Save The Warhorse Of World Trade

Around the web there is talk of the present situation as a form of “trade war” that is new to us and which is not fully understood. Certainly, politicians of many nations, anxious to place the blame on other people in other places are claiming that they and their economies are under attack.

There are some basic problems with this. One is what kind of war is it? Is it one where the Barbarians are at the gate or others of that kind? Or is it a modern kind of war which involves a mix of technology, diverse powers and a ruthless approach to the elimination of the enemy.

With the film “Warhorse” on release there is the temptation for me to see it in terms of the First World War. When the play was on at the “National”, at first I wasn’t interested but was urged by others to go.

At the performance I found myself next to an old soldier who had been with the Household Cavalry and I had had my moments with one cavalry regiment or another. We both found it an absorbing and moving performance. I am hoping that someone will buy me the DVD of the film.

But to return to the current financial wars, what is clear is that many, locked in the theories and assumptions of the past do not understand what is happening and what has happened in the last decade or two in global finance.

The down grading of national debt announced this weekend with more to follow in other spheres is seen as an attack when it is a simple admission of the reality that governments have lost control of the rate of interest systems.

We have had all the palaver of one central bank or another holding interest rates “low” when in fact the real markets have rates that are very different and tell a different tales. The resulting distortions are a barrage on real business.

There is the assumption that governments allied to their central banks and the banks within their jurisdictions can control the key supply of money and its major flows. It is clear that they cannot. With all the new monetary devices and so many of the big financial banks and houses off shore this control is wholly lost.

Then there is the question of taxing and spending. With industrial scale tax avoidance taking out revenues from the rich and spending locked into social security, subsidising some things but not others and declaring big prestige projects that will never ever yield any return on capital employed then this in turn is beyond control.

Also out there on the web are those pointing out that in the EU in particular, as well as in other countries the extent and depth of regulation creates a major obstacle to controlling spending or indeed being able to reduce much those areas affected. “Hanging on the old barbed wire” so to say.

In the Western Front of the First World War you were in one set of trenches or another, or worse still stranded in the fog of No Man’s Land, pocked by deep shell holes many of which might contain lethal gas and at the mercy of what ever was going on.

What financial trade war do we have at the moment in WW1 terms? Is it a Retreat From Mons? Is it a Battle of the Somme? Is it one of the Battles of Ypres or is a Kaiserschlacht?

To me increasingly it looks like we are stuck in the No Mans Land of the Third Battle of Ypres, better known as Passchendaele and the war horses have long gone.

Season's Grumbling

As the last few days have been spent in running round like a scalded cat dealing with this and that, none of which has to do with festivities, cheeriness is far from being the mood of the moment.

So despite all those messages that people have been sending to each other blissfully wishing happiness, prosperity and bright futures for all, I have picked up on a couple of items which fit my current state of mind.

They are both from Zero Hedge, the laugh a minute commentary on the state of world finance. The first explains why central planning, particularly in money matters, is likely to devastate the world economy.

http://www.zerohedge.com/news/black-swan-fund-creator-explains-why-central-planning-has-doomed-us-all

The second is a take on how governments manage to go about this. The fun thing is the lead item which mentions government selling unwanted buildings. In many cases these will be not just the army barracks and offices suggested but also hospitals, schools and care homes, UK style.

http://www.zerohedge.com/contributed/peak-heist

May I take this opportunity to hope that I will be completely wrong and it will not be half as bad as many suggest.

As for geophysics, it has been quite a few days since a really big earthquake whilst there have few quite damaging events, notably Christchurch in New Zealand. Let us hope the next big one is deep sea and nowhere near an urban area.

Time to sign off for a few days or so.

When Digging Holes Know When To Stop Digging

With Cameron saving the Hedge Funds, Sarkozy trying to save his skin and Merkel desperate to save the Landesbanks, it was always going to be very difficult. Then there is the disconnection between most of media reporting and reality.

Sir Mervyn King, the Governor of the Bank of England says the situation is impossible for the UK to control. President Obama on the other hand has implored Cameron to exercise some control to save the Euro in order to save his Presidential election prospects from a Euro bust.

However, something is changing notably the Atlantic Multidecadal Oscillation that might deliver a cooler spell in the coming years, hat tip AK Haart, which could have marginal economic effects at a time when the margins are critical.

http://wattsupwiththat.com/2011/12/09/the-november-amo-index-goes-negative-first-time-since-1996/

Amidst all the excitement at what is going on in outer space with planets in far galaxies and super Black Holes, Nicholas Shaxson points out that there is a Black Hole rather nearer home:
http://treasureislands.org/yet-more-evidence-of-the-london-financial-black-hole/

As for what was really going on in Brussels, another hole of a different kind, Richard North has his own ideas:

http://eureferendum.blogspot.com/2011/12/uncertain-situation.html

I hope that the first footer for 2012 will be able to find a piece of coal. We might need it.

