What One Trillion Dollars Looks Like

H/T Obnoxio

Ever had difficulty visualising the stunningly large amounts of money being bandied around at the G20 and on the news? Well, this is a helpful visual aide.

And you will be quite literally AMAZED by the size of a trillion dollars. Especially after learning that $1 million would fit into a small shopping bag

I Shall Call Ye Cassandra.

A spookily prescient blog from Crashomatic that pretty much covers why printing more money is a bad thing, and that it only benefits the people who actually print the money.

I heartily recommend you read the whole thing - even though it is with a US slant - as it does explain a lot of things very clearly and very quickly.

Hat-tip to The Devil for pointing this one my way.

Possibly A Bit Late

As it's already climbed back above $300 a share, but if Google drops back below that figure, then you may want to consider buying into it. There's a very good chance - IMHO, although I am not a stockbroker, thank fuck - that you could double your money within 12 months.

You can track Google's price here

Avoiding The Elephant

You may be surprised to see that I've not mentioned the Government and the current banking fiasco/crisis. I've tried to avoid it as I think I would find it difficult to stop once I've begun*.

I've been following it, obviously - both on the BBC and in the Metro (the only newspaper I actually read now I'm a commuter) - but I've been in an unusual position for me. I just don't know what to say about it. I've read an analysis from an economist's point of view (Timmy), a stockbroker's point of view (British Dude), a Libertarian's point of view (LPUK) and from the ex-trader's more political point of view (Guido). And I'm still not entirely sure I understand what's gone on.

As far as I can tell - and anyone can point out where I've gone wrong here - the American banks were told by their Government that they had to lend money to people who they would not normally lend to (the so-called NINJA loans - No Income, No Job) in order to allow said people to buy houses. I'm guessing that the American economy isn't quite as built on house prices as the UK economy, but that by having a credit history, these people could be proper consumers.

So the banks lent the money, knowing that it was more likely these NINJAs would default. In order to avoid having the debt firmly sat on their books, the banks wrapped it up in smaller packages and sold it on. To other banks. But with a AAA rating so that it wouldn't look as toxic as it would turn out to be. Hence the amount of banks that started to get into trouble when the NINJAs started defaulting to such a major extent that the house prices in America started to fall dramatically.

As the banks couldn't trust each other (as the amount of trouble they were in was hidden or just plain unknown) they then wouldn't lend to each other. As they wouldn't lend to each other, the banks were less able to pay off any short term debts they had in trading balances. And they couldn't get any money in from anywhere apart from the Bank Of England, and going to them cap in hand made the banks look desperate & likely to collapse. Thus confidence in them eroded further.

The Government claim that they tried to save the banks, but after Robert Peston informed everyone that the Government had had a meeting with all the big four banks who were looking for cash, bank shares fell even further. Whether this was incompetence of the highest order, or a deliberate attempt by the Government to get the banks nationalised on the cheap, time will only tell. But when both the Prime Minister and the Governor of the Bank Of England come out within a day of each other saying the UK economy is going into recession (thus sparking a sell off of Sterling by any sensible trader around the world) the impression I get is that it's incompetence.

At the same time, Iceland's banking fell over quite spectacularly. UK public bodies had somewhere in the region of £1bn invested - hardly a surprise as the interest rate was unbelievably (for good reason) generous - and despite warnings being issued some months earlier. I've even seen reports here that there were warnings in July 2007 about the fragility of the Icelandic scheme. Entertainingly, the Audit Office (whose job is to ensure that £180bn of public sector spending provides "value for taxpayers" and should oversee any investment advice) had £10m tied up in the Icelandic banks, and the Audit Commission are now being investigated by the National Audit Office.

In order to "protect UK savers" the Prime Minister then used anti-terror legislation to freeze the accounts held in the Icelandic banks. Interesting that this legislation was used against a NATO ally, but such is the joy of function creep and badly worded (or not, depending if you're a conspiracy freak) legislation. More interestingly, the legislation only freezes the funds for 30 days, so in a couple of weeks we should have another announcement about Iceland.

