The US' credit rating, the peril of interest rates and the need for wholesale reform

As you know, S&P downgraded the US' credit rating to AA+ last month. That's still a lot better than most countries in this financially shaky world. But as long ago as July 2010 Dagong, a credit rating agency working for America's biggest foreign creditor, China, rated the US "AA with a negative outlook".

Here are a few graphs to tell the story of US public debt, and the cost of paying the interest on it as a proportion of gross Federal tax collections:

This next one might be a little surprising, even heartening:

That is greatly influenced by the long-term decline in interest rates:

For the period up to and including fiscal year 2000, the average rate on public debt was slightly over 7%, and has been reducing since the recession of the early 1990s in order to stimulate (and then rescue) the economy.

Now let's look at what interest would have been payable in dollar terms, if the rate had been (say) 7% throughout:

Had that 7% rate been applied throughout, this is what it would have taken out of the gross tax collections:

That is the big worry, and why I don't doubt that there's a lot of collusion and fudging going on behind the scenes.

But that doesn't make me a Tea Partier. This is not a story about wicked old government and how we'd be better off without it altogether.

The reason why debt has become particularly dangerous over the last couple of years, is that Uncle Sam has been trying to save our bacon. Perhaps he's done it in the wrong way, and should have let gambler banks go down - you have so many more second tier banks to take over, unlike here in the UK. Maybe it's not too late to for the US to do that, in a controlled way, even now.

And yes, we all need to look at social benefits, though again I'm not with the let-the poor-starve party. For example, we might just possibly question the profits of pharmaceutical companies (with their endless me-too variants on perfectly good drugs that are coming out of copyright); the profits and contractual get-out weaselling of insurance companies; the battening of lawyers on the medical system; the training costs and remuneration of the medical profession. There is more than one way to trim the fat, apart from abandoning US citizens to bankruptcy, ill-health and premature death. Can we please get away from an Orwellian Animal-Farm-style slogan-bleating of "private good, public baaad"?

I do have an issue with both the US and UK governments, not about their power and control but the exact reverse: their failure to moderate the growth of private debt over the last 30 and more years. Counterintuitively (if you think the Right is responsible with money), it was under President Reagan and Prime Minister Margaret Thatcher that total debt to GDP soared, as I discuss at length in a previous post here, and most of that was private debt. Fighting one foe, they failed to notice the manoeuvering of another, namely the psychopathic greed of the financial industry whose aid they requested.

I am reminded how Ireland's freedom was lost because the King of Leinster invited the Normans to assist him in recovering his throne in Wexford, in 1169. Guinness-drinking Irish sentimentalists may lament "the Saxon foe across the water", but their real enemy was the bloodthirsty, land-hungry, Viking-descended Norman, and King Dermot MacMurrough, who let him in.

Both public and private sectors are due for reform.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

Tax-free inflation-protected deposit scheme (UK) still available!

Now that NS&I has withdrawn inflation-linked Savings Certificates, the Mail on Sunday looks around for alternatives. I'll give them a slightly closer look here, with links for you to click through. Please note that Yorkshire Building Society has a cash ISA version that means returns are tax-free even if you are a taxpayer!

1. Post Office Inflation Linked Bond - N.B. closing date 16 September (or earlier if fully subscribed)

• Single lump sum investment, £500 min., £1 million max.
• 3-year term: RPI+0.5%, annually, OR...
• 5-year term: RPI+1.5%, annually
• Backed by Bank of Ireland.
• RPI adjusted once a year in August, according to UK Office of National Statistics RPI index.

Drawbacks:

• No withdrawals allowed during the term
• Interest is taxable (but remember that you or your partner may not be a taxpayer)

2. Cambridge Building Society Inflation Linked Bond Issue 1 - N.B. closing date 15 September (or earlier if fully subscribed)

• Single lump sum investment, £5,000 min., £85,000 max.
• 5-year term: RPI+1.0%, annually
• Runs from 16 Sept 2011 to 16 Sept 2016
• RPI calculated according to UK Office of National Statistics RPI index over the investment period

Drawbacks:

• No withdrawals allowed during the term
• Interest is taxable (but remember that you or your partner may not be a taxpayer)

3. Yorkshire Building Society Protected Capital Account (PCA) Inflation Linked 8 Plan - N.B. closing date 15 September (or earlier if fully subscribed)

• Single lump sum investment, £3,000 min., £85,000 max.
• Managed by Credit Suisse International on behalf of Yorkshire Building Society
• 6-year term: greater of RPI and 16%, i.e. minimum return is 2.5% p.a. even if inflation is zero or negative!
• RPI calculated according to UK Office of National Statistics RPI index over the investment period
• Can also be accessed as a cash ISA (max. £5,340), for tax-free returns
• Can transfer other cash ISAs into YB inflation-linked cash ISA
• Can invest in cash ISA as well as non-ISA bond

Drawbacks:

• Early exit fees apply
• Interest is taxable (but remember that you or your partner may not be a taxpayer), UNLESS you opt for the CASH ISA VERSION

4. Santander Inflation Linked Bond Issue 5 - N.B. closing date 5 October (or earlier if fully subscribed)

• Single lump sum investment, £500 min., £2 million max.
• 6-year term: greater of 105% of RPI (over the term) and 8%, i.e. minimum return is 1.29% AER p.a. even if inflation is zero or negative!
• RPI calculated according to UK Office of National Statistics RPI index over the investment period

Drawbacks:

• Early exit fees may apply - contact issuer for details on 0845 765 4321
• Interest is taxable (but remember that you or your partner may not be a taxpayer), however according to the Mail article an ISA version is available - contact issuer for details

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

Should Americans dump their dollars?

