Are We Doomed?

On this most solemn Crucifixion day, let me share some sombre stats with you :

 Let me put that in writing :

Gas up 168% in ten years
Electricity 97%
Property 66%
Water 63%
Council tax / rates 59%
Petrol 59%
Food 39%
Rents 28%
Consumer durables -5%
Average income up 38%
CPI inflation up 27%.


I don't know what it tells you, but it tells me that the ONS measures of inflation, as far as the poor are concerned, are woefully inadequate. There's no doubt that 24" monitors (made in the Far East) are a fraction of their 2001 price - but how many of those do you buy a year, compared with the number of trips to the garage or supermarket you make?

With pensioners' savings bringing near-zero incomes, and benefits being restricted to 1% increases for the next three years, in tandem with more talk of energy price rises, people will freeze to death with costs like these.  

The graph is from Tim Morgan's The Perfect Storm (pdf). He's head of research at the broker Tullett Prebon, and his thesis is that

a) barring a nuclear miracle* (fusion or thorium), the era of cheap energy is over
b) the end of cheap energy = end of growth
 
c) the West is particularly poorly situated to deal with this because

d) we've outsourced most of our production to the Far East
e) but we've continued our high consumption, which has left us

f) massively indebted, both at the personal and State level - debt which can only be repaid by heroic and unattainable future growth assumptions. In other words, we're doomed.

I'm particularly taken  with Dr Morgan's work because his short term forecasting record is pretty good. In one of this earlier Strategy Reports, Thinking The Unthinkable, he said the government's deficit reduction strategy was doomed to fail :

"We believe that the British economy simply is not capable of growing at anything like the rates which are predicted by the OBR and are critical to the government’s deficit reduction calculus."

His arguments were based on the idea that previous growth had mainly been the result of private borrowing and public spending, both of which had braked sharply, if not gone into reverse. The sectors of the economy which had provided most recent growth were precisely those which the crisis had hit hardest. Another sobering graph :

  
To be fair, this may well have been the story of 1986-2007, or even from 1979. Doing things - up, producing things (except houses, schools, PFI hospitals and office blocks) - down.

I digress. The point is, he was right in his prediction, and his explanation of why Osborne's targets wouldn't be hit was persuasive. So I was naturally receptive to his gloom and doom.

Trouble is, I'm an Eeyore, a sucker for predictions of Armageddon. Laban was a Green before the word was invented, back in the days of Paul Ehrlich's Population Bomb and the Club of Rome's Limits To Growth. (I still believe in their basic theses - though Ehrlich failed to predict the Green Revolution which prevented mass starvation, so his forecasts of hundreds of millions of famine deaths in the 70s and 80s happily failed to materialise - and he looked ridiculous. But .. "the trees do not grow up to the sky".)

So I'm a long term believer in doom and gloom, but we have to live in the present, in the long run we're all dead etc. What's exercising Tim Morgan is not that we'll run out of energy, but that it won't be cheap any more, because of something called EROEI - Energy Returned On Energy Invested.

Eighty years back you could drill in Arabia and for every barrel's worth of energy used to make, transport and power the equipment and the oil produced, you'd get a hundred barrels back - EROEI was 100-1. Forward to the North Sea now, and Dr Morgan believes the ratio may be as low as 5-1 - that the cost of five new barrels of oil is burning an existing one. Lower still for the tar sands of Canada and shale gas (although at that point I have to ask - why is shale gas so cheap in the States? Are the producers losing money on it?).

Now Tim Worstall thinks that EROEI is "nonsense", but I must say I don't find his argument as presented in Forbes very persuasive :

"while the math and physics of ERoEI is just fine, indisputable even, it’s just not a very useful conceit except in certain very limited situations. Basically, what is being said is that as oil gets deeper, more difficult to pump up, perhaps with tar sands we’ve got to use more energy to purify the stuff, then at some point we hit a boundary, a system boundary. We’ll be using more energy to get the oil out than we’ll get energy from the oil we get out."

Dr Morgan just says that energy's going to be very expensive, and that world economic growth has almost exactly paralleled increased energy use. Increased EROEIs will, he says mean that an ever greater proportion of world energy use will be devoted to ... energy extraction, with a consequent decrease in the amount devoted to other activities, like driving to Swansea or turning on the electric fire. 

"It takes 1,000 tonnes of water to grow a tonne of wheat. That water must be fresh water. Producing fresh water requires huge amounts of energy. The Sun does this very nicely for us, evaporating it from the oceans and sending it back down as rain again. Now, think of the energy that is required to evaporate 1,000 tonnes of water…..that’s 1 million kilos at 419 kJ per kilo. 419 million kJ. There’s around 3,000 calories in a kg of wheat. So our tonne of wheat provides us with 3 million calories. 3 million kcal (nutritional calories that is) is 12560400 kJ. A little over 12 million kJ. So, in producing that staff of life, those grains which keep the entire world turning, we use 35 times as much energy as an input as we get as an output. And we’re quite happy with this. We don’t think it odd at all. And we most certainly don’t say that it’s unsustainable because it doesn’t pass the ERoEI calculation.

The reason we’re not worried about it is because we’ve got vast amounts of energy coming to us as sunlight. Huge, massive, great big gobs of it. And we’re entirely happy to use it copiously, waste huge amounts of it, because there is so much. We want that energy in a form that can be used by our bodies and we’re just delighted to waste 97% of the energy in order to get a bit in the form we can use.

ERoEI just isn’t a binding constraint on our system, not at any human scale."

Tim's just describing the Agricultural Revolution of 6,000 years or so ago. But we no longer just want "energy in a form that can be used by our bodies" (and even that energy is now dependent on large secondary fossil fuel inputs - via the fertiliser, the tractor, the harvester, the grain dryer, the bakery, the supermarket). We want lumpy, if not liquid, energy - energy we can cart around as fuel for our cars and aircraft, energy to create electricity to power everything from tablet computers to ski lifts, energy to warm our homes - transportable energy. Apart from nuclear and (in some parts of the world) hydro electricity, our main sources are fossil fuels - a finite resource, that once was cheap to extract, but no longer. The low-hanging energy fruit has gone.



