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The Next Economic Crash

Ever since I’ve been ill I’ve been amazed at what an incredibly complicated and effective system the human body is.

Things have gone wrong that I’ve previously taken for granted and I’ve been forced to learn how the different control systems keep everything working together.

The economy is the same.

It is made up of the many different decisions that the billions of people make.

It is best understood by learning a little about systems thinking. [continue reading…]

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The full title of this book by Craig Rowland and JM Lawson is

The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy“.

In my review at Amazon.co.uk, I gave the book Five Stars. This means I think it is Excellent and is Very Highly Recommended.

Here is my book review.

Excellent lesson on effective diversification because of economic uncertainties

I was introduced to the idea of the Permanent Portfolio by a magazine article and I wanted to know more so I bought the book.

It sounds strange but I found it hard to put down as I finally had the nagging doubts I had about diversification erased from my brain. [continue reading…]

in Best Business Books, The Next Economic Crash

The Future Of Your Business And Wealth

The Future Of Your Business And Wealth Is In Danger In Times Of Recession, Depression, Deflation, Inflation and Hyperinflation

Hindsight is a great luxury which we don’t have for our current and future decisions but we can look back on the past with more clarity.

The great prosperity the developed world has seen in the last thirty years has been built on debt and unfinanced promises of generous future welfare payments.

Spending by consumers, businesses and governments was financed from borrowing against future income at an increasing but unsustainable rate. The crash in 2008 was inevitable and the monetary and fiscal stimulus seen since then and considered necessary to keep the wheels turning, is storing up more problems in the future.

You can’t get out of a debt crisis by borrowing more and printing so much “funny money” that it debases the major currencies of the world.

Business Owners Don’t Have To Be Victims Of The Economy [continue reading…]

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The Heart And Mind Of An Economist

I promote myself as having the mind of a finance director and the heart of a marketer to both emphasise my main skills (and a big factor of difference to my competitors) and also to stress the two main stakeholders each business must strive to meet:

  • Delighting customers so they buy and buy again
  • Making enough profit for the owner to keep him or her in the game and continually innovating to add customer and shareholder value.

These two forces can be portrayed as opposing each other (e.g. a customer gains with a low selling price, a business makes more money from a higher price) but I believe there’s an optimum position that meets both.

As I intend to look deeper at the next economic crisis, which I expect to make the 2008 to 2013 contraction look like a baby, I think it’s important you understand my views on economic theory and politics.

The Mind Of A Free Marketer [continue reading…]

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The Depression of 2016 by Rafael Aguayo

The Depression of 2016 by Rafael Aguayo

Book Review Rating – 4 Stars

This is a fascinating book that takes virtually all of the politics out of the debate on the economic situation by building and discussing a systems dynamics model.

You hear about the annual deficits in the USA and the UK, the high growth in China and India, the troubles in the Eurozone and like me, you probably think about how these things can be connected.

Well this book helps to answer those thoughts although its main focus is on the relationship between the USA and China.

The Origins Of The Crisis – The Boom in the USA – 1980 to 2000

Statistics analysis shows that this was a remarkable period that caused the Dow Jones index to soar. The authors research traces this back to two connected but compensating forces that have caused a great imbalance:

  • The annual fiscal deficit in the USA that has pumped up the economy
  • The annual trade deficit in the USA that has deflated the economy and at the same time caused the stock exchange bubble and then the real estate bubble.

[continue reading…]

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Crash Proof 2.0 by Peter Schiff

Crash Proof 2.0: How To Profit From The Economic Collapse by Peter D. Schiff

Book Review Rating – 4.5 Stars

Peter Schiff is an American economist and investment manager who believes in the Austrian economic theories and predicted the real estate crash that came close to ruining the world’s economic systems in September 2008.

But he expected the problem in America to be much worse than we’ve seen so far.

The format of Crash Proof 2.0 is interesting. You get the chance to read:

  1. His original thoughts that were published in 2006.
  2. His updated thoughts after the real estate crash that were written in 2009. [continue reading…]
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Is Economic Growth A Force Of The Past?

In the UK the Chancellor made his Autumn Statement yesterday updating Parliament and the electorate on the economic woes.

Things don’t look good and it’s hard to see how the UK can keep its AAA credit rating that keeps government interest rates down.

The basic message is that government spending is high while tax receipts are low. This means the annual public spending deficit will stay with us for many years to come

All the time the accumulated national debt is increasing and will create a huge burden when interest rates are forced up in the international money markets.

The unfriendly squeeze on lower government spending and higher tax rates is going to keep any feel good factor away for years.

The current coalition government between the Conservatives and Liberal Democrats and the next Labour government will be forced to do the opposite to what they want to do.

