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It’s magic! Chancellor pulls £35bn from the QE hat

(Update) Economists express alarm and the pound falls as the Bank of England’s controversial money printing policy takes an unexpected turn.

 
It’s magic! Chancellor pulls £35bn from the QE hat

The UK economy has been dealt what the Bank of England says ‘amounts to a small loosening of monetary policy’ following a decision to transfer the income from gilts the Bank bought in its quantitative easing (QE) scheme to the Treasury.

The money, which will amount to some £35 billion by March 2013 – with regular payments to follow – will be used by the Treasury to reduce government debt, but economists are already warning of the long-term consequences of the transfer.

The Bank’s monetary policy committee (MPC), which yesterday voted against extending its bond-buying stimulus scheme beyond the existing £375 billion of money it has created to fund the purchases, said the move would have an effect similar as extending QE by the same amount.

Until now, the money from gilt coupons has been held by the Bank of England, but the move brings the Bank’s policy in line with easing schemes undertaken by central banks in Japan and the US, the Treasury said, while arguing that the previous arrangement was ‘economically inefficient'.

Surprise move helps chancellor hit debt target

Nevertheless the move surprised experts and adds to the increasingly surreal nature of the UK's monetary policy in which the Bank of England has created new money electronically; used it to buy government debt to inject the money into the economy; then transferred the interest it receives to the Treasury; which can use it to reduce the level of its borrowing.

The timing of the transfer provides a short-term boost to the chancellor ahead of his Autumn Statement in December.

Michael Saunders, an economist at Citigroup, said of the plan: ‘The reduction in the debt/GDP ratio may just about be enough for the Office for Budget Responsibility to project that the government will probably hit its target of a falling debt/GDP ratio in 2015/16, whereas previously that appeared out of reach.’

This monetary loosening is, however, likely to be temporary because, as the Bank of England governor Mervy King (pictured) stated in his letter to the chancellor: 'It is likely to lead to the need for reverse payments from the government to the APF in the future as the Bank rate increases and the APF's gilt holdings are unwound by the MPC.'

Saunders added: ‘This may be a key reason why the MPC decided not to expand QE further at yesterday’s meeting.’

Comparison with Zimbabwe

Ross Walker of RBS said that although the transfer announcement is a short-term positive for the UK government's funding operations, 'it will inevitably raise questions/concerns about public debt "monetisation" and, more generally, the relationship between the Treasury and the operationally independent central bank.'

Philip Rush of Nomura echoed this saying the change crystallised the inter-dependence of the Bank of England and the Treasury and risked comparisons with Zimbabwe which destroyed its currency with money printing four years ago.

'Now, whenever the BoE does QE, it will be directly and transparently reducing government borrowing not just through putting downward pressure on yields [which fall as purchases drive up the price of guilts], but through causing all the costs the government faces in issuing its debt to be returned to it promptly each quarter,' he said. 

Rush added: 'It is not "Zimbabwean style" monetary financing because any money printed is done so only temporarily, at least in theory, but it looks to us to be a conservative version of it.'

The pound fell 0.4% to a two-month low of $1.5910 against the dollar as markets digested the news.

Will the Bank ever sell the gilts it has bought?

Malcolm Barr of JP Morgan expressed concern that the APF cash pile had originally been viewed as a safety net to offset potential losses when the Bank sells the gilts when economic conditions return to normal.

He said: ‘we were much more comfortable with the idea of the coupon profits sitting within the APF as a buffer, which could soften the scrutiny of the fiscal implications of losses on gilt holdings when monetary tightening was eventually needed.’

The transfer of cash to the Treasury would increase scepticism that the Bank of England will ever sell the gilts it has bought, he said.  

Andrew Sentance, a former member of the MPC, warned via Twitter: ‘Monetary policy now has fiscal consequences. When/if BoE unwinds QE, the deficit will look worse!'

Tony Nangle, head of multi-asset allocation at Threadneedle Investments, backed the move, however. 'These coupons are not part of the QE programme and it was made clear at the start of QE that they would always be the property of the Treasury. The Treasury has been able to service its debts and so build up this cash reserve at the Bank by borrowing from the market. This process has been akin to borrowing money with an interest rate in order to stuff it under the mattress.'

Here is a video explaining what quantitative easing is and how it affects people relying on income from their savings

78 comments so far. Why not have your say?

nickle

Nov 09, 2012 at 15:33

http://www.ons.gov.uk/ons/dcp171766_263808.pdf

Look at what he's hiding.

4,700 bn (page 4)

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Keith Cobby

Nov 09, 2012 at 15:41

As I posted on this topic earlier in the week:

'Why earn it when you can print it'

I think Adair Turner let the 'cat out of the bag' a few weeks ago when he suggested cancelling the BoE holdings.

The way forward is what it has always been - devaluation and inflation.

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nickle

Nov 09, 2012 at 15:46

Keith, your missing the other 'D'. Default.

That's the plan for the state pension. Not pay it.

Read the accounts. It's 'contingent' which translated means, we won't pay it.

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Steven Heath

Nov 09, 2012 at 15:47

Fantastic that this QE , has given £35 Billion to the Public Purse in this very troubled time . I have another £12.6 Billion , scrap all Foreign aid . The UK is in so much dept , unless we look after ourself's first , there will be no UK , just another Greece .

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nickle

Nov 09, 2012 at 16:31

he UK is in so much dept , unless we look after ourself's first , there will be no UK , just another Greece .

=============

Unless? We are in just as much shit as Greece. The debts are real but hidden off the books.

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Steven Heath

Nov 09, 2012 at 16:44

True , but at least we have some income , Greece has none . With much stronger measures , like a Flat Tax , scrap Foreign Aid . It may be possible to start climbing out of this deep hole of dept . Remember we have some of the Best people in the UK . If the Government lets them create business and we cut wasteful expenditure . It is possible we can rise from the ashes and be Great Britain again . But stop all free hand outs , especially non UK and get the EU budget down .

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nickle

Nov 09, 2012 at 17:04

Steven, its not unless they default.

You can only make the call about getting out if you know the income - agreed, and the size of the debt. You need both sides to work out if there is a way out.

The debt is at least 7,000 bn, on current taxes of 570 bn.

It's not possible to dig your way out of that mess without defaulting in different ways. e.g Not paying the state pension / means testing. Abolishing the state second pension - with no payouts. Putting a cap of 12K on all public sector pensions (pro rata for time worked). ...

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J Thomas

Nov 09, 2012 at 18:30

With the Democrats back in power in the US and now more funny money from the Bank of England , is it any wonder the gold price has went up 3% in the last two days?

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Big Al

Nov 09, 2012 at 21:40

Time to batten down the hatches old boy. Buy gold,buy land,trees,possibly dollars,buy bookmakers,funeral directors,you will make a fortune. I do not charge for this wisdom.

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Woodberry

Nov 09, 2012 at 23:13

I don't understand this (not being a banker or an economist). Do they?

After 2007, after banks become dependent on securities which their top managment didn't understand themselves, wasn't one clear lesson that we shouldn't get involved in things which could not be explained in simple terms.

Does it mean anything in the real world if one government institution buys the debt of a second government institution and then gives the money back again?

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johnnie

Nov 10, 2012 at 07:19

Anyone who thinks the UK can rise from the ashes is dreaming.