* of course the thorium cavalry may gallop over the hill, but we still can't go on increasing energy use indefinitely. How would we get rid of all the extra heat? I guess the fate of the Martian atmosphere is ever in my mind.       

“Nice Euro you got here. Be a shame if somebody broke it.”

I get the impression the Euro elite, and especially the Germans, are very disappointed with the Greek vote. A Syringia vote would have been the signal for no EU money, bank runs, Euro exit within a few days.

Spain, Portugal, Italy would all get the message loud and clear.

“Nice Euro you got here. Be a shame if somebody broke it.”

Now the Greeks are in for more years of misery and unemployment - and IMHO they'll still end up out of the Euro. The same may well apply to Spain.

The analogy is a girl – as it might be Angela – with a hopelessly dependent boyfriend, Alexis. She doesn’t want to hurt him, but wants to dump him, so treats him badly in the hope he’ll find a pair from somewhere and break it off himself. Better for her, better for his self-respect.

Instead, he takes all the abuse and promises to be a better boy in future. Angela’s heart sinks … she’s still stuck with him…


It would certainly have been “interesting” in a Chinese curse sense had Syringia won. As I understand it from here, Syringia’s policies are

a) stay in the Euro
b) no to the austerity package

People voting for that platform would have been terribly disappointed one way or the other. If b) had been implemented, the plug would be pulled on Greece “pour encourager les autres”.

At the other end of Europe, Mrs Merkel campaigns on

a) no money printing, no German taxpayer subsidising the periphery
b) total commitment to the Euro project

Again, one way or the other voters believing both of those things are going to have a bit of a rude awakening.

Merkel is slowly, by inches, being dragged down the path of currency debasement and inflation, having sworn against it. The German people, having given up the Deutschmark on the understanding that the ECB would never countenance currency debasement and inflation, are also in for a rude awakening. The Euro elite don’t want to go down that path, but they’re running out of options, and Obama and Cameron are telling them “we’ve done it – what’s your problem?”

I personally find the prospect of the German electorate becoming massively disillusioned with their political leadership a lot more scary than a few thousand Greeks throwing things at the police. But then I’d never have thought that the leadership of the British working class would tolerate having their wages and conditions driven down by cheap imported labour, and I was wrong about that.









UPDATE - Jeremy Warner in the Telegraph on what some hedge funds are thinking :

Angela Merkel, the German Chancellor, has said no to virtually every form of debt mutualisation so far proposed. But kicking and screaming, she's in practice already agreed to some – the bail-outs – and if the single currency is to survive in its current form, she'll eventually have to go a lot further. The German Chancellor is something of a tease – she says no until she says yes. Numerous lines in the sand have been drawn only eventually to be surrendered as the crisis intensifies.

"China is a kleptocracy of a scale never seen before in human history "

Hedge fund manager and top financial blogger John Hempton looks at the Chinese economy - basically describing how Chinese workers, forced by demography (one child policy) to save for their old age, and limited by the state in their investment options (to bank accounts with a below-inflation return), are robbed by inflation - the money going at low interest rates (negative real rates) to State Owned Enterprises - which are then looted by the elite.

The Chinese banks are the finest deposit franchises in human history. They can borrow huge amounts at ex-ante negative real returns.

And those deposits are mostly lent to State Owned enterprises.

The SOEs are the center of the Chinese kleptocracy. If you manage your way up the Communist Party of China and you play your politics really well may wind up senior in some State Owned Enterprise. This is your opportunity to loot on a scale unprecedented in human history.

Us Westerners see the skimming arrangements. If you want to sell kit (say high-end railway control equipment) to the Chinese SOE you don't sell it to them. You sell it to an intermediate company who on-sell it in China. From the Western perspective you pay a few percent for access. From the Chinese perspective – this is just a gentle form of looting.

And it is not the only one. The SOEs are looted every way until Tuesday...

A normal business – especially a State Owned dinosaur run by bureaucrats – would collapse under this scale of looting. But here is the key: the Chinese SOEs are financed at negative real rates.

A business – even a badly run business – can stand a lot of looting if it is (a) large and (b) funded at negative real rates.Those negative real rates are only possible because there are copious bank deposits available at negative real rates to State controlled banks.

People saving for their old age, then being robbed by high inflation to enrich a financial elite who benefit from negative real rates of interest? Thank God it couldn't happen here!




UPDATE - NYT.

"... a broad consensus of Chinese economists says the country is overdue for another big push to encourage private enterprise and to foster a shift toward a more consumer-driven economy. The challenge, they say, is turning back China’s domineering state sector. But that seems increasingly unlikely. Publicly controlled enterprises have become increasingly lucrative, generating wealth and privileges for hundreds of thousands of Communist Party members and their families. And in a clear sign of its position, the government has moved to limit public debate on economic policy, shutting out voices for change. "

Spanish Infantry Develop Rocket Arm

Remember Laban's trip to Asturias this time last year ?

"I really am surprised there's not mass civil disobedience. Their 1930s forebears - right or left - wouldn't have stood for it."

And our tour of the industrial valleys ?

As you drive up the AS117 through Langreo to San Martin, you could be in the Swansea Valley or Vale of Neath - in the days when the factories were still open.

It felt like early 60s South Wales - a main road and a railway along the valley, houses clustered above where the valley was wide and crammed in where it wasn't, factories below.

At San Martin, we passed the Pozo Soton coal mine and the Galva Zinc plant. The former is now the centre of what looks like a rerun of the 1984-5 UK miners strike.

Mining has been a key element in the local economy in the provinces of Asturias and Leon for centuries. Many miners fear that government plans to reduce subsidies from 300m euros (£242m; $376m) to 110m euros will doom their industry.

