Fred the Shred goes undercover

I wonder why former RBS boos - Sir Fred Goodwin - felt the need to get a super-injunction banning the publication of information about him. Any ideas?

The Treasury proposes a new framework for financial regulation

The Treasury has just produced a paper outlining a new framework for financial sector regulation. The paper proposes three new innovations:

• A new Financial Policy Committee (FPC) will be established in the Bank of England, with responsibility for ‘macro-prudential’ regulation, or regulation of stability and resilience of the financial system as a whole;

• Micro-prudential (that is, firm-specific) regulation of financial institutions that manage significant risks will be carried out by an independent subsidiary of the Bank of England, the Prudential Regulation Authority (PRA);

• Responsibility for business regulation will be transferred to a new regulator - the Financial Conduct Authority (FCA). The FCA will have responsibility for conduct issues across the entire spectrum of financial services.

The strategy has at least two commendable features; the Financial Services Agency will be, for all practical purposes, abolished. As such, we are witnessing a rare example of insitutional accountability. The FSA's failure is being justly punished.

Second, the Bank of England is now back in the driving seat. It has primary responsibility for overseeing the financial system. In practical terms, it is a return to the pre-1997 position, thus unwinding the nightmarish Brownite experimentation in financial sector supervision.

However, on more substantive regulatory reform, the strategy is disappointing. Instead of promptly pushing for higher capital and liquidity requirements, the strategy has placed its trust in Basel III - a multi-lateral approach to enhancing financial sector regulation.

We are likely to wait a long time for an international consensus for tighter capital and liquidity requirements. It would be far better to circumvent these tedious discussions, act unilaterally and decisively strengthen our national regulatory framework. The government should propose higher mandatory capital and liquidity requirements.

Bankers will inevitably complain that tighter regulation will reduce UK financial sector competitiveness. There are two ripostes to this argument. First, the UK is excessively dependent on financial services. We need to diversify, and some downsizing of the city of London would be no bad thing. Second, tighter regulation might have powerful reputational effects, strengthening UK bank balance sheets, which might limit some of this loss in competitiveness.

In any event, tighter regulation is needed in order to avoid a repetition of the 2008 financial crisis. The sooner the government acts to constrain reckless banking practices, the better.

Talking down the risk and upping the LTVs

Northern Rock are back in the game. The state-owned bank will again offer 90 percent mortgages. Andy Tate - Northern Rock Director - summed up the new sales strategy:

"Our new products, which will be offered within our prudent risk appetite and only to customers with good affordability, should appeal to those who have lower deposits and first time buyers."

Don't you just love the linguistics of financial irresponsibility; "prudent risk appetite" and "good affordability". Today's announcement is part of a process. Shortly, we will see another announcement where Northern Rock will be offering 95 percent mortgages, again using weasel words like prudent and affordable to justify the slide in lending standards.

The sad truth is that we have learnt very little from the collapse of Northern Rock. There are far too many people who want the bubble back.

RBS exercise restraint

First the bad news. RBS chairman - Sir Philip Hampton, conceded that last year more than 100 employees received compensation of at least £1 million. The good news is that the number was lower than the preceding year.

There is even more good news - bonus pool was less than £950 million. It could have been so much higher.

Stephen Hester, chief executive, summed it up perfectly "We have tried to exercise restraint."

Personal debt in the UK

Infographic by Money Debt & Credit

Barclays - such a naughty bank

Barclays need a little distraction from its dubious tax affairs. Lets shift the subject over to regulatory compliance. Here are a few tasty press releases from the Financial Services agency.


FSA fines Barclays £7.7 million for investment advice failings and secures as much as £60 million in redress for customers

18 January 2011

The Financial Services Authority (FSA) has fined Barclays Bank plc (Barclays) £7.7 million for failures in relation to the sale of two funds. Barclays will contact customers and pay redress where appropriate.

Between July 2006 and November 2008 Barclays sold Aviva’s Global Balanced Income Fund (the Balanced Fund) and Global Cautious Income Fund (the Cautious Fund) to 12,331 people with investments totalling £692 million.

