Saturday, 8 August 2009
Mervyn King - An Open Letter To The Governor
Picking up my morning newspaper, a “Metro” free sheet, from the waste bin outside the local station, (who pays for print these days?), I learned that the Bank of England, which is yours and mine, intends to scatter munificence to the order of £50 billion more smackers to your nearest and dearest in The City, Westminster, and Mayfair. Perhaps it is time for me to make a bid for small non-business, in fact small non much at all, these days. We may be able to help the recovery you want far better than the dodgy geezers in those parts.
On a works outing to the Royal Opera, perhaps it was “Gotterdammerung” that gave you the idea for Quantitative Easing (QE). At her immolation, when the heavens collapsed with the doom of the ancient Gods, Brunnhilde hurled The Ring back into the Rhine to restore the Rhine Maidens guardianship of the Rhine Gold. The ordinary people then emerge blinking into the dawn of a new era where they now have the power to decide. Obviously you can’t have any of that, but as chucking good money about is the dish of the day for mainline economists, I see your reasoning.
But what neither Wagner nor Marx ever understood about capitalism, the basic issue is compound interest. It is not much in fashion these days, in fact one of the things that people want to ignore, as one of those “difficult” subjects. Indeed you may not be aware of it yourself. Once upon a time no home was without its little handbook of tables that set out costs and figures of different rates of interest, but perhaps these were too tricky for the typical software engineer to programme. Certainly, they do not fit all those marvellous mathematical formulae and structures on which all our lives, and your systems are now based. I know politicians never could understand them. They can only work in days, although those of higher intellect might manage weeks, but when it comes to months or years, oh dear, and they could never accept that interest is the price of money and has to be paid.
The people to whom you hand all this loot, don’t keep it at home, or even spend it. It is sent by High Priority Mail to off shore banks, trusts, investment funds and the rest to help them make their figures more convincing, especially when they are sent on a merry-go-round of computer servers around the world. This way it is secret, so when they tell you and us that all is now well, you have to believe it, or they will just come back and ask for more, again, and maybe again.
I know some may find its way into the odd pension fund, or lending to big business, who are all then persuaded to buy Treasury Stocks to support government spending, which then enables you to do some more QE, and this will, OK, I give up. What worries me is the interest payable. You see the rate of interest you publicise, and the rates of interest I have to pay, and all the local people I have to deal with pay, are wildly different. As a three card trick, it is wonderful, what I don’t like is what is happening to my budget.
Those who benefit, and earn mega money, do not pay much, if any, UK tax, and have no intention of doing. But when the Treasury borrows, it will then pay interest and this will be compound. As there isn’t a cat in hell’s chance of any of these debts being repaid soon, the interest liabilities will increase and will rocket after a few years, and I, and others like me will have to pay the lot. Unlike all those with offshore outlets, who will be liable for nothing at all, in fact, if they owe the Bank or the government any significant amount they will be allowed to write it off or paid off with a profitable nationalisation deal.
I know Keynes said that to spend might be wise, and I know exactly what he meant. Whenever someone goes on about QE and all that the first thing I do is to reach for the “General Theory of Money And Employment” and the wall sized diagram I have that sets it out in visual terms. Keynes did not mean throwing huge sums at casino bankers and Heath Robinson financial engineers to salt away abroad for free and without safeguards. He meant real investment yielding real long term benefit for the national community. He assumed that the whole of the community would pay their taxes, indeed the poor would pay as few as possible. He did not mean that the rich would be able to evade or avoid the lot, leaving the whole liability on the ordinary working people or the poor. He did not mean slushing money into the hands of foreign oligarchs and high rolling speculators or bingeing on prestige sports events, nor did he mean indulging in fantasy colonial wars.
If I may give you an example. Closely involved with many of the more hopelessly bust banks are some property men. They now control many of the freeholds and much of the property management services in the private rented sector, including the bulk of the retirement housing sector. Very few of those who live in these flats have much in the way of income or wealth, many of them are at the margins and on tight budgets. The service charges of the great majority of the old and vulnerable in these flats has been racked up nearly 10% compound for a few years now by the private property conglomerates controlled by private offshore Trusts concerned. The consequence is that their real disposable incomes have been cut by up to a third. The Office of National Statistics does not factor this into any indexes, and service charges do not count in calculations of many benefits or the claims for disablement or care, so the leaseholders are triple losers.
Do I need to spell out what this means? The income streams extorted from these people, entirely legally, have been used to leverage property speculation and take on debt from casino banks. So when you bail out these banks you are bailing out the property magnates, and supporting their lavish and wonderful lifestyles directly at the expense of the old and disabled. The Treasury knows this, you know this, others know this and certainly many politicians, but the magnates are their best friends. There is one downside, however, and that is you may have just about wrecked the market in flats, now an overbuilt and over priced sector, where the service charges now cost more than any mortgages, putting them beyond the bounds of affordability.
So if you must spend on consumption, then why not direct it to the old and poor one way or another who are being and have been screwed blind and whose incomes are deteriorating by the day? In parallel, why not do something to protect the unlucky victims of the mad scramble for loot that has caused all the trouble? In that way QE might actually mean what it says.
More important Keynes believed in certain moral imperatives. Alas, Merv, neither your Bank nor anyone it deals with these days believes in that kind of thing. But Keynes was a fan of the ballet. Perhaps Merv, you might try ballet for a works outing instead of all the Wagner and opera stuff. Like President Bill Clinton when he saw the Royal Ballet at the Kennedy Arts Centre in Washington DC in a performance of “The Sleeping Beauty”, you might realise the need for your very own Lilac Fairy.
If you have a look at the plot it is the Lilac Fairy who overcomes evil and deceit in the name of good and the truth.