Monday, 29 November 2010

Total fiscal union?

So Ireland have had their bail out. There's no guarantee it will last. Irate Irishmen are known for blowing things up. They may still walk away from the deal after signing, say in a few months when the inequities highlighted in my previous post are better known.

Next fiscal basket-case in the bond markets' cross-hairs is Portugal. Eleven million people (compared with the ROI's population of 4.5 million) but much the same GDP. The Portuguese are poor! 200,000 of them eat out of soup kitchens. That's serious poverty.

Then after Portugal is bailed out (basically by the Germans) attention will switch to Spain. Spain is economically six times larger than Portugal; in population terms four times larger. Spain is richer, but that's bad because it means Germany cannot afford to bail out Spain. No-one can afford to bail out Spain. If Spain needs help the euro is toast.

So how to stop it getting that far? Well, the answer is total fiscal union. Instead of there being Irish bonds and Portuguese bonds and Spanish bonds and German bonds - merge the lot. Henceforth there are only eurobonds, issued by the European Central Bank in Frankfurt. Then the bond markets cannot pick on weak members of the eurozone.

But how does that work? Some eurobonds are issued, who gets the cash? Well, that's where total fiscal union comes in. The ECB hands out the cash according to some formula. Eurozone countries no longer have any borrowing powers of their own. To borrow they must go begging to the ECB. Yields on the eurobond will be some weighted average of the existing yields. Every member country is equally responsible for the redemption of eurobonds although probably every member country will retain its existing national debt, which has to be financed with new bonds as old bonds expire. So old national bonds will continue to exist but only as a legacy product. You won't be able to buy new ones.

It could just work! It does involve a massive transfer of sovereign power to the EU though. The participating eurozone states would be reduced to a status equivalent to American states vis-a-vis their Federal government. Frankfurt would be telling them how much they can spend in the future. (Another apt analogy would be the relationship between Scotland and London. Scotland decides how to spend the money, but London tells them how much they can have.)

Does every eurozone state have to join this fiscal union? Well, all the weak ones have to, Ireland, Portugal, Spain, Italy, Greece. If Germany doesn't join there's no point. France might try to stay out, but the German public would be a bit pissed off if the French aren't seen to be pulling their weight. The smaller euro users would probably be bullied in, eg Malta. In practice if a few smaller euro nations wanted to stay out of the union it probably wouldn't matter. They would be paying a premium in the bond markets for their independence.

Ireland, a nice little earner

So the deal is done. Ireland will be borrowing €85bn from a number of sources, including the UK and Germany and her own pension funds.

Ireland will be paying 5.8% interest on the loan. The UK will be borrowing to fund our €7bn share of the loan, at 3.34%. The Germans will be borrowing at 2.74%.


Thursday, 25 November 2010

Media coverage of Derby rape cases

Nine men have been convicted of abusing 27 girls aged 12 to 18, including raping under-aged girls and forcing them to work as prostitutes.

Horrific, I'm sure you would agree. But also horrific is the media's blatant ignoring of the fact that the perpetrators are mainly muslim Asians and the victims are all white girls.

In this latest case, the "Derby rape trials", which have been on-going since February this year the convicted persons published by the BBC are:

Abid Mohammed Saddique
Mohammed Romaan Liaqat
Faisal Mehmood
Mohammed Imran Rehman
Naweed LiaqatFarooq Ahmed
Ziafat Yasin

They don't give a complete list of names. But it's pretty obvious that most of the criminals are muslim, for starters they are called "Mohammed" more often than not. (Mohammed is now the most popular boys' name for babies born in the UK this year - provided you include all the variations in spelling, Mohamed, Mohammet etc.)

And it all goes back to the Prophet Mohammed. He married his wife Aisha when she was 7 years old and started having sex with her when she was 9. This sets the standard by which some muslims live; paedophilia is endorsed by their religion.

Yet somehow the BBC fails to notice the muslim connection. And the rest of the media seems to go with "Asian rape gang". Asian? You don't see many Sikh or Hindu rape gangs! It must be pretty gutting for them to be lumped in with these animals.

