“It’s the economy, stupid”

Is a phrase associated with Bill Clinton’s successful 1992 presidential campaign. So why should that matter for the Scottish Independence referendum? Simply because for many people this is one of the key factors which they are considering before they decide which way to vote. It would be fair to paraphrase the headline to be “It’s the NHS, stupid” or “It’s the nucs, stupid” as they’re also thing that folk are thinking about. But this post is about the economy. I might deal with the others in future posts. I’m not an economist, but I do read economic books and information. I’m trying to understand what’s going on, and what it might mean for the future generations. To me, there are plenty of warning signs which make me think that the UK economy is really not in a good shape at all. And this matters, or should matter, when we think about what an Independent Scotland’s economy might be like. It’s not just about Scotland’s future – it’s about the UK’s future too. I’ve tried to avoid using numbers in this post as it’s possible to argue a case based on whatever figures you have to hand. Instead I’m looking at how the economy is structured and the things that make a contribution to it.

So, the UK economy. It’s all rosy isn’t it? We’ve got spectacular growth in property values (in some places), decent amount of jobs being created, inflation at a low level so what’s to worry about? The “broad shoulders” of the UK are bearing up and carrying us all along. But are they? Are they really? The spectacular growth in house prices is in London. 25% increase in property values……… wow. The North East of England, large parts of Scotland tell a completely different story. Now I’ve held the belief for a very long time that there is something fundamentally flawed if house prices are racing ahead of people wages and ability to buy them. To me, it’s just nuts. I just can’t see how, in any reasonable society it can ever be good for this to be happening. All it does, as far as I can see, is to put buying a home out of the reach for a very large part of the society. Why should this matter? It’s always been tough to buy your first home. Well no, it hasn’t ever been as hard as it is now. When we bought our first home in the mid 80’s it costs us about 2.5 times our joint income. In London, they are now saying the average house is about 9 times joint income. So how can anyone, even if they are on a reasonable wage ever think about being able to buy their home? The whole topic of home ownership vs rental is another to think about. Rental would probably be OK if there were controls on rents and there wasn’t the insane focus on economic growth through increased property values….. But we are where we are and we have to compare the options of an uncertain future. (A thought to ponder. Can the future ever be anything other than uncertain? Think about it….)

Thomas Piketty has demonstrated in his book “Capital In The Twenty First Century” that we’ve reached a stage in our (western) economic development where inequalities are “locked-in” by the rise in returns available to those with capital. The UK economy is a living breathing exemplar of Piketty’s theories. Are these the economic conditions which will enhance an independent Scotland? Piketty, amongst others, suggests there are alternatives to the “Austerity-Max” which dominates the UK political/economic thinking.

Students are leaving University with debts which are bigger than many of my generation’s first mortgages. So is this a con created by the banks in cahoots with the Government? Saddle the youth with the baggage of debt before they’ve even started their careers and we’ll own them forever? Feel free to discuss, but it’s a point of view which has some credibility.

Meanwhile back at the UK economy. It looks like all the growth is once again coming from the financial services sector. It’s only 6 years since we last saw what that delivered to the UK economy. So just how robust is the economy? I think it looks scarily similar to the way it looked in 2006 or so. Property values in London racing ahead of everything else, an almost unregulated finance sector creating money out of thin air. Go and read about rehypothecation of assets, hedging and derivative trading – it’s all STILL going on and we know how well that worked 6 years ago don’t we? The UK Government hasn’t made any real changes in regulating the banks, so why should we be thinking they’re doing anything different from 2006/07….. Think again about London property prices, if it looks like a bubble, feels like a bubble, acts like a bubble then it probably is a bubble. What’s going to happen when this one bursts? (Which it inevitably must, maybe not until after the 2015 elections though). Who is going to sort out the mess this one leaves behind? Bail out the banks? What? Again? With who’s money? Perhaps with one of the decreasing number of assets the UK has? Oh hang on, we’ve already privatised almost everything so that only leaves the oil tax revenues then doesn’t it? The UK debt is estimated to be £trillions. That’s a serious problem which just isn’t going to go away without some really apocalyptic event. To be clear, this is the UK debt (like our national overdraft). The deficit is not the same thing at all. Despite some politicos seeming to think so. The deficit is the difference between what we get in over a time period, say a month, and the amount of money we spend over the same time period. So….. reducing the deficit obviously helps the economy, but it doesn’t necessarily reduce the debt. Huh? Supposing UK plc has been taking in £100/month in tax but at the same time spending £150/month on stuff. That’s a £50/month deficit. After a few months of doing this UK plc would have a significant debt – which has to be paid back – with interest! Now suppose UK plc manages to reduce it’s spending from £150 to £120 that’s a good thing. But the debt is still going up. UK plc is still having to borrow more money than it’s taking in, just at a slightly lower rate. This is what’s actually happening in the UK economy. Obviously the figures are far, far larger, but the UK government is continuing to spend far more money that it is taking in, despite the slavish adherence to “Austerity”. So where’s the money going? Good Question – ask a “Better Together/No Thanks” rep to explain this to you. I can’t. I just know that someday UK plc is going to have to pay back all this money and that is probably going to cripple the county. (You can read more about this here – http://en.wikipedia.org/wiki/United_Kingdom_national_debt).

