It's not just me then

Karl Denninger* has posted a fascinating article** which not only explains why "all money is in fact debt"***, but on the basis of decades' worth of figures comparing money velocity, federal debt and economic growth, shows that it is perfectly possible that once confidence in the economy has fallen to a certain level, printing additional dollars actually reduces the size of the economy, i.e. it's worse than ineffective ("pushing a piece of string").

* An American who writes about economics. I don't know what his day job is or where he stands politically (in despair, probably) but his Genesis Plan to fix US banks was pretty much the same as my own Five Point Plan in the context of UK banks.

** H/t Gardeniadotnet.

*** I tried to explain why 'money' and 'credit' are the same thing a few posts ago ('credit' and 'debt' are just two names for the same thing, of course). Tim W has now covered the topic and I left a comment there as well.

Reader's letter of the day

From Saturday's Times:

Marital punishment

Sir, Recently my wife and I had the pleasure of helping a couple who had been separated for three years come back together. Their three children were delighted and soon I will have the privilege of conducting the rededication of their wedding vows.

I was surprised to learn that the moment they began to live together as husband and wife they had to inform the benefits office and the local council. In consequence considerable financial support was removed from the family. What sort of Government finds it perfectly reasonable to financially reward adultery and desertion but penalises fidelity and commitment in marriage?

Rev Dr Anthony J Carr, Wroxall Abbey, Warwickshire.

Hardly news, but this is something that cannot be mentioned often enough.

Lilley's Option

I ended up watching the proceedings of the Public Administration Committee on the BBC Parliament channel yesterday, transcript here and I was impressed by what Peter Lilley said:

...when there is a problem - a perceived political problem - officials come up with a range of options which exclude one option. I observed this when I was a humble PPS at the Department of Environment and suggested that we always ought to include this option on the list and it became known as "Lilley's option" and that was do nothing. Indeed, it continued to be known as "Lilley's option" after I had ceased to be in the department, long after they have forgotten who Lilley was, but the option was at least put on the agenda.

and

I discovered that it was illegal to carry out pilot changes in the DSS and we changed the law so that we could carry out pilot changes and see how things worked in one area before we universalised them. There is another great help in finding out how things work in practice and it is called abroad. Abroad they have tried a lot of policies; some have worked, some have failed.

When I used to say to my officials, "But how do they deal with the problem of social finance for housing in other countries?" they would say, "Oh Minister, we could go to the Foreign Office, we could get them to ask all the embassies, there is not a social affairs adviser in most embassies so we will go to the employment adviser where there is or the economic adviser where there is not, and it will take months before we get any comprehensive information".

I then pointed out to them, that there was a thing called a telephone which had been recently invented and most foreigners speak English. If you phone up your opposite number in the department abroad and ask if it works you can find out.

One of the panel, Paul Flynn MP picked up on the "abroad" concept and pointed out that other countries had legalised or decriminalised drugs and this usually turned out for the better, Peter Lilley dodged the question a bit but it seemed pretty clear that at heart he is for legalisation, regulation and taxation thereof, rather than criminalisation.

As I'm feeling generous, and as he was not honoured for this sideswipe, I shall hereby award him a 'rock'.

My 'Bloggers Cabinet 2; Tory wannabe 0

Energy Minister Nick Drew takes another look at those scare stories and comes to much the same conclusion.

Proper mining engineer 1; Tory wannabe 0

You may vaguely remember recent headlines based on the fact (to the extent that anything can be accepted as a fact any more) that "Germany has 99 days of gas storage capacity, France has 122 days, while Britain has just 15 days".

The Remittance Man* explains why this is complete and utter scaremongering tosh.

* Who has accepted the post of Defence Minister.

Who else is using the CIA's Time Travel Machine?

As I have said before, there are chucklesome similarities in the way that people with a vested interest in talking up house prices and the Global Warmenists present their figures.

It is pretty much beyond dispute that for ten years, house prices were rising and the weather was becoming slightly warmer (here in the UK at least). As long as prices were rising and temperatures going up, they could compare each year with the preceding year, and, ignorant of the fact that everything reverts to the mean in the end, boldly predict that these trends would go on for ever.

The Halifax released their December House Price Index today. While the Nationwide is still peddling the line that "House prices might be down X per cent over the last year, they are still up by Y compared to Z years ago" (to try and con people into seeing a house price bubble as a long term investment), where X has flattened off at about 20%, Y is a figure plucked out of the air and Z is an ever larger number of years, the Halifax are going on the opposite tack and are trying to con people into thinking that prices are bottoming out:

"The UK average price has returned to the level in August 2004 (£159,799)"

... or at least that they haven't much further to fall "The house price to earnings ratio – a key affordability measure - is at its lowest for five and a half years. The house price to average earnings ratio has decreased to an estimated 4.44 in December 2008 from a peak of 5.84 in July 2007... The long-term average is 4.0." Sure, but let's not forget the overshoot, back in the mid-1990s the price/earnings ratio was about three!

Anyway, I digress.

The point being that the Warmenists can no longer say that this year was hotter than the one before, because it ain't true; and while El Niño obviously contributed to Global Warming; La Niña merely "masks an underlying warming trend"*. So they have to travel further and further back in time to find a cooler year.

There's a fine exemple of this DoubleThink here:

The Met Office and experts at the University of East Anglia on Thursday said global average temperatures this year would be 0.37 of a degree Celsius above the long-term 1961-1990 average of 14 degrees and be the coolest since 2000. They said the forecast took into account the annual Pacific Ocean La Nina weather phenomenon which was expected to be particularly strong this year and which would limit the warming trend...

