The old order changeth, yielding place to new

David Cameron, slated in an anonymous article by an old-guard Conservative MP in the Daily Mail on Saturday, is further embarrassed the next day by selective and distorted revelations of a confidential briefing by his "close friend" Christopher Shale (full document here), who is then found dead in a toilet at the Glastonbury Festival. I think Cameron is on notice and conscious of this, is likely to make some further misjudgments in the effort to regain control swiftly. It's very odd he should remark "a big rock in my life has suddenly been rolled away", which to some ears would have a most inappropriate Biblical association.

On the other side of the House, Jack Straw has returned to the fray with further carefully-calculated populist topics. The burka controversy stirred the pot nicely in 2006, when it had become clear that Gordon Brown wasn't up to filling the saddle from which he'd thrown Tony Blair. Now, it is equally clear that the voters are less than impressed with the Miliband brothers' exaggerated sense of political entitlement. So Straw has let it be known last week that he thinks the euro is doomed, and this week that he is mightily concerned about the selling of consumers' personal data by car insurers and others. His comments have been well taken up by the allegedly Tory-hating media and perhaps we are meant to start thinking that it is time that Ed should make way for an older man; never send a boy to do a man's work, and so on. But I think Richelieu deceives himself if he dreams of becoming King.

The next General Election will be interesting. Perhaps we will finally see the collapse of both main political parties, a wish Peter Hitchens has repeatedly expressed.

America's debt, the role of the State and the fight for survival

I'm going to look at the contention that State debt is the real villain and all we need to do is cut taxes and social benefits, and let business have its head. I don't feel it's quite as simple as that, but please do put me right wherever you see the need. This is an exploratory essay so I'd welcome correction, and further information and ideas.

First, let's agree that somehow or other, the State has to balance its books (over some cycle of time, to allow for recessions), because ever-increasing debt ultimately leads to ruin. That seems intuitively obvious.

So, how bad are the government's debts? Here's a graph of the official annual figures for the 58 years ending last December:

That looks dramatic, though the very steep slope in the last couple of years is atypical because of attempts to deal with the post-credit crunch economic crisis. Now let's see it in the wider context of GDP:

For the Federal government's "real" (GDP-adjusted) debt, the lowest point is in 1974, then a few years later, starting around 1980, the debt begins to rise significantly, doubling from its low by the early 90s. After that there's the boom of the later 90s, the bust of the 2000s disguised/mitigated/deferred by monetary easing, and the reckoning of 2008 onwards. (The final slope looks much as it did in the previous graph, since the economy has stalled.)

We end the sequence actually not far above where we started in 1952, but this time against the background of a greatly changed economy and society. To understand this we need to widen the lens to include the panorama of Total Credit Market Debt Outstanding:

This doesn't fit conveniently into the conventional narrative. All those whirring government-debt-counting widgets on blogs, yet 2007 was an historic low point? Something's funny here; time to look at what else was going on in the credit market. Let's begin with the "domestic" elements:

Proportionally, households up from 19% to 25%, nonfarm up from 3% to 7%, others generally stable or declining. The domestic sector as a whole shrank from 95% of TCMD to 69%.

So what was responsible for most of the rest? The financial sector:

Four subsets account for most of the financial sector:

As you see, it's now mostly mortgage-related. The graph above takes us to 2008, and below you see the first decade of the new Millennium, including the bailout of mortgage pools:

This demonstrates the government's recent effort to maintain the status quo. Personally, I feel that criticising them for this is like stoning the firefighters when they come to the blaze. My gripe is about how the fire started, which was the attempt to support homebuying and then to shore up home prices.

Take a look at what happens when we include the above three mortgage-based elements in the category of household debt - I rename the aggregate as "house and home":

So it's not general government overspending that's the biggest problem; at least, not directly. And then, when the home lending cracks up, the government rides to the rescue:


Oddly, from 1974 on, home and government debt are almost mirror images:

But it wasn't so before, when the two lines ran almost parallel. Perhaps there was some postwar golden age when money was going not into the spendthrift government, not into illiquid and non-income producing homes, but instead boosting American business? It seems so, if we look at the other subsectors of the "domestic" heading:

Having partially re-categorised the debt in a way that I hope you won't think too unfair, here's the simplified big picture showing how things changed over those 58 years:

To me, this seems illustrative of developing malinvestment. We have been buying and even speculating on houses, and filling them with foreign-made TVs, computers, iphones etc; but we've had much of our consumption on credit and indirectly (via the Treasury), quite a bit of that from abroad. (I say "we" because my brother is now an American, and aso because Britain is America's mini-me in terms of its economic problems.)

Imagine if that money had gone into business ventures, instead of illiquid and non-income-producing housing assets. What if successive governments had reined-in credit and consumer spending, and encouraged the reinvestment of profits into industry and research, rather than the unreally-rewarded financial sector?

Far from over-regulating, it would seem that government has failed to regulate sufficiently. Laissez-faire economics may work okay when the quantity of money is limited, but fiat currency (and debt, which forms part of it) entails the duty to supervise and intervene when necessary.

Was debt ever good? I speculated earlier that there might have been a postwar golden age of beneficial credit, when business borrowing accounted for a third of all debt. Yet when we relate the credit market with GDP, here's the result:

It seems as though debt never fully pays for itself, and the faster the debt accumulates, the worse it gets. Coincidentally, Karl Denninger has just made the same point. Last year, Nathan Martin's "Chart of the century" purported to show that beyond a certain point, additional debt results not just in lesser growth, but actually reduces GDP. Are we all wrong, or is "sound money" a (maybe the) precondition of a sustainable economy? (And how do we square this with the fact that many individual businesses borrow and prosper - is it that leverage gets you market share but tends to shrinks the market overall?)

The size of the debt is unimaginable, though still calculable. Four years ago I was reading Michael Panzner reporting on comptroller-general David M. Walker's mission to warn the nation, Cassandra-like, of the scale of unfunded State healthcare obligations. Even then, the latter was talking about figures exceeding $50 trillion. Well, we've breached that ceiling right now, even without factoring-in the notional capitalized value of benefit programs. Here we are:


Some say we're approaching (and some others say we're past) the point where it becomes mathematically impossible for the economy even to service the interest on our obligations, let alone reduce the amount outstanding. I'm not sure I agree, though the challenge is certainly daunting. Here is the total credit market debt expressed as a percentage of GDP:

If we have to be deeply in hock, perhaps it's better to have the government take care of some of the burden, for three reasons:

1. The debt doesn't have to end, as for example a mortgage does. Loans may need to be rolled-over, but the nation as a whole doesn't retire, so it can borrow forever.

2. Government debt is more secure, in the sense that more fiat money can be created to make the payments. How can you run out of nothing, which is where the money comes from? (Or rather, it comes from diluting the value of other people's stock of the money.)

