A comment about wealth...

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The ONS has published the latest figures on the UK's wealth. And this has resulted in a load of, mostly ill-informed, articles either celebrating the rise in numbers of millionaires or bemoaning the alleged increase in wealth inequality.

Here's once such:

On the other hand, the data suggest that wealth disparity across Britain is worsening. The richest 10pc of households now own 44pc of total household wealth – an increase since the current Government came to power in 2010. The top 10pc owns about five times as much as the poorest half of the population, who between them account for just 9pc of overall wealth. 

Bear in mind that we are talking here about wealth not income, which means that this observation really doesn't matter a jot. The question we need answering is how wealth will change over time not how it is distributed right now. Indeed, if we look at the least wealthy half of the population, this will include a huge chunk of the population living in houses with whacking great mortgages, young graduates in their first jobs with student debts to pay off and school leavers with no assets and £150 of credit card debt.

All of these people probably have negative wealth, but for a lot of them, this will change. Folk will pay off their mortgages turning the homes into wealth, student debts will get paid off and that youngster will join a pension scheme. So the issue isn't whether the top 10% own 44% of total household wealth but how many currently living without wealth will become wealthier simply by the process of continuing what they're doing right now.

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A thought about debt...

This morning while trundling along going nowhere on the treadmill my mind wandered onto this thorny problem of "the debt". After all it's the subject of great discussion by our masters across Europe as we come to terms with the impact that years of artificially low interest rates and profligate governments have had on the national balance sheets.

One argument out there is what we might term "debt denial" - or rather the belief that by taxing rich people and rich companies a little more all the problems will go away. The more sophisticated voices out there put on their best frowny clever-person faces and tell us that, of course, government debt is different:

What I have in mind is this idea that you can keep running deficits which, if they grow no faster than GDP, can create a debt that is stable at a desired share of GDP.

Got that folks? Spotted the problem haven't you! It's the Mr Micawber principle:

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." 

The problem is the fundamental rule of debt. At some point you have to pay it back - with interest. Government debt is objectively no different at all from the debt that you and I may have as private persons - we borrow money and, at an agreed point, pay that money back. To pretend otherwise is to believe a nonsense.

Right now we are playing two games to avoid having to face up to repayment - firstly we're inflating the economy with freshly printed moolah. If the value of the pound in your pocket gets smaller through this inflation it means the debt on the government's balance sheets (including all that private debt they nationalised when they "bailed out" the banks) also gets smaller. Less to repay!

Secondly we're urging economic growth - using exactly the same methods (low interest rates, government funny money, infrastructure projects) that created the problem in the first place. The bet is (and it's a bet with your and my money) that the extra money in the economy will stimulate economic growth which will help solve the problem by producing more tax income and thereby reduce the need to borrow.

In the meantime government continues that borrowing (and the Bank of England its printing of money to lend to the government) so as to avoid the discussion about that first principle of debt - you have to pay it back.

As Mr Micawber knew and clever economists, bankers and politicians forget, we should live within our means.

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Mick and Gerard discuss the banking crisis...

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Mick is a gardener – a fictional gardener to be sure but he could be real. Mick cuts grass, trims bushes, digs over and plants up flower beds and, for doing this, gets paid by grateful customers. Being an honest citizen, Mick tots up all he earns in a little book and subtracts from that the amount he spends – on diesel, maintenance and insurance for the pick-up, on gardening gloves, on the fuel for the mowers, on sharpening the tools (and replacing them when they’re broken or worn) and on a host of other bits and bobs he buys to do the job.


When he buys stuff for customers, maybe bedding plants or some compost, Mick adds a little margin for his trouble. Not a lot or else folk would stop asking him to buy things. And this is carefully recorded in his little book.

Once a year Mick gives the book (and a shoebox filled with receipts and so forth) to Gerard, his accountant, so the tax can be done. Gerard checks Mick’s adding up and subtracting, adds in a little advice (‘you do know you can claim for that, don’t you’) to justify the £300 he’s charging Mick (who will, of course, dutifully write that amount into his little book). Once all the form filling is done, Mick has a bill for taxes which he pays since, being sensible and organised, he’s set aside a little each week in anticipation of this tax bill.

