Poverty in the UK

The definition of poverty in the UK is a complex issue and if you don’t believe me read 

https://fullfact.org/economy/poverty-uk-guide-facts-and-figures/

Or

http://www.ifs.org.uk/docs/MCPR_RJ.pdf#page=4

However this graph probably paints an accurate picture:

What this shows is that in the first five (youngest) age groups poverty has increased in the last ten years. Overall there are now over 13 million people in poverty in the UK.

The reason that people under 60 are becoming poorer is because those earning wages (or who are salaried) have seen wages stagnate since the crash of 2008, but those over 60 who are more likely to hold assets (like a mortgage free house) and asset prices are booming.

See this article for detailed explanation:

 http://uk.businessinsider.com/uk-wages-gdp-and-inequality-2016-3

This is the story of the world economy.  Since the crash the rich have become richer and the rest have become poorer.

The real problem with this is that in other times of financial troubles have tended to be circular and a bust is followed by a boom.

But today there is no sign of a new boom 8 years after the bust and the usual economic stimulators like low interest rates (cheap money) have had no effect.

In fact the policies of the US Federal Bank, the Bank of England, the ECB and the Bank of Japan, have exacerbated the problem. Between them these four central banks have created about $7 trillion dollars of new money (Quantitative Easing) without any significant world economic growth and it seems most of this money has inflated asset prices worldwide.  

See:

https://trendshare.org/how-to-invest/what-did-quantitative-easing-do-to-the-stock-market

So what is the answer to these problems? 

If it were up to me I know that I would not seek advice from any current politician or central banker because it is they who have led us here. We need a fresh start. 

Cash is King – long live the King.

Denmark is to become a cashless society in 2016, Sweden also has plans to go that way and today Norway’s second biggest bank  has announced it will no longer accept cash.

This follows on from this recent article in the FT: The case for retiring another ‘barbarous relic’

Should we just accept that cash has had its day and wave it farewell? I do not think so – and here is why.

The main reason is very simple.  Physical money is created in the UK on behalf of the Bank of England and sold by the Bank of England to other banks at face value.  This means that every pound that you draw at the cash machine has cost a bank £1. But this cash only accounts for 3 to 4% of the money supply, the rest is electronic money i.e. non physical. All electronic money is created when banks make loans, banks do not lend their own or customers’ money, they create it.

So, to the banks, cash costs money but electronic money is free.  Therefore when cash is eliminated banks will make even more money as they will no longer have to pay for cash. So the only commercial organisations which can create their primary resource for free and then charge other people to use it will get even richer.

But there is another less obvious reason why banks want to get rid of cash. Some countries are issuing debt at negative interest rates (this include Germany, Italy and surprise, surprise Denmark and Sweden). This means that to finance spending, the governments offer bonds that the investor has to pay to hold. This is because in the current economic wonderland there is a shortage of safe assets and investors are prepared to lose money to hold these “safe” assets.

This negative interest is hard to apply to normal bank deposit accounts because savers will just draw their money out in cash and sit on it, and in these days of zero inflation this means money in banks with negative rates will devalue but cash will not. So the banks answer is to get rid of cash. Or in the example cited in the FT article they could date stamp bank notes and they will devalue over time so after say one month your £5 note will be worth £4.95!!!

So cash should remain king to stop these money bandits in their tracks. Demand that shops keep taking cash and that banks issue and accept cash.

You have been warned. 

When up is down - how capitalism has turned itself on its head

Jim Grant is an economist of the Austrian School and writer, this week he wrote:

 “The modern financial animal is wont to assume that he or she lives in an age of science. Just peruse the economic research that the great central banks produce. Even the titles of the papers are incomprehensible. Surely, the wit of man and woman has conquered the mysteries of money. The truth is we live in an age of pseudoscience. The central banks’ forecasting models have failed to predict the future. Quantitative easing and zero per cent interest rates — policy centrepieces of the post-2008 era — have failed to restore what we used to call prosperity.

Far from dealing in science, central bankers, and, to a degree, investment bankers and security analysts, employ magical thinking. What they have conquered is scepticism.”

Wow! What he is saying is the most powerful people in the financial world do not know what they are doing, but they have succeeded in fooling most people that they do.

Is he right? There is plenty of evidence to say he is. In the UK in the early part of this century the TV was full of ads asking us to take out a second mortgage to “consolidate all your debts into one monthly payment”. After the 2008 crash these ads disappeared, part of the sub-prime disaster that plunged the world into a banking meltdown.

And what was the answer that our financial masters came up with to sort out the banks and the world economy that had been brought down by issuing debt that could not be repaid? Easy create more debt. Except this time the debt is not being issued by banks and financial institutions it is government debt that has to be re-paid, under the current system, by government surpluses i.e. the taxpayer  

In order to run a surplus government revenue must exceed government spending. In the UK in the last 50 years this has happened just six times, a total surplus of £45billion. The total deficit in those years comes to over £1 trillion. The government debt since the 2008 crisis has increased by £800 billion. Given these figures it is easy to see that the debt will never be paid off by running surpluses.

