It is Obvious

Chris Rick has got altogether too much to say

Archive for November, 2009

The rule of 72

Posted by chrisrick13 on November 30, 2009

It is obvious: numbers can be very tricky.

I often run the old prostitute joke on people over house prices, particularly when I hear the words: “I can’t sell my house”.  I ask if they think it could be sold tomorrow for £1m.  The answer is no.  (I don’t have friends that are that rich.)  Then I ask if they could sell it tomorrow for £1.  The answer is always a derisive “of course”.  Then I ask if it could be sold tomorrow for £10.  Then I ask £100, then £1000, then £10,000.  The answer is always that it can be sold.  Therefore we have agreed that it can be sold tomorrow and are just looking for the best price to achieve that.  You can sell your house in any timescale you want (which is usually short) by setting the price appropriately.  This is not a blog about house prices though.

The current increase in world population is down around the 2% level (8 cents a passenger mile anyone?  This won’t carry on for that much longer as in 800 years or so there will be someone for every square metre of land…which we clearly will never reach.  We have 8bn people now.   At what level will there be zero growth?  When will we get there?  Will we reach a sustainable level?  Have we already overshot sustainable and will have a reduction at some point?  We can choose how to prolong and sustain life, but will we ever choose or have to choose how to reduce it?  This is not a blog about population.

I’m interested in the rule of 72 as I used to know it.  In fact I found out that it is actually more accurately the rule of 70.  It is a very useful rule.  It simply says that if you divide 70 by the percentage yearly change in some number you will get how many years are required for the original number to double.

If you buy a house for £100,000 and the value goes up by 10% a year then it will be worth £200,000 in just 7 years.  If you have money on your credit card at 23% and pay the minimum each month then after just 3 years the money you owe will have doubled.  If you have 2% population growth then that means it doubles about 3 times in a hundred years.  So in 2109 we will (would) have 64bn people on the planet.  Clearly the net increase will have changed radically downwards before then.  In 2044 we would have 16bn people and I am very sure that the rate of increase will be down to zero or below before then.

Suppose I have a pension fund that earns me over the long term 7% a year and the long term inflation rate is 3.5% then if I start paying into it at age 20 and retire at 60, I will have doubled my pension fund in today’s terms.  The reality is that a differential of 1% is not often reached and if pensions were taxed they just would not work.  All that I am doing with a pension is giving money away for 40 years (reducing) where the pension fund promises to give me money with the same purchasing power as it had when I gave it to them after the 40 years.  They will also do it via an annuity which will even out what they give to me over my expected lifetime.  If you smoke don’t bother even if you trust pension companies and the world order.

This does not sound like a particularly alluring argument.  I’ll save (say) 30% of my income when I am young, fit and healthy so that when I am old and can do a lot less with my reduced needs I’ll have enough to live on.  How about have fun now and work 1 1/2 days a week when you get older?  If that goes wrong and you can’t work then the state will look after you or your children will.  A much better strategy to my way of thinking.  There are enough people who will have no fun up until they retire and will then have to live off the state.

Do I really think that the financial system will be around to support that in 40 years?  Have I confidence that any pension fund will last that long and make consistent returns over that period?

Perhaps the rule is most useful when applied to GDP?  Recently world GDP has shrunk but there is a long term average.  Picking a number is difficult but I could put up arguments for 2%.  This means that at that rate the world GDP will double in 35 years.  Do you really believe that will happen?  In 35 years not only will there be twice the current population in the UK, but also twice as much economic activity?  At some point growth will reduce to zero.  Either it will be managed or we will have a war, a disease or an environmental problem that will kill a lot of us off.  However the world order has been based on 2% a year for a long time.  The rate of increase is constant but that is not very helpful.  Think of a car accelerating at 2% of its current value each hour starting at 10mph.  At the end of an hour it is going 10.02 mph.  By the rule of 70 it is doing 20 mph after 35 hours.  Any car can do this, even if many drivers could not.  This is not very useful.  You are not going to get anywhere like that…except that travelling from London you would have reached Aberdeen.  The UK government is counting on 3% growth to get this economy out of debt.  How many years do we need that growth rate to get out of trouble?  How many years will pass before our GDP doubles?

