Just shut up about interest rates!

…because you don’t really know what you are talking about!

After six years of endless predictions for when interest rates will start to rise, a lot of people are now gradually realising that many economists and central bankers don’t really know what is going on. Banks and investors have been pencilling in rate rises for years.

We have had Forward Guidance from the Bank of England which has proven fairly useless at giving anyone a clue when interest rates will begin to rise. There is always an excuse not to raise rates; inflation is too low, volatility in Chinese equities, a central banker wears a strange tie, etc. Will there ever be a right time?

In the six years that rates have been held at near zero in the UK, US and Europe there has been an additional $57,000,000,000,000 of debt added to the world economy. Debt which can never be repaid. We see bubbles around the world, from property to stocks.

By keeping interest rates so low for so long and injecting trillions of dollars of liquidity into the banking system, central banks have sown the seeds of the next financial meltdown. They seem so out of their depth that they spend their time reacting and adjusting to the rapidly changing developments in the markets and are incapable of making real assertions about the right policies for the future.

In the U.S. the reaction of the markets to positive employment data has been negative. Good news is bad news. This shows how dysfunctional things have become. Banks are addicted to cheap money and the highly leveraged want rates to stay low forever; they know that their debt is unaffordable if rates should return to the long term average.

Recently there has been two conflicting comments from the Bank of England’s Monetary Policy Committee. Kristin Forbes said that if you linger too long in the sun you could get burnt. She was concerned that if rates did not rise soon it could undermine economic growth. Meanwhile Andy Haldane has indicated that the next move for interest rates could be downwards! He is so concerned about another economic crash that he would consider making rates negative and even the abolition of cash to stop people hoarding. Good luck everyone!

RBS - The Rogue Bank of Scotland

 On the 27th February 2014 the Royal Bank of Scotland announced losses of £8,200,000,000 for 2013. This brings total losses since 2008 to £46,000,000,000 which is more than the £45 billion that the bank received from the taxpayer when it was bailed out in 2008. Money well spent then!

The bank still has £38,000,000,000 of highly toxic loans on its books. There was talk of moving this debt out of the bank and into a so called ‘Bad Bank’ to be looked after by the state. Hold on a minute! RBS is already 82% owed by the taxpayer, what difference does it make?

The scary fact is that RBS has a £1,900,000,000,000 balance sheet that it is trying to unwind. This figure is nearly one and a half times the size of the whole UK economy! It has just recently been announced that RBS directors are sharing a £18,250,000 share deal! RBS is trying to compete in this insane financial world where banks are being kept alive by money printing, but RBS is broken and rotten to the core, it will probably take the whole country down with it.

Meanwhile Fred Goodwin at just the age of 55 is enjoying his £342,500 per annum pension that he has been claiming since 2009. Not a bad reward for steering one of the world’s largest banks into bankruptcy. He is currently working as a charted accountant; I really don’t think that this is a good idea and I fear for the company he is working for.

In my opinion, ‘Fred the Shred’ should have been fed through the shredder! Seriously, why isn’t this guy and his cohorts in prison? Actually, no that would be a further waste of tax payer’s money! I think working in a homeless shelter for a few years on the minimum wage would give Fred the reality check he needs.

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.

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.

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.

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.

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.

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.