A Happy and Prosperous Year for 2009!!

A year ago I sent the same hackneyed message to my readers in cyberspace not realising that 2008 would be a devastating year for equity and property holders pretty much everywhere. The FTSE 100 index is down over 30 pct and this has led to similar losses in UK personal pension plans. This would be exacerbated if investors held and did not get out in time bank stocks such as Bradford & Bingley, Royal Bank of Scotland and Halifax (HBOS). One of the saddest experiences was to see Alliance and Leicester throwing in the towel and deciding to go for self-immolation with the bid from Banco Santander. The Spanish bank might have built up some favours with the British government but its UK subsidiary Abbey is often cited for poor performance in the personal finance pages of the British press on Saturdays.
However, Banco Santander did act decisively and did not mess about. From what I saw about the demise of Bradford and Bingley, the Spanish bank did help out the British financial authorities by quickly agreeing to acquire the retail deposit and branch side of the former building society.
Our premier Gordon Brown supposedly rescued the world's financial system. However, I don't think he used the breathing space after the collapse of Northern Rock up to the nationalisation of Royal Bank of Scotland to shore up the financial system. You got the impression that Gordon Brown and UK Chancellor Alistair Darling were more concerned about being bamboozled by Richard Branson than mitigating the cost of the Northern Rock bail-out to the taxpayer. As it is the UK Treasury nominally controls over half of the mortgage lending but the banks are only willing to lend on very high deposits.
Brown and Darling should be praised for rescuing RBS and HBOS, who were tellingly both led by non-bankers. Unfortunately, both banks might end up fully nationalised if the terrifying forecasts about their property lending are realised.
The credit crunch has produced some more hilarious moments. A lot of rich people in the United States have taken a hit with the Madoff scandal. Here, in the UK Sir Tom Hunter can't really be a billionaire if some of his retail interests go into administration. A lot of British property companies are looking at the abyss yet again. Lending to them was not obviously sub-prime but in 2009 it will be interesting to see where companies such as British Land might end up.
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The Germans and the IMF have publicly criticised Brown's economic policies. Yet the Bank of England has engineered a fall in sterling and sharply cut interest rates. Spain and Italy must only look with envy. Greece seems to be a failed state. Yet Spanish and Italian banks benefited from not being allowed to invest in esoteric instruments such as SIVs, which have so hit Barclays. Unfortunately, for the European Union when the moment of truth came, the member countries have followed their own rescue policies. The Germans are concerned about picking up the tab for any EU package and they don't seem to be as enthusiastic about the European ideal.
A personal fact finding mission to Deutschland to find out if this actually the case is off the agenda at the moment with the current level of the pound to the
euro.
In the past few years following our current account deficit, European companies picked off British firms in areas such as chemicals, industrial gases and building materials. I supposed these investors wished they had waited and could have picked up UK PLC for less.

Michael Portillo looks at the Basra departure.

In the recent Sunday Times, former Conservative Minister Michael Portillo wrote a very perceptive article about our departure from Basra. He noted that the U.S military were getting a bit miffed about the British Army's supposed skills in counter-insurgency gained from Northern Ireland. Portillo also noted that the UK lacked the stomach for the Iraqi campaign. What was the point of having all our weapons such as nuclear etc?
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However, what was heartening was the number of posts to the article from the United States, which praised the contribution of the British troops on the ground. There was a local post saying that we are such a small country (bankrupt one at that) we should not get involved.
My view is that Prime Minister Gordon Brown, who sees his main job as cutting military expenditure, should have had the courage of his convictions and pulled the troops out of Iraq and Afghanistan, when he got the top job. We are in an impossible
situation. We can't win the wars and we will never get much leverage with the Americans. Commentators are suddenly noting that the British tortured Obama's grandfather in Kenya. Why he is going to support us?
http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5375770.ece

Apparently the U.S military are a bit chippy about British Army.

On the day when British Prime Minister Gordon Brown officially announced the timetable for our withdrawal from Iraq (conveniently a long way away from the UK unemployment figures), perhaps we can take stock of our six year military involvement in the country, which is the cradle of
civilisation. It started with all of the British ambassadors in the region trying to persuade Tony Blair don't do it. It ended with apparent criticism of our military contribution from our U.S allies. I know we are the victims of propaganda and spinning but the government can't hide the fact that Basra seems a bit of a disaster for the British Army.
I suppose the troops were let down by factors such as the lack of helicopters and defenceless transport. It was always an expedition where financial costs were paramount ie in keeping them down. The British government also failed in mobilising support from the public for the troops. It seemed to shy away from emphasising they were fighting for a worthwhile cause. I think the Great British Public are guilty of not supporting our troops.
I thought the UK military's top brass could have done more to have avoided having troops in both Iraq and Afghanistan. They were probably told that Iraq would be six months not six years but they could have done more to avoid being used for political ends.
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What if the Krauts are right about the Brown package?