Spanish coal miners armed with homemade rockets and slingshots have clashed with police over the country's austerity measures. They fired on the officers in El Entrego near Oviedo close to the mine 'El Soton' which has been hit by cutbacks in coal subsidies. Strikes, road blockades and mine sit-ins have hit 40 pits as 8,000 workers in northern Spain continued their protests.

(incidentally, I note that the Mail's coverage is much superior to the BBCs, and that you'll search the left Brit blogs in vain for a mention of this story)


Two points. I'm not at all opposed to subsidies in the right place and time. The pre-Euro Spanish government managed to keep the mines going without bankrupting itself. La vrai France, so beloved of the English, the France of small family farms and little towns full of real shops, is a product of tariff and subsidy - and long may it remain so.

And rocketry - those photographs brought back memories of a much more irresponsible Laban, and of "battles" between student houses fought across streets from attic windows. It's surprising how accurate a tube-launched rocket can be - but when launching from indoors the loader also needs to have a paper plate or similar handy, to block the rear of the tube - otherwise the room soon fills with smoke, and the sparks can set things ablaze. Just ask Mario Balotelli. 

Mass Immigration And The Lewis Turning Point

Ambrose Evans-Pritchard ponders the wealth of nations :

For China, the cheap labour era is over. It faces the "Lewis Point" where the limitless supply of migrants from the countryside dries up and urban wages surge.

Pay has already been rising at 16pc to 18pc annually in the Eastern cities for several years, and this is now happening in Chengdu and Chongqing in the heartland.

I'd heard vaguely before of the economist Arthur Lewis, the first black person to win an academic Nobel, and his famous model :

In his story a "capitalist" sector develops by taking labour from a non-capitalist backward "subsistence" sector.

At an early stage of development, there would be available an "unlimited" supply of labour from the subsistence economy which means that the capitalist sector can expand without the need to raise wages. This results in higher returns to capital which are then reinvested in further capital accumulation. In turn, the increase in the capital stock leads the "capitalists" to expand employment by drawing further labor from the subsistence sector. Given the assumptions of the model (for example, that the profits are reinvested and that capital accumulation does not substitute for skilled labor in production), the process becomes self-sustaining and leads to modernization and economic development.

The point at which the excess labor in the subsistence sector is fully absorbed into the modern sector, and where further capital accumulation begins to increase wages, is sometimes called the "Lewisian turning point" (or "Lewis turning point") and has recently gained wide circulation in the context of economic development in China.

So as long as there's a plentiful supply of new labour, our capitalist doesn't need to raise wages. In its original development context, we're talking early-to-mid nineteenth century - the stuff that people like Dickens and later Zola railed against (in Zola's case after it was well on the way out).

By the latter half of the nineteenth century the country had moved to town, working class living standards were rising - and they didn't stop until the 1970s.

Lewis was writing in a 1950s Britain where "Globalisation In One Country" was undreamt of. It didn't occur to him that a wealthy country might start to put in train the reverse process, bringing in millions of poor from all over the world (a process which a change of government shows no sign or intention of stopping) and stopping wage growth in its tracks, before reversing it. Inflation's been over 5% for three years now, wage rises around 1% a year. That's a hefty cut. Asset price inflation - especially housing - has been high for 25 years.

And, as Adam Posen will tell you, it's a lot easier to let inflation lower real wages than "crush" nominal ones.

But unlike China, where the Communist capitalists, having a concept of a nation and a national interest, won't start importing millions of foreigners the moment wages go up, Britain seems likely to see this "un-development model" continue indefinitely. There are only a finite number of peasants in China, and it's a big country. Eventually, if the Communist Party continue their impressive capitalist stewardship, the average Chinese may be comfortably off.

The UK is a very small country, and there are a lot more poor people in the rest of the world. It could be a very long time before the "limitless supply of migrants" dries up and the UK becomes the first world economy to experience a second Lewis point.

Maybe when I mooted the prospect of UK real wages reaching Chinese levels I was being over-optimistic.

More Dreadful Stereotyping

It's not just Andrew Gilligan - here's the Telegraph's Jeremy Warner on yet another looming Argentinian financial crisis (turns out that, like the Greeks, they've been fiddling the figures) :

Argentina's problem is that it remains mired in a politically and economically corrupt past. Until these things change, it will continue to stagger from one crisis to the next, regardless of the exchange rate regime it adopts. Devaluation is no substitute for structural reform. Given the origins of its immigrant population, it is perhaps no surprise that the Argentine economy actually has quite a lot in common with the troublesome periphery of the eurozone. In terms of its problems, it's Italy, or even Greece, magnified several times over.

I see. One set of wops and dagoes is very much like another, eh ? ... Laban takes him to task as I did Mr Gilligan.

Isn't all this stuff just the worst sort of racist stereotyping? The idea that Latins in Argentina are fiscally irresponsible because Latins in Europe are fiscally irresponsible is ridiculous.

Next thing he'll be saying that Swedes in Minnesota are thrifty and hard-working.

Mr Warner, you're an intelligent man. Surely you must have been taught that we are all exactly the same, and that's why we should celebrate our differences?

Eurogeddon or Wishful Thinking ?

Telegraph :

"Suddenly, no-one wants to hold euro denominated assets of any variety, and that includes what had previously been thought the eurozone safe haven of German bunds... All of a sudden, the pound is the European default asset of choice. "

Ah yes. That must be why the Euro's collapsing against sterling. Not.

A Few Thoughts On The Euro Crisis

Just as a communist might argue that "true communism" has never been tried, dismissing the Soviet Union, China et al as flawed implementations that don't invalidate the basic model, you could argue that there's never been such a thing as "true capitalism" or "free market" outside of say the local car boot sale. To a greater or lesser degree governments have always put their oars in, special interests wielded their baleful influence - and individual capitalists done their best to establish monopolies or cartels, destroying the market.

