disposable income, made businesses less dependent on bank financing to expand, and potentially led to job creation.

3. By distributing the money directly to citizens, as a form of ‘citizens’ dividend’. This money would have been used for spending (growth) and also for debt-repayments (helping bank solvency, reduced household debt so higher disposable income due to lower debt repayments).

4. By employing the unemployed. The £375bn created by the Bank of England was sufficient to employ 2.5 million people full time on the national average salary for approximately 5 years. Logistical issues aside, it should be clear that there were more effective ways of stimulating the economy through the creation of money than injecting new money into the financial markets and hoping this money would reach the real economy.

Hollywood studios grasping at straws

The Hollywood studios are taking BT to court. The issue at stake is should BT (and other ISP’s) block users accessing sites that enable piracy. For me the resounding answer is no. Why? The internet is an open network – like the road network people can travel around visit places without some big brother watching what you are doing. You may think that blocking certain sites is all they need to do, but the reality is these sites will reappear with different name and covers. So in order to discover the new sites they will watch what you are doing. The idea is like getting the local authority, that build your roads, to stop you going to a market that sells pirated DVDs.
The sad thing is that the studios see piracy as the reason for the massive fall in sales yet the reality is consumer behaviour is changing with the multiple ways to access and consume content. On-demand services are in their infancy as are connected TV and connected set-top-boxes (STB). So why are people not buying DVD or Bluray Disks (BD). Could it be Hollywood has run out of ideas?
New films are not telling stories consumers want? The global financial slowdown is making people spend less? The existing libraries of DVD/BD that consumers have, is good enough? Could it be that Digital Video Recorders (DVR) enable easy recording of broadcast content, so that when there is nothing good on there is always something on the PVR? And to top it all off, unlike VHS tapes these alternatives don’t wear out and display the content as good as broadcast TV or better.
I would not be surprised if pirate web sites have seen a fall in demand too!
The current consumers of Hollywood content have grown up with computers, broadband and multitasking. They have a short attention span and why watch something again when there is something new. They need to show through their online social network, that they are up with the latest and new.
These are the issues that Hollywood needs to understand and address. UV is also not the answer…

Networks & Network Providers

I took part in a panel discussion today about networks. Over seventy industry leaders from across the UK. Was FTTH (fibre to the home) a good investment? Would FTTC (fibre to the cabinet) be cheaper and just as good? How do network operators reduce their costs?

I was surrounded by people all intensely interested in networks. One person (a Welsh MP) pointed out that the EU defined broadband as anything above 150kb/s and some other organisation had defined it is anything above 256kb/s (from memory). The UK government had so far not defined what it means by “broadband” and therefore the ambition to get broadband into every home by 2012 probably achievable simply by defining UK broadband as anything above 32kb/s.

However….During the discussion it was easy to get caught up in the hype and technology and how you could get 40Mb to the home. Would the customer pay for it, and how much?

Consumers don’t by broadband because they want broadband – sure early adopters and techys might get into a “my broadband is bigger than your broadband” type of discussion, but, as the actress said to the bishop, it isn’t about size its what you do with it.

Consumers buy broadband as a means of getting to content. In fact going back to the basic telephone service people wanted to talk to other people. The networks provided the connection and the consumers the content.

Technology and assets give companies a barrier to competition. Their ability to control and use the technology allow them to dictate the way it is used and who uses it.

The record industry is a good example – recording studios and vinyl pressing plants were expensive and inexcusable technologies for new companies to invest in and entre the market. They were certainly not in the reach of the consumer. But as new technologies came along so it eroded this control/power. Pressing plants were sold off as what differentiated one label from another was not how well the record was made but what was on it.

Broadcasters had technology but also had the benefit of limited radio spectrum. The licensing regimes of the UK and Europe, meant that it was difficult for new entrants to make the investment and take the risk to bid for a license. This additional barrier (lower in radio broadcasting) kept them in control and complacent, beyond the natural life of their business models.

Anyway back to networks… These too are starting to lose their power as one network (fixed line or mobile) starts to look very much like the other. Why chose one over another: –

1. Does it work?
2. Is there a cheaper one that works just as good?
3. Is it hassle to get/maintain?

What has changed for the network operators is that the desirable/compelling/valuable content that customers want to get to, is not user generated, point to point of voice and data.

So what do network operators (service providers) need to do? Do they want to simply survive or do they want to transform?

Railway operators never got into air transport. Yet they were wealthy organisations at the time and could have easily expanded. Enormous synergies in scheduling time tables, selling tickets, reservations, engineering operations, logistics of rolling stock/planes, and staff roles. But they were rail operators, stuck with the technology and not the transport market need they serviced.

Networks operators follow the same route, married to providing networks and not the fulfilment of the consumers’ demand for content access.

So how do I see the network providers evolving, as apposed to becoming a low cost commodity utility? One thought…

The telephone directory was a way of customers finding out information about what (or in this case who) was on the network. As the internet grows (around 5,000 pages/second in 2008) it is increasingly difficult for the consumer to find what they want. Google (fast as it is) is throwing up a mountain of information to sort through. How many pages am I going to visit before I find the information I was after?  You Tube. Very funny clips, but if I have to spend 50-minutes watch dross, to find a 3-minute gem, I’m going to start to rely on my friends sending me a link in an email. Much more efficient!

As content (quality, professional production) gets onto the internet, how does the consumer no it even exists, let alone where to find it.  Is there a role for the network provider to be trusted recommender or aggregator of content? Is that worth paying for? Collect information on what I like and sell it on, but let me see some benefit. And not just in the adverts

I think it is almost impossible to predict what the consequences will be if 40+Mb/s is delivered to the home but some indicators now are not good.

