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owing money to backward nations

“While western consumers have been dancing the night away, China has been working round the clock, accumulating a vast stockpile of foreign currency reserves, mainly greenbacks. Asian countries now have enough dollar assets to buy a controlling interest in every company in the Dow Jones index.”

“Asian Tigers can afford to prowl the world in search of industrial and financial prey. So, too, Middle East oil producers, who recognise that they squandered their riches from the energy boom of the 1970s and are determined not to make the same mistake again. Their game plan appears simple: buy blue-chip assets, be patient, collect rewards.”

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on recessions and depressions

First, definitions:

“Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.” [Quoted from economics.about.com page 2]

There have been many detailed attempts at definition since the Thirties, used by different people for different purposes. Commonly, a recession is called after two quarters of drop in the GNP.

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No-one can predict the market, no-one.

There is a saying: ‘Even a fool can get rich in a bull market’.

The herds run thither and hither. If prices are falling, prices will tend to fall. If they are rising, they’ll tend to rise.

Until they change direction.

Golden Balls [James Goldsmith] used to say, “If I think the market is on the turn, I phone up 6 brokers, and if they all say buy, I sell, and if they all say sell, I buy.

You can try to assess turns of the market and hope to profit, or you can try to forecast long-term real value.

Henry Ford
“The desire seemed to be to find a short cut to money and to pass over the obvious short cut - which is work.”

Meanwhile, the UK government keeps printing money. The result is prices may rise without values changing.

related material
GNP and other quality of life measurements

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pssssstttt - would sir like to buy some dodgy euros? page 2 page 3

“When inflation surfaces, as it did last week, the markets think the ECB [European Central Bank] will hike rates - so the euro goes up even more. That then further undermines exports and growth - making it even harder for the bank to raise rates to deal with inflation.

“This, in turn, forces the ECB to at least maintain its hawkish rhetoric - certainly compared with the Bank of the England and America’s Federal Reserve - which pushes the euro up anew.

“This is a conundrum the eurozone can’t seem to escape. And as inflation rises, and the dollar keeps falling, the ECB becomes more and more boxed in.

“Something has to give. And it may be that desperate measures are needed. After all, sceptics like me have always said the operational viability of the single currency won’t be known until the system is tested by a serious downturn. That moment may now come soon.

“Interest rate spreads between government bonds in France, Spain, Germany and Italy have lately got wider and wider. In other words, believe it or not, the markets are increasingly betting on the eurozone breaking up - as political tensions rise, and the needs of inflation-averse nations like Germany can’t be reconciled with much weaker debt-driven members like Ireland and Spain.”

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uk’s brown the clown - managing director of the northern crock

Some background: Following a credit crunch generated by the sudden loss of confidence in the US mortgage market, the UK bank Northern Rock is having continuing problems. NR called in the UK central bank, the Bank of England, for cash support. Meanwhile, Northern Rock customers withdrew several billion pounds of deposits.

The hole keeps getting deeper and Brown the Clown just keeps digging.

“The sum involved has surpassed five per cent of the Chancellor's annual budget

And this is the idiot who was recently claiming Tory [government opposition] tax changes were uncosted and unaffordable!!

“There is no real opportunity for private equity because it [Northern Rock] has eaten so much money. The Government is in there for something of the order of £30 billion, which is an enormous amount... the only way anybody could buy Northern Rock is with very, very substantial government support.

“The company, he said, was bust, its brand worthless. Without the Government's guarantee and cash injections from the Bank, the Rock would run out of money in a flash. If the business were to be sold, Darling would have to leave the guarantee in place, but would the European Commission allow that?

“Moulton summed up the mess into which the Treasury has blundered: "Is the Government going to be prepared to potentially lose £30 billion? I think that's a number they have never even contemplated - I would be very surprised if there were a deal to buy the shares. It is a huge political problem.”

“ Sale documents, prepared by the Rock's directors, assume that the Bank's £20 billion-plus line of credit will be extended for the foreseeable future and that interest charges on the loan will be reduced. It is envisaged that by 2010 the Rock will still owe the Old Lady £6 billion (doubtless on knockdown terms).

“This is an outrageous - and unacceptable - demand for private profit at public expense. The intention, it seems, is that someone should make off with the gold mine while the rest of us are given the shaft”.

related material
on money - northern crock

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economic lunacy - government, information-tech projects and cost-plus - how they waste your money

This is the week for for economics - so now an item on ‘cost-plus’.

This is a favourite corrupt and foolish way of costing government contracts.

I’ll illustrate with an government IT project.

This is how it works:
You get some idiot in the government to sign a contract for a complex information technology project.

