Friday, 19 December 2008

Merry Christmas all

No more posts this year; this blogger is off to the Alps for a couple of weeks!

Wednesday, 17 December 2008

Obama elected, I think

On Monday (15-Dec-2008) this week Barack Hussein Obama was elected President of the United States - at least I think he was, there seems to have been a news blackout!

In theory the "electors" of each state should have met and done the actual voting and then reported the result to the current vice-president (Who he? Dick Cheney!) who will then make an annoucement to Congress on January 6th next year. Inauguration will be on January 20th.

So now he really is President-"Elect"; previously he wasn't.


US Federal Reserve adopts ZIRP

ZIRP is Zero Interest Rate Policy. The Fed has set its interest rate to 0% to 0.25% - they're not committing to a specific number anymore. The Fed can do this because, unlike the Bank of England, the Fed only sets a "target" rate, and then uses "Open Market Operations" to force commercial rates into line.

Of course to force down the rates they are trying to influence they must flood the country with cash; which they will naturally "print". If asked, they would assure you that at some point in the future, when the credit crunch is over, they will collect up all this "printed" money and "burn" it so that there is no long term loss of value to the dollar.

The question is: should we believe them?

Bank of England through the looking glass

November's CPI number was 4.1% - still more than twice the target of 2 percent.

The governor of the Bank of England has written his quarterly letter of apology to the Chancellor of the Exchequer (Link). In it he says he's going to be "looking through" all the current instability rather than actually doing anything about it.

In previous letters he was also "looking through" the situation; in fact he has always had a two-year horizon: "don't worry about now - it will all be fixed in two years!" He'll still be saying that in ten years' time.

UK unemployment tops the million

Today sees the release of figures showing that British unemployment has just passed the million; 1.07m to be precise.

However that comes nowhere near a full statement of the problem. There are actually 10 million people in the UK who are of working age but not in paid employment; of these we have:

1 million claiming jobseeker’s allowance

0.8 million seeking work but not qualifying for JSA (eg too young, or not paid enough NI.)

2.1 million want a job but not actively looking (hence don’t qualify for JSA but get other benefits.)

Here’s a breakdown...

Umempoyed by category


How much does it cost the taxpayer?

Job Seeker’s Allowance.............. £2.2bn
Housing Benefit..................... £1.5 bn
Council Tax Benefit................. £300m
Illness and Disability Benefits..... £18bn
Lone Parent Benefits................ £7.4bn

Those 2.3 million sick people are costing the lion's share of the bill. Most commentators reckon that at least 1m of them aren't really sick at all but have been "parked" by the government in that category to flatter the numbers.

However the total social security budget is nearly £150bn! That of course includes pensions at £120bn and running the infrastructure to distribute benefits.

Monday, 15 December 2008

Swimming naked when the tide goes out

Warren Buffet famously said, "It's not until the tide goes out that you can see who has been swimming naked."

The tide has well and truly gone out for Bernard Madoff who seems to have lost $50bn of his clients' money. It went out when he failed to find the $7bn he needed to meet redemption claims on his fund.

What's amazing is that he has been running investment funds since 1960, and the tide has gone out several times since then and he survived each time. It's not surprising then that his clients trusted him implicitly.

How does he feel today? Almost certainly relieved that the big lie is all over and it's all someone else's problem. He didn't bother denying his guilt to the FBI when they came knocking. He probably has a spring in his step he hasn't had for decades.

This just leaves us with the question: how many other hedge funds are swimming naked and can't make their redemptions?

Wednesday, 10 December 2008

Rioting in Greece

To understand the riots in Greece you need to watch this video clip. The mainstream media are all down-playing a certain aspect of the situation.

US T-bills now have negative interest rates

If you want to lend the US government some money you'll have to pay them for the privilege. Yes, the 3-month Treasury bill rate has dipped to -0.01 percent.

This isn't quite as mad as it seems. If you need a safe haven for a few billion US dollars you can't improve on Uncle Sam; he's got the printing press and can make new dollars if he runs out. Holding cash costs money for security; bank deposits have a return but with banks dropping like flies there's a risk of not getting your money back (above the $100K FDIC compensation limit) so paying the US government to hold your cash is actually sensible if you're totally risk averse.

Meanwhile the ten-year bills are a better deal; the interest rate is a big fat zero.


Edit: I'm told the FDIC insurance limit is now $250,000. The limit will return to $100,000 on the 1st Jan, 2010, except for certain types of account. (More)

Tuesday, 9 December 2008

Northumberland publican arrested for newspaper display


Meet Peter Mailer, owner of the Black Bull Hotel in Warkworth, Northumberland:

Peter Mailer, publican
Peter Mailer: Publican

Police raided the Black Bull on Tuesday, 2nd December, because an off-duty senior police officer from Nottingham had visited and seen a display of newspaper clippings Peter had put up.

They took down the clippings and arrested Peter. He was taken to Alnwick Police Station, along with the cuttings, where he was interviewed under caution. He has now been bailed to return to the station on December 23, when he will learn whether or not the Crown Prosecution Service will charge him.

What the clippings said I don't know. But they were all from nationally published newspapers.

But Peter's real crime of course is that he is a supporter of the British National Party. No doubt the unnamed senior police officer, who did not complain at the time of his visit to Peter's pub, just made a sneaky report later, will have earned many brownie points from his political masters for this underhand harassment.

(More here)

Monday, 8 December 2008

Preparing to print sterling

Further to my They can't print gold post it seems New Labour are gearing up to print sterling in some quantity.

There is a new Banking Act currently before Parliament. It contains the following clause:
223 Weekly return
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect.

(This insidious little clause seems to have been first noticed by Guido Fawkes.)

Section 6 of the Bank Charter Act 1844 requires the Bank of England to publish a weekly account of the amount of money, notes, silver and gold, in circulation.

So the new banking bill, whose ostensible purpose is to provide a statutory regime for dealing with failing banks, in fact clears the way for secret money printing.

All of us who live and work in the UK rely on the value of sterling, and yet it seems possible that the government is planning to debauch the currency. Printing money can lead to hyperinflation; however it will take a while for the extra supply of money to become apparent to the markets, and until then the government will have free cash to spend.

Thursday, 4 December 2008

Gordon spews more of the taxpayers' money

Yesterday, after the Queen's Speech, Gordon Brown announced his latest cunning wheeze to buy votes for the next election. It's quite simple: if you have a mortgage up to £400,000 and your circumstances are reduced, eg your income goes down, you may postpone interest payments on your mortgage at the taxpayers' expense for two years.

The way it works is you pay reduced mortgage interest payments, or no payments at all, and the missing payments get added to your loan. The government guarantees these payments to the lender.

Apparently eight large banks have bought into the scheme so far; although only in principle. They were quite surprised yesterday to learn they were already totally on board. Of course the government-owned Northern Rock doesn't have much choice.

At first sight this scheme isn't so silly. A lot of people are very close to the finance edge; they have big loans and require both his and her incomes to make the payments. One loses his or her job and it's repossession time. And then the state would have to pick up the pieces with benefits and the like, especially if there are children. Even from the taxpayers' point of view it may be financially cheaper to pay (or at least offer guarantees) so the family can stay in their home.

Doubtless people working in property such as estate agents, lawyers, developers and the like are also hoping this scheme will put a floor under house prices and bring the market back to life.

And the whole scheme isn't expected to cost a lot of money: best case £100m, worst case £1bn. That's not much in the context of government planning to borrow £120bn this year.

However looked at in greater depth some problems become apparent. For example only the "first charge holder" can use the scheme because only they can extend the term of the mortgage, but most repossessions are due to second charge holders from other loans secured on the property calling in their marker.

In any event the big tsunami of repossessions coming soon isn't due to owner-occupiers not covering their mortgages, it's the buy-to-let market collapse where amateur landlords are out of their depth, unable to access any of the cheap loans now available because they don't have sufficient equity (or any equity) in the investment property. As the recession bites these landlords are also finding it increasingly difficult to find anyone to rent their properties. There are between 500,000 and a 1,000,000 empty homes in the United Kingdom so they are squeezed between a rock and a hard place - property value is falling, so equity is falling, hence mortgage costs are rising, meanwhile rent is falling because tenants are scarce.

The scheme is also open to abuse. Anyone who wants to live "rent" free can access the scheme before eventually allowing their house to be repossessed after a couple of years. This could be very attractive to people with mortgages far greater than the value of their homes, and remember 125% mortgages were not unheard of a couple of years ago. Factor in the near 20% reduction in values over the last year and run that forward a couple of years and people could easily be owing twice or even three times what their house is worth. Two years rent free followed by a wiping of the debt might seem like an easy option.

Another problem with the scheme is the banks have to find the money to fund it. Contrast this with a repossession and forced sales where the bank suddenly has a lot of money coming in. New loans are already thin on the ground. If this scheme is used on any scale the banks are going to be very short of cash. Let's look at some numbers.

We expect 75,000 repossessions next year (CML estimate) and let's assume an average mortgage of £100,000 costing 6,000 a year in interest payments. (Forget about capital repayments - that's so last century!) That's £450 million the banks haven't got. Assume each repossessee uses both years' of grace, that's £900m not being lent out in new mortgages. Hence money will get more expensive and push even more people into the scheme.

But the real problem with the scheme is the message it sends to everyone who isn't over-mortgaged. It says: you who have been prudent, cautious and sensible are now going to pay for those who were profligate. These prudent people are now struggling to get a 2% return on their savings while the feckless are getting a lot of free money thrown at them. It seems likely their money will be going abroad where it is no longer exposed to the falling sterling and a decent return can be had. The prudent people may be going with their money. And who can blame them? Why should they be expected to pay for the imprudent who borrowed without any thought of tomorrow?

