Good2Have a View

Government spending, and the subsequent deficit, is very much in the news at the moment. All the major political parties are engaged in a Dutch auction, in which they vie with each other to be the toughest cutter of spending. Although only the Lib Dems seem to be serious about this as both Tories and Labour want to protect ‘vital’ services. Vital, in this context, meaning the ones the electorate value most, have the most spent on them and therefore are the ones most eligible for cuts particularly as the early years of the last decade saw money woefully mis-spent on these electoral sweeties.

Of course, the electorate will not return a Lib Dem government so the deficit will be handled in the time-honoured British way of fudging the issue. The process of quantative easing (QE) has already monetised part of the debt. That is, the Bank of England has printed money to buy up, and therefore eliminate, part of the existing government debt. QE in the US was used to buy corporate debt, in order to allow business to start re-investing and therefore revive the economy, and government debt.

The monetising of debt is outlawed under the Maastricht Treaty. Germany has a characteristically disciplined approach to finance. Its folk memory of the inflation of the 1920s, as the Weimar Republic sought to print away the debt burden of the Treaty of Versaille, and the subsequent catastrophe of the Nazi period focuses its mind wonderfully. But extraordinary times call for extraordinary action. The European Central Bank (ECB) has also engaged in QE, but has bought corporate debt. Whilst no one is suggesting that the British are going down the same route as the Germans in the 1920s it does show a similar mindset.

Of course, default is always the nuclear option and one not spoken of in polite company. However, the UK government has already defaulted on some of its debt liabilities but no one seems to have noticed.

When the government nationalised Northern Rock and part of Bradford and Bingley it took on all of NR’s liabilities (retail and wholesale) and some of BB’s (wholesale). The wholesale debt is in the form of Permanent Interest Bearing Stock (PIBS) a form of corporate bond. For a time, it maintained interest payments on these bonds, although the market didn’t expect this to continue as they were trading at massive discounts. Then it stopped. It simply defaulted. They didn’t have the ring of gilts but the government had taken on these liabilities and it had demonstrated its obligations by making the interest payments.

Both of these actions, QE (monetising debt) and PIBS defaults, shows that if the government can get away with something it most definitely will try.

The third fudge is almost part of the British way of life – inflation. This is the most likely tool that the next government (be it Tory of Labour) will go for, After all, the Treasury ministers will change but not the Treasury senior civil servants.

Inflation increases (nominal) tax receipts and whilst benefits are also linked to the RPI, if benefit cuts are introduced (presumably under the euphemism of  ‘focusing’ benefits on the really needy) then there is a net gain. This then eases the pain of servicing debt – departmental budgets don’t need to be under so much pressure to provide debt servicing payments.

 Of course, it does rely on foreigners (who buy a lot of UK debt) not noticing. But if no, or very little, further debt needs to be sold and maturing debt re-paid in devalued pounds it will work – for a time. But then in politics everything is about toady’s interview and tomorrow’s headlines; the end of the week is a long, long, way off.

There is a down side that index-linked gilts won’t be impacted and public sector unions (the only ones having any semblance of power nowadays) may make angry noises over wages – but nothing’s perfect. Worst case scenario, from the government’s point of view, is that what they gain on the roundabouts they lose on the swings but they have a good chance of pulling a fast one.

At the moment, politicians are competing with each other over public expenditure. The Tories and Labour making noises (nothing new there) whilst the Lib Dems have actual proposals (again, nothing new there). This all arises as a result of the massive expansion in borrowing due to the recession and bank bailouts. However, there is a much more serious public finance issue that revolves around the levels of government borrowing that existed before any bank bailouts occurred and the UK economy was still growing strongly.

Normally, it is the bond markets that take a serious view of such matters but this issue does have serious consequences for the ordinary citizen, as today’s sale of GM’s European operations to a the Canadian parts firm Magna demonstrates.

In the fiscal year 2006-2007 government spending was £555bn and tax receipts were £518bn (see. http://www.global-vision.net/facts/fact15_6.asp).

That is, the government was having to borrow £37bn. During a period of substantial growth governments should be running surpluses. This has two effects. First, it takes money out of the economy that might otherwise be stoking demand and so causing inflation. Secondly, it puts the government in a position to run a deficit if the economy stumbles.

The fighting in Iraq and Afghanistan might be thought to be an exceptional scenario causing this process to be de-stabilised, a sudden need for excessive spending. But, the deficit is bigger than the entire defence budget of £32bn. According to the Operational costs in Afghanistan and Iraq: Spring Supplementary Estimate 2007–08,  the cost budgeted for those operations was  £1.4bn. So we have a deficit of £35.6bn due to the normal operation of the UK government when there should have been a surplus.

