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Money vs. reality

I've just listened to James Howard Kunstler's latest podcast[1], an interview with "ecological economist" Eric Zencey, whose book “The Other Road To Serfdom”[2]came out late last year. I give below a loose summation and interpretation of what I saw as the main points.

Zencey gives a good definition of sustainability: a system that doesn’t undermine the preconditions of its existence. (I recall a TV programme about farming in Norfolk, where thanks to centuries of intensive arable agriculture and other erosion factors the soil level had dropped so much that an old farm house had to have extra steps added, to let the occupants get up to its front door.)

He says that money is not always a good measure of what is going on, or what is beneficial, in an economy. Money is an abstraction, like a mathematical model, and reality is the energy and matter of the Earth, which we transform to suit ourselves. When fiat money is essentially infinite, but the world is finite, there is the potential for dangerous modelling distortions that will lead to seriously incorrect choices. Zencey like the idea of increasing bank reserve requirements until we get “100% money” (but I fear that might cause a depression that would result in a backlash that casts off all restraint).

GDP is flawed: it measures what he calls the “general commotion of money”, but it has no column for debits. (This reminds me of a presentation I heard at the BAAS[3]in Birmingham in 1977, where an economist noted that eating more sweets and going more often to the dentist both raised GDP. ) Real growth, in the sense of more net benefit to us, is not the same as increased activity. So he calls for the adoption of an alternative yardstick, the Genuine Progress Indicator.[4]

Zencey suggests that instead of the classical –theory tripartite division of economy into land, labour and capital, we should consider four classes of resource or capital: the built infrastructure, plus natural, social and cultural capital. (I emailed Mr Kunstler last month to say that the prospects for the US are still good, since the ratio of population to arable land is higher than anywhere else except Russia. He agreed, but said in effect that US culture has degraded and the infrastructure has seriously weakened, so that Americans are not the same people they were in 1943.)

Our current rate of consumption of “natural capital” is several planets’ worth; we will, he says, eventually get a sustainable system, it’s just a question of what kind, and so our task is to give future generations as many options as possible. The world is not infinite, and our current agricultural system “turns oil into people”. When the oil runs out (and like many other commentators he scorns the “100 years of shale” story) we’re back to the natural resources of 1800 (when the world fed maybe a billion humans) plus whatever modern technology we can employ to make best use of them. Perhaps a sustainable human population of 2 or 3 billion?

Current economic measures generally don’t factor-in ecological degradation, but Zencey notes that the Failed States Index[5]includes an element for demographic pressure on resources. (And not just local-demographic, I’d say, if we think about what’s happened in the Middle East.) One of his chapters is provocatively entitled “Got terrorism? Blame economists”.

But he agrees with Kunstler that the young, much-maligned Millennial generation are hopeful, care, are passionate to use their knowledge to engage with the challenges we’re leaving them.

---

[1] http://kunstler.com/podcast/kunstlercast-246/

[2] http://www.upne.com/1584659617.html

[3] http://en.wikipedia.org/wiki/British_Science_Association

[4] http://en.wikipedia.org/wiki/Genuine_progress_indicator

[5] http://en.wikipedia.org/wiki/Failed_States_Index

All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Big US banks are making people homeless through secondary loansharking

Read this outrageous story from Michael Snyder. JPM and others are buying up local government tax debts, multiplying them with their own charges and forcing homeowners onto the street.

Some people are losing the roof over their heads for a debt that costs no more than a good meal in a restaurant: "big banks and hedge funds keep tacking on interest, penalties and legal fees until the tax bills are many times the size that they originally were."

http://theeconomiccollapseblog.com/archives/how-big-banks-can-steal-your-home-from-you-even-if-your-mortgage-is-totally-paid-off

All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing.

Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

How to price the British housing market?

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

The Economist magazine published an interactive tool at the end of last month, to show what's happened to house prices since 1975. They say that (thanks to Osborne's vote-buying house purchase schemes) "the British market is picking up even though its fundamentals—unlike America’s—suggest continued overvaluation."

This is just fun with statistics. Prices "in real terms" may change when food and fuel get more expensive and "average incomes" ignores widening regional and income-group disparities.

I have also suggested before now that we don't have a housing shortage, we have a housing misallocation. Rents would be lower if we had some properly enforced policy on economic immigration. And there is the vexed question of all those spare bedrooms - "taxing" them hits families that don't have it easy, yet very many old people are clinging on to property that's dauntingly difficult and expensive for them to look after (my wife's grandmother hadn't been able to go upstairs for decades).

But thanks to the fragmented family, people are less likely to take in their elderly relations. I know a doctor who, when a chap wanted to complain about how his old 'un was being looked after, agreed enthusiastically and offered to have the ambulance follow the chap home so she could be safely installed into his loving care; gosh, how fast the complaint went away!

Inflation is a matter of choosing A and B and comparing them. Unless Osborne plans to imitate Rudolf Havenstein then his (and the supposedly independent BoE's) pumping has to stop, probably after the 2015 General Election. My guess is that except for "hot spots", house prices will decline in cash terms, especially as unemployment and underemployment continue to undermine the workforce.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

John Ward: Co-op and TSB customers should seriously consider switching

John Ward looks at the split of TSB from Lloyds Bank and suggests TSB customers should get out - as well as Co-op customers, who look set for a "haircut".