But, at least as far as the post-war period's concerned, all that pales into insignificance compared to today's interventions. For at least the last four years, all investment decisions have turned on what governments will do. As Jonathan Weil put it three years back :

"... the clearest path to making money in the public markets is to know in advance what the government plans to do next ... and when - and then trade on it. Let there be no doubt: Plenty of people with access to such inside information are enriching themselves this way now."

Prime example in the UK - the Bank of England Pension Fund, who moved the bulk of their assets into inflation-proofed securities when they started printing money.

Today's big question - will Germany either

a) print ?
b) bail out Southern Europe ?
c) neither - at which point defaults start, absent
d) Euro-area fiscal union - with Germany running the show hands-on, because while they may trust the Irish, Dutch and Finns, they can't trust the Greeks or the Italians, and maybe even the French ?

Now either a) or b) will see a surge in global stock prices - even though it won't actually address the "structural imbalances" - a PC way of saying that the Germans are German and the Greeks are Greek. It's just kicking the can down the road for another few years - but when have the markets worried about the long term ?

c) will see a collapse of prices, the break up of the eurozone and perhaps 2008 all over again, until the realisation dawns that the sky hasn't actually fallen and that Spain, Italy and Greece are better off with their own currencies (though leaving would be seen in all of those as a national humiliation). But the "imbalances" would at least be fixed.

d) - "now this is the d you can't see, said the cat" - can you really see German civil servants and Bundesbank officials sitting in Greek government offices and out enforcing tax collection ? Not at all sure I can. If anything was likely to cause major friction 'twould be that - and I don't think the Germans want to be Europe's police and civil service. They'd just like the Greeks and Italians - well, to be more like Germans. We can all dream.

And, talking of major friction, I'm yet again impressed by the UK left - for the last 20 years we've been hearing from them how much more sensible and better-organised the Europeans are, and how the awful little Englanders just don't appreciate how much better off we'd be in a closer European embrace.

But now they're warning that if the Euro breaks up, the continent faces descent into war. I heard Richard Horton, editor of the Lancet (of "Everyone Dead in Iraq" fame) on Any Questions (in Ely) a few weeks ago. Asked about the possibility of the Greeks leaving the Euro, he launched a hysterical rant on the subject of 50,000 Jews being deported from Greece during WW2 and implied that a replay was on the cards in the event of a Greek exit. Apparently the lovely Europeans, who we should all strive to emulate, are only restrained by the EU from slaughtering each other ... looks like a late conversion to the Peter Hitchens thesis (written, admittedly, before Britannia went on crack and started working the streets) that "Britain is the only virgin in a continent of rape victims".

To be fair, the left is being given ammunition by a host of Eurocrats fearful for their jobs. I'm not at all surprised that Herman van Rumpy-Pumpy waves the grisly spectre. Where else would he get so much money and power ? But I think the Polish Finance Minister needs to take an aspirin and have a lie-down, rather than warning, as he did last Monday, that Euro breakup would lead to a European war.

Now all the way along Germany's been saying "we will do what we have to do to support the Euro" at the same time as saying "we won't print or bail out". Does not compute.

The conventional wisdom is that the Germans won't print because they're scarred by the memory of Weimar and wheelbarrows, although that took place nearly 90 years ago. Not so, according to a commenter at FT Alphaville.

"the Weimar hyperinflation is often cited as the main reason for Germany's 'obsession' with sound money. But visiting Germany frequently on business and speaking to Germans I doubt that. Most people alive today did not live through that period.

The real reason is that post WW II-Germans got used to their DM as a reliable store of value and kept on doing that with the Euro. Only 40% of Germans are home-owners, as indeed, under a stable currency renting often makes more financial sense. Germans don't invest in the stock market but prudently put their money in cash in a savings account.

Hence, the typical German family is completely unhedged against inflation, and is therefore worried about it.

For the average German who has worked and saved 20 to 30 years, it is actually a better prospect to live through a deflationary depression and have a 30% chance of being out of work as opposed to seeing his life's savings wiped out through currency debasement. That's what's driving German politics, not the Weimar memory."

In the buy now, pay never UK the chancellor can take a political decision to bail out borrowers by printing, to the detriment of savers - because borrowers massively outnumber savers. In Germany the prudent ARE the electorate.

So will Merkel print ? IMHO yes - once a big enough disaster has happened - maybe a Greek default or euro-exit. She'll remember all the promises that were made to the electorate when they lost their beloved DM - then she'll break them.

But that's predicated on the guess that she won't want to be the one bringing the Euro down. And I might be wrong (to be honest, I think that massively ripping off the responsible and sober German electorate is far more dangerous than Greece or Italy defaulting).

Any ideas ?

Cameron vs Merkel

We've seen an interesting spectacle - Chancellor Merkel of Germany lambasting the Greeks and Italians for borrowing and spending too much, and preaching austerity to them.

But now come the French, US and UK, lambasting the Germans for not printing Euros the way the US and UK printed dollars and pounds.

Cameron, representing a highly indebted country with a dreadful balance of payments and a riotous immigrant and underclass population, whose prime export is intelligent natives, will today preach profligacy to the leader of Germany, a nation with none of these problems.

"You want more IMF cash, because you're too squeamish to print? We debauched our currencies - you can damn well debauch yours! And if you don't, there'll be a global depression - and it'll all be Germany's fault!"

Mervflation

RPI inflation hits 5.6%.

And the Bank of England, whose mandate is to keep inflation at no more than 2%, are printing money - because otherwise inflation will be really really low ! But don't worry - it'll be back to 2% soon - Mervyn King says so.

Economist Shaun Richards :

I have looked back at the Bank of England’s past inflation forecasts for today to see how they compare with a level of CPI inflation of 5.2%.

November 2009 1.8%

February 2010 1%

May 2010 1.5%

August 2010 1.5%

February 2011 2%

These are estimates from the mid-range of its fan charts but as you can see any minor error in staring at the chart is dwarfed by the scale of the forecasting incompetence exhibited by the Bank of England. Apparently we are supposed to believe yet again that inflation will fall below target and only this month we required a further £75 billion of Quantitative Easing to stop a deflationary nightmare!

