World Cup Debacle - Win Win Win

Is this what we pay our taxes for?

Let's agree one point straight away - bringing the 2018 World Cup to England would cost taxpayers a packet.

How much?

Frankly we have no idea. Just like with 2012 Olympics, nobody seems to have worked out anything as mundane as precise costings. All we can glean is:

"The cost of staging the tournament between now and 2018 is being put at just under £1 billion. The Government has already signed guarantees worth £300 million while the 12 host cities have guaranteed funding of £400 million. The bid itself has cost £15.5 million to finance. Manchester is one of the host cities with two of the chosen stadia. A recent report by its city council suggested the cost to local taxpayers would be up to £30 million."

£1bn, huh? And does anyone believe that?

Quite. We can all remember how the projected cost of the Olympics quadrupled - yes, quadrupled - once the bid had been won. All of it to be extracted from us taxpayers.

Yes, the England bid has just been rated as being likely to generate more revenue that many of the competing bids, but what we need to ask is who gets those revenues? Sure, Fifa will take a big slug, tax free, so they'll be well pleased. But how much will we schmuck British taxpayers get? I think we know the answer.

Tyler has no problem with us hosting the World Cup (he will tune out the inevitable national humiliation). But he does have a huge problem with being forced to pay for it.

Which is why he is absolutely delighted with the late intervention of our public service broadcaster. Panorama's allegations of Fifa executive committee members taking bribes has pissed off Fifa, and almost certainly stymied our bid.

Brilliant.

In fact it's win, win, win.

First, we win because we save ourselves a pile of cash (not to mention avoiding having our noses rubbed in a pile of national humiliation right here on our own doorstep).

Second, we win because we remind everyone of the corruption endemic in all of these big international bureaucracies (eg the UN). Putting big western money into the hands of people with third world fiduciary standards is asking for trouble.

And third, we win because everyone will blame the BBC. Our self-styled public service broadcaster has just denied the public the service of the greatest show on earth.

Delicious.

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Facing Up To The Doomsday Machine

So what have we learned from today's autumn fiscal report from the Office for Budget Responsibility?

First, the OBR under Chote still thinks George is on track to deliver what he promised in June:

"Our best judgement is that the Government has a better than 50 per cent chance of meeting its mandate for a cyclically-adjusted current budget balance in 2015–16 and of achieving its supplementary target of seeing public sector net debt fall between 2014–15 and 2015–16."

Spot that "better than a 50% chance"? To listen to Will Hutton and the BBC's other "neutral commentators" you'd think the OBR had said "less than 50% chance". The fact is that despite everything previous Chancellors have promised, there are never any certainties in fiscal forecasting. "Better than 50%" really does mean George is on track.

Indeed, on the OBR's forecasts, things could well turn out better, because they reckon the downside risks to growth - the ones stressed by the BBC - are evenly balanced by the upside "risks". That is, growth could turn out higher than the central forecast, boosting tax revenues and cutting welfare payments. The OBR thinks there's a 1-in-3 chance that the government will actually be in surplus (ie repaying debt) by 2015-16:

As for the OBR report itself, it's in a different league from anything HM Treasury has previously published. It provides much more detail on the underlying assumptions, and for the first time gives some chapter and verse on BOM's old friend the Doomsday Machine (aka the risk that debt interest payments grow faster than the government's ability to finance them out of current revenues).

On that, the headline message - trumpeted by everyone from the Chancellor down - is encouraging. It is that debt interest payments are now expected to be lower than forecast in June - £18.6bn lower over the forecast period as a whole (2010-11 to 2015-16). So that's definitely good.

But we shouldn't get carried away. Debt interest still increases from £43bn this year to £63bn by 2015-16. Moreover, the OBR lifts the lid on the underlying drivers of its debt interest projection. And there we discover that what's driving the reduction in costs is not some big cut in borrowing, but a cut in the assumed interest rate the government will have to pay.

