The Curse of Low Interest Rates

The Bank of England's Monetary Committee was this week split but Interest Rates have again been held at record low levels of just 0.5%. Surely this is good news for us all and the economic recovery?

The reality is that there is a ticking bomb in the system as those people who either are already on standard variable rate (SVR) mortgages or are due to be on them soon, have a nasty shock in store. The fact is that interest rates will rise - it's just a matter of when not if. SVR today is from 3.5% to 4.95% and many people have budgeted the affordability of their mortgage and lifestyle based on this rate. If base interest rates should raise by just 1%, then it would constitute as much as a 29%% rise in SVR and, therefore, repayments which is a huge increase. And let's face it, given past SVR levels, a 1% rise is trivial.

The saviour for people in this predicament in the past was to grab a fixed rate mortgage around now and lock themselves down on repayments. But the problem is that new fixed rate offers are factoring in what banks think will happen to interest rates and in many instances these deals are unaffordable already for people on SVR. There is a ticking bomb in terms of potential repossessions in the future.

The indicators in the economy are not good. The retail sector is suffering as 4%+ inflation rates hit. Jane Norman, Thorntons, TJ Hughes, Carpet Right, Habitat amongst others have suffered terminally in a raft retail of bad news. And only part of this can blame the internet changing buying habits or out of town shopping growth. You can tell when it gets tough when affluent London commuter towns like St Albans have boarded up shops in the High Street and Poundworld is the most thriving shop. Consumers are already reining in their credit exposure and spending. The news gets worse as only yesterday British Gas spoke of yet another hike in gas prices of around 20% as a strong possibility and we already are seeing upward pressure on food costs.

The fact is that inflation figures are misleading. The real inflation rate amongst people with average or lower disposable incomes is actually much higher as those goods which are increasing in price faster represent a higher proportion of average spend to these people as it may do to richer people. The rising cost of energy hits average incomes much harder than higher incomes as these people may spend the same on energy but it is less of a proportion of their average spend than lower paid people.

And today, Public Sector workers are striking over austerity measures which threaten their pensions which are gold plated compared to the real world of the Private Sector. But here's another reality. The Government does not invest lump sums over the long term 'saving and investing' to pay for Public Sector pensions, they actually come out of the current account paid for by National Insurance. So Public Sector pensions are paid directly out of our taxes, there is no magic fund or annuity to pay this. You and I, everyone, pays for Public Sector pensions directly in our tax bills today - and this is only going to get higher. So while in the Private Sector we have a crisis looming in terms of retirement income, we are paying for the gold plated, premium Public Sector pensions in our tax.

And the Public Sector workers think we will support their strike? They must be joking.

So people stuck on SVR mortgages have it in all directions - higher interest repayments to come, more taxes to pay for Public Sector pensions and the like and higher inflation on staple goods. It's not a pretty place to be. Add in greater uncertainty on jobs, particularly in the banking and retail sectors and the picture is very gloomy.

In many respects, the damage caused by the economic disasters in the financial sector has yet to really bite. The next 24 months could see some very tough times and a band of people are right in the firing line. By keeping the interest rates low to kick start the housing market, many people who got new mortgages based their affordability assumptions based on lower interest rates continuing.

This is the curse of low interest rates.

Will There Be A 'Double Dip'?

Of the many questions that face us as we go into 2010, perhaps the most serious is, 'Will there be a double dip?'

It takes a moment to work out what that means, but effectively the climb out of recession is merely a false dawn and we lurch back into recession for another period before finally emerging into real growth. Of course, this would be a huge disappointment to the Government as we have already had the deepest and longest recession on record, so as we clamber up the sides of the slippery slope to growth, it could be disastrous if we slither back down - at least for their re-election chances it would be.

Just today we heard that the rate of growth in house prices has slowed. I actually think this is not such bad news - the return to economic growth would be far more healthy if it was not led by or dependent on house prices. However, there are more serious issues that we face.