Shameless

"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term"

Mervyn King is shameless. Absolutely shameless. But only someone sure of his political backing could come out with such barefaced lies. He knows George "printing money is the last resort of desperate governments" Osborne is on board.

So the moral hazard of bailing out the banks - not once, but soon twice - is paralleled by the moral hazard of robbing the prudent and pensioners. It's a good job I had no illusions to lose about the Tories - and, as I feared, George Osborne's few sensible ideas before the election were soon forgotten after it.



Labour, 2008. QE1 announced. Mervyn King says there won’t be inflation because of the ‘output gap’ – all those factories running two shifts when they could be running three. BoE Pension Fund moves all its assets into inflation-proofed bonds.

Sterling devalues by getting on for 30% (and the printed money goes into share and commodity prices). This raises inflation dramatically, because most of what we consume, especially commodities, is imported – those factories were non-existent divisions on the BoE map board. Wages are static, because mass immigration means it’s a buyers market for labour*.

With prices rising and wages static, the only way to keep household consumption up is to send the wife out to work or spend on credit. But the wife’s been at work since 1989 – it was the only way you could afford the mortgage – and who’s going to increase their personal debts in this economic climate ?

So consumption falls. Working people are getting poorer at around 5% a year. There’s a small increase in manufacturing for export, but the balance of payments is still massively negative. Retailers suffer, the economy flat-lines.

OMG. The economy is not recovering ! Inexplicable !

Conservative, 2011. QE2 announced. King, abandoning reality completely, says it’s because his magic crystal ball says inflation is going to fall dramatically. Sterling devalues (it’s dropped 10c against the dollar in a couple of days). This raises inflation again, because most of what we consume, especially commodities, is imported.

Wages are still static, because mass immigration is still at near-record levels despite the crisis.

So consumption falls again, as it must.

OMG. The economy is not recovering ! Inexplicable ! Time for QE3 !

Rinse and repeat until UK real wages are at Chinese levels and pensioners are self-immolating in Parliament Square. Where's Fernand Bonnier de La Chapelle when we need him ?







* Marx - "The main purpose of the bourgeois in relation to the worker is, of course, to have the commodity labour as cheaply as possible, which is only possible when the supply of this commodity is as large as possible in relation to the demand for it"

The Spirit of Prophecy

Commenter Ando at FT Alphaville, 20 months back, after QE1 :

Dodge | February 18 1:09pm |

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The BofE will surely have to come up with a better excuse for another dose of QE. They can't say "we're doing more QE because the Government has to borrow so much money", although perhaps that might be more honest...

Ando | February 18 1:18pm

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No, they'll say "the recovery is faltering and the economic situation worse than we thought, so more QE is required to safeguard recovery".

What they won't say is "we used QE to defer enormous amounts of economic pain and it also helpfully assisted the government in financing the deficit, but the trade-off is that all that deferred pain will descend like the wrath of god if we stop, because none of our structural problems, such as an unaffordable public sector and levels of household leverage, have been tackled, so we'll keep trying to defer the pain in the hope things get better on their own somehow. But they won't."

At least Japan had/has household savings to finance themselves, even if it is horrendously circular, and an export-led economy. We're stuffed.

The economy's been fuelled for the last 30 years by easy credit and the associated debt, plus the mass transfer of women into the labour force (as shown in this graphic - I have no doubt the US and British experiences are similar). We're running out of women to transfer (and those we import prefer raising children), and the debt expansion, shock horror, couldn't be sustained indefinitely. Sterling's devalued 30% and wages are static.

Yet apparently it's an absolute disaster that there's no growth. Why aren't we getting "back to normal" ?

Because the "normal" of the last 30 years = debt-fuelled ? And the only people interested in taking on more debt are those who can borrow at 0.5% from the BoE (i.e not me or thee ?).

The crunch could have been very deep, unpleasant, and short - as in Iceland. Instead, it's going to be drawn out over a decade or more, inflationary, and living standards will be continually squeezed.

"I don't know whether to laugh or cry at people's complete lack of financial savvy"

I was looking up some old work notes last night, and with them I found a few old letters - obvious circulars - that I'd failed either to open or throw away. One, dated 2005, was an invitation from a company called Inside Track to attend a free seminar as my first step in becoming a property millionaire :

Start From Scratch - Live on Easy Street Instead of Struggling For a Living!

Dear Friend,

Are you sick of the daily grind? Tired of working hard for little reward and sick of never having enough to make ends meet? At last there is a way out...

Have you noticed how ordinary people are quietly getting wealthy through property? How even your taxi driver and window cleaner mention their 'buy to let flat'? Ever thought "Huh? How did he manage to buy investment property?

They discovered the way out ...

Have you ever felt you were being left behind? Isn't it your turn to get rich?

My name is Jim Moore. Eleven years ago, I was broke, toiling for a pittance, massively in debt (credit cards, bank loans, HP you name it, I had it). I was utterly sick and tired of the daily grind. Sure, my job was okay in parts. I even liked some bits of it, but I knew that I could work there until my dying day and never make any serious money.
Nobody else thought like me.They seemed content to be drifting into old age and poverty. But I was different - I wonder if you are too? Do you think the purpose of life is to slave for 65 years, pay off a mortgage on some pitiful little house and then huddle in front of a 1 - bar electric fire, struggling to make ends meet on a government pension ?

No ?

Neither did I - and swore that I would do something about it. I didn't want fantasy riches. Like you, I'm not a greedy person. Heck, What is the point in rolling in a gleaming heap of gold - more than you can spend in ten lifetimes? No, I didn't want that, But what I did want .... Freedom. Freedom from worrying over money - can I pay this bill, or that debt? I've had that - never again! Now I can pay any bill of any amount instantly it becomes due. That's a great feeling, let me tell you.

