It is Obvious

Chris Rick has got altogether too much to say

Archive for the ‘Economy’ Category

Better never than late

Posted by chrisrick13 on June 5, 2011

It is obvious: to everyone

In 1979 The Conservatives came to power.  They saw that their priorities were to tackle inflation (in double figures) and cut the deficit.  As a result the national debt would start to shrink.  Sound familiar?

Soon after that Margaret Thatcher made her ‘not for turning speech’.  About a year later (1981) 365 economists wrote an open letter to The Times  telling her she was wrong and needed to change policies.  This was shortly before the economy recovered and took off.  In the end those goals were achieved…I am not going to enter into arguments about the cost or how it was done…it was done.

Facing high inflation, a large yearly deficit and huge debts, 50 economists wrote to The Observer this week calling for the government to cut less from the budget.  Still sound familiar?

There will be no repeat of the ‘happy ending’ this time.  I suppose that I could claim pleasure that 315 economists have learnt their lesson, but that is mischievous of me.

I might ask where they were in 2005, 2006, 2007,… when we were rushing headlong into the current mess?  It was obvious to me and to just about everyone that I read.  Why did they not speak up then?  A clear conclusion is that they had no idea.  That being the case, what possible reason is there to believe that they have any better idea now?

I might think that they were right because they were basing their comments on evidence.  However the budget and the deficit have both risen and no cuts have occurred yet.  Having failed to predict the current problems they are now insisting that we believe their next prediction with no evidence to base it on!

This does leave us, and I do mean you and me, with a problem.  The government has no reliable source of information on which to base their decisions.  On that basis, any decision, including the one to do nothing, is just as good as another.

This leaves us with the old joke of asking a local how to get to somewhere to which the response is that you should not start from here.  The trouble is that here is where we are.

The flaws in the plans of Labour (if they have one) and the Conservatives is that both rely on growth.  Come on up Dr Bartlett.  If we have 2% growth in the economy then it is a given that with budget cuts we’ll have no deficit within 4 years and it will only take 20 years to take the debt down to reasonable levels.  At 2% growth the economy doubles in 35 years.  I have asked before: do you see us doing twice as much as we do now, ever, let alone in 35 years?

Do the economists offer a way out of this mess?  No they do not.  I can’t blame them as I cannot see a way out.

It is obvious: to everyone except an economist.

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With sympathy

Posted by chrisrick13 on February 8, 2011

It is obvious: live in the future

I still have sympathy for politicians of whatever colour.  They sometimes have power which they struggled mightily to get, but when they have it there is not much they can do with it.The economy of the nation is one that I bleat about lots.  They have conflicting advice, poor information and few available tools.  Anything that they do has a long lead time meaning that they can’t act promptly and often will not see the results of their endeavours until after they are out of power when the opposition takes all the credit or blames them.  I wonder why they do it.

However that is not the only aspect to having power.  There is another much more important task for them and it is one that receives a lot less publicity.  It is like the explorers of centuries ago.  Set off from England looking for North America, get your course one degree wrong and by the time you cross the atlantic you are in Brazil.  So it is with policies enacted today having a significant effect many years hence.

There are many examples.  In the 40’s the NHS was created.  It was said at the time that with the consequent improvements in the nation’s health that the cost would steadily reduce.  How different things could have been.  Our lengthening life expectancy is down to good sewers and vaccination programs.  The Victorians built the former and small teams of scientists for beans developed the vaccines.

The M1 and the rest of the motorway network has had a huge impact on life in this country.  It has allowed us as a nation to respond to economic demands in a flexible and cheap manner.  The rail network similarly…but for that we must again thank the Victorians and before.

North sea oil used to upset me.  Get it out the ground as fast as possible and spend it seemed to be the intent.  Why not keep it and pace its extraction over a hundred years?  Why was the decision made to flare off a lot of gas?  Big decisions that are affecting us now.

So with those and many other examples it is down to the government to find the clear winning policies and back them.  They can gather experts together from all over the world and perhaps come up with a few good policies.  The results will be seen in the future.

If they are unsure then they can ask the BBC to interview a few people on the street.