I remember going to West Germany in the mid 70s when the UK was collapsing with strikes etc. I think I got 11 DMarks to the pound but I am not sure. What struck me how well-organised things were. Public transport worked while railway yards seemed ultra efficient. Then later West Germany carried out the biggest corporate acquisition ever and it has taken years to sort out with write-offs etc. Now, the Germans have the key role in the Eurozone economy. They can literally decide who stays (Spain?), who goes (Italy?). The single currency zone probably only works for countries next to Germany such as Holland.
You get the sense that Merkel does not have much time for Brown but at least we don't suck up to the Russians like the Germans. The Brown financial and economic package has not attracted plaudits in Berlin and the Germans have laughed at the VAT reduction. They remember our PM's lecturing when he was Chancellor and apparently he did not bother to listen to speeches in Europe by taking his headphones off. Yet the package has represented an attempt to fight the credit crunch and the recession. We will have to wait a while to see if it works. Brown will probably call an election before that happens.
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Roger Wood publishes one of its regular newsletters.

The accountancy firm Roger Wood has issued one of its regular newsletters. It notes the various elements of the temporary change in UK VAT from 17.5 pct to 15 pct. Roger Wood notes that you don't have to pass on the VAT reduction.
Based in Weymouth the firm notes that more firms are likely to face a tax enquiry with the efforts to collect more tax and VAT. Roger Wood also looks at the VAT consequences of housebuilders, who rent out properties they have built. the firm says it can help with "the partial exemption calculations, which are tedious and complex."
Meanwhile, the VAT reduction has been criticised by German Finance Minister Peer Steinbruck, who basically says the recession is irreversible and that we just have to grin and bear it.
To implement the VAT cut has been very fiddly in administrative terms for many companies. I don't get the sense the government appreciated that fact. It will be interesting to see if the reduction has helped retail sales.

What does 2 pct base rate feel like?

Perhaps the UK economy is slipping towards Japanese style deflation but you can't fault the Bank of England for acting. After years of glacial movements in base rates, the central bank has quickly cut base rates by 2.5 percentage points. Obviously, if they fall to zero from the current level of 2 pct then we are in Japanese territory.
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At the height of the Japanese property bubble the Emperor's palace in Tokyo had a valuation equivalent to California. Hopefully, the adjustment in British property values will not have to be so severe. The one problem is the electoral cycle here with the Gordon Brown government trying to limit the impact of the residential property decline, which is ultra important for voters.

Official denials about Euro are not very convincing.

It looks to me that the official denials by the British government about not
joining the Euro are not very convincing. It has been left to officials to poo-poo the idea of jettisoning sterling and joining the single currency. Lord Mandelson has said there are more pressing problems to sort out but the long-term objective is to join the Euro. That is not much of a denial.
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I remember when the single currency was set up there was talk of prices converging. However, the price of a coffee in a cafe is very different in Finland compared with Portugal. Also one attraction for the Club Med countries is that they would swap their weak currencies with a strong one. However, despite the D-Mark being fixed at a relatively high rate, the Club Med countries have been defenceless against German exporters. They have been unable to protect their domestic companies from competitors, which have cut costs and benefited from lower inflation.
It is in the nature of things that central banks are heavily criticised but the Frankfurt-based European Central Bank recently kept interest rates unnecessarily high when it could have supported the U.S Federal Reserve Bank when it was cutting.
This made the dollar weaker than it should have been.

A big dose of inflation will sort it out!

The troubled state of the UK economy has led to a 25 pct fall in the pound, which has been amazing in its speed. Such a fall could lead to importing higher inflation. A big dose of inflation would sort out our debt problems, if our creditors accept being repaid in depreciated pounds.
There has been fevered speculation that British Prime Minister, Gordon Brown, could choose to enter the euro locking in a low rate. Downing Street has denied plans to join the single currency but are there ideas, proposals, projections etc?
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Joining the euro would have quite a few advantages for the UK economy such as lower transaction costs with our EU trade partners. However, it might be preferable to wait and see if countries such as Greece and Portugal survive the current downturn and stay in the single currency.
Having an independent currency can act as a shock absorber if we make a complete horlicks of the economy. However, over the long term devaluation is not a road to prosperity. Sterling might be just too small in an era of mega currencies such as the dollar and the euro.

Pre budget report still not getting good notices.

The pre budget report of British Chancellor Alistair Darling is still not getting good notices. There has been a lot of comment on the future increase in national insurance contributions, which is a tax on work. It also does not help improving employment levels.
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There was also concern at the rise in government borrowings. I suppose we could fall in a debt trap although the general assumption must be that a big dose of inflation will sort it out. This might fall foul of bond vigilantes, foreign investors will not buy our gilts (government bonds) because of the sterling depreciation.