Tuesday 22 April 2014
The best blog about how banks work:
Frances Coppola wrote this in 2012 but it is still the best explanation of how high street banks work
Monday 17 February 2014
10 reasons why the UK is not a democracy.
10 reasons why the UK is not a democracy.
1. The Monarchy.
If the head of state is unelected and is appointed by right of birth
then this is not democracy. And if anyone out there is thinking “but the
Monarchy have no real power” think again. Read this and remember all members of our armed forces and all MP’s swear allegiance to
the Monarch. It is an act of treachery for them to be republicans.
2. The House of Lords.
The second chamber of
parliament, which can block and amend laws, is unelected. Its members are
mostly appointed and partly hereditary. All three major UK political parties wanted
reform and stated in their 2010 manifestos that this should change to an
elected second chamber. However despite majority support for a bill in
parliament for this it has been dropped from government business (see 6 below)
3. The selection of candidates.
The Prime Minister
of the UK has, for the last 91 years been either Conservative or Labour. The
membership of these two parties in 2012 is less than 1% of the population and
it is these members (and often a small sub-set of them) that select
parliamentary candidates, therefore our MP’s and governments are not
representative of the vast majority of the people. See this
4. The disconnect between manifesto promises and implemented policy.
4. The disconnect between manifesto promises and implemented policy.
Every political party at a general election sets out its
policies in a manifesto. These are meant to be pledges that if elected will be
enacted as law. Anyone who has lived through a 5 year parliament will know that
they are littered with broken promises. “ we will not increase tuition fees”
said the Liberal Party in 2010. But in coalition government they voted for an
increase in the first session of parliament.
“we will give you the voters the power to sack your MP” was a key pledge
of the Conservatives in 2010. This has been dropped now they are in government.
“we will safeguard Britain’s credit rating with a credible plan to eliminate
the bulk of the structural deficit over a Parliament” was also a Conservative
pledge. Britain’s credit rating has been downgraded and the plan to eliminate
the deficit in one parliament has been shelved indeed there is now no date for
when this will happen but certainly at least 5 years from now. There are also always glaring omissions from
manifestos. The privatisation of the NHS was not in either the Liberal or
Conservative manifesto in 2010 but it is being implemented in Government.
Therefore the idea that somehow the people decide on the policies of any
government is flawed because the manifestos are not implemented and new
policies are implemented without a mandate from the people.
5. Party funding, lobbying and corruption.
It costs
a great deal of money to contest all 650 seats at a general election. The
maximum spend allowed of £30,000 per seat so for the main parties a spend of
over £18m is required to reach the maximum. As we have seen the number of party
members is small so subscriptions alone cannot hope to reach these numbers. Let
alone run the party machines between elections. Therefore all political parties
seek donations from individuals and organisations. Once parties are funded in
this way then the possibility of corruption is always present. Over the last 25
years we have had a number of high profile scandals including Cash for
Question, Cash for Honours and Cash for Influence. See http://en.wikipedia.org/wiki/Cash-for-questions_affair http://en.wikipedia.org/wiki/Cash_for_Honours
http://en.wikipedia.org/wiki/Cash_for_Influence
Whilst the political parties and individual MPs tout for donations it will
always be the case that they are open to claims that they implement policies
for their backers and not for the people they are supposed to represent. The
dropping of proposals for the banning of tobacco adverts in F1 after a big
donation by the head of F1 does nothing to suggest that laws are passed by the
will of the people and not by the wallets of backers. And this is just one of
any number of examples. That brings us
to lobbying. The UK lobbying industry is
worth £1.9bn and employs 14,000 people. Does it make any sense to conclude that
lobbying (or seeking to influence decision makers) does not work in the face of
these statistics? The fact that a tobacco giant is able to give a £6m contract
to a lobbying firm and then see plans for plain packaging on cigarettes
abandoned by the government suggests that it was money well spent. See http://www.guardian.co.uk/politics/2013/jul/20/cameron-lynton-crosby-contract-philip-morris
6. Individuals in power represent themselves not
the people.
