It is Obvious

Chris Rick has got altogether too much to say

Archive for February, 2013

Go forth and multiply

Posted by chrisrick13 on February 28, 2013

It is obvious: me, me, me, me, me

China managed 10% growth for a while.  It doubled its economy in 7 years.  It was easy.  They arranged for millions of people who worked on the land and contributed little to GDP to move to cities to work and consume.  They did what we can never do in the UK or the West and got everyone to double their consumption.  They did not double their population but they more than doubled the population that consumed.  Can’t be done again.

What is happening to the world’s population?  It takes every childbearing woman of the right age to have 2.1 children in her life to keep population stable.  In the West that figure is nearer 1.7.  So India, China Brazil and a lot of other countries are increasing their populations but not by enough as the world average is under 2.1  I am being deliberately vague as the real numbers have lots of decimal points.

So in the UK to get 2% GDP growth we need to build another London, another Birmingham, another every other village, town and city in the country and fill them with consumers and producers over the next 35 years.  Alas, we are not even having enough children to stop the population declining.  Immigration is the answer.

So to keep England English we need to get out there and increase that 1.7.

It is obvious: me, me, me, me, me – I volunteer

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That’s interesting

Posted by chrisrick13 on February 27, 2013

It is obvious: I know what you are doing

At some point interest rates will go up.  That is an easy prediction.  I think that day is not too far away.  Interest rates were moved down to 0.5% to…?  Not sure anyone said why.  We all think it was to save the economy.  Clearly if people and companies can borrow at 0.5% they will borrow loads.  People will spend it and companies will invest it.  The economy will grow.  Except that has not happened.  For people the low base rate has not translated into low rates for borrowing.  For companies they can see no point in investing in an economy where they are selling less.  So low interest rates have failed to achieve the desired effect.

Were interest rates to go up what might happen?  A lot of mortgage holders would be put out of their misery.  Banks would be forced to declare losses and go bust.  A lot of savers would see a decent return on their money and a low inflation economy that they could and would spend it in.  Companies would see good reason to borrow again.

I think the BoE has proved that interest rates and their movement have different effects at different levels.  Moving them up would have effects that are not all bad.  Why not do it?

What bothers me is QE.  It was used to inflate the economy and stop inflation undershooting target.  So now that inflation is way above target, has defied BoE predictions that it will go below target and is predicted by the BoE to spike again, why are the governor and two others on the MPC voting for more of it?

It is obvious: I know what you are doing and a lot of the stupid people have worked it out as well.

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Austerity – are you doing your bit?

Posted by chrisrick13 on February 26, 2013

It is obvious: Power is an addictive drug

In the 50’s there were a lot of Lyons Corner Houses in London.  They were big restaurants where they packed you in.  Lots of waitresses and you could get a 3 course meal for 2 bob and a cup of tea for 2d and do it at speed – during your lunch hour.  They were very successful for a long time.  The cost translates as 12p today.  The company made more profit on the tea than the meal.

I have a friend in Baltimore who talks about ‘the cost of entry’.  I go into a restaurant and pay £22 for a bottle of wine that I can buy in Sainsburys for £4:50 and pay £30 for a meal I can cook just as well at home for £5.  I’m not paying for the liquid and the food.  I am paying to be in a nice place talking to friends.  It is my cost of entry.

So it is when I go, far too often, into Nero for a coffee.   I’m paying £2+ for a coffee that I know I can make at home for less than 40p.  The £2 is the cost of entry.  I like being there with a newspaper or a wife.  Luxury, decadence, conspicuous consumption it does not matter.  I am happy to pay to get in.

Except I have decided to drink more coffee at home.  My family bought me an Espresso machine for my birthday last year.  I know it cost £80 as I paid for it.  I also know that now I have had many more than 40 coffees at home instead of at Nero it has paid for itself and will go on paying.

At that rate I can reckon on not spending £320 a year at Nero that I had done each year in the past.  If I’m doing it, so are 100,000 others.  So Nero will be down £32m on its revenue.  The government will be down on the tax were Nero to pay any.

The termites are out and it is not just people who are choosing between being warm and being hungry.  This is not a sudden insight that nobody has seen before.  It is a simple statement of the way that the economy is shrinking.  It is reducing one cup of coffee at a time.  It does not matter what is said in the media by any loud mouth.  I know that I don’t have infinite amounts of money (which I am sure someone else I know well actually believes is the case).  However I have been moved to consider the possibility that 200 fewer cups of Nero coffee equals one flight to see my son in Washington DC.  The lies that I hear, the fudged statistics, the exhortations to spend have little effect on me.  The less money that I give to Nero the more money I give to BA.  My bucks are only banging in one place instead of both which they were doing last year.