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Italy (sort of) taxes high frequency trading

http://www.capitalbay.com/latest-news/297010-new-principal-suspended-2-days-after-showing-students-scary-terminator-spoof-video-he-made-to-introduce-himself-to-school.html

Italy has today put into effect a tax on high frequency trading (HFT). Aside from raising some desperately-needed revenue, it may help make the financial markets a little less unstable. For as firms develop ever faster computer-based share trading systems, we risk something like the financial version of a "Terminator"-style Skynet catastrophe - except that the machines are merely following the rules shoved into them. "Garbage in, garbage out", as a college friend repeatedly told me 40 years ago. It can certainly be terminal for some:

"In 2003, a US trading firm became insolvent in 16 seconds when an employee inadvertently turned an algorithm [automatic trading program] on. It took the company 47 minutes to realise it had gone bust," said Andrew Haldane of the Bank of England in a speech given in Beijing two years ago (pdf). He also noted that for a brief moment during the "Flash Crash" of 6 May 2010, "Accenture shares traded at 1 cent, and Sotheby’s at $99,999.99. [...] The Flash Crash was a near miss. It taught us something important, if uncomfortable, about our state of knowledge of modern financial markets. Not just that it was imperfect, but that these imperfections may magnify, sending systemic shockwaves. [...] Flash Crashes, like car crashes, may be more severe the greater the velocity."

Zero Hedge had been advocating a "Tobin Tax" on HFT before the Flash Crash happened (Keynes had mooted the same in 1936!) to put what Haldane calls "grit in the wheels." A few months after the crash, financial expert Martin Hutchinson also called for it, and he repeated the call a year later, with a proposed refinement that would see one rate for shares, a smaller one for bonds and a higher one on derivatives.

Mike "Mish" Shedlock, writing in January, disliked the idea altogether, citing the experience of Sweden and claiming that such a tax would merely drive trade away from exchanges where it was introduced. But that may not be so simple: big trading firms pay big money to site their own computers right next to the exchange (it's known as "co-location") and given the incredible speed of cyber-trading, this huddling up confers a microtime gunslinger's advantage that may make the tax worth paying - after all, the co-location rent is a tax they're already more than happy to fork out.

"Mish" also objects that the tax will reduce liquidity and make the market more volatile - but Hutchinson counters: "In periods of turbulence, the liquidity that HFT supplies is quickly withdrawn, as the institutions operating the trading systems shut them off for fear of large and destabilizing losses. Indeed, liquidity that switches off when it is most needed is of no use at all. To the contrary, it destabilizes the market rather than stabilizing it." He adds that HFT is all about trading on unfair terms anyway; it "should qualify as inside information, and thus be illegal."

According to the FT today, Italy has plumped for a mixture of charges focusing on HFT and "side bet" derivatives - but exempting transactions by certain kinds of intermediaries. Tyler Durden at Zero Hedge notes that this is a horse-and-cart-sized hole in the rules and traders will scramble to redefine themselves. But according to Hutchinson, "a Tobin tax could severely hamper [the] trading revenue" of some major banks (Goldman Sachs, Citigroup, Morgan Stanley) as "these banks already are in bad shape"; so the market-maker exemption may not be about favoritism.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Defending savers: an email to Peter Hitchens

Dear Mr Hitchens

I'm glad you're taking up the cudgels for savers. You may (I hope) be interested to know that when NS&I ILSC were first introduced in 1975, both the Government and the Opposition explicitly accepted that there was a moral obligation to savers to protect them from inflation, and with your and the Mail's resources you may be able to get more of the back story.

Here are two relevant Hansard extracts:

________________________________

Hansard record of House of Commons debate, 10 July 1975:

http://hansard.millbanksystems.com/commons/1975/jul/10/savings-index-linked-schemes

Mr. Neubert

Does the Minister accept that the opportunity to invest in inflation-proof schemes is an act of belated social justice to millions of people who have seen their savings irreversibly damaged during the recent rapid rise in the rate of inflation? Will he make recompense to many of them by easing up on his vindictive attacks on the principle of savings embodied in the capital transfer tax and the wealth tax?§Mr. Barnett

The hon. Gentleman has put his supplementary question at the wrong time, because National Savings are rising very well at present. I am sure he will be delighted to hear that. As to what he called "belated social justice", I am sure he will pay due attention to the fact that the scheme was introduced by a Labour Government and not by a Conservative Government.Mr. Nott

Is the Chief Secretary confident that a further extension of index-linked schemes—which are welcome to savers—will not cause a diversion of funds away from deposits with building societies, leading to a rise in the mortgage interest rate?§Mr. Barnett

We are, indeed, aware of those problems. That is precisely why we introduced the scheme in this limited way.

Hansard record of House of Lords debate, 4 November 1975:

http://hansard.millbanksystems.com/lords/1975/nov/04/national-savings-schemes

Lord LEE of NEWTON

My Lords, does my noble friend agree that while the index-linked schemes are extremely good value for money, it would be a good idea—as inflation has been rather rampant—to increase the maximum amount that can be invested in them?§Lord JACQUES

My Lords, the Government have two conflicting obligations. One is an obligation to the taxpayer to buy goods and services as economically as possible, and secondly there are certain social obligations. The Government believe that by the action they have taken they have got the right balance.

