Whose bonds would you buy?

CMA have released their first quarter report on sovereign debt ratings, as implied by market pricing of the 5-year default risk on government bonds. I give below a rearranged extract to show where the USA and the UK stand in relation to other countries.

It's worth noting that despite recent improvement, the UK is still out of the "AAA" bracket.

Circles and straight lines

The above chart from here (htp: Global Perspectives) is another of those attempts to perceive underlying order in the apparently random movement of the market and the economy. I've tried the same myself and suggested that the period from 2000 on may be like 1966 - 1982 (the last top and bottom of the market when adjusted for inflation). The interesting thing about the above picture is that the c. 16-year cycle appears to work over a much longer time - starting with the later part of the nineteenth century.

The cycle is not very regular - it varies from about 12 - 20 years - but tends to support my feeling that the real bottom this time may lie in the next 5 - 10 years.

Another quibble is that while some aspects may have a circular form, there are also linear developments that could change everything. One such is China's awakening from its centuries-long economic slumber, with the result that the world's financial centre of gravity is shifting from West to East; another, related to the first, is the unprecedented growth of debt in Western economies. A third is the development of computer technology and lightspeed communications, so that knowledge and expertise that took centuries to acquire can be transferred rapidly to developing economies. What we have lost through folly, we may not be able to regain through hard work.

This is why some commentators have switched their attention to the social, political and military implications of a permanent power shift - from democracies to authoritarian governments of one kind or another. Michael Panzner has tried to follow up the success of his Financial Armageddon with just such a conspectus, but events in the next decades will be determined by even more complex and subtle factors than the ones that led to the crashing end of the twentieth century's money system.

It would be a neat finish to observe that the Titanic had a casino and that the latter didn't have any effect on the iceberg - but (perhaps fortunately for haters of the glib), the ship didn't have a gambling joint. Though there was multimillionaire John Jacob Astor and his cronies, playing high stakes card games in the smoking room.

In short, for those who are focused on the money, I still believe worse is to come than has happened already. Others should remember it's not all about money.
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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.

The turning point may be 2016 - 2020

The above chart from here (htp: Global Perspectives) is another of those attempts to perceive underlying order in the apparently random movement of the market and the economy. I've tried the same myself and suggested that the period from 2000 on may be like 1966 - 1982 (the last top and bottom of the market when adjusted for inflation). The interesting thing about the above picture is that the c. 16-year cycle appears to work over a much longer time - starting with the later part of the nineteenth century.

The cycle is not very regular - it varies from about 12 - 20 years - but tend to support my feeling that the real bottom this time may lie in the next 5 - 10 years.

Another quibble is that while some aspects may have a circular form, there are also linear developments that could change everything. One such is China's awakening from its centuries-long economic slumber, with the result that the world's financial centre of gravity is shifting from West to East; another, related to the first, is the unprecedented growth of debt in Western economies. A third is the development of computer technology and lightspeed communications, so that knowledge and expertise that took centuries to acquire can be transferred rapidly to developing economies. What we have lost through folly, we may not be able to regain through hard work.

This is why some commentators have switched their attention to the social, political and military implications of a permanent power shift - from democracies to authoritarian governments of one kind or another. Michael Panzner has tried to follow up the success of his Financial Armageddon with just such a conspectus, but events in the next decades will be determined by even more complex and subtle factors than the ones that led to the crashing end of the twentieth century's money system.

It would be a neat finish to observe that the Titanic had a casino and that the latter didn't have any effect on the iceberg - but (perhaps fortunately for haters of the glib), the ship didn't have a gambling joint. Though there was multimillionaire John Jacob Astor and his cronies, playing high stakes card games in the smoking room.

In short, for those who are focused on the money, I still believe worse is to come than has happened already. Others should remember it's not all about money.

Paging Lord Tebbit...

I like Norman Tebbit; he is his own man. And he has the courtesy to respond to commenters on his blog, however deranged they may be. Perhaps he will respond to the following, which I have submitted to this post of his:

Are Conservatives really conservative, in the sense of wishing to preserve the country? A message I have been trying to get out for some time, is that the financial bust that has scarcely begun, has its roots in excessive growth of the money supply not only under Labour but also under Conservative administrations.

Regrettably, The Bank of England’s website gives figures for M4 only as far back as 1963, but comparing annual changes in M4 with GDP, it’s clear that that banks have run riot for most of the last 47 years. Far more has been lent into the economy than could be justified by growth in economic activity, and the result has been a debt-fuelled ballooning of asset valuations.