The government needs to create a new London every 15 months to get their growth targets.  While the termites are out, each one of many millions nibbling away at their own cup of coffee.  No chance Mr Cameron, why not let the Labour party have a go…and I bet you wished you had two years ago.

It is obvious: Power is an addictive drug that destroys just as effectively as heroine and all the other drugs

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Did you win on the lottery?

Posted by chrisrick13 on February 24, 2013

It is obvious: I’ll say it again

Not mentioned Professor Bartlett recently.  The long-term growth figure (and target I think) is 2%.  This means that in 35 years time the economy will be double its size.  I have tried to characterise how impossible this is.  I think I have the hard-hitting examples.  There will be another London, another Birmingham, another Sheffield.  Think of any town you like and there will be another one somewhere to match it.

If that is not the case then you will be driving twice as far each year.  You will buy a house twice the size of your current one.  You will eat twice as much…a target a lot of people seem to working on already.  You will work twice as many hours.

It isn’t going to happen, not just in 35 years at 2% growth, but ever.  One small example is the 10 new towns that are planned by the government.  The planning battles have yet to start.  It will be 10 years before a new town is even started.  We need to get on: there is another London to build over next 35 years.  Time is passing.

So the growth will not happen.  Take a look at growth predictions by governments.  They are all optimistic to be charitable.  Unrealistic to be…realistic.   (To decode these numbers just apply Rick’s Law.)  This does not stop governments planning their economies based on these growth estimates.  Why is that?  It is because without growth they are going to have to put their hands up and admit that the country’s economy will crash, which it will then do.  Keep on with the fiction and it will be somebody else’s problem.  This is the current Labour strategy, but they might just have mis-timed it.

The only way that the government debts can be brought to a reasonable level is by growing the economy and paying off debt out of the extra money created from that growth.  Were the required growth achieved I am very sure that the government of the day would omit to tackle the debt.  Conservatives might, Labour most certainly would not – just look back over the last 15 years for a typical example.

So there is no hope.  For the people in the country there is a distinct reduction in hope.  However for many the hope is there.  Just because something is different does not mean it is worse.

I have worked on the impossibility of doubling in the required time-scale.  This gives an absolute guarantee that at some point growth will come off that 2% target.  It cannot be avoided.  It is off it now and I don’t see any likelihood of it coming back in a long time.  A low growth economy is a perfectly good one to live in.  However there is an internal problem.  Banks cannot survive without growth.  They depend on borrowing money and lending it out many times over.  That requires growth or the mechanism fails.  We are not going to have growth and banks are going to…fail.

So watch for the ever more strident debate about growth from politicians.  The roles will reverse for the parties but always the government will introduce policies to promote growth (which they have little hope of doing) and fix the statistics to show it is happening where they can.  The opposition will criticise the government for failing to create growth  and hint at policies they might introduce that will guarantee growth…which they won’t.  In the meantime the economy will be subject to external forces all larger than the ones that the government can engineer.  They might as well not bother doing anything.  It will be just as effective.

Some countries will come out of this process well.  Norway and Canada are two to believe in.  For the rest it is a lottery.  Have you got your ticket?

It is obvious: I’ll say it again, and again, and again, and again

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I was wrong

Posted by chrisrick13 on February 23, 2013

It is obvious: the building will fall over

There is a muttering in the crowd.  You can see people nudging their neighbours: ” ‘ere he’s got no clothes on”.  The response is: “Naah – he wouldn’t have the nerve”.  Then: ” You know.  You might be right.”

So it goes with a growing realisation.  There is not a sudden gasp from everyone.  First there is disbelief as the idea is so outrageous.  Then as the evidence mounts more and more people realise and suddenly it is the new norm.

Moodys has dropped the UK credit rating from AAA to AA1.  Everyone who is anyone was expecting it, but now a lot of people will see it and the nudging of neighbours grows.  Does it matter?  Not a lot because the finance industry knew it was coming.  As they say: the market had already factored it in.  In itself that is an admission that there is a ‘them and us’.  What it does mean is that people become a little less keen to lend to the UK.  It means the cost goes up…eventually.  There is a long way to go before UK gilts become junk like Greece and others.  The longest journey starts with a single step.

So it is that the efforts of central banks, governments and the EU are working hard to make sure that there is no whirlwind.  However the tap is dripping.  The termite has nibbled and it has just taken another bite.

The trigger event is not the first thing, as I have been saying, it is just the last nibble after many before it.  However it is the one that is followed by the falling over.

It is obvious: the building will fall over but that happens at the end not the beginning

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Anyone want a castle?

