Category Archives: economy
2005 revisited
Yesterday’s budget sounded a note of optimism. The economy is growing, the deficit is shrinking, and …
… hang on …
… the deficit? We’re running a still-huge deficit when we’re in the cyclical boom? Right, straight back to the bubble-economics that got us into trouble in the first place!
2005 was kind-of the opposite. The economy was slowing, the credit bubble had grown beyond sustainable, house prices were stumbling, and we were staring at recession. The government of the day spent its way out with a huge dose of Ballsian stimulus: add fuel to the fire, buy a couple more years feelgood at the price of turning that recession into the biggest slump for 30 years.
The chancellor of the day rationalised breaking his own rules by explaining that when he had talked of a balanced budget, he meant over the economic cycle. So at the bottom of the cycle in 2005 he would spend more, and make it up when the economy recovered. Ed Balls said much the same even as his idea collapsed in flames. And now … today’s chancellor has made clear his own commitment to Osbrownomics: run a huge structural deficit and – currently – claim the credit when a cyclical boom takes a few quid off the headline figure.
Hmmm … not really so different to 2005 after all …
On the plus side, the mood music about savings is a real change, and a welcome one. It will probably work for some time, propped up by “safe haven” status for the global super-rich. But that of course is another bubble involving prostituting our economy most wantonly! One day sentiment towards Sterling will change, and then what can survive a round of Weimar inflation in commodities including food and energy?
All in it together? Not me!
Our beloved government tells us we’re all in it together, and must take a share of the pain.
I’m struggling to see much pain coming my way from today’s spending review. I was a little concerned about rural bus services (most of which are subsidised, and in a car-dominated world would struggle without a subsidy), but it seems they’re only suffering a small cut[1]. On the positive side, quite a lot of worthwhile investment is not being cut. Probably the worst cop-out is the amount of pork-barrel spending that lives on, such as sacred-cow bribes to today’s pensioners (even as younger folks see our future entitlements reduced) – but we knew that already.
How do I escape? Well, partly it’s the usual story: they’ve managed expectations so the actual announcement is ‘not so bad’. But more to the point, it’s where I’m coming from: as a single working person, the system ordinarily expects me to pay for everything but get nothing back. I haven’t lost anything in the spending review, because I had nothing to lose[2]!
Actually there is one more substantial loss. The changes to the pension rules are going to make it harder to afford a house before I retire. But that’s more than offset by the apparently-substantial reductions in money going in to the housing market to keep it unaffordable. Under successive government’s housing policies I’ve spent many years paying three times over[3] into the pockets of far richer people, but finally there seems to be a real prospect of that correcting. If house prices fall sufficiently then restrictions on what I can save cease to matter! 🙂
Having said all that, I’m concerned the spending review looks hopelessly inadequate to tackle the dire state of public finances. I’m more impressed by bold moves like the Scottish parliament’s getting rid of 25% of NHS management posts, if (as seems unlikely) we can take that at face value.
[1] As witness the extremely unusual fact that the bus companies en masse were the stock market’s best performers today on hearing the news.
[2] The budget is of course a different story.
[3] First through taxes, some of which are channeled into housing, both in ‘affordable’ and ‘social’ housing, and in housing benefit. Second through rent, which is inflated by having to compete with housing benefit recipients who have no incentive to seek a good deal. And third, if I get rich enough to buy, by prices inflated by all that public money, including not least the inflated yields (rents) for property pimps.
Νέμεσις
Could today be nemesis for Greece’s tragedy?
News reports tell us three people were killed in a bank firebombed in a riot today. And that the demonstration organisers were shocked into calling it off when they heard the news. Could it be that history will put today down as the day they turned the corner, lost the appetite for destructive protest (those who have it), and buckled down to try and work their way out of their troubles?
If so, let me wish them all the best. Not that anything I say matters. More importantly it seems Mrs Merkel is trying hard to help them to help themselves, steering a perilous course between a Σκύλλα and Χάρυβδις of conflicting demands. And they perhaps have the Irish model to follow.
What will it take to move the UK on from hubris? With all the manifestos still firmly in denial, tomorrow’s election is a lost opportunity.
[edit to add] Showing my ignorance here. Of course I meant to say Κάθαρσις and strike a much more optimistic note.
A plague on both your houses!
