The Magic of Money – Hjalmar Schacht and how to defeat hyperinflation.

Hjalmar Schacht will be judged kindly by history. One of the few people to be acquitted at Nuremberg. Perhaps unsurprisingly as he was never a Nazi party member, had no role in world war II, plotted against Hitler, saved the Wiemar republic from the crisis of hyperinflation, and was in good part responsible for policies which lead to germanies miraculous recovery from the great depression, fixing the deficit and building the autobahns. When tested as an american prisoner at Nuerberg he had the highest IQ there of 143.

Ironically if these policies had not been persued then Germany would never have been strong enough to persue agression. In 1935-36 he urged Hitler to reduce military spending, turn away from autarkic and protectionist policies, and reduce state control in the economy. He didnt succeed.

In the Wiemar period he was a hyper conservative banker appointed monetary commissioner for his typical old style banker stoicism. At that time the central bank was nominally independent, operating a ‘real bills’policy and he was a civil servant.

In his 1967 text ‘The Magic of Money’ he blamed the hyperinflation on the central bank monetarising the allied reparations induced debt, causing easy credit, used by speculators to naked short sell against the mark. The allied powers had insisted on a loosening of control of the Central Bank by the german government – which only made things worse as the bank thought that the state balance sheet with reparations was ruinous.

Following the allied occupation of the Ruhr following a debt default, the programme of ‘passive resistance’ saw the workers on strike, but still being paid by the government money printing. Think about this. T=o, so prices must rise and real wages fall, even without the presses running, profits are eliminated, as are government revenues, so debts rise and the currency falls, a self reinforcing cycle develops. As soon as such a cycle unfolds the future becomes predictable and expectations come into play.

As his Secretay said of his work at the highlight of the crisis in 1923

‘What did he do? He sat on his chair…No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal …Apart from that he did nothing.’

As Bortkiewicz (1925) wrote at the time

‘One need not turn the quantity theory of money on its head in order to explain the disproportional growth of money supply and inflation at a certain stage of the inflation process. Instead, the theory needs to be re-interpreted in a way that allows for the fact that the price level is not exclusively determined by the money supply but also by the expectation of the level of further emissions.’

Schacht scuppered the naked short sellers by announcing in advance a new currency at a predictable value.

In Joan Robinson’s view

‘lack of confidence in the domestic currency, the expectation of further emissions and devaluation, has direct bearing on the level of prices and therefore magnifies the effect of an increase in the money supply. As a corollary, the proportionally higher rise in the price level compared to the supply of money creates a monetary scarcity, which actors are trying to overcome by accelerating expenditure thereby raising the velocity. This adaptation process might eventually lead to a substantial acceleration of the circulation of money.’

The phenomenon of hyperinflation is much more than just printing presses, it is as much about expectations, exchange rates and cost factors bidding up money wages and reducing real wages and profits. Given fears today about QE we need to understand its subtleties much more.

Marx, Economist Historian or Economic Historian

Digging around into the influence of the neglected political economist Edward West an obvious point struck me. We tend to see Marx as an all encompassing social theorist, for right or wrong. Yet 99% of those that read him really grasp the context in which he wrote vols I to IV of Capital. Pretty much all of Marxs notes and the large part of his published writings in his later life are critical exercises in economic history.

Comprehensively and exhaustively he grinds through every last footnote and idea of classical economics available to him in a public (which missed quite a lot as we now know such as Ricardos and Malthus’s letters, and Cantillon) – at least those he regarded as not banal or vulgar. It wasn’t too far removed from a Mark Blaug textbook although with a quite different ideological axe to grind.

A post from 2007 from Brad De Long struck me

We might as well start with Karl Marx. “De te fabula narratur! Marx wrote in the preface to the first edition of the first volume of Capital: it is about you. Why should Marx’s German audience read the details of the industrial and social history of England mixed up with pieces of classical economic theory and a coquette’s flirtation with Hegelian philosophy? Because, Marx wrote: “The country that is more developed industrially only shows, to the less developed, the image of its own future.” –Karl Marx, Capital, preface. In short, it is about you.

Thus in Marx’s view, economic historians and development economists were or ought to be the same. In fact, all economists and economic historians ought to be the same. In fact, everybody ought to be an economic historian: studying the social and industrial history of England, and then applying its lessons everywhere around the globe, was the most important task. Economic historians ought to rule the world, for they held the key to the lock that opened the door behind which was concealed the answer to the riddle of human destiny.

