Steve Keen, a non-mainstream economist who is one of a mere handful to have predicted the Great Financial Crisis, has put his latest academic paper on his website. It has a lot of mathematical equations and technical terms, as you'd expect, but I think it's possible to get the general drift if you don't get disheartened by all that. As a non-pro myself, I'll try to pick out some of the main points that appear relevant to investment (I am sorry that I cannot yet reproduce his graphs but in any case that might infringe his copyright).
Keen attempts to model the economy including the role of debt, which appears to be a major factor insufficiently considered by classical economic theory. Using past data, he observes that from 1920 -1940 "rising debt was strongly correlated with falling unemployment" (p.4).
But in the last 20 years private debt has risen far faster than production (fig. 5, page 5) and rising debt now appears to be associated with rising unemployment (fig. 12, page 11). Keen blames what he forthrightly calls "Ponzi finance", i.e. speculative money poured into assets, causing them to become overpriced. In the aftermath of the 1929 Great Crash, the biggest debt load was among businesses and government; now, most of the debt is concentrated in the financial sector and households (fig. 13, page 12). Running his model, Keen finds (fig. 14) that there is an inbuilt tendency for speculative debt (as opposed to debt-financed investment in production) to take off and ultimately account for almost all the debt in the economy.
Another of Keen's themes is that economics has confused the amount of money with the flow of money. This has misled the USA into supporting banks on the assumption that the latter would lend out the usual multiple of their deposits (they didn't), whereas in Australia the emphasis was on financial support to households. Consequently, unemployment in the USA has doubled to 10%, but in Oz it seems to have stabilised at around 5% (fig. 23).
It seems that as total debt reaches a critical size, there is an alteration in the way in which money and the economy interact (I think chemists call this sort of thing a "phase change"). Prior to this point, the system appears to be settling down, rather as milk does in the saucepan before suddenly frothing over and burning on the hob. Kenn quotes (p.12) Hyman Minsky: "Stability—or tranquility—in a world with a cyclical past and capitalist financial institutions is destabilizing".
In Keen's model, the first effects of the crackup are felt by workers: wages spiral around from 100% of GDP, centring towards c. 70%, but then suddenly collapse down to below 50% (fig. 33, page 43). For about 10 years in this final decline, business profits appear fairly unaffected; then they slump catastrophically into deep losses (page 44). At the same time, the banker's share of national income soars. Economic growth turns into economic contraction, and we move from an apparent settling-down of the inflation rate into a savage deflation exceeding 35%.
As with any mathematical model, there is always the question about how far it fits observed reality, and in economics it seems hard to get exact figures and generally-agreed definitions, especially where debt is concerned (see my previous post). But Keen's seems to be a model operating on strict internal logic based on clear theoretical data and correlations, with outcomes that chime with phenomena we've see so far. His model has very worrying implications for the next part of the cycle.
An unknown factor is what government will do. Whatever the economic machinery, politicians are liable to throw a spanner into it, if only to be seen to be doing something. Keen's prediction of a housing price collapse was refuted by the financial measures the Australian government introduced to help householders, and internationally it is widely feared that governments will ultimately attempt to mitigate the effects of deflation by debauching the monetary system and introducing hyperinflation; hence the shrilling of the "gold bugs".
So every economic model will have to be updated to incorporate the new cogs, axles and valves invented by our desperate leaders. The value of Keen's model is, I think, not so much to offer accurate predictions of the future as to show that the system as it stands appears to tend to equilibrium but actually is highly unstable. He is predicting the burning of the Phoenix, not its reincarnation.
UPDATE: Keen's dynamic model, with its self-reinforcing trends, has something in common with George Soros' ideas of market feedback loops. Soros terms this process "reflexivity" and set out his theories in his 2008 book "The New Paradigm for Financial Markets". In his speech at Berlin's Humboldt University last week, Soros argues that Germany would be damaged by an exit from the Euro and should be less purist about financial rectitude at a time when weaker Eurozone countries are struggling to support their banking systems.
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.
Monday, June 28, 2010
Sunday, June 27, 2010
How bad is the debt problem?
The things we really need to know seem to be the hardest to find out, at least here in the UK. I look again and again for figures on our debt and each time get a different answer.