However, there were a number of serious failings in the way the funds were sold.

FSA fines Barclays £2.45m for failures in transaction reporting

8 September 2009

The Financial Services Authority (FSA) has fined Barclays Capital Securities Ltd and Barclays Bank PLC (Barclays) £2.45m for failing to provide accurate transaction reports to the FSA and for serious weaknesses in systems and controls in relation to transaction reporting.

FSA levies £1.12m fine on Barclays Capital for client money breaches

26 January 2011

The Financial Services Authority (FSA) has fined Barclays Capital Securities Ltd (Barclays Capital) £1.12 million for failing to protect and segregate on an intra-day basis client money held in sterling money market deposits.

Under the FSA’s client money rules, firms are required to keep client money separate from the firm's money in segregated accounts with trust status. This helps to safeguard and ring-fence the client money in the event of the firm's insolvency.

Fixed Rate Savings Bond Terms and Conditions - Barclays Bank plc

2006

Why did we think it was unfair? We (the FSA) thought the term that allowed changes for 'any other good reason' was open-ended and therefore meant that the firm had not given a clearly defined valid reason for varying the contract. We thought that gave the firm too much discretion.

Barclays Bank Plc, trading under the name of Woolwich

As a qualifying body, we, the Financial Services Authority (the FSA), can challenge firms using terms which we view as unfair under the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations). So we review contract terms which are referred to us by consumers, enforcement bodies and consumer organisations. This has led to Barclays Bank PLC, trading under the name of Woolwich, undertaking not to use the Woolwich's terms which we consider may be unfair.

But we are only complying with the law

Shamed by their excessive use of tax avoidance schemes, Barclays have fallen back on the excuse of last resort; "we are only complying with the law".

As an aside, Barclays has a less than perfect record of following the requirements of UK legislation, as various judgements from the Financial Services Agency will attest. Moreover, UK corporate tax law is notoriously complex. It is an unequal struggle between the slick accountants from Barclays and the disaffected and underpaid tax inspectors of her Majesty's Customs and Excises.

Still, it is hard to understand why tax inspectors can't squeeze more corporate tax payments from Barclays. The company just reported their results online and 2010 was a very good year. Profits amounted to about £6 billion. Roughly speaking, around a third of these profits came from retail banking operations, the bulk of which were generated in the UK. The remainder came from Barclays capital, the investment banking operation primarily based in London.

For tax liabiilities, location matters. Corporate income tax, in theory, should be levied on the profits made by firms in a given geographical region. Judging by the financial statements, the majority of Barclays operations as well as their employees are based in the UK. Yet curiously these UK operations never seem to generate significant amounts of corporate income tax payments.

Barclays have tried to hide the paltry amounts of corporate tax payments by publishing the total tax amounts that the company paid over to the Exchequer. For example, they have included the amounts of PAYE paid by their employees. In 2009, the bank paid around £2 billion over to HM Revenue & Customers, although £113 million was corporation tax.

This only adds to the mystery as to why corporate income tax payments are so low. High levels of PAYE payments point to high underlying salary payments. Normally, companies don't pay out massive wads of cash unless their workers are generating large profits. Aren't bank bonuses supposed to be tied to profits?

Companies have an incentive to hide those profits from the taxman. Otherwise, how could one explain the massive financial flows into the Cayman Islands; a barren rock in the middle of the Caribbean. Banks have taken advantage of the complexity of corporate income tax regulations. They have arranged their financial operations so that they are now effectively liberated of any responsibility to pay taxes.

However, our Parliament is sovereign. We can determine our own tax laws. If the political will was there, Barclays would not be able to avoid taxes in such a scandalous way.

One simple way forward would be for corporate income tax on banks to become a presumptive tax. At the end of every quarter, the bank would have to pay a fixed proportion of its PAYE contributions as an advance payment on future corporate income tax liabilities. A rate between five and 10 percent would be reasonable.

