In these news blogs, we’ve considered a Tobin tax on a number of occasions: see A Tobin tax – to be or not to be? and Tobin’s nice little earner. On 10 December 2009, the Treasury published a discussion document, Risk, reward and responsibility: the financial sector and society. This, amongst other things, considers the case for a financial transactions tax – a form of Tobin tax. As Box 4.A on page 35 states:
“James Tobin’s original proposal for a transaction tax was to tax foreign exchange transactions. The purpose of the tax was to tackle excessive exchange rate fluctuation and speculation on currency flows, as Tobin felt that short-term movements in capital flows could severely limit the ability of governments and central banks to follow appropriate domestic policies for their economies.
However, the recent crisis has shown that there is considerable risk inherent in other financial markets. In some of these markets trading volumes have also grown enormously compared to the value of underlying assets. As set out above, instability may result from these markets due to the complex nature of counterparty networks and a lack of transparency, and the transmission of financial shocks through the system.
Recent attention has therefore focused on a broader tax on financial transactions – potentially, this would include trading in a wide range of instruments, currently traded both on and off-exchange.”
The goverment in the UK has recently taken one step in increasing taxes on the financial sector. In its 2009 pre-Budget report, delivered on 9 December (see Cutting the deficit and tackling the recession. Incompatible goals?), a new tax on bank bonuses was imposed. The rate is 50% on bonuses over £25,000. Since then a similar tax has been imposed in France and Germany’s Chancellor, Angela Merkel, said that she found it a ‘charming idea’, although probably not practical under German law. She did support, however, the use of a Tobin tax on financial transactions, similar to the one being considered in the UK. Such a tax, to be effective, would ideally have to be imposed worldwide, but at least by a large number of countries.
So is the case for a Tobin tax gathering momentum? The following video podcast considers the tax’s aims, effectiveness and practicality – as do the articles.
Video podcast
Radical Tobin Tax proposal could go mainstream BBC Newsnight, Paul Mason (10/12/09)
Articles
Now’s the time for a Tobin tax Guardian, George Irvin (11/12/09)
EU leaders urge IMF to consider Tobin tax Financial Times, Tony Barber and George Parker (11/12/09)
We can always get to Utopia – even from here Irish Times, Paul Gillespie (12/12/09)
HM Treasury makes case for Tobin tax City A.M., Julia Kollewe (11/12/09)
The Tobin Tax – a brief history Telegraph (8/11/09)
European Union presses IMF to consider Tobin tax Telegraph (11/12/09)
Questions
- How do current proposals for a Tobin tax differ from Tobin’s original proposals (see Sloman and Wride, Economics 7th edition, pages 756–8 or Sloman and Hinde, Economics for Business 4th edition, pages 743–5)?
- Explain how a Tobin tax could be used to reduce destabilising speculation without preventing markets moving to longer-term equilibria.
- How might the use of a Tobin tax on financial transactions help to curb some of the ‘excessive rewards’ made from financial dealing?
- Examine the advantages and disadvantages of using a Tobin tax on financial transactions. How might the disadvantages be reduced?
- What considerations would need to be taken into account in setting the rate for a Tobin tax on financial transactions?
“We will look back at 2009 as a watershed in economic history. This is the first time since the war that the world economy has not been led out of a recession by the US consumer.” (Jeremy Beckworth, CIO, Kleinwort Benson Private Bank – see second linked article below) How has the Chinese economy fared during the global recession? What policies has it pursued and how successful have they been? Will Chinese growth continue and how will this impact on the rest of the world? What economic risks does China face? These are questions that the following articles consider.