This scheme also sends a bad message to the wider world; the world of people Gordon Brown needs to buy UK debt to fund his massive spending splurge. These people will see ever reducing interest rates as an indicator the government has no plans to defend the value of sterling and ever more debt-funded bail-out schemes as an indicator that the UK is bad place to be putting your investments. It's by no means clear that Gordon will be able to get the world to pay for his grandiose plans.

And it's not really likely that house prices will be stabilised by this measure. House prices are a function of the availability of credit and of jobs. Both of these are shrinking and this scheme won't stop that. And anyway, house prices need to fall; houses are currently far too expensive.

But viewed in purely political terms, this scheme makes sense. Plenty of people with large mortgages are afraid they may lose their jobs. The reassurance the scheme provides will inculcate a feel-good factor (alright, maybe just a feel-less-bad factor) by the protection it provides. Even from people not actually using the scheme that should be good for some votes.

Friday, 28 November 2008

London police take taxpayers' money

First, let's look at the caste of characters in this sorry story...

This is Assistant Commissioner Tarique Ghaffur of the London Metropolitan Police.
Assistant Commissioner Tarique Ghaffur: not a happy bunny

And here we have his boss, Commissioner Sir Ian Blair, top cop for all of London...

Commissioner Sir Ian Blair: racist?

Back in June, A. C. Ghaffur accused his own force of racism against him and his own boss of various iniquities including not renewing his contract and sidelining him. He launched a court case for compensation. (Link)

By November Ghaffur had withdrawn the worst of his allegations, the court case is off, but he has received an undisclosed financial "compensation" thought to be around £800,000. (Link)

Ghaffur is to leave the police and is expected to seek a security-related position with the London 2012 Olympics Delivery Authority. (Ironically Sir Ian Blair has in the mean time also upset his own boss, the Mayor of London, Bonking Boris, and been canned. He leaves today with a pay-off circa £200,000. Sir Ian is expected to write a book.)

So happy ending for everyone? Pay-offs all round. Well, one loser does come to mind: the taxpayer!

If Sir Ian really did the bad things Ghaffur originally accused him of why was he not disciplined and why is the taxpayer paying the compensation instead of him? And if he did not (the allegations were withdrawn remember) why is Ghaffur getting a penny of our money? This feels like daylight robbery by the very people who are supposed to protect us from such things!

Thursday, 27 November 2008

They can't print gold

"Printing money" is a figure of speech for when a government just gives up on actually affording its spending, or even being able to sell bonds to finance holes in its budget, and decides that since it can create its currency out of nothing - it will.

This doesn't have to mean running the printing presses - although in Zimbabwe it does. Modern central banks can drop billions of created money into favoured accounts with a few keystrokes on a 'puter.

Of course sensible governments don't do this because they know that for every dollar (etc) they "print" the existing dollars will lose an equivalent amount of value; ie, there's nothing to be gained by printing. Or is there? Well, firstly if a government prints it is transferring wealth from the people who hold its currency, usually its citizens, although in the case of the USA also a lot of foreigners, to itself. It's a rather covert form of taxation which exhibits itself in the economy as inflation, or done to excess, hyper-inflation. Secondly, although printing is supposed to be "zero-sum" in practise it takes people a long time to notice during which period the government has "free" money without the inevitable reckoning in the form of devaluation (or inflation of prices.)

Since bearing down on inflation is usually a major on-going struggle, paper money really doesn't like holding its value, governments are a bit cautious about printing. But we live in deflationary times. Now, they could print and get away with it. So of course they will. They won't call it printing; they'll use some econo-jargon such as quantitative easing.

But it's printing really. This has just started in the US. There were major ructions a few weeks back when Hank Paulson wanted to spend $700bn on toxic waste (mortgage-backed securities actually) but earlier this week he spent $800bn with scarcely a whimper. This is because the £700bn was borrowed and hence painful to the taxpayers, and the $800bn is to be printed so pain-free, for now.

What should a person do if they don't fancy being fleeced in this backhand manner? Well, gold is the usual safe haven for savings when you don't trust your government, but gold doesn't earn you any interest.

There is another option: buy "underground" gold, ie, buy gold before it has been mined by buying into mining stocks. Unlike owning physical gold there's an element of risk here, but the rewards are potentially higher.

You'll want gold stock from companies which haven't already committed to selling their gold at a given price, for which you'll need to see the HUI index.

Wednesday, 26 November 2008

Nightmare on the High Street

Today has seen the recession take two major scalps. Woolworths, the High Street retailer with 815 stores (which unfortunately it only leases and doesn't own) has filed for administration, effectively declaring itself bankrupt. Furniture retailer MFI is expected to do the same within the next few minutes. Twenty-six stores will close; the company may continue trading in some reduced form.

Neither of these events was unexpected. Woolworths has been seeking a buyer prepared to part with £1 for the whole operation, and it looks like no-one came forward. Perhaps the lack of capital and the £300m debt put people off. How ironic though that you could have bought the company for the price of a small bag of their famous pic 'n' mix. (For non-UK readers, pic 'n' mix is a self-select candy facility sometimes also called Candy King.)

MFI was less expected but with the complete collapse of the housing market they were never going to be far behind. Most new furniture and carpets are sold so recently bought houses can be refurbished.

Anyway, the "take home" from all this is that the recession has now left the finance and property sectors and has gone mainstream. More big names will undoubtedly follow.

Sources: here and here

Tuesday, 25 November 2008

Dr Tobin has been released

Jailed in London under a German warrant for a "crime" committed in Australia, Dr Tobin has been the cause celebre the mainstream media didn't touch. His action, questioning the holocaust, is no crime in the UK, nor in Australia, but the Germans still ordered his arrest when his plane touched down in London.

After 50 days of unjust incarceration he has been released. Read about it here.

Monday, 24 November 2008

Alistair Darling's pre-budget report

Alistair Darling, the Chancellor of the Exchequer, has just come before Parliament and announced a package of emergency measures to try to fix the UK's broken economy. Of course, he didn't actually use the word "emergency", what he actually did was open his mouth and spray borrowed money all over the place.

The big give-away includes:-

VAT reduced from 17.5% to 15% effective Monday 1st December, and lasting until the end of next year. (Cost to government: £12.5bn)

Small and medium-sized enterprises to have exemption on property tax up to a ratable value of £15,000. (This reverses to some extent his decision in April, which I blogged about back then.)

The aforementioned SMEs will henceforth be allowed more time to pay their tax bills (as long as they want basically) and will be able to offset loses going back three years, instead of the current one. Their rate of corporation tax will also not be going up as planned. They will be able to borrow up to £1 million directly from the government, and AD has arranged for the European Investment Bank to provide an additional £4bn in loans via the usual retail banks.

AD is also chucking £3bn at the economy in a sort of "New Deal". This cash will be spent on road improvements, social housing, schools, and energy efficiency measures, eg grants to insulate your home.

"Families" will also be receiving some direct largess. Child benefit is rising by a couple of pounds per child per week. Child tax credits are going up, pensioner credit is going up and the state pension is rising as well (up to £198pw for a couple.) And the icing on the cake: every pensioner is getting a £60 one-off Christmas bonus; £120 for couples.

AD is also trying to stop people in debt losing their homes. Henceforth the government will pay unemployed people's mortgages up to £200,000, previously £100,000 and at an interest rate of up to 6%. AD has persuaded lenders to hold off any repo action for mortgage-holders in arrears until 3 months have passed; and THE BIG ONE, the government is also looking at underwriting new CDOs, you know, those toxic bonds which started the whole credit crunch in the first place; no concrete scheme in place for this yet - let's hope it never happens.

All this is to be financed by (i) borrowing now, and (ii) much higher taxes later.

Have a look at the planned borrowing...

Year Borrow
---- ------
2008 £78 bn
2009 £118 bn
2010 £105 bn
2011 £87 bn
2012 £54 bn

That's heavy stuff.

In April this year he claimed he would need to borrow only £43bn. He seems to have got through £35bn in the last couple of months bailing out banks and the like.

In his response the Shadow Chancellor, George Osborne, challenged him to confirm that he was planning to increase the national debt to one trillion pounds! From AD, answer came there none.

In fact GO's stock is rising. He rightly accused the chancellor of planning to borrow his way out of debt. He neatly pointed out that Labour backbenchers were applauding now the cancellation of measures they applauded when introduced earlier in the year.

From 2011 onwards, ie after the next general election, AD plans some severe tax increases. There will be 0.5% on all National Insurance contributions, employer and employee; a new top rate of tax of 45% for people earning £150,000pa and cuts in allowances for people on £100,000pa. AD foreshadowed increases in petrol, alcohol and tobacco duties.

I think the chancellor's whole attitude can be summarised as: spend, spend, spend like there's no tomorrow, because actually there isn't. Not for him and his New Labour gang at any rate. In their one short decade of power they have trashed the economy so badly it will take a hundred years to fix. It's not conceivable that they be elected for a fourth term in power, and surely they must be praying they are kicked out so they don't have to suffer the consequences of their own incompetence.

Thursday, 20 November 2008

BNP membership list leaked

A slightly out-of-date BNP membership list has been leaked into the public domain; probably by a disaffected former member of staff - despite there being a court injunction to prevent this.

Of course no court order can recall a document once it has reached the internet. By now thousands of people will have their own copy. This blogger even has his own copy. (Don't ask, I won't supply a copy.)

Rather than bemoan the iniquity of the situation this blogger has decided to use his considerable IT skills to extract some trivia from the list. Just who are these BNP members anyway?

Well, 10297 of them are Misters, 1422 are Mrs, 411 are Miss and 556 are Ms. There are 41 Doctors, not necessarily medical, 5 Reverends, two Sirs, one Lord and one Lady (the lord and lady don't appear to be related.)

There are 3019 members flagged as activists; there is one serving police officer, who is also an activist (rather brave that!) and another 20 retired or former police officers.

