9 May 2015, 6:41pm
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  • England’s shy Tories take the day

    Surprise result to the election it appears, well a surprise to the punditry though not necessarily to the odd canny investor :)Shy Tories turned out in force and David Cameron is back in No 10, without the moderating influence of the crybaby Nick Clegg, who marched his party to their greatest success and their greatest doom all in the same action. I had a temptation to go with the headline England goes John Galt but that’s probably taking it a little bit too far, even in search of a decent headline. Why are shy Tories shy? – presumably because of the Scruton doctrine

    ‘Leftwing people find it very hard to get on with rightwing people, because they believe that they are evil. Whereas I have no problem getting on with leftwing people, because I simply believe that they are mistaken’

    Most people pursing financial independence will probably benefit on the finance front relative to other possible outcomes, some of the key items of the Tory manifesto are

    • Take everyone earning less than £12,500 pa out of Income Tax altogether 1

    Now on a technicality pension income doesn’t count as ‘earning’ although it’s subject to income tax, but the Tories probably don’t want to piss pensioners off either. The changes in personal allowance are quite transformational for the value of pension income, particularly when combined with Osborne’s changes. Before the Coalition, the personal allowance was £7,200 – with the best will in the world it’s probably a struggle to live well with an income below that even if you have paid your house off and gotten shot of the kids, whereas according to TFS £10,000 p.a. allows for relative luxuries including a serious consumption of alcohol which is just as well since it appears that pensioners are a bibulous bunch going on regular benders.

    I could wish for an end to the theatre of of passing laws to try and embed rises in taxes etc. The whole point of government is to pass laws, and to unmake them, so this is a damn fool waste of parliamentary time. As the old boy Yoda said, do or do not, there is no try. There’s no need for a faux legalistic framework, simply follow your manifesto and don’t put up the specific range of taxes you said you wouldn’t.It’s not like last time, Dave, where you could blame Nick for stopping you implementing Conservative manifesto promises. And let’s face it, you landed the mother of all sucker punches by getting Nick to renege on his no rise in tuition fees 2010 manifesto promise 😉 Nearly all voters have a dog in that race – either their children entering university or their grandchildren

    For those working and earning well I guess

    • we will raise the 40p Income Tax threshold to £50,000

    will be sort of welcome, though it’s not such a huge raise on what it was when I was working, unless it interacts with the notably raised personal allowance, in which case the combination is probably a decent lift on what it was five years ago.

    And yet the Ermine does wonder if we will get the 1980s back. Let’s have a song

    because on page 8 there is

    • We will find £12 billion from welfare savings

    Let’s hope that the theory is true that in the developed world we are all becoming more peaceful and less violent people because of the removal of tetraethyl lead from petrol. Caitlin Moran makes an interesting point in the Times (paywall, but free syndicated version in the Australian – Google is always your friend to read the Times for free – search the title :) )

    Push the highest rate of tax for a few thousand people to 90 per cent and let the bin-men go on strike. Annoying but not fatal. If you are generally secure, a government can inconvenience you, make you poorer or make you angrier – it can, let’s be frank, be a massive, incompetent, depressing, maybe even immoral pain in the arse – but you, and your family, and your social circle will survive it. It is unlikely that the course of your life will be much different under one government than the next, however diverse their ideas.

    By way of contrast, what’s the worst – the very worst – that a government policy can do to you if you’re poor? Food-bank poor? Dependant-on-the- government poor? Well, everything. It can suddenly freeze, drop, or cancel your benefits – leaving you in the panic of unpayable bills and deciding which meals to skip.

    I have been lucky enough to have been in the first category, and now is time to tip a hat to Lady Luck, particularly as I came from a working class background, I grew up in a much much poorer Britain but perhaps a kinder one, and particularly one a bit more meritocratic. It’s not all luck – I didn’t spend money I hadn’t earned other than having a mortgage, which I did pay off, and I didn’t have children I couldn’t afford.

    We are all much, much richer now in material terms, but that is not enough – the contrast between us is widening 2it’s now much, much greater than they were when I was growing up. The rich are richer, strict rationalists will say the poor are richer than they used to be too, but humans are social animals who compare themselves against each other, so there be trouble in this materially better off paradise. And that, sadly, is part of the problem with how rich or poor we all feel, together with macro shifts in employment that are destroying the ability of the Average Joe to earn a living enough to buy a house and raise up to two children. It’s hard to establish what is really the cause of this – some blame the Establishment, some blame the inherent complexity and interconnectedness of the world and a loss of shared narratives, some blame peak oil and resource crunches 3, some blame the rich for ratcheting up the expectations of us all and pricing us out of the markets for fundamentals.  Take your pick, and of course remember the bearish argument always sounds smarter.

    I really hope that those £12bn of benefit cuts (can I nominate the £2bn welfare benefits for rich landowners be included in the roster of cuts) don’t give us another roll-call like the 1980s – Brixton, Toxteth, Southall, Lewisham, the Battle of Trafalgar Square. In a narrow sense I will probably be richer with the result of the elections, though there probably isn’t that much in it – I am not rich enough or poor enough to have been in great hazard from any likely government action. But I am fearful – of social unrest. As a student in London I shot grainy images of the soup kitchens under Charing Cross railway arches. That was not the Trussell Trust, but maybe it’s where it is going.

    Though I am in good health I am fearful of what will happen to the NHS in the next 30,40 years -I will need a larger emergency fund to deal with that, although at least the fear and loathing that is the US medical system is still some distance away.

    The Ermine will become richer soon…

    because I am getting older, specifically at some point I will pass the 55 mark and all of a sudden I will get hands on some of my own savings 4. Along with the saying that coffee is there to help me with the things I can do something about, red wine to help with the things I can’t, it is time to look to some of my values. I used to have a CAF card from years ago, but on that fateful day in Feb 2009 when I realised I was going to retire early I shut down all such activities. I have tried to reactivate this, because although I will become richer I will take every step not to pay tax 5. However, even as a non-taxpayer but an investor I do pay some tax, just not very much, in the form of dividend tax credits. There are in fact two great benefits of using a CAF card. The most specific one is that it makes it possible to take advantage of gift-aid and have it recorded and totted up in a way I can see, and presumably print off in evidence should I ever need to for HMRC, along with my dividend tax credits – I can track that I am not over-claiming.

    It should be noted that you can only set dividend tax credits in unwrapped accounts against Gift Aid – so ISAs don’t count. However, I have significant unwrapped holdings, and once I get hold of my own savings I will prioritise transferring SIPP money into ISA savings over unwinding capital gains allowances. So I will probably have enough unwrapped dividend tax credits for my relatively modest plans, at least until I become a taxpayer again as a pensioner.

    The second benefit is in some ways far greater. The trouble with charities nowadays is that they have adopted many of the traits of business, and in particular once they have your personal details they will pester you shitless with requests for more money, and if you’re unlucky, sell your details to some sort of do-gooding sucker’s list to other like minded sorts. I originally got a CAF card to avoid that malarkey. The Ermine has a simple principle when it comes to charities – unless there’s some sort of return, like with my RSPB membership 6 where it actually does something for me to reveal who I am then I want anonymity. Particularly if it’s a charity that deals with human problems, anonymity is king – don’t call me, I’ll call you, because of this selling of mugs lists.

     

    Notes:

    1. Conservative Manifesto 2015 page 5
    2. As an example, CEO pay was about 40 times that of the grunts (US study, Table 6), compared to over 200 times now
    3. I generally fall into this category, though I subscribe a little to the other camps too
    4. Yeah, I know, I don’t so much become richer but I get access to my own money
    5. I will run out of road on that once I draw my main pension, but I still have a few years of flying under the HMRC personal allowance to go
    6. where I get into RSPB reserves like Minsmere that normally charge for free or effectively prepaid with membership. Most RSPB reserves don’t charge.
    1 May 2015, 11:56am
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  • Representation without Taxation

    There’s an election in the offing in Blighty, as it’s been nearly five years since the last one. There’s much hue and cry, although to my eyes less separates the three main parties than there used to, much is about the details and less about the big picture. Some of the big picture stuff is changing, and it’s changing is some pretty rum ways.

    Many years ago, in the 1770s in the reign of good ‘ole King George there was a bunch of uppity upstarts in one of the colonies of the Empire that got all het up about paying tax without any say in how it got spent, and their rallying cry was no taxation without representation. They had a point, and the rest is the history of the United States of America, no longer a colony for over 200 years.

    Now one of the aims of becoming financially independent is of course to minimise taxes. One of the curious twists of fate in Britain is that it’s much easier to do that when you have money – you can influence how much tax you pay by using pensions and by controlling your income. As a wage slave I was always a PAYE employee, so the main option I used was using pensions, but the ways of controlling your income are much greater for the self-employed. In particular paying yourself in limited company dividends can be a lot more attractive that paying yourself in cash income.

    However, a more recent accelerating trend seems to be increasing the personal allowance, which lifts more and more people out of the tax system altogether. Of course they still pay consumption taxes like VAT; another curious twist of fate is that those chasing financial freedom probably pay less of this sort of tax simply because you probably buy less Consumer Stuff.

