Clive Hale says he feels like a lone voice in the City as he gives his support to the 'leave' campaign. Here he explains why.
"Whether your main interest is equality, liberty, democracy, economic survival, sovereignty, debt reduction, increased export potential, encouraging entrepreneurs, fiscal independence, social fairness, overpopulation, community mutualism or calling leaders to account, it has become abundantly clear since 2008 that you will have to forfeit every one of these aspirations if your preference is to stay within the European Union." John Ward, blogger at The Slog
"When it becomes serious, you have to lie."
"We all know what to do, we just don't know how to get re-elected after we've done it". Both quotes by Jean-Claude Juncker, Luxembourg politician and president of the European Commission
These quotes provide a fascinating insight into the psychology and intentions of the EU leadership. These people have a profound impact on our everyday lives, but that may be about to change.
"It" just got "serious"; the UK is about to make a decision that could alter the course of history, not just for the UK and Europe, but for the rest of the world too.
It was no accident that President Obama recently visited these shores and gave us an ultimatum to toe the line, vote to remain and sign up to the Transatlantic Trade and Investment Partnership (TTIP) - by doing so, quite unintentionally, he started to tip the balance in favour of an out vote.
The text of the secretly negotiated TTIP document has been leaked, exposing it for what it is; a license for big business to drive a stake into the heart of the democratic process.
As the Brexit camp is now ahead in the polls, it seems that the EU President Jean-Claude Juncker is poised to make another unwelcome contribution to the debate. Were he to do so the fate of the Remain camp is probably sealed; Brits as a rule don't like being told what to do - especially by non-Brits…
An EU remain vote will shackle the UK to a fundamentally flawed experiment in co-operation that, as a result of overly politicised economic mismanagement and policy error, combined with outright political incompetence, is, at best, highly likely to condemn Europe to a Japanese-style economic stagnation for at least a generation. At worst, total failure and acrimonious disintegration.
Throwing off the shackles with a Brexit vote probably guarantees a recession, but from which the UK will emerge, almost certainly, financially stronger and definitely more independent; able to trade more openly with the most dynamic nations on earth.
We are told repeatedly that we will have more influence inside the EU. The reality is that we have very little influence unless we follow the lead set by Germany and France.
Ask the Greeks how much influence they think they have. They recently asked the undemocratic, unelected Eurogroup of finance ministers for a meeting to consider ways of helping them to deal with their debt burden. But Jeroen Dijsselbloem, the chairman, said: "There is nothing to discuss."
This Thursday, the UK electorate has an opportunity to shape this country's economic and political destiny for generations to come. This momentous event at the ballot box is not the traditional one between left, centrist and right, or, depending on your political view point, good and bad outcomes.
Much of the public referendum discussion has so far focussed on either emotive issues, where deeply held personal opinions are not going to be changed, or self-interests, which again are unlikely to be swayed.
Most voters will cast their vote according to their own prejudices and self-interests. That's simply human nature and totally understandable. Few will think of what outcome is best for the average person on the street. Even fewer will think forwards to what is best for our children, or even their children!
As a group the young are more like to vote to stay in as I did in 1975 in the belief that we were joining a free trade zone when in fact Ted Heath, who took us in two years earlier, knew full well that political integration was the long term goal, but kept very quiet about it.
If I had taken the trouble to read the Treaty of Rome, that fact would have been clear. But I didn't, and very few today are well informed enough to make a decision that will stand the test of time either.
The key issues are not debated by the mainstream media and there are more than a few corporate and political vested interests hoping that no one will. The EU leadership has committed seven deadly economic sins.
Throwing off the shackles with a Brexit vote probably guarantees a recession, but from which the UK will emerge, almost certainly, financially stronger and definitely more independent.
Deadly Sin 1: Currency Manipulation
"For a small, open economy like Cyprus, euro adoption provides protection from international financial turmoil."
A quote from Jean-Claude Trichet, then president of the European Central Bank (ECB), in January 2008. After the provision of a number of emergency loans to Cyprus throughout 2012-13, on 25 March 2013 a €10bn ECB bailout of the entire Cypriot banking system was undertaken.
