Choosing Control

Bust of Emperor Augustus wearing the Corona Civica, on display in the Musei Capitolini (Rome). (Photo credit: Wikipedia)

The future really is almost here.

We now have flying cars, self-driving cars, and floating concept cars. Of course, the latter’s  technology would in my ideal world be used to create Back to the Future hoverboards just in time for 2015, but I digress…

The point is that our technological sophistication is extraordinary. Other examples would the powerful miniature computers we carry around (even if most people just browse Facebook, play Angry Birds, and make the occasional telephone call on them), the bionic exoskeleton that let a paralysed woman complete a marathon and motion capture technology that should make teleconferencing more useful. And as the sheer quantity of data exchanged across the internet increases, our ability to continuously access this data also advances by leaps and bounds.

Increasingly, the problem we face is one of control. The weakest link in all the above technologies are the human beings using them; we simply can’t crunch information as quickly as a computer. Our advantage lies in being able to prioritise data once we have a manageable amount to deal with. But we need help to winnow the initial mass down. This is why manipulating the flow of information is crucial. It explains the rise of search engines, automated control systems, and social networking sites. All of them personalise what information enters your conscious sphere; an invisible filter on the world.

The dilemma individuals face is how to retain a broad enough overview of the world to have a balanced perspective while not getting bogged down with excessive detail.

It’s impossible to ignore new technologies. Unless you are an avowed Luddite, you’re exposed to it daily. However, it is possible to prioritise. The world is tipping in favour of those who can correctly decide what is important. They can choose what data to exchange, adjusting their degree of privacy to accomodate this. And they can choose when to let automation run their lives and when to actively intervene to change course. These people will get the benefit of technological sophistication. Everyone else will be prone to becoming lost and homogenised within a morass of data and control systems.

What do you actually want to achieve, and why?

Life can be so fast-paced that people spend all their time running to stand still. Decide your goals. Then figure out what information you need to allow into life to facilitate them. For example, if you don’t need 100 different apps, don’t get them. It’s clutter; rubbish filling your mind and clouding it.

Do not be a human magpie attracted to the newest shiny object, and then instantly forgetting it.

Augustus Caesar’s personal motto of festina lente (“hurry slowly”) is more relevant than ever. A sense of control is not achieved by trying to do everything quickly, but by actively choosing when and how to act. Take the time to plan ahead and life simplifies. And technology returns to being a tool rather than a master.

Aquascutum: shielding a brand from financial storms

Aquascutum scarf, showing its club check
Image via Wikipedia

Aquascutum, venerable maker of stylish raincoats for over 150 years, is in administration. As this is the second time in almost as many years that it is in stormy financial waters, it may be said that they are better at shielding you from water than they are at protecting themselves. At time of typing, YGM, the Hong Kong based owners of Aquascutum’s Asian rights are exploring the possibility of buying the entire brand.

Sadly, one suspects this may result in downward pressure on quality in order to restore margins, and a general exploitation of the brand. As an owner of Aquascutum raincoats and overcoats, I would personally regret such an outcome. But are there any other possibilities? And why has Aquascutum been unable to be profitable?

The latter issue is fairly easy to understand. Aquascutum has always been an mid-to-upper market player, heavily focused on the rainwear segment. That is the model that kept in business for so many decades but it is no longer sustainable for two very simple reasons; fewer men wear raincoats regularly and the middle-market in general has been squeezed in favour of a polarisation of sales towards either niche high-end luxury brands or bargain basement low-cost retailers. This reflects the current development path of our societies in general. Aquascutum has been stuck in a no-man’s land.

It has tried various strategies to escape this trap, but they have been highly contradictory and poorly followed through. For instance, it spent a lot of money developing non-rainwear lines, but never marketed them aggressively. And it attempted to position itself as a luxury brand while having more discount outlets in its portfolio than it has proper shops, not to mention the less-than-stellar concessions it has in too many middling department stores.