These funds could be held in escrow accounts. At the end of the year banks would have to justify why those profits should be allocated to offshore centres. If they can genuinely prove that the profits were generated through operations conducted abroad then they can receive a rebate on corporate tax payments. However, the level of proof required would have to be extremely high.

The idea isn't that radical. Presumptive taxation is quite common worldwide as well as advance payments on corporate income tax. It would offer a way of genuinely cracking down on these outrageous tax avoidance schemes that banks have abused for years. If Barclays don't like it, then they put all their ATMs on the Cayman Islands.

Bank profits, correlations and tax

"Any link between Barclays Group profits and the amount of tax paid to the UK government is inappropriate - there is no direct correlation between the two."

Barclays Bank Press release

I defy anyone to find a more arrogant statement than the one produced by Barclays bank and reported in yesterday's Guardian. Whatever Barclays might claim, the vast majority of its operations are based here in the UK. Nevertheless, it somehow they contrived to pay only one percent of its annual profits to the UK Exchequer.

Some simple arithmetic highlights the absurdity of the Barclay's statement. The current rate of corporate income tax is 28 percent. Therefore, in order to pay just one percent of global profits as taxes to the UK, it follows that only 3.6 percent of those profits are attributable to UK banking sector operations. Does that seem likely? Call me a failed accountant, but I think not.

In terms of financing its operations, Barclays is proudly British. It has profited handsomely from the low rates engineered by the Bank of England. While savers are being punished by zero returns on their deposits, Barclays bank generously awarded their staff with a huge pay increase last year. However, the patriotism disappears when it comes to paying tax.

The bank also has the reassurance of knowing that should they fall into any difficulties, the taxpayer is there ready to bail it out. Yet despite this extraordinary generous financial back-stopping by the state, Barclays claims that there is no correlation between its profitability and the amount of tax it pays to the government.

Imagine if we all thought that way. Suppose that millions of PAYE taxpayers suddenly claimed that their salaries have no correlation whatsoever with the amount of tax owed to the government. It is of course an absurd claim.

Bankers are out of control. This sense of entitlement knows no bounds. They think it's perfectly acceptable to demand massive bailouts when their reckless decisions threaten bankruptcy. They also feel no obligation to pay a reasonable contribution to the public purse. Instead, they claim their corporate affairs are too complex to require paying any tax.

Earlier this week, David Cameron promised welfare reform. He pointed to a sense of entitlement that is endemic among the poorer sections of society. I'm still waiting for a similar statement about corporate welfare. When will we see a banking sector corporate welfare reform bill before parliament?

Tragic lives, to entertain you

Carolyn Moynihan, Deputy editor of mercatornet.com.

If the sexual revolution sometimes appears as a doubtful benefit to civilisation, there is always one accomplishment its champions can boast: women have been liberated from the domestic sphere and can take their place in public life as equals in intelligence and dignity with men.

There are casualties, of course. One of them, French actress Maria Schneider, died earlier this month at the age of only 58. Born to a teenage mother, the child of an extra-marital affair who did not meet her father until she was 15, Maria was only 19 when she played opposite Marlon Brando in a film which remains a byword for depravity or daring, depending on which side of the revolution you take your stand.

One need never have seen "Last Tango in Paris" (I have not) to know about its dehumanising theme: sex with no hint of love between two people who do not even know one another’s name, and a scene, which, though still described in reputable newspapers by circumlocutions, is clearly simulated sodomy. Maria found out later that the part was originally scripted for a boy. She recalled much later that she was humiliated by the scene and cried real tears during it, but that she was a mere “baby” at the time and fell under the power of director Bernado Bertolucci, whom she described as “manipulative”.

Bertolucci and Brando got Oscar nominations from the avant garde for their brainwave while Maria, left to cope with the scandal and being “looked at like an animal” by men in public, rapidly progressed to a nervous breakdown and a life blighted by drug addiction, suicide attempts and broken relationships. She rarely undressed in a film again, and in latter years offered women actors this piece of advice: “Never take your clothes off for middle-aged men who claim that it’s art.”