Get your rule of 70 out and use it regularly.  More examples will follow.

It is obvious: numbers can be very tricky but it is easy to get control of them.


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Laffer all the way to the bank

Posted by chrisrick13 on November 27, 2009

It is obvious: there will have to be tax rises to get the UK economy out of debt.

I have already written that to pay off the national debt we will have to be prepared for government spending cuts and increases in taxation.  Spending cuts are difficult to do and achieve a real cut: sacking a civil servant takes his salary out of expenditure but his pension or unemployment benefit comes out of the government purse.  Contracts cannot usually be cut they have to run to an end and then not be renewed.  Whereas tax increases are immediate.  Though the consequent decreased spending by the taxee does also reduce the government tax take.

However I forgot the much derided Laffer curve.  This simply says that at 100% tax nobody has any incentive to work so tax take is zero.  At 0% there is no tax.  Somewhere in between is a level at which people will work and and pay the most tax.  I understand it is at about 40% that this occurs.  I have also read that the current tax take is at about that level.

Just from this simple realisation, increasing taxes is easily done, increasing the tax take is not possible.  One of the two ‘weapons’ available to fight the nations debt actually has no ammunition in it.

That leaves public spending cuts.  Where shall we start.  Roads?  Police?  Schools?  Libraries?  Health?  Armed forces?  To have any effect they will have to be huge.  I’ll say that again: HUGE.

It is obvious: there will be no tax rises to get the UK economy out of debt.

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Do we need another trigger or will this do it?

Posted by chrisrick13 on November 27, 2009

It is obvious: predicting is not easy.

Today Dubai is in trouble.  Actually it has been in trouble for a long time but it has been hidden from public view.  There have been senior bankers and politicians frenetically working behind closed doors.  They knew as did a lot of others who were close enough.  Now everyone knows.

The one good thing about a blog is that you can say “I told you so”.  I remember the housing crash that started in the late 80’s in the UK.  It was triggered by the ending of joint tax relief on mortgage payment.  It was something that cost mortgage payers less that £100 a year.  Still the market was ready for a crash.  It just needed a trigger.  I have sat an laughed at the idea of paying a fortune to sit in air conditioning and look at sand.  There are plenty of places that offer a lot more and a lot more convenient to get to.

Now we have a £54bn problem in Dubai and markets around the world are falling.  Will this be the trigger?  We are ready for a crash.  It is a matter of when not if.  Just a moment though – £54bn?  How much did we put into the banks?  How much is QE costing?  How much has the US put into rescuing the economy.  How much does China have stashed away.  £54bn is much less than a drop in the ocean.  I talked about selling off Cornwall, surely these islands/hotels/leisure centres can be sold off to support the world financial system?

The problem is that this is not the only problem.  The problem is that it is UK banks that financed these ventures and will lose.

That is the problem with triggers.  They are unexpected.  They are small.  They are not rational.  Big events follow.

It is obvious: predicting is easy, timing is impossible.

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I’ve got an education

Posted by chrisrick13 on November 27, 2009

It is obvious: it is important to get an education.

I’ve got a degree.  I’ve actually got two.  (I’m almost a singing group.)   I’m not sure how much use they have been to me in the past.  I know they don’t do much for me now.  The education did put some very good foundations in place for me to build on.  So I shouldn’t be too critical of my education.  All that which has made me into the software engineer that I am today was not taught at university.  I got it through slugging it out for many years, through reading a lot, through listening to some really smart people who were prepared to talk to me…and I don’t have a job now!

When I did my degree there weren’t many people went to university.  It was elitist.  Only mega-brains went.  I wasn’t one but crept in.  The people there were more thinkers than doers, designers not builders.  The more practical people went to a tech college and got an HND or HNC.  Not a lesser being, just a different skill-set.  A lot of people also did apprenticeships.  Again not a lesser person, just even more practical and probably much more use to society than the degree holders.

Employers could buy their specific skills and identify them easily.  The problem was that human beings develop at different rates so it was very easy for someone to get stuck in a track and not able to get out.  The debate on this between me and my wife (a teacher) will be cited in the divorce proceedings as unreasonable behaviour or given as mitigating circumstances in her defence after she does for me.