Happy Holiday



With many of the Western economies unable to stand much in the way of oil price increases and many of the Middle Eastern countries unable to cope with much in the way of oil price reductions the basics are not looking good.

At the same time China needs to keep trading to keep its economy on the go and to enable their balance of payments surplus to fund the need for savings and growth. The same Western economies recently run on consumerism, debt and many with balance of payments deficits cannot continue on this basis.

Elsewhere, it is being pointed out that the Euro crisis is not simply about debt. It is about gross distortions and imbalance in the balances of payments as well. To do something about the debt will impact on the balances.

The whole lot has been kept going by free and unlimited flows of capital in a global market and these are dictated not by national interests or indeed rational markets but by the need to rack up the figures and keep things moving.

So some are saying that just as other things will have to change so will the whole notion of free capital flows and unchecked financial operations, much of it tax light or free. But the means to do this are beyond most governments.

Also, some governments see their role is to defend these free capital flows because of their local interests and the influence wielded by those running the companies involved.

Consequently there is little coordination of policies despite all the meetings and the spin as politicians frantically try to put together deals to keep the various shows on the road.

The chaos mongers are taking bets on which is the next big one to go in the world of banks and finance. There are a select group of leading candidates any one of which could cause a major panic and lead to bigger but not better bail outs and the rest.

Enjoy the festive season.

Deleveraging For Dummies

Today is the First Day of Advent, once a major date in the Christian calendar now the start point for the Great Shopping on which so much of the economy and the credit card industry depends to meet not just its quarterly but its annual targets.

Unluckily, there is a cloud over it all this year caused by the problems in Europe, the risks entailed and other international uncertainties, for example how much will President Obama give Ben Bernanke and Goldman Sachs for Christmas? They will be hoping for a lot more that one extra live turkey.

I have known worse. On the same occasion in 1945 the situation was grim beyond despair also across Europe. Three days later in Paris the French Government nationalized five banks in an attempt to contain a gathering financial and employment crisis. A month later there were riots in Paris and Rouen because of severe shortages of bread.

Also just after this date an Anglo-US Loan Agreement was signed in Washington, Britain having is own serious problems. In the US there was more interest in the later news that General Patton had hit a truck in his car and was soon to die.

When this happened his troops in Bavaria were routinely searching women employed as manual labour in many US Army facilities. There were few German males around at the time. The ladies had hidden pockets all over their clothing to contain scraps or food items taken were they could. Butter they smeared over their arms, other items were tucked in different parts of the anatomy etc. etc.

Across Europe many starved that winter, many froze and many died because their bodies could not cope with routine ailments, even colds never mind flu’. There were no antibiotics save for Allied servicemen and virtually no other drugs.

In many areas the problem was the absence of a viable local currency, huge parts of the economy operated by barter or quasi-money commodities, notably cigarettes. Crime was rife and punishment harsh and not necessarily within the legal framework.

In this context there is a triple bill of serious items for today.  Automatic Earth sees that the only way this can go is for a massive deleveraging of the European Banking system. This would be big nasty and everyone would get badly hurt.

http://theautomaticearth.blogspot.com/2011/11/november-25-2011-deleveraging-there.html

One web contributor, The Slog, who has put in a huge amount of determined work now asserts that the European answer is to put us all in hock to the banks, let them off the hook and by doing so “forgive” a lot of debt. We will pay for it, we will have no option and we will suffer the consequences. The Euro and banking elite will not.
http://hat4uk.wordpress.com/2011/11/27/eu-crisis-bombshell-how-the-eurozone-plans-to-sell-us-out-to-the-banks/

Zero Hedge contributors have been relentlessly critical of the political shambles over the Euro and the handling of the relevant problems. Their story is that even in the depths of the Foreign Office someone is beginning to worry.

http://www.zerohedge.com/news/britains-foreign-office-prepares-riots-europe-sees-euro-collapse-when-not-if

It was later in December 1945 that the IMF and the World Bank were established. In June 1946 the Inaugural Session of the General Assembly of the United Nations met in London to be welcomed by King George VI.

But in February 1946 IBM had revealed a machine for electronic calculations, ENIAC. It needed 18,000 valves to work. It was widely regarded as a curiosity with limited potential functions.

So perhaps in 2012 HM The Queen could see the whole international edifice created then collapse in part due to human mishandling of electronic means of calculation and communication.

But others will be hungry again and going round offering family heirlooms or prized possessions for food or fuel.

