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Public Sector Hit:
I read in the times yesterday that there are to be widespread job losses in the public sector, most notably local council offices. It was reported that in the region of 7,000 redundancies would have to be made.

The reasons for the bulk of these redundancies was the collapse in the housing market, which has led to a fall in fees from property developers, land searches and domestic planning applications. I found this interesting that even though the state is responsible for these functions, there does seem to be some common sense operating within these departments, in so much that a decrease in the workload has led to a reduction in the staff needed.

Maybe I’m just too cynical, but I just assume that most people that work for the state do so because they expect a nice easy life, with an above inflationary payrise each year and a nice pension at the end of it - oh, and job security. I had never really considered that, as in private enterprise, these departments would have to effectively be self funding, and thus employ at a level that is sustained by the current level of activity.

Private Sector Hit:
I heard on the BBC news at lunch time that Honda in Swindon would have to stop production during April and May of this year. This is on top of a proposed shutdown in February and March, which would mean they are unproductive for 1/3 of the year. This is quite incredible, and what’s more so, is the fact that they are not laying people off, they will be keeping them, but won’t have any work for them during this period.

There were some mutterings during the bulletin about how the government was going to have to bailout the car industry in this country. I don’t see why they should, the car industry is probably bloated and inefficient in this country and could probably use this recession to transform itself into a more competitive sector. And if it can’t, then what’s wrong with importing cars? No doubt they would be cheaper - you can already buy a European right hand drive car in Europe for far less than you can in the UK.

I suspect there are probably import duties for non-EU manufactured cars, a way of the government protecting the interests of the UK car manufacturing industry - which last time I checked, was not British at all, Ford is American, Honda & Nissan are Japanese, Jaguar Land Rover is Indian, Rover is Chinese, and any other manufacturers tend to be small sports cars and not mass market cars.

So it does beg the question, should the UK government really be bending over backwards to help foreign owned UK manufacturing concerns? And in fact, wouldn’t the government serve it’s people better by increasing the competition and thus lowering prices substantially, such that we all wouldn’t be so reliant on credit to make a new car purchase? As it is the lack of credit and economic uncertainty that has caused such a drastic drop in demand for new cars at the moment anyway.

In one of his latest speeches on our current economic ills, David Cameron had two very concrete proposals regarding savers and pensioners.

One was that basic rate taxpayers should not incur any tax liability on the interest paid on their savings.

Now that would get my vote every time. For many a long year now I have railed (quietly) against what I saw as the unjustified fiscal theft of interest from small savers and in particular, in times of high inflation.

Why do I say some taxation of interest is unjustified?

Historically most, if not all, of interest paid on deposits has simply acted to restore the real value of the sum deposited against the effects of inflation. My contention has always been that this restorative element should not be taxed as income, in principle it is more akin to the payout of an insurance policy.

Some time back, the government themselves acknowledged this by their way of taxing Capital Gains.

Before Gordon Brown saw a way to increase the tax take - or maybe it really was to simplify the taxation of capital gains - capital gains tax was applied only to the real gain made upon the disposal of a taxable asset. In calculating the gain, the original cost of the asset was increased in line with retail price inflation from the month of acquisition to the month of disposal.

In effect that part of gain caused by inflation was ignored and not taxed.

David Cameron’s proposal maybe goes further than that, but how long will it last if real interest rates reappear?

Given today’s seemingly ever plummeting base rate it looks as if we are now back in the days where the rate of interest is less than the rate of retail price inflation. That’s why I only give David Cameron two and a bit cheers for his proposal – I’ll leave the rest of the accolade for the day when we see a return to positive real interest on savings.

In the meantime we should encourage our political leaders to adopt this proposal as a fair method of treating small retail savers. Be assured, as I am, that those with deeper pockets have always found ways to redress this iniquity.

Punish savers and make them spend money was published in the Opinion columns of The Times on Thursday 8th January by Anatole Kaletsky exhorting us to ignore the advice of David Cameron and as individuals to spend our way out of this current recession.