    From a personal point of view, that’s dandy. And yet I do wonder what will happen as this trend increases, and we have a larger and larger number of people represented in elections but who aren’t personally impacted by the grubby costs of all the jam today we would like. Some of this trend is simply the results of increasing inequality of income and wealth, of course – if the 1% own 99% of the wealth and most of the income then it isn’t surprising that most of the tax revenue comes from a smaller tax base. Although I don’t agree with all of his conclusions, I think the Torygraph’s Jeremy Warner makes an interesting case in his article about the tax and benefits system –

    it also makes the government dangerously reliant on those with increasingly less direct interest in what the money is actually spent on, the more so given the growing focus on pensions, health care and other welfare entitlements. The contributory principle in taxation has all but disappeared. By progressively raising the tax-free allowance, the Coalition has turbo-charged this process of disassociation between revenue providers and users.

    Obviously the Torygraph is there to bang the drum for Wealth, but his case is supported by Mona Chalabi’s brilliant Guardian article that shows that higher rate taxpayers contribute the vast majority of tax revenues, though they are only 15% of the taxpayers by number.

    Contrast this with the situation when the Ermine started work in 1982. Ignoring university infill summer jobs and suchlike, this was my first real job, a junior test engineer lining up electronic sensor heads. I was intrigued to find that after compensating for inflation it paid better than the average wage is now. However, the personal allowance in 1982/83 was shockingly low – £1565, so most of that salary was taxable, and the basic rate of income tax was 30% with an additional ~9% national insurance. The young Ermine paid nearly 40% tax/NI on a higher proportion of his salary at the beginning of this career than the 2006 higher-rate taxpaying Ermine.

    People in those days were much more involved in the costs side of the tax and spend equation than they are now – if the personal allowance goes up to £15,000, which of course I am all for, personally :), then a typical two-person household earning the average UK household income of £27,000 need not pay any tax at all if they both earn roughly half. The whole tax/spend/representation thing is very different to how it used to be. Perhaps the argument is that inequality has gone up and so this is inevitable.

    Inequality has risen since 1982

    Inequality has risen since 1982

    There’s some support for that argument in the change in GINI coefficient since 1982, unfortunately although the figures show inequality has increased I have no feel for how significant a shift from ~33% to ~37% actually is.

    Maybe representation without taxation is just what you get as power shifts from labour to capital. I figure it’s going to lead to some strange places at times. It’s easy to make the case to no taxation without representation. I’m not so sure the other way round won’t have difficult birth pangs of its own…

    Working for The Man post 45 is a risky business

    The Man is an unreliable dance parter, the hazard is in relying on working for The Man into middle age. The LA times has a mini series on the shrinking middle class. Unlike the British middle class whinathons and SAHM child benefistas and grizzling journalists that I’ve taken the piss out of earlier these guys are closer to the manufacturing industry end of things, and they seem less culpable than our lot with school fee ambitions for their progeny. All these guys seem to want is a house, two cars and a dog –  one of them sums up the feeling

    The promise that your kids would have a better life than you, with the house, the two cars, the dog and everything else, it’s gone.

    In fairness to the promise it  didn’t go away, it moved eastwards with globalisation. They were probably chuffed with how cheap DVD players and iPhones are these days… But it’s tough to feel good about that when it’s your end of the boat that’s sinking. Two things are common to all their stories:

    They relied on an employer in some form or another. The other is just like me, they failed to lift their eyes to the distant horizons, though they had fewer savings than I had.

    I don’t know the stats for the US, but in the UK most of us work for an employer. Fewer than 10% of us were self-employed when I started work in the early 1980s, rising to 15% in 2014.

    The Man seems to like ’em  25-35…

    You could could be lucky, get all the way to retirement working for him in one form or another. But The Man prefers younger models usually – they’re cheaper, probably more pliable, and in some industries like tech there’s the Zuckerberg doctrine of which more later. For occupations that need some skills he doesn’t like ’em too young, because he can’t see track record, but I’d say late twenties to mid thirties seems to be his favoured the age bracket, old rich favouring the young is not just a dating problem.

    There’s more change in technologies and ways of working now. Pretty much everything a young web designer starting now knows will be hopelessly obsolete in thirty years’ time, and this trend devalues and depreciates skills quicker than before. On the flipside things often improve faster now and we will probably be able to do more with less in those thirty years, whatever the equivalent of the Internet will be then. For consumers and users this isn’t all bad at all. There is a corollary of this.

    Your peak earnings are probably coming earlier in your career than for previous generations

    This is a terribly difficult one to tease out of the statistics. The ONS published this report that seemed to indicate this is true –

    1410_onswages

    more »

    25 Feb 2015, 6:11pm
    economy shares
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  • others are greedy and the Ermine is fearful

    You want to be greedy when others are fearful. You want to be fearful when others are greedy.

    Warren Buffett

    Much brouhaha about the FTSE 100 at last closing above the level of its 15-year old dotcom high in December 1999. The rational investor will tap a copy of his efficient market hypothesis, sigh and wonder what all the fuss is about. Trouble is the market isn’t efficient, it’s all about the madness of crowds in the short term. And it means they’re greedy 1. I haven’t worked out what the hell we are doing up here for a couple of years now, and I’m still puzzled. As for the Americans, they’re drunk on it.

    And I can’t help a shiver go down the spine, because unlike whippersnappers like this, I was there in the early days of the Web, with an ESI account (eventually bought out by Charles Schwab and then bought out by Barclays). A group of us late thirty-somethings  dreaming at work – I still remember the welcome note the young Ermine sent out when I set up the internal company share discussion board

    “The aim: to make us rich. Very very rich”

    Asshole. Sorry young Ermine – you were at least circumspect enough to not risk money you couldn’t afford to lose. There was a heady and peculiar feel about it all. One fellow did do very well in 1999. Which was a bastard when it came to paying the capital gains tax on that lot the next year and his total portfolio was worth less than the CGT bill! Time to remortgage – it’s not meant to be like this… I was a timid Ermine, mucking around with no more than about £10,000 in total so I was spared that sort of slaughtering. £10k cash is worth about £15k nowadays. It was also worth more to me then because it was a larger proportion of my salary than ten years later.

    Looking back at the paper records of that time, the Ermine wasn’t as hammered as much by the dotcom bust as I thought, because I withdrew a lot from my trading account in ’99. I’m not sure why. It felt rough because I knew Mr  CGT cock-up personally – I was awestruck by the total abount of money he was trading but didn’t have the balls. It was a stupendous amount of money  – only fifteen years later have I seen that amount of valuation in an account summary of my own 2. So I knew a few people who got hurt big, whereas I just had the black tip of my tail pulled in comparison.  I’d really like to be able to claim I saw the denouement coming but I probably wanted to go on holiday with DxGF and also to start funding my ISA, which does show the classic dotcom story (I don’t have all the portfolio valuation statements but I put £7100 into this over a couple of ISA years before losing interest)

    The Ermine dotcom ISA - £7000 into about half that over three years

    The Ermine dotcom ISA portfolio valuations – cash in of about £7000 into about half that over three years

    I got good value out of the experience, because I learned what not to do. Do. not. Churn. For God’s sake, just don’t

    bunch of contract notes from two years of my dotcom days

    bunch of contract notes from two years of my dotcom days

    One of the great things about investing in those days is that it was so much more tactile – you got contract notes in the post each time you bought and sold. I filed mine, and spread the suckers from two years out. One of the obvious failure modes of my early investing days is right out there in plain sight – each one of those tickets cost at least £10 I think on the turn. Yes, volatility was shocking in the dotcom tech days and you could cover the cost of churning in the runup to the bust. But to be honest it didn’t really matter what you held then, so why trade all this shit when it notched down and buy something else that was racing up. These days if you want to trade over days and weeks go spreadbetting young man. Better still tune out of the wall of noise and chill. I keep these contract notes as a memento mori. Do. Not. Churn. If you’re not a daytrader then if you aren’t prepared to hold it for six months then don’t damn well buy it, and if you are a daytrader then you are Frankie and The EscapeArtist wants a word in your shell-like.

    On the other hand, like a good little regular index investor, I started investing in a virgin Tracker ISA ( I believe it tracked the FTSE All-share but could have been FTSE100. Had a good-for-the-times TER of 1%)

    Virgin tracker ISA

    Virgin tracker ISA

    I was buying until 2000 (the dotcom ISA took over from then 😉 The pattern is not shockingly different – everybody got hurt in 2000 and may of us quit investing by 2001. From the looks of these charts I guess learning that cost me about £5000. When you look at the cost of numbnuts trying to charge you for sure fire courses on how to be a top trader the cost of attending investing school at the University of Life isn’t so bad. The lessons for me were –

    If you’re gonna stop investing regularly in the stock market, go on strike at times like 1999 or maybe now, don’t go on strike in the bear markets. That’s easy to say but still hard to do. It gets easier to do after you’ve seen it work. It’s one of those gut things.

    Do not churn. If most of your holding periods are less than a year you are a churner 3 A lot of your return is in the waiting.

    Don’t chase momentum. If it all looks high, look for something low. And still check the bastard out – sometimes it’s good to sit tight. Unlike chuck Price you don’t have to get up and dance, and at the paltry levels of interest these days holding cash in a S&S ISA (or even in a Cash ISA, not that that’s really worth the candle either) is a reasonable thing to do. Low inflation/deflation is the cash-holder’s friend. It’s not gonna last

    Note from my index investing career that index investing will still not save you if you are Dumb Money and chase momentum. Index investing is a method, not a solution.

