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Showing posts from May, 2011

Vampire City

I was asked some time ago to write a blog explaining how government debt works, who owns it and who pays interest on it.  Well, better folk than me have written on this subject, and I've listed a few of their contributions below.  But the more I look the relationship between the financial sector, the Government and ordinary people, the more I am struck by the way in which the financial sector acts like a sponge, draining real money from the economy and replacing it with debt.  Or perhaps more like a parasite, some kind of giant leech sucking the lifeblood out of Western economies. 

There are two ways in which this happens.  The first was the subject of one of my previous posts, The Great Savings Fallacy.  In this I argue that when people save by placing their money in pensions, long-term savings accounts or bank deposit accounts, most of this money is removed from the economy and is not available for investment. Additionally, much of this money is eligible for tax relief, so ther…

Modern gods and human sacrifice

I read a fascinating post today by the excellent Australian blogger billy blog. In it he notes that even when the Australian government was running surpluses between 1996-2007, the international financial institutions pressured it to continue issuing debt - and it gave in to them. During that period the Australian government issued more debt than it needed but didn't actually use the proceeds in any way that benefited the people of Australia.  This intrigued me. Surely when a government is running a fiscal surplus it will pay off debt, won't it?  Well, apparently not.  Why not?

Billy answers his own question at length in the blog, but to summarise here - the government continued to issue debt because the international financial markets needed it for liquidity.  It had nothing to do with the people of Australia and everything to do with providing risk-free funds to speculators.  And the taxpayers of Australia paid interest on that unnecessary debt.

At the same time as the inter…

Open Letter to Mark Reckless, my local MP

Dear Mark

I am writing to support today’s Hardest Hit march.

The package of cuts being enacted by the Coalition affect housing, disability, sickness and welfare reform. In short this means that many of the most vulnerable members of our society are being targeted. Disabled people have higher costs than other people because of the additional requirements they have, whether it be for a special diet, clothing or communication and interpretation needs. In this regard I would draw your attention to the report written in 2004, entitled 'Disabled People's Cost of Living', which highlighted the fact that:

"The weekly income of disabled people who are solely dependent on benefits is approximately £200 below the amount required for them to ensure an acceptable, equitable quality of life. Unmet weekly costs for disabled people who work 20 hours per week at the minimum wage are up to £189 (for those with high-medium needs."

Yet despite the daily struggle faced by the disable…

Illusions and delusions - the lure of credit and the price of debt

This blogpost is all about debt - national debt, personal debt, government debt - and its effect on the UK economy and the lives of the people of the UK.

We hear a lot about the "national debt" being too high and growing because we are running a deficit. There has been an astonishing degree of confusion between "debt" and "deficit" from some notable people - including the Chancellor of the Exchequer - so I thought I'd start this blogpost by explaining "debt" and "deficit" and how they relate to each other.

By "national debt" people usually mean Government debt, which is the money that the Government borrows from banks and other financial institutions to fund the difference between its spending and income.  In any one year, the difference between Government income and expenditure is either a surplus (if income exceeds expenditure) or a deficit (if expenditure exceeds income). If there is a deficit, additional money must b…

Demand worries

Commodities market traders behave a bit like sheep - when one runs away, they all do. On Thursday last week, they all fled in droves from commodities. Was this important?

Well, maybe. Initially this looked like an irrational blip - the FT certainly thought so.  The sharpest fall was in silver, largely due to higher cash margin requirements, and it dragged down the rest of the precious metals market. Other commodities fell on short-term panic about possible losses on futures ahead of expected poor world economic growth figures. Now they've got the figures, they aren't panicking any more. The long-term trend is still up. I therefore expect prices in all commodities to rise again shortly. 

Sadly that means this drop will have little or no effect on inflation, and I still think Bernanke will go ahead with QE3. Expect more inflation misery to come.

However, I think this incident is a pointer towards an underlying issue with the way in which the world economy is being managed at th…

The worm in the apple: what went wrong in retail banking

In my last post I debunked the myth that the financial crisis was caused by evil investment bankers gambling our precious savings on the international financial casino, and pointed the finger firmly at the massive expansion of high-risk lending by retail banks in the traditional forms of lending - corporate loans, personal loans and in particular mortgages. In this post I shall examine the role of government in encouraging and supporting excessive risk-taking by retail banks, and show that the financial crisis was in fact underpinned - and you could even say, caused - by the implicit support that all governments give to retail banking.

Since my last blogpost the Independent Commission on Banking (ICB)  has produced its draft report. My comments in this blog are inevitably influenced by this report, and at times I shall refer to it directly. But that doesn't mean I agree with it.

I shall start with a discussion of the taxpayers' guarantee for retail depositors.  How many of my…