_______________________________________

I have been trying for 447 days so far to get my MP (John Hemming) onside and so far I've sensed a definite reluctance to consider this issue important. When I gave him the above extracts (for the third time - I suspect he doesn't read his correspondence with sufficient attention) he very grudgingly said (by email, 22.07.2013) "I will ask [my researcher] to put these points to the minister with the suggestion that a small number of index linked bonds should be made available with a limit as to how much any one person can hold."

__________________________________

A further point:

You may have seen that on 9 August the Treasury announced retrospective changes to NS&I savings products held by savers, some of whom will now be very old and may even depend on them for funding care. The date of the announcement is suspicious, coming as it does in mid-holiday silly-season time. But the date that these changes are due to take effect is even more suspicious: Armistice Day 2013 - a good day to bury bad news?

It occurs to me that this apparently cynical choice of date could be effectively turned against the pocket-robbing spivs of the Government, since it may be possible to track down WW2 survivors who now hold NS&I products - do you think this could be worth a try?

_____________________________________

If you'd care to glance through my attempts to get heard - and read the stupid, guff-filled and irrelevant responses from various Treasury ministers - please see below for the links to my humble amateur blog/magazine:

Part1 - http://broadoakblog.blogspot.co.uk/2013/03/fighting-government-for-savers-and.html

Part 2 - http://broadoakblog.blogspot.co.uk/2013/04/fighting-government-for-savers-and.html

Part 3 - http://broadoakblog.blogspot.co.uk/2013/05/fighting-government-for-savers-and.html

Part 4 - http://broadoakblog.blogspot.co.uk/2013/07/fighting-government-for-savers-and.html

Part 5 - http://broadoakblog.blogspot.co.uk/2013/07/fighting-government-for-savers-and_25.html

NS&I retrospective changes - http://broadoakblog.blogspot.co.uk/2013/08/ns-to-hit-pensioners-on-armistice-day.html

Very best wishes

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

NS&I to hit pensioners on Armistice Day

"Tens of thousands [of] customers with old National Savings & Investment savings accounts will see returns cut in November, it emerged today.

"The changes affect savers who took out an NS&I Savings Certificate before 1996.

"Roughly £745m is held across 967,000 of these accounts, according to NS&I. The government's savings arm told The Telegraph that the return on 89,057 accounts, typically held by older savers, will fall from November 11, 2013."  

http://www.telegraph.co.uk/finance/personalfinance/10233444/NSandI-reduces-rates-again-hitting-90000.html

The Telegraph also says:

"NS&I was created in 1961 as the Post Office Savings Bank to encourage saving and attract deposits for the Treasury to use running the country. These two tenets remain today. The simplest way to raise money is to offer alluring rates to savers. However, NS&I is bound by rules that force it to balance the interests of three parties: the Government, savers, and the banking industry.

"A flood of money going into NS&I coffers has upset this balance and the Government has ordered NS&I to stop taking so much money. As a result it has cut rates and accounts to dissuade savers. The latest version of NS&I Savings Certificates is no longer on sale."

Yet again, the Treasury shows that it has forgotten its own history, or feigns to have done so. As I have shown here and to my MP, both the Government and the Opposition expressly recognised a social obligation to pensioners to protect them from inflation, when Index-Linked Savings Certificates were first introduced in 1975. This was made clear in exchanges in both the Commons and the Lords (please see the link just given, for details).

I don't know whether the choice of Armistice Day for these new changes to take effect, is a deliberate insult to the elderly, some of whom may still recall the last World War, or simply another example of the crass, oblivious obtuseness that I am coming to expect from the finely-honed minds of the Treasury.

At least there is the option for existing holders to switch to new index-linked certificates - but the rest of us are excluded from making fresh purchases. And this still leaves open the question of how RPI may be manipulated in future to minimise returns to savers.

I read some general trends here: the Government is quietly abandoning its duty to keep inflation down, its grip on the public finances is slipping, and the public (rushing to NS&I for safety) can see that the Emperor has no clothes.

One commentator on the Telegraph article (1066goldberg) says buy physical silver; another (oldkingkole) says he doesn't understand the logic; I think I do.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Interest rates will trigger the meltdown - Hugo Salinas Price

In King World News (2 August) Hugo Salinas Price alerts us to the threat of interest rate rises, which he describes as "fatal" and leading to worldwide "massive bankruptcies".

I'd known that derivatives are a huge market; what I hadn't realised was that the overwhelming majority of the contracts are related to interest rates.

The graph below is a visualisation of data from this Wikipedia article on the derivatives market:

Theoretically all the bets net off against each other, but we've seen what happens when a counterparty defaults (Lehman etc). Now consider that the annual GDP of the USA is only 3% of the notional value of interest rate contracts alone.

Frightening.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Coppola: Gold backing would destroy the US dollar

In a new article for Pieria, Frances Coppola argues that fixed currency systems can't cope with rapid change in the balance of international trade. Reverting to the gold standard would force the US to balance its books, but this would slam on the brakes so hard that a depression would ensue and foreign countries would have to find an alternative to the US dollar.

As matters stand, says Martin Armstrong, "The dollar is setting up to be the ONLY viable currency."

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Fighting the Government for savers and against inflation (5)

In which token action is grudgingly promised:

MP to me, 14 July:

I accept that there are issues about access from time to time. I will write to the minister about this. The table office are very picky about how questions are put to ministers and normally edit them.

Would you please give me a reference to the comments from 1975?