If to this is added the debt arising from PFI projects (thought to be around £20bn in 2007) the truly awful state of public expenditure can be seen.

In fact, PFI (in a sense) lies at the heart of this matter. Following the dot com bubble bursting in 2000, the UK did manage to weather the economic fallout better than most countries due to government spending. However, when growth reappeared in 2003 that spending should have been cut back. The private sector was now growing so the public should be shrinking. The problem was that the bulk of the spending had gone on public sector wages. Had that spending gone on capital projects (the sort of thing PFI was meant to deliver) then, once the project is complete, the spending can stop. Reigning back public sector wages is much more difficult, if not impossible, for governments.

Consequently, when the bank bailouts were required and the subsequent recession brought its own costs and loss of tax revenue the borrowings were starting from a poor position and so making a difficult position an impossible one.

Germany, on the other hand, went into the 2007 banking crisis in surplus. So it had the room to borrow and spend the UK government had denied itself. This meant it could offer Magna financial support the UK government could not offer its car firms; the UK having reached the end of the borrowing road.

To cut spending in the middle of a recession makes no sense. Will there be the political will to do it once the recession is over (bearing in mind the amount to cut represents 10% of entire government spending)?

There are only three ways to deal with this deficit

1)            Increase taxes – There is some scope here,

2)            Cut the public sector workforce – but that increases government spending due to unemployment

3)            Cut wages in the public sector– either in nominal terms or relatively by allowing inflation to erode their real value.

The first option does have some possibilities. Anyone who owns a British passport should have to pay UK income tax, no matter where they live. Obviously, where tax treaties exist, tax paid in the place of residence can be offset against this liability. However, taxation for those on low wages is far too high and makes many jobs not worth the pay. So the first priority is not to boost tax revenue so the government can spend it but so those on low wages can be taken out of tax. No one on the minimum wage should pay tax. By making these jobs worthwhile, there are possible savings in a variety of benefits.

However, taxing ex-patriates alone is not likely to achieve the desired end to taxing the low paid or reducing the budget deficit.

The Reagan-Thatcher paradign that low taxation encourages entrepreneurship, wealth creation and a ‘trickle-down’ effect that benefits society in general has been proved wrong, If we take the USA, the country with the highest reputation for entrepreneurship, the ratio of median to average wages has reduced since 1990. That is, the last 20 years has seen any increase in wealth go largely to top-earners

http://www.ssa.gov/OACT/COLA/central.html

The following calculator shows that the rise in the median wage has only kept pace with inflation

http://www.halfhill.com/inflation.html

In fact government inflation figures (any government) are notoriously subject to manipulation as a variety of products are often ignored. The USA removes food and energy from its ‘core’ inflation calculation. If food and energy aren’t core to an individual’s life I don’t know what is.  So, in reality, the median wage has probably fallen in real terms. So much for trickle down.

That, therefore, gives greater scope for increases in both capital gains and income tax.

However, it is unlikely that reversing the tax environment developed during the 1980s will pay for tax cuts on the low paid and reverse the structural budget deficit. That means that the last option has to be a major feature. If high rewards in the private sector haven’t achieved the desired end then high rewards in the public certainly haven’t.

Education is a prime example. For 27 years, both GCSE and A level have shown consistent improvement. One of the features that indicated Bernie Madoff’s invetment schemes wre fraudulent was the lack of volatility. There are always good years and bad years. The 27 years of there being only good is a scam. Some trick is being pulled somewhere.  

That means pay cuts have to be focused. The question needs to be asked of a great deal of the public sector: Are you providing a public service or simply satisfying political  whimsy?

  Pay restrictions are preferred to job losses since it doesn’t cause a rise in unemployment and a subsequent increase in government spending. Taxes from public sector workers fall due to smaller wage packets. However, tax in the public sector is simply the government taking back a little of what it has previously given so it has a net benefit. For example, a person earns £100 and pays 31% (income tax and national insurance) back to the government making a net outlay of £69. If wages are cut by 10%, the gross wage falls to £90 and the tax take to £27.90; making a net outlay of £62.10. The government has saved £6.90.

The so-called leaders in the public-sector are no such thing since, by definition, they merely carry out government dictate. They do not have to face the risks and pressures of the private sector so do not justify the rewards.

Without this cut in the structural budget deficit, the UK‘s finances will always be on shaky ground and the UK economy vulnerable to external shocks that leave any UK government impotent.