3. The interest rates are, accordingly, lower than for most private and corporate borrowing. The average for all Treasury interest-bearing debt is currently 3%, whereas fixed-rate mortgages (if you can get one) are running at 4% - 5%, and credit cards are now averaging over 16%.

So, by all means let the government play little Dutch boy, plugging the holes in the dam. The total interest on the national debt for fiscal year 2010 was $414 billion, a vast sum but still an effective interest rate of around 3%. What average rate is being paid on the other $38 trillion or so that's burdening the economy (not to mention capital repayments)? Imagine if that debt was on terms similar to the government's...

Maybe it's not the banks that should be bailed out, but businesses and consumers. How would things look if more debt was transferred to government and slowly retired and paid for by various forms of taxation? Could this help distressed consumers and businesses keep going for long enough to get back on their own feet? Or must we go the let-'em-fail way demanded by free-market Puritans? (In which case, can we also get puritanical about the money supply and who is allowed to supply it, please?)

Bailing out is a good thing to do when the ship is sinking, but we have to do much more than that. So much has to go right that it's no wonder Dr Marc Faber (aka "Doctor Doom"), away in his Thai retreat, reckons it's hopeless and predicts a complete economic "re-set" (including the death of the dollar) and war. I hope he's wrong for once, otherwise I'm wasting my time here.

Survival begins in the head: you have to believe you'll get through, so you can condition your mind to look for tools and opportunities. Can we work on the assumption that there is a way?

One way was suggested in 1993 by the far-seeing billionaire Sir James Goldsmith, who recognised the threat that GATT posed to Western economic and social stability. Sadly, the man is no longer with us, but his book, "The Trap", is still available and highly relevant, even more so now that Goldsmith's predictions are coming true.

Globalisation has tipped the balance of power so decisively in favour of capital and against labour that American - and European - society is beginning to tear itself apart. Sir James advocated a system of economic trading areas to protect against completely unbeatable competition from extremely low-cost labour forces.

Either capitalism - which, theoretically, creates work and wealth by allocating capital efficiently - must have some bounds set for it so that it nurtures the society that gave rise to it - or, as Marx predicted, its contradictions will destroy itself. If we don't want an Ayn Rand dystopia, we have to make it possible for our people to work and prosper.

We are presently trading away not merely our income but the jobs that earn it, and the capital and physical means that create the jobs, and the knowhow that utilises the means in productive projects, and the intellectual property rights that safeguard the knowhow. As for the development of fresh, potentially wealth-creating knowledge, I understand that businesses have been cutting their R&D and even the universities favour their MBA schools over maths and science.

We need a plan. It will call for visionary leadership, skilled and patient management, the most careful international diplomacy, and the co-operation of politicians, voters, workers, industrialists and financiers.

In the meantime, emergency measures may be necessary, and they may not be the ones the econo-fundamentalists want. Austerity could be the worst possible solution at this stage - it is the exact opposite of Keynesianism to let rip when times are good and starve the economy further when there's already a recession on, and others are making this point already, e.g. "Rortybomb" and Australian economist Bill Mitchell. And there are those who say that taxation is nothing like as onerous as many people believe.

Or do you go with "Doctor Doom"? If so, maybe you shouldn't be planning to be rich in your own country, but preparing to move far away from the consequences of the coming collapse.

If you think that is irresponsible doom-talk, consider the President's Executive Order of a couple of weeks ago. I don't read the establishment of a White House Rural Council as mere quasi-socialist interfering; I sense the beginning of a national plan to survive and feed the nation in disrupted times. If it isn't such a plan, then there should be one.

For it's about more than just money, now.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

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.

Did you know...

... that the October Revolution actually occurred in November?

Why the stockmarket could fall by 70% in real terms

(The following article was published yesterday on Seeking Alpha.)
_______________________________________

My Feb. 11 SA estimate that the Dow could drop to 4,500 is echoed in a May 16 video interview with Russell Napier, who is predicting an equities bottom at around S&P 400. Actually, this is even lower than my guess, in proportion to the index chosen, but Napier says his figure is an average of what he expects valuations to be.

I've had a little abuse for this view, some rather personal, and it seems I'm too dumb to notice that the market has just had its biggest, fastest rise in history. Actually, the latter fact has not escaped me, and I take my hat off to those who have got on and off the Enron-like ride at the perfect moments -- so far.

What we've really seen in the last decade is two economic heart attacks and liberal use of the defibrillator: First a slash in interest rates that (given the venality and criminality of some in the financial world) led indirectly to the busting of the housing market and some major banks, and then a pouring of resources into the banking system that is now busting the credit of whole governments.

In a way, conventional market analysis is now hardly relevant, because the system is so grossly interfered with by government that everything hangs on what the Fed decides to do ... and how long it can get away with it. I pointed out several months ago that China (among others) is becoming very antsy about the export of America's inflation to the developing world.

In a May 10 interview with MoneyWeek's editor Merryn Somerset Webb, Napier says he expects the "reset" to come in two stages: First deflation, and then sharp inflation. I've pondered the in/de question for a long time, and his analysis seems plausible to me. We're so interconnected these days that a bust wouldn't just wipe out profligate banks, but also would crater the pensions and investments on which we have come to depend ... not to mention the taxman, who (particularly here in the UK) has found it very convenient to harvest money from the swollen financial sector. So inflation will be seen as the way to steal wealth to spackle up the cracks in the system. (Can you make a whole house out of spackle and duct tape, though?)

What's unusual about the current situation is that bonds are not on the other end of the seesaw to equities. Napier foresees a swift move up in interest rates that will undermine both. They say you shouldn't give an estimate and a timeframe at the same time, but he does, for the bear "pit": 2014. We shall see.

Meantime, Mike Shedlock today gives an alternative view, pointing out that corporations are holding a lot of cash. Maybe so, though I'd like to know more about who has the cash and who has the debt; whether some have both; and what the latter may do if interest rates spike. Not to mention what will happen to the demand side when ordinary Americans finally run out of money, as indeed many are doing already.

I have suggested that cash is not a bad place to be, unless you are one of the SA-reading gunslingers who has a sharp eye and sharper reflexes. Given the growing vulnerability of the US dollar (and various moves to weaken its position as the world's reserve currency), Napier has said (in the May 16 interview linked above) we might consider the currencies of emerging markets.

And I hedge my bet on the destination of the market by saying it may not be Dow 4,500 or S&P 400 in nominal terms -- but the market could well be there after adjusting for inflation.

Finally, there is a bright gleam in the dark: As Napier says, the bottom won't be in for long, and those who have the cash then and get in fast can "go to the beach" for years afterward. Like, as the FT interviewer said, in 1982.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

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.

NS&I Savings Certificates - the clock is ticking!

