UK Financial Recovery and Election

Well the general election is this week, and its decision time about who to vote for....

As I have the right to vote I really strongly believe in using it. But I even more strongly cannot back any of the parties.

Rightly the economy is the biggest factor for the electorate at present. So where is that up to? My facebook friends will have seen my various tweets about this, that I ought to expand upon here.

I have my eyes and ears on one man for my economic advice. His name is David Blanchflower CBE who is a Professor of Economics. When I mention David below I mean Mr Blanchflower, not the tory leader. The reason I listen to him is he is the one voice that knew this recession was coming. He has a regular weekly column in New Statesman which I await each week with bated breath. He is also an economic adviser to the government, and sat on the Bank of England Monetary Policy Committee for a brief period, who he recently wrote have 'lost the plot'.

The recession and the UK economic recovery

So the UK is now out of the worst recession in decades by the skin of its teeth. A recession is commonly defined as a period of negative GDP growth for two consecutive quarters. GDP is the economic output of the country. Growth for the quarter just gone was provisionally 0.2%, and 0.4% the previous quarter. All the signs, such as consumer confidence, private business spending, money supply, the housing market and unemployment are all still unfavourable. For instance unemployment statistics show that the period each claimant is unemployed for is increasingly larger. Money supply to businesses and property buyers is still next to non-existent. The cheap 95% LTV (Ie 5% deposit) mortgage is consigned to the history books. A standard Buy-to-Let mortgage now requires a 40% deposit.

We are recovering from the recession, but this recovery is still at a clearly fragile stage. Any mistakes in economic policy today could end that recovery, and cause a double-dip recession. Avoiding a return to a recession should be of utmost priority. The only priority.

UK Government borrowing

Secondary to the above, but also important is the country's borrowing. UK borrowing is now approximately £167bn. This is a lot of money. An eye-watering amount. This will have to be brought under control and repaid. The Bank of England governor was recently quoted as saying in private that whoever has to make the cuts to repay it risk being out of power for a generation. Really tough cuts are coming and are unavoidable regardless who wins. Expect more stikes and large public unrest. The cuts needed have been summarised as equivalent to a 6p rise in income tax.

Any government has a tough balancing act between spending to prop up the economic growth and money supply, or making cuts to address the borrowing. As has been seen in Greece lately, unaffordable borrowing can be disastrous. If experts and investors feel a government cannot afford its level of borrowing, a country's official credit rating can be reduced. Greece was downgraded to junk status a couple of weeks ago.

So what if UK's rating is downgraded? We are currently enjoying the best possible credit rating. A downgrade would not be good. To consider the effects of a downgrade, my expert quotes yields on government bonds. UK bonds are currently trading about the same price as Italy. He notes that Italy's official credit rating is four 'notches' below ours. This he says is evidence that the bond markets have already priced a downgrading into their prices. So if a downgrade were to actually happen it would have a moderate effect on us. In summary, a return to recession should be a much larger concern than having our credit rating reduced by a notch or two.

The other effect of a country's finances being out of control is the sterling exchange rate. At the start of the storm about Greece a few months back, Sterling was still loosing ground against the Euro, which I saw as a very bad sign for Sterling. This again suggests that the level of our borrowing has already been priced into the markets, and a downgrade to our rating would not have a major effect. A weak sterling could even help stimulate demand for UK exports which become cheaper in real terms.

It is for these reasons David argues that securing growth is more important than repaying our debt at the present point in time.

Inflation and Deflation

The next issue is inflation. UK inflation has officially been 3% in February and 3.4% in March, well above the official target of 2%. However David believes these are a temporary blip due to energy prices, and the end to the 15% VAT holiday, and that inflation will drop back down to around zero very soon. The worst thing that could occur is know as deflation - negative inflation. This is bad because everyone will stop spending as officially goods will be cheaper in real terms if one delays spending. To try to avoid deflation UK interest rates are at a record low of 0.5%, and predictions say they will stay low for a while to come. Low interest rates help stimulate inflation, and vice-versa. Also a medium-term rise in inflation would not be a totally bad thing as it would make repaying the government borrowing easier, as the real cost of the debt would drop. As such, when inflation returns the government could allow it and increase their official target. I need to add that steady, and relatively low inflation is the ideal, and it was a real problem years back when it was 15%.