We live in an age of two dangerous desires – the desire for sensation and the desire for simplicity. The media, ever mindful of the need to satisfy a highly competitive market for these desires, therefore latches on to everything as being dramatic and then presents it in the starkest (simplistic) terms possible. So it is with the current state of economic ‘recovery’ as manifest in house prices.

Statistics, being mathematical in nature, despite coming with a health warning in the form of the mantra ‘lies, damn lies and statistics’, seem to be taken as fact. The important attribute of any statistic is to first understand just what it is being measured. For example, let’s say we have a 3-month average of widget production (where would we be without the widget). In the first 3-month period we see production fall from 100 a month to 80 a month and at the same time the stock level  falls from 10 to 5. This arises due to a recession and a fall in demand so less production and less of a need to have a stock to act as a buffer to demand. The production occurs during the course of the month at 25 per week as demand may average out at 25 per week. But some weeks can be busy, so as not to turn custom away stocks are required. But if demand falls stock levels can also be reduced. Stock also costs and its level is never predictable so a judgement call is needed  - to lock up cash in stock or to have it available.

During the course of the next 3-month period it turns out that the level of 5 was perhaps too conservative and at the end of the period it is felt that 6 would be a safer level. So production is ramped up, slightly. There has been no extra demand but all judgements need to be re-visited from time to time and if there is a little more confidence or things haven’t worked out as bad as was suspected perhaps we should ramp up production, just a little, to give us a slightly bigger buffer.

This increase in production in one statistical period is then jumped on by the media as an indication of end to recession. It offers a dramatic and simplistic headline – ‘Production Up, Recession Over?’

 Of course, the next period, due to demand still being unchanged, we decide to ramp production (slightly) down now as the target of 6 has been reached and there is no evidence that any higher level is required. Indeed worries may have crept into management’s mind, for no particular reason, and production is cut (further) to reduce stock levels back to 5.

So it is with the recent apparent ‘surge’ in house prices.

In its latest house price survey, Nationwide building society reports a 1.3% rise in house prices in July. This follows a 1% rise in June. When expressed as 3-month moving average, the rise is even more dramatic – a rise of 1% in June but 2.6% in July. A level they report as being the fastest since February 2007. It is at this point that foreheads should become furrowed.  It is not to be expected that we are suddenly back at the height of the pre-credit crunch craziness.

Of course, the real clue lies in what is being measured. The Nationwide maintains an index based on a representative sample of properties. However, what it doesn’t do is to allow for volume. So, if 10 properties change hands and those properties attract an unrepresentative set of buyers (people with particular requirements and the money to satisfy them) it is quite possible that such prices could occur.

People buy houses for all sorts of lifestyle reasons – the area is one they’ve always wished to live in, gardens are bigger, traffic is less, schools are more appealing, etc. With a fall in house prices it is quite understandable that such people might well now move, as long as they have sufficient equity to find an attractive loan. In such cases waiting for house price falls is not an option. They have no real interest in finance per se, as long as the mortgage is affordable that is the extent of any financial interest. They are unlikely to put their lives ‘on hold ‘ whilst house prices fall further.

It is also possible that there are a few brave souls who, faced with poor returns on savings, have decided to enter the buy-to-let market.  But this would be a HUGE mistake.

The following chart, taken from the Nationwide report shows house prices over the last 30 years. The trend rate of price increase is 2.9%. pa Of course, that doesn’t allow for any of the costs of home ownership  - insurance, maintenance, borrowing costs, property taxes.

Nationwide House Price Figures

I took a look at buy-to-let earlier this year simply to run the numbers as to what sort of business being a landlord is. By looking at the rents available for 3-bedroomed semis and the costs that arise my calculation was that only figures around £80,000 would provide value. The properties providing such rents were being sold (in small numbers) for around £140,000. So vastly over-priced from an investment perspective.

This ties in with other aspects of home ownership. My dad used to tell me that home ownership was ‘enforced saving’ and he was right. Houses do not create wealth they soak it up – as my calculation showed. At the end of a period of ownership, however, a house may then release some of the wealth it has soaked up as down-sizing occurs.

The above curve shows that around the trend line there are periods of above trend activity that are followed by below trend activity. Since Q2 2009 is on the trend line it would reasonable to expect that, despite (the statistical anomaly of) recent house price rises, further declines should occur.

Furthermore, banking crises tend to follow a particular pattern. On average, 1.9 years after the start of the crisis GDP starts to pick up again. I’m sure this average is being used by the government to predict a rise in GDP by the end of 2009 – the crisis having started with the problems at Northern Rock in late 2007. This is then followed by a rise in share prices. This makes sense since a rise in GDP means a rise in business activity, profits and dividends – so making shares more attractive. This is then followed by a rise in employment. An initial recovery will see a rise in productivity as measured by output value per worker, but, eventually, confidence returns to the market and business bites the bullet of hiring again. Only once employment picks up do we see a rise in house prices as individuals now have money to spend. So house price rises reflect wealth creation not cause it. The gap between GDP taking off and house prices doing likewise of the order of 3 years.