Helping Hands

One of the imperatives of history is that if you call in a bunch of the heavy mob to help you then they are likely to help themselves. All too often it is a lesson that is learned only once and by the time you have realised the consequences it is too late.

When certain tribal leaders at the south eastern end of the Atlantic Isles thought that those Romans with their desirable lifestyle might help them to discourage their neighbours from being aggressive they did not know what it would lead to.

Rather later all those princes and rulers in the Indian sub-continent who saw a temporary advantage in availing themselves of the services of those rough people from the west who seemed happy only to go back home with pots of bullion made a similar error.

More recently we have had an unlucky conjunction of our supposed leaders from around the world when faced with complex issues calling in help from an assortment of all too willing people. Blair, Brown and Balls gave the keys to the City of London to a group of financiers assisted by Rupert and his friends. There is no sign of them going away. They are still in charge despite all the hand wringing.

On the continent, no longer isolated since the early 1970’s the EU sought help from a select group of political interests who told it that the economics could be made to fit if one currency could be installed. It didn’t and not only is the EU itself out of both financial and political control the currency system supposed to be basic to the economics has tanked.

The same political and other interests propose another set of arrangements to deal with the situation, if only to retain their powers of extracting whatever money can be had to shore up their position. Now the EU is at their mercy.

In America the leaders of the major corporations and financial houses have such a grip on Washington DC that they are never likely to lose it short of the collapse of the Union which theoretically should not happen. Just like the collapse of many past empires theoretically should not have happened.

There is a debate on what sort of economic principles are now the key to US policy and what their effect might be. The reality is that there are few principles to be found and the politicians could not apply them because of their backers. To others the model seems to be that of the former Enron company. Certainly Enronomics seems to be abiding working model at present.

Russia has its billionaire magnates wreaking havoc not only at home but in many other places including London. The Chinese seem to be willing to help anyone and once installed will stay. The Indian magnates are very willing to help any politicians anywhere, at a price.

Then there are the people whose assets are from energy sources and who have their own ideas, notably in the Middle East. Some of these ideas are religious, some “economic” but all intent on bolstering their own positions and supporting those of their followers and hirelings wherever they are.

In the meantime our child politicians are playing their games of charades. The US is already in the throes of a Presidential campaign that is meaningless in terms of the administration having any real control. The UK Party Conferences have been stand up comedy routines, “Clap hands here comes whoever.” The EU leaders are a travelling circus and the other world leaders are like a tribe of groupies following the latest financial hit band.

In the past it was easy to know who really ruled because of all the flummery and ceremony attached to Kingdoms, Empires or political centres and their workings. In the 21st Century it is hard to tell because you cannot see where the money is.

Quite simply, it goes and where it is kept is secret. The means by which it is moved are secret and the inner workings of the relevant corporations and agencies for the most part are also secret. And now nobody can do much about it except protest.

Eventually all the economic and political systems of the recent and more distant pasts have collapsed for one reason or another. For our present way of living and doing things it may be only a matter of time.

It might only need one more very big bad one, whatever it might be.

Travellers Guide

This is a short post because there is travelling to be done on family affairs over the next few days.

In the meantime there could be some difficulties in world or other finance.

Here is a brief guide to the nature of the problem:

The Euro

A monetary system without the system.

The Pound

Once based on a home owned working economy but now on a foreign owned financial service.

The Dollar

Once a world currency based on a world economy now without the world power or much of its economy.

The Renminby

Once based on a closed economy now on a trading economy that does not want to trade in its currency.

The Yen

Once based on a trading economy that is losing its trade.

The Rouble

Once based on a planned economy that is no longer planned or anything else.

The Rupee

Once based on a peasant economy but now without the peasants.

Given my past record while I am away something will happen.

Pretty Pictures

Events have crowded in this weekend, so only some nice pictures for you to relax with.

Going Pear Shaped

It has been a long hot week with a lot to do and then it all happens. Again, it is all going pear shaped.

There have been many claiming that this one was coming, unluckily a lot more notably amongst people in high places cheerfully told us all that every thing was for the best in the best of all possible worlds.

One that is not new but has now grown so far out of control it puts all at risk is the extent and nature of embedded fraud in the international financial system. The post below flagged by Nicholas Shaxson in his Treasure Islands blog and picked up via Tax Justice Network sets out James K. Galbraith’s views.