Of the population that can get broadband, the take-up is way less than 50%. So not the “must have” technology.

Of the people that do have broadband around 50% get less than 1Mb/s download speed. Assuming that they are putting up with this (as they continue to pay) if not delighted, then 4Mb/s would probably fit their current needs not 40Mbit. “What about HDTV?” I hear you cry. Does anyone want to stream live HDTV over the internet?

• If it’s a film or recorded programme = download it
• If its news = why HD
• If its sports = why are you not watching in on a broadcast channel

Take the scenario that there are two adults and two teenagers, each simultaneously watching a streamed HDTV programme. 10,000 lines in an exchange area x 4 40,000 video streams. Will the backbone cope –

“Some will be watching the same programme?” Even if they are if two people watch the same if they start at different times they are different streams.

“Cache the content in the local exchange!” for how long? 3 hours of HDTV per person adds up to a lot of storage.

I’m sure 40Mbit to the home will come. It could enable social change (maybe even a revolution) with people working from home and a growth in cottage industries, a reduction in travel and CO2 emissions. Our kids are already used to interacting and socialising and would probably be easy to adapt and adopt this working environment. But will we look at the society that creates with pride?

ITV results are bad news, but what are they going to do about it?

ITV results are bad news, but what are they going to do about it?

Well it seems blame the regulator, the economic conditions, the growth in digital TV and the internet.

Have blamed everything it seems tat they are going to cut cost and look at revenue generation.

Cutting costs is what Charles Allan did for several years. Outside observers could say that this drove out creativity, drove away viewers and eventually led to where they are today.

Carolyn Fairbairn (ITV’s group strategy director) says that the TV advertising model is broken. That advertising rates in the UK are the lowest in Europe. She was speaking at the London Business School (3rd March 09) in a debate titled “Future of UK PSB Television”

Is the advertising model broken? There are lots of commercially funded TV channels in the UK that seem to be doing OK. Sure its harder but ITV has failed to adapt so from their perspective it is broken.

Who cares? No one really ITV is not delivering the audiances that the advertisers want or the programming the viewers want. Michael Grade, in an interview today (BBC Radio 4) when questioned about his strategy of using content creativity, to grow the business, said, that ITV were creating content for which they could generate a return on investment for their shareholders. The interviewer queried, “So what about the viewers?” To which Micheal Grade had a long pause (almost “I hadn’t thought about that” moment) before claiming that the content was attracting audience. NOT ENOUGH OF THE RIGHT ONES MICHAEL.

The denial of what is going on is what happens in many industries where the dynamics change and the incumbent/dominant players are unable/willing to make the changes necessary. Example the British Motorcycle industry when the Japanese arrived. The mechanical digger industry when hydraulics came along and the computer industry as generic PC’s took over from mainframes and narrow word processing systems.

ITV strategy must be to get cheaper home grown talent and innovative content. Don’t pay through the nose for Ant and Dec for Simon Cowell.

Use ITV 3 and 4 - try an Opendoor slot for independent producers, armature groups and University media departments (maybe even consumers) to showcase programmes. A talent slot rather than a talent show. Themed so that it isn’t random what consumers will see – Comedy, Drama, Music etc This may not be right but try something other than blaming everything else.

Put your viewers first and if they come back so will the advertisers.

Just ahead of the curve BT and Ch4

Comforting to know that I may be just ahead of the curve.

BT emerges as suitor to merge with cash-strapped Channel 4

The Future of Channel 4.

The Future of Channel 4.

Call me simple, but I just don’t get it.
Channel 4 in the UK is predicted to be insolvent/bankrupt or otherwise financial unable to continue within the next few years.
There has been some talk of merging it with one of the other UK broadcasters – the benefit would be synergies could be realised that reduced the cost.
Ch4 is owned by the government but is funded solely through advertising. It has a Public Service obligation that has meant it has not adopted the “me too” (Strictly Come Dancing –BBC begat Dancing On Ice) strategy of ITV or stick with tried and trusted popular formats (I’m a celebrity…) also a strategy of ITV.
Ch4 has a very credible record in producing innovative, challenging programming over its life. Not having to provide a return to shareholders should mean that more of its revenues can go into continuing this innovation. Merging with a commercial broadcaster ITV or Ch5 may give operational cost synergies but it will also add the cost of servicing shareholders.
When the Chairman of Ch4 says he favours privatisation over merger that doesn’t seem to make sense either – there are not operational cost synergies but the burden of servicing shareholders would arrive. This will inevitably be followed by the finance people that understand nothing about creativity (as demonstrated in ITV (Charles Alan) and simply drive cost out and stick to tried and trusted formats that eventually become stayed and boring.
Privatising Ch4 could mean that Luke Johnson (the Chairman) gets some kudos and a pay rise, for chairing a private company. This is the only driver I can see for suggesting it. I can’t see that if Ch4 is destined to become financially insolvent, as it is,why (unless there are costs that they already know can be cut) its future would be any more secure if privatised
While there might be some other genuine reason I am sceptical. Following the £600k p.a. pension payments to the failed head of RBS I am fed up with individuals benefiting from stripping the country’s assets and cultural heritage or screwing the tax payer.
Here is a thought…maybe not good for Ch4, but BT is struggling with BT Vision and could derive some synergies from acquiring Ch4. It would also be less challenging to maintaining the plurality of UK broadcasters.