Indeed, the following curve from the Office of National Statistics shows inflation from 1750 until 2000. The interesting section is from 1974 to 2000 where prices really took off rising by 7.8% pa. Investment in index-linked government bonds would have produced a much better return than a house with no risk and no extra charges.

Inflation From 1750 to 2000

However, averages are meaningless unless something is normally distributed (the bell shaped curve) with as many large items as there are small ones. And nothing is actually average. So we know that recovery (as measured by GDP) hasn’t occurred yet. Indeed the Purchasing Managers Index still shows decline going on, albeit at a slower rate. So, this recession must be skewed towards the high-end of recessions. That means I would not expect any increase in GDP by the end of this year. And no increase in house prices overall until several years hence.

Psychology matters, especially in economics, but talk of recovery in the economy just doesn’t add up.

In the 1989 film Field of Dreams, Kevin Costner plays a farmer who hears voices that command him to build a baseball diamond in one of his fields, with the immortal lines “If you build it, he will come.” A similar approach seems to being taken with the whole idea of re-vitalising the economy – if the banks have the money to lend consumers and businesses will come and borrow. I think this is as fanciful as Field of Dreams.

In February of this year, the Economist reported that 10 ears ago, British households were the fourth most indebted among the G7 economies. By the end of 2007 they were the most with a debt burden equal to 185% of disposable income. In 2007 the accountancy firm Grant Thornton reported that for the first time outstanding UK personal debt exceeded GDP

http://www.grant-thornton.co.uk/press_room/amount_of_uk_consumer_debt_exc.aspx

In 2008 they reported that it had actually got worse

http://www.grant-thornton.co.uk/press_room/uk_personal_debt_exceeds_uk_gd.aspx

To get that debt back to even 2003 levels requires some massive saving. That debt amounts to £1.444 trillion. The chart below shows that in 2003 UK debt was around 130% of disposable income. If debt at 185% of disposable income equates to £1.346 trillion (2007 GDP), then disposable income is £727.5 bn (£1346bn/1.85). If debt was at 2003 levels, still much higher than the ‘profligate’ US consumer, that would make outstanding debt £945.8 bn. That means at least £400 bn (probably nearer £500 bn) of savings or foregone consumption.

Last year a net £4bn was repaid. So at that rate it will be a good many years before the level of debt is anywhere near where it should be.

Other than reducing the actual level of debt, the other way to reduce the debt/disposable income ratio would to be to increase the level of disposable income.

The attitude of the Bank of England and most economists is that deflation is bad because it make the debt burden worse. The money spent servicing debt would be able to buy an increasing amount of goods and services as their price fell, so it is more expensive. However, deflation expands the purchasing power of disposable income whilst inflation decreases it in a world of pay freezes or pay cuts. At the Tesco Express near me the cost of petrol has risen 13% in the last 6 months. This situation of inflation, high debt and low or no pay rises simply makes debt default more likley for both companies and individuals.

So whilst interest rate cuts may help in servicing the debt it is extremely unwise to take on yet more debt. This is further compounded by the collapse in private sector pension schemes. So even without the need to pay off this horrendous debt, individuals would be advised to save for a retirement that threatens penury.

But there is a bigger problem, why did it get like this in the first place?

The chart below from the Office of National Statistics shows UK disposable income from 1971 to 2003. It shows how the disposable income of the top 10% of earners rose much faster from the early 1980s than for the bulk of the population. But it is the bulk of the population that constitutes a market. Ford made money by making cars that were affordable to the general population not those who can afford a Rolls Royce.

The experience of the 1980s onwards shows that the broad market (that section of the market not comprising the top 10% of earners) has suffered a decreasing trend in disposable income, as the following graph for the US shows.

disposable income trend

The past twenty or twenty-five years look to have come to an end and there is no sign of any means of replacing them.

I have to admit that, whilst I adore music and find it a great solace, I am not really an arty person. Having a technical education and degree, no affinity for novels (with a few exceptions, the ones I have read never seem to have any insight into the human condition) combined with 30 years of reading the Economist doesn’t really set you up for Newsnight Review. However, it seems to me (in so far as I understand the plot?) that the Samuel Beckett play Waiting for Godot offers some parallels with the current state of the global economy.