Sometimes, with public debt, it's because of problems of definition - for example, the "National Debt" is different from the "Public Sector Net Debt". Even then, there's the question of what has yet to be included in the accounts, and what has been designed not to appear in the accounts at all (e.g. the Private Finance Initiative, or PFI). Official statistics say "government debt" in 2009 was almost 70% of GDP. According to this source, the Bank of England put it at 60% in January 2010. But reportedly, the Centre for Policy Studies estimated that the true figure at the end of 2008 was 103.5%, including public sector pensions and PFI. Even the lower, official figure for Public Sector Net Debt is forecast to rise steeply in the years to come, to around 80% (a similar story is told here).
Then there is private debt. A couple of years ago, personal debt in the UK broke above 100% of GDP, according to Grant Thornton. In the USA, private indebtedness has soared to something like 300% of GDP (recently reconfirmed by Australian economist Steve Keen here).
But we also have to factor in business debt. This graph from Moneyweek adds business and private debt together to show the UK's figure running at around 250% of GDP. - and the graph is out of date. It's fair to guess that we're as badly off as the Americans.
Finally, we have to consider who are creditors are. How much of the debt is owed "within the family", so to speak, and how much to foreigners? 18 months ago, the Spectator magazine's Fraser Nelson reported an estimate (by Michael Saunders of Citigroup) of total "external" debt among the G7 nations:
Sometimes, with public debt, it's because of problems of definition - for example, the "National Debt" is different from the "Public Sector Net Debt". Even then, there's the question of what has yet to be included in the accounts, and what has been designed not to appear in the accounts at all (e.g. the Private Finance Initiative, or PFI). Official statistics say "government debt" in 2009 was almost 70% of GDP. According to this source, the Bank of England put it at 60% in January 2010. But reportedly, the Centre for Policy Studies estimated that the true figure at the end of 2008 was 103.5%, including public sector pensions and PFI. Even the lower, official figure for Public Sector Net Debt is forecast to rise steeply in the years to come, to around 80% (a similar story is told here).
Then there is private debt. A couple of years ago, personal debt in the UK broke above 100% of GDP, according to Grant Thornton. In the USA, private indebtedness has soared to something like 300% of GDP (recently reconfirmed by Australian economist Steve Keen here).
But we also have to factor in business debt. This graph from Moneyweek adds business and private debt together to show the UK's figure running at around 250% of GDP. - and the graph is out of date. It's fair to guess that we're as badly off as the Americans.
Finally, we have to consider who are creditors are. How much of the debt is owed "within the family", so to speak, and how much to foreigners? 18 months ago, the Spectator magazine's Fraser Nelson reported an estimate (by Michael Saunders of Citigroup) of total "external" debt among the G7 nations:
The point of this is that not only are we very heavily in hock, but we are particularly vulnerable to pressure from foreign creditors.
In another post, I plan to consider our options, and the extent to which the recent "emergency Budget" has helped solve the problems we face.
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.
Saturday, June 26, 2010
"Jesse" predicts gold will appreciate 500%
We've seen the price of gold in dollars quadruple since the beginning of the new Millennium. Compared to inflation, gold is above its long-term average - but still below its 20th century peak in 1980, when the American economy was under severe strain.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
*It's how my mother's family lost their farm in East Prussia, now a heavily-militarised sliver of Russian Federation land with access to the vital open-in-winter Baltic seaport of Kaliningrad. The Russkies threatened to base missiles there in 2008 in a Cuban Crisis-style response to US plans for missile bases in Poland and the Czech Republic. Perhaps some wealth in portable form wouldn't be a bad idea, after all - it would certainly have helped my family on their flight westwards.
"Jesse" predicts gold will appreciate 500%
We've seen the price of gold in dollars quadruple since the beginning of the new Millennium. Compared to inflation, gold is above its long-term average - but still below its 20th century peak in 1980, when the American economy was under severe strain.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
*It's how my mother's family lost their farm in East Prussia, now a heavily-militarised sliver of Russian Federation land with access to the vital open-in-winter Baltic seaport of Kaliningrad. The Russkies threatened to base missiles there in 2008 in a Cuban Crisis-style response to US plans for missile bases in Poland and the Czech Republic. Perhaps some wealth in portable form wouldn't be a bad idea, after all - it would certainly have helped my family on their flight westwards.
