Debt and money

[Cheshirechappie]

It would also have strangled at birth the ridiculous, damaging and unsustainable property price inflation we see now. A lot of it is driven by foreign 'investors' wanting a safe haven (read 'laundry') for dodgy money. How that helps our economy completely escapes me.

My son moved back home in March having previously rented in West London - from a gentleman who lived in Saudi.

He's just had an offer accepted to rent a 4 bed house (at £2,500pm :shock: ) in SW London - the Landlord lives in the U.A.E.!

I've no doubt there's some 'dodgy' money but I also think the UK is still perceived as a relatively safe haven for investment (whether in property or other assets) and/or as a bolt hole should the SHTF in the investor's homeland.

Quite how my kids are meant to get started on the housing ladder at the moment I don't know - one bed flats are over £200k round here and his work* (in W.London) means he can't travel too far.

* By way of a positive on foreign inward investment his employer is a subsidiary of SBG - the Saudi Bin Laden Group.

I may be wrong, but I think government are moving to try and address that problem. They've changed the tax rules on buy-to-let property; there were several small investors bemoaning their lot as a result of the said tax changes in the Telegraph a couple of weeks ago; whether the said changes affects overseas investors acting through shell companies and such like I don't know, but I suspect the intention is to make residential property less attractive as an investment for anything other than living in as a main residence. Whether that will be enough to correct the problem, or other measures are planned or might be needed, I've no idea.

 

[Mike.S]

Not sure I agree it would have strangled house price inflation. That started much earlier. I was planning to move in the late 1990s, and had everything in place financially to move where I wanted to until prices started to shoot up, and the price differential between the house I owned and the type I wanted where I wanted became too great, and got steadily greater. Whatever was causing house price inflation was acting from about 1999 onwards, not 2008. It's certainly a major problem, though, and I don't see a simple solution. Even building new houses won't stem the rise in costs if population continues to grow as predicted (from a current 64 million to about 75 million by 2030, apparently - and they'll all have to live somewhere!).

When I bought my first house in 1979 it was difficult to borow money you almost had to beg for that last couple of hundred pound you needed letters from employer gaurranteeing overtime etc I think the max they would give me was one and a half times my earnings then somewhere down the line it was twice your earnings then 3 times or eventually just how much do you want to borrow as well as the shortage of housing I think the availability of money just chased prices up,just my opinion.

My first house purchase was in 1985, when interest rates were much higher than now. I just about survived paying 16% at one point - there wasn't much left over for luxuries, even on a fair salary with regular incremental rises. When was the peak of 'negative equity' and a rash of repossessions? Late '80s or early '90s? Not fun times to have a newish mortgage.

I think the early 2000's house price inflation may have been linked to artificially low interest rates stimulating a rash of spending. Given that interest rates are currently at historical lows, Heaven help anybody with an up-to-the-eyebrows mortgage. The other problem is that if there is another recession (and they happen!) government has no margin to stimulate economic activity by reducing interest rates. The next recession will hurt ordinary people. A lot.

Those posts chime with me. Bought my first house in 1985, at a time when there were 'mortgage queues' and you were lucky to be eligible. I worked for a bank and received a subsidy to bring the rate down to 5%. Worth something then but not now! Moved in the early 90s when some friends had negative equity (having bought late 80s).

Around 2000, when Brown sold our Gold at its lowest price (since known in finance circles as 'Brown's Bottom' ) - allegedly to bail out 2 American banks (JP Morgan and Goldman?) - the money supply started increasing at a faster rate. See these graphs (click on the MAX button) : UK and perhaps clearer in USA - a pre-cursor to the boom and bust of 2007-9. Even clearer on this graph - scroll down to near the end 'Global Money Supply from Jan 1970 - Oct 2008'.

The last graph is particularly salutary as it was in 1971 that the USA broke the USD link to gold (the GBP and other 'allied' currencies were linked to the USD following the Bretton Woods agreement in 1944 - negotiated when UK and other European + Japan economies were kaput and USA was booming - having financed/supplied all sides). So, all the major currencies became backed by nothing. Nuff said....