I wanted freedom from debt - crippling month on month debt - Visa, bank overdraft, HP interest being piled upon interest, final demands for payment, threats of CCJs. You know the situation, I'm sure. Now I am debt free (apart from commercial loans to fund portions of my property portfolio - those are not the sort of debts I am talking about). I am using the awesome power of OPM - Other People's Money to make myself incredibly wealthy. You could do this with our help.) It is hard to believe that just a few short years ago I was a humble wage slave with zero prospects. Now 1 have transacted millions of pounds worth of property deals and amassed a private fortune. I even buy and sell entire football grounds!

Now I have the car of my dreams, a wonderful private house (worth £1 million+) and all the cash I could ever spend. More importantly, I am FREE free from the daily grind, the commuting, the bosses the mind numbing routine. I 'work' about 3 hours a day (visiting properties, doing deals) and I travel extensively. I have never looked back. Would you? I cannot believe that I sat in that office all those years, taking orders; doing menial, pointless work; watching the clock... and for what? £7 an hour, I seem, to recall! Ha! Recently I made £30,000 for an hour's work (of course, I cannot do that 40 hours a week I wish!) Ten of those is a cool £300,000 in my pocket.

I made my fortune just dealing in property (some of which I have never even seen).

I am living proof that property is the fastest and safest way for the ordinary person to become wealthy. And by 'wealthy' let me state exactly what I mean. I mean at least £1,000,000 in property assets within 3 to 5 years of you starting. And that's just step one, of course. You can go on from there if you want £3 million, £10 million it's up to you. My own goal is £50 million by the time 1 am 50 (£1 million for each year of my life).

Property wealth is not some fantasy. Take a look at The Times list of the 500 richest people. It is boring in its repetitiveness property, property, retail, property, property, property, brewing, properly, leisure, property... you get the idea!

Take a look at property prices over the years. I have shown the graph on the next page. It just keeps going up and up and up... Sure there have been a few minor little dips - hardly what you would call a crash, merely a blip in an ever rising graph. People often say to me - "Jim, haven't prices peaked out? Aren't we in for a crash? I read in the paper that... " Yawn! They said that to me in 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004 and they are still saying it in 2005! Boy, did they miss out.

I don't know whether to laugh or cry at people's complete lack of financial savvy. They are heading for a lifetime of drudgery and lack, and a poverty stricken miserable old age.

Let me ask you some questions: Do you see any of Britain's richest dumping their property portfolios? Uh... no. They are quietly accumulating more. Do you see any crash in house prices, bearing in mind that there is an estimated shortfall of 4 million homes in the UK? Remember what you know about supply and demand - huge demand, little supply means... Price rise. In 1901 there were 4.7 people, per household on average. Now it is 2.1 and falling. People want more space. They want to live alone. They are getting divorced and swapping one home for two.

Property has risen on average 11.3% year on year in the UK since 1948.

I'm sure you know enough about compound interest to realise that 11.3% looks unexciting by itself, but compounded over even a few years can bring very decent gains. (Just £50,000 invested at this rate returns half a million pounds in 20 years!)

I have had people walk out of my workshop and make their first deal within a few days. One man bought a brand new home for which he outlayed the grand total of £350 from his own bank account and then promptly received a £10,000 cash back! He is now on his fifth property.

And this man was a novice before hearing about Inside Track. These were his first property deals. He admits to being nervous doing the first one. He felt like a fish out of water. But after receiving the £ 10,000 cash back, he became a believer. Why not come and learn exactly how ordinary people are getting steadily wealthy by accumulating a tidy property portfolio? These are people with no experience, no training and little or no money (let's face it, it isn't hard to make a million in property if you have half a million sitting in the bank already!).

Look, I do not have the space to convince you here. So what I have done is put together a superb (and what's more FREE) 2 hour session where I will begin to explain these wealth generating principles to you in person. This letter is my personal invitation to you to come along and see for yourself. For the last four years I have been teaching thousands of ordinary people the astonishing money making secrets of residential and commercial property. Secrets which you can apply for yourself. Secrets which can make you independently wealthy. The Inside Track programme (as it is called) has helped many to achieve their financial dreams.

How to retire completely debt free in 3 to 5 years.

How to buy lucrative UK property with little or no deposits.

Simple formulas used by the wealthy to create income.

How to make money from property in good times (easy) AND BAD (even easier!).

Buy as many as you wish and access the very best mortgage rates.

Build and grow a successful rental property portfolio in record time.

Buy property and get paid tax free cash on certain transactions.

Locate the best, most profitable transactions which are never advertised.

Get 'hands on' assistance from top property professionals.

Aside: Perhaps you are wondering why I am happy to pay for this workshop? The answer is simple. We provide in depth property investment education proven to make you wealthy. Only when you start making deals and getting rich do we make a small commission from properties we introduce to you. Take this small percentage on hundreds of deals and it adds up to a sizeable amount. (Obviously you are under no obligation at all to purchase this property, we just think the deals we introduce to clients provide the very best revenue potential, and we'll prove it).That sounds a fair exchange, I hope you will agree. Our knowledge for a small commission when you make a deal. I hope also that has put your mind at rest.

Any averagely bright and hungry person could build a £1 million portfolio, from scratch in five years or less.

What other plans do you have to make £1,000,000 and retire? If you do not do something right now, you will fritter away the next few years and be in exactly the same situation you are in now or worse. Not nice. Not nice at all.

Finally, let me ask you a question. Are you going to carry on exactly as you have for the last five years? Or are you going to seize control of your destiny, right now, today? The cost is trivial (travel expenses plus some of your time) so if you don't do it now, 1 think it is fair to say you never will. As this is a free introductory workshop, the places tend to be grabbed fairly quickly so please call right now to reserve your place.

Years ago, I came to a crossroads like this. I chose the right path - the one that led me to the good life. Why not give yourself the same break?

Best regards

Jim Moore
CHAIRMAN

I looked at this and thought - I bet a pound to a pinch of poo that they're bust - and that there are a lot of unhappy (and poorer) wannabe millionaires.

