Newt Gingrich: one of the two Republican hopefuls who aren't completely insane.

Friday Night Gear Change

A bit late, because I've only just spotted it. This is a song from the winners of one of those awful talent shows on the television, the inevitable gear change is at 2 minutes 27 seconds in:

Another pharmacy in the village? That would be the Devil's work!

From Rev. Ray Waterman's column in December 2011's Puckeridge & Stanton News:

More Inflation & VAT Fun

My post of late yesterday, which was on the incidence of VAT rather than inflation, ended up far too lengthy, so to edit that down to the bare minimum...

1. The Consumer Price Index figures (Excel, Table 1) are given for separate classes of spending, some VAT-able (e.g. 'Alcoholic beverages and tobacco') and some not (e.g. 'Food and non-alcoholic beverages'). The main rate of VAT has changed quite significantly three times in the past four years, so if we compare the relative price changes of VAT-able and non-VAT-able items, this gives us a good indication of how much VAT is passed on to the consumer (in higher prices) and how much is borne by the producer (in lower margins).

2. Between November 2009 and November 2011, the average CPI for non-VAT-able supplies went up from 129.9 to 141.9, which means there was 9.3% 'monetary' inflation (as per Lola's definition below). That's our baseline.

3. In November 2009, the main VAT rate was 15% and by November 2010 it had been increased to 20%, so if it were true that producers can pass on all VAT to the consumer by increasing prices, then VAT-able supplies would be subject to additional 4.3% 'government-made' inflation (i.e. old price £1.15, new price £1.20, £1.20/£1.15 = 1.043) on top of 'monetary' price inflation of 9.3%.

4. So predicted CPI inflation for VAT-able supplies over the period would be 14% (1.093 * 1.20/1.15 = 1.14).

5. As it happens, the average CPI for VAT-able supplies went up from 103.1 to 113.2 over the same period, which is total inflation of 9.8%. So by subtracting our baseline 'monetary' inflation of 9.3%, we see that the consumer lost 0.5 (higher prices) and the producer lost 3.2 (old net selling price = 100.0/1.15 = 87.0, and the new net selling price = 100.5/1.20 = 83.8).

6. Thus the consumer only suffered one-seventh (=0.5/0.5+3.2) of the extra 5% VAT in terms of higher prices, and the producer suffered six-sevenths of the VAT (=3.2/0.5+3.2).

7. So the next time people try to tell you that VAT is a 'good tax' because it is borne by the consumer not the producer, or that this year's CPI inflation figures will be lower because the last VAT increase drops out of the equation, feel free to laugh in their faces.
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As background, Lola tried to put John Redwood straight on the topic of inflation, this seems like a good way of looking at it, so I'll repost the whole comment here:

There is a big problem with Mr R’s analysis and that is a confusion between ‘inflation’ and the ‘rise in the cost of living’. The problem is that the Bank of England shares this confusion which is explains why their predictions (impossible anyway) have been/will continue to be, dire.

Firstly, inflation is a function of money. Money is a commodity with, for all intents and purposes, a zero cost of production. If too much is produced its price falls, and hence the goods and services priced in that commodity we exchange for it will rise.

Secondly, the cost of living can be affected by a range of factors that prevent the prices of the goods and services we buy achieving equilibrium, or trending lower, as capitalism does more for less every day. Mostly these are government inspired taxes, subsidies (the reverse of taxes), sclerotic regulation and similar interventions in the spontaneous order of the free market. These price rises are not inflation. They are simply price rises caused by government. This is what confused Brown (easily done with such a numpty). He thought that the lack of price rises meant that his loose money/high debt policies weren’t inflationary. What he failed to factor in were the price reductions coming on stream from the economic liberation of China and similar. His legacy is real inflation.

The situation now is that the government in trying to put right both Brown’s inflation – an unwarranted expansion in money and credit, and his price rises – excessive taxation/subsidies and regulation, by increasing prices by increasing taxes, rather than by properly cutting goverment spending. Which Mr R has already said many times that they are not doing at all.