 

[artie]

For those, like me, with a deep interest, there's a quite good basic video - it's two hours long but worth perservering: Economic Truth Documentary.

* because we're all in the faeces and it won't end well.

I haven't got all the way through this so maybe my question is premature, but..

At one point in the vid, the narrator explains, that the treasury creates money by printing notes for 3-4p each and sells them to banks for face value. Making for themselves a tidy 96-97% profit.

Does anyone else see a flaw in this.?

Yes. I'd say 240% - 330% ish
But then again, that only works for one pound notes. I think I'd stick to fifties.

I was thinking more along the lines of,

The government printed the money, what did the banks use to buy it.???

 

[RogerS]

This article is well-worth reading. Professor Kay seems to know what he is talking about.

http://www.ft.com/cms/s/0/9ed90bd2-8308 ... z3qoAVtoTZ

 

[John Brown]

I was thinking more along the lines of,

The government printed the money, what did the banks use to buy it.???

Fair comment, but my point stands also. Making something for 3p and selling it for 100p is not 97% profit.

 

[Mike.S]

The government printed the money, what did the banks use to buy it.???

As the customer of the bank used his current account to 'buy' the cash (i.e. credit balance reduced or overdraft created) then the banks have accounts with the Central Bank (indeed, are required to). So, if Bank A wants cash the Central bank will provide it and debit Bank A's account accordingly. The Central bank ends up with an asset (money taken from Bank A or a debt by Bank A) balanced by a liability - 'Notes issued'.

This point - on a bigger scale - was made in a blog article recently: see here scroll down a bit to "Which brings us back to Adair Turner, and his note on "monetary financing." This is what he says:" and read the paragraphs that follow. A bit further down is:

There are a number of ways in which the money could be “created” with different precise implications for the central bank balance sheet. They include:

The central bank directly credits the government current account (held either at the central bank itself or at a commercial bank) and records as an asset a non-interest-bearing non-redeemable “due from government” receivable
[end quote]

It's the same principle - the creation of money, bearing in mind that the "non-interest-bearing non-redeemable “due from government” receivable" is a complicated phrase representing the same thing as a bank note i.e. cash.

 

[artie]

I was thinking more along the lines of,

The government printed the money, what did the banks use to buy it.???

Fair comment, but my point stands also. Making something for 3p and selling it for 100p is not 97% profit.

OK how do you calculate gross profit then.?

 

[artie]

The government printed the money, what did the banks use to buy it.???

As the customer of the bank used his current account to 'buy' the cash (i.e. credit balance reduced or overdraft created) then the banks have accounts with the Central Bank (indeed, are required to). So, if Bank A wants cash the Central bank will provide it and debit Bank A's account accordingly. The Central bank ends up with an asset (money taken from Bank A or a debt by Bank A) balanced by a liability - 'Notes issued'.

This point - on a bigger scale - was made in a blog article recently: see here scroll down a bit to "Which brings us back to Adair Turner, and his note on "monetary financing." This is what he says:" and read the paragraphs that follow. A bit further down is:

There are a number of ways in which the money could be “created” with different precise implications for the central bank balance sheet. They include:

The central bank directly credits the government current account (held either at the central bank itself or at a commercial bank) and records as an asset a non-interest-bearing non-redeemable “due from government” receivable
[end quote]

It's the same principle - the creation of money, bearing in mind that the "non-interest-bearing non-redeemable “due from government” receivable" is a complicated phrase representing the same thing as a bank note i.e. cash.

Enjoying this, but it is hard to get "ones" head around it all.

 

[Mike.S]

Enjoying this, but it is hard to get "ones" head around it all.

Absolutely, only took me a couple of decades

 

[John Brown]

I was thinking more along the lines of,

The government printed the money, what did the banks use to buy it.???

Fair comment, but my point stands also. Making something for 3p and selling it for 100p is not 97% profit.

OK how do you calculate gross profit then.?

You didn't say gross. As a layman, I was using the 0 Level maths interpretation of profit. Although sadly I was out by a factor of ten in my calculation Which you either didn't notice, or were too polite to mention. I choose to believe the latter.

