As Easy As One, Two, Three

Alistair Darling is a formidable politician and a fine Chancellor. His record proves it. Yeah.

So when he tells us that the route out of our borrowing situation - not mess - is as easy as one, two, three then we should believe him and start doing a Jackson Five jive. Like his Lords and Masters, Brown and Mandelson, he believes the prime way out of the mess we are in is to borrow to grow.

Hands up all those people in business who have borrowed to grow. A fair number I would suggest. Hands up all those businesspeople who have borrowed to grow in a recession. Not many. Typically in business we borrow to survive when in a recession as growth opportunities are fewer unless you can find a little opportunity niche that you can exploit.

Granted running a country isn't like running a business but there are only so many things you can spend the borrowed money on to incent growth. So far, we have seen the massive bank bailouts as the main form of spending, hence borrowing. This has been the vast majority of what we have spent. We have also reduced VAT which is due to end but retailers would say this has helped stave off the worst of the economic recession. In business to business companies like mine, VAT decrease make not a jot of difference.

So if we borrow more, we can theoretically invest to produce growth. I would really like to understand exactly what the Government is going to invest in right now to stimulate growth other than to entice consumers to do what they did before which is borrow heavily to fund their spending. Already, people are facing some austere spending cuts as job uncertainty grows. Credit card and unsecured debt across the population is dangerously and unsustainably high, wages are set to not grow and possibly decrease, and taxes are set to increase. It really does not take a genius to work out that growth is really going to have to be 'false growth' in order to stimulate the economy.

The Chancellor's wish list is that we borrow more, try to reduce spending while maintaining priorities and increasing taxes which will all stimulate growth - one, two, three. The growth will produce a richer economy which will make it easier to pay off the debts.

Right. Meanwhile, across the pond Alan Greenspan is warning that US debt is now dangerously high at $1.4 trillion. He warns that there comes a point when the economy runs away from you and you continue to borrow more money just to service the interest on the debt as the growth rate just eludes you enough to need to borrow more just to try to catch it. In 2014 it is estimated our interest bill on our debt will be £60bn per annum which is equivalent to the entire NHS budget at current rates.

There comes a time when you need to stop borrowing and cut your cloth for the economy you are in. That does not stop you from investing in growth - it is just a realistic look at what you can really afford. It means that some of your grandest plans will have to be re-thought, some of your pet projects put aside. It means you have to make a rigorous look at the layer upon layer of wasted management and bureaucracy. It means you have to look hard to gain efficiencies, it means that some services will have to be downgraded and cut. It means some businesses will have to be allowed to whither and die. It is just a fact.

Britain has gone through an unprecedented period of 'false growth' where we believed we were prosperous but we were not as well off as we thought. We have to rein in spending across the board - at a personal and Governmental level. We have to make certain sacrifices which some people will not like - but there is far too much fat in our public sector and we are letting far too many people into our country. That is not a racist remark - it's a simple fact. I have no time for people like the BNP, they are dangerous and a subversive influence with no credence in modern politics. But they will gain a foothold if we do not face stark facts in this country.

13 years ago, Blair and his Government trashed the issue of immigration at election time and swept to power. Like so many other things about that wave of 'Cool Britannia' the issue came back to haunt them in their laissez-faire style of Government. Like so many other issues, like the economy and the banking system, they now look to blame the previous Government for current problems. It really is a time when the reckoning is long overdue.

It would be good to hear from people like the Chancellor the truth about our situation, what he actually proposes to do to in real measurable activities to remedy it and then get started. If he thinks that just talking will solve it as is the traditional method of politics, then it will be as easy as one, two, three but we will be no further forward. However, if he looks a little further afield he will see that countries like France and Germany have got to the very heart of the problems and are now functioning nations out of recession as we still wallow in it. He will learn quickly that applying vast sums of money only pays dividends if you apply it in the right places.

Stuffing it into the pockets of bankers was our biggest mistake and will be the most enduring. As these rich people wave two fingers at us and make vast profits again off the back of our kindness and stupidity, Britain is no better off. Borrowing more money will not help us now - we should have never have blown so much in the first place.