In the meantime I have a few ideas, or I wouldn’t be writing this.  Research into fusion power.  We are doing it already but not on a big enough scale.  Coal.  Start building coal power stations with socially acceptable handling of the pollution aspects…or simply don’t bother like the Chinese.  Education and training.  Famous words from Tony Blair but not much action.  This has two prongs.  First is bringing everyone up to a decent standard.  This has huge savings in social costs.  Second is getting our best thinkers to spend time doing it.  Put lots of money into higher education…and research.  It is a bit of a lottery, but the more tickets you have the better the chance of a big win.

I have a number of other interesting ideas that I will save until I am Prime Minister.

It is obvious: live in the future and you will make a better job of today.

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Standing on the shoulders of giants

Posted by chrisrick13 on February 4, 2011

It is obvious: making money is a risky business.

How does a bank work?  It attracts money.  Say, $100.  It lends that out at a higher interest rate than it pays.  The borrower puts it back in the bank and starts to draw on it while also paying in interest.  The bank lends $90 of the money. It goes to another borrower who repeats the process.  The $10 the bank hangs on to keeps the first borrower going.  It now has $190 lent and earning interest at, say, 5% while it is paying 1% on the original $100.  It can be repeated a lot of times so that the bank has $500 lent earning $25 a year while paying the original contributor $1 a year.  Good business.

But there are problems.  Supposing the original lender wants her $100 back?  It is not easy for the bank to get at that money.  But there is a simple solution.  Borrow from another bank at maybe 5%.  There is still a good business there.  As it now stands there is no real money in the bank.  Regulators do something to ameliorate this kind of problem by requiring the bank to hold, say, 10% in liquid assets.  Wasted money, but when the original lender turns up for her money it is there.  Still good business.

I can barely handle that in my small brain.  However the banks have developed a lot of ‘instruments’ that carry out this money multiplier effect: leverage.  These ‘instruments’ are fearsomely difficult to understand.  What leverage means is that you can borrow $100 and make $25 each year.  If you choose carefully who you lend to then it is a very secure and profitable business.  If you supply money for a lot of sub-prime borrowers to buy houses and secure those loans on those assets then you are vulnerable to, perhaps, a couple of hundred people who grind coffee and pump hot water through it for a living, keeping their jobs.  When they lose those jobs the houses cover their debts unless you are at the top of a housing bubble when they don’t.  Either the bank goes bust or some mug (the taxpayer) comes along and lends you that (say) $500 until you can unwind the business (the loans made)…or build another one leveraged on the $500 lent by the mug.

If you are cleaned out through these poor loans then it is bad for you.  However it is bad for the businesses that bank with you.  They lose reserves that you were holding for them and lent out but more importantly they lose cash and the ability to manipulate cash.  Stop cash flow and the company dies very quickly.  If that company dies then another hundred suddenly have bad debts related to the first company.  They die.  So the mugs always pay up.

So the whole economy stands, or falls, on the efforts of a couple of hundred coffee makers in Starbucks.

Is this a good idea?  It is called risk, but is it a good or a bad risk?  For a banker it is somebody else’s money and after a year and a bonus he can retire.  So it is no risk at all for the person gambling your money.  This is one of the reasons why airplane pilots sit in the cockpit and don’t control planes remotely from the ground.

It is obvious: making money is a risky business, but if I can see it why haven’t those who know better?

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Owwww – that hurts

Posted by chrisrick13 on January 28, 2011

It is obvious: a lot of the obvious stuff isn’t

There seems to be two ‘truths’ about the economy at the moment that nobody questions.  The first is that increasing interest rates will be harmful to the UK economy and the second is that we can manage without the cuts/tax increases.  I wonder that the coalition has not done more to bring these ‘truths’ out into the open for a full examination.

I ground my teeth listening to the BBC, yet again, asking the man in the street rather than someone with deep knowledge.  They were asking about petrol prices.  The instant expert said that the government ought to cut the taxes on petrol.  I agree.  Not only do I drive a lot of miles but many of the goods and services that I use travel a long way, not least food.  The next question they didn’t ask our instant expert was that as the government is spending more than it gets, any taxes not gathered in from petrol have to be gathered in from somewhere else.  Where was he proposing that the income should come from?  Maybe close every second hospital?  Perhaps stop Motability for disabled people?  Kick half the prison poulation back out on the streets?  Not bother with police?  These bleats taken in isolation are really people saying that they don’t care how the government deals with the deficit as long as it does not affect them.  The coalition will cut and tax, on the whole, even handedly.  But there will be a bias towards the people who voted for them.  In a long term play for a lengthy period in power the Labour party has abandoned its voters.