Sunday, June 20, 2010
Fun with gold
As the crisis continues, the gold bugs cheerily anticipate rocketing gold prices. Some fling about wild notions like $50,000 per ounce, others try to be a bit more sober (or less drunk) and guess at $10,000. But there are so many imponderables, as I comment:
Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?
Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?
Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.
Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.
But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.
This farmer (http://thebeginningfarmer.blogspot.com/2008/02/how-much-land-do-you-need.html) reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.
Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.
So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.
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.
Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?
Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?
Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.
Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.
But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.
This farmer (http://thebeginningfarmer.blogspot.com/2008/02/how-much-land-do-you-need.html) reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.
Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.
So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.
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.
Email to clients, 20 June 2010
Dear Client
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
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.
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
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.
Soros thinks markets still overpriced
June 11: Multi-billionaire George Soros gives his views on the present systemic crisis. He argues that since complete catastrophe was averted by government action in 2008, free-market discipline (failure and bankruptcy) no longer applies and must be replaced by official regulation and management - or the "superbubble" will eventually burst. I give below some extracts, but the piece is worth reading in its entirety.
... life support consisted of substituting sovereign credit for the credit of financial institutions... But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt... budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip...
When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation.
He will speak more on the latter subject in Berlin this Wednesday. In the meantime, please note his comment on market prices, which I have highlighted. Some people seem to think that the corrections in stocks and residential property have brought us back to normality - I don't think so.
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.
... life support consisted of substituting sovereign credit for the credit of financial institutions... But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt... budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip...
When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation.
He will speak more on the latter subject in Berlin this Wednesday. In the meantime, please note his comment on market prices, which I have highlighted. Some people seem to think that the corrections in stocks and residential property have brought us back to normality - I don't think so.
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.
Tuesday, June 15, 2010
Banks - growing worry
There is growing concern about banks again, reflected in what is known as the "Ted Spread" - the difference between the yield (effective interest rate, compared to trading price) of government debt (3-month US Treasury bills) and interbank lending (the LIBOR rate). According to Paul Nolte, the difference has widened over the last three months from 10 basis points (0.1%) to over 50 b.p. (0.5%). In other words, investors are willing to accept a lower income from government debt, in exchange for greater confidence that they will be able to get their money back.
The Ted spread can be a significant indicator - I passed on concerns about it in December 2007, months before the great credit crisis slammed into us. But to put it into perspective, at that time the spread was 2%, or four times higher than now. Nevertheless, a straw in the wind.
And evidence that there are those in the market who know (or have good reason to suspect) what's going on, long before it's disclosed to the rest of us by our alert and expert news media. Still, the latter can hardly be blamed - Peston the messenger was shot at by many, even when his message came rather late.
Perhaps I should take an insanely insouciant, upbeat angle on it all, like the Book in The Hitchhiker's Guide to the Galaxy: "Many men of course became extremely rich but this was perfectly natural and nothing to be ashamed of because no one was really poor, at least no one worth speaking of." On the same note, James Quinn's latest post includes the following graphs:
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 Ted spread can be a significant indicator - I passed on concerns about it in December 2007, months before the great credit crisis slammed into us. But to put it into perspective, at that time the spread was 2%, or four times higher than now. Nevertheless, a straw in the wind.
And evidence that there are those in the market who know (or have good reason to suspect) what's going on, long before it's disclosed to the rest of us by our alert and expert news media. Still, the latter can hardly be blamed - Peston the messenger was shot at by many, even when his message came rather late.
Perhaps I should take an insanely insouciant, upbeat angle on it all, like the Book in The Hitchhiker's Guide to the Galaxy: "Many men of course became extremely rich but this was perfectly natural and nothing to be ashamed of because no one was really poor, at least no one worth speaking of." On the same note, James Quinn's latest post includes the following graphs:
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.
Monday, June 14, 2010
Credit crunch, bailouts and unemployment - according to Steve Keen
Steve Keen, Australian post-Keynesian economist and one of only about 16 (previously estimated at 12) out of 20,000 econ pros to have predicted the "credit crunch" (aka GFC - Global Financial Crisis), looks at economic models and produces his own. The one I find most striking is the last, Fig. 22:
There are several implications I see here:
1. It is better to bail out borrowers than banks
2. The disruption takes c. 15 years to settle
3. Whatever is done or not done, we are left with permanently elevated levels of unemployment
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.