The BoE says it will eventually unwind (ie sell) the gilts and the treasury will have to pay for that including the capital losses which could easily amount to £500bn. By then the treasury will no longer be able to borrow at todays low interest rates so the deficit and debt will soar-result: tax increases and more cuts:. result recession, solution more QE.

Thus we enter a spiral of recession and money printing which will cause inflation and the wiping out of peoples savings.

Even in the most optimistic scenario where the UK economy soon starts to grow at say 3 % pa it will take maybe 25 years to recover fully. Don't forget that in 18 months time there could well be £700bn worth of asset purchases to unwind which equates to about two-thirds of GDP.

Those who believe that the UK is not at all like Greece are right, for now but will not be right for long.

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Ken Gaskin

Nov 10, 2012 at 09:52

Quantitative easing (QE) - "They" don't have the guts to call it what it is - DEVALUATION.

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Geoff Downs

Nov 10, 2012 at 09:58

We may get inflation many years from now. Can't see it happening anytime soon without expanding bank lending. Devaluation does not have to lead to inflation.

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johnnie

Nov 10, 2012 at 10:16

Geoff, I think we have had this discussion before but anyway.......there has and will continue to be inflation of the money supply. Inflation in the UK has been high in the UK compared to interest rates but I accept that it has not been raging inflation. Instead the inflation is exported to emerging economies through capital flows; Eventually this will come back as price inflation.

The price of bonds is at a 250 year high, it is the mother of all bubbles which will burst-that much is certain. When it does the BoE will be left holding a pile of worthless paper which the treasury ( taxpayer) will need to buy back. Well guess what if you look at the figures it is obvious the treasury isn't able to buy it back, what then?

The BoE and treasury rely on the fact that the majority of people are financially illiterate but when it all unfolds the consequences will be there for even the feeble minded to see clearly.

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William Bishop

Nov 10, 2012 at 10:20

Woodberry may be too modest - as long as the money created by the process that he descibes stagnates in the banking system, the effect on the real economy is likely to be very limited. As long as this remains the case, Geoff Downs, and not the inflation alarmists, is likely to prove broadly correct.

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johnnie

Nov 10, 2012 at 11:13

@William Bishop

Whether inflation is high or low is hardly the point in the greater scheme of things.

Just explain to me, if you can, exactly how and when the BoE is going to unwind these purchases, if you do the sums you will come to realise that they can't.

It's not an alarmist conspiracy theory it is basic arithmetic and common sense.

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Geoff Downs

Nov 10, 2012 at 11:32

The yield on Government bonds is signalling deflation. I know on this subject I tend to repeat myself but please look at Japan. In the eighties they had a massive asset boom, their stock market peaked at 38,000 +. They have had a problem ever since and they have deflation.

The point made by William Bishop is correct about the possibility of money stagnating in the banking system.

Remember also we had a devaluation of the pound in the 1990's but it did not cause inflation.

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James B. Johnson

Nov 10, 2012 at 11:37

Steven Heath

Not the flat tax again!!

It would be wonderful for high earners which, of course, is your motivation.

Just greed on your part I'm afraid.

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James B. Johnson

Nov 10, 2012 at 11:37

Steven Heath

Not the flat tax again!!

It would be wonderful for high earners which, of course, is your motivation.

Just greed on your part I'm afraid.

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joe stalin

Nov 10, 2012 at 11:46

Frankly there is no alternative. The last Govt has left our finances in such a mess and the majority of the country's working population tied to the State's apron strings and on unrealisticly high and unfunded benefits. Politics of enevy has seen the tax burden shift to thwe extent that 5% of the population pay 60% of the tax burdon, and idiotic and politically motivated meddling has slowed what economic recovery we may have had to a crawl. It is all the more remarkable that we are not yet in the position that Greece and Spain are finding themselves in. Our salavation is that we can print ourselves out of trouble which is more than the others can. we need to cut the rate of tax and broaden the base, reduce corporation tax but stop tye non dom nonsense used by virtually every foreign owned company operating in this country.

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johnnie

Nov 10, 2012 at 11:55

@Geoff The yield on Government bonds is signalling deflation.

And the solution therefore is more QE?

Which ever way you look at it-inflation, deflation or whatever-when the bond bubble bursts the UK economy is in big trouble.

I know you have previously said that US and UK bonds are a pretty safe investment and I guess you are a cautious investor. My view for what it's worth is that sovereign bonds are anything but safe. When the bubble bursts it could be quick, very quick. Beware that's all.

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Geoff Downs

Nov 10, 2012 at 12:21

johnie,

Firstly I think it is good and valuable to hear a wide range of views, and yes I do worry about many possibilities in the investment world.

More QE, no I don't think it has achieved much, other than keep asset prices elevated. Each round of QE seems to have less effect on stock prices though.

Regarding being cautious, perhaps as stock markets are a lottery that is the best way to proceed. Of course the temptation of easy riches is always likely to attract people into more risky assets, and that is their choice.

I believe we are in a bear market and have been for about ten years. In that time there have been long and significant spikes where some investors have done well.

At the moment though we have less credit and the economies of the world are struggling. For me therefore there is no reason for asset prices to stay high.

US Treasuries and UK Government Bonds, in my view, will do well in this environment. You talk of a bubble. A bubble exists surely when everyone is saying BUY. Is anyone advising you to buy Gilts at present?

Anyway we will have to see in the end how all this mess turns out.

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derek farman

Nov 10, 2012 at 14:24

So we have an impending fiscal cliff. The USA is on the edge of theirs. Spain and Greece have fallen off. Portugal teeters. The EU want loads more money which will allow them to continue with their incredible waste. Even Angela Merckel doesn't seem to have woken up to this one.

Kind of looks as if the so called economic experts need to go back to school, to rethink and learn prudence. But surely the best lesson is to cease spending more than we earn, and never let local and main stream politicians rush out with our cheque books to rashly spend spend spend.

Steven Heath has got the right idea, but it will need a chancellor with real toughness and balls to prune away the money gobbling things we are involved in and to attack tax avoiders big style.

Hopefully this will be before our economic storm totally engulfs us. .

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Geoff Downs

Nov 10, 2012 at 15:52

Derek,

You are correct. Debt is no bad thing if it is exceeded by growth in the economy. Alas because it is not are economy is unstable. Of course the trick is reducing public spending without making debt worse. I don't think anyone knows the answer to that just yet.

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nickle

Nov 10, 2012 at 16:59

So the questions that never gets asked about growth and debt.

1. How big are all the debts? Pensions included

2. How much interest is paid on that debt?

3. By how much does the debt growth each year?

That's the debt side.

Now on the income side. Since its government debt, that means it has to be paid out of taxes. You can allocate more tax to debt, by cutting spending.

The ideal way to cut spending is to get people back to work. Even on benefits, that 15K a year each with some extra taxes coming from them. Hmm, 1 million = 15 bn. Defict (not the debt, 150 bn).

Where is the other 135 bn going to come from?

Remember when politicians talk about growth they mean growth in taxes.