Politicians are almost always ruthlessly ambitious people. Once in
power they will do everything they can to hold on to power at the expense of
the people they are supposed to be representing. A good example of this is
referred to in point 2 above. The bill in 2012 to reform the House of Lords as
an elected chamber was put before the House of Commons and at second reading
received a considerable majority in favour. However 90 Conservative members
voted against. The prime minister decided to drop the bill. Why? It is a good
bet that had he tried to proceed with it then he would have faced a leadership
challenge and could well have lost. He therefore put himself above the will of
the people (remember this had majority cross party MP support and was in all
three parties manifestos) – how can this be democracy when the leader of a
party puts his own interests above the peoples will? See http://www.parliament.uk/briefing-papers/SN0640
7. First past the post.
Our electoral system itself
is undemocratic. The party that wins the majority of seats rarely wins the
majority of the popular vote. In 2010 the Conservatives won the most seats with
36.1% of the vote. In 2005 Labour won the most seats (and a parliamentary
majority with 35.2% of the vote. And do not forget that not everyone votes – in
2010 the turnout was 65% and in 2005 just 61% voted. This means that David
Cameron became Prime Minister with the support of just 21% of the
electorate. In Australia voting is
compulsory. At their last general election the PM was returned with 51% of the
votes and so could be said to have a mandate from the people. A candidate that
receives support from just 21% of the electorate cannot claim to have a
democratic mandate.
8. The “payroll vote” and the Whips.
The house of
commons is organised in a way that takes away from the constituency MP the
right to represent his constituents. Over 150 members of parliament are on the
government payroll (they get extra salary for being ministers or junior
ministers than ordinary MPs). In any vote in the commons the “payroll vote” means
that those 150 members cannot vote with their conscience or in the interest of
their constituents because they would then be sacked from the government. Their votes are effectively bought. Also when
the government want to pass a law they “whip” their MPs into voting on party
lines and not according to the interests of their constituents. Effectively MPs
run the risk of expulsion from the party (and de-selection) if they defy the
whip. Therefore the basic tenet of a parliament of representatives is
undermined. The representatives do not represent anyone at the legislature they
are “told” what to vote for.
9. Lack of veto.
There is no power of recall over
an MP who is found to be not representing his/her constituents. For instance an
MP who rarely (if ever) attends parliament cannot be re-called and a
by-election triggered. Even if the MP is guilty of serious wrongdoing (i.e.
breaking parliamentary standards) he cannot be re-called. The only recourse is
to wait until a general election and even then if that MP is reselected by the
party (see 3 above) then he/she may well be re-elected
10. Statutory Instruments.
It has become the
practice of governments over recent years to make use of things called
Statutory Instruments. This confers on ministers power to enact legislation
without further recourse to parliament (other than passing the original act
giving them those powers). In this way ministers are given vast power without
the checks and balances of scrutiny by the people’s representatives.
Governments have argued that this simplifies the working of government and is
less bureaucratic, but it cannot be democratic to give unfettered power to one
person to make laws. See http://www.parliament.uk/business/bills-and-legislation/secondary-legislation/statutory-instruments/
and http://www.guardian.co.uk/commentisfree/henryporter/2009/jan/14/statutory-instruments-parliament
Friday 15 November 2013
10 things you need to know about banks
Ten things you need to know about banks.
1. “Your” money in a bank belongs to the bank. When you deposit money in your account you are making a loan to the bank, in law the money becomes property of the bank. You have entered into a contract with the bank and they agree under the terms of this contract to pay you back the money you have loaned them when you ask for it. However they can default on this contract, at the moment the only guarantee that you will get your money back is via the government (taxpayer). This “insurance” scheme only covers you for £80,000 and deposits over this are unprotected.
2. Banks can create money. If you loan money from a bank the bank creates the money electronically and credits your account. This has the appearance of creating money from thin air but in reality the money is created on the promise of the borrower to repay. This is because as soon as the loan is re-paid the money that was created is destroyed. Except of course the bank has charged you interest, where has that money come from? When you realise that before the crisis in 2008, 97% of all money was created in this way then the interest itself is also created as a loan for someone else.
3. Banks cause inflation. By the processes above, each transaction carried out by the bank creates money, increasing the total amount of money in the system. As in any supply/demand situation if you increase the supply without an increase in demand the price will fall, so the value of the currency falls which is inflation. i.e. £1 buys less
4. Banks gamble with depositors’ money. The largest 9 US banks hold $228 trillion of derivatives. A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. E.g.- A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative. It was this sort of betting that brought the crash in 2008, and caused the bailout by the taxpayer of banks across the world. Be in no doubt, if the banks had not been bailed out by the taxpayer depositors would have lost their money (not withstanding government insurance mentioned above, but again taxpayers money).