If only Anna Nicole Smith had heard that before she met Hugh Hefner and launched her notorious public career from the pages of Playboy. But it was already far too late. At age 24, and from another dysfunctional family, the girl from the Texas backblocks had been married and separated, had borne a son and worked as a stripper. In Playboy she announced her ambition of being “the next Marilyn Monroe”. What happened was even worse than that. Anna Nicole lived one of the most bizarre and demeaning lives imaginable, goaded on by the insatiable appetite of reality television consumers for watching people self-destruct.

And that is the point, you see. Having thrown off every kind of restraint (she was a pathological over-eater as well, and foul mouthed) nobody respected her or seemed to give a damn what happened to her -- least of all the media bosses who used her so shamelessly. New York magazine put her on its cover in 1994 to illustrate a story called “White Trash Nation”. She had exposed what libertinism does to people and the liberal establishment did not like it. Her death from a drug overdose in 2009 was described by a British academic recently as follows:

"Anna Nicole did not end in a state of grace. When her son died, she hysterically entreated Jesus to take her instead, then recovered in time to sell the last photographs of him alive; at his funeral, she climbed into his open coffin. A few months later, she died in a puddle of vomit, and millions peeked at snapshots of her messy exit on the internet."

That disdainful and sarcastic account of a woman’s horrible death is just a small part of a carefully crafted (the writer, Peter Conrad, teaches English literature at Oxford) four-page article, all in a similar sneering vein. One does not have to read far into it, however, to understand the utter contempt in which some highbrow liberals hold the lowbrow victims of sexual liberation and the popular “culture” it has spawned. The whole thing is an eye-opener.

But the reason for the article is even more shocking: yesterday in London an opera based on this unfortunate woman’s life opened at the Royal Opera House. Yes, “Anna Nicole”, the opera (libretto by the same genius as gave the world “Jerry Springer, The Opera”), is going to make arty entertainment of the desperate trajectory of her life all over again -- complete with (warning on the ROH website) “sex, extreme language and drug abuse”.

But this cynical production seems to be only the beginning of a trend. Later this year, a stage show at the Globe Theatre will dramatise the life of Jade Goody, who achieved celebrity status in the UK version of Big Brother in 2002. On the strength of her “rough-around-the-edges, hard-drinking” performance (to quote one of the kinder journalistic descriptions) Jade was voted fourth place in a viewers’ poll on the “100 Worst Britons”. Next she disgraced herself by uttering racist putdowns of Bollywood actress Shilpa Shetty on Celebrity Big Brother.

She was, notes one writer, “at once dismissed and over-analysed as ‘famous for being famous’, a manufactured creature whose only talent was relentless self-exposure, the dismal product of a country in thrall to the cult of celebrity.” However, the journalistic consensus seems to be that Jade “redeemed herself” by dying, very publicly, of cervical cancer -- a walking public health advertisement. She was only 28, a victim of exposure to the sexual mores of the twentieth century.

Now she is to be immortalised, or rather, deified, in a play called “The God of Soho”. Playwright Chris Hannan gushes: "The contemporary equivalent of the kings and queens and dukes that Shakespeare puts on stage are these stars. We call them our gods and goddesses."

Oh. Do we? Jade Goody did display a kind of heroism at the end of her life -- she did the best she knew to protect her two young sons, having them, and herself, christened, and using her celebrity status to earn as much money for them as she could -- but the attempt to mythologise her is absurd, and a form of commercial exploitation in the same league as Big Brother, Playboy and Last Tango. She was not a tragic queen or goddess; she was a real, misguided young woman from yet another chaotic family who seemingly never got a word of sound advice until she was face to face with death. Such lives are best left to the private memories of those who truly loved them.

Dutch soprano Eva Maria Westbroek, who takes the role of Anna Nicole in the current London production of that name, has expressed puzzlement over the motives of the woman: “Why would you do that to yourself? Where does that come from?” Ms Westbroek has decided, writes Peter Conrad in the Observer article quoted earlier in this piece, “that Anna Nicole was driven, like Salome, by an erotic compulsion that compelled her to destroy herself: ‘I find her fascinating and tragic because she really went for death.’”