With this done, and by way of thanks, Mick takes Gerard down to the pub for a celebratory (if the paying of taxes can ever be a celebration) pint or two. And they get to talking like you do when you’ve had a beer.

Now Mick knows that Gerard – unlike him – is an educated bloke, been to university and accountant school, knows some long words about money. And Mick, who as a good citizen, makes sure he watches the news most days, asks Gerard about the banking crisis. After all, not only is Gerard an educated bloke, but he’s an accountant. And that means money. Gerard must be able to explain what all went wrong.

However, Gerard isn’t at all sure. For him, the bank is just a place through which money flows – mostly away from him and his clients. For sure, Gerard knows about borrowing – paying a price for having something now rather than waiting until we can afford it was the way Gerard’s shopkeeper dad always described it. And he knows that the banking crisis is something to do with borrowing. Or rather, the consequence of borrowing – debt. So he tells Mick this.

Now Mick, too, understands borrowing and debt. He’s got a mortgage – not a big one – and he had to take out a loan to buy the pick-up he uses for work. Mick appreciates how borrowing means that – at a price – he can have something now, like the pick-up or somewhere to live that he would otherwise be unable to afford. But he has another question for Gerard: “where does the borrowing come from,” asks Mick?

Gerard takes a long sup of his pint – he would have sucked on the stem of his pipe but they banned that in pubs – and thinks. “Did you ever watch Jimmy Stewart in ‘It’s a Wonderful Life”, asks Gerard?

“Oh yes,” said Mick, “one of my favourite films – a Christmas classic!”

“Good,” replied Gerard, “then you’ll remember the scene with the run on the bank when all the Savings & Loan customers crowd in to get their money out?”

“Absolutely, and at the end Jimmy Stewart and the others dance round the room with Papa Dollar and Mama Dollar in a wire paper tray!”

“Well during that scene, George Bailey – he’s the Jimmy Stewart character – explains to the crowd that the money isn’t in the bank, it’s in other people’s houses and businesses. It’s been lent out and these folk are paying it back with a little added as the price of having the money before you’re earned it.”

“Oh yes,” smiled Mick, “and George used his wedding cash to pay out on the run and the Savings & Loan stayed open.”

“Correct, correct,” Gerard leant back on his chair beginning to relish the explanation, “the problem is that modern banks – unlike that in the film – have made a really big bet. They’ve bet that everyone won’t arrive at once asking for their deposits back and have lent £10 for every £1 they have on deposit. In effect they’ve magicked 90% of the money we use from out of thin air.”

“But people still pay back,” Mick was fascinated by this exposition, “so the new money isn’t a problem until that stops?”

“Yes, or until people want to take more money out. You need another pint?”

“I think so,” Mick’s mind was spinning a little – he could see how his little business worked. And even how the bank’s role in lending money worked – but how could they lend so much?

Gerard returned from the bar and Mick was straight in, “but how could the bank take such a big risk, make such a massive bet?”

“I think,” said Gerard, “that it’s to do with deposit protection. In the film, the deposits were at risk, people stood to lose their savings if the bank closed. Today, the Government guarantees the deposits in banks – your and my money simply isn’t at risk so the bank can take whatever big bet it wants with the money.”

“So it wasn’t just the banks, it was government too,” spluttered Mick.

“And there’s more,” explained Gerard, “not only did government guarantee the deposits so banks could lend £10 for every £1 they had on deposit, most of that extra money wasn’t lent to folk like you to buy pick-ups and houses but was lent to the government. The same government who set the rules that made the lending possible.”

“Now you’re losing me,” Mick frowned, “the government gets all those taxes from people like me, why does it need to borrow?”

“You know you keep that little book, the one you give to me once a year so I can prepare your accounts and your tax return?”

“Yes.”

“You know how you’re very careful to make sure that what you take in exceeds what you spend?”

“Absolutely, I’d go bust otherwise.”

“Well the government doesn’t think it has to do that..."

"You what?"