I fear for the situation we are in. As Sir Howard Davies put it recently, we do not have a clue how bad the situation really is. What we do know is that debt is probably the biggest issue this country and its people face. As any small businessman will tell you, there comes a time when your business needs more cash at a much faster rate than it can grow - we call that throwing good money after bad.

Right now, Britain faces exactly that situation. For every new pound borrowed, we had better know exactly how we will spend it and how much it needs to return and in the meantime we need to find how we can create more money from savings ourselves - long before they raid the pockets of the people in taxes. Because right now, as a taxpayer with a stake in all this, I would really like to know where my next pound will be spent and it had better not be to give more support to rich bankers, support the immigration of more people, fund vast inefficiencies and bureaucracies in Government and the public sector, pay for wage rises to politicians, fund vast allowances for the same people or on wars which we should not be fighting.

It's my money, and I want a say. I think we are all in the same boat.

The Economics of Debt

Any small businessman will tell you that debt is a huge burden. It is not only that the interest cost is a drain on money that can otherwise be invested but it is the notion that once you have a debt, it is damn difficult to get rid of it.

Other businessmen think debt is fantastic. From it you can leverage huge profits and it is the principle behind many private equity fuelled buy outs. For a small capital outlay, vast sums of money can be borrowed to buy companies which can be later sold with a disproportionate amount of profit from the risk going to the private equity house. In the purchase of Boots, private equity outlayed less than a few hundred million while raising £9bn.

Debt, in that sense is good. Philip Green used a pile of debt to pay himself a one-off dividend of £1bn tax free. Debt, in plenty of senses then, is good.

But for the average business, the problem with debt is that it has to be productive in terms of increasing profits. Without a huge boost to profits, cashflow does not sustain the interest payments and so you have to borrow more in the hope that your business will catch up. In the end, it can be good money after bad as the implosion inevitably comes as the debt gets ahead of the business. For small businesses, debt is only good for working capital and generating more cash, beyond that it is a millstone.

So how do Government's view all this? The US just closed out its fiscal year with $1.4 trillion of debt, the highest national debt since 1945. As former Head of the Fed, Alan Greenspan, observed this is the most worrying aspect of the US economy. The equations start getting explosive in his eyes as more money is required to pay interest on the debt and you end up borrowing more just to pay the interest - the priority has to be to bring that debt down.

There are a few ways to do this. First up, you can get the economy growing, which is why there is so much debt there at the moment as the US tries to use more debt to stimulate the economy. This is exactly Greenspan's issue - using debt to stimulate growth can go horribly wrong and it's exactly what small businesses fear - if the revenue streams do not come through fast enough to bring much needed cash, then pretty soon you end up borrowing more. The second way, is to sell assets which has been the recent domain of the UK Government. The problem is that beyond gold, countries usually do not have easily 'liquifiable' assets. In Britain's case, we no longer have large golden stakes in large companies, we have the stakes in the banks but they are all still under water while other things like buildings and debts are not so easily sold. One thing we did not have was gold to sell. Such asset sales, as a small businessman would know, tend not to add much to the coffers to reduce debt - in our case it may be a few company cars, maybe a building, furniture or plant facilities. Asset sales of this type are usually done in desperation, like pawning jewellery in the face of credit card debt. Inevitably you are a buyer's dream and so you will never get full value for your assets as the British Government will soon find out.

Further, selling assets as a business means you have less to bargain with for the future and for a Government, once it is sold that's it - gone. The final way to make inroads into debt is to make cuts in the budget. Small businesses know all about this. Wastage is the first port of call but usually there is not a massive amount of 'wiggle room'. Certainly, the end of month pizzas may go, fresh flowers in reception, travel is fairly game forcing salespeople and managers to think hard before travelling and then looking levels of spend on things like flights and hotels. Then it gets nasty - the biggest expense for small business is the salary bill and that's where cutting can produce real savings. Of course, you are affecting your future capabilities but needs as must - for my money, it should always be the last port of call.

And so to Government. I argued yesterday that cuts can be made very easily - when you look around at the multifarious layers of Government and the associated lackies and cost, long before you start affecting public-facing services, you have vast layers of expense which are pure wastage. This is an easy starting point for Government and savings can be realised very quickly by canning external advisers, consultants, halting project overruns, getting rid of contractors, looking at layers of management and getting rid of many of them.