Where did that compulsive eroticism come from? Well, we know one answer to that question: it came to a large extent from the culture created by film directors, porn magnates, television bosses and brand marketers -- the “middle-aged men” who cynically encouraged Maria Schneider, Anna Nicole Smith and Jade Goody to expose themselves, one way or another, in the name of art, but for reasons of profit.

To that line-up we now have to add opera house and theatre czars, playwrights and performers from the world of the higher arts, who, having emptied theatres of their traditional audience by the hollow and obscene post-modernist charades they choose to put on the stage, are now bidding to fill the seats with recruits from the bear-pit of reality TV.

That the vulnerabilities and compulsions of women from what the British like to call the “underclass” are exploited by their masters for entertainment some 40 years after Maria Schneider made her fatal mistake, should make us wonder exactly what the liberation of women means.

This article was written by Carolyn Moynihan, Deputy editor of mercatornet.com.

The monetary miracle is over

One should never underestimate the importance of luck. For almost a decade, the Bank of England proved to be very fortunate. It managed to simultaneously keep interest rates low, dramatically increase the money supply, and at the same time meet its inflation target.

How did it pull off this monetary miracle? The chart above provides a comprehensive explanation. It breaks the CPI inflation rate down into two components; the rate for services, which are mostly produced domestically; and rate for goods, which are almost entirely imported into the UK.

As the chart illustrates, prices for domestically produced services have grown fairly consistently at between three and four percent a year. This is far in excess of the Bank of England's inflation target. Prices of goods, on the other hand, were falling between 2000 and 2006, exerting powerful downward pressure on the aggregate inflation rate.

The reason for this negative inflation rate for goods is well understood. China industrialised, and exported huge quantities of clothes, footwear, and electronics. Prices for these items fell massively. In contrast, domestically produced prices increased rapidly in response the the extraordinary surge of Bank of England inspired monetary growth.

For many of us, this inflationary dichotomy between its goods and services will ring true. Anyone who regularly hired an accountant or chose to educate their children privately will be familiar with the four percent a year price hike.

So, it is fairly easy to see how the Bank of England got away with loose monetary policy and low inflation. Nevertheless, there is a more intriguing question embedded in this chart. To what extent did the surge in goods prices trigger a financial crisis?

To see how the turn-around in import prices might have precipitated the crisis, it is worth remembering how monetary policy worked in the past. In previous decades, rapid credit growth would have quickly fed through into prices. Eventually, interest rates would have increased, credit growth would have subsided, the economy would have slowed, and eventually inflation would have moderated.

This didn't happen in a decade before the crisis. Credit exploded while the overall inflation rate remains subdued on account of cheap imports. The Bank of England didn't feel obliged to raise rates, and the credit bubble just kept on growing.

Unfortunately, the old trade-off, like an unwelcome relative, returned in 2006. Inflationary pressures were building in the East,and import prices began to increase.

There were tentative signs of trouble in 2005. The Bank of England made a half-hearted attempt to raise interest rates to stem inflationary pressures. But the monetary policy committee took fright when it saw the property market weaken. Rather than tackle the growing inflationary menace, the committee buckled, reduced the bank rate and gave the housing bubble a new lease of life.

This weakness before the inflationary enemy resulted in renewed price pressures. In the early months of 2007, the Bank of England and its sister institutions in the US and Europe, were belatedly hiking interest rates.

This changing policy stance was sufficient to expose all the poor lending practices and financial sector abuses that had built up through the previous decade. Many banks, particularly small ones like Northern Rock, had cut interest margins to the bone and jacked up their leverage ratios. The slightest perturbation of interest rates and the financial system was in deep trouble.

The rest of the story you know.

So here we are - four years on from the crisis - and inflation has hit 4 percent, and it is likely to go higher. The Bank of England now believes itself to be trapped. It fears to raise interest rates on account of what it thinks a rate hike might do to the frail recovery. As for dealing with inflation, it has no strategy. There is no plan, just a vague hope that somehow things will turn out alright in the long run.