Although most of the addresses are in the UK, there are 46 from the USA, 18 from Canada, 7 from France, 6 from Germany and a smattering from other countries in Europe and further afield, including a couple from Saudi Arabia.

As for the members' names: they are mainly ordinary sounding native British, including 173 Smiths, 107 Jones, and absolutely no Mohammeds or Husseins at all.

Anyway, that's enough fun with grep.

My advice to the BNP High Command for the future is - use heavy encryption and make sure access to the member database is only possible via an approved program which cannot be used to print out or copy the entire list. That way even staff who are authorised to access the database can't take a personal copy.

Tuesday, 18 November 2008

Inflation falls, no thanks to the BoE

The inflation numbers for October are out:-

CPI: 4.5%, down from 5.2% last month
RPI: 4.2%, down from 5.0% last month

Those are "year to date" figures. The month-on-month RPI was actually negative in October at -0.8%. The biggest faller was the cost of motoring at -0.39%; this is due to the price of oil falling quite dramatically.

Of course these numbers are still over twice the official targets, which doesn't seem to concern the Bank of England any.

(Source: Gov stats)
(Source: BBC)

How it ends

I recommend...

It's a dispassionate analysis of Great Britain's economic and political situation. Perhaps excessively gloomy, in that it fails to consider the possibility of a Nationalist government coming to the UK's rescue, but essentially it's a sober and accurate account of plight we are in.

Anyone know who wrote it?

Friday, 14 November 2008

The debt we're in

The Daily Mail have produced this alarming graphic showing the real debt the UK has:

The big number at the bottom is: £155,000 per household.


Thursday, 13 November 2008

Is Obama really American?

Seriously, there are now several lawsuits outstanding against "President-elect" Obama demanding that he produce his original birth certificate. So far all he has done is put up on his website a recently printed document with the certificate number blacked out. Ironically the certificate is stamped with "Any alterations invalidate this document" so the document is by definition invalid.

There seems to be a body of opinion that BHO was born in Kenya. His paternal grandmother claims she was present at his birth in her Kenyan village. Obama seems strangely reluctant to produce his original birth certificate.

The issue is important of course because the US president is required to be a "natural born American". This is generally taken to mean someone who was born American rather than became American. Obama's father was a Kenyan and never became an American; his mother was an American but her son, according to the law as it then was, would not automatically have been American because she had not lived for more than 5 years in the US as an adult at the time of the birth (she was only 18.)

Btw, I write "President-elect" because although everyone seems to be calling him Present-elect, he isn't, not yet. So far all the American people have done is choose how their state representatives should vote at the Electoral College meeting which will actually choose the president. That will happen on December 15th. Only then will he have been "elected".


TARP is dead. That's the Troubled Asset Relief Program, Henry "Hank" Paulson, the US Treasury Secretary's, plan to spend $700bn on buying up dodgy bonds from American banks. All the congressmen and senators were told the sky would fall unless they voted for TARP and McCain and Obama had to take time out of their busy electioneering schedules to go to the Hill and save the world.

But Hank has changed his mind. No more TARP he says, he's thought of something better to spend the money on (yes, he still wants the $700bn, but not to spend it on what he was going to spend it on.) Nope, now he wants to spend it in some way that will let 'mericans take out consumer loans, to buys cars and stuff. You see if Americans don't buy cars then General Motors will go bust and that will put one million workers out of work, one way or another. Anyway Hank has already spent almost half the cash on injecting money into other ventures such as AIG.

Actually this isn't such a bad idea. Why bail out the banks? Surely it is better to bail out the American people directly, not give money to fat cat financiers?

Thursday, 6 November 2008

Bank of England cuts base rate by an unexpected 1.5%

At lunchtime today the Bank of England announced a change in the base rate of -1.5 percent, taking the rate to 3.0 percent; the markets and media had been expecting a cut between 0.5 and 1.0 percent. The immediate effect on the markets was to boost the FTSE 100, this fell back within a couple of hours, and, strangely, a boost of sterling versus the US dollar, which so far has been sustained.

We must ask: why did the BoE cut by such a massive amount, and what will the effect be on the economy? (Not since 1955 have we had interest rates so low!)

First: why make such a large cut? The BoE is supposed to be targeting inflation as measured by CPI. At 5.2 percent CPI is currently more than twice its 2.0 percent target. The BoE has largely been ignoring this for a while now. However, thanks to the dire economic situation CPI is likely to fall of its own accord. About a year ago there were big increases in the cost of oil and food. These upticks will drop out of the index shortly. There have also been recent big falls in the price of oil (from $140 to $60 per barrel) and these falls will dominate the index for next year or so. The BoE can therefore claim to have the lid on inflation by this arithmetic trickery. Hence it is open to them to cut the base rate. Some insiders are claiming they may actually undershoot the 2.0 percent target in the coming months. It’s also worth remembering that although we won’t see a new CPI number for another 12 days the BoE already has sight of some early data.

The reduction in the base rate gives the government several short-term benefits:-

Christmas boost. The holiday shopping season has widely been predicted to be a complete wash-out. Giving consumers more money to spent may buy some limited and temporary relief for the retail sector.

Bank capitalisation. Banks are likely to respond to the cut by applying it in full to savers but only in part to borrowers – except people with base-rate tracker mortgages who are big winners in today’s announcement. By increasing their slice of the pie banks will rebuild their balance sheets and need less financial help from government. (Various government ministers have been on the media claiming banks should pass on the cut in full to borrowers, but it’s not really in the government’s interest for this to happen.)

Relief to mortgage-holders. The government would love to kick start the housing market. They may be hoping this cut will do it. (It won’t.)

Feel-good factor. Let’s not forget that there is a by-election today. Labour is defending a 10,664 majority in Glenrothes, Fife. This cut may swing a few votes.

Cost of public debt. At the start of the year the UK’s national debt was approx £620bn (not including all the fudged figures in public-private partnerships and the like.) Since then the government has committed to a vast amount of additional spending financed by borrowing. Add the cost of Northern Rock’s nationalisation, the Bradford and Bingley rescue, the Icesave compensation and the stakes the government intends to take in many of the major banks and you can add anywhere between £100bn to £200bn to the public debt. The government budgeted £30bn this year to pay the interest on their debt (which incidentally they’ve increased from £400bn over their term in office.) Clearly £30bn isn’t going to be enough. Cutting interest rates will help them out of this hole.

And now we turn to what the economic effect of the cut will be.

Most mortgage-holders will see some benefit. Those with trackers will see the full amount; and LloydsTSB has announced it will pass on the full amount to its standard variable rate customers. People on fixed-rate deals, usually locked in for 2 to 5 years, will see no benefit. Unfortunately this is almost half of all mortgages. So some High Street benefit can be expected from the cut.

By rights sterling should have fallen sharply on the announcement, but it didn’t. The markets probably priced in most of the cut a few weeks ago. Sterling has dropped considerably, especially against the US dollar, recently, down from $2.10 a year ago, to $1.56 this week. The bit they didn’t price in, the 0.5 percent surprise, may be offset against the gain of more consumer spending. The BoE and government must be praying that sterling holds up. If it doesn’t CPI won’t fall as expected and today’s gamble will have failed.

The big losers from today’s cut are savers. In theory savers are the motor of the economy; savings are used to fuel business and industry. Under New Labour the habit of saving has been lost and the economy has been fuelled by borrowings from overseas instead. So the government has fairly complacently ignored savers. With CPI at 5.2 percent (last published number) and the base rate now 3.0 percent all savings are going to lose 1 or 2 percent of their real value per year, which is very annoying for savers but there’s not much they can do about it.

Ultimately an economy running nicely needs savers; they can’t be ignored. But this government is only really concerned about the short term. Their horizon is never more than 3 or 4 months out. They are damaging the country by continuing to fuel the economy with borrowings but forever pushing back the day of reckoning by every more desperate measures. The public debt taken on this year alone will be decades in the repaying.

Wednesday, 5 November 2008

Barack Hussein Obama

I suppose I should be having some thoughts on BHO, since he has just been elected 44th President of the United States, Commander-in-Chief of the world's largest standing military force, custodian of the Big Red Button and tenant of the White House/Area 1/1600 Pennsylvania Ave, whatever you like to call the place.

The trouble is: what thoughts to have? He's an enigma wrapped in a mystery enveloped in a fog of uncertainty.

Where did he come from? How did he leap onto the world stage so suddenly like that? He's all shiny and new, unsullied by past political battles, untarnished by rumours of sexual misbehaviour, free of any suggestion of dodgy land deals. Sure he has smoked a little grass and snorted some coke but shrugged it off as youthful high jinks; decades-old news. Even his policies are bland and unobjectionable. He wants "change". You'd have to be a terrible curmudgeon to turn your nose up at "change". The world has got problems; we need change. The nature of the change is of course unspecified.

It's early days, but already I suspect we will know him mainly by the people he choses for his Administration; or rather the people who chose themselves and then pushed him forward as the front man.

Mind you, he isn't president yet. He's got to keep it together for another ten weeks until his inauguration on January 20th; not get shot, not let anyone find out he was actually born in Kenya (if true) and if there are any skeletons in his closet keep them very quiet and well hidden.

Monday, 3 November 2008

Where has all the money gone?

We used to be rolling in cash, houses were booming, credit was easy and money flowed like water. Then in September 2007, suddenly, it all stopped and since then we've been in a "credit crunch" and nobody has any cash.

However, enquiring minds will be saying to themselves: money is never really created or destroyed, it's only ever transferred from one owner to another, so where is all that cash today? Someone must have it. When the music stopped which lucky person ended up holding the cash?

This post aims to answer the question: who has the money? (And by implication, can we get it off them?)

The sad answer is, in the main, no-one has the money. It really has ceased to exist, basically because it never actually existed in the first place. We need to look at where it came from in the first place.

Let's start with something easy...