If you're considering buying an NS&I Savings Certificate, especially the (RPI-) index-linked version, you may need to decide quickly.

NS&I's site says they "expect [them] to be on sale for a sustained period of time", which gives them room for manoeuvre as to timing and could leave ditherers suddenly high and dry. They also say "we are currently experiencing high volumes of calls" and this could mean that they will reach their overall sales target well before the end of the financial year - which is why, reportedly, the Certificates were withdrawn from sale last July . It's also worth noting that there is no specific target for Savings Certificates - as I reported here last month, it is merely expected that NS&I will end the tax year managing £2 billion more than it did at the beginning - spread over all its products, including e.g. Premium Bonds.

Moreover, there is commercial pressure to withdraw the Certificates. I reported that they were back on 12 May, and a mere two weeks later the Nationwide Building Society began complaining of "unfair competition" from NS&I.

The Government is in a cleft stick: people should have a secure and inflation-proof haven for their cash, but it is also a priority to get banks and building societies lending again to stimulate the economy.

It has also been observed that since the financial sector has been allowed to dominate the economy, the Treasury has become semi-dependent on taxes on bankers' bonuses. I have to bite my tongue at this point!

Actually, the competition complained of is not as fearsome as it was. True, you can invest up to £15,000 for a 5-year period (and can also buy them for children aged seven or more); but the 2- and 3- year versions are no longer available for new purchases (existing ones can usually be rolled-over on maturity), so the maximum you can invest has been sharply reduced: in 2006 you could have committed up to £45,000 per person, by buying three different versions at the same time!

Further, although the Certificates are still RPI-linked and tax-free, the additional interest is now only 0.5% per year. As before, you can access the cash before the end of the 5-year term (I suspect this term was chosen as being the least attractive), but you lose a year's interest.

Having said that, I still think they are better than what you can get elsewhere. As this FT article says (see end), the commercial alternatives are either taxable or carry a degree of investment risk.

If you do want to get in (and remember, this is NOT a personalised recommendation!), do so before the market whinges the Government into submission. You can apply online here.

INVESTMENT DISCLOSURE: We're just considering buying some ourselves!

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.

Letter to The Spectator: GM contrarianism

Sir;

Matt Ridley’s statement (Diary, 14 May) that “GM allows the organic dream of drastic cuts in pesticide use to come true without high cost” must surely be disingenuous coat-trailing, or at least an instance of grossly unbalanced journalism. Before he ripostes that this was only a passing comment in a desultory diary, I should like to suggest that the subject of how we are going to feed ourselves and our descendants deserves better than a contrarian throwaway line.

Mr Ridley makes no reference to research (e.g. as quoted by Friends of the Earth in 2008) that indicates increased use of pesticides in conjunction with GM crops. Is he also unaware of the common assertion that one of the purposes of GM in cereals is to develop crops that are resistant to the side-effects of herbicides and some pesticides, so helping to expand the market for the agrichemical industry? Does he further wish us to believe that he is ignorant of the debate about monoculture farming: how it allegedly increases liability to disease and pests, which in turn encourages the use of chemicals that harm wildlife and soil microorganisms and degrade the soil structure?

As a meat-eating, leather-shoe-wearing Westerner, I should like those who come long after me to have the same options; it is not only the plastic-sandaled devotees of Gaia who are concerned about sustainability, or the integrity of our environment.

NS&I Savings Certificates return!

Five-year index-linked and fixed rate NS&I Certificates are now available again, according to a hotline email received here today.

Demand is likely to be high so if you want to get in, NS&I recommend applying online.


INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.
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.

Quizlet

Who said this?

"The purpose of agriculture is not just to produce the maximum amount of food, at the cheapest direct cost, employing the least number of people. The true purpose should be to produce a diversity of food, of a quality which respects human health, in a way which cares for the environment and which aims at maintaining employment at a level that ensures social stability in rural communities."

1. Hugh Fearnley-Whittingstall
2. Tony Benn
3. David Miliband
4. Sir James Goldsmith
5. Ross Finnie
6. Barbara Ward and Rene Dubos
7. Nick Brown

We need both AV and compulsory voting

It looks as though the Alternative Vote will be given a resounding raspberry.

A shame, because we may soon see radical policies in Scotland on the "mandate" of a majority party that has won overt support from less than 25% of eligible voters.

Here, thanks to The Guardian's Datablog, are the results of the Scottish Assembly Elections, expressed as a percentage of the electorate, 49.64% of whom abstained:



This is hardly the basis on which Mr Salmond can feel justified in reversing the Highland Clearances, or whatever he plans to do with the systemically-distorted power he is set to wield.

The Celtic Twilight is perhaps better represented by the party I call (with apologies to Dylan Thomas) "Fforeggub" - which has just put in a storming performance in my own ward's local council election, garnering over two-thirds of the potential vote. This democratic failure has ousted the nice Lib Dem lady (I voted UKIP, on principle) in favour of the Labour bod, who got less than 16% of the franchise:



In an increasingly divided and crisis-beset country, I'd argue that we need not only the Alternative Vote but (as I said last month) mandatory voting.

For me, a spoiled ballot is spoilt behaviour, and an abstention is a moral abdication. It is not a worthy exercise of your liberty to surrender liberty itself. The blasé line "Don't vote, it only encourages them" is exactly wrong: the failure to vote empowers and emboldens those who squabble to grab the country out of each other's hands and play recklessly with it.

The One Percenters

Just voted. I asked one of the returning officers, "Good turnout?"

"Still under 200." This is at gone half five. So my wife and I represent over 1% of votes cast so far, at that station.

I wanted my vote to count, but not this way.

Credit cards and consumer protection

As reported in the Daily Mail today, you get additional consumer protection if you make a purchase of an item worth £100 or more by using your credit card.

The Mail piece is based on details on page 16 in the latest issue of "Ombudsman News", a regular publication by the Financial Ombudsman Service (aka FOS -see link in sidebar under "Financial Regulators (UK)"). In the case cited, a student had bought what turned out to be a faulty computer and when she complained, the shop advised her to contact the manufacturer; but she didn't have time to do this, so she sought redress from the credit card issuer instead. When the issuer refused, the FOS ruled in the student's favour.

Section 75 of the Consumer Credit Act 1974 (current version) states:

"If the debtor under a debtor-creditor-supplier agreement falling within section 12(b) or (c) has, in relation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall accordingly be jointly and severally liable to the debtor."

"Jointly and severally" means that the consumer does not have to deal with the shop or the manufacturer first, he/she can get the money back from the credit card company; but the supplier can also be dragged into the action, if the consumer so chooses.

This does not apply if the purchase is via a "non-commercial agreement", or if the item cost less than £100 or more than £30,000, or if the credit card terms have been breached (e.g. by exceeding the credit limit on the account).