To fund part of the bailout, savers' deposits (above €100,000) were seized and used to bail out the bankrupt banks. To this day, capital controls, restricting the amount of money that can be taken out of Cyprus, are still in place.
Contrary to Mr Trichet's comments, adoption of the euro has simply been an economic disaster for Cyprus. And the worst part of this story: it was all entirely predictable.
Why? All rational economic justification for the EU went out of the window the minute that the single currency became a fact of life. Currencies act as the pressure valve for an economy.
They weaken when economies are weak, thus encouraging increased capital inflows and inwards investment, therefore cushioning the economic fall, and eventually promoting recovery.
The opposite is also true for booming economies, where currencies appreciate and ultimately dampen the euphoria, before the boom 'overheats' and becomes too destructive.
The minute you block that pressure valve, by artificially fixing the value of currencies, as the advent of the euro has done in Europe, internal pressures begin to build.
History is littered with examples of financial crises where official currency manipulation is a major symptom. Arguably, there has never been a totally successful currency union anywhere in the world, as the internal pressures always result in unbearable economic and/or social distortions.
The euro is clearly no different; today social discontent and expanding economic disparities are plain to see and they are getting worse. When will the pressure become too great? And when will that valve blow?
History is littered with examples of financial crises where official currency manipulation is a major symptom. The euro is clearly no different.
Deadly Sin 2: Ignored History and Common Sense
"Facts do not cease to exist just because they are ignored." Aldous Huxley
A precondition of a 'one size fits all currency' is a 'one size fits all interest rate'. You can't have different interest rates within a single currency regime, as this would cause destructive internal capital flows, as money rapidly gravitated towards the highest interest rate.
One thing that is difficult to grasp is why national leaderships don't study history before undertaking grandiose ideas. If the Europeans had looked across the channel to the UK, they would have realised this currency and interest rate point.
In the UK, since the demise of the industrial revolution, we have needed multiple interest rates. Clearly, as we live and work within a currency union known as pounds sterling, this is obviously out of the question.
Consistently, the UK has needed lower interest rates and a weaker currency in the north, to stimulate that part of the economy, the "increased capital inflows and inwards investment" point, and higher rates and stronger currency in London and the South East to dampen down a booming economy there.
So, the UK has ended up with a highly skewed economy of economic and social distortions - simultaneous stagnation and continuous boom, or, known locally as the North/South divide.
The only reason that the pound sterling union has held together for the past hundred years or so is that we have a highly developed central taxation system that redistributes wealth from the South to the North.
And the only reason that this fiscal discipline has endured is that the UK is on the whole a fully integrated population of only 65 million people, mostly of the same religion, speaking the same language, critically with much the same mind-set and attitude, and a 1,000 years of history binding us all together. In short, we are a homogeneous nation.
Compare and contrast the UK's dynamics to that of Europe, with 28 nations, 500+ million residents, from countless tribes and belief systems, speaking hundreds of dialects and having vastly different attitudes on European integration to name but one point of disagreement.
The co-operation and willingness simply isn't present in Europe to allow wealth redistribution via a united fiscal regime. Without one, the distortions created by the single currency will continue to multiply until the pressure proves too great.
Until we reach that juncture, expect periodic crises in countries like Greece as the pressure builds to the point where the powers that be feel compelled to fudge yet another solution.
Commentators have suggested that the EU is just a re-run of the founding of the United States of America. This is an inherently flawed argument. The US was a very young, sparsely populated country struggling to expand and survive when the dollar was adopted and the fiscal wealth redistribution structure was created.
This is a very different scenario to that of trying to merge together 28 already mature and independent nation states. The US is exactly that: 'United'. Europe isn't. The fiscally disciplined German taxpayers aren't going to be persuaded to continuously send money to nations that they see as financially reckless and lazy!
The only reason that the pound sterling union has held together for the past hundred years or so is that we have a highly developed central taxation system that redistributes wealth from the South to the North.