Whilst admitting that this sounds paradoxical Mr Kaletsky nevertheless “explains away the paradox” by claiming that weak debtors should be replaced with strong ones – presumably meaning those prudent individuals who are capable of living within their means and have not buried themselves in a welter of unnecessary debt during the last decade or so in spite of the unrelenting sales pressure on the part of the banks to do so.

My own humble opinion is that this is complete and arrant nonsense.

There are institutions within our economic system whose primary function used to be to match retail savers with good sound long term borrowers who were ideally investors in the productive economy. The expectation being that the vast majority of these long term investors would meet their interest and capital repayments from the return on their investment.

These institutions used to take an interest in the probability that the borrowers would be able to fulfil that expectation and would generally be reluctant to advance funds to those they deemed unlikely to meet that goal.

We usually refer to this type of institution as a Bank. Somewhere along the way both Mr Kaletsky and many of our banks seem to have lost the plot.

It is about time that these institutions recognised their prime function and got on with it, if necessary with a few digs from David Cameron. (Probably the worst thing about this whole mess is that I find myself agreeing with a politician!)

Until recently we were told that Consumers’ Credit was already too high, how is now sensible to increase it even further?

I don’t object in the slightest to the idea that government should bring forward spending on infrastructure that will better equip us as a nation to take full advantage of the next upswing of the economy, all credit to them if they can.

I do not see how the idea that weak debtors can be replaced with strong debtors will help us at all, they are both bad types of debt, and as such, it is a recipe for compounding the present disastrous situation and should be dismissed out of court.

So there we are Carry On Saving! If you can!

Maybe in years to come we will have the comedy version of current events featuring the good old British film industry and those stalwarts of the Ealing and Pinewood Studios to help us forget how bad the good old days of the early 21st century really were!

No prizes for suggesting who would play wicked Gordon!

I watched the news this lunchtime, which was all about the Bank of England base rate cut, and how it is the lowest interest rate since the Bank of England was founded in 1694. This is therefore an unprecedented period in the history of the UK economy.

Most of the focus during the bulletins about the base rate cut seemed to focus on the negatives, which seem to be that the banks are still not lending to each other, they’re not attracting any foreign investment funds because the returns are too low now thanks to the cuts in the base rate, and the perennial moan about the banks not lending to businesses and consumers.

Typical of the media not to focus on any of the positive news that comes from this announcement today, such as the fact that around half of UK properties that are mortgaged are on tracker rates. As such this vast number of homeowners and landlords will find themselves with more disposable income, which is good news for the UK economy (assuming that some of that money trickles back into the economy in the form of increased consumer spending).

When you consider that only as recently as November 2007 the base rate was up at 5.75% (BOE lowered to 5.5% in December 2007), means that in just fourteen months, we have seen a 4.25% reduction in the base rate, or in terms of the average UK mortgage of £150,000, a saving of £531.25 a month in interest. Surely this would have been a far more positive spin on todays Bank of England announcement, given the recession and numerous stories of businesses entering administration and laying off staff.

I read with interest in The Times over the weekend that the Chancellor is considering another bailout package for Britains Banks. When will the government learn, the banks in this country are taking their money and running with it!

The evidence is clear in the amount of lending being done during the last quarter of 2008 that despite the governments best efforts to get credit flowing freely again, the banks are simply not playing ball. I wonder why this is though?

Is this simply a case of banks trying to take the government for a ride? One minute saying

“yes, we’ll start lending money willy nilly as long as you (the govt) bail us out”

And then as soon as the deal is done, deciding to renege on their promises to the government, and simply stashing the money away and building up their capital reserves, at the expense of Jonny Taxpayer and a naive government no less.

Or is it simply that as a nation, there is now not enough “good credit risk” customers out there, only swathes of “poor credit risk” customers, whom the banks no longer wish to lend to anymore? I suspect it’s a bit of both, banks probably do want to stash money away, build up their reserves, and lend at higher margins than previously, whilst the government would like the banks to start lending freely (as this would potentially boost spending in the wider economy), the banks can’t comply if in doing so, they end up repeating the same mistakes which caused the credit crunch in the first place.

