Saturday, 19 September 2015

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!

Sunday, 18 January 2015

Will the debt monster eat your savings?

 With house price growth and house sales slowing down; I sometimes begin to wonder what other crazy plans the government could invent in order to prop up the housing market. If house prices still begin to fall after Help to Buy, Funding for Lending, bailing out the banks, printing £375,000,000,000 and holding interest rates at 0.5% for six years; what would they do? How bad would things have to get before we would see even more extreme market manipulation?

They could reduce interest rates even further so that they become negative. This would reduce the cost of servicing debt but I suspect that savers would have something to say about paying a bank to hold their money! There could well be a mass exodus of capital out of UK banks and possibly social unrest.

As the whole fiat monetary system is based on growing levels of debt, maybe the debt monster will soon consume all bank deposits. The following scenario may seem extreme but we now live with a western economy that already has unsustainable debt levels, increasing volatility and signs of currency wars.

Savers deposits are replaced by debt of equivalent value due to a collapse in economic growth and deflationary pressures. This helps keep mortgage rates low because an artificially engineered demand for the debt would have been created. Savers are paid a small amount of interest (yield) for holding the debt but would never be able to draw out any of their original capital as it would no longer exist! Virtually all money in existence represents debt and savers become mini bond traders. Capitalism without the capital.

Saturday, 8 March 2014

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.

Saturday, 21 September 2013

Funny money (part 2)

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

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

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

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

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

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

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

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

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

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

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

Monday, 2 September 2013

The human mind is lost in time.

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

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

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

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

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

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

Friday, 23 August 2013

Funny money (part 1)

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

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

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

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

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

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

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

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

Thursday, 18 April 2013

Well earned profits?

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

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

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

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

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

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