It has never been able to decide what it really wants to be, diluting the brand’s identify in the eyes of consumers across the world.

A rescue strategy will have to make some fundamental decisions: do they want to take Aquascutum upmarket? Or do they want to make it a mass market brand?

In my opinion, it would find life as a mass market brand impossible. Theoretically, production could be aggressively offshored, more lines added and an attempt made to milk any latent value in the brand to the general consumer by having a small halo line of top quality products above a large range of far less impressive merchandise. This is the Burberry school of brand development. It has worked for them (more or less), but it is expensive and risky, especially with Burberry already a large presence in the same marketplace. I fear Aquascutum has simply left it too late to compete with them in this arena.

It would be better served by shrinking and focusing on a pure luxury identity. Keep production in England, focus on rainwear/outerwear/related items, drastically reduce the number of discount outlets & department store concessions, and ensure the one or two full retail locations that remain exude quality, brand pedigree and personalised service. Turnover would be a lot lower, but margins could be restored and the brand might have a fighting chance. Aquascutum now needs to be aspirational luxury to survive.

Are there any other options? Has Aquascutum simply left it too late? And is there life left in the middle class, mid-market segment generally?

Walkers Crisps expose the elusive nature of reality

UK readers have probably seen this advert; International readers may need reminding that our crisps are your potato chips. Regardless of where you are in the world, consider what Walkers Crisps are demonstrating with their latest advertising campaign. They have created three new flavours, none of which is instantly recognisable as the food upon which it is ostensibly based. They then exult in this flavour opacity by selling them “blind”, and asking eaters to guess what the flavours are, in return for a cash prize.

The success of this campaign depends on any one – or a combination of – the following axioms being true:

• Walkers are unable to accurately recreate complex food flavours in crisp format
• Crisp flavours are so divorced from real food flavours that devoid of an active packaging lable nudge, they cannot be recognised as such
• People are hopeless at actively identifying any flavour, relying heavily on explicit prompts in any setting
• Actual flavour doesn’t matter; only the idea of the flavour matters
• (we can take it as read that a somewhat bemused elderly lady speaking slowly to camera is also a necessary but not sufficient factor to crisp marketing success…)

My suspicion is that all the above are true to some extent, but it’s the point about the Idea mattering more than the Actual, that is the most interesting.

Seekers of truth have long debated whether there is a reality separate from human perception. Walkers’ contest demonstrates the impossibility of answering this question. Each entrant submits an answer based on their own perceptions. Walkers determines who is correct by reference to their food scientists’ design brief. But if a majority of people do not identify the flavour as the one Walkers meant their crisps to taste of, is it the taster or Walkers that is wrong?

The extreme Idealist position would be that neither camp is wrong, but rather that there isn’t such a thing as an objectively identifiable food flavour, only a consensus agreement between a large enough mass of people. This circular logic, of course, is what accounts for the longstanding joke that any previously unencountered food “tastes like chicken” (chicken having a sufficiently broad flavour so as to cover a multitude of new tastes). This dependence on perception & cozy consensus also underpins the problem outlined recently at the Oxford Wine Blog, discussing how to fairly rate wines.

What is true in the realm of food & drink applies equally in all fields of knowledge. For instance, there is much debate about the new psychiatric diagnoses being created by the upcoming DSM-V, with the concern (shared by myself) that it will encourage an over-medicalisation of the normal human condition. DSM-V loosens the diagnostic criteria for many existing disorders, and creates fresh ones too. This is a clear boon to the pharmaceutical industry (who will be able to sell into a whole new set of niches), to some blinkered professionals (who believe in their ability to heal everyone, if only they had more power to do so), and to those individuals seeking (consciously or unconsciously) to divest themself of responsibility for their situation and to adopt a sick role where they require treatment instead. Deciding where illness ends and normality begins has always been difficult, and in large part depends on consensus, something recently discussed at the start of a friend’s TEDx talk. The future seems murkier still.