It has been pointed out that this recession has been felt almost exclusively in the private sector and that the public sector has done nothing to rein in cost, eliminate wastage or make cuts. Thus, the majority of the newly unemployed have come from the private sector. Yesterday, we saw positive results on the unemployment number as the rate of additions to the total seemed to slow and this had a small positive effect on the budget deficit forecast for the month. This could be a false dawn as the Government are going to have to start making some serious cuts - very soon and that means people hitting the dole queues from the public sector. It's crazy that it hasn't yet happened - but it has to.

My point in all this is that as small business people we know the economics of debt. It is a bad thing, particularly when markets are depressed. You can borrow in such times but it is usually out of desperation when in all reality, you should be cutting your cloth. Spending money in the hope things will come good, without a great plan for finding ways to grow, usually ends in tears as interest payments mount.

Alan Greenspan knows a thing or two about economics and I think he is right. Debt is know reaching the critical point - Britain is spending in the hope of an upturn and spending big. While you have to spend money to stimulate, you have to realise that in the background you have to make essential cuts.

It isn't as if we cannot survive if cuts are made - Britain is a bureaucratic monster with one of the heaviest public sectors in Europe. If we cannot find efficiencies in this structure then we ought not to be in Government, because as small businessmen we can see it all too easily.

The public sector is too big, too fat, has overly generous pension schemes and is a huge burden on our taxes and business - it has grown vast, inefficient, multi-level departments, which are mini-governments in themselves, over the last 12 years that has spawned regulation after regulation culminating in the last tranche of the farcical new Companies Act just last month which was years in the making, issued in 3 almighty sections and added really just 4 things of note to over 97% of the number of companies in Britain.

The waste is just awesome and shameful - and it needs to be cut, and fast.

Where Has All Our Money Gone?

Wandering through St Albans market yesterday on a lovely September afternoon, I couldn't help noticing that the stalls, the shops and the restaurants seemed far busier than they have been for a while. Now that Lord Mandelson has decreed it, are we really out of recession?

There does seem to be some encouraging signs and we should be thankful that we may be through the worst of things even if 'The Dark Lord' and other like Stephen Hester of RBS warn that we should not assume that everything will be rosy from now on. Even so, perhaps there are signs that we are getting a little more confident and spending more.

Perhaps different to the last recessions when there were similar effects on jobs and industry, this time around we are left with an incredibly large bill as a long term legacy of the crisis we have been through. Some stark facts reveal the cost of the credit crunch and recession combined has been around £1.5 trillion which was the total amount we spent, collectively, on bailing out our financial system.

We recapitalised and provided loans to the banks to the tune of £289bn which included the nationalisation of Bradford & Bingley and Northern Rock as well as our shareholdings in RBS and Lloyds Banking Group - we are still around £10bn to £20bn down on this but the shares in RBS and Lloyds have recovered significantly and we may get our money back soon on those particular deals although the other two may take a good deal longer. We gave a further £200bn in general liquidity support to banks - which prevented those we rescued and others vital support to stop them going bust.

We spent a further £400bn in purchasing and lending money to buy assets. It is unclear how much of that money can be recovered. Then, of course, we have guaranteed a further £650bn to banks to cover their losses. In theory, we should get a good proportion of that money back providing banks remain solvent and there are no disasters ahead. Alan Greenspan, former head of the Fed in the US, recently said we would get another crisis at some point so we should still be wary that all this money is certainly at risk. It does make you wonder why we continue to condone and aid the machinations of the financial system when we know it has such inherent risk if it is not properly reformed and regulated as the last thing we need is for the whole thing to happen again - then the money would have truly been lost and we would require a great deal more to perform another economic resuscitation.

The £289bn of loans to risky banks is equivalent to £11,500 of liability for every household in Great Britain.

That's an awful lot of money for a society that already has around £1 trillion of unsecured debt, masses of mortgages, diminishing household income and more uncertainty on jobs. I certainly don't have the money lying around if it was required.