Me to MP, same day:

With pleasure:

Hansard record of House of Commons debate, 10 July 1975:

http://hansard.millbanksystems.com/commons/1975/jul/10/savings-index-linked-schemes

Mr. Neubert

Does the Minister accept that the opportunity to invest in inflation-proof schemes is an act of belated social justice to millions of people who have seen their savings irreversibly damaged during the recent rapid rise in the rate of inflation? Will he make recompense to many of them by easing up on his vindictive attacks on the principle of savings embodied in the capital transfer tax and the wealth tax?

§Mr. Barnett

The hon. Gentleman has put his supplementary question at the wrong time, because National Savings are rising very well at present. I am sure he will be delighted to hear that. As to what he called "belated social justice", I am sure he will pay due attention to the fact that the scheme was introduced by a Labour Government and not by a Conservative Government.

Mr. Nott

Is the Chief Secretary confident that a further extension of index-linked schemes—which are welcome to savers—will not cause a diversion of funds away from deposits with building societies, leading to a rise in the mortgage interest rate?

§Mr. Barnett

We are, indeed, aware of those problems. That is precisely why we introduced the scheme in this limited way.

Hansard record of House of Lords debate, 4 November 1975:

http://hansard.millbanksystems.com/lords/1975/nov/04/national-savings-schemes

Lord LEE of NEWTON

My Lords, does my noble friend agree that while the index-linked schemes are extremely good value for money, it would be a good idea—as inflation has been rather rampant—to increase the maximum amount that can be invested in them?

§Lord JACQUES

My Lords, the Government have two conflicting obligations. One is an obligation to the taxpayer to buy goods and services as economically as possible, and secondly there are certain social obligations. The Government believe that by the action they have taken they have got the right balance.

MP to me, 22 July:

I will ask [my researcher] to put these points to the minister with the suggestion that a small number of index linked bonds should be made available with a limit as to how much any one person can hold.

My comments:

"... small number... limit..." - I don't understand the implicit attitude. Mr Hemming has no Treasury or economic brief in this Coalition; why so reluctant to protect savers against theft by inflation?

Also, no reply from the Telegraph journalist or either of the Treasury ministers, whom I Tweeted in Part 4.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Quote of the... day?

".. allow me to remind you of Sibley's Law. Giving capital to a bank (said that worldly banker, Nicholas Sibley) is like giving a gallon of beer to a drunk. You know what will become of it, but you can't know which wall he will choose."

- Christopher Fildes, Spectator magazine, 15 December 2007

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Market timing

Conventionally, we are told that market timing is impossible and that you'll miss short,sharp gains by staying out, etc.

But the market is no longer conventional. The swings have become much greater, there's all sorts of jiggery pokery behind the scenes (how is co-location legal?) and debt is a sword of Damocles over the whole system.

Rob Arnott at PIMCO (htp: Wall Street Ranter) recently contrasted US equities with emerging markets stocks, thus:

Reversion to the long-term US mean would involve a 29% drop  in value - and usually there's a significant overshoot. Let's not forget that the market has halved twice since the year 2000, and the recoveries seem to be down to monetary life support rather than healthy fundamental economic growth.

There's a San Andreas Fault running under this financial edifice. And the US market and economy are so large that a fall there would surely shake the foundations in other parts of the world.

Doubtless there are some traders who will make, are making, fortunes on short-term speculation, but the odds against outsiders managing to do it make the game one not to join.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Fighting the Government for savers and against inflation (4)

We have new, again not wholly satisfactory, replies from the Treasury:

 

MP's covering letter (dated 10 July 2013):

 

"Please see enclosed the response from the treasury regards the two Parliamentary Questions which you requested be put to the Treasury.

 

"I trust that the answers are of interest."

 

My comments:

 

1. One of my questions has been materially altered and this has destroyed a vital point, namely, the moral case for protecting the value of savers' deposits - an argument that was clearly accepted when Index-Linked Savings Certificates were introduced in 1975.

 

2. The answers are certainly "of interest" (I have to hope that the MP is being ironic) as both fail to resolve one or more substantive issues in the questions as originally proposed.

 

FIRST QUESTION

 

My version:

 

"Is the [Minister/PM] aware that National Savings Index-Linked Savings Certificates were introduced in 1975 as a form of social justice to savers affected by inflation, as is made clear by exchanges in this House on 10 July 1975, and will he now instruct NS&I to make them permanently available again without further delay?"

 

Version as put to Minister:

 

"To ask Mr Chancellor of the Exchequer, if he will instruct National Savings and Investments to make National Savings index-linked savings certificates permanently available to savers with immediate effect."

 

Treasury written answer, from Mr Sajid Javid MP (08 July 2013):

 

"National Savings and Investments (NS&I) purpose is to provide cost-effective debt financing to the Government by issuing and selling retail savings and investment products to the public.

 

"In meeting this objective NS&I follow a policy balancing the interests of their customers, the taxpayer and the stability of the wider financial services market. In line with this remit NS&I do not anticipate new sales of Index-Linked Savings Certificates this year."

 

My comments:

 

It is particularly disappointing that the reference to proceedings in Parliament was excised, because they show that the Government and the Opposition accepted the MORAL case for protecting the value of savers' money. I had thought the editing was done by the MP, but he seems to be suggesting that it was done by the officials who handle the questions submitted.