Posted by chrisrick13 on February 22, 2013

It is obvious: a lot of the information thrust at you is not information at all

I worked with an American lawyer a long time ago and we often talked about other stuff in the gaps between bashing the opponent.  He said that if you are accused of something you should deny and be consistent in your denial.  You could come up with any reason however implausible but deny.  Perhaps it was your long-lost twin who was separated from you at birth or aliens abducted you for a while and your clone did it.  Be consistent and say it often.  After a while people, especially juries, start to believe you.

I am away for a few days with my wife who has a very different view on the economy and the survival of the species to me.  She showed me an article in a newspaper which made the claim that renting was now more expensive than buying.  I read the article and it did not give any details or answer any of the questions I had.  I believe that renting and house buying are part of the same market.  People will move to whichever it cheapest.  It is a market full of inertia and lags so that there will be times when one is cheaper than the other but the market will take care of it…eventually.  The smart and nimble people trade on those lags to buy and sell property.  They buy and rent out when house prices are low and sell when they are high.

I’ve done this before so you can check up on my consistency.  I have a house that is worth £400,000.  That is my view and I have not tested that in the market, and perhaps I really should.  What does it cost to own it?  There is £20,000 in lost interest every year were it in the bank.  Over a long period there is an average £12,000 in maintenance every year.  £3,000 a year sees the council tax and buildings insurance dealt with.  Add in a small amount that I have to heat it a bit over the winter.  That is £35,000 a year it costs me to own it.  Any other costs are those associated with me staying alive which I will try to do whether I rent or buy.

You might say that I need to include the increase in the value of the property.  I would respond: what increase?  House prices have gone down in recent years in absolute terms.  Throw in inflation and in real terms it has gone down as well.  But inflation affects the cash as well.  So I would just comment that house prices have gone down recently and what do you think they are going to do for the next few years?

I might also add that if the house is not where you live, then any capital gains will be taxed and if it is you might get hit with mansion tax or if you keep it then your children might well pay a similar amount in inheritance tax.  Not that it will bother you!

I looked into what my house would rent out for, were I to go abroad last month.  I can get about £1200 a month for it and I will ignore costs and voids.  So at the moment I can own my house and live in it or I can rent and have £20,000 in my pocket.

So how did that newspaper come up with its numbers and why haven’t I sold?  Why do I see a consistent theme that buying a house is a good thing?  Why is the government trying to create an environment where people will buy their houses?  Surely it is better for the population to rent houses and spend the extra money in the economy and not give it to bankers?

It is obvious: a lot of the information thrust at you is not information at all and most of the rest isn’t either

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You can bank on this

Posted by chrisrick13 on February 20, 2013

It is obvious: Mervyn King is clean-shaven every day

The governor of the BoE got to £5.4m in his pension fund and stopped paying.  If he got 5% return on that money then he would have to scrape by on £270,000 a year when he retired.  If he gambled on living 20 years he could grab £1.35m tax free and live on nearly £200,000 a year.

Of course inflation would hit those numbers, but at the 2% target rate, not much.  Oddly though, the pension fund is almost entirely invested in index-linked gilts (should be called guilts).  Surely he would be better sticking the money in something like the stock market or fixed income gilts or bonds at a rate higher than 2%?  Does he expect inflation to move up inexorably?  Of course he does.  Everything he has done has ensured inflation will not hit his target for many years.

So why is the governor not forced to take his pension from his fund which is set off against the national debt but his pension payments are made on the nominal value of the fund…increased by 2% a year for inflation at the rate the BoE is supposed to maintain?

At the moment he ‘manages’ the economy and nobody holds him to account for his abject failure.  Then he gets a pension that is completely insulated against the mess that he has made.  Is there any incentive whatsoever to even try to get it right?  Nope.

It is obvious:  Mervyn King is clean-shaven every day –  he must have someone do it for him because he can’t possibly look at himself in the mirror

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Where is the rock?

Posted by chrisrick13 on February 19, 2013

It is obvious: run for the hills

You can take your pick, but the government’s pick is CPI and that says inflation is at 2.7%.  Fudged and fiddled the inflation rate is much more than this.  The BoE (and the government) are trying to do two things.  First they want inflation up, despite what they say.  Second they want the £ down.

They also have to keep interest rates low.  I do wonder at this one.  They need to keep interest rates low for mortgage holders.  There are so many people who can barely pay and so many people in arrears.  Any increase will slump the housing market and put thousands out on the street.  Yet all their efforts seem only to widen banks’ profit margins.  Do you see any mortgages at base rate plus 0.1% as my last mortgage was?

