DAVID'S SOAPBOX

Why are we in a mess?

You may have asked yourself this question.

There is an industry which makes a fortune out of providing news. There are newspapers, magazines, television news channels, television programmes devoted to discussions about the news and generally too much conflicting information being rammed down our throats.

You may reasonably think that because the ups and downs of life are so widely circulated if a problem arises then we shall have learned a lesson from it and not repeat the mistake.

Indeed and pigs fly.

The 1914-1918 war was said to be “the war to end all wars”.

We know that to be a lie because along came the 1939-1945 war.

The 1939-1945 war was thought likely to be the last major European conflict.

What happened when it finished?

The Russians pointed their missiles at us and we reciprocated with the benefit of help from America. This stand-off was quaintly called “MAD” or “mutually assured destruction”.

To a large extent, and I am grateful for it, it worked. There is nothing quite like knowing that if you lob a few bombs at the enemy they will lob a few bombs back and everybody will die to crystallise the thinking of even the maddest, most gung-ho American politician or General.

We have thankfully moved on but now surely our greatest concern is that a nuclear device or devices could get into the hands of people who would not be worried about the bombs being lobbed back but more interested in a bit of mutual annihilation.

Do you remember when the Berlin Wall came down and Russia released its grasp on its tottering, bankrupt empire? We thought the network of spies would be redundant and there would be no need for M15, M16 or whatever other organisations apparently guard us from the wicked foreigners.

Nowadays they can hardly employ enough people to enable them to snoop on those who would bring down our way of life and whom we allow here on the grounds of freedom, human rights or some other equivalent nonsense.

Have we learned from history?

Well certainly the Americans haven’t. If there is one thing that Northern Ireland has taught us it is that you need to keep a dialogue going with the enemy no matter how much you do not believe in their cause nor the lengths to which they have gone in order to draw attention to it.

So what do the Americans do with Iran which they say poses a real and present danger were it to acquire nuclear weapons and use them on the Israelis or even worse, us? It refuses to talk to them.

At least we have a President Elect who seems prepared to talk to anybody and is not frightened to state the American point of view at the same time. We shall see.

To you and me, however, the main concern is probably how we are going to make a living in a world which seems to be hell bent on bankrupting itself.

How on earth could this happen you may ask.

We all know that the use of four letter words is considered to be a sign of a poor vocabulary.

There are, however, 2 five letter words which have brought us to this state of affairs.

The first of these words is “trust”. Every time we go and vote at an election we trust the party we vote for to do something to better our lot in the world. We trust them to know what they are doing. We trust they will have our bests interests at heart. We trust that they will have learned from history and that they will accept advice from people who are experts in their field. We trust the experts to be impartial.

On that basis you would reasonably have trusted those in power to have learned lessons from past financial disasters. Words such as “boom and bust” come to mind as well as talk of excessive credit and unsustainable property price explosions.

What is the reality?

The reality is another five letter word “greed”. This word has brought our economic system to its knees.

We have seen greed manifest itself in an inevitable spending spree by the public, politicians and anyone else who can get their hands on some money. This was created by the availability of money on a large scale and loose, if any, regulation in the financial services industry.

If you add to this the natural desire for politicians to continue in office why should they put a stop to the public feeling good – feeling good makes people vote for you.

Also there is something in greed which makes us feel good. If a property that you purchased for, say, £200,000 becomes worth £500,000 you feel good. When things go well for you and your assets appreciate too fast in value deep down you know it’s going to go wrong but you hope that first it’s a long time coming and second when it does it hits others worse than you.

So what went wrong?

It is hard to answer because there are no many different versions around. According to Gordon Brown it’s nothing really to do with us – it is all to do with the rest of the world and America in particular.

What we can see in America is that much of the problem had to do with some pretty low level lending to people who firstly did not have the assets to secure the money they were borrowing and second did not, nor ever will, have the ability to repay it.

It would seem that because of the commission geared basis of the financial services industry these loans were all packaged together and sold, sometimes in a circular movement, with everybody taking a little bit out of the package each time it moved on. Some of these packages were apparently so complex that those dealing with them didn’t fully understand them.

Given that our major banks all got involved in this it seems to me a bit rich for Gordon Brown to blame the Americans.

The sad thing is that we have been here before. We have indeed been here several times before.

