New Economics Theory – The Sisyphus Formula : Retained Profit = Fixed Assets + Debt.
The Sisyphus Formula – Simple Version :
Net Retained Profit = Fixed Assets + Consumer Debt
Let’s start with some a priori bookkeeping and then we’ll see later how well it holds up using numbers from the National Accounts : a) Business Borrows £100 from a bank : We have :
Dr Cash £100 Dr Loan £100
Cr Loan £100 Cr Current Account £100
And the Sisyphus Formula : “Net Retained Profit = Fixed Assets + Consumer Debt” holds true as all items in the equation are Zero at this point. The business then pays Workers the £100 to build a Fixed Asset so we then have :
Dr Fixed Assets £100 Dr Cash £100
Cr Loan £100 Cr Wealth £100
Again the Sisyphus Formula : “Net Retained Profit = Fixed Assets + Consumer Debt” still holds true as we have : Retained Profit (£0) = Fixed Assets (£100) + Consumer Debt (- £100).
If we call our Fixed Asset “Stock” (I use the term ‘Fixed Asset’ as a shorthand for non-Financial Assets of all types including Stock) and we sell £20 of it to the consumers for no profit at all – for starters – we’ll have :
Dr Stock £80 Dr Cash £80
Dr Cash £20 Cr Wealth £80
Cr Loan £100
Again the Sisyphus Formula : “Net Retained Profit = Fixed Assets + Consumer Debt” still holds true as we have Retained Profit (£0) = Stock (£80) + Consumer Debt (- £80).
If instead Business had sold £20 of Stock and made £10 Profit on it we’d have :
Dr Stock £80 Dr Cash £70
DR Cash £30 Cr Wealth £70
Cr Retained Profit £10 Cr Loan £100
Here we have Retained Profit (£10) = Stock (£80) + Consumer Debt (- £70) Once again the formula holds.
If now Business pays out £5 of this profit in dividends then we’ll have this : Business Workers
Dr Stock £80 Dr Cash £75
DR Cash £25 Cr Wealth £75
Cr Retained Profit £5 Cr Loan £100
And now we have Retained Profit (£5) = Stock (£80) + Consumer Debt (- £75).
Starting again from scratch to test other transactions : If a business found a piece rock that had a funny shape and had it ‘valued’ or ‘re-valued’ from Zero (cost price) to £150 Market price then we’d have this :
Business Dr Stock £150
Cr Re-Valuation reserve £150
In the National accounts Re-valuation Reserves are, to the best of my understanding ultimately included in Net Profit so we actually have this : Business Dr Stock £150
Cr Retained Profit £150
and once again the formula balances as we have :
Retained Profit (£150) = Stock (£150) + Consumer Debt (£0).
If some consumer with Zero wages wants to buy this Rock then they’ll have to go into debt to do so so then we’d have :
Dr Cash £150 Dr Goods £150
Cr Retained Profit £150 Cr Debt £150
Again Retained Profit (£150) = Consumer Debt (£150) and the Formula holds.
If some of this retained profit is released in dividends – say £30, then the total net debt of the consumers, which equals the amount they owe to the Banks to Business less the amount of cash, company bonds and company shares they own will now be reduced by £30 so once again we’d have Business Consumer
Dr Cash £120 Dr Goods £150
Cr Retained Profit £120 Dr Cash £30
Cr Debt £150
… Retained Profit (£120) = Consumer Debt (£120) and the equation still works. If this company then issued £20 of bonds which were bought by the consumers for £20, then we’d have this :
Dr Cash £140 Dr Goods £150
CR Bonds Issued £20 Dr Company Bonds Held £20
Cr Retained Profit £120 Dr Cash £10
Cr Debt £150
and the Sisyphus Formula would look like this: Retained Profit (£120) = Consumer Debt to bank (£150) + Cash (£-10) + Bonds Owned by Individuals (£-20) and the equation still works. Had the Company issued Company “Shares” instead of “Bonds” the situation would have been exactly the same, when all the talk is done a Share is essentially a Bond with a different risk profile attached – it’s a Financial Liability owed to the holder. So far I’ve only looked at Business and Individuals, Where does Government get involved in all this ? Well as Government isn’t a profit retaining entity – i.e. it’s not requesting more money back than it pays out – you can think of Government as being a consumer – on the outside of the Business World. So in the Formula, Government Debt is included in ‘Consumer Debt’. Foreigners – What about Imports and Exports ? – These do not fit into the equation at the moment : If a consumer borrows £150 to buy a French Rock – as in the above example – then the Retained Profits of the UK Companies is Zero but the Consumer Debt is £150. So if foreign transactions are to be included in the Formula then it needs to be amended to read : “UK Business Retained Profits = UK Business Fixed Assets + UK Consumer Debt + (Exports – Imports)”. So in this example we have : UK Business Retained Profits (£0) = UK Consumer Debt (£150) – Imports (£150). Income from Abroad – say dividends received from a foreign company for £150 – these can be counted as part of Exports for then we have : UK Business Retained Profits (£0) = UK Consumer Debt (-£150) + Exports (£100), for dividend income received by an individual and UK Business Retained Profits (£100) = Exports (£100) for dividend income received by a UK Company. As it stands, using the conventional financial system developed in pre-machine age Venice, “Retained Profits of Business” are another way of saying Business Fixed Asset Building Programmes and/or Consumer/Government Debt. In a country that has little Retained Business Profits and lots of Net Imports, the formula could be re-arranged to say Net Imports means Business Fixed Asset Building Programmes and/or Consumer/Government Debt increases. Solution : – Use NEFS – so then we have : Retained Profit = Fixed Assets + Debt + NEFS So what’s this extra NEFS – ‘Net Export Financial Simulation’ term that’s going to ‘save us’ ? Imagine we were a Net Exporting Nation – say like Germany or Japan, what happens there is workers get paid to £1,000 to build 3 cars and two of the cars are ‘Exported’ so there is only one left in the shop and it costs £333 to make so it can be sold for say £400 so the businessman makes a profit and, after buying all the cars in the shops, the Consumers still have £600 left in their bank accounts. So NEFS is about saying ‘After making 3 cars, whay can’t we own 3 cars – why give two away to some foreigner in order to balance some number in a dusty ledger somewhere ? Imagine having 3 cars sold for the £400 in total rather than just the one. This way they will own 3 cars and have £600 left in their savings. But wait ! If the businesman borrows £1,000 to pay to make 3 cars and only gets £400 back he’ll go broke – Well the only thing missing is some numbers that say £600 to balance it up – This £600 of numbers is NEFS – NET Export Financial Simulation. In the first situation the Businesman in the real Net