National Debt was around £466bn in 2007, £526bn in 2008 and we thought it was really bad when it would rise to £609bn in 2009. But by 2014, debt is forecast by the Treasury to rise to £1.37 trillion - and remember, we have revised these predictions every month so far as lower tax returns and higher benefits pay outs due to greater unemployment has affected the wishful thinking calculations to date.

In 2014, we will pay £60bn in interest on that borrowing alone.

£60bn in the context of the total bail outs does not seem much. But to put into proper perspective, that's equal to the entire Education budget for the year or just over half the budget for the NHS. It is that huge and it is why the world's formative credit agencies are beginning to believe that Britain's ability to service and repay the mounting debt will get progressively harder. As we borrow more and more, confidence will get lower and lower as there is only so much that everyone of us can afford to keep up with the repayments, particularly as we are all affected by the fall in the housing market and the uncertainty in the job market.

For us as individuals, our household net income has dropped over the last 10 years. We supplemented our earnings by a rich source of money - the rising equity in our homes. Sadly, in this crisis as much as 15% has been wiped off the value of our homes which is equivalent to around £422bn.

It means that we are collectively worth around 10% less in terms of our personal wealth or around £393bn has been wiped off our collective value. Finally, between 2007 and 2008, around £815bn has been wiped off our value in total.

That is equivalent to about £31,000 less wealth per household in Britain in just two years. Given that we are liable for £11,500 per household too, our actual drop in wealth is closer to £42,500 per household.

I don't suppose those milling around the market had actually thought that through as they started spending again as if there was no tomorrow.

Lightening Can Strike Twice

It is very unsusual that anyone agrees with me, even my wife, so imagine my surpise when I read that no lesser sage than former Federal Reserve boss, Alan Greenspan, goes on TV to agree with me.

Ok, so he didn't actually mention my name but he all but did. He was interviewed by the BBC for some series and he said, and I quote, 'The crisis will happen again but it will be different.' See, I told you so. Those eagle-eyed readers will know that I have repeatedly, not once only, said that the way we have dealt with this crisis has only papered over the cracks and so it will recur. Now two experienced individuals have publicly agreed with as I number Joseph Stiglitz, Nobel Laureate as another. He, again, rather strangely omitted my name in his announcements but the gist was the same.

Pedants among you will note that Greenspan is observing dryly that economic crashes come after prolonged periods of growth - and that is inevitable. That is not quite what I said - in fact, I said something very different but, heck, the result was the same. Greenspan even goes onto to say that sub-prime may have triggered the current crisis but it could have been any other of the weaknesses in the system that could have brought it on. In a roundabout way this again agrees with my personal thesis and I suspect for the same reasons this time. Sub-prime was just a manifestation of a flawed system. I think that's what Greenspan is saying and he probably nicked the idea from me.

Reading the article more thoroughly reveals that his opinions are pretty different and frankly, that's because he knows what he's talking about whereas I am guessing. However, it wasn't a bad guess - take note, Gordon, that plumb job as CEO of UK Financial Investments is up for grabs and I think anyone who gets even half of what Greenspan thought of right needs to be considered seriously particularly if there are nice bonuses associated with the job, old chum. Greenspan goes on to say that he thinks regulation should focus on fraud and capital requirements at banks to get them back on track.

To be honest, the sentiments are echoed by a real banker. I said banker, actually. Stephen Green, Chairman of HSBC, who has just levied a £25 per month on my HSBC Bank Account without warning and for no apparent reason, has actually come out and admitted what Adair Turner was barking on about the other day was right. Turner was two steps closer to the Funny Farm when he suggested that many of investment banks' activities 'served no social purpose' and Green may have saved him from the padded cell by agreeing. Further Green says that 'excessive' bonuses should be stopped too. I bet he got some nasty stares from his whizz kid traders when he got into the office today.

What Greenspan and Green are saying is that banks need to focus more on their core activities and make sure their basic fundamentals are right. In a much less reasoned way, I have said the same to anyone who would listen. Green says that 'Some parts of our industry have become overblown, and certain products and services failed the tests of usefulness, suitability and transparency'.