When suddenly it all goes wrong people with assets, often property, try and unload them particularly if they have heavy borrowing. The trouble is that by then the banks are in a mess because they have realised that by re-valuing everything they are holding a whole pile of rubbish loans that are just not going to be repaid.

Then the Americans allowed Lehman Brothers to go under. Well done America. You wanted to set an example and started a panic instead.

Banks lend long but borrow short so they are consistently having to go on to the money market to borrow money. If one major bank goes bust it does not take an Einstein to work out that others may go with the result that the banks become reticent to lend to each other. After all who is going to go next? Well done America! There is nothing quite like really thinking things through. If banks do not lend to each other this means they will have no money to lend to their customers.

Yet the banks are saying to their customers “we want you to repay our loans because you are defaulting on them and in any event your asset has now devalued so much that we want to protect ourselves from any further loss in value.”

The property or asset holder will say “I can’t sell because there are no buyers”. The bank will say “that’s not our problem it’s yours”. The seller will say “but no bank is prepared to lend money to a buyer to take this asset off my hands”. The bank will say “nothing to do with us”.

But surely it is.

The Bank of England have poured billions into the banking industry to provide liquidity. But all that does is to stop the haemorrhaging of the outgoing funds and the inability to replace them by sort-term borrowing.

The government says “we have a rescue package” and promptly lends billions of pounds to the main banks to prevent them going under. The Bank of England have also lowered interest rates at a dramatic rate in an effort to keep the cost of borrowing down and stimulate the economy.

But I say why is the money that the government is lending to the banks being lent at a rate of 12%? That is 4 times today’s base rate of 3%.

It means that if a bank fails to lend that money out at 12% or more it will lose money on it.

Am I missing something here?

Government policy is to bring interest rates down to give the economy a kick start. But what they are saying on the one hand is on the other hand being destroyed by providing money to the banks at an excessive rate.

One hears figures being bandied about as to the global loss to the banking system. Without wishing to show my age I can remember when winning £75,000 on the football pools would apparently set you up for life. It would now buy you half of a one-bedroom flat in Brighton.

The word “trillions” has been mentioned. Now a trillion is a figure which starts with, say, a 1 and then has 12 noughts after it. There may be those reading this who will immediately email me and tell me that I am an ignoramus and that in fact it’s not 12, it’s either 9 or 15 which I believe it to be in some other countries. Whichever way you look at it it’s a lot of money to lose and basically it’s a lot of money that is no longer available to lend to the likes of you and me. Or at least that’s how I read it.

It is said that there is in the order of 55 trillion US Dollars worth of gross derivatives outstanding. Given these are redeemable money transactions backed up by a non-cash item how much more will the losses be? If a small amount goes sour this could infect many lenders and keep the downward spiral going.

You will have gathered that I am not a financial expert but merely trying to make sense out of all the information that we are flooded with.

We now have a “scare” word flung at us. It is the word “deflation”.

We all know what inflation is. It is the increase in prices of a range of products from one year to the next.

Because we have not had deflation since the last war save for a few months here and there in the late 1950’s and 1960, none of us have really lived through it. Deflation is a sustained fall in prices across the economy for goods and services. It does not just mean the odd reduction in the price of products here and there it means falls in prices more or less across the board.

At first this sounds rather exciting. Surely it is a huge money saving exercise which will benefit people as long as their wages do not go down. In fact a short-lived burst of deflation for a few months needn’t be a disaster or so it is believed.

What happens, however, when people stop spending because they are waiting for cheaper prices to come? This is already happening in the property market which has come to a virtual standstill as a result and is causing prices to go even lower.

The answer is that that the lifeblood of demand will be removed from the economy.

Because spending is falling sharply businesses will sell less, are forced to cut wages and lay off staff which, in turn, leads to less spending, even lower demand and even sharper falls in prices. The end result could be a deep and prolonged recession.

On top of that incomes will have to go down because wages will need to be reduced. However, people who have incurred debt still need to repay it so debt will become an even bigger burden and there will be more bad debts and losses to the banks’ capital structure.

As we have the highest debts of any leading economy we are heavily exposed to the dangers.

There are a number of ways of curbing deflation but once in it it is hard to escape. It needs aggressive action such as that being taken by the Bank of England in lowering interest rates and possibly also by the government in making tax cuts or increasing public expenditure.

