Monday, November 09, 2009

A Quick Reminder: The Government are Cunts

[NOTE: I'm not The Devil, and I know I'm late to the party on this, but fuck it. You can't have too many reminders.]

OK. We had an "asset bubble." Lots of things were overpriced. That house you bought for £200,000 was actually only worth £150,000. Share in a company were priced at £3.30 but were actually only worth £2.50.

These things happen. Sometimes speculators drive the estimated value of things up higher than they should be. Whether tulips, south sea trading rights or housing this stuff has been going since year dot and will happen from time to time pretty much forever.

When senses return and the bubble bursts, a load of people are left with assets that are worth less than they paid for them. In today's case, the 'victims are the banks'. Northern Rock doled out billions on pounds to people who couldn't afford to repay it, on the basis of properties that weren't worth their valuation. In order to "save the world", resident genius G. Brown stepped in with colossal quantities of cash to help the bank stay afloat.

As more institutions realised they were in the same fucking hole, so they turned to us—via our representatives—for help. Which would be great, except for the small detail that we can't afford the losses either. Consequently, no-one dares to lend money to anyone else all of a sudden. And when your economy is largely based on credit (who buys a sofa for cash these days?) that spells trouble. Anyway, because we "can't let these institutions fail" we're the ones stuck with all this shit.

So now, the Government is encouraging the printing of money. £200 billion of it thus far. This is supposed to be used so that the banks will start giving credit to people and they can spend it on stuff and then we'll all be happy and somehow one day we'll be able to pay the £200 billion back.

Only here's the rub: interest rates are 0.5%. That means if I lend you a hundred quid, you only have to give me £105 back in a year's time (or something, who the fuck knows how it works—read the small print and get back to me). That's not much return on my investment. On the other hand, stock markets were sent artificially low by the banking crises. So my £100 is going straight into shares instead because I can make more money there because I'm not a moron. So while every economic indicator from GDP to retail sales to employment continues to tank, the stock markets head in the opposite direction.

This is why the money the government is printing isn't reaching the 'real economy'. Instead it is feeding a stock market rally. We're creating another fucking asset bubble. Meanwhile, businesses and people are going to the wall because they still can't get credit. Worse, eventually we're going to have to deal with this £200 billion that has been created somehow.

Are we going to tax it back from corporate institutions who have benefited from our largesse? Pfft. The only answer is to accept that everything is going to get more expensive. With that much easy money floating around in the economy, that's what inevitably will happen.

For proof, you only have to look at Germany's Weimar Republic or modern-day Zimbabwe to see what happens. When there's a lot of cash, prices shoot up because money itself becomes cheap. It's a problem with modern economies that have decoupled their monetary systems from something tangible like gold. As our money itself becomes worth less, so people demand more of it in exchange for their goods. This is inflation, and it is a bitch. Because if your £15,000 a year is barely enough to live on now, how will you feel when the price of everything shoots up 10% in the course of a year?

Now to me, a no-mark in the middle of nowhere, knowing fuck all about nothing, it is baffling how the rich, mighty, connected and intellectually powerful people who claim to run this country can't see this. But then there's a lot of things I don't understand about them. Frankly, we'd be better if they went off to do something more productive. Like fucking stoats. In Iceland. Without condoms.


Andrew said...

£100 + 0.5% = £100.50 not £105. Just sayin' :-)

Anonymous said...

"£100 + 0.5% = £100.50 not £105. Just sayin' :-)"

He obviously went to the Brown school of economics

Chris said...

Now to me, a no-mark in the middle of nowhere, knowing fuck all about nothing, it is baffling how the rich, mighty, connected and intellectually powerful people who claim to run this country can't see this

They can, perfectly clearly. It's the poor mug left holding the worthless assets/toytown money who soaks the loss when the music stops again, not the people who put it into circulation originally. They've taken their profit and F'ed off already.

Quantitative Easing is *exactly* like counterfeiting in that regard.

Demetrius said...

It's worse than you think and you are mostly right. There are some real nasties that the government is coming to come up with in the next few months. Also, there are a lot of people trying to get by on a lot less than £15,000

John B said...


The banking crash destroyed about gbp400bn of money in the UK.