Array of figures adds to optimism over China economy Reuters (15/10/09)
Look East for the land of opportunity Jeremy Beckwith, Portfolio Adviser (14/10/09)
Greenback Woes Boost China’s Global Muscle Money Morning (15/10/09)
China Rises Amid Global Economic Crisis Manufacturing.net (13/10/09)
Why China must do more to rebalance its economy Financial Times (22/9/09)
China economic growth accelerates BBC News (22/10/09)
Chinese economy grows at fastest pace in a year Telegraph (22/10/09)
China’s 3Q growth accelerates to 8.9% pace Los Angeles Times (22/10/09)
Questions
- Examine whether Chinese inward investment to the UK is desirable for UK companies and employees.
- Why is a more powerful Chinese economy a ‘mixed blessing’ for the USA?
- In what ways is the Chinese economy ‘distorted’? Explain why this matters.
- Why is it encouraging that China’s current account and balance of trade surpluses have been shrinking?
- What effect would an appreciation of the yuan (or ‘renmimbi’) have (a) on the Chinese economy; (b) on the rest of the world? What would determine the size of this effect for any given appreciation?
- Why must China do more to rebalance its economy?
Gold prices have been soaring in recent months. In fact, such is the demand for the precious metal that Harrods has just started selling gold bars. “The Knightsbridge department store yesterday began selling bars of pure Swiss gold bullion as part of a range that is being displayed in a miniature vault on the lower ground floor” (see eighth link below).
In November 2008, gold was trading at around $750 per ounce; by October 2009, the price had reached $1080 per ounce. Why has this happened? Will the trend continue? What does it signify about the world economy – both its current and likely future state? The following articles look at the causes and effects of this new ‘golden age’.
Gold prices continue to hit new highs Guardian (7/10/09)
Gold price hits fresh high Guardian (14/10/09)
Gold’s bull run set to roar ahead This is Money (17/10/09)
Why the price of gold is rising BBC News (13/10/09)
Gold price ‘set to double in four years’ (includes video) Telegraph (10/10/09)
Gold at $1,500? Don’t hold your breath Telegraph (10/10/09)
Bullion bulls The Economist (8/10/09)
Harrods put Swiss gold bars up for sale in a miniature vault Times Online (16/10/09)
Gold Eases from New High as “Less Bad” Data Drives Up Equities, Oil & Wall Street Bonuses BullionVault (14/10/09)
Gold Just Broke Its Neck, Targets $5,250? The market Oracle (14/10/09)
Questions
- Use a demand and supply diagram to illustrate the change in the price of gold between November 2008 and October 2009. Does the explanation lie largely of the demand or the supply side? Use the concepts of price elasticity of demand and supply to explain the size of the price change for any given shift in demand or supply.
- How is the price of gold related to the strength of the US dollar?
- Explain whether gold is a commodity or a currency (or both).
- What is meant by the ‘head and shoulders pattern’ in the price of gold? Is the use of ‘patterns’ a good way of predicting future prices? Give reasons why it may or may not be.
CPI inflation in the 12 months to September 2009 fell to 1.1% (from 1.6% in the 12 months to August). RPI inflation for the same period was -1.3%. In other words, retail prices actually fell by 1.3% in the 12 months to September. According to the ONS, “By far the largest downward pressure affecting the change in the CPI annual rate came from housing and household services. This was principally due to average gas and electricity bills, which were unchanged between August and September this year but rose a year ago when some of the major suppliers increased their tariffs.” (See below for link.)
If the CPI inflation rate falls below 1% (or rises above 3%), the Governor of the Bank of England is required to write a letter to the Chancellor of the Exchequer explaining why and also what the Bank of England intends to do about this. The Bank of England targets the forecast CPI inflation 24 months’ hence and attempts to achieve a rate of 2%. Normally, if the forecast rate is below 2%, the Monetary Policy Committee will decide to cut the rate of interest. The last Bank of England Inflation Report (August 2009) forecast CPI inflation of around 1.5% in 24 months’ time. If the November Inflation Report forecasts a similar figure, or even below, what can be done? Bank Rate is already at a historic low of just 0.5% and a further cut is unlikely to have much effect. Should the Bank of England, then, engage in another dose of quantitative easing? Perhaps the letter, if it has soon to be written, will make it clear.