Exporting Country had £600 in some bond from some foreign person he’ll never see and these £600′s in foreign bonds will just build up year after year in some dusty ledger somewhere never being used to buy foreign goods with – remember it’s continual year on year Net Exporting I’m talking about – not balanced trade – Exporting cars to pay for imported bananas etc. Net Exporting Countries do not suffer inflation as an automatic situation despite their ‘too much money chasing too few goods’ – £1000 wages and £300 worth of 1 car situation. If real Net Exporting Countries don’t suffer this why should NEFS countries who will have more goods – three cars to buy in the shops because they didn’t ‘Net Export’ two of them. Lack of competition is a far bigger driver of inflation than ‘too much money’. No the real big worry about people having ‘too much money’ is that once they are out of debt and have enough money they might start to live independent lives, develop their personality etc. NEFS – ‘Net Export Financial Simulation’ is the mechanism whereby the dividend of the ‘White Heat of Technology’ can be finally realised. Let’s now test this formula against the numbers from the National Accounts (or Click Here for a Spreadsheet Version) : 2001 2002 2003 2004 2005 2006 2007 2008 2001-2008 Business Retained Profits 173,200 444,300 (59,400) (48,100) (342,700) (105,100) 90,100 812,600 964,900 Increase in Business Fixed Assets 13,400 48,800 47,700 88,700 19,200 111,500 31,100 (71,100) 289,300 Household Financial Debt Increase 224,800 361,300 (127,600) (73,400) (358,000) (143,700) (46,400) 431,800 268,800 Government Financial Debt Increase (24,500) 17,600 17,600 40,300 27,800 27,300 35,200 76,400 217,700 Foreigners Financial Debt Increase (39,700) 16,500 2,700 (103,500) (32,500) (100,300) 69,100 373,500 185,800 174,000 444,200 (59,600) (47,900) (343,500) (105,200) 89,000 810,600 961,600 Difference 800 (100) (200) 200 (800) (100) (1,100) (2,000) (3,300) These numbers are in Millions and the differences are of the order of the statistical discrepancies in the Blue Book – So the Formula works in real life ! QED ! A quick look at the numbers : It shows that in 2001 all the Business profits were funded by the increase in consumer debt (Mortgage Increases/Credit card Increases/Selling of Bonds and Shares) – which also funded the decrease in Government debt as well. In 2002 the Profits of Commercial Companies and banks were almost totally accounted for/funded by an increase in consumer debt. Between 2003 and 2006 companies in total made year on year losses totally half a Trillion largely caused (matched) by Consumer Debt decreasing by three quarters of a Million over the same period. In 2007, despite Consumer debt decreasing again, Business made a Profit funded by an Increase in Government Debt, Foreign Debt and a Companies Fixed Assets. In 2008 Consumer Debt jumped sharply by just £400 Billion and Foreign Debt jumped by just under £400 Billion, helping to fund a fund a Business Profit of £800 Billion. The question arises as to why foreigners should increase their debt to the UK – given our miserable Export situation – If a foreigner borrows money – say £100 – from a UK bank then the Foreigner’s Financial Assets will go up £100 (their new Current Account) and their Financial Liabilities will also go up £100 – the new loan they owe. If the Foreigner buys UK Shares or Bonds with the money then their Financial Assets will remain the same at £100 for the financial assets to go down and for them to be only left with a Financial Liability then the shares they bought need to drop in value, in which case the £800 Billion Profits of 2008 were half funded by poor Johnney foreigner losing £400 Billion in the stock exchange, or they bought our goods (I didn’t see and Export surge in that year) or they used the money to buy things like UK Land and Buildings – The National accounts do not have any data for Non-Financial Assets of Foreigners. So what a pile of ‘funny money’ this is ! – we do pretty much the same thing each year and yet we lurch from a third of Trillion loss to nearly a Trillion Profit because some adjustments are made in a dusty ledger – or a computer screen somewhere. This ‘finance’ has no bearing on the ‘battle for scarce resources’ – what economics pretends to be – our resources don’t change so erratically. Modern finance is a miserable excuse of Proxi for reality – for real economics. This is hardly surprising as it was invented in pre-machine age Venice. Look no further than this out-of-date system for the reason that despite us living in the computer age they tell us we need to work till 70+ because we a ‘too poor’. We are not ‘too poor’ in reality – there is loads of food – it’s just the meter we use to measure our wealth – our financial system – is broke. The financial baromater shows “dull, cloudy… work hard and die poor” while actually it’s perfectly sunny outside. For Q3 2009 – So up to September 2009 – though the Government gallantly increased it’s Debt by £88,300 Million – which should provide a nice profit for Business you’d think, because Households reduced their debt by £435,300 Million and Foreigners Reduced their Debt by £209,100 Million, there was an overall reduction in Debt outside the Corporate World of £556,100 Million. The figures for Corporate Fixed Assets are not known to me yet but if Business didn’t have much of Fixed Asset Building party this year – which seems reasonable given all the ‘For Let’ signs outside empty office blocks all over the place – then Business is looking at a staggering half a Trillion loss this year. They only had £122,200 Net Retained Profit coming into the year at the start of 2009, so after all those millions of Business people have done all that work – OK in some cases “work” – for all those years, overall Business will be at a loss. To which I say “Stop playing musical chairs and start using NEFS !” Let’s now look at some of the other basic numbers picked from the UK National Accounts 2009 Blue Book and a couple of other places. Year 2000 2001 2002 2003 2004 2005 2006 2007 £ Million £ Million £ Million £ Million £ Million £ Million £ Million £ Million GDP 976,533 1,021,828 1,075,564 1,139,746 1,202,956 1,254,058 1,325,795 1,398,882 Wages 462,355 490,978 508,614 527,630 549,995 570,471 593,815 629,834 Interest/ Dividends 132,429 135,233 122,655 127,615 136,243 154,867 160,864 175,856 Small Business 56,931 61,282 64,967 68,324 74,282 79,061 80,023 82,398 Operating Profits 259,001 265,797 288,091 313,300 333,619 346,260 378,185 401,832 Less Dividends 43,755 49,894 43,787 45,248 46,705 50,397 51,249 50,087 Retained Profit 215,246 215,903 244,304 268,052 286,914 295,863 326,936 351,745 Market Cap LSE 1,868,092 