The scenario is very simple.  The government has to cut the deficit.  The deficit is the overspending that is increasing the national debt.  If it gets too big then UK will default on its debt and a bunch of accountants at the IMF will be running the country.  If that happens the proposed cuts will look
like mild grazes compared to the slashing that the IMF will do.

Why would we want to increase interest rates?  This is how inflation is conquered.  What is wrong with a good dose of inflation?  For a start it makes our debts to the rest of the world disappear as if by magic.  The problem is that the rest of the world and in particular those that lent us money are not stupid and have long memories.  The other problem is that I am a net saver.  In common with all net savers, inflation makes my prudence a waste of time and rewards the profligate.  In common with all net savers I have a long memory and intend to  be around voting for some time to come.  But why will it hurt the economy?  Why will it ‘de-rail the fragile recovery’?  What recovery?

Suppose that interest rates were moved up with a clear intent from the MPC that they are on an upward trend.  The pound will rise and imports will get cheaper.  This will help inflation and balance of payments – foreign stuff gets cheaper.  It will handicap our exports…what exports?  Our cost of production is already so high that foreigners are only buying our stuff because there is no alternative.  Our exports are not sensitive to the value of the pound.

What else happens.  Borrowers have less money to spend in the economy.  But at the same time savers have more.  Rate increases will dampen the economy, but not much.  What happens to the extra interest payments?  they either trickle through to the people who lend money or they go to the banks as extra profit.  Where has the UK government ‘invested’ more money than a year’s GDP…the banks.  Maybe these investments will come closer to profitable liquidation?

What else?  A lot of people will default on their mortgages.  I cannot apply logic and work my way through that scenario.  There are too many branches of possibility.  A few things are predictable.  House prices will fall.  But if they do then perhaps a lot of people unable to afford houses now will be able to.  Maybe a proper market will develop as the prices reach the long term ration of wages to price?  One group of people will be kicked out their houses and suffer and another group will move in.  The banks will possibly be at the stage where the mortgagees have sufficient equity in their houses that on repossession they will make only small losses.

There lies the problem.  Between here and an economy that has few debts and is growing at sustainable rates with a manageable balance of payments, there is a period of pain, but that pain will not be evenly distributed.  The government has to create the pain, manage those who suffer and hope they can keep the country stable until the pain abates.

It is obvious: a lot of the obvious stuff isn’t, but it is inevitable.

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Trigger pulled?

Posted by chrisrick13 on January 25, 2011

It is obvious: don’t just do something

For people such as myself with a, to say the least, pessimistic view on the economy of this country, the GDP figures are an “I told you so” moment.  It is too early though.  There is plenty of bad news out there, but it is too uncertain to say that it is yet the beginning of the end.  I find it amusing that a bit of snow might be the trigger that I have been talking about though.

The spin is out on these figures.  They will be revised.  That is true.  Does not happen a lot but down is an option.  One month of bad weather will not cause a change in economic policy – quite right.  What happens if we have two?  February has had more bad snow than December over many years.  The most problematic part of the numbers is that the consensus was for GDP to go up by 0.5%.  So all the ‘experts’, in the full knowledge of the snow and its effects, with many retailers reporting already, were out by 1% in their estimates.  I suspect Paul the octopus could do better (RIP).

I find I am repeating myself a lot no matter where I start from.  I will not apologise for that and will issue two repeats here.  First is house prices.

The GDP number, if ignored for what it is but looked at for its unexpected nature, has made all economic forecasts more uncertain.  It has added uncertainty that will further mitigate against house price rises.  Taken for its actual value it will have made another group of people unwilling to commit to a mortgage thus reducing demand from where it was just yesterday.  It will also cause another group to act further to reduce its risk from mortgage lending: the banks.  Expect borrowing on a mortgage to get more expensive and more difficult to do.