Yes, they were bust (humble wage slave Jim failed to mention above the multi-million pound bankruptcy of a previous venture, L'Arome) - and yes, there are indeed some unhappy clients. It's bad enough borrowing to bet on price rises on off-plan (i.e. you buy before they're built) city flats - let alone Spanish property.

After hearing that buying property could help them wipe out their mortgage before they retired and attracted by claims that Spanish property prices were set to rise by 30% a year, the couple signed up to buy an offplan three-bedroom house for €253,000 (£171,000). The deal was struck by mortgage broker Anson Bailey, say Steve and Cate. Its representative then persuaded them to buy a second off-plan three-bedroom house for €230,000. They planned to sell both homes before they were completed. The 30% deposits were financed by switching the couple's £65,000 repayment mortgage on their four-bedroom house in Telford, Shropshire, to interest only and raising it to £162,000.

Oh dear.

Inside Track received 10% of the sales price from the developer.

Inside Track indeed.

They got the money for one house refunded after it was sold to someone else and they were offered a poorer replacement.

But the Biddles have been saddled with the second property, which they have been unable to sell despite all the assurances. As a result, they have a Spanish interest-only mortgage for €190,000 while the mortgage on their Telford home, where they have lived for 14 years, stands at £112,000 after the refund of the deposit on the first property. The couple had owed £65,000 on their UK house before buying the Spanish properties.

Ho hum. I guess a man sees what he wants to see and disregards the rest when it comes to deals like this. Doesn't anyone ask why, if property dealing is so lucrative (and it has been, for many people - right up until the time when it wasn't), and you have inside contacts that can find the best deals, you should want to share it with the world, even for a fee ? The answer I guess is that if you get the fees and a cut of each sale, you can make money without putting any capital at risk. That's you the introducer, not you the punter, of course.

Still, you can't keep a humble wage-slave down - remember how it was EVEN EASIER to make money from property in bad times ? - Jim Moore is back with a new venture - IAP Global.

IAP Global's presenter Kevin O'Connor addressed a room of 50 investors, most of whom were respectable middle-class professionals. He didn't waste any time explaining the nature of the opportunity on offer.

"Distress is the reason we're here," he said. "The developer is being pressured by the bank. If he wants to get out, we're happy to deal with him. We then negotiate a discount for you."

Claiming that IAP Global sources property from "distressed developers and individual landlords" who are desperate to sell, a minimum of £25,000 "instant equity" is reflected in the price. He goes on to explain: "If you walked into an estate agents and were talking about £100,000 for a property, we'd get it for £75,000."

Hmm. This appears to be Inside Track in reverse. I wonder if by any chance they get a cut of the price ? And I wonder how you could put together a list of distressed individual landlords, desperate to sell ?

Would it - could it ? - bear any resemblance to the Inside Track client list ?

It has to be said that the Inside Track sell was good - hitting just the right note about being able to pay the bills. My degenerate (and poor) youth gave me a great distrust of people who write about 'the poor' for a living yet have never in their lives been afraid to open the electric bill.

Indeed the sell was so good that it has not died with Inside Track. Here is the opening, word for word, being used by one Brian Watson to sell his online opportunity (with a company called Global Domains International - caveat emptor).

"This Irish Miracle"

Written in 2006, quoted by Joseph Cotterill (his added links and emboldening, too) at FT Alphaville :

Ireland is no longer on the edge of Europe but is instead an Atlantic bridge. High-tech companies such as Intel, Oracle and Apple have chosen to base their European operations there. I will be asking Google executives today why they set up in Dublin, not London… What has caused this Irish miracle, and how can we in Britain emulate it?

… in a world where cheap, rapid communication means that investment decisions are made on a global basis, capital will go wherever investment is most attractive. Ireland’s business tax rates are only 12.5 per cent, while Britain’s are becoming among the highest in the developed world.

World-class education, high rates of innovation and an attractive climate for investment: these are all elements that have helped to raise productivity in Ireland. It is not the only advanced economy to have achieved this uplift. Last week in Washington the new Chairman of the Federal Reserve, Ben Bernanke, told me about the impact that the sustained increase in productivity growth had made in generating prosperity in the US…

The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.

Good job we're slow learners, or we might be in even worse economic shape, were that possible.

But what manner of man can this be, who hails the tremendous prosperity of the US and Irish economies, and obviously cannot see a cloud in the economic sky? Surely, while a talented polemicist, he should be kept well away from any influence over actual decision-making?

Er... oh. Oh dear, oh dear. Most unfortunate.



UPDATE - to be fair, the SNP's Alex Salmond, currently heading up the Provisional Government of Scotland, went one better, lauding the economies of both Iceland(c) and Ireland(r) as the template for a future independent Scottish economy. Had he got his way, it might have been the shortest independence ever and the greatest disaster for the Scottish economy since the Darien scheme - which led directly to union with England.

Those Student Fee Increases

this blog, last week - against the student tuition fee increases :

"the Gove option will mean that a lot of bright working or lower-middle class kids will look at a potential £60,000 debt and they won't bother - unless they're at Oxbridge or doing a course with a pretty much guaranteed career at the end of it. Outside this small subset of courses, university will be restricted to those whose parents can subsidise them - i.e. the very rich.

That's not all bad - I can see cultural studies departments being disbanded across England and Wales. Economic forces will cut away swathes of courses and institutions, correcting the insane growth of the last 25 years.

But at that kind of cost the idea of education as a good in itself will wither away. Who's going to do archaeology without a private income ?"

I'm pleased to say that Goldsmiths Cultural Studies lecturer - now professor - John Hutnyk has got together with some likeminded souls, and very kindly put together a suggested hitlist of disciplines (and indeed, individuals) for the chop.