Definitionally, if we fail to create gbp400bn of money to make up for this, we'll have deflation.

If the BoE prints about gbp400bn of money, that will be a non-inflationary way of avoiding deflation.

If the BoE prints more than gbp400bn of money, *then* we risk going down the Weimar route.

Anonymous said...

It's a problem with modern economies that have decoupled their monetary systems from something tangible like gold.

worng, unfortunately for greece when Alexander sent large quantities of "treasure" back home from his conquest of persia the sudden flood of "money" saw inflation that made the majority of people poor, it almost destroyed greece whilst the slaughterer continued his blood quest/ego trip.

The biggest problem we face with the credit expansion through printing of money (quantitative easing) is paying it back.
The banks can fob off the goverment for years to come whilst their investments slowly pay it back naturaly.
We the people on the other hand have to pay those who hold the gilts that were sold to get the credit. The money that the BoE created was used to buy back old gilts currently on the market.

Don't blaim the banks, blaim those who used the fiaso (that they created) to try to buy an election, to create a voter base that is employed directly by them.

Idiots, thieves and murderes supported by sycophants.
Modern goverment has changed from the monarchies of old not one single bit, you still pay for the demands and folly of the few.

chris southern

Blue Eyes said...

This is possibly the least coherent and worst argued post I have ever read on this site.

A house has no inherent value. Neither does gold. They have no more inherent value than the numbers on the Bank of England's screen.

sobers said...

@ John B: There is a difference between the destruction of asset values (which never existed in reality, unless you cashed out your house and lived in a tent) and the cash being 'printed' now, which does exist in reality, and can, and will, be spent at some point on real goods and assets. Unless the BoE remove the cash at some future point (which I think is highly unlikely) it WILL produce higher inflation. No if and buts, WILL.

Equally do you not think that the worst thing we can do is try and inflate the very property bubble (and other asset bubbles too) that caused the current crisis? The misallocation of resources within the economy due to the property boom needs to be reversed and capital moved towards productive sectors of the economy, not the house builders, the finance sector, and the service sector (which relied on the disposable income coming from easy credit, and equity withdrawal).

Unless that misallocation is reversed we will be doomed to repeat the current mess, only worse in a few years time.

Anonymous said...

Brown, when Chancellor, had as much knowledge about basic economics as I have about nuclear physics, and that is zilch. In Brown's case, even less than zilch.

Pa McDoom has created a 'Michael Mouse' world of his own making, and now believes his own bullshite "We saved the world....!". Mind you, the Gibbering B'Liar, the Sainted One, Teflon B'liar left him wandering around in his own delusions.

Was Blair scared of Brown. Well, if as the 'famous rows' between Number Ten and Eleven Downing Street are to be believed (and why not), then Blair possibly was scared of Brown when he went into one.

After all, McDoom had been badgering B'Liar for years so he could have his turn at being 'Dear Leader'. Now look what we have got ruining, yes ruining the UK.

A bunch of closet 'Marxist-leninist' Toss-pots, control-freaks, incompetents, vindictive middle-class hating bullshite merchants......

They, like their predecessors of the late 1970s (Jim Callaghan and Denis Healey), will consign themselves to the shitepit of history one more time, too wander the highways and byeways of politics blaming everything on them..."Nasty Torys and Maggie Thatcher" just as they always have done..

Fred Lumptynickers. Being of sound mind, of the County of Kernow, in the villages of Port St Wenn & Gaverne. On this day of Ye November 9th 2009.

John B said...

@sobers, perhaps I should've been clearer: I'm not talking about the notional value wiped off share prices or house prices, I'm talking about the *actual* money that was *actually* destroyed in bank write-offs.

(if Bank X thinks it's got gbp50bn of cash to lend to people, but then discovers it actually only has gbp25bn to lend to people, then that's gbp25bn of fall in the money supply, just as much as if it had acquired gbp25bn of notes from the BoE and burned them - it has nothing to do with asset prices etc).

Anonymous said...

"interest rates are 0.5%. That means if I lend you a hundred quid, you only have to give me £105 back in a year's time "

Ah - not too good for someone posting on economics ?

John B said...

But brilliant for a door-to-door loan salesman ;-)

AD627 said...