In the definitions section of the Act, "“non-commercial agreement ” means a consumer credit agreement or a consumer hire agreement not made by the creditor or owner in the course of a business carried on by him" - in other words, loosely speaking, the transaction has to have been commercial rather than private.

Worth buying a car from a dealer this way, perhaps?

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

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.

AV explained beautifully

(htp: angry exile)

A letter to Douglas Carswell MP

Monday, 02 May 2011

Douglas Carswell MP
The House of Commons
London
SW1A 0AA


Dear Sir

Financial Services (Regulation of Deposits and Lending) Bill 2010-11

Congratulations on your speech introducing the above Bill, which I have just seen on YouTube. May I offer some counter-arguments so that you can rebut them when others raise them?

• Were your Bill to become law, the banks might simply offer no interest on “storage bank accounts” and a sufficient differential on “investment accounts” to draw money away from the former, even from cautious savers (but still not enough in the latter case to match inflation). In fact something like this is already happening with people investing in stocks who shouldn’t.

• British business might be at a disadvantage if we have this rule but other countries don’t. Look what the US has already bought from us with “candyfloss money” – the old Cadbury Quakers must be spinning in their graves.

• Savings need to be safe in terms not only of the return of capital, but the return of its real value. NS&I Index-Linked Savings Certificates fitted that bill, and were withdrawn in 2010 for the first time in 35 years. This is an indication of the Government’s priorities, surely. But even when available, money had to be locked up in those Certificates for years. And when first introduced, they were only available to pensioners.

• If you really want sound money for the protection of ordinary savers, then we should have index-linked (and linked to a properly fair index of consumer price inflation), instant-access (or short-notice access) cash ISAs, so that deferred consumption is at least not penalised, if not positively rewarded.

Very best wishes to you and for your Bill,

Rolf Norfolk

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.
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.

Sir Fred Goodwin

Owing to a "super-injunction" still in force, I am unable to say any more than that Sir Fred Goodwin is a *anker and has been a prominent *anker for years.

In the news: Gerry Adams and Libya

In the Daily Mail, Petronella Wyatt recalls how, aged 12, she was threatened by the IRA on account of her father's journalism; she describes Gerry Adams' smile as reminding her of "the glint of coffin handles".

Elsewhere in the news: one of Colonel Gaddafi's sons (and three grandchildren) reportedly killed by a missile on account of Western interests' quarrel with his father. This is not authorised by UN Resolution 1973 and the assassination of political leaders is against inernational law; when the inevitable reaction occurs, the Libyan ambassador is ordered to leave the UK.

It is said that at the Battle of Waterloo, Napoleon rode momentarily within range of a British musket, but Wellington forbade the shot.

In praise of rotten boroughs

Democracy is inconvenient and there are moves to tidy it away, one of them being to reduce the number of MPs from 650 t0 585, with the following result (using size of electorate as at 1 December 2010):


Imagine that the constituency in which you live is a vast coach, and the MP your driver. What chance is there that you will go to the destination of your choice? Especially when the front rows are filled with lobbyists, Whips and others with much louder voices than yours.

Whereas in the General Election of 1831, 152 out of 406 MPs were chosen by fewer than 100 voters. Gatton (Surrey) and Old Sarum (Wiltshire) each had only 7 electors and each sent 2 members to the House of Commons. At least you'd have got a drink out of them once every few years.

AV means the driver might just hear a little chorus from the back, above the commercial and cliquey hubbub roaring just behind him.

Andrew Marr comes clean

About time. I touched on this in 2008 and discussed his inconsistency in 2009. Yes, our interest is prurient - "we know-what-you've-been dooo-ing" - but he suddenly refused to be paid in his own coin. Now he should be in a stronger position to deal with oblique threats from deranged Campbell types.

Why didn't Ian Hislop blow the gaffe before? For all his moral judginess, Hislop was reportedly chosen as a safe pair of hands by those who had got to the age where they needed Private Eye to be their pension fund. In his heyday, Ingrams would have gone for the story and blow the consequences. By the way, how many people were interviewed for the PE editorship when Ingrams stood down? Can't wait for an in-depth on that story.

Still, prudence is the better part of valour. The former editor of Spiked magazine met with a fatal accident in Cyprus shortly after an edition of his publication that included explosive allegations about a then Tory cabinet minister's private activities in a North African hotel.

Mind how you go.

Banks still under pressure?

The banks are supposed to get lending again, and simultaneously rebuild their cash reserves. But Bank of England statistics show that reserves are actually falling, instead.

Figures for last month show that year-on-year, notes and coins in circulation increased by nearly 4%, but reserves held in bank accounts dropped by over 11%.

I reproduce the BoE's table below (interesting that they present it in a bashful pale grey on white - the visual equivalent of the civil servant's polite, embarrassed cough?) - click to enlarge.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

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.

In a nutshell

You can get a headache thinking about inflation and deflation - but either way you stand to end up broke. Either you'll be rolling in worthless money or you won't have any money.

James Kunstler

New site launch: Orphans of Liberty

A new site is starting today, run by a (mostly) right of centre blogging collective. Give it a go: Orphans of Liberty.

Will the government really help us against inflation?

Inflation-proof, government-backed savings will soon be back on sale - or will they?

On 19 July 2010, National Savings & Investments (NS&I) abruptly withdrew Index-Linked Savings Certificates from general offer to the public - for the first time ever. These plans were launched in 1975 and were originally available only to pensioners, at a time of high inflation (24.2% for that year).

Yet last July, inflation was only running at 3.1%, so why stop the offer at that time? The Bank of England base rate was at an historic low of 0.5%, therefore inflation was comparatively 6 times higher; but the difference in numerical terms was only 2.6%. In 1975, the BoE rate varied from 9.75% to 12%, with RPI running at more than double that and the rate difference was over 12%.

One reason for the NS&I hiatus will have been the emergency general review of Government borrowing requirements following the General Election. But another may be the kitten-weak condition of the banks, which are trying to fulfil two contrary directives, namely, to lend money again and also to rebuild their cash reserves. Perhaps they are to be spared too much competition. The anticipated rush for NS&I index-linked plans is such that they have set up an email alert system. When offered, the new certificates could sell embarrassingly fast and draw the public's attention to the Government's suspected inability to address worries about growing inflationary pressures.

But how much, exactly, are they going to offer, and when? Like many others, I misunderstood the Press (e.g. the Guardian) as saying that £2 billion would be on sale; but NS&I's release (23.03.2011) merely states that the target for the total funds they manage, spread over all their products, is an increase of £2 billion, which will "allow NS&I to plan the re-introduction of Index-linked Savings Certificates for general sale in due course. Subject to market conditions, NS&I expects to be bringing Savings Certificates back on general sale in 2011/12."