Last night Newsnight did a long report on the Derby case without once mentioning, or even appearing to notice, the muslim connection. They had a representative from Barnardos who claimed these rape gangs now operate in every town and city in the country and thousands of girls are involved. (It seems unlikely to this blog that this is literally true - not everywhere in the UK has been enriched by a muslim presence yet, thankfully.)

But the BBC seems completely oblivious to the fact that this is one ethnic group preying on another. Or rather they don't want to report it. They are protecting their left-wing agenda and concealing the glaring flaws in the multicultural experiment which has proved a disaster for this country. What gives them the right to use OUR money to promote THEIR agenda is not clear.

Tuesday, 23 November 2010

Which little pig is safe?

Here are the deficit and debt numbers for a few European nations. (Remember: deficit is the year-on-year borrowing and national debt is the total accumulated debt.)

Click to enlarge

Who do think is the next to suffer the fate of Ireland? The most important metric is probably the deficit as a percentage of GDP. Existing debt must be rolled-over but generally only once every ten years, new debt has to be funded in the markets today. This would indicate that the UK is the next to meet the wolf. However the UK is different, we have our own currency which we can print at will. So running to the IMF/EU is not something we need contemplate this side of a hyperinflationary disaster.

Next in line is Spain.

But really these numbers don't tell you much. Ireland and Greece both failed, but for different reasons. Greece was profligate to the max and doesn't really have a functioning tax base. Meanwhile in Ireland most citizens pay most of their taxes most of the time. Ireland's problem was those two large banks Allied and Anglo. They are stuffed with bad debts from the property collapse but have a taxpayer guarantee. They have been suffering a low-motion run over the last few months - so slow it has been referred to as a bank-walk rather than a bank-run. But eventually crunch time comes. There have been some suggestions in the press that the ATMs would already have run dry in Ireland if the bail-out money hadn't arrived.

So the much mooted "contagion" doesn't really apply. Different countries are suffering for different reasons. If Spain is up next it's likely to be more of an Irish situation than a Greek. Spain has over-built with holiday apartments which stand empty just like the Irish ghost towns. Twin that with, say, Santander suffering a few big bad debts in Brazil, and you might have the making of the next little pig to go running for cover.

Monday, 22 November 2010

Take your money out of Irish banks

The stats page indicates this blog has some readership in Ireland, so here's some advice for you: Get your money out of the bank! Well, some of it at least. Ireland is now in an Iceland situation - it has a couple of large banks, Allied Irish Banks and Anglo Irish Bank which have spread their tentacles around the world and are in danger of over reaching themselves. Their operations are out of all proportion to the banking requirements of the Irish economy.

Of these Allied is the one giving most cause for concern. The reason being that it has greater retail exposure and although 100% backed by government guarantees there might come a time when the government does not have enough cash to honour that pledge.

Anglo on the other hand is government-owned and had little retail exposure. Its debts are huge but they're the government's problem. Allied's debts could be your problem.

So the current EU/UK loan is an exit opportunity for anyone with cash in Allied. Take it out, move it somewhere safer. In fact now is a good time to be holding a substantial fraction of your savings in cash, at home. (Hide it well!) Ireland is entering a time of uncertainty similar to the tail end of 2007. The most likely future is simply that the crisis will blow over. However, other scenarios are possible: bank failure, "long weekends" and unscheduled bank holidays, withdrawal limits, and it's even possible that Ireland would try to break free from the euro (although this is extremely unlikely for the reasons given in the previous post.)

In the event any of these things come to pass - holding a big wad of euro notes in your hands would be very reassuring.

Friday, 19 November 2010

Wall Street Journal attacks Mervyn King

Mervyn King, governor of the Bank of England, has not been popular on this blog for several years now. He has presided over a massive debt bubble and consistently refused to take any preventive or remedial action.

However he hasn't taken much flak from the mainstream media - until now. The august and respected Wall Street Journal has turned on him, saying,
Should in a year’s time the BOE’s forecasts continue to be undershooting actual inflation as much as they have done hitherto, the market’s confidence in King and his colleagues will evaporate very quickly. The solution then won’t just be a very large and very rapid tightening of policy. It will be to replace King with someone whose reputation isn’t riddled full of holes.