It is a long lecture but instructive if you have the time to read it. Simply, it is saying that economic policies that we might want are unattainable because the financial fraud is impossible to deal with.

http://my.firedoglake.com/selise/2011/08/01/james-k-galbraith-the-final-death-and-next-life-of-maynard-keynes/

Elsewhere, The Automatic Earth takes the view that Europe has thrown in the towel. For those not familiar with the sport of boxing this is about Europe being so far down the drain that it is not bothering to get out of it and concedes defeat; meaning that the Germans have taken their towels away from the communal pool.

http://theautomaticearth.blogspot.com/2011/08/august-5-2011-europe-throws-in-towel.html

None of all this is new, there have been crises before and major defaults. One of the problems afflicting Tsarist Russia was that it was already a debtor nation before 1914. Having substantial primary economic resources there was a ready market for its bonds.

By 1917 the debt was much greater and imposing a major burden on government. The Bolsheviks on taking power promptly defaulted inflicting huge losses in the major financial centres, notably Paris. It is arguable that the British 1919 Murmansk Expedition had something to do with the City of London.

This issue has not yet been resolved almost 100 years later and still the subject of legal actions and international differences:

http://www.angelfire.com/pa/ImperialRussian/news/87news.html

So how many centuries will our difficulties take to resolve?

And Now For The Not So Good News

Here are a few things to cheer you all up in these troubled times, rather than go on about it all myself here are a few links.

With an interesting Atlantic storm brewing off South America which may develop it seems best to start with what can happen in The Gulf if it becomes busy in weather terms:

http://www.theoildrum.com/node/8201#more

The oil is needed not only for vehicles but for a vast range of other products. Amongst them are the pesticides so crucial to our crop yields. There seems to be a growing problem.

http://www.naturalnews.com/033195_superweeds_farm_equipment.html

With money at the front rank of our affairs, one lot who are more often on the mark than off it do not like what they see.

http://www.moneyandmarkets.com/day-of-reckoning-tomorrow-46267

Another one reminds us that President Obama trained as a lawyer and found himself needing to understand economics and finance. Just like Tony Blair did.

http://www.marketoracle.co.uk/Article29587.html

Back in Europe it is beginning to become more complicated in the weft and warp of central banks, globalised investment banks and the rest.

http://www.zerohedge.com/contributed/your-mark-get-set-bank-run-dominoes-serial-lehman-20-x-4-eu-are-falling-pace-quickening-

In the FT it appears that Terry Smith has caught up with my Fantasy Island Theory of Economics.

http://ftalphaville.ft.com/blog/2011/07/29/638071/terry-smith-says-the-world-is-living-in-a-fantasy/
Meanwhile in New York some folk are living like some people at the Nene Park in Peterborough. The local football team is known as “The Posh”, a word that does not describe the campers way of life.

http://www.financialarmageddon.com/2011/07/the-new-reality.html

If you have the cash you could always take flight but if you haven’t you will have to make up for the taxes that are not going to be paid.

http://treasureislands.org/virgin-enterprise-off-to-geneva-to-shirk-tax/

In the past things have sometimes changed suddenly, but not always happily. We seem to going through a dry spell at the moment.

http://www.livescience.com/15267-ancient-city-mysteriously-survived-mideast-civilization-collapse.html

At Covent Garden the St. Petersburg Mariinsky Ballet are doing “Don Quixote” and is sold out for that one. Perhaps it is the only thing that makes sense.

Good Cop Bad Cop

The link below is a long item but deals very fully with the financial issues at present concerning the functions of the ECB and IMF.

Basically, the thesis is that they have made a serious mess of the situation and the prospects are not good.

http://www.nakedcapitalism.com/2011/06/bill-black-bad-cop-crazed-cop-%e2%80%93-the-imf-and-the-ecb.html

The opinion seems to be shared by an increasing number of people.

Games Of Chance

This is a short post but a large subject, like what in blazes is going on? If these people do not know, as well as many others, is anyone going to be right or are they all going to be wrong.

Given this, and that they have access to more or less the same data and sources as our civil service and government and may understand it better, then can we believe anything we hear coming out of Westminster or Washington DC?

The link below is a collection of other links about the nature of uncertainty at present; apparently the answer lies in the leverage. The banks are said to be running it at 20 to 1.

If that is not bad enough a lot of the assets on which the leverage is based are government bonds. These are issued by the same governments that have borrowed heavily to support the banks.

http://www.financialarmageddon.com/2011/05/nothing-to-see-here.html

What really worries me is that I look on them as optimists.

Arresting News

It is reported on Wednesday 9th March 2011 that a number of arrests have been made in relation to the financial operations of the Kaupthing Bank, the Icelandic bank at the heart of the recent UK financial and banking crisis.

Robert Peston on the BBC has been extremely cagey in his comments as have much of the media. For some reason they express surprise.

As this is now possibly a criminal case I will make no comment.