There is a path forward. As individuals, we can try to acknowledge the gossamer-thin nature of reality. The lack of an objectively identifiable truth does not negate the emotional meaning of a subjective one. But crucially, neither does it elevate the subjective into the position of unquestionable fact simply because objectivity is difficult to ensure. Meaning is possible alongside such tolerance, even when Truth is not achievable. And with meaning, comes the potential for happiness.

In other words, Walkers crisps may not have a flavour all can agree upon, but we can still decide whether we like them or not.

The Wisdom of Walter Bagehot

Readers of The Economist will already be familar with the name Bagehot, it being the title for their UK-focused regular column. I suspect fewer will have read anything by the man after whom it is named.

I recently had cause to browse Lombard Street: A Description of the Money Market (a free online copy can be found at Project Gutenberg). Written in 1873, in the aftermath of a banking crisis (Lombard Street is in the City of London, and used in this context to refer to the global banking system), it’s a remarkably prescient view of our current situation, and one worth citing from directly. I will not provide much further commentary as his quoted words are self-explanatory both in their description of the problem and the least-worst solution. I’ve also kept any modifications to the absolute minimum required to retain comprehension on stitching the quotes together.

The briefest and truest way of describing Lombard Street is to say that it is by far the greatest combination of economical power and economical delicacy that the world has even seen. Of the greatness of the power there will be no doubt. Money is economical power. But very few persons are aware how much greater than the ready balance is the floating loan-fund which can be lent to anyone or for any purpose.

A million in the hands of a single banker is a great power; he can at once lend it where he will, and borrowers can come to him, because they know or believe that he has it. But the same sum scattered in tens and fifties through a whole nation is no power at all: no one knows where to find it or whom to ask for it. Concentration of money in banks, though not the sole cause, is the principal cause which has made the Money Market so exceedingly rich.

It is a luxury which has never been enjoyed with even comparable equality before.

But in exact proportion to the power of this system is its delicacy. Only our familiarity blinds us to the marvellous nature of the system. There never was so much borrowed money collected in the world. If any large fraction of that money really was demanded, our banking system and our industrial system too would be in great danger. The amount of cash-in-hand is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it.

We do not always manage it with discretion. There is the astounding instance of Overend, Gurney, and Co. to the contrary. Ten years ago that house stood next to the Bank of England in the City of London; it was better known abroad than any similar firm known, perhaps, better than any purely English firm. The partners had great estates, which had mostly been made in the business. They still derived an immense income from it. Yet in six years they lost all their own wealth, sold the business to the company, and then lost a large part of the company’s capital. And these losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the City of London would have lent it better. After this example, we must not confide too surely in long-established credit, or in firmly-rooted traditions of business. We must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right.

Ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. These banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. At first, incipient panic amounts to a kind of vague conversation: Is A. B. as good as he used to be? Has not C. D. lost money? and a thousand such questions. And every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons; and attacks them all more virulently than at first. All men of experience, therefore, try to strengthen themselves in the early stage of a panic [by limiting credit].

A panic, in a word, is a species of neuralgia; you must not starve it. The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them.

There should be a clear understanding between the Central Bank and the public that, since the Bank hold out ultimate banking reserve, they will recognise and act on the obligations which this implies; that they will replenish it in times of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.

We should also look at the rest of our banking system and try to reduce the demands on the Bank as much as we can. The central machinery being inevitably frail, we should carefully and as much as possible diminish the strain upon it.

It may be said that the reserve in the central bank will not be enough for all such loans. If that be so, it must fail. But lending is, nevertheless, its best expedient. This is the method of making its money go the farthest, and of enabling it to get through the panic if anything will so enable it. Making no loans as we have seen will ruin the country; making large loans and stopping, as we have also seen, will ruin it. The only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. This policy may not save the Bank [and the country]; but if it do not, nothing will save it.