The Yen Carry Trade.
During the last couple of decades much profit was to be made in the yen carry trade, which worked as follows. The Japanese economy was in the doldrums from 1990 onwards after their massive property crash of the late 80s. (At one point the grounds of the Imperial Palace in Tokyo was calculated to have a real estate value equal to the entire state of California! So when I say "massive" property crash I mean it!)

To address this recession the Japanese government did the classic thing and reduced interest rates, arriving eventually so close to 0% that you'd struggle to get any return at all on your savings. The Japanese housewife (custodian of all money in Japan) was pre-disposed to intense saving due to the shame of being destitute in the omnipresent recession, but despairing of any return in Japan sent her money to the West where interest rates were higher. These yen were converted to US dollars and European currencies and lent to Western consumers for a low interest rate, but still considerably more than mama-san could get in Japan.

The banks operating this trade won in two distinct ways. First they could borrow at 0.5% and lend at 3.5% or more. Second, because the act of selling yen and buying pounds or dollars was pushing the value of yen down, when it came to repay, the capital sum had reduced; provided the borrowing kept increasing. Only when there started to be net repayment did the Western currencies fall and the yen increase.

At peak at much as two trillion US dollars worth of yen were transported to the West. Mama-san got her (relatively) high interest and greedy Westerners got to spend money they didn't own.

Unfortunately mama-san now wants her savings back. She doesn't trust the Western economies not to lose it. So the answer to the question of where the money is going is, in part, back to Japan.

Fractional Reserve Banking
Imagine this scenario. You want to buy a car but you don't have the cash. So you pitch up at HSBC and say, can I borrow £10,000? They say yes and a few keystrokes later your current account has ten thousand pounds in it. Where did this money come from? Answer, nowhere; it cost HSBC absolutely nothing to drop £10K into your account (which, of course, won't stop them charging you interest on it.)

You high-tail it along to your local dealer, pick out a car you like, haggle the price down to £10,000 and ask, how should I pay? The dealer invites you to transfer the cash to his account using your debit card. You notice he also banks at HSBC. So once you've driven away in your new car you're paying interest at, say, 8% on the £10,000 and the dealer is earning perhaps 1% on the £10,000. HSBC is meanwhile pocketing the difference on money that, so far, it created out of nothing!

But what are the chances that both you and the car dealer use the same bank? Well, quite good if the bank is as big as HSBC. Size is everything for banks. The bigger they are the more likely the money they lend will never actually leave the bank, just bounce around from account to account. Only the work you have to do to pay the interest is real.

Eventually the dealer will spend the money to pay its staff, to buy new stock, to rent its premises and the like. Some of your £10,000 must leave HSBC. Maybe a lump of it ends up at Barclays. What happens then? Well, it's quite simple, HSBC borrows it back from Barclays on the infamous inter-bank market at the LIBOR rate. So the money still does not really exist. The LIBOR rate is typically a few percent below the retail loan rate, the interest rate you are paying, so HSBC is still in profit after paying Barclays to borrow the money back. And of course, for every pound that HSBC has to borrow back off Barclays there will be another pound Barclays has to borrow off HSBC so in the main all these payments cancel out.

In September 2007 the system collapsed. Barclays refused to lend the £10,000 back! Or at least they would have done, but the LIBOR rate was soaring and Barclays wanted more interest than HSBC was charging on the original loan so borrowing the money back would have been pointless.

So the lending stopped. And as the existing loans were paid off no new loans were created and the money effectively ceased to exist.

Asset Deflation
Since about 1993 increasingly exotic financial instruments have been created to structure credit; a veritable alphabet soup: RMBS (Residential Mortgage Backed Securities) CMBS (Commercial Mortgage Backed Securities), CDO (Collateralized Debt Obligation), SIV (Structured Investment Vehicle). These are all tradable; they have a notional value. And as the value increased over the years the banks and other institutions such as pension funds which owned them have been booking the gains, ie, they have been producing annual accounts which showed these gains as real profit.

Unfortunately as it has become rather obvious that the debts on which these instruments are based will not be repaid in full so the value of the bonds has been falling.

And since the gains (although completely notional) were booked as real profit so the falls must be booked as real loss. Money, which in a sense never existed, drains from the system.

The future...
So what does the future hold for the credit crunch? Which dogs haven't yet barked? Well, there's the big one - CDS (Credit Default Swaps). A CDS is used to insure against the default on a loan. A dubious loan which needs to be sold on can be shored up using a CDS. This converts it from unsellable to sellable; or from only sellable at a hefty discount to a speculative investor, to sellable to a pension find which will only touch triple-A class bonds.

The market for CDSs is enormous, multi-trillion dollars, and there is massive cross-contamination between the insured and the insurer. This is very reminiscent of the Lloyds collapse of the 1980s where syndicates where unknowingly buying back their own risk.

If the CDS market fails it will be spectacular.

Friday, 31 October 2008

US Presidential Election - 2008

Next week, on Tuesday 4th Nov, Americans will go to the polls and work their voting machines to select the 44th President of the United States. The candidates are:-

John McCain, Republican
Barack Obama, Democrat
Bob Barr, Libertarian
Chuck Baldwin, Constitution Party
Cynthia McKinney, Green Party
Ralph Nader, Independent

The current front runner is Barack Hussein Obama (not that you will find the "Hussein" part of his name on any of his publications or his website.) However, whoever is elected, the loser will be America. The ideal candidate didn't even make it past the primaries. He is Ron Paul:-

Ron Paul: The Man Who Should Have Been President

Ron Paul is a Republican United States Congressman from Lake Jackson, Texas, a physician, a bestselling author, and he came 4th in the Republican presidential primaries.

Learn more about Ron Paul here.

Monday, 20 October 2008

UK Public debt

Public debt is very topical so let's have a look at the numbers. Here is the total value of UK public debt over Gordon Brown's tenure:

As you can see debt growth was quite restrained in the first few years of New Labour's governance; back then they were fearful of being considered profligate and were sticking to the previous Tory government's spending plans.

Then in 2001 there was a sudden dip in the debt. How come? Well, not through prudent management of the economy; actually the government sold off bits of the radio spectrum for the next generation of mobile phone and garnered £30bn in one fell swoop. Gordon Brown also transferred some spending to PFI, Private Finance Initiative, schemes and so took it off the books.

From 2002 onwards spending ballooned. Gordon Brown really let rip! We ended 2007 with a public debt over 600bn.

New Labour politicians are keen on saying they've been paying off debt. Of course they haven't, they just mean relative to GDP and even GDP has only grown on the back of private sector debt and inflation; both of which they have singularly failed to control.

Now of course, who knows that the real number is? One hundred billion pounds for Northern Rock; more for Bradford & Bingley, more to bail out other banks. We are going to see a sharp uptick. I hope future generations of Britons are braced for how deep they will have to dig.


Friday, 17 October 2008

Yap islanders

Down in the South Pacific lies a little archipelago called the Yap Islands. They are inhabited by a Polynesian tribe, the Yapese, and are notable for their money. They have a rock solid currency. In fact, they use stone discs up to 12 feet across as "coins". (This is a bit historical - these days they also use the more convenient US dollar.)

For centuries the Yapese have prized stone discs because of the difficulty in obtaining them. They have to travel hundreds of miles in canoes, carve the discs out of calcite deposits and transport them back to the Yap Islands, also by canoe.

When a Yapese "spends" his stone disc the disc itself doesn't necessarily have to move. They leave them littered over the islands and everyone knows who owns which disc. In fact sometimes the discs fall into the sea during transport and are lost forever from view, but they can still be spent - everyone knows it's there under the waves which is good enough.

In the North Atlantic there's another group of islands where the natives do much the same, only with houses. That's us.

Thursday, 16 October 2008

Judge deports Somalian

Judge James Simpson, he says what the rest of us just think...

Abdi Mohamed: Somalian criminal

A 34-year-old man who has lived in London for three decades is to be deported to Somalia after a judge said his criminal record qualified him to survive in the war-torn country.

Since arriving in Britain, [Abdi Mohamed] has tried to build a life in north London but took up petty offending to support his drug and alcohol addictions. Mr Mohamed came into contact with law enforcement when he was 12 and later began committing burglaries to buy cannabis and cocaine. His most recent conviction was for an assault on a prison officer, after which the Home Office applied to have him deported to Somalia.

Dismissing his appeal, the immigration tribunal judge said: "His experience [criminal activity] will make him more street wise than someone of a similar age who has led a crime-free and more conventional life. These experiences will place him at a distinct advantage in dealing with the circumstances in Somalia and should make it much easier for him to avoid pitfalls."


Surely the least we can expect from someone given asylum in our country is that they obey the law? That judge is a hero.

Wednesday, 15 October 2008

Unemployment is starting to pick up

Figures out today show we have 1,790,000 (ish) unemployed workers in the UK, that's up by 164,000 from three months ago. It's 5.7% of the workforce. Check out this BBC graph showing unemployment over the last couple of decades:

Click on image for larger view

It's not dramatic at the moment but it is inevitable. As I've spelt out in previous posts the UK economy has long been fuelled by MEW - mortgage equity withdrawal - people seeing their house go up in price and spending the "gains". At peak, in 2003, £93bn was spent into the economy like this.

Obviously MEW is now deader than a dodo crossed with a great auk so the economy has run out of fuel. We'll have to go back to making things for a living; the adjustment will take a while and be painful.

Tuesday, 14 October 2008

Inflation vs deflation - you decide.

Yesterday, on the 13th October 2008, Gordon Brown nationalised the banking sector. Well, he took large stakes in certain banks such as LloydsTSB, RBS, and HBOS; other banks such as HSBC told him to stick his money where there is limited sunshine - they don't need bailing out.

Today we have new inflation data:-

CPI: 5.2%, up from 4.7% last month
RPI: 5.0%, up from 4.8%

The base rate you will recall is 4.50%.

