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  Select Month August 2008 May 2008 April 2008 December 2007 October 2007 February 2007 September 2006 November 2005 October 2005 September 2005 August 2005 March 2005 January 2005 December 2004 March 2004 November 2003 October 2003 June 2002 May 2002 February 2002 December 2001 May 2001

That would seem to sum up the Government following their latest u-turn.

The abolition of the 10% income tax rate, and resultant increase in income tax bills for those on low incomes, is about as ill-conceived as Labour taxation policy can get.

Pressure from the media, irate voters and a veritable flock of back-benchers provides us with this latest policy about-face.

The first part in the solution, some sort of additional payment for those aged 60 to 64, would appear to make things more complicated and add in new layers of taxpayer-paid-for paper shufflers. Payments are expected to be rounded up so the beneficiaries could end up in pocket and not out of it.

The claim is that it is easier to process this demographic first.

The pensioner and soon-to-be-pensioner age group, aka the “grey vote”, is the must-suck-up-to demographic. They are quickly becoming the dominant age group and are the most politically active with it. The politicians priority is to keep them sweet, no matter what it does to the country’s finances. They are the people you need to keep on side if you want to try to hang on to power

Demographic Doom at the Ballot Box outlines Philip Booth’s report, ‘The Young Held to Ransom – a Public Choice Analysis of the UK State Pension System’. The conclusion, shifting resources from the young to the old is a trend that is set to continue into the future. The pyramid scheme that is the State Pension being primarily to blame.

This latest example of creating policy on the fly highlights the Government’s staggering ability to waste resources. Their apparent need to add in layers of complexity whilst creating non-jobs for phalanxes of civil servants. It is as if destroying value seems the only way a central-planning-obsessed lumbering leviathan of a Government can think. Why do something simple when you can complicate the hell out of it.

There is an alternative solution to whatever random collection of ideas are being put forward as a band aid to the current fiasco. This solution has negligible administrative expense, some one-time paperwork by Government and employers will be needed, yet still treats all taxpayers fairly and actually means everyone who was not earning in excess of the previous 10% ceiling, £2,230 in 2007/08, actually pays less tax.

Raise everyone’s tax free allowance by half the old 10% tax band.

Simple.

On 2007/08 figures that would be £1,115. Using what would be the 2008/09 figure of £2,320, the increase in the tax free allowance would be £1,160.

Any low-waged worker out there who earns less than £1,160 above the current tax free allowance ends up paying no tax. Up to £116 better off than last year. Up to £232 better off than with what is currently in place.

Anyone low-waged earning above £1,160 and up to £2,320 of currently taxable income is still better off, on a declining scale. They are better off £2 less for every £10 above £1,160 they earn.

For example. The tax savings for the low-waged, earning just above the current tax free allowance threshold would be:

Anyone earning £2,320 or over breaks even. No more tax than if the 10% rate still existed.

As a strategy it makes sense. Unfortunately, it is something which should have been enacted instead of the combo tax-futz of abolishing the 10% rate whilst simultaneously lowering basic rate of tax from 22% to 20%.

The upping of personal allowances is simple. Everyone can understand it. Implementation is easier. It certainly makes more sense than the comedy of errors which has lead the Government to where it is today.

Instead we get more of the same. The removal of excessive amounts of tax from everyone’s income. With the opportunity to get some of it back if you happen to have the lifestyle that the Government approves of or are of a demographic which needs to be kept on side.

If that is not you then, for now, you are left to twist in the wind whilst you continue to pay your unfair share.

At midday the Bank of England’s Monetary Policy Committee announced it had reduced the Base Rate by a quarter point from 5.75% to 5.50%, just as had been expected.

The more important questions are, “When will the next cut be?” and “Will rate cuts do much good to save the housing market and the wider economy?”

Commenting before the announcement Mark Stephens, of independent economic think tank in:specie™, said, “A 25 basis point cut is in the bag. Actually, they should cut by 50 but they won’t. That would smack of desperation. It was fear of being perceived as panicky that meant they didn’t cut in November and fear of the same will prevent them from acting decisively now”.

And that is the point. Plod-and-pause tends to be the mentality. A rate move here and then wait and see. When action and decisiveness is needed, the response is often procrastination and pontification.