Bagehot went on to describe the importance of central bank lending at a premium to the pre-crisis rate & to lend against collateral, both to ensure moral hazard remained. The US Federal Reserve, The Bank of England, the Bank of Japan and even China’s central bank have all read & understood Bagehot and turned on the money tap to keep the global system from seizing up entirely and so utterly destroying the quality of life of billions of people. The European Central Bank likely also understands it, given its participation in the 30th November 2011 central bank agreement to increase dollar liquidity. Unfortunately, it is currently prevented from acting further due the legal limitations placed on it by, primarily, the Germans in terms of using one of a central bank’s greatest assets: printing money to permit that liquidity flow and devalue currency, even at the cost of inflation.

As we begin to see the cautious outlines of a potential “grand bargain” on lending involving the IMF, the world’s major central banks, the BRICS, and Eurozone fiscal policy union, let’s hope they haven’t left it too late…

Italy. Or, How Markets Got Their Groove Back.

Image via Wikipedia

Two Eurozone governments toppled in almost as many days. First Prime Minister Papandreou of Greece was forced to resign, and at time of typing we hear that Prime Minister Berlusconi of Italy is finally throwing in the towel. The common factor? Despite bluster, both eventually kow-towed to capital markets.

Markets are much misunderstood & maligned. They are either perceived as Machiavellian, plotting complex geopolitical outcomes from the shadows, or as irrational, disregarding long-term economic fundamentals in favour of short-term risk-taking. Markets are a reflection of the sum of a large number of disparate actions. As such, they are subject to the emotional temperature of those making deals. Fearful traders make for volatile markets.

Since the global financial crisis first hit in late 2007, those traders realised en-masse that something had gone dreadfully wrong. The complexity of some of the financial vehicles, especially in securities markets, led to an inability to accurately price risks. Accurate pricing of risk is an essential of any market, from the man on the street choosing how much a used car is worth, to an investment bank deciding what a trillion-dollar collateralised debt is worth.

That inability to price risk shook confidence in the entire financial system, with results we’re all familiar with. Far from being Machiavellian geniuses, traders are all too human. They became extremely fearful to trade with, well, anyone. They lost the ability to gauge what was worth investing in and what was not, and in their fear desperately turned to politicians and governments to solve the problem.

There is something subtly different in the air this week. The repeated failure of those politicians to restore confidence, most especially in the eurozone but also in the USA, has caused something to snap. Market have gone from childlike fear to doing their basic job: pricing in risk. The cost of Italian government debt rose to near-unsustainable levels on the back of prolonged shilly-shallying by the Berlusconi government, prompting his slow-motion fall.

This is a restoration of moral hazard in markets for which we should all be very grateful, as it is the first sign in over four years of a return to some degree of normality in how markets are supposed to work, as abnormal and dramatic as the events themselves are. Unpopular as they currently are, markets are our least-worst way of judging monetary value. There is something potentially cathartic and empowering about their net actions this past week, which may encourage sustainability and further progress in the months to come.

Governments, beware.

Honey, I couldn’t be happier than if they were based on real grades

Hand-drawn (by one of the negotiators) diagram of the eurozone deal, via Reuters. Note the many question marks...

We have an eurozone deal. The huge sense of relief felt by worldwide markets was almost palpable in its intensity, with global indices soaring in unison.

Of course, it’s a massive temporary fudge with large blank spaces that need filling in over the next few weeks. And in itself it does nothing to address the underlying structural problems of the eurozone (more on that later).

But it’s a lot more than I expected last week, so I’m pleased that enough heads could be banged together to at least come up with something. More importantly, it really felt like some tough decisions had been made.

Which brings me onto the difference between substance and appearance, and the vital importance of psychology in bridging the gap.

The title of this post is taken from the grossly underrated mid-90s movie Clueless. For the uninitiated, Clueless follows Cher (Alicia Silverstone), a Californian high school girl with a talent for manipulation and a fondness for matchmaking. The plot is loosely based on Jane Austen’s Emma but is shrewd enough in its updating to stand strongly as a work on its own.

