Archive for the ‘Politics’ Category

The rich get richer and the poor get poorer. It sucks, but that is the way of the world. At least that is what most of us assume, but data from the ONS out this week suggests this may be wrong.

Since the start of the economic downturn in 2007/8 the richest 20 per cent of households have seen disposable income fall by 6.8 per cent, the poorest 20 per cent have seen income rise by 6.9 per cent.

It is important that we point out what we mean by disposable income at this point – it’s after taxes and benefits. The ONS has included VAT in the equation, by the way.

In 2011/12 the richest 20 per cent – before taxes and benefits – enjoyed income of £78,300, which is 14 times greater than the poorest fifth, which had an average income of £5,400. That is a ratio of 14 to one.

But take into account taxes and benefits and things look different – very different. The top 20 per cent saw disposable income fall to £57,300, while the bottom 20 per cent saw it rise to £15,800. The ratio changes to just four to one.

So what a bunch of socialists the government of the last few years has been. Except they haven’t really.

For one thing, the data does not tell the full story. It does not tell us about average income in the top 1 per cent quartile.

Besides if you drill down, things look different. If you look over a much longer time period, say from 1977, a quite different picture emerges. Since 1977, disposable income for the bottom 20 per cent has risen by 1.93 per cent, and by 2.49 per cent for the top 20 per cent.

There is in any case a more noticeable gap between the top 20 per cent and the rest of the population.

Average disposable income for the second poorest 20 per cent was £21,373 in the last financial year, or 1.35 times more than the first 20 per cent. Average disposable income for the middle 20 per cent was £27,526, or 1.29 times the average for the second poorest. Average disposable income for the second richest 20 per cent was £34,437, or 1.25 times the average for the middle 20 per cent. And average disposable income for the richest 20 per cent was 1.66 times the second richest.

But then again, so what? Don’t the rules of numbers mean that the average of the top 20 per cent will always be much higher than everyone else for the simple reason there is no upper limit to the top 20 per cent. The lowest disposable income can be is zero, the highest is… well, it’s infinite. Instead let’s look at how things have changed.

Equivalised disposable income, by the way, means: “The total income of a household, after tax and other deductions, that is available for spending or saving, divided by the number of household members converted into equalised adults; household members are equalised or made equivalent by weighting each according to their age, using the so-called modified OECD equivalence scale.” See: Glossary: Equivalised disposable income

And by the way just one more point. The proportion of people in the bottom 20 per cent who are retired has fallen over this time period. . This is because retired households have seen incomes growing at a faster rate than those of non-retired households.

© Investment & Business News 2013

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This may come as a shock. But apparently there used to be a system in the UK where if you wanted to send a message to someone, you wrote it down on a piece of paper, put the paper in a flat paper bag known as an envelope, stuck an adhesive picture of the queen in the top right corner of this ‘envelope’, and put it complete with this likeness of the Queen in a big red box.

Some people put other things in the red box, but they were not thought of positively by society. And then, something miraculous occurred; this envelope appeared on the door mat of the person for which the message inside was intended a day or two later.

It seems like a primitive custom, but that, according to a research recently made available on Facebook and emailed to journalists, is how things used to be.

And now, a company that operates in this state of the art way of delivering messages is set to be privatised. The Unions say that the Royal Mail is the type of company, offering such an essential service as it does, that should be under state ownership.

The Unions are right. How could we possibly manage without the Royal Mail if it wasn’t for email, Facebook, Twitter, Skype, LinkedIn, oh and DHL and TNT and, well… the list goes on a fair bit.

Delivering messages by the British postal service was once a lynchpin of the British economy, and indeed of the British Empire. Where would Victorian Britain have been without it?

But, and this may come as a shock to some, Queen Victoria is no longer on the throne and these days we have this thing called the Internet. Funnily enough, in this Internet age the Royal Mail has found a new function – namely to be the means by which shoppers and eBay users can have the products that they buy online delivered.

Some of the products shipped over the Internet will be sent that way only on a temporary basis. Love Film is a great user at present, but for how much longer? Given the increasing ease by which we can watch films online whether there will be a need for DVDs delivered by post seems unclear.

The Unions don’t like it, and it may be harsh to say that they need to accept Queen Victoria isn’t the throne anymore, but their concerns are legitimate. But the government has come up with a way to appease workers; 10 per cent of the shares on offer will be given to staff. Unions may try to block the privatisation, but once it has happened they will surely be forced to step back.

