Posts filed under 'Features'
In my previous article I described the remit and practical activities of the Bank of England, as they relate to the operation of the UK economy. Now it’s the turn of the Treasury (or HM Treasury, to be accurate), which is the part of the government that looks after the UK’s money - most of it raised through taxes - and, to a large extent, decides how and where it should be spent.
The first fallacy to blow out of the water here is the idea that taxes collected in a particular sector are also spent in that sector. For example, it would be nice if road tax revenue was spent on improving the transport system, wouldn’t it? Or if levies on the oil industry were used to promote renewable energy sources.
Well, they aren’t. Such so-called ‘hypothecation’ of taxes would be complex to administer, though arguably it would help people feel that their hard-earned cash was being used for something practical rather than, say, lining the pockets of MPs who fancy a second house in London. For example.
Instead, all revenue collected by the government goes into a large pot which is then doled out in accordance with plans drawn up by the Chancellor of the Exchequer (currently old badger-brows, Alistair Darling, and previously Gordon ‘Prudence’ Brown).
Continue Reading June 22nd, 2008
Although most people have a rough idea of how the UK economy works (or, if you’re being cynical, doesn’t work), the functions of the various components and their relationships to each other can be quite elusive. We’ve covered some aspects of money on this site in the past (here, for example), but there’s more to the economy than money itself. In fact, arguably more important than money is the way in which that money is moved around the economic system of the UK.
Over the next few articles I’m going to look at each of the main institutions involved in the movement and management of money in the UK. I’ll be looking at the Treasury, the FSA, the City of London as a whole and, to start with, the Bank of England (you may have spotted the one glaring hole in this list, more important than all the rest, which I’ll cover at at a later date).
The Bank of England is not a bank in the traditional sense. You can’t deposit your money there directly, and nor can you borrow from it directly. Banks, however, can. This is the fundamental aspect of one of the Bank’s stated core purposes: to maintain financial stability in the UK economy. By lending to banks that are suffering from cash-flow problems, unusual circumstances or moronic management, the Bank can act as a buffer to prevent problems in one area of the economy spilling over into others. Hopefully.
To quote from the Bank’s own documents: “Financial stability entails detecting and reducing threats to the financial system as a whole. Such threats are detected through the Bank’s surveillance and market intelligence functions. They are reduced by strengthening infrastructure, and by financial and other operations, at home and abroad, including, in exceptional circumstances, by acting as the lender of last resort.”
You may feel a hollow laugh coming on at this point, given the last year’s experience of a crumbled, nationalised bank, a bursting bubble of overpriced housing, rising inflation - especially in food and fuel - and incomes that fail to match expenses. It doesn’t look much like financial stability, does it?
Continue Reading May 29th, 2008
Sooner or later, when considering decisions about money, you will come across the Vested Interest. In fact it’s almost impossible to avoid them. A Vested Interest (VI for short) is a person, company or organisation that wants to get its views across in order to somehow influence the people who are reading, watching or listening to them. ‘VI’ may be used to decribe the entity itself or his/her/its viewpoint.
Some VIs are obvious, some less so. I have a VI in writing this article. I’m hoping that if I make it interesting enough, and the information contained within it useful enough, more people will read it and so the traffic to this site will increase and hopefully at some point we’ll be millionnaires. Actually, it would be nice if we could make enough money for a cup of tea once a week, or perhaps cover the hosting fees. So my VI is quite transparent and, I hope, harmless.
But that is rarely the case once you get into the mainstream media. As Piers Morgan and his tipster colleagues at the Daily Mirror proved a few years ago, the temptation to use a position of public influence to push your own agenda can be overwhelming. And it’s not always illegal, either, though one might argue that it should be.