Here's the OBR's chart comparing June and November's assumptions on the average interest rate HMG will have to pay on the majority of its new bond issues (so-called conventional gilts):

As we can see, November's assumed rate is lower throughout the forecast period (by an average 0.24%). And it's the assumed lower rates that drive the bulk of the saving.

Now those lower rates reflect what has happened in the gilt market since June, so fair enough. Especially since George can argue that it's his "tough choices" that have given the market confidence to cut his borrowing rate.

But as we all know, rates that go down can also go up - especially if the market gets the jitters on inflation. So what happens then?

Again, the OBR report tells us. It includes a handy ready reckoner (Table 4.20) that shows what happens if the interest rate on gilts increases by 1% from what has been assumed. An it's not pretty - a 1% increase throughout would add £15bn to debt interest costs (and although we can't quite tell from the OBR table, with higher gilt yields there would almost certainly be other associated increases, reflecting for example, higher interest rates on National Savings).

One of the most interesting sections is on the long-term fiscal outlook, where an unchecked Doomsday Machine at full revs can do some real damage.

The key long-term issue is one we've blogged many times - too many old people, and not enough workers to support and look after them. The healthcare and pension costs of the old people increases inexorably, the tax revenues generated by the young fail to keep pace, and government borrowing goes through the roof.

The OBR has cranked some numbers looking out to mid-century showing how this could impact public sector debt. It reckons that even if all future governments maintain the same degree of fiscal restraint as George (a highly unlikely proposition given past experience), the cost of all those old people will push debt up to 100% of GDP by 2050:

But concerning though it is, that projection almost certainly understates the problem. Not only does it exclude all those off-balance sheet Enron debts, but others have projected much higher debts by mid-century (eg the Bank for International Settlements recently projected UK official public debt at 550% of GDP by 2050 - see this blog).

This is a serious problem - and Tyler speaks as one who will be part of that problem. Something will have to be done, and none of the options are going to be popular.

The OBR says it is taking a much closer look and will be reporting back next year. We very much hope that they give it to us straight - much straighter than the "fiscal sustainability" reports the Treasury have issued in the past, which have basically made out everything's fine.

Minds need to be concentrated on Doomsday.

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All A Question Of Breeding

Not everyone can have the Major's breeding

No sooner had the Tylers returned from the frozen wastes of Swindon, the Major came steaming round. He simply cannot believe the way Lord Flight was slapped down over his "perfectly sensible remarks re breeding".

"I mean everyone knows the socialists have landed us with a huge problem. Everyone knows it's insane to reward feckless teenage girls for having kids they can't afford to support, and won't bring up properly. Think of all the problems we're storing up - well, no, think of all the problems we already have! Hideous costs, disrupted classrooms, vandalism, drugs, muggings, obesity, yet more pregnant teenagers, prisons already full up... gah!  It is mad, literally mad, to encourage breeding among the dregs of society. We should be working to prevent it - by all means possible!"

His reddened face had contorted alarmingly. "Down at the bottom, having kids has become a career option! Yet when anyone talks about it in public, they got taken out and shot!" A finger jabbed towards Tyler. "And that's because of people like you! Too squeamish to face the facts! Too namby-pamby to speak up. You make me sick!"

"Well, thank you, Major," Tyler ventured. "But according to the BBC, nobody goes out and has a child just so she can claim child support - it's hardly a king's ransom, you know. I'll bet you wouldn't get pregnant for that kind of money."

Spluttering, the Major charged on. "I want you to look out the numbers. I'll bet the lower orders are breeding like rabbits. Hopeless moronic girls dropping no-hope kids left right and centre. All paid for by us! US!!"

****

What we need here are a few facts.

And what we need to know before anything is whether the birth rate is higher among benefit dependents than among those who pay their own way?

Luckily the Office for National Statistics publishes an annual review of births in England and Wales, and the most recent one is entitled Who is having babies? Which sounds like it ought to answer our question straight away.

Except that it doesn't.

Yes, it tells us there were 708,711 babies born in 2008. And that over half were born to mothers aged between 25 and 35, with a quarter being born to younger women.