5. Banks can gamble on credit. The collapse of Barings bank was due to a rogue trader betting more than the value of the bank and losing. As stated above derivative trading is not regulated and even within banks regulating systems can be bypassed, there are many recent examples of traders betting more than the limits imposed on them by their banks.
6. Banks regularly lose money gambling. A definition of a bet is that two sides take an opposing view of an event and when the event happens one side gains a financial advantage over the other. In other words when you gamble there is always a winner and a loser. Therefore if banks are gambling sometimes they will lose. Example – this from associated press 16th March 2013, WASHINGTON— Two former high-ranking executives at JPMorgan Chase faced tough questions from U.S. senators Friday about why the bank played down risks and hid losses from regulators when it was losing billions of dollars. The hearing was held a day after the Senate Permanent Subcommittee on Investigations issued a scathing report that ascribed widespread blame for $6.2 billion in trading losses to key executives at the nation’s biggest bank.
7. Banks do not hold enough funds to repay all depositors. At any one time a bank only holds in liquid assets a fraction of the funds it “holds” on deposit. The amount a bank holds is calculated by “expected customer behaviour models”. This is why the biggest risk to a bank is a “bank run”, i.e. a situation where all the customers want their money back at once.
8. High street banking operations make more money from charges than from loan interest. As seen in point one above when we pay money into a bank we are lending them money, it would seem fair that banks should pay us for the privilege of having use of our money as they do when lending to us. However interest on current accounts is now by exception, and for many accounts the customer is charged for lending the bank money. Banks now validate these charges by “adding value” such as mobile phone insurance; these services are paid for by the charges and commission paid by their commercial partners who gain access to the customers’ details.
9. Banks use their privileged position to make profits. When a bank lends to you they check your credit worthiness. As an individual you have an “ordinary” credit position. A bank as a financial institution has a “privileged” credit position by way of its deposits and liquidity (funded by you!). This allows the bank to borrow cheap and lend expensive. This spread at the moment is at its starkest because the Bank of England is allowing banks to borrow at 0.5% but they are lending at a minimum of 5.1%. Of course some lenders are charging considerably more.
10. There are alternatives to banks. If you feel that traditional banks are not the types of organisations you want to hold your money then look here for alternatives: http://www.moveyourmoney.org.uk/
1. “Your” money in a bank belongs to the bank. When you deposit money in your account you are making a loan to the bank, in law the money becomes property of the bank. You have entered into a contract with the bank and they agree under the terms of this contract to pay you back the money you have loaned them when you ask for it. However they can default on this contract, at the moment the only guarantee that you will get your money back is via the government (taxpayer). This “insurance” scheme only covers you for £80,000 and deposits over this are unprotected.
2. Banks can create money. If you loan money from a bank the bank creates the money electronically and credits your account. This has the appearance of creating money from thin air but in reality the money is created on the promise of the borrower to repay. This is because as soon as the loan is re-paid the money that was created is destroyed. Except of course the bank has charged you interest, where has that money come from? When you realise that before the crisis in 2008, 97% of all money was created in this way then the interest itself is also created as a loan for someone else.
3. Banks cause inflation. By the processes above, each transaction carried out by the bank creates money, increasing the total amount of money in the system. As in any supply/demand situation if you increase the supply without an increase in demand the price will fall, so the value of the currency falls which is inflation. i.e. £1 buys less
4. Banks gamble with depositors’ money. The largest 9 US banks hold $228 trillion of derivatives. A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. E.g.- A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative. It was this sort of betting that brought the crash in 2008, and caused the bailout by the taxpayer of banks across the world. Be in no doubt, if the banks had not been bailed out by the taxpayer depositors would have lost their money (not withstanding government insurance mentioned above, but again taxpayers money).
5. Banks can gamble on credit. The collapse of Barings bank was due to a rogue trader betting more than the value of the bank and losing. As stated above derivative trading is not regulated and even within banks regulating systems can be bypassed, there are many recent examples of traders betting more than the limits imposed on them by their banks.
6. Banks regularly lose money gambling. A definition of a bet is that two sides take an opposing view of an event and when the event happens one side gains a financial advantage over the other. In other words when you gamble there is always a winner and a loser. Therefore if banks are gambling sometimes they will lose. Example – this from associated press 16th March 2013, WASHINGTON— Two former high-ranking executives at JPMorgan Chase faced tough questions from U.S. senators Friday about why the bank played down risks and hid losses from regulators when it was losing billions of dollars. The hearing was held a day after the Senate Permanent Subcommittee on Investigations issued a scathing report that ascribed widespread blame for $6.2 billion in trading losses to key executives at the nation’s biggest bank.