The strange thing is, I've been through two recessions before, some bad financial times and three stock market crashes (yes, I am old). This latest one didn't wipe as much off the share prices as the last one (when the dotcom boom suddenly went bust in 2001 - mainly after everyone suddenly realised that none of the internet companies had a business model that actually made, you know, cash). This one hasn't seen interest rates go up to 15%, indeed they've just come down again. There hasn't even been a single power cut yet, let alone dead people not being buried.

I'm not saying that this isn't a financial crisis, but it seems to be based more in the financial markets than in real life. How many people (outside of bank staff) have been directly affected by this in the UK? 10,000? 50,000? 100,000? Out of a population of 62,000,000 that's not a huge amount.

Okay, so if you need to get a mortgage then it is now more difficult, but that's not necessarily a bad idea. The UK housing market was (and still is) over priced. If it falls, then more new buyers will be able to afford to get on the property ladder (having got deposits for more expensive properties). If you already have a mortgage that you can afford to repay, keep doing that and enjoy the fall in interest rates. Your house is worth less than you paid for it, probably, but you still have a roof over your head and you aren't starving to death. Chances are, if you don't move in the next 10 years it may eventually be worth more than it is now.

If you have a mortgage and can't afford to repay it, then (unless you've been made recently unemployed or had a change of circumstances) how were you planning on keeping the house anyway? Getting yourself in HUGE debt by hoping to sell your house for more money than you paid for it (so you eventually had no mortgage and a free house) is pretty much the same as the South Sea Bubble in 1720 - eventually, it will fail.

Why the Government were so insistent about nationalising the banks, rather than just letting them fail and guaranteeing savers their money back, I have no idea. Surely by propping the banks up, they're being told that no matter what stupid thing they do, the Government will always bail them out. Not going to make them take better decisions, is it?

Why the Tories didn't complain about the Government's plan and ask if there was a 'Plan B', I have no idea on that either. There was no mention in Labour's pledges to bail out banks. There was no discussion in Parliament about whether it was the right thing to do. Nothing. The Government just wade in with half a trillion pounds of taxpayer's money and do what, exactly? The FTSE is still hovering about 4000, the pound is still falling against a raft of currencies and the entire country is out of pocket.

How Gordon Brown has managed to come out of this looking like the saviour, when he was the Chancellor in charge of the country's finances for ten years prior, I similarly have no single clue. I'm still slightly surprised he hasn't called a state of emergency yet, and become a proper dictator.

Perhaps it's just a matter of time.

* - And having read the post, I think I was right. Apologies for the rather long rambling explanation of how I see the financial crisis.

Next Domino To Fall?

Following on from the failure of the Northern Rock in the UK and Bear Stearns in the US, CNN are reporting that Lehman may be the next victim of the credit crunch.

The brokerage firm saw its shares drop as much as 39% in early trading in wake of JPMorgan Chase's $2-a-share purchase of Bear Stearns. Monday's sell-off took Lehman shares to $24.50, down from $39 Friday, before they staged a mild recovery. The recovery mirroring the general up turn in the Dow Jones.

The collapse of Bear Stearns has fueled fears of a widespread breakdown in the U.S. financial system. Lehman, like Bear Stearns, has been a big player in the mortgage market in recent years and investors worry that its exposure to now-toxic mortgage-based securities, combined with its relatively small size, might be fatal. Lehman is the fourth-largest U.S. player on Wall Street, behind Goldman Sachs, Merrill Lynch and Morgan Stanley.

I've also heard, separately, that the Fed are considering a 0% interest rate - like Japan did in the late 80s and early 90s, although they did go to negative rates at one point - in an attempt to kick start consumer spending again. As people are being told "there's a recession coming" so they start to save their money. Unfortunately, this actually speeds up the recession as there's a reduced demand for goods and services, leading to lay-offs and closures. Which prompts more people into saving.

You can see the spiral, can't you?

As far as I am aware, the Bank Of England has no plans to follow suit, although this is more likely due to the inflationary effect such a policy would have on the UK's housing market.

