The terrifying truth about debt - and inflation

The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.

This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.

Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.

Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.

If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.

Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:

"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.

"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)

Pictorially, Schwab's figures would look like this:

Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!

Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:

In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.

The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.

The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.

The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Change song

Since shanties are in the news... bawdy but catchy

by Martin Carthy

What the people said

Why not a Lab-Con pact?

Last Thursday, the people spoke, and what they said was this:

"We want a proper government. A strong, honest government that works for us.

"One that doesn't make stupid compromises just to keep in power. One that works for what most people want.

"A job. A better chance for our children than we had. Money to pay bills, to pay for a bit of fun, to save for when we're old. Decent education and healthcare, keep crime down, protect us from enemies domestic and foreign.

"Apart from those things, if you have a wonderful vision of the future, write a novel or make a movie. We don't want revolutionaries, Puritans of any religion or none, national separatists or the European Brotherhood of Man.

"Now, get on with it. And stop lying and fiddling the expenses."

So, why not a coalition of Conservative and Labour? Up to the 70s/80s, when the country was tearing itself into pieces because of economic crisis after Bretton-Woods collapsed, there was quite a lot of consensus between the two sides.

If Clegg can talk face to face with Brown and his back can talk to Cameron, maybe Lab and Con could discover that they have more in common with each other than they have with the LibDems. (For a start, neither of them thinks that a white flag is a robust defence in a nuclear world.)

With 424 seats, a Lab/Con government of national unity would have a majority of 198. Enough to ignore special pleading and political blackmail from Alex Salmond, Ieuan Wyn Jones and the Northern Irish factions; enough to ignore the babel of grand reformist schemes from the LibDems; and enough left over to ignore episodes of up to half a hundred backbenchers at a time temporarily crossing the floor of the House in a hissy fit about their own pet projects.

We face enough challenges to occupy a full-length Parliament, challenges that all serious politicians would wish to solve together.

So, why not? Out of 650 Members of Parliament, is is really impossible to find 326 that would cooperate for the national good?

There might even be some Liberal Democrats willing to help.

Exports and loans

The way Charles Hugh Smith explains it, it seems that Germany is the China of Europe.

Goldman Sachs - "financial terrorists"

Max Keiser claims GS quite deliberately caused last week's 1,000-point drop on the Dow, just to remind the US Government who's master.

Who is Nick Clegg?

For someone propelled into the political spotlight, Nick Clegg is an oddity. Unlike Blair, who treated attention like a sunlamp, Clegg seems oddly uncomfortable - not just with his situation, but with himself. Many photographs show his head tilted forward slightly, as though manfully resisting the urge to look down; after making key points in the pseudo-Presidential TV debates, his eyes would flick to the floor; and if you cover the top part of the face, look at the mouth - all wrong, somehow.

Like Baroness Ashton (Europe's first High Representative For Foreign Affairs), he looks like a natural loser who's won the Lottery, but is going to have it all taken away from him at some point. True, both are winners in a sense now, but the European setup that gave Clegg his first major political position as an MEP (after some years of service with the European Commission), and Ashton (I think) her last, has carefully arranged matters so that you have a big group of nonentities in a mock-Parliament, while all the real power is vested in the Council of Ministers. In short, these two are perfect stooges and the light of publicity does not flatter them.

It is, I think, significant that Clegg's postgraduate learning included a spell at the College of Europe in Bruges, an outfit whose purpose was described by postwar Euro-idealist Henri Brugmans as "to train an elite of young executives for Europe." I read that as a sort of McKinsey for pliable idiots. Other British Isles alumni include former Tory MP Nigel Forman, Neil Kinnock's sprog Stephen, LD stiff Simon Hughes, ScotNat MEP Alyn Smith (how a nationalist and a federalist? explain!), and Irish-born ex-Gen Sec of the European Commission David O'Sullivan.

Now, for a short spell, Clegg's playing with the big boys, and they're going to have his marbles and the bag they came in. Nothing will persuade any Labour or Conservative leader to agree to PR, a system that would guarantee perpetually recurring crises of governance like the present one. The Single Transferable Vote as some describe it (preference ranking within conflated groupings of constituencies) would tend to a squeeze of minor parties in favour of the largest two; tweaked versions of the Alternative Vote are obvious political fudges designed to include cosy dunroamin deadend spots for loyal, clapped-out Party hacks or political chessmen in search of a sinecure (I believe AV+ was Roy Jenkins' brainchild, if so the connection doesn't surprise).

The best that can be hoped for by LibDems is constituency-level Alternative Vote, and it's by no means certain that AV would prove greatly helpful to them. In habitually Conservative seats, many LD voters may be slightly disenchanted Tories who will return to the fold if they feel threatened by some Lib-Lab combination; in Labour seats, the same situation in reverse; and some Liberal seats could be threatened by odd tactical combinations of their enemies, questioning LD policies on e.g. nuclear disarmament, Eurointegration, immigration.