For example, of all the possible investments, the property market is not regulated by the FSA. Any idiot can call themselves a ‘property expert’ and give what is basically unregulated financial advice. And many of them have. Media people are among the most likely to be amateur landlords, so it’s not particularly surprising that the television schedules have been riddled with programmes extolling the virtues of ever-increasing property prices over the last decade. Nor are newspapers immune. The Times, for example, has carried a lot of property advertising, and has columnists who seem to believe that ‘house prices only go up’ - coincidence? Maybe.
Identifying Vested Interests will help you to decide for yourself whether a particular article is truly impartial - or as impartial as it can be - or whether you should treat it as wishful-thinking fiction. The following selections reflect my personal experiences with the media outlets concerned and are opinions only. Your mileage may vary, as they say.
Continue Reading May 12th, 2008
I am writing to enquire whether you have any vacancies on your strategic board for someone of my talents. I realise that it is a little unorthodox to apply ‘on spec’ for such a high-ranking position within your organisation, but I believe I have the necessary skills to further increase the profits and assets of Big Bank Plc. In this letter I will attempt to demonstrate my knowledge of the challenges and opportunities in our marketplace.
1) Who are our customers?
I understand that our most lucrative customers are those with the least awareness of financial matters; indeed, the less numerate they are, the better. Rather like the dear old PM, in fact.
If they don’t know the difference between APR and AER, if they fail to read the small print in their credit contracts - not that it matters, as I’m sure I have the necessary legal skills to make such text impenetrable - and if their limited attention is grabbed by an ‘introductory’ rate, then they are exactly the kind of people we need to target.
I think that if we closely follow that other highly successful model of commerce - drug dealing - we won’t go far wrong in attracting and retaining the right customer base.
2) How do we get people to take on more debt?
Continue Reading April 14th, 2008
We’ve compiled some of our favourite quotes on the subject of finance and economics - if you know of any good lines that we’ve missed, please leave them in the comments…
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” - Henry Ford
“The financial markets generally are unpredictable. The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.” - George Soros
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.” - Warren Buffet
“Where large sums of money are concerned, it is advisable to trust nobody.” - Agatha Christie
“I believe that banking institutions are more dangerous to our liberties than standing armies.” - Thomas Jefferson
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” - George Soros
“Investors have very short memories.” - Roman Abramovich
“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” - Napoleon Bonapart
“Money is worthless unless some people have it and others do not.” - Anon
“If you would know the value of money, go and try to borrow some.” - Benjamin Franklin
“The modern banking system manufactures money out of nothing. The process is, perhaps, the most, astounding piece of sleight of hand that was ever invented. Banks can in fact inflate, mint, and un-mint the modern ledger-entry currency.” - Major L. L. B. Angus
“Inflation is taxation without legislation.” - Milton Friedman
“Bankers own the earth; take it away from them but leave them with the power to create credit; and, with a flick of a pen, they will create enough money to buy it back again… If you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit.” - Sir Josiah Stamp, Director, Bank of England, 1940
“Wall Street people learn nothing and forget everything.” - Benjamin Graham
“In all recorded history, there has not been one economist who has had to worry about where the next meal would come from.” - Peter Drucker
“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.” - Warren Buffet
March 29th, 2008
Usually on this site I write features about various aspects of the financial system, leaving Lance to concentrate on the current affairs opinion pieces. But it’s becoming increasingly difficult to remain dispassionate.
The financial system is having a bit of a wobble at the moment, rather like that earthquake that hit the UK recently, knocking a few glasses off the shelves and knocking a few minor celebrities off the front pages, at least for a day.
What has been called a ‘credit crunch’, and ignorantly predicted to be ‘over by Christmas’ (though, like the war, nobody states which year), is actually something rather more serious: in all probability it’s a return to normality. Risk is now being priced back into investments, default spreads are widening and, in general, everybody’s paying more for their money.
Which is as it should be. The last five years or so have seen a collective delusion on the part of economists, central bankers (with some exceptions), financial journalists, house buyers and consumers.
