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?