Looking at one page of capital I – concerning wages – it struck me that for the first time I understood it because I had read the footnote sources in the original. Marx had basically taken West’s (1826) refutation of the wages fund wholesale, had called his origination of the theory of differential rent ‘epochal’ and called his ideas on value and demand ‘banal’.

Marx here simply hadn’t got it. His ideas on wages, so central to his theories in capital II and III depended on West’s retheorisation of the cost of production theory – which depended in turn on on a pretty much wholly formed marginal productivity theory of price. This is only compatible with a labour theory of value if it is taken as a ‘labour commanded’ concept, and only then as a marginal concept, with the money wage taken as a numeraire depending on the quantity of money at any one fixed point of time. The kind of reformularisation advanced by Klaus Hagendorf (the same identity was pointed out by Bohm Bawerck -in terms of the opportunity cost of labour – a century ago).

So no wonder Marxist economists (especially TSS believers and disbelievers) disagree about Marx’s real meaning. Marx did not consistently link price and value theory because one of the key bridges he used depended on a theory he didn’t understand and called banal. He used it because it seemed correct and was pedagogically useful. The answer does not derive from the study of Marx’s text but of his footnotes and references, of the subject of his study.

It is sometimes claimed that Marx should not be blamed for being contradicted by the economic revolution of the 1870s because he was writing a decade earlier, others claim that he should have picked up on the ideas in the wind. I now hold to the latter view – they were not in the wind there is clear evidence they were in his face.

If only Marx had written as a popular historian of economics – then his own writings would not have acted as such as barrier to popular understanding of his subject.

GIS and Planning, stop flirting start s***ging

How sad am I – news of the day proposed features of Arcgis 10.1, at least being able to distribute advanced spatial analysis models through the cloud- yeah.

Am I talking past you???

A couple of years ago I had some interns from Kingston University. Kingston is top dog for GIS in the uk, planning well – could do better.

(the land of their Coombe Hill campus btw is worth an absolute fortune – worlds worst place for a campus, very good for russian billionaires)

What struck me was the planning students did not know the first thing about GIS. ‘Not enough time’

The two schools talked entirely past each other.

Do planners in the uk not know about the fundamental advances of the Florida School.

The founder of GIS Jack Dangermount, as a young landscape architect, was inspired by the great Ian Mc Harg to create computer systems to promote better environmental planning ‘ to design a better world’

What tools do the planners at various planning schools think they need to learn to design a better world?

GIS today is the equivalent of a scale rule – a tool all planners should be able to use without thinking.

Common Sense Prevails on Community Right to Build

I was critical last year when the project which became ‘The Community Right to Build’ was announced.

The project was properly launched today and backed by a host of amendments to the localism bill in the Lords. Credit where credit is due I think the revised scheme is broadly workable and a vast improvement.

Basically the localism bill will create a system similar to neighbourhood development orders. The proposals will need to be in line with the strategy of the development plan, there will be a quickfire examination (written reps) and then a referendum with a 50% threshold. Proposals may not undermine EU directives – a key criticism before.

The cyncics may say this is too bureaucratic and why not simply apply for planning permission.

The reason I think it could be important is twofold. Firstly even the smallest schemes of affordable housing in rural areas seem to run into huge opposition and many ‘exceptions sites’ fall away after initial parish enthusiasm. The route typically requires RSL involvement which creates fears of the ‘wrong sort’ – usually quite unfounded as shared equity schemes for locally qualified occupants are the norm. Landowners are often reluctant to sell as they will make very little money as with exception sites you cant cross subsidise with market housing. Hence philanthropy slips away and landowners simply promote market village housing through the SHLAA route.

This scheme could undercut that in that the schemes will be locally driven (whilst still retaining due planning control) the local will come to understand themselves the delivery, local controls options open to them and negotiate a mutally beneficial scheme with the landowner, where some discount on the open market value pays for the construction costs.

Local planning authorities will be keen to ensure that it is not just a scam for country landowners to build houses for themselves in the countryside by ensuring that communities put in place legal arrangements such as community land trusts. It is encouraging that the Depts lealfet lists all the right bodies.

Finally the backstop of a referendum will ensure that the Nimbys and Nimtos don’t dominate debate in front of easily swayed councillors.

This is the first positive non planner bashing, and communitarian,  initiative by the new government.

Southern Cross – Who is to blame?

It is not like me to defend Stephen Schwarzman americas 52nd richest man.

He sold Southern Cross Britains largest care home owner 1n 2008, now teetering on bankruptcy, threatening to leave the state with the bill for 31,000 elderly residents.

