Monday, 28 March 2011

Our economy is unbalanced

One of the Office of Budget Responsibility forecasts George Osborne gave in his budget last week is that wage growth this year is expected to be 2.0%, and next year 2.2%.

So we currently have RPI inflation running at 5.5% and wages growing at 2%.

This means that on the year spending power will decline by 3.5%.

Then next year spending power will be down by almost 7%, unless inflation is controlled.

Then 10.5%.

And so on.

And as each business receives less revenue so its employees in turn spend less and there's a downward spiral.

The government seems to think inflation will  fix the economy and has tipped the wink to the Bank of England to let rip. The chancellor of the exchequer and the governor of the Bank of England continue to exchange their billets doux every three months when Meryvn King reports he had missed the inflation target again and George Osborne replies that it doesn't matter. MK has been missing the target for years now. In any other job such a poor performance would have got someone canned, but the governor sails serenely on.

It would seem the government actually wants inflation and MK is happy to provide it. The government seems to think inflation will solve our problems. The root cause of our economic malaise is too much debt. And it's true that historically inflation has made the debt go away. Inflation robs savers, but provided you were prepared to take the stick for doing that then the inflation solution used to work.

But inflation is not going to fix the economy. Wage inflation would do the trick, but wage inflation isn't happening. We have the wrong sort of inflation. Our inflation is imported price inflation: higher oil prices, higher food prices, higher textiles, higher raw materials. And we have a service economy. Manufactured goods are price resilient because so much of the cost is raw materials. When you have a service economy and the customers all say "serve me cheaper or I go elsewhere" you have no choice but to take it on the chin.

To fix our economy we need wages rising ahead of inflation. We can either go the hyperinflation route and print enough money to make wages go up or control inflation by raising interest rates. The first option requires increasing the printing geometrically over time to sustain the wage/price differential and sooner or later you run out of paper to print on. And long before that you run out of credibility.

Now normally this wage/price imbalance would cause a recession which would kill inflation because consumers can't afford to pay more. But, to repeat, our inflation is foreign and foreigner suppliers care eff all that we cannot afford their goods. What they don't sell here they sell elsewhere.

So really the options are: raise interest rates now, control inflation and probably have a small recession due to the over-endebted going under, or don't control inflation and have a much longer and deeper recession later.

A small recession now would reduce house prices, land prices, wages, generally deleverage the economy and make UK Plc more competitive all round. Employees paying less for their housing in turn can be paid less for their labour. It becomes cheaper to acquire land, to build a factory or office block, to hire staff and produce goods or services and the country becomes competitive once more.

Or the government can let the wrong sort of inflation rip and have a much worse recession later. Imported raw materials will soar in price away from the affordability of domestic businesses. There will be some attempts to replace imports with domestic production but we cannot make oil out of air. Nor, realistically, will we find replacements for imported food or other commodities. This kind of recession doesn't go away for a generation. In fact the younger generation often decides that it would be better to move abroad where they can get better rewarded work and pay lower taxes. (Already happening in Ireland.) So the ratio of taxpayers to state beneficiaries gets worse and taxes cannot be reduced to stimulate growth and the downward spiral fuels itself.

I seem to recall the before the general election Mervyn King said that whoever won would be out of power for a generation. That may be his only accurate forecast ever!

Wednesday, 23 March 2011

Budget 2011

George Osborne has just delivered his second budget to the House. The Red Book is here. The basic taxation and spending plans are given by these charts.

(Click to enlarge)

As you can see he's planning to borrow £122bn in 2011/12. In fact his borrowing plans are as follows:

The comparison with Osborne's first "emergency" budget looks like this:

So he's raised his spending by 1.87%, not too bad, but at the cost of raising taxation by 7.5%

It seems we have quite a painful year coming up. The main tax rises were already "programmed in" before today. They mainly consist of raising the national insurance rates and under-indexing tax allowances. In fact the 40% tax threshold is being reduced. A number of people receiving no pay rise this year will none-the-less find themselves moved from the 20% tax and to 40%.

