Category Archives: Financial arcana

Note to debt doomsayers

When someone buys a country’s government bond, the government needs to pay it back on a specific date. If the government refuses to do so, there will be a total collapse in international confidence in the debt of the country and of all its banks, companies and residents, a currency crisis, and generally a wide range of Very Bad Consequences.

When someone works for a country’s government and is told they’ll get a nice fat pension, the government can decide to not pay it. This will upset the person who works for the government quite a lot, and might be perceived as somewhat unfair. However, the consequences for the country’s ability to borrow, invest and trade in international markets are non-existent.

Therefore, anyone who counts public sector pensions as a liability faced by the UK government in the context of the current financial crisis (generally as a way of saying ‘ooh, we’re nearly as bad as Iceland’ – Nadeem Walayat, this means you) either doesn’t understand what they’re talking about, or is trying to mislead their audience into thinking things are much worse than they really are.

Why we aren’t all doooooooooooooomed

A commenter at CiF, against all odds, cites some relevant statistics:

Financial services which – some people fondly believe – is “all we do nowadays” made up only about 5% of the economy at their height, (rather less now, methinks), whilst industry accounts – according to that CIA thing everybody else seems to be quoting from – for 23.4% of GDP.

In Germany, by contrast, industry makes up a massively larger 31.1% of GDP. (With France a measly 20.6%, the US an even more measly 19.8%, and mighty Japan, at 26.5% only 2% bigger.)

(Link)

The Bill Emmott piece on which he’s commenting isn’t at all bad, either. Although the total, ruinous collapse of the dollar next year is going to be the major story…

Save, borrow, whatever

So the fairly essential cuts in interest rates are hitting savers. As a net saver, I can only say this is a good thing.

There are approximately four sorts of people in the UK, financially speaking:
1) people with no assets or liabilities. “The poor”.
2) people with houses and mortgages. “Hard-working families”.
3) people with some savings, no house and no mortgage. “People who noticed there was a bloody great house price bubble”.
4) people with houses, savings, and no mortgages. “Jammy sods”.

Cutting the interest rate benefits people in group 2, at the expense of groups 3 and 4. But the house price crash has massively disbenefited people in group 2, to the benefit (either now or at some point in the next couple of years) of people in group 3. The fact that we’ll lose out on interest in the short run is more or less irrelevant, since by next year our cash will be worth about 1.5x what it was in 2007 in terms of “how much house can you get?”. So it’d be churlish for people in group 3 to worry too much about bailing out the poor buggers in group 2 – we’ll just buy their houses for next-to-nothing…

People in group 4 are unequivocally hit both by the house price crash and by the interest rate cut. But since their net worth is enormous by comparison with everyone else, even after both these adverse events, and since they’re the ones who benefited from 40 years of house price inflation and the enormous wealth transfer from the young to the old that this entailed, their plight is pretty much inconsequential.

And the poor? Well, they’re pretty much still poor, just as they were during the boom.

World of Chutzpah

BBC City Diarist ‘Stephen’:

During the chancellor’s pre-Budget report and the opposition’s response, there were alternate gasps of disbelief and jeers of contempt across our trading floor. It’s utterly bewildering how our political system has managed to put such innumerates, however well-meaning, in charge of our economy.

Hmm. Perhaps, after you – not the politicians at all – were directly responsible for screwing the economy, you might lay off on jeering at them for trying to clean up the mess you created? And given your complete inability to price or understand liquidity risk, perhaps ‘innumeracy’ jibes might be considered especially inappropriate?

As ever, Dan Davies has the sensible economist’s take on things: viz, it’s all to the good but probably won’t be enough. And prophet of doom Willem Buiters is as terrifying, well-argued and appallingly badly written as ever.

Furniture, nudity thereof

If anyone uses the phrase ‘the cupboard is bare’ when referring to the UK’s current economic position, this is an excellent indicator that they are entirely clueless about it. For one, it’s an embarrassingly trite and twee metaphor, unlikely to be used by anyone literate; for two, it paints an entirely false picture of the government’s financial situation (also, note that the government precisely and exactly did pay down the national debt as a proportion of GDP, which is the only figure that matters, during the boom times, which makes criticising them for not doing so particularly weird).

As Chris highlights (while also, correctly, pointing out that the current ‘sterling crash’ isn’t one at all – if it were, the pound would have fallen significantly against the euro, which it hasn’t. Rather, it’s a dollar/yen rally), people are still falling over themselves to lend the government money at very low interest rates. That’s an indicator that outside of cutesy-talking-point land, serious people accept there’s plenty of, err, cupboard-room.