The Chancellor’s Pre-Budget Statement on the 24th November may prove to be historic for a number of reasons.

First, we have had for some years promises under Gordon Brown of no more “boom and bust” and of “prudence”.

Well the “boom” has certainly gone and the “bust” comes ever closer. As for “prudence” this seems to have been well and truly forgotten.

Second, we have an alarming debt building up as a result of current and projected government borrowing that has to be paid off sooner or later. Do you remember that it was Gordon Brown who said that one would only borrow to invest. No more it seems.

Third, we have the end of New Labour and a not entirely surprising revert to type. It was New Labour in Tony Blair and his close entourage who insisted that there should be no reverting to “taxing the rich” particularly following the 1992 shadow budget which lost them an election they were on course to win. Now they are back to the politics of envy.

So what did the 24th November pre-budget report do?

The short answer is very little.

The idea is that apparently a 2.5% reduction in the rate of VAT would encourage the public to spend. Really? What sort of world do these politicians live in. If an item in a shop, restaurant or whatever is currently price at £11.75 that means the base cost to the public is £10 and the VAT element is £1.75. If you reduce the VAT element by 2.5% there is a saving of 25p. So do these people who live in a different world from us (I mean by this politicians) seriously expect that first the price is going to be reduced by this 25p and secondly that anyone is going to be more encouraged to buy it than they would have been before. What rubbish.

A sensible move, if one is going to use VAT as your flagship item, would be to reduce VAT to, say, 10% so that people can see and feel a real benefit in falling prices. Then people would start buying. If twice as many people bought as were going to buy with the rate at 17.5% the government would actually not only get the VAT back but make a profit on it. We would risk a balance of payments deficit so it would need careful thought if we don’t have the ability to cope with demand. However, it is worth considering.

A short-term 10% rate would be no more than a quick fix and would be wholly counter-productive when the 17.5% was restored. You will get a consumer boom which when the 17.5% rate kicks in will convert into an even bigger recession. So the answer is to phase in the increase to 17.5% over a period of 3 to 4 years.

As it happens because of our membership of the EU we are not allowed to reduce our VAT rate below 15% without the EU’s consent and only in special circumstances.

If in looking after our self-interest this caused a problem then I am afraid that what the politicians should do is to say to the EU something along the following lines:-

You may have realised that the EU is not a popular institution in the UK. The Southern Irish love it but they are not part of the UK.

We are going to look after our economy and preserve our jobs.

We have avoided Referendums on EU related matters because we know that we would always lose them.

So the bottom line is that if you try and interfere with our economy to the detriment of our people what we shall do is put the matter to a Referendum. The Referendum would be quite simple. It will say “do you wish to remain in the EU or for the UK to leave it?”

We suspect the answer will be an overwhelming “leave it”. Now we know that there are procedures for this and they take time. We do not, however, have time to mess around with these niceties and we shall simply leave the EU the day after the Referendum.

If you try and play any of your silly bureaucratic games, which have so aggravated our people to date, by fining us or in any other way making life difficult we shall retaliate like for like.

The fact of the matter is that we pay more to the EU than we get back.

On top of this you sell us far more goods than we sell to you.

We also employ large numbers of EU members within our economy but the reverse does not apply.

Now you and I know that there is not a single politician in this world who has the guts to actually say this albeit Margaret Thatcher went pretty close when she was in power.

Another tried and trusted method is to inflate the economy by flooding the financial system with ultra-cheap money. So much for the sense in the government lending money to the Banks that need it at a 12% interest rate!

When I mention Margaret Thatcher my thoughts to back to the end of New Labour. New Labour intended to encourage enterprise with a low tax rate economy with the public benefiting from growth and prosperity.

Old Labour tended to have a quick fix for everything. It was “increase taxes on the better off”. Theirs was the politics of envy and Margaret Thatcher changed the country. Tony Blair gave many people hope that New Labour would follow on from the Thatcher years. The aim was to take away the rough edges so that society became more caring.

We now have a Chancellor of the Exchequer whose political history is from the far left and a Prime Minister who, when he was Chancellor, never enthused over leaving the rich to spend their money as they saw fit.

So what we now have are promises of higher taxation on what are termed “large earners”. The squeeze is twofold. Higher earners will lose their tax-free allowance. They will pay a higher rate of 45% on their top income.