Deadly Sin 3: A Refusal To Accept That They Might Be Wrong
"More dangerous even than delusions of grandeur, are illusions of control." Peter Warburton, economist
Between 1999 (when the euro became the de facto currency) and 2007, It looked like the above mentioned flaws were totally irrelevant. The European economy appeared to be doing very nicely; there was virtually full employment and wealth was being 'created' at a previously unprecedented rate.
However, this was predominantly a debt-fuelled illusion. The Greeks, Irish, French, Spanish, Italians and Portuguese found that for the first time ever they could borrow money at German, Dutch and Austrian interest rates - the "one size fits all" interest rate that everyone loves in this scenario.
However, economic prosperity generated by debt is only temporary in nature, as the debt ultimately has to be repaid, constraining future growth at the date of repayment. All debt achieves is to pull economic activity forwards to today, at the expense of the future growth. We have now reached the "future".
The European banks were more than willing to lend to the garlic belt nations and the Celtic Tiger during the early noughties, as despite dire historic financial track records of these countries, the assumption was that Germany was back-stopping the whole system.
So they borrowed - and on a truly heroic scale. That capital was "invested" (mostly wasted) in unproductive assets. Hence, the ghost estates of Iberia and Ireland that were only built because financing could be obtained very cheaply; there was no fundamental demand for such assets.
The start of the US credit crisis laid bare the fact that we had witnessed the largest misallocation of capital that the world had ever seen, much of it in Europe and it was predominantly financed via debt.
Those outstanding debts obviously have to be serviced and repaid, or defaulted upon. The result today is that the European banking system is not only the most leveraged in the world, it is also in many instances saddled with eye-watering levels of bad debts that simply can't be financed.
Worse still, the European debts are often secured on assets that are in many cases virtually worthless. The banks are too weak to stomach the necessary write offs, so the game of pretence that all is fine continues for a while yet.
Deadly Sin 4: Ignored Obvious Problems and Blamed Everyone Bar Themselves For The Situation
"Banking establishments are more dangerous than standing armies." Thomas Jefferson, former US president
The Anglo-Saxon nations (and Spain up to a point) are probably the only countries in Europe that have recognised, and then done a sufficient job of cleaning up their banks' balance sheets by forcing debt write-offs, asset sales and recapitalisations.
With regard to their non-performing loans, the other Europeans have generally deployed their usual policy of 'extend and pretend'.
Basically, they "extend" the duration of the loans by continuously rolling them over, and all concerned "pretend" that everything is OK, in the hope that somehow the loans are eventually repaid. Hence, removing the immediate need to account for losses.
(Side note: The Japanese deployed this policy extensively when they had a banking crisis in the early 1990s. They are still suffering the negative economic consequences today.)
But many of these loans are unlikely to be repaid. "Hope" is the most expensive word in finance and economics. Today, the Italian banking system alone has €360bn of non-performing.
This amount is equivalent to 17.1% of 2015 Italian GDP. It is a monumental number, and is a huge millstone around the neck of the Italian economy. Is Italy the new Japan? The Italian banking system simply doesn't have the capital to offset such a colossal amount of losses; "extend and pretend" is their only option.
The Italian government have just raised a €5bn bailout fund to offset investors' angst about this issue - a sum that covers less than 2% of the problem…
It might surprise readers to know that the Italian banking system isn't the most worrying case within the EU. That honour somewhat surprisingly falls to Germany, and one bank specifically.
That bank's balance sheet is still 33 times leveraged on some capital ratio measures; an equivalent US bank would be about 12 times. It's share price has just hit an all-time low, 90% down from the pre financial crisis peak. No prizes for guessing…
When the contrarians stand up to the authorities and point out that among other things that the European banking emperors are wearing no clothes, they are bullied into silence, usually via increased regulation and ridicule. The hedge fund community has been just such an example - they have been fall guys since 2008.
This is an incredibly dumb position for the authorities to have taken, as with the right encouragement they could have been a very large part of the solution for the current economic malaise, not to mention the cleaning up of the banking system. Our economic leaders were too short sighted to see that.
So why hasn't the European banking system yet collapsed under its own problems?