I think what Green is saying fits in with Turner's assessment. My personal take was that I think many products that banks traded so excessively in the last 10 years have been out of touch with any reality and I would assert that the profits made came out of thin air. Quite literally, taking one of these products as collateral to a restaurant to the pay the bill would be no better than me offering my lottery ticket to the waiter and saying this £1 ticket is for payment and you can have whatever it is worth as payment for the meal. The waiter would have a reasonable chance the ticket is worth £10 but a 1 in 14m chance it was worth a jackpot, plus all the probabalities in between. But the highest likely option would be that the ticket was not worth anything. Imagine the waiter taking that ticket and it being traded many times and each time the people who traded take some real money from the other party in return of a chance of a jackpot. Pretty soon, the ticket will have been traded so many times that whatever it is worth will never pay for the price paid. The trades have nothinbg to do with the ticket's worth.

It may be a bad example but it is not far off the truth. Some of the products the City trades serve no earthly purpose other than to line the people's pockets who trade them.

So I would stick my neck on the line and say to Greenspan, 'Actually, Alan, you are wrong. The crisis we saw did not come as an inevitable consequence of a prolonged period of prosperity, it came as a result of the vast increase in trading of spectulative products that had lost all touch with their origin and so were generating virtual, not real profits.'

I would further assert, that until we ban such products being traded, we will endure another cycle of fictional prosperity and spectacular bust bigger than before - unless we change the system fundamentally. It isn't about regulation and it isn't about capital reserves - it's about what banks trade. Sort that out and we get of that problem until they invent the next scam to make money. And one last note on this for all those virtual reality merchants in the City - the talent they so loyally protect, who they believe should have the freedom to earn as much as they like, have been trading only make-believe products. Frankly, any kid could have done it who had played Monopoly.

It's some day when you realise all the tripe you have written actually is getting close to the truth. Greenspan and Green, I salute you.

Counting The Cost of Lehmans Bank

It really does astound me when, in the midst of the biggest banking crisis since the Great Depression, we still have greed ruling decision-making in banks while the industry takes a bath.

I was already appalled that Gordon Brown had personally intervened in the final hours of the takeover of HBOS by Lloyds TSB which gave the combined group over 28% of the UK mortgage market - not because it made a very uncompetitive situation but because Lloyds TSB did not have the financial resources to undertake the deal. It immediately required a bail out from the Government and consequently the taxpayer owns 43% of the new company. It simply should not have been allowed to take place.

But Barclays Bank - well, they are something else.

The Collapse of Lehmans Bank

Even before the aftermath of the crash of Lehman Bros had started to permeate through the system, Barclays Bank, almost with Fred Goodwin-style over-zealousness and like the proverbial rats up a drainpipe, steamed in to buy the investment banking remnants as a wise investment.

Even a circus clown could have told the executives that Investment Banking was not the 'strategic place to be' in the current economic climate - you know, a recession combined with a credit crunch, that 'Once every 100 years crisis' according to Alan Greenspan.

Nope, the diehard washouts at Barclays Bank decided that spending suicidally in a crisis is a really brilliant strategy, so two-fingered armchair sages and paid a fat wedge of cash for the defunct bank.

That was in September.

Fast Forward to Today

Oh yes, you guessed it already. The very same Barclays Bank today announced the loss of 1,300 jobs in Barclays Capital, the Investment Banking arm of their company. Bright, cutting-edge strategic thinking at work there then. In all 2,100 jobs are to be lost, some 7% of the workforce.

But these proud fellows don't come cap in hand to the taxpayer and expose us to their follies. Not this collection of Oxbridge-trained upwardly earning chaps, these boys are far more happy having Middle Eastern cash - and £7bn of it too.

It Beggars Belief

We are talking just 3 months from sinking a load of money into Investment Banking to grab the imploded Lehmans to announcing 1,300 job cuts in the investment banking business. It really does make you think how these people work and what they think as they hob-nob from meeting to meeting, power breakfast to power lunch and whizz across the Atlantic being the cream of British commerce.

I have blogged about planning for a recession to be prepared - the planning I meant was to avoid it. These boffins planned their way into it.

Frankly, I wouldn't give them a chip shop to run as they would buy parsnips because they look cheap when everyone wants potatoes, then fire the guy frying for cooking the wrong thing.

It's that stupid.