The Royal Mail has too many competitors for the Unions to risk weakening it, and the job security of members.
But there are some questions.

Does Royal Mail have an unfair advantage? In much the same way BT used to have (perhaps still does) an unfair advantage in supplying cables to the home (which the competition authorities tried to counteract), the Royal Mail has a distribution monopoly. When was the last time you went to the Post Office to send a parcel and the clerk asked you if would be using the Royal Mail or DHL today?

And then there is timing.

Privatising state companies, such as the Royal Mail and indeed Lloyds Bank and RBS, may well be a good idea. Frankly, the government coffers could do with some extra money. But does that mean the ideal timing is now? It may, but right now the government can raise money easily and cheaply.

The plans to privatise the Royal Mail have nothing to do with whether this is a good time, and a lot to do with where we sit on the political calendar.

Finally, there is a question mark over the belief, commonly held, that governments are lousy at running companies and that the private sector is always best. Maybe the private sector is best, but perhaps not for the reasons generally given. Lots of private firms turn out to be badly run, even more badly run than state owned firms. It is just that such firms go bust. State firms tend to get more subsidies.

See it in terms of evolution.

This works by having lots of different ideas, and selecting only a very small proportion of them. You can’t second guess what evolution will throw up next. The private sector scores over the state sector because it has survivor bias built in. Good businesses evolve. The state sector tries to do things via a kind of intelligent design, and that is what doesn’t work.

© Investment & Business News 2013

Uk Population

Here’s a chart for the UK population as of now with a line for the official projections 10 years hence.

As a tool for prediction this chart can be quite powerful; pictures speak a lot louder than words.  The way to use the chart is to imagine the blue and red lines being pulled across the page as we all move inexorably towards God’s waiting room on the right.

We’ll be pulled past 2 marks on the way. The left block shows where young people (16 – 24) might find themselves becoming employed and paying taxes – remember that 20% don’t though so the ‘new workers’ line is copied and shifted lower.

The next mark, for the retiring age for men, shows an ever increasing rate of retirees, after a very steep previous 10 years there will be another 7 million arriving during our 10 year look into the future. You might notice an almost mirror image of the lowered ‘new workers’ line but the unemployed are living off the state too, so there is another 1 million to be added to the line on the right if we want to balance workers vs. state supported.

Unfortunately, because the leading edge of retirees points up and the leading edge of new workers points down, things just get worse. While this demonstrates the ex-growth nature of the economy it is reassuring to compare the huge block of substantially employed people and the much smaller wedge shaped block of the already retired.

So it looks a lot less gloomy right now but as our 10 year view unfolds it builds to uncomfortable levels all the way up to and past the baby boomer’s peak in 15 years.

Note how the red projection line slumps after the retirement age. I’d like to think that this is not an early death syndrome but rather an indication that retired people like to head off to countries with blue skies and sunshine. As we have seen, the retiree level is really lower than the new workers level and that’s a significant first; it just gets progressively worse after this as the retirees line builds even steeper and the workers line pulls across a dip. Incidentally there are dips because WW1 and WW2 were one breeding cycle apart (27 years) and the resulting post war pulses have yet to die down.

If you are about 50 now you are at the population peak age. Births subsequently declined for 13 consecutive years, and that was another first, signalling the end of centuries of perpetual population growth. Because accounting practices, pension arrangements, government finance, and much more, all worked because growth conveniently forgave all sorts of silly thinking, there were, and still are, bound to be some serious consequences.  The way the world works has changed forever.

The workings of pension schemes are of particular interest. With perpetual growth there was always a bigger pool of funds to pay out the liabilities so nobody needed to be particularly efficient. That is no longer the case and you can be sure there will be a raft of pension scheme failures.

With such a huge pension liability arriving over the next 15 years the pension funds have to prepare by switching out of equities and into bonds and then progressively the bonds are then sold as net payouts increase. Logically we might expect weak equities and strong bonds eventually followed by weak bonds.  When the bond sell-off stage arrives one wonders how the Government finances will work – who will they sell bonds to then?

An ex growth world has some implications for equities. Shareholders have got used to accepting lower yields in exchange for corporate growth. As soon as the growth stops then a proper yield will be required. As an example a company yielding 2% and going ex-growth might have to yield 4% to remain attractive. So that means the share price would have to halve!  How likely is this scenario?