The financial system that has so spectacularly hit the buffers, despite its many faults, did at least do what it was supposed to do – consume global production. It did this in the time-honoured fashion of connecting savers (China, Far East, Germany) with borrowers (US and the UK, in the main part). This is what banks do so no problem in that. In so doing, it allowed the borrowers to consume the producers’ output using the producers’ money.

This is not the free-lunch for borrowers that it may at first appear. The Chinese and other South-East Asian exporters to the US bought US T-bills (US government debt) in order that by exchanging their currency for dollars their exports might be maintained due to their currencies not appreciating against the dollar. The plus-side was that the US government’s deficit spending (yes, the US also spent wantonly like the UK one) was easily funded. This in turn led to money in consumers’ pockets as the US government spent money with either its own employees or the employees of states whose projects it funded or the employees of businesses whose products and services it bought.

The downside was that the US, like the UK, ran a huge balance of trade deficit (especially with China) that prompted calls from members of Congress to call for the imposition of duties on Chinese goods that undermined employers in their constituencies. Not everyone got a bite of the lunch.

Economics, despite its liking for mathematics, is all about psychology. Using mathematics is a very good way to influence a person’s thinking since mathematics is a language of logic (arithmetic is not mathematics) and therefore a proposition supported by mathematics must be a sound one. Of course, logic is only as good as the premise on which it is based.

So mathematics can be as much a psychological tool as status, greed, envy or any other emotion. By using the complex packaging of debt, supported by even more complex mathematics, banks were able to persuade everyone (including themselves) that risk had been reduced maybe even eradicated.

This packaging matters because it is a way for those owning the debt to reduce their risk. The debt is an asset, a series of cashflows stems from the debt just as much as a series of cashflows stems from the output of a piece of equipment in a factory. However, by selling the debt on you remove risk. Since the borrower can default you can never guarantee that those cashflows will continue. Furthermore, the concept of discounting those cashflows over time means that, if you get the discount rate wrong – for example, inflation is higher than you expected and interest rates on risk-free government bonds greater than expected - you will have over-valued that debt. By selling the debt, you now have a bird in the hand rather than two in the bush. You have made a decent profit (historic cash from the debt plus a price that reflects future cashflows) and if the buyer can do the same with those future cashflows, then good luck to them. Of course, the buyer now carries the risk.

With the money from the sale of existing loans new loans can be made. And of course the buyer of this debt, in an age of global finance, could just as easily be a Chinese or German bank as a US or UK one. So if you can’t lend easily in your own country then lend by proxy in another. Thus we have producers helping in the financing of debt in consuming countries. Savers’ funds being channelled to spenders.

When doubts arose over the risk-level associated with some of these packages the psychology unravelled. Are we the bank holding ALL that risk? Is the bank wishing to borrow from us holding too much of that risk? If so, we need to hold on to our cash. Lending becomes a bad idea.

The hedge funds preyed on this psychology. Warren Buffet’s mentor, Ben Graham, described Mr. Market as being a manic depressive – excessive elation followed excessive depression. Mr Market being so disposed, it gives hedge fund managers the opportunity to make a killing by betting share prices in banks and other financial institutions would fall and then making it a reality either by waiting for a sensationalist media to do their work for them or by letting their actions be known and rely on their reputation in the market to do the rest. If Joe Superstar is doing this then it must be true. A study of investment decisions in the wake of the market becoming aware of Warren Buffet’s investment decisions shows exactly the same thing. His reputation for getting investments right becomes a self-fulfilling prophecy.

 See http://www.fma.org/Chicago/Papers/Imitation_Is_the_Sincerest_Form_of_Flattery.pdf section IV. Empirical Analyses  sub-section B. Market Reaction to Initial Public Disclosure of Berkshire Hathaway Investments

So the confidence in the system falls and with it the function it performs – hence global recession.

Waiting for Godot, in so far as I can determine, seems to start with the failure of a simple action (removing a boot) and then descends into a complete mess that is open to many interpretations. All the time salvation is hoped for by the arrival of Godot, whom no one admits to being able to recognise or when and where Mr.Godot may actually appear. So it is with the global economy. The simple action of consuming world output (there is certainly demand for lots of things) seems to require the most convoluted of thinking. The fact that such a process has not arrived leads to all sorts of interpretations as to the future shape of the global economy – there being no agreement on what this would look like and when and where it may turn up.

Neither the play (presumably made to be performed in somewhere other than a small room) nor the actions by governments to save the banking system seem to address the other side of the footlights. I cannot imagine that the audience for this play come out feeling enlightened, exhausted yes but not enlightened. Similarly, a loan requires two to tango – you save, I borrow. 