I am repeating more than BBC1 and Dad’s Army with my second point.  The rule of 70.  All economics is based on running economies with growth.  We are relying on cuts, increased taxes and growth to get us out of our economic mess.  The IMF has predicted 4.4% global growth for this year.  Chinese growth at over 8% is considered too high. A shrinking economy is not good.  Something like 2% is considered optimal.  With growth at 8% an economy will be doing twice what it is doing now in a little over 8 years.  China will not manage that.  But what of 2% growth?  This is something we aspire to.  Were we to achieve it then in a little over 8 years the economy would be close to 25% bigger than it is now.  Tell me what is going to happen for us to be doing 25% more of anything in 8 years time.  It simply cannot happen.  Push out to 18 years for a 50% increase.  Simply, it cannot happen.  We have to get used to 1) a period of economic pain while the nation’s spending is cut to the point where the nation can reduce its debt burden 2) living in an economy that has low or no growth 3) finding a way to manage a zero growth economy.  The best answer that I can think of is that we improve the efficiency of everything we do rather than just trying to do more.  That needs the whole population to change the way it thinks.  Given that the evidence is that not many of us are thinking at all, that might be tricky.

How about a revision to 0.1% shrinkage and then GDP for the next quarter coming in below zero?  In case you didn’t realise, that is a double-dip recession.  We are half way there.  Start reading the words of people who have been predicting double-dip.  Then get yourself some strong sleeping tablets.

It is obvious: don’t just do something – sit there…

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The Emperor’s old clothes

Posted by chrisrick13 on January 17, 2011

It is obvious: here there be…

I just read an article by Ambrose Evans-Pritchard.  Another of the mult-talented people that I seem to keep bumping in to.  He was on a similar theme to Notayesmans about the Portugese debt and statements by the people in charge.  They seem to be modelling themselves on the actions taken by the Irish so as to maximise their pain.

He also mentioned the EU mechansims in place to support ailing economies and talked of them being able to cope only with the ice above the water.  This I have heard before: Notayesmans, Flanders and Preston to name but three.  Everybody knows that the EU/ECB/IMF can keep Greece, Portugal and Ireland going, but that there is no possibility of doing that for Spain and/or Italy.  Yet still those who can stand on podiums before others and the press continue with the fiction that they can manage the situation.

We all know that Spain and Italy are likely to move to the state that they need serious help and that nothing can be done to save them.  Indeed there are many who say that Greece, Ireland and Portugal will fail and it is only a matter of time until they do.  All the kings horses and all the kings men are only mopping up yolk.

The euphemism I hear is that the markets will test…whatever action is taken.  It is such a good excuse for those in charge.  They are doing the best they can for everyone and suddenly an evil monster rears up out of the undergrowth and chases them off.  It is not their fault they are above reproach…and stupid.

What is a market?  It is a lot of people acting to get the best result for themselves that they possibly can.  If they don’t they lose.  It might be their job, their home, their life.  It is survival of the competent.  The fittest always survive but so do those that act in reasonable fashion.  For investing it is always a balance of reward against risk.  If the EU takes away risk then expect people to invest as much as they can at the insured rate.  If the EU says that it will insure risk and the market monster does not believe it can do it then the cost of the market’s investment goes up.  (We are all very interested in this as most of our pensions come from ‘the market’.)

The cost of the debt of the nations mentioned above is steadily going up.  It is only a matter of time until someone shouts: “Naked”.

It is obvious: here there be…Markets – grrrrrh.

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This is interesting

Posted by chrisrick13 on January 14, 2011

It is obvious: I know little about economics.

The excellent website Notayesmanseconomics thundered in today on inflation.  He has been warning for a long time about inflation being a problem.  He has pointed out the moves in various futures contracts (which I don’t understand) that indicates that the financial markets (which I will carefully avoid having to define) have factored in an interest rate rise.

This is a problem for the UK.  There will come a point where the MPC cannot ignore inflation.  It seems to me that there is only one way to combat it and that is to raise interest rates.  This slows consumer led inflation and I assume that the consequent rise in the value of the pound will help with import led inflation.  Alas this is not the case if everyone else puts interest rates up.  I will carefully ignore the effect on export performance from increased interest rates and increases in the value of the pound.

If interest rates go up then I will be happy as my cash might start to retain its value under inflation.  Anyone with debts will be unhappy.  That implies a lot of people will not be able to service their mortgages.  This is mitigatged by many people having fixed rates for a number of years.  So any effect might be delayed.