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ICD

Nov 11, 2012 at 01:23

If lots of people hold a certain view it can be because of any of 3 reasons. They are:

1. Because of peer pressure resulting from propaganda from the media (most common)

2. Because of vested interest

3. Because they have thought about it in an open-minded and careful way (least common)

That is my own cynicism. I don’t think that financial doom is just around the corner, because when it is totally obvious, such as for the Greek government who wouldn’t have had the money to pay public workers this month without agreeing to terms imposed on them then, usually and reluctantly, something gets done. The financial chaos of Sep 2008 came about surely because no one was acknowledging what was happening. When it became clear to the American government how bad a situation the financial institutions had allowed to develop they pretty much made up new rules as necessary to save the day.

The objective of encouraging people and businesses to spend more so that tax is generated painlessly is complicated and beyond me. But it is easier to have a view of the ‘big picture’. If a country collects too little tax, its citizens fail to work sufficiently and it pays itself too much money, there will be trouble in some form or another, obviously. If you tell a public worker that his pay will be reduced or his retirement delayed he will be outraged. What can be done more easily is to give him his contractual pay that happens to be worth much less in purchasing power. Hence the usefulness of inflation! And of course the difficulty for Greek and Spanish governments is that inflation and devaluation are not available, but they still have to do what they should have done all along and that is effectively ‘balance the books’.

Do I have any positive suggestions? Yes.

· Recognise our problems and slowly and progressively head in an improving direction. People want pay rises for reason 2 above, but claim it is to boost the county’s economy. Better to concentrate on projects that make the country richer, (roads, bypasses, fast rail connections, airports in the right place) and that provide employment.

· Concentrate on greater fairness. Certain sectors exploit their activity and the lack of genuine competition and should be reminded that they exist to serve society, rather than the other way round. I am thinking of the financial industry, the legal system, and the media in particular. All three are a vital part of our way of life but do a rotten job.

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ICD

Nov 11, 2012 at 01:23

If lots of people hold a certain view it can be because of any of 3 reasons. They are:

1. Because of peer pressure resulting from propaganda from the media (most common)

2. Because of vested interest

3. Because they have thought about it in an open-minded and careful way (least common)

That is my own cynicism. I don’t think that financial doom is just around the corner, because when it is totally obvious, such as for the Greek government who wouldn’t have had the money to pay public workers this month without agreeing to terms imposed on them then, usually and reluctantly, something gets done. The financial chaos of Sep 2008 came about surely because no one was acknowledging what was happening. When it became clear to the American government how bad a situation the financial institutions had allowed to develop they pretty much made up new rules as necessary to save the day.

The objective of encouraging people and businesses to spend more so that tax is generated painlessly is complicated and beyond me. But it is easier to have a view of the ‘big picture’. If a country collects too little tax, its citizens fail to work sufficiently and it pays itself too much money, there will be trouble in some form or another, obviously. If you tell a public worker that his pay will be reduced or his retirement delayed he will be outraged. What can be done more easily is to give him his contractual pay that happens to be worth much less in purchasing power. Hence the usefulness of inflation! And of course the difficulty for Greek and Spanish governments is that inflation and devaluation are not available, but they still have to do what they should have done all along and that is effectively ‘balance the books’.

Do I have any positive suggestions? Yes.

· Recognise our problems and slowly and progressively head in an improving direction. People want pay rises for reason 2 above, but claim it is to boost the county’s economy. Better to concentrate on projects that make the country richer, (roads, bypasses, fast rail connections, airports in the right place) and that provide employment.

· Concentrate on greater fairness. Certain sectors exploit their activity and the lack of genuine competition and should be reminded that they exist to serve society, rather than the other way round. I am thinking of the financial industry, the legal system, and the media in particular. All three are a vital part of our way of life but do a rotten job.

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ICD

Nov 11, 2012 at 08:23

I apologise for my rather long comment appearing twice. I clicked, and nothing happened. I waited and waited. I cautiously clicked again, and got a message that citywire had encountered a problem, then, suddenly my overlong post appeared twice. Honest!

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Anonymous 1 needed this 'off the record'

Nov 11, 2012 at 08:51

How else can our socialist welfare state operate, devaluation and inflation are all that's left....

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Geoff Downs

Nov 11, 2012 at 09:58

We have had a massive boom in all asset classes, i.e. property, commodities and stocks. This has been fuelled by easy credit and debt. Those of you who made money in these areas thought and still think it could never end.

QE is trying to kickstart that boom again.

Now there is to much debt and credit as dried up. There has to be a bust .

The slow decline in these asset classes has begun. Hopefully someone, or some party will find better ways to manage our economy in future, so as to end this cycle of boom and bust.

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ICD

Nov 11, 2012 at 11:34

Why does there have to be a bust? After the excesses of the past surely individuals, government, businesses and even banks (perhaps not banks) are now trying to improve their financial status and behave more responsibly?

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Geoff Downs

Nov 11, 2012 at 11:41

Well your own comments say why it will be bust.

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nickle

Nov 11, 2012 at 12:51

I don’t think that financial doom is just around the corner, because when it is totally obvious, such as for the Greek government who wouldn’t have had the money to pay public workers this month without agreeing to terms imposed on them then, usually and reluctantly, something gets done.

===============

So lets see. What's that something in the UK going to be?

State pension? Sorry you can't have that. We haven't the money to pay it.

Private pension? For the public good, its been nationalized. Have one of our promises in return.

You're missing out on some major items.

1. You need to quantify the amount of the debt the government has, on and off the books.

2. Then you can compare tax revenues with the cost of servicing that debt. Now you can get a good estimate of just how much of that debt the government is going to default on.

3. Now, work out which of those debts will be reneged on. The big hint, is that its pensions.

4. Work out too what a government in desperation will do. For example, will it follow Hungaries lead and take all private pensions?

I'm sorry but what you've said is all wafle. It's a fairy story unless you put the numbers too it.

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nickle

Nov 11, 2012 at 12:53

Why does there have to be a bust? After the excesses of the past surely individuals, government, businesses and even banks (perhaps not banks) are now trying to improve their financial status and behave more responsibly?

===============

Because the debts are too big.

http://www.ons.gov.uk/ons/dcp171766_263808.pdf

Is just a summary. Look at page 4.

4,700 bn hidden off the books - and that is just the state pension.

Add on top borrowing, civil service pensions, state second pensions, expected losses on guarantees, post office pension, PFI, ... All debts that have to be paid (or you default)

Tax revenues 570 bn.

I estimate that they are 13 times geared, with all the expenses of the NHS, schools, ... on top.

Spending is 730 bn.

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joe stalin

Nov 11, 2012 at 18:09

The tax base is simply not wide enough too few people are paying what they should so reducing the rate is the only answer. Politicians and Govt aparatchicks like those at the BBC are all screwing the system by using offshore taxation get outs and personal service contracts. The same is true for many in the civil service and ai wonder how many politicians baying for a yet greater contribution from the 5% are? Britian already is the highest taxed country in the world -is it any wonder people are leaving and that london has been replaced as the world's number 1 financial centre by New York. ? It strikes my the people making the decisions over our country's destiny are as stupid as they are hypocritical. Even red Margaret Hodge's family steel business pays no tax in this country go figure I am sure she is not alone.

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Geoff Downs

Nov 11, 2012 at 18:32

Obviously to get people who should pay tax to pay it, is important. Beyond that though I'm not sure if taxes are the real issue.

