5 Becomes 10

Quick Recap

The Public Sector spending cuts and tax increases that we are going through are designed to address the gap between what we earn as a nation and the higher amount we spend (which means we have to borrow to cover the gap). Or to put that another way……spend less, create more income and then there is no need to borrow. Austerity at its finest……apparently.

 

The Problem

Westminster informed us that their 5 year austerity plan would lead us to economic redemption. The problem……unemployment and slow economic growth is hampering how much is coming into the coffers and there is very little left to cut in public spending to make savings.

 

School Report Time  

As a consequence of the austerity measures not addressing the income / outgoing balance, Public Sector borrowing was up £600 million to £15.4 billion in December.

 

5 year plan you say? There are only 2 years left! Let’s call it a 10 year plan shall we? What’s an additional 5 years of pain between friends!

 

Frightening really.

Fiscal Cliff

Love him or loathe him (no need to answer that), George Bush's actions at the start of the banking crisis were effectively to all but stop taxes in the US. This would be paid for by higher taxes and spending cuts many years later, giving him plenty of time to escape into the night on his horse.

 

That time is now upon us.

 

Unless all political parties agreed otherwise, the tax rises and spending cuts became law on 1 January 2013 in the US. This would see significant and far reaching negative consequences on economies throughout the world (the UK included).

 

However, at the 11th hour, an agreement was reached and a craze of optimism swept through investment markets......falsely. 

 

 

Reality Check #1

No agreement was made on the tax increases and spending cuts. The parties simply agreed to delay a decision and stop Bush's law coming into effect.

 

Reality Check #2

Let's take the following example household:

 

Annual Income:     £  21,700

Annual Expenditure:      £  38,200

New Debt On Credit Card:     £  16,500

Outstanding Balance On Credit Card:     £142,710

Total Budget Cuts So Far:                               £        39

 

Now, replace £ with $ and add 00000000 to the end of the figures......and what do you get? The US economy. Frightening isn't it.

 

Now add to this the UK's reliance on the US economy buying our goods / services, we have a problem.

 

Let's imagine President Obama comes home from work to find sewage problems. The sewage goes all the way up to the ceiling. What should he do?

 

(a) Raise the ceiling.

 

Or

 

(b) Remove the sh*t?

 

It's a tough call but it can't be ignored. This is what US politics will now debate over the next 6 weeks.

 

So the next time you hear the US Fiscal Cliff mentioned and dominate the TV / radio / newspapers, remember......it is a big deal for us. The US economy is effectively our economy.

 

Frightening but reality.

The Magic of '9'

It started with the banks and it must end with the banks.  

 

Please remember this throughout the next 2 -3 years as the UK economy limps along and we dip in and out of recession……It started with the banks and it must end with the banks.
 

Our Government has no money to ignite the economy when it is insistent on increasing taxes and cutting public spending to tackle the budget deficit (we spend 8% more than we earn). So that leaves the Bank of England……but they have pumped £375 billion into the UK economy and it has had little / no impact.
 

And that leaves just one other option for the UK……the banks.
 

In essence, we need the banking sector to make money easily / cheaply available to allow the UK to spend on goods / services. This will then allow the magic of the multiplier effect of ‘9’. Basically, when £100.00 is borrowed and it is spent, the recipient of the £100.00 then spends it plus the profit they made on the £100.00 (let’s call it £110.00). The recipient of this £110.00 then spends this and the profit they made. And so on, and so on. The impact is that £100.00 borrowed is eventually £900.00 injected / created within the UK economy. The magic of ‘9’.
 

But here is the problem……the banks don’t want to lend. They really have no interest at all in lending. It is not in their best interest to lend. Why? Quite simply they want to meet the requirements of the Basel II Bank Rules that force all banks within the EU to hold sufficient cash reserves within their balance sheets by 2019. These reserves are significantly higher than previous and lending money does not help them meet this requirement as they have to set aside even more reserves with each loan leant out.
 

Banks in the UK are likely to take 2 – 3 years to be in a position to sort out their reserves and balance sheets. In the meantime, loans will be difficult to come by or be far too expensive for the majority.  

With the hands of the Government tied (albeit self-imposed), the banks have Westminster and the UK economy in a hostage situation and we have to wait for them to lend again. The result is a UK economy that will literally limp along in 2013 and 2014.     

Like it or not (and I’m guessing you are a ‘not’), it started with the banks and it must end with the banks.

We have literally gone full circle and learnt nothing.

