Leatherhead Matters

The Golden Rule was officially adopted by  Gordon Brown when he was Chancellor of the Exchequer.

The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending. This means that on average over the ups and downs of an economic cycle the government should only borrow to pay for investment that benefits future generations. Day-to-day spending that benefits today’s taxpayers should be paid for with today’s taxes, not with leveraged investment.

Gordon Brown has fiddled his own rule by redefining the timing of the start of the economic cycle, when he moved the cycle to two years earlier (from 1999 to 1997). This allowed him to add another £18 billion - £22 billion more of borrowing and still argue he hadn’t broken his “Golden” rule.

The Government’s other fiscal rule is the Sustainable Investment Rule, which requires it to keep debt at a “prudent level”. This is currently set at below 40% of GDP in each year of the current cycle.

There are very strong rumours that the current Chancellor is finally going to admit defeat and abandon one of these two rules in an announcement during the next few days. Government revenues are expected to be significantly lower than forecast as the economic downturn bites and the housing market crumbles.

Come back Prudence, New Labour may have abandoned you but, I come from a generation which loved you! Remember this………

Folk are starting to cut back on driving and the weekly shopping basket but, you know it’s getting serious when high income families cut back spending by:

• Downsizing their SUV (the Hummer has become a bummer with plummeting sales)
• Selling their second homes
• Selling their boat
• Foregoing their pool or, spa purchase (down 15% this year)
• Delaying big purchases such as TVs, cars and furniture
• Ceasing the purchase of $4 lattes  (causing a sell off of Starbuck outlets)

This is going to get a lot worse over the next 6-12 months!

Read More HERE

Petrol & Diesel prices are now so high that some people are selling their bodies in exchange for fuel!

Read more HERE

The oil tanker drivers are striking for increased pay and their union UNITE is upset that the drivers pay is not much higher than it was in 1992.

1992 was a pivotal year for oil tanker drivers employed by the major oil companies. After  decades of using their ability to bring the nation to it’s knees, tanker driver pay had reached £42k/year in old money. Most companies decided to contract out the role of fuel deliveries to service stations between 1991-93 and now most of the original drivers have since left the industry with blue chip pensions & generous severance packages.

Today, basic pay for a tanker driver is around £32k plus overtime and Unite are seeking to push the basic rate up to £42k. The tanker drivers are on strike this weekend after their union rejected a basic salary offer of £36k.

But what’s the logic for Unite demanding £42k? It just happens to be the same number as in 1992. But, the world has changed since 1992 and we live in a world where salaries are determined by supply & demand and comparison with other similar groups.

Oil tanker drivers provide a vital service but should we value their services & skills more than say a doctor?

The NHS Blog Doctor reports that:

The world might want to know that the basic salary these guys (drivers) are rejecting - £36k a year - is considerably more than the pay for an SpR, well over half a decade out of medical school, in his/her thirties, supporting children, in London

An SpR is a  Specialty Registrar, a level up from the old House Officer grade.

The reality is that UNITE’s tanker drivers can put a choke on the economy. It’s brute force vs relative social contribution & skill! Plus, UNITE know that the Gordon Brown’s government will be relatively passive in this dispute since, the Labour Party are dependent on union funding to stop it going bankrupt in the next 12 months.

The global economy is teetering on the edge of recession. Both food & fuel prices are rocketing so that even middle earners are now having to adjust their lifestyle. But, surely the high net worth, big spenders will keep the economy ticking over?

Don’t bet on it!

Marine fuel is selling for up to $5 a gallon and with a typical boat requiring a fill up of as much as 500 gallons that’s $2500 a time.

Boat sales have been declining in recent months as debt-strapped consumers rein in discretionary spending. Sales of new boats declined in nearly every category last year, and new boat sales were down 8 percent overall, according to the National Marine Manufacturers Association.

The Boat Owners Association of the United States reported that although its membership increased about 1 percent this year, the number who own boat insurance policies has dropped more than 10 percent - a strong indication that boat ownership has fallen recently.

So if yacht sales are declining you can be sure the boom is over and there are economic stormy waters ahead.

Every day Gordon Brown wakes up he looks for more ways to spend our cash. He is addicted to debt and like any addiction, it’s a pathological state.  Addicts typically “progress” through 3 stages, characterised by:

1. constant cravings and preoccupation with obtaining the substance;
2. using more of the substance than necessary to experience the intoxicating effects;
3. and finally ….experiencing tolerance of the addictive substance, withdrawal symptoms, and decreased motivation for normal life activities.

After a decade of bingeing on debt, Gordon is certainly showing sign of withdrawal from normal life activities and his normal sources of supply are deserting him.

The Guardian today says:

Senior officials in the Labour party, including Gordon Brown, could become personally liable for millions of pounds in debt unless new donors can be found within weeks

The party has five weeks to find £7.45m to pay off loans to banks and wealthy donors recruited by Lord Levy, Tony Blair’s former chief fundraiser, or become insolvent. A further £6.2m will have to be repaid by Christmas - making £13.65m in all. The sum amounts to two-thirds of the party’s annual income from donations.

The figures are a conservative estimate as they do not include interest that will also have to be paid. A Labour source said that although the total debt was listed as £17.8m on the Electoral Commission website, the true level, with interest, was nearer to £24m.

And on the economy, the National Statistics Office says:

The UK net debt was £526.8 billion at the end of April, compared with £495.9 billion a year earlier. The Budget forecast for net debt at the end of March 2009 is £581 billion (Source: National Statistics Online). Government net debt has been steadily increasing as a proportion of gross domestic product (GDP) as shown in the chart on the right. (Note:The National Statistics data probably understates the real picture since, their data excludes Northern Rock)

Poor Gordon! How can we help him start to kick the habit? Perhaps he should start by calling the National Debtline on 0808 808 4000. Or, perhaps he should look at the DirectGov web site on “Ways Out of Debt“. This helpfully explains 

If you’re struggling with debts, they may seem impossible to manage. However, there are ways to get out of debt, no matter how bad the situation seems. And there’s plenty of free advice available to help you.

