Saturday, 21 September 2013

Funny money (part 2)

 If you think the statements below sound crazy, it’s because they are! Although these analogies are within a personal context, it’s quite scary to realise that many of these processes are going on in the financial centres of the western world.

Invest in some debt today before it’s too late!

Do the right thing and ask for a bail out. Your country will be proud of you!

A friend of mine owns a local bakery. To grow his income stream he is offering cheap debt coupons with every loaf of wholemeal bread.

I am investing in debt for the economic health of my country.

Yesterday I placed a bet that I will go bankrupt next month. I think this is going to be a nice little earner for me!

You owe it to yourself to max out your credit card. Don’t worry, you will be keeping many people in a job in the process.

Let’s go down to the debt superstore and pick up some junk bonds, they are great value at the moment.

I need to go out and get myself a loan to help me pay the interest on my debts.

I am buying up all the debts of my neighbours. They will spend the new cash on things they don’t need, but hey, it makes them feel better and keeps the system ticking along.

I evaluate myself to be worth £25,000. Based on this calculation I will re-mortgage myself and the newly created mortgage debt will be split into four pieces. These chunks of debt will then be used as Christmas presents to my friends and family.

Monday, 2 September 2013

The human mind is lost in time.

 I frequently travel on trains and I have been observing a peculiar action made by some of my fellow passengers. This action relates to pressing the train door release button when either boarding or disembarking a train at a station.

The train button illuminates and a loud bleeping sound is heard when the door release buttons become activated. It is only at this moment that the train doors will open.

I have noticed that many passengers press the door release button repeatedly before it becomes illuminated and before the loud bleeping starts. Some of these passengers may rarely travel by train and therefore not be aware of how the doors open. However, many are frequent commuters that I see often at the station.

Why would one keep repeatedly pressing the button if they had the knowledge that doing this would not result in the train doors opening any quicker? Maybe they are thinking about something else and are not aware of what they are doing. My reasoning would be that their mind is projecting into the future; they are standing on the station waiting for the door to open but this is not fulfilling so the mind wants to be in future (on the train or at their destination).

The human mind is often obsessed with the future, imagining it as better than or worse than the present moment. This reduces the present moment to an unsatisfactory experience and creates anxiety; you want to be at some future point in time but you are not. My observation with train doors is just one example of this process playing out. This mind dysfunction is causing problems and suffering all over the world in ways that are not so easy to observe.

The truth is that the present moment is all we ever have.

Friday, 23 August 2013

Funny money (part 1)

 If I take out a loan of £10,000 from a bank, that money is created out of nothing. The money is deposited into my account and the bank has a signed agreement which says that I will pay the £10,000 back plus interest. It is an IOU.

Money represents debt not value. Virtually all the money in existence is based on debt. Without any debt there would be no money.

This system of money creation is known as Fractional Reserve Banking. This basically means that banks only keep a small fraction in reserve compared to the amount of debt they have on their balance sheets.

The European Central Bank (ECB) is just one of numerous central banks that have taken unprecedented steps to shore up the western banking system and thus prevent complete collapse.

In the last few years the markets have been reluctant to keep buying the debt (bonds) of Italy and Spain. The borrowing costs for these countries increased significantly.

As the result of this the ECB started to provide loans for these countries in exchange for some of the debt that the markets were unwilling to buy. These low interest loans are known as Long Term Refinancing Operations (LTROs).

During 2011 the ECB started to directly buy the debts of some weaker Eurozone countries. The decision to do this led to the resignation of the ECB’s chief economist.

As you can see from the chart below, the ECB’s balance sheet is expanding rapidly with the debts of Eurozone countries. What is the quality of this debt? Will it ever be repaid?

Thursday, 18 April 2013

Well earned profits?

 The giant US bank, JP Morgan, has just announced record profits of $6,500,000,000 for the first quarter of 2013. This is an astonishing amount of money considering that the US economy is struggling; the growth figure for the last quarter of 2012 was just 0.4%.

The main contributor to these profits was the investment banking division. Yes that’s right, the same area of banking that led to the financial collapse of five years ago. As a consequence of that crash, the US taxpayer bailed out JP Morgan the sum of $25,000,000,000 in 2008.

The other large US banks such as Citigroup and Goldman Sachs have also announced big increases in profits. It seems that the Federal Reserve’s stimulus package of buying $85,000,000,000 worth of ‘assets’ every month is having quite pleasant repercussions on Wall Street.

JP Morgan said that there are signs the US economy is “healthy and getting stronger”. Healthy and getting stronger for who? Elsewhere in the country we learn that there are 47,000,000 people living on food stamps. That’s nearly one in five US citizens and it’s an unprecedented number.

At the beginning of April, the Californian city of Stockton was granted permission to file for Chapter 9 bankruptcy protection. This is the largest US city so far to go bust. Detroit is a much larger city that could be heading the same way.