If the goal is to fight inflation, and that is real inflation and not the discredited CPI variety, then rate cuts shouldn’t be happening. However, given what happened in August and September, Central Bankers seem to have given up on projecting the illusion of being inflation fighters. The job is to save a bloated economy, overly indebted and founded on speculation, from imploding. Or at least try to delay the day of reckoning a little longer.

If saving the economy is what is intended, postponing the retribution due for years of profligacy and wanton excess, then action needs to be taken. Unfortunately that action will require more than rate cuts, even if those rate cuts came in a timely fashion.

Governments may pump newly created money into the economy by creating fake jobs or squandering limited resources on pet projects and cash handouts to keep the voters placated. But the real volume of money in the system isn’t money at all it is credit. And that credit is created out of thin air by the banks. At the moment the banks don’t want to lend to each other, let alone the man in the street.

So for now Central Bankers cut rates. In recent days Australia has frozen rates and Canada has cut. Other countries are now looking to cut as the global credit contraction, particularly focussed on Western economies, continues to bite. On December 11th the U.S. FOMC is expected to cut rates by a quarter point.

Lowering rates, means a weaker currency. A weaker currency means higher price inflation as the cost of imported goods increases. Just what you need when the economy is faltering.

“Overindebtedness by both consumers and Governments, the U.S and the U.K being the most blatant examples, means that declining asset values combined with a credit contraction could lead to a deflationary depression”, said Stephen Rose director at Debt Advice Bureau™.

“It is possible that the multi-decade Debt Supercycle is at an end”, added Rose. “If that is the case then cutting rates won’t provide much comfort, even if there is a false dawn as people perceive a few months of respite”.

“If this is a Credit Crunch, all well and good”, continued Rose. “Another year or so, and things will begin to pick up. Credit markets will sort themselves out and confidence will tentatively begin to return”.

“If it is a Credit Revulsion, which it is starting to look like it is, then the impact is going to be a lot worse and last a lot longer than anyone thinks”, Rose concluded.

And that is the point. Credit Revulsions are rare but the effects are long lasting. Think the Great Depression. Think Japan, which has been suffering serial recessions for almost two decades. What happened between 1989 and 1995 in the UK was a mild little credit revulsion, no more than an appetiser. This time we may be presented with the main course.

For now it is difficult to get a clear picture as events continue to unfold. The only thing that appears to be certain is that it is all hands to the pump. If the Government and the Bank of England what to avoid the economy descending into the abyss then they have to do something about it, and that something needs to be more radical and more proactive than what they are doing now. It has certainly got to be more than the occasional, belated cut in the Base Rate.

The unfolding events in the credit markets are only the beginning of considerably leaner times ahead. What started with the Bear Stearns Hedge Funds in February of this year, is destined to infect the entire economy.

Whilst the exact catlayst for the overdue economic downturn was always in debate, rising inflation, HIPs and Gordon Brown becomning PM being some of the possibles, the economy’s cards had been marked for some time.

In “Sell Now! Why You Don’t Want to be a Homeowner”, published about a year ago, we included a long range chart showing RPI-adjusted GDP going back to the 70s. It was christened the GDP “Wedge of Doom” as it both showed a large wedge formation, which had lasted over 30 years, and a noticeable decline in aggregate GDP growth which promised tough economic times ahead.

Updating the chart with the most recent GDP figures, released last week by the ONS, provides an even clearer picture of the declines ahead.

The wedge can easily be seen, as can how the GDP growth rate broke below the trend line at the end of 2004 and kept declining through Q3 of 2005.

You can also see how in Q1 and Q3 of 2006 GDP growth came up against the underside of the old support (lower green) line and bounced off it. In the investment world it is common knowledge that “old support becomes new resistance and old resistance becomes new support”. In this case, the old support has become new resistance. That is bad as it signals a stifling of GDP growth for many years to come.

If we reduce the time frame to 1993-onwards, we can get further confirmation of a recession with another chart.

As you can see above, for 12 years the GDP growth rate moved within a range of about 1.4% to 4.3%. Then in Q3 2005 it broke through the floor, when RPI-adjusted annual GDP growth fell to just below 0.9%.

When it bounced back it peaked at 2.94% in Q3 2006, which provided the upper green (resistance) line for the trend. GDP growth declined again, then bounced back to a lower high of 2.57% in Q2 2007 before falling away again in the third quarter. This confirms the downtrend within the new channel.