The title quote is spoken by her father, proclaiming his delight at her ability to deftly manipulate her way into getting higher grades than her academic ability deserved, by pairing up two of her hard-grading but lonely teachers, improving their mood, thus making them more lenient graders. Reality becomes be a malleable function of applied psychology.

The movie has a lot more of these satirical, bitingly-accurate little asides. For instance, when Cher is asked her opinion of violence on TV, she replies, “Until mankind is peaceful enough not to have violence on the news, there’s no point in taking it out of shows that need it for entertainment value”. If you’ve never seen the movie, perhaps dismissing it as fluffy/superficial rom-com, you should definitely watch it. It neatly dissects the 90s as Heathers did the 80s, except it does so with affection rather than disdain.

The eurozone deal is currently based on ephemera. It has little real substance to it, as the details of the bank recapitalisations, haircuts and EFSF expansions are yet to be fleshed out. But what it achieves is psychological; it draws a line in the sand around the problem. To paraphrase Churchill, it feels like the end of the beginning. And that may be enough of a psychological sleight-of-hand to persuade markets to react accordingly, which will then translate perception and appearance into reality.

The American investor Benjamin Graham is famous for saying, “In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”. What he meant was that day-to-day fluctuations are based on volatile emotion & appearances but over the years, profitable businesses with a future will outperform unprofitable businesses.

For the eurozone to profit from the breathing space granted by the psychological drama of today’s deal, they must turn around their core business: they need to remedy the structural problems of monetary union without fiscal union. There are signs this will happen. EU President Barroso is pushing for deeper fiscal integration within the eurozone. Essentially, the richer countries will gain some control over the poorer countries’ budgets in return for helping them fund their economic deficits. This would certainly help mitigate the structural problems, though of course no-one really wants to talk about the potential democratic deficit created by such a move.

On a more parochial level, the UK may potentially be able to get the best of both worlds, benefiting from a more stable eurozone while remaining outside it, and retaining relative economic independence while still being part of the EU single market. It’s an exciting, if unpredictable, situation. There is a saying, popularly though inaccurately attributed to an ancient Chinese curse, “May you live in interesting times”.

We are certainly doing that. Better try to enjoy it.

Stock Markets lost among the waves

FTSE stock market stagnation since 1998, data from Yahoo Finance

As world stock markets take another cold plunge again today, even the most rational and fundamental-focused investor takes a sharp intake of breath and wonders when a corner will be turned. Obviously, if the eurozone got a grip of its debt problem, things would begin to improve. But leaving such common sense to one side, this is precisely the kind of febrile climate that encourages one to explore stranger waters.

One step removed from goldbug hysteria and palmistry is economic wave theory. The more comprehensible end of the spectrum focuses on the logical and simple fact that businesses will leverage themselves more when things are going well, and then have to deleverage and contract when economic times sour. This is all sensible enough, and accounts for the basic cycle of boom and bust.

A more subtle variation of this is the Kitchin cycle, which is the manifestation of an information lag. It takes time for businesses to both recognise and act on fresh market information, for example by expanding & buying new stock or converselylaying workers off & restricting inventory. The Kitchen cycle is therefore thought to operate over about a 4 year term.

A slightly slower wave is the Juglar cycle, which operates over about an 8 year cycle. This measures not how business use the resources they already have available to them, but how the invest in creating new resources, for example building a new factory or power plant. These things take longer, so the Juglar cycle is a longer than the Kitchen one.

Beyond this territory, we enter more speculative economic wave theory. At a 20 year cycle level, some believe a Kuznets cycle operates, reflecting world movements in migrant populations and the effects they have on GDP. Kuznets applied a mathematical filter to economic data to reveal his cycle. Unfortunately, application of the same filter on white noise (random data) also reveals this cycle, suggesting it is an artifact of the filter rather than a real event, although arguments continue to this day whether it is real.