It seems that the actions of the Federal Reserve since 2008 has created two parallel economies or even realities. The rich are getting richer and the poor are getting poorer.

Saturday, 23 March 2013

Why is there so much ‘spin’ in economic journalism?

 Since the onset of the financial crisis one could be forgiven for getting slightly confused about what is really going on in the economy. Bank bail-outs, house prices, inflation, quantitative easing and the Eurozone debt crisis; there has certainly been much to report.

The fact that there is no longer strong economic growth focuses the attention of different groups within society. These groups seek different outcomes and their perception of what has caused the economic downturn and what needs to be done to put it right, varies significantly. Many journalists ‘spin’ their stories to represent the views of one these groups within society. This is especially common in news reports about the housing market; there is a cognitive bias in order to support vested interests.

Looking at the economic pages of the BBC website recently I noticed conflicting reports on the same subject. On one page there were two articles about the Japanese economy. One headline read, “Signs of a pick-up in Japan’s economy” and the other said, “Japanese economy worse than forecast.” The predictions for growth in the economy over the last few years have been farcical. The IMF, OBR, CBI and others have all consistently downgraded their predictions. Do they not know what they are doing or is their reporting suffering from some kind of cognitive bias?

The truth is that we need to read many economic articles from different sources, some more trusted than others. Instead of our self-grasping mind attaching itself to an ideology, we can take a clearer and more balanced view by trusting our inner wisdom and integrity.

Sunday, 10 February 2013

Should savers do more to help borrowers?

 There are many people in the UK who have, over the last fifteen years, decided to borrow too much money. As the economy has turned sour The Bank of England has tried to help out these over stretched borrowers by keeping the base rate at the historic low of 0.5% for four years. Additionally it has pumped £375,000,000,000 into the ‘economy’ (QE) which has helped to sustain house prices. The UK government has also come to the rescue by providing up to £80,000,000,000 of ‘cheap’ money to banks (FLS) so that they can offer even cheaper mortgages.

Unfortunately the Funding for Lending Scheme has had a negative impact on savers because banks no longer have to rely on attracting depositors. Thanks to low interest rates and FLS the current rate of return being offered on savings products is appalling. Most savings accounts offer a rate which is far below inflation. Effectively savers are losing out on billions of pounds of interest whilst the cost of servicing mortgage debt has been reduced significantly.

As we are ‘all in this together’ I think savers should do even more to help out over-stretched borrowers. Perhaps a proportion of the interest paid on ISA’s could be redirected to mortgage accounts to reduce the cost of borrowing even further. After all it’s not the fault of highly indebted consumers that we are all in this economic mess. They were under pressure to take on more debt by the banks; it was very difficult to say no. The overwhelming desire to compete with the neighbours leads to a re-mortgage, a new car, house extension or exotic holiday. I’m sure many savers feel deep sympathy over borrower’s unfortunate circumstances.

Saturday, 2 February 2013

Wealthy elite to control the London property market?

 Within days of posting my first blog, the London Evening Standard ran a front page headline which read “£100,000 deposit to buy first home”. This astonishing conclusion was the result of research carried out by Oxford Economics who predict that London property prices will just keep on rising and by the year 2020 the average price will be £489,214.

Even if it was possible to amass £100,000 for a deposit, one would still need to obtain a mortgage of nearly £400,000 to buy the ‘average’ house. Given that most lenders have now come to their senses; it is no longer possible to borrow much above four times annual earnings. This means a salary of around £100,000 a year would be required to qualify for the mortgage.

We talk of the human race progressing in many areas but when it comes to something as fundamental as housing we seem to be fast tracking back to the Victorian era; a wealthy property owning elite providing expensive, insecure short term rental accommodation for the rest of us.

The current influx of foreign money and the influence of ‘The City’ is keeping London’s property bubble inflated. All bubbles though, must eventually burst.

Saturday, 19 January 2013

The London wealth gap. A recipe for more unrest?

 I was reading in utter amazement a front page article in the London Evening Standard which reported that three quarters of the first phase of a luxury housing development had been sold in just four days. The prices started at £350,000 for just a studio flat and rose to £6 million for a penthouse. Many of the buyers are from overseas, especially Asia.

How long can the London property bubble be sustained? This is difficult to answer but due to the fact that over half of all property bought in London is by overseas buyers, the current momentum is being driven by the wealth created in growing and emerging markets. The UK and US economies are being kept afloat by unprecedented central bank intervention which is sustaining the wealthy elite.

The gap between rich and poor has always been wide in London but it seems that it is now reaching huge proportions. With the prospect of many more cuts to social welfare, increasing energy bills and increasing food prices; the social unrest that we witnessed in 2011 could seem quite minor in comparison to future displays of discontent. I wonder if all of these overseas property 'investors' realise what they may be letting themselves in for.