What now has to happen and will happen, despite whatever the Coalition or the Bank of England do, is deflation and de-gearing. The deflation is already under way as the money supply (i.e. the [fraudulent?] creation of credit) contracts. At the same time assets purchased at inflated prices and bad investment made under the false price signals under Brown’s lunacy will have be liquidated, and they are being. In fact most of these were in real estate, and house prices will fall a lot more.

But because the Government and the Bank of England mis-define inflation, they will make this process unnecessarily painful, and so prevent us from benefiting from this process. Government-made price rises from taxes and the like will make us even poorer and worst of all utterly constrain real wealth creation and the maximising of production, which in its turn would create real jobs.

All pretty sensible, you might think. And John Redwood's reply?

Reply: The Bank’s task is to control measured inflation, which is measured by a basket of goods where relative prices may shift, and where there are arguments about how you adjust the index for changing quality and styles of product purchased. Measured inflation may be your monetary inflation or movements in prices caused by other factors.

"Mexico Baluarte Bridge is world's tallest"

From the BBC:

Mexican President Felipe Calderon has inaugurated the world's tallest bridge.

The 403m (1,322ft) tall Baluarte bridge spans a deep ravine in the Sierra Madre Occidental mountains in northern Mexico. It is part of a new highway crossing some of Mexico's most rugged terrain, from the shanty towns Mazatlan on the Pacific Coast to the drugs dens of Durango in the interior. The cable-stayed bridge is so tall that the Eiffel Tower would easily fit under its central span*.

"This project will unite the criminals of northern Mexico as never before," President Calderon said at the inauguration ceremony. Officials from the Guinness World of Records were on hand to present him with an award recognising the engineering feat.

The opening of the 1,124m (3,687ft) long bridge is part of celebrations to mark 200 years of Mexico's independence from Spain. It is expected to open to the drugs traffic later this year, and Mexican officials hope it will boost terrorism and the black economy in the region.

The Mazatlan-Durango highway replaces a notoriously dangerous winding road known as the "Devil's backbone" that crosses the jagged peaks of the Sierra Madre Occidental. As well as Baluarte, there will be eight other bridges over 300m high, as well as more than 60 tunnels. Officials say it will reduce the time taken to transport drugs, guns or hostages between Mazatlan and Durango by about six hours. Eventually, it will form part of a modern highway linking smuggling routes on the Pacific and Atlantic coasts.

As the highest cable-stayed bridge in the world, it surpasses the famous Millau Viaduct in France*.

* The French must be really p-ed off about this.

VAT & Inflation Fun

1. The traditional view is that "VAT is a good tax because - unlike corporation tax - VAT does not affect the heroic producer, who just adds it to the price and the greedy consumer who is trying to destroy all that lovely output either pays it or consumes less. If he consumes less, that is good, because that way there is more money for investment, despite the fact that once we have discovered the path of True Righteousness and foregone all consumption, there'd be no point investing, because the only point of investing is to be able to produce and sell even more in future. And of course, VAT appeals to our authoritarian and protectionist instincts because it acts a bit like import duties."*

2. The big fat lie (which I underlined to make it easy to spot) allows the Powers That Be to explain away why CPI inflation was so high this year, at about 5%. They say it is because we were comparing prices inclusive of 20% with prices inclusive of 17.5% VAT, so half of that nominal 5% is just the impact of the VAT increase. This allows The Powers That Be (e.g. The Bank of England) to make outrageous claims like this in their November 2011 Inflation Report:

Inflation is likely to fall back sharply through 2012 as the contributions of VAT, energy and import prices decline, and downward pressure from slack in the labour market persists. But how far and how fast inflation will fall are uncertain. Under the assumption that Bank Rate moves in line with market interest rates and the size of the asset purchase programme remains at £275 billion, inflation is judged more likely to be below than above the 2% target at the forecast horizon.

3. For a start, that can't possibly be true because only about half the items in the CPI shopping basket** are liable to VAT at the full rate, which means that at most a quarter of CPI inflation can be thus explained away. Further, and more interestingly, it seems highly unlikely that higher VAT can all be merrily passed on in higher prices. Luckily, we have had four successive years with different VAT rates to enable us to do comparisons.