"... in due course", "... subject to market conditions"; one could hardly call that a blast on the post-horn.

Going back to the Government's own Budget plan as stated in the "Red Book" (Annex B, page 90), the guidance is merely that "National Savings and Investments (NS&I) is expected to make a contribution to net finance of £2 billion", without even a hint that any of this must be from inflation-linked plans.

By contrast, the same page sets a target of £38.4 billion of index-linked gilts. That sounds interesting, except most if not all of that may be taken up by institutions such as occupational pension funds in order to underpin their guarantees to retired members.

What about general savers? Few commercial outfits, if any, can offer guaranteed inflation-proofing and anything like 100% security, let alone exemption from income tax and CGT. This recent article from the Daily Mail details some options, but they are either taxable or risky.

So in some ways, even though inflation is still far from what it was in the mid-1970s, we may be worse off today. Theft by devaluation may have become official, if unstated policy.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.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.

Things I don't know about Libya

Who is the legitimate ruler, or what is the legitimate government, of Libya? Is is Gaddafi, or Zaid Hamid, or who?

Is there a legitimate government at all? If so, why has 40% of its ground forces been destroyed? If not, why has the situation not been resolved in 40 years?

How do we decide who should rule? Does any outsider have the right to decide?

Who(m) are we "helping"? In what way are they "better"? What will they do if they win?

At what point does the destruction of the "government's" forces constitute an attempt at "regime change"? Is this legitimate, or not (there seems to have been considerable wobbling about this in HM Government recently)?

Is this whole thing like Italy's (Mussolini's) campaign in Ethiopia in the 1930s?

Should the UK have declared war on Mussolini as soon as we perceived that he was a ruthless dictator?

What happens if we stop now?

What happens if we don't stop?

How do other African and Arab nations view our actions?

Is this going to imperil us at home?

How did these Arab rebellions really start? Did Western secret services have anything to do with it?

When will we get some in-depth, non-partisan discussion on the mainstream media about these issues?

When will I get my State Pension?

What with women's State Pension Age rising from 60 to 65 in stages, and proposed further deferments for both sexes, you may be confused about when you're actually going to get your State Pension.

Click here for the calculator from the Pensions Advisory Service and find the answer! They work in conjunction with the DWP so it should be right.

Please note that legislative changes may change the answer so check again when you hear further news on this topic.

I have also placed this link in the right-hand sidebar under "Other helpful sites".

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.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.

US credit wobbles; hold cash not bonds

The fuss about S&P's "AAA with negative outlook" for US credit is remarkable mainly for being so far behind the curve.

The Beijing-based Dagong credit rating company gave America a significantly lower "AA" with negative outlook, back in July 2010 (and the UK was one level worse than that). Remember that China is a business partner and needs a clear view of how commercial operations are proceeding; this is not about Oriental mischief-making.

On the other hand, the talk of US Treasury default is wild, and I quite understand how it makes pensions expert Leo Kolivakis decidedly impatient; after all, that "negative outlook" comment is screwed to the side of a continuing AAA rating. But I do rather doubt that current US bonds will be honored in the sense of preserving and slightly increasing your wealth.

Charles Hugh Smith's thesis, on which I commented a few days ago, is that the American plutocracy will consolidate its gains by forcing a bond strike; personally, I think it's unnecessary to postulate a conspiracy in order to agree with him about the consequences. With interest rates at an historic low in the Anglo-American sphere, there's really only one direction in which they can change. Why would you buy now? And more importantly, why would you hold, when a rate rise could savage the tradable value of your holding?

Those who need to keep exports flowing, such as China, may be prepared to pay the price of maintaining the status quo, making on profits what they're losing on bonds, but as I said in February ("Global Credit Warfare"), the language over there is getting rather anxious and aggressive. Dagong's report bluntly states that America is exporting inflation worldwide.

Having said that, inflation in prices is very uneven and unfair. Proportionally to income, the rising costs of food and energy are hitting the poorest worst: I can cut back on brandy and weekend leisure trips, but how does the underclass cut back on hamburger helper? And with a large wad of ready cash, the better-off are in a position to snap up residential property cheaply, and bargain hard for luxuries such as cars, computers and other shiny gewgaws. I should think this is a great time to go to bankruptcy auctions, especially since the taxman isn't much bothered about setting a reserve. So in many ways, inflation hasn't yet really reached the rich.

But invulnerability is an illusion. When the remains of Mayan civilization were discovered, no wealthy Mayans were found sipping mai tais among the half-finished stone carvings.

We're all in this together, and because it's global now, we're mutually involved in a way that hasn't happened before. As Adam Fergusson relates in his chilling book(recently reissued) "When Money Dies", during the 1923 Weimar hyperinflation and the period leading up to it, German export business did very well, so well that the jealous and punitively-minded French wondered who'd won the war. Speculators also prospered, until the currency was reorganised, at which point they "took off for Paris and went to work on the franc, their departure the first signal that stabilisation was a fact." For a long time, reports Fergusson, visitors to Germany would see apparent national prosperity, simply because the cafes and restaurants were full of the winners; they didn't see the middle class exchanging their pianos for a side of ham.

But now, with an increasingly integrated international economy, it's getting more difficult to evade the problems simply by moving to another country. Tensions are rising, and not just in the Arab street.Western governments are deferring the day of reckoning, consuming their own debt like the serpent Ouroboros but without the element of timelessness. The present state of affairs cannot continue indefinitely, as Karl Denninger has been saying since 2007.

What are the possible outcomes?

Outright default? Don't hold bonds.Bond strike, interest rate rise, savage economic retrenchment? Don't hold bonds.Total collapse of the currency? Don't hold bond. High inflation? Don't hold bonds.

The least nuclear of all the options is the last, so unless we have a collective death wish that seems the most likely. Jesse thinks the dollar won't go to zero, but have a few zeroes knocked off it, like the French franc in 1960 (not that that stopped the decline): "I think the reissue of the dollar with a few zeros gone is inevitable. It is the timing of that event that is problematic. It could be one year, or it could be fifty years. There is a big difference there for your investment strategy." Reminds me of the scene in an old Cheech and Chong movie where they offer a peasant dollars and he spits on the money, saying you haven't got Mexican? Except this time he'll want a chicken or a silver necklace, instead, because inflation now respects no national boundaries.

Whether the debt-accelerated system manages to slam on the brakes without hospitalizing the vehicle's occupants, or hits a tree (everyone got airbags?), or simply grinds to a rutted halt in a cornfield, buying into the bond market now without some ulterior motive looks like wanton self-sacrifice.

Don't take it from me; take it from Bill Gross, who "sees no value in U.S. government bonds at current interest rates" and has dumped them altogether.

Meanwhile, let's start a national debate about social cohesion. That or wait for the jungle to recolonise the abandoned temples.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.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.

