Last week's Fun Online Poll was about VAT. Politicians have spent so long fobbing off VAT on us by saying "It doesn't hurt the producer or business because it is 'passed on' to the consumer" that a lot of people appear to believe it.
People will, by and large, only pay what they think something is worth. Sure, the demand curve is price elastic. For example, I'm a Bob Dylan fan, so I'll buy his new CD as soon as it comes out for £12.99. Somebody else may not be that bothered and wait until the January sales and get it for £11. Another will buy it half-heartedly as part of a 3-for-£20 offer a couple of years later and so on. Some people can't stand Bob Dylan and wouldn't take one if they were free.
But not only is it physically impossible for everybody to pay 17.5% more for everything that they would otherwise have bought (they have to reduce their consumption by 7/47 and hence output of VAT-registered businesses is reduced by 7/47) but 77% of us simply won't do so. So even if it were physically possible for everybody to overpay, they won't - so instead of the record shop selling the new Bob Dylan CD to £12.99 guy and to £11 guy, they can only sell it to £12.99 guy.
Seeing as in the long run consumption=production, anything that reduces consumption must reduce production as well, I wonder how many different ways there are of trying to explain this?
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A lot of people are now going round saying that the UK's sterling-denominated public debt (i.e. 'gilts') may lose their AAA credit rating, and Tory politicians love saying it because it makes them sound as if they know what they are talking about. This, by and large, complete bollocks of course. As any fule kno, all an AAA-rating means is that there is virtually no credit risk. As long as the government can merrily print sterling bank notes or their electronic equivalent, there is no way that they will ever actually default.
This get-out does not necessarily apply to countries who have borrowed in foreign currencies (which to all extents and purposes includes the GIPSI countries), who do occasionally default (despite they could still merrily print their own currency to buy the foreign currency, which would be a super one-way bet for speculators).
An AAA-credit rating does not mean that the gilts or bonds will turn out to be a particularly good investment, as it says little or nothing about interest rate risk (if you buy very long dated gilts today yielding 4% and the interest rate goes up to 8%, then you lose nearly half your investment). And it's rising interest rates that people are panicking about (especially in a Home-Owner-Ist economy, which only 'works' when interest rates are falling)
So this week's Fun Online Poll is to try and establish how many people have fallen for it. Vote here or use the widget in the sidebar.
Bring back the typewriter
1 hour ago
9 comments:
AFAIAC Gilts are already priced at AA. Anyway AAA is an 'appraisal' rating by a third party. Sort of like a property 'valuation', which like Gilts often bears no relationship at all to market prices.
Some very good points there on both issues, Mark.
The UK could indeed lose its AAA rating though if the rating agencies think that the government will not be willing to print enough to finance the deficit and might choose rather to default.
I see what you are getting at, but I disagree that printing money is always favourable to default.
History shows that funding a deficit using the central bank can lead to hyperinflation, the gvt has to take this risk into account when deciding whether or not to default or crank up the presses.
The gvt can of course default on domestic commitments by passing legislation and/or cutting spending on things, but this can create the risk of being voted out.
So given the three options - default on debt, default on voters or print money there is possibly a scenario where the gvt chooses to default on debt.
Admittedly this is a very small risk and gilts are therefore AAA. If macro-economic circumstances change this risk might increase in the eyes of the ratings agencies and then we could be downgraded.
There are plenty of second world nations out there who issue their own bonds, in their own less trusted currencies, which are rated a lot lower.
This is more or less what Stiglitz was trying to explain to the up-himself-hedge-fund geezer on Newsnight yesterday.So no problems there .
One small thing,as Columbo says when nearing the door:You say that the Guv can" merrily print sterling bank notes or their
electronic equivalent" above ,but recently you were claiming that electronic credit creation by quantitative easing would take money out of the system.Or is this a case for Edgar Lustgarten who used to say in his (not) vintage TV show: "But this is where he made his fatal mistake!"
BTW never received the e-mail you said you'd send after the previous 15 round thud and blunderfest.
L, that's true - the AAA ratings for RMBS crap turned out to be highly inaccurate.
AC, S_L, if you think that a UK government would default, rather than print away or try and inflate away*, feel free to vote for 'possibly' or 'yes'.
* Which doesn't work in the absence of currency controls, of course.
Most trading operations must have a certain proportion of AAA stuff on their books, this portfolio management is monitored by all regulators.
If UK gilts lose AAA rating there'll be a firesale by professional investors.
If that happens then ratings agencies may look at the country's rating - if that drops as a result then UK listed companies are going to take a drop.
//BKR.
So does Zimbabwe have an AAA rating since it has its own money?
You are mistaken (as Neil Craig has spotted). Have a look at http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245205605859. Look at the credit ratings for Japan and Saudi Arabia (AA and AA-). Tell us why you think the UK won't fall into a similar or worse position.
Nail, Anon, fair points. Feel free to vote 'Yes' in this week's poll.
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