"...most years in recent times governments, here in Britain, in the US and in Europe, have spent more than they raised in taxes. I know that’s hard to comprehend given how much we pay in tax – nearly half of all we earn – but governments didn’t think they had to worry because they’d set the rules so those nice banks would provide the cash. Government simply borrowed more and more each year.”

“So the government fixed the banking system so the banks could lend more, then borrowed that money to fill in the hole in their budget? Sounds like a criminal enterprise to me! Why did it go wrong?”

“Just like in the film, people started wanting their money out. The banks all lent money backwards and forwards between them – like a carousel with dollars on. One day some of them decided to stop the carousel, to stop passing the money round.”

“And…?”

“The system seized up. Banks were threatened, for a minute the whole thing looked like it might collapse. But the governments had a plan, instead of getting the banks to create new money by lending £10 for every £1, they would simply make up some new money of their own, give it to the banks and then borrow it back.”

“Sorry, say that again,” Mick was amazed

“Yes,” said Gerard, “they called it ‘quantitative easing’ but all it did was provide cash for the banks so they didn’t have to stop lending. And the government needed that lending, not to help your business like they said, but because otherwise they’d need to make big cuts in public spending or have a huge increase in taxes.”

“So let me get this right, the government allowed banks to lend more money than they had on deposit by protecting those deposits, then when people wanted their money out, the government printed more money and put it into the banks so the same government could go on borrowing? Where do we live, fairy land?”

The mournful sound of the pub bell sounded as the landlord called time.

“Guess I’d better scoot,” said Gerard, “been great talking and thanks for the beer.”

“Cheers," said Mick, “I’m hoping for some afters so I’ll stick around. There’s a couple of people here I’d like a word with and the place needs all the cash it can earn to keep going. One last question.”

“OK.”

“So all this inventing of money by the banks and the government,” muses Mick, “at some point it has to be earned by someone doesn’t it?”

“I suppose so. Probably us. We’ll be paying a load of taxes just to pay the banks back for lending the government all that money the government gave to the banks to keep them lending.”

Gerard smiled wryly, stood up and left. Mick was left wondering. Maybe Gerard was wrong, perhaps the chatty bloke on the telly from the Bank of England was right and we’ve nothing to fret about, there’ll be some hard times but it will turn out OK. But maybe not, maybe if all the money goes on paying back yesterday's debts, if the government keeps on borrowing and even printing more cash, maybe we’ll never pay it back. And that would be wrong Mick thought. We have to pay our debts.

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Ski-ing and the prospect of Greek default

We're told that Greece - despite this weeks latest bailout - is likely to default on its debts.

So, even if the EU were willing to take on all of Greece’s debts, Greece would be paying more than 10pc of GDP in debt interest. Of course, the EU isn’t going to do anything like that. No plausible market interest rate is going to be less than twice that level. So to repay its debts, Greece would have to be willing, for decades, to devote well above 10pc, perhaps closer to 20pc of GDP simply to paying interest. 

You see, Greece is going to default - the bondholders are going to have to get a haircut. It is inevitable...is it not? Or does the postponing of the inevitable - what nature ordains - reduce the likelihood of that inevitability. Let me explain with a ski-ing metaphor.

When I learned to ski the instructor, in an effort to break my habit of leaning back, explained (in a fabulous French accent that I won't reproduce):

"Ski-ing is controlled falling over. Because of gravity you are going down that hill, what we do is agree with nature that we will fall over but put it off until we get to the bottom. And then we don't need to fall over."

The longer we postpone default, put off Greece's moment of tumble, the less damage that fall will do, the haircuts become number three rather than number one and the lenders - sovereign or private - have time to order their affairs so as to minimise the loss from default. And you never know, the inevitable might not be inevitable?

Mind you the Greeks aren't noted for prowess at winter sports!

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"La, la, la. Not listening, not listening." The Bank of England and the inflation threat

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It is a while since I’ve commented on the extent to which our economic lords and masters are ignoring the damage that consistent above-trend inflation is doing. However I was prompted by the observation – from this source – that:

Most inflation is being caused by indirect taxation by the state

Now, while it is true that increases in VAT and in duty on fuel, fags and flying affect prices, this is not the full story. Over the past couple of years a range of excuses have been set out for our relatively high inflation rates – upward fluctuations in oil prices, poor grain harvests, bad weather and so on. Yet throughout all this – and even when rates of VAT were reduced temporarily – there was not let up in the rate of inflation exceeding both trend rate and the Bank of England’s forecast rate.