7. Banks do not hold enough funds to repay all depositors. At any one time a bank only holds in liquid assets a fraction of the funds it “holds” on deposit. The amount a bank holds is calculated by “expected customer behaviour models”. This is why the biggest risk to a bank is a “bank run”, i.e. a situation where all the customers want their money back at once.
8. High street banking operations make more money from charges than from loan interest. As seen in point one above when we pay money into a bank we are lending them money, it would seem fair that banks should pay us for the privilege of having use of our money as they do when lending to us. However interest on current accounts is now by exception, and for many accounts the customer is charged for lending the bank money. Banks now validate these charges by “adding value” such as mobile phone insurance; these services are paid for by the charges and commission paid by their commercial partners who gain access to the customers’ details.
9. Banks use their privileged position to make profits. When a bank lends to you they check your credit worthiness. As an individual you have an “ordinary” credit position. A bank as a financial institution has a “privileged” credit position by way of its deposits and liquidity (funded by you!). This allows the bank to borrow cheap and lend expensive. This spread at the moment is at its starkest because the Bank of England is allowing banks to borrow at 0.5% but they are lending at a minimum of 5.1%. Of course some lenders are charging considerably more.
10. There are alternatives to banks. If you feel that traditional banks are not the types of organisations you want to hold your money then look here for alternatives: http://www.moveyourmoney.org.uk/
The rule of law
The is an old song that goes....
It’s the same the whole world over,
It’s the poor what gets the blame,
It’s the rich what gets the pleasure,
Ain’t it all a F*****G shame.
I am reminded of this every day when watching the current UK government stuff the poor and disadvantaged in every way possible. The performance of the Department of Work and Pensions has reached new lows even for the sociopath Ian Duncan Smith and his cowering, cowardly henchman Mark Hoban. They have resorted to the lowest trick in the politicians’ armoury, making a retrospective law to overturn a court ruling that they (the DWP) had broken the law.
Of course if you are poor and you break the law you are punished, recently a disabled protester shouted at David Cameron that he had “blood on his hands” because of the work assessment policy that was finding sick and disabled people fit for work and the subsequent deaths of 100s of such people. The disabled protester was seized by police, and found guilty of public order offences and fined an amount of money she cannot possible afford to pay.
Now politicians are elected to pass laws. When these laws are debated, amended and refined the idea is that they then get to the statue book and the politicians work is over, it is up to the justice system to ensure these rules are obeyed and punish those that do not obey them.
But passing laws is like installing software on a PC. Sometimes new software will stop existing software from working just as some new laws will interfere with existing laws and sometimes are contradictory. It is up to the courts and judges to apply the law in a way that makes sense of the law in its entirety and this is done by considering cases brought under the new law and reaching judgements that form precedent for subsequent cases.
However, just as you cannot install an Apple Mac app on a Windows PC, there are certain no no’s when it comes to new laws. For instance you cannot implement a new law that affects a certain group of people without making sure those that are affected know what has changed (under the new law) and what they need to do to comply with that law. If the new law has automatic sanctions for non-compliance then it is illegal to enforce these sanctions if you have not made the rules clear.
An example of this would be the 30mph speed limit in towns and cities. Everyone who learns to drive has to pass a theory test that explains the rules about speed limits and that when you have street lights but no signs this is a 30mph zone. If the government wanted to change this to 20mph then they would have to run a publicity campaign, like the “clunk click” seat belt ads, to explain the change.
Now the DWP and its ministers know this. Indeed the DWP costs the taxpayer £6 billion pounds a year in administration and part of that goes on expensive lawyers that are supposed to take care of these things. However when they introduced their new workfare (welfare to work) schemes they failed to explain properly to unemployed people that if they did not take up these “voluntary” unpaid work placements they would be sanctioned and lose their jobseekers allowance. Now two brave souls took the DWP to court over this and won a victory in the high court. This opened the way to all people who had refused their placements and been sanctioned to reclaim their JSA back, this would have costs the DWP £130 million. So the DWP decided to go to parliament and using the governments majority get MPs to vote for a new law that retrospectively replaced the old one to explicitly state that sanctions would apply to all people who had refused placements and stating that all sanctioned were not entitled to JSA.
