UK tax cuts: Something just does not add up

It would have been a bombshell for many, but in good old British tradition details of this annoucement were leaked this weekend, so here we are picking this apart before Alistair Darling has made his speech due later on today.

The jist of it: Labour want to spend their way out of this unprecedented recession. And we are all seriously concerned that the numbers behind the justification of the intention to spend our way out of the recession just does not seem to add up.

Starting a small business during recession

My other half and I have recently started a small IT consultancy business. Earlier this week, I went on a 3 day business start-up course to recap on fundamentals of law, marketing, finance and accounting. The course was organised by a UK organisation called Business Link. Its objective is to provide free advice and coaching to new start-ups.

I was a bit sceptical of how useful the course was going to be, but I have to say it was quite good. I feel that it has left me feeling inspired to go out there and make money. They say that at least 50% of small business fail – it must be more than that though – and it’s not difficult to see why this is so. Our tutor said that we as attendees maximised our chances of being in the successful 50% by coming on this course. Judging by the responses of fellow students I am inclined to believe him.

People set up on their own for all sorts of reasons, but it seems the desire for independence and flexibility is one of the biggest drivers. However many are ill-prepared. The students on this course were full of enthusiasm and great ideas. Unfortunately a few were in for a rude shock when it came to the basics of accounting and finance. For example, as we were doing a cash flow forecasting exercise, there was a sharp intake of breath from one lady. She looked around shocked and announced that she just realised she could not implement her business idea for at least another year – she forgot about the costs of buying or leasing a van and other key equipment. And she already printed labels and logos for her products! She is lucky that she realised the problem now and not after investing even more into her start-up. But many more would not have a clue and launch straight in.

Granted, it is scary to make this step at the start of a recession however well-prepared one might be. The people I know – my ex-colleagues – are keeping their heads down and holding onto their corporate jobs for dear life. I really hope there would be no going back for me. I spent so many years dreaming about working for myself that making a U-turn now and running for the relative safety of full time employment is the last thing that I want to do.

It’s all in the mindset, it seems. Over the years, I have lost count of the “final straws” in my last job with my old employer, but I never thought I’d actually do it. Watching myself getting progressively more miserable has eventually tipped the scales in favour of drastic action. So here I am facing the unknown and the daunting ahead, trying to contain my excitement.

Doing a basic SWOT (Strenghts, Weaknesses, Opportunities and Threats) analysis on any new start-up is showing that Recession is a threat. However I firmly believe that it should also teach us rigorous cost control, discipline and focus, which will give us an edge in future years. Running a business with few frills but delivering a fantastic product or level of service to a customer is a very very worthwhile objective to achieve at any time of the economic cycle.

Wish us luck – and if you, my reader, need an IT project manager, maybe we should talk? 🙂

Shock move by the Bank of England to slash interest rates

Yesterday interest rates in the UK were slashed 1.5%, an unprecedented move which literally drew gasps of surprise from the City of London. At most perhaps 1% was expected.

Recapturing the initiative: The move was meant, the Bank claims, to be that decisive step in dragging the country out of the unfolding recession. But it seems that the investors were not impressed. UK shares continued falling on the day and the FTSE ended up 5.7% lower.

The Bank is seemingly trying to re-capture the initiative so that it is seen to be in control of the economy. It does not feel like it is in control, though, and the latest surprise interest rate cut feels like a knee-jerk reaction to events.

Economic outlook: UK interest rates have been quite high for some time and the Bank of England has been trying to micro-manage its inflation targets by fine-tuning its rates at 0.25% at a time. It lost track of the bigger picture long ago, being obsessed with inflation for way too long. Now the economy is shrinking, unemployment is on the rise, no-one is lending, no-one is spending, the markets are unstable and panicky and the financial system is in a mess. And they think they are going to be seen as leaders saving the day with a rate cut out of the blue? I don’t think so; too little, too late.

The rates should have been cut much earlier, then they could have had an impact when it mattered. That was at the latest at the start of 2008.