Back in February 2009, the Bank forecast that the inflation rate today would most probably be between 0% and 1%. They reckoned there was a 1-in-4 chance that prices would actually be falling (i.e. the Dreaded Deflation), and the chance of inflation being over 2% was put at well under 1-in-10.

Crank forward to February 2010 (just 9 months ago), and the Bank had nudged up their forecasts a bit - they now said inflation would most likely be between 0.5% and 1.5% by now. But they still thought there was a good chance of lower inflation, and still a 1-in-5 chance of deflation (despite the fact that the printing presses had been running in overdrive for a year).

And now? Well, today's CPI inflation has actually turned out to be over 3%. And even the Bank's own November forecast acknowledges its back on a rising track.

So there you have it, the Bank of England – along with plenty of others - has hitched its wagon to the idea that we face deflation which requires us to have, what are in effect, negative interest rates. And today the Bank confirmed that rates won’t rise. And this is despite a big hike in commodity prices, continuing concerns about food prices and the VAT increase.

While all this is going on the Treasury is jumping up and down on the high street banks asking why they aren’t lending any money.

U.K. Chancellor of the Exchequer George Osborne said Tuesday that the government is in discussions with banks to ensure they make a material and verifiable increase in lending to businesses, especially smaller firms.

So let’s think about this George. The banks aren’t very keen on retail lending at the minute despite the Government having printed plenty of money (alright I know they haven’t actually printed any more notes then usual but shovelling money into the banks’ balance sheets* amounts to the same hill of beans). Now why do you think this is? Why aren’t the banks lending?

Spotted it! Banks aren’t lending because they’re losing money doing so – and, quite understandably, banks are not especially keen on making more losses. All that money (along with the make-believe money from the Government) is sitting snugly in the banks’ virtual vaults waiting for interest rates to rise. And the banks know rates have to rise because inflation can’t be allowed to continue at current levels for much longer.

If the Bank and the Government want to stimulate lending the best way to do that is to raise interest rates. Right now the banks are making plenty of money doing their everyday transaction management and ‘moving money around’ business and see no real point or incentive to encourage risky small business lending. Plus, of course, raising rates would reduce inflationary pressures.

Unless, of course, the Bank and the Treasury are really rather pleased about above trend inflation – what better way to reduce the deficit and control the debt! At the expense of savers, shareholders and those who didn’t behave like Viv Nicholson during the last decade.

*Technically QE isn’t ‘monetising Government debt’ as the Government isn’t buying its own debt. Third parties (banks and so forth) are buying the government’s debt. And the assets bought by the bank with QE are different and separate from this. Or put simply – we give the banks cash and they (and their clients) buy government stocks. This is of course wholly different from ‘Mugabenomics’.

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F.A.Smith, financial decision-making and the understanding of numbers

The holidaying Geek from Oxfordshire posted a little video explaining the problem with big numbers. It points out that huge numbers mean almost nothing to us – in truth we struggle to make the distinction or have any real grasp of the scales involved. And this becomes more problematic when political communicators (which some folk feel is spelled “L. I. A. R. S.”) mix up the measures used by switching between millions and billions or by referring to percentages in the same sentence as real numbers.

And this confusion is compounded by mixing up concepts – right now most of the public don’t know the difference between “debt” and “deficit”. This isn’t because the public are stupid – in their own lives they’re pretty good at understanding budget deficit (I’ve got more to pay out than I’ve got coming in) and total debt (I owe so much but only have to pay a little of it back right now). It is because our political leaders like us confused. And right now they’d like us to think that halving the deficit – reducing the country’s overspend by half – can be seen as somehow reducing the debt when that simply isn’t true as each year that debt is getting bigger.