This is the same as setting up a speed trap in a 30mph zone. Waiting till all the cars went through the trap and then retrospectively changing the law so that the speed limit was 20mph at the time of the trap, and fining all the drivers that were going over 20 but less than 30.
The original complainant has decided to take the DWP to the European Court of Human rights because she argues that this retrospective law is unfair and against basic human rights. The DWP has at taxpayers’ expense decided to hire a top QC to not only fight the ECHR case but also to launch an appeal against the original judgement. UPDATE DWP Lost!!!!
Now there are other factors to consider here. First research across the world into these workfare schemes has shown that they do not improve the chances of an unemployed person getting a job. The DWP knows this because they were the ones who commissioned the research. Second the DWP say the schemes benefit the unemployed because it gets them used to a work regime. Third these schemes provide free labour for employers that get a stream of new free workers every six weeks which means they do not have to take on any permanent paid staff. It is a subsidy for these already wealthy companies (like Tesco). Lastly it is forbidden for the employers to employ the people on the scheme when their placement ends (this is because if they did it would be admitting that they had vacancies and therefore they should have not participated in the scheme, a Catch 22 situation).
So the DWP want to make sure unemployed people spend six weeks providing free labour for rich companies for £71 per week (when minimum wage would pay over £240) with no hope of a job at the end of it, and wasting six weeks of time when they could be looking for work , just out of spite.
When you consider all these things it is clear that these schemes are a punishment for people who are (mostly) for no fault of their own unemployed, and the use of a retrospective law is proof of how far these disgraceful people will go to make sure the poor and disadvantaged suffer.
It’s the same the whole world over,
It’s the poor what gets the blame,
It’s the rich what gets the pleasure,
Ain’t it all a F*****G shame.
I am reminded of this every day when watching the current UK government stuff the poor and disadvantaged in every way possible. The performance of the Department of Work and Pensions has reached new lows even for the sociopath Ian Duncan Smith and his cowering, cowardly henchman Mark Hoban. They have resorted to the lowest trick in the politicians’ armoury, making a retrospective law to overturn a court ruling that they (the DWP) had broken the law.
Of course if you are poor and you break the law you are punished, recently a disabled protester shouted at David Cameron that he had “blood on his hands” because of the work assessment policy that was finding sick and disabled people fit for work and the subsequent deaths of 100s of such people. The disabled protester was seized by police, and found guilty of public order offences and fined an amount of money she cannot possible afford to pay.
Now politicians are elected to pass laws. When these laws are debated, amended and refined the idea is that they then get to the statue book and the politicians work is over, it is up to the justice system to ensure these rules are obeyed and punish those that do not obey them.
But passing laws is like installing software on a PC. Sometimes new software will stop existing software from working just as some new laws will interfere with existing laws and sometimes are contradictory. It is up to the courts and judges to apply the law in a way that makes sense of the law in its entirety and this is done by considering cases brought under the new law and reaching judgements that form precedent for subsequent cases.
However, just as you cannot install an Apple Mac app on a Windows PC, there are certain no no’s when it comes to new laws. For instance you cannot implement a new law that affects a certain group of people without making sure those that are affected know what has changed (under the new law) and what they need to do to comply with that law. If the new law has automatic sanctions for non-compliance then it is illegal to enforce these sanctions if you have not made the rules clear.
An example of this would be the 30mph speed limit in towns and cities. Everyone who learns to drive has to pass a theory test that explains the rules about speed limits and that when you have street lights but no signs this is a 30mph zone. If the government wanted to change this to 20mph then they would have to run a publicity campaign, like the “clunk click” seat belt ads, to explain the change.
Now the DWP and its ministers know this. Indeed the DWP costs the taxpayer £6 billion pounds a year in administration and part of that goes on expensive lawyers that are supposed to take care of these things. However when they introduced their new workfare (welfare to work) schemes they failed to explain properly to unemployed people that if they did not take up these “voluntary” unpaid work placements they would be sanctioned and lose their jobseekers allowance. Now two brave souls took the DWP to court over this and won a victory in the high court. This opened the way to all people who had refused their placements and been sanctioned to reclaim their JSA back, this would have costs the DWP £130 million. So the DWP decided to go to parliament and using the governments majority get MPs to vote for a new law that retrospectively replaced the old one to explicitly state that sanctions would apply to all people who had refused placements and stating that all sanctioned were not entitled to JSA.