UK Basket Of Goods

The Retail Price Index (which is a method of calculating inflation in the UK) uses a "basket of goods" approach. Things which are being purchased more frequently are included and things that have gone out of fashion are removed. The price is compared year on year (so Feb 2008 with Feb 2007 etc). And the changes in the cost of the goods is considered to be the retail price inflation.

The BBC has a story about the latest changes. Notable inclusions this time are USB memory sticks, muffins and smoothies. Going out are frozen vegetarian meals, stubby bottles of lager and 35mm film. The initial report from the Office of National Statistics is here.

All well and good.

But there is - as usual - a slight problem with this method. First of all, the one used in the UK does not include mortgage repayments. So the RPI is actually a lot lower than real inflation. Secondly, as consumer electronic goods generally get cheaper over time, any comparison with them included also means that the overall inflation rate is lower than it actually is. Thirdly, taking consumer electronic goods once more as an example, it gives a false impression of the true inflation rate for the elderly or the poor - just how many iPods a year do you think your Granny buys in comparison to food and heating bills - as the weighting is not adjusted by age of consumer.

In August 2006, Clerical Medical's report (available for download here) showed that in the previous 10 years, pensioner inflation was 34%. In the twelve months to August 2006, it was 3.9%. The Telegraph reported in December 2006 that the rate for pensioners had gone up to 9%.

As I blogged earlier this year, This Is Money were reporting in January that the true inflation rate for pensioners was running at 7%. Since January - as you may well have noticed - the cost of food, gas, electric and petrol have gone up rather a lot, so this rate is likely to be MUCH higher now.

If you are interested in knowing what your personal inflation rate is, the Office of National Statistics has a calculator here. Although whether you could use this as a basis for negotiating a payrise is doubtful, it is still worth a look.

Snouts Slightly Out Of Trough

MP's are now expected to produce receipts for every expense over £25 - rather than the present £250 - from next month the BBC is reporting. Office expense petty cash claims are also to be reduced from £250 to £50 a month.

This is a step forward to open and accountable MPs, but is still some way short of the levels they - through HMRC - expect of the British public. Pretty much every single company in the UK, including those in the public sector, are expected to produce receipts for every expenditure claimed.

A Damning Indictment

Following on from my previous posts about the poverty line existence of pensioners and the exploitation of the new lower middle class, a story today of a 76 year old man who was sentenced to 34 days in jail for not paying his Council Tax.

Richard Fitzmaurice, who spent 22 years in the Royal Army Ordnance Corps, had declared in court: "I am here on a matter of principle. The way old age pensioners are being treated is shameful."

To make a bad situation worse, a pair of handcuffs was slapped around his wrists as soon as his 34-day sentence was passed at King's Lynn Magistrates' Court, Norfolk. As the handcuffs were put on him, the former warrant officer asked: "Is that really necessary? You don't need those for me."

But the court ruled "procedures had to be followed". A phrase that was probably very reminiscent for him, as it's remarkably similar to the line trotted out by the lower ranking Nazis after the war ended: "we were only following orders"

The Birth Of The Lower Middle Class

Maybe I just missed it prior to the beginning of the Thatcher era (1979), but I don't recall there being a pursuit of wealth and possession before the Conservatives came to power. Perhaps there was and it just didn't manifest itself as fully as it did during the "grab what you can" times of the early 1980s.

The phrase "Greed Is Good" as spoken by Gordon Gecko in "Wall Street" was - in my mind at least - supposed to be a damning indictment of the wealth at all costs approach. Unfortunately (from my point of view) the drive of the City to make more money at the expense of everyone else seems to have seeped out and infiltrated every day life to the point where it became expected by everyone that they too would be millionaires.

In a post in 2006, I mentioned about the way in which City Centre regeneration had been kick-started by gentrification, rather than a grass roots approach. I didn't suggest then that the problem was caused by Councils not having sufficient funding, but this is a very real possibility due to the decreased amounts of rent they were receiving from the reduced amount of Council tenants.

I can still remember people being happy to live in a Council house that they rented and would never own. Of course that changed when the Conservatives allowed the purchase of Council houses by tenants. The tenants bought the house - thus removing it from the social housing pool - and then, often, sold it on at a small profit shortly afterwards. Whole housing estates suddenly went from being all social housing to being entirely privately owned in a matter of years.