Another way debt has been reduced in the past is by inflation. If I lend you £100 and you promise to pay me back in one year with 5% interest (£105) that sounds good but if inflation is running at 10% per year then you would need to pay me back £110 just to re-pay the capital. So inflation can reduce debt – the problem with government debt is that as inflation rises so does the amount of interest governments have to offer to sell their debt.

Of course there is another way (the government preferred way) to look at national debt. This is to use a percentage of GDP. If I earn £10,000 per year I am going to struggle to pay a loan of £5000 back in 1 year as it is 50% of my income, but if I earn £50,000 then at 10% of my income I could probably pay back that loan back in one year.  So as GDP increases then the national debt is more manageable. The problem with this is, growth in GDP depends on an increase in the amount of money available to be spent into that economy.  And as to increase money supply you must create more debt we are back to square one. 

The debt cannot be re-paid, but we must not say this out loud, instead we must pretend that it is manageable and to keep people from seeing the truth we will impose austerity whilst at the same time making sure the status qou is maintained by rigid control of asset values. 

Jim Grant says later in his article “. Prices should be discovered in the market, not administered by a government”

Essentially in order to properly run a free market capitalist economy then you cannot buck the market, but since the 2008 crash the central bankers have had to control every market (FX, Property, Bonds, Commodities and Equities). Because if left to themselves all the bubbles would burst and prices (and asset values) would plummet.

So essentially we are living in a capitalist utopia that is being run under centralised control rather in the same way as the USSR was all those years ago. With exactly the same result. The proletariat are suffering and are paying for the elite to maintain their lifestyles.

And we all know how that ended. 

Fear of Pigs

There was a pig in the sky yesterday; they saw its high flying act,

The Mail and Express reported it, BBC too so its fact.

And I know cause they said, why it’s all Labour’s fault,

A matter of national security, bringing flying pigs to a halt.

For if left unabated, the end of the world is nigh,

Not to mention price of bacon literally going sky high.

So forget that your wages are falling,

And the rent they’re charging appalling

Your credit card’s taken a mauling,

Soon the bailiff will surely be calling.

We must take this pig issue seriously

It is the biggest most important thing clearly,

So we all voted Tory, that’s it end of story.

Money - the untold story

I have blogged about money before but to me the way money works today is the most amazing confidence trick played out on the unsuspecting public and it bears repeating endlessly until we all decide enough is enough and we do something about it.

So first let me dispel some myths. Which of these statements is true?

1.       Banks lend money from customer’s deposits

2.       The Bank of England directly controls the supply of money into the economy and guarantees the currency (the pound sterling)

3.       If everyone repaid all their debts the economy would be stronger

4.       When governments spend, they are spending money that has been raised in taxes i.e. Taxpayers Money

5.       Governments cannot create money, there is no money tree.

6.       When I deposit money in a bank it is belongs to me but I let the bank use it as long as they give it back when I ask

In fact all the above statements are false.

The true situation is:

1.       Banks create money when they make loans and destroy money when the loan is repaid. However they keep the interest charged. Therefore banks make profits by creating money they don’t have getting you to earn that money to pay back to them so that they then destroy it and charge a you fee for doing so.

2.       The Bank of England issues and controls the amount of cash in the UK economy, but this is only 3% of the total money supply. Banks create money when they lend and can create as much as they like. The Bank of England can take indirect action to try to control the money supply through interest rate policy but this is not always effective.  The Pound Sterling (like all fiat currencies) has value only in so far as people have confidence in it as way of exchanging it for goods and services. It is not tied to a particular value of gold or any other store of value. As anyone knows who travels abroad the pound’s value against other currencies can move up or down quickly and therefore you can never know from one day to the next what it can buy you, therefore there is no guarantee as to its value.

3.       As stated above banks create money when they make loans, and 97% of all money in the world is created in this way. Therefore, effectively, all money is debt. Therefore without debt there would be no growth and the economy would be depressed (i.e. a depression).

4.       Governments spend money that they have borrowed by issuing bonds (taking out loans). All governments do this, taxes are money they recover in order to service the loans (pay the interest) –unlike bank loans Bonds are interest only payments until maturity when the original amount is repaid. Governments tend to roll over (reissue bonds) loans at maturity.

5.       This is a tricky one, governments do not create money in the accepted sense because as we have seen banks create money. However the central banks (which are banks after all) do create money as in Quantitative Easing. The Bank of England, as part of their response to the global financial crisis, created £375 billion under quantitative easing, this money was used to buy government bonds NB these could not be bought directly from the government as international agreements say central banks cannot create money to pay off its own governments debt, so the BOE bought these bonds from the open market but mainly from UK banks. So the Bank of England in theory (as all banks) has to destroy this £375 billion once the bonds mature BUT as has been seen they have continued to create more money as each bond matures so that the level of government debt they hold is roughly constant at £375 billion. This has the effect of cancelling the debt, as the Government never has to repay it. Also the government has agreed with the Bank of England that all interest payments paid to the bank for the bonds it owns will be repaid back to the government thereby creating a magic money tree (the interest on money created from nothing being used to pay down government debt and the QE rollover cancelling debt).