The chancellor's economic expectations are now that growth next year will be 1.7% - which is a reduced forecast but still optimistic considering that Q4 of calendar 2010 (our most recent statistic) was -0.6%, ie shrinkage not growth.
He threw in a couple of tasty tax cuts: corporation tax is to be reduced immediately from 28% to 26% and then down to 23% in subsequent years. He also cut 1p off a litre of petrol and cancelled the upcoming duty increase.

On the fuel side of things he has a cunning plan to stabilize petrol prices. When oil goes above $75 per barrel like it is now he will use the excess revenue from our North Sea oil production to cut prices at the pump. When it fall below $75 he will let the North Sea operators keep their cash.

He plans to merge National Insurance and Income Tax. He said this will take many years to implement and pensioners will be protected (they don't pay NI) and will retain the contribution principle. 

There was quite a lot of good stuff for business. Another 21 enterprise zones are being created. Planning is to  be simplified; small and start-up businesses are to be protected from more domestic legislation; the dual discrimination provisions of the Equality Act are to be abolished (these allow an employee to claim discrimination based on, say, being a woman AND being pregnant.) The banks will be lent on again to increase the loans available to small business by 15% and Entrepreneur Relief is being doubled to £10m.

On the personal taxation side not much changes if we overlook the under-indexation of allowances. Non-doms who stay in the country for more than 12 years will have to pay £50K rather than £30K in taxation but there will be relief if they bring investment funds into the country. Everyone else will be better off provided they earn less than £35K pa.

Alcohol duty is frozen except on strong beer. Tobacco is going up at inflation plus 2%. Tax discs are going up by inflation only (which is naughty to put it mildly - not many people are getting pay rises which keep up with our ever rising inflation. George is taxing us on his own incompetence!)

On housing £250m will be made available to first time buyers as part of shared equity schemes, provided they buy new builds. The new build requirement makes this more of a bung to the property developers than anything else. SMI (Support for Mortgage Interest) is being extended. This pays some or all of the mortgage interest payments for people who lose their jobs, or suffer reduced circumstances. SMI was due to run out, but is now to continue for at least another year. You may recall SMI was trimmed quite considerably in Osborne's previous budget.

Quite a few new technical colleges are to be created and some railway lines are to be upgraded.

Young people will get 100,000 new places on work experience, and 40,000 new apprenticeships.

Charities will be able to claim up £5,000 of Gift Aid per year without paperwork and inheritance tax will be reduced by 10% if 10% of the estate goes to charity.

The plans for a Green Investment Bank are being brought forward. The bank will start life with £3bn of government money. Its purpose is to provide loans for "green" schemes which are too long term or too risky for regular banks.

All in all it was a largely boring budget. No great shocks. Most of it had been leaked beforehand. Even the shadow chancellor Ed Balls was brandishing a copy of the speech yesterday.

Tuesday, 22 March 2011

Inflation numbers for February are out

Yes, that's the grim news. CPI 4.4%, up from 4.0% in January, and RPI up from 5.1% to 5.5% in February.

This is extraordinary. The BoE already had access to these numbers at their last rate setting meeting when they decided to continued their strategy of "vigilance" and masterful inaction.

If your savings are denominated in sterling you are being taken for a ride. You need to get them out, into Swiss Francs or Norwegian Krona or gold, anything which will hold its value. It's clear now that the Bank of England intends to let inflation rip.

This time last year the Bank of England gave a "central prediction" that today's CPI number would be 1%.

Their forecasting, like their control of inflation, is utterly inept.

Tuesday, 15 March 2011

The Japanese want their yen back

It's a rainy day in Japan.

At the time writing three nuclear reactors are overheating; one has been on fire, one may be cracked and leaking radioactive gases. Radiation of 400 millisieverts per hour has been recorded at the Fukushima Daiichi site - 100 millisieverts per year will give you cancer.

Meanwhile the death toll from the earthquake and tsunami hasn't even been evaluated yet. The news media are now largely ignoring this side of things The most recent estimate is 1300 fatalities but it seems quite reasonable to assume the final count will be over ten thousand.

In all this tragedy the Japanese people have shown themselves to be true heroes. There have been no reports of civil disorder; no reports of mass hysteria; no reports of resistance to the decisions of the authorities. The contrast with, say, the New Orleans Katrina hurricane couldn't be greater. In New Orleans even the police officers took to looting TVs from Walmarts.