While I’m here, a couple of points on the Centre for Policy Studies report that purports to show the UK has a ginormously terrifying public debt. For a start, it’s written by a Tory MP – aren’t think-tanks producing this kind of report supposed to maintain some vague pretence of not being entirely motivated by partisan hackery?

Content-wise, it’s the same report the CPS churn out every year, with the figures slightly updated. And as always, it’s spun ridiculously: the angle is approximately “when you include the PFI Enron accounting, Network Rail’s nationalised in all but name-ness, bank bits, various other dodges and public sector pensions, the national debt is enormous”. In fact, the only non-trivial sums it identifies are PFI payments – which it exaggerates by a factor of more than three by failing to follow anything even vaguely resembling accounting standards, as I’ve already pointed out here – and public sector pensions, which are an order of magnitude larger than any of the other factor, and are the only way authors of this kind of paper can get from “the national debt is 42% of GDP instead of 39%, nobody cares” to “oh my god, the national debt is 150% of GDP and we’re all ruined due to Evil Labour”.

Quite how the hell public sector pensions should be accounted for is a tough question, and not one which has been satisfactorily resolved anywhere by anybody. However, suggesting that the UK is particularly screwed because of Labour’s incompetence and dodging, when actually the problem has existed forever and in every developed economy, is grossly dishonest. It also doesn’t represent debt in the sense of ‘people who have pieces of paper saying you’ll pay them and who’ll sue you if you don’t’ – it’s just a promise from politicians to be nice to old people, and we all know about the iron-like unbreakability of politicians’ promises…

[*] Yes, Network Rail’s GBP20bn debt should be included in the headline figures, as it’s government-guaranteed and not secured against tradeable assets. So should the real PFI number of c.GBP30bn; together, these add an extra 4-5% of GDP to the official national debt figure. I’m happy to confirm for the benefit of readers who question my political neutrality that these should be classed in the national debt proper and that Labour are slippery sods for not doing so (although on the other hand, they were the first ever UK government to move to GAAP for public sector accounting and are one of the first globally to adopt IFRS).

The banks shouldn’t be: it doesn’t make sense to view debt backed by tradeable financial assets as part of The National Debt, since it doesn’t represent money that’ll have to be paid back out of future taxation. At worst, we’re on the hook for the difference between the value of the banks’ mortgage books now and the long-term value of the relevant houses, cushioned by homeowners’ wiped-out equity. Even if we have a two-year depression and house prices fall 40% from their peak, the loss potential isn’t high.

I endorse this product and/or service

While I’ve spent a few days been being assortedly sunburned, rained upon, terrified and crushed on our fine inland waterway system, dsquared has sort-of-broken his ‘not commenting on the current crisis’ rule. Read it.

Yes, of course there’s some TWST, WT? to it, but the conclusion that Western banks’ loans exceed their deposits because the decision was taken at a macro level (and a long time ago) for Western economies’ imports to exceed their exports is pretty hard to deny. Even if it’s not as satisfying as saying ‘those bastards in Canary Wharf stole our money’.

Just in case…

I’m doubtful that RBS will fail, despite some informed commentators’ beliefs to the contrary.

However, in the event that it should collapse, I’d like to be the first person to suggest that the Deloitte partner who led the BCCI liquidation would be an excellent choice of administrator…

Update: fail prediction FAIL. If the government is forced to take a majority stake in your company, you’ve failed.

In other ‘don’t panic’ news…

rates are still looking pretty good on UK government bonds, so even after the financial bail-out the government has plenty of room to borrow for infrastructure investment.

The only danger is if politicians bow to the pressure from “let’s turn this recession into a depression because we hate Keynes” maniacs and don’t take advantage of the opportunity…

Anything the global financial system can do, local government can do worse

Individuals who lost more than £50,000 in the Landsbanki collapse certainly let greed get in the way of good sense, and certainly don’t deserve the generous bail-out terms that the government has given them. However, that pales into insignificance compared to the 20+ local councils who’ve lost tens of millions between them in Landsbanki deposits. And who won’t get a penny back, as compensation schemes for bankrupt banks only protect retail investors.

These organisations actually have people employed with financial qualifications in working out what to do with their money. And it’s not like they haven’t been burned before by the collapse of a dodgy bank that just happened to be the highest interest payer (if it is in fact possible to work in local government finance without being told about the BCCI collapse and its knock-on effect for councils, then there’s a systemic problem in that everyone in the entire industry is completely inept).

It’s unfortunate that local taxpayers can’t recover the missing assets from the idiots in question, and the councillors who’ve singularly failed to oversee them (and who, I’m willing to stake near-Landsbanki-style amounts of money, will be more or less equally drawn from the ranks of the major parties).

Update: The Daily Mash calls it right: “oh fuck, we meant ‘Luxembourg'”…