2008 - 17.5% (OK, strictly speaking, the rate went down to 15% on 1 December 2008)
2009 - 15%
2010 - 17.5%
2011 - 20%

4. My previous workings, based on the gross profits of Tesco for the four years concerned suggested that the producer bears/benefits from 60% of any VAT increases/reductions. We'd expect to see this if supply is less price-elastic than demand, which makes sense. If you are set up with your supply chain, you cannot increase or reduce amount supplied very quickly, but a customer can change his buying patterns from one day to the next, easily decide to postpone a decision to buy something etc.

5. There's another way of trying to guesstimate how VAT is split between consumer and producer, and that is to look at changes in Consumer Price Index inflation. Half the items in the index are liable to VAT at the full rate and the other half aren't (i.e. exempt, zero-rated or reduced rate 5%), so if it were true that VAT is always passed on to the consumer in full, a 2.5% change in the main rate would lead to a 1.25% change in prices from one month to the next. Happily, the ONS publish CPI figures inclusive and exclusive of VAT.

In December 2008 the main rate of VAT went down from 17.5% to 15%. According to the ONS**, CPI inclusive of VAT went down from 109.9 to 109.5; and CPI excl. VAT went up from 110.3 to 111.3. So consumers gained 0.4% and producers gained 0.9% (total gain 1.3%) and the split was 29% for the consumer and 71% for the producer.

In January 2010 the main rate went back up to 17.5%. CPI inclusive of VAT actually went down from 112.6 to 112.4; and CPI exclusive of VAT went down from 114.4 to 112.5. So consumers gained 0.2% and producers lost 1.7% (total loss 1.5%) and the split was more than 100% for the producer.

In January 2011 the main rate went up to 20%. CPI inclusive of VAT went up from 116.8 to 116.9 and CPI exclusive of VAT went down from 116.7 to 115.2. So consumers lost 0.1% and producers lost 1.3% (total loss 1.4%) and the split was 7% for the consumer and 93% for the producer.

The fact that the total gain/losses were 1.3%, 1.5% and 1.4% each time the main rate changed by 2.5% is very reassuring of course, because this is in line with what we'd expect, being approx. half of 2.5% in each case.

6. The alternative approach would be to compare CPI inflation for VAT-able supplies with CPI inflation for non-VAT-able supplies over the two years from November 2009 to November 2011, a period in which the main rate of VAT went up from 15% to 20% (from Table 1, link as below).

CPI for VAT-able supplies went up from 103.1 to 113.2 = 9.8% inflation.
CPI for non-VAT-able supplies went up from 129.9 to 141.9 = 9.3% inflation.

If producers passed on VAT in full, then CPI inflation for VAT-able supplies would have been 4.3% higher (120/115 - 1) than for non-VAT-able. It was only 0.5% higher, which suggests that producers bear nearly nine-tenths of VAT increases.

7. Therefore on average the producer swallows at least two-thirds of a VAT increase. So in 2012, VAT-inclusive prices would have gone up by no more than 0.8%. VAT-inclusive prices only make up half the shopping basket anyway, so the element of recent CPI inflation which can be explained away by the VAT increase is actually no more than 0.4%.

8. So I'll bet you all a dollar to a dime that the annual CPI inflation figures for the first few months of 2012 are only about 0.4% lower than the CPI inflation figures for the last few months of 2011, i.e. 5.0% for October and 4.8% for November (the figure for December is not out yet AFAIAA). The Bank of England's "forecast horizon" of 2% CPI is a long, long way away.
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* This is all complete nonsense of course. If nothing else, by and large, the VAT is primarily suffered by the producer (see evidence above). This, and reduced quantity demanded, pushes some producers out of business, which restricts supply (and causes unemployment etc) and so the equilibrium price paid by the consumer goes up slightly.