It hasn't taken long for the commentariate to move from bodies in rubble, to exploding nuclear reactors, to the effects on the world's economy. Will oil go up because Japan needs more to rebuilt or down because Japanese industry is effectively switched off for now, and you can't drive very far anyway? Will their bonds go up due to a wave of patriotic buying (the Japanese people own 95% of their own government's debt) or down because the government will be plunged into a fiscal crisis?

For the last twenty years, since 1990 or so, the Japanese have lived in a deflationary environment. And in a deflation saving is very attractive - your money gains value while it's sitting around doing nothing. The Japanese government has spent the last two decades trying to get the Japanese to spend their cash but nothing doing, the yen just piled up.

Burned by the economic crash of the late 1980s the Japanese housewife, custodian of all money in Japan, decided to save hard in case of future rainy days. However with the government reducing interest rates to ever lower levels to try to get some spending happening Mrs Yamamoto couldn't get any return on her cash, so she sent it abroad where the interest rates were higher.

The yen carry trade, as it became known, moved about two trillion US dollars' worth of yen into the West, into the USA, Europe (mainly the UK), and into Australia and New Zealand. And did we make hay with this abundant cash? Yes, we did! Money became cheap in the West. We took out massive mortgages to buy over-priced houses. We took car loans. We took holidays on the never-never. We partied for a decade.

But our borrowings are Mrs Yamamoto's savings. She was saving for a rainy day. And it's likely that the Mrs Yamamoto needs the cash now to do some work on the house, or to make up for the fact that Mr Yamamoto's factory isn't running at the moment.

Basically Japan looks likely to suck back in all the cash it exported between 1990 and 2007. (After 2007 there wasn't an interest rate differential to make the yen carry trade worth while.) Of course when Western currencies are sold for yen the yen will rise in value. This has already started happening and the Bank of Japan has tried to contain the situation by pumping cash into the economy, but they have their own "meltdown" situation. A couple of hundred billion USD's worth of yen pumping isn't going to stop two trillion USD's of yen being called home.

So money could be getting tight around these parts. If you want a loan, a mortgage perhaps, you may find that Mrs Yamamoto got to the bank first.

The Americans will likely deal with this problem with more dollar printing, aka quantitative easing. Tight money is deflationary, answer: QE. The situation in the UK isn't so clear cut. Our CPI inflation is already double its target, and that's not because we've been giving ourselves greedy pay rises, it's because world commodities have gotten rather expensive. And with Japan sucking in resources to rebuild, commodities aren't going to get any cheaper (after the initial economic hiatus has worn off) and we in the West are just going to have to tighten our belts.

(Additional: Might as well put a stake in the ground. This morning a pound would buy you 132.5 yen. Let's see how that moves over the coming days.)

Thursday, 10 March 2011

No fear of debt

For some debt is a fearsome thing. It's a monster which must continually be fed and if it ever gets the better of you the consequences will be, at the best disgrace in your peer group, and at worst homelessness, hunger and penury.

Most of us have a healthy apprehension of debt.

But there's a another group of people who know no fear of debt at all. They love it. The more they can borrow the better. These people have a name, they're called billionaires. Here are a couple of choice specimens:

Tchenguiz Brothers: Property billionaires

This pair of chancers made their fortune by borrowing as much as they possibly could, investing the cash in property, then using financial leger-de-main to use the property as security to borrow even more cash and start all over again.

In this manner these London-based, Iranian jews built a business empire once worth more than a billion pounds.
But just as a rising tide floats all boats so when the tide retreats you get to see who has been swimming naked. (Apologies to Warren Buffet for blatant quote theft!) And it seems the tide as just gone out on the Tchenguiz brothers. They were arrested at 6.30am yesterday by a team of 130 police officers, including a couple of cops from Iceland. It seems they have questions to answer on the general subject of the collapse of the Kaupthing Bank.

There are two approaches to the borrow as much as you can and assume the day of reckoning will never come school of business. One, you just hope that day will never come, or at least not until you're dead and buried, or at least too old and gaga to be prosecuted. If the day comes then take it on the chin and tell yourself that at least you lived in the lap of luxury for most of your life even if you end your days in prison. This could be called the Bernie Madoff method.

The second, and more subtle way is to insulate yourself from the debt so that if and when the day to pay comes it turns out you don't actually owe anything.