If the Kuznets cycle is controversial, the Kondratieff (or Kondratiev) wave is in the realm of the fabulous. It suggest an even longer 40 year cycle and suggests that the economy has relatively quiescent (though possibly volatile) periods alternating with more steady booms in activity. The theoretical basis to the Kondratieff wave is that it reflects the emergence of revolutionary new technologies and their impact on the economy. Some have gone so far as to suggest that the period between about 1983 and 1999 was one of the booming phases (reflecting the microchip revolution), implying we’re now in the middle of one of those volatile but stagnant intervening times.

While it all sounds fantastical, if one projects backwards it’s tempting to selectively choose facts to fit the theory. For example, the period of 1965 – 1983 was equally stagnant and volatile as the past 12 years, in terms of stock market fluctuation. And before that, 1950 – 1965 showed marked increases in valuations. Further back in time, 1929 – 1945 coincided with the Great Depression and WWII, whereas before that were the Roaring Twenties. If Kondratieff wave theory has a kernel of truth, then the current volatile stagnation will stretch until about 2016, although the last two years before then should show signs of steady growth too. So only a few more years of trouble left…

To finish on a more optimistic (although probably even less well-founded) note, I must mention the Elliott Wave Supercycle (or Grand Supercycle Theory). This speculates that there is a 250+ year broader supercycle of oscillating economic activity. The most recent one is thought to have begun in the early part of the 19th century, beginning with the Industrial Revolution. If true, we still have another 50+ years of boom, before the world economy drifts into between two and three centuries of relative waning.

See, it’s not all bad!

Euro Farce

The Eurozone remains en route to implosion. But it’s a slow-motion train wreck.

I first blogged about this almost exactly one year ago, and again last November; I doubt today’s post will be my last. I won’t rehash the detail from those posts, but reading them in light of ongoing events proves their points.

Eurozone central bankers and politicians have consistently failed to definitively address the fundamental structural economic flaw generated by a unified monetary policy and nationally disparate fiscal policies.

That’s because there is no way to address this mismatch, short of unifying fiscal policy to a much greater degree than stronger countries’ economies (and voters) are prepared to accept. Or breaking up the monetary union, which Euro politicians and central bankers refuse to accept.

Paul Mason, BBC Newsnight’s economics editor, is just one of many journalists now publicly discussing scenarios previously considered verboten. His idea of Euro bonds would be one way of addressing the structural problem, but fails the litmus test, as I doubt it would be palatable to German voters. His final point, quoted below, paraphrases one I made in my earlier articles:

Whether we hit the barriers of political unacceptability or a market attempt to take down the ECB first is a question everybody hopes we never have to answer, but markets have staged attacks on central banks before.

Where I differ from his perspective, is that I hope the question is answered, and soon.

What is needed is clarity and finality, not ongoing slow-motion crisis and farce. Euro currency fragmentation will be intensely painful, but as with a sticking plaster, it’s best to act decisively to limit the overall agony. It’s been over a year since this crisis started, and the hope then was that temporising measures would buy enough time for economies to recover, and that growth would be enough to disguise the underlying problem. If it had happened, it would have worked.

It hasn’t happened, because what Greece, Ireland, Portugal (and Spain and Italy) desperately need in order to grow is rapid and major currency devaluation relative to other world currencies, to make their economies competitive again. They cannot get sufficient devaluation within the Euro, as the relative economic strength of the northern Eurozone countries keeps the currency as a whole moderately attractive internationally. It is falling in value somewhat, despite that, but not nearly enough to save the periphery. The ECB’s recent interest rate hike simply underlines how monumentally destructive the Euro is proving to the peripheral economies, not to mention their citizens.

Solving the problem demands decisive political action to either break up the Euro, or drive the Eurozone significantly towards  fiscal union. Forgive my scepticism but I doubt we’ll get either. Just more muddling through with temporary bailouts and other weak measures. In short, keeping fingers crossed, hoping it buys enough time for natural growth to kick in, and praying the market is too stupid to see what’s going on in the meantime.