In fact, there never was a plan. The only thing that kept inflation down for ten years before 2006 was luck and a flotilla of Chinese cargo ships packed full of goods.

How cheap dresses and fancy shoes led to the financial crisis

Fashion has never been cheaper.

Since 2000, the ratio of clothes and footwear prices to hourly earnings fell by almost 60 percent. Around half of that decline was due to the direct effects of lower prices; the other half came from higher nominal wages.

This chart illustrates this spectacular fall in the real price of clothing. It also demonstrates the extraordinary structural change that has occurred in the world economy over the last 10 years. There was a time, and it wasn't so long ago, that Britain had a textile industry. That industry has all but disappeared. Instead, all our clothes are produced overseas, mostly in East Asia, particularly in China.

This chart doesn't just highlight the disappearance of a single British industry and the rise of China as an economic superpower. It also explains how the Bank of England made some profound errors in the conduct of monetary policy. The bank wasn't looking too closely at the sudden profusion of style around Threadneedle street or the meteoric rise of Jimmy Choo. If they had noticed, they might have avoided the greatest economic and financial disaster for generations.

As clothing and footwear prices fell, it should have provided powerful downward pressure on the overall price level. Yet throughout the last decade, consumer prices continued to increase.

Until 2006, that increase was around 2 percent a year. Although this inflation rate doesn't sound too serious, it obscured huge shifts in relative prices. If clothes prices were falling sharply, other items had to be going up in order for the overall inflation rate to be two percent. In reality, cheap Chinese imports were hiding a lot of inflation.

Low headline inflation lulled the Bank of England into a false sense of security. It chose to ignore the fact that cheaper imports were distorting true underlying inflationary dynamics. Since the headline inflation rate was within its mandated target of two percent, all was well with the world. Therefore, the only sensible thing to do was to reduce interest rates to historically low levels.

This provoked a borrowing frenzy. The primary destination for cheap credit was the housing market. The Bank of England couldn't fail to notice the double digit increase in house prices. However, it argued that it wasn't the job of a central bank to target asset prices. The CPI was the thing that mattered, and that was under control.

Despite this neat excuse, the borrowing frenzy wasn't just confined to the bubblicious real estate sector. Lower interest rates also encouraged households to fund consumption expenditure with a huge increase in personal debt. Flat screen TVs, new cars, home extensions, and extravagant holidays to Asia were all funded by cheap loans from high street banks. Behind all this debt accumulation was the Bank of England, with its low interest rates, and a belief that inflation was under control.

Then, it all fell apart. There is no need to recycle the sequence of events that led to the financial crisis. It is suffice to say that from 2007 onwards, banks failed and households either could not or would not continue borrowing to finance consumption. Aggregage demand crashed, and GDP fell through the floor, taking a sizable chunk of tax revenues with it.

As the crisis unfolded, the Bank of England impotently tried to revive the economy with lower interest rates. Despite the dramatic cuts in the bank rate, the UK economy dived into the deepest recession since the war. The Bank of England was also suckered into resuscitating the banks, who quickly sucked in huge amounts of taxpayer’s money. Before you could say "Clements Ribeiro makes nicer dresses than Georges Chakra" every major economic indicator was pointing in the wrong direction.

What was it that drove Britain into this sorry mess? Superficially, it looks like interest rates. Search a little deeper and we see that for 10 years the Bank of England ignored the fact that clothing and footwear prices were falling in absolute terms. Instead, they focused on the aggregate price index and an inflation target that was almost certainly too high. This negligence gave them the justification for excessively low interest rates.

This chart has a twist. Since the beginning of 2009, clothing and footwear prices are no longer falling. In fact, over the last year, clothes and footwear prices have increased by two percent. While this is lower than the overall level of inflation, it points out that the Bank of England can no longer rely on low wages in China to keep UK inflation down.

Those days are over.

Productivity slowdown

UK productivity - output per worker - has recovered with the exit from recession and the return of economic growth. However, the post-recession productivity growth rate is significantly lower than the rates recorded prior to the financial crisis.

In the long run, it is productivity growth that creates the basis for higher living standards. We still have some way to go before things return to normal.