It also tells us that of those births registered jointly by two parents (either married or unmarried), the vast majority were to fathers who claimed to have some recognised occupation (ie something other than lying in bed all day drinking cut-price lager and procreating):

But those stats don't tell us what we need to know.

For one thing they only apply to births registered to couples. 43,000 births (6% of the total) were to single women not living with a partner. And the ONS report gives us no information on their socio-economic classification.

Moreover, there's another c40,000 registered to fathers who are "unclassified", and we can all imagine what sort of fathers they might be.

And then again, of the births registered jointly to couples, a stonking 70,000 of them were registered to couples who weren't actually living together at the time of registration. Now, does that sound like a viable benefit-free home background?

Unfortunately, that's all the info the ONS summary gives us.

In fact, that's pretty well all the hard info we've been able to uncover at the national level.

But there are some local stats which cast a very interesting light on how baby production incentives work in areas where alternative employment opportunities are limited. And they are the stats that show for each local authority area the percentage of births that are to unmarried mothers.

Across the country as a whole, that percentage is now 45% - ie nearly half of all births are now to unmarried mothers. But in some areas of the country that percentage is much higher.

In 2009, the highest was in Blackpool, where no fewer than 69% of babies were born outside marriage. In Blackpool to be born to married parents puts you in a minority of just 31% of your peers.

Joint second highest were Easington and Hartlepool on 68%. And here's the whole top 10 (the national average is 45% remember):

Spot the pattern?

Take a moment to study the list.

Yes, that's correct - all of these areas are in economic black spots up North and in South Wales. All have relatively high unemployment rates, relatively low wages, and rather limited alternative career options for girls at the bottom. All have relatively high welfare dependency.

Compare and contrast with the areas where the percentage of births outside marriage are lowest (ie where the vast majority of babies are born to married couples).

The very lowest, on just 27%, is the Royal Borough itself - leafy Windsor and Maidenhead. Then comes Wokingham (29%), Slough (32%), Surrey (32%), and the somewhat inappropriately named Rutland (33%).

And what have all those areas got in common?

Yes, right again - relatively low unemployment, relatively high wages, and relatively low welfare dependency. In other words, a career having kids has to be relatively less attractive.

OK. OK. Not very scientific.

True. That's because the government does not publish the data we really need to see, so we're driven to these alternatives.

But it does make you think.

Further investigation required. Preferably by the government.

PS If you haven't already done so you should read this excellent article by Dennis Sewell on eugenics and the welfare state. It recounts how the socialist founders of the welfare state believed it would need to be accompanied by the elimination of anti-social elements. As the sainted William Beveridge put it: ‘those men who through general defects are unable to fill such a whole place in industry, are to be recognised as “unemployable”. They must become the acknowledged dependents of the State... but with complete and permanent loss of all citizen rights — including not only the franchise but civil freedom and fatherhood.’ Pity he never got the chance to share his bracing ideas with the Major.

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The Chattering Teeth Classes

At age seven Tyler was scarred for life by his primary school teacher's tale of her great grandad being frozen to death on a stagecoach crossing Salisbury Plain. Now that was real weather.

And as it happens Mr and Mrs T will be spending tonight in Swindon. That is, if they make it through the weathergirl's promised whiteout hell.

Luckily the weathergirl's right hand girl in the Met Office global warming department has just been on R4 Today telling us that global warming is proceding at an even faster pace than she'd previously feared. Something to do with drifting boys being colder than ships apparently.

Well, in truth I'm not quite sure that is what she was saying. Just before the 7.57 weather forecast with its whiteout prediction for the weekend, she told us this could be the warmest year on record. And if it hadn't been for those pesky sunspots - the ones the Met Office never even mentioned to us before others pointed them out - we'd already be frying.

Hmm, yes.

In 2008-09 the Met Office cost us taxpayers £162m.