Although inflation continues to soar up into the sky at the moment there is an irony here; we now have a good chance of deflationary collapse. Those numbers may come down, even go negative, without interest rates being raised. During the 1990s Japan had deflation with base rates at 0.25%. It is possible. However it is not a sign of masterly management of the economy by the government and the Bank of England. No, it's a sign of imminent recession, maybe even depression. Prices are falling because demand is falling because economic activity is stopping.

Economic activity is stalling because for the last ten years it has been driven by debt, and new debt has not been available for a year now. The government's nationalisation of the banks, with firm instructions to get lending again, is their latest, most desperate attempt to stoke up more debt-based spending. For a while it may work, but it should be obvious you cannot borrow forever. Eventually you must repay and the longer you leave it the more it will hurt.

The government now has two paths ahead of it: (1) keep injecting borrowed money into the economy, eventually running out of borrowings and printing money for people to spend, in which case we will have hyperinflation, see posts passim relating to Zimbabwe, or (2) start the painful process of repaying debt and constructing an economy based on wealth-creation, by which I mean, manufacturing, agriculture and genuine added-value such as pharmaceuticals or computer software design.

Which path will they take, I wonder?

Thursday, 9 October 2008

Government spends a lot of money and reduces interest rates

Well golly gosh! Yesterday morning Alistair Darling and Gordon Brown cooked up a plan to spend half a trillion of your pounds on bailing out the banks and ending once and for all the credit crunch. This is how the money breaks down...

£250bn........... Government guarantees for bank bonds.

£200bn........... "Special Liquidity Scheme", ie short-term loans for banks temporarily strapped for cash.

£25bn............ Capital injection into banks by buying preference shares (and the equivalent for building societies which don't have shares, called PIBS if you're really interested.)

£25bn............ Same as above if the first £25bn didn't work.

Voila, £500bn! However the cannier readers will have noticed that most of the cash is actually "guarantees" and "loans", ie not money that really has to found from somewhere, not if the bail-out plan works anyway. So you may be wondering just how much the taxpayer is really in the hole for here. Well, about £80bn is going to have to raised in extra borrowing to cover recent events, including of course compensating ICEsavers, and rescuing Bradford & Bingley.

It's even possible that over the longer term the taxpayer could even make a profit on the deal. Apparently Sweden did when they bailed out their banks in the 1990s. I mean, prices are bargain-basement at the moment. The government is doing what's known technically as "bottom feeding".

So although at first blush it looks like the British plan at £500bn (or US$875bn approx) is actually bigger than the American TARP which is $700bn, in fact the money spent is likely to be far less; TARP remember involves actually buying these "troubled assets" rather than just taking a stake in the banks involved.

At the same time as this jazzy bail out plan was announced the BoE and a load of other banks around the world dropped interest rates by 0.5%. So we now have base rates looking like this:

UK.......... 4.5%
USA......... 2.0%
Euro........ 4.25%
Australia... 6.0%
Canada...... 3.0%
Japan....... 0.5%

So what about inflation? At the last count CPI was at 4.7%, considerably more than its 2.0% target, in fact more than double. The BoE has persistently refused to raise rates enough to tackle inflation.

But their failure has led us to an economic recession; there may even be a depression in the offing. We've had stagflation for a while now, but the future is deflation. Already things are getting cheaper: oil, food, housing; not gold of course, this isn't fairyland!

So you may think I applaud that. I mean, I'm always banging on about the dangers of inflation. Well, no! You see, the whole aim when running an economy, the Holy Grail if you like, is "non-inflationary growth". This means everyone earns more but prices don't go up, so everyone is richer. It's no good earning more if prices go up by as much or more; and it's no good prices coming down if your earnings come down by even more; either way, you're poorer. You may be thinking, "but my earnings aren't reducing." Well, wait until you've lost your job, or been put on short hours. And even if you aren't personally affected other people will be. National earnings will be falling soon.

And what is the point of reducing interest rates anyway. Is it so we can all borrow more, and even the government can borrow more? Surely borrowing is what got us into this mess in the first place? No, the answer to too much borrowing is: repayment. What we need now as a nation (even as a hemisphere, America you too!) is a prolonged period of austerity and debt reduction. The spending frenzy of the last decade must be paid for, and the sooner the better.

Wednesday, 8 October 2008

Taxpayers bail out banks

Alistair Darling, the Chancellor of the Exchequer, has this morning launched a plan to spend £50bn of your money to keep British banks afloat for a bit longer. (See Treasury statement.)

Did you, the British taxpayer, want to own some banks? Or even all the banks? Well, in the past you have involuntarily owned many businesses to stop them going bust: car manufacturing, shipbuilding, coal mining, railways - these all used to be private before being nationalised to avoid bankruptcy and save jobs and were then later re-privatised, mostly by Margaret Thatcher. This New Labour government has of course already re-nationalised the railways (the tracks that is, not the trains themselves.) So taking tranches of British industry into pubic ownership is not a new phenomenon. However it is generally unsuccessful. The government is simply not very good at running a business. (They are not very good at running a country either but they don't have any competition for that.)

It's far too early to say if AD's £50bn bail-out will return us to normality (not that I'd personally want to return to normality; I'd prefer a more restrained, less debt-ridden future) but I'll sign off with just one thought...

You, the taxpayer, will be giving a shed-load of money to the banks, and then when you take out a loan or mortgage they will be charging you interest on the money you lent to them in the first place! That's nice, isn't it?

Tuesday, 7 October 2008

ICEsave has gone down

It's been an eventful morning! For a few hours now customers of ICEsave, the internet-only bank owned by Landsbanki of Iceland, have been reporting their website wouldn't let them log in.

By lunch time the Icelandic government had announced that Landsbanki had been put into receivership, the directors all sacked, and savers with ICEsave would probably be looking at applying for compensation from the combination of the Icelandic scheme and the British scheme. I hope they don't need their money too soon; I can't see this being fast.

There seem be quite a few people around who decided at the tail end of last week, or even yesterday (Monday) to get their savings out of ICEsave and have done the transfer electronically, only to find the money has gone from ICEsave but not yet appeared in their nominated UK account. I don't know if these transactions will complete normally but clearly now is not a good time to be between two stools.

There now follows my opinion on how British people should protect themselves from the banking crisis:

1. Only bank with British banks with a High Street presence. Avoid internet-only banks; there's reason they pay higher interest and it's not a good one.

2. If you have more than £50,000 in savings spread it across several banks so that none holds more than the compensation limit of £50,000. Be careful you don't inadvertantly open accounts with different banks in the same group - you would only get one lump of compensation.

3. Don't put your savings in the same bank as you've got a mortgage with; your compensation if the bank failed would be offset against your mortgage. The same goes for any other debt, overdraft or borrowing.

4. The safest banks in the UK are thought to be HSBC and LloydsTSB. Longer term savings may also be put in NS&I bonds.

5. Even if you have less than £50,000 savings (and that's most people!) use a minimum of two different banks. Never put all your eggs in one bank.

6. Keep a lot of money in cash, in ten and twenty pound notes. In the 1929 Great Depression there was a "banking holiday" which lasted a week, designed to stop people withdrawing money from banks. You need to be able to survive a few weeks without access to any bank account. Remember, when the herd panics the ATMs will be empty before you know it.

7. Keep a month's worth of canned food in the house; ideally food that can be consumed uncooked.

I sincerely hope these precautions will never be called upon, but if they are you will be better placed than almost everyone else.

Monday, 6 October 2008

Achtung Gerald Toben!

Pity poor Dr Toben; he's an Australian citizen arrested and held for deportation in the UK at the behest of the Germans for the "crime" of Holocaust denial. Allegedly while in Australia he published on the internet some suggestion that belittled the Holocaust; this is a crime in Germany (and in many other EU states.) However, it is not a crime in the UK where he has been arrested, nor in Australia where he "did" the foul deed. Hence my use of the "crime" quotes.

Gerald Toben: Nicked for the crime that never was

Obviously the way to solve this legal anomaly where someone can be whisked off to Germany for a "crime" that isn't even illegal is to make Holocaust denial a crime in the UK was well! This will occur to New Labour pretty shortly so expect to see it on a statute book near you soon.

Weekend tragedy

Yes, sadly, poor Hannah Bradbeer has been booted from X-factor by that evil Cheryl Cole of the Loud Girls singing group. Still, she took it stoically with just a tinge of red to her eyes as she marched off (unlike some of the "men" who blubbed like babies!) Ah well, back to the Hedge Fund on Monday I suppose for Hannah. Simon Cowell will be chortling with mirth that Cole dismissed her best prospect of a win. He'll probably have her signed up before the series ends.

Really, it makes the news that Iceland is bust with banking debts six times its GDP, and Germany has blinked and guaranteed all its private banks and we should all be stocking up on baked beans pale into insignificance, doesn't it?

Friday, 3 October 2008

Libor - bid only

Let me explain: LIBOR is the London Interbank Offer Rate, it's the interest rate banks use to lend to other banks and is usually a little above base rate; unlike the interest rate they use to lend to you which is usually a lot above base rate. The difference between base rate and LIBOR is called the "spread". LIBOR is different for different currencies, eg sterling versus US dollar and is different depending on how long the borrower wants the cash for. You can borrow overnight (this is the minimum term) three months is more of a metric and is the usual term; and in theory you could borrow all the way up to 30 years - fat chance of that in the current economic climate though.

The wider the "spread", the more over the odds the borrower is paying for his short term loan. When the spread widens it means the lender doesn't really want to lend and has to have his money prised out of him by the premium interest rate. Spreads have been widening through-out the credit crunch. They are routinely up above 2% compared with a more usual 0.2%. That's painful, but not the end of the economic world.