1,641,945 1,358,603 1,214,293 1,386,720 1,597,609 1,869,448 2,041,056 Export Goods 187,936 189,093 186,524 188,320 190,874 211,608 243,633 220,858 Export Services 81,883 87,773 94,012 102,357 112,922 119,186 134,246 150,645 Foreign Income Received 132,934 138,534 121,664 123,185 138,311 186,740 237,622 291,302 International Transfers In 10,483 13,917 12,234 12,047 13,767 17,400 18,473 14,046 Import Goods 220,912 230,305 234,229 236,927 251,774 280,197 319,945 310,612 Import Services 66,881 70,573 74,380 79,745 84,508 93,444 99,464 105,838 Foreign Income Paid 130,972 129,109 103,378 105,662 120,466 164,885 228,049 270,527 International Transfers Out 20,258 20,432 21,104 21,882 24,043 29,249 30,358 27,584 Current Account Annual (25,787) (21,102) (18,657) (18,307) (24,917) (32,841) (43,842) (37,710) Current Account Cumulative (78,954) (100,056) (118,713) (137,020) (161,937) (194,778) (238,620) (301,398) The huge difference between the Profit shown here and the Profit (and half the time the Loss) shown above is that the Profit shown here is “Top Line Profit” – i.e. Sales less Cost of Sales and few other costs. The Real Profit – the one shown at the top of this article is derived from the movement between the balance sheet, this then is Sales less all costs and includes re-valuations of assets, pension liabilties… and ‘other’… the whole works. Notes : 1) These figures are at ‘current prices’ which means people didn’t actually get paid wages of £462,355 Million in the Year 2000 they were actually paid a bit less, say wages of something like £400,000. All the figures shown for previous years are ‘inflation adjusted’ so they look higher than they actually were – it’s trying to show the wages in ‘today’s’ money. 2) There are lot’s of problems with ‘GDP’ – the preface in the National Accounts Blue Book mentions some of them, other issues are mentioned in What’s wrong with Keynes ? What’s wrong with Monetarism ?, I have shown it here so you can have it as a ball park figure in your head to compare to the other numbers. 3) Wages, which is the Gross Wages figure, is not really income – it’s just a cost to a business, Real, cash-in-your-pocket Income is Gross Wages minus PAYE and National Insurance taxes, so take off a few quid in your mind for the PAYE and NI from these figures. 4) Interest/Dividends – This is the Interest and Dividends paid to Individuals. It’s not obvious from the Blue Book if this is Interest Before Tax or After Tax so bear in mind there might be a tax adjustment to get to the actual money received. 5) Small Business – this is the Income of small family businesses under the line Mixed Income – It does not say in the Blue Book if it is Gross, Net of Expenses, Net of Tax or actual Drawings Net of Tax – the cash-in-your-pocket Income. 6) Profits – Operating Surplus. This is the Profits of Financial and non-Financial Companies and this is where NEFS Economists differ from old fashioned Economists. According to old fashioned Economists this is all counted as Household Income i.e. £259 Billion in the Year 2000. Whereas all that you actually see as a householder and shareholder of the £259 Billion, is the Dividends paid to Households figure – a mere £45.258 Billion in the Year 2000 – (This then gets taxed so you are down to seeing something like £30 Billion in cash – but say the tax gets given to people on the state pension and nurses etc, so the we are back to £42.258 being in the hands of Consumers) . NEFS economists are not alone in this view, even the Taxman does not see the £259 Billion as your income – Shhh ! If he did – he’d tax the living day lights out of you. The Taxman, like NEFS Economists only see the Dividends you receive as your income. There is a legal fiction that the shareholders of a large PLC ‘own’ the company. In reality a modern PLC is a ‘retained profit accumulating machine’ and the dividends it pays to it’s shareholders are little different to the Interest it pays on it’s bonds – shares are just an alternative and more flexible way to structure company debt, dividends are just like variable interest payments on that debt. In the NEFS World, Business pays £10 to a worker to make stock of £10 and then tries to sell it for a profit back to the workers at the weekend in the shops – who are now consumers – for £12, but can’t because the consumers only have £10 in their pockets. An old fashioned economist does not see a problem here as, if the stock will be sold for £12 (it’s considered bad manners to ask how) then the shareholders will have made £2 profit and hence they will have £2 of what they call ‘Income’ so the Workers have £10 Income and the Shareholders £2 Income so there is £12 Income to buy they £12 retail sale price of the stock – Q E fiddle-i-D ! – In The NEFS World, for all the stock to be sold, the extra £2 is originally created by several means : Consumer debt, Government debt… see the main NEFS article. So say a consumer goes into Debt and borrows £2 from a bank (and note, some Old Fashioned economists think this is silly because if Consumer A borrows £2 from a bank then the bank is lending out some savers £2 so if the workers get paid £10 and one worker decides to save £2 and not spend it then we are down to £8 ready to spend, if the bank then lends out this £2, we are only back up to £10 ready to spend – we are still £2 short to make the £12 needed; other Old fashioned economists start wittering on about it being possible for the banks to create this extra £2 but only through ‘Fractional Reserve Banking’ – which has a few problems of it’s own see The Myth of Fractional Reserve Banking. In the real world (and the NEFS World), when a bank makes a loan of £2 it does not take the money from a savers current or savings account (has your bank balance and the NEFS world ever gone done because your bank loaned some money out to another customer ?), what is does is it adds £2 to a loan account and adds £2 to a current account – a balancing Debit and Credit, this creates £2 of new money (the current account balance), this can be then added to the £10 in wages and the stock can be sold for £12, with £2 profit for the company. (It is at this point that old Fashioned Economists fallaciously jump in and point at the New £2 in the Current account and the New £2 in the loan account and fallaciously claim “The £2 ‘savings’ in the current account is being loaned out in the Loan account – you see we need Saving to make Investments” they incorrectly cry). The company can then pay out a typical to generous 25% dividend = 50p, this 50p can be used to pay off £50p of the consumer debt but it still leaves £1.50 consumer debt that matches £1.50 retained profit of the company. So in the old fashioned Economists World we have Income (£12), which equals Consumption (£12) – and “what’s the problem ?”