"The fact that 2008 is forecast to be cooler than any of the last seven years does not mean that global warming has gone away," said Phil Jones, director of climate research at UEA."What matters is the underlying rate of warming - the period 2001-2007 with an average of 0.44 degree C above the 1961-90 average was 0.21 degree C warmer than corresponding values for the period 1991-2000."

La Nina and its opposite El Nino ocean-atmosphere phenomenon have strong influences on global temperatures. La Nina reduces the sea surface temperature by around 0.5 degrees Celsius while El Nino has the opposite effect. "Phenomena such as El Nino and La Nina have a significant influence on global surface temperature and the current strong La Nina will act to limit temperatures in 2008," said Chris Folland from the Met Office Hadley Centre.

* Google currently gives us 2,010 hits for that phrase. I wonder how many it will be in a few months' time?

Ridiculous prediction of the year (so far)

From the BBC:

By 2050 90% of today's children will be overweight or obese, it predicted.

If, on the off chance I am still alive in forty-one years' time and there are no more fatties than there are now, how would I go about calling these maniacs to account and asking them to apologise (assuming any of them are still alive)?

Crest Nicholson in £500m debt-for-equity swap

Here's another good example from late November that I overlooked:

Crest Nicholson is solving its unmanageable debt problem by talking its lenders into a debt-for-equity deal that would cut its borrowings from £1bn to £500m... Its major lenders have agreed to a debt restructuring plan, the result of this being that the level of debt will halve to £500m in exchange for them taking 90% of the equity, leaving management with the remaining 10%.

This is the free market solution to these problems, with no government intervention or taxpayers' money involved. When 'credit' was in abundance, Sir Tom Hunter borrowed a shedload of cash from HBOS* to take Crest Nicholson private, i.e. buy all its shares that were previously quoted on the Stock Exchange. The gamble went wrong but there is still some underlying value to the company's assets, i.e. its land bank (which will probably fall 80% in value, but there will still be something left). HBOS thought it was lending money and Sir Tom thought he was buying shares. Now that the dust has settled, it turns out that HBOS was buying shares and Sir Tom has lost the gamble and ends up with a lot less than he hoped for. A debt-for-equity swap is just the opposite of a leveraged buy-out, in other words.

My point being, debt-for-equity swaps would work just as well for banks. There is no need for anybody to lose money on the transaction, provided bondholders were given shares with a market value equal to the market value of the bonds that are converted. Existing shareholders get diluted down, but they end up with a smaller slice of a more securely funded business, so they needn't end up worse off either. For the taxpayer it's a Big Win, of course, as well as for the wider economy - there'd be no part-nationalised banks and more securely funded banks would, all things being equal, be in a better position to provide finance.

* OK, technically, they formed a 50/50 joint venture.

"Money" and "credit" are the same thing

Whatever anybody says or writes about economics, always remember the simple rule that money and credit are the same thing.

Credit is easier to understand, actually. If you decide to buy a nice 40" LCD TV (with 2 scarts and inbuilt Freeview box) for £519*, for example and you don't have the 'money' to hand you could stick in on a credit card, or sign up to repay the loan over three years, or hand over a scribbled IOU and promise to come back and pay next week. Subject to checking your status, this is all pretty much the same thing.

If you are like me and have actually saved up, you use your debit card. So money goes out of my account and into Curry's. But the money in their account is merely a 'Promise to pay' made by some government department. If you do it the old fashioned way and pay with coins and notes, again, the retailer is merely giving the government credit. Coins and notes are an interest-free loan to the government, don't forget.

When we sold our house last year, we could have agreed with the purchaser that we'll leave the price outstanding as a loan, and that he pays us monthly instalments with interest. But as I have no experience with this sort of thing, we took cash of course, which we deposited back with the bank which the bank (or some other bank which borrowed from the bank where we put our 'money') in turn lent back to him. The bank is just a middleman in this transaction.

A lot of people reckon that the government - or indeed banks** - can create money. In a physical sense, the government can, and in a slightly more abstract way banks can create credit. But if you ignore 'money' and think about credit, no institution on its own can create credit, i.e. the faith that your counterparty will actually pay up at some stage in the future.

So however much money the government prints, and however low the political appointees at central banks cut interest rates (aka 'pushing a piece of string') and however much money the government forces nationalised banks to lend, it is all for nought.

Because it is that faith that your counterparty will be able to pay in future that has been shattered by the credit crunch, and that is what will have to be restored before the economy picks up again.

* As we did today. Hallujah, we are chavs!

** Anybody who says that banks can create money is way off piste - what they actually do is facilitate credit, which may of course be a credit bubble, not real credit.

Yup. Not even Babelfish is that useless.

From the back of the box containing one of my lad's Xmas presents:Even those of you who can understand German won't be able to make head or tail of the German version. I tried it in Babelfish and even that came up with something not quite so ridiculous:

Bauen Sie einen Flugzeugträger und 12* vorbildliche Flugzeuge* zusammen. Knallen Sie heraus und kerben Sie ausbessert zusammen***. Konstruieren innen**** zu einem 30cm Modell.

* Heck knows why '12' was translated as '9' in the French and German versions.

** 'vorbildliche Flugzeuge' means 'exemplary aeroplanes'. The correct translation would be, er, Modellflugzeuge.

** This sentence is still gibberish.

**** This is grammatically way off piste, but to be fair, the original English was wrong as well.