Now everyone gets a degree.  Nobody becomes a plumber.  This is a problem.  Even though it means little nowadays, not having a degree immediately takes you out of a certain universe.  You are in a track that you absolutely cannot get out of.  If you do get a degree the chances of you getting a ‘good’ job are quite small, and because so many are applying for so few jobs it is truly random that you will get one anyway.  To get a degree you will run up considerable debt and end up getting a job that will not pay enough to pay off your debt.  This is why taxation is the way to pay for degrees: those that do get the well paid jobs will pay for lots of degrees in their taxes, those that don’t get them will at least not have a huge debt burden blighting their lives.

This raised, and then dashed expectation is going to cause problems.  Do you really need a degree and £20,000 of debt to work in MacDonalds?  Degrees were not originally intended to prepare you for a job.  That was, no, is, the place of training.  Why educate when you need to train?

It is obvious: it is important to get an education or training not both.

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How useful is a statistic?

Posted by chrisrick13 on November 24, 2009

It is obvious: statistics on the internet are very useful.

I see a lot of information on the internet.  The price of BP shares for the last year.  Average UK household income for as far back as you might care to go, the top 100 cities by population, the batting average of Alex Rodriguez (Yankees 3rd baseman), or just about anything including a lot of economic information.

Trouble is I have no idea how accurate these stats. are.  They are laid out there in nice graphs and tables so they must be true.  I have no time to verify and in any case could only do that if I accessed raw information on the internet, but what about the provenance of that information?  Of course I can always go to a government web-site.  The information there cannot possibly be other than true and correct…

The papers and news programmes prey on the unwary.  How often do I see graphs that do not display the origin.  For those of you not mathematicians if you see the vertical line on the left and the horizontal line on the bottom and they do not meet with a zero for both of them then what you are seeing is an attempt at deceit.  Look for these and if you do not see them draw the graph to include both zero’s.  You may well find that the plunging and peaking line suddenly becomes almost straight.

Then there is the reduction to some meaningless number.  If you ask Boeing how much it costs to fly a 747 they will say 8 cents a passenger mile.  “Wow” you will say.  That is cheap.  How many miles does a 747 fly each year?  Say, 3m with 400 passengers.  That is $72m.  Not so cheap?

A few blogs ago ( I took a meaningless number, the total debt of the UK, which is in trillions of pounds, and converted it to a number that means something:  £70,000 of household debt for every household in the country.  This number has gone in the opposite direction to the 747 one, but it is very useful.  Depending on your financial position this number is scary or a nothing.  I know people who could probably dig up the cash at a few hours notice.  I know others who will never see that in their lives.  If you can borrow the money and pay of half of it in 4 years which the government is promising to do then that is £809 a month each one of us has to find, or £10,000 a year.  This is a number you can grab hold of, it means something…if you trust my figures.

It is obvious: questioning statistics on the internet is very useful.

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The Tolpuddle Martyrs

Posted by chrisrick13 on November 24, 2009

It is obvious: we have a rich heritage.

The Tolpuddle martyrs had the first trades union meeting in this country under a sycamore tree in Tolpuddle.  They started the trades union movement and got long holidays in Australia as a result.  The tree dated from 1670 and was 150 years old before they met under it.

This tree is now one of a small number of heritage trees.  It has a plaque stuck in the ground next to it proclaiming this and the fact that the Queen designated it so in 2002.

I know all this because my brother-in-law has jut finished renovating a house in Tolpuddle not 20 yards from the tree.  I’ve spent some time looking at the tree as I visited the house to look at progress over the last year or so.  It is in a poor state and indeed another tree has been planted by the TUC that comes from the first tree to keep the memory of the event with a live tree.