From 1979 to 1990, GDP grew annually by an average of 8% or so, but M4 by 19% p.a., a difference of 11% p.a. compound. The New Labour years have seen something like 10% M4 growth and 5% GDP growth p.a., in other words a discrepancy of only half that experienced during the boom years of the 1980s.

Perhaps one could argue ignorance as a plea in mitigation by both political parties; after all, only some 12 professional economists out of an estimated 20,000 worldwide predicted the credit crunch (because debt does not feature highly in classical economic theory) – though I was relaying warnings from mid-2007 onwards, via my blog. But surely ignorance can be no excuse now.

What, then, do the Conservatives propose to do to deal with a banking system that has brought us to the verge of final national destruction?

Housing - plenty of room to drop

Charles Hugh Smith points out that in some areas, property values have already dropped by over 70% from their heady 2006 peak.

In a nutshell

All the shares of a single stock are valued at the price it last traded at. Sounds a little like how it used to work in the housing market.

"Jim in San Marcos"

Tossers

4.10 p.m. BST today: a couple of Labour canvassers come to the door.

- We're from the Labour Party, can we count on your support?

- No. I can't vote for any of the major parties, because they won't give us a vote on membership of the EU. I believe that membership of the EU without a referendum is ultra vires.

- Ah, so I'll put you down as UKIP, then.

- No. I don't want in or out, I want a referendum.

- I recall we had one in the...

- No. That was on membership of the Common Market, not membership of the EU.

After asking whether my wife (they used her first name) was in, and my telling them that she was but was otherwise engaged, they left.

See you all again in five years' time, no doubt.

Thr triumph of bureaucracy

This picture from Shoreditch, London, is doing the rounds via email. It encapsulates the state of Britain today: the pettiest arbitrary regulation trumps all human feeling, social and religious custom. Could this happen in Italy? I think not.

Debt: we will have to default

Denninger points out that if interest rates return to normal, two-thirds of taxes will go out to pay the rent on the debt. He urges default and says we should replacement private lending by banks, with direct money issuance by the government.

Whether or not his idea will come to fruition, this proposed desperate remedy shows that the disease is equally desparate.

Funny money and the politics of the Millennium

Money, since it is the lifeblood of economy and politics, sheds light on the Grand Plan of our would-be masters. Part of that plan is to persuade us that systems that worked perfectly well for centuries are somehow silly and quaint, not at all modern. Actually, the old systems often worked much better, and have been made irrelevant only by destructive changes wrought by small but well-coordinated cadres of political activists. This is as true of common law, natural justice, Magna Carta etc as it is of the allegedly silly duodecimal system.

The exchange below is part of a comment thread from the redoubtable Angels in Marble blog, which recently featured a post about the horrors of school dinners:

NOMAD: My memories of school dinners in the 40s and 50s are quite positive and all in all good value for about 1/3d. We all got fed adequately - and even on occasion there was enough left over for seconds...

HATFIELD GIRL: 1/3d, Nomad? You'll be recalling dividing £67/13/6d by £14/11/5d next. (no writing down, of course).

ROLF: "dividing £67/13/6d by £14/11/5d"= 4, remainder £9/7/10d, I think (not writing down, as you said).Now I teach children who still can't grasp multiplying by 10. The easier you make it, the dafter they get.

...

£14/11/5d is 8/7d short of £15.
4 x £15 = £60.
So the remainder is (£67/13/6d - £60) + (4 x 8/7d).
= £7/13/6 + 32s + 28d
= £7/13/6 + 32s + 2/4d
=£7/13/6 + 34s + 4d
=£7 + 13s + 6d + 34s + 4d
=£7 + 47s + 10d
=£9 + 7s + 10d, or £9/7/10d.

We NEVER had to do something like that, and as I say, children who can't divide by 12 also can't divide by 10.

The duodecimal system is very good for dividing sums of money by time periods or groups of people, and was appropriate when people were paid in pennies per day or shillings per week.

The x12 and x20 system is not responsible for the rip-roaring inflation of the 20th century that has systematically robbed savers and now pretty much bankrupted the nation (except for a fantastically rich and corrupt elite).

I would also point out that there are 60 seconds in a minute, 60 minutes in an hour, 24 hours in a day - because government hasn't yet found a way to inflate time.

There are also 360 degrees in a circle, still used for navigation the world over.

If ever we do for the pound what France did for the franc in January 1960 (100 old = 1 new), the duodecimal system may come into its own again.

The rule of 10 is just part of the great plan to erase the past and all links to it, so that we may have Year Zero and the socialist millennium.

Voters to strike on May 6th?