This is the same as setting up a speed trap in a 30mph zone. Waiting till all the cars went through the trap and then retrospectively changing the law so that the speed limit was 20mph at the time of the trap, and fining all the drivers that were going over 20 but less than 30.
The original complainant has decided to take the DWP to the European Court of Human rights because she argues that this retrospective law is unfair and against basic human rights. The DWP has at taxpayers’ expense decided to hire a top QC to not only fight the ECHR case but also to launch an appeal against the original judgement. UPDATE DWP Lost!!!!
Now there are other factors to consider here. First research across the world into these workfare schemes has shown that they do not improve the chances of an unemployed person getting a job. The DWP knows this because they were the ones who commissioned the research. Second the DWP say the schemes benefit the unemployed because it gets them used to a work regime. Third these schemes provide free labour for employers that get a stream of new free workers every six weeks which means they do not have to take on any permanent paid staff. It is a subsidy for these already wealthy companies (like Tesco). Lastly it is forbidden for the employers to employ the people on the scheme when their placement ends (this is because if they did it would be admitting that they had vacancies and therefore they should have not participated in the scheme, a Catch 22 situation).
So the DWP want to make sure unemployed people spend six weeks providing free labour for rich companies for £71 per week (when minimum wage would pay over £240) with no hope of a job at the end of it, and wasting six weeks of time when they could be looking for work , just out of spite.
When you consider all these things it is clear that these schemes are a punishment for people who are (mostly) for no fault of their own unemployed, and the use of a retrospective law is proof of how far these disgraceful people will go to make sure the poor and disadvantaged suffer.
Magic Money
The magic money tree
On March 7th 2013 Prime Minister David Cameron made a speech where, in response to calls for more public spending said “It’s as if they think there’s some magic money tree. Well let me tell you a plain truth: there isn’t.”
Link Here:
Well as usual the Prime Minister was being economical with the truth and here is why.
When the coalition government came to power in 2010 Government net debt stood at £828bn (source ONS Q1 2013). As of Q1 2013 (three years later) this stood at £1,182bn (source ONS). So in three years of tough deficit reduction the debt went up by £354bn (at an average of £118bn per year).
So behind all the “we are dealing with Britain’s debt” rhetoric the truth is we are a still borrowing at an impressive rate. Now the government knew that borrowing was going to rise and that they would have to keep going to the open market to fund this. So it was in the governments’ interest to make sure it could borrow cheaply. So in association with the Bank of England they came up with a wizard wheeze. It was called “Quantitative Easing”, or to put it another way “a magic money tree”.
Now regular readers will know that commercial banks already have a money tree, because they are allowed to create money to make loans to customers. This process does however have a slight problem in that commercial banks can only create money in relation to funds they hold. This relationship is around 1:10 meaning if they hold £100 they can lend/create £1000. This is a good wheeze but not as good as quantitative easing, because QE is done by what is called the “central bank” and a central bank can create as much money as it likes. We know this because on each bank note is a promise from the central bank to honour payment of that “money”.
So the Bank of England has created £375bn. Sounds like a money tree to me, but wait there is a twist. The Bank of England is supposed to be responsible for inflation so if it just dumped £375bn of new money into circulation that might just cause inflation so it had to come up with a plan. What it is has done is to create a company to” invest” the new money and over time the plan is that the investments be successful and cover the original money created which will then disappear as easily as it was created – now that is a Magic Money Tree.
This new company formed to invest the £375bn has an interesting backer. The UK Government has underwritten the business of this company so that if the investments of this company are not successful the taxpayer will bail it out.
The new company has made only one type of investment, it has bought from UK banks UK Government Bonds. The effect of this is that interest rates on these bonds have been kept artificially low (because of the increased in demand). This has meant the government could continue to finance its debts at low rates of interest. Which helps lower the deficit which is a win for the government?
But now comes the best part. The government has to pay the holders of its debt interest (and the capital on maturity). So the Chancellor said to the Bank of England – now you hold £375bn of government debt we will have to pay you interest. How about we don’t pay, keep the money and instead use it to further reduce the deficit.
The Bank of England agreed to do this so now we have a win/win for the Government – low interest rates and a windfall consisting of interest on bonds bought with “magic” money. So far the government has used this magic money tree to pocket £40bn.