Again, securing growth will help raise inflation over the long term, and hopefully completely avoid deflation. Cuts too early will stifle demand, and consequently lower inflation.

So to summarise the above, the government borrowing is not an issue. Yes it will have to be paid for and reduced over the next five years. Yes we should have been saving money during the good times. But escaping the recession, getting the economy working properly again and protecting jobs should be the priority.

To summarise my summary, I support Labour's policy on handling the economic recovery. The tories plan of making cuts immediately with an emergency budget are very dangerous. Looking back through history, one will note that the great depression of the 1930's was caused by inappropriate government austerity measures during a fragile recovery. They caused a far worse recession.

Rise in National Insurance for businesses and employees, or rise in VAT

Labour are planning to raise £6bn by an increase in National Insurance. Tories have promised to scrap the increase. This money has to come from somewhere. Labour is already trying to raise billions by 'efficiency savings' and trying to find another £6bn is not realistic. This money will have to come from a rise in VAT instead. Or to put it another way if the money is not raised from businesses it will all be raised from you and I. On this subject I note many prominent economists (over 100) support the labour view, and many non-FTSE100 businesses (Ie no economic experts at all) support the tory policy.

Also at a time when government finances are this tight, I cannot see justification for such a huge increase in the inheritance tax threshold which Mr Cameron is proposing. Currently the limit is £325k and the tories want to triple this to £1,000k.

There can be absolutely no justification for such expensive tax cuts at the present time. Especially when arguing in the same breath for immediate and very serious spending cuts elsewhere based on the argument that it is a priority to pay back the borrowing today.

Other issues

Another issue for me is air travel. I'm not refering to the recent volcano in Iceland. Although this will possibly have an impact on our economy, I am refering to availability of flight slots. I am referring specifically to the extra runway at Heathrow, which Cameron opposes. We need more flights from more airports. International companies rely on them when choosing where to base their international offices, and when choosing where to host business meetings and conferences.

At present London is a very attractive proposal internationally, and we need to keep it that way! Please don't let all the environmentalists destroy this, on the basis of an unproven theory about climate change. No-one knows if it will happen, or what the effects of it would be with any certainty.

So three main reasons I can't vote tory:

1. Handling of the present economic recovery.
2. Scraping raise in National Insurance, and most likely having to raise VAT.
3. Anti air travel policy.

However, there are a few strong reasons I could not vote Labour. I did say I agreed with their handling of the present economic recovery, and I also have to agree Gordon Brown did keep inflation under control as chancellor. But as any reader of some of my previous posts will know, I strongly dislike Gordon Brown. He has the worst record for raising back-door taxation. He can also be blamed for poorly preparing our finances for the recession. All world leaders seem to hate him, damaging the standing of our country with other world powers.

So for all that I strongly believe as I have the right to vote that I should use it, I even more strongly believe that I cannot vote for anybody.

Chris

Reforming Europe

Mr Brown is still resisting calls for a referendum on the latest EU Constitution - oops I meant minor reform treaty!

I really thought when he came to power he was refusing so he could eventually make a U-turn and call the referundum telling everyone he had listened to them and subsequently improving his popularity. We were promised a referendum, and his case against one is extremely thin. I can't see any harm by calling one. And by the electorate saying no.

I feel a couple of everyday analogies will best illustrate my opinion about the governance of the EU.

First I will use Object Oriented Programming. The programmer is given a complete set of standard libraries to perform operations such as creating windows and making them function. Say for example in one application you need to change the appearance of your window by putting the popup menu on the bottom instead of the top. You can then write your own routines for displaying the popup menu. There are now two procedures for the same operation - the one that came with the computer by Microsoft and the custom one you wrote for your own application. It is my application and I am responsible for writing it so my own version will override the Microsoft one. But the parts of the default Window library that I am happy with and have not overridden will still apply. I only have to re-write the parts I wish to customise.