There is a certain amount of material, however, on the web. This includes

Recently

http://thecynicaltendency.blogspot.com/2010/03/he-who-pays-piper.html

http://thecynicaltendency.blogspot.com/2011/02/economics-of-extraction.html

http://thecynicaltendency.blogspot.com/2011/01/2011-bad-beginning.html

And previously, the last one re Cayman Islands mentions the notion of Iceland on Thames.

http://thecynicaltendency.blogspot.com/2011/01/who-owns-london.html

http://thecynicaltendency.blogspot.com/2009/11/parliament-government-way-we-live.html

http://thecynicaltendency.blogspot.com/2009/09/gordon-brown-granny-basher.html

http://thecynicaltendency.blogspot.com/2009/09/tax-havens-another-one-bust-cayman.html

Those with a liking for history might study the crash of the Ayr Bank on 10 June 1772 which help trigger the major collapse of financial institutions in London as well as the fortunes of so many leading Scots and other families and then cascading down the social ladder to those of more humble and working trades.

Including mine.

Chinese Crackers

With the BBC and other media attempting to herd us into the retailers to save the economy there were some interesting things going on. Oxford Street in London was thronged with shoppers but to our eyes few of them seemed to be local.

A later report said that many were Chinese tourists. As so much of the merchandise on offer was made in China and transported here this made me wonder. Did many of the tourists have to pay excess on their baggage on the return journey?

It appears that in China the government led property boom has created some large towns in which there are few takers for the properties, largely because there are no jobs available.

Where there are jobs available some people become very rich and look for high returns. One place that attracts them is central London where despite all the economic troubles property prices remain high and with prospects of capital appreciation.

This has helped to drive up prices. The investment advantage comes from the housing benefits available to those who rent and have little or no income. Even at a cap of £20,000 a year a wise purchase of a rental block can yield rich results for a careful buyer.

This will be if the flats can be rented out to incoming migrants who will be entitled to benefits. Moreover by creating a shortage, prices inevitably rise maximising the benefit payments that finish up with the investor. Many migrants are Chinese.

Meanwhile in the USA the domestic property market has gone bust. This has hurt a lot of big financial operators. The US Government has borrowed huge sums from abroad to bail them out. A lot of the money has been loaned by China.

One effect of this has been to almost eliminate the old American middle class and its traditional industries are in free fall due to manufacturing being exported abroad, notably to China. Everything could depend on the high tech’s industries and innovation.

These depend on some key resources notably rare earths and their derivatives. A major producer is China that is now restricting its exports to protect its own industries, if only to promote more development to fill up some of the empty cities.

The growth of China has helped to put pressure on both oil and food prices. In the USA the government, lobbied hard by the relevant companies, has given over large areas of land to growing biomass to create ethanol to ease the problems.

This has reduced the supply of food so driving up prices that impacts seriously on the world commodity markets. This affects Africa in particular and some states in that continent are selling a lot of their land to China to help the Chinese source their food.

The money for this land does not go to the peasants in any way. It is transmitted to tax havens in the care of a number of financial organisations closely connected with Wall Street. Some of these have been bailed out by the USA government and are still in deep trouble.

They are hoping that investment in China will get them out of it. However, foreign investment in China is a high risk business in that their government will always take care of its own above foreigners, unlike British or American.

A great deal of the risk in producing consumer goods is that consumers might be less able to buy them and be unable to pay the added heavy financial premiums arising from debt driven consumerism that underpins many financial organisations.

My head is beginning to hurt, I could go on but enough is enough. This year I may just skip Hogmanay and haggis and wait for 2 February to have some rabbit stew. After all the Chinese New Year does take us into the Year Of The Rabbit.

Perhaps the markets could be due for a dose of myxomatosis?

Topshop Bottom Dollar

When the rent-a-crowd demonstrators and more modern flash mob media grabbers take to the streets, I often wish they did not because they more often confuse the issues and lead the debate into directions it should not go. The recent events relating to tuition fees for students and Sir Philip Green’s Topshop are both cases in point.

Polly Toynbee was amongst those at the Oxford Street Topshop but perhaps she was simply looking to get a good price on the Topshop offer of a Nude Love Panel Body, Animal Flippy Shorts and Pink Mesh Swirly Sequin Sleeveless Crop Top for the Guardian Winter Solstice Party.

The problem with tuition costs is university financing as a whole and the level of provision that there should be. The students and some politicians who really ought to know better who assert that it should be “free” are talking nonsense. Nothing is “free” in our modern money based world there are always costs that have to be paid.

The costs may not be obvious. The old economic concept of “opportunity cost” has been forgotten. The cost of me sitting here doing this is the other things I might have done, some of which might entail earning money or services or goods in exchange for whatever I did.

What the students and their supporters claim is that others should be paying for their university education either in full or in part. At the same time we have been led to believe that some 50% of our labour force should be graduates. So where was the money to come from? Not only should they be graduate, but it should be the norm for them to be away from home.