‘Of course’, you cannot have a clear idea of how much the project will cost to produce. Among other problems, the government is sure not to know just what they want and they will continually change their ‘minds’.

So, you set up a cost-plus contract.

In other words, you charge the government what it costs you, plus a percentage. Good trick this!

Once the contract is signed by the dopes, sorry the government officials...

You hire twelve programmers.
Now when you hire twelve programmers, you will rapidly discover that one of them is capable of producing as much as the other eleven put together. But you cannot easily pay the one the combined wages of eleven programmers,[1] can you? After all, soon enough the one will be earning more than the managing director, or ministers. It will even annoy the other eleven programmers if or when they find out.

So, soon enough, the guy doing the work of eleven will walk, usually within a few months. After all, if he’s that good, he’ll also be bright enough to realise he’s worth more than the others and go get far higher wages, usually in an American corporation!

But it doesn’t stop there...

The next two programmers, who are a little less able, can do the same work as the other nine. Well, you cannot easily pay them four or more times the wages of the mentally confused (you know the ones who get in a muddle when there are two ‘ifs’ or three labels in a programming routine). So within a year or two, the two second-string programmers will also be off to greener pastures.

Now the company has nine mediocrities.

Of course, the director has already hired twelve more programmers to replace the first genius who walked, and likely one of them will also be a whizz.

The process continues and within a few years, the original twelve programmers have been replaced by 400, or 600, or 1000 mediocrities.

There is a truism in programming that a seriously good programmer can code up a highly complex package in five years, and so can 500 hack programmers!

Now consider the company owner ‘doing’ the government contract.

Instead of the wages for twelve programmers on which to calculate the cost-plus, the company now has hundreds of none-too-great coders for the cost-plus calculation. A far better deal as far as the company is concerned. And you wondered why the systems do not get delivered and do not work when they are, and they cost billions?

Now you know J

end note

  1. Or even the wages of five, and sack the rest. This would, of course, be considerably more efficient and may well end up with a half-useful product. But it would not be so profitable for the company. This is a good part of why so much industry serving government contracts became feather-bedded and unprofitable, while so many of the best British engineers and scientists have migrated abroad where ‘equality’ is less of a fetish and talents are encouraged and ‘appreciated’.

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first and second round effects of external prices rises on inflation has been moved to the Economics Zone at abelard.org.

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“Useful essay by laffer on supply-side economics” has been moved to the Economics Zone at abelard.org.

the clown is lying about public finances, as usual - understanding the lying uk government theft

“The Office for National Statistics reported that there was a net cash requirement of £5bn last month - the highest for August since monthly records began in 1984. The Government's preferred measure, the net borrowing requirement, was £9.1bn, again far higher than expected.”

“According to economists, the UK's public finances have deteriorated more than almost any other major western nation over the past five years, as Labour embarked on a major spending spree. Although it has attempted to cut back on its costs over the past year, the ONS figures indicate that it is failing to generate enough cash to keep itself in the black.

“The figures showed that the amount companies paid in corporation taxes during August, £704m, almost halved from the same period last year.

“Gemma Tetlow, a research economist at the Institute for Fiscal Studies, said: "Alastair Darling will have to deliver his first Pre-Budget Report with government borrowing higher than last year, rather than falling as Gordon Brown had predicted. Over the longer term, the Treasury will be concerned that the recent problems in banks and markets will reduce tax payments it receives from the financial sector.”

“And as long as PFI allows ministers to carry on being photographed opening new schools and hospitals - while passing the bill onto future generations - the industry will continue to get its way.” [Quoted from telegraph.co.uk]

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“The Office for National Statistics said the preferred public sector net borrowing measure showed a shortfall of £9bn last month, much worse than the £6bn expected by the City. Statisticians said government spending was growing faster than expected because of higher debt levels and higher interest rates on that debt, while corporation tax receipts have fallen well below expectations.

“While Treasury sources pointed to one-off factors affecting corporation tax receipts last month, the figures show that in the current fiscal year's first five months, the government received 3% less corporation tax than in the same period last year. In the March budget, Gordon Brown pencilled in a rise of 12% in corporation tax this year, banking on the profitability of UK companies reaching a record high.

“Public sector net borrowing for April to August came in at £19.2bn against £16bn last year. The current budget, excluding investment spending, was running a deficit of £11.7bn in the first five months, worse than the £8.6bn last year despite a record surplus in July." [Quoted from money.guardian.co.uk]

The lying UK government is also hiding other debts off books, for instance £200 billion of Private Finance Initiative [PFI]

“So PFI has allowed New Labour to "deliver" lots of shiny new schools, hospitals and other projects, while allowing Gordon Brown, the Chancellor, to claim that his "fiscal rules" are intact.