    So what is it about now? Look all around you and the highway is littered to the horizon with cans kicked down the road by politicians eager to make it all go away for another five years. There is stupendous wreckage in the eurozone. The Chinese, Japanese and everyone else seems locked in a deadly embrace to trying to outprint money and make it some other sucker’s fault. Trade has slowed to the extend that we have overcapacity in world mining, commodities of all sorts and the oil price had tanked for  lack of demand due to a lack of economic activity. Warmongering sociopaths from Putin to the vexatious nutcases all over the Middle East are working out their childhood traumas on unfortunate legions of their fellow human beings. Grexit has been postponed, not resolved.

    Apart from that everything is dandy. I know that you shouldn’t be a doomster but that doesn’t mean you have to empty the Kool-Aid in one go. The valuations of the developed world seem mad given the state of the place. Let’s hear it from Citi’s Chuck Prince in 2007

    When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

    All those damned kicked cans littering the highway, too, piling up and getting under people’s feet and making things more complicated. The ermine is fearful. Not fearful as in 2001, having lost a shitload of money and wanting to sit out the next dance. Fearful as in 2015, trying to work out what the hell to do with the coming years of ISA allowance because all those other blighters seem greedy.

    The market can stay irrational for longer than I can hold out selling my own stuff back to me. I only have another three years of CGT holdings to liquidate, and then I am going to have to start putting real money into my ISA as opposed to selling my unwrapped holdings back to myself, I hope this one’s gonna blow before 2018…

    There’s also a sneaky little corollary to that. If an when it does blow, don’t just load up my ISA. Load up an unwrapped trading account too, to sell back to myself in the Kool-Aid euphoria years like now. What did that fellow Greenspan call it? Irrational exuberance. His countrymen are doing that right now IMO.

    Notes:

    1. well, it also means our govenrments have printed a shitload of money that needs to stick to something I guess, and in the UK housing and equities is as good as any.
    2. I am lucky this is largely in an ISA
    3. There’s nothing inherently wrong with churning though your costs start to rise. But I have learned that I am absolutely crap in that mode. so I don’t do it – I favour being catatonic when investing.
    12 Feb 2015, 2:15am
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  • Zorba the Gr€€k is still skint after five years

    As the euro continues to fall amid disappointment that the EU has not come up with a solid rescue plan for Greece, Zorba makes an appearance

    Patrick Blower, Feb 2010

    It was five years ago to the day that I saw this livedraw on what was then the Guardian’s Comment is Free 1. Only one of the leaders in the cartoon is still standing after the five years, – five years is a really long time in politics.

    In those heady days, a nervous Ermine was still at work, but had roughed out a flight plan for the exit. All this turbulence in the market seemed hazard and opportunity, and I was convinced the Euro was going to blow, the internal contradictions of a finance union without a transfer union, the lack of common cause.

    None of these things have changed, but I underestimated the doggedness with which people cling to old forms, and of course perhaps the preparations the rest of the eurozone felt they needed to do to bolster the creaking edifice against Grexit. Even now it’s hard to say – will I look back at this in five years time and wonder how nothing has changed? Exactly how long can the markets stay irrational while the entirety of the Eurozone grinds its way into insolvency.

    Just like then, it feels that the forces are gathering for a showdown. It is in points of change that opportunity arises and destruction threatens. The five year anniversary seems to be a good one to invoke the spirit of Zorba the the Gr€€k once again. The world has still not recovered from the 2008 financial crisis, there is still too much capital chasing not enough productive assets. Greece is a symptom as well as a cause – the Eurozone serves two masters. As Lincoln observed the problem in a different field

    A house divided against itself cannot stand. I believe this government cannot endure, permanently, half slave and half free. I do not expect the Union to be dissolved — I do not expect the house to fall — but I do expect it will cease to be divided. It will become all one thing or all the other.

    Abraham Lincoln, 1858

    So too with the Eurozone, it lumbers endlessly from crisis to crisis, and it is time for it to become one thing or another. It has crushed too many dreams already, and it needs to shape up or to start to cut away the dead wood, and become small enough to for a political and transfer union to hold. Or the United States of Europe needs to be constructed.

    To call in another American view on the fiasco, I was glad to hear Greenspan finally call it out in public

    “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognises that parting is the best strategy.
    […]

    The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”

    Until that comes to pass or the whole misbegotten enterprise disintegrates from its internal inconsistencies the rotting corpse that was wounded by the original financial crisis will endlessly stink up the place and ruin Europeans’ lives – particularly young folk by the looks of it.

    As a young man I was unlucky enough to graduate into Thatcher’s first recession in 1982, but although deep it recovered relatively quickly compared to the 2008 recession that seems to be combining with other strategic shifts in the workplace. In Britain although these problems may be affecting the quality of jobs, in the Eurozone and southern Europe there seems to be grinding youth unemployment as well as a general protracted recession – five years of that is a serious hit on one’s working life. No wonder there is a Greek youth brain drain.

    Can’t pay, won’t pay

    The Greeks are never going to repay the debt in Euros. Writing the debt off which is what Syriza seem to want isn’t going to help them in the long run either. They are yoked by the Euro to people that like to live in a different way. Let’s see what happened in the past. I hit up these guys for some historical USD to GDR, GBP and DEM from 1990 to 2001. I then normalised everything to a value of 1 on Jan 1990. Basically you needed 2½ times as many Drachma to buy a US dollar in 2000 than you’d needed 10 years before. Germans, who didn’t exactly have a great 1990s needed roughly the same and even in Blighty we only needed about 20% more GBP to buy that dollar. You can quibble as to what sort of store of value a US dollar represents but the difference cancels that out. There’s something different about the way Greece likes to do things and its currency reflected that.

    As time went by you needed more and more drachma to buy that US dollar

    When Zorba the Gr€€k was drawn, roughly the same distance as is covered by this chart had elapsed after the drachma was crash-locked to the Deutschemark’s proxy the Euro. Now it’s 1.5 times the space covered by this chart. There’s no point in resetting this to zero now, it’s a structural difference. In a true currency union like the United States, rich parts continuously transfer money to poor parts, else a New York City dollar would appreciate against a Detroit, MI dollar – in the chart above you’d need a lot more Detroit dollars to buy a beer in NYC at the end than at the start.

    The Greeks may be the canary in the coal-mine

    Those Gr€€k €uro debts ain’t gonna get paid. There’s a history lesson in this for the rest of us too. In the good times it’s easy to believe in financial promises, but in the end a lot of finance is just that, promises. A lot 2 of my ISA is also promises, so are all those British mortgages taken out of overinflated house prices at low interest rates by people who will never earn enough in a lifetime to discharge those debts unless something changes. At the moment the lens is focused on Greece, but it can move, and maybe zoom out. Odd things are happening in the economy – we have created a lot of money to buy off the day of reckoning in 20o8 and after seven years it’s still not finding things of value to stand proxy for, companies are hoarding cash because they can’t invest it to make things people can/will buy more of. It’s not necessarily all bad. Maybe it is the final denouement of consumerism -the Post Carbon Institute’s Richard Heinberg in a curiously upbeat mode

    The practical result of declining overall societal EROEI 3will be the need to devote proportionally more capital and labor to energy production processes. This is likely to translate, for example, to the requirement for more farm labor, and to fewer opportunities in professions not centered on directly productive activities: we’ll need more people making or growing things, and fewer people marketing, advertising, financing, regulating, and litigating them. For folks who think we have way too much marketing, advertising, financialization, regulation, and litigation in our current society, this may not seem like such a bad thing; prospects are likewise favorable for those who desire more control over their time, labor, and sources of sustenance (food and energy).

    […]

    The energy glut of the 20th century enabled us to embody energy in a mind-numbing array of buildings, infrastructure, machines, gadgets, and packaging. Middle-class families got used to buying and discarding enormous quantities of manufactured goods representing generous portions of previously expended energy. If we have less energy available to us in our renewable future, this will impact more than the operation of our machines and the lighting and heating of our buildings. It will also translate to a shrinking flow of manufactured goods that embody past energy expenditure, and a reduced ability to construct high energy-input structures. We might find we need to purchase fewer items of clothing and furniture, and fewer electronic devices, and inhabit smaller spaces. We might also use old goods longer, and re-use and re-purpose whatever can be repaired. We might need to get used to buying more basic foods again, rather than highly processed and excessively packaged food products. Exactly how far these trends might proceed is impossible to say: we are almost surely headed toward a simpler society, but no one knows ultimately how simple. Nevertheless, it’s fair to assume that this overall shift would constitute the end of consumerism (i.e., our current economic model that depends on ever-increasing consumption of consumer goods and services). Here again, there are more than a few people who believe that advanced industrial nations consume excessively, and that some simplification of rich- and middle-class lifestyles would be a good thing.

    I grew up in a simpler London, and when I look around me at the shocking waste and inefficiency of consumerism compared to only 40 years ago I do wish we could distil the many great and genuine innovations and improvements from all the destructive busywork and tat that takes away.

    Why? For crying out load, why?

    Consumerism. Why did this misallocation of resources happen?

    Perhaps Greece rubbing up against the evil heart of darkness in the common cause assumptions of the Euro is reminding us that in the battle of illusion against reality the latter tends to win out over time. We tell ourselves many stories round the virtual campfires weaving meaning into the flickering shadows on the wall. Although these myths are symbolic, not all of them are true. It is going to be an increasingly difficult task to find a way of turning cash into usefully productive long-term assets against a background of secular stagnation, and making easy assumptions is probably not the way to do it. Much of the appreciation is asset prices like shares and houses doesn’t reflect an increase in underlying value or future income stream in the case of shares. It merely reflects the increased amount of QE money chasing those assets. Anybody could be a great investor over the last few years with that sort of tailwind, though the day of reckoning seems to be getting closer with the help of our Greek friends shining a light on what unrealistic claims upon the future look like.