 

[Droogs]

To interpret a statement about percent you need to ask "percent of what?"
P(profit amount in cash terms) / C(cost to manufacture in cash terms) x 100 This gives you the MARK UP PROFIT %

P(profit amount in cash terms) / S(Selling price in cash terms) x 100 This is the PROFIT MARGIN %

If you want the profit as a percentage of what it cost you then it is
97/3 x 100 = 3233.3333rec%

If you want the profit as a percentage of what you sold it for then it is
97/100 x 100 = 97%

HTH

 

[Cheshirechappie]

It may not be too wise to regard Wikipedia as the ultimate authority on anything, but this is worth a read - https://en.wikipedia.org/wiki/History_of_money - because it reveals several aspects of money that I, at least, hadn't appreciated.

Firstly, the idea of 'debt' may have preceded the idea of 'money', in that "I owe you one" may have come before "I owe you one unit of something". Then, there's a point that those better versed in these things may have regarded as obvious, and that is that money depends on trust - a banknote is only a promise to pay, and we trust the bank to do so if necessary. Thus, you can only have 'credit' or 'debt' where trust exists. A bank can only continue to exist as long as people have trust in it. Finally, the name of the British 'pound' came about because it was originally defined as a pound weight of silver (hence 'Sterling' perhaps?) - but it's devalued a bit since then!

Thus, the world financial system can only remain functional as long as enough people trust it. What would happen if that trust evaporated, I hate to speculate....

Edit to add - Thanks to the Mods for cleaning the thread up and allowing it to remain open. There's potential to learn much more yet, I think.

 

[Peter Sefton]

Good to see it back on track

 

[RogerS]

Another topic that people (especially the press) get vexed about is to say that so-and-so in country Y only earns $x a month which compared to UK wages sounds exceedingly small (and usually the reason for printing this 'fact'). Yet without any mention of the prices in country Y, the earnings statement is meaningless.

 

[doctor Bob]

Another topic that people (especially the press) get vexed about is to say that so-and-so in country Y only earns $x a month which compared to UK wages sounds exceedingly small (and usually the reason for printing this 'fact'). Yet without any mention of the prices in country Y, the earnings statement is meaningless.

Not really, I would hazard a guess that an Indian worker on 10p/hr is not going out at lunchtime and buying a big mac and chips for 5p.

 

[RobinBHM]

Probably not..although I can remember buying a Mcd's ice cream cone in Turkey for 250,000 lira (12.5p) the same year as 9/11 (whenever that was).

In the UK we have become accustomed to very cheap prices for many many goods that are only cheap due to the tiny labour cost element from third world manufacturing. Its crazy to think items like jeans can be bought for a fraction of their price 30 years ago.

 

[Flynnwood]

This is worth watching if only to enlighten a little.

http://www.youtube.com/watch?v=iFDe5kUUyT0

The guy has his own agenda ... take his views as they are. Worth a watch though.

 

[artie]

This is worth watching if only to enlighten a little.

http://www.youtube.com/watch?v=iFDe5kUUyT0

The guy has his own agenda ... take his views as they are. Worth a watch though.

over 4 million views. :shock:

 

[Droogs]

Finally, the name of the British 'pound' came about because it was originally defined as a pound weight of silver (hence 'Sterling' perhaps?) - but it's devalued a bit since then!.

As I was taught, the British Pound got it's name from the Libraponda, which was the pound (approx weight) of salt paid to Roman auxiliary legionaries from dominian states on occupation duties in Britain. Which is why we use a stylised L as the symbol for the pound, although when promisery notes were first issued they were indeed a legal promise to provide the bearer with X lbs of sterling ie 99.99% pure silver on demand from the creditors bank

 

[RogerS]

Another topic that people (especially the press) get vexed about is to say that so-and-so in country Y only earns $x a month which compared to UK wages sounds exceedingly small (and usually the reason for printing this 'fact'). Yet without any mention of the prices in country Y, the earnings statement is meaningless.

Not really, I would hazard a guess that an Indian worker on 10p/hr is not going out at lunchtime and buying a big mac and chips for 5p.

Nope he won't. More like the equivalent of 0.01p. You need to check things out a bit more.