. In the NEFS world (and check your bank account, the real World as well), we have “I work hard, long and well and I end the week in more debt than I started with” – you might be a lucky individual who does not have this problem but over the whole economy this is inevitably going to be the case – the closest I can explain it with is its like musical chairs – no matter how fast you run and how well you listen someone is going to lose every round – there are more chairs than players – in a similar manner, in NEFS Economics – and the Real Economy – there are more prices than wages and dividends – so no matter how hard you work, someone somewhere will go into more debt. The Debt can be Consumer Debt, Mortgage Debt, Government Debt and/or Debt owed by Foreigners. It is this equation : Profit (Retained Profit of companies) = Fixed Assets (the money paid to individuals in wages and dividends during the creation of Company fixed assets and stock increases) + Increase in debt outside of the corporate world (i.e. the debt of Individuals, Mortgages, credit cards, loans, student debt… The debt of Governments, the debt of foreigners). This is the equation that we toil under, I call it the Sisyphus equation (the Greek guy with the boulder), as this is the equation that leads civilisation to destroy itself with debt burden just as it’s technology frees it from the toil of it’s ancestors. The other thing to bear in mind is a lot of ‘wealth’ in the UK is caused by the revaluation upwards of Assets. The problem with this from real and NEFS perspective is that If I build an office block for £10 million then there is £10 million paid out in wages, so when this cost of £10 Million (+ say £2 Million mark up profit = £12 Million total) gets charged to the tenants, and hence to the final customers of the tenants, though the customers cannot afford the full £12 million they will at least have the first £10 million and only need to go into debt for the last £2 Million. But, if the £10 Million is merely a ‘revaluation’, when the Company charges £12 Million to customers, the customers will have to go into debt for the full £12 Million as no-one was ever paid the ‘revaluation amount’. That said there is also a ‘middle ground’ problem here : even if £10 million is paid out to workers to build an office block, if it takes say 5 years to build it, how much of that £10 Million will be sitting in savings accounts waiting to to be spent on the prices generated to the consumer ? – Zero to very little. Most of that £10 Million will have been used to fund the profits of other companies (by ‘fund the profits’ I mean provide the extra £2 cash to consumers allow £12 to be received in sales when only £10 was paid out in costs) . These other business’s will then be sitting there with £10 million in retained earnings, requiring say a £2 million a year ROI – Return on Investment – at this point, the builders are laid off now the office is finished so there is not only not the £2 Million per year in builders pockets there is an extra demand on consumers – the prices from the office block costs will appear in consumer prices. So, even without a revaluation, this middle ground case – where it takes a long time to make something – has a similar effect to a revaluation – there is a huge gap between the prices in the shops and the money the consumers have to spend. At this point we have a recession, which has nothing to do with the battle for scarce resources or over-population… all the usual suspects – it’s just that the numbers all got in a twist. In a recent article in the Economist magazine “The danger of the bounce” 09 Jan 2010, an old fashioned economist explains that, in reference ot the big building in Dubai, the Buri Khalifa just being opened, the finishing of the Petronas Towers in Malaysia, as well as the completion of the Empire State building : “Sky scrapers have long be associated with the ends of financial booms… such towers are commissioned when money is cheap, they are often finished when the champagne has gone flat”. Here the word ‘money’ is used, as it often fallaciously is, in the singular, as if it is a one entity thing – a coin you can point at and have in your pocket, whereas, as you now know, money is more like a quantum binary particle and it comes in pairs : Debits and Credits. With real money being used in transactions which involve two parties, ‘money’ is actually a four way bookkeeping transaction – quadruple entry. It involves things like wages, which are income to the recipient yet costs to the payer, as well as prices, which need to be higher than costs for business to continue, and are income to the business and a drain on savings to the consumer. Looked at it from this way, these Sky scrapers and the general building boom that usually accompanies them, add income to the workers/consumers and are a large part of the cause of the ‘Financial boom’, rather than an effect. When the buildings have been finished, they become a drain on income through prices and are part of the cause of the ensuing depression, they are not just a white elephant effect of previous years of cheap credit and ‘bubble madness’. Given that Economics is meant to be about the battle for scare resources (whereas in reality it’s more about balancing the Sisyphus Equation), the author of the magazine article makes no attempt to explain the paradoxical depression that follows – just at the point at which the ability to produce goods and services in this new shinny office – or factory – or other major work is at an all time high and resources are plentiful and not scarce – business stops – Sisyphus’ boulder of Real Wealth rolls back down the hill due to the weight of debt – he merely finishes his sentence with the old hackneyed metaphor “the Champagne went flat”. In the £10 costs, £12 Sales example above, the Retained Profit matched the Consumer Debt. Is this always the case ? – No, the ‘full equation’, the Sisyphus equation has two major items on the right side – Fixed Assets and Non-Corporate Debt : If the company borrows £12, spends £10 to makes some goods and £2 to make a fixed asset then workers/consumers will have £12 cash from their wages, so goods can be sold for £12 and the company will make a profit of £2 and no one will end up in debt – The £2 retained profit this time is represented by the increase in fixed assets. As a 3rd alternative, the company can pay £12 to make some goods, then export £2′s worth abroad. Then the workers can use the £12 they were paid to buy the remaining £10 of goods (£10 at cost price). The company then makes £2 profit in Sterling and has say 20 Yen left spare received from the