US university invests heavily in gold

The University of Texas has doubled its holdings of gold in 2010, bringing the total to nearly $1 billion, according to Bloomberg.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

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.

Hold cash now, buy bonds when interest rates rise?

On Friday, Charles Hugh Smith posted a theory that I can accept as at least plausible: America's rich will consolidate their long-term gains by engineering a bond crisis - a refusal by the Federal Reserve to keep financing government spending.

This will make interest rates soar (collapsing the tradable values of bonds and, I'd have thought, equities); new bond issues will have to offer much higher income; the rich move in with their huge reserves of cash; then comes the demand for serious economic retrenchment; interest rates fall; because of their locked-in high yields, the capital value of new bonds shoots up; hey presto, another killing for the millionaires.

If that's so, the strategy will be to copy the rich (if you have the resources) - hold cash patiently and pile into the bond market when interest rates peak.

Other implications that occur to me: don't owe any more money than you have to, don't overinvest in residential or commercial property, don't be in a business that depends on people's discretionary spending. Reconsider your balance of shares, bonds and cash. It may even be worth thinking about moving somewhere with historically lower crime rates.

What about "inflation-protected" investments, such as NS&I Index-Linked Savings Certificates (due to become available again soon)? Smith observes: "Holders of TIPS [Treasury Inflation-Protected Securities, in the USA] will do OK, unless the government fraudulently sets the rate of inflation well below reality. Hmm, isn't that exactly what's it's already doing?" But presumably there's a limit to how much the government can misrepresent inflation; and besides, Smith's thesis is that we are headed for deflation because inflation robs the rich.

He could be wrong; but if he's right, the word passed down the ranks of cash holders is "Stand fast!"

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

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.

Exhausted by outrage

Read this article in Rolling Stone (hat-tip to Robert Wenzel), about how the Federal Reserve gave money to America's foreign competitors, billionaires in tax havens and even the business-inexperienced wives of Wall Street dealers.

Then if you can stand it, read Matt Taibbi's article about how nobody important on Wall Street is going to get prosecuted for the misdeeds that blew up the Global Financial Crisis.

This can't be happening.

April News

1. National Savings & Investments has not yet reintroduced Index-Linked Savings Certificates, but watch out for their return as reportedly they have a target (limit) of £2 billion in new issues. I think they will go very fast, bearing in mind continuing concerns about inflation. You can register with NS&I here to receive email updates and be among the first to get in.

2. As we are in a new tax year, you have a fresh ISA allowance. The overall limit per person is £10,680 of which up to £5,340 can be in a cash ISA; any excess must go into a stocks and shares ISA, which can be with the same or a different provider.

3. Investing for children: as you will know, the Child Trust Fund was launched in 2005 and vouchers backdated to include children born after 1 September 2002 - and now the scheme has been shelved. However, plans that have started can continue and contributions can still be made. This autumn (1st November) we expect the introduction of an alternative for under-18s, the Junior ISA. According to the Daily Mail, the allowance will be £3,000 per child and unlike adults ISAs it will be possible to switch from cash to stocks and shares and back again. It's also worth noting that this allowance also applies to children born before 1 September 2002 (who were not eligible for the Child Trust Fund). Please also see this article by Gaynor Pengelly on other options for children's investments.

4. For various reasons, my personal attitude to risk re stocks and shares is still cautious, except possibly for commodities - but even in that sector there are issues of big-boy speculation and market manipulation. If you invest now, I'd suggest you be prepared to take a long-term view. Do please contact me if you'd like a personal discussion of your own portfolio and future plans.

5. Contracting out of SERPS/S2P: from 2012, it will no longer be possible to contract-out through a personal pension, stakeholder or money purchase pension scheme. This is because the Government plans to introduce a more generous flat-rate State Pension for all, from 2015 or 2016. I warmly welcome this, because up to now we've had a terribly complicated scheme of giving with one hand and taking away with the other - Pension Credit, Pension Savings Credit etc. The bizarre result was something like an effective 40% tax rate if you had a small State pension and had a little extra income from savings - Higher Rate Tax for poor people! Here's an intriguing angle: We've yet to get full details, but a possible effect of this change of policy could be that if you are currently contracted-out (or have previously done so) and are due to reach State Pension Age after the new scheme starts, you may get the full new State Pension PLUS extra income from the contracted-out pension, whereas someone who had stayed in SERPS/S2P throughout would get nothing more. Maybe the Government will do something about it (surely their civil servants will have spotted it) - but let's keep our fingers crossed and hope they'll think it's too complicated to adjust now.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities. 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.

Alternative Vote and the Apathy Party

If AV is a controversial step, what about tackling non-participation? The last four UK General Elections have also been the lowest in terms of turnout since World War II, according to this site:

Statistically, there appears to be only a slight negative correlation between the size of turnout and the size of the winner's majority, as witness the 2010 results:

... but the British system is full of idiosyncrasies. A constituency in the Western Isles, or Northern Ireland, or one of the industrial blightlands, is not going to have the same characteristics as one in Hampshire, Slough or Greater London. And apathy can be confused with despair: in a rock-solid safe seat, those who would vote against the incumbent if they had a chance of unseating him/her, may simply not bother to vote at all.

Why not insist that everone must vote - perhaps adding the option "none of the above" to the ballot form?

Australia has a system of compulsory and enforced participation in General Elections, and so does Singapore; among European countries where it is compulsory but not strictly enforced, are Belgium and (for Senate elections) France.

South America (which I think will have a very interesting and possibly bright history over the next century) has many countries where voters must take part. Using the information here, I give below a map of them:

Let's start with AV, and if that doesn't winkle the people out of their sofas, let's go where so many other countries have led the way. Who knows, we may one day have a democracy.

Voting reform: AV = First Past The Post

The above video is no longer available on Youtube but can be watched on the BBC's website here:

http://www.bbc.co.uk/news/av/uk-politics-13048603/referendum-campaign-broadcast-by-the-no-campaign-broadcast-on-11-april-2011
_____________________________________________

This evening I saw the political broadcast for the "No" vote and I think I've rarely seen anything so untrue and misleading.

First we got candidate Alan B'Stard promising everything to get in, then forming a coalition and welching on all the manifesto promises. Ans: No, that is what we got under the present system.

Then we saw a horse race where the third placed was declared the winner. Ans: No, under AV the victor IS ALWAYS the first one past the post, the "winning post" being 50% of all ballots cast, if necessary by taking into account second and third (etc.) preferences.

As opposed to the present system, where the last Labour government got a clear majority of 66 seats on the basis of a minority of the votes. In the 2005 General Election, out of 650 MPs, only 220 won 50% or more of the votes cast in their own constituency (see "Election results for Using and Applying statistics" here.) In over 66% of Parliamentary constituencies, all the horses failed to finish!