As a second example I refer to the structure of any company. The top boss and the board of directors will determine general company policy - for example the normal working day is 9AM to 5PM. However the IT department may have 24 hour operators so the standard working day for this team is different from the rest of the company. There is a specific policy for one department because the standard policy would not be suitable. That department manager has authority to deviate from the company standard when appropriate, and I don't know of many CEOs that would object to this scenario.

What our government is going to do within Europe is the opposite of the above. I approve of the single market so our companies can easily trade with customers in Europe. The argument for Europe having a single larger voice in international affairs is great. Having a united front is fine if it is united. Unfortunately discussions at every European summit come across as anything but united. What benefit to us is a larger voice if it doesn't say what our electorate thinks it should? But common sense has gone out the window in allowing Brussels the last say on British policies and laws.

What I strongly disagree with is our country being governed in the same way as all the other countries in Europe. The UK is one of the most technologically advanced countries in the world. The majority of members in Europe are developing countries. France is a socialist state. Governing a third world country or a socialist country is very different to governing an advanced capitalist country. One size fits all never works. Did we not learn anything from the collapse of the ERM in 1992? I also note even with Maggie's rebate that financially we gain nothing as we are one of the main net contributors to EU finances. It is daft that 40% of the EU money is wasted subsidising French farmers.

Lastly the government in Brussels is not elected by or accountable to the UK electorate in any way. They know very little about the operation of our country. Some European figureheads have even specifically been rejected (Neil Kinnock, Peter Mandelson, William Hague). The UK government that is elected and that understands the operation of the UK will become completely powerless. This is dangerous.

At present we have plenty of EU laws imposed on us. I question the benefit of many of these. After this treaty things will be much worse.

As this current treaty stands we would be better staying away and forming similar agreements with the Europe that is created as benefits us. I would rather be a United State of America with whom we have far more in common. There have been too many times over the last few years where Tony Blair has taken a different stance internationally to Europe and I have agreed with him on most of them.

I have written to my MP for an explanation exactly what the benefits are of being in Europe and adding my voice to the calling for the referendum. Will post here when/if I get a comprehensive reply.

Chris

Living with an American Express card

Everyone has heard of American Express, and as a company they have an image of providing exceptional quality services to the wealthy. Upon looking at their product range in more detail they have a number of services targetted at the average consumer.

In terms of payment cards, their top of their range product for new customers is the Platinum Charge Card. A charge card works very similar to a Visa or Mastercard credit card used by nearly all consumers. The only difference between a credit card and a charge card is you must pay off the full balance of your account each month. It is not possible within the terms and conditions to make a small payment and defer paying the outstanding balance in return for paying interest.

What's the benefit to that? If you can get a credit limit on your credit card that is suitable for your needs there is no benefit. But the point is the American Express does not have a credit limit. I don't think Victoria Beckham would cope for a month with a £20k credit limit. This is the market for the charge card. Want to buy a house this week, no probs - pay with Amex (if the agent accepts it)!!

Being a sucker for carrying flash plastic in my wallet I applied for one of these Platinum Charge Cards to find how good their service was. At the time I saw a TV campaign promoting their concierge service. It showed someone working flat out who was able to call the card and ask them to track down and send a gift to someone important. I liked the idea of having an American Express personal assistant at my beck and call.

Once I received the card it was very traditional looking. It wasn't a particularly impressive looking piece of plastic compared to some of the better designs of credit cards at the time. The best thing about it was presenting it for payment in the big department stores like Selfridges or Harvey Nichols. You immediately got a look of respect from the cashier. The worst thing about it was being rejected in 30% of stores 'Sorry we don't take Amex - have you an alternative card?'

This is the main reason I no longer have the card. If I am having to pay a Visa bill I got sick of paying an Amex bill as well. Another reason is chip and pin. The cashiers no longer see your card. You just put it in the machine, enter your pin and remove it to your wallet. Call me a poser, but that is why every card is now platinum, because at the launch of the idea they were a status symbol. Everyone wanted one.