There has been talk of the government starting a new, nationalised bank, that would buy up all the other banks’ bad debt, thus cleansing the financial system of all the toxic debt that has been causing so many problems for the past eighteen months or so. Even this may not help the situation, if the real problem comes down to there being a lack of credit worthy individuals or businesses to lend to.

So perhaps the reality of 2009 is that we will all have to improve our credit ratings, which will allow the banks to lend to us again, thus resolving the current financial crisis. Doesn’t bode well for the government - who seem to think that bankrupting the country, by borrowing heavily to fund spending on public works and job creation schemes is the way to stave off a serious recession - if the banks will only lend to those with excellent credit records (who generally don’t need to borrow money).

With Christmas just around the corner and having not quite finished my Christmas shopping, I went out yesterday to get the final few gifts that I needed. Granted, I’m having a cheap xmas this year thanks to the credit crunch, so I wasn’t going to be going on spending binge myself, but it seemed to me that plenty of others were!

Given that every day we hear about job losses and a very bleak financial future for this country (and in fact the world), there seemed to be no shortage of shoppers indulging in some last minute Christmas shopping. The shop I was in was so busy that I had to queue find a parking space, queue to use the toilet and queue to checkout, in fact it took over an hour to buy four items!

So why was this shop so busy, when so say nobody has any money this Christmas? I can only guess that there are a lot of people who are simply in denial of the fact that their jobs are unsafe and the economy is in poor health, and thus spending without any thought for the consequences. Probably putting the Christmas shopping on credit, thinking they’ll worry about it in the New Year, deceiving themselves that January is always a cheap month, so they can pay off the xmas excesses then (but in fact will have forgotten this promise to themselves as soon as they see the bargains available in the “January Sales”).

I’ve always thought the best way to get through Christmas is to start saving a bit of money each month so you have a nice fund with which to pay for Christmas presents and parties over December, I’ve only ever managed it once, and it did make a difference – January came round and I didn’t feel worried about how much I’d spent, because I’d budgeted for xmas it in the previous few months.

No doubt there will be a surge in bankruptcies and such in the new year as people’s Christmas spending, on top of already record levels of debt, catches up with them. Perhaps there’s a lesson for us all in this – don’t get sucked in by all the festive advertising, stick to your budget and remember, Christmas is supposed to be a religious festival, to celebrate the birth of Jesus Christ, not just an excuse to go on a spending spree!

I was speaking with a friend earlier who has decided to get involved with a company that write off unsecured debts. They are not an insolvency company, so they are not putting in place an IVA or bankruptcy, they are taking creditors to court. In doing so, they are winning compensation for their clients on contracts that are not in line with the Consumer Credit Act, as far as I understand it.

I can’t make my mind up on whether this is a brilliant idea or just a little bit immoral, as from what I can make out, the spirit of the contracts are fair, but they seem to be winning the compensation largely on technicalities, but isn’t it always that way when dealing with anything legal…

Granted, I did write a post recently on how to get out of debt quick, (which was a bit of a rant about how greedy bankers and lenders have got us into this current predicament, and therefore we shouldn’t feel too bad about using IVA’s or bankruptcy as a way of writing off debts) which would suggest that I would be all in favour of using recent changes in legislation to deem credit contracts unenforceable and thereby claim compensation to get the debts written off, however, this method seems too good to be true, what’s the catch?

The way I see it, if you are going to use an IVA or bankruptcy to get your debts written off, it comes at a price, namely a ruined credit record for at least three years, but more probably six years (until such time that it will be wiped from your credit file). By simply suing the creditors and getting the contracts judged to be unenforceable, and winning compensation to get the debts written off, it strikes me that there’s no pain for those that have their debts written off, and therefore, a large chance that they will not learn a lesson from the experience, and thus get themselves into a similar mess a few years down the line.

Maybe I’m being old fashioned in my thinking, however I can’t help but think that when someone commits a crime and is found guilty, they have to serve a sentence. By using this method to get debts written off, it’s like robbing a bank, getting caught, and then being let off on a technicality, we wouldn’t stand for it in those circumstances, would we?