Of more importance to those of us in the teeth-chattering real world is Ofgem's newly announced probe into retail energy prices. Their latest analysis shows that the energy companies have indeed whacked up their profit margins for domestic consumers. In the last three months they've increased from £65 pa to £90 pa per dual fuel customer :

Now, they have to make a profit - we all need to understand that. But publicly raising their margins in the face of general austerity looks a tad on the dumb side. You wonder if we're getting the whole story.

So time to saddle up the stallions and hit the ice road.

Tally-ho.

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Very Unhappy

You're no happier than him - want to swap?

So WTF is Dave making us spend £2m measuring happiness?

To be honest I can't face blogging it. The whole business of so-called "happiness economics" makes me want to leave the tent and wander off alone into the blizzard.

We've blogged the dismal "science" of happiness several times (eg here and here). In brief, it is based on the ludicrous idea that happiness can be measured, and that you can compare happiness today with happiness yesterday. The "measurement" comprises asking people how happy they feel out of 5 (no, really).

OK - out of 5, how happy are you feeling right now?

I have no idea what you've said, but I do know that averaged across all of us, the answer will be around 2.2. That's because it always is. Come rain or shine, better or worse, richer or poorer, the average never changes much.

And to prove it, here's a picture we blogged earlier ("life satisfaction" is another term for happiness, and the new economics foundation - nef - are major promoters of the whole crackers concept):

What is Dave thinking of?

Hopefully it is just some kind of spin exercise, in which case it's just another £2m flushed down the bog.

But the real worry  is that he hopes to use it somehow to guide policy. To accept the soppy left's argument that lower economic growth doesn't matter because more money doesn't make us any happier. That we were all just as happy back in 1973 with the Austin Allegro. Or back in 1473 with unglazed windows.

Back in 10000 BC, some lefty druid almost certainly used the same argument against the invention of fire.

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Just How Scared Should We Be?

Sorry kitty

Could it happen here? When the markets have finished their sport with Ireland, Portugal, Spain, etc, will they turn on us?

Let's compare our situation with Ireland's.

Both of us have governments that are currently borrowing far too much. Theirs is a bit worse than ours, but setting aside this year's extra binge to bail-out their banks (equivalent to an eye-watering 20% of GDP), they're not that much worse. According to the OECD, even before today's emergency cuts, they were already planning to cut their borrowing to 7.4% of GDP by 2012. Which compares to the 6.5% planned by George.

Both of us have governments that went into the Crash spending unsustainable tax revenues built on unsustainable debt-fueled booms. And both of us have governments that were already carrying far too much debt when the crisis broke - in fact at end-2008, HMG's debt at 57% of GDP was actually higher than Ireland's 48%.

But the most worrying parallel is that both of us have governments that have written open guarantees for banking systems that are big enough to take us all down.

The key risk - as we've blogged many times - is that the banks' assets may well be worth a lot less than it says on the tin. Everybody is now acutely aware of that possibility, so without a taxpayer guarantee (implicit though it may be), any of the banks could face a run on their deposits and other sources of funds at any time. Which would break them. And quite possibly us as well.

But as we've just seen with Ireland, taxpayer guarantees only work if the markets retain confidence in the government's ability to deliver on those guarantees. And when you have taxpayers guaranteeing bank debts that are a multiple of their own incomes, that confidence is not something anyone should depend on for very long.

You see, a key point to remember is that the very same taxpayers who are having to service the government's debts, and guarantee the banks' debts, are also having to service their own personal debts as well. Which is one hellavalotta debt.

One widely used measure of overall indebtedness is an economy's total gross external debt - ie all the debt owed by all domestic entities to foreigners.

When last sighted (June 2010), Ireland's gross external debt was $2.1 trillion. Now, that is a serious liability. It is getting on for 10 times Ireland's annual income. It's like you having a mortgage of ten times your income secured on a row of unfinished estate houses in the middle of a peat bog.

And our own external debt?

Well, actually it's only $9 trillion. Which comes in at a "mere" 4 times our annual income.

Phew. We can all relax.

Er, nooooo.