Went to see Rory Bremner at the Warwick Arts Centre last night. Funny hour of one-man stand-up, then panel time: the president of the Students' Union, a professor of politics, a local talk radio jock and left-wing (slung out by New Labour) ex-MP Dave Nellist.

Bremner asks the audience (500+) how many will be voting Labour; I saw maybe three or four hands. Then Conservative; ditto.

The general feeling, after the fun section, is numb helplessness. An old Scot called from the audience that our democracy is a sham; nem. con. Nellist also made the point that there is essentially no difference between the major parties, and that it's all about management now, not political philosophies.

I think we might see a voters' strike come Election Day. I can't see who I can vote for, and I'm not prepared to vote Labour Buggins out just to get Tory Buggins in. Not that my 1/74,000th share of the electoral roll could make the slightest difference.

When the penny dropped

Tony Blair receives a standing ovation from the entire House of Commons at the end of Prime Minister's Questions, 27 June 2007. David Cameron praises Blair's achievements and wishes him well in whatever he does in the future. BBC2 is criticised for failing to broadcast the ovation.

Despite the adversarial arrangement of the floor of the House of Commons, it seems to me that, politically, the two sides are no more than a Möbius strip. Whether we can include the mass media and make three sides into one, I cannot say.

Do they work for us at all?

"I discovered that there was a direct correlation between the highest outside earners and those with the poorest attendance records in the Commons" - Martin Salter

Notes and Queries (2)

Words of the Day:

Hawk: one who hawks, or peddles, his political influence to business interests via the services of a lobbying organisation.

Dove: one who seeks to wash away the sins of Honourable Members, e.g. by retrospectively redefining terms in order to exculpate his colleagues from charges of theft by false accounting. The term is derived from the name of a popular brand of soft soap.

Notes and Queries (1)

The collective noun for MPs is "an infestation" (for pairs or small groups, "a scurry"). Although gaining currency, "a prostitution" is incorrect; Professor Blanding suggests that the latter usage may have arisen from the recent public perception that Parliament is a "house of ill-repute".

Bad news round-up

Jesse discusses recent comments by Japanese economist Yukio Noguchi, predicting national bankruptcy and hyperinflation (the IMF reckons the crisis could hit in 2019). Jesse thinks the UK and some of Europe will go first; even more worryingly, he turns to spiritual matters (which I respect, but it's a sign of how bad he feels the situation to be).

Speaking of the IMF, Richard Daughty rehearses his theme of reckless money multiplication, the inevitable bust and the wisdom (so he thinks) of investing in commodities such as gold, silver and oil. He castigates the IMF and its proposed imitator, the European Monetary Fund, for their part in the inflationary process.

Nathan Martin uses official statistics to show how as debt increases, the additional stimulus to GDP gets less. The break point on the graph seems to be 2015, after which extra debt will reduce GDP.

Warren Pollock delivers a punchy two minutes from the Metropolitan Museum of Art, comparing the past civilisations inside with the doomed one outside, currently enjoying sunshine, hot dogs and a cappella music.

I read all the above people frequently. Each has his own take, his own style, but all seem technically proficient in finance while retaining their integrity, their indignation and their hope that something can be done. Their views are echoed in this week's article by University of Montreal economics professor Rodrigue Tremblay, whose conclusion in part reads:

It seems to me that the U.S. financial system, and even the world financial system, have to be profoundly reformed, if they are to serve the real economy, rather than the contrary. If such a reform does not come about, however, I am afraid that we have entered a period of economic difficulties that may last many, many years. In fact, I think that the world economy stands today at the edge of a large precipice.

The economy - how it works

House prices could fall 40%

The above graph is from the Financial Times Alphaville website, as part of an article that discusses Britain's exceptionally poor situation compared with other major economies.

I bought the house we're in, in 1984. I was stunned when, several years ago, a friend told me what it was worth then. House prices have felt like a fantasy for years - maybe that's why people started to borrow against them for consumer spending sprees. Buying with a credit card (or line of credit on your home) never seems as difficult as parting with folding money. It was all a lovely dream.

Now, we're waking up. Britain's underlying troubles seem to me at least as bad as in the early 80s and the early 90s, so it appears logical that when the government faces up to the challenges (instead of credit-spending its way onwards, as is still happening) house prices will go below the "average" line to match the previous lows.

I think it will be a buyer's market for years to come. So for downshifters, it may be worth selling at what seems a painful discount now, to make sure you have the cash to go buy something cheaper (also at a discount, naturally).

Having said that, I have also observed before that the housing market is segmented according to location and price bracket. Prices may well change more (or houses may trade more slowly) in some categories than in others. To see what houses have actually sold for in the UK, look here; for sold prices in the USA, see Domania here.