Of course interest rates will stay low (never mind inflation). Of course house prices always go up by 10% a year when wages rise by 3% (never mind the impossibility of the maths). Of course it’s different this time (no, it never is). Of course the UK has a miracle economy based on selling financial products and ever more expensive houses to each other, and doesn’t need manufacturing (unlike the Germans, for example).
To use the vernacular for a moment, it was all bollocks.
Continue Reading March 25th, 2008
Put two economists in a room together and you’ll get three different opinions on the state and future direction of the economy. Surely economics, the dismal ’science’, could learn something from one of the true sciences, such as physics?
Certainly there have been efforts to do so, particularly among large investment banks and hedge funds, who have used quantitative analysis tools running on powerful computer systems to try to tease out the signals from the noise of price movements, taking into account thousands of different influences from interest rates to tax variations, asset prices to currency exchange rates and much more, all on the basis that there is some underlying predictability, some ‘law’ that governs price movement.
Which makes it all the more surprising that so many of them got it so spectacularly wrong; to the tune of $188 billion and counting. Why?
Continue Reading March 11th, 2008
You’ve probably heard a lot about hedge funds if you pay much attention to the business news, but the chances are that you’re not entirely sure what a hedge fund actually is, and you haven’t got round to looking it up because it sounds like it might be complicated. Don’t worry, it’s actually quite simple…
In an ordinary investment fund (a ‘mutual fund’ to US readers), the fund manager usually takes all of the money given to him by the investors and uses it to buy shares in companies that are expected to deliver the best returns. With us so far? Good. The difference with a hedge fund is that the fund manager doesn’t just use the investor’s money to buy shares, he can also use more sophisticated trading mechanisms like short-selling, leverage, futures, derivatives, etc…
While these options are much more complex than simply buying and selling shares in companies, they also offer much higher potential rewards. The original idea of a hedge fund was that it would continue to make money for investors whether the overall market was rising or falling, although these days the focus of a hedge fund is usually to achieve much higher than market returns using aggressive trading/investing strategies.
Who can invest in hedge funds?
Because of the high risk and complexity associated with hedge funds, they are considered to be specialist investments which are not normally available to retail investors, and are not subject to the same level of regulation as retail investment products that are available to the general public. Hedge funds are normally only available to specially qualified investors, which usually means organisations or very wealthy individuals.
Hedge fund performance
According to an October 2007 survey (PDF) into the performance of the top 50 hedge funds by financial news service, Barrons, the leading hedge fund in 2007 achieved an average annual increase of 48% over the previous three years. This clearly shows that some hedge funds have the ability to provide extremely high growth. But at the bottom end of the chart, the 50th best performing hedge fund in the world delivered an average of 21% growth per year.
The problem with hedge funds…
Hedge funds are controversial for a number of reasons. Firstly, because they are not heavily regulated, the way in which they operate is not very transparent. This can be a problem because they often employ risky trading strategies with very large amounts of money, which has the potential to cause serious and catastrophic disruption to international markets. The lack of transparency and large sums of money at stake can also encourage some hedge fund managers to behave, shall we say, in ways that might not be entirely legal, especially since their vast salaries are usually linked directly to the performance of the funds they manage.
Where did hedge funds come from?
The invention of the hedge fund is usually credited to Alfred Winslow Jones in 1949. The first part of his idea was to look for two kinds of stocks:
- Strong shares which would rise quicker and fall slower than the rest of the market.
- Weak shares which would rise slower and fall quicker than the rest of the market.
Jones held long positions on the strong shares (i.e. he profited if their value increased) and short positions on the weak shares (i.e. he profited if their value decreased). In theory, if the right shares were chosen, this strategy would deliver profits whether the overall market went up or down. Jones also came up with the idea of placing limits on who could invest in his fund, in order to avoid the fund being heavily regulated.
March 2nd, 2008
1) Money = Freedom. End of story
You might not need money to be happy, but unless you feel like living off the grid and growing your own food (in which case, I say good for you) you’re always going to have bills to pay, so you need money to live. For most people this means getting sucked into a life of wage slavery.