 

I have Tweeted Mr Javid:

 

 

From the Daily Telegraph, 15 March 2010:

 

"NS&I Index-linked Savings Certificates are also known as Inflation-Beating Savings and are designed to give savers a guaranteed tax-free rate of return, higher than the rate of inflation measured by the Retail Prices Index (RPI), if held for the full certificate term.

"The certificates were launched in 1975 and were initially available exclusively to pensioners as a way of protecting their savings against high inflation. In 1981 the exclusivity of the certificates was dropped and they were made available to all savers."

And from Part 1 of this series on my blog, an extract from my email to my MP (03.03.2013):

May I also draw your attention to two passages in Hansard from 1975 that make it perfectly clear that Government recognises the moral obligation to protect the value of savers' money?

Hansard record of House of Commons debate, 10 July 1975:

Mr. Neubert

 

Does the Minister accept that the opportunity to invest in inflation-proof schemes is an act of belated social justice to millions of people who have seen their savings irreversibly damaged during the recent rapid rise in the rate of inflation? Will he make recompense to many of them by easing up on his vindictive attacks on the principle of savings embodied in the capital transfer tax and the wealth tax?

 

§Mr. Barnett

 

The hon. Gentleman has put his supplementary question at the wrong time, because National Savings are rising very well at present. I am sure he will be delighted to hear that. As to what he called "belated social justice", I am sure he will pay due attention to the fact that the scheme was introduced by a Labour Government and not by a Conservative Government.

 

Mr. Nott

 

Is the Chief Secretary confident that a further extension of index-linked schemes—which are welcome to savers—will not cause a diversion of funds away from deposits with building societies, leading to a rise in the mortgage interest rate?

 

§Mr. Barnett

 

We are, indeed, aware of those problems. That is precisely why we introduced the scheme in this limited way.

 

Hansard record of House of Lords debate, 4 November 1975:

Lord LEE of NEWTON

 

My Lords, does my noble friend agree that while the index-linked schemes are extremely good value for money, it would be a good idea—as inflation has been rather rampant—to increase the maximum amount that can be invested in them?

 

§Lord JACQUES

 

My Lords, the Government have two conflicting obligations. One is an obligation to the taxpayer to buy goods and services as economically as possible, and secondly there are certain social obligations. The Government believe that by the action they have taken they have got the right balance.

 

SECOND QUESTION

 

My version:

 

"Will the [Minister/PM] give a guarantee on behalf of the British Government that savings covered by the terms and limits of the Financial Services Compensation Scheme will be fully protected against ad hoc restrictions of access, bank bail-ins and other forms of expropriation or forced conversion?"

Version as put to Minister:

"To ask Mr Chancellor of the Exchequer, whether savings covered by the terms and limits of the Financial Services Compensation Scheme are protected against (a) ad hoc restrictions of access, (b) bank bail-ins and (c) other forms of expropriation or forced conversion."

Treasury written answer, from Mr Greg Clark MP (09 July 2013):

"The Financial Services Compensation Scheme (FSCS) provides protection for deposits up to £85,000 per depositor, per authorised institution."

My comments:

I have tweeted Mr Clark:

We have seen that savers in Cypriot banks originally faced partial loss of even their insured deposits. Now the proposal is to convert some of account amounts above 100k Euro into bank shares, and some of the rest is to be lost or frozen or ineligible to receive interest.

But it doesn't stop at Cyprus. A Russian journalist, Valentin Katasonov, sees this as a global trend towards "Open Bank Reconciliation", and there is now Europe-wide agreement on making not only bondholders but depositors pay the cost, as Bruno Waterfield reported in the Telegraph.

Here in the UK, the Bank of England has set up a "Special Resolution Unit" for failing banks; the SRU Director Andrew Gracie gave a speech to the British Bankers' Association (pdf) in September 2012, outlining what might happen and how it would be carried out and the media coverage appropriately managed. Among the public announcements he envisages (pp. 4-5) are:

"any insured depositors would be fully protected - as is always the case; and [...] the final extent of creditor write-downs, and rates of conversion to equity."

Now, an ideas speech to bankers is not a binding commitment or a statement of official policy. If push comes to shove, can we be absolutely sure that some of our "insured" money won't be frozen, or compulsorily swapped for shares in a bank of established dubious quality? This is why we need very specific assurances - or to get our money out.

If that last sounds alarmist, note the rumour on John Ward's blog, that JP Morgan is now sending people into Portugal to help big investors get their cash out of the country ahead of a bank bail-in there. And Barclays is among several banks recently downgraded by S&P.

The issues may soon turn out to be far more than merely theoretical.

UPDATE

The following email exchange with the MP today may be of interest.

Me: Thank you for your letter and enclosures of 10 July. I assume that your concluding remark about the answers being "of interest" is tinged with irony. I have Tweeted the Treasury ministers concerned to get more relevant, more specific replies.

He: What they are basically saying is that they don't want to issue any more index linked debt at the moment. They are also saying the 85K is safe.

Me: I understand that. Please don't think that you're the only grammar-school-educated boy in South Birmingham. I also have a degree in English from Oxford.

My point - and it would have been clearer if you hadn't edited out one of the most important parts - is that it is not only my view that they are morally obliged to offer index-linked securities, but the view of the Government that introduced them in 1975, and also that of the Opposition at that time.

As to "safety", this too needs clarification. Argentinian depositors' money was safe during the 2001 corralito, but it wasn't accessible.

I am on Day 398 of this enquiry via yourself and think it might be better if we pursued the case in parallel from now on.