6.       In fact when you deposit money in a bank it belongs to the bank, as a perusal of their terms and conditions will tell you. They do promise to repay on demand BUT as seen in the Cyprus “bail in” when a bank is in trouble deposits can be confiscated to pay “senior” debtors, e.g. shareholders, bondholders and corporate debtors before account holders.

So, we have seen that Banks (including Central Banks) create all money by making loans and without loans there would be no money and no economic growth.

This gives banks an amazing commercial advantage over all of us in that they can choose were the money they create goes. It is no surprise that they use this power to enrich themselves and prefer, on a basis of 70/30, to gives loans (money) to the financial sector (including themselves) over productive industry and individuals. This is why there is so much money (over $700 trillion) tied up in financial derivatives.

It is also why the gap between rich and poor has widened so much, because banks enrich the already rich by granting them loans (creating money for them) which the lenders use to invest in assets that return a profit for them over the medium to long term like property, hedge funds, bonds and other financial derivatives.

QE also benefits those who have the most assets: This can be seen here:

But the salient points are on page 10:

·         “The overall impact of QE on household wealth is likely to have been substantial.”

·         “In practice, the benefits from these wealth effects will accrue to those households holding most financial assets.”

Points 22 and 23 of  “The Distributional Effects of Asset Purchases Bank of England, 12 July 2012”

If you believe like I do that there must be a better way or you think what I have written is not true then I urge you to have a look at this:

I look forward to the day we can change the money system to something that serves the interest of us all not a privileged few. This is a revolution we can achieve that will truly change the world for the better. 

Magna Carta - nothing really changes – where the power lies 1215-2015

Let’s get one thing straight, the Magna Carta signed in 1215 did nothing for the freedoms of the ordinary man. The document was drafted as “the articles of the Barons” and its main proposals were limitations on taxation and other feudal payments to the Crown, with certain forms of feudal taxation requiring baronial consent. It focused on the rights of free men—in particular the barons—and not serfs and unfree labour.

So what it enshrined was that the taxes imposed on the peasants that worked for the Barons would go to the Barons (and not the King) unless the Barons agreed.

The freedom it enshrined was for the Barons to go unfettered about the business of exploitation.

So consider todays news: http://www.independent.co.uk/news/uk/politics/how-hedge-fund-superrich-donated-19m-to-tory-party-10024548.html

The super rich big business leaders are donating huge sums to the party in power, why?

To make sure that they can go unfettered about the business of exploitation.

Nothing changes. 

Sleepwalking into the next World War?

The biggest danger facing the world is not ISIS not Al Queda, or any other religious extremism. The biggest danger to the world is the US Dollar losing its status as the world’s reserve currency.

 The reason this financial foible is so dangerous is that the USA will literally do anything to maintain the status of the US dollar, including going to war.

Why? The USA is currently spending between 30 and 50 percent of the its revenue to service (pay interest on) its enormous debt mountain currently north of $17 trillion. The reason so many investors buy US debt is that the US dollar will always retain its value while the world trades in dollars.  If people started to question the future of the dollar, then US bonds would no longer be so attractive and the US would have to increase rates to sell the debt (that they need to roll-over as existing debt  it matures). If that happens then they will be effectively unable to service the debt and could theoretically default on the debt mountain. Can you imagine the impact on the world if the US defaults, it would make the crisis of 2007/8 look like a picnic in the park.

The USA will never let this happen as their power in the world (and the reason they dominate the world) is financial. Without this financial clout their power would wane quickly. Of course the USA has massive military might. But this is paid for by deficit spending (by borrowing money). If the government found borrowing more difficult the military budget would have to be cut.  This is unthinkable for the commanders of US forces. So the US military has a vested interest in stopping the demise of the dollar.

We do not have to look very far for evidence of the USA’s defence of the dollar’s status. The current sanctions imposed on Russia (supposedly because of their acts in Ukraine) have been designed to have maximum financial impact on Russia. This is because at the BRIC summit last year Putin had the temerity to propose a new “world” bank supported by the BRIC countries that would facilitate trade between them in their own currencies. If Brazil, India, Russia and China start trading amongst themselves and not using the dollar then the start of the dollar’s downfall is assured.

Russia has not responded well to the sanctions and has sought to deal with other countries like Iran, who also are under sanction by USA, making bilateral agreements in local currency. Russia and China have also recently signed such agreements worth hundreds of billions of roubles.

Over time the US’s response is going to get more and more desperate. 

We should all understand the risk that this could eventually lead to a war with Russia.