UK house prices slip again

Today, the Nationwide printed its first house price number for the year. It was a bad one. Year-on-year, property prices are down 1.1 percent. Compared to December, prices are down 0.5 percent. It was the sixth consecutive month of declining prices.

A trend has now emerged; banks appear to be less willing to lend into the property market. As the credit has stopped flowing, prices have started to slip. In short, we seem to have entered a second credit crunch.

UK property market is weakening

Recently, there have been a string of new numbers pointing to a weakening UK property market. The latest was mortgage approvals. On a seasonally adjusted basis, approvals in December fell. Year on year, the flow of new credit to the housing market is down about £2 billion. That is a big number. In December 2009, monthly mortgage approvals were running at £8 billion; in December 2010, the number was just £6 billion.

Banks are again tightening credit. A new and more gentle credit crunch seems to be underway. It is less dramatic that the post-Lehman crunch. Nevertheless, it points to a further near term weakening of property prices.

Just what we need right now; an oil price bubble

The crisis in Egypt is doing wonders for the price of oil. As demonstrators filled the streets of Cairo, the price of Brent crude hit $100 a barrel, its highest level for two years.

However, it would be misleading to think that the political crises in North Africa is the main driver behind the recent spike in oil prices. The crisis has helped over the last month or so, but the market has been trending upwards since the summer.

Cheap money, lots of speculation and a growing expectations of inflation - these are the factors driving the price of oil higher.

Somebody stop me

I have got to stop clicking on the links on the World Economic Forum's website. Everywhere I look, I find idiocy.

The latest discovery was the Financial Development Index, which is found in their Financial sector Report. Guess who is top. Yes, it is the UK. We are number one. The US is number three, while Ireland and Spain are 15th and 16th respectively.

This index must be reliable. It has numbers, so it must be scientific.

How Lehman brought down the pro-western governments in North Africa

The world is always throwing up surprises. Did the leaders of Tunisia and Egypt think that their regimes could be threatened by the collapse of a highly leveraged bank like Lehman? Yet, that seems to be what is happening.

The casuality is straightforward. When Lehman crashed, central banks cut interest rates to prevent Wall Street banks and hedge funds from going under. As soon as the immediate risk of a financial meltdown subsided, these low rates unleashed a speculative bubble in commodities.

The consequences can be seen in the chart above that illustrates the FAO's world food price index. Since December 2008, world food prices have increased by 55 percent. Some items have increased much faster; sugar is up 148 percent, cooking oil is up 116 percent.

These increases can not be explained by falling supply or increasing demand. The price changes are too large and over a very short time period. No, it is the derivatives market. Speculators borrow cheaply and seeking higher yields, speculate on commodities futures. This speculative trade pushes commodity prices up, creating a massive surge in inflation.

The social and political implications of this speculation in developing countries is devastating. Regimes in places like Tunisia, Egypt and Yemen were always highly unstable. With double digit food inflation, they are crumbling. Moreover, this crisis is unlikely to stop in North Africa. Dare I mention the P word? - P---stan and their red hot nuclear arsenal.

There is now a conflict emerging between the strategic interests of Western governments and those of Wall Street and the City of London. The balance sheets of Western banks remain fragile. They need low interest rates to maintain cheap sources of financing. Global stability, on the other hand, requires higher interest rates to defuse the speculative bubbles in commodities.

Currently, this conflict is at its sharpest in Egypt. Should Mubarak fall, thirty years of carefully crafted US diplomacy in the Middle East will be destroyed. Anyone who thinks that Egypt will effortlessly transform into a thriving western democracy while food prices are crippling the urban poor is living out of fantasy.

Two years on from the Lehman collapse, what has the bailout achieved? Economies in western economies have crashed; their governments have become loaded up with debt, and inflation has ripped apart the tenuous living standards of the poor in the developing world. Yet, Goldman, JP Morgan and Merrill continue as if nothing has changed.

The world is too fragile to absorb another speculative bubble. However, that is what this extended period of low interest rates has unleashed. It has destabilised North Africa and other regions could follow. Who could have seen that when Lehman filed for bankruptcy?

