Money better spent by France & Germany

From the BBC news website

"Some measures already announced by national governments

Germany: package of measures set to generate 50bn euros in investment and contracts

France: 19bn euro injection into key industries

Spain: 40bn euro fiscal stimulus package, including 6bn euros in tax cuts

Italy: 80bn stimulus package, but a large part of the money has been already received

UK: £20bn (23.6bn euro) fiscal stimulus plan, including cut in VAT

Seems like leaders in France and Germany have a lot more sense than Brown and Darling who are just going to blow the money for no gain with a 2.5% reduction of VAT.

Credit Crunch or Resource Crunch or Both

What bothers me a lot is our leaders go around talking and acting like we just have a credit crunch caused by the US finance industry. I am of the opinion that we face a double whammy with a Credit Crunch plus Resource Crunch. What I think hit most households in the UK was not an increase in Mortgage repayments ( Unless you happened to be re-mortgaging ) but rapid increases in the cost of Food, Petrol and especially Energy ( Gas & Electricity ). Part of the problem was laid at the state of the dollar, but most explanations were that there was too much demand for too little resource. Now the cost of Food has stabilised and possibly reducing a bit, Petrol has dropped from its peak and hopefully Energy bills will start to come down now the cost of Oil has dramatically reduced. The explanation for the reduced costs are down to reduction in demand due to the ensuing Recession. Now what I find very concerning is that surely the fundamental problem has not gone away. When countries start to come out of recession the effect of the Resource Crunch will come back and we once more be faced with an escalating price of Oil, Energy and Food. That's assume the cost of Food ever deflates. Now given that UK is predicted to be hit hardest with the recession, we will probably be the last to come out, faced with high Oil and Energy bills, exacerbated by low value of Sterling, high borrowing and high taxes. I can see it taking at least 10 years plus before we begin to see the light of day.

Cut in VAT 17.5% to 15%

We are currently lead by complete Moron's. A cut in VAT from 17.5% to 15% WILL NOT stimulate the economy. In our case over 90% of our budget is food, Council Tax, Petrol and Energy, non of which will be reduced. Given that we face the fact that interest from our saving will fall and we are going to have to cut back hard. I will be very surprised if retailers will pass on the saving as they are already cutting their prices by 10-20%. Also the people who will gain most are foreign producers It will cost business money to change the rate and then change it back again in a years time. Labour may have been right that we need a financial stimulus, but this is not going to be one, all they have done is run up a huge debt with no gain, what a complete bunch of Muppets

Light at the end of the tunnel fading.

Just when we thought there might be light at the end of the tunnel things change. Food costs seemed to have stabilised, Fuel seems to be coming back to pre-crunch levels and indications are that Energy costs would come down as well. First Mervyn King rocks the boat by cutting interest rates and making statements about possibility of zero interest rates, thus removing interest payments which are an essential part of this Families budget. Now The government is to shuffle the pack with Tax changes. I am not looking forward to Monday's announcement as I suspect that we will not gain anything in the short term and get hit by tax hikes in the medium term.

Gordon Brown Mistakes

Gordon Brown admitted today that he made a mistake over the boom and bust statement and then dismisses it with "Politicians make mistakes" as if his mistakes don't matter. I guess he says the same about selling the countries Gold on the cheap or being the catalyst to the demise of UK pensions. Well I think he and many other leaders are about to make even more mistakes. The problem that I see and that we experience is that our major expenses in order are Food, Council Tax, Petrol, Energy Bills - all of which are unavoidable. Forget about CPI and RPI, what we need is EPI Essentials Price Index i.e. take a basket of things people can't avoid and leave out the discriminative spending. An EPI index would be what effected most people especially the retired and those on low income. I am sure the EPI we have experienced over the last 12 months is way higher than CPI and RPI. I also don't see the high cost of essentials going away. Okay Oil has peak at around $140-$150 a barrel and is now back down to around $50, but its not going to drop to zero and inflation is still over twice the 2% target. Food remains stubbornly high. Okay we may see deflation in a lot of goods but I don't see it happening to food. I also don't see it happening to Oil now it has dropped back to around pre credit crunch levels. Energy will follow Oil and Council Tax is headed only one way - up.