Which brings us to F.A. Smith, who was born in a back-to-back in Heanor, Derbyshire, went down the pit at 14, got out of the pit and into college and ended up as a regional director of British Coal. He was also my grandfather and, most relevant to this discussion, Chairman of Penge Urban District Council in the 1950s. And we are concerned with his view on the setting of budgets, which can be stated as follows:

“…the amount of debate about a given budget item is in inverse proportion to its financial value.”

Thus an hour or more might be taken arguing about how much it cost to clean the Chairman’s car or the saving from not providing tea and biscuits at meetings whereas the multi-million pound redevelopment of the town centre will go through more-or-less on the nod. So to link back to the spin referred to above, we spend ages discussing how much NHS hospital chief executives are paid – and getting ever more indignant about it – while ignoring the fact that halving the pay of every senior civil servant will not make any noticeable difference to the scale of either deficit or debt.

When big decisions finally do get made about the deficit (and the debt), those decisions won’t be subject to great campaigns, intense scrutiny or detailed debate. Nor will they feature on the front page of the newspapers for weeks on end. These are big decisions about cuts in spending, about making jobs redundant and about stopping providing services or giving benefits that are given today. And they will be made in comfortable offices away from public attention, managed through party whips and delivered in the form of a dry statement from ministers.

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How labour will confiscate your savings

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The public finances are in a mess. The level of Government borrowing cannot be sustained. The prospect of serial strikes by public sector unions looms. International agencies, the markets and the central banks eye Britain with doubt.

But Gordon cannot increase taxes much more – he cannot increase taxes on the rich beyond the (pointless and negative) level of 50% or revenues will drop. He can’t muck about with VAT for fear of really screwing the “recovery” – assuming there actually is one. And there’s only so much cash that can come from tinkering with allowances, duties and the like.

What Gordon would really like is to get his hands on our savings. On the billions we have squirreled away for our retirement, to pay for long-term care, to provide for our kids education, to do any number of little things we thought were important. But nothing is more important than Gordon pretending he doesn’t have to cut public spending. Nothing. Not your retirement pension, not the lump sum to pay off your mortgage, not the cash sums you’d like to give to your grandchildren. Nope. Gordon needs that money.

And he’s going to get it. Not by confiscation – that wouldn’t be popular. He can’t introduce a stinging wealth tax without plumbing new depths of unpopularity. But he’s going to get it…

…he’s going to use inflation to make your meagre savings get him out of the mess. Let it rip…last month +1% - the most rapid increase on record. This month +0.6% - the second biggest monthly increase. And next month? Expect similar.

The Government’s strategy is to use inflation to reduce the impact of massive debt and to protect Labour’s key public sector voters. That’s why they printed £180bn in so-called “quantitative easing”.

Inflation is 3.5% now. Expect 4.5% - even 6% - over the next few months. And watch the value of your savings shrink! Transferred neatly into the reduction of the real value of government debt. Let it rip!

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Dear Football - be careful what you wish for it, might come to pass

I must be getting old and grey – forgetful even – but isn’t the Conservative Party supposed to be against “government intervention” in private businesses? If so perhaps someone should explain the concept to Hugh Robertson MP, who is (I’m told) the Party’s Sports Spokesman:

“I encourage in the strongest possible terms footballing bodies to come together and work out a proper solution as a matter of urgency. My final point is that if they do so, we will back them, but if they do not, Government intervention remains an option.”

It seems to me that there is a growing pressure for government intervention in the affairs of football clubs. Indeed, Manchester United fans protesting about their clubs owners (presumably for the terrible crime of making money from said ownership while the club wins cups, leagues and championships) are reported to be:

“Calling on their considerable contacts in Westminster and Whitehall, Manchester United supporters are to make the future of their club, and particularly the controversial, debt-driven regime of the Glazers, one of the issues of the forthcoming General Election.”

Reading Henry Winter’s uncritical piece (from which the quote above is taken) it strikes me that the Manchester United Supporters Trust is seeking to use political pressure merely to promote a takeover bid for the club. It really is as simple as that – the Trust wants to own the club and if it can't do it the honorable way through raising money and writing a cheque out for the current owners’ interest, it will enlist political campaigns to force the change through.

Football supporters are making a big mistake by letting government regulation in through the door. As I have said before – be careful what you wish for as it may come to pass. I have absolutely no doubt at all that government regulation would be bad for football, bad for supporters and bad for the clubs.