Sunday, June 13, 2010
Currents in the sea of debt
Michael Panzner, author of "Financial Armageddon" (a book I reviewed 3 years ago when I began to relay advance warnings of the credit crisis), is a great miner of news and comment. Here he has unearthed an article that analyses the apparent improvement in USA household debt figures.
It seems that there has been over $400 billion in defaults; and many of those who haven't defaulted (yet) have continued to increase their debt. If the economy continues to struggle, perhaps a portion of the latter will also renege on their financial obligations.
One coming blow to the US economy is a fresh wave of mortgage problems. Traditionally (and unlike in the UK), domestic mortgages were fixed for the entire term of the loan, but in the late greedy rush to make fortunes in fees, banks and brokers offered housebuyers "option ARMs" (adjustable rate mortgages with an initial very low interest rate fixed for a few years). These loans are due to start coming off their "teaser rates" over the next couple of years.
That's when many homeowners may either be forced to default, or choose to do so because they calculate that falling house prices will catch them in a negative equity trap. In many (not all) cases, they may be able to default and leave their credit problems behind, because the loan may be of a kind that is attached to the property only - the lender can't pursue the borrower for any debt left over after selling the house. So all the beleaguered borrower has to do is send back the keys - the slang for this is "jingle mail".
Lots of American houses are built of wood. Standing empty and uncared for, they are likely to deteriorate quickly, even if they haven't been trashed by resentful ex-owners as a parting slap to the repossession teams. And there is still plenty of land to build new houses, so an existing property in poor condition may never find a new buyer - especially if it's in an area blighted by unemployment and rising crime, like former "Car City" Detroit.
The bankers have been sustained by huge financial backing from the government, but it may not be possible to light that match twice. Put "financial crisis" and "second wave" into your Web browser and you'll find lots of material to support the view that we are merely in the eye of the storm (another phrase now frequently used, e.g. by Tim Wood here).
I therefore remain cautious about investment, yet fearful that governments will try to escape their obligations through inflation.
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.
It seems that there has been over $400 billion in defaults; and many of those who haven't defaulted (yet) have continued to increase their debt. If the economy continues to struggle, perhaps a portion of the latter will also renege on their financial obligations.
One coming blow to the US economy is a fresh wave of mortgage problems. Traditionally (and unlike in the UK), domestic mortgages were fixed for the entire term of the loan, but in the late greedy rush to make fortunes in fees, banks and brokers offered housebuyers "option ARMs" (adjustable rate mortgages with an initial very low interest rate fixed for a few years). These loans are due to start coming off their "teaser rates" over the next couple of years.
That's when many homeowners may either be forced to default, or choose to do so because they calculate that falling house prices will catch them in a negative equity trap. In many (not all) cases, they may be able to default and leave their credit problems behind, because the loan may be of a kind that is attached to the property only - the lender can't pursue the borrower for any debt left over after selling the house. So all the beleaguered borrower has to do is send back the keys - the slang for this is "jingle mail".
Lots of American houses are built of wood. Standing empty and uncared for, they are likely to deteriorate quickly, even if they haven't been trashed by resentful ex-owners as a parting slap to the repossession teams. And there is still plenty of land to build new houses, so an existing property in poor condition may never find a new buyer - especially if it's in an area blighted by unemployment and rising crime, like former "Car City" Detroit.
The bankers have been sustained by huge financial backing from the government, but it may not be possible to light that match twice. Put "financial crisis" and "second wave" into your Web browser and you'll find lots of material to support the view that we are merely in the eye of the storm (another phrase now frequently used, e.g. by Tim Wood here).
I therefore remain cautious about investment, yet fearful that governments will try to escape their obligations through inflation.
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.
Wednesday, June 09, 2010
The Impending Geek Shortage
In his recent editorial (“Why a liberal arts degree? The Big Shaggy”), David Brooks of the New York Times writes, “… many people have the ability to produce a technical innovation; … Very few people have the ability to create a great brand;…”
Polite words almost fail me.