However every silver lining has a cloud and the bank has reminded the Chancellor that over time (and once they stopped buying bonds) interest rates would rise and the value of bonds issued at low rates would fall, this may mean that the value of the investments made by the company set up by the BOE may at some point be less than the original £375bn, in which case the Government would have to find the shortfall.
But never mind that because probably that time will come after the next election and may well not be this government’s problem.
On March 7th 2013 Prime Minister David Cameron made a speech where, in response to calls for more public spending said “It’s as if they think there’s some magic money tree. Well let me tell you a plain truth: there isn’t.”
Link Here:
Well as usual the Prime Minister was being economical with the truth and here is why.
When the coalition government came to power in 2010 Government net debt stood at £828bn (source ONS Q1 2013). As of Q1 2013 (three years later) this stood at £1,182bn (source ONS). So in three years of tough deficit reduction the debt went up by £354bn (at an average of £118bn per year).
So behind all the “we are dealing with Britain’s debt” rhetoric the truth is we are a still borrowing at an impressive rate. Now the government knew that borrowing was going to rise and that they would have to keep going to the open market to fund this. So it was in the governments’ interest to make sure it could borrow cheaply. So in association with the Bank of England they came up with a wizard wheeze. It was called “Quantitative Easing”, or to put it another way “a magic money tree”.
Now regular readers will know that commercial banks already have a money tree, because they are allowed to create money to make loans to customers. This process does however have a slight problem in that commercial banks can only create money in relation to funds they hold. This relationship is around 1:10 meaning if they hold £100 they can lend/create £1000. This is a good wheeze but not as good as quantitative easing, because QE is done by what is called the “central bank” and a central bank can create as much money as it likes. We know this because on each bank note is a promise from the central bank to honour payment of that “money”.
So the Bank of England has created £375bn. Sounds like a money tree to me, but wait there is a twist. The Bank of England is supposed to be responsible for inflation so if it just dumped £375bn of new money into circulation that might just cause inflation so it had to come up with a plan. What it is has done is to create a company to” invest” the new money and over time the plan is that the investments be successful and cover the original money created which will then disappear as easily as it was created – now that is a Magic Money Tree.
This new company formed to invest the £375bn has an interesting backer. The UK Government has underwritten the business of this company so that if the investments of this company are not successful the taxpayer will bail it out.
The new company has made only one type of investment, it has bought from UK banks UK Government Bonds. The effect of this is that interest rates on these bonds have been kept artificially low (because of the increased in demand). This has meant the government could continue to finance its debts at low rates of interest. Which helps lower the deficit which is a win for the government?
But now comes the best part. The government has to pay the holders of its debt interest (and the capital on maturity). So the Chancellor said to the Bank of England – now you hold £375bn of government debt we will have to pay you interest. How about we don’t pay, keep the money and instead use it to further reduce the deficit.
The Bank of England agreed to do this so now we have a win/win for the Government – low interest rates and a windfall consisting of interest on bonds bought with “magic” money. So far the government has used this magic money tree to pocket £40bn.
However every silver lining has a cloud and the bank has reminded the Chancellor that over time (and once they stopped buying bonds) interest rates would rise and the value of bonds issued at low rates would fall, this may mean that the value of the investments made by the company set up by the BOE may at some point be less than the original £375bn, in which case the Government would have to find the shortfall.
But never mind that because probably that time will come after the next election and may well not be this government’s problem.
Education for the elite by the elite
In my opinion Michael Gove’s announcement today of changes to GSCEs in England is a direct parallel for the struggle between left and right in politics.
Over time more pupils have been attaining A grades at GCSE and generally the number achieving A, B or C (which were considered a pass) has also increased.
Now of course there can be a number of reasons for this level of raised attainment. It could be that the standard of teaching has improved; it could be our schools are providing a better environment for learning. It could also be that pupils are working harder or it could be a combination of all of the above. On the other hand it could be that the exams and the course work are just getting easier and/or the marking less stringent.
If you’re a politician on the right it doesn’t really matter, what matters is that the result is more success and less failure, and a movement to that dreaded position of equality. Politicians on the right hate equality with a passion.
For the status quo to be maintained (which is the best position for a conservative) there must be inequality. There must be the elite and the rest, the successful and also rans. In this situation the less advantaged can be told they need to work harder in order to make it into the elite, which of course means the elite have a willing workforce to exploit for profit.
