Last Of 2009

 

 

Much debate in recent weeks has focused on bankers bonus payments, secret £62 billion loans to RBS and HBOS and will QE, Quantitative Easing, be extended, stopped or understood?

 Bankers Bonus Payments

 Far too much media space has been covered with this issue, so I will not add to it, except with me commenting… all bankers are not bad and not all bankers are good… but if bailout banks need billion pounds bonuses, fire all the directors with a P60… it’s our money. Remember there would be no bank if it were not for UK Plc plus no bonuses.

 

Secret £62 billion to RBS and HBOS

 

This shows that before 8th August 2007, Senior Scottish Bank Executives made a balls up of running their banks! What is now certain is that it’s likely the gaffer of The Bank of Scotland our Merv, a character, who probably knows too much. Simply, it’s almost certain that if he has lent £62 billion quid of Scottish money to keep the ATM’s working; he has done the same for Barclays, Lloyds etc, etc!

 Mervyn King as I have repeated, is an academic, who in early August ’07, preached about moral hazard, “messing it up” to you and me and played hardball… by doing so, he individually made a difficult situation worse. By not accepting calmly the facts, he punished the idiots, which whilst it made the banks worse, it made the whole banking community lepers.

 

Those punished banks then took their medicine by making you and me suffer. You may not agree with this but the facts speak for themselves.

 

So to QE

 

This is being extended by an extra £25 billion and the biggest beneficiaries are banks, pensions funds and other institutional investors, especially banks.

 

They are using the BOE cash to buy shares, commercial property, fund rights issues by Lloyds TSB and others and push the FTSE to very high levels.

So in effect, King punished the banks, helped them, then realised his punishment had punished UK Plc, i.e. you and me, and therefore set about saying Ooh ps so sorry, “Here’s £200 billion quid to make you feel better”.

 

Of course no one knows or will ever know if QE will work, but the Gold price tells you by its record price, that savvy investors, believe £200 billion of QE, allied with record government borrowing, the same thing really, is going to cause inflation sooner or later.

 

Well if you owed someone £200 billion, wouldn’t you want to (in real terms) find a way to make repaying that money easier?

 

Of course you would?

 

The easiest way to reduce the effect of repaying any loan or mortgage is to encourage inflation, which helps dissolve the real value of the debt.

 Currently we have deflation of –1.5% with interest rates of 0.5%, which means to you and we have real interest rates of +1%.

 Consequently, if interest rates rise to 2.5% and inflation increases to 2.5%, the real effect of those interest rates is zero… the situation ahead of us at some point.

 

Inevitably, once all the money in the system (via QE) starts causing inflation, as it will, interest rates will have to rise, to try and reduce inflation… however, because the UK is buggered, the BOE will not increase interest rates to curb inflation until it is 200% certain the economy has turbo charged growth; the risk of not letting the economy rip roar means, QE has to be extended.

 

Regrettably, there is not enough money in the world to allow QE to go on forever, as a result, the only alterative, on offer for any central bank or governor, is to do everything they can to get the economy going, as the risk of not taking positive action soon enough is stagnation.

 

Japan has spare economic capacity of 10% and has had for years, despite the government having debts of 200% of GDP… deflation and no prospect of the good times again.

 

The UK is well aware of previous mistakes of not acting early enough. At the same time, they are well aware of using inflation to get them out of the s***.

There are plenty of early warnings of rip-roaring inflation ahead of us, house prices up 10%, booming stock markets, booming investment banks profits.

 

Many commentators are suggesting house prices will fall next year, initially they should, but 12 months from now they probably will be up between 5-10%. My view is 10%… not because of lack of supply of houses, but because banks are flush with cash and want to lend it to make profits, so they will fall over themselves to compete in the mortgage market… knowing their security (the houses they mortgage) will be worth more from offer to completion.

 As we discussed before, everything in the UK depends on a healthy housing market and we have to get that market roaring to get consumer confidence up. Unless UK consumers are confident to start spending, we will suffer like Japan for years.

 Fortunately, Merv has worked this out early, and is taking or putting the medicine in place… now!

 Make no mistake the quandary for all of us with savings and borrowings is to work out when the break is released on low interest rates, because eventually interest rates will have to rise.

 

My view is changing but current rates or rates under 1% will be with us for sometime ahead or not until we see the word inflation in every tabloid. At that point, BOE will get interest rates up.

 The real test will be for those who want to sell their houses and bank their equity, because beyond 2013 house prices will by that point be steaming ahead.

 

My current view is consumers are reducing personal debt, (wrongly in my view,) but this is holding back consumption… but only until they realise inflation will be better at solving their debt burden, and then consumer spending will take over.

 

Of course in the future we may well have a new man in 10 Downing Street, but “he is a toff” and never done a dirty job in his life or worked for £5 per hour. He cannot hope to understand how hard life is for working class people.

 When I was a student, I buried the dead in the 1976 heat wave, unblocked sewers, sucked up compacted sceptic tanks, and collected dead dogs from the local vet for incineration

Men and women doing these jobs are screaming, because current economic policy is all against them, as it is for so many.

 Having stated the above, eventually conditions will improve and I fear the government of the day will try and impose measures through taxation to prevent booms in house prices, as well as price and income policies to prevent or control wages. Neither will work because the pressure for higher incomes will be driven by rising prices through inflation. Taxing rapidly increasing housing profits is useless; all that will do is stop the housing market overnight, which will lead to bust again.

 A better and more sustainable policy is to tax the buying and selling of land, as that will reduce land speculation in its tracks or control increases to more modest levels.

 At that moment, houses only need to increase by 4-5% per year to enable the housing market to start functioning efficiently. Will any politician though understand the cure for boom or bust in housing or commercial property is to tax land speculation? Not housing?

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