Firstly, £200bn of Quantitative Easing (QE) is soon to end - where we have issued new, 'funny money' to buy our own debt. Pretty soon Government bonds will have to vie for real money buyers and that will be a crucial test of Britain's economic health in the eyes of others. The best that QE has done is to ease credit conditions but in reality it has been stored by banks to shore up their capital ratios and some have used it to play the markets again with devastatingly profitable effect. Little has got into the real economy and allowed people like us to get access to credit more freely - or businesses for that matter.

This lack of credit is still an issue. Today, as the recession lingers, businesses have not made big demands on banks for credit - not for growth or investment, at least. Most businesses have reined in costs and tried to decrease dependence on credit, hoping they will get good, easy access to money when the markets recover. That could be a real issue as not only will firms be making their demands at roughly the same time but it will be a crucial test once again of whether QE has worked. Many suspect this will be a tough time for businesses and impair the country's ability to recover and grow.

More importantly, around the same time, as thousands of businesses took the opportunity to defer the payment of tax bills, there will be cash demands on them. By taking up the Government's initiative on 'Time to pay', firms have kept vital cash in the business at a key time rather than have to borrow more to pay their tax bills or for that matter have to make deeper cuts. However, it does not mean that they do not pay their taxes, it merely gave them a stay of execution. The taxman will want his money soon enough. Once again, this will all happen at roughly the same time and companies will have to find the cash at a time when they most need it to grow and take advantage of the recovery. Again, it jeopardises the tenuous period of growth we have.

Similarly, there will be chaos for firms on 1 January as the VAT returns to its old rate. Those firms having their year end on 31 December will have a dilemma as they would normally bill all they can. If they are a distributor, then their customers who sell on to end users may fear receiving an invoice before 31 Dec if they cannot immediately bill the goods - so 'goods in transit' or 'shipped from factory' situations will be areas of uncertainty as the chain of invoices for VAT purposes may have differing VAT rates. While the situation may be clear in some accountants' eyes, I can tell you very large firms are very fearful of the lack of clarity issued by HMRC on the subject. For many firms, who operate on incredibly thin margins, if they are left holding the VAT difference, it could wipe out some or all of their profit on a transaction.

Out in the world of consumers, there is the issue of deferred payments on mortgages. On paper, it was a good idea, but the problem is always about the detail and the time for returning to payment is a real issue. At some point, despite over 1m new claimants on the dole, people will have to start paying again which will make less available to spend in the high street, particularly if house prices have not regained sufficient value as to wipe out the negative equity many are suffering.

Clearly, there are many things to be negotiated in the coming year and some of them have the potential to drag as back into recession. The biggest of them all will be when the Government finally faces up to the inevitable cost cutting it will have to make in the Public Sector. Over the last 12 years, an extra million jobs have been added to the Public Sector as well as all the outsourced contracts. As many as one in four jobs are associated with the Public Sector and it is anticipated that the Government will have to cut back so far as to regain all of the incremental spending it has made over the last 12 years - that is the stark reality we face. A simple argument can be made that all of those 1 million extra jobs created out of nowhere in the Public Sector simply to support bureaucracy and red tape and creating untold inefficiency on inefficiency will have to be lost. It not be that many but there will be big job losses in the Public Sector for sure - that's more people claiming on the Welfare State and less paying tax; the double whammy that keeps knocking the Government estimates on borrowing off line. This, of all factors, has the biggest potential to hit us as it not only puts a huge strain on the system, it also throttles the business of those dependent on the Government for a portion of their profits but most of all it means that our ability to service our national debt is less certain - and this has a corresponding repercussion on the credit rating of the country which affects the price and attractiveness of our Bonds.

It will be a tough year still for businesses and a tough year for Government. If we are to avoid the double dip, it will take businesses to lead us and the Government to ensure there is credit available when needed most. None of that is really certain at this stage.

The Danger Of Big Debts

I blogged only this morning on Alistair's Darling's dogma about borrowing to rescue Britain from the recession - 'borrowing to grow' is the mantra that he and the PM repeat endlessly.