Ouch! Read the full article here.

Wednesday, 17 November 2010

Getting out of the euro

Ireland and Greece and maybe Portugal and Spain could do with getting out of the euro and into a currency they can devalue at will. How easy would that be? Well imagine the Irish government announces that Ireland is breaking free, the euro is to be canned and the punt is coming back. What happens next?

The euro was adopted with a big-bang switch over. All savings accounts, all debts, all contracts were instantly converted to the euro, and cash was changed over the course of a few weeks. In fact Ireland was the fastest switch over country, most cash had changed in the first two weeks. This was made possible by the fact there was a hard lock between each national currency and the euro - everyone knew what they were getting years ahead of time. Reversing the operation you could attempt a hard lock, one punt equals one euro or similar, but everyone would know that the punt was destined to be devalued and they would struggle hard to keep their savings in euros. If their bank account were due to be converted on "punt day" they would move to a foreign currency account, or just plain withdraw euro cash.

On reversion to the punt the Irish government would undoubtedly like to redenominate its national debt into punts. And why not? Long dated Irish bonds were denominated in punts before the euro dawn and would be returning to their original currency. But the markets would regard that as an effective default and would sell up before punt day. Yields would shoot through the roof. The Irish government would be unable to fund its deficit.

In short, converting to the euro was an easy option, getting out would incur the wrath of all concerned. In fact it would be necessary to run both currencies in parallel so people felt secure. Bonds would have to stay in euros to keep the markets happy. People's savings would have to stay in euros to stop runs on the banks. This means debts would have to stay in euros as well. (Otherwise lenders would be out of pocket.) Later when the new punt had found its right level people would be happier to convert, at the going rate.

Contracts would be problematic. If they weren't implicitly changed (eg contracts of employment and salaries) there would be little point leaving the euro in the first place since devaluation is what it's all about, but if they were changed there would be all sorts of problems where a liability remained in euros but payments were converted to punts, for example a contract to supply goods sourced overseas at a particular price.

Clearly it would be massively traumatic for Ireland to leave the euro.

Quite the reverse would apply in the Germany. If Angela Merkel announced the return of the Deutschmark the German people would be extremely happy. They would know that a liberated DM would rise relative to the euro and they would be delighted to have their savings automatically converted. There would be a small number of losers - people with contracts committing them to buy in DM goods previously priced in euros, but most people would be better off, at least initially. Later they would suffer a little by losing market share to cheaper eurozone countries.

And Germany leaving the euro would cause a euro devaluation which would benefit the weaker euro countries without them having to leave the euro.

So it looks like Germany must leave the euro.

Monday, 15 November 2010

Getting out

So the Chandlers have been released after 388 days of captivity. The exact mechanism of their release is being kept secret by the organisers to deter other kidnappers, but the general feeling is about $1m was raised by public appeal, plus a contribution from the Somali government such as it is. This contribution bought the Mogadishu government some "Chandler time" and the Chandlers were obliged to visit the presidential palace for PR reasons. The money was handed over via "tribal elders" and the Chandlers were let go.

A legal super-injunction taken out by the family prevented the media from covering the negotiations with the kidnappers because every time progress was made the kidnappers raised their expectations.

The British government doesn't pay ransoms for its citizens. That's its firm position. Other Western governments do. However, let's not forget that the British also did not negotiate with terrorists, until that is, a peace deal was done with the IRA and it turned out they had been negotiating with them all along. "We do not pay ransoms," is the obvious public position. What happens behind the scenes is likely a completely different story. Quite possibly a lot of public money went into that ransom.

The original response to the kidnapping was bungled by the government. We now know that the Chandlers were taken from their boat under the nose of a British warship. The decision was taken not to intervene in case the Chandlers were hurt. The rightness of this decision can be debated, but we should never have got to the point where Somali pirates feel comfortable operating a few yards away from a warship.