So they leave spare bedrooms back in one place and now large areas of rented housing are student dominated. Does nobody see the economic costs of this alone for broader society? We have the same people complaining about the shortage of housing, yet the size and nature of higher education is one of the factors in creating the shortage and driving up rentals.

Then there are the ghosts at the feast. There is little or no suggestion of any parental responsibility or for that matter of grandparents, some of whom are property rich as the beneficiaries of past inflation. Most students are “poor” in the sense that they have no earnings or title to wealth yet but in many cases the families are not.

The complications in any grant system are how much, to whom and on what basis. In the grants systems of the past, theoretically based on parental ability to pay, there were many curiosities. Those in regular PAYE and ordinary jobs would be supported according to size of income.

But this did not differentiate between those who had started with nothing who were caught when they most needed to save and those who already had certain holdings. Moreover, parents whose “income” was what their accountants said it was after some creative work could be made to be income poor.

I recall one landed family with a large estate whose student youngsters were on full grants as well as many business men who were either self employed or owners.

One way or another it involves the taxpayer, or rather those paying tax. This brings us to Topshop. Sir Philip Green, much admired for his business acumen, has been picked out for attention. He did well in riding the heights of our recent debt driven consumer boom. Now he is asked to help us all take the fall.

The trouble is that along with very large numbers of other wealthy people he has benefited from the money changing industry that has allowed the most wealthy to make tax payments in the UK largely optional. The distinction made, of which Pecksniff would be proud, between “avoidance” and “evasion” in this complicated field is technical.

Our previous government allowed the creation of a very large financial industry devoted to tax avoidance/evasion as well as encouraging foreign ownership of UK assets that had much the same effect. At the same time it did little about evasion amongst the very rich. The present one seems unlikely to impact on this.

The irony after the football fiasco in Zurich of Nestle moving its newly acquired subsidiary Cadbury top management elements to that town for tax purposes seems to have been lost on much of the media.

Because I recall the pernicious and damaging effects of high taxation of the post war period which lasted until the 1970’s I believe in the objective of low rates of taxation. But I believe in all those earning in the UK and from UK assets being obliged to pay their share for the common good.

If the high earners and the wealthy are absolved then clearly the lower income groups are going to have to endure rather higher levels. If this is the case then the implication of this is that the lowest earners, many non-graduate will be paying a disproportionate amount to support the higher education sector.

It is from this sector that some of the future wealthy is likely to emerge and on the present pattern a goodly proportion of them will not be paying much UK tax.

Something here does not quite fit. Paradoxically, amongst the demonstrators are many who are likely to benefit most from the situation at the expense of us all.

I hope Polly got a good discount on her store card. She would need it if she was paying interest on the account, which is one reason why Topshop was doing so well.

Threading Needles And Jumping Beans

In 1961 the year the Berlin Wall went up and “West Side Story” and “La Dolce Vita” hit the screens, Viv Nicholson of Castleford in Yorkshire won the pools for the huge amount of £152,000 (say 40 detached houses in Tunbridge Wells) and declared she would “Spend, spend, spend”.

For this she was excoriated by the press and from pulpits. Sound and moral men told her to save, exercise due economy and to invest wisely to gain a reliable income and by doing so set a good example to her class and community.

Evidently she was a lady ahead of her time. Today she would be regarded as a potential member of the board of the Bank of England and Charles Bean, the Deputy Governor would be praising her economic wisdom and sense of moral purpose. Vince The Mince and Ed The Red would be hanging on her every word.

Avoiding all the very obvious jokes about Mr. Bean I understand he has told us all to loosen up on spending, take on extra credit, forget saving or run down those you have and for that matter draw down on capital perhaps by extending mortgages or going in for some fancy equity release caper. All that is missing is a big poster with the little children looking up at a pensive father and asking “What did you do in the Great Recession, Daddy?”

Perhaps I should take Mr. Bean to a quiet room, play calming music (not Mozart or Beethoven, they both died broke) and explain things to him gently in a soft voice and gentle manner. Then I might clobber him with the shillelagh I keep to welcome door to door salesmen and debt collectors just to make sure he gets the message.

Firstly, my income has suffered steady deterioration in the last few years almost entirely due to the relevant indexes being fiddled to understate real price rises for the bulk of the population.

Also, the way in which major financial entities now govern how companies operate to achieve very high and ever increasing rates of return on their highly leveraged investments has impacted in all sorts of ways on many of our basic expenses. Mr. Bean and his little friends gave up the idea of regulation without realising how they would impair basic consumer spending and saving.