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Perhaps Britain needs a Tea Party too?

Britain’s economy stutters along in recession or near recession.

Our Government’s debt spirals out of control.

Our leaders argue over whether to spend more money we don’t have on one thing or another.

Our central bank prints billions in a frantic and desperate attempt to stem the collapse of our financial system.

Ordinary folk see more and more of their cash taken in taxes.

What little cash the Government lets us keep is eaten up by inflation

It really is a mess. And there’s precious little evidence of anyone campaigning to get things sorted out. What Britain needs is a party that believes in opposing excessive government spending and taxation. A Tea Party that believes in:


Fiscal Responsibility: Fiscal Responsibility by government honours and respects the freedom of the individual to spend the money that is the fruit of their own labour.

Constitutionally Limited Government: As the government is of the people, by the people and for the people, in all other matters we support the personal liberty of the individual, within the rule of law.

Free Markets: A free market is the economic consequence of personal liberty.


It seems we need to protest – to stand up and say to those lording themselves above us, squandering our cash on their personal prejudice and funding their petty squabbles: “that’s enough, can we have our country back now? Can we have more modest, more accountable government? Can we have our own money to spend? Can we make our own mistakes and live our own lives free from your interference?

I’ve never marched, never protested, seldom sign petitions. But I’ll protest for this. I’ll march. Might there be others?

Welcome to the Nessie Recession?

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Ian Pearson from Futurescape is predicting a "Loch Ness Monster" recession:

"...rather than a double dip, our view is that we are looking at more of a roller-coaster decade in which we will see regular rises and falls in different economies around the world. Our colleague Ian Pearson refers to this as a ‘Loch Ness Monster’ downturn – with uneven peaks and troughs emerging with very little warning. The pain will be felt quite unevenly – those economies that have done most to curb or prevent their banking system from entering into huge leveraged debt transactions and complex high volatility derivatives contracts are likely to fare best – or suffer the least relative pain."

And in support of this a report from Société Générale is cited that warns clients:

"...to prepare for a possible "global economic collapse" over the next two years. They highlighted that total US public and private debt was now 350 per cent of GDP and many years of deleveraging would be inevitable – even without further shocks. The report warns that even without any new public spending, within two years, government debt would rise to 125 per cent of GDP in the US and the Eurozone, 270 per cent in Japan and 105 per cent in the UK."

So batten down the hatches guys - and if you're in business: stick to the knitting!

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Fixing the Finances: we know what to do - get on with it please

The consistently interesting Burning our Money reports on Sir Stuart Rose's observation on the public finances:

"It's very simple, we're skint"

And in the body of an informative post the cure is set out:

1. Public spending must be cut by around 15% (ie £100bn pa)
2. Taxes on enterprise and employment must be slashed - we have to earn our way back to prosperity

Simple. Can we now stop agonising about it and get on with doing what needs to be done?

£175,000,000,000 in debt and the Government produces glossy brochures!

Home from work. Cup of tea. Post (this being a non-strike day it seems). Blood pressure soars.

Why? Because this organisation - a waste of time and money if ever there was one - spent your and my money on producing a 16 page full colour glossy brochure featuring the joyous headline:

"Overcoming climate change together"

...and it's worse. The whole magazine - page after page - features examples of Government squandering our money:

• The Yorkshire & The Humber Regional Grand Committee
• Non-executive Directors of GOYH (of a civil service branch - why?)
• A puff for European Structural Funds (aka our money filtered through Eurocrats and given back)
• How "Faith Communities bring £300 million to the region" (and how much goes out to pay for the international superstructures of the various religions - damn sight more I suspect)
• Loads of inconsequential money for the housing sector (not enough to make any difference but still millions)
• Plus a double page spread featuring the money wasted by government in holding endless meetings to talk about climate change

...there's folk out there trying to keep businesses afloat, worrying about whether they'll have a job next week, stressed about paying the mortgage...and the Government Office wants to talk about how its talking about "climate change" and send out expensive glossy brochures. It makes me want to scream and shout and tear down their posh (and expensive) offices in Leeds.