Ireland may be in much worse shape than us, but compared to our major league competitors we are still in pretty bad shape. Germany's external debt stands at 1.4 times annual income, and the US is on less than one times. Japan - the country that people are always telling us has much more debt than us - is on less than 0.5 times.

Even more shocking, we are in worse shape than either Portugal or Spain - the two piigy countries now in the market firing line.

Here's the chart:

And that's why we can't relax. We may be in better shape than the Irish, but compared to other major economies we are right out on the thin ice.

True, we're not in the Euro, so we're not completely stuffed (as today's encouraging export news underlines).

But we can't devalue our way out of this debt for one very simple reason - a large chunk of it is foreign currency debt (eg see this blog).

How scared should we be?

It's at least an 8.

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Straightening Out Our Straitened Times

Thanks to all those who spotted Tyler's deliberate (ahem) spelling errors in yesterday's post on the Royal Wedding.

The truth is that Tyler has never been much cop at spelling. His A Level history master was once driven to warn that T's poor spelling "betrayed a lack of scholarship". Even worse, Tyler has latterly slipped into the slovenly and entirely unacceptable habit of checking such matters on the internet rather than the OED.

So yesterday, before publishing the post, he actually checked "straightened times" on Google. And he was delighted to find that Google had no problem with it whatsoever. There were plenty of suggested links on that spelling, including links to articles in the Telegraph and Times. Surely they couldn't have got the spelling wrong. Could they?

And what about jewelry? Mrs T may have put her red pen through it, but Google was relaxed. In fact, the very first suggested link on jewelry is to Tiffany's. That's Tiffany's as in the guys who know all about such matters:



What's that? Tiffany's are a bunch of Yanks, and they don't know nuffink about spelling? Well yes, fair comment.

Maybe you can't depend on the internet to give you definitive information on spelling and grammar.

Which brings us to Gove's planned crack-down on pore spellurs lik Tyler:

"A-levels and GCSEs are to be toughened up with fewer but harder exams and a crackdown on poor ­grammar and spelling under sweeping reforms being unveiled next week...Candidates for all written GCSEs will be marked down for poor ­grammar, spelling and punctuation."

Now of course, we all think our dumbed down exams need toughening up. And we all know that employers say they'd much prefer to have staff who have mastered the 3Rs rather than a sheaf of irrelevant GCSEs gained by cut and pasting the internet. We all know that. But should Gove be laying down the content of exams?

The thing we've always liked about Gove's schools policy is that he wants to take the politicos out of the schooling business altogether. All they are then responsible for is funding the education vouchers. Everything else is down to the schools themselves and the power of parental choice. Excellent stuff that would soon have our schools rocketing back up the international league tables.

So how come Gove is right back where so many failed Education Secretaries have caused so much damage in the past? Why does he think he knows how to structure exams, even down to their marking systems? Why can't he leave it to the professionals, guided by his new schools market?

He was asked that very question by A Marr yesterday, and he didn't really answer it.

Come on Mr G, we understand it's tough. And we understand you are taking on the entire education establishment and the BBC.

But we're depending on you. We need you to keep the faith. We need you to redraw the boundary between government and our schools.

PS At least Gove has abolished Labour's ringfenced school sports budget. This has cost us £2.4bn and was supposed to turn out a new generation of kids who preferred sport to junk food. Yeah right. Naturally the school sports outreach industry is aghast, as is the BBC (it's been on all day). But what the Major wants to know is why can't we just go back to having competitive sport in state schools? "Why is it," he rants, "that the only international sports where we have winners are the ones played by the public schools? It's no coincidence that both our rugger and cricket teams have captains and vice captains from public schools. It's because those schools have made quite sure competitive sports have been kept alive and well - none of this namby-pamby rubbish, there, there, winning doesn't matter. Of course it matters! Compare that to those overpaid nancy boy losers in our clod-hopping football team... they all come from the Harold Bloody Wilson Community College, you know! It's a national disgrace." Etc.

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BOM Royal Wedding Edition

The cake decorations won't cost much

OK, we've held off for a few days, but what is it going to cost? And more to the point, who's going to pay?

