Sunday, December 30, 2012

Harvey and Rabbit

My small dog is an avid television fan and is especially keen on programmes, such as 'The Dog Whisperer.' Meerkats of any shape or size and the movie, 'Ice Age.'

Causing particular excitement this Christmas, is the new TV advertisement by ThinkBox, 'Harvey and Rabbit.' As as a special request, I've embedded it here, so the small furry film critic, presently sitting on my desk and looking out of the window, can watch it on the iPad, which is a whole new experience for her.

Moving on to more serious issues and following-on from yesterday's entry, my daughter asked me recently why Governments can't just print more money to escape a recession. It's an astute question, because of course they do but call it 'quantitative easing' which brings the risk of inflation with it like a plague-infected flea on the back of a rat.



If you ask anyone in the street and many politicians, it's quite likely that they won't recall how we arrived at the mess we are now in and it's all to do with Gold.

Until 1971, the quantity of dollars the US Government placed into circulation was linked to the amount of Gold held in the treasury at Fort Knox; remember James Bond and Mr Goldfinger? Most western governments worked the same way and this was called the 'Bretton Woods' standard and quite simply prevented governments, like our own, from printing currency when they wanted to.

However, in the irresistible race to make government larger, raise money for huge projects and to employ millions of hitherto unemployed people in the public sector, two things happened which led us to the dilemma we face today.

Firstly, government did what it had always done when it couldn't raise money to meet costs through direct taxation, it issued bonds. However, this rapidly became the equivalent of you or I paying for Xmas on our credit cards as old debts were recycled into new ones; almost identical to moving the balance from one big debt, to a new credit card with an introductory and attractive lower rate but over a greater period of time, so you pay more interest in the longer term.

But who pays you might ask and this is when it becomes very clever and explains why the banks are a vital part of our twisted economic ecosystem. The Government issues, let's say £1billion of bonds at 5% interest and sells these to the big banks; exchanging the paper IOU's for hard money the government can spend. The paper is quite worthless unless of course, the Bank of England or any other central bank, then prints the money, which it gives to the private banks in return for the IOU's with interest and this is what happens. If you tried this in the real world you might get arrested for fraud.

So far, so good you might think but the collapse of the Gold Standard removed any restraint on government printing as much money as it wished, with the spectre of the Weimar Republic in Germany in the 1930s, hovering in the background. This is where you and I pay for this conjuring trick, without realising it, because that's how we get inflation. Western government agree on their inflation targets each year to synchronise their currencies to prevent them becoming worthless over time; think of the Zimbabwe dollar as an example of a currency outside the system.

Since 1971, the Pound has lost 90% of its value, in contrast with the Swiss Franc, which is still locked to the Gold their government holds in their Zurich vaults. This means that someone has to pay to pay for the interest each year, this is fundamentally what we call inflation, through a deliberate policy of allowing prices to rise to balance the decline in the value of the currency. And if everyone is in it together, the prospects of any one nation dropping-out of this poker game is rather too frightening to consider when countries like Greece and Spain can no longer pay the interest payments.

Lastly of course, the arrival of New Labour and in particular Prime Ministers Blair and Brown, introduced an even cleverer conjuring trick to fund the runaway expansion of government. This was called 'PFI.' the public finance initiative. It is no different to a really impressive credit card but one with extended payment terms and which isn't controlled by the banks but by private business instead. So if you want to build new schools and hospitals, you do a twenty-five year deal with a big company at eye-watering levels of interest; think of Wonga.com.

You get get all the big projects which Government dreams about on credit, which convinces the voters that the government and in this case Labour, with its creative borrowing tricks going back to Harold Wilson, is wonderful with our taxes and great with its finances. All these vote-catching initiatives are of course mortgaged against the tax-returns of future generations and our grandchildren are saddled with the debts. And there's another problem and that's over time the number of people receiving more in benefits than they contribute in taxes has been rising steadily. These hidden' off books' liabilities are estimated at being worth over 20% of or GDP or £11,330 of debt per household, in addition to the existing £32,000 of 'official debt' left to each home by the last government.

The political argument is a relatively simple one. Conservatives are naturally resistant to borrowing against an uncertain future and the taxes of future generations but this represents a central pillar of Labour's game. This works when economies grow in a predictable fashion and income tax revenues remain sensibly proportionate to expenditure but this hasn't happened for over twenty years now as western economies stagnate and there is little guarantee that future generations will have the economic strength to repay the interest on these huge loans, let alone the capital. This explains why the present government is trying so hard to bring the debt down so fast in such painful austerity measures.

So when I sit across Thanet's council chamber and hear our present Labour administration carping about finance, toffs and 'greedy bankers' I consider that the sad joke is on them, because like some post-modern version of George Orwell's 'Animal farm' they've swallowed the hopeless fiction of the past, pedaled by Ed Balls and worse still perhaps, these same people are following the same dated class war agenda and control our local finances here in Thanet.