“Having raised the money, built the facility and put servicing teams in place, PFI investors then receive regular payments from local and central government over 30 years or more, after which ownership reverts to the state.

“But in recent years this complex mechanism has become controversial. Government figures show that infrastructure and services worth £54bn have been bought under PFI, but at a long-term cost to the taxpayer of £160bn. Respected bodies now regularly ask whether PFI is good value for public money.”

“Having invested £3.4m in the construction of the Docklands Light Railway in east London, for instance, Mowlem sold its stake in 2003 for £19.4m - achieving a near six-fold return....

“And last autumn Carillion sold equity in a range of PFI projects, including Rye Hill prison and Manchester Magistrates Court, for £46m, some 6.6 times its original outlay.”

“ This market is absolutely flying," says one City analyst who didn't want to be named. "How often do investments come along which offer a government-backed double-digit yield? No wonder everyone is piling in.”

“[...] the details of long-term agreements involving vast sums of public money often remain under wraps, even to the head teachers, NHS bosses and others trying to run the facilities involved.” [Quoted from telegraph.co.uk]

There are also growing pension commitments, if I may use the word ‘commitment’ in context of this government.

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Following the Autumn Budget statement from Alistair Darling
Every time ‘New’ Labour make money announcements you can be very sure that the more they are examined, the more they come apart in your hands.

It is important to realise that house prices are being driven up by ‘New’ Labour’s continual and deliberate inflation. This inflation is running at over 10%, not the 2 or 3% the government liars keep claiming with their highly fiddled RPI index. This process of inflation continually drives up house prices. That drives those prices up towards the levels at which the theft taxes, such as stamp duty and inheritance taxes, apply. In other words, the nominal (inflated) prices mean what looks like a concession this year rapidly disappears.

This has other effects also. The governement liars keep announcing increases to budgets. But again much, most or more than those alleged budgets are again eroded, disappear or even amount to real reductions. Inflation also drives down the real value of ‘benefits’, pensions and wages and so on.

It also results in income being taxed from ever lower levels, as the real value of money shrinks year by year.

All this leaves houses as damned near the only way to avoid Socialist Labour theft. Hence, the steadily increasing ‘stamp duty’ and ‘inheritance taxes’ as they try to steal even that.

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bubbles, debt, borrowing and inflation in the uk

  • Central bankers do not “create bubbles”. Tulipomania creates bubbles. Those bubbles eventually collapse. You only know they were a bubble when that collapse occurs.

  • Debt allows you to buy a tractor this week and make profits for years, while you pay off the debt out of the profits. There is nothing intrinsically wrong with the UK’s £1.3 trillion of debts, as long as that money is productive. Further, the real value of any debt drops steadily under inflation. Look at the book profits in so much housing.

  • When the music stops (the bubble bursts), the market can be cash-strapped. A central bank then lubricates the market back into action (though there is more than that). The central bank feeds in liquidity to the markets (it does not put on the brakes at that point), then the central banker winds back the slack.

    The now promoted UK Treasury Minister, Gordon Brown, has been feeding in excessive money supply in ordinary times. I see no evidence of that in the USA under Alan Greenspan, now retired Federal Bank Director. Of course, feeding liquidity can be excessive, but that is wisdom after the event. It is not intentional monetary policy. An excessive money supply generates inflation, it does not cause bubbles.

  • Inflation drives what some people call ‘excessive borrowing’, as is occuring in the UK. That is fully the responsibility of Brown the Clown. It is rational to borrow cheap money, especially if an inflationary policy is in place.

    Such conditions transfer wealth from the poor to borrowers. That wealth transfer is part of the Mr Brown’s real culpability and dereliction.

    Now look at what this means. Poor people see the middle classes getting rich by exploiting Brown’s inflationary policies. In desperation, they hope they can get on the bus. To do that they take desperate chances, offered by profit-hungry bankers.

  • the example of Northern Rock:
    The collapse of this bank, turning it into Northern Crock, is the action of Northern Crock directors. Those borrowing from Northern Crock were acting foolishly only because they were acting at the (apparent) top of a market. Loose money [money liberally offered at low interest rates] gives a message to the common man... That loose money is the direct fault of Gordon Brown.

    why the Northern Crock collapse ocurred:
    No proper economic education and loose money formed the conditions for Northern Crock, just as the foolish ‘drug war’ forms the conditions for the independent drug dealers.

further background
on money - northern crock
brown the clown true to form over northern rock
the mechanics of inflation: the great government swindle and how it works

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