The spectacle of our politicians going into the general election just gets ever worse.
Last week, not unexpectedly, the chancellor gave us the pampers budget: a bit of superficial feelgood, but absolutely nothing to stem the disastrous effluence of ten years of monetary and fiscal incontinence. Modest election bribes for key interest groups pensioners and motorists, confirmation of previously-announced tax rises, absolutely nothing to surprise.
But then he goes on to say we’ll need cutbacks a great deal tougher than those Mrs Thatcher introduced to dig us out of our last major trouble. Another stroke of PR genius: everyone’s in favour of savings in the abstract, but as soon as a future government turns that abstract into real proposals, they are inevitably horribly unpopular. All hell breaks loose amongst – at the very least – relevant interest groups and their representatives in the meeja, and now Labour is positioned to point and say “it wouldn’t have been so bad under us, but they killed the recovery.” Worse, noone is even challenging the notion of “the recovery”: they’re all complicit in the “feelgood” encapsulated in the pampers budget.
A while ago I wrote that I’d hold my nose and reluctantly support the tories. That was on the supposition that they’d at least be better than the current lot. Since then, they’ve done nothing but disappoint. We desperately need a credible programme of substantial cost savings, but instead they’re giving us exactly the same as labour: more pampers! And looking back, they’ve been complicit in many of Labour’s worst deeds, from the Iraq war to Bank bailouts. A thoroughly dismal prospect.
Then finally today a real policy: they’ll reverse one of Labour’s tax rises. Except … not reverse it, rather tinker with it, to affect different people differently. WTF? More labyrinthine complexity for the poor taxpayer to wade through. This is the very mindset of rampant Big Government and a principal root of what’s wrong with Brown. For ***** sake, choose one or the other; either keep it or abolish it, don’t tinker! Obfuscation and complexity serve the corrupt: should we take this as an announcement ahead of time?
Or, far better, get rid of the NI designation altogether, and replace it with honest taxes. Best would be radical reorganisation, but failing that they could at least fold NI into income and corporation taxes. But that’s another rant.
So I reluctantly conclude that I can’t support the Tories, not even as a less-bad option than Labour.
What else can one hope for? There isn’t another option for our national government. There is, as usual at election time, lots of media speculation about Libdems holding the balance of power, so what about them? Alas, yet another unpromising prospect. A couple of years ago they caved in to meeja pressure dumped a leader I liked on the grounds that he was too old(!) in favour of a chinless wonder. They include an alarming element of “Old Labour” style ideology, and until recently had by far the most unaffordable spending plans of any national party: the luxury of someone who won’t have to govern. To their credit, they’ve gone much further than the main parties in identifying specific policies they’d have to abandon (or postpone) in view of the economic disaster. But a look at their website (in composing this post) tells me they’re still hugely pledged to tax-and-spend at utterly innumerate levels. Oh dear.
Shall I change my name by deed poll to None Of The Above and stand for election? On a central platform headed by the abolition of the Westminster parliament.
How to stifle an economy
Following my little rant on Wednesday, it’s clear vet gets it (albeit with more cynicism than I had intended), but it appears none of the powers-that-be (including the mainstream meeja) have noticed a problem.
So let’s try again. First, in the current world, with big tax breaks for empty properties:
Entrepreneur: I’d like to rent your business premises. Here’s my business plan: as you can see, it moves into the black in year 3. I’ll be bringing this great new service to the area, and I’ll employ 6 people there.
Landlord: Here’s our price list (it’s only 10% up on last year).
Entrepreneur: There’s no way I can afford that initially. How about a reasonable reduction for those critical first two years?
Landlord: That’s our price. Take it or leave it.
Entrepreneur: But you have a monopoly on business premises, and 30% of the high street is standing empty. Surely it’s in everyone’s interest for me to open shop?
Landlord: Goodbye.
Entrepreneur is unable to open new business. The area doesn’t get its new service. Jobs are not created. High street just falls further into dereliction, as only charity shops (who enjoy good tax breaks of their own) can afford it[1].
Contrast a world where there is no tax break for empty properties. Now the half-derelict high street is costing the owner real money, so it’s in his interest to come to a compromise with the entrepreneur:
Entrepreneur: I’d like to rent your business premises. Here’s my business plan: as you can see, it moves into the black in year 3. I’ll be bringing this great new service to the area, and I’ll employ 6 people there.