I had a discussion with someone today about my negative response to this sentiment. And I tried to explain, beyond Alan Greenspan's gloomy view about borrowing too heavily as to why I believed it is not the only way out. I acknowledge that running a business is not the same as running a country but certain principles about debt are true no matter how you look at it.

Today, Government debt has been easily 'sold' as bonds as the main buyer in recent months have been ourselves - Quantitative Easing (QE)has allowed the UK to buy its own debt and so make it look very attractive. QE is drawing to its conclusion and the Government has indicated it will not spend any further than the £175bn already spent. Some speculate that when our bonds go on the wider market there may not be the enthusiasm by institutions and other Governments to buy our debt so willingly.

The reason is this, in my view. Anybody looking at loaning a person or a business more money will look closely at how it is run. If the lender (effectively the buyer of the bonds in our debt) sees that the person or business is not making efforts to create cash of its own, then there are warning signs about the long term ability of the person or business to keep up the payments on the debt. For an individual, a lender will look at income, savings, assets, prospects, other loans and current spending habits - indeed, new mortgages are rumoured to require much more rigorous scrutiny of how income is disposed of before assessing how much can be afforded. Business has the same scrutiny - the last thing that any lender wants to do is to lend money for an expensive lifestyle or wasteful use of money by a business. So if the MD wants a loan to buy a yacht to take customers around the Mediterranean while business is bad, the lenders will not be keen, just as Citigroup could not buy Corporate jets during the credit crunch.

What lenders would certainly want to do is to see how an individual or business accommodates their lifestyle or business to service the debt. If an individual receives the money and blows it on champagne and high living, the lender will not be happy as this is not helping the servicing of the debt and may well end up with the individual getting into more difficulties financially. For a business, if the business does not look to its own cost line, income or cashflow to maximise the use of the money, lenders, particularly in austere times, may not believe the business is going to be able to keep servicing the debt without coming back to ask for more.

A good example of this for our Government is the fact we borrowed, yet again, at much higher rate than previously forecasted in September, once again missing our forecast on borrowing and requiring us to borrow yet more. This lack of understanding of our own 'business' by the Government has to make lenders think twice about our long term ability to run the 'business' that is Britain. Further, we are not growing - despite spending astronomic sums pushing our borrowing sky high, Britain's GDP contracted again last quarter when other countries emerged from recession. Time and again, our Government has repeated the views that Britain's economy was strong and resilient to the recession and we were not overly reliant on the house market.

Time and again, the Government has been wrong.

Like a bad management team in any business, a lender will take a dim view of those managers who do not fundamentally have a good grip on their business. It is clear that our finances are run more in hope than in knowledge and lenders cannot lend endlessly against such poor management. The fact that there is a clinging belief that growth will come so just spend more, is a sure symptom that our 'management' has little clue as to what is going on.

But there is another big issue. The Government's stubborn refusal to cut costs is a major factor in putting doubt into would-be lenders' minds. Just like a person who takes a loan and blows it on champagne and good living, lenders will want to see where our money is going. If all we do is support the lifestyle of rich bankers, it has to be a worrying sign. The fact that we have written an open cheque to underwrite banks' bad business for the future is another serious issue - this is not supporting growth, this is supporting liability - to a lender for a mortgage this would be akin to another loan having a preferential or equal charge on your assets, this would have to limit the size of available loans and the appetite of the lender to risk it. Further, the Government just keeps avoiding the issue of making efficiencies and saving money. We need to show that we can create cash to help service debts so that if the economy remains in recession for longer, we can at least cover part of the 'miss to the forecast' if nothing else.

Finally, there is the taxpayer. While we are the 'collateral' for the loan as Britain has few assets left to sell, if growth is slow or the debt burden gets too high, then the Government will keep turning to us to get more of the money in tax to service the debt. If unemployment continues to grow, less tax is taken and the burden on the welfare state increases as a result, then we can borrow money to pay for the 'miss in forecast' but the debt servicing on the increased borrowing comes from increased taxes. It isn't rocket science. Lenders will observe that as time goes on and the tax burden increases, the appetite of British people to continue paying will decrease and this spells danger to the country's ability to service the debt.