It pays its staff absolute minimum wage, filled its homes to maximum occupancy, fed residents on a food bill of less than £3 a day, and as Panorma revealed often abused its own residents.

Yet Tory MP Tory MP Sarah Wollaston, a GP, said to the Sun “It can’t be right that people can make a fast buck and clear out leaving taxpayers to pick up the bill.”

Well Sarah they can, in a capitalist economy blame the people who clear in – those that buy at stupidly inflated prices.

The problems at Southern Cross have been known for several years in the sector, it has come up every few weeks for years, and it is a miracle that it has taken so long to come to a head.

In July 2008 Giles Pratley wrote in the Guardian

A big nursing home operator, loaded with debt after a series of acquisitions and fancy sale and leaseback deals, is plunged into financial crisis. Why does Southern Cross’s tale feel familiar? It’s because the same plot played out between 1999 and 2001.

Nursing homes had to be refinanced in their droves in that period. Indeed, Southern Cross was one of the operators that picked up the pieces of that financial mess. As now, the bleat from investors was pitiful: we thought these companies were safe; we thought their revenues were underpinned by local authorities; we thought an ageing population made them growth stocks.

Wrong on all counts. The truth about nursing homes is that the industry is horribly cyclical. Demand is driven only partly by demographics. The more important factor is the ability and willingness of residents, or their local authorities, to pay.

Right now, cash-strapped local authorities are demanding better prices in the knowledge that the supply of beds exceeds demand.

Note, too, that operators’ ability to manage their costs is limited. Many of their staff are paid the minimum wage and so a large chunk of overheads is beyond the operators’ control. Throw in higher energy costs and food bills and Southern Cross’s crisis was predictable.

But there is no operational difficulty that cannot be made worse by the wrong financial structure. That’s what Southern Cross has: a pile of debt, taken on during the fashion for leverage that also infected pub companies and housebuilders. The result everywhere is the same: financing crises and falling share prices as cash flows assumed to be rock-solid turn out to be soft.

The wonder with nursing homes is that investors fell for a story that ended so painfully in the last cycle. Memories, once again, were too short.

It is much easier of course to blame the visible head of a private equity firm in the US who went public, than the invisible fools in the UK who bought the IPO, or the landlords of the sale and leaseback schemes who dont realise that as the revenue stream is dependent on public spending when this falls so must rents.

Why mortgage lenders cant up foreclosure rates

Interesting post on Keith Jorows blog

Dramatic data from New York which shows that despite increasing default and length of delinquency foreclosure rates have actually fallen. Apparently lenders are happy letting occupiers live rent free.

I posit that lenders were hesitant at first to foreclose to not incurr the wrath of government and not wanting to force prices down too much. I think they have also learned about the paradox of deleveraging – if they do now foreclose they are shagged. Many banks are now owners of large amounts of property acquired from failed development companies. They dont want to dilute their asset base.

Ive also been reading about the impact of the bursting of the tulip-mania bubble in the C17. It was less than might have been imagined as the courts treated many forward options contracts as unenforcable gambling and legislation was passed allowing traders to not meet contracts for a fee. Would a similar approach to CDOs be such a bad thing.

Tulipmania and ‘sound money’

I have been taunting some of the austrians on that modern austrian theory cannot explain speculative bubbles in cases where there was no central bank, or even full reserve banking, and therefore this is a black swan for Rothbards theory and they are unfair to blame the ‘fed’ for everything and longing for Gold. One example was Tulipmania.

One of the responded with a austrian explanation of tulipmania a cracking piece of economic history.

But heres what Doug French had to say.

what made this episode unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite. As kings throughout Europe debased their currencies, through clipping, sweating or by decree, the Dutch provided a sound money policy which called for money to be backed one hundred per cent by specie. This policy, combined with the occasional seizure of bullion and coin from Spanish ships on the high on the high seas, served to attract coin and bullion from throughout the world.
The end result was a large increase in the supply of coin and bullion in 1630s Amsterdam. Free coinage laws then served to create more money from this increased supply of coin and bullion, than what the market demanded.
This acute increase in the supply of money served to foster an atmosphere that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips.

Swans on the canal.

Is Ken Shuttleworth the world’s worst architect?

I dont like criticising architects, especially when they are bold.  In my career I have often had to instruct architects on conceptual schemes and crit their drawings.

But Make and Ken Shuttleworth are a disgrace.