Mr. Brooks’ argument is that manipulating emotion by words is a rarer and higher-order skill than ‘simple’ problem-solving. This view was shared by the ancient Greek philosophers, who looked down on the people who made things as ‘mere artisans’. It is also the stated view of Richard Cohen of the Washington Post, Simon Jenkins of the Guardian (UK), and the late writer Norman Mailer.
To be consistent, this alternate reality means ignoring the hard work and dedication of legions of scientists and engineers, and treating our comfortable existence as the Natural state of things.
It is also the apparent view of our nation’s scientifically- and technologically-illiterate middle managers, administrators, money manipulators and politicians. Starting in the 1970’s, they collectively watered down science and mathematics education, reduced funding for research and de-emphasized manufacturing.
This ‘service-based’ economy allowed us the illusion of confusing the movement of wealth with its creation, and brought the nation to bankruptcy. Lawyers, accountants, bankers, hedge fund managers, and the like all have incomes which are vastly larger than those of the typical scientist, and yet they produce absolutely nothing of any substance.
Unfortunately for them, the energy, economic, environmental and societal problems that we face are largely scientific and technological. Simply put, without a lot of such work, most of us would starve.
At most universities, the number of majors in any one of psychology, sociology, communications, pre-law, and other non-technical fields dwarfs the total in the hard sciences and mathematics combined. Exactly where will we get the experts that we badly need?
Polite words almost fail me.
Mr. Brooks’ argument is that manipulating emotion by words is a rarer and higher-order skill than ‘simple’ problem-solving. This view was shared by the ancient Greek philosophers, who looked down on the people who made things as ‘mere artisans’. It is also the stated view of Richard Cohen of the Washington Post, Simon Jenkins of the Guardian (UK), and the late writer Norman Mailer.
To be consistent, this alternate reality means ignoring the hard work and dedication of legions of scientists and engineers, and treating our comfortable existence as the Natural state of things.
It is also the apparent view of our nation’s scientifically- and technologically-illiterate middle managers, administrators, money manipulators and politicians. Starting in the 1970’s, they collectively watered down science and mathematics education, reduced funding for research and de-emphasized manufacturing.
This ‘service-based’ economy allowed us the illusion of confusing the movement of wealth with its creation, and brought the nation to bankruptcy. Lawyers, accountants, bankers, hedge fund managers, and the like all have incomes which are vastly larger than those of the typical scientist, and yet they produce absolutely nothing of any substance.
Unfortunately for them, the energy, economic, environmental and societal problems that we face are largely scientific and technological. Simply put, without a lot of such work, most of us would starve.
At most universities, the number of majors in any one of psychology, sociology, communications, pre-law, and other non-technical fields dwarfs the total in the hard sciences and mathematics combined. Exactly where will we get the experts that we badly need?
Monday, June 07, 2010
Faber on inflation, war, and physical and financial security
May I recommend that you watch the following video in full, even if you are not an economics buff?
Dr Marc Faber is a highly respected investment and economics commentator. He has a wry sense of humour that verges on what the Germans call galgenhumor - the sort of joke you make when you are about to be hanged. His thesis is that prices have become very volatile because of manipulation of interest rates and the money supply, and that in the West we are now so far in debt that governments will see no option but to create very significant inflation.
Accordingly (he thinks), the things people would usually regard as safe stores of value - cash and bonds - will turn out to be places to lose your wealth. Equities may not make much in real terms - and may well lose a lot at certain points (he looks for example at the Mexican experience from the late 70s to the 90s) - but are likely to recover again. Nimble investors may even do very well by exiting and re-entering the stockmarket at the right points.
Faber also considers how the Eastern economies are coming to dominate manufacturing production and consumption, so that although they seem poor compared with us they are not spending the majority of their money on services, as we do in the West. Further, they are not generally so indebted (if we ignore Japan). Faber thinks that at some stage we should all have a significant proportion (he gives a ballpark figure of 50%) of our investments in the East - though he stresses that's not a signal to get in right now.
He is also bullish long-term on gold, merely because of what he thinks will happen to our currencies as governments in the West try to inflate their way out of the debt trap. Interestingly and untypically of many of Faber's audiences, many of the people he is talking to here themselves hold significant amounts of physical gold. (I have just come back from a haircut here in Birmingham and a shop has just opened next door, specialising in buying gold - not so much an outlet as an inlet, you may say.)