The US and especially the UK are not savers, as the chart for UK savers below shows; US savings ratios have behaved similarly. If they were then the Chinese and the Germans would have to become bigger spenders and borrowers if that output was to be consumed.

UK Savings Ratio

So for the global economy to revert to anything like it was pre-2007 those waiting for Godot need to devise a way to either change the mentality of both current borrowers and savers or devise a new means whereby the psychology of savers in Germany and China can be persuaded to pass their hard-earned savings to the spendthrift Brits and Yanks. Could be a long wait.

My son has a small part-time job that boosts his income, as a university student, slightly. When I was a university student, back in the early 1970s, I knew no one who did this but then I had a full grant, albeit means-tested, and whilst I left university with no money I had no debt either. My son will not be so lucky. The (financial) value of a degree is highly dubious anyway (see the Emperor’s Clothes) and with what looks like a severe recession (if not depression) on the way he needs to do all he can to keep this debt to a minimum. It also serves another purpose.

He works for a company in the leisure and service sector. It charges very high prices for its services but, of course, pays the minimum wage. It also (probably) breaks employment law as my son regularly (in fact it seems invariably) works a 12-hour shift without a break. In other words, my son is part of a ‘flexible’ labour market. Flexibility being a one-way street as management will, naturally enough, regularly seek to get him to do more hours than he wishes or can do due to his studies. It has provided him with a sobering lesson in, what are for many, the harsh realities for a very large number of workers, if not most.

I say (probably) most because the sector of the economy that has grown since the eighties has been the service sector. Of course some services deliver high added value and high wages - the law, medicine, marketing, finance, etc. - but these are confined to a few. The bulk of service sector is the ‘McJobs;, low-skilled, low added-value, jobs such as a hamburger flipper at McDonalds; retail being the most common example. I always think it is note-worthy that all the participating dragons in the Dragon’s Den run service industries and that, of the five, only one operates in the high added-value range. All the rest rely on these sort of jobs.

In addition, another area of employment growth has been that of the self-employed. Not out of entrepreneurial vigour but out as the only means of achieving a decent, if sometimes irregular, income.

What the present economic turmoil boils down to is the failure of what I would describe as the Reagan/Thatcher paradigm. This concept was that by taxing high earners lightly and having light regulation wealth would be created. This wealth would then ‘trickle down’ the economic pyramid (few at the top, many at the bottom) bringing wealth to all. The wealth creation process being driven by entrepreneurial types. If this paradigm is not dead it certainly is severely (perhaps critically) wounded.

Certainly in the US we have seen a degree of technical innovation mostly in and around the IT and telecommunications industries. In the UK innovative services in telecomms (particularly mobile phones) have arisen. However, most of the manufacturing jobs arsing from that technical innovation have gone to such places as China. Innovative services till result in most jobs being retail jobs. This means the wealth has not trickled down. And the most glaring demonstration of this is the indebtedness of the average American and Briton, who is even more indebted than his American cousin. This indebtedness is then reflected in bad loans made by banks. Those loans would normally form part of a bank’s assets and as the loans turn bad so do the assets. That in turn drives the need of the banks for extra capital. The loss of asset value can only be made good by depositors loosing some of their money  (the risk causes the sort of run seen at Northern Rock) or by the banks raising fresh capital as with the rights-issues from Bradford & Bingley, RBS, HBOS and Barclays and, ultimately, part-nationalisation.

This indebtedness will arise in some cases out of individual greed, stupidity, etc. But I doubt that is the bulk of the problem. The demise of manufacturing has seen the demise of the regular, well-paid job. I can remember interviews with ex-Rover employees a year after the collapse of Rover. Most had found new jobs but none as well paid as at Rover. Of course, that, in part, reflects on Rover’s problems - paying wages not justified by its output.

Patently, globalisation is at the heart of this matter. Benefits most certainly arise from this. Otherwise poor countries can become wealthier. Consumers benefit from competition and cheaper goods. In economics there is a poser - export jobs or import labour, although both the US and the UK seemed to have managed both. The reason being that manufactured goods can be moved around the globe. It is more difficult to move services. Indeed, the irony is that it is the high value services in IT and the law that are more easily moved rather than those of having your lawn cut. As a result, low wage services that can’t be out-sourced rely on immigrants willing to accept low wages.

Karl Marx always believed that productivity would cause the fall of capitalism. As productivity improved the demand for workers would fall causing unemployment, social disruption and, eventually, revolution. Of course, what Marx had failed to appreciate was that those workers formed a market for the sorts of goods even wealthy Victorians could only dream of. The innovation in products and production methods of first America and then Japan stayed Marx’s forecast. However, to sell those products and create the jobs to make them, consumers needed money.