I watched the film Wall Street again last night and found it fascinating. I think the first time I watched the film was when I was a teenager, and didn’t understand any of the financial jargon being used and how it effects the characters in the film. Now that I’m an adult and have learned about these things, I found the film even better!

What struck me as an interesting notion in the film is the way Charlie Sheen’s character, Bud Fox is trying to get ahead by studying charts and projections for various companies whereas Michael Douglas’s character, Gordon Gekko pretty much ignores this information and relies almost exclusively on “tips” or information that he acquires from “moles” within the companies he is targeting.

Now in real life, this would be deemed to be “insider trading”, and is in breach of stock market rules. This is because the notion of the stock market is that the companies are “public” companies and so all information that could affect the companies’ stock market price has to be announced publicly. By circumventing this rule, if you find out information that may positively or adversely affect the share price, you can make a play with your shares and take advantage of the situation.

The thing that struck me most with this, is that in private limited companies, the opposite is true – in fact all share dealing in private limited companies is in effect insider dealing as there is no public exchange for private limited companies.

So if insider dealing is outlawed in public stock exchanges, as it can give those who have access to inside information an unfair advantage, then why is it that this is the only way of dealing in private limited companies? And does it mean that if you want to make serious money, you should discount investing in large, public companies and instead opt for small, private companies, where you can get access to inside information and much more easily take control of the business?

I think it depends on your attitude to risk and your level of experience. As I said in my post about good investment ideas yesterday, the best investment you can make is in yourself and your understanding of business.

The mortgage marketplace is a tricky place. There are so many different lenders, and each lender has so many different products to choose from, it can be daunting trying to pick the right deal.

Not to mention, that each month it seems that the lenders change their product range. One month a certain lender may have the best deals in town, but the next month they don’t have any good deals.

So how do you pick the right mortgage for you? Simply put, you need to work out who you are. I’m going to generalise a little bit here, and say that there are four types of potential mortgage buyer:

• Risk averse, low income
• Risk averse, high income
• Risk taker, low income
• Risk taker, high income

I will at this point define what I mean by low and high income. Someone who is low income is defined as someone who’s mortgage (and other debts) equates to more than 25% of their household disposable income, and high income is defined as someone who’s mortgage (and other debts) is less than 25% of their household disposable income. I use percentage of disposable income because I have met many people who earn very little money but are high income and many who earn lots of money but spend a large proportion of it on their debt repayments.

Risk averse and low income

These kind of buyers should buy a long term fixed rate deal, anywhere between 3-5 year fixed rate deals will give them certainty of payments for the medium to long term. This means they know what they will be paying each month on their mortgage, and they don’t have to worry about what the base rate is doing.

Risk averse and high income

Should go for a long term capped rate deal, so that they know that their mortgage will never get more expensive than the level of the cap. Also, because they have more disposable income, they are in a position to take a small chance on the base rate, which occasionally will move in their favour, thus resulting in a small decrease in their mortgage payments. The difference could of course be used to overpay the capital or saved for times when the base rate rises above the initial rate.

High risk and low income

A low income buyer should not be completely reckless with their finances, even if they are risk takers, so I suggest they go for a short to medium term capped rate, this will limit their exposure to rising interest rates and allow them to take advantage of any reductions in interest rates.

High risk and high income

These buyers should go for a long term tracker rate. The reason for this is that as the mortgage does not represent a huge proportion of the disposable income, you should be able to deal with any rises in interest rates without too much trouble, with the upside being that you get to take advantage of any reductions in interest rates.

Of course, this is only a guide, and any decision will of course need to take account of the various fees associated with a mortgage, not just the rate of interest. The main thing to look at in any decision on a tracker or capped rate will be the margin over or under the base rate. There are usually some really cheap tracker rates that come with 2-2.5% arrangement fees, which usually swallow up any potential savings made on the cheaper rate.

The last thing that any potential buyer should look carefully for is the penalties for extricating yourself from the mortgage contract. I would always look at products that had either no penalties or only had penalties for the duration of the discount period.