The most important step to take is to “Face up to your debt problem. Almost everyone owes money - bills are a fact of life. But sometimes you may find you’re swamped with debts and can’t see a way of paying them all. The worst thing you can do is to ignore the problem - it won’t just go away”

Gordon is most likely to confront his addiction by seeking financial advice & assistance from the National Unity Bank & the Cooperative Bank (otherwise known as the Trade Unions)….. although the terms of further loans are unlikely to be declared to UK citizens!

Or, finally, if things get totally out of hand, Gordon would be well advised to go to the National Debtline  web site page on “Managing Bankruptcy“, while the rest of us leave the country!

Oil prices are at at a record high. This is the time opportunistic politicians crawl out of the wood work to berate “Big Oil”. It’s all Big Oil’s fault the politicians cry they are price gouging, they are colluding,  they are ripping us off!. It’s time to hold parliamentary/senate inquiries. Let’s even nationalise them!

The chart below illustrates the futility of political breast beating. Not a single private, global, oil company males it into the top 10 largest oil companies. The big players, who control the market, are all government owned, national oil companies in the Middle East, Russia & S. America. They control 94% of global oil & gas reserves. The two largest, the National Iranian Oil Company (NIOC) & Saudi Aramco dwarf all others. In global terms, ExxonMobil, Shell & BP are bit players.

Gordon Brown needs a cause to demonstrate that he understands and “shares our pain”. So watch out for a Parliamentary inquiry into oil prices later in the year. It will be pure distraction politics!

Click on chart for a larger version

Gordon Brown claims that rising inflation is a product of “global turbulence”

Fraser Nelson (Spectator) explains why Gordon is being economical with the truth:

1) Plunging pound. Since Brown took over the pound has nosedived and is now 12% weaker in general – literally Black Wednesday magnitude. Who’s to blame for that? Opec? Bush?  Brown has suffered so many other disasters that no one has commented on this huge inflationary pressure. Factory gate food and drink imports are actually up 15%, so worse is to come.

2) Soaring Food. As Gordon Ramsay will tell you, we import plenty food nowadays – so the currency woes magnify global food price hike for British consumers. Result: CPI food price inflation is a shocking 7.2%. This is what people feel and experience when they head to the supermarket. This will get much worse – as I blogged on Trading Floor yesterday we’ll be in double-digit food price inflation by next year.

3) Services. UK service cost is 3.7% says today’s CPI - yet only 2.8% in the Eurozone. Why so much higher? This is largely a reflection of growing labour costs in Britain. Jack up regulation and employment taxes and this is the result over the long term. As I said yesterday, companies don’t pay tax. Only people do. Service costs shows how regulation is a form of taxation.

4) Tax. Of the 108p a litre petrol, 72p of this is tax. Brown bangs on about OPEC, yet he could bring the UK’s petrol prices (and diesel prices, second-highest in Europe) down with a click of his finger. Americans pay 45p a litre for petrol. That we do not is due to decisions made in Downing Street.

5) CPI v RPI. Let us never forget Brown unleashed a new era of inflation when in Dec03 – the beginning of what I call his “reign of error” - he swapped the RPIX 2.5% target for CPI of 2.0%. It was based on the false claim that the difference between these two indices would be 0.5 points, when it’s twice this. Effect 1: interest rates were set too low, triggering a cheap credit boom and fuelling a housing bubble, now bursting. Effect 2: the media started hoodwinking readers, by using CPI as “inflation.” Since 1948, the public have known RPI as “inflation” which is why no one believes the data now. RPI(X), which one might term “real inflation” is now is 4.0%.

One additional thought on inflation is that the worst hit are usually those with the lowest income, particularly when food costs rise. One of Brown’s claims is that he has taken 600,000 people out of poverty. I think it’s likely that, by the time of the next election, he will need to revise this number downwards as some of those just above the poverty line, are inevitably going to sink back into poverty as their income falls short of rising costs.

Inflation statistics reported today by the Office for National Statistics (ONS) are truly appalling….and still rising

Input prices rose an adjusted 2.4 percent on the month, taking the annual rate up to 23.1 percent, mainly due to soaring fuel and food costs. Output prices rose an unadjusted 1.4 percent on the month in April, taking the annual rate up to 7.5 percent.

These inflation figures are the highest since the series began in 1986 and must be putting a serious squeeze on the manufacturing sector!

They also mean that rises in the headline rate of inflation….Consumer Price Inflation (CPI) are set to rise for most of the rest of this year

Gordon Brown will live to regret his trumpeting that he had ended the cycle of boom & bust & tamed inflation

In 2007 the Exchequer received around 12.5 billion pounds in taxation of North Sea oil, with the average oil price at around $60/Bbl. Oil prices are now at twice last year’s level ($124/Bbl today) so, Government tax receipts are set to soar this year. Add the extra revenue from Vat on fuel at the pump & Alistair Darling is going to have an unexpected , bumper windfall.

But wait a minute. Both Gordon & Alistair have put an absolute clamp on any additional government expenditure. The mantra is that: “there is a freeze on government spending”. They  argue that this is only prudent at a time of economic uncertainty.

Next year, they will argue that their prudence has paid off. In the year before an election must be held, there will be bounty for all. Not because of “prudence” but, because of a windfall from record oil prices.

Sometimes, to be a successful leader, you have to be lucky. Gordon Brown is lucky! He served his term as Chancellor over a decade of unprecedented global growth. Now as PM, his luck may still give him an edge at the next election!