Perhaps I’m being unduly pessimistic but there seems to be an automatic assumption that the economy will return to the average growth rates of the past — about 2.5 % per annum.

The Underlying Causes Of Economic Growth

Economic growth is usually defined as the annual percentage change in gross domestic product (GDP) after adjusting for the increase in monetary values caused by inflation.

This is an assessment of how much the country has produced of value in a year.

It’s quite a hard concept to think about beyond the abstract level.

Does a nurse looking after sick patients add to GDP? Yes she gets paid although the NHS is funded by the taxpayers. But what about a relative who acts as an unpaid carer for an ageing parent?

Fundamentally there are only two ways to increase GDP

  1. To have more people in the country contributing to the economy.
  2. For those who are working to increase productivity.

Demographic information tells us that as the baby-boomer generation retires and life expectancies increase, there will be an increasing proportion of people who are retired. While they will create demand for goods and services, they won’t directly contribute to GDP.

In fact this generation bulge will increase the pressure on state spending on health, pensions and long term care.

Productivity of those who are working needs to increase quickly for the economy to stand still.

But there’s a fairness issue. If you work harder you want to share in the increased wealth. That’s only natural.

This increases the need for even more productivity gains.

And that means change.

But change is usually resisted. It’s scary.
It’s hard in the private sector but the balance of power between the business owners and the employees usually means that it happens. Perhaps not as much or as quickly as the business owners want but it happens.

It’s even more difficult in the public sector where union power is high and moral pressure for good causes is intense.

In 2012 the public sector represents about 38% of the economy by tax take and 45% by spending if I’ve understood the statistics correctly.

To close the annual deficit those numbers need to come together. To pay back some national debt tax needs to be higher than spending.

Can the public sector increase productivity fast enough to create economic growth? Can the private sector grow even faster to compensate?

I’m not convinced they can.

I struggle to see how we can live up to past rates of economic growth.

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What Can Be Done To Boost The UK Economy?

Chancellor George Osborne will give his autumn statement later this week  (December 2012) with GDP 3.1% below the 2008 pre-recession peak.

The peak was 18 quarters or 4.5 years ago and with average annual growth rates of 2.5%, we are more than 13% behind where we could have been if the recession had been avoided. That’s why the pain feels severe. Borrowers have been protected to some extent by the low interest rates but for those with savings, the impact combined with high inflation has been painful.

More worrying the government continues to spend money it doesn’t have.  Despite all the talk of austerity,  the numbers reveal that government non-capital expenditure is an inflation adjusted 6.7% increase on pre-crisis levels.

That doesn’t sound much like an austerity program to me and any business that promised its bankers that it would cut costs and had to admit that it had done the opposite, would be in for a very tough meeting as the owner’s credibility would have been shot to pieces.

Restoring Aggregate Demand To Boost The UK Economy

The problem with aggregate demand is that the consumer expenditure is 5% down, but we know that was fuelled by excessive debt that has to be paid back.

In fact in the short term the economy needs consumers to splurge like crazy but long term there are big problems if savings for old age don’t increase massively. It’s a complete mystery to me how any government can do the right thing for the long term when it means sacrificing short term growth and the feel-good factor that boosts polls and helps politicians to be re-elected.

Money is trapped within companies who are reluctant to invest. Tax breaks like the old 100% capital allowances would help.

The service sector is above pre-recession levels just,  manufacturing is down by 8%. The steepest fall is construction,  a whopping 18%.

A walk down any high street or shopping centre shows we don’t need more stores.

We do need more houses as the basics of supply and demand have kept prices at high levels against average incomes although there have been some falls.

Increasing supply will push down prices,  hurting the haves but helping the have-nots. Pension funds could be encouraged to get involved with social housing.

Infrastructure projects also offer a way to boost the economy,  either publicly or privately funded. Incentives need to be put in place to help those with the funds to invest in these big projects and the government could use its ability to borrow at remarkably cheap levels to fund capital projects.

The risk is that the AAA credit rating for the UK will be reduced. In all honesty, without sustainable growth, that’s likely to be reduced any way. The more risky spending is the costs of funding all the good causes which make demands on the taxpayers money.

That may sound harsh but it’s frightening how small the percentage of the people who make a net contribution to the economy is. It’s easy to keep spending on good causes because morally it’s the right thing to do. The trouble is that means taxing those with money, and they can only be pushed so far, before they push off.

What Do You Think Can Be Done To Boost The Economy?

I’d like to know what you would do if you were the chancellor with the responsibility to manage the country’s finances.

I maintain that the 2010 election was a good election for the Labour Party to lose. Those golden rules of Gordon Brown including keeping national debt below 40% and balancing annual deficits and surpluses out over the economic cycle still sound good to me. It’s a shame it didn’t happen. Poor Prudence.

