Here are a few quick thoughts about things that happened last week.
First, the UK election and the failure of the opinion polls. Ahead of the General Election we met with several of the big opinion pollsters, and even ran a Bond Vigilantes x Politics event featuring Anthony Wells of YouGov. Without exception they highlighted how unusual it was that, whilst the Conservatives appeared to be neck and neck with Labour in the polls, it would be unprecedented for them not to win the election given that a) David Cameron was far ahead of Ed Miliband when people were asked who would make a better PM and b) the Tories were far ahead of Labour in the polls when asked who would do a better job on the economy. These two issues have always determined who won the General Election. Taken together with the well-known concept of the “shy Tories” (the theory that many Conservative voters are ashamed to admit to voting for what might be perceived to be self-interest, and so either lie, or do not participate in opinion polls) which has consistently led to the polls underestimating the actual Conservative share of the vote, and it should have been obvious that the hurdle for a Labour win was incredibly high. Yet all the pollsters still forecast that Ed Miliband was most likely to be forming a government. It’s a lesson for us all about ignoring noise and spin, and not expecting a different output from well tested inputs. In particular think about Europe – why would we not expect a huge monetary policy easing by the ECB, together with less fiscal austerity going forward, not to have a positive impact on Eurozone growth? It will (not permanently, and maybe not massively, see Japan) – but many expect deflation and depression forever.
Secondly, the Danish government announced plans to let shops stop accepting cash as payments. Officially this is to ease “administrative and financial burdens” and is part of a programme of reforms aimed at boosting growth – and there is evidence that high cash usage in an economy acts as a drag on GDP growth. The article quotes McKinsey which suggests that for the US, use of cash shaves 0.47% per year off GDP growth. Not only is cash handling expensive, and cash payments can easily slip through the tax collecting net, but there’s another reason why Denmark might be encouraging a full move to electronic money. Danish interest rates are currently negative, with the deposit rate at -0.75%. In a world of physical cash it is possible for many economic participants to avoid a negative interest rate simply by withdrawing their money from the banking system and keeping it in a safety deposit box or under the mattress. In Switzerland (another country with negative rates) 60% of banknotes in circulation are held in the largest CHF 1000 note, perhaps for ease of storage outside of the banking system. Only by doing away with physical money and moving to electronic money can a central bank fully control monetary policy. This paper by Trond Andresen of The Norwegian University of Science and Technology (and which hat-tips Krugman’s work on e-money) additionally suggests that the use of electronic money would allow central banks to control the velocity of money rather than just the supply. A world of negative interest rates will accelerate the movement towards the abolition of paper money by the authorities.
Next, Tesla. I’ve had enough of oil prices sending my bond investments up and down on the whim of dictators and cartels as they increase or decrease production. We may soon be over all that nonsense. Tesla last week announced that they have had $800 million of orders (38,000 orders) for their new home and business storage batteries – they are sold out now until the middle of next year and are trying to increase their manufacturing capacity to cope with demand. Each domestic battery can power a home for 5 hours (not long) and is expensive (up to £2300), but the pace of improvement in both metrics is really encouraging. I think this is huge for the energy security of the world – I’d pinned my hopes on nuclear fusion but it’s gone a bit quiet of late. Instead, Europe has been quietly installing a massive amount of solar capacity. In 2014 there were 7.3 GW of solar additions, of which 2.2 GW was residential rooftop. To put that in context a large nuclear power plant produces 1.6 GW of energy (although that runs 24/7, not just when the sun is out). The ability to store energy in an increasingly cheap and efficient manner will produce big economic benefits. It’s not just Tesla leading the way here. Samsung is also building much bigger batteries (articulated lorry sized), which are now being used by power generation companies. For me, it’s not just the reduced reliance on fossil fuels that appeals; it’s the reduced reliance on a national grid. This means that the chances of mankind surviving a global catastrophe (nuclear war, meteor strike, zombie attacks) greatly increases as micro-generation eliminates reliance on a handful of highly complex power stations and distribution networks. With solar and batteries we won’t have to start science and technology from scratch if the worst happens. Or at least we can watch House of Cards DVDs on telly whilst we await the next wave of zombie assaults.
Finally, if you haven’t seen it yet, we’ve got a YouTube channel. At the moment we’re putting up our economics focussed videos on it – our War Loan film, Mike Riddell’s chat with Richard Koo about balance sheet recessions, and interviews with Diane Coyle (on the concept of GDP) and Ed Conway (on Bretton Woods). Please take a look.