Within a few hours of the kidnapping a team from the Special Boat Service (possibly the mysterious, newly-formed X squadron), based in Poole, Dorset, were in the area and preparing to mount a rescue. At this time the Chandlers were in a known location, on one of the pirated ships. However this rescue was vetoed by London and the Chandlers were then moved to the Somali mainland, to an unknown location and rescue became impossible.

Thus the protracted 388 day ordeal began.

Any sort of punitive military action is hampered by the fact that the Somalis still have several hundred other hostages, mainly the crews of pirated ships, and the exact location of the kidnapping village (these are tribal endeavours) is unknown. What is clear is that the navy must reclaim control of the seas in the area. This means attacking pirate boats BEFORE they actually attempt an act of piracy. Speed boats out at sea for no obvious purpose must be stopped and searched and confiscated if weapons are found. The crews can be returned to dry land with nothing but the clothes they stand up in. Any boat resisting or refusing to stop should be fired on. The harbours where these speed boats congregate should be shelled.

In short the pirates should be driven back onto land.

Meanwhile in Burma, Aung San Suu Kyi has been released after 15 years of house arrest. It remains to be seen what effect this will have on Burmese politics.

Thursday, 11 November 2010

EU accounts rejected again

The European Union has had its annual accounts rejected again, for the sixteenth year in a row. The auditors concluded that billions of pounds of EU funds were spent wrongly, such as farmers being paid for crops that were never grown, or sheep being double counted to get extra grants.

The EU has a yearly budget of £88bn, of which £15.5bn comes from the UK (our bill is up £450m on last year, Cameron having failed to abide by a pledge to freeze our contributions.)

If this were a private company the directors would long since have been sent to jail. Instead we are forced to endure this perpetual kleptocracy.

Wednesday, 10 November 2010

English students protest fee increases

English students: skipping lectures

A few posts back this blog noted that Irish students were demonstrating against a University fee rise to €3,000 while English students seemed to be supine in the face of potential fees of £9,000 (and £6,000 as typical fees.)

Well, the English have now revolted in their turn.

They seem to have invaded Tory HQ and smashed it up a bit.

It remains to be seen whether this will have any influence on policy. Probably not. The weak link in the coalition government is really the LibDems. It might have been more effective to invade their headquarters.

Laughing from the sidelines are the Scottish, who pay nothing.

Tuesday, 9 November 2010

BNP back in court, day 2 of 2

Day Two at the Royal Courts of Justice; a smaller coterie of BNP supporters outside and just the stalwarts in the court. Of the defendants only Simon Darby turned up, slipping into place half an hour after the start of proceedings. Nick Griffin is apparently out of hospital but did not come to court, much to the chagrin of the Commission who seemed disappointed that their main target is so elusive.

Today was a morning-only session and Griffin’s brief, David Reid QC, did most of the talking. Mr Reid went through the court order that Griffin & others are alleged to have ignored, showing how each clause either didn’t apply, didn’t mean what the CEHR said it meant, or had in fact been complied with.

He also said that as far as he could see the only reason that the Commission were keeping Darby and Lumby in the case was so they could hit them with costs afterwards. (Muttered conversations outside the court also seem to be along the lines of: pay up and we’ll let you off the hook.)

One of the other barristers, previously referred to as the Munchkin, also spoke (in real life Mr Lay it seems.) One might have slightly more confidence in his grip on the case if he hadn’t kept referring to the British National Party as the “G”NP. Rumpole didn’t speak at all.

Anyway after Griffin’s barrister had laid out the defence, taking all morning to belabour some of the simplest points imaginable – one just hopes his written argument was more cogent – that was it. Case done and dusted. Draft judgement will be handed down within seven days, but it will be secret, and there may have to be yet another court day before final judgement.

Without wishing to prejudice the case, it’s not looking very likely that anyone is going to jail here.

Monday, 8 November 2010

BNP back in court, day 1 of 2

Once more to the Royal Courts of Justice in the Strand where the Commission for Equality and Human Rights (CEHR) today continued their attempt to jail Nick Griffin, Simon Darby and Tanya Lumby.