In an ideal world most of that money would arise from the goods and services those consumers produced, with the only loan of any significance being a mortgage. That mortgage being, in turn, financed by the goods and services the individual produced. In fact this is the world I occupied as an employee. I have only ever had one loan other a mortgage and never have had any credit card debt. But, in a world of low wages arising from ‘McJobs’ the only means of keeping the system going is by debt. Even now as we look at the remains of a debt-induced financial disaster there are calls from government and commentators to keep the lending going. Lending for investment in business and the resulting wealth that can create is one thing but lending for consumption is obviously not a sustainable practice.

So where are people to get this money for consumption from? If globalisation is the problem why have it? Because it benefits everyone from producers to consumers - although what long-term damage to the planet will be done by everywhere being like Gravelly Hill or Los Angeles is worth considering.

The only answer I can see is that of re-distribution. Not through the highly inefficient benefits system. Tax credits only apply to people with children and involve huge bureaucracies. The best form is to accept that low taxes on high earners do not deliver the goods and that taxing low earners at all causes chaos due to indebtedness. So tax rates of 50% plus do need to be levied on high earners (£100,000 plus) with no income tax (or the return of the 10p band??) for those earning less than £20,000. Probably coupled with a wealth tax on millionaires and billionaires. Some will move on but then remove their rights to UK citizenship.

It also means recognising that a good deal of public spending is in the wrong place. Being tougher on the likes of doctors (particularly GPs) and judges. Being tougher on contracts, particularly with IT and management consultancies.

When I left university in 1973 things seemed bad. Oil prices were going through the roof but due to the politics of the Arab-Israeli problem. Governments were trying to stave of unemployment by keeping interest rates too low to control inflation. These problems were bad but not systemic. Industry learned to live with high oil prices by using less of it. The US applied itself to some of the politics in the Middle East. Interest rates were eventually raised.

What we have now is a fundamental problem with the way people live their lives and the ability of economies to deal with that.

The West Midlands Police, when not in a take-away, can frequently be seen driving around in vehicles proclaiming that crime has fallen. Well, I guess they should know as they are the ones who manufacture, sorry produce, these statistics.

Public relations (spin) is a constant facet of modern life. And why not, if you have a good story to tell then tell it. But does the West Midlands Police have a good story to tell anymore than Gordon Brown does over his mismanagement of the economy, simply repeating something does not make it true.

Over the last 12 months two issues have demonstrated the true mindset of the West Midlands Police – or rather its senior management. Channel 4 in 2007 aired a programme concerning what was being preached in West Midland’s mosques. Some of these preaching’s were not only distasteful, welcoming the killing of British soldiers in Afghanistan, to the probably illegal; advocating that apostates (converts to Christianity) be crucified and young girls assaulted if they didn’t wear religious clothing. Neither the Crown Prosecution Service (CPS) nor the West Midlands Police felt these recorded statements amounted to criminal activity and had been taken out of context. How you can advocate the murder of Christian converts or homosexuals out of context beats me.

In the end West Midlands Police issued a complaint to Ofcom that editing had been used to misrepresent the Muslim community in the West Midlands. This complaint was rejected.

The Ofcom report showed the documentary had “accurately represented the material it had gathered and dealt with the subject matter responsibly and in context”. As a result the police issued a statement, concluding: “We accept, without reservation, the conclusions of Ofcom and apologise to the programme makers for the damage and distress caused by our original press release.” The same statement was later posted on the Crown Prosecution Service website.

Channel 4 then issued a writ for libel against both the CPS and the West Midlands Police and won damages of £100,000. To the best of anyone’s knowledge, despite Ofcom concluding that the footage was not misleading and taken out of context, no action has been taken against any individuals shown in the film

However, Chief Inspector Chris Pretty was given no such defence as comments out of context when he mad a comment about ‘black men’s wheels’ when presented with a model BMW. Somehow this is racist and he was disciplined and downgraded – presumably by the same management that found the Channel 4 programme ‘misleading’.

Certainly there are a good many people, paid out of public funds usually, who see the use of the word ‘black’ as racist. Blackboards, baa baa black sheep, the black economy, getting black looks – these are all deemed racist by mentally disturbed people. I thought it very ironic that an interview, aired on local TV with the public following this incident, with a black man who was himself a BMW driver (so here was a case of a black man’s wheels) thought it racist as it implied black men were drug dealers. Since drugs were not mentioned this demonstrates word association in, at least, the mind of one black man.

The differing levels of ‘proof’ are quite remarkable. In one case the promotion of violence is acceptable and in the other the use of word black is not.