Now i've covered the day to day aspects, I will detail the services included with card membership. These can be divided into three categories:

Travel benefits include a travel booking service. Whatever you need, be it a last minute flight or a bespoke holiday of a lifetime the service will take your requirements and arrange everything for you. Problem is in most cases you could save plenty of money by spending 10 minutes searching the internet. You got the offer of 2 for 1 flights but these apply to a very restricted list of airlines. Don't expect to get the offer flying Manchester to London, to New York or to Ibiza or Greece. You get membership to premium hotel schemes but all these provide is complimentary benefits on staying like a massage or an evening meal. In my two years as a member I never booked with them. I did use my access to airport lounges a few times.

Protection benefits or specifically travel insurance for your family and supplementary card holders. They also offer purchase protection and emergency assistance but this is common on most free credit cards.

Lifestyle benefits are basically the concierge service I mentioned I saw in the TV advert. I note that on the Amex website this has now been described much more accurately. This service can send a gift, book a restaurant or special event for you. When I used it to book a restaurant I had to give my full card and security details, and was then asked for nearly the full address of the restaurant I wished to use and details like the time and number in the party. By the time I had done this and waited for a callback in most cases it would have been easier to call the restaurant direct!

These benefits were so restricted as to be nearly useless. I called the travel service to book a ferry to the Isle of Man. They refused saying they only deal in travel by flight. I needed to take my car. I wanted a plumber in Manchester. They refused to help because they didn't have a fully vetted list. Reading their separate insurance I thought they had! I asked for an executive lounge in Greece or Ibiza. Out of a list of 500 there wasn't one. A local worker at the airport told me 'we don't have many executives in Ibiza'! You do but they are hard to spot in shorts!!

There is a loyalty point scheme. I struggled to find anything in their list of rewards that I actually wanted. In the end I settled for Molton Brown vouchers. I also havn't mentioned that there was an annual fee. A very big annual fee of (cough) £275. This has now gone up to £300!

To conclude the overall membership experience was disappointing, especially if you take the charges into account. Except food supermarkets and petrol stations, acceptance of this card is poor. Most stores at the Trafford Centre in Manchester refused it. BMW dealers and service centres do not accept it. Most stores in foreign airports refused it. Don't think of using it abroad as the foreign conversion fees are extortionate. The service was poor, refusing to book anything but run of the mill requirements. The Membership Rewards couldn't be redeemed for anything one would actually want. It was hard to save for them with card acceptance being so poor. If you can find a free credit card for your needs get one instead!

Chris

UK economic problems.

In the last week there has been a severe failure by our government and regulatory bodies to calm jitters in the UK economy.

I saw the treasury select committee MPs grilling the head of the Bank of England, but can't help but feel they missed the point.

Northern Rock is in serious difficulty. Their balance sheet is comprised mostly of mortgage lending with a small proportion of deposits. Because of the fallout from the recent US sub-prime mortgage lending crisis the cost of inter-bank lending (which NR was more reliant on than was prudent) has risen sharply, with banks much more reluctant to lend one-another money for fear that the securities offered for the loan may be overvalued.

The select committee seemed to focus entirely on the Northern Rock situation which I see as the symptom, not the actual problem.

Northern Rock had been looking for a solution for its problems for about a month before the issues bit. The problems were directly caused by fallout from the economic problems in US. These pleas had fallen on deaf ears and the problems left to grow.

In my opinion this is what went wrong:

1) The Bank of England took an extremely hard line. They were aware of the situation with the interbank lending. Banks were keeping all their cash in case they hit problems in the near future. The Federal Reserve in America noticed a similar problem and they took action. They injected cash into the system promptly, offered banks a reduced borrowing rate and have since dropped the main interest rate by two 'notches'. Our bank sat there and did nothing. Had they improved access to short term funds I feel none of the current problems with Northern Rock and the banking sector in general would have happened.

2) Northern Rock asked the Bank for a 'lender of last resort' loan. This request was immediately made public. Mr King informed the Treasury Committee he would have rather used 'covert' lending so the bank could sort its problems without causing the large public panic causing queues of savers withdrawing their savings. Covert lending was made illegal by the EU Market Abuse Directive. I wait for the day I hear of an EU directive that is in our best interests.

3) Approximately a week before the crunch hit, Lloyds TSB wanted to buy Northern Rock. From what I have read they pulled out becuase the Bank of England refused to extend the terms of loans to Northern Rock to a buyer.