John B - could you enlarge on your distinction between banks' lending powers and notional value wiped off asset prices? How does "actual money" get destroyed?

Furthermore, could you offer some examples of an economy that has deployed QE and avoided inflation? We have a dozen or more examples of economies that have printed money and reaped the whirlwind of high or hyper inflation.

AD627 said...

Oh, and while asset bubbles are indeed a perennial problem, this one was caused by governments. The Greenspan put was a prime driver. In the UK, Brown's fudging of the inflation measure and packing of the MPC with dolts, together with a massively pro-cyclical fiscal policy were key.

In addition, his trashing of the pension industry and encouragement of wholesale immigration helped drive house prices to unsustainable levels.

Anonymous said...

Easy just turn half of the public sector into fertiliser.
No one will notice the difference,aprox 400 billion a year will be saved,and we will not have to import food anymore.
Plus we get the added joy of watching the fuckers dance whilst beibg riddled with bullets.
Job done.

thefrollickingmole said...

Blue Eyes.

I would argue against youe assertion they have no intrinsic value.

Both have been seen as a shelter in severe economic downturns, people have confidence they maintain some value of their own. Brown sold your gold at rock bottom prices because he believed there was no intrinsic value in it, somehow that thing with no value is worth 4-5 times what he sold it for.

Housing (at least in Australia) is overpriced because of 2 reasons. lack of supply, and secondly it is the LEAST taxed form of investment (when you factor in risk). We currently have a taxation review underway which is making rumbles about "removing this distortion from the market".

So taxing every other investment isnt a distortion, only not taxing it is?

Politicians are scum, it doesnt matter where you are. They dont want money to have value tied to anything, or they cant print more of it and transfer those debits theyve run up to the general public via inflation/devaluation.

TheFatBigot said...

Injecting lots of extra cash might be inflationary, it might be deflationary or it might be neutral; it all depends what happens to the money.

Previously the banks had paid the government lump sums in return for the right to receive future income. This is what "gilts" are - IOUs issued by the government. Now they are selling back those IOUs, in effect they are giving up the right to future income in return for cash.

The cash the government is using to buy these IOUs has not come out of the safe at 11 Downing Street, it has been created by running the printing presses. On the face of it this injects additional money into the system and should be inflationary (because the same amount of assets exist but there is more of the stuff by which they are valued).

But, it can only be inflationary if the new cash is available for use. In fact the banks are required to keep it in the safe, to be called upon to meet liabilities as and when they arise.

An inability of banks to pay their debts is essentially deflationary because the creditors' cash receipts fall and so, therefore, does the amount of cash in circulation. Allowing the banks to meet liabilities that would otherwise not have been met is inflation neutral.

This is why the QE process, as it is being exercised today, is essentially inflation-neutral in the short term - because it does not affect the day-to-day supply of money sloshing around the system.

The longer term is almost impossible to predict because current QE policy is just one aspect of the equation. Not only might that policy change but there is also the effect of the need to repay huge government debt. This also might be inflationary, deflationary or neutral, it all depends on what steps are taken.

John B said...

TFB, good stuff.

The area where serious inflation *is* a risk is if the next government decides that deliberately inflating away the debt will be easier than trying to repay it. This has nothing to do with QE, however.

Anonymous said...

The time lag between an increase in the money supply and the correlating level of inflation is well established.
Basic, fundamental economics. Weimar here we come.

Henry Crun said...

Anon 01:21, Wiemar nothing, Zimbabwe here we come.

March Hare said...

Someone asked for a country that employed QE without resulting high inflation - Japan.

Brown was right, in some senses, that gold has very little intrinsic value. The value it has is the biggest bubble in human history, and the longest one, simply because people believe it to be untouchable. Real value comes from what use something is. Gold has limited uses in anything other than Jewelery and so actually does nothing to increase value when manufactured with something else. Sand, when melted into a silicon wafer, can produce integrated circuits; silver can be used in high quality electronics; hydrocarbons can be used to manufacture plastics etc. etc.

Gold has no real use and is simply valuable because idiots think it will always be valuable.

sobers said...

@ John B: I'm afraid your description of a 'bank thinking it had £50bn, and finding it had £25bn' proves you know sweet FA about banking.