FURTHER UPDATE

Let's see if the Press can help. Andrew Oxlade at the Telegraph called for a return of "Thatcher bonds" back in April, now I've Tweeted him:

___________________________________

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

In one picture: what the banks have done to us since the 1980s

Source: Charles Hugh Smith

 

Another corker from independent thinker Charles Hugh Smith today. The graph above shows how the "boom" of the Eighties was a phoney, as were the "recoveries" from the lows of 2003 and 2009. (The latter Nineties I see as partly "real" because of efficiencies and consumer demand created by dramatically increasing computer power and the international and cross-class spread of electronic communication systems.)

 

To me, this demonstrates that it's not a Left versus Right thing; it's about the unholy alliance of bankers and politicians who trade wealth and political power among themselves. In the UK, the British Conservative Party is just as much to blame as the supposed socialists (who oversaw a further deterioration in manufacturing and working-class employment).

 

The question is, can we have preventive reform soon or must we wait for full-scale disaster to force it?

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Killing the small investor

Yesterday at Marylebone railway station, London, I saw a banner poster from Blackrock Investments, urging savers to consider getting out of cash (with the usual perfunctory, statutory warnings about risk).

Yet according to Testosterone Pit (htp: John Ward), the smart money is dumping investments as fast as it can:

“We think it’s a fabulous environment to be selling,” said Leon Black, CEO of PE giant Apollo Global Management. With stock markets having more than doubled since their 2009 lows, average prices for leveraged buyouts have jumped to nine times earnings, he said. His firm had already dumped about $13 billion in assets over the last 15 months. “We’re selling everything that’s not nailed down,” he said.

This reminds me of 1999, when an investment house sent its representatives around to IFA meetings to persuade us to encourage our clients into tech stocks because of the coming second, "super-boom". I smelt a rat and suspected that our mom-and-pop savers were being set up to help large, favoured clients cash out of their positions. 

The stockmarkets (Dow and FTSE) have halved twice since 2000. I had hoped that when the first crash bottomed out (2003) we would be back into a sensible investment environment, and if that had happened I would probably still be in the industry, since I could have squared investment recommendation with my professional conscience. I hadn't reckoned with our wildly irresponsible governments, who flooded the market with cash and created the property bubble, then crashed interest rates and pumped in more cash to support the busted banks.

So, down twice, up twice - and now, possibly, about to go down for the third and final time.

Meanwhile, I have been trying for over a year now to get my MP merely to ask a question in Parliament about the restoration of safe, index-linked investments for ordinary savers. No joy. Apparently we are to be thrown to the wolves.

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Fighting the Government for savers and against inflation (3)

The struggle continues...

No reply to my email of 21 April (see Part 2 of this series) before I sent the following:

Me to MP's researcher, April 27, 2013:

Further to my last email of 6 days ago, perhaps you could spare the time to look at the latest article by Matt Taibbi in Rolling Stone. It may give you some idea of why I now (as a former IFA of 23 years' experience in the financial industry) regard the whole bank and trading shebang as irredeemably systemically corrupt. Any government that wishes to retain its claim to authority needs to protect the life savings of the little people.

http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

Do please let me know how you are getting on with framing appropriate questions as previously discussed.

Best wishes

 

No reply before the following:

 

Me to MP and his researcher, May 08, 2013:

 

Perhaps the following may show why asking about NS&I Index-Linked Savings is important and topical - and getting some mainstream interest and airing. Is there any reason to delay the debate much further?

http://hitchensblog.mailonsunday.co.uk/2013/05/when-money-dies-the-horrors-of-inflation.html

(I read the book myself some time ago.) As Hitchens says, the 1923 Weimar inflation (which my mother's family lived through) is unlikely to be repeated here - but the damage is great even if it happens a little more slowly. 10% inflation for 7 years will halve the value of money.

Should we really leave Parliamentary comment on inflation to Ed Miliband, thus suggesting by implication that the Coalition is unconcerned?

Best wishes

 

Reply from researcher, with copy to MP, May 08, 2013:

 

Apologies for not processing this in the last two weeks – all questions fell at prorogation in April and after I last emailed you it is not likely we would have had a response in time. We have been in recess for the last week in any event where Questions could not be tabled.

We are now able to table a question with the new session opening today – Last time I looked at this I was wondering if you had a more specific question in mind than the general one I gave you on the 12^th March (Below) Which you responded to on the 21^st April after I emailed you again on the 18^th April.

'To ask the Chancellor of the exchequer what steps he has taken or plans to undertake to maintain the value of savings against increased inflation and devaluations of the pound.’

You’ve sent me the below on May 3^rd, it would be helpful if you could clarify if you are worried about individual or also state ‘savings’ – on the second the financial Savings Guarantee Scheme at present does guarantee savings under £85,000 in the event of systemic banking collapse or other smaller bank failure without penalty to the individual or value of the saved amount but the government will only be able to clarify that it has no intention to bring in a new bank bailout ‘tax’ of any kind for sums under that amount and no future government action is bound by a previous one – the government does not take the view, at present at least, that the Proposed (and rejected) tax on savings under or over a protected amount should be taxed in any way, (although it would consider funds over that sum forfeit in the case of bankruptcy, for example) to the best of my knowledge.