Our economy is a consumer led one. We have a reduced manufacturing base. Citizens have been given easy credit and are in many cases in debt. Government is in debt to.

For our economy to continue to grow, the expansion of lending and credit needs to continue. This can't happen because consumers are reluctant to borrow and banks to lend.

We therefore have no solution to the problem of debt. Austerity could make it worse and spending risks running up more debt.

The Government seeks to create inflation but this is not working. QE may have had an effect on food and commodity prices but nothing else.

What the answer is I don't have a clue.

In this environment though I think you will see asset prices decline and potential deflation rear it's ugly head.

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nickle

Nov 11, 2012 at 19:50

Politicians and Govt aparatchicks like those at the BBC are all screwing the system by using offshore taxation get outs and personal service contracts.

=========

Of course they are. They know what's going to happen.

4.7 trillion of state pension debt (minimum) means there will be chaos. What better than to get your money out.

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ICD

Nov 11, 2012 at 20:47

Nickle (and others)

If what I have said is all waffle and a fairy story without numbers then I would like you to convince me of that.

The banks in USA blithely continued with their unsustainable situation until the unthinkable event of house prices falling occurred. Presumably Greek politicians turned a blind eye to the country’s accounts thinking that it was better to let someone in the future face up to reality. I have taken a quick look at the ONS ‘A broader picture of the public sector balance sheet’. I am not used to these large sums so I will need longer to try to understand the significance. Presumably what you are saying is that we in the UK will face our own version of the Greek scenario and eventually something will have to give or we also will run out of money.

I do not say that you are wrong, because I do not know. Perhaps through laziness I have believed politicians who say we are making progress. What I do know is that there are always people telling us that something terrible is just round the corner. Most of the time they are wrong. Journalists kept saying that the Euro was doomed and it is still with us.

I hope my mind is open enough to accept that you may be right. If you want to put down any more evidence or arguments that will make sense to me I would welcome that. I need to leave my computer now, but will take another look at the material from the ONS, though it is not the lightest of reading!

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an elder one

Nov 11, 2012 at 23:40

Boom and bust is just natural dynamics, that is, oscllation about a stable norm; recently - a few years - it's been allowed to get out of hand through vested interests and thoughtlessness; in engineering terms the solution is negative feedback.

The populus - including government - have been allowed to borrow more money than they earn to buy goodies. Government makes the laws that rule our progress; they should spend less energy on inventing devices for social engineering and more on establishing rules for the maintenance of a proper basic balance of earnings versus spending.

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Herman Brodie

Nov 12, 2012 at 08:13

Illusory Profits on the Way to JFK

Achance conversation about the fraudster Madoff got us talking about profits that were equally illusory - those of the Federal Reserve...

http://www.unexpectedutility.com/blog/investing/illusory-profits-on-the-way-to-jfk/

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nickle

Nov 12, 2012 at 16:48

If what I have said is all waffle and a fairy story without numbers then I would like you to convince me of that.

===========

OK. Lets deal with the UK.

1.1 trillion in borrowing. That's the only debt that the government admits to in its debt figures. You can check this by going to the DMO website.

State pension. People contribute now. Government pays out later. It's a debt just as much as the borrowing.

4.7 trillion is the fudged figure estimated by the ONS (national statistics).

So were up to 5.8 trillion already.

Tax revenues last year - 0.57 trillion (570 bn).

Spending 730 bn.

Ho hum. 10 times geared with a spending habit worse than any coke addict.

On top of that we have the state second pension, the civil service pension, PFI, nuclear clean up, expected losses on guarantees, post office pension - all accrued debts (not future debts at all), and all off the books.

===========

I am not used to these large sums so I will need longer to try to understand the significance. Presumably what you are saying is that we in the UK will face our own version of the Greek scenario and eventually something will have to give or we also will run out of money.

===========

Yep. they are 13 times geared, with a spending habit.

So you have a choice. Default further on the state pensions, or the NHS? Which do you pick?

State pension or Welfare? Er, that's not a choice. That's just a label on the money going out. There isn't the money.

Then you have the left's arguments. If only we could tax a bit more, the rich, it would all be hunkey dorey.

So lets see. Lets start with Richard Branson. We liquidate all his assets. 2 billion raised. OK, its Monday. At the current rate of overspending, that money plugs the deficit (not spending, just the overspend), for a bit. It's now Thursday. Who are you going to tax today?

The debt is 6 times GDP. Do you think there are a handful of super rich people with 6 times the total earnings of the UK salted overseas?

===============

Most of the time they are wrong. Journalists kept saying that the Euro was doomed and it is still with us.

===============

Yep. And look at what they are doing. Creating money to spend. Just like QE on steriods.

Look to at QE. Where's the money gone? To the banks? Er, no. It's been used to buy 345 bn of Gilts. Yep the muppets are buying their own debts. 375 bn of QE.. Where's the other 30 bn gone? Brown bought banks shares in bankrupt banks. The share price has tanked.

So how do you think the government is going to pay for the state pension?

To put it in context. What's your share of the debt?

It's 250,000 pounds. Can you pay that off with the interest?

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joe stalin

Nov 13, 2012 at 08:42

You are absolutely right. The only dfference between us and Greece is that there are some "rich" people who are paying ten taxes they owe. With 5% of the working population paying more than 60% of taxes would n't be nice if the other 95% paid a little more? In Greece the equivalent 5% have said" blow that for a game of soldiers"- keep pushing and more will do the same in this country- hello Greece- hello Giorgous Osbornopolous.

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johnnie

Nov 13, 2012 at 10:15

RPI up from 2.6% to 3.2%, way above BoE target.

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ICD

Nov 13, 2012 at 13:29

Nickle: Thanks for your detailed answer. I am rushing around at present, but will take a closer look this evening or in the next day or so. I hope you are wrong, because some with more knowledge than me don't see it as quite so bad, but I have an open mind

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nickle

Nov 13, 2012 at 20:00

Thanks ICD.

It is the crucial issue. Even questions over getting a bit more tax out of rich people is moot.

The phrase, I'm a little bit pregnant Daddy springs to mind. Along the lines of, I'm a little but bankrupt.

There are other debts too on top. Accrued debts, not future debts.

When you've checked out the numbers, I think there are two things to consider.

1. What can you do to protect yourself, and hence the people near to you

2. What's the reaction going to be of the masses when they find out they have been defrauded.

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johnnie

Nov 14, 2012 at 05:23

@nickle

1. What can you do to protect yourself, and hence the people near to you

Buy Gold.

Now I know that there are those who use this forum who believe Gold to be risky because the price is driven by the herd mentality and greed. That however is only a small part of the picture.

There are also so called Gold bugs who buy because of fear or perhaps ideology, fear that paper money is becoming more and more debased.

Then there are central banks, particularly emerging economies which are buying Gold at an unprecedented rate and this trend is expected to continue for years to come.

There are increasing signs that the supply of Gold is starting to shrink '(the supply has been fairly steady for decades). Supply is predicted to fall by 20% in 2013. Of course there may be new and significant finds but as each year passes finds will become smaller and extraction costs will rise.

Now it is easy to imagine that those people driven by greed or ideology might be wrong about the direction of the Gold price but to believe that the central banks are wrong about the vulnerability of paper money would be crazy.