Well take a supermarket for example. As a footfall company, whose profits are directly linked to the traffic through the door, the impact of an ex-growth population will be severe. Actually the population is not quite ex-growth, it is just slowing down, but even so companies in this category are subject to massive falls as soon as their growth is seen to end. Just to be safe, sell all your growth stocks?

You can see why there was a property boom over recent decades as the only way the available housing stock grew was via owners dying or new houses being built. Looking back it seems so obvious that fewer old people (from a previously smaller population) supplying demand from a much bigger block of house seekers would result in big price rises.

The chart is giving a strong indication of a repeat performance. Note how there is a bulge moving into the first time buyers age groups and then compare that to the lower height of the chart where old people might shuffle off. Demand will clearly outstrip supply for a while and looking forward 10 years this is increased by immigration as can be seen by the way the bulge actually grows as it moves across. The low end of the housing market looks like a good bet and you can expect a rally in the house builders too.

All this is good for the economy with an added twist. The baby boomers already have a house and yet they are about to inherit their parents houses which can easily be sold on at today’s fairly substantial prices; an added boost to the economy for several years to come.

This last point reinforces the idea that retiring couples with windfall cash will head for the sun. That’s bullish for overseas holiday homes so get in while they are depressed.

Any negatives? Well the way the dotted red line sits above the blue line has implications for NHS services over the next 10 years. It doesn’t look much but in percentage terms there is a significant increase with a detrimental age bias to account for too. An already stretched service has a crisis looming.

The big bulge in the new adults group will all be driving cars for the first time; good for the motor industry but bad for traffic jams.

Conclusions:  No great dramas for the next 10 years but this is the lull before the storm. After 15 years the peak of the baby boomers will be at retirement age and from then on it is hard to see how the books stack up unless the, already brimming, country is filled with more foreigners.

The houses to buyers ratio is likely to top out, leading to a sustained bear market in house prices. The stock market will slump horribly as it goes absolutely ex-growth and the pension funds go into net draw down.  The Government will find it hard to fund the state pension burden and increased demands on public services. Borrowing to bridge the gap will be hard as traditional lenders, in the net draw-down scenario, have no need to buy bonds. Interest rates may well climb as a result and then the National debt financing costs spiral up. Pay more, borrow more, pay higher; sounds familiar.

A UK Government default before 2028?  Not so hard to imagine is it?

Data – The Office for National Statistics

Opinion – Patrick O’Connormist

Here are two technical terms, before we get underway: fiscal multiplier and blinkered. A fiscal multiplier simply describes the relationship between government spending and GDP. Blinkered, which was a theory developed by Professor Obvious from the school of common sense, may apply George Osborne.

Here is some simple maths. Let’s say that for every pound the government spends on welfare and department spending, the economy grows by 60p. Let’s say that for every pound spent on infrastructure, the economy expands by one pound. Professor Obvious might suggest the following: spend less on welfare and departmental spending, and use the money saved to boost spending on infrastructure.

If you want to take a view from the ‘School of the Not Quite so Bleeding Obvious’ (SNQBO), then things change. What is true now may not be true tomorrow, next week or in, say, ten years’ time.

It does, however, feel as though the equations described above are roughly right at the moment.

Yesterday the IMF said: “The United Kingdom could boost growth by bringing forward measures already included in its fiscal plan, such as spending on infrastructure and job skills.”

Capital Economics reckons that if the government was to spend £10 billion in this way, it could cancel out the GDP dampening effect of its planned £6 billion cut on welfare and department spending for 2013.

The other benefit of investment into infrastructure, and indeed job skills, is that it can lead to improved productivity, precisely the area where the UK is so weak.

Furthermore, by taking money scheduled for expenditure at a later date, Mr Osborne could implement the IMF recommendations without worsening the UK’s public debt in the long run.

So why not do it?

One reason might be, and excuse the introduction of another technical term, the slippery slope. Osborne may fear that short term one-off initiatives have a habit of becoming entrenched. That is to say that theory might suggest we just need to take the money from planned future expenditure, but when we get to that future date, the government may find that it is still under pressure to spend that money.

The other reason is that Mr Osborne, to use the jargon, is blinkered.

© Investment & Business News 2013

Last year I did a list of each country’s national debt divided by population to see what the next generation might either pay interest on or pay back.

Examples in $1000 per head:

UK 26.5

Ireland 35

Germany 28

France 31

Spain 17.5

Italy 38

Japan 83

USA 29

Canada 37

Norway 39

Australia 11.5

So what you might say? As a percentage of GDP it’s not so much … well that’s got naff all to do with it too unless there is a current a/c surplus … if you cut someone’s hair it adds to GDP but it hardly pays the £26,500 you owe on top of the £10,000 on your credit card.