Retail banks’ response: One of the reasons this is not going to be an economic remedy that the Bank of England wants is to be is that retail banks are going to pass on as little of the rate cut as possible to their customers. Retail banks are in a big spot of bother themselves, needing to regroup after the credit crunch contraction set in and wiped out their balance sheets assets.

Being aggressive competetive profit-making organisation (= or fat cats as others will call them) that they are, they have no altruistic tendencies to help out consumers in need of cheaper credit – they are out to squeeze as much money as possible out of all of us.

We might argue it is socially irresponsible to act in this way when they ended the global economy in an unprecedented mess. But banks are exactly that – always have been – probably always will be – out for themselves. At best they will say they are serving their shareholders’ interests, although I have argued
before that often these are just lofty words of intent.

Yesterday’s interest rate cut will benefit banks which will now be able to secure cheaper credit for themselves at the time when credit is scarce. Banks are not going to willingly give all of this money away to its customers by correspondingly reducing their own lending rate and thus eliminating their chance of taking a profit, at the time when they are making losses on their past bad loans and derivatives transactions gone sour.

Lend me an umbrella: The confidence in making sensible lending decisions has been shattered by recent global events and it will take time for banks to start being cooperative once again. Remember the saying

“A bank is an institution that lends you an umbrella when the sun shines, only to take it away when it pours”.

We are seeing this process in action right now.

Low confidence is driving the recession: So if the government wants for retail banks to re-start lending, it is a bit like ordering the water to flow upstream. Lending policies are being drastically tightened, tolerance of customers in arrears is probably approaching zero, and rate cuts are not being passed on in a desperate bid to increase banks’ own profitability.

The promise of a recession is as ever becoming self-fulfilling, and we seem to have little control over this downward spiral at this stage – until we think we’ve gone far enough and confidence starts returning again.

 

Copyright 2008 by CuriouslyInspired

A historic election for the US and the world

Today is a historic day for the US – a convincing victory of Barrack Obama, the Democratic candidate, in the race for the White House. Hail Senator Obama, the future first black president of the USA!

Even as I write this, I know it should not matter what colour the face of the winning candidate is. Maybe it will matter less going forward, now that the USA have come this far – but it seems to matter a lot today. So it’s a victory for racial equality, amongst other things. And this alone would have made it a historic day.

Politically and economically, this victory gives the US a chance for change. And it gives the rest of the world a hope that the US will show us a different face. We hope that the USA will stop interfering in other countries’ political affairs, stop being aggressive and act as a policy-maker around the globe. It does not own the world – so we would like to see it behaving like an equal to other nations.

We would like the US to take concrete environmentally-conscious steps and set an example for tackling global warming and investing in alternative energy technologies. Many have paid lip service to this matter in the past but not much has been done. We make no mistake, this is a huge challenge which needs to balance the need for ongoing economic development of the country with ways to make it much greener, fast. But now is the time to step up and really do something.

Last night, US citizens have chosen change over more of the same. It is up to Barrack Obama to lead them through to change he has been talking so eloquently about during his campaign, and to inspire the whole country to adopt the new ways.

Governments can only do so much. It is the electorate that often makes it happen. Senator Obama has scored an unprecedented victory last night which shows he has the support to make change happen. We have seen historic pictures of people queuing up to vote in this election. The Americans have come out in their millions and said that they have had enough of the status quo of the previous presidency. Don’t waste this chance, Obama!

Will Barrack Obama stay true to his ideals once he is in place? Will he change the face of the USA on the international political landscape – or sway under pressure from various lobbies and moderate his election campaign principles? Many have fallen victim to pressure in the past.

Only time will tell whether Obama will stay strong and see through his inspirational ideas. We hope he does – and that today we have seen the start of the new era for the US and the world.

Call for action: Plastic rubbish soup overwhelming the Pacific ocean

I was profoundly shocked to see these pictures of the floating rubbish in the Pacific ocean yesterday. See some disturbing the pictures of this Global ecological disaster here.