    The Greeks want to live with a currency that depreciates faster than the Germans. It is called the drachma. Possibly if Northern Europe wants its money back from the repudiated € loans, sue Goldman Sachs who aided the Greeks get into the Euro under false pretences, and good luck with that. It’s always good when seeking repayment to pressure people who actually have some money, and the Vampire Squid would seem to be where a lot of the money ended up 😉

    Goldman Sachs arranged swaps that effectively allowed Greece to borrow 1 billion Euros without adding to its official public debt. While it arranged the swaps, Goldman also sought to buy insurance on Greek debt and engage in other trades to protect itself against the risk of a default on those swaps. Eventually, Goldman sold the swaps to the national bank of Greece.

    The drachma is dead. Long live the drachma.

    Notes:

    1. Sadly along with it’s other faults the Internet is not forever – because meaning is held on the transitory relations of bits of spinning discs and network switchery that somebody has to pay for the rust that is linkrot  never sleeps. Analogue media coded information in what they were and didn’t need a constant supply of power and rent, though they had their own decay mechanisms. I was surprised to find this was hard to get hold of again after only five years. For me at least the Guardian’s link doesn’t play, but the artists own livedraw site still has it. I used a youtube link
    2. okay – all of it – a solar flare/EMP would vaporise the lot, but even without that some promises are more hand-waving than others
    3. energy return on energy invested – how much energy you have to invest in getting energy

    Here’s to interesting times in 2015

    Ah, New Year, a time for revolutionary change? Sophie Heawood has some point that January is a bad time to start anything new in, we really should have gone for September. It’s brass monkeys out there and the cruel coldest month of February still awaits. The fire festivals of the shortest day have passed. Heck, after the excesses of Christmas we could at least have advanced the 28 day shortest month to January to give wage-slaves a mini-boost. Mind you, when we look at the results in places with “Doros”, a double salary at Christmas maybe that’s not such a good idea. The WaPo is uncharitable about these things, and Fortune magazine is particularly cutting about giving wage-slaves festive breaks

    The 14th salary works like this: Greek workers get their annual salary in roughly 14 instalments. On top of 12 monthly payments, employees receive double their paychecks in December, right in time for Christmas consumerism. They also receive half of their monthly spending in the spring to shell out on goods for Easter. Then they get another half-salary boost in July, before their traditional summer vacation.

    In the interests of balance, Slobber takes this kind of thing to task, but hey, never let the truth get in the way of good journalism I say 😉

    Glastonbury Tor in the mist

    Glastonbury Tor in the mist

    The Ermine spent a while mulling things over the Winter Solstice in Glastonbury, and read a lot. Reflections and ruminations are not the things for a New Year. It’s about carpe diem, the opportunities on offer, and what with the return of the Eurozone crisis, an election here in the UK and the Russian brouhaha there is the scent of hazard and opportunity in the air. We haven’t had a good rumble in the markets since 2011, and it’s getting harder and harder to turn a decent yield with high valuations.

    It’s a funny old world – the price of oil, for instance, is lower than the marginal cost of new production. UTMT has a nice piece on this. There’s a link to the old boy Tim Morgan, he of ex Tullett Prebon fame and the report “Britain – Armageddon – there’s no way out of here’. Tim’s in a new guise and brings us the pithy summary

    what we are witnessing is not the dawn of an age of cheap energy.

    Low oil costs look like good news but when it’s lower than the cost of new production then it isn’t. Unless we’ve all decided to use a lot less energy, and lest we forget just how hard that is, the humble refrigerator in your kitchen is consuming the rough equivalent of the daily output of two horses.

    after a long glide, it’s time to see if the engine of finance starts again for me…

    This could be the year that I return to having an income. I will have have coasted on savings and investment income for three years since leaving work – that’s 10% of my working life before I draw a DC pension, which is indeed made up of more of those cash savings. One of the bizarre things about financial independence is how everything is set up to qualify someone’s financial probity in terms of their income. With no income I am a financial deadbeat in the eyes of banks. At least I didn’t have trouble switching energy provider, but I struggled to borrow money and probably wouldn’t get a credit card, a mobile phone contract or a loan. Most of what I borrowed has come back to me now and the rest is coming it over time. but as usual you can’t do anything with cash these days…

    The Lorax. He's a fellow who can tell you a thing or two about buying thneeds on your credit card

    The Lorax. He’s a fellow who can tell you a thing or two about buying thneeds on your credit card

    It’s perfectly understandable to banks, apparently, for you to want to spend money before you’ve earned it, particularly for your consumer thneeds – but have assets in the wrong place or tied up in pensions or an ISA and lenders aren’t interested. So I am finally returning to the salaried – or rather the pensioned, maybe, and cease being a financial unperson, when I get my cash savings back from those nice fellows at Hargreaves Lansdown with the Chancellor’s 20% bung on top.

    I was/am a salaryman at heart

    The Ermine is a maverick, but I have to say I was entirely conventional and non-entrepreneurial in that I hate not having an income, even though I had enough savings to cover the intercession. Spreading out previous savings, indeed making one ad a half years savings stretch to three years just doesn’t feel like a stable situation. For starters, how the hell do you qualify the answer to the Micawber question – am I spending less than I earn? I could do this as a logical and arithmetical exercise given the time before I could sensibly draw my pension, but if you have no income then the gut feel is always

    ‘spend as little as possible, this sucker’s going down, play for time’

    It made me over-cautious in spending, particularly in the early days. Unlike the salaryman, there’s no easy way to qualify a good rate of spending with no income. You have to take everything with you once you leave work – and your savings need to address not only your running costs but also the risk of the unknown unknowns. Those risks are much higher at the start of the journey than at the end, so it is rational to minimise spending at the start of any period of living off fossil savings 1. Playing for time sounds okay and sort of fail-safe, but time is also a fossil resource – they ain’t making any more of it.

    Once I have an income the answer to Wilkins Micawber is easy – as long as my spending minus my dividend income is less than my pension income then old Wilkins will be happy 2. I had no mental model of living without a steady income because all my adult life I had had one. Unlike most UK personal finance folk, my retirement was an unceremonious scrabble for the exit rather than a carefully planned strategy.

    But it worked in the end – I can see my way to getting access to my savings. It was overly pessimistic to assume I would have zero income across the intercession between finishing work and drawing a pension, although I do appreciate the changes that made it possible to swap savings for an income boost, and hope they aren’t rolled back by the new Government in May. The changes in the workplace that turned what had been an interesting career for the most part into a gamified paint-by-numbers miasma of mockery, metrics and mendacious quarterly ‘evidence’ for the performance management system is also providing new routes to market and ways of microselling niche content that offer occasional opportunities for a more creative Ermine following my interests. I don’t chase work, but I don’t turn down sales if I’ve already done the work 😉

    In the Economist’s The Future of Work series there is an interesting throwaway line about the looming future of work

    The on-demand economy is unlikely to be a happy experience for people who value stability more than flexibility: middle-aged professionals with children to educate and mortgages to pay.

    though it will be great for those who haven’t picked up financial commitments like mortgages, children, dogs, tastes for fine living and debt. Provided they have talent, that is. Indeed the drumbeat of the changing world of work is getting louder, and it favours the opportunist and the unattached/uncommitted. It makes it easier for a retired Ermine to turn recordings into dollars where previously they would have been accumulated as reels of tape, but it seems an increasingly rough ride for many. Which is presumably why we Brits thrashed seven bells out of our credit cards in November. To the tune of £1.25bn. The Ermine has a confession to make – I was part of the problem that month. In my defence I bought productive assets and breathing space with the money, and I have half of it back as cash. No consumer goods were bought with it, but I fear that is not the case for a lot of that £1.25bn.

    So I’m looking for opportunities in 2015. Maybe this is the year that the Euro blows, and those oil prices may offer opportunities for buying oil firms and service companies at lower prices. I can’t see the world living without conventional oil for a good time yet. I’m not doing shale, but although Vlad’s always got a really sourpuss look on his face these days he’s in charge of a lot of real fossil fuels. Dude, you need to lighten up.

    Vlad on the horn, irreverently swiped from UTMT

    Vlad on the horn giving some poor blighter the Third Degree, irreverently swiped from UTMT

    2014 shares review

    Looking back, overall 2014 wasn’t that bad for me, the Ermine annual unit value 3 is up over 15% (the FTSE100 total return is up 0.72% in 2014 despite all the bitching that it lost in SP terms). This is despite clocking up two definite cock-ups in retrospect – following my old mate Warren Buffett into Tesco and jumping the gun on the deeply troubled Vladimir Putin’s operation. However, I am saved by the power of diversification – TSCO can go down the pan and I’d still easily be in positive territory for the year. I am mulling over whether I should short the rouble to the tune of that HRUB holding.

