Sunday, 29 November 2009

No insurance is the best insurance (really)

Sounds surprising but uninsured drivers are less likely to have an accident: they drive carefully because they know nobody will pay for their car's repair. The same principle should apply to banks but it does not because the government guarantees up to £50,000 per saver and institution in the event of a bank going burst. No wonder the less solvent banks usually top the best savings rankings and savers are happy to trust them their cash: no matter what happens, they will get their money back, courtesy of fellow taxpayers.

That incentives risk-taking. Banks lend irresponsibly without worrying about the consequences or caring for their customers' money because the government will always step in to save the folk's savings. Without that guarantee, banks would think twice before trying to become the next Intergalactic Empire (RBS buying the Dutch lender ABN AMRO in 2007, the Force was not so strong after all) and savers would deposit their hard-earned cash into solvent institutions.

Sunday, 22 November 2009

Nationwide: run, baby,run !

Graham Beale, [Nationwide's] chief executive, also warned of a renewed fall in
house prices next year as more people lost their jobs and unemployment rose. -

The government is hoping that the low interest rates will generate a new property bubble to take the country out of recession - at least until the next election. That is not going to happen because:

1- Britons cannot even save £200 for a new TV under the "buy now, pay later" culture, let alone saving 30k for a house deposit.

2-Nobody has 30k anyway: Britain has one of the world's highest debt-to-GDP ratios. The average Brit owes £9,191 according to Credit Action, a charity, and that excludes mortgages.

3- House prices skyrocketed until 2007 because cheap credit created bubble-jobs and illusion of wealth, not for sound fundamentals (work hard and save, wow, revolutionary).

4- Homeowners are losing their jobs, with unemployment set to reach 10pc next year. The government is trying to bail-out everybody but sooner or later it will become obvious that there is not enough money to save that many debtors. Homeowners will be forced to put their properties into the market as the only way to pay their debts. That will keep prices down.

5- Inflation is the government's favourite choice to pay for the debts by reducing the real value of money. Do not let it: get some good-old Inflation-Beating savings from NS&I and Swiss Francs. .And some Swiss chocolate.

Sunday, 15 November 2009

Peter Schiff was right... now it's time to run

Granted, Peter Schiff - a Libertarian economic guru- was right about gold in 2006. But, when everybody in your local pub and their grandma is talking about buying something, it is time to sell like it happened with Internet stocks in 2000. Gold will continue rallying as long as the US Central Bank - the Federal Reserve- feels comfortable with a weak dollar to boost exports and generates just enough inflation to reduce the real value of the 12 trillion dollars national debt.

The problem is the dollar cannot keep going down for ever and ever, with the Chinese watching how their dollar holdings become worthless. Sooner or later, Ben Bernanke - Chairman of the Federal Reserve - will be forced to say the magic words: "we prefer a strong dollar". Then it will be too late for those who are going crazy buying gold.

Thursday, 12 November 2009

Chinese democracy

The problem about lying is that one always gets caught. China can only lie as long as get-rich-quick investors and anti-West lobbyists want to believe her, like they believed Japan in the 1980s, but the truth is that a dictatorship with barely any respect for law and property trying to run an economy based on semi-slave labour cannot succeed unless it cheats the numbers. State-owned banks have been lending outrageous amounts of money to inefficient state-owned companies, in a sort of "creative accounting" to produce unreal GDP growth figures (see the excellent articles on the subject by Vitaliy N. Katsenelson) .

Government-planned economies never work, no matter how Chinese they are, and still remains the question of how a corrupt and despotic government will cope with several hundreds of millions of hungry unemployed once the bubble bursts.

Saturday, 7 November 2009

The nation's credit card

Contrary to what Labour might say, a "stimulus plan" does not solve any problems but delay them. The "car scrappage" scheme or the 15pc VAT cannot last forever because even the nation's credit card (called National Debt) has a limit. The stimulus creates a false sentiment of prosperity by printing money out of thin air - the Bank of England takes care of that- and putting devalued pounds in people's pockets to encourage them to spend. That buys time to the Government to create a new asset bubble that will create some bubble-jobs and, they hope, buy enough votes to win another election.

But sooner or later we will have to face the fact that the Government is broke and we all have to pay the credit card bill. What we need is sound economics based on low taxes, small government and a bit of common sense. Spending money we do not have in "stimulus" plans only stimulates our future ruin.