1. How to set aside money and preserve its spending value, without being eroded by inflation and taxes and without being forced to accept any kind of investment risk;
 

2. How to be sure that no portion of savings below the deposit insurance ceiling will not be seized in some form of bank bail-in or pseudo-tax, but be payable in the form and to the schedule expected by the saver.

As such I might suggest this amended question as a draft off the top of my head and would welcome any comments or amendments you want to make.

'To ask the Chancellor of the Exchequer what steps he has taken or plans to undertake to maintain the value of savings against increased inflation or devaluations of the pound, if he has given thought to the taxation of savings by the Exchequer in various forms putting off individuals from saving some of their earned income by eroding the investments value, if he shares a concern that efforts to tax the small scale saved income of individuals to rescue financial institutions, such as measures debated by the Cypriot Parliament recently as part of the European Union’s and International Monetary Funds’ bailout terms undermine general confidence and what measures he can or will take to reassure individual savers that their investment will not be used to rescue institutions which have grossly mismanaged their affairs and thus be penalised, via the reduction of the value of their savings, for the mistakes of risk takers on a systemic financial level.’

If we can agree a draft I can get it to the table office as a written question as soon as you are happy and John is comfortable tabling it.

Yours

Me to researcher (copy to MP), May 09, 2013:

Thank you for your response. Again I must say that the issues are sufficiently important to ask orally on the floor of the House, rather than be buried in writing. I have already seen what a written answer from the Treasury is like. Am I mistaken in thinking that oral PMQs and questions to Ministers raise matters in the way that is most likely to result in prompt and effective action?

There are two separate issues and I'd suggest that they be pursued separately. One is inflation, the other is expropriation. The questions need to be pin-sharp specific to prevent wriggle, deflection, partial answers and waffle.

On the first, I think the question should focus on the need to restore NS&I Index-Linked Savings Certificates. Hansard links I gave you earlier showed that protecting the small saver was recognised as a "social obligation" - by both sides of the House - when they were first introduced in 1975.

On the second, you will doubtless know that the first proposal in the Cyprus bank affair was to take money off even those who had less than 100k Euro in their accounts. It doesn't matter whether it's dressed up as a tax, a bail-in or forced conversion to bank shares; up to the insured amount, savers should be able to transfer or extract all their cash. Once that principle is breached, no money in any European bank is safe and that will spell the end of the system as we know it.

A suggestion for (1):

"Is the [Minister/PM] aware that National Savings Index-Linked Savings Certificates were introduced in 1975 as a form of social justice to savers affected by inflation, as is made clear by exchanges in this House on 10 July 1975, and will he now instruct NS&I to make them permanently available again without further delay?"

Hansard reference (10 July 1975):

http://hansard.millbanksystems.com/commons/1975/jul/10/savings-index-linked-schemes

A suggestion for (2):

"Will the [Minister/PM] give a guarantee on behalf of the British Government that savings covered by the terms and limits of the Financial Services Compensation Scheme will be fully protected against ad hoc restrictions of access, bank bail-ins and other forms of expropriation or forced conversion?"

Best wishes

MP to me (copy to researcher), May 09, 2013:

I tend not to do Oral questions. They don't have any real effect on government policy and it is a lottery as to whether you have the opportunity to ask one. Hence we can put in a treasury oral each time treasury come up (about every 3 weeks) and at some point it may be asked (perhaps at the 3rd or 4th time of asking) or we can put in a written question and get a response in just over 5 days.

Me to MP, May 09, 2013:

Thank you. Whatever works, is what matters, to paraphrase Alastair Campbell. I look forward to the response. I can only hope it's better than the patronising drivel I got from Lord Sassoon.

MP to me, May 09, 2013:

I can,of course, go for an adjournment debate to have a longer session. I do think it is an issue to give some attention to. However, we should start with written questions and letters.

Me to MP, May 09, 2013:

Thank you for your response.

We've had Lord Sassoon's letter 10 months ago (25.07.2012) in response to your letter to the Chancellor's office dated 02 July 2012, so presumably we're past that point and into follow-up. And how hard can it be simply to instruct NS&I to resume doing what it had previously done for an unbroken period of 35 years through thick and thin? This is not a new or complex matter, I would submit.

MP to me (copy to researcher), May 09, 2013:

I am on the train at the moment and would have to get a copy of the letters to hand to comment.

Me to MP, May 09, 2013 (6 minutes after the last):

I can help, to a degree. I don't have a note of what you wrote to the Chancellor's office, but here is the text of Lord Sassoon's letter:

"Dear Mr Hemming

Thank you for your letter of 2 July to George Osborne regarding correspondence from your constituent [...] about National Savings and Investments (NS&I). I am replying as Minister responsible for this policy area.

I appreciate that your constituent is concerned about savings in the current climate of relatively high inflation and low interest rates and is disappointed that Savings Certificates are no longer on sale. It is important, though, to recognise that inflation has come down from 5.2 per cent in September 2011 to 2.4 per cent in June 2012. The Government continues to give priority to reducing the impact of rising prices on families and businesses including through the recently announced deferral of fuel duty increases, which means that petrol prices will be 10p per litre lower than they would have been under the previous Government's plans.

NS&I provide cost-effective retail debt finance to Government. The money invested in their products contributes to the Government's overall debt financing remit. In doing this, NS&I follow a policy of balancing the interest of savers and the taxpayer with the stability of the financial services market. While doing so they aim to meet the financing objective set each year by HM Treasury.

It might be helpful if I explain the reasons why NS&I withdrew their Savings Certificates.