    Before I slap myself on the back too much, any Brit sat on their backside with a decent exposure in GBP to the S&P500 via an index fund would have had a better ride this year at 20%, they would have got the USD forex boost as well. Although I have deliberately avoided the US market (their TR was 29% in 2013 which I thought was outrageous and setting up for a fall) the Americans have served me better outside my ISA when I exchanged a load of The Firm’s shares for a load of Vanguard FTSE Dev World ex UK which is 50% US. They also did better than I did in my ISA this year 😉 So you pretty much only needed to have a pulse and be in the market with a bit of US exposure to do okay, indeed the surprise in the case of the ISA is how I survived my anti-American bias. Don’t get me wrong, I’d love to have more exposure to the dynamism of American capitalism. I just don’t want to pay the currently exorbitant prices of getting it!

    Looking back, it was the years when I didn’t do so well that the seeds for better performance was laid. 2011 wasn’t a great performance on my unit price, a 2% fall. But some of what I bought then did the heavy lifting in 2013 and 2014. I’ve also started to see very high levels of volatility – they aren’t proportionally particularly outlandish but the absolute levels of the changes wrought get larger as time goes by, because the capital base is rising. The salaryman measures things against the yardstick of my erstwhile annual salary, and as capital appreciation and a little inflation pushes the capital base the volatility increases to a very significant part of that annual salary. Put it like this, the difference between the high-water mark this year and the low-water mark is a sum that would have seriously pissed me off to lose as a worker bee. That sort of rudeness is just what the stock market does, and it’s why it flames out most private investors (and yes, I could yet be one of them in future – nothing is guaranteed). I have to use the intellect override this  – I didn’t earn or have the high-water mark and the sun will rise again from the low point. Such is the conundrum of investing – you always have to fight some part of yourself in the endless battle between fear and greed. The only imperfect defence against the myriad of cognitive biases is to inform, to understand more, but also to know thyself.

    I’m gradually losing the HYP yield fight as my yield falls as a percentage of the total capital – the annual return is shifting in the direction of capgain rather than dividend income. Some of this is because I am deliberately diversifying away from the UK as the total stake gets larger, which drops my yield (the UK is a relatively high-dividend market), and some of the index funds are accumulation funds so they are total deadweight from a yield point of view.

    But then jolly good downturns are the time to build one’s HYP, whereas frothy markets pumped up with QE are the time to either diversify or sell your own unwrapped shares back to yourself in an ISA wrapper to bloodlet some capital gains allowance. Every dynamic system has its systole and diastole, and it’s better to roll with the cycle of opportunities than fight it.

    Notes:

    1. cash savings are non-renewable, unlike a share portfolio in drawdown over decades, but the stock market is unsuited to hold savings for a non-earning period of two or three years because of its high volatility
    2. There are cases imaginable where this wouldn’t hold, but they probably don’t apply to me
    3. unitisation is a way of tracking your ISA performance that works with the fact that most of us drip money into an ISA year on year,  which terribly complicates other ways of doing that. It is explained in this Motley Fool post. I had to repeat the exercise pretending to only unitise as if I had stayed in cash because I didn’t believe the result at first. The arithmetical result is quite counter-intuitive, compared to simply taking the ISA provider’s total market value divided by book cost after you have run for a few years

    The case for a Universal Income

    Those clever fellows at Oxford University have identified a problem with social mobility – it’s increasingly downwards. I have to run with the Guardian’s description of this because it looks like the paper is published by Wiley and is therefore going to be £££££ to get.

    The Grauniad will bring to the party their own biases, and yet their summary of the problem seems pretty clear and gels well with Humans Need Not Apply  – a storm of globalisation, automation and the shift of power from labour to capital is stripping out premium jobs – to wit

    The UK’s boom in managerial and professional level public services and industrial jobs during the 1950s, 1960s and 1970s saw an increase in the proportion of children born into professional and managerial families. The decline in these jobs meant that the number of individuals at risk of downward mobility were higher.

    Goldthorpe added: “Politicians are saying that a new generation of young people don’t have the same opportunities for social advancement as their parents, and these results seem to bear that out. The trend shows that, while social mobility has not stalled, more mobility is going in a downward direction than in the past.

    “ The emerging situation is one for which there is little historical precedent and that carries potentially far-reaching political and wider social implications.”

    I’m not totally sure there’s no historical precedent – the story of humanity is not a monotonic increase in wealth from generation to generation, but it is a problem. The issues boil down to that Britain’s GDP is being produced with fewer people. In itself that shouldn’t be a surprise – after all if you look at how many people it took to make anything a generation ago it’s obvious that you need far fewer people to make it now. There was a programme called The Secret Life of the National Grid that showed how the old CEGB used to erect pylons – basically about a hundred men and a lot of rope! According to the ONS, the real value of Britain’s manufacturing output is much higher now than in what we think of its heyday. When I entered the workforce over a quarter of the UK workforce was involved in making stuff, whereas now we make more stuff, but with  fewer than 1 in 10 of us compared to more than 1 in four. As the ONS succinctly says

    productivity in the manufacturing industry has risen by around 2.8% a year since 1948, compared with 1.5% in the service industry. While only 8% of UK jobs are now in manufacturing, compared with 25% in 1978, today’s workers are significantly better skilled and more experienced.

    We booted those humans out, and manufacturing does this quicker than services. Now whenever you say this might not be an unalloyed good loads of people come down on you like a ton of bricks and holler Lump Of Labour Fallacy until you can’t hear anything any more. The Economist gives a good summary too. The LoLF is predicated on the assumption that it is always possible to improve things for people in the world by putting more people to work, so Schumpeterian creative destruction is all to the good, as it can reallocate capital and work to where it can do most good.

    This assumes people are always as flexible as they were in their 20s. So they had better not get old, have children or otherwise tie themselves down to any one place or way of doing things. If you want to see the counterfactual, take a drive to some of the Welsh valleys – the Ermine started work and got to retire all in the space of time since these areas were nuked by Mrs T in the early 1980s and they still haven’t recovered by the looks of it.

    The other trouble is the modern economy produces great jobs and crap jobs, with nothing in between. And it’s producing fewer and fewer great jobs, though these seem to be higher and higher paid. At the moment we fight that – but the battle is being lost. At the moment we tell people work is the way out of poverty, which is bullshit.Let’s have a bit of fun with Google, shall we, on the theme of work is the way out of poverty. Let’s start with the dude who ought to know

    Bloomin' eck, I thought we've already done Halloween. Oh, wait. That was the other guy...

    Bloomin’ eck, I thought we’ve already done Halloween. Oh, wait. That was the other guy

    Iain Duncan Smith: ‘My mission is to lift people out of poverty and I will not give up’ there’s a hint of the Terminator in there, Iain. Always pays to investigate whether the thing you’re trying to do can actually be done, if only to find out which impediments to take on first…

    Sweatshops: A Way out of Poverty – Ludwig von Mises institute. Loosely paraphrased to  ‘get ’em by the balls and their hearts and minds will follow’ 1

    For millions of people, work is no longer a way out of poverty – Archbishop of York/George Osborne

    Seven ways UK wages have changed over the past four decades – the proletariat has been losing this fight for the last 20 years

    Is Social Mobility Really Going into Reverse – only if you think about the money, according to the Telegraph

    We now have to subsidise crap jobs with tax credits for people to survive on them. I don’t think work is the way out of poverty unless you are unusually skilled. It’s time to strike a new bargain with the 1%. Along the general lines of

    Dear 1% – Britain provides opportunities for you to sell us stuff, move money around in complex ways and get rich on that, and hell, invest in London property. We the people of Britain are easy with that. In return, we require that you give us something in return, and that is a tax on economic activity in terms of corporation tax, CGT and income tax. And we also require that you obey the law of the land as far a polluting the environment etc. Let’s cut a deal. Make as much money as you want, within the rules. If you don’t like that, piss off to Monaco or wherever.

    The standard riposte to that is the wealth creators and owners of capital will up sticks and take their toys with them. Atlas Shrugged by Ayn Rand is the long-form version of that. In balance  there should also be a call to the rest of the 99%, along the general lines of a fantastic rant I overheard from someone describing why the 99% were moaning about the cost of living so much

    People go through life picking up unnecessary accessories like dogs and children without thinking how much it all costs. No wonder they get themselves into trouble.

    It’s hard to argue with her observation, and this is from one of the 99% 😉 Mr Squirrel takes a slightly softer line.

    It appears that that august organ, the OECD takes issue with the claim that all the wealth creators will cram into Monaco or a seastead with their capital leaving the remaining starving hordes to eat each other. Unlike  Wiley who act as Gollum to knowledge the OECD publishes their stuff – short form here and full monty to be had from here. It’s worth a read – basically in contrast to Ayn Rand they take the view that we are our brother’s keeper in terms of the maximum aggregate human societal benefits:

    The most direct policy tool to reduce inequality is redistribution through taxes and benefits. The analysis shows that redistribution per se does not lower economic growth. Of course, this does not mean that all redistribution measures are equally good for growth. Redistribution policies that are poorly targeted and do not focus on the most effective tools can lead to a waste of resources and generate inefficiencies.

    Now before we all become communists it is possible for this to be true and yet nevertheless some people’s end of the boat may end up going down, even if most of the boat and inhabitants rise. Somewhere the John Galt in me does and did object for paying for other people’s lifestyle choices, for most of my working life I was paying towards my colleagues’ child benefit, though I am very happy that this has been stopped now. They are/were rich enough to pay for their own choices in life 😉

    The OECD’s stats are also backward-looking, over a period where the assumption that it is always possible to improve things by putting more people to work probably held. I have a lot of time for the thinking that we are in the middle of a third industrial revolution, and I will probably not live to see the full effects of this one. It takes far longer than a human lifetime for the rubble to stop bouncing in an industrial revolution, and the transformational effect of the improvement in communications, data handling and processing on economic activity is probably not complete. Unlike Roger Bootle, however, I wouldn’t necessarily bet on human ingenuity this time.