Secondly, despite not taking foreign or indeed any holidays recently my savings have also depreciated in real terms because interest rates governed by the Bank have not reflected the realities of the markets. The interest on any credit etc. that do relate to market conditions are still way too high for any rational man to take them on.

Indeed, I have been on my own personal tax avoidance scheme and refusal to obey the advice of my masters. We have simply stopped spending on almost all goods that carry VAT or not absolutely essential to basic functioning. Also, we have cut our activities and therefore car and out and about expenses quite radically.

We can manage quite well without all the heavily advertised consumer stuff that people are urged to fill up their supermarket trolleys with. Yes we spend more time doing things that most people no longer do, like eating leftovers and preparing foods by hand rather than buying packaged versions.

Economies and activity that were routine for earlier generations but forgotten now have been reinstated. Threading needles and not throwing away is now something we are doing a lot more often.

Sorry, Mr. Bean, no can do. We are already closer to the margins than we want to be. If things go badly for us there will be no help from a shattered state machinery. If I were fool enough to do as he suggests then I would in the same sort of trouble that so many have endured.

It was precisely the spending and credit ideas that he is recommending that have broken so many families, ruined so many others, caused so many repossessions, have put people into debt slavery for the rest of their lifetimes and reduced so many pensioners to penury.

If he really wants to know what could happen he should ask Viv or at least take a look at her web site. Is this his vision for Britain’s future?

Turning Out Nice Again

Around a decade ago and for a while afterwards we pessimists were a lonely few brooding over figures and facts and coming to conclusions that everyone knew were hopelessly wrong or misjudged.

They thought we were just trying to attract attention to ourselves in the same way that squalling infants do when they have scratched a finger.

Then we had no means of communicating with others who shared our isolation and could only scribble things to the media who promptly binned them with all the forecasts of alien invasions or visitations of the saints in all their glory.

Now the web is full of them. You can hardly put “money” or something like it into a search engine and the screen will groan with links to armies of persons with one disaster or another in prospect about all the economic woes.

It is a relief to return to the hurricane, earthquake and volcano sites for light relief and a welcome dose of uncertainty. One happy moment this week was reading that the San Andreas fault has delivered bigger earthquakes more frequently than we have thought in the past and with luck Hollywood will be under water before the next disaster movie hits the screens.

You may not know that Herbert Morrison is the name of the radio reporter who was present when the airship “Hindenburg” crashed in flames and whose emotional reports are an essential part of any documentary on the subject.

It is one of those weird coincidences that a leading member of the post war Labour Government had the same name and who was responsible for several disasters of another kind.

He was grandfather to Peter Mandelson, economic and financial guru to Tony Blair. Tony is now to front a boutique investment bank in Mayfair to assist all his little friends with tax avoidance and playing the complex financial markets.

What role might Peter play in this scheme I wonder? More to the point, where is all the capital for this caper coming from?

Meanwhile, out there amongst the pessimists are some who have taken up the idea of “The Hindenburg Omens” (Wikipedia), a series of financial movements that presage a nasty crash in the markets. This is rarified and highly technical stuff. I enjoy looking at the charts but not attempting the mathematics.

These forecasters and experts who have turned pessimists are saying that it all going to be rough soon. Also, it may be rougher than the last two or three years. Given all the experts of one field or another who are claiming that we are now over peaks and on the way down in the supply of vital resources of all kinds they could be right.

In the UK we have major deficits in trade, energy supply, food supply and a lot of other things, so it all brings a smile to the most devoted pessimist. The thing that really makes us start to laugh is the idea of Tony Blair going into investment banking at exactly the wrong time.

And the hurricane season seems to be warming up at last.

A Far Away Country

At www.dailybail.com today under “Blood In The Streets” there is footage of the riots at Leinster House in Dublin. They look to have been very ugly as protesters demonstrated at the continuing bail out of the banks and finance houses whilst heavy cuts to public spending are being made. Leinster House is the home of the Dail Eirann, the elected lower assembly of the Republic of Ireland.


Because of the large scale coverage in the UK Media of the comings and goings of who are to be the people in London who administer the instructions from Brussels and Berlin for the UK these riots have been ignored. But they are an expression of the growing resentment of the reductions being made, the likelihood that they will last a long time, whilst between Ireland, London and the EU steadily increasing sums from Irish taxpayers are going to prop up banks and finance houses.


Dublin is in a far away foreign country that we take little notice of these days save for the occasional imported celebrity. Perhaps there may be lessons for us. In the meantime I am off to the Post Office to meet a few friends.

Tomorrow Is Another Day

Those taxpayers who cannot avoid paying tax are the only persons contained by existing political boundaries and are wholly at the mercy of their political elites. These elites, their support systems and much of large scale economic activity notably in financial services are not financially confined within the “nation states” they control and from whom they extract their rents and income streams.