Deadly Sin 5: Employed Purely Short-term Thinking
"A banking system is an act of faith. It survives only for as long as people believe it will." Michael Lewis, author
The main reason that the European banking system hasn't yet collapsed is down to the ECB's negative interest rate policy (NIRP), and money printing largesse which has been extended to allow the purchase of European corporate debt nearly 10% of which is trading at negative interest rates as currently is the ten-year German bund.
ECB president Mario Draghi famously said that he would "do whatever it takes" to save the euro. He simply can't afford another banking crisis. Europe has had zero interest rates for roughly four years now, and recently they have actually become negative.
All in an attempt to reflate economies by forcing savers to spend and consumers to borrow more, generating inflation in the process.
Handily, ZIRP/NIRP also keeps debt servicing costs, on the monumental outstanding and growing debt mountains, to a minimum. The ECB is also betting that this makes debt defaults less likely so the weak banks do not have to recognise their losses.
The other major beneficiaries of the ECB's current policies are governments. To fill the gaping holes in European governments' finances that stagnating economies have left, their leaders are running huge budget deficits (i.e. borrowing more money, in the absence of sufficient tax receipts, to fund social commitments).
To finance these, sovereign debt is being issued. But a very dangerous situation, commonly known as the "doom loop", is developing.
The ECB creates €80bn per month out of thin air, with which it buys up assets (mostly bonds) from the banks and markets; hence injecting €80bn of new liquidity into the European financial system.
The theory (dream) is that this liquidity is then lent to corporations and consumers generating a pickup in economic activity. In reality, very little new lending is happening as intended.
The new liquidity is being used by the banks to buy up the very same sovereign debt that the governments are issuing. Hence the banks in countries such as Spain are now holders of massive amounts of Spanish sovereign debt issues. As it's issued by governments, it is perceived as risk-free.
The governments need this process to continue to finance their ongoing commitments, and the banks are happy to proceed as they arbitrage a risk-free gain, and give their balance sheets a veneer of strength.
However, if a highly indebted government gets into financial trouble, the banks are going to be imperilled as the debt that they hold will fall dramatically in value.
And if the banking system has problems, governments will have to rethink their financing requirements; or face up to their voters and renege on over-generous past promises. That would cost votes, as Juncker's second quote implies.
ECB financing of European governments, directly, is illegal under EU law, so this back-door process via the banks circumvents the rules quite nicely. The fiscally prudent German Bundesbank (Germany's central bank) are known to be livid at the whole scam. But Draghi knows that there is nothing that they can do about it if they wish the EU to hold together.
How is a crisis, initially caused by too much debt, solved by issuing even more debt? See Einstein's quote below for the answer.
Deadly Sin 6: Failed To Adjust Policies That Are Clearly Counterproductive
"Insanity: doing the same thing over and over again and expecting different results." Albert Einstein, scientist
The ECB's monetary policies of the last eight years have been a dismal failure. Economic growth across Europe is generally stagnant, consumers aren't spending and savers are still saving.
Yet the ECB desperately carries on down the same route regardless. The central bankers' holy grail is to create inflation of around 2%pa, but this has failed to materialise. Exactly in whose interests is it to have a certain level of inflation?
Virtually the entire population spend their weekends looking for bargains - i.e. lower prices (deflation), not higher ones (inflation)!
The answer of course is politicians, who run consistent budget deficits with which to bribe the population, and indebted bankers. Both need inflation to reduce the future value of the outstanding debts that they are accumulating.
There are a number of reasons why these policies aren't just failing; they are now dangerously counterproductive.
Firstly, extremely low and now negative interest rates are a disaster for the banking system, as it forces depositors, the most dependable source of increasingly scarce bank capital, out of the banks.
If the depositor is charged to keep their money in a bank, as they are under a negative interest rate regime, they are likely to withdraw it and keep it under the mattress.
Have you wondered why governments are increasingly mentioning the abolition of physical cash in favour of electronic currencies? It would force you to keep your money in a bank as you wouldn't be able to take it out in physical format. Then you can be fleeced at will.
Or you could buy some gold bars… now there's a good idea!