Working the figures the same way for the 2010 General Election, only 217 out of 650 MPs jockeyed their way past the post. That's almost exactly the same situation as in 2005; we have a coalition government only because of disillusioned and mistrustful voters switching between parties - using the current voting system.

In 2005, Labour got 35.7% (the largest proportion) of the total national vote; in 2010, the Conservatives got 36.5% (the largest proportion) of the total national vote. The mess we have is, I repeat, under the current voting system and is a result of political breakdown, not (directly) owing to a glitch in the psephological mechanism.

Some might say, why change the system, then?

I'd answer, the breakdown of the relationship between the representatives and the people is (to a significant degree) attributable to an unrepresentative system of voting, one which encourages a party political divide because MPs in "safe" seats needn't bother listening. For 20 years I had no member of any of the major political parties even ask for my vote, because however I voted, I was going to get the Labour stooge. When the constituency boundaries were altered for 2010, suddenly I had both Labour and LibDem candidates on my doorstep.

Needn't bother listening? Needn't bother working, either, in many cases: how is it possible for "hard-working" MPs to write novels, handle handfuls of directorships etc, if not for the cosy calculus of "pairing" and the lazy delegation of most of the constituency work to constituency workers? I am reminded of the eighteenth century Caribbean plantation owners who lived in London and left all the responsibility to their estate managers and overseers.

Oh, and all that guff we're hearing about how very complex AV is? Bollards. Fifty years ago, housewives were completing similar questionnaires in newspaper ads, to win washing machines - "Put these advantages in order of personal preference: price, speed, capacity..."

No-one can foresee exactly how voting will change when all votes count, or at least half of them, anyway. The LibDems needn't assume that it will benefit them most, for if it does, the other parties will adopt a raft of me-too policies. No bad thing, perhaps, to make politicians work for a consensus.

And maybe, just maybe, we'd start to examine the candidates more carefully, rather than simply glance at their rosettes. No wonder there's such resistance to change from the spoiled heirs of the present arrangement. Just who IS funding the "No" propaganda?

Ah, but without (so-called) first-past-the-post we wouldn't have had Thatcher, say the Conservatives. Well, I think a general retrospective reassessment of her achievements is in order, seeing as how we've nearly killed our industrial base and allowed the financial sector to come out in a massive, choking algal bloom. But while we're reviewing her with the crystal hindsight of history, we can look again at the miserable record of the Socialist governments, too. The vaunted advantage of a government enabled to take bold action on the back of a Parliamentary majority founded on a minority of votes, is not such a strong argument, in my view. *

And why should all be decided on red and green benches in the best clubs in London, anyway? We're long past the time when it took days to ride a horse to the capital and every provincial church told its own time; modern communications call into question the antiquated system of remote, unresponsive, not infrequently rather arrogant and sometimes downright corrupt representation.

When it really matters, the people can and will declare a clear opinion, even against the advice and guidance of their leaders, as witness Iceland's referendum on the bailout of the banks. More referendums, say I - provided the arguments to inform them aren't as lying and twisted as what I saw tonight.
________________________

*Update (November 28, 2017): Only twice since 1918 has any party garnered more than 50% of votes cast nationally in General Elections - the Conservatives both times, in 1931 and 1935 - see page 12 of "UK Election Statistics: 1918 - 2017" (pdf) on the House of Commons website here:

http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7529#fullreport

In the paper shop

The newsagent was reaching under the shelves with a litter picker, searching for plastic ties and brown paper from the morning's news bundles.

In came the old man who has spent £30,000 on National Lottery tickets since it started.

"You'd better not bend like that in front of me, or you'll get the Golden Rivet. Are you looking for your wallet?"

"A penny."

"A friend of mine once bent down for a penny, and broke his neck. Never bend down for anything less than fifty pee."

Bill Whittle vs Michael Moore

You don't have to be a right-wing commentator like Bill Whittle to think Michael Moore is a crowd-manipulating phony. But I think Mr Whittle may have proved more - and less - than he intended.

It's clear from what he tells us that seizing the entire income and assets of "the rich" would cover the USA's expenses for only a year. Of itself, this does not exonerate those who benefitted hugely from skewing the economy. What he has shown is that the damage done to Humpty Dumpty is greater than all the king's horses and all the king's men can easily undo.

Eating the rich is revolutionary talk à la française and like Robespierre, Michael Moore might find he'd started a revolution that ate its own children. Reasserting the rule of law is another matter, and it would be part of the corrective process of justice to fine, jail or defenestrate from public office those who had the mens rea in this morass of criminal incompetence and wickedness. This is something for which Karl Denninger himself has often called. Right does not belong to the right, any more than to the left.

What a shame that Mr Whittle has forbidden all responses to his video. I suppose he would consider what I say to be merely part of his "predicted sewer backwash on the intertubes".

Behind the truth: Pastor Terry Jones and the Koran-burning

It could all be a terrible mistake. Pastor Jones may have thought he was burning his financial records:

"At first, Terry and Sylvia Jones split time between the Cologne and Gainesville churches. Then in 2008 they cut ties with the Cologne church after members accused the couple of financial improprieties connected with their side business, TS and Company, which is owned by Terry and Sylvia Jones. TS and Company sells vintage furniture on eBay and was supposed to help support the churches."

The secret target of tax / NI merger: the self-employed

The recently-announced plan to combine or harmonise levels of income tax and National Insurance Contributions could see the self-employed hit hard.

The government is moving the State pension system away from the layer cake of basic pension plus additional variable toppings of Graduated Pension, SERPS and S2P and towards a single income benefit for all set at a level that lifts pensioners out of the complicated and negatively-reinforcing savings trap.

But if all get the same benefit, it could be argued, all should pay the same, or at least the same rates. I think we may end with the self-employed paying the same proportion of their income in tax and NIC as employees - possibly also including what is currently the employer's contribution. This might vitally boost the government's flagging finances.

I commented on the stealth tax of NIC back in 2007, and showed how for an employee on basic rate tax the total government swipe was equivalent to a marginal rate of 40%. There is (or was, until the introduction of the 50% tax band) really not much difference between basic and higher rate tax-paying employees.

But there is a distinct advantage for certain categories of fairly highly-paid professionals to be self-employed or work as partners rather than directors. This could change - and what a juicy target those (e.g.) barristers might present!

Potentially, there's a plus for us ordinaries: if this tax-cum-NIC were all income tax, then it would be far more attractive for average earners to make personal pension contributions. Skandia thinks we could see the end of Higher Rate Tax relief on pensions; but I think it possible we could see, in effect, HRT relief for all. That would be radical, and ultimately beneficial. And it would reward the prudent ant above the live-for-today grasshopper.