In answer to your second point we could look to Greece and Spain who have already found out that they have been defrauded. They have been systematically shafted by the likes of JP Morgan, Goldman Sachs et al working hand in hand with government and who have completely escaped criminal charges despite presiding over market rigging, mortgage fraud, money laundering for drug cartels, mis-selling of financial products, insider dealing etc etc etc.

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J Thomas

Nov 14, 2012 at 12:06

@Johnnie

Wise words regarding gold. I have been ridiculed on these pages before for advocating collecting gold sovereigns is not only a fascinating hobby but a serious long term investment.

When Gordon Brown in 1997 sold off most of Britains gold to the pawnbokers for $360 an ounce he called holding gold ' barbaric '. Now gold is $1725 an ounce there are many in The Bank of England who wish the clock could be turned back.

I consider my gold sovereign collection built up over 30 years to be my best investment ever. With the advent of internet brokers and ebay the spread between buying and selling is now under 9% with trades completed in 24 hours.

The only note of caution is if you hold a serious amount invest in a bank safe for about £90 a year for security. Also itemise them in your will, if you dont they have a curious habit of becoming ' lost ' on the death of the owner.

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johnnie

Nov 14, 2012 at 16:21

@JThomas

Nice one mate, if you have been stacking gold for 30 years then you will be way ahead of most on this forum. Long may it continue, which it will.

There is never a bad time to add Gold-maybe that will change-but not soon.

I salute you sir , as a matter of interest to me do you hold any Silver? Would be interested in a discussion about that because at the moment I am 50:50 Gold:Silver

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nickle

Nov 14, 2012 at 18:27

I've similar views on gold.

So my approach is this.

1. Save lots. Use Gold. It's not a particularly good strategy for the economy, because its money going into something that is non-productive. However, its a counter against the muppets.

2. What are the problems?

a) Don't use pensions. You're locked in.

b) Contribute the bare minimum to the state pension. [Same with any tax really]

c) Property. Hmmm. Pay your own property off. Done. BTL? Hmmm I already see signs from the left that they want to get BTL landlords. Nasty people apparently. Nothing to do with massive demand from economic refugees.

Also, its immoveable. You can't move it. Like pensions really.

So I see property taxes, BTL taxes, and confiscation of assets on the cards.

Why? Check out page 4

http://www.ons.gov.uk/ons/dcp171766_263808.pdf

4.7 trillion of debt hidden off the books. Just the state pension

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J Thomas

Nov 14, 2012 at 21:24

@johnnie

Gold and Silver tend to move in tandem in my experience. Over three years gold has increased 60% and Silver 89%. Over five years gold has increased 182% and Silver 189%, so you could say that Silver has actually been the better investment over the medium term.

However as collecting gold Sovereigns is also a hobby of mine I have tended to stick with gold apart from some Silver antique work.

Exactly the same dynamics work with both Gold and silver, which is scarcity of supply for the manufacturing of jewellery and industrial uses.

This is why both metals have been used for thousands of years as a hedge against inflation/deflation and more recently in the last 700 years as protection against Fiat (paper) currency.

It always amuses me when supposedly informed commentators state ' you cant eat gold '. This is perfectly true yet I'm not sure eating paper money full of dirt, ink, and metallic strips, would constitute a nice meal either.

No, Buy precious metals, keep them thirty years, and you'll have a better pension than 95% of the population in retirement.

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nickle

Nov 14, 2012 at 22:00

This is why both metals have been used for thousands of years as a hedge against inflation/deflation and more recently in the last 700 years as protection against Fiat (paper) currency.

=========

It's actually not a good hedge against inflation. It might be on scales of one hundred years or more. but that's pretty useless for most people.

If you take 10 years as an example, its been pretty bad. You've pointed out one example. Over the last 3 years or 5 years, it hasn't tracked inflation. Previously we've had inflation and gold going down over similar and longer periods.

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johnnie

Nov 15, 2012 at 06:54

@nickle

You are right that Gold does not always beat inflation but you need to look at inflation in the context of interest rates. If interest rates are high then you can protect your capital by banking it-that's when people have no need for Gold. Today however interest rates are near zero, or you have to pay the Bundesbank to hold your money safely. The banks will take your money(and pay little interest) and gamble it -if they collapse you lose your money.

The other consideration is that confidence in paper money is dwindling fast. The current fiat system is reaching the end game although it will be replaced by another paper system. I imagine that the next system will be based on a reserve currency which represents a basket of currencies which will include the US dollar as but one component. Contenders to have their currency included will need to have Gold reserves. I am not for one minute suggesting a return to Gold standard but it is perfectly possible to have a stable and trusted currency which is backed by say 30% hard assets.

Why do you think emerging economies are buying up so much Gold?, Why is there no Gold coming out of China-which is the worlds largest producer?

Now many people simply do not want to believe that the current fiat system is going to come to an end. History tells us that fiat systems do not have a long life-maybe 50-70 years. The current system has been going for 42 years and is now entering the endgame- the signs could not be clearer. It sounds fanciful I know but all fiat systems come to an end -there has never ever been ONE exception.

That is why it is sensible to invest in Gold today.

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johnnie

Nov 15, 2012 at 09:42

Moody's warns Osborne that UK AAA rating is under threat.

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johnnie

Nov 15, 2012 at 10:26

NEWS TODAY

Eurozone in recession

UK retail sales down 0.8% in Oct

Dutch GDP down 1.1% in Q3

Italy GDP down 0.2% in Q3

Austria GDP down 0.1% Q3-first fall since 2008

Spain GDP down 0.3% Q3

Germany and France doing a little better but not much.

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johnnie

Nov 15, 2012 at 13:11

Another scandal, banks mis-selling PPP revealed.

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johnnie

Nov 15, 2012 at 13:14

I mean CPP, sorry

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J Thomas

Nov 15, 2012 at 14:11

The ultimate Fiat currency is of course the Euro, which is fast tracked to end after no more than 25 years, and even that timescale is optimistic.

Regarding who is buying gold, I can only speak from personal experience selling some Sovereigns, yet most buyers are from the Far East and US.

I think this is rather sad, I would prefer them to remain in the UK as part of our heritage.

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nickle

Nov 15, 2012 at 16:07

Johnnie, I've no doubt times are good for gold and it will continue.

The reason isn't an inflation hedge. It's a hedge against stupid governments.

The inflation hedge is always trotted out, and its pretty much the opposite.

http://www.ons.gov.uk/ons/dcp171766_263808.pdf (page 4), should terrify you by the way.

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derek farman

Nov 16, 2012 at 09:03

Nickle ....gosh, page 4 sure is terrifying.

I read this yesterday ....'One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors' ...Plato

Says it all.

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nickle

Nov 16, 2012 at 09:43

Exactlty.

1. It's been hidden. It's taken me ages to get the figures.

2. The figure has been manipulated down. All the discussions about discount rates.

Let me explain the last bit There is something called the triple lock for the state pension. You get the highest of 2.5%, inflation, or wage inflation. Ho hum, imagine the state offering a complex derivative to people. Lets just look at 2.5% or inflation. The inflation target is 2%. So you have to assume that the liabilities will increase at 2.5 - 2 = 0.5% per annum in real terms. Then to present value, you discount back future payments using inflation. The two inflations rates cancel and you can use 0.5% as the increase in the liability side. In effect, this is just the increase in cash flows with a 0% discount rate.