The size of the problem: Plastic rubbish, referred to as “rubbish soup” or “trash vortex”, which has been accumulated in the sea for decades, has created two floating continents up to twice the size of USA in the middle of the Pacific ocean, and continues to grow at an alarming rate. Plastic is not biodegradable and cannot be digested, so it stays around forever. It does however break up into smaller pieces as the result of exposure to sun’s rays (or photodegrade) and after that, causes untold environmental harm.

Where does it come from? Around 20% of the floating “soup” comes from rubbish discarded from ships and oil platforms, with the rest coming from land.

How it was discovered: Because the debris are translucent, to a great extent broken up into small pieces and float just below the surface, they are invisible to satellites. Bizarre as it seems, it was discovered only by chance in 1997 by an americal oceanographer Charles Moore who was taking a shortcut home after a yacht race and literally sailed into the Eastern rubbish patch. He says that this was an ocean he had never known:

There were shampoo caps and soap bottles and plastic bags and fishing floats as far as I could see. Here I was in the middle of the ocean, and there was nowhere I could go to avoid the plastic

He ended up sailing through it for a week and said that the rubbish float probably went on for hundreds of miles. It was then estimated that the size of the patch was the size of Texas and was going to double in size in the next decade.

Why the Pacific? A combination of Pacific currents sitting underneath a stable high atmospheric pressure system with very light winds (also called the Gyre), typical of the Pacific ocean’s natural rhythm, cause the the “soup” to accumulate during the winter months in two areas of the ocean, so that it reaches its maximum density by spring. Changing currents then disperse it so that some of it is washed ashore in great quantities, small pieces creating plastic dunes, large pieces visible to an untrained eye.

Environmental impact: The “soup” is causing harm in several ways:

• It is highly concentrated (outnumbering plankton by up to 6 times and rising) and can be broken up into small pieces. Birds mistake plastic for edible things and pick out large amounts of it, later dying of malnutrition, blocked digestion, or getting slowly poisoned as the result
• As plastic breaks down further and further, it enters the food chain of the entire living ocean and gets into the human food chain
• Particularly dangerously, huge masses of tiny plastic pellets called nurdles – the raw materials of the plastics industry – are lost or spilled every year. They are likened to chemical sponges that attract dangerous chemicals like pesticide DDT, which also enters every living creature’s the food chain. Consequences include cancer, obesity, infertility, immunity problems, and many other nasties.

Algalita Foundation: Charles Moore was so alarmed by his discovery that he set up a non-profit organisation Algalita Marine Research foundation dedicated to protection of the marine environment through research, education and restoration.

What can be done by us: To stop the plastic soup from getting any larger, we need to change the way we think about plastic in our daily lives.

The easiest-to-do things include:

• Use canvas or recycled bags for your shopping
• Use items packaged in metal, glass, or paper packaging – instead of plastic
• Spread the word! Not everyone is aware of the dangers of plastics
• Speak to manufacturers and ask them – why do they still use non-biodegradable packaging? There are plenty of much greener alternatives out there and people want to see these used.

It’s a call for action. It is up to us to make the change, and demand a corresponding change in the attitudes of industry and commerce.

For more information about Algalita, check out this site

http://www.algalita.org/

Russia at risk of government debt default

A serious financial crisis is continuing to unfold in Russia.

Capital outflow: In the last few weeks, foreign investors withdrew their money out of Eastern Europe, the Russian stock market has fallen over 60%, and the government has been on a spending spree trying to prop up the collapsing markets. The very small rally Russian markets have experienced in the last 5 days are rumoured to be due purely to government’s share-buying activities.

As I wrote recently, the government committed a package of $120bn (and some sources say, $200bn) to bail out struggling large Russian banks – against the backdrop of some bank runs and bankrupcies of the smaller players.

Oil price collapse: Coupled with the above, the price of oil has recently fallen back beyond the $70 per barrel, now standing at about $67. Russia needs the oil price to be above $70 to break even and balance its national budgets (compare this to $95 for Iran and and Venezuela, and $50 for Saudi Arabia. Source – NY Times).