Today, the Government are acting as if there will never be a time when it cannot go to the open market and raise money or take it from taxpayers. I think that lenders will start taking a dim view of Britain's ability to repay soon. From my own perspective, I am getting more shirty about where that increase in tax would be spent - if it is on wars I don't agree with or MP allowances or bureaucracy and inefficiency, I will not be happy to pay it.

I believe that making cost savings on our budget is essential to the country's good let alone to prove we can manage ourselves. We have too much flowing through the public sector and too much inefficiency - we can easily save money if we want to. We must prioritise what is important and cut costs where we can meaning some services will be affected, that's just a fact. Only when we have our house in order will be be able to see where we can invest money that we may have to borrow to create growth. Today it is just pure guesswork and it has almost exclusively been wasted on the financial sector.

Given that everyone pounds on that the financial sector is only 9% of our GDP is has taken a disproportionate amount of money on a grand scale to bail it out. This means that our dependency on this sector is far greater than its contribution to our wealth would suggest. That also suggest that we are pouring money down a drain in saving it - this is not good news for would-be lenders as right now we are funding lifestyles in the banking sector as much as if the Government borrowed £100bn before the crash and handed it all back to us in tax cuts to spend on what we wanted - they wouldn't have done it as it made no sense. But that's what they have done - but the billions have gone to a small percentage of people to not just save their careers but to make them far richer than they were before. It is that stupid.

In simple terms, if Britain were an individual wanting a mortgage and it had a budget and sources of income as it is today, our finances would not stack up. The lender would want to see how we adjust our spending and plan to grow and to be right on top of our 'managing the debt' before lending us more money.

Because the prospects right now are not good. We need to staunch the losses we are making as a nation to slow down our rate of burning money which is fuelling our requirement for more debt. Until we get that balance right - Britain is a bad debt in the making.

Bank Rip Offs

Is it comforting to know that although we may now be significant shareholders in several major High Street banks, and paying handsomely for some time to come and for all the other things we have 'agreed' to, that the banks themselves are ripping us off too. Such gratitude.

Of course, if we were big institutional or private investors, they would be treating us very nicely with possibly big lunches, promotional events or even a few 'sweeteners'. But at the grim end of banking, we non-institutional investors are being ripped off right royally.

My knowledge of this came about by a unilateral move by my bank, who I shall call to save their embarrassment, HSBC. Oops. A couple of years ago, they welcomed me with open arms after I finally got so cheesed off with Nat West after 30 years, that I changed. Along with my Business Account, HSBC, make a fine penny out of me. On arrival, they rolled out the red carpet and gave me Premier Account status as I had the Gold Account with NatWest, which in fairness to them gave you a number of good privileges one of which was a £10,000 preferential rate overdraft facility and another was a £10,000 credit limit on the Gold Card.

HSBC offered none of that mumbo jumbo but told me this account used to cost £25 per month and was only for 'high value customers' only which in hindsight was anybody swapping from Nat West. Well after a few disasters on the Business side, which have not been addressed for over 3 months, I got my Premier Account statement yesterday to find that they had started charging me £25 per month. I looked for an anniversary or something but none existed. I looked for a letter - nope, none had arrived. I had received a sales call the week before but I had sent them away with a flea in their ear. No, this was something a clever bank manager had thought up and unilaterally decided to charge Premier customers with.

My feverish mind went into action and wondered if the £25 per month gathered from all the customers would in some small way got to pay for the vast bonuses at the investment bankers end while the consumer customers rotted as usual. I also scoured my new booklet to see what fantastic new privileges I received on top of the lack privileges I already had - but there were none.

So I called the number on the statement and went through the reams of security, not knowing my PIN as I rarely called people and just used the internet. The helpful chap in Northern Ireland told me that all Premier customers now had to pay £25 per month - had I not been told? Right, so what did I get. There was along pause - it appeared I got nothing, except the 'Premier' logo on my card, remembering the things I got at Nat West. The only way he could waive the £25 per month charge was if I earned over £100,000 a year in salary and bought one of their Wealth Management products or I had to have a minimum of £50,000 in their deposit account which pays naff all interest (note the stock market has risen 40% in the last few months).