That horrifies the ONS and the treasury, but its an accurate reflection.

So what do they do?

1. They assume that they have assets, when they have none. So they then use a asset rate with no assumptions of defaults to discount a liability. It's just plain wrong. It's deliberate and its a fraud.

2. Other EU countries are in similar messes. However, because the shock of 'discovering' that you're a victim of a fraud is too much, they are going to allow countries to use another rate to report the numbers.

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ICD

Nov 16, 2012 at 13:50

The figures in the ONS article to which you refer are ‘obligations’ not debts. The obligations are worked out using standard procedures and assumptions, apparently and on the plus side of the accounting process is money available from taxation. So though the public finances may be far from ideal I do not see this as a doom situation

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nickle

Nov 16, 2012 at 14:02

Obligations not debt.

Hmm, lets see. We can solve the problem by not paying the state pension.

Somehow I suspect that in a court case, the victims of the fraud might see it different.

=====

So though the public finances may be far from ideal I do not see this as a doom situation

=====

Do the maths.

Tax reveues? 570 bn.

Present value of the debts.

1.1 trillion for borrowing

3.7 for state pension

1.3 tr for civil service pensions

PFI

expected losses on guarantees ...

....

I make the present value of all past debts around the 7 trillion mark.

13 times income.

So with the Welfare, NHS, police, defence, roads, schools, ... all coming off the income, the gearing is worse.

You don't see it as a doom situation I think as an article of faith.

If you put the numbers too it, its dire.

There is no money from taxation. They are already overspending by 30% on top of taxes.

The problem is the debts are all back end loaded. Take the money now, spend it. Then when it comes to pay out, default.

So how are the vast majority in the UK going to handle no state pension and no welfare [it doesn't matter what label you put on it, the cash isn't there]

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ICD

Nov 16, 2012 at 18:24

Let's work in billions! As far as I can see, yes, the 'national debt' is 1100 billion, about 18300 for each person which is horrific. If the lenders were to get 5% then that is 55 billion in interest. Assuming your figure of 570 billion tax revenue that leaves 515 billion to pay all the bills and our pensions and reduce the debt.

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nickle

Nov 16, 2012 at 18:33

As far as I can see, yes, the 'national debt' is 1100 billion,

================

That's the 'national borrowing'.

Now, have you contributed to the state pension? If so, why aren't you owed the state pension for your contributions? That's legally enforceable, unless they change the law to say you can't have it.

What about the civil servants and their pensions? Not on the books either, and that a contract.

...

Why use 60 million? Only 30 million pay any tax.

On the money to pay the bills. Currently the bill is 730 bn a year. Ho hum, what's going to be cut?

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ICD

Nov 16, 2012 at 23:47

If I was running the economy I would certainly try to avoid such enormous debts, but then perhaps no one would vote for me. But to take the side of the state against your comments, it could be claimed that the state pension scheme to which I certainly contributed is more like an insurance scheme. If I contribute for decades then die the day after I retire, the state wins handsomely. On occasion the opposite happens. Basically the state runs a scheme that provides me with some income until I die. I don’t believe I have any right to say, “I have contributed x Pounds, I would like them back now, with interest.” I think the same argument can be used with the other pension obligations.

Now changing sides, so to speak, I agree the figures are very sobering. But if you were in government now what would you do? You can find economists who advocate austerity and the opposite. I think all this is too simplistic, but the media likes simplistic and we like to have good guys and bad guys; someone to blame. With a little effort I can blame everyone. I particularly want to blame the media, because they are the interface between the public and what is going on, but the media could say that they exist in a competitive world with dwindling customers and they have to compete and give the public what it wants.

Getting back to the subject, the present government, I believe, says that the state finances will get worse for a while, and then start to improve at some time in the future. I quite understand people taking a cynical view on this but I would like the media to provide a genuine expert, (not a journalist please) with no vested interest and no political allegiance to comment.

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nickle

Nov 17, 2012 at 10:26

If I was running the economy I would certainly try to avoid such enormous debts, but then perhaps no one would vote for me

=============

Let me put it a different way. The debts are there. People don't know about them because they are hidden. So lets say the government publishes all the debts, and sends every taxpayer a bill each year with a pro rata share of the debt.

Would people be demanding more spending?

Would people be demanding jail time, confiscation orders against those who ran up the debts?

It's a game changer.

The idea that the state pension system is an insurance system where there are winners and losers amongst the contributors. Well lets take the numbers and crunch them.

https://docs.google.com/spreadsheet/ccc?key=0AvnR4AGFSHkocEh3N2FreUtzUnpJbkUtXzdNNDktRlE

It's a spreadsheet. We take a median wage earner. Mr Average (not quite). We work out what they earned in the last 40 years using the average wage index. We take their NI, and invest it in the FTSE. At the end of each year, they make or lose on the index, add on some dividends, and the NI contributions.

For that 26K a year earner, they would have had a fund of 550,000 pounds. Instead they get a state pension costing 130,000. 420,000 ripped off.

That can never be recovered by living longer.

So I'm afraid your argument that its an insurance system where there are winners and losers in the system, determined by longevity doesn't work. All contributors are losers.

Those advocating austerity versus spend spend spend aren't saying looking if we spend we get get us out of 7,000 bn of debt. They only admit to 1,100 bn of debt. Like you they think there must be an easy solution. There isn't.

So what are the solutions?

1. Immediate 30% cut across the board in government spending. 30% because that is the extent of the overspending.

2. Migration. Migrants should only be allowed here if they pay more tax than the average government spend, and for as long as they carry on doing so. ie. You have to be an economic benefit to the UK as measured by the tax you pay. EU and the rest of the world. ie. No discrimination on basis of sex race age etc. Just a simple test.

This decreases the demand for housing, making more available. The left's demand for more housing, more high speed rail is bonkers. Spain spent billions on housing and on high speed rail. If the left think that's a great idea and solves things then Spain would be booming.

3. Stop accruing any more pensions debts. People keep existing rights, but no more accruals.

Instead, NI goes into a fund in your name. If married, 50% goes into your partners fund, and funds are ignored on divorce. This produces lots of money for investment in companies, which is good for growth. On retirement you have to spend your fund. If and only if the fund runs out, do the rest of us help. On death the remainder of your fund goes to your heirs fund. For the poor who tend to die early, their funds end up with their children. It means the poorer will get richer. Compound interest and saving makes you richer. The state pension then withers. If your fund pays more than the state pension, you will never be bailed out. Given someone on 26K can get a fund that generates 19K a year, inflation linked, joint life, then over time the number needing insurance in minimal.

However, its not going to happen. The state is bankrupt, and the debts will get bigger and bigger. They can't pay them. so here are my predictions.

1. More cuts in pensions.

2. Means testing of the state pension - child benefits are the dry run.

3. More taxes

4. Less services.

Then the ability to borrow will dry up. It's already there. Of the 375 bn of QE, 345 bn went on Gilts. The deficit over the same times is about the same. The only people lending to the government is the BoE.

So its going to go all Greek. With no services, lots of people will then say, why should I pay tax and get nothing back? The state wants me to fund a pension system that pays out 20p in the pound, and now they have taken that away.