The next factoid you need to know is that most of the mega-rich household-name corporations aren't cash rich at all. They work on "lines of credit". They have treasury departments which organise their financial situation continually borrowing and repaying loans on the short-term market using the LIBOR system. Their total debt isn't necessarily growing; they pay off the debt in time, but then they re-borrow almost immediately. For example at the end of each month they may need a big cash pile to pay all their staff - so they borrow, but then they repay over the coming month until they need to borrow all over again at the end of the next month.

So what does "Libor - bid only" mean? Well, "bid" is bidding to borrow money, and "offer" is offering to lend money and any bank which says "bid only" is saying we'll borrow but won't lend to anyone at any price.

"Libor - bid only" is the state the financial markets reached today. So it's just as well we aren't near a month end, isn't it?

Monday, 29 September 2008

Bradford & Bingley have bitten the dust

B&B went down the drain over the weekend. This was widely predicted, not least by me. The deal is a bit strange though. Santander, the Spanish bank which owns Abbey and Alliance & Leicester has acquired the viable part of the business for an unknown sum and the taxpayer gets to keep the so-called toxic waste, ie, all the bundled buy-to-let mortgages that are going to be defaulted on when the amateur landlords throw back the keys to their new-build flats.

Nice! We get the dross and the Spanish get the cream. And what do the B&B shareholders get? Who knows? B&B wasn't bust (unlike Northern Rock say) but they seem to have been deprived of their property by government fiat. This smells a bit fishy. I wouldn't be surprised if the small shareholders aren't rather annoyed.

However there was good news over the weekend as well. Hannah Bradbeer got through two X-factor bootcamps and is off to be mentored by Cheryl Cole in Cannes, France.

Friday, 26 September 2008

Bradford & Bingley - teetering on the brink

Good old B&B, the gentlemen with the bowler hats, although these days they prefer a cute chick in the bowler, they teeter on the brink. This time last year their share price was over £3 and today you could buy one for less than 20p. Will they go bust or will they not?

Amazingly, despite clinging to the cliff by their fingernails, they are still all over the TV screens offering 6.5% for your savings; while HSBC would begrudge you more than 5.5%. This is called the "risk premium", ie, it's a special bonus because you might not see your money again. Avoid!

Meanwhile, as widely predicted, not least by me in previous posts, Washington Mutual, the "big one", has just folded gracefully into the arms of JP Morgan where they will nestle with Bear Sterns. Truly in these times Cash Is King and if you're holding the folding there are bargains to be had.

Tuesday, 23 September 2008

Large Hadron Collider Rap

Here's an educational video by "Alpinekat".

Although so far they've only made the protons go at 27mph and most people wouldn't spend $1bn to do that! But it's early days...

TARP - Troubled Assets Relief Program

If you're a normal American; sensible, prudent, don't borrow more than you can afford to repay, work hard and save up for your treats, then you should be spitting tacks at TARP. Henry "Hank" Paulson, the US Treasury Secretary, has a plan to spend seven hundred billion of your tax dollars (yes, $700bn!) to bail out the feckless spendthrifts who aren't like you at all.

There are only two glimmers of hope in the whole situation...

Firstly, the Troubled Assets Relief Program "TARP" might never happen. And secondly because it will be buying in a reverse auction, lowest bidder wins, it might actually make money in the long term; although I wouldn't hold my breath on that.

How much is $0.7tr anyway? Well it's twenty times what Bill Gates is worth, or perhaps you prefer to think of it as one twentieth of the entire GDP of the USA. It's about the same as the military budget, including everything: army, navy, air force and marines. Basically, it's a lot of money; a huge heap of the stuff.

And where will Hank get this cash from? Well, he'll borrow it. It's not like borrowing got us into this mess in the first place, is it?

Tuesday, 16 September 2008

Hannah Bradbeer, the next big thing?

Too many of my posts are financial in nature and bad news. So to rectify that here's some good news. The X-factor reality TV show has discovered a new star. She's 22, she works for a Hedge Fund (couldn't resists that!) and after she sung for the X-factor judges Simon Cowell's tongue had to be rolled up and tucked back in his mouth. (Although, you never know, he may just have been thinking of his fees.)

Hannah Bradbeer

But don't take my word for it, check out the video...

Inflation up and down, but mainly up

Today the Bank of England has announced....

CPI is 4.7%, up from 4.4% last month,
RPI is 4.8%, down from 5.0% last month.

The CPI target is 2.0% and a very generous government allows a 1.0% margin on that. Still Mervyn King and his fellows on the MPC seem unable to hit anyway near the target - probably because they are not even bothering to try.

Monday, 15 September 2008

Yet Another Black Monday

Well this morning on Wall Street has been interesting, hasn't it?

Lehman Bros, an investment bank with $600bn of assets has declared itself bankrupt and is about to be dismembered by its fellow investment banks. Merrill Lynch, another large securities company, has sold itself to Bank of America - basically because it was bust. And American International Group Inc (AIG), the world's largest insurance company, has asked the Federal Reserve Bank for an emergency $40bn loan. That does not indicate sound financial health.

So what are the implications of all this?

Let's start with Lehman Bros. The feeding frenzy starts now. Lehman's has some valuable bits, eg, its asset management, and some toxic waste to the tune of $60bn in the form of collateralized debt obligations (CDOs) - basically mortgages which have been bulked and turned into a negotiable bond. Other banks will be trying to get the good stuff cheap, and the bad stuff even cheaper, if at all. Lehman's CDOs have a face value of $60bn but how much they actually go for in the open market will be very interesting indeed, perhaps as little as 20 cents in the dollar. The knock on effect here is that lots of banks are holding CDOs, often presented on their balance sheets with very optimistic valuations. (Provided you don't actually try to sell something you can claim it's worth anything you want.) This forced exposure to the market is going to crystallise valuations and could embarrass a fair few household names.

The other interesting factoid with the demise of Lehman Bros is that it has not been deemed by the powers-that-be as "too big to fail." Two "white knight" rescuers were on the stage last week: Barclays plc, and Bank of America. BoA rescued Merrill Lynch instead, and Barclays dropped out when the Fed refused to underwrite the CDOs. So if Lehman's is not too big to fail at $600bn then rather a lot of other institutions are not as well.

Note also that Barclays may not have been motivated in their rescue bid by sheer altruism, sorry, I mean profit. They were looking for Fed guarantees and an unkind take on their position would be: if Lehman's is too big to fail and we buy them with taxpayer guarantees then we'll be too big to fail as well. Perhaps Barclays have some bad news for us coming up.

Merrill Lynch: BoA has "merged" with them for £50bn. I guess that secures their future since Bank of America really is too big to fail.

AIG is still very much in play; so far they just want a short term loan from the Federal Reserve, just $40bn please guv'nor. Of course once the taxpayer is in the hole for $40bn it might be quite difficult to say no to further demands; prepare to see good tax dollars follow bad ones.

And for the future; who's next?

Well, in the US Washington Mutual has been teetering on the brink for quite a while now; and over here in the UK Alliance and Leicester and Bradford and Bingly are generally favourites for doing the next "Rock", but of course Her Majesty's government wouldn't let them actually go under.

On the markets generally today: the US$ is down; gold is up; oil is unchanged. Pretty much what you'd expect.

Wednesday, 13 August 2008

Commercial property owners are knocking the empty ones down

Back in April the government cancelled some rather important tax breaks. If a commercial building was unoccupied the owner used to get a 50 percent discount on the rates for retail and office space, and a 100 percent discount on industrial premises. Since April 1st these discounts have been limited to the first three months (six months for industrial property) of vacancy.

So of course empty buildings become major liabilities and owners take the obvious way out and demolish them. This week, the industrial landlord O&H started demolishing a fifth of its Alexandra Business Park, Sunderland, and last week gave approval to demolish a further 37,000ft of the 750,000ft park. (Link)

This is dire news. We are in an economic downturn and many buildings will be unused until the cycle turns and growth resumes. But if they have been demolished in the meantime growth will engender reconstruction costs and be so much slower; all to avoid a tax now. Better surely to give the tax break so empty offices, retail units and factories will exist to be grown into when the good times return. Such short-sightedness is classic New Labour.

Tuesday, 12 August 2008

Inflation up again in July

July's inflation numbers are out.

CPI: 4.4%, up from 3.8% last month
RPI: 5.0%, up from 4.6% last month


The current base rate you will recall is 5.0%. The Bank of England left it untouched at its rate-setting meeting earlier this month.

What does this mean?

Well, if you're a taxpayer, you can no longer take your savings to a bank and deposit them for more than their value will go down due to inflation.

I've blogged before that UK inflation is out of control; really I'm just documenting the decline now.

One might ask the question: why is the Bank of England not doing anything to stop the problem? Why haven't they increased interest rates? The answer is pretty simple and think I may have mentioned it before. They kept interest rates far too low over the 1997-2007 decade so that New Labour could tax and spend with gay abandon and now when they badly need to raise interest rates they can't because it would force too many people into bankruptcy.

Lastly, watch the US dollar, it's starting to rise against sterling...

Monday, 11 August 2008

Expropriation of Property in South Africa

There's a bill currently before the Parliament of South Africa called the Expropriation Bill.

It gives government ministers the power to expropriate private property for public use, or to expropriate it if it is deemed to be in the public interest; which includes expropriating it on behalf of a private individual who will then become the new owner. Compensation must be paid to the previous owner but the amount is a balance between the value of the property and the public interest.

The property to be expropriated is likely to be farmland in the first instance, although the Bill is worded loosely enough that other land, factories, businesses, shares or even intellectual property such as copyrights could be expropriated.

Unsettling similarities with Zimbabwe can be seen. The current hyperinflation and economic collapse in Zimbabwe started when white farmers had their land confiscated. And now we are seeing the very early seeds of mass-starvation in South Africa.

Tuesday, 5 August 2008

The Debt We're In

Let's look at how much debt we're in here in the UK. As of the end of June 2008....