But what does the community the West Midlands Police serves and protects thinks about it? Who knows? Who cares?

The West Midlands police, along with Britain’s 42 other forces, are answerable only to the home secretary and their local police authority. Since the police authority for the West Midlands was remarkably quiet over the Channel 4 case we have to assume that they are a weedy board of councillors, magistrates and assorted other appointees with little clout. Certainly they find no need to engage in PR.

This centralisation of control dates back to the 1960s, when corruption was a problem in many local forces. It also means that any debate as to how to deal with violence, or any other crime, takes place nationally

The bottom line is that policemen may hold surgeries for local people, but they can take or leave whatever requests such meetings throw up. They are certainly motivated by the rigid system of central targets, which encourages then to focus on busting minor offenders rather than on protecting the public. Of course the fact that the government has dropped the word ‘Islamic’ when referring to terrorists may also be an influence.

This may change, but being Britain only a bit and then at a glacial pace.. A policing green paper, published on 17^th July 2008, will introduce some kind of directly-elected local control. Various options are being muted. The Tories want to replace police authorities with elected police commissioners, who would set policing priorities as well as signing off on budgets. The government seems to be leaning towards a less radical option that would preserve the existing police authorities, but insisting that their members be elected. Home Office research shows that the “vast majority” of Britons have never heard of police authorities, and most of those who have don’t know what they do. That’s no surprise as they do nothing worth talking to the media about.

It is hard to imagine chief constables being under the thumb of bunch of anonymous people elected on a minuscule turnout. Furthermore, a green paper is only a discussion paper. For it to progress it needs to become a white paper and then a Parliamentary bill. Bearing in mind that there’s at most two years until the next election don’t hold your breath that this particular bird will fly.

So PC Plod will go about his duties of being a statistics generator for the spin merchants. As George Dixon used to say ‘Mind how you go’.

Well, we’ve come to the end of an era. No, I’m not talking about the end of the pier show that feature the pantomime horse that was Tony Blair and Gordon Brown - although that was more like the Pushme-Pullyou from Dr Dolittle. No, I’m referring to my son’s finishing has A-levels and the end of secondary education.
Although we’ve been through major changes before - first day at school, going from junior to secondary school - this is more profound. Both his first day at school and the move to secondary school still left Sam as a child the day after. The end of secondary school, combined with that rite of passage - the passing of a driving test, leaves you as a parent in no doubt; the day after tomorrow is a different world, an adult world.

 No more frantic searching for sports kit, no more parents’ evenings, worst of all no more school ski-trips. The school ski-trips seemed to bring out the best in my son. He is a good skier and,  being an only child (as I am),  you worry about how well they will make friends and socialise - just as my mother did about me. But along with the good there has been some bad - not least with ‘A’ levels.
School is not really about education, it is about box ticking. Voltaire’s view that education is a fire to be lit not a vessel to be filled is a million miles away from the reality of UK education. It probably always was but when I did my ‘A’-levels we had time, particularly at lower-sixth level, to spend time on education rather than exam passing.
My greatest influence was my chemistry teacher, Dr Nathaniel Schulman - universally known as ‘the Doc’.. A holocaust survivor who, in the great tradition of European Jewry, ran the philosophy classes, the chess club, the debating society. By persecuting such people, the Nazis were always going to lose the Second World War. Dr Schulman did more than anyone else to light that fire.
My son, on the other hand, like all other sixth-form students had AS levels to study for when in the lower-sixth. I tried to be his Dr Schulman.
On a more practical level, in my day you studied three A-levels in search of grades. Now four are studied in pursuit of points, with an algorithm to turn grades into points. And, of course, points mean prizes. I thought four seemed a lot, if they were to be done to the depth required, so when my son wanted to drop history that seemed reasonable. What neither me nor his mother realised was that he would get points from an exam just by writing down his name. However, the school should have known that. So when he asked to drop it the school made no attempt to explain the implication of this.
For the best part of one year his English teacher was absent. This usually meant cancelled classes. Concerns raised over this  were always met politely but totally ineffectively. In the end we (his mother and I) solved it in the time-honoured middle-class way - we hired a teacher for him.
In the end all was well that ended well. In fact, Sam did as well as any of his friends that had passed their 11-plus and gone to King Edwards. My wife and I filled the gap - a moral for anyone look to the public-sector for assistance. You’ll get the minimum, if you want quality you need to be in a position to make your own provision.
As one era closes another opens. Sam now enters the waiting room of life. Not knowing what he wants or can do, he has to now start finding his own way. University is just a way (although an expensive one) of putting tomorrow off.