"It had become usual to give Napoleon the credit for every successful achievement and every stroke of good fortune. You would often hear one hen remark to another, 'Under the guidance of our Leader, Comrade Napoleon, I have laid five eggs in six days'; or two cows, enjoying a drink at the pool, would exclaim, 'Thanks to the leadership of Comrade Napoleon, how excellent this water tastes!'

13 comments:

Anonymous said...

In church today I heard a lady in the pew next to me
saying a prayer.
It was so sweet and sincere that I just had to share with you.

"Dear Lord,
This has been a tough two or three years.
You have taken my favourite actor Patrick Swayze.
My favourite musician Michael Jackson.
My favourite Blues Singer Amy Winehouse.
My favourite actress Elizabeth Taylor.
And now my favourite singer Whitney Houston.
I just wanted you to know that my favourite politicians are
Ed Milliband, David Cameron, Nick Clegg and Ed Balls."

James Maskell said...

The difficult position for the BoE is to balance off its remit of tackling inflation against the need to create growth, which it has means to help with.

On local finances, is there any indication about how much the failed Director of Transformation might cost the Council?

Simon Moores said...

There's a question. Does Mr Hamburger receive a large portion of fries as a leaving gift?

Richard said...

There once was a village called Midsomer Friedman. They ended bartering and printed currency. (the currency printer was called Cyril).

After a year of trading all villagers declared a profit. The pub, the blacksmith, the brewer, the carpenter, the farmer everyone.

So now they were all worth more money Cyril had to print more so as to increase total currency by the amount of total declared profits.

Brother Simon from the village church was in the pub when someone asked him "Couple of things Simon First does the village economy have growth or inflation and how come Cyril is the richest man in the village ?"

Richard said...

First cow "Thanks to the leadership of Napoleon this water tastes so good. It is the nectar of the gods."

Second cow, "Mostly Mercury ?"

Simon Moores said...

In this example, I would say that profit is simply what the village says it is and remains illusory because it's a closed system. The question is whether the goods being bartered are becoming more expensive now a currency has been introduced and that takes us straight back to Karl Marx!

Richard said...

Suppose the Domesday Normans carry out a village audit five years after the introduction of village currency.

If they have more cows, sheep, farm implements, improved buildings, better crop yields and roughly the same population and no benefits system ... the village economy has grown ?

By the way the Normans find that Cyril has diversified into banking.

Actually you did well there. Good for a man who, by his own admission, cannot relate to helicopter technology and its insights into politics.

Yer cyclic control. When you try to progress you will lurch either to left or right. Gyroscopic precession.

This is a model for politics. The swing left or right when trying to hold a forward centre ground momentum. Precession in politics is the phoney war period before politicans admit we are in fact in recession.

Torque reaction. Yer rudder pedals. That is to control against bad spin. (And to steer)

Collective lever. That is akin to the "We are all in together" spin. Pull that lever up and it acts on all blades equally and we climb. In politics if a tory is genuine about his collective sentiments he has become a commie.

When the collective (correlated throttle etc) force matches the gravity of the total masses we hover. Which is a way of using up the fossil fuel reserves to get nowhere. But there might in the interim be favourable panorama views.

Simon Moores said...

Very good!

Anonymous said...

Simon, You refer to big projects built using credit and convincing the voters that the government is wonderful and our grandchildren being saddled with the debts, but isn't that exactly what you did when you guaranteed your arms length and dodgy Thanet Leisure Force to finance an extravagant swimming pool in Ramsgate with no viewing facilities for the public and no prospect of the scheme ever breaking even. Or was that another instance of you falling for the rubbish dished up by your officers. I hope you are going to find out how much Mr non-transformation, who your great leader engaged, is going to cost us.

Simon Moores said...

Rick.. no RUC and SAS stories please. I've deleted your last comment to avoid going off down the road of Deal barracks bombing et al...

2:12 "your arms length and dodgy Thanet Leisure Force" is a comment that stretches the imagination a little and I'm not quite sure where you are coming from in referring to my "Great Leader?" Do you mean Clive Hart?

Readit said...

I read a Christmas cracker joke which amused my simple brain.

"There are three kinds of people in the world"
"Those that can count and those that can't".

Perhaps the punch line should have read.

"Those that can count and politicians"

Anonymous said...

Simon, Isn't Thanet Leisure Force one of those beasts that don't have to file publicly accessible accounts so we don't know how much they are costing and where the money goes? When the swimming pool deal was done, didn't the Council stand as guarantor for TLF. As for the second point, I don't think Clive Hart had stolen the leadership at the time. Wasn't Mr Non-transformation taken on during your time?

Simon Moores said...

No, this was a very recent appointment. I did not even have time to meet te chap.

As for TLF, I can't recall anything which might warrant scrutiny, then or now. Councillors need to be guided by officer advice in such matters. They are the experts and we ask questions.