I recall during the Wilson and Callahan labour governments what was known as a “brain drain”. Basically that is when highly qualified professionals settled abroad, many of them doctors, teachers and engineers.

In February of this year it was estimated there were 3 ¼ million British born people living abroad of whom more than 1.1 million were highly skilled university graduates.

High house prices and taxes and poor climate are frequently cited as reasons for this.

This is an alarming exodus and given the cost of educating graduates or training junior doctors, it should be of concern to any government.

So what does the chancellor do to encourage people to stay here? He says that he is going to put up taxes with particular reference to mid to high earners. Just the thing to encourage people to stay here rather than leave for a country where housing is cheaper, the climate a lot better and the tax rates are more friendly towards high earners. Will these people never learn from their mistakes? Why do they still insist on pandering to the jealous, bitter left.

To add to the sense of wellbeing amongst those who are producing and creating, National Insurance is going to go up yet again. Now it is no good saying that National Insurance is for the NHS or whatever because it is, by any stretch of the imagination, a tax. So it’s a one-half per cent extra tax for the employee and yet another half per cent for the employer. All this is of course designed to create more employment. But only for those earning £20,000 plus a year.

So who is it that the labour party are really seeking to help? Well it’s those who are not so well off. They have been promised they won’t have to pay any more taxes than they are doing now and indeed the usual handouts and goodies are promised on top.

I do not want to come over as some sort of right-wing loony. Earlier in this article I mentioned that much of the crisis stemmed from lending money to people who had neither the security to back it up nor the ability to repay it. They took the money, spent it and then shrugged their shoulders. Trillions of pounds, dollars or whatever have had to be written off at huge cost to the rest of us. So let me repeat it – it was the people who could not afford to pay back the money that they had voluntarily borrowed who caused the problem in the first case.

The problem wasn’t caused by people who worked their guts out day in, day out, hour after hour in order to provide for their families and their futures. They were not the cause of the problem.

So let’s take it one stage further. Who is now paying to sort out the problem? Good heavens, it’s the people who didn’t cause the problem and who worked their guts out to provide for their families and their futures. How are they paying? By having to shoulder the repayment of the money that the government is borrowing to recapitalise all the institutions that lost all this money lending it to those who never had the slightest intention or ability to pay it back.

When you consider this one would say to oneself “but surely these hard working and thrifty people are not going to be punished indefinitely for the wrongdoing of others”. Don’t believe a word of it. Those who caused the problem will now get more benefits, better looked after and money poured into their pockets in the hope that they will go and spend it and get us out of the problem. You may say “what about the thrifty surely they benefit”. Not really. They have been told that they are going to be taxed and taxed heavily to pay back all this money that has been borrowed to pay for the past misdemeanours of the defaulters plus to keep them in the standard to which they have, or hope to, become accustomed. Does that seem a little unfair?

I was recently told by a bank manager that he was puzzled that in the midst of all this economic gloom and doom two of his customers were expanding their betting shop empires by opening two new betting shops. I asked him why he was so surprised. After all the government has had it perfectly clear where they intend distributing their largesse and the pubs and betting shops await such largesse like vultures.

A question I ask is could we have avoided this? If I knew the answer to that I would change my career even at this late stage and make a fortune Hindsight is easy. Many cheap scoring points are made using hindsight to the discomfort of the people whose decisions went wrong. Rest assured that politicians will be giving us lots of “hindsight” in the run up to the next election. But how much can we believe?

I think most of us benefited one way or the other from the boom years. Although I was and am cynical about pouring money into public spending the concept of doing so so as to improve services was worthwhile. It is just that the services do not seem to have improved much but we do have an extra 800,000 civil servants since this government came to power in 1997. Heaven forbid that the idea is that they will vote for those who gave them their jobs.

It is fair to say that many of the problems do appear to come from America but we must not lose sight of the fact that we happily tried to share in the benefits and didn’t put any money aside for a rainy day.

The government has not helped by allowing a massive consumer property-driven boom to occur without somehow levying sufficient tax to put money aside for when the inevitable slowdown/recession was going to arrive despite the lessons of the 70s, 80s and 90s. I say “lessons” because they were there to be learned but they haven’t been and it is you and me who will pay the price in the future, and heavily.

Don’t feel too sad though. At least the people who helped cause the problem will have more money to spend in the pubs and betting shops – your money!