Shameful

Germany v Greece

In my post Germany 1 – Team GB 0 (follow the link below), I commented on Germany being less and less reliant on selling to the Eurozone. Not good news if you are in need of German goodwill to prop you up financially.  
 

http://stevesmithlive.blogspot.co.uk/2012/11/germany-1-team-gb-0.html

 

 

There has always been an assumption that Germany would (sooner or later) move further and further away from the Eurozone, as the weaker members were effectively dragging them down. In essence, Germany are only as strong as the weakest link in the Eurozone.  

 

 

Some interesting news this week……

 

 

Top level economists in Europe have calculated that it has cost Germany €600 billion to keep the Eurozone together. However, it also calculated that it would cost Germany €1.2 trillion to let the Eurozone collapse. And this answers very nicely the question on many lips as to why Germany have stuck at it.

 

 

Add to this the German Election in September 2013, and it is safe to say that the Eurozone will be held together very tightly……well for the next 9 months anyway.

 

 

2014 could see an interesting unravelling of Greece and in effect Germany could pay them to leave (they’ve got a €600 billion kitty to play with after all).

 

 

Saved for another year!

The Price of Gold

Amongst all the political strutting when the UK economy came out of recession thanks to 1% economic growth in Q3 of 2012 was an absolute gem that our great leaders of Westminster decided not to tell us……we came out of recession thanks to a once in a lifetime economic party designed to make the UK money. AKA The Olympics.

And that is the bigger story……it took something so vast to take us out of recession that there is genuine concern for the UK economy in the short term.

 

I will leave you with just one thought on the subject:

In every Olympics ever held (except Beijing 2008), every host nation has suffered an economic slump the following year.

Let’s hope those gold medal memories last long into 2013 as they will have to be paid for!

Stick or Twist?

Stick or Twist?

Having the Chancellor’s ‘autumn’ Statement in deepest ‘winter’ on Wednesday tells you all you need to know about the current state of our economy and politics……confused.

For all the spin, counter spin, political arguing / point scoring and statistical skulduggery……it is important we understand the simple facts of the current situation.

1.     Under the Labour Government, the UK’s public outgoings were far higher than the public incomings. This deficit was the highest of all developed economies in the world and resulted in the UK public borrowing reaching record levels to bridge the shortfall in income.

2.     In May 2010, Mr Osborne promised to eliminate this budget deficit within 5 years through the austerity measures of higher taxes and public spending cuts. Or to put that another way……the Government would have more money coming in and less going out. The job losses from public sector cuts and increases in taxes were sold to us on the basis of “short term pain for long term gain”.

3.     Mr Osborne’s original estimates were calculated using assumptions on economic growth provided by the Office for Budget Responsibility. Mr Osborne then reviews these periodically and manipulates UK income / expenditure through the budget each year to ensure that we are on track.

4.     Wednesday was the half-way point in the 5 year plan. The result……the income / expenditure hole is actually bigger today than it was in May 2010. 

The Government is powerless in addressing our finances by using fiscal policy if it doesn’t ignite the economy. 

We are now in a Catch 22 situation. If taxes are increased and public expenditure is cut further, this will have a detrimental impact to the economy. However, if the Government borrows further to ignite the economy, it will have more income through taxes in the long term but the financial black hole will get bigger and the deficit will not be addressed.

Stick or Twist?

Well the current Government have decided to ‘stick’. They will stick to the continued plan of tax increases and spending cuts but the outcome will be a 5 year plan becoming 6 (very optimistic), 7 (doable just) or 8 (realistic) years to complete. Throw in a General Election in the middle of all of that and any figure you pick has a decent chance!

A dire state of affairs......

King of Close Shaves

In case you missed it last week with all the media coverage on newspapers, hacking and proposed associated new laws against the want of our Prime Minister (he really is clueless)......the new Governor of the Bank of England has been chosen.   

Out with the old (Mervyn King) and in with the new (Mark Carney)......

Marvellous Merv's tenure has certainly left a legacy.  On his watch,  the Bank of England was rightly criticised for not providing any warning or pre-emptive evasive action when banks grew into lethal weapons of mass destruction. To compound the misery, he has never come forward to accept his part of the blame or offered any apology. It was a very close shave that things didn't work out far worse from the banking crisis fallout.....and it was still bad. How he kept his job will offer conspiracy theorists a story to hand down generations. It is a mystery to all.

The one piece of encouraging news is that his successor is a real curve ball. He didn't go to Eton or row with any of the cabinet at Oxford. Instead, the Chancellor went for a Canadian Central Banker and a real outsider. This pretty much tells you all you need to know of Downing Street's opinion of the Bank of England currently.  

What can we expect? Time will tell but the bar has been set low and Mark Carney can hardly do any worse than the past 8 years!