Hmm, good luck with that…!

Japan Earthquake: Consequences

Map of tsunami wave height; click for source

The twists and turns wrought by the Japan earthquake have gripped and troubled me. I am by nature, and to some extent profession, a contingency planner. When faced with a difficult situation, I tend to switch into a pattern-recognition and problem-solving mode, anticipating consequences in order to take advantage of them. The Japan earthquake is troubling because its medium and long term ramifications are very unsettling.

The facts are straightforward: the 9.0 magnitude earthquake that occured off the Sendai coast on 11th March was one of the most powerful ever recorded. It generated a massive and rapidly-arriving tsunami, leading to major loss of life and catastrophic damage. Several nuclear reactors at Fukushima are in danger of core containment breach, and at time of typing, there are reports of a minor containment breach at reactor 2. The Bank of Japan has pumped trillions of yen into the economy to prop it up during the crisis, and the emergency services and military appear to be doing the best they can under trying circumstances.

The consequences are much harder to define.

The loss of life is of course immensely tragic on personal, national and global levels. However, the calculating side of me is bound to point out that on that global scale (comparing it to previous natural disasters such as Haiti’s earthquake) it is not disproportionate.

Many tens of thousands (probably hundreds of thousands) of lives were undoubtedly saved by Japan’s affluence. Its wealth enabled adherence to strict building codes, making deaths from the earthquake itself relatively limited. This is a triumphant testament to technology and its careful widespread implementation.

The tsunami killed many more. It is much harder to prevent tsunami deaths. One would assume that Japan will respond by implementing more safety restrictions into its building code for coastal properties, such as mandating the orientation of buildings to permit the force of tsunami waves to pass through rather than destroy. These would be relatively straightforward regulations and I have little doubt Japan will respond well in this regard.

The economic consequences are more painful. Natural disasters are generally associated with an immediate GDP hit, followed by a rebound 6-18 months later as reconstruction kicks in. Under normal circumstances, Japan would follow this overall neutral pattern (as it did following Kobe’s earthquake). But Japan’s national debt is enormous at about 200% of GDP, and interest rates are already in the basement following decades of stagnation and the 2008 financial crisis. This limits economic room for manoeuvre and magnifies the impact of that short-term GDP hit, making it more likely to be prolonged. If Japan’s GDP is negatively affected for more than 6 months, it may trigger a global slowdown. Although it has been stagnating for 20 years, Japan is still the world’s 3rd biggest economy and a major recession would impact global demand chains.

This is particularly concerning for the UK, given that the success of the austerity programme being implemented by the coalition government is dependent on moderately strong private sector growth. Direct UK-Japan trade is in the order of about £10-20bn only, so although knock-on effects via the USA are harder to quantify, it’s possible that the fallout to the UK economy will be relatively contained. It’s simply too early to be sure about the impact on the UK beyond noting that several large insurers will bear major, but largely absorbable, losses.

Fallout of another nature is perhaps more troublesome in the long term. It’s highly unlikely that radiation from Japan will cause the UK any problems whatsoever. Even within Japan, the impact should hopefully be fairly limited, especially if the cores at Fukushima do not lose further containment. But the effect on our energy policy may be significant.

Elements of the Green movement have been swift to use the incident to buttress their more generalised anti-nuclear policies. While some environmentalists now support nuclear power as being cleaner than coal or oil, and therefore helpful in mitigating climate change, the majority still push very strongly against an expansion of fission plants. Public opinion has gradually been shifting back towards nuclear power in the decades since Chernobyl, but this progress is likely to be reversed in the emotional knee-jerk response to what we are seeing unfold in Japan. The longer it takes to control the cores, the worse that response is likely to be.