Landlord: Here’s our price list (it’s only 10% up on last year).
Entrepreneur: There’s no way I can afford that initially. How about a reasonable reduction for those critical first two years?
Landlord: We’re not a charity, and we have to consider our investment and overheads!
Entrepreneur: But you have a monopoly on business premises, and 30% of the high street is standing empty. Surely it’s in everyone’s interest for me to open shop?
Landlord: Well, we can’t meet your request in full, but maybe we can meet you halfway for the first two years. I’ll put it to my board and see what we can do.
Entrepreneur: Thank you.
A better outcome all round, except for landlord who fears lower rents more than empty properties!
p.s. glad to see the chattering classes have picked up on how damaging the employment tax is (maximum marginal tax rate on earned income now rises to 76%[2] from April 2011). Though it’s the fact that the increase also applies to middle-income people that’s mostly stirred things up: guess that’s where there are more votes.
[1] Nothing wrong with charity shops, but they tend to be remarkably similar to one another, and the demand for what they do is satisfied by one or two – not the ten or twenty we commonly see in a high street today.
[2] If you earn £100k, and get a rise to £101k, government will take £620 of that rise from your paycheck and another £140 employment tax from your employer, for a total of £760.
The most scandalous break of all
Today’s “pre-budget statement” (pre-election statement) brings no big surprises. Taxes on productive work and employment up, some “stimulus” tax breaks ending. Huge election bribe for pensioners. Token attack on banker bonuses.
One announcement stands out as the biggest scandal of all[1]. Tax exemptions for empty business properties to be maintained. So our property hoarders are to be rewarded, while productive business who might be bringing a product or service and generating jobs can be squeezed out, or forced to pay crippling rents in a rigged market. That’ll do as much as anything of late to suffocate any prospective recovery in the real economy.
It’s bad enough in a small country where space is always at a premium that there should be no penalties for hoarding property. But positive rewards for it are an absolute outrage!
There’s a parallel argument regarding tax breaks for empty residential property. But it’s secondary: residential taxes are much lower, the breaks for empty property are smaller, and there are separate issues with how it is taxed. On the other hand, there’s still a scandal of rapidly rising numbers of empty homes – and no pressure on their owners – in a country where many struggle to house themselves.
[1] Just in case anyone thinks I have a vested interest, I should perhaps clarify that I am employed by a big company and work from home. So I’m about as far from being affected by this myself as it’s possible for anyone in the UK to be.
Defying your betters …
In today’s mail, a letter from the Yorkshire Building Society (of which I am a member, by virtue of having a few quid in an ISA there) concerning the proposed takeover of the Chelsea, a building society that’s got into trouble.
The letter assures me that “Your Board unanimously believes that this proposed merger is in the best interests of the Yorkshire’s members.” The reasons cited have merit: for example, it will indeed expand the branch network[1], but I can’t help thinking this is just one side of an argument with two sides.
Especially so in the current economic climate, where the powers-that-be are desperate to sweep any problems of bust financial institutions under the carpet to fester, and are prepared to do so fraudulently. A little over a year ago, the Chelsea was itself the white knight riding to the rescue of a much smaller building society; now it itself is in trouble. That deal was surely far too small to have had a significant effect on the Chelsea, but this proposed deal is not: in terms of size it’s a merger of relatively-equals. Who’s to say the Chelsea’s current debt might not drive the Yorkshire down in another year?
Besides, I really don’t want to be complicit in propping up the current government’s policy of mass Denial, which is currently pushing our economy the way of Weimar. If a small crisis now over the Chelsea can help break that dam before it grows even bigger, then I’m for it.
I’ve never voted against a motion from the board of an institution like this before. But there has to be a first time.
[1] But since the local branch of the Yorkshire (where I opened my account) closed, neither BS is accessible from here.
Confidence trick
Today’s news about the government supplying an additional £60 billion to the Scottish banks last autumn is shocking, but not surprising. The explanation is that it was done on the quiet so as not to damage confidence. Or in other words, it was a con trick. We hear they repaid the money a few months later: it’s not yet specified, but I guess they drew on the funds that are now taxpayer shareholdings.