This will be the big effect.  No small trigger.  If the cost of a mortgage rises to the long term average then house prices will fall to the long term average.  Versus salaries that average is 4 times and currently it is over 5 times.  House prices will drop 20% on that basis.  I will play silly games here, but suppose that the average salary of those with a mortgage drops by more than that due to some of them not having a job or moving to part time or lower paid work.  This might push the average mortgage back up to 5 times earnings.   So after the first 20% fall there might be another 20%.

I’m a pessimist so don’t listen to me.  If I put on my optimists grin can I see anything out there that is good enough news to make house prices increase?  Over the next year?  Over the next two years?  Don’t forget that interest rate rises are coming alongside the job cuts.  If you are thinking of buying wait if you can.  It will be clearer in a year and the money you have will go a lot further.

I also think it unlikely that there will be big drops.  There is too much working to counteract the cliff-edge effect.  What will happen is that homeowners will be ground down over a long period…but at nearly 5% inflation it is not that long, as, in real terms, the price of an average house has dropped by about £12,000 over the last year.  Roll in the rule of 70.  At last years rates the value of a house halves in under 10 years.  You need to be looking at that all the time.

To any first time buyer I would say: make sure you can afford the mortgage at 10 times the base rate, make sure that you have good prospects of retaining your job, be very sure that the house is somewhere that you would be happy to live for the next five to ten years.

Notayesman finishes today’s article with a good question.  The 0.5% interest rate was an emergency measure…introduced 22 months ago, so are we still in an emergency after all this time?  I would like to add my own: if we are in an emergency what has been done about it over that period?  If anyone feels equipped to answer I might then ask when will we see the results of that action.

It is obvious: I know little about economics and in common with a lot of people I seem to have a better grasp on reality than those who do know a lot and are in charge.

Posted in Economy, Houses, Uncategorized | 1 Comment »

Survival of the fattest

Posted by chrisrick13 on January 13, 2011

It is obvious: banks break the rules.

I am slowly developing an understanding, flawed or not, of where we are in the UK, economically speaking.  I am ahead of most of the population as I am able to distinguish between debt and deficit.  There is little hope for us with such ignorance on the part of voters in a democracy.  However I have heard enough times by enough people that the lack of bank regulation caused the credit crunch to believe it.  At the weekend Lord Lawson was the last one I heard with such a view.  He laid it squarely at the door of the de-regulation introduced by Gordon Brown.  Those new rules replaced his, so you might expect him to have that view.  However he added credibility by casting doubt on his own, tougher, rules being sufficient.

I have also heard it said (I cannot attribute) that the attraction of so many large financial organisations to London was those new, lax, rules.  Was it a deliberate ploy by Brown?  Very clever if it was.  I wonder if he saw the crunch coming?  He also oversaw a massive increase in personal debt and put in place a structural deficit for the government.  It seems that there was no plan to get out of that state and indeed in the last days of power he went out and committed a lot more expenditure following on from the PFI where he had brought forward a lot of future spending to today.  If his plan was to wreck the economy of this country then he had got it spot on.  I can’t think of any other plan that fits his actions but I can’t discount incompetence.  Just because you are paranoid does not mean you are wrong.

But why should we criticise the banks?  They have a duty to maximise profits on behalf of their shareholders, legally and within the regulatory framework.  Any bank that did not push those rules to the limit would probably have gone out of business.  At the very least those in charge would have been replaced by people prepared to play to the limit of the rules.  It is natural selection: an inappropriate response to external events results in extinction.

We had a regulatory system and as much as we may not like what banks do (and I am one of those) but there were few occasions where banks were caught breaking the rules.  I might bring to mind the UK and the golden rule of Brown…dropped when it became inconvenient.  I might think of Maastricht and the rules by which governments in the EU must run their economies.  Greece lied and broke the rules.  Ireland simply ran at the rules very fast with no plan to even find brakes let alone put them on.  Even Germany does not meet the rules.  Can we blame banks that stuck to the rules that were in place when governments are incapable of doing the same?

I might even turn my attention to sub-prime loans in the US.  The banks did not break the rules.  Large numbers of people agreed to something and then broke that agreement.  I know that it was obvious that they would, but they still broke the rules when they stopped servicing their loans.  The banks kept to their side of the agreements and broke no rules.

It is obvious: banks break the rules…ooops, no they don’t, we do.

Posted in Economy, Uncategorized | 2 Comments »