Or maybe we'll just see an extension of the heavy tax burden to not only barristers, but jobbing plumbers, plasterers and the like, accompanied by more horrid, bullying tax investigations.

Trickle-up Economics

One standard conservative argument is that the wealthy are rich because they invest their money. The poor are that way because they spend their money.

The answer is thus to decrease taxes on the rich to stimulate the economy and increase employment.

Thirty years of trying have shown this not to work.

The problem is that the conclusion does not follow from the premise.

If we take the logical approach to this, we should increase taxes on the wealthy, and make sure that the lower-income folks get it. They will spend it, possibly in stupid ways, and thus stimulate local economies. Thus, more people get jobs, the government gets more tax revenue, and the corporations make even more money.

Too good not to pass on

http://abstrusegoose.com/339

Humility

Source: SMBC

The Most Evil Bank Scheme Ever

Conventional economics, so I understand, ignores the problem of debt and monetary inflation, because it's assumed that the money spreads quickly and evenly throughout the system. Wages up, prices up, nobody's hurt, right?

Wrong. Just like the Oklahoma Land Rush of 1893, who gets there first wins all. This is why those in the FIRE economy have taken over.

But you know, they are small thinkers, all of them, even the billionaires. What they've done so far is like building a faulty nuclear reactor; what they could do is like dropping the H-bomb.

Here's the scenario:

1. Two new banks are created - let's call them Orcbank and Trollbank. No branches - don't need them if you don't deal direct with the public. The problem with the housing bubble is the people. They have to be missold mortgages and then have to keep up the ridiculous payments while their equity tanks. Far too messy.

2. The Federal Government borrows a scad of money from the Federal Reserve - it doesn't matter how much, because the FR makes it up out of nothing anyway (watch Glenn Beck's recent crisp summation of the Fed's history).

3. This money is divided into two equal parts and deposited interest-free in Orcbank and Trollbank.

4. Orcbank lends whatever is the legal (who makes the laws?) maximum multiple of its deposit, to Trollbank; Trollbank does the same for Orcbank.

5. Then the banks go shopping. They go to all other banks, plus Fannie Mae and Freddie Mac, buying up any residential property that is now worth less than its mortgage. Not at phony book value valuations: the real, disaster-filled forced-sale valuations. Many billions, maybe trillions of dollars'-worth. And Orcbank and Trollbank buy the lot, for the full value of the debt, cash on the nail.

6. You now have two monster insolvent banks. Oh, dear.

7. No, you don't. You merge Trollbank with Orcbank, forming the new First Bank of Mordor. And poof! the debt disappears, every last cent of it. All the assets (mortgages) and liabilities (money loaned out) on one are exactly the same as, and counterbalanced by, the other. Matter meets antimatter; mutual annihilation of all assets and liabilities.

8. What's left? The deposits, which are returned to the Federal Reserve via the Government. The interest? We'll come to that shortly.

9. Oh, and there's the not-so-little matter of free-and-clear ownership of gigantic quantities of residential real estate. First Bank of Mordor, wishing to have nothing to do with such a tedious and messy business as moneylending, deregisters as a bank and becomes the Sauron Real Estate Trust. Sauron can rent out property at whatever rates it likes, whatever the market will bear - having no debts, everything after maintenance and repairs is profit.

10. Sorry, that should read "everything after maintenance, repairs and management costs" is profit. In fact, you don't want to make a profit: you just want to pay everyone who's in on the scam. No pesky shareholders, please, so no dividends. If the Fed can be a private company and own America's government, Sauron can be a private company and own America's real estate.

All it needs is the OK, and there's a small enough number of people to see right about their doubtless and naturally very large and absolutely confidential though never defined ongoing expenses, if they're willing to take the money. And the Fed will need some interest for the money it loaned for that short period of time; plus I guess a few billion in administrative fees. Who cares? It's only money.

Upside? Some very happy people in blue suits who just relocated to the Caribbean or that island Scaramanga fitted out so luxuriously. Insolvent banks bailed out - and you can always rinse 'n' repeat if you didn't do enough the first time round (by the way, there's always the commercial real estate bubble to rescue, too).

Downside? Joe Average pays rent forever. But there's not that many properties he can buy instead of renting. In fact, you may just have turned a bubble into an incredible shortage and so up go valuations again. After all, they're not making any more land. Who knows, when the price is right Sauron may start selling tranches of real estate, just to ease the market.

And if Joe Average doesn't like it? What do you think you've got police, Army and the National Guard for?

No, surely they wouldn't do it. Surely you'd never get this past enough legislators and regulators to make it stick. But I'm telling you this idea publicly, just in case it's already been germinating in someone else's twisted little head. That's what you pay quants, lawyers and accountants for - crooked schemes to steal from the people.

This is the potential of fractional reserve banking, governments that lend free money, crony capitalism and the secret magic of the Federal Reserve. They'd have to dress it up as rescuing the system and the people; you know, being responsible managers of the economy.

All they have to do is dare. And look what they dare to do already.

New Smart Bomb

Traders were shown a radical new-generation weapon at a major arms fair today. Fitted with a sensor that monitors its target in-flight, the Moral Bomb only unleashes volcanic hell on a bad person; otherwise it dissolves harmlessly into a cloud of doves and rose petals, the banshee wail of its tailfin converting into a whistled version of "You Lift Me Up".

Many bulk orders were found on the partly-completed forms found among the wreckage of the spectator stand. Claiming "it finally puts the 'eth' in 'lethal'", a spokesman for the manufacturer said that subsequent tests would be carried out in strikes on Libyan armoured columns.

Breaking News

As all visual media are now reporting, some people have been breaking shop windows in London today. And that is the end of the Breaking News.

Elsewhere in the capital, over 200,000 people have been marching in protest against something, but nobody has noticed.

Index-linked savings to return!

Great news: National Savings & Investments are reintroducing Index-Linked Savings Certificates, according to this article in the Guardian newspaper.

But there is a sales target (£2 billion) and then quite possibly NS&I will shut up shop again, as they did last year. So it's likely that these will fly out very fast and you should be on the lookout for the launch - click here to get email updates from NS&I.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.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.

Galgenhumor

The kindest people have the cruellest humour, it's kind of a ying-yang thing. Seen in an advice centre for carers today:

"I wish my lawn was EMO so it would cut itself."

"The EU has no power over Parliament" - British MP

"The EU has no power over parliament. In fact the Lisbon Treaty included a change for a provision to leave the EU. Parliament can simply refuse to incorporate EU law and in my view should be a bit more critical.

People also get confused between the EU and the Council of Europe."

Rt Hon John Hemming MP to Mr Rolf Norfolk, emailed 22 March 2011

In view of this, be prepared to challenge any Minister who claims that something is so and cannot be changed, because of European legislation. The struggle is between the people and their supposed representatives in Parliament.