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Sunday, October 19, 2008

How do we get out of this?

I'm trying to understand the situation, and it's worrying that many experts freely admit they don't understand, either. Here is the simplified picture I'm building up:

Democratically-elected governments wanted their voters to get back the feelgood factor after the tech bubble burst and the stockmarket pretty much halved. So they undid the belts round the banks' waists and said, go eat.

The banks went at it like labradors at a full plate of Gravy Train, and got very fat on lending far too much money, with very few questions asked. Houses doubled in value and became the new stockmarket.

Then the bust, because whatever you treat like an investment will behave like one. Except houses are unlike shares: if you lose all your money on them you have nowhere to live, and this will make the losers very angry and vengeful. Also, housing is illiquid, which is bad news for banks, who can't put bricks and fridges in their vaults. And if the banks go bust their richer depositors (some of them Party contributors?) will get very upset, also the businesses that hold their balances in cash. This last is very important: a small fraction of bank accounts holds the majority of uninsured cash.

So now the "rescue". Billions - hundreds of billions - poured into the system. Who will pay the bill?
  • Not the shareholders, since (in most cases) we didn't let the banks collapse.

  • Not the majority of retail depositors - they have votes, and enough education to make trouble.

  • Not the poor - they have nothing, and are more likely to vote for whoever keeps paying their benefits. That's if they vote at all, but non-voters will become very interested in democracy if their money runs out.

  • Not the seriously rich - they have most of their personal wealth safely outside this thieving country and if annoyed, will not only move out but close businesses that employ many voters, which will dump smelly stuff on the heads of the Government and leave a big tax hole to boot.
I can see only two classes of juicy victims: taxpayers, and people who have saved up money.

Very few people understand that the combination of income tax plus National Insurance and employer's NI, is effectively a marginal tax rate on income of over 40% on all but the worst-paid. Raising direct taxation much more will only increase the incentive to give up work altogether, or to lay off employees. And there's only so much benefit to be gained by shipping-in zillions of low-paid foreign immigrants to replace them - that dodge is getting to be a public embarrassment, politically as well as economically.

Indirect taxation tends to be regressive, hitting the poorer worse (as a proportion of their income) - which implies a need to increase their benefits. Not impossible - there's a plan afoot for an extra levy on power bills, to finance heating costs for the poor. Doing it in this roundabout way preserves the illusion that we are a lower-tax economy, and appeals to the sneaky, surreptitious personality of the man currently running the country. There will be other subtle and economically suspect ways to raise tax, and Gordon Brown thought up many during his incumbency as Chancellor of the Exchequer - which, I think, has not yet ended.

And then there's the attack on savers. Means-testing is a good one, yielding a very high effective tax rate. Last time I looked, the combination of minimum income guarantee and savings credit for pensioners worked out to a 40% tax on poor pensioners who'd increased their pension income by voluntary savings.

Inflation is a fruity possibility. The government is going to have to borrow staggering amounts in coming years, to pay for the current bailout and future mass unemployment, so if the returns on its bonds can be lower than inflation it'll help the public finances a bit.

But who's got the money to sub our kleptomaniac Government? Maybe they won't bother to ask the people to trust them any more; maybe they'll just ask the Developing World to buy-in with their sovereign wealth funds. In other words, sell the country, piecemeal.

Isn't that what's happening? The younger generation will be taxed and worked half to death, the older ones will find they're not as wealthy as the illusory boom led them to believe, and meanwhile the New Pan-European Bureau-Aristocracy is selling us all to foreign powers and foreign businessmen, who do not have to answer to the electorate?

I must study the Highland Clearances, and the Flight of the Earls.


The Ror said...
This comment has been removed by the author.
The Ror said...

Commonly referred to as a "Middle-class shakedown".

Back in the box peasants :|

Sackerson said...

Hi, ROR. Was it nice to work for Lehman?

The Ror said...

Not really. My spoon is wooden, not silver, so I always felt outta place.

There were some cool people, but the management was a mess. I was support staff *cough* and joined at the end of the boom, so never really saw the riches *cough - damn*

Most people really didn't have a clue what was happening: the market knew far more than we did.

Thanks for the blog: makes the gardening leave more bearable (har har)

Sackerson said...

I hate gardening.

Anonymous said...

I love gardening. I can watch it for hours.

Sackerson said...

With you there, DM.

Jim in San Marcos said...

Hi Sack

You hit the nail right on the head.

If we picture the tax system as a horse and cart analogy. The taxing system worked great in the beginning. Our governments have added more and more baggage to the cart and now the horse is straining to pull it.

The young people should escape the disaster in progress. I think the people to suffer the most will be those ready for retirement who have saved for many years. Inflation is the ultimate tax.

I wish I had bought more gold when I was young. Of course when your young you only think of fast cars and pretty women. Go figure.

Sackerson said...

"Of course when your young you only think of fast cars and pretty women."

I thought of them all right; getting them, another story. Thanks for calling by!

P.S. Gold looking a reasonable sort of price just now, don't you think?

Jim in San Marcos said...

I'm not sure. I picked mine up at $320 and ounce. and it did drop to $280. Back in 1985 it was considered a very poor investment. It wasn't the sort of thing you bragged about, people would laugh in your face for being stupid.

I would suggest that you set aside 10% of your portfolio for gold and silver, not as an investment, but as a store of value. Governments can't print gold or silver.

Historically the ratio of silver to gold has been 16 to 1. So at the present valuations, silver is the better deal.

Another thing to look at is there are very few silver mines. Silver is usually a by product of other metal production like copper. So if copper demand is low, not much new silver is coming to market.

Sackerson said...

Thanks, Jim, enlightening as ever.