Total personal debt: £1,444 bn

This is made up of

Mortgages: £1,212 bn
Unsecured loans: £232 bn

Average unsecured loan per-household

All: £9,309
Only those in debt: £21,650

Average household debt in the UK is £58,000 (including mortgages).

Average owed by every UK adult is £30,424 (including mortgages).

Average outstanding mortgage for the 11.8m households who currently have mortgages now stands at £102,554.

In June alone borrowing grew by £4.0 bn; comprised of £3.1 bn in mortgages and £0.9bn unsecured loans.

And we're just talking personal debt here. The government has borrowed the same again.


Wednesday, 30 July 2008

Zimbabwe announces currency to be divided by 10 billion

The Zimbabwean Central Bank governor, Gideon Gono, has announced that from 1 August 2008 there will be a new Zimbabwean dollar, worth 10 billion existing dollars. Link.

Is this the biggest zero-slashing exercise in the history of money? They are taking ten zeros off the end of their bank notes! The effect will be to reduce the typical price of a loaf bread from Z$250,000,000,000.00 to Z$25. That should be more convenient all round - and since they can't get the paper to print such large banknotes there will be a saving there as well. The old and new dollars will both circulate until the end of the year when the old ones will cease to be legal.

Of course, this all a complete nonsense. They will be adding more zeros to the new notes before you know it. The real future for the Zimbabwean dollar is oblivion. Possibly Zimbabwe will enter the "Rand zone" and adopt the South African Rand as its official currency. Zimbabwe only really exists due to the generosity of the South Africans anyway. They could try to adopt the US dollar, like various failed South American states have done - with some success (Equador) and some failure (Argentina).

Or, idea from the left field here, the Chinese are muscling into the African continent; how about a Yuan peg?

Thursday, 24 July 2008

Hyperinflation in Zimbabwe

Zimbabwe is in dire straights. Their inflation rate passed ten thousand percent a few months ago; some estimate it now as one million percent, but it can't actually be calculated because the basket of goods is empty! With nothing on the shelves it's not possible to work out an RPI number.

They tried various things to halt the inflation. They made it illegal to put prices up; they said we'll confiscate your business if you do - and they did confiscate a lot of businesses. But law cannot control the market; goods will leave shops by the back door if they can't leave by the front.

Zimbabwean banknotes have been acquiring more and more zeroes to keep the wheels of commerce lubricated. And this can sometimes work. The French successfully converted old Francs into new Francs by dividing by 100 and the new Franc stayed good until the introduction of the Euro.

But not in Zim. And anyway they've run out of paper to print the banknotes. The classic solution to this is to recall old notes and stamp a couple of extra zeros on them. Perhaps they'll do that.

So we have a text-book example of end-stage hyperinflation coming up! We should be grateful at the once-in-several-generations opportunity to see this rare economic beast in the flesh. In the last stage banknotes are burned as soon as they are printed since they are worth more as fuel (this happened in the German Weimar republic.)

Of course Zimbabwe already has a complete parallel economy. If you actually want to buy something from somebody you first arrange for your friend in the UK to pay his friend in the UK £1 and then as soon as the seller gets confirmation from his friend it's yours. A simple barter economy may also arise, although this is highly vulnerable to the cops turning up and nicking all your stuff so is less popular than the foreign-proxy scheme.

Another characteristic of the terminal economy is goods being repackaged in smaller and smaller units. Where previously you bought a packet of fags now you buy them individually; eventually they will just snip you the end off a fag to make it stretch even further.

And what does President Mugabe think of this? He LURRVVES it! You see Zimbabwe receives foreign aid in hard currencies. The government gets the aid and distributes it to its supporters. The poorer the people are the bigger the wealth difference between the regime and the plebs; hence the bigger the power gap and so government is more secure. Money is power and Big Bad Bob is the one who's got the cash.

(And now an irrelevant aside - anyone want to get rich quick? The Indian 1 rupee coin is currently worth 35x more as scrap metal than as a coin. Fill yer boots!)

Retail "growth" in June slightly more believable

Today we have the retail growth number for June. It's a fall of 3.9 percent.

Last month the Office of National Statistics announced that retail growth was 3.6% in May, and I announced here that this number was derived by their tea ladies peering into the dregs.

This fall of almost four percent however is actually believable. It's what you would expect given the Bank of England's abdication of their duty to control inflation. Food costs more; clothing costs more; the only things which cost less are the things you only buy every few years such as laptops and ipods.

There is far more pain to come.

Tuesday, 15 July 2008

Inflation getting worse

Today we have the inflation numbers for the year to end-of-June. They don't look pretty:

CPI.....: 3.8% (up from 3.3% last month)
RPI.....: 4.6% (up from 4.3% last month)

In case you'd forgotten, the CPI target is 2 percent, and its absolute upper bound is supposed to be 3 percent. It's roaring away. The Bank of England thinks it might hit 4% by the end of the year; I think if it's still under 6% we should count ourselves lucky.

It's only been a couple of days since the MPC met at the Bank of England and took a sanguine view that inflation was not a problem and interest rates could be left at 5%. This seems like a complete abdication of their responsibility. I don't think they really care anymore.

We have also had Alistair Darling all over the TV and radio asking for pay restraint to contain inflation. (So inflation is a problem after all, huh?) What he seems not to "get" is that the inflation in the UK is coming in from abroad; oil and food prices are rising due to increased consumption in the Far East. Pay restraint in the UK isn't going solve that; if anything it would make the pain worse. Only a base rate rise to stoke the value of sterling can fix this problem. Although cutting taxes would offset the damage to some extent.

Is the man stupid, or something?

Thursday, 10 July 2008

Bank of England Fails

The Bank of England is charged with ensuring that those pretty scraps of paper we use as money retain their value. It's important that someone does this as scraps of paper have an innate tendency to devalue to their actual paper value. This task of making sure money keeps its value is called, “controlling inflation”, and when New Labour came to power in 1997 they formed the Monetary Policy Committee of the Bank of England and gave it the power to set interest rates. The general rule is: the higher they set the interest rates the higher the value of those scraps of paper. (The reason scraps of paper can lose their value is because it’s too easy to make new ones; if we used something rare as money, a precious metal maybe, then there would be no need to worry about inflation, simple scarcity would keep the money valuable.)

So the MPC was tasked to ensure sterling retained its value by keeping inflation, measured by the Consumer Prices Index, low. Specifically they were told to make sure the Great British public didn’t lose more than two percent of its wealth every year by keeping CPI at 2% more-or-less; they were allowed a leeway of 1% either way.

You might think a 3% loss of wealth is still rather fearsome. And it has to be said that CPI is anyway not a good measure of inflation. It’s calculated from a basket of goods which does not include house prices - which are a significant expense to most people (be they owner-occupiers or renters they still have to “buy” housing one way or another.)

Last month’s CPI number was 3.3%. Today the MPC should have leapt into action to get than number below the 3% absolute cap they are tasked to enforce. They should have done that by raising the base rate from its current 5.0% level.

You may be wondering how raising interest rates would actually help reduce CPI. It’s like this: when interest rates are raised people with debts have to pay more to service them and so have less money to buy goods and services so suppliers have to hold their prices down; and, more people want to keep their savings in sterling so the value of the money goes up compared to foreign currencies and imported goods, eg oil, food, manufactured goods from China and the like, all become cheaper in Britain. This gives our scraps of paper more value.

How did the MPC acquit themselves in this solemn duty of keeping our money valuable today? Well, sad to say, they failed. Despite CPI being 65% over target they did not use the one and only weapon in their arsenal and raise interest rates. No, they held interest rates at 5.0%. They decided to let the theft of 3.3% of your wealth annually carry on unabated.

So everything you own is losing value; your house, your car, everything you’ve got in the UK has a value denominated in sterling - and sterling is losing its buying power. Even intangibles such as your pension rights are losing value. You will be poorer in your old age due to the MPC’s inaction today.

Frankly, flogging would be too good for the bastards!

Friday, 27 June 2008

Henley-on-Thames by-election

The results are in from yesterday's by-election in the constituency of Henley-on-Thames; previous incumbent one Boris Johnson, now mayor of London. The numbers are as follows:-

John Howell - Conservatives, 19,796 (56.95%, 3.46% increase on 2005 general election share of vote)
Stephen Kearney - Liberal Democrats, 9,680 (27.85%, 1.84%)
Mark Stevenson - Greens, 1,321 (3.80%, 0.54%)
Timothy Rait - British National Party, 1,243 (3.58%)
Richard McKenzie - Labour, 1,066 (3.07%, -11.68%)
Chris Adams, UK Independence Party, 843 (2.43%, -0.07%)
Bananaman Owen - Monster Raving Loony Party, 242 (0.70%)
Derek Allpass - English Democrats, 157 (0.45%)
Amanda Harrington - Independent (Miss Great Britain Party), 128 (0.37%)
Dick Rodgers - The Common Good, 121 (0.35%)
Louise Cole - Independent (Miss Great Britain Party), 91 (0.26%)
Harry Bear - The Fur Play Party, 73 (0.21%)

Electorate 69,086 - Turnout 34,761 (50.32%, -17.58%)

The significance of these results is not that the Tory candidate won by a vast margin, that was always going to happen, but rather that the Labour candidate was pushed into fifth place behind the Lib-Dems, Greens and BNP. He lost his deposit.

Also interesting is that the BNP came from nowhere to take 3.6 percent of the vote - nowhere because they have never previously contested this constituency. This make them the fastest growing party of them all; and Labour the fastest shrinking.

Friday, 20 June 2008

Lies, Danm Lies and Retail Statistics

Yesterday the Pimlico, London-based Office of National Statistics reported that last month (May, 2008) retail inflation was running at 3.5 percent for that one month alone. The year-on-year number is 8.1 percent.