    We have a lot more humans to draw on, and capital can be more picky about which humans it uses. When I graduated, I was bright enough to be able to work in research and development. The twenty-something me was 2 nowhere near bright enough to work for Google. So we could have a lot more economic activity and vast increases in GDP with fewer humans aided by machine ingenuity, but the spoils of war would increasingly accrete to those that own the means of production, otherwise known as Capital.

    As a result the idea that we can improve economic efficiency by educating people better is not a given for the future in my view. It may be a good thing for their quality of life – after all having reached the end of my working life the economic value of my education is now entirely spent. There is still some intangible value in terms of being able to read, write and have a basic grasp of how things work, infer conclusions from experimental data and have a cultural reference to the world around me – the value of education is not purely as a way to amplify earning power. It’s possible that the OECD’s narrative is accurate for the past – the historical economy had the capacity to employ more human capital and ran below full bore because it was starved of skills and boots on the ground. The global economy has got access to a hell of a lot more people now than it did when I started work, and this seems to be at the same time as it needs fewer people per unit economic activity as a result of the various issues in Humans Need Not Apply.

    Which then brings us to the point of what the hell is the economy for? Is it to make as much stuff as possible and get as many people to buy this as possible, even if they can’t add enough economic value to pay for their consumption? Is it to maximise the sum total of human experience? These are political issues, but we don’t really seem to be tackling those issues as to what all this economic activity means and whether it is serving us well, we just know that we want ‘growth’ because it sprinkles some fairy-dust and seems to have made people feel better over time. Charging around telling people work is the way out of poverty seems to be pissing more and more people off, because it’s just not true. Eighty years after Keynes observed

    The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods. In short we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.

    he could still make the same observation.

    The Citizen’s Wage/ Universal Income – an alternative to the Occupy movement

    The Occupy movement is one response to the rise of the 1%, which is basically to try and tear them down. But it isn’t the only one. There’s another one. Let the 1% (and the 20% below) earn shedloads of money. After all, take a look at the Grauniad’s excellent analysis from Mona Chalabi  – people paying higher-rate tax and above make most of the running in tax revenue – about 2/3 of the tax take comes from them.

    Then set a flat rate of tax, at 40%. Abolish the personal allowance. But give everybody a universal income of about the National Minimum wage once they reach 18.  At the old higher rate tax threshold of ~ £40k you will have paid 32% of £30k which is about £10k in tax leaving you with £30k, under the new regime I guess you’re paying £24k in tax leaving you with £16k to which is added £13k resulting in ~ £30k in total

    Abolish all special interest pleading – nearly all of the Welfare state goes away, we presume that the NMW is enough to basically live on, be you pensioner or 19 year-old. No special case for having children – a couple on the NMW is a little under the average household income. Now, without the requirement to work, you can enjoy your children, see them grow up, walk them to school. You can now live anywhere in Britain we don’t all need to pack ourselves into the SE because that’s where all the jobs are – maybe even repopulate the North of the country – fabulous countryside.

    If you don’t have kids, well, you have a bit more money then, follow your interests. Have a better house or car, or go on holiday more. If you want more than the NMW, then by all means, if you are talented enough, go get a job. Your universal income won’t be taken away or taxed, but everything you earn would be taxed.

    The uber rich will now have to pay decently for their shit to be cleared, their houses to be cleaned and for fire service in London. But they can afford it, so the wages of shit-shovelling service industries will go up to whatever is needed that people will sell their time to do that sort of thing electively. But both parties will have a choice, and it’s up to the market to set the right price.

    This isn’t a fully formed idea – there’s no doubt endless problem with it. For starters until globalisation makes everybody in the world equally well off and we have ended war, entitlement needs to managed. Britain allocates citizenship/residency largely by jus soli as far as I can see, and some steps will need to be taken such as requiring you to be born in Britain by people here legally to get the entitlement. Before I get charged with being a card-carrying nut-job – immigration is no problem but the parents will have to be here legally and presumably work of be of independent means. And it seems fair enough that if you aren’t entitled to the citizen’s wage you at least get a personal allowance re your earnings of the same amount :) The devil would be greatly in the details.

    The problem we have at the moment is that we seem to be trying to micromanage our way out of macro sociological changes. The disenfranchising of a large part of the human population of a First World country isn’t necessarily a problem if it is caused by improvements in productivity caused by technology 3, but the way we allocate resources is going to drift out of track with the assumptions that underlie our societies.

    With the industrial revolution we managed to dramatically reduce our use for human physical labour, but increased our capacity to use intellectual human labour. With the Information and computing revolution we are reducing our need for intellectual human labour, because we can solve many of these problems using IT (and outsource a lot that doesn’t). It’s not absolutely clear to me where we are going to put these now idle hands to work, though I don’t have the Protestant Work Ethic that always assumes the Devil is going to be the employer of last resort. There are many things that would be nice that more human effort could do, but in general we don’t seem to be prepared to pay hard cash for them.

    That which we can’t do automatically demands much more cognitively of the humans 4, and it is beyond what many can do, we are way beyond the central bump in The Bell Curve and out there in the tail. I’m not really sure I’m bright enough to get ahead in this economy if I were starting now, the leading edge is way out there. We aren’t doing less, but the fruits of the productivity enhancements are accruing to people with capital and to people with power. CEOs and the 1% are skimming off a fair amount of the capital, but it is interesting that they have streaked ahead particularly through the use of equity allocations as well as higher pay.

     

    Notes:

    1. Charles Colson, possibly
    2. I am making the slightly ageist common assumption that this fades with time – accumulated experience has much less value now in technical fields than it did when I started work
    3. if the improvements are caused by globalisation then it is a problem, because living standards must fall to equalisation otherwise there will be balance of payments problems with the countries doing the work
    4. Not all future work is cognitive. There will still be work for some other types of skills – being a footballer, or a Kardashian doesn’t require smarts, and artistic creativity requires a different type of smarts

    It’s Election year, lots of lovely pork is up for grabs

    now this looks like trouble...

    not that sort of pork…

    Bank of England to Government – we need powers to rein in the housing market

    Threadneedle Street is asking the chancellor, George Osborne, for powers to restrict the size of mortgages compared with the value of a property and borrowers’ income, in what is a major policy shift following the 2008 banking crisis. The buy-to-let market will be part of its considerations when deciding to apply any restrictions.

    Government to, well pretty much anyone

    Sod that for a game of tin soldiers, we want more people paying more money for homes – so we’ll give them a 20% bung to make it happen

    Are they ever going to learn? Imagine a parallel universe where house prices were half the cost they are. Where the Bank of England operated credit controls, like they did in the 1970s, so that you could only borrow so much of your wages. We still wouldn’t have any more houses, because we hate everything about building houses. Niccolo Machiavelli told us why, in The Prince

    It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them.

    So it is that everyone who already lives in a place, no matter how mean and ugly their hovel, thinks “I don’t want that development of mean little hovels, because it will inconvenience me/spoil the view/just piss me off”. So no more houses would be built than now. Some would say fewer would be built, but the cost of a house is determined not by the cost of building it but by the value of the land. If stupid people could be stopped from overbidding for this, these costs would fall. Nevertheless, there would be a massive boost for the common weal.

    Why? Just think of the extra fun we could all have with the money that’s no longer ticking up the numbers on our mortgages, at least. The poor could go on holiday/afford to buy food and the rich could afford to send Tarquin and Jemima to public school, although they would probably bid the price up with the new found money they weren’t pouring into housing. That’s not such a bad thing as nobody needs public schooling, whereas everybody needs to take shelter from the rain.

    No more bloody pork for the housing market, Dave. Just don’t go there. Don’t fight the tape, don’t add fuel to the fire, butt right out of it. Everything about housing is so deeply wrong in the UK, this is an area where we need Government – to stop the self-harm. But until we can put something in the water supply that cans the meme that paying rent to a landlord is wasted money, because paying rent on the money rented from a bank for a house you will never get to own outright is so much better – even though it’s just a change of counterparty. The Telegraph tells us the average working life is no longer long enough to be able to afford to buy a house. So you are renting that money.

    It’s been a bad week for a lot of proposals that will have some ghastly consequences. At the risk of sounding like David Icke here’s some obvious actions and reactions

    Death taxes, eh? Wanna know what a death tax is? This fellow knew how death taxes work, and it's not the way the retired colonels of the Torygraph were fearful of...

    Death taxes, eh? Wanna know what a death tax is? This fellow knew how death taxes work, and it’s not the way the retired colonels of the Torygraph were fearful of…

    Action:

    Ros Altmann tells us  Seven things you need to know about George Osborne’s abolition of the pensions death tax. Dear Ros, and all the others who call this a death tax –

    You can’t take it with you you stupid berks, there are no ‘king pockets in a shroud!!! The dead pay no taxes.

