Flat Broke and Berserk

Stagflation? Who can say?

Paul Kasriel says no to seventies-style stagflation, for two reasons: oil supplies aren't being choked off, and unions are weak. He may be right.

But I understand that the Saudis are keeping oil production at an unsustainably high level, even though this is damaging the quality of the remaining underground reserves. In French wine-growing terms, this is known as "faire pisser les vignes". And given the Peak Oil issue, we're going to find that countries like Russia and Iran may use their energy supplies to further their own agendas.

As to union wage demands, yes, the brothers are no longer so united; but the voters may yet get together behind a politician who promises to maintain living standards. I predict this will be achieved by writing checks/cheques on the future, i.e. inflation. That's after the current bout of monetary deflation, of course.

Which brings us to currencies. It's a good week for readers of Julian Phillips: here he discusses how in rural India, the rupee is on a flexible gold standard to avoid the depredations of taxation and bribery; and here he looks at possible plans by G7 nations to place your money under house arrest, to prevent it fleeing the country.

Is this back to the 70s, or the 60s? As Wikipedia reminds us, "In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1979. "

Pursuing my "sell up and get a (possibly horse-drawn) caravan" theme, I note it's a tradition of the Romanies to collect large pieces of Royal Crown Derby pottery - beautiful, thickly patinated with gold, easily identifiable in the event of theft, and impossible to melt down. Soon it'll be time to join the raggle taggle gypsies, O.

Until then, I have to have a replacement car (they tell me Fiat stands for "Fix It Again Tomorrow"), so I'm off to a second-hand auto supermarket today. Let's see if there is any real sign of recession hitting big-ticket items.

The low interest trap

The UK's residential housing stock is now worth an estimated £4 trillion. But this valuation is powered by £1.2 trillion in mortgages, an average first time buyer loan of £140,000, a loan/income multiple of 3.61 and the base interest rate at 5.5%.

In 1987, the average first-time buyer borrowed £25,000, with a loan/income multiple of 2.1 and the base interest rate at 10.5%.

So the modern housebuyer now takes on 72% more debt in relation to income. Interest rates (and house values) may go up and down, but the amount borrowed is a hard - and now heavy - number. All this for the same thing we had 20 years ago - a safe place to sleep.

One might think that the true value of our housing is the gross less debt, i.e. (4 - 1.2 =) £2.8 trillion. That approach would work, if each house had the same proportion of debt. But it must be far less than that, since most of the debt is on the shoulders of the young(ish) - if they halved their initial borrowing, there would have to be a severe impact on house prices generally.

What would houses be worth if no-one could borrow more than 2 years' income against them? What if there were no mortgages at all? What will happen - what will the multiplying effect be - when the housebuying generation finds itself so burdened with taxes and high food and energy costs, that it cannot afford to take on such large home loans?

In whose interest has all this money-lending operated?

In cartoon-caveman times, chasing the bear or sabre-toothed tiger out and seizing the cave would be a day's work. Now it takes 20-25 years (sometimes far more) to chase out the bank. Have we progressed?

Will sovereign wealth funds support the market?

BBC Radio 4 broadcast an interesting programme on sovereign wealth funds tonight. Is it not possible the oil exporting and trading surplus nations will be looking for a home for their capital, at the same time as private investors and overborrowed institutional investors are trying to cash out?

If so, the real story is not yet another impending market crash, whose effects may in any case be softened by an influx of new money that has political motive and so is not so narrowly focussed on a fair market price; instead, the major issue may be that, just as the West's industrial base has been hollowed-out, so its equity base may be attenuated in the same way.

In other words, our countries are like a man who has lost his job and is just about to find out that his pension scheme has been raided.

Laying it on the line

Some people will act beyond their self-interest. Karl Denninger is an expert investor, but is moved to be an economic prophet for his country and like other prophets, despairs of the passivity of his people:

This financial weapon of mass destruction is going to detonate.

It will make it impossible for the government to pay your Medicare and Social Security benefits.
It will result in double the tax burden you have now being laid on your children and grandchildren, OR MORE.