However the tree is covered in ivy.  You can see this on:

This is an old picture.  It is much worse now…or it was.  My wife and I spent 20 minutes with secateurs and cut through most of the major branches of the ivy on the tree.  Ivy only grows on trees, it does not feed off them.  Soon all the ivy on the tree will be dead.  If anyone cares to, they will be able to carefully strip it in a few months.  It is nearly impossible to get rid of ivy but it is easy to keep it down.  Just 20 minutes

The National Trust trumpets this tree as part of our heritage but they can’t arrange for someone to come along and keep the ivy down to give the tree a chance for a longer life.  The people of Tolpuddle couldn’t step out and chop the ivy…familiarity breeds?

It is obvious:  we have a rich heritage that we are letting go.

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Where are we going?

Posted by chrisrick13 on November 20, 2009

It is obvious: nobody knows where the economy is going.

I saw the Telegraph yesterday.  I don’t often look at a newspaper but when I do I only read the business section.

First up was a comment on the MPC minutes for last month’s meeting.  The whole point of a committee is to get consensus.  Having one saying ‘no more’ one saying ‘lots more’ and 7 saying ‘continue as we are’ is quite a reasonable spread.  You might say it is what you would expect.  However this is different to the lone or single direction disagreements that have been seen before.  It confirms that nobody really knows what the result of QE will be.  For me QE risks inflation.  I am very sure that the point when problems start will be when QE stops.  We won’t even have to wait until the unwinding starts.

Next I noticed that Societe Generale have put out a 68 page document telling its clients to brace for a global economic collapse.  They are not predicting one and indeed call it a worst case scenario.  However it is firmly on their agenda and they put up some interesting numbers.  Elsewhere on the same day I read: “If long-term interest rates rise to levels higher than a country’s long-run growth rate, public revenues won’t be enough to keep up with the state’s interest bills.  When this happens, the fiscal position becomes untenable and the debt spirals upwards.”  The report talks of reaching the point of no return both generally and for UK, US and Japan specifically.  Not happy reading.

On the same page is an article about the coming election.  It concludes that there is time.  The rest of the world and in particular the people who are buying our debt are waiting for the election.  A hung parliament, my prediction, will be a disaster as it will not take the necessary steps.  However none of the political parties have said they will take the required action.  Perhaps if Vince Cable became Chancellor, no matter by what route, then we might have a chance.  If the Conservatives win (not likely by my reckoning) then perhaps they will throw their hands up in horror when they see the books and take the needed action.  Anything else and our debt costs will rise well above the long term growth rate.

On that front the article also mentions the Fiscal Responsibility Bill.  My last blog entry mentioned debt repayment.  I had put it in terms that showed what it means to each of us.  As a commenter (Bill Howard) said, under that bill every household will have to find £10,000 a year to meet that bill’s requirements.  That will be done either by tax cuts or reduced services.  Services cannot be turned off like a tap so the brunt of it has to be tax increases.  Can most households in this country handle a 30% reduction in income.  I think not.  Even if they could, what would that do to the economy?  The bill is a nonsense but it does at least highlight the impossibility of our situation.

It is obvious: nobody knows the precise destination of the economy but the direction is certain.

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I don’t have any debts

Posted by chrisrick13 on November 18, 2009

It is obvious: I don’t have any debts.

First I have to say that anyone who incurs credit card debt is either a fool, lazy or both.  Credit card debt is unsecured against assets, but don’t think that you can walk away from that debt.  If you have assets (a house) and a job then you can incur debt at much lower levels of interest.  If you are not in that state then you jolly well should not be running up debt but can still probably get better interest rates than a credit card.  I don’t have credit cards or credit card debt.

Over the last few years I have had a long look at my spending and done everything I can to reduce it without reducing my life style.  If it were health decisions I was making I’m in the situation where I wished I smoked so that I had something big I could give up to make a difference.  I have reduced costs everywhere.  If I have done it then so have a million others.  This has a huge effect on an economy.

I don’t have a mortgage.  I tell friends and family on a regular basis.  I tell strangers on the street.  I can’t do any more there.  I slugged away in the nineties with double digit interest rates.  I had a mortgage that was due to be paid off in the mid-nineties but expanded my family and house just in time for those big interest rates on a big mortgage.  As soon as I could I stepped up the repayments.  I don’t have a mortgage…have I told you that?