By rights, it should be the bride's parents. We all know that. Plus of course, Kate's parents could save a few bob by using party products from the family company. Maybe they already have - as Mrs T points out, the plastic ring in the pirate party bag looks awfully familiar, and it's currently 10% off:

Chas and Di's wedding in 1981 cost a reported £30m, which in today's terms would be about £170m - a mind-boggling sum in these straightened times.

Supposedly it's not going to cost taxpayers anything like that because HMQ and Charles are going to pick up the tab.

Fine.

Except that it turns out they're only paying for the service, the champers, and the cake - a few tens of mills at most. The main cost - the cost of security - will still be down to us. And based on other recent bunfights, such as the G20, the security bill could run up to £80m.

So what do we think? A sawn-off austerity wedding behind closed doors inside the Tower of London?

Our present Queen got married back in the original Age of Austerity in 1947. She had to put up with recycled jewelry and a wedding breakfast limited to 150 guests. Plus:

"The two Royal kneelers, used during the service, were covered in rose pink silk. They were made from orange boxes, due to war time austerity, and date stamped 1946."

Wonder if they've still got those kneelers somewhere in the shed.

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Dermot, Dermot, Helmut, and Helmut

WARNING: CONTAINS GRATUITOUS AND JUVENILE STEREOTYPING OF OUR EUROPEAN PARTNERS

The prospective disintegration of the Eurozone highlights all the old problems with single currency areas.

For years the Euro's one-size-fits-all monetary policy set interest rates far too low for countries like Ireland and Spain, inflating monstrous property bubbles that have now exploded with such disastrous consequences.

And throughout the periphery, cheap credit financed massive consumption growth, generating totally unsustainable current account deficits. Going into the Crash, Zorba and Pedro were ramping up their consumption by 4-5% pa , producing current account deficits in excess of 10% of GDP. Dermot went absolutely bananas, jacking up his spending by a roaring 20% in just three crazy plastic-fueled years.

Meanwhile staid and steady Helmut barely increased his spending at all (up by just 0.4% pa over the 5 years pre-Crash). He kept his nose pressed firmly to the grindstone, and with peripheral Europe's consumers frantically upgrading to Mercs and BMWs, the German current account surplus ballooned to 8% of GDP (2007).

But now the music has stopped, Helmut finds himself facing a horrible HORRIBLE reality. All that money he deposited in his local bank was lent to Zorba, Pedro and Dermot to buy needless luxuries. And it now looks like the money will never ever be repaid. Even worse, he himself may need to prop up spendaholic Z, P and D for years to come.

It is surely obvious to everyone that the single currency has shackled poor industrious Helmut to a bunch of wastrel low-productivity untermenschen fellow Europeans. What a schmuck Helmut must be.

Yes, yes, we can all see that now. It's obvious.

Except...

Well, it turns out that not all Helmuts have done quite so badly out of the Euro as our Helmut.

For example, the Helmuts who produce those Mercs and Bimmers have done very well indeed. They have benefited from having a currency weighed down by inefficient free spending Zs, Ps and Ds, rather than being strapped into the ever-appreciating Deutschemark.

Because the Euro has done wonders for Germany's exporters. Since the Euro's launch back in 1999, Germany's competiveness has improved by around 10% - a huge relief after the worsening of competitiveness over the previous decade.

But in sharp contrast, the Euro has been a disaster for exporters from the PIIGS - their competiveness has worsened by over 15%. Indeed, relative to the German export powerhouse, their competiveness has worsened by more like 25% - in just 10 years.

Here's the chart (it shows relative unit labour costs, the standard measure of international competiveness; a higher figure denotes that a country's export costs have risen relative to its competitors, making the country less competitive):

So all those Helmuts who are in the export business have done pretty well out of the Euro. Whereas any exporters among the Zs Ps and Ds have been absolutely stuffed.