As he rightly points out, "Browne’s plans will drive whole fields of knowledge into decline" - such fields of knowledge as :

Race and Cultural Studies

Critical Theory and Philosophical Aesthetics

Contemporary Literature and Culture

Cultural History

Women’s Studies

English and Cultural Studies

Media Arts

Women’s and Gender History

Visual Cultures

Memory Studies ( I forget what that is - LT)

I guess every cloud has a silver lining ...

I(c)reland

How they got there - good piece at WSJ. The banks, the regulators and the big accountants don't come out well.

Mr. Bacon suggested the government buy loans from the banks at discounted prices, effectively handing them cash and easing doubts about their viability. By insisting on steep discounts, Ireland would be less likely to lose money on the purchases. On the flip side, bargain prices would trigger losses at the banks—which the government would probably have to patch with more capital. The taxpayer would foot the bill either way, but at least Ireland would understand how big it was.

The approach "has the merit of certainty and clarity," Mr. Bacon argued. But, he added, it would only work if "the projection of the extent of impairment is accurate in the first place."

It wasn't.

It seems that the Irish government were given incorrect information, not once but several times, on the extent of the financial damage - on the basis of which they guaranteed the banks and most of their debt.

A correspondent writes :

The British magazine Punch used to depict Irish people as thick-browed, ape-like, half-humans, concerned only about one dimensional matters like eating and drinking. We railed against the racist stereotype. We were wrong. We are, after all, a shamelessly base people that clearly cannot sit at the same table as the more civilised peoples of Europe.

Does anyone ever wonder if the endless process of ethnic cleansing we call emigration, might have had a devastating affect on our gene pool, in a form of natural selection? Have we exported the good genes, and retained the genes for selfishness and stupidity?

A view from the ground - an Irish farmer fills in the politics for the Englishman :

Meanwhile, we have a government with a majority of 2. This arithmetic depends on the green party, who don't have a lot to contribute in the way of sound financial management (!) and 2 independents. One of these independents has told the Government that he will only support the budget (December 7th) if it includes MORE money for Kerry, while overall it must cut total public spending by more than 10%. There's a by-election next thursday, which the government will lose. They know this, which is why they delayed holding it for 17 months and were eventually forced to by a legal action brought to the courts by that well known champion of democracy, Sinn Fein. There are 3 more by-elections which are also long overdue for the same reason, and despite the judgement about the first one, the government is using the delays inherent in the court process to delay holding these three till after the budget. The boss, Brian Cowen, has an opinion poll rating of just 11% and a track record as finance minister 2002-2007.

The excellent Kevin Myers doesn't think much of the new Lansdowne Road either :

The combined resources of the GAA, the FAI and the IRFU could have created a 100,000-seater super-stadium. But instead, the lords of IRFU settled for an almost studio-sized ground at their old haunt on Lansdowne Road: with not the 83,000 spectators at the present Croke Park -- which was filled for every home international including Italy -- and certainly not the 100,000 of some future all-code Croke Park, but with just 50,000.

Which other sporting organisation in the entire world has built a stadium that is known to be 30,000 seats below market demand?

There were as it turns out nearly 20,000 empty seats in Cardiff a week ago, not as I guessed 10,000 - and not many more on Saturday, either. Lansdowne Road had 15,000 empty seats.

A/c/t Kevin Myers, the President of the IRFU earns 400,000 Euros a year - which maybe why they think 430 euros (about £320) is a reasonable price for four rugby matches.

Oh Frabjous Day !

Alas, it doesn't feel like May 1997, though. Perhaps it's a good thing. I have no illusions about Cameron to be shattered.

A pity there isn't a Lib Dem Chancellor - that would have bolted them into the Government more securely than anything else - and given the unpleasant things the Chancellor will have to do the Blessed Vincent de Cable would have been a neat choice. As it is, there's still the possibility that they'll be able to distance themselves from all that. Labour will sing 'Tory cuts' from Day One - a Lib Dem in the hot seat would have made that more difficult. And besides, it may not be fair, but George Osborne still looks as if his special subject at school was holding other boys heads down the toilet and pulling the chain.

I approve of them taking on the raising of the income tax threshhold to 10K, but how will that work in practice without giving us all a tax cut ? How do you taper that off without producing higher marginal tax rates for still low-paid people ?

I can see only one answer - a rise in income tax such that, say, someone on average wages or thereabouts pays a little more than now (we have to share the pain), those below pay the same or less tax, those above pay more. And VAT will presumably be 20%.

Don't like it, but Gordon's sums haven't added up since Prudence was put on crack and made to work the streets in about 2000.

Quote Of The Day

Dalrymple muses on public debt and the UK economy :

"London is the Athens of the North"

Not Just America

Edward Harrison at Credit Writedowns :

At the heart of America’s problems is an economic policy which is designed to keep wages down but consumption up. That necessarily means more bubbles, more debt, more wealth and income inequality, and consequently more strife and social unrest when the gravy train ends. You cannot expect to hollow out a country’s manufacturing base, set up a bunch of McJobs to replace it, and still have consumers spend to support the economy.

Well, you can, but it can't go on indefinitely. What's keeping wages down ? A toxic combination of union weakness and mass immigration. What keeps consumption up ? Debt. That scenario sounds like the UK to me.

Quote of the Day

In many senses, this will be a good election to lose. The ravine twixt government expenditure and income is so wide, and the push needed to close the gap so strenuous and painful, that both major parties have decided to leave the kiddies believing in Santa's little Lapland workshop, with its busy elves.

Why make them unhappy at their tender age ?


Martin Wolf in the FT.

The government bears substantial responsibility for the vulnerability of the economy and public finances and is, even now, relying on optimistic assumptions. It is not providing the fiscal insurance needed against worse outcomes. It is obvious why the government has made that choice: it does not want to frighten the horses. But the horses – the British electorate – are deluded. Since the economy is substantially smaller than expected, the size of the state has to follow. The question is how and when...

Letting the electorate into the know is – most politicians agree – not what politics is about. In such a crisis, that is more than a pity; it is a disgrace.