The red arrow is an indication of where the RPI-adjusted GDP growth rate is heading.

What we have are two different charts, each with their own patterns. In both cases both patterns have been broken to the downside. In both cases there has been confirmation that the old patterns are out and the new ones, which promise tough times for the economy, are now in control.

So, how are things going to play out?

A recession based on RPI-adjusted GDP starting in 2008 is a given. Starting Q3 or Q4 is my view. Though RPI-adjusted GDP could turn negative as early as Q2 2008.

How long it lasts is another question. Given how dependent the economy is on rising house prices and consumer spending, as opposed to actually making stuff and exporting it, I can see GDP growth being negative to Q1 2010.

More charts and further analysis can be found at http://inspecie.co.uk/

And finally.

Over the next couple of weeks I will be preparing a research report with more details on the recession expected to start in 2008 and the others expected between now and 2020. If you want a copy, please use the comment box below. Provide your details as normal and enter “Recession Report” in the comment box itself. It will be filtered out and you will be contacted when the report is published.

Both Psychologies magazine and Radio 4 have contacted us because they are looking for people for thier upcoming features.

If you would like to be involved you shoud contact them direct, and as soon as you can as both features are time sensitive.

Psychologies Magazine

Psychologies magazine are running a feature called ‘Can money buy happiness?’ for the May issue. This is a regular section of the magazine where we ask a range of experts and real people to discuss a hot topic. The emphasis is on how it affects us as individuals and our psychology.

They are looking for a woman aged 26+, an ex-student who is still in a lot of debt from her student days. The person will need to be prepared to talk openly about her financial situation and how she feels about money.

She would need to be available for a shoot in London on either Wed. 28th February or Thu. 29th February. The magazine will pay their travel to and from London and she will get her hair and makeup done, and lovely pictures. They are also prepared to plug anything they want.

If interested you should phone Sarah LeBoff on 020 7150 7298 ASAP as the deadline is quite tight.

Radio 4

Radio 4 are making a programme called ‘Between Ourselves’ which brings together in conversation two people who have a shared experience. They are planning to make a programme with two people who have experienced bankruptcy and are looking for potential guests.

It will be a half hour programme in which they will go into some detail, so the people they are looking for would have to be extremely articulate, with a real degree of insight into their situation.

They are willing to pay a fee, around £100, for the chosen guest(s).

If interested contact the producer, Karen Gregor, by emailing karen[dot]gregor[at]bbc[dot]co[dot]uk with your name and contact details.

UPDATE:

Deadline has now been passed. So participants are no longer required.

That is the reaction to the prediction by lettingfocus.com that half of all properties will be buy-to-let or second homes by 2026.

“This is more peak of bubble nonsense”, said Debt Advice Bureau director Stephen Rose, dismissing the prediction as “rubbish”.

“The only way it can happen”, continued Rose, “is if there is a dramatic decline in homeownership, resulting in millions of people who used to be homeowners becoming tenants once more. Then, theoretically, 50% of properties could be non-main residence properties”. Meaning that they are being let out or are second homes.

However, a massive drop in the number of properties owned by owner-occupiers would mean dramatically lower prices, not the higher ones which such a prediction would hope to foreshadow.

Unfortunately, the continuing rise in property prices is not being supported by underlying fundamentals. The reality is:

1. The growth in mortgages has been in a steady downtrend since the last price peak in 1989. Not supportive of long-term growth.

2. Repossessions have been increasing since they bottomed in the first half of 2004. Promising an increasing supply of discount properties becoming available.

3. Lending criteria for buy-to-let have dramatically weakened. This has enabled properties to be purchased with levels of deposit unacceptable just a couple of years ago, multiplying the leverage and risk for purchasers at the same time.

4. Numerous first-timers, with no landlord experience, have rushed to jump on the bandwagon. Many buying flats in city centre developments, resulting in empty flats as supply exceeds rental demand.

5. Speculative BTL and off-plan properties are being sold on the basis of capital gains, whilst the negative yield is disregarded. Never an advisable strategy and a sure sign of a market topping as property peddlars try to justify unjustifiable prices.