Then unlike the Greeks, in the UK you will get riots. Like France too.

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ICD

Nov 18, 2012 at 11:41

I am not sure why there is so much annoyance at unfunded pension schemes. You probably deal with your electricity bill on a ‘pay-as-you-go basis, just as the UK deals with the state pension. Instigated by the EU there has been a move to assess the many obligations of the state in providing pensions and benefits by providing a single figure assessment. If you go to this link

http://www.ons.gov.uk/ons/rel/pensions/pensions-in-the-national-accounts/uk-national-accounts-supplementary-table-on-pensions--2010-/art-mainarticle.html

and open the PDF you will find the following:

1.2 Two caveats

Pension liabilities do not represent debt in that they do not constitute previous borrowing which has to be serviced or ultimately repaid. However, they are liabilities in the sense that they represent the obligations outstanding implied by current pension rules and legislation. In the case of unfunded pensions which are the responsibility of government, these obligations need to be met out of future revenues and receipts. Of course pension rules and legislation can be changed and, for this reason, pension liabilities are properly defined as ‘contingent pension obligations’ rather than debt.

It is also important to note that the supplementary table is prepared on an ‘accrued-to-date’ basis, in line with similar information contained in the National Accounts. This means that pension entitlements (or obligations) represent the amounts due for service to date. They do not include rights which will be built up in the future. As the European Central Bank has pointed out (ECB 2010), in order to assess the fiscal sustainability of unfunded pension schemes, “the concept of pension entitlements needs to be extended to include entitlements that will be accrued in future, while at the same time comparing these ‘claims’ with future social contributions and tax payments”.

I think that makes clear what these single figure obligations are. I am collecting a state pension. No doubt there is some actuarial age when I am supposed to die. So the accountants can work out the total pension payments I am still due to get. And everyone else, of course. Also the ‘accrued’ payments to which current workers have already become entitled. That’s quite a lot, and during that time current workers and even retired people like myself are paying tax. The figures are not good but they are not doomsville, either.

When I started working and paying my NI I had no knowledge or interest in my state pension due to start in 45 years time. I was aware that pensioners without other means were rather poor and I had a vague idea that improving my pension situation would be a good idea. I do not recall any government official, employer or politician lying to me or saying anything about my pension to me. As I got nearer to retirement I thought about such things more, like most people. I rang up the DWP a few times and asked what I would get if I retired at 65 and they told me.

It is perfectly reasonable for nickel to suggest that if our NI contributions were invested in the FTSE we could expect a better pension, but the government has many demands on its finances, and has to win votes as well. I presume this median earner earns 26k a year. I believe the NI for such a person is 12% so his annual NI is £124800 over 40 years. A 5% pa return would be £6240 Nickle in government suggests cutting public expenditure by 30%. Maybe he could make some really persuasive speeches, but I think the likely result would be rioting, increased unemployment, recession so less tax receipts, and of course we would blame the EU. As for immigrants, well the crucial factor for pension funding is the proportion of workers to pensioners and the fact that we have swelled the ranks of young workers has made the proportions much better for us.

I am not suggesting everything is rosy. There is appalling unfairness in our society that should be discussed, understood and corrected and living within our means would not be a bad idea. If you look at old film it is clear that we are much better off now and fatter!

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nickle

Nov 18, 2012 at 16:56

I am not sure why there is so much annoyance at unfunded pension schemes.

===============

1. Because they are a debt.

2. That debt is 4.7 trillion.

3. Future tax payer's can't afford to pay that.

4. That 4.7 trillion represents 20p in the pound as a payback on their contributions.

Point 4 is down to no compound interest and the money leaking on other things.

=====

It is perfectly reasonable for nickel to suggest that if our NI contributions were invested in the FTSE we could expect a better pension, but the government has many demands on its finances, and has to win votes as well.

=====

So do fraudsters. Both share the same modus operandi, which is to hide the extent of the money being leaked. If people knew the extent they were being fleeced, they wouldn't stand for it.

=====

I believe the NI for such a person is 12% so his annual NI is £124800 over 40 years

=====

You would be wrong. There is employer's NI that is for the benefit of the employee. Add that on top. Or are you going to try and claim that because its the company that pays it, it doesn't count? e.g. VAT, its irrelevant to people because companies pay the VAT. I've never paid a VAT cheque to the HMRC personally.

The migrants are needed is just a myth too. The average government spend is 11K per person. You need to be on 40K plus a year (per migrant) to help pay for the pensions. How many meet that criteria? The rest just add to the bill. If a migrant arrives on a family ground late in life its even worse.

=====

I do not recall any government official, employer or politician lying to me or saying anything about my pension to me.

=====

They are lying about how much they owe. It's not on the books. A company wouldn't be allowed to do that. They would be jailed.

Lets see. I start a new bank and start taking deposits. I book that money as a profit and pay out massive bonuses. It's a great idea because there will be new depositors along to pay out when people want there money back (in 40 years time). I can't see what the problems is at all, can you (not really, just showing why its a scam)

Lastly, at the start of your post

=====

Pension liabilities do not represent debt in that they do not constitute previous borrowing which has to be serviced or ultimately repaid

=====

That goes to the heart of it. 4.7 trillion can't be afforded. so the debt won't be paid. You won't get your state pension (the 20p in the pound as it stands).

Now think how that works for the poor. They won't get a state pension, or welfare. State pension, welfare - just a label on the cash going out.

So when you ring them up you confirmed the debt.

So which is it. You are owed a state pension because the DWP told you, or you aren't?

After all, it doesn't have to be repaid means that they are intending to abolish the state pension. They won't pay you.

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ICD

Nov 19, 2012 at 01:06

You say it is a debt. You refer us to the ONS. I also refer to the ONS and Sarah Levy from the Pensions Analysis Unit, ONS says it is not a debt and explains what it is. We’ll have to leave it at that, but if anyone wants a balanced assessment of our national debt this may be helpful: http://www.economicshelp.org/blog/2783/economics/the-biggest-lie-in-british-politics/

written in April 2011

Yes, I know the employer makes an NI payment, but the discussion is about what the worker is paying out and later getting back as a pension. The employer’s payment could be regarded as another tax.

Finally, I am getting my pension and hope to continue to get it. If the state finances run in to big problems they will reduce my pension not tell me that the money has run out. If you were in government I suppose you would reduce it by 30%. That would be tough but we would still be better off than many around the world. We need to keep a sense of proportion

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Woodberry

Nov 19, 2012 at 01:56

I have an excellent sense of proportion. I see a disproportionate effort and media blitz being directed at public servants and their pensions to distract attention from those in banks and financial services who have made millions out of the general public (private and public sector) and are getting away with it.

Having got that off my chest....

The reason some (not all) pubilc sector pensions are unfunded is that we collectively as a nation have not funded them but instead relied on tax income matching expenditure when the time comes. No politician has dared to suggest that those unfunded pension schemes should switch to being funded (by employyer and employee) because of the cost to the Exchequer of doing so.

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nickle

Nov 19, 2012 at 09:27

ONS says it is not a debt and explains what it is.

====================

Let me elaborate.