    Reaction:

    Rich people will featherbed their kids, who will outspend their compatriots on housing. After a couple of generations of this, we will have a dog-eat-dog society if we are lucky. If not we will have the English Revolution as the dispossessed battle the possessed in a war of all against all. The Ermine is not of the opinion that people’s children have unlimited rights to the fruit of their ancestor’s labours once these ancestors are pushing up daisies. An awful lot of people died in the past to wrest the wealth of the country, first from the King with all that Magna Carta malarkey and then from the aristocracy after the World Wars. I am all for property rights and the rule of law, and I don’t want to see the politics of envy and wealth creators stripped of the fruit of their labours. In life their property is theirs, but in death, well, they really can’t take it with them.

    wealth distribution in the UK

    wealth distribution in the UK – a 300k IHT tax-free lump sticks each child into the 5’th wealth decile of people at the high-water-mark of lifetime wealth accumulation

    To forestall the usual I worked hard for this blah blah blah, note that a) you can give money to your kids tax-free over a period while you are alive, b) ahem, you’re dead, pal, and past caring, and c) a couple can pass £600,000 to their children before IHT is charged. Divvied up across two rugrats who have zero other wealth would put each of them into the 5th decile of wealth in the UK. It would be sad to see a New Aristocracy rise from the ashes. I am sure that solutions can be found to address Pa deceasing when the child is a minor and other edge cases, but in general we are living longer – particularly the richer among us.

    I know it’s an unpopular view, all I can say is be careful what you wish for the precious fruit of your loins, and hope there’s no afterlife so you never get to hear about the results of these best laid plans 😉 The obvious side to be on in this Hobbesian choice is on the side of ancestral wealth. Just don’t mention this dude and the Reign of Terror, eh? The trouble for the ancestral wealth is that all the bad guys are already inside the country’s borders, and they will have little to lose. Also see #3 – they may not have to take up arms…

    Action:

    Help to buy, or any other cobblers like that under the banner of “assistance for people to pay too much for a house”

    Reaction:

    People pay too much for houses. D’oh. That’s what you want, Mr Cameron. yes? So that ties up loads of capital in an unproductive asset. In theory if I own a car factory and invest twice as much into it I get to make more cars in the same time, or better cars, or cheaper cars. If I pay twice as much for a house in real terms than the last person who buys it, it still keeps the same amount of rain off my head. The only people who win from that game are Buy to Letters. Who can look after themselves, thanks.

    Action:

    Loads of the proletariat earning less than £12k get to pay no tax at all. And yes, an Ermine will benefit no end, indeed I may shift my affairs as to get a higher proportion of income from ISAs if necessary.

    Reaction:

    Loads of people vote for stuff without any regard for the cost of provision. It’s a particularly hard one to undo because of all the new losers in a one person one vote system where an increasing percentage of the voters pay no tax at all. Let’s face it, turkeys don’t vote for Christmas, do they?

     

    15 Aug 2014, 6:30pm
    debt economy
    by

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  • What will the power shift from labour to capital make things look like?

    As we wander around the many lovely historical relics that Britain has, usually in the care of the National Trust these days, we think we are looking at the past. Wander around the many rooms, and marvel at the effort it would have taken to keep these clean in a world without fossil fuels or vacuum cleaners.

    Stately pile in Leicestershire

    Stately pile in Leicestershire

    Now everybody in the personal finance world is trying to build capital, to make income. It’s the Holy Grail of pension planning, the vanishing point at the distant horizon, the Ermine sitting in his back garden drinking iced coffee while other people toil to fix the sewers and bring water and power and ideas to him. We don’t do this in the up-close and personal way that the Downton Abbey set do 1. We use machines and energy to do it, and if you see people power substituting for capital you know that someone’s thrown the big red switch and the projection reels are rolling – in reverse, and that the aristocracy will be in the ascendant again.

    Financial Independence is the non plus ultra  – the destination for which we PF types forego all the gratuitous consumerism of our fellow men, living like celibate monks in a brothel. It’s quite a new concept in human societies. Those grand buildings in the care of the NT were serviced by an army of grunts, basically working for The Man. Over a working lifetime, they didn’t get to save enough money to retire, because they didn’t earn enough money over and above their living requirements. Although we often associate this retirement with the welfare state, trades unions and friendly societies were in this space in the early years of the 20th century.

    One of the mantras of the PF world is you can earn a 4-5% real return on capital in a suitably diversified portfolio of assets. This isn’t bad – be grateful you’re living now rather than earlier in the 20th century 😉 In even earlier times, however, the return on capital was better, presumably because the servants never earned enough spare over their needs to retire! On the downside if you were the Man you had to be the first-born son of The Previous Man – capital was inherited, passed down the line by the doctrine of primogeniture. It was a drag if you were the second son, and you were SOL if you were female.

    shamelessly pinched from Krugman who pinched it from piketty

    shamelessly pinched from Krugman who pinched it from Piketty

    I got this from Krugman’s Why We’re in a New Gilded Age but I think he got it from Thomas Piketty. There are a few interesting things here. One is that this is the return on capital after taxes – it can of course be varied using taxes. You’ll note there was a low in the period that had the two World Wars – I guess taxation was high and the destruction of capital too. Another thing that is interesting is that the high-water mark of world GDP growth encompasses my working lifetime – I finished work at the end of it. I guess there’s some kind of limits To Growth forecasting in there, or maybe Piketty’s been reading Life After Growth. Either way we’re seriously into unknown unknowns there.

    It is, therefore, possible, that my story is a blip on the thread of financial planning – the thought that an average grunt who left school owning a kettle and the shirt on his back could command enough resources to retire 34 years later. For that piece of luck I am duly grateful.

    What do we learn from this? One is that the rate of return on capital assumed by a lot of PF thinking isn’t that unusual, from a historical perspective. It is, however, a bit unusual compared to recent historical perspective. We really could do without any more bloody wars in Europe, and the associated high taxation. OTOH there did seem a big stimulus to growth, although on such a coarse scale it’s hard to say that this wasn’t due to progress in agricultural yields or due to electrification. One of the valid questions would be does growth inherently reduce the return on capital, or is this correlation with something else?

    An ermine looking back 30 years, about to enter university. Or not.

    One thing does seem clear, however. We are headed towards a world where capital is getting a larger slice of the pie. We see that in wage stagnation, and also in a fall in growth. One fo the hypotheses for the fall in growth is the increasing cost of energy. So what does the future look like?

    Much more stratified and class-bound, I would hazard. If I were collecting my A levels today, and if there were and older Ermine-head on the shoulders 2, I would question some of the shibboleths and assumptions of the consumer lifestyle and image.

    I would note that the modern world offers three doors for the A level student. One is the route of university and £30,000 worth of debt. Now in the world I have worked through, £30,000 of debt would probably have been worth the candle, but in the world I see before me, I don’t feel that way at all – I have much sympathy for this viewpoint that university is an unaffordable luxury. There are two reasons why this is different today from 30 years ago:

    • 30 years ago, the exams were much harder 3 I think it was 7% when I entered and 11% when I left in 1982 of school leavers went to university at all. The exams screened strongly for academic ability, in ways you aren’t even allowed to think about today because it hurts the feelings of those that don’t make it. As a result of this, there were far fewer graduates in the workforce, the graduate premium was stronger.
    • Poorer students got grants and I believe everyone had their course fees paid for by the LEA, whereas now we have the loans situation, which means a student is indebted by £30,000 as well as the opportunity cost of losing the money they might have earned in the first 8-10% of their working life. Although it’s not exactly the same as going to Mastercard and taking out a loan for £30,000 as Martin Lewis is at pains to explain, the trouble is that with a 50% entry target, university is by definition targets at those of average academic ability and up. As a result the graduate premium is much lower, for the simple reason that the product is a lot more common. It’s true that in there are the same 11% of old, but the problem now is employers have to find them, assuming academic ability correlates with better ability at what they want. One of the biggest problems has been that heft in student numbers – it meant that the taxpayer couldn’t afford to support five times 4 as many so the cost of the opportunity has gone up for the students at the same time as the value of the product has been dropped because the market has been flooded.

    All round this seems to be a policy failure. We haven’t asked the fundamental questions, which are

    what is university for?

    • if it is to provide better work cannon-fodder, is this what companies and the available work want?
    • is it better if companies train their staff themselves – vocational training used to be a lot better – the Ermine was trained in how to use a lathe and other gear by companies, not schools, even though it was a peripheral part of what I would be doing, I have never used a lathe directly in my line of work but needed to know what could be done with one.
    • Is is right to normalise debt to our young adults so early in life – a student debt is more money than I have ever borrowed in my life other than as a mortgage

    At the same time I note that there are other routes

    • England is an expensive place to go to university, particularly if you are English – European universities where under EU rules you have equivalent access to courses and support may be a cheaper option (and often taught in English!)
    • The modern world offers the entrepreneurial and talented more opportunities to get to market and a much more efficient business operation than was possible in the past. You don’t need a university degree if you don’t have to convince an employer to employ you – code an app needs knowledge, not a degree and you can learn an awful lot of things online nowadays. Against that the odds against the successful entrepreneur are bad. Many are called but few are chosen to succeed.

    The good thing is you have far more options. The bad thing is that the value of the default option has been mullered – price up and value down. I personally wouldn’t go to university in England if I were 18 now, though I would consider Europe 5.

    Minimize debt in a slow-growth world

    One of the macro reasons is that in a low-growth world, debt is a very-dangerous thing indeed, because it’s hard to outrun with wage inflation. Debt also means mortgages. Part of the romance Britain has with house price inflation is because one generation did well out of that (it was my Dad’s generation, not mine – I got slaughtered by housing in the UK). The oil shocks of the 1970s caused high inflation and labour had the whip hand – enough power to drive up wages. They didn’t get any richer, because productivity didn’t go up, but inflation did and their wages kept pace with inflation, reducing the value of the debt in real terms.