foreigners. The company can then sell the 20 Yen to a bank for say £2, the Profit of £2 is then represented by £2 cash in the company’s bank account. The Bank can then go and buy Japanese bonds, shares….’Invest in Japan’ so in the bigger picture the £2 profit is represented by owning £2 of Japan – so the Japanese owe us the £2 – the debt of foreigners. Strangely enough, this ‘trick’ also works in reverse : not only can you Net Export your way to having enough money you can also Net Import your way to having enough money as well – If workers/consumers Net Import £2 worth of Japanese goods, a Japanese bank will end up with £2 of sterling which it can then ‘Invest’ in the UK – it can buy bonds, shares, property, race horses…. The British people who are in receipt of this £2 then have the extra £2 to make the £12 needed to buy the £10 of goods at £2 profit for the company. In this case the £2 profit is represented by the £2 ownership of UK shares/bonds/property now in the hands of the Japanese. If the UK Government issues bonds of £2 and the banks buy them, then which ever worker gets paid that £2 – say a nurse – then that means that there is once again the extra £2 to enable the company to make it’s £2 profit – a profit represented by government debt (our future tax liabilities) owed to the Japanese. Another way or writing the Sisyphus formula is : Retained Profits for the year = Increase in Net Consumer Debt + Increase in Net Government Debt + Increase in Company Fixed Assets + Increase in Net Exports (An increase in Net Imports would mean that the Japanese say are able to buy our Bonds – but this is sort of already counted in the increase in net debt of the bond issuer). As you can see, doing things this way round – using a financial system invented in pre-machine age 15th Century Venice leaves us with the equation : The better we do – more profits – the more debt (or fixed assets) is need – i.e. “The better we do, the worse we do” – it’s almost Dickensian – “It was the best of times it was the worst of times” – no wonder we never got that 3 day week thanks to the ‘White Heat of Technology’ we were promised by Harold Wilson back in 1963. We got the technology bit right but we are using a daft-as-a-bat out-of-date finance system, so we are stuck in the office all day, all life, looking forward to an old age of penury. 7) Market Cap – I derived these figures from the 1) All share index on the Yahoo finance page and a base line figure I found that said that at the end of Dec 08 the Market cap of the all share was £1.28 Trillion, then I did some averages on the numbers. As this number is not from the Blue Book there is no inflation adjustments done to get to ‘current prices’ like the rest of the data shown. Also worth noting is If Company A has a Market Cap of say £1 Million and Company B, an Investment Company, issues shares and buys Company A for £1 million then the Investment company’s Market Cap might be about £1 Million as well. I suspect the All Share index might double count the one £1 Million Market Cap and show £2 Million in the situation especially where these investments are done on a ‘Portfolio basis’ – i.e. B owns less than 10% of all the shares- so bear in mind the figures might have some doubling up in them. Can we look at theses figures from the past 10 odd years and see the Credit Crunch Coming ? Looking at the Gross Wages to Household Debt Ratio (By ‘Household Debt’ I mean Currency and Deposits less Mortgages and Loans, so if you have a loan of £100 and cash in the bank of £20 then your Household Debt figure is £80) we have : 2000 2001 2002 2003 2004 2005 2006 2007 Household Debt 731,000 807,200 920,300 1,046,700 1,181,100 1,253,100 1,410,900 1,517,400 Gross wages 462,355 490,978 508,614 527,630 549,995 570,471 593,815 629,834 Debt/Wages Ratio 1.58 1.64 1.81 1.98 2.15 2.2 2.38 2.41 What this shows is that the ratio of our debt burden to our wages is getting higher. When someone takes out a mortgage for a house the essential deal is – “As an average worker I have spare income of say £100 per month, how much can I afford to pay ? – at 10% interest rate I can afford to pay £100/per Month, which is £1,200 per year, which is £12,000 over say a 10 year mortgage (this is just looking at interest only) – so the average house will cost £12,000. At an interest rate of half of that at 5% I can afford, and hence the house prices get bid up to, double £12,000 = £24,000. You might have noticed that house prices have been soaring over the past couple of decades, interest rates have been low and falling – this is old news, what is not so old news is that if you bought the house at £24,000 – not because it was ‘worth’ £24,000 but because £24,000 is essentially the answer to the equation “What I can afford per month/divided by the Interest rate when I bought it, then if the interest rate went from 5% back to 10% 1) I will be paying so much to the bank that I won’t be able to afford to buy anything else from productive industry 2) I will default on my mortgage and get repossessed and my bank, which proudly displays the mortgage I owe it as £24,000 on it’s balance sheet, will have to sell it for £12,000 and show a write down of £12,000. This, over the whole economy – I’m talking about average Joe here, might crash the bank so those people who think they have wealth in their bank shares on the stock exchange will have nothing and those people who have invested in pension companies/Investment Trusts etc who have invested in banks will have nothing. What is quite new news is that the standard answer to this “Oh this is because money was too cheap in the last two decades” have missed the point : When Mr A sold his house to Mr B for £24,000 when the interest rate was low, Mr B took out a mortgage for £24,000 and in doing so asked a bank to create a new £24,000 for him. Mr A obtained possession of this £24,000 and this and all the other extra £24,000′s provided the extra £2′s to fund the profit of the companies selling goods and services for the past two decades. And this is the rub – economics is meant to be about the “Allocation of scarce resources” but we were only able to provide goods and services for the past 20 years by messing round with some numbers on a piece of paper relating to swapping ownership rights to a couple of hundred thousand cold, draughty, leaky Edwardian hovels. If we were able to do this on the back of house price rises then we should be able to find a way for industry to provide goods and services to us independent of these house prices based on the ability to produce. Think about it in real terms rather than financial terms and you might begin to see how ridiculous the game is. Interest rates are low – why might they rise ? – Well start at the basics, the reason banks charge more in loans than they pay on current accounts is to make money. (Old fashioned economists think that borrowers lend from savers and banks are just the middle men, the broker, who takes 5% from the borrowers and pays 2% to savers and keeps 3% as a fee – Whereas NEFS Economists see that when a bank makes a loan of £100 to customer A it does not take £100 from saver B, what happens is that to create the Loan of £100 it Debits Customer A with £100 in a Loan account and Credits the same Customer A with £100 in his Current account – Customer A is both a brand new Saver and a brand new Loaner ! – ‘He saves his newly created loan’. At that point he then pays 5% on his new Loan and earns 2% on his new savings. Usually he uses his new current account balance, his new savings, to buy something, say a new car. The Current account then becomes the property of the car seller – who is now the new saver. If the car seller banks elsewhere, then the first bank, instead of owing £100 to a customer at 2% (nice and cheap), it has an inter-bank loan it owes to the second bank and pays LIBOR rates (ouch) on the £100 – this is why banks want to attract savers – not because they need the savers money to loan out, but because it’s cheaper than owing another bank. The first bank is then worried that if customer A defaults on his loan then the bank will have Zero assets but owe £100 to the second bank at LIBOR. The higher the risk of default, the higher the first bank has to charge for the loan to cover this risk. So can you think of a reason in this sunny financial climate why banks might feel the need to raise interest rates ? What else do we owe ? – Well, we’ve been Net Importing for Donkey years now, but starting with Year 1994 as zero, we had built up a cumulative Current account deficit of £53,167 Million by the year 2000, and then between 2000 and 2007 we imported 1/4 of a £Trillion more than we exported, leaving us 1/3 of a £Trillion in hock to the rest of the World. One of the sort of paradoxes of Finance is “If you only £pay for your imported goods you still owe”, So We, as a nation, owe something like £1/3 £Trillion to the rest of the World despite all these Imports having been ‘£paid for’ by the consumers who bought them. Paradoxes of Finance ? – Time for some new general theories : Well number 1 must be the one where a bank makes a loan but does not loan saver’s money out – it creates both a new Debtor and a New saver at the same time. Number 2 I suppose will have to be ‘The more profits a company makes, the more debt somebody somewhere has to go into’ (Ignoring fixed assets for a mo). Let’s call number 3 the “If you only £pay for your imported goods you still owe” paradox. I’ll Finish for now with Paradox Number 4 : If country A “Invests” in Country B then, by the same act, Country B “Invests” in Country A. Paradoxes 1 and 2 are explained above, I’ll explain 3 and 4 now : Paradox 3 -This ‘paradox’ only works in a Net Importing situation, to make things easy to explain, instead of saying We sell £100 to the Japanese and they sell £110 to us on an ongoing basis, I’ll just net it off and say that they sell us £10′s worth of goods and we sell them nothing – it’s the same effect. If I borrow money from my bank for £10 and use it to buy/pay for say a Japanese gizmo with it, then the Japanese businessman has £10. This is of no use to him as is, so he sells it to a Japanese bank for say 20 Yen and goes away happy. The Japanese bank then has a liability to the Businessman of 20 Yen and an asset of £10 owed to it from the English bank. The Japanese bank can keep the situation like this and earn LIBOR level rates from the British bank (this is quite common – in 2008 the Rest of the World had Investments in the UK that were £549,800 Million in UK Shares, £1,138,700 Million in UK Bonds and £3,582,200 in Bank Accounts), or sell it and buy shares and bonds in the UK. Whatever happens we still “owe” and we pay either in Bank interest, Bond Interest (Tax if it’s a government bond) or dividends. We only really pay for the goods properly and cease to owe when we sell something to the Japanese – i.e. have balanced trade, that way he give us back the £10 and we pay no more interest on it. Paradox 4 – If country A “Invests” in Country B then, by the same act, Country B “Invests” in Country A, is best explained by asking you to think “When you do something ‘financial’ i.e. “I Invest in Africa or China” – what are the banks doing behind the scenes ? – So if I borrow £100 from my UK Bank – Bank A then my bank does Dr Loan £100, Cr Current Account £100. To start my ‘investment’ in Africa say, I open an account in an African Bank B and pay in the £100 in (Assume the African country uses Sterling so we don’t confuse matters with Foreign Exchange). “Paying the £100″ in means I write a Bank A cheque for £100 payable to myself and deposit it in Bank B. Bank B then owes me £100 and it presents the cheque to Bank A. The UK Bank A then owes the African Bank B an Inter-Bank Balance of £100. “Investing in a country”, according to the National Accounts means that that country owes me something. I live in the UK and Bank B in Africa owes me £100 – this will show as UK investment in foreign lands. But, the UK based Bank A owes £100 inter-bank balance to the African Bank B and this will also show up in the National accounts as ‘Foreign Countries Investing in the UK’ £100. To get a Net Investment other than Zero we need to trade un-evenly so either A) I then use the £100 current account in Bank B to pay locals to make me some goods and then sell those goods to the locals for £110 and Bank the £110 back in Bank B, then the National accounts will show that Africa owes the UK a net figure of £10 – it will show that UK has Invested Net £10 in the Africa ! or B) If I just trade with Africa from the UK but sell more to them than I buy by £10 then this will show the same as A in the National Accounts that the UK has Invested in the Africa – this is what lots of ‘International Investment’ essentially amounts to it’s just the results of imbalanced trade. Looking at the National Accounts you can see some ‘strange at first glance’ numbers : In 2007, despite having a not untypical £2,175 Million Trade and Income surplus with Switzerland, they had a “The UK owes us £75,417 Million more than they owe us balance”. This sort of thing is caused by using 3rd countries to ‘do the banking’ in. So if the Chinese Net Export say £80,000 Million to us, then we will in reality owe them £80,000 Million. But if they bank £70,000 Million of this in Switzerland then the National Accounts will show that we are in debt to the Chinese for only £10,000 Million and the