The picture in Ireland casts futher light on this. We posted the Irish Daily Star's yesterday, but it bears closer scrutiny:

It seems the real Irish winners from the Euro experiment were not the Dermots in the Limerick street at all (at all)*. Sure, they gorged themselves on flat screen tellies from Taiwan like the best of them, but they're now stuck in Limerick facing the the bill. No, if reports are to be believed, the real winners - the ones who made big money in the boom and have largely kept it - are the "gouger-politicians, their wanker-banker buddies and their dodgy developer chums".

Which highlights a very important point - one we have made on BOM before. When you hear people arguing for this or that economic or financial policy as being in "the national interest", you really do have to ask how they will benefit themselves? (Yes, that does include Tyler).

Because no policy is going to benefit everyone equally, and although economic theory says that the winners can be made to compensate the losers, political reality says that's rarely the case in practice.

The Euro is a classic case in point. The winners of this hare-brained experiment have been the federalism industry, German exporters, and cheap money speculators of one kind or another. The losers have been European taxpayers, and all those now living in peripheral areas that are now so uncompetitive they face years of wage cuts and falling living standards to put things right. If they ever can be.

Things would be even worse for the PIIGS if they pulled out?

Don't be daft. Even if the Germans and others do promise massive fiscal bailouts from here to eternity, shackling themselves to the Deutschemark will ensure they never ever become competitive. They will never ever stand on their own feet again.

A bit like say, the North East of England - shackled to the Pound and consigned to perpetual welfare dependency.

* Apologies for lame at all at all commentary on Ireland. Mrs T is half Irish and Tyler simply can't resist it.

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Prompted Response Prompts Lies.

When it comes to customer satisfaction evaluation, I've written often of my distrust of prompted recall and my preference for the net promoter score. But I'd never expected to encounter them simultaneously.

Earlier this week I had a ten minute conversation with John Maeda as Part of his Fortune Cookie performance. Before I left the gallery, I was asked if I had heard of the net promoter score and, when I answered yes, was asked to rate my experience

You'll be surprised to read that I tend to grade low, so while I had thoroughly enjoyed the conversation I was going to rate it as an 8. But,under net promoter rules, I know that rating would be discarded as middling and so I found myself rating it a 9. In other words, the prompt had changed my behaviour and my perceived appraisal.

Now this was an art event and the prompt may well have been an innocent conversation-starter or, indeed, part of the event but the bottom line is, if you want
a true reflection of your customers' experience, you have to be utterly agnostic and make no attempt at prompting.

You may think it's going to facilitate the rating, but Heisenberg taught us otherwise.

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Is Default Now The Only Real Option?

Seemed like a lovely idea at the time... but who was going to pay?

As we've blogged many times, our real National Debt is far bigger than the government officially acknowledges. When we calculated the real debt for the TPA this year, we estimated the true overall total at around £8 trillion, nine times the official total, and over £300,000 for every single household in Britain. Here's the picture to remind us:

Our number picked up a fair amount of flak at the time for including things that are supposedly not real debt, such as pension liabilities. We answered the criticisms here, but one particular objection is worth picking up again in the light of the Irish crisis.

Our debt figure included the gross liabilities of our nationalised banks, amounting to £2.6 trillion. And the objection was that those liabilities are backed by the banks' assets, so just looking at the liabilities is scaremongering.

There is of course some truth in that point, but we argued that taxpayers need to know our total potential exposure. Because in these uncertain times, nobody can be at all sure what the banks' assets are actually worth.

And now we have a real live example of what happens when reality bites. As we noted here, the reason George has had to accept shoring up Ireland is that our banks' have lent the Irish well over £100bn - ie we can't afford to let them go down without risking a £100bn hole in our banks' balance sheets (£80 odd billion of which would be down to the nationalised RBS and Lloyds).

So how does George's decision impact on the National Debt?

An interesting question.

If we lend the cash directly, then it will likely add to the official National Debt. But if we lend it via a guarantee on one of those baffling Euro financing facilities, it will likely not add to the official National Debt at all - it will just be counted as a contingent liability, which the government habitually ignores. Even though in the real world, we are just as fully exposed to the liability either way.