Obviously, in the UK, with the old folks about to fund the out of work young folks as well as the civil servants, NHS etc (biggest GDP earners presumably and therefore the biggest ‘so what’ in this whole sad tale) this black hole is here to stay for a long time.

To get away from the obvious side of the story let’s have a look at the other side of the loans – the £26,500 each and every one of us had borrowed on their behalf… someone is the lender and so they will either ask for it back one day or extend the loan forever and the borrowers (you) will pay the interest. As the banks already went bust then presumably the debt is met by bond issuance from each government … “wow government – must be safe” bonds of course.

So who owns the bonds? i.e who is hoping to get paid back?  As it’s not countries per se nor banks so much, it must be the pension funds and the pension funds have your money in trust for when you retire. So the money they are going to give to you one day is indirectly the money you already owe ? And in order to realise that money, the pension funds have to redeem the bonds so the government has to find the money to give the pension providers to give to you….. enough of that … the real truth is that the government bought votes by indirectly spending your pension fund over the past few decades. The government borrowed from the very people it was robbing at the time. Many pension plans will have to go pear-shaped… whose will be first?  Do you doubt this? In that case just tell me who is going to produce your £26,500?

Any thoughts out there?

Patrick O’Connormist is this week’s guest contributor to The Money Spy blog

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Nobel Laureate Joseph Stiglitz reckons that US student loans are the next big western economic crisis in the making – the next sub-prime. In the UK, the numbers are not quite so scary, but we do seem to be adopting many of the worst elements of the US economy.

Meanwhile, we keep hearing about kids going to university, and coming back with degrees that are not much use to man nor beast – but they do have lots of debt.

In his book ‘Anti Fragile’, Nassim Taleb (author of ‘The Black Swan’) questioned the link between education and economic success. Taiwan had lower literacy rates than the Philippines before it embarked on its period of growth. South Korea had lower literacy levels than Argentina before its growth era, and before Argentina’s collapse.
When we look at a country’s wealth and compare it with education, we see a connection. Richer countries tend to spend more on education. But which way is the causation? Does education lead to wealth or wealth lead to education?

Taleb reckons that apprentice-type education models are more closely correlated with economic success.

Here is the snag. Higher and further education may not cause GDP to rise, but for individuals there is a link between education and wealth. Countries that offer free advanced education to all tend to see a more evenly spread distribution of income.

Besides, in the era we are set to enter, in which we will see 3D printing, and nanotechnology, many people may have to re-train several times throughout their career. Maybe a good education provides an essential foundation in a world of very rapid change.

© Investment & Business News 2013

It used to be a magic formula. Never mind what is happening in the real world; in industry, in business. Never mind what is happening with wages and productivity. If house prices were rising, households felt as if they were better off, and went out and spent more as a result.

It happened in the UK. It happened in the US. Raghuram Rajan, a former chief economist at the IMF, argued in his book ‘Faultlines’ that rising house prices in the US made up for the growing gap in income distribution. So during a period in which median wages in the US hardly changed, house prices surged on the back of low interest rates, and plentiful supply of credit.

Government backed agencies Freddie Mac and Fannie Mae also helped to ensure that house prices only ever rose, and that consumers – most of whom had forgotten the very concept of savings because it no longer appeared necessary – enjoyed the perception of growing wealth as their home rose in value.

It ended in tears of course. These things do. Maybe it will end in tears again, this time with bond prices, as factors beyond the control of central banks force up inflation and in turn lead to higher real interest rates.

But in the UK, George Osborne came up with a cunning plan in his latest budget. It is called “help to buy” and is there to give first time buyers who can’t rustle up the necessary deposit a lift onto the housing ladder. He is also looking to help existing home owners move up the ladder, too.

It’s a bit like a UK version of Freddie Mac and Fannie Mae, and, of course, if our George can engineer house prices upwards, consumers will feel richer, spend more, and electoral success may belong to the Tories.

Alas, Andrew Brigden, a senior economist at economic consultancy Fathom, does not see it that way. He said: “Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit… Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.” And to that the ‘Daily Mail’ and ‘Daily Express’ exclaimed with delight: “Look!– House prices are set to soar,” they said.

And with that, George Osborne is now preparing to create economic recovery with two new discoveries. Apparently, two plus two equals five, and black is white.

© Investment & Business News 2013