Hate your job? Suck it up, you need the money. Feel like taking six months off to write a novel or travel the world? Tough, you’ve got bills to pay, get back to work. All that changes if you’ve got money. When you’ve got cash in the bank, you have more options and more freedom. That’s why it’s important to start thinking about your long term financial wellbeing as early as possible, so you don’t waste your life working to make other people rich.
2) Time is powerful, use it to your advantage
When you’re 18 you may not have a lot of spare cash, but you’ve got a much more valuable asset – time. I don’t mean that you should spend every spare minute working your nuts off to earn money or figuring out ways to get rich (although if you’re that motivated, again I say good for you) just that you should make the most of the fact that you have plenty of years ahead of you.
If you start saving and investing whatever tiny amount you can manage now, and increase that as your earnings rise, thanks to the magic of compound interest you’ll achieve a decent level of wealth while you’re still young enough to enjoy it.
3) Debt will ruin your life
Again, when you’re 18 and broke, it might seem like a great idea to use credit cards to pay for holidays and shiny new toys – a few hundred here or there isn’t a big deal, right? Before you know it, you’re in for a few thousand, so you take out a consolidating loan – but that’s OK, because it’ll only take a few years to pay that off.
But old habits die hard, and soon you’ve racked up more debt on the credit cards, and you’re still paying off the loan. Congratulations, you are now the bank’s bitch – you will work all day, every day, for the rest of your life to make some suits richer than you will ever be.
4) Commercialism is bullshit
Big business wants your money more than you do, and they will do whatever it takes to empty your bank account into theirs. They spend billions of dollars on marketing, advertising and public relations to convince you that you want what they’re selling, and most of the time you fall for it.
Unless you learn to see through the bullshit, they will own you, and you will work for them forever. Sure it’s good to treat yourself occasionally, but next time you’re thinking of buying some shiny new toy, just ask yourself whether what you’re about to buy is really worth getting into debt or digging into your savings for. Even if you’re buying something you really need, most of the time there’s a cheaper option than the one you’re being sold.
5) Fun does not cost money
Boredom is the enemy of financial security, when you’re bored there’s an overwhelming temptation to start spending. Find cheap ways to amuse yourself – everybody’s different, but there’s always something you can do to entertain yourself without pissing away cash.
Charity/junk shops are a goldmine of cheap stuff, books, DVDs, video games and random playthings. Parties can be cheap boredom killers (mix cocktails/punch using own-brand spirits – nobody will give a shit, they’ll all be too wasted). Check your local newspaper for free gigs and events in your area. Buy a cheap musical instrument, learn to play, start a band, get laid more. Whatever pushes your button – just get out of the habit of immediately reaching for your credit card when you’re bored.
6) You aren’t smart enough to get rich quick
You know who gets rich quick? Smart, ambitious people with great ideas and the drive and financial backing to make those ideas happen. Face it, 99% of us aren’t those people. Some of us might get lucky, but most of us won’t. For the rest of us, the only way to wealth is to spend as little as we can get away with, and put as much money as possible into savings and investments.
The good news is that this path is open to everybody, it’s not difficult - it just takes time. The sooner you start, the sooner you’ll get there.
Your turn - what do you wish you’d known about money when you were 18?
February 27th, 2008
It sounds like a daft question, doesn’t it? Money is the notes and coins in your pocket, the numbers on your bank statement, the limit on your credit card. You use it to buy things. Simple as that.
However, as with many seemingly daft questions, this one is worth scrutinising more carefully. For instance, why are those particular notes and coins ‘worth’ something? Why can’t we make our own? Why do we need money in the first place? How do the electronic numbers in bank accounts become the ‘real’ notes and coins in our hands? All of these questions and more spring up when we ask what money is.
Not all the questions can be answered in one short article, but we can lay the groundwork here. We’ll start with a basic premise and work upwards. Here goes: money is a medium of exchange.
Continue Reading February 24th, 2008
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