Only Darby was actually in court, Lumby was caught up in travel problems and Nick Griffin is apparently in hospital with kidney stones. The court heard that he has been in and out of hospital a couple of times this last week. (Kidney stones is “renal colic” when you’re a barrister – not kidding!)

However all defendants now have barristers, Griffin was represented by one David Reid, and Rumpole and Munchkin (see previous post on this subject) were in court for the other two. Like on the 7th of September, Robin Allen, QC, BA (Oxon) for the Commission took charge of proceedings and his first act, even before the judges were in, was to order a line of people to shuffle along so that “Susie” the black lady from the CEHR would have somewhere to sit. The line in question was somewhat reluctant and “Susie” had to go sit down in the well of the court.

By 10:45am Lord Justice Moore-Bick and Mr Justice Ramsey had entered the court, each closely followed by a flunkey to pull out their chair for them. (This is a two-judge case therefore two flunkeys are also required.)

Mr Allen QC was then on his feet until the court rose at 1pm. In a long and turgid exposition he recapped the whole sorry saga going back months if not years. In an impressive display of mental fortitude their Lordships on the Bench didn’t fall asleep. Possibly the effort of turning over the pages at Mr Allen’s direction was keeping them awake.

By lunch time the judges had managed to extract from Mr Allen that the Commission’s position was that Nick Griffin had complied with the court order to change the BNP’s constitution in a tardy and partial manner and had sent something by email which he should have sent by post.

The Commission’s case is proceeding like a crab, making small forward progress but mainly shuffling sideways. They ordered Nick Griffin to change the BNP’s constitution and put up a message to all members on the website. So Nick did that. But then the CEHR didn’t like the wording of the change, and didn’t like the fact the message to all members was put on a members-only website, and didn’t like the fact that the clauses they wanted out of the constitution were only “suspended” not deleted – whatever that means.

One suspects that using the BNP members-only website to communicate with the members didn’t involve enough public humiliation for the CEHR’s liking.

However, his Lordship Lord Justice Moore-Bick seemed to know how to deal with crabs and as Mr Allen sidled off on a tangent he brought him on track every time. Mr Allen went downhill a bit as the morning progressed; he started by calling Nick Griffin a liar and saying the means to “sequester” him were close at hand (did he have a room full of cops next door?) but by the afternoon he was back-pedalling, saying he didn’t want to create a martyr, and that maybe a small fine would be an appropriate sanction but he left that very much up to the court.

Of course the CEHR is trying to win this by bankrupting the party with costs, not by winning an argument in court. They’re just looking to throw enough mud to have the costs awarded against the party.

It has to be said Nick & co don’t seem to have done themselves too many favours. Why didn’t they just comply with the original court order in a timely manner? And it seems Nick sent in his evidence in the form of five different affidavits, each one superseding the previous. That’s not very organised, to put it mildly.

Anyway, the case continues. Tomorrow the defence barristers will get a look in. Today most of them hardly said a word. I can’t wait.

Friday, 5 November 2010

The ICT immigration con

Our new coalition government promised to clamp down on immigration and restrict the number of work visas issued. And for a while it looked like they had done as they promised. Sponsoring organisations have been cut back on the number of foreigners they may bring into the country. The Universities have been particularly hit - top research jobs remain unfilled because the number of foreign scientists they can give jobs to has been halved.

Only premiership football has been exempt. Manchester United and friends still get to bring in as many foreign players as they like.

But unfortunately the government (probably deliberately) left the back door open and migrants are swarming through.

The back door is called ICT - Intra-Company Transfer.

If a multinational company has overseas staff it wants to bring into the UK for a couple of years the rules are very lax. The lucky employee needs to earn about £24,000 a year (from which travel and subsistence costs may be deducted so in reality they can be paid as little as minimum wage) and be an "expert", ie have a relevant degree, or three years' experience. The company then gets to employ this person in the UK and no taxes are paid either by the employee or the company for two years.

A big trade in "bodies" has been set up, bringing mainly Indian IT workers into the UK (and the USA under the L1 visa scheme.) These workers have no real connection with the British or American companies they work for, and they displace domestic workers who are more expensive, not least because they have to pay taxes.