Karl Denninger comments today on Greece's alleged failure to roll-over her debt, Germany's weakness and the fatal over-extension of debt in the American economy.

I respect Karl's expertise and information, but am often put off by his (to me) excessive use of bold type, underlining and capitalised words, dramatic language etc. Nevertheless, he's making a couple of radical predictions.

One is a very severe US stockmarket drop ("half -- or more", "try a 90% loss on for size"). Another is the consequent failure of insurance-based guarantees, including (a) annuities and (b) the FDIC.

Unlike here in the UK, where bank deposits are guaranteed by the Government, in the USA depositors are protected by a company, the Federal Deposit Insurance Corporation, so the value of the guarantee depends on the value of the assets held by the FDIC.

I touched on this question of FDIC underfunding in 2008 (following "Mish") and 2009 (following Karl himself) and if Karl is right, the moment of truth could be drawing near.

Yet there are others, including Charles Hugh Smith, who contrariwise expect the dollar to strengthen as the world trading system unravels, or at least to survive because its collapse would properly collapse the system.

We do live in uncertain times. My instinct would be to hedge my bets, but the conventional methods employed by investors - insurance-type hedging - may not work in a very unstable situation. Consider counterparty risk.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

Children's language development and the importance of teachers

Via James, I have just come across this absolutely fascinating 10-minute talk.

It demonstrates that there is a vital and very early window of learning in which babies acquire the typical sounds of their native language - has to happen well within the first year of life.

But partway through the talk, there is a piece of research showing that audio / TV make virtually NO difference to learning new sounds, it HAS to be through direct human contact.

To me, a possible implication is that this connection of learning with the social part of the brain is that it may also be true for later learning.

Perhaps teachers cannot be replaced by computers, after all - despite this new project in the USA by a private company looking to get into educational provision.

NS&I withdraw Savings Certificates

On 28th May I said the clock was ticking for those who wanted to get into NS&I Savings Certificates; it's now stopped. Received by email today:

"Dear Mr Norfolk

As you’ve registered to receive updates from NS&I, I’m writing to let you know that all current Issues of NS&I Savings Certificates were withdrawn from general sale at close of business on 6 September 2011.

The latest Issues of Savings Certificates had been on sale for almost four months (since 12 May 2011) and have been very popular. When we launched the Issues we expected the amount invested to be substantial, and our expectations have now been met.

We’re sorry if you haven’t been able to invest on this occasion, but we will contact you again as soon as the next Issues go on general sale.

You can see the current rates for all NS&I accounts and investments on our interest rates page.

Yours sincerely

Garry Bond

Head of Customer Management"

To me, this makes clear that the Government is not really much interested in protecting savers; a point I made to Douglas Carswell MP back in May.

I'll let you know when these Certificates are on sale again - I guess it'll be early in the next tax year, i.e. April/May 2012, after "sales targets" have been set by the Treasury.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

Never, ever give up

WEDNESDAY UPDATE: a half-starved black cat has appeared at the kitchen door of our hard-to-get-into garden. After some food and drink, she is now laying siege outside. We have already progressed to the cardboard-box-and-blanket-in-the-garage-and-get-some-catfood-in stage.

_____________________________________

Discovered last month, a dog living on Africa's highest mountain. And back in 1950, a kitten followed a party of climbers to the top of the Matterhorn:

Perhaps I shouldn't quit, after all.

Why Tony Blair was PM, and Jack Straw never will be

"In 2005, a year after Belhadj’s rendition, Jack Straw declared there was ‘no truth’ in claims of British involvement, while Tony Blair maintained there was ‘absolutely no evidence’." - Daily Mail

Blair, with his Prince of Orange tan and ever camera-ready face, is slippery; Straw, with his worn, domesticated look is slippery as defined by Ross Noble: a bit like a slipper.

Straw gets into trouble; Blair, as a teacher at his public school said, "... is a superb actor. He’s good at getting others into trouble but avoiding it himself. He’s a s*** and Labour will regret it if you choose him."

Perhaps I should be glad that Blair, described by Clarissa Dickson-Wright as a "mimsy psychopath", got where he did; glad that the bankers have brought the country down and yet are themselves prospering better than ever; glad that MPs cheated on their expenses; that my share of the vote will soon go from 1 in 72,000 to one in 80,000; that the law is an ass, that the police have become better at public relations than public protection, that nurses are too busy to feed and water their patients, that the DPP has decided to turn a blind eye to euthanasia.

For where the authorities and institutions of this world are concerned, I want liberation from trust. I wish the reverse of Mark 9:24 - "I disbelieve; help thou mine belief". So many of us write to the papers (press men tell each other we're nutters), comment on web posts (and are derided by Private Eye's "From the message boards" column) and, of course, write our own citizen's-journal pieces for no money and which are read by almost nobody.

What a weight will be lifted from our shoulders when we finally give up, and ape our betters in the cold pursuit of self-interest.