UK consumer price inflation at 5-year low BusinessWeek (13/10/09)
Recession helps push inflation to five-year low Independent (14/10/09)
Inflation falls to lowest in five years Guardian (13/10/09)
Inflation dip likely to be short-lived Guardian (13/10/09)
Deflation, not inflation would be the bigger threat if the Conservatives do what they say Jeremy Warner blog, Telegraph (13/10/09)
Pound hit by falling UK inflation BBC News (13/10/09)
Pound hit by falling UK inflation (video) BBC News (13/10/09)
Pound pays price as inflation slides to five-year low Times Online (14/10/09)
Investors weigh risks of inflation and deflation Financial Times (12/10/09)
Wage ‘catch up’ for public sector BBC Today Programme (14/10/09)
Current data on UK Inflation (National Statistics)
Time series data (annual, quarterly and monthly) on UK prices and inflation Economic and labour Market Review (National Statistics)
Questions
- Why did the annual rate of CPI inflation fall so much in September 2009?
- Is the Bank of England Governor likely to have to write a letter (or letters) to the Chancellor in the coming months? Explain why or why not. What is likely to be the role of expectations in determining whether a letter has to be written?
- Why did the sterling exchange rate fall on the announcement of the inflation figure? What are likely to be the effects of this? What will determine the size of these effects?
- Why may additional amounts of quantitative easing be necessary in the coming months? How would a contractionary fiscal policy affect the desirability of additional quantitative easing?
The International Monetary Fund is made up of 186 countries, which together strive for global monetary co-operation, financial stability, the facilitation of international trade, as well as promoting high employment and sustainable economic growth. At the same time, the IMF and the World Bank also aim to reduce poverty around the world. Some task! – especially with the current financial crisis putting strains on even the richest of countries. In its annual meeting on the 2nd October 2009, the ‘rescue’ of more than 12 governments has already been organised by the IMF.
But it is not just countries who are suffering. The World Bank has said that it could run out of money within the next year and the IMF’s Managing Director has also suggested that it will run out of money for its low-income-country loan facility, which loans money to low-income countries at zero interest rates. However, France and Britain have stepped up with a $4 billion allocation to the IMF to help poorer countries, which may lead to other countries doing the same.
Meanwhile, Alistair Darling continues to fight to keep Britain’s seat at the IMF, as some suggest that Europe has too many seats and should give them up to make room for growing economies. This comes at a time when Britain is also facing the prospect of being side-lined from a new group of economic superpowers that would include the US, Japan, China and the Eurozone countries. The following articles consider the role of the IMF and the WB, as the global economy continues to face financial turmoil.
Doubts remain over global power of IMF Financial Times, Alan Beattie (3/10/09)
Pledge for more IMF help for poor BBC News (4/10/09)
World Bank could run out of money ‘within 12 months’ Telegraph, Edmund Conway (2/10/09)
Will tough new G20 measures work? BBC News (26/9/09)
France, UK to loan IMF$4 billion for poor nations Bloomberg, Sandrine Rastello (3/10/09)
Darling rejects call for UK to lose permanent seat on IMF Guardian, Larry Elliot (4/10/09)
Alistair Darling battles to keep UK on the world’s economic top table Telegraph, Edmund Conway(3/10/09)
See also:
IMF Homepage
World Bank Homepage
Questions
- How do the roles of the IMF, the World Bank, the G7 and the G20 differ and overlap? Do we need all of them?
- What are the arguments for less European representation at the IMF? How may this affect decision-making?
- If the G4 does go ahead, with the Eurozone as one of its members, why will the UK be sidelined?
- It is often mentioned that all countries are interdependent, but what do we mean by international policy harmonisation and why is it desirable?
- The BBC News article and the Telegraph article talk about money shortages at the IMF and the WB. What does this mean for the poorer countries and also for the UK and France which have allocated $4 billion to the IMF?