Today it looks like the Rock is struggling to find a buyer at any price! It is looking increasing likely the government will have to support it over the longer term.

Fortunately last week the B of E woke up and intervened by guaranteeing no depositors of NR would lose any savings and to offer £10 billion funds to lubricate the markets. Such a U-turn was well overdue. The Bank of England definitely neglected one of their core duties to ensure market stability. The MP committee forgot to ask them why.

Chris

Offers that sound too good to be true!

Are you interested in some good deals I've taken advantage of?

1. Free pair of the best portable headphones on the market.

Take out a subscription to What Hi-Fi paying by direct debit and receive a pair of the best portable headphones that are made, the Sennheiser PX-100. If you listen to music on the go you need a pair of these.

The subscription will cost £10.15 a quarter with no minimum subscription, cancel at any time.

To order call 08456 777813 quoting offer code M027P or see the current issue.

2. Landline phone calls.

Fancy calling the UK for 0p a minute any time of day with no maximum call length or redialing? No need to change your current telecoms provider. Calls to mobiles 10p a minute in the week, 4p a minute at the weekend, any network. Calls abroad from 1p a minute. Visit website for full list of rates.

There is a fixed charge of 4p for each call made. No joining fee. No monthly fees. If you dont make any calls on the service it costs you nothing. You will be billed to a credit card monthly in arrears. At the start of each call a message is played telling you the applicable per minute rate.

Why waste energy trying to get V o IP to work when you can use a normal phone at these rates? Cancel your inclusive call package. Sign up to the service on the web at www.1899.com
Once registered prefix each number you dial with 1899 to call using the service.

Finally I should say I make no profit from telling you of these deals.

What are BSkyB doing with their money?

Remember British Satellite Broadcasting (BSB) launching the squarial? That was 1989!

Late 1990 BSB and Sky were both struggling to make a profitable satellite TV system. They 'merged' on Sky's terms to form BSkyB, now commonly known as Sky.

Sky has no satellite, and rents use of the Astra system for a quoted £50m in 1990.
They established offices at a run down West London industrial estate, now also home to Harrods distribution centre.
They gave everyone free satellite dishes and set-top boxes and started charging subscribers a monthly fee for access to more TV channels than the 4 terrestrial ones. (Channel 5 launched in 1997 by a Spice Girls cover of a 1960s hit 5-4-3-2-1 :) ).

In the past 16/17 years what have Sky had to pay for?

New programmes? No
Producing new channels? No, someone else does this and _pays_ Sky to transmit it (The cost of which is now being investigated by Ofcom). Sky's few channels all carry tons of adverts.
Infra-structure? No, still renting an Astra satellite. Sky Digital has been running since 1998.
Lining shareholders pockets? No. 5 year share price chart shows price change from over £9 to approximately £5.50p today.
Exclusive content? No. Football and new movies are only available at extra cost!

Ok, this is great. So the subscription charge for their service must be dropping nicely??
No. It was £15 a month in 2002, now it is £21 a month.

Hmmm, must be some good extra features??
No. You want to record what you've got? £10 a month extra!
Improved picture quality? Ah HD your thinking? £10 a month extra for about 10 channels you've already got in HD! I'm not paying for HD when the standard service is not even providing the specified 576 lines!

Hell they must have fabulous customer service, sending everyone Christmas hampers, loads of free special offers. That's the only other place the money can be going? No.

Customer Service is non-existant. I called technical support the other _night_ - ie off peak. This was an 0870 number (read 10p a minute). After 1 hours 15 minutes on the phone the picture technical experts couldn't tell me if I could connect my standard box with S-Video or Component. They said use SCART. My HD projector hasn't got a SCART. They couldn't help.

This doesn't add up. As the title of the post says, What are BSkyB doing with the money? Reading today's telegraph even Murdoch senior and Murdoch junior don't know! Their take on the next 6 months figures differed by about £100m.

Update: 3 days after my article they spent nearly £1bn buying a controlling 17.9% stake in ITV to stop NTL and ITV merging. They don't care if their customers are happy, they are squandering all their cash fighting to keep their monopoly so customers have no choice but to stay with Sky.