And when that happens, if I am still alive I'm going to spend MY MONEY on a full page advertisement in The Wall Street Journal (or whatever the "mainstream media" is at that point) telling your kids (who will then be adults) that you scr*w*d them on purpose because you were too much of a cheap j*ckoff to get on a plane and go raise h*ll in Washington DC to put a stop to this cr*p!

I wonder what their reaction will be to "Dear Old Dad" when they're living in poverty as a direct consequence of you fiddling while Rome burns?

I wonder if Moses used expletives when he came down off the mountain and found the people worshipping a statue of an ox?

Good man.

Cut and run?

Atash Hagmahani does pessimism in a flowery and Orientally allusive way, but the bottom line is familiar: stagflation is on the way, if not here already, thanks to financial imprudence and the offshoring of work.

His action points are interesting, including starting to save hard (and I agree that's technically possible, though many people might find this hard to sell to their life-partners) and (more controversially) not wasting money on a college education for your children:

They will spend vast amounts of money (much of it borrowed) on an education that is economically worthless; the jobs they could not get out of high-school will still be out of reach after college.

I think that recommendation needs qualification. It seems to me that in poor countries, the well-off are even better-off. Surely it's more important to ensure that your children, if capable and hard-working, either pursue courses that train them for well-paid work, or at least go to universities that raise their ambitions and help them make useful social connections.

But I think he's right to think that we'll soon find we're in a game of musical chairs with most of the seating removed. Another of Hagmahani's options is simply to quit the country. It's time to really think out of the box.

All our banks are sub-prime

The Mail on Sunday reports plans by the British Government to borrow money from the Middle East, on Islamic Sharia terms - that is, without, technically, paying interest.

Never mind the Islamophobic subtext: Islam is not the only religion to object to charging interest (which was illegal in France up to the Revolution of 1789). According to The Merchants' Magazine and Commercial Review by Isaac Smith Homans, William B. Dana (1849) (found by Google search here):

The Jewish law prohibited all usury between Jew and Jew, although it was allowed between Jews and foreigners. (Ex. 22 : 25 ; Levit. 25 : 36, 37 : Deut 23 : 19, 20. Compare Ps. 15 : 5 ; Ezek. 18 : 8, 13, 17, Ac.) The reason of this distinction, according to Father Ambrose, was, that God designed usury as one of the ways of making war upon the Canaanites and other heathen nations.

The Canon Law, as it is called, i. e., the ecclesiastical law of the Roman Catholic Church, pronounces the taking of interest, even the least, to be a mortal sin, and declares those who defend the practice to be heretics.

The interpretation of usury as a form of warfare is resonant.

There is also the unreligious technical point, that the money supply must increase to cover the interest charged. Either that, or ultimately all the money in the world will end up in the hands of the money-lenders.

This may not have mattered quite so much when the world was not so monetized - when we built our own houses, grew our own food, drew water from wells and rivers, and made our own clothes. It has to be said that none of it, generally, was as nice as today (though at least water didn't come in plastic bottles that took seven times as much water to make); but as more and more of reality nowadays has a price ticket on it, the inexorable demands of interest must either create unbounded inflation, or by seizing all our assets, enslave us. Perhaps usury is indeed a form of aggression.

Which leads me to wonder where money came from in the first place. How can you invent something, define the world with reference to your new creation (and possession), and use it to claim - to seize - ownership of the world? This is to make the money-issuer - originally the King or Emperor - lord of all the Creation he can control. So is power the only game in town? Maybe civilised life, the quiet enjoyment of one's own hard-won personal property, is merely an illusion, a time-out in the game. But impoverish the middle class and all bets are off - as Germany found out in the 20s and 30s. How foolish must a State be, to allow its mismanagement of finance to threaten the social order. Still, the Germans weren't entirely responsible for the WWI peace treaty that led to the total wreck of their economy; by contrast, look at this latest from Karl Denninger on the current, State-permitted mess.