So, as Russia makes less and less money through its oil exports and wasting ever-increasing sums of money on propping its markets, where does this leave it?

Debt overload: Predictably, not in a very good position. Russia has accumulated a lot of foreign loans and in the next couple of months, needs to roll over $47bn of them. As there are very few investors left wishing to extend their support to struggling economies, this task will be exceedingly challenging. In total, Russia has $530bn worth of foreign debts, clocked up during the recent years of massive market expansion and over-confidence. Of these, another $150bn are falling due to be refinanced in 2009.

On track for downgrading: S&P issued a warning that it might downgrade Russian government bonds reflecting the declining credit-worthiness of the state. However presently, it maintains a credit rating of BBB+, the third lowest investment grade. If Russian bonds are downgraded further, this means they will lose their investment grade status, and any further credit to the country will cost it even more.

Moody’s downgraded the Russian financial outlook from “stable” to “negative” in the last week, citing “slowing asset growth, higher inflation, the slump in equities and funds leaving the country, all of which could result in deteriorating fundamentals for banks” as reason for its decision.

Credit default swaps, which are being taken out as means of insuring investors against (in this case) Russian government bankruptcy, are reflecting this in their pricing. CDS spreads (the difference between the buy and sell quotes), which serve as a measure of risk tolerance, are widening massively, reaching a 1,123, which is higher than spreads on Iceland’s debt before it sought a rescue from the International Monetary Fund, reports the Telegraph.

Russian government heading for bankruptcy? Thus the creditworthiness of the Russian state is in itself in question. It may be that the Russian government is heading for a default on its foreign debt, as it did fairly recently in 1998 – although the situation in 1998 and 2008 is somewhat different.

 

Copyright 2008 by CuriouslyInspired

What the UK government knew about the approaching Icelandic bank crisis

Here is something that did not surprise me at all today.

The UK government, it appears, knew perfectly well that the Icelandic banking system was heading for a meltdown – as recently as March 08. But it did nothing to help out some of the UK savers.

Back then, the Icelandic government was seeking help for its banking system as the confidence was starting to collapse and it needed money. Mervyn King, the governor of the Bank of England, commissioned several reports to assess the state of the Icelandic banking sector, and refused to help out when the results that came back were – predictably – not very reassuring.

Failure to act: Discussions earlier on in 2008 on the possibility of turning UK operations of Landbanksi, the now-collapsed bank, into a UK subsidiary, did not reach any conclusions. This means that whilst the UK government was aware of the impending danger to Landbankski’s UK savers, it failed to negotiate a status change for this branch which would have meant savers would have been covered by the UK deposit protection scheme when the collapse inevitably happened. It failed to act to aleviate the inevitable fallout.

Liberal Democrat treasury Vince Cable is now calling for an inquiry to understand the extent of UK government’s knowledge about the forthcoming crisis.

The government has recently confirmed that it will back private investors’ money, but this leaves charities and local councils at risk of losing all their money.

The savings debacle: Now, a huge amount of charities and public sector bodies have their money locked in collapsed Icelandic banks. Here is the quick list of councils that caught out in the meltdown.

Some councils have been warned: It appears that many did have a prior warning about the impending danger. Landsbanki, Glitnir and Kaupthing bank were all downgraded in Feb – March 2008 by credit rating agencies. The confidential advice to move savings elsewhere was passed to many councils by their advisor, Sector Treasury Services.

Some acted on this advice and moved the investments; some could not, as money was locked in long term deposits. Others – and this is the shocking bit – continued ignoring financial advice and even increased deposits made. This, unfortunately, just confirms some council’s incompetence in financial management.

Read more details here.

So, tell me something I did not know? The UK government that is wilfully closing its eyes to the inevitable and refusing to act early, and UK councils that do not competently manage their money. What a shambles.

 

Copyright 2008 by CuriouslyInspired