I would have laughed but he was being serious. My response was, and what if I didn't comply - oh, I could be downgraded to a normal bank account. Asking what the difference was, he couldn't actually think of any. When I pointed out that if I was to shop around and see what new account I could get for my simple needs, what would stop me from changing banks? He offered to refund the £25 that had already been taken from my account without authorisation, which got me back to where I was at the end of last month. I asked if a manager could call me to explain all this, as part of the Premier package is a mysterious relationship manager which sounds more like a marriage guidance counsellor. Again a long pause - it may difficult to get someone to call me. I have to admit I offered a financial inducement - a bribe if you like. I said I would send him a cheque for £1 if a manager called me back today. I knew my pound was safe and sure enough no one has called yet.

Call over, I have looked at the web to see what bank accounts are available and my goodness I was shocked. Most now have some kind of monthly charge even for internet banking, either implicit or hidden depending on what you want. But here is the incredible part - most are offering overdraft facilities at around 19% (some more, some less).

Read it again - 19% APR. The current base interest rate has been pegged at 0.5% for the last 4 months and banks have repeatedly missed their lending targets. Here is a good reason - getting credit costs and arm and a leg. Meanwhile, they offer only 0.1%, if anything at all, if you have money in your account or some offer deals of up to 6% if you have an unreasonable sum in your current account. Suffice to say, HSBC comes well down the Moneymarket.com list of 100 ranked bank accounts with a punitive 19.9% should you go over the agreed overdraft limit at any time, for however long, as I have found out.

For the mathematically challenged this is nearly 39 times the base rate that they are earning. In some cases, like Nat West, RBS, Northern Rock and Lloyds they are actually charging us extortionate rates using OUR OWN MONEY.

It really makes you think, as we sit aghast watching the whole debate about bank bonuses, high risk investment strategies, regulation and the like, that the whole world relies on our utter stupidity and ignorance. We bail the banks out and they sting the consumers who did so by charging us ridiculous mark ups for borrowing back our own money that we gave or lent them, and they also want to pay excessive sums to the idiots who caused the whole problem in the first place.

Who is to blame? Well the daft idiots who decided on a bank bail out plan that just gave banks money without a single caveat on how it was to be used - the Government. It could not be a worse scenario. Take credit cards, loans, mortgages or overdrafts, the minimum multiple on the base rate is at least 6 to borrow our own money back. Banks are having it easy at every end of the spectrum as they have us by the short and curlies, make no mistake. We are damned without them and we are damned with them - and we missed the one opportunity to get more favourable terms, when they needed us more than we needed them.

I am still not sure how the heck I solve my problem with HSBC, but the one thing I learnt in my short research today, is that there isn't a bank out there who is offering a fair deal. It is such a pity that none of us had a say in the more than fair deal we gave them when we bailed the swines out.

QE(D)

There's a lot of debate as to whether Quantitative Easing (QE) is actually working. The Bank of England recently agreed to increase its use of QE and will spend as much £175bn on the program.

The problem is that down at the street level, the amount of lending is falling short as banks have missed their lending targets, repeatedly. In fact, the desired effects of QE which should be a good deal more credit being offered into the market in terms of new loans, mortgages and the like have been sadly lacking. In fact, there are plenty of accusations that financial institutions are ripping off consumers and business as the cost of business loans and mortgages are several percentage points above the base interest rate of 0.5% which has remained the same for 5 months. In theory, we should have had a bonanza in new credit in the market - the effect has been pretty much the opposite.

However, banks tell us that the reason why loans appear very expensive compared to the base rate is that they have to borrow money to lend on the wholesale money markets where interest rate is a good deal higher, so their profit margins on the apparently high interest rate loans to consumers and business are not as high as we think. This does indicate that QE has not had a great deal of effect. I go back to what QE was supposed to do.