If inflation does move off upwards, the perceived wisdom is that interest rates are increased to combat it.  This dampens the economy – the very thing the government is sworn not to do.  Indeed all they talk about are measures to increase activity in the economy.

So if, and more likely, when inflation starts to move up the only action the government/BoE can take is to increase interest rates.  This will increase the value of the pound, decrease GDP, push many people over the edge into default on their mortgages, crash the housing market, increase government spending on benefits massively.

That is not pretty.  The alternative is hyper-inflation.  So which is it going to be?

This what a soft-landing is all about.  Nudge and ease the economy to keep inflation down and at the same time keep the economy growing at least a little until a stable state is reached.

So who have we got lined up to manage this situation?  David Cameron, Ed Milliband, Mervyn King, George Osborne, Ed Balls.

It is obvious: run for the hills before it gets too crowded up there.

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Told you so

Posted by chrisrick13 on February 18, 2013

It is obvious: I know what I am doing

Thanks to Shaun Richards.  Rightmove have house prices just 1% less than 2008.  Given official inflation over that period was 18% all us house owners, should  we sell, would be loosing 20% on our ‘investment’.  Don’t think about feeding and watering the place over that period.  Don’t think about buying and selling costs.  Don’t think about real inflation and not the laughably calculated official inflation which would put the loss at over 30%.  Don’t think about adding in costs and coming at a loss of more like 40%.  Don’t think – that’s what the BoE want you to do.

It is obvious: I know what I am doing better than the BoE and many others

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Keep it simple stupid. Hey stupid! Are you listening?

Posted by chrisrick13 on February 17, 2013

It is obvious: I’m trying to write outrageous fiction

IR35.  There.  I said it.  First time in a long time.  Labour decided that software contractors were making too much money so introduced IR35 to stop them.  They misjudged how determined and smart software people in general are.  You have to be autistic to be any good at it.  That means they pursue things to the very end and do it well.  The point of the law was to declare a contract between two companies really to be a sham and therefore treated as employment.  Roll forward 10 years to a minuscule number of contractors paying anything and a lot of lengthy court cases of which the revenue have won very few.  None of the contractors ever gave up.

The success of this measure could be seen when the revenue/government were asked how much was raised by IR35 and they were unable to come up with any numbers.  Do you think that if they had raised, say, £500m that they would not have shouted out loud?  They have also indicated that they are going to increase the number of inspectors working on IR35.  Do you do that on a tax measure that is rolling in money?  Or if you really don’t know what it brings in?  Given the government cuts and the overworked state of the revenue staff is this even likely?

What does IR35 do?  If you can decide that a contract between two companies is not a contract then you can declare it employment and collect NICs that would not otherwise be paid.  Trouble is a lot of the time if you manage to do it then you create precedents that mean that contracts between, say, BT and a local authority are not actually contracts but employment.  It is simply unworkable because the definition of in or out is impossible to arrive at with the danger that you drag every company contract in the UK into IR35.

Still there is Labour for you.  For the chasing of a few geeks they destroyed the most flexible workforce in the universe that enabled the UK to compete with all the Johnny Foreigners and win big for UK.  A bit of dogma goes a long way.

Can you imagine my amusement when Mr Milliband declares that he will tax houses worth over £2m to pay for bringing back the 10p tax rate.  I’m a proflicate waster I spent £100 on a dinner out last week.  Mr Milliband declared that the £100 that it will put in the pockets of every family would make a big difference.  It will get me an extra meal out each year.  It also tells us that it will be on the first £1000 of taxable income.  Will it swing my vote for £2 a week?  Will an extra meal out each year make any difference to me?

Best of all though a lot of people going to be asking in whose view is a house worth £2m?  We can have the situation where a house is valued at £2m and sells for less a short (or long) while later.  Will these people have a comeback on the government because they got it wrong?  Just suppose that we have a real house slump (as we will) then will the government owe a lot of money?

If Labour look even remotely likely to win the next election what will happen to the housing market in London?  What will all those Russian drug barons, and corrupt Chinese officials be doing with their houses?  The London house market will be flooded with lots of houses all worth £1,999,999.  I wonder what house sales figures will look for London next month?

I want to send a message to Mr Milliband.  There is no such thing as a 10% tax rate.  On all the money that you earn between £6000 (ish) and £43,000 a year you pay 12% NIC.  How much simpler it would be to increase the lower band to the same point that tax does kick in and simply add it to the tax percentage?  Then everyone will be aware that the basic rate of tax is actually 32% and the government can get rid of 10,000 tax inspectors.

It is obvious: I’m trying to write outrageous fiction and the Labour party turns it into fact before I can publish it.  (Conservatives as well.)

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