Alcohol-related deaths fall in the UK

During the last 15 or so years, something went badly wrong with social attitudes to alcohol. Deaths related to alcohol consumption increased by 80 percent. At least there was some good news in 2009; the death rate came down slightly.

One interest fact; the death rate among 55-74 year olds is 16 times higher than for 15-34 age group. For people 75 and over, the death rate comes down sharply and is only slightly higher than the national average.

What are we to conclude from that? Heavy drinking is likely to kill you in middle age? Or are you more likely to turn to the bottle as you get older?

On a related subject; would a doubling of the taxes on alcohol be a good idea? I think so, but if you disagree, then tell me why not. That is what the comments button is there for.....

Why are we so unhappy?

So why is there so much unhappiness about inflation at present?

The answer is clear. The three factors I described – higher import and energy prices and taxes – have squeezed real take-home pay by around 12 percent.

Average real take-home pay normally rises as productivity increases – money wages normally rise faster than prices. But the opposite was true last year, so real wages fell sharply. And given the rise in VAT and other price rises this year, real wages are likely to fall again.

As a result, in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.

Speech given by
Mervyn King, Governor of the Bank of England
At the Civic Centre, Newcastle
25 January 2011

Did you know you live in a plutonomy?

Citibank analysts have invented a new word - plutonomy.

This is how they define it;

"There are certain economies, driven by massive income and wealth inequality – plutonomies – where the rich are so rich that their behavior – be it negative savings, or just very low consumption of oil as a percentage of their income overwhelms that of the “average” or median consumer."

In other words, a plutonomy is an economy where only the rich matter. The average consumer is simply "overwhelmed". Who are the plutomonies - the US, Australia, Canada and of course, the UK.

Citibank cite three reasons for the emergence of the plutonomies; asset price inflation, the rise of managerial capitalism, and technological change leading to the creation of a new class of high net worth individuals. Twenty years of tax breaks for the rich, coupled with sophisticated tax avoidance arrangements, it seems, played no role in this happy state of affairs.

As Citibank casually point out:

"As the rich having been getting richer over the last 20 years or so – both in terms of their share of income and wealth – so too businesses that have been servicing the rich or selling to them have enjoyed a favorable operating backdrop."

And the implication for investors?

"We should worry less about what the average consumer – say the 50th percentile – is going to do, when that consumer is (we think) less relevant to the aggregate data than how the wealthy feel and what they are doing. This is simply a case of mathematics, not morality.

There is no right or wrong. It is all numbers. There are no value judgements. There are rich people and irrelevant serfs. What does the future hold for the plutonomies? There is good news and bad news. Lets serve of the good bit first:

"the plutonomists are likely to get even richer over the coming years."

However, there are risks. First, there is the danger of financial collapse:

"As much of the wealth of the plutonomists is held in one shape or other in financial wealth (as opposed to land or property), the state of the financial system is important. Financial collapse, as in the Great Depression in the US, would be a serious challenge to the plutonomists."

And there was I thinking that a financial crisis was a bad thing. However, there is more bad news.

"Perhaps the most immediate challenge to Plutonomy comes from the political process. Ultimately, the rise in income and wealth inequality to some extent is an economic disenfranchisement of the masses to the benefit of the few. However in democracies this is rarely tolerated forever.

We see the biggest threat to plutonomy as coming from a rise in political demands to reduce income inequality, spread the wealth more evenly, and challenge forces such as globalization which have benefited profit and wealth growth.

Reactionary political forces are likely to rise as globalization persists and the losers in developed economies gain in numbers. To an extent we see this happening in Europe, for example, where the rise in the profit share (fall in the wage share) has come at the same time as the rise of right-wing, generally anti-immigration parties. "

Up is down; left is right. A reactionary is someone who wants a fairer society. To oppose a fall in the wage share is to be anti-immigrant and implicitly racist.

Reading this memo, I can't help sensing that the authors are just being provocative. Is the world really this way? Or are they just trying to amuse us?