In the past, I have likened QE to champagne glasses stacked three tiers high so that there is one on the top, two on the second tier and three at the bottom. If you pour champagne into the top glass it fills and overflows and starts to fill the two glasses in tier two which subsequently fill and then overflow into the bottom tier. If you imagine that the Bank of England holds the champagne bottle and the champagne is the money they are pouring into the financial system then we see it cascade down from the institutions to banks to the public. That's the basic principle.

But what is happening, or at least there is good evidence of it in the accounts of banks, is that banks have a target to get their loans-to-deposit ratios back in order as this was a huge problem for banks like RBS. QE is the process of buying Government gilts and if we assume that most of that new money flows to banks then it is effectively 'new deposits' of the safest kind in the banks. This means that if the banks hold onto the cash then their ratios look a damn site better. If they want to make more loans, then they could get money in off the wholesale markets and theoretically this will not dilute their loans to deposit ratios too much.

It is in fact as if instead of champagne glasses in tier two of our champagne glass pyramid but two buckets which take a long, long time to fill when they are being filled by the overflow of a single glass before they overflow and cascade into the glasses below. Until the banks feel their ratios are in order, then they are not likely to offer a great deal of this new money out in terms of credit - or that's one explanation. It is probable that they would even lend this money out to other banks anyway as that is far safer lending than to the public or business anyway with all these guarantees flying around.

In a daft twist, some of the money raised by institutions in gilt sales may have also been lent to banks in the form of short-term debt securities which means that banks are getting a nice level of subsidised lending from the Government in two forms as all such debt is underwritten. Again, there is little incentive to lend this money out to less safe hands.

Finally, it seems that as the FSA has instructed banks to buy more safe debt like gilts, much of the cash flowing into the banks from QE is actually going to buy gilts again. This helps the banks' liquidity ratio by stacking up on more 'quality' liquid reserves. It provides a great killing if you sell gilts but doesn't do the economy a great deal of good - in fact, as I blogged recently, it seems that new paper money is buying a great deal of our own new debt. I am no genius, but that has to be unhealthy in the long term as you cannot keep buying high value goods with new paper money. I would like to be disproved on that as it feels like a time-bomb to me.

On the face of it, QE seems to have just pumped money into banks who have sat on the cash. It is the reason why Chancellor Alistair Darling gets so cobby with banks when they consistently miss their lending targets which was the PM's and his (along with those clever investment banks advisers) grand plan to rescue the economy. I dare say we are actually better off because of it but there is a real danger that we either put too much in and trigger rampant inflation or we put too little and we get the opposite effect. It is why QE has never been a generally sensible way of controlling an economy as Japan and Argentina found out. It's why the Bank of England has adopted this measure only for the first time in its history.

Because unlike a QED (Quad Erat Demonstratum) proof of a theory, QE is not an exact science at all. It is pure guesswork.

Why We Are Not Economists

The Bank of England did two things this week. First it decided to keep interest rates at 0.5% - good news for mortgages, bad for savings. Second, it extended its practice of Quantitative Easing beyond its agreed limit of £150bn to £175bn, raising the question of will it go further?

The £175bn has been used to buy Gilts, or Government Bonds on future debt which we need to pay to off all our recent extra spending. In fact, in certain sectors of the Gilts market, the bank now owns above 70% of the available issues. On the face of it, this is econo-masterminding on a grand scale to save our economy and we feeble-minded numb skulls watching via the news articles should shut up and let the experts run the show.

You do not have to be a genius to work out this a high risk strategy. Quantitative Easing is in fact creating money out of nothing to purchase valuable things. It would be the same as you and I getting a classy money printing machine, printing off some fresh fivers, tenners, twenties and Fifties and then walking into a jewellers and buying a stack of gold. If anyone stopped us, we could say that are good for the money as we have a some savings in the bank and it is hardly likely that several jewellers would ask us to pay with real money all at the same time. Why, couldn't they just take those notes we have given them and use them to buy whatever they wanted - no one should worry as we are good for the money - and again not all vendors will come to us at the same time asking for the real money or its equivalent.