In July 2010, the popularity of both their index-linked and Fixed-interest Savings Certificates reached unprecedented levels and sales volumes far exceeded those either anticipated or required by NS&I to meet their financing target set by HM Treasury. Because of this, they took the difficult decision to take Certificates off sale on 18 July 2010. This change however did not affect existing customers.

The March 2011 budget confirmed NS&I's Net Financing target for 2011-12 as £2 billion with a range of £0-4 billion. To achieve this, they needed inflows of some £14 billion from sales and reinvestments during the year which gave them the ability to reintroduce one 5-year term of Savings Certificates on 12 May 2011. Their aim was to keep them on sale for a sustained period of time to enable as many savers as possible to invest.

As they expected, the Savings Certificates proved very popular and in just under four months they had received over 500,000 transactions. In order to stay within the Net Financing target range for the year, at this point they had to withdraw the certificates from sale.

Existing NS&I Savings Certificates customers can, on maturity, keep their investment for another term of the same length. Alternatively, they can reinvest into any of the other Savings Certificates terms and issues on offer to existing customers.

In more general terms, the Government wants a saving system based on freedom, fairness and responsibility, which is both affordable and effective.

To support and encourage savers the Government has:

• ensured the amount that people can save tax-free is not eroded by inflation by indexing the amount that can be paid into ISAs each year. This means that the Government has increased ISA limits by £600 this year, including an extra £300 for cash ISAs;
• announced at Budget 2012 that Government will work with industry to improve competitiveness and transparency in the ISA market, particularly by encouraging the industry to work towards faster ISA transfers;
• introduced Junior ISAs, offering parent a clear, simple and tax-free way to save for their child's future;
• confirmed that employees will have a new duty to automatically enrol qualifying employees into a pension scheme from October 2012. This has the potantial to encourage 5 to 8 million more people to start saving or save more into a workplace pension scheme. The Government is also establishing the National Employment Savings Trust (NEST) to provide a low-cost, high-quality pension scheme for individuals not currently served by the market;
• set up the Money Advice Service to offer free and impartial information and advice on all money matters available online at www.moneyadviceservice.org.uk , face-to-face, or by calling its helpline on 0300 500 5000. The Money Advice Service also launched a financial health check to help people proactively manage their money. It also publishes comparative tables of savings accounts and the interest rates offered; and
• given individuals more choice over the use of their pension savings to provide a retirement income by removing the effective requirement to purchase an annuity by age 75.

Please pass on my thanks to Mr Norfolk for taking the trouble to make us aware of these concerns.

Yours sincerely

James Sassoon

LORD SASSOON"

... and here is my reaction:

"Thank you for forwarding Lord Sassoon's letter, which arrived here yesterday. It is not at all up to the standard that I would expect from a Treasury mind; in fact, it is little short of a disgrace.

The first page confirms what I suspected, that the present Government is concerned only with its own funding needs and not at all with what should be its commitment to savers, not to say the currency (which according to the BoE's own website has lost 99% of its value since 1900). As you know, National Savings Index-Linked Certificates were introduced in 1975, a year in which RPI inflation was, as I said to you before, 24.2%. If the government of the day could bring in this product at such a time of crisis and galloping inflation, I cannot see any justification for the present hiatus.

The point about the present level of inflation is useless. Savers need to know for sure that their money retains its spending power over the chosen period, not to be informed from time to time that RPI may have temporarily dipped.

The second page slides further downhill into irrelevant party political nonsense. To be specific about its failures to address the subject, I will take each of Lord Sassoon's points in order:

• The cash ISA limit has nothing whatever to do with maintaining the purchasing power of cash.
• ISA transfers, ditto.
• Junior ISAs, ditto.
• The NEST pension scheme is not a savings vehicle but an investment vehicle, a distinction that surely cannot have escaped someone with Lord Sassoon's background in the financial services industry. The nearest to cash within pension funds is either money market funds (which have a big fat question mark over them at the moment, I can tell you as an IFA) or bank/building society cash funds that (a) usually offer a significantly lower rate than cash ISAs and (b) are (except perhaps for SIPPs) not covered by the FSCS in the way that individually held accounts are (see the Pensions Advisory Service's article here).
• The Money Advice Service is also irrelevant to the purchasing power of cash savings.
• Changes to the requirement to purchase an annuity at age 75, ditto."

Best wishes,

MP to me (copy to researcher), May 09, 2013:

I will ask Martin to draft a letter along the lines of your response.

Me to MP, May 09, 2013:

I would be greatly obliged if we skirted round Lord Sassoon's letter, which is nothing but a large catch of red herrings, and, whether by oral or written question (whichever in your professional opinion and experience is likely to get the more expeditious and effective response) ask the two questions I drafted for your researcher this morning, namely:

"Is the [Minister/PM] aware that National Savings Index-Linked Savings Certificates were introduced in 1975 as a form of social justice to savers affected by inflation, as is made clear by exchanges in this House on 10 July 1975, and will he now instruct NS&I to make them permanently available again without further delay?"

and

"Will the [Minister/PM] give a guarantee on behalf of the British Government that savings covered by the terms and limits of the Financial Services Compensation Scheme will be fully protected against ad hoc restrictions of access, bank bail-ins and other forms of expropriation or forced conversion?"
 

All original material is copyright of its author. Fair use permitted. Contact via comment. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.