I can’t think of any debts I might have.  I do have liabilities in that I have houses that need maintaining and for which the council will demand council tax.  So I need an income stream beyond food and heating.  I’m not proposing to live in a hole in the ground so I will always need that…or go and find a suitable hole.

Think hard Rick…ahh!  I don’t have a good pension.  I have assets that I hope to sell and live off the proceeds, but I missed the top and I’m resigned to the fact that I’m not going to get anything near what I hoped I might get when I sell.  My assets and my pension funds and the government pension will keep me going.  Actually they won’t but that is another blog entry.  The lack of a sufficient pension is a debt.  It is a failure on my part to save enough.  It is a debt that I have run up over my working life by not saving enough.  A lot of people have that.

Do I have savings?  Certainly got some cash slopping around.  Got some shares.  Got some other bits of saving.  Not much but I’m pretty well off by many measures.

So where is this debt that I hear so much about.  Put me on a line of people rated by their debts.  I know that there are plenty of people above me with assets far in excess of mine.  I know that there are plenty like me.  There are also plenty with fewer assets but who don’t have debts.  There are plenty of people living well within their means.  How many people are in debt?  Not that many I suspect.

Provided that everyone who wants/needs to work can, then we as a nation are not in too bad a shape.  Most people are supporting themselves and those that can are easily able to support those that can’t through taxation…if we are working.

So where is the debt?  The only entity that is running its finances poorly is the government.  Don’t for one minute think it is the government’s fault.  We voted them in.  Or a worse sin, you failed to vote.

Many people think that they have been contributing taxes for 40 years of work and have paid for their pension.  Not so.  They have been paying other peoples’ pensions and now need their children to pay theirs.  This pension deficit and the money the government has borrowed are our debts.  About £2.1 trillion or £70,000 per household is owed.  It is at about double a level at which default is inevitable for the nation.  At 5% interest that is about £100bn in interest every year.  I can’t complain though.  Both hospitals that I visit have been re-built.  There are more policemen than shoppers on my local high street.  My children have been educated.  Terrorists are finding it mighty hard to blow up London.  We don’t have fibre optic broadband in every house or any chance of a secure energy supply over the next few years, but that is yet another blog.

This £70,000 though does give a feel for what is required from each and every one of us to get the government…us…to a zero debt.  If Gordon knocked on my door I could not write him a cheque.  I could cover a lot of it, but not all.  Painful it would be.  I know people who could pay more.  I know a lot of people who would consider this to be the far side of the moon.

But it is not just a matter of stumping up the money.  If I were to write a cheque for £70,000 there are a lot of things I would not do.  That in combination with everyone else would probably bankrupt every company in the country.  Suppose I took on my bit of the government debt then I am going to have to find about £7,000 a year in interest.  Run it as a sinking fund over a fair few years then it might be £8,000 a year if the bond markets are that patient.

What it does show is that with an average household income of £30,000 (ish) that the required money to deal with the debt will take away 25% of its spending power for many, many years.  It will take away all the discretionary spending and take big bites of required spending.

Assume that to alleviate this that the government stops spending so much and decides to cut £4,000 per household from its spending and use that for interest and principal repayment.  Each year it has to cut £120bn from its budget of £600bn which is a cut of 20%.  The increase in payments is less as the government is already paying interest on some of the debts but the absolute amount is 20%.  At least the government is still smoking…and we are all down £4,000 a year as our part and not £8,000.

Cutting 20% off the government’s spending, sending me a bill for £70,000 through taxation or some combination of the two will make my life much harder than it is now.  My gosh have I simplified things and none of it works unless we as a nation actually produce something so that the population can work.  The solution is in our hands.  We just have to suffer some pain for the duration of the sinking fund: about 30 years of only being able to buy essentials to stay alive.  Will we be prepared to do it?  It is either that or something worse.

The question I might ask is why the government for the last 12 years didn’t squirrel away a little bit while we weren’t in recession?  Had it have saved 0.5% or spent 0.5% less than it did there would now be £400bn less of debt and that certainly could have easily been done.  Am I prepared to put someone into government who will do something about those debts?  Is there someone available who will do it?

It is obvious: I have big debts that I didn’t incur and little chance of managing how those debts will be handled.