They take their money and ownership of assets where they wish. So for the UK the offices of our Inland Revenue which extracts taxes from most of us are no longer owned by our government but by a private equity company based in Bermuda. This company made a very profitable deal on the purchase of the offices and is doing very well out of the leasehold and other charges.

It would be wearying to go on and on and on about all the other examples, please refer to Tax Justice Network on the international situation. In some countries, notably Greece it has gone to greater extremes. There, it is said, hardly any of the top 30% in wealth terms pay much if any tax. Nor do they intend to. One side effect is that such Greeks have been buying into London property and helping to keep up prices there. The UK needs this kind of help much as it needs a return of the Bubonic Plague of 1665-1666.

The great trouble for the media, the politicians and the pundits is that explaining all this to the ordinary, or even most of the educated population is conveying the sheer complexity and depth of what is involved. All I can do is give below the comment made by Tyler Durden yesterday in Zero Hedge dot com “The CDS Traders Verdict Is In – UK In Deep – As Are France And Deutschland”. In another post the site points out that the Greek bail out is also a bail out of French banks.

In the next few days and maybe months you are going to hear a lot about “contagion” and the gathering sovereign debt crisis implodes, explodes or goes stratospheric. Like it or not you and I are part of it, so get used to the idea.

Quote

Portugal... Spain...Greece...these are all last week's news based on CDS trading patterns. Indeed, this week saw the biggest trade unwinds of all top 1000 CDS entities (including all corporates) precisely in these three names.

As the PIIGS implosion is finally being appreciated by everyone and their grandmother, the "speculators" are booking massive profits: the net cover/rerisking in Portugal and Spain was a massive $500 million net notional unwinds in each in the week ended April 30.

Also known as taking profits. Greece and Ireland were also in the top 5, so as we have repeatedly claimed, the market will no longer make the news in Club Med. So where will it? No surprise there - the UK, France and Germany. The smartest money in the world is now actively betting the core of the eurozone is where the next CDS blow up will take place.

With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names.

The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million. Nuff said. Yet a tangent on the UK: last week the UK saw $443 million in net notional derisking. This week the number is even higher: $558 million. There is now over $1 billion in net risky bets made that the UK may not last.

And Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind.

Unquote

The ones who will be worst affected are those who are the taxpayers. And there is no known cure.

Debt & Equity, Winners & Losers

In Humbugs and Tarts a couple of days ago, I nominated Geoff Hoon as my choice of the day in the meeting for money scandal unveiled by C4 and The Sunday Times. My reason was his cheerful willingness to use his NATO and EU contacts to help American Private Equity firms to buy up European defence companies.

The item below culled from the site of Tax Justice Network explains why. It means that when Brown and Labour are proclaiming their vision for all, necessarily to be paid for out of taxation, in reality they are happy to help the big boys, at a price and a cheap one, to set up schemes that will help them avoid UK tax.

As ever, they win, we lose, and we will pay more and more.

TAX JUSTICE NETWORK
Thursday, March 25, 2010

On the tax treatment of debt.

In October 2009 we blogged on a major faultline in global capitalism: the relatively different tax treatments given to equity and debt. This issue, largely as a result of a ferocious lobbying offensive by private equity companies and others, has not been in politicians' sights - but it should.John Plender has an excellent article on this in the Financial Times, entitled It Is Time to Stop Punishing Prudence, which says many of the same things we said (and our last article quoted him, too.).

As Plender says:"The heated debate on the taxation of bank bonuses has distracted attention from a glaring omission in current policy proposals to put the financial system to rights. This is the tax bias that exists in favour of debt at the expense of equity in the US and UK, which are the countries that matter most for global financial stability. It is a bias that potentially undermines the thrust of regulatory efforts to strengthen bank balance sheets."Indeed.

So a private equity company, for instance, has its financing supplied from a zero-tax haven, and pays no tax on the interest income there, while getting tax deductions on the cost of this interest income from the higher-tax onshore jurisdiction. It is a simple, and routine, abuse.

There seem to be two main approaches to evening out the difference in the tax treatment of these very different forms of finance. The first would be to make the notional cost of equity finance deductible against tax.

The second, far better approach, would be to stop making interest payments on debt tax-deductible. This would allow governments to reduce headline rates while broadening the tax base.

Plender points out some of the pitfalls of the first approach: "The snag is that this reduces tax revenue and narrows the tax base – the assets and income available to be taxed. The switch to giving relief for equity finance is reckoned to have cost Croatia up to a third of corporate tax income.

Raising headline rates of corporation tax to compensate is politically difficult."Politicians need to wake up to this essential question. Stop this, and (among other things) a world of offshore abuse disappears.