Would you approve of a bank operating the same way? ie. Taking money for pensions, spending it, [after all its not a debt, so it must be income], on the grounds that there will be depositors along in the future to pay out?

Under all accounting rules, FRS17, GAAP, its a debt. Pure and simple.

Now for the government this is a major issue. Imagine coming along and saying, woops, we've found 4.7 trillion of debt hidden down the back of the sofa.

Hence the its not a debt and because we don't have to pay the state pension.

In part I agree with you. It's not a debt because they won't pay the state pension. They aren't booking it as a debt because you won't get what you've paid for. That's the fraud.

Woodberry

========

have an excellent sense of proportion. I see a disproportionate effort and media blitz being directed at public servants and their pensions to distract attention from those in banks and financial services who have made millions out of the general public (private and public sector) and are getting away with it.

========

You sense of proportion is lopsided.

4.7 trillion owed for the state pension. 1.35 trillion owed for the civil service pension. 1.1 trillion on borrowing.

Cost of the bailout?

Well so far, the largest figure I've seen for the losses is around 0.09 trillion (90 bn). Offset against this are all the tax revenues that have been taken by the state. When you look at the losses, the biggest loss is down to Gordon Brown's share trading. Of the rest, why shouldn't civil servants who run the regulation of banks take the blame for a large part of the mess?

The difference is of the order of 100 to 1.

I think your sense of proportion is a bit odd.

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derek farman

Nov 19, 2012 at 09:35

Being a little brutal, perhaps with the explosion of obesity, UK's pension liability could drop quite a bit !

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nickle

Nov 19, 2012 at 10:10

http://www.spiked-online.com/images/lifeExpectancyGraph.gif

Doesn't look like that is the case.

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nickle

Nov 19, 2012 at 10:11

ICD. Can I make you an offer. Invest your pension with me.

I promise not to book it as a debt. I promise to spend your money as soon as you give it to me to boost the economy.

Or do you think that I do owe you something for your money?

:-)

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joe stalin

Nov 19, 2012 at 12:59

hmm I thought captain Bob went swimming years ago

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nickle

Nov 19, 2012 at 14:49

The similarity with Maxwell and Equitable life are telling.

1. Maxwell used the pension fund for other purposes. The government uses the money for other purposes. End result, pensioners are done over.

2. Equiteable life.

They ommitted the liabilties (Guarantees) from their accounts. Since they weren't in the accounts they didn't hedge them, or work out they had a mismatch between assets and liabilities.

They hide the liabilities and carried on recruiting new pensioners, who've ended up paying for the early joiners. They are also locked in and can't get their cash out.

Exactly the same as the state pension. Exactly the same result , pensioners are done over.

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ICD

Nov 20, 2012 at 12:16

Nickle

Would you approve of a bank operating the same way?

Banks do operate that way in a sense. When you deposit money in a current account they don’t put it in a safe with your name on it, and lend it out on your behalf. What they do is use your money in highly dubious ways, and try to ensure that they have enough money available to service likely demands at any given time. That is pretty much what the country does.

The ONS and I still insist that the pension obligation is not a debt. I can understand this might be seen as a hairsplitting point, because if it has got to be paid it doesn’t matter what you call it. But people reading your contributions written in your confident authoritive (but wrong) way might get a misleadingly negative view of government practices. Quoting from page 8 of ‘The history of state pensions in the UK: 1948 to 2010’ by Antoine Bozio, Rowena Crawford and Gemma Tetlow, Institute for Fiscal Studies

(If you want the link it is : http://www.ifs.org.uk/bns/bn105.pdf )

“The National Insurance Act 1946 introduced the BSP, with effect from 1948, but right from the start it differed from the proposals of the Beveridge Report. Political considerations made it impossible to implement the fully funded scheme that Beveridge had envisaged because such a scheme made no provision for pensions for those already older individuals who had suffered through the Great Depression and contributed to the war effort. Faced with the significant immediate bill of paying pensions to individuals who had not made contributions, the government opted to introduce a ‘pay-as- you-go’ system rather than a funded one. Individuals paid contributions (known as National Insurance (NI) contributions), but instead of the level of these being related to an individual’s own future pension benefits (as Beveridge had envisaged), they were related to what was needed to fund the benefits of current pensioners. Over time, the link between a person’s contributions and the pension income that person receives has become even weaker, as NI rates are now set simply according to the overall budgetary needs and distributional objectives of the government and are not directly related to either future pension benefits or current pension funding needs. The BSP is often called ‘contributory’ because entitlement to the pension requires individuals to satisfy some conditions on their NI contribution histories. However, since the pension benefit received increasingly depends very little on an individual’s years of contributions and not at all on the actual level of contributions made, the pension cannot really be considered to be contributory in the usual sense. As a result, the BSP is not, whatever its appearance, a social insurance scheme. Its design and implementation are described in detail in Section 3.”

So it has pretty much been a ‘pay-as-you-go’ scheme from the beginning. In the last few years it has been seen as desirable to show the ongoing obligation ‘on the books’ at least as a note. So rather than accuse the government of being fraudulent they have become less fraudulent on this occasion.

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nickle

Nov 20, 2012 at 13:13

Banks do operate that way in a sense. When you deposit money in a current account they don’t put it in a safe with your name on it, and lend it out on your behalf. What they do is use your money in highly dubious ways, and try to ensure that they have enough money available to service likely demands at any given time. That is pretty much what the country does.

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They have to book it as a liability don't they? They can't have assets < liabilities taking capital into account.

Why shouldn't the state operate on the same basis instead of using a complete bastardisation of accounting like Bernie Maddoff?

The put of accounts is to tell the owners and others, whether the enterprise is viable. In the case of the state, whether giving it cash for a pension will result in you getting a pension back.

That's why its hidden. They have no intention of paying out because they can't. That's why they keep going on about 'contigent'. It means we won't pay.

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It is pretty much what the country does.

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Except the country hasn't. Hence QE. 345 bn of QE has gone on Gilts - lending to the state. You're assumption is wrong.

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The ONS and I still insist that the pension obligation is not a debt

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It is splitting hairs. However, it doesn't change the reality they won't pay out. I think even you accept that.

1. They admit they need to change the law to default.

2. That means as it stands, it is a legal debt.

3. They are accepting money with the promise to pay.

4. They have hidden the debt off the books.

http://www.legislation.gov.uk/ukpga/2006/35/section/2

See 2006 Fraud act, section 2. False representation.

As for being contributory. It is. Ring up the DWP and they will tell you how many years you have contributed for, and they will tell you that you are owed a pension. I've done it.

The problem with your arguments, is that you are arguing the government case. That's the arguments of a fraudster. See the Fraud act for details.

Remember, pay as you go, means you pay, and the money goes to someone else.

At the end of the day, it isn't going to function as a social insurance scheme. They cannot afford to pay out their promises. No matter how you want to spin it, that's its not a debt, its sort of a debt, ... They cannot afford the liabilities.

So consider the consequences. The vast majority of the UK have paid in trillions. That same group have no other pensions that will generate enough to live off. When the government pulls the rug by defaulting on the 20p in the pound they currently pay out, those people will be destitute and unbelievably angry at being defrauded. They young will be angry at government attempts to steal from them to get out of the mess. Between the two groups, there are enough who will resort to violence.

In the UK and France it will be very ugly.

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