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I don’t have a job

Posted by chrisrick13 on November 17, 2009

It is obvious:  I don’t have a job at the moment.

I do have an income though (for a while) and I do have a working wife.  I also don’t have a mortgage and the bloodsucking leeches have left home.  I can probably get away with never working again, though I take no comfort in that prospect.

I am also better placed than many people who, when out of a job, can only apply for another job.  I design and build software so I can spend my days moving my skills higher  (and should not be writing this blog) and writing software on a speculative basis.

Still, there is little work about.

It puzzles me when there is talk of increasing the retirement age forcing people to work longer.  Look at the jobless figures.  There are 2.5m that the government owns up to.  There are many more who are not working and like me don’t appear on the jobless numbers.  There are many more who are on some government scheme and don’t appear on the figures either.  Let’s take a million pensioners out of retirement and force them to work.  Where will these jobs come from?  I also have (poor) pension provision.  There are many of those people without a job, and now denied a state pension, who will have nothing.  They will move to income support or somesuch.  Therefore raising the retirement age will simply move them from one government hand-out to another.  It will simply increase the unemployed count by a couple of million.  The pension deficit will be moved sideways.

What of the young coming out of full-time education?  They have newly acquired skills and they can’t get a job.  I had some plumbing work done last month.  I would have done it myself but we were in the area of flooding the house if I got it wrong so I brought in a plumber who had been doing it for 30 years.  He did a good job and charged a good price then drove off in his new Jag.  Would I have used a 16 year old just out of college?  I spoke to the plumber.  He was only working mornings and only doing that as the rates were so high.  He had made his pile.

What of those newly redundant who go on government training schemes?  They are maybe 10 or 15 year experts in their chosen profession.  They are going to train for 6 weeks, 12 weeks, 18 weeks in a new profession.  In the next classroom are the 10 and 15 year experts from that new profession who have also been made redundant!  I would not have had any in that class doing my plumbing.

There is a lost generation of children who will find ever getting a job very hard.  It is going to be made even harder by my generation.  We are going to deny our own children jobs.  Indeed when pay rates go down, with no overheads, I can afford to take a much lower rate and still survive.  My children with mortgages, their own young leeches, few assets and no savings, and, indeed, with a student loan to pay off, cannot survive on anything but a high ‘living wage’.

It is obvious: there are plenty like me who will deny the needy of a job for a long time to come in the race to the bottom.  Tinkering with the retirement age will do nothing.  And I still don’t have a job.

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Economic Models

Posted by chrisrick13 on November 11, 2009

It is obvious: economic models are an essential part of planning for all of us.

Today the Bank of England (BoE) changed its forecast for GDP over the next several years.  This is a revision of a forecast made just 3 months ago.

If I am presented with a long prediction from a model I hope that the next prediction, 3 months down the line, will merely extend the prediction another 3 months into the future.  If the new prediction completely changes the data just a few months ahead then I would contend that the prediction is not actually a prediction.  It is better termed a guess.  Why should I ever believe that a model is giving me any useful information if successive predictions don’t confirm the previous one?

These so-called models are not actually predictive at all.  They react to recent events and point in a general direction that even my goldfish can figure out.

Standing here in mid-November 2009 I can confidently predict that the UK is probably running out of recession but for the next long while it will run close to the zero level at best.  Indeed the error in data collection will be larger the percentage change in GDP such that errors might easily technically put us in recession when we are not or v-v.  There will be no revisions to this prediction.  The model I am using is a good one.  What is more, it is a deal cheaper than the BoE model.

I have been careful to talk about models.  These are supposedly much more accurate than graphs.  A graph of a statistic may not have any mathematical formula that can be used to draw it.  However these graphs do look alluring.  Approximate straight lines that people plot on with a ruler.  Lovely U-shaped curves that people swoop up in a beautiful curve, typical of a quadratic equation.  However they omit to allow that it could be a cubic equation which has the same long sweep down and a short sweep up, looking like a quadratic equation, and then sweeps down again forever.

In short these statistics and model are the tools of historians.

It is obvious: economic models do at least tell us one future that will not happen.

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