Other investment themes are covered in the last few minutes of the video, and include agricultural land and infrastructure companies working e.g. in India, where the majority of the population is still rural and cities will have to be built.
Faber considers geopolitical aspects as well, and thinks that there will be growing international tensions. He is quite clear and non-humorous about how big cities are very vulnerable and that those who can afford to do so should have somewhere to live far away from them. It's worth pointing out that he has taken his own advice and lives in Chiang Mai, northern Thailand - and close to borders with several other countries.
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.
Dr Marc Faber is a highly respected investment and economics commentator. He has a wry sense of humour that verges on what the Germans call galgenhumor - the sort of joke you make when you are about to be hanged. His thesis is that prices have become very volatile because of manipulation of interest rates and the money supply, and that in the West we are now so far in debt that governments will see no option but to create very significant inflation.
Accordingly (he thinks), the things people would usually regard as safe stores of value - cash and bonds - will turn out to be places to lose your wealth. Equities may not make much in real terms - and may well lose a lot at certain points (he looks for example at the Mexican experience from the late 70s to the 90s) - but are likely to recover again. Nimble investors may even do very well by exiting and re-entering the stockmarket at the right points.
Faber also considers how the Eastern economies are coming to dominate manufacturing production and consumption, so that although they seem poor compared with us they are not spending the majority of their money on services, as we do in the West. Further, they are not generally so indebted (if we ignore Japan). Faber thinks that at some stage we should all have a significant proportion (he gives a ballpark figure of 50%) of our investments in the East - though he stresses that's not a signal to get in right now.
He is also bullish long-term on gold, merely because of what he thinks will happen to our currencies as governments in the West try to inflate their way out of the debt trap. Interestingly and untypically of many of Faber's audiences, many of the people he is talking to here themselves hold significant amounts of physical gold. (I have just come back from a haircut here in Birmingham and a shop has just opened next door, specialising in buying gold - not so much an outlet as an inlet, you may say.)
Other investment themes are covered in the last few minutes of the video, and include agricultural land and infrastructure companies working e.g. in India, where the majority of the population is still rural and cities will have to be built.
Faber considers geopolitical aspects as well, and thinks that there will be growing international tensions. He is quite clear and non-humorous about how big cities are very vulnerable and that those who can afford to do so should have somewhere to live far away from them. It's worth pointing out that he has taken his own advice and lives in Chiang Mai, northern Thailand - and close to borders with several other countries.
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.
Sunday, June 06, 2010
Another expert predicting sharp market falls
Bob Janjuah of RBS is talking about the S&P 500 halving from its current level - over 1,700 - to somewhere in the 800s. If this is reflected in the Dow then the Dow will do what (in Dec 2008) I suggested it might, i.e. fall to around 4,000 points.
The interviewer describes Janjuah as an uber-bear, but in fact some other commentators have said the same for quite some time, and it's not even the most pessimistic figure I've seen. Though if and when it comes, the index may have to be interpreted in the light of inflation - and what the true inflation rate really is, is another issue.
Given this scenario, Janjuah says he is interested in gold, "value" (income-producing) stocks of large, financially solvent companies, and emerging market equities.
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 interviewer describes Janjuah as an uber-bear, but in fact some other commentators have said the same for quite some time, and it's not even the most pessimistic figure I've seen. Though if and when it comes, the index may have to be interpreted in the light of inflation - and what the true inflation rate really is, is another issue.
Given this scenario, Janjuah says he is interested in gold, "value" (income-producing) stocks of large, financially solvent companies, and emerging market equities.
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.
Tuesday, May 18, 2010
Is it time to get out of cash?
For a long time - years - I have counselled caution to clients, and thought cash was not a bad place to be. That has been correct for the last decade or so. If you had hopped in and out of the market at just the right times, you might have done very well, but equally you could have lost very heavily. The FTSE still hasn't got near to its peak of 1999, and when you consider inflation, in real terms we are still far below.
But we may be moving on to a new phase. Governments in the USA, the UK and now the European Union have poured quite staggering amounts of cash into the banking systems to prevent their collapse. Some commentators now think that we are heading for an inflationary period that will devalue savers' money (and interest rates on deposits are not matching the official inflation figures).