You do realise that your 'cash' in the bank doesn't exist, other than as a number in a computer somewhere? That cash deposits in a bank are liabilities not assets?

Banks take your cash and lend it to people to buy assets, such as houses etc. That gives them a liablity (you coming in and wanting your cash back) and an asset (the loan backed by the house). The trick of banking is to have enough cash lying around to cover the expected withdrawals at any point. No bank could survive if everyone turned up and asked for their deposits. The cash isn't there. Its in houses, in office blocks, in the things bought by people with credit cards and loans.

The loss of 'value' comes when the value of all the assets in the bank (all the loans , and underlying loan assets, plus the banks own capital) no longer equal or exceed the value of the cash liabilities. Then the bank is bust. Pretty much as RBS, HBoS, NR, Bradford and Bingley et al were. Banks do not suddenly find they have billions less cash than they thought, not unless someone has nicked it. What they do find is that the assets they have lent money to buy/build are no longer worth what they were. Hence the loss of value is in asset prices, NOT cash.

There is also a difference between a liquidity crisis, where you are not bankrupt, but at a given point you don't have enough cash to pay the people who want it (a classic 'Its a wonderful Life' style run on the bank). It takes time to liquidate assets, even if they cover the liabilites, and a bank can fall in those circumstance. In such conditions it would be perfectly OK for the govt to step in, provide liquidity, knowing it would soon get the money back on an orderly sale of assets.

Anonymous said...

> Blogger March Hare said...
> Gold has no real use and is simply
> valuable because idiots think it
> will always be valuable.

Correct. Do you see a shortage of idiots in the World?

In my view, the gold bull run has only just begun. When the X-Factor/Big Brother watching mob are busy buying it, rather than selling their jewelery off to "Postal Gold", that's when I'll be selling the gold mining shares I've bought over the last 3 months. ;)

Lost in Devon said...

March Hare: So, if I offered you gold and asked for nothing in return, would you refuse it?

If you found some, say, whilst scratching around in a stream bed, would you ignore it?

It has value in a free market and keeps value simply because it's scarce (it also looks nice).

If I replace every instance of the word "gold" in your comment with "money", it reflects my opinion somewhat accurately ;)

March Hare said...

@Lost in Devon
Money should represent actual goods and services in that country. The value of these will fluctuate depending on many things, the money supply and expected inflation and growth being 3. Gold represents gold. Some people see it as valuable because it's shiny and relatively tarnish-proof. But not all.

When the Spanish went to South America they brought back lots of silver and gold that the locals had no use for, you couldn't make a knife or a weapon of it, it was too soft. They saw the lust the Spanish had for the metals and couldn't understand it. They were right.

Savonarola said...

This idiot has owned gold, bullion and shares, since 2003.

I prefer to own this idiotic investment in prefernce to BoE and US iou's. So do the Central banks of India and China.

Try some Centamin or Randgold. You will be laughing all the way to the bank.

March Hare said...

So Savonarola, if you owned one of the few pieces of volcanic glass that people knew of, would you feel just as clever. If something is valuable for no reason other than that people think it's valuable you are playing a very dangerous game. Think Tulips, think South Sea Bubbles, think Tech stocks.

Gold has simply kept its mystique longer because lots of people are magpies, but the intrinsic value of something is the worth/value you can create with it. The price is simply what the next idiot in line is willing to pay you for it.

Richard said...

We're heading for Zimbabwe faster than people think - the pound is already 8% down against the Zimbabwe Dollar.

Anonymous said...

The wrecking crew responsible for the financial collapse knew what they were doing, Brown's masters know what they are doing. They contrived this financial raping through the whirlwind of fiat currency via deregulation and predatory lending practices and tying all the assets together with derivatives, only to pull the rug out and deep-six the investments. They're going to make us responsible for ALL the assets: hundreds of trillions of loonies worth. This is indentured servitude and the real collapse hasn't happened yet.

Gold will stave off starvation if you've used it wisely and so will storable food and if you own your own property. However, once the carbon rationing and taxes come into it you're heading down the same road as the rest of us. We're being 2nd if not 3rd world-ised and this will destroy the middle classes.

They did this on purpose, because you can have independent people under totalitarianism. Welcome to the NWO folks, it's going to get ugly.