I went to a presentation last night, for an opportunity in the growing health and wellbeing market. The presentation was to demonstrate how the business operates and how the opportunity can help to create either a nice extra income on a part-time basis or in some cases a decent income on a full time basis.

Like all network marketing businesses, they always demonstrate how it is easy to make a bit of extra money around your current job/business, but also show that if you are willing to work at it full-time, you can create, for most people a much better income/work life balance than you could achieve by having a job.

The reason I went to the presentation is that a friend of mine invited me, she’s been trying to get me to come along for a little while, and eventually myself and my wife had time to go to the presentation and see what was on offer.

I was a little surprised to learn what I did learn during the presentation. The income available, if you were prepared to work hard, was much greater than I ever imagined it would have been. I never realised there was such demand for health and wellbeing products, it is an industry that is set to become the next trillion dollar industry. The company already has turnover of over $2billion worldwide, and a pretty healthy £36million in the UK alone.

How do they make so much money without any advertising? By network marketing, using the power of a personal network (your family, friends, colleagues, etc) and a personal recommendation to spread the good word, so to speak. It’s not exactly re-inventing the wheel, many industries work on personal referrals/introduced business, and there are a plethora of network marketing opportunities, such as Utility Warehouse/Herbalife and many more.

Effectively, you have to sell to your personal contacts. This is difficult for many people. In fact the lady that I sat next to last night was telling me that she finds that the biggest obstacle to overcome. I simply told her that she had nothing to worry about; it’s natural for an inexperienced salesperson to find the idea of selling a struggle when they first start out.

I remember the first time I had to do sales work. I was at university and had taken on a job as a telesales agent for a company that sold mobile phone contracts. The work involved cold calling people from the phone book and asking them if they would be interested in speaking to someone about getting a mobile phone. I didn’t last long, and in fact the company didn’t last long either – it went under a few months after I left!

In reality, the products should sell themselves, and that’s what the company relies upon, as it knows that most people are not naturally gifted sales people, so the benefits of the products must be fairly obvious so that inexperienced salespeople (the everyday people that sign up as distributors) will have a fighting chance of shifting the products and therefore making some money.

Where these network marketing companies really work is when they sign up distributors who are actually good at selling. The people they sign up as distributors who are good at selling with invariably be able to take the proposition and quickly sell enough of the stock to make a decent amount of money, and then sell the idea of being a distributor onto someone else, effectively duplicating what they have done.

It’s this process of duplication which grows the team of distributors and provides the leverage – you benefit from the efforts of the people you sign up as distributors – that the real income opportunity is based on.

In any network marketing business there will be 9 people who poke it with a stick, sign up a few of their own customers and make a small amount of money each month from their purchases, and 1 who will sign up other distributors and make a nice income by leveraging the efforts of others in their team.

Some people think it’s wrong to make money off the back of other people’s efforts, but in reality, the successful distributors have put in much more effort in signing up a team than the team members who in turn only sign up retail customers.

In reality, it’s very easy to sell the products being offered here, it’s much harder to sell the proposition of becoming a distributor, so I say well done to those that do.

Why is it so much harder to sell the proposition of being a distributor? Mainly because the vast majority of people are resistant to change. If you have someone who is in a job, they are probably in their comfort zone, and becoming a distributor will most likely take them out of their comfort zone.

I would love to get involved with this business, I believe in wellness products, I would probably benefit from using some if not all of the products, however, I suspect I won’t.

“Why not?” I can almost hear people saying. Because, what interests me most in any network marketing business is always the product/service, and never the business. I sat through the presentation last night and couldn’t think of a single person I knew who would be interested in the business opportunity, but I could think of lots of areas that you could sell large volumes of the product.

You’re probably thinking, “why’s that a bad thing?”, well I suspect if you wanted to simply set yourself up as a distributor and not a team builder, the powers that be would not be that happy, and you would be under pressure from above to build a team that each did small volumes of business rather than building a business yourself that did large volumes without the help from a team. Perhaps I’m wrong.