And what about our Real National Debt (RND) calculation? That already includes the full liability supposedly backed by the banks' Irish "assets", so at first blush you might conclude that all we are doing is simply swapping one liability for another. Maybe the total RND doesn't change.

Alas, while that would be the case if the Irish were using HMG's new official loan to repay their existing loan from HMG's banks, that's not what's proposed. Instead, the new loan will simply add to the existing loan, so that the Irish can go on living day-to-day for a few more months. The Real National Debt just got even bigger.

Which is just a prelude to this morning's real question.

Prompted by some fascinating emails from longtime BOM correspondent NL, Tyler has been thinking further about how we can ever hope to escape from under this humongous debt burden.

Earlier in the week we reminded ourselves of the four traditional escape routes for indebted governments, and who ends up paying:

1. Repayment - ie the government runs budget surpluses. Taxpayers pay.
2. Default - most likely in the form of a partial default via debt restructuring (aka haircuts, debt for equity conversions, or coupon conversions). Lenders pay.
3. Inflation tax - where debt is denominated in fixed money terms, governments can work off their debts by engineering inflation - effectively a gigantic stealth tax on debt holders. Lenders pay ( including anyone who has been foolish enough to save their nest egg in a building society account).
4. Growth - GDP growth is the holy grail of indebted governments. Growth makes a given amount of debt less significant relative to GDP and tax revenues with each passing year. It's a get-out-jail free card for both the borrower and the lender.

NL emailed to object:

"Growth doesn't do anything for the debts. It's a bit of linguistic trickery. The only thing that pays debts in this way is growth in taxation. Politicians don't want to admit that they have to take more and more money in order to pay debts. So they use deceipt. If we take growing taxes and turn the adjective into a noun, who can complain about growth?

So when ever you see growth, it really means we are going to take more money from you in taxation to pay off our mistakes."

And of course, NL is quite correct - "the only thing that pays debts in this way is growth in taxation". It's the growth in tax revenues that floats the government free from the fiscal rocks. Taxpayers do end up paying more.

So how can it be seen as a fiscal get-out-of-jail-free card?

Because compared to an increase tax rates, an increase in tax revenues flowing from higher growth is a lot less painful for most people. They may be paying more tax in money terms, but relative to their incomes it will probably be less - the burden will feel lighter.

We can think of it in the same vein as the increase in tax revenues that we've often seen following cuts in tax rates, For example, when the Thatcher government cut the top rate of income tax, revenue from top rate taxpayers actually increased. And indeed Tyler believes cuts in tax rates now would generate actual increases in tax revenues within a very short period (eg we should cut the new top 50p income tax rate soonest).

But NL is not so easily convinced, and responded:

"There is also the other little calculation.

Lets take a million unemployed. 13K a year in benefits. They all get minimum wage jobs, so they pay 2.5K a year in taxes. However they will still get housing benefits. That's 5K a year. All relatively round numbers. Net increases in taxation / reduction in benefits comes to 13 - 5 - 2.5 = 5.5K per person.

So for each million that gives 5.5 billion. Even getting all those not in work, back to work, isn't going to close the deficit."

Tyler loves practical calculations like this - they really bring things into focus.

Let's take NL's assumptions as correct, although we reckon his arithmentic needs tweaking (ie by getting these unemployed back to work the government saves £8k pa in benefits - £13k minus £5k HB - plus it gets an extra £2.5k in tax revenue, equals £10.5k total improvement in the fiscal position). The overall saving from returning one million to work is £10.5k times one million, equals £10.5bn.

And given that there are currently well over 5m adults of working age living on benefits, that would suggest we could save over £50bn pa - if we could get them all into paid employment.

Now, a £50bn pa saving is not bad, not bad at all.

Except that we'll never get all 5 million back to work. And against a Real National Debt of £7.9 trillion, even a £50bn pa saving not really all that much. At £50bn pa it would take 158 years to pay off the debt. Tyler will have long since departed. The junior Tylers will have joined him