The power of the State to coin money is nothing to the way the banks multiply it. Something like a mere 3% of all money is in notes and coins; the rest is deposits and credit - i.e. promises. Instead being charged a modest fee for guarding your cash (which is, I understand, the practice of the traditional Swiss bank), you're paid what you think is a nice rate of interest - but thanks to fractional reserve banking, your deposit can be multiplied and loaned out, at even higher rates. No wonder the banks always seem to have the nicest locations, including converted Tudor houses in little Warwickshire villages.

Swelling the capital within the economy ultimately pushes up prices, though as money-lenders become more cautious and call loans back in, the opposite happens; but meanwhile, the expanded money supply also builds-in massive future inflation, because interest must come back, as well as all the existing capital. Even if some of this fake capital is lost because of asset write-offs, the lenders will seek to make up for it by charging more interest on the loans that haven't defaulted. And the difference between the small interest paid out to you on your little deposit, and the larger interest demanded on the much greater loan base, pays for all the overheads and leaves over enough, and more than enough.

Meanwhile, the temporarily bloated money supply inflates assets, including assets that really you must have, such as a roof over your head. In the UK, the M4 measure of money supply has approximately doubled since 2000 - and house prices have done almost exactly the same. But I don't have the power to say, I don't believe in borrowing money so I won't pay so much for your house. And since you (quite understandably) will refuse my lower offer, I will have to rent instead - at a rate that reflects the price of houses. What would houses cost - what would rents be - if home loans were illegal?

So now, in the wake of sub-prime (and other, earlier financial bubbles), we're all clapping our hands to save Tinkerbell's life. The government pumps yet more funny money into the economy to shore up the confidence tricks of bankers, and in the case of Northern Rock, their own voter base. If we understood what this "Tinkerbell" is really like, and what she's been up to, perhaps we'd be better off letting her die.

Except the law's on her side, and she'd take us and our families down with her. After all, by agreeing to borrow, we fix an obligation in nominal terms, even if (owing to events beyond our control, but not necessarily beyond that of the money-makers, and money-fakers) the assets decline in nominal terms. In fact, by first expanding and then contracting the money supply, it is possible for lenders to take your assets and any additional capital that you personally contributed, then reinflate the assets later. Hey presto, they've grabbed your cash. No wonder some Americans trash the house before mailing back the keys.

I think that for those who have the liberty to do so, escape comes in two stages: get your cash out, then buy whatever you need so that in future, you depend on the money system as little as possible. You should also stay mobile - the State needs captives, and a house is an excellent way to tie you by one leg. And the licence plate on a car is the next best thing to a tag clipped onto your ear. Unfortunately, in an overcrowded island like ours, this doesn't seem realistic, but maybe that's why an Irish girl told me, years ago, that farsighted (and typically pessimistic) Germans were buying into rural Ireland. Perhaps in America, or some other land blessed with a lower ratio of population to fertile land, we may escape with the raggle taggle gypsies. Velvet-clad slavery, or freedom and poverty?

What care I for a goose-feather bed?
With the sheet turned down so bravely, O!
For to-night I shall sleep in a cold open field
Along with the raggle taggle gypsies, O!

UK public debt twice as bad as America's

David Walker, the US Comptroller General, reckons the debts and unfunded liabilities of the USA amount to some $53 trillion, which assuming GDP of $13.75 trillion means a debt-to-GDP ratio of 3.85. Mr Walker, now retiring, has taken his "Fiscal Wake Up Tour" round America for two years, warning Cassandra-like of the woe to come if things don't change soon.

"Wat Tyler" of the redoubtable blog Burning Our Money reckons UK debts and unfunded liabilities to be some £9 trillion, which assuming GDP of $2.472 trillion (c. £1.26 trillion today) means a debt-to-GDP ratio of 7.16. Sir John Bourn (74) is the UK's equivalent of David Walker, and recently left office after a tenure of 20 years. A Google news search using the terms "Sir John Bourn", "debt" and "warning" yielded nothing today.

We worry about mortgages, but according to this site:

"Recent figures from the Council of Mortgage Lenders (CML) showed average first-time buyers borrowed 3.24 times their income - the highest level ever recorded...Many lenders will calculate a debt income ratio, which as a rule of thumb should not exceed 40%. " (i.e. 0.4; my highlights)