Who gains? The employers, whose profits go up. Who loses? Almost everyone else. The domestic worker loses his job and the state loses the taxes the domestic worker would have paid and instead has to pay benefits.

After two years the ICT worker is expected to "go home". But all that happens is that the Indian company that supplied him moves him to another post in the UK or USA.

A number of service companies, eg Tata Consultancy Services, Infosys and Wipro, have got this operation down to a fine art and are effectively running an international trade in contractors, very much not in the spirit of ICT.

This back door needs slamming shut PDQ.

Thursday, 4 November 2010

The Irish are broke

Have a look at this chart...

Would you say it's tending towards infinity?

Do you wonder what it's a chart of?

Well, wonder no more. It's the interest rate the Irish government has to pay to borrow money. (Technically, it's the yield on a ten-year bond.) They pay nearly 8% while the Germans pay little more than 2% for the same thing.

It doesn't look good, does it?

Taoiseach Brian Cowen would be well advised to have the IMF on speed dial!

That said, they are probably OK until the middle of next year due to having sold all the bonds they need to sell for the next few months.

It's QE2, the Americans are printing momey again

Yes, Ben "Helicopter" Benanke, Chairman of the New York Federal Reserve Bank has decided to quantitatively ease another $600bn on top of the $1.75 trillion he has already printed so far. This new money will be drip fed into the US economy at the rate of $75bn a month until the middle of next year. Specifically it will be used to buy bonds thus converting "savings" into cash. Ben will be looking to buy "distressed" bonds (unlike in the UK where Merv only buys gilts with his QE money.)

This is expected to have two beneficial effects (i) money market interest rates should fall, and (ii) banks should hand out more money to companies, because cash earns nothing sitting in their vaults.

In practice what happened last time Ben did this is that new money mainly got spent buying things on the stock market. The banks don't see why they should take a risk lending the money to people when they can just use it to buy paper that yields a nice return. So a stock market boom is to be expected. In fact, it's too late to expect it, it happened as soon as Ben announced the new QE yesterday. (And much of it had already been priced in.)

Now, here in the UK Merv has just today announced that QE will be held at £200bn and the base rate is sticking at 0.5% for yet another month. This must be irking him somewhat. The UK QE is equivalent to 12% of GDP and since our economy only grew about 3% over the last year we currently have a "real" growth rate of -9%. Merv would love to QE some more to fend off the possibility of a double-dip recession, especially since the second dip would be the real recession, much deeper than the 2008 recession.

But unfortunately Merv has been presenting QE as the solution to deflation, but we currently have inflation, CPI and RPI are about 50% over target. Merv can't bring himself to say: I've lost control of inflation but I'm going to print more money anyway because I've also lost control of growth. (At least in USA they do have some genuine deflation going on, house prices falling, etc. That said, see a critique of Ben here.) None of that here in the UK.

However, I wouldn't totally guarantee that Merv will hold his nerve forever. He may decide to QE anyway. He's got big inflation booster coming up in the form of the VAT rise to 20% in January, up from the current 17.5%. He might claim this is somehow an "artificial" inflation that doesn't really count.

Of course it may not count to him, but you'll still notice it when you go shopping.

The Irish are revolting

Yesterday about 25,000 Irish University students protested in the middle of Dublin. Apparently their fees might be going up to €3,000 a year. They displayed catchy slogans such as "Education not emigration" and "BA Hons not BA to London".

25,000 Irish Students

Two thoughts occur...

1) Our government is threatening to put University fees up to £9,000 a year - why aren't our students demonstrating?

2) Irish students are fully entitled to attend British Universities if they want, and under EU provisions cannot be charged in a discriminatory manner, ie, have to be exempted fees if they are poor, and have to be given loans otherwise, which there will likely be no way of making them pay back.

And while English students are paying £9,000 a year for the privilege, Scottish students will continue to received a free tertiary education in Scotland, although they have to pay if they come south for an education in England. (Strictly speaking Scottish students ARE charged fees in Scotland but the Scottish government pays the bill for them.)