No method of power generation is risk and impact free, but nuclear is in many ways safer, cleaner and more cost-effective than other methods. It has some major drawbacks of course, not least that if all the lines of defense do collapse, then the consequence of a fully exposed core are very significant. Nuclear power stations are designed with significant depth of defense and I hope and pray that the depth is sufficient to allow the Fukushima cores to be brought under control. Newer designs of plant are more defended still (Fukushima is about 40 years old), with passive as well as active lines of retreat in case of emergency.

While it is absolutely right that nuclear plants should be designed with the precautionary principle uppermost in mind, I believe it is fundamentally wrong to construct an entire energy policy around such worst-case scenarios. Any energy policy has to be balanced not solely against the risk of incredibly unlikely catastrophe, but against the far more likely effects on the economy, and the need to securely keep the lights on.

Britain is a much more geologically stable country, and with newer reactor designs, I firmly believe that nuclear power is easily a safe enough option. It is also going to be necessary in order to maintain power grid stability in the face of our international obligations to mitigate climate change. Renewables alone simply cannot fill the gap in the short time we have. I hope there isn’t a knee-jerk response against nuclear fission’s planned expansion in this country.

Of course, a more lasting solution would be cost-effective large-scale nuclear fusion, and there is a very strong international effort to develop the technology required, which I touched upon in an earlier entry. That would be both cleaner and safer than fission.

National disasters can paradoxically bring out the best in people. All the reporting from Japan conveys images of an understandably shocked and frightened populace, but one attempting to work with authorities to rebuild their country. Having visited and worked there, I believe they will succeed.

Equality is not Fairness

 

The impact of women on male insurance premiums

The European Court of Justice ruled today that it is illegal for the insurance industry to use of gender to determine risk.

It contravenes the European Convention on Human Rights (ECHR) which requires that wherever possible, each gender should be treated equally in order to prevent discrimination. The result of this attempt to mandate equal rights has led to the bizarre situation of the Court being forced to rule that an industry which distributes the cost of insuring risk according to the eminently fair principle of riskier individuals bearing more of the cost, can no longer do so.

And I doubt that anyone really expects the outcome of this to be that men’s car insurance premiums will fall by more than a token amount. Instead, the more likely outcome is that women’s rates will increase instead, making the population as a whole a lot worse off. The impact on the wider insurance industry will affect pension annuities too: men generally get higher rates because statistically they are likely to die before women. Now both sexes will get something closer to the lower female rate.

This ruling is a beautifully accessible example of the difference between equality and fairness.

Treating everyone equally – assuming that just because they are all human beings, they all deserve the same treatment – is fundamentally unfair. People are not equal. Fairness and justice should be about equitable outcomes, not equal ones. Confusing these concepts leadings to well-meaning but ultimately self-defeating creations like the ECHR that do a disservice to the population they are meant to protect.

Individual variation resulting in inequality and differential outcomes is not something to be feared. Fairness demands that our society is freely able to distribute its bounty equitably – albeit unequally – between individuals.

Now, preventing discrimination is vitally important. But stopping discrimination is about preventing inequitable outcomes to individuals because of their group membership, not to prioritise the group membership over the individual, which is what the ECHR does.

The Court had no alternative but to rule the way it did, because the ECHR is deliberately phrased to emphasise the gender identity sub-group rather than considering humanity as comprising a mass of individuals who just happen to fall into various sub-groups.

Membership of a sub-group should never lead to inequitable outcomes; gender (or religion, race, sexuality, and so on) should never be used as a reason to inhibit rewards to a particular individual. But membership of a sub-group should never be used a reason to mandate equal outcomes with other sub-groups.

The way to avoid this is to bypass the importance of sub-group membership altogether: value the individual instead.

Related Articles

• This insurance ruling trivialises human rights | Stephen Booth (guardian.co.uk)
• EU court bans insurance sex discrimination (foxnews.com)
• Gender case hits insurance costs (bbc.co.uk)
• “UK insurers face “large-scale adjustments” over ECJ gender ruling” and related posts (insurancedaily.co.uk)