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Tax Dodging Companies & Conscientious Consumers

With many Western governments running large and unaffordable annual public spending deficits (despite claims of austerity) attention has turned to giant companies who use aggressive tax saving schemes.

This includes companies like Google,  Facebook,  Amazon and Starbucks which make high sales in the UK but pay little corporation tax.

They do this by switching revenue out of the UK subsidiaries and switching costs in through loopholes in the tax regulations.

Whether this is appropriate behaviour depends on your perspective.

Governments will see it as bad as they are losing tax but it’s their tax laws that are allowing it to happen.

Company shareholders (direct or indirect through pension schemes) should see it as admirable.  The more money the company keeps, the more valuable the shares.

Companies can point to the value they create for the economy through employment tax, property rates and VAT.

Consumers may be indifferent but it is the body of individual consumers who have the power to make companies do the “right thing”.

Whilst differentiation is usually about creating a positive preference for one particular brand,  negative differentiation can create a preference for anything except that brand.

When I was a student,  there was a boycott against Barclays Bank because of their involvement in apartheid South Africa.

These tax dodging companies risk social outrage creating similar boycotts.

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The Misery Index & The Impact On Business

The Misery Index is a term which is gaining popularity in the press as economic problems and social unrest increase in 2011.

What is The Misery Index?

The misery index is a composite measure made up of two important measures of economic activity:

  • The unemployment rate
  • The inflation rate

The misery index was created by economist Arthur Okun in the 1970s. Harvard economist Robert Barro created the Barro Misery Index also in the 1970s which also included GDP and the bank rate.

When I first studied economics in the mid-seventies, it was thought that there was a trade-off between unemployment and inflation. As one increased, the other was supposed to reduce according to the Phillips curve suggesting a fairly constant misery index.

While it was a nice theory connected to supply and demand

  • if demand exceeded supply, then prices would increase but unemployment should reduce as the incentives to increase supply improved; and
  • if supply exceeded demand, then prices would fall but unemployment would increase as actions were taken to reduce supply

a look at the economic data showed that the link wasn’t strong and the misery index raises and falls.

The Misery Index Across The World

MoneyWeek magazine (28 October) reported the misery index across the world’s leading nations.

The Countries With the Lowest Misery Index

  • Switzerland 3.50
  • Japan 4.80
  • Norway 4.90
  • Mexico 8.37
  • Australia 8.80

The Countries With The Highest Misery Index

  • South Africa 28.90
  • Spain 23.99
  • Greece 19.23
  • India 18.39
  • Argentina 17.20

The UK has a rating of 13.30 and the United States 13.00.

The Impact Of The Misery Index On Business

The misery index affects confidence. As it increases, consumers and businesses as investors become less confident about the future, increasing the likelihood of delaying spending decisions and increasing saving. As people become less confident of the general economy, the natural inclination is to put about some rainy day money although doing it may become harder because incomes are squeezed.

Different parts of the economy are affected in different ways by increases in the misery index.

As the unemployment element increases, people who are unemployed find it more difficult to get a job and those in employment fear that they may lose their jobs. This aspect of the misery index won’t affect those who are already retired.

As inflation increases, consumers incomes will buy fewer goods and services unless their incomes rise in line or faster than inflation. If unemployment is high, bargaining power of employees to protect their standard of living is weak meaning those in work are likely to have their incomes squeezed and be forced to either cut back on consumption or to increase their personal debt to maintain lifestyles. Increasing debt when unemployment risks are high is risky.

Those retired may be protected against inflation if their pension plans are linked to an inflation index although there will be discrepancies between the index and pensioners’ own purchases. Many pensioners may have a fixed income without any link to inflation and even worse, those without annuities who rely on investment income are squeezed by the record low interest rates.

The misery index creates a feeling of helplessness. Consumers want and need more income to keep up with inflation but unemployment keeps the wage pressures suppressed and there are few opportunities to supplement income with overtime and secondary part-time jobs. Individuals who can afford to save are likely to build up a “worst case” reserve but while this makes sense for the individual consumer, it further weakens confidence in the economy as the reduced consumption causes businesses to cutback further on employment.

The Misery Index and Business Strategy

Both unemployment and inflation should be considered in the PEST Analysis. I believe the misery index is worth adding in as an extra measure to monitor since the statistic related to confidence.

Wikipedia has an interesting analysis of the misery index across the presidents in the USA. It shows how troubled the seventies were with Nixon, Ford and Carter. To some extent, there is a time lag between the actions which cause inflation and unemployment and it showing through in measurements. For example, unemployment is a lagging indicator of recessions.

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