Inflation Rate Drops

According to the news despite the cost of Oil dropping over 50% the figures CPI has only dropped from 5.2% to 4.5%. Excuse me if I remain sceptical about the claim that it will drop to less than 2% and possibly negative. Personally I don't agree that it should signal further interest rate cuts

Exchange Rate

Thursday 13th November 2008 - Sterling falling to new lows against the Dollar and Euro. Maybe the markets will force even lower so that the Bank of England's MPC will then have to reconsider the madness of reducing Interest Rates towards zero. Certainly going to make Oil more expensive in the UK than other countries. Add to that the excessive Tax the Government rakes off and UK companies are at a major disadvantage as far a fuel is concerned to rivals in other parts of the World.

Household Bills.

Like everybody else I guess we were being hit by large rises in Food, Petrol and Energy. Food is our biggest expense and Octobers costs were about the same as the previous month. Petrol is the next biggest expense and this was down slightly on previous month. We are on a fixed tariff for energy so the direct debit does not change and will not change till next year. Personally I would be quite happy with some deflation - I feel sorry for those made unemployed with the recession but we have already been down that route. A few years back my employer told me they did not want me any more and I had to take early retirement before I could really afford it.

Recession biteing.

Spent a lot of time this week moving savings to long term fixed interest accounts/bonds.
Trouble is when they expire and interest rates are potentially round zero, our household income drops by about 18% which is about £3,000 per year. So thanks to the Bank of England's decision we will not be contributing towards any economic recovery. Admittedly we have just come back from a holiday in Spain, thanks to neighbours and friends letting us use their apartment for next to nothing. We had committed to flights etc a long while ago so cancelling was not a good option. Now we have no plans to take holidays in the future not even in the UK. Already clothes shop at help the aged so limits to where else we can cut back.

Lower Interest Rates Stimulating Demand.

There are issues with the Bank of England lowering interest and hoping it will stimulate demand.

• Will the full reduction be passed on by the Banks?
  It looks like the Banks will pass on the rate reduction but after a delay so that they make money. I am sure they would prefer to keep some of the reduction to claw back some of their losses and also because of the increasing risk of defaulters
  
  
• Nearly 50% of mortgage holders have fixed rate deals so there will be considerable delay before their monthly budget is effected.
  
  
• Will people spend money or keep their repayments constant and just pay back the mortgage quicker. My preferred option would be to keep up repayments as far as possible having allocated mortgage savings to covering increases in essentials such as food, petrol and energy.
  
  
• Small business would be unwise to invest in the current climate, unless they could see demand for their products or services improve.
  
  
• It may help small business reduce the cost of their borrowing, but that does not really solve anything if your order books is empty.
  
  
• Low interest rates encourage people and businesses to make bad investments that are not sustainable when interest rates eventually rise.
  
  
• The exchange rate will suffer, which will increase inflation, after all we import more than we export.
  

Is Cutting Interest Rates a way out of Recession.

I think the Politicians, Bankers, Economists and Business leaders should think again about their mantra that cutting interest rates helps the economy out of recession.

Lets go back to first principals - If I put money in a savings account I should get paid a rate of interest for lending the money. Out of the interest most people will have to pay tax probably 20% but in some cases 40%. If inflation is significant then there is little incentive to save as by saving people will be losing out.

If savings rates are low then most probably so are annuity rates which are normally a couple of percent higher than savings rate as the provider collects all the money when the customer passes away. Some people are able to defer taking their annuity ( Up to age 75 ) when rates are low, but many do not have the savings to allow that option.

So when the Bank of England reduces Interest Rates the people who get hit are savers and people about to retire. The people with savings are often retired.

The people who benefit are those who have saddled themselves with debts. The larger the debt the bigger the benefit.

One problem that often occurs is that the value of sterling is effected and the exchange rate falls.
When the pound falls against the dollar the cost of Oil, Energy (Electricity & Gas) increases.
Oil increases put up the cost of fuel, which increases transport costs and food is also likely to cost more.

The question is having reduced peoples spending power by reducing savings and increases in inflation is this more or less than the gains of those with debts and mortgages. Will the later have spent more to help the economy.