If the result of the education system is to produce only successful students there will be inevitable unrest when the job market cannot fulfil the raised expectations of the qualified students. So the answer from the politicians of the right is to make the exams harder and marking tougher to ensure the result will be an elite that pass and a majority who fail. This satisfies the view of the right wing that they are elite and they must protect their position at all costs, whilst placating the masses with the “try working harder” mantra (if you want to join the elite).
The result of capitalism is inevitably a wealth pyramid (see below)
Wealth Pyramid
This emphasises the elite/masses nature of the economic system that is prevalent across the globe. The graph shows that 0.5% of the population of the world own 37.5% of the world’s wealth and that 3bn people (68%) have to be content with just 4.2% of the wealth.
Of course this is a situation that the left want to change, to re-distribute this wealth more fairly across the population. That is why the left do not see anything wrong with a student body that has more passes than fails. That is because in a world where a job is guaranteed for all and a living wage is provided for all workers expectations of a successful student can be fulfilled.
Just time for an analogy to finish, the premier league in football was introduced earlier this century. As a result the TV money lavished on this elite league, premiership footballers have become amongst the richest people on the planet certainly in the 0.5% of the graph above. However football at the grass roots level has withered, there are more and more football clubs folding and relying on hand outs from well healed supporters to survive. A classic case of the success of the elite at the expenses of the rest. However the game in the UK is dying, more and more of the elite are imported from poorer countries (which still have hungry kids at grass roots level). Here there is no money in the lower levels for coaching and fewer talented players coming through. It could be that the very success of the elite eventually leads to the downfall of the game because it becomes starved of the talent it needs.
Could this happen elsewhere?
Over time more pupils have been attaining A grades at GCSE and generally the number achieving A, B or C (which were considered a pass) has also increased.
Now of course there can be a number of reasons for this level of raised attainment. It could be that the standard of teaching has improved; it could be our schools are providing a better environment for learning. It could also be that pupils are working harder or it could be a combination of all of the above. On the other hand it could be that the exams and the course work are just getting easier and/or the marking less stringent.
If you’re a politician on the right it doesn’t really matter, what matters is that the result is more success and less failure, and a movement to that dreaded position of equality. Politicians on the right hate equality with a passion.
For the status quo to be maintained (which is the best position for a conservative) there must be inequality. There must be the elite and the rest, the successful and also rans. In this situation the less advantaged can be told they need to work harder in order to make it into the elite, which of course means the elite have a willing workforce to exploit for profit.
If the result of the education system is to produce only successful students there will be inevitable unrest when the job market cannot fulfil the raised expectations of the qualified students. So the answer from the politicians of the right is to make the exams harder and marking tougher to ensure the result will be an elite that pass and a majority who fail. This satisfies the view of the right wing that they are elite and they must protect their position at all costs, whilst placating the masses with the “try working harder” mantra (if you want to join the elite).
The result of capitalism is inevitably a wealth pyramid (see below)
Wealth Pyramid
This emphasises the elite/masses nature of the economic system that is prevalent across the globe. The graph shows that 0.5% of the population of the world own 37.5% of the world’s wealth and that 3bn people (68%) have to be content with just 4.2% of the wealth.
Of course this is a situation that the left want to change, to re-distribute this wealth more fairly across the population. That is why the left do not see anything wrong with a student body that has more passes than fails. That is because in a world where a job is guaranteed for all and a living wage is provided for all workers expectations of a successful student can be fulfilled.
Just time for an analogy to finish, the premier league in football was introduced earlier this century. As a result the TV money lavished on this elite league, premiership footballers have become amongst the richest people on the planet certainly in the 0.5% of the graph above. However football at the grass roots level has withered, there are more and more football clubs folding and relying on hand outs from well healed supporters to survive. A classic case of the success of the elite at the expenses of the rest. However the game in the UK is dying, more and more of the elite are imported from poorer countries (which still have hungry kids at grass roots level). Here there is no money in the lower levels for coaching and fewer talented players coming through. It could be that the very success of the elite eventually leads to the downfall of the game because it becomes starved of the talent it needs.
Could this happen elsewhere?
Friday 13 September 2013
MP Expenses 2012-13
MPs have decided that the new rules on expenses are there to be avoided! So the "personal" expenses have gone down but the overall total has gone up because the emphasis has shifted away from second homes, toothbrush holders and duck ponds to employees. Check out the story here:
http://www.theguardian.com/politics/2013/sep/12/mps-expenses-rise-record-high
http://www.theguardian.com/politics/2013/sep/12/mps-expenses-rise-record-high
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