The Tchenguiz brothers strike me as being of a subtle nature. 

The hope of the "billionaires" of course is always that the rising tide will continue to rise for so long that being long in physical assets and short in cash will eventually shrink their debt to the point where they are genuinely rich and debt-free. Never forget that money continually loses value, and tangible assets rise for decades at a time.

Sometimes though, the door to genuine, debt-free wealth slams shut on you just as you're about to jump though. Bummer!

Tuesday, 8 March 2011

Emdadur Choudhury fined £50 for burning poppies

Here is Emdadur Choudhury

Choudhury: Burned poppies during 2 minute silence

During last year's Armistice Day (November 11th) ceremony in Kensington, West London, Choudhury burned poppies and his supporters chanted, "British soldiers burn in hell". For this insulting behaviour he was yesterday fined £50, which he rightly remarked is only £10 more than a parking ticket.

 Supporters clash with police

Fortunately for Choudhury he receives £800 a month in welfare benefits from the British taxpayer, so finding the cash shouldn't be too hard.

The Leeds-born (his parents moved here from Bangladesh) 26-year-old father of two declared: "I don’t have any respect for British soldiers, and if they lose a limb or two in Afghanistan then they deserve it. You expect me to feel sorry for them? Of course I don’t."

Some think the sentence is a little on the lenient side. However, in the USA it wouldn't have been an offence at all. It would have been a "protected" act - allowed by the 1st amendment to the constitution. This blog tends to agree. It was not so much criminal as in bad taste. Ideally the court would simply have given him an absolute discharge - followed by deportation to the muslim land of his choice of course.

Friday, 4 March 2011

Barnsley Central: Labour hold

The results are in for Barnsley. They look like this:

As expected Labour romped home with an increase in vote share although a drop in  total votes cast due to the reduced turnout.

The shock of the night was the Lib Dem wipe out. They lost two thirds of their support, came sixth and lost their deposit. Again they are paying the price for being in coalition with the Tories. It may all be cosy at Westminster but in the country the grass-roots membership is hopping mad at the betrayal of their principles.

UKIP are the big winners of the night, more than doubling their share of the vote and pushing the Conservatives into 3rd place. We are beginning to see a trend of UKIP being the party of choice for the "protest" voter. None-of-the-above becomes UKIP at the polls.

The BNP turned in a credible performance. There was a small loss of vote share but the deposit was retained, and of course it's very satisfying to beat the so-called 3rd party of British politics, the Lib Dems.

Enis Dalton (BNP): Retained deposit and beat the Lib Dems

The lesson for the BNP is the same as it was in Oldham Central. There needs to be an accommodation with UKIP (and the English Democrats). We cannot afford to have the anti-EU, anti-immigration votes spread across several parties. At the very least all three parties should be running joint candidates, and in the longer term a merger should be considered, maybe a British National Independence Party could emerge.

Thursday, 3 March 2011

Voting today in Barnsley and Wales

Today the citizens of Barnsley Central are going to the polls to replace their jailed MP Eric Illsley currently serving 1 year as a guest of Her Majesty for fiddling his expenses to the tune of £14,000. The results in the constituency at the 2010 general election were as follows:

 (Click to enlarge)
As you can see Labour won comfortably with nearly half the vote. Labour will also win this time - their supporters do not seem to be blaming the party for the actions of the MP. The main question from a nationalist perspective is whether the BNP will gain or shed voter-share.

At the Oldham East by-election, held back in January to replace the disqualified Labour MP Phil Woolas who knowingly made false statements about his rivals, the BNP lost voter share and slipped behind UKIP. This was due to UKIP being able to focus its far greater resources on the constituency whereas at the prior general election Oldham East was a BNP priority but of no great interest to UKIP.

Meanwhile the Welsh are also at the polls.They are not electing anyone, just deciding whether to make the Welsh Assembly more autonomous from the parliament at Westminster. The question they are being asked is: "Do you want the Assembly now to be able to make laws on all matters in the 20 subject areas it has powers for?"

The likely result is "Yes". The difference this will have on the lives of people in Wales is effectively zilch. The referendum was part of the Lib Dems' conditions for joining the coalition government and is of interest to practically no one else.