Secondly, low and now negative interest rates are a disaster for the banks themselves, as it erodes their profitability. Lower interest rates reduce the margins that the banks can earn on lending. This weakens the banks' balance sheets and constrains their ability to lend more.
It also prevents the banks paying dividends, which weakens their share prices. It is worth noting at this point that the banking industry is highly inter-related. The banks don't work in isolation, rather they all have multiple business dealings with each other.
They are economic dominoes - one fails others will fall. The banking industry really is only as strong as its weakest link and parts of the European banking chain are in a perilous state.
Thirdly, low or negative interest rates are simply robbing savers of spending power. This is especially evident amongst the silver-haired generation. When savers' income is supressed, savers tend to save even more to replace the lost income, consumer spending falls as a result and we end up with deflation.
Fourthly, the Japanese have consistently employed ZIRP over the past 25 years. And by doing so have condemned their economy and population to economic stagnation. Capitalism only works efficiently if you allow 'creative destruction' to thrive.
(Read the truly great economist Joseph Schumpeter's works on creative destruction - I sincerely wish that our leaders would. Schumpeter, like all "great" economists, never won a Nobel Prize.)
Businesses that can't cover their cost of finance ultimately should go bust, but they are then replaced by more modern, better managed, more creative and more efficient businesses.
Bad businesses should be allowed to fail, they shouldn't be kept alive purely by central banks' ridiculous monetary policies, they crowd out dynamism and creativity! If new businesses are allowed to flourish, they boost employment and productivity, and therefore GDP and wealth creation.
The ECB's policy of supporting "zombie corporations" is now suppressing wealth creation. They might not like it, but if we are to enjoy the undoubted benefits that the capitalist system provides, our leaders also have to allow the corrective consequences when things go wrong.
Fifth, and related to the above point of creative destruction, if incumbent companies can borrow at an artificially low interest rate, they use that to their apparent advantage. They don't generally borrow and invest in risky projects such as research and development, or new plant and machinery, as the ECB hopes.
They expand their businesses by buying up already established enterprises; a much more risk averse way to grow a business and purely because the cost of finance is so cheap.
The impact of this is that the nation's productivity collapses, as only new investment, and not purchases of existing businesses, are included in the nation's productivity calculations.
The Bank of England recently ran a competition amongst economists to come up with the answer as to why UK productivity was falling, despite their generous monetary largesse. It was because of their monetary largesse that productivity was so disappointing!
Unsurprisingly, the powers that be refused to accept this point. It's far too much common sense for them to contemplate (see Deadly Sin No.2, above).
Finally, and related to the productivity point above, the absence of GDP growth, so much desired by politicians and central bankers, is causing them to make other even more desperate decisions.
GDP growth is simply the combination of two factors; the change in the size of the population and the increased productivity of that population. What happens if a region's productivity is falling?
Either, the region has to ramp up productivity, and, as we've seen above, EU monetary policy is directly counterproductive to this, or the population has to expand.
If the indigenous population is shrinking, as it is in many European countries, immigration is the only alternative, which opens up a whole new set of issues.
What ultimately brings the European banks to their knees? Apart from Brexit, how about Italian non-performing loans? Another Japanese crisis? An economic crisis in China? Bad debts in the global energy sector? Simply the next European recession?
The longer the policymakers dither and delay, ignoring the real issues hoping that something turns up, the worse the ultimate situation becomes. The banks are probably too weak to survive another major crisis and tax payers won't stomach another big banking system bailout, although if the bail-in strategy is invoked they won't have any say in the matter! (See Deadly Sin No.7, below).
Whether we like it or not, the banks are one of the cornerstones of our complex societies. Without them, nothing gets made, moved or consumed. In the EU, they are generally too weak to fulfil their traditional role of funding future development and economic growth.
And even if they could, having just survived an existential crisis, banks remain unwilling to finance the most significant drivers of future economic development: entrepreneurial start-ups.