This is a staggering leap in retail therapy by a public still reeling from petrol prices at £1.20 a litre, and gas prices predicted to rise by 40% this coming winter. We haven't seen this level of retail inflation in the UK since the dog days of the Callaghan government in 1979. However, as a statistic, it is also completely unbelievable, since despite Gordon Brown's best efforts we aren't living in Zimbabwe yet.

Sir Philip Green, owner of retail chains BHS and Arcadia, said the figures were bizarre, given the economic situation. "These figures in no way reflect the current trend. They are totally misleading. I have no idea where they collect this information from. I'd love to know." (Link)

So how can we account for this ONS brainstorm? Well, I did mention at the top of the post that the ONS is based in Pimlico in Central London. (They have another office in Hampshire but that only concerns itself with the ten-yearly UK census.) But they are not long for London; they are moving lock, stock and barrel, to Newport in Wales.

Now I'm sure Newport is a fine place, but I suspect the ONS is hemorrhaging its skilled staff who don't fancy living and working so far from the bright lights of London town. In short, one must assume that the ONS is now staffed only by its tea ladies who are plucking statistics out of the bottom of their teacups.

Thursday, 29 May 2008

What shall we do when the oil runs out?

Crude oil has hit $135 a barrel (a barrel is about 35 gallons and can be used to make 15 gallons of petrol plus other stuff) and the prices at the pumps in the UK hover around £1.10 for a litre of unleaded.

Some say that this extraordinary price is more indicative of speculation than any actual shortage. This may be true for the near term but the oil is going to run out sooner or later - it would be a good idea to have some sort of plan in place for when it does.

Of course, the oil is never really going to run out completely. Think of it like this: when God created the world He supplied it with 3 trillion barrels of oil. The first trillion barrels were easy to access, you just dug your pickaxe into the ground and a great black gusher came up and you were rich. Unfortunately that trillion barrels has all gone now. We're working our way through the second trillion. This oil is hard to access, you need to dig deep and suck hard. Worse, for every 5 barrels you get out you're burning another barrel just to run the rig. We're a long way into this trillion barrels and known reserves are falling. Saudi production will probably start to fall in 2010. Iraq and Nigeria could produce more but they are in the grip of local wars. (Interestingly Saudi could produce more now but to do so they would have to invest in more wells--why spend the money when all it would do is reduce the price they then get for the stuff?)

As for the 3rd trillion barrels; it's not really liquid at all. It's bound up in rocks and tar sands. We would have to be desperate to try to extract that oil. You would be burning two barrels for every one you extracted and for some of it you would literally have to burn more oil than you ended up with--so completely pointless even to attempt.

During the oil price peak of the 1970s the oil companies did some investment in getting oil out of shale rock, but the oil price fell again and they lost their shirts. Since then they've been reluctant to try.

So, one way or another the oil is going to run dry, or at least get too expensive to use. What will we do then?

There are people who think the oil running out wouldn't be such a bad thing. Think of the environment, the clean air, when there's no oil being burned. Of course we'd have to live like it was the Middle Ages all over again--but were the Middle Ages really so bad? Commute on horseback, goods delivered in carts, sailing ships for international travel and candles to light your way to bed. No pollution, a simpler life.

The down side is that about 30 million people in the UK would die of starvation without mechanised agriculture and the other 30 million would have a life expectancy of about 30 years due to disease and malnutrition.

So it might be a good idea to find some sort of oil replacement before the oil is gone.

Let's look at what we use oil for.

The world requires about 80 million barrels of the stuff a day. It goes about one third to run cars and trucks and planes and ships - transport basically, one third is used to generate electricity for industrial and domestic use, and the last third as an ingredient in manufactured goods, including plastics, clothing, fertiliser and even food.

Let's start with the "generating electricity" side of things. There are lots of other ways to generate electricity: solar power, wind power, tidal power, geothermal power. Of course you can also burn other stuff like coal or gas, but since they're running out just like oil there's probably not much point gearing up to use them. (And it would be nice to have a "green" replacement.)

The trouble with all these options is that none produces enough power reliably enough. Solar? When the Sun isn't shining you have no power. Wind? Same problem. Tidal power is of course very predicable but there are only two high tides a day and what do you do for juice the rest of the time? (This problem isn't totally insurmountable. There are "multi-basin" solutions which let you eke out your tide over the course of a day.) However even capturing every high tide in every nook and cranny of the UK wouldn't give us enough electricity to replace our oil consumption.

Geothermal requires the Earth's subcrustal heat to come to the surface and in the UK it mainly doesn't.

There are always biofuels, but then 3rd worlders starve.

Frankly it's going to have to be nuclear.

Now nobody likes nuclear, and nobody wants a massive nuclear plant near them. But technology has moved on since the 1950s and nuclear doesn't have to be like it was. Check out this dinky little reactor:

Dinky reactor

It's completely sealed and self-contained and good for a 100 megawatts. 100MW, how much juice is that? Well the UK really needs about 50 gigawatts so 500 of those babies would keep the lights on when the oil's gone.

It's a breeder reactor and runs on uranium 238. We could go for a more conventional reactor using U235 but although there's enough U235 in the world to keep the UK supplied forever; let's face it, the rest of the world will be going nuclear as well and U238 is at least 100 times more plentiful. Unfortunately the UK doesn't actually have any uranium mines but the world's reserves are mainly in Canada and Australia - politically stable and friendly countries.

The reactors would be dotted all over the country; buried underground of course for safety and concealment and nobody could be a NIMBY because everybody would be getting one. There would be an added benefit that the 10%-20% power loss that happens when the national grid shunts electricity around the country would be reduced by widely distributing the generators.

These reactors would never be opened on site. The local operators would do little more than guard them and polish them. If maintenance or refueling were required the whole reactor would be lifted out of its silo and trucked to a remote facility such as Sellafield.

Who would make these reactors for us? Well, Rolls Royce do a nice line in reactors for submarines so I suggest these wouldn't over-tax them.

Which brings us to transport.

How will we fuel our cars when the oil is gone?

Assuming we have plentiful electricity thanks to an investment in nuclear power there are a few options. Let's look at them.

Hydrogen-powered cars: Hydrogen is easily extracted from water by running a current through it. It can then be "burned" to reform water and release energy. It takes about 50 kilowatt hours to produce 1 Kg of hydrogen (that's 180 megajoules) but on the plus side hydrogen has an energy density slightly higher than petrol, per Kg. Unfortunately that doesn't mean the tank can be smaller because it will require massive pressurisation and hydrogen cars will be very heavy bombs waiting to happen.

Nitrogen-powered cars: We're talking liquid nitrogen here. You can condense it out of the atmosphere which is about 80 percent nitrogen, put it in an insulated tank, and power a car by drawing some off and heating it whereupon it will expand and turn a turbine. To cut a long story short your car will be safe (nitrogen is inert) have a top speed of 30 mph and conk out after ten miles.

Iron-powered cars: Yes, you can burn iron, believe it or not. It has to be in the form of filings or dust with particles of exactly the right size: too large they won't burn, too small they explode. The energy density is higher than petrol. I think this one is a non-starter but I put it in just to show there are some weird possibilities out there.

Battery-powered cars: These are good for lightweight vehicles over a short range. The best lithium-ion batteries like you get in laptops have an energy density of 750 kilojoules per Kg. Contrast that with the energy density of petrol which is about 150 megajoules per gallon. As you can see a battery the size of your petrol tank would struggle to propel your car for more than a couple of miles. (By the way, a "joule" is a measure of energy equal to a watt-second. You'll need to know that when we work out how many extra reactors we need to run our electric cars.) So successful battery powered cars need to be light, devote an inordinate amount of their interior space to battery, and not go very far. A maximum range of 150 miles perhaps. The other big problem with batteries is they have a strictly limited number of recharges before they need substantial reconditioning.

Capacitor-powered cars: We're talking super-capacitors here, not the tiny little things you see on circuit boards. Unlike batteries which use a chemical reaction to store energy capacitors store their juice as raw electrons. They can be charged and discharged millions of times without loss of capacity, and the recharge time will be minutes. The best, admittedly experimental, capacitors have an energy density up to 1 megajoule per Kg. So if your car's petrol tank were replaced with a capacitor of the same size you'd be able to go at least three miles extremely fast.

So I think the root problem is clear: the only power-storage technology we have is either too dangerous, or too limited. We can generate plenty of electricity but how to store it in the car, or bus, or truck, or train?

Wait a minute! Electric trains don't carry their juice around with them, they are supplied from the track, either by overhead cables (the continental solution) or in the UK using a third rail which people can walk on and kill themselves.

Could we do the same with cars? The overhead cable idea is obviously out, how would cars overtake or go off-road? But a power cable could be buried in the road surface under the tarmac and the car could pick up the power by induction. The road would be safe to walk on provided you didn't dig down to the cable.

Power cables would need to be buried in all the motorways, A-roads and B-roads. That's about 60,000 miles of road. The car would also need to have perhaps a 100Kg capacitor onboard for use when it wasn't over a power cable. That would give it an independent range of about 30 miles. The capacitor would charge itself up whenever the car was in contact with a power cable. The power cables wouldn't need to be continuous, for example, you could skip junctions for ease of laying the cables.

Now wiring up the country's roads would be a hideously expensive and disruptive exercise. Worse even than all the digging that happened to put cable TV in, but once it was done the whole energy storage problem goes away.

For billing purposes each electric car would have a secure meter like the odometer but recording how much juice the car had sucked out of the public roads. Once a year, say, it would be read, eg at the MOT, and you'd get a bill. It wouldn't be a vast bill since electric cars only cost one or two pence a mile to run.

Off the top of my head I think another 500 of those breeder reactors would be sufficient to fuel every car, truck, bus in the land.

Aircraft would still need to the fueled by oil, and we would still need oil for manufacturing. But with our consumption down by at least two-thirds oil's last day would be postponed quite substantially. I suspect we will still have to restort to bio-oils to some extent, the 3rd-worlders will just have to eat cake.