The best that can be hoped for by Nick Clegg, I think, is to do a Blair: sell out to powerful interests who will springboard him into some position less vulnerable to the people's franchise. Perhaps the reward for his long service to Europe will be a seat on the European Commission (maybe he still speaks to David O'Sullivan and friends - see above). He, and ultimately his descendants, will be accepted into that modern equivalent of the Hapsburg dynasty that is the nascent power support structure of the EU.

Or maybe he'll stand his ground, and watch his party get whittled away back down to six seats, a fate David Steel vividly remembers.

It's the Tories who fear voting reform - and the LibDems who should fear it

Watching William Hague and Danny Alexander speak to the Press outside the Cabinet Office, it was obvious to me how shtum they were keeping about electoral reform.

There's a good reason, I think: a truly representative voting system would probably mean there would never again be a Conservative government.

Let's say that we had some form of nationwide Alternative Vote. The votes for the very small parties would likely pass on about equally between the Tories and Labour - maybe a little more Right than Left. The key would be how the LD votes would split, and I'd guess it would be not less than 80:20 in favour of a left of centre Labour party. Even now, that would mean an outright majority for Labour.

Just as American politics is basically a choice between two sides that from a British perspective seem right-wing, British politics under "fair voting" would be a choice between two left of centre parties, for to have any hope of power the Tories would have to share even more in "progressive" political values than they have done in many years. Indeed David Cameron's electoral sales pitch already reflects this, to some extent.

But if we go down this road, then we might be better off with a truly Presidential system, because the two candidates could be assessed not only on general policy direction but on character. We're mutating into a leader-driven system as it is, thanks in major part to the mass media, especially TV. At least a national direct election for the country's leadership would winnow out callow, jumped-up backroom boffins like Milliband - or so I'd hope.

It's much more difficult to judge what would happen if we retained the territorial constituency system but adopted the Alternative Vote. I don't have the time, the psephological database or the specialised computer programs and theoretical assumptions to study 650 constituencies and play out the permutations. But this is what Gordon Brown is rumoured to be offering the LibDems, and forming a coalition to get AV may be better than going for PR with the Tories and eventually ending up with a FrankenLeft party that swallows the LibDems whole.

If Clegg and co. come to a deal with the Conservatives without electoral reform, I think it'll be the end for Clegg; if they get PR, it could be the end of the third force in British politics. Yet Labour haven't enough to go on, even with the LibDems' support.

Perhaps the upshot will be another General Election, even sooner than the 12 - 18 months people are talking about. And that could fracture both Labour and the Conservatives, as Peter Hitchens has long suggested and wished.

We do live in interesting times.

Should we fear proportional representation?

There are vested interests opposing electoral reform. One of their subtler strategies is to propose pantomime-horse variants on the Single Transferable Vote (AV+ etc) , I suspect to muddy the waters sufficiently so that people will say change isn't worth it.

The fact is, under the present system 95.5% of the seats went to the three major parties; if seats had been allocated in proportion to votes cast, the top three would still have had 88.3%. Between them, quite enough to vote down everyone else.

Yes, some of the "wrong types" (e.g. the BNP) would have got a voice in Parliament; but actually, the fourth biggest party would have been UKIP, with 20 seats - and under a different system, UKIP might have gained switch-support from those who voted BNP because of concerns about national sovereignty and the economic and social effects of relatively uncontrolled (yet disproportionately locally concentrated) immigration; leaving the race-haters fuming in an even tinier corner. Some other minorities would have even fewer seats than they have now, and we'd have some fresh voices on the benches. Is it really necessary to uphold a flawed existing arrangement merely because it gags mouths that might offend us?

Another objection is that the LibDems would be the kingmakers, the masters of the seesaw. Not necessarily: how many of those who voted LD tactically last week, would have voted directly for Labour or Conservative if they had thought their vote would count as much as anyone else's?

PR would break the link between an MP and his/her constituency, say some. Yet it seems that so much voting is simply for the rosette, and we have just seen a General Election campaign fought on presidential terms, without our having the right to elect the President.

In 26 years, I've been doorstepped twice by Parliamentary candidates - both them in the last month, because thanks to boundary changes I'm now in a marginal constituency. Before then, I had two Labour bods in succession, each obviously taking the view that they needn't make any effort because the seat was usually bombproof under First-Past-The-Post. (I have a sneaking - perhaps totally unfair - suspicion that the boundary was altered partly to shut out Respect, who were threatening to do well in this part of Birmingham.)

I'm not a fan of the party list kind of PR, because that takes away the voters' right to reject individuals they consider unsuitable - but the Single Transferable Vote (STV) would give a voice to us voiceless people, and we might be heard from time to time among the hubbub.

I give below a list of seats actually won, and another showing how brutally simple national PR would have allocated them; what it can't show is how votes would have been cast if people knew every vote counted absolutely equally, nationwide; or how the picture would change if you could express 2nd and 3rd choices in constituency-based STV voting.