Deadly Sin 7: Kept The Proletariat in The Dark
"So long as they (the Proles) continued to work and breed, their other activities were without importance. Left to themselves work, the care of home and children, petty quarrels with neighbours, TV, football, beer and gambling filled up the horizon of their minds. To keep them in control was not difficult." George Orwell, 1984
It is often observed that people hate the way that new EU legislation is brought in via the back door. In reality, new EU legislation isn't totally hidden from view. You just need to know where to look for it - and then you'll require a lawyer to decipher it for you!
How many European and British investors and savers today realise that cash held in a bank is potentially one of the riskiest assets that they own thanks to recent changes in EU law?
Historically cash is seen as the opposite - a 'safe' investment. My guess is that very few people realise that on 1 January 2016, all deposits held in any EU financial institution became potential "bail-in" assets - i.e. if a financial institution fails, depositors' cash can now be legally seized and be used to bail out the bank (as happened in Cyprus in 2013).
As incidentally can all forms of debt instruments issued by a bank. And if you think that it can't happen, it just has - in Austria.
Bank bondholders should shoulder the burden ahead of the tax payers if their institution fails, as they are actually being paid to take the risk. Blair, Brown and Balls let them off scot-free at the expense of taxpayers after the 2008 banking crisis in the UK - a terrible mistake.
So this legislation correctly lessens the burden on taxpayers in future. But for deposit holders, who currently earn virtually no return, to now be treated effectively as 'bank capital' is a fundamental change in rights.
What is most frustrating about this is that there has been no education on the subject (indeed no £9m leaflet campaigns to inform us!).
How many other pieces of EU legislation have been passed, without our knowledge, which could impact our lives as seriously as seeing your life savings taken?
The outright theft of assets, as this is how many would see it, is now the default option across Europe for bailing out banks. And it is all perfectly legal.
Conclusion
"We cannot solve our problems using the same thinking we used to create them." Albert Einstein
1. A one-size-fits-all currency and interest rate regime is a disaster waiting to happen in such a mature, diverse and inflexible European economy.
2. Successful countries, like successful companies, adapt and adjust as situations dictate. The EU is too dogmatic, views are too entrenched and attitudes too varied. There are 28 separate voices around the same table to be heard - 'decision stalemate' is the only possible outcome.
3. The global economy suffered a near death experience in 2008, Europe's leadership, as is their way, have completely failed to do anything about the causes of it.
4. Economic policy in the EU is not only failing, but it is exasperating the problems that it is meant to solve. Yet the ECB plough on regardless.
5. The banking system is the EU's Achilles heel and it is in dire straits. One can't be absolutely certain of another banking crisis in Europe, but all the signs are there. Draghi may yet pull further white rabbits out of his hat. If he does, they will serve to exasperate the more fiscally conservative nations of Europe. At what point does Germany say enough is enough?
6. The EU is now driving nations apart. For the UK, leaving the EU now will be economically painful; staying in, quite probably more so. What the "in" politicians fear most, is that the UK leaves, and does just fine! How likely is that? History would suggest very!
The most obvious initial casualty of an 'out' vote is sterling, it is likely to fall in value on the foreign exchanges, and possibly quite a long way. Certainly against the dollar and yen although the problems it would bring to Europe as a whole might hurt the euro too.
Ironically, the Bank of England has been trying to engineer a weakening of the currency over the last eight years but to no avail. A significant devaluation would probably generate a boom in the UK economy similar to that experienced after our ERM exit in 1992.
Someone is going to pay for the crisis that has been growing in Europe since 1999. Unlike the US and UK, the Europeans have mostly chosen to ignore their issues, rather hoping that they would just go away.
Financial crises are historically paid for by a stealth confiscation of wealth (i.e. inflation). But that policy has clearly failed this time. So this crisis will ultimately be resolved by another form of confiscation: taxation, hyperinflation or outright theft.
Voters in the UK are about to decide if they want a seat at the table when this banquet of consequences is served to the EU. Is the UK better off seizing the initiative now, and putting the nation in control of its own destiny, rather than hanging around waiting, and then one morning waking up to a terminal crisis and the inevitable breakdown of the "Union"?
Whatever you do this Thursday, please make sure you vote and think carefully before you do. It is unlikely that there will be another such opportunity in your lifetime.