But don’t worry there are plenty of jobs being created in the UK aren’t there? The headlines about employment are papering over the fact that many of these “jobs” are on zero-hours contracts or part-time. The Joseph Rowntree Foundation has recently published their analysis of the state of the UK. Their authoritative new research published today (30 June) shows that the cost of what the public thinks is essential has soared 28 per cent since 2008 while average earnings have risen only 9 per cent. The analysis shows that even as real wages start to rise again, low-earning families with children are unlikely to be able to close the gap between their income and their needs, due to low pay, rising prices and reduced government support. You can read it here – http://www.jrf.org.uk/publications/minimum-income-standard-2014. And then factor in that most of the job creation is in London where property prices are rising even faster than wages……. Summarising the JRF report, for most people things are not improving and are unlikely to improve in the foreseeable future without major political interventions and changes. Now think about all of this in terms of the economy. If a high percentage of the population is struggling to make ends meet (perhaps because they’re paying down credit card debt or paying large mortgages) what’s keeping the economy ticking over? Also think carefully about pensions. Remember that the UK pensions aren’t funded by some saved up pot of gold, they’re paid to pensioners from the money the government gets in every month in tax. So if the economy in the UK isn’t in good health (maybe because there’s that vast debt to pay back AND the new jobs being created have a high percentage of zero-hours and minimum wage/part time positions) then the future of UK pension payments is starting to look really uncertain. Means testing and as many reductions in pension payments as possible – I’d bet on these coming. Soon. Just after the 2015 elections.

And all the politicians in Westminster are singing from the same hymn sheet on “Austerity-Max” for the 2015 elections. So ask yourself, “Where’s the change that society (and thus the economy) needs going to come from?”

So you can see how the “Broad Shoulders” of the UK economy really are good for Scotland aren’t they? It’s so important that if you’re thinking of voting “NO” you go into this with your eyes wide open. The UK is not in a good economic position – just don’t believe that this fact is ever going to be discussed in the mainstream media. The UK’s future is scarily uncertain.

Do you really think an Independent Scotland could be any higher risk? Are we really “Better Together”?

 

 

Rehypothecation – an explanation.

If you’ve managed up till now to avoid this word, it’s because you’ve been living in a financial la-la land, a dreamworld where banks and brokers are honest & straightforward, and the world financial system is basically sound. Of course, they simply aren’t, and it isn’t. But however bad you think everything is, rehypothecation makes it all worse… much, much worse.

The quick version goes like this: that when a bank or broker lends money secured against an asset, they can then borrow against the same asset they’ve lent against. And that the bank or brokers who lend them money can then repeat the process. The initial mortgaging is hypothecation: the subsequent chain of mortgages is called rehypothecation.

As explained on the excellent Zero Hedge site, there is a fundamental asymmetry between US rehypothecation rules and UK which in essence means we let all the worst and dodgiest deals happen in London. Rehypothecation rules:-

Under the U.S. Federal Reserve Board’s Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client’s liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).

 

Places to go and read more on this type of subject. Some of these are a bit older, but the broad circumstances they describe don’t seem to have changed much.

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