And it was encouraged, no, it was expected that if you were able to, you would buy your own council house: then you would have an asset. You clambered onto the mortgage ladder and your working life went toward paying for your castle. Repairs and maintenance that had previously been undertaken by the Local Authority became your own responsibility. Bonus for the LA as they no longer had to have hundreds of workmen to do these jobs. And in the short term (a phrase that I may well be using a lot) the LAs also benefited from receiving the sale price of the house.

Unfortunately, this short-termism was just that. In the longer term, the LAs received less money from tenants - as there were less tenants - and those there were were usually in dire financial straits and the Council were effectively paying for them to be housed (in the form of Housing Benefit and Council Tax rebates). True council housing now has become mainly a ghetto of the elderly, the extremely poor and the migrant. These "sink estates" as they have become known, can have up to 80% of the houses with no-one in full time employment living in them.

Mostly gone from council housing were people in full time employment who took little from the system, but gave a lot back. These people were to become the new order, the lower middle class. Not wealthy enough to be deemed truly middle class, they're taxed harder as a percentage of their earnings and receive less financial support from the Government than those both above and below them. Created by the drive towards home ownership for all, the lower middle class are essentially stuck in an endless fight against losing it all, and trying to reduce the gap to the true middle class.

And I shall return to how this lower middle class fight has affected the financial markets worldwide in a later post. Mark one thing though, things need to change; there needs to be a revolution.

Football And The Pursuit Of Money

First off, this will be a rant in a series of rants. So if you don't like rants, look away now. If you do like rants but don't like football, you might actually enjoy this one.

For those who don't know, I am a Newcastle United fan by birth. In that I have no choice; I was raised there. I was (and still am to a lesser extent) a fan of Tottenham Hotspur, and this was due to how they played football when I was a kid - exciting attacking stuff.

But that is about to end. I shall be giving up the support. I shall no longer be caring what the results are and where "we" are in the table. My mood at weekends will no longer determined by 11 people on a football pitch. The enjoyment I get from the game has waned over recent times. Last week however it impossible to continue.

Last Thursday, Premier League chief Richard Scudamore announced a plan which would make teams play one more game each in a foreign venue. All 20 clubs of the Premier League agreed to explore a proposal to extend the season to 39 games.

Those 10 extra games would be played at five different venues, with cities bidding for the right to stage the game, but not guaranteeing which teams would play. It is understood the fixtures would be determined by a draw and that the top-five teams could be seeded to avoid playing each other.

Scudamore is reported by The Telegraph as saying on Friday "Never on my watch will it go to a 40th game" yet by Monday this had changed to "You can't sit here in the job I have and say 'never'." An expansion beyond 39 games is now under consideration.

Scudamore claims that this move is necessary: "We've seen how sport's globalising, we compete in the entertainment industry." He tries to argue that this is about positioning football as the world's number one sport and to encourage the leagues in "developing countries".

This is bullshit: it's all about the Benjamins.

As has become the norm in the Premier League, money has become the driving motivation for all decisions. There is no regard whatsoever for the loyal UK based supporter of limited means: the traditional football fan.

With the average Premiership footballer now receiving (correct to April 2006) £13,000 per week, the gap between football player and football fan is enormous. In the Championship the average wage is £3,700 per week and in League One it's £1,300. League Two players on average bring home £950 per week.

The average wage across the whole of the UK is around £500 per week. In two weeks the average Premiership footballer earns the same as the average worker does in an entire year. There are, of course, well known examples of footballers who earn in excess of £100,000 a week. It’s a long, long way from 1881 when Blackburn Rovers were the first club to pay their players. The wage then? £1 a week.

Dan Jones, partner of Deloitte's sports business group, said "We do expect the average annual earnings for a Premier League player next season will be in the region of £1.1m and that over the next three years we will see English football's first player to earn £10m per annum from a club, equivalent to £200,000 per week"

The pursuit of money is the driving force for the Premier League's decision. It is my view that the pursuit of money is destroying football. Further, it is my view that the pursuit of money is destroying society, and it is to this subject that I shall return in my next post.