Swiss if £70,000 Million – so most of the real £80,000 Million debt to China will show up in ‘the don’t worry it’s only European Debt” section. It’s a similar story with Net Imports, if the Chinese sell goods to say America and they get adapted a little and sold to us, then it shows in our books as Imports from America. We are told that China is busy now-a-days trading with it’s Asian neighbours – but it’s Asian neighbours trade with us a lot as well – how much of our imports from say Singapore are front imports from China ? “Made in Hong Kong” was written on most of my toys when I was a child yet Hong Kong makes little or nothing of anything and never did. It was mainly repackaged ‘made in China’ goods. I suggest a mixture of common sense and paranoia are probably better guides to the international trade situation than the neatly arranged Geographical breakdown figures at the back of the National Accounts. Have a look – the cars on the street are German, the quality electronic goods are Japanese, if you wrote most of the rest of the stuff off as being Chinese, I don’t think you’d be too far wrong. While the value of the housing stock virtually doubled between 2000 and 2008 providing a solid jelly like base for the nation’s wealth : 2000 2001 2002 2003 2004 2005 2006 2007 2008 House Value 2,430,800 2,607,400 3,135,100 3,491,100 3,902,100 4,047,100 4,473,100 4,921,300 4,460,700 (Actually the line I am using is ‘non-Financial assets’ so New houses are included in this as well as cars etc so bear that in mind), the other source of a Englishman’s wealth was his pension: While he was being paid £10 to make something he would have to buy at £12 at the weekend, he ignored the £2 shortfall and started the week by ‘investing’ £3 in a ‘pension’ (i.e. Gave it back to companies to pay people to make more goods with more prices thus increasing the debt required to buy the goods – sterling idea ! and/or ii) Gave the money to pension fund managers to buy shares from other pension fund managers in companies that were 10 years on and Lord knows how many points higher than the point of irrational exuberance in 1986) So from what I can see from the National Accounts he made net regular Contributions of : 2000 2001 2002 2003 2004 2005 2006 2007 2008 Net Pension Contributions 29,836 34,692 47,195 36,309 44,201 51,219 61,928 67,168 16,942 a total of £389,490 Million during the period. In the meantime the value of the pensions lurched up and down : 2000 2001 2002 2003 2004 2005 2006 2007 2008 Net Pension Value 1,633,700 1,564,900 1,419,000 1,544,300 1,641,000 1,931,300 2,111,300 2,210,300 1,888,300 Movement (68,800) (145,900) 125,300 96,700 290,300 180,000 99,000 (322,000) Ending a staggering £254,600 Million higher in 2008 than in 2000 – and this after ‘contributing’ £389,490 Million – that’s £134,890 Million worse off than sticking it under the mattress – “Psst wanna buy the Brooklyn Bridge” So the rub is this : It was not the ‘greedy bankers’ that got us into this mess – actually they saved us ! – The ‘easy credit bubble’ has provided us with the extra £2′s to buy the goods in the shops for the past 10-20 years. Had we not had easy credit then we would have been flat broke 20 yers ago – we would not have had the extra £2′s to buy the goods in the shops. The challenge is this : To Mr Brown, Mr Cameron and co. as well as leaders round the World : Given the figures we have so far and given the Sisyphus equation you are working within, don’t just talk and use English words, which are wholly inadequate in discussing matters of finance – the English language uses the word ‘money’ and was based on old coins and hence was appropriately singular in many ways back in history. Modern ‘Money’ however is bookkeeping – it’s double entry for each party concerned and so it’s essentially Quadruple Entry. We will give money to X” implies 4 bookkeeping entries – 3 of which most politicians and financial journalists have no awareness off. Don’t say ‘We will work for Recovery’ – fill in the schedules – in broad terms – and show all the entries to see if your sentences even make sense in the first place : Shall our recovery be based on house price rises ? – if so how high shall the mortgage/wage ratio get ? Is it to be based on ‘working harder’ – where is the extra money going to come from to fund the profits ? Is it to be based ‘cuts in public spending’ – If a businessman can’t sell his goods to a policeman because the policeman does not have enough money, how much worse will it be if the policeman becomes unemployed ? – Granted the businessman will have lower costs due to lower taxes, but he will always want more than he paid out so the essential problem is still there. Is it to be based on an Export Drive – Shhh don’t tell all the other countries in the World or they will try it as well – how can we all Net Export to each other ? Do you want more money in pensions – if people save and ‘invest’ more how business sell the goods already in the shops that are already priced higher than the wages that have been paid out ? NEFS Manifesto : 1) The slogan “It’s Reality Dummy !” 2) The Aim – “Real Wealth” 3) Policies to get more Real Wealth for Individuals Main Policy : Adapt the Sisyphus Equation to add a NEFS element on it see : NEFS – Net Export Financial Simulation – it’s a bookkeeping trick to tidy up the numbers so we aren’t financially poor when we are in reality rich. Other stuff : Real Wealth – What do I mean by this ? “Wealth”, in many sections of society, is a rude word, it means ‘greed’ and ‘not getting to Heaven except through the eye of a needle’. My understanding of wealth : I look at women at 40 who have only just now got some financial stability and want to start a family. They spend a fortune and make themselves ill (all the hormones they have to take) to have a baby on IVF, and it’s not much good for the baby either : “Under developed liver, under sized kidneys, one eye not working… ahh were you an IVF baby ?” the doctor asks. I see women at 35 who have had a baby and their screen saver and mouse mats in the office have pictures of their kids, who they spend most of the day talking about. I see women in their twenties going into abortion chambers to kill their babies in order to keep going with their career so they can have a house and a deformed baby later by IVF. I see girls in the teens having babies to “get a flat on the social” – I see these things and I don’t see wealth. Reality has it that the best time for a woman to have a baby is in her twenties – we need a financial system that reflects this reality. It may be proactive – i.e. If you get married and have a baby in your twenties then you will receive NEFS money of £X amount. It may be benign – Everyone gets