There is an argument for investing now, not to make a genuine gain, but because over time stocks and shares may not lose as much in real terms as cash at the bank. This is the view of Dr Marc Faber, for example (see excerpts from a recent interview here), even though he believes that the monetary system will eventually collapse (and presumably be replaced by a new currency).
There are other ways to protect against inflation, notably National Savings Index-Linked Certificates, which are backed by the government and will return growth in line with RPI plus 1% per annum or so. We can argue about how exactly inflation is measured - and that is relevant - but their definition of inflation will have to be fairly reasonable, we hope.
More speculative investors may be eyeing gold (which has already quadrupled in price since 2000), silver, oil, agricultural land etc - but commodities are risky and there are already funds investing in these areas with the advantage of borrowing very cheap money, thanks to the state-supported banks.
If you would like personal advice, do please get in touch.
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.
But we may be moving on to a new phase. Governments in the USA, the UK and now the European Union have poured quite staggering amounts of cash into the banking systems to prevent their collapse. Some commentators now think that we are heading for an inflationary period that will devalue savers' money (and interest rates on deposits are not matching the official inflation figures).
There is an argument for investing now, not to make a genuine gain, but because over time stocks and shares may not lose as much in real terms as cash at the bank. This is the view of Dr Marc Faber, for example (see excerpts from a recent interview here), even though he believes that the monetary system will eventually collapse (and presumably be replaced by a new currency).
There are other ways to protect against inflation, notably National Savings Index-Linked Certificates, which are backed by the government and will return growth in line with RPI plus 1% per annum or so. We can argue about how exactly inflation is measured - and that is relevant - but their definition of inflation will have to be fairly reasonable, we hope.
More speculative investors may be eyeing gold (which has already quadrupled in price since 2000), silver, oil, agricultural land etc - but commodities are risky and there are already funds investing in these areas with the advantage of borrowing very cheap money, thanks to the state-supported banks.
If you would like personal advice, do please get in touch.
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.
Monday, May 17, 2010
Can Osborne do it?
The UK's new Chancellor, George Osborne, is committed to finding £6 billion of cuts by the this weekend. That sounds like a lot, but given the scale of the challenge facing the country I think this target is a tiny sop to the markets that showed such concern on Friday (and which failed to recover today).
An economics professor was brought onto BBC News 24 this lunchtime; he pointed out that UK government spending runs at £700 billion per annum and UK GDP is something like £1,500 billion. £6 billion is peanuts, less than 1% of current spending.
A recent OECD study (this link is to John Mauldin's post on "Business Insider") suggests that we need to do far more to stabilise the economy. Even if we set ourselves a leisurely 20 years to bring debt-to-GDP down to 2007 (pre-crisis) levels, Britain would have to make savings of 3.5% of GDP. So using figures already given, I make that £52.5 billion per year.
Government statistics say that median earnings in the public sector in 2009 were £539 per week, or a shade over £28,000 per year. Let's assume that for every pound in pay you need to allow another pound in overheads. So every job cut saves £56,000 per annum. If we want to save 3.5% of GDP, we need to lose over 936,000 jobs.
Actually, it's worse than that, because there's the loss of tax (and NIC) revenue when you make someone unemployed; plus the additional cost of unemployment benefits, probably higher medical costs because of the health impact of joblessness, and so on. So, make that a target of more like 2 million jobs to lose? Especially if, on average, you cut less-well-paid jobs (teaching assistants and so on). That's out of a total of 6 million public sector employees, if you take John Redwood's figure; or 8 million if you take the first comment on that post, by Mark Wadsworth; i.e. a loss of a quarter to a third of the public workforce.
That's if you do it over 20 years. According to the OECD's report, doing it in 10 years would mean savings of 5.8% of GDP; or 10.6% over 5 years. Unimaginable.
Then there's the fact that we're starting from an annual budget deficit, not a balanced budget. Even before the credit crunch, the UK's deficit was running at 2.7% of GDP. According to the post by John Mauldin above, in 2011 the deficit is expected to be 9%!
So, it's just not to come from public sector layoffs alone. And even there, some of the cuts will impact the private sector, e.g. outsourced IT projects in the NHS, the education system and the widely-hated national ID card system.
The Welfare State is going to be hit hard. But how? State Pension Age raised to 70? Family payments for special needs children cut? Unemployment benefit payable for a limited period only, as in the USA (though even there they're having to extend the benefit period on an emergency basis)?