Whilst the prediction may make an interesting headline, it would be better to take it as a contrarian signal. More proof of the hysteria usually found in the end days of a large speculative bubble. Whether that bubble revolves around how rare a particular tulip bulb is, how earnings don’t apply to dotcom companies or how property always goes up in price.

A growing number of bankrupts are being targeted for Bankruptcy Restrictions Orders (BROs) as Official Receivers pursue those bankrupts who are believed to have acted in bad faith and contributed to their bankruptcy, according to figures released today.

Anyone thinking they can rack up loads of debt and use bankruptcy as an easy way to walk away form their responsibilities needs to think again. “The screw is tightening on those who have been guilty of misconduct”, said Desmond Flynn, Inspector General and Agency Chief Executive of the Insolvency Service.

In the six months to September 2005, 165 people have been made subject to BROs or Bankruptcy Restrictions Undertakings (BRUs) for periods ranging from 2 to 11 years. In addition, the Secretary of State has issued directions to take proceedings against another 313 bankrupts and Official Receivers are working on submitting reports on a further 600.

The most common allegations made in support of applications are:

• Contributing to the bankruptcy by gambling or extravagance;
• Incurring debts with no reasonable prospect of being able to meet the liability incurred;
• Entering into transactions to prefer friends or relatives ahead of other creditors or at a value less than the true value.

BROs and BRUs were introduced on 1st April 2004 in England and Wales, the same time the length of bankruptcy as reduced from up to 3 years to a maximum of 12 months, as a way of dealing with those bankrupts who were considered to be blameworthy, dishonest or culpable in their conduct leading up to bankruptcy.

BROs or BRUs subject bankrupts to bankruptcy restrictions for between 2 and 15 years and, as with bankruptcy, all BROs and BRUs are recorded on the Individual Insolvency Register, which can be accessed online and searched by anyone.

But BROs are only one way to ensure that bankruptcy is not an easy way to avoid paying back one’s debts. Income Payments Orders mean that whilst a bankrupt may be discharged from bankruptcy after one year, they can still be liable to make contributions from their income for three years.

Just because you’ve been discharged doesn’t mean you stop paying. “If bankrupts can pay towards their debts, they will pay”, said Mr. Flynn.

Bankruptcy is not a get-out-of-debt-free card. Bad faith bankrupts you have been warned.

Article copyright © Clientsmart Limited. Reproduced with Permission.

19,687 mortgage repossession orders were issued in England and Wales in the three months ending September, a massive 66% increase on the same quarter last year, according to figures released by the Department for Constitutional Affairs.

The figure is the highest since the third quarter of 1993, back in the dark days of the property recession and is far removed from the low of 9,616 experienced in the first quarter of 2003, just 30 months earlier.

The number of possession orders being issued has been increasing since the early part of 2004 and the trend is expected to continue with the expectation that the 25,000-orders-issued mark could be breached by the end of March 2006.

Don’t Panic Just Yet

Things may be getting worse, but it is not necessarily as dire as the figures initially suggest.

The number of possession orders does not reflect the number of properties that will end up being repossessed. It is more common for lenders and borrowers to come to an agreement over the outstanding debt rather than events end in the property being repossessed. It is also not uncommon for a property to have more than one possession order issued against.

There is no denying that it is an escalating problem. Actual repossessions for the first 6 months of 2005 totalled 4,640, according to figures released by the Council of Mortgage Lenders, up from 3,070 in the preceding six months.

Whilst these figures emphasise that the majority of repossession orders do not translate into actual repossessions, it does highlight the growing number of people with repayment problems. The CML anticipates the total number of repossessions for 2005 will be more than 10,000, still far removed from the 70,000 a year witnessed during the height of the property recession of the early 1990s.

Talk to Your Lender

The difference between the number of possession orders issued and actual repossessions also highlights how important it is to talk your lender as soon as you find you can’t make the mortgage payments.

“If you are having problems making your repayments it is imperative your get in touch with your lender immediately”, says Stephen Rose director of the not-for-profit Debt Advice Bureau™. “Don’t bury your head in the sand in the misguided hope that things will sort themselves out. If the lender doesn’t know what is happening, they are more likely to take you to court”.

“The sooner you talk to your lender, the sooner you can come to an arrangement. One which you can afford and which ensures you don’t have to worry about nasty letters arriving in the post”.

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