NEFS money and then nature can take over – I am in my twenties and I want to start a family now and I can afford to start a family now so I will. You can hear the word ‘wealth’ and picture a grotesque fat bloke with a cigar in his mouth or you can picture a well dressed, well fed (nutrition wise – shinny coat, bright eyes and all that) family playing in a park – this is very expensive – to feed and clothe a family properly costs a lot more than it does to buy an expensive cigar. We have the productive ability to be able to produce good food, clothes and lots of other things – we need a financial system that can match this reality. Lost potential – remember I was showing above how putting your money under your mattress was a better call than investing in pensions between 2000 to 2008 ? well think how many PHD bods were working day and night with all those computers analysing all those figures to end up with less than nothing. Imagine they had been working on designing and building massive wave power machines or solar energy factories in Africa – imagine if they had been doing something useful for us – adding real wealth ? ‘We cannot afford’ – we need a financial system so that if we look at something and say it cannot be physically done then, only then will we say ‘We cannot afford it’. If we have the brains etc to do something but don’t because of some numbers on a piece of paper then we are fools and the future will laugh at us (if we have one) and aliens will laugh at us (if they exist then they seem to be highly automated and must be using some NEFS type system otherwise, they will have had a major i.e. 100% un-employment problem) I see a teenage girl dressed like a cheap tart, “This is how they dress on the pop videos”. Pop videos use a hypnotic trick called Flicker TV – the camera angle is changed frequently – less the 3 seconds, The human eye is designed to take note of changes – it’s very useful to see a small change or movement in a big field or forest when you are hunting or being hunted. Indicators on cars use the same trick. Flicker TV needs to be banned. An eight to ten second delay in camera angle changes needs to be the legal minimum. This would destroy most of the pop video industry – which might sound like a decrease in wealth, but it will mean de-hypnotised kids who cover their underwear up when the are out, which is an addition to real wealth. I see a woman in her forties looking utterly depressed; “I’ve just been watching East Enders” – Soap operas like East Enders which specialise in ‘misery porn’ use the same Flicker TV hypnotic trick that pop videos use – watch it with the sound down and try to count to 3 before the camera angle changes. A ban on Flicker TV will destroy East Enders, again this might sound like a reduction in real wealth but if this means that millions of East Enders viewers are de-hypnotised, then think of the real wealth that will be caused by the lack of pointless made up misery they suffer. Think of the increased attendance in mid-week dance, language and evening art classes there will be, think of the extra time parents can spend playing snakes and ladders with their kids… I think I’d also like to ban things like trans-fatty acids, artificial foods dyes, sun beds – things that take money from vulnerable people and add nothing to them and actually destroy their health – which is their wealth and ours. China – This is getting silly. There is no Economic Theory on Uni-Trade – They sell to us, we don’t sell to them. China is a communist state and using Uni-Trade it has destroyed industrial production capacity all round the World. We need some import duties/WTO fine in China for a few Trillion pounds in compensation for the decimation its unfair trading practices have wrecked. Ugly News. We need to see ugly things on the News Farming – some premium meat in the shops says “Out-Door Reared”, I asked a butcher what this was about – he said that most beef in the UK is ‘grown’ indoors much like factory chickens. What sort of wealth is this ? – we see cows in fields – we need the TV cameras to show us the ugly news of cows locked in sheds all life. Fish – We need, something like a ten year ban or near ban on fishing. Lots of fish just get used as farm fertiliser and food for pigs. We need the time to allow the fish stocks to re-fill. Abortion – The TV is a wash with the fun bits of sex. TV has lots of ‘Radical, Exciting, Daring’ Producers. All ‘Radical, Exciting, Daring’ means is they want to put more bare boobs on the screen earlier and earlier in the evening. We have 600 abortions every day in the UK – pretty dire – here we are in the post Holocaust, post slavery, post hanging, post “never again…” World, in the 5th richest country in the World and we have 600 women each day, every day being so desperate/poor/cruel/whatever that they they kill their own kids. We need ugly News to show these abortions. The films are available and sickening. The “Fun side of Sex only” TV bans these films. We are out in Afghanistan fighting the World’s most evil foe so they say – Al queda and the Taliban couldn’t dream of killing 600 British people a day every day. This is huge, it’s ugly and it’s virtually completely hidden. We need to remove the log from our own eye, before going after the amateurs in Afghanistan. NEFS will go a long way to taking the financial pressure off women in the abortion line and so should reduce the number of abortions dramatically – but if we are going to butcher babies to death every then it needs to be on the news every day in full colour. Basic Maths : As is stands now the formula that is the basis of the annual economy is : Retained Profit for the Year = Increase in Fixed Assets of Companies + Increase in Debt of Individuals, Government + Foreigners. This is proved above. This is the ‘musical chairs’ equation that means the better our companies do, the more in debt someone somewhere becomes – if we are Net Exporters then its foreigners who go into debt, if we don’t then its us. But this is a wholly artificial formula imposed upon us by the rules of the artificial pre-machine age, financial system we use. We can change this formula to be Retained Profit for the Year = Increase in Fixed Assets of Companies + Increase in Debt of Individuals, Government + Foreigners + NEFS, this way, by using NEFS, we can reduce the values of the other terms in the equation hence we won’t need to build tall empty buildings to have 5 years of an Increase in Fixed Assets, we can build what we think we need in reality, not what we need ‘financially’ and hence increase our ‘real’ wealth – much of which will be our increased time away from ‘work’ – finally we’ll receive the payoff from the white heat of Technology.