Now I’m no lawyer, but I understand that obtaining money by deception is fraud, and is a serious crime. That’s why public companies are required to publish accounts and to have them audited: so that people dealing with them can assess the financial risks in doing so. That includes shareholders. Was anyone who bought RBS or HBOS shares while the loans existed defrauded? Seems like they should have a case.
But the time that was happening was also the time when safe-and-solid Lloyds bank, with an excellent dividend but without the spectacular gamblers’ returns of the Scottish banks, was taking over the zombie HBOS – the biggest basketcase of all. Lloyds went from being the healthy bank that hadn’t needed a rights issue to being itself a basketcase needing a government bailout. Contrast Barclays: they were in worse shape than Lloyds pre-crash, but came out on top by buying Lehman’s assets from the receiver, as Lloyds should’ve done with HBOS.
We know Lloyds shareholders were seriously shafted by some combination of Lloyds own board and government pressure. But Lloyds shareholders also had a vote. Not a very useful vote, given that the big institutional shareholders were also HBOS shareholders who stood to see those holdings wiped out. But nevertheless a vote, and that was taken in the absence of financial information that was clearly as relevant as it was huge.
The inescapable conclusion seems to be, Lloyds shareholders were defrauded. Massively!
I was a Lloyds shareholder myself when all this started, and indeed, these shenanigans turned me from a long term buy-and-keep shareholder to a trader, as I took advantage of the wildly-fluctuating market. Since I’ve made a net profit trading Lloyds shares during and since the crash, I’d be hard-pressed to demonstrate a loss, so I don’t see mileage in my joining a class action, or anything else that might be about to happen. But I can still be pissed off by this dishonesty.
Prisoners Dilemma and Boom&Bust
Bank of England prints new money, up to 20%[1] of the money supply.
Stock market rallies hugely, on thin volumes of trading. Well, that at least has some merit, given quite how far it had fallen.
— But —
an unheard-of 18% fall in investment! A nominal fall: against what should have to be a 20% rise to retain its value in real terms! The productive economy is dropping out of competitive measures other than cost-cutting (notably staff costs).
And that 20% of new money gets soaked up by housing, where the price crash has halted since the spring, again on low numbers of transactions!
It’s a prisoners dilemma: do individuals use their money for the overall good, or for personal gain? In a healthy society, the two would be, well, if not fully aligned, then at least not in stark opposition to each other.
You take out a big mortgage, get security, big tax breaks, and government bailouts if you lose your job. You rent and save for a house, you get poor security, and you have to live on the savings (including investments) if you lose your job. So here’s the prisoners dilemma: if the job’s not secure, get the biggest mortgage you can, and put those savings into a house!
Repeat over lots of prisoners-dilemma-victims and the economy takes a real hit: the tax-and-benefits system has hobbled it. Not once but twice: the money sunk into a house is not being invested in the productive economy, and the homeowner has lost flexibility to move!
It seems to me we’re on a timeline with this escalating boom&bust:
2005: house prices take a small fall, quickly “corrected” by low interest rates, ~15% underlying inflation (M4 money supply), and pouring public money in.
— leading to —
2007: lenders start going bust
2008: house prices take a bigger fall, “corrected” at mindblowing expense to the economy
— leading to —
2010? government starts going bust
2010/11? house prices take a proper collapse, taking the currency and much else with them.
What to do about it? Well, emigrating again has appeal. Short of that, I’m putting ever more of what I have into assets that derive value from outside the UK.
[1] and counting, until they pull the plug on Denial.
1000 times more damage than Hitler could do
1942-1945: Operation Bernhard seeks to undermine the UK economy.
2009: Bank of England does likewise, but with 1000 times more money. And that’s just a couple of months: how far will they go with another year before an election?
Of course that figure of 1000 times neglects the devaluation of money in the meantime, and therefore grossly exaggerates the difference. But there’s a serious point: Germans in the 1940s remembered the devastation that printing money had brought to the Weimar Republic. In more recent times we’ve seen it only from afar, in Zimbabwe. While the Irish government pulled back from the brink with an austerity budget, we’re just plunging headlong forward from our budget for denial.
The irony now is that this is really no more (or little more) than a partial acknowledgement of inflation that has already happened. The inflation took the form of banks printing money in the form of mortgages, driving up property prices and transferring massive wealth from the highly-taxed productive economy to rich and low-taxed property owners.
Oh lookee, is it time to start saying I told you so?
niq's soapbox 