This formless and inelegent confusion doesnt even cut it as sculpture and is nothing more than an excuse for a giant advertising hoarding.  The phrase perfuming a turd comes to mind.

It would likley make the (sadly defunct) Bad British Buildings Blog and win the Carbunkle cup, which he nearly won in 2009 and 2010.

Stuart Lipton has described their City scheme the worst he has ever seen.

Ken Shuttleworth defends his monsters with the saying. “A city is like a garden,”  “Things grow up, you chop them back, new things grow. That’s what keeps it alive. It’s not about sentiment; it’s about what works.”

Time for some pruning Ken.

The National Planning Policy Framework Forensics #2 The Presumption in Favour of Sustainable Development.

This section deals with how the ‘presumption in favour of sustainable development’ is operationalised.

On pages 4 and 6 of the draft the logic behind the presumption is set out

  • Sustainable development requires growth to achieve it
  • Therefore the planning system should encourage growth
  • Planning must operate to encourage growth and not act as an impediment.
  • This must start from a positive assumption about development, to create certainty and confidence for national and local investment.
  • So ‘plan positively to promote development’ in both decision taking and plan making.

This is a logical chain, but notice what went missing along the way.  The fact that sustainable development cannot be achieved without certain kinds of growth doesn’t imply that all kinds of growth promote sustainable development.    If you don’t make the distinction then you are implying that all development is sustainable therefore all growth is, you can delete the sustainable from sustainable development.  In fact the text does just that it replaces sustinable growth with growth,  promoting sustainable development with promoting development.  Hence the presumption in favour of sustainable development is in reality a presumption in favour of all development.

This should be easily rectified in the text, but the drafting creates worries that the omission was deliberate. That the real intention was to use sustainability as a viel to promote development per-se whatever its sustainability merits.

Ill look now at how the draft differs from PPS1 Delivering Sustainable Development and the accompanying document The Planning System General Principles

The word ‘presumption’ appears nowhere in the above. It did in earlier drafts of PPG1 post 2004 and pre 2007 but there were complaints that it didnt square with the presumption in favour of the development plan.

PPS 1 para 1 sets out a strong and positive role for the planning system in delivering sustainable development

Planning shapes the places where people live and work and the country we live in. Good planning ensures that we get the right development, in the right place and at the right time.

The practioners draft nowhere includes any concept of place shaping, the word ‘place’ does not appear once. It includes no simple covering statement that development should occur at the right time. It does not contain any the philosphy that planning should be selective about development. The philosophy is that it should be less selective. This is an enormous step backwards. Backwards to the early 80s planning system where planning was seen as an annoyance, a bureaucratic inconvenience that should get out of the way as the market alone would shape places. By not believing that planning has this positive role it removes any statement that good planning can be a good thing in its own right in delivering sustainable places.

Why not simply include these first two sentences from PPS1?  Is the phrase ‘right development’ seen as allowing local authorities to be too prescriptive and negative?  May I suggest the following instead:

Good Planning should shapes the places where people live and work and the landscapes we live in,  ensuring  that we get the development the country needs, in the right place and at the right time.

The practitioner draft states:

Applying the presumption in favour of sustainable development in this context will mean:

  • local plans should be prepared on the basis that objectively assessed development needs are met;
  • development proposals that accord with these plans should be promptly approved; and
  • where planning policies are out of date or a plan is silent or unclear on a particular development, approval should be granted.

This presumption should apply unless to do so would cause significant harm to the objectives, principles and policies set out in this National Planning Policy Framework.

Compare this to ‘The Planning System General Principles’

Local planning authorities must determine planning applications in accordance with the statutory Development Plan, unless material considerations indicate otherwise. If the Development Plan contains material policies or proposals and there are no other material considerations, the application should be determined in accordance with the Development Plan. Where there are other material considerations, the Development Plan should be the starting point, and other material considerations should be taken into account in reaching a decision. One such consideration will be whether the plan policies are relevant and up todate.

The Barker review proposed a tweaking of this but it never fully found its way into PPS4.

The Budget Statement ‘The Plan for Growth’ says in para 2.12

Where local authorities do not have plans for development, or they are silent, out of date or indeterminate, this policy will mean that local authorities should start from the presumption that applications for development and job creation will be accepted

But this is not what the draft NPPS says, this says that they should be approved – not determined with a presumption, which implies a weighing and balancing of material considerations.