Quantitative Easing (QE) is really like that. Except of course, that we are no allowed to print our own money. But we have a way of doing so. Many of us have indeed printed new money over the years by taking some of the equity in our houses and creating new money in its place - sadly we have cannot behave like the Bank as we have to repay the loan, the Bank apparently doesn't. Another sad fact is that many of us are in a serious situation where the value of our assets have dipped below the original debt taken to buy them or we have negative equity - some 39% of all Northern Rock customers are in that mire while around 20% of Lloyds customers are.

QE is the process of conjuring cash from fresh air and buying really valuable items with it - with complete impunity. It works on the principle used by most banks which says if I have £1m in reserves in the bank then I can lend out many multiples of that as not everyone is going to ask for their money back at the same time or create a run on the bank. Meanwhile, the more 'unreal' money you put into circulation, the less the real money is worth. That means that each time you create more unreal money, prices have a tendency to rise as vendors think if there is proportionally more unreal money in circulation, then if they raise their prices they will keep the amount of real money they want for their goods.

It's a hard concept to grasp but if for every £1 in circulation, if 10p is unreal money created by QE, then each shop should raise their prices by 10p to get £1 of real money.

Very quickly, inflation can set in as it is so attractive to print more money to to apparently 'buy' your way out of economic trouble. Countries like Argentina did this and very nearly bankrupted themselves as so much unreal money bought apparently valuable things that the country nearly collapsed as inflation went into hyper-mode to try and compensate. QE, in economic terms, is the last resort of third world countries to save themselves.

Unless of course you are the experts at the Bank of England who think Britain is rich enough to do so. With our wonderful balance of trade heavily pitted against us, our manufacturing base pretty low and our rising debt after the bank bail outs set to almost double Sovereign Debt, QE makes perfect sense. Britain can afford it.

Our Sovereign Debt is based on cashflow, largely our tax receipts to pay the interest and repay the loan at some time. As with our own households, if we leverage our equity, then we have to pay for it, whether our assets rise or fall. In reality, by creating more money to buy our own Sovereign Debt, all we have done is created the need to raise more debt in the future to pay for it, as you have bought the debt with unreal money. It is the start of a very vicious cycle.

I am no genius, and better people than I will put me right, but one thing I know for sure is that you cannot buy anything for nothing. There is always a price to pay. QE is merely a postponement to pay in the future - we buy our own debt with more debt.

Pure genius.

Some Good News, At Last?

The average price of homes rose 0.9% last month according to Nationwide. Mortgage approvals rose from 32,000 in January to 38,000 in February. It could be signs that the economy has some 'green shoots' at last - or are they?

The measure of Quantitative Easing (QE) as started by the Bank of England last month has yet to take great effect and so the positive movement cannot be put down to that measure. Besides, in a volte face by Mervyn King in the face of unexpected and bad news of a rise in inflation, it seemed this was no longer the vogue idea.

In response, for the first time 14 years, an auction of National Debt failed as the markets got spooked.

As the G20 country leaders get into full swing today, there will be another crucial time in the City as the next debt auction takes place and the markets will be wary of the outcome. To keep the housing market moving, the theory is that some of that cash has to cascade down to house buyers in the form of more liberal lending terms.

The Dangers

While this is generally received as a good thing, we have yet to agree upon a new structure and strategy for the regulator, the FSA. One of the huge problems that we have faced was the crazy and far too easy terms of lending on houses that got us all delving into our mortgage equity to spend. Northern Rock was not the only bank to lend at over the asset value in its 125% Together mortgages and most banks who lent anything over 80% loan to value (LVT) in the last year or so have seen their buyers actually go into negative equity.

Perhaps it is time to set out the rules properly about sensible lending policy at banks like a cap at 80% LVT so that we do not make some of the same mistakes again. It really is time that household disposable income came to the fore as the fuel for lending rather than the hope of equity growth and release.

Or am I asking too much?