Or will we, despite desperate and hugely unpopular efforts by this new government, eventually end with default on a massive scale, either straightforward or by hyperinflation? Increasingly, this seems a distinct possibility.
I fear that George Osborne's attempts at reassuring the markets will not succeed for long. And if the Opposition makes maximum political capital out of the disaster, quite possibly the voters will reinstate Labour in five years' time, in the hope of mitigating the pain; which, if the next government plays along, may ignite the final financial crisis.
We must hope for the best and support this coalition in what must be far more serious measures than have been telegraphed to us so far.
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.
An economics professor was brought onto BBC News 24 this lunchtime; he pointed out that UK government spending runs at £700 billion per annum and UK GDP is something like £1,500 billion. £6 billion is peanuts, less than 1% of current spending.
A recent OECD study (this link is to John Mauldin's post on "Business Insider") suggests that we need to do far more to stabilise the economy. Even if we set ourselves a leisurely 20 years to bring debt-to-GDP down to 2007 (pre-crisis) levels, Britain would have to make savings of 3.5% of GDP. So using figures already given, I make that £52.5 billion per year.
Government statistics say that median earnings in the public sector in 2009 were £539 per week, or a shade over £28,000 per year. Let's assume that for every pound in pay you need to allow another pound in overheads. So every job cut saves £56,000 per annum. If we want to save 3.5% of GDP, we need to lose over 936,000 jobs.
Actually, it's worse than that, because there's the loss of tax (and NIC) revenue when you make someone unemployed; plus the additional cost of unemployment benefits, probably higher medical costs because of the health impact of joblessness, and so on. So, make that a target of more like 2 million jobs to lose? Especially if, on average, you cut less-well-paid jobs (teaching assistants and so on). That's out of a total of 6 million public sector employees, if you take John Redwood's figure; or 8 million if you take the first comment on that post, by Mark Wadsworth; i.e. a loss of a quarter to a third of the public workforce.
That's if you do it over 20 years. According to the OECD's report, doing it in 10 years would mean savings of 5.8% of GDP; or 10.6% over 5 years. Unimaginable.
Then there's the fact that we're starting from an annual budget deficit, not a balanced budget. Even before the credit crunch, the UK's deficit was running at 2.7% of GDP. According to the post by John Mauldin above, in 2011 the deficit is expected to be 9%!
So, it's just not to come from public sector layoffs alone. And even there, some of the cuts will impact the private sector, e.g. outsourced IT projects in the NHS, the education system and the widely-hated national ID card system.
The Welfare State is going to be hit hard. But how? State Pension Age raised to 70? Family payments for special needs children cut? Unemployment benefit payable for a limited period only, as in the USA (though even there they're having to extend the benefit period on an emergency basis)?
Or will we, despite desperate and hugely unpopular efforts by this new government, eventually end with default on a massive scale, either straightforward or by hyperinflation? Increasingly, this seems a distinct possibility.
I fear that George Osborne's attempts at reassuring the markets will not succeed for long. And if the Opposition makes maximum political capital out of the disaster, quite possibly the voters will reinstate Labour in five years' time, in the hope of mitigating the pain; which, if the next government plays along, may ignite the final financial crisis.
We must hope for the best and support this coalition in what must be far more serious measures than have been telegraphed to us so far.
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.
Debt, inflation and the looming currency crisis
This post has been copied from the Broad Oak Blog (see also sidebar on right). I think I'm getting to the point where it's all been said and like Wolfie, maybe I should stop and take care of my own situation as best I can. I shall continue to post from time to time on the Broad Oak Blog, focussing on financial matters for the benefit of clients. Otherwise, I shall read others' blogs and websites - but try to keep quiet, apart from the odd comment.
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The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.
This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.
Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.
Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.
If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.
Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:
"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.
"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)
Pictorially, Schwab's figures would look like this:
Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!
Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:
In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.
The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.
The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.
The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.
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 terrifying truth about debt - and inflation
The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.
This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.
Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.
Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.
If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.
Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:
"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.
"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)
Pictorially, Schwab's figures would look like this:
Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!
Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:
In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.
The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.
The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.
The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.
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.
Wednesday, May 12, 2010
Tuesday, May 11, 2010
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