Lets start unpicking this by looking at the law. The NPPS should start with ‘Planning decisions should be determined in accordance with the statutory Development Plan, unless material considerations indicate otherwise’ (P&CA 2004 S38 6) – there should be a glossary reference to what the development plan is and the stringer principle from ‘General Principles’ – we shouldn’t have to keep dusty documents around to explain what the NPPS really means.

Why should the NPPS start out with the correct statement of the law? I can only presume that RSSs are an embarrassment and the government would rather pretend they didn’t exist. But following Cala II they cant be avoided, and will be around for at least 1 to 2 years. We cant wait for the NPPS until then. They are the elephant in the room and by law the NPPS must deal with them.

Indeed the government would be be hung by its own petard if it proposes that development in line with the development plan should be ‘promptly approved’ But but it doesn’t the reference to ‘local plan’ is not defined, but presumably it means any statutory development plan which is not an RSS.

The government is hung by its own petard. Where an RSS favours a development and there is an up to date adopted local plan then the draft says it should be ‘promptly approved’ – no allowance for other material considerations, no allowance for the ministerial statement on revocation of RSS. Where an RSS allows for a development but the local plan had not yet caught up by definition the local plan is out of date. In those circumstances ‘approval should be granted’ (no reference to quickly??) – again no weighing and balencing of material considerations – the decision maker would have to disregard the potential revocation of RSSs as a matter of national policy.

Now the NPPS could state that the SoS considers that RSSs are out of date, but this would open legal challenge as revocation and changes have not been subject to SEA/consultsation etc. The SoS would be particularly vulnerable in the SW and WM as he has deliberately sat on his hands.

There is no way that the NPPS can lawfully not consider the development plan into and all material considerations in the round.

The Plan It law blog dryly the blog notes that the phrase ‘material considerations’ doesnt appear even once in the draft.

Can a statement of national policy lead to the disregarding of all material considerations other than the NPPS and the development plan? Now lets quote ‘General Principles’ on the Gransden case.

The Courts have …held that the Government’s statements of planning policy are material considerations which must be taken into account, where relevant, in decisions on planning applications. These statements cannot make irrelevant any matter which is a material consideration in a particular case. But where such statements indicate the weight that should be given to relevant considerations, decision-makers must have proper regard to them. If they elect not to follow relevant statements of the Government’s planning policy, they must give clear and convincing reasons (E C Grandsen and Co Ltd v SSE and Gillingham BC 1985).

By law the decision maker must have regard to other material considerations and may refuse or approve applications in a manner contrary to the development plan or the NPPF if they can give reasons.

If the government wants a constitutional style zoning system where local plans are binding they need to change the 2004 act, until then discretion is permitted and the NPPF should reflect this. If they want a default yes irrespective of material considerations again they should change the law.

Representations from the public are material considerations – does the NPPF imply that they are not to be considered by these tests!

In terms of the remaining paragraphs of this section they are not comprehensive. – they dont deal with the situation of where a proposal is contrary to an up to date development plan.  It does not deal either with the case where a proposal is contrary to the NPPF or the development plan but where unacceptable impacts could acceptably be mitigated through conditions or planning obligations.

In any event the courts have held that the age of a development plan is not a material consideration – what matters is whether it is still relevant. For example a green belt may have been designated 20 years ago but might still be relevant.

To be logical and lawful I would suggest the following redrafting.

Applying the presumption in favour of sustainable development in planning means :

A) Plan positively – Development plans should be prepared swiftly and kept up to date on the basis of evidence including that objectively assessed development needs are met in a sustainable manner ;

B) Planning decisions should be determined promptly in accordance with the statutory development plan, unless material considerations indicate otherwise (P&CA 2004 S38 6) – see Glossary.  In accordance with these principles:

  • development proposals that accord with the development plan should be approved; 
  • development proposals that do not accord with the development plan should be refused;
  • where planning policies are not relevant or no longer relevant to a particular development, the development should be approved.

This clause should apply unless to do so would cause significant harm to the this National Planning Policy Framework, in particular its principals of sustainable development, and to material considerations taken as a whole.  Developments Plans also should always be considered as a whole.

C) The decision maker should consider how planning conditions, obligations and the Community Infrastructure Levy can be used to improve development in accordance with the National Planning Policy Framework and the Development Plan, including how they can mitigate the impacts of a development, and whether this mitigation could remove any policy or material considerations to the extent that it could lead to a scheme being approved that would otherwise be refused;

D) In applying these principals the preferred outcome of the planning process, for all involved, should be the objectively assessed sustainable development needs of the country should be met through a plan-led system and this enables applicants to submit proposals where the decision is yes.