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.

Vote for the Apathy Party

The three Birmingham constituencies aggregated above have over 180,000 registered voters between them, though over 40% failed to use their vote in the last couple of General Elections. Had non-voters come to the polling station and all voted for "None of the above", they would have won in 2005 and 2001, and come second to Labour's "landslide" victory in 1997.

One person's vote is worth c. 1/36,000th of the active voters, and less than 1/60,000th of potential voters*.

Little wonder that modern politics is a matter of computer-assisted psephology, spin and deception.

*Nationwide, the average is 69,935 voters per constituency (2007 Boundary Commission review)

"Consent has not been given" - the EU and cross-party collusion

'It seems a shame,' the Walrus said,

'To play them such a trick,

After we've brought them out so far,

And made them trot so quick!'

The Carpenter said nothing but

'The butter's spread too thick!'

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Email to Nick Clegg MP via his website, 17 February 2010:

Dear Mr Clegg

I was recently doorstepped by your colleague John Hemming MP, now that my address falls into the Yardley constituency, following recent changes by the Boundary Commission.

Mr Hemming asked whether there were any issues I would like addressed, and my immediate response was Europe, and when we would be allowed a referendum on our membership. He referred me to his support for EDM 20 (18.11.2009) and this, coupled with his courtesy in actually asking for my vote and opinion in person, are factors that, ceteris paribus, would persuade me to vote for him in the next General Election.

However, seeing the behaviour of the other major political parties on that topic, Mr Hemming’s stance will be entirely futile if an EU referendum is not also LibDem policy. Can you give me any assurances that will make it worth while to vote LibDem rather than UKIP in 2010?
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Reply from Douglas Dowell, 10 March 2010:

Dear Mr xxx

Many thanks for your email to Nick Clegg MP. Nick has asked me to contact you on his behalf. I apologise for the delay in responding but I hope you’ll understand that, due to the sheer volume of correspondence that Nick has been receiving, it can take some time for us to reply.

Liberal Democrats understand that EU membership is controversial and that many people have concerns about it. However, we believe that membership is vital to Britain and we would point out that an exit would be very far from cost-free. It is true that countries such as Norway and Iceland, by virtue of their membership of the European Economic Area, have access to the single market without EU membership: but they have to pay for it. EEA countries pay into the EU’s funds, as do members, but have no ability to amend or change the laws which are enacted at EU level except, in theory, an ability to reject outright – which would be a potential occasion for the EU to terminate the EEA agreement. This is no real choice – simply a requirement to implement most EU laws without a vote on those laws. This is not a model Liberal Democrats want for Britain.

However, we also recognise that the European Union has evolved significantly since the last public vote on membership in 1975. Liberal Democrats therefore remain committed to an in/out referendum on EU membership the next time a British Government signs up for fundamental change in the relationship between the UK and the EU. This is the vote on Europe that really matters – not a dishonest vote on any particular treaty, but a chance for the European question to be settled once and for all.

Thank you once again for emailing.

Best wishes,

Douglas Dowell
Office of Nick Clegg MP
Leader of the Liberal Democrats
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My response to Mr Dowell, 10 March 2010:

Dear Mr Dowell

Thank you for your courteous and detailed reply.

Your para 2 gives one side of the argument, which is fine, and I'm sure there are arguments to be made on the other side also. The thrust of my question is not primarily about for and against EU membership; if we had an honest debate and a referendum, I would abide by the result of the people's decision, whichever way it went.

In my view, this is the biggest constitutional shift since 1688. The issue is so great that it cannot be limited to an imprecisely-worded rider to a raft of manifesto commitments and aspirations. The fact is, we haven't been asked and the status quo, half in and half out, is one we have come to without proper democratic authorisation. It is like finding oneself being married by proxy, without banns, vows or exchange of tokens. Consent has not been given.

It is nothing like adequate to promise a vote "next time" there is some "fundamental" change. You will be aware of the ratchet-like legal process that has already commenced, and the way in which EU Commissioners and others find their positions and pensions conditional on their active support of ever-closer union.

From the street, it looks as though all three major political parties have colluded to repudiate democracy, and some would say that the political class as a whole has therefore lost the moral right to claim to represent us. This disconnection between rulers and ruled, together with the growing gap between the financial class and the consumers and workers they have abused, may threaten economic and social stability within the next generation.

I simply cannot use my vote to legitimise any party that refuses me a vote when it most matters. The LibDems appear to take the franchise seriously, with your call for the STV/Alternative Vote, and you have worked hard to build connections with local communities; why so shy of a referendum?

Sincerely
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No further response yet.