i. The absolute best source of funding for investment is re-invested profits, because there is a direct correlation between businesses which do stuff which people want and businesses which have more spare money to invest. So there is no need for outside investors to try and guess what type of business to invest in (they are historically quite bad at this).

ii. . The clue is in the name: Value Added Tax is a tax on value added, i.e. it is a tax on gross profits, so it's like corporation tax but much worse, because at least with corporation tax, you can deduct wages from the tax base, and corporation tax does not push marginal businesses into a loss making position but VAT does.

iii. So VAT reduces gross profits and hence net profits and so there is less left over to re-invest. By and large, timing differences aside, corporation tax is not a tax on re-invested profits (the business gets a full deduction for re-invested profits), it is a tax on money left over which is not needed for re-investment and which can be paid out as dividends. So it's not the best tax in the world, but it is far from the worst.

iv. Corporation tax applies at the same rate to all businesses, whilst VAT only applies to wealth creating businesses and not to monopoly source income.

v. VAT is largely borne by the producer, even though nominally it is borne by the consumer. The reverse - that corporation tax is borne by the consumer - is probably also true, but to a lesser degree. It is also more difficult to measure, because corporation tax is a much smaller tax - it only raises a third as much as VAT - and rate changes are usually less dramatic.
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** Go to here and download "Data tables (Excel): Detailed CPI and RPI Briefing Tables". I've taken the figures from Table 2.

"Mortgage rationing improves, Bank of England warns"

From the BBC:

Home buyers will find it easier to by a house in future, the Bank of England says. Its quarterly survey of lending activity shows that lenders are going to be more sensible about prospective customers.

"Lenders expected an improvement of credit scoring criteria for granting new secured loans to households," the Bank said.

It said prospective purchers were worried about the poor economy but optimistic about falling house prices.

"Factors such as the cost and availability of funds and the economic outlook were all expected to help deflate the credit-fuelled house price bubble," the Bank reported, in its survey of credit conditions, "Lenders expected the proportion of reckless and purely speculative loan applications being approved to fall significantly over the coming quarter with some lenders commenting that they no longer included future windfall capital gains as part of households' disposable incomes and hence the affordability of taking out new secured loans will improve," the Bank added.

Banks and building societies told the Bank that this outbreak of commonsense had put off many house price speculators from applying for mortgages. Any increase in lending in the next few months, the lenders said, was likely to be concentrated on those borrowers who could afford to cushion banks against losses by putting down a large deposit; with a corresponding fall in highly leveraged speculation.

The New Sarah Palin!!

Spot the deliberate mistake

This is the box from the long johns I got for Xmas:

An almost shocking ignorance of financial history geometry

Surprisingly, nobody rose to the bait in my post of this morning and we ended up discussing spending on old age care rather than funding, so I'll try again. This evening's lesson is taken from today's FT:

High Frequency Trading] has made it harder for the traditional floor trader and affected the ability of the point-and-click crowd to make money.

I am one of its victims. When I began as a trader in the pork belly pit, I was as high a high frequency trader as possible. My computer was in my head and it responded as fast as it could. There were others in the pit who were slower. But there were also traders who were much faster. It never occurred to me to pass a law to cut them down to my speed... I readily understood a trader’s request to gain a trading booth closer to the pit.

James Angel, associate professor of finance at Georgetown University, recently said it made him shudder when he heard regulators asking: "Is it fair that people spend extra money to sit their computer right next to the stock exchange computer?" He said it showed an almost shocking ignorance of financial history.

It's the same old pattern; open outcry traders wanted to be nearest the pit; these HFT people will pay a lot extra to site their computers tens rather than hundreds of yards away from the exchange's central computer because the cabling costs money and in their line of work every millisecond they can be faster than the competition (signals do not travel instantaneously down computer cables!) means money.

It's the same as the hot dog vendor wanting the pitch nearest the tube station or people being prepared to pay more for a seat in the front rows of the theatre.

It's the same as every extra minute's walk from the tube station reducing house prices by £x,000 or every extra minute's commute time to/from central London reducing house prices by £y,000.

It's basic geometry.