    Labour will be much, much weaker in the coming thirty years 6. Globalisation and increasing automation will see to that. We may get inflation, but wages need to keep up with it for house price inflation to be A Good Thing. Otherwise we get what we have now – the real value of houses rising and fewer people being able to afford them, and that is not a Good Thing – for anybody 7

    In a low-growth world, even those student loans are going to be more onerous. So beware the debt, or at least investigate getting it down, first by asking whether university is necessary and a good match to your skills and aspirations 8, and if so considering the foreign option while it’s still open to you. Hopefully Cameron’s plans for an EU referendum won’t bugger that up.

    Logan's Run

    Logan’s Run, I suppose there are some compensations for the YOLO set

    Student debt is an obvious one to minimise, but lifestyle costs are one way that the young do get through money 9. You do need some conspicuous consumption to wine and dine and play the mating game, but a little bit of excess goes a long way, as long as it’s the right sort of excess. There’s a limit to how long it’s wise to take the YOLO mantra, unless you plan on taking a Logan’s Run approach to extreme early retirement. I avoided debt in my twenties by being exceedingly tight with housing 10– I shared houses and targeted the lower, more tatty end of the market. I regularly pass one rental in town aimed at students that has a rate of £56pw – that’s probably the end I was running at. And debt due to consumerism is bad, again particularly so where labour is weak. The normalisation of consumer debt and student debt are the most toxic features arising since 1980 for personal finances. If you can’t pay for your consumer goods in  cash, you’re not worth it. End of.

    If we zoom out even further, that power shift from labour to capital is harming productivity in the UK – it means it’s cheaper to hire people to do some jobs that capital. Take the humble car wash. In Britain garages used to get great big furry roller things that you’d drive into and put a coin in and it would wash your car for you while you were inside, not a human in sight.

    The Ermine knows the meaning of the plastic bottle on the Downton promo shot

    The Ermine knows the meaning of the plastic bottle on the Downton promo shot

    Nowadays you see a lot of these car washes broken, but you see loads of signs for hand car wash in supermarket parking lots and btis of waste ground – people with a few buckets, chamois leathers and a pressure washer are cheap, It’s cheaper to pay people to do this now than invest in the machines. That is not a good sign – not a good sign at all. The Ermine knows the symbolic meaning of the plastic water bottle on the Downton Abbey promotion picture. The plot of Downton’s Abbey is running backwards, and the power of inherited wealth and aristocracy is rising again 😉

    Look at the retired colonels of The Telegraph fulminating about death taxes. These parents know in their hearts that the best way for their children to get ahead is for them to inherit wealth, because they will probably not be able to earn it. It’s the most natural thing in the world for parents to want to featherbed their kids, over and above others. And parents realise in other ways that they try and buy privilege for their offspring – the whole independent school fees is also to try and build in advantage. Pass on capital – be it financial or social web capital, because the chance to earn your way ahead is thinning out. The aristocracy will be back. Not necessarily land, this time, financial capital will do, perhaps. Some of George Osborne’s DC pension changes play into this too – now the 55% tax rate on pensions going into an estate is removed.

    So take care about the things you assume about the world ahead. What worked in the past won’t necessarily work that well in future – and loadsadebt and easy money are a particular hazard to getting ahead. Labour is going to be poorer than capital relative to the last 50 years. On the upside, the talented, the crafty and the well-connected will make bank like gangbusters, it’s the average to the modestly bright that will take the shaft – many of those that will be considering that £30,000 debt.

    Wealth warning – this is the scribblings of a jaded fiftysomething that grew tired of the the way the modern world of work is. If you are a twentysomething you have the energy of youth, you have fire in your belly and I wish you all the best of British luck. I don’t think I have said anything that’s explicitly wrong, but the glass is half empty, and one of the specific advantages of youth is that your glass should always be viewed as half full.

    From a personal finance point of view I do believe you should think about taking on a £30k claim on your future earnings very carefully and know why you’re doing it rather than just drift into it because it’s the done thing, and have a clear vision of how doing this will help you earn more than 30k in real terms across your lifetime  and compensate you for three years of not earning. Or if you are rich enough, whether a damn good time and one of the few rites of passage we have in the West is worth it as a consumer experience regardless…

    Zooming even further out, what will that society look like? Staid and sclerotic – who you are will matter much more than what you know or even what you can do. Maybe Downton Abbey with more mod cons and better contraception. Don’t think we’ll be going to the moon. Or Mars. It’s where we are going if Life After Growth is true. But it isn’t predestined, maybe the other side of Wilkins Micawber will show, the one that isn’t normally cited in PF circles

    Something will turn up

    Notes:

    1. I’m inferring this from press reports about the programme, I’ve never watched it personally
    2. because in reality I was much more susceptible to peer-pressure and going along with established norms in my 20s
    3. the exams were norm-referenced (ie a fixed percentage of entrants got As) 
    4. one of the things that pisses me off is the mantra oh my generation pulled up the drawbridge. We didn’t do it deliberately, but did it by being so weak-willed that we couldn’t face telling the less able of our blessed children they weren’t smart enough to benefit from university. This was lily-livered incompetence, not malice as far as I can tell. It is bad, but without knowing how we got ourselves into the shit we can’t formulate a way out of it. Paying fees and maintenance to five times as many people wouldn’t help. We either need to make more jobs that are matched to the lower levels of ability, or eliminate enough undergraduate places to get the proportion to match the jobs we do have. It was right 30 years ago, maybe the proportions want to be higher now because we have a different employment scene and people might be a bit smarter but an increase of FIVE times in 30 years? You don’t need a degree to work a call centre. And society should be honest enough about your ability not to encourage you to spend £30k chasing an empty dream. Which would you rather have – not getting your grades or a place in clearing or picking up a £30,000 debt and lose three years of potential working life to end up in the same position but with a fancy piece of paper? I do accept that the adult world is not serving its offspring at all well here but the answer isn’t pay five times as many people through university as we did three decades ago. Two times, maybe, and there I am all for student grants and fees being paid from general taxation – HMRC will get it back in higher tax receipts later
    5. studying abroad also makes you look more enterprising and go-getting, which everybody likes, and at ease with other cultures which some employers seem to like. But I’m no expert, so DYOR
    6. I mean labour in aggregate. At the moment a lot of capital is being appropriated by the 1% and particularly the 0.1% as income, and technically this is also labour
    7. I guess it is a good thing for buy to letters but that’s it. It isn’t a good thing for owners unless they downsize, as they still need somewhere to live, and it tempts twits like Shona Sibary to live above their means.
    8. this in itself is a beastly tough thing to ask when you’ve just started out – how the bloody hell are you supposed to know?
    9. I am staggered at what the kids of my ex-colleagues buy, though I am pleased to see one old trick is still active – if you want Dad to help you buy a car say to Mum you’re thinking of getting a moped or a motorbike :)
    10. only to throw the win away when I did buy a house – you can survive some big mistakes, just not too many
    23 Jul 2014, 11:20am
    economy frugality
    by

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  • The real way to make money using old pallets is to be Blake Lively

    Wow. I was wasting my time recycling pallets into kindling or log-stores. Here’s the way to do it

     

    Upcycled pallets - way to go, Blake!

    Upcycled pallets – way to go, Blake!

    Not only do you get to touch the hemline of Blake Lively thus acquiring a sprinkling of her faeriedust that will make you younger, more beautiful and generally transform your otherwise pedestrian life of quiet desperation into celebrity heaven, but you also get to read cock like this

    The bones of old New York get a new lease on life in these Dutch-style bicycle crates. Built to last a lifetime from reclaimed local wood sealed with natural tung oil, each beautiful Brooklyn-made piece is imbued with its own unique character. Caboose it onto your bike to carry the day’s produce, impromptu flowers for your sweetheart, or whatever you need to transport in a stylish manner—emission-free!

    Ninety-Five flippin’ dollars – that’s fifty-six of your Earth Pounds. For something with massive great slats that will spew your designer shit out all over the highway if you actually did stick it on a bike, which is why people in Amsterdam use bike baskets made of mesh so all their crap doesn’t fall out, particularly when they ride over the cobbles. Not only that but bitter experience has taught me that you stick your flippin’ uprights on the inside of the slats so you can get enough screw into the damn things else you’ll have a kit of parts again in no time at all. Years ago I made some VHS tape holders along these lines inspired by the ones in Sex Lies and Videotape where I forgot this, or else got to learn it for the first time 😉

    1407_blake

    It’s time to throw in the towel on the you can become free through not spending all your wages buying shit meme. The opposition forces are too strong when people bankroll this sort of cobblers. Decadence has set in too deeply. The economy is shattered, fewer and fewer people will earn enough to fulfil their modest aims in life, and yet the froth rises  and spreads over the surface to cover the roiling darkness. The fight is futile, the bad guys won, the battle is lost. The centre cannot hold; the falcon can no longer hear the falconer. All hail to the God of Shopping, our new overlords.

    Won’t someone send out the search party to find and scoop up all the brains that have fallen out all over New York City  so at least they can be given a decent burial rather than feeding the dogs? And please, please, let Preserve go bust quickly to restore my erstwhile belief that I don’t share a planet with too many fools ready to be parted from their money…

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