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By November Ghaffur had withdrawn the worst of his allegations, the court case is off, but he has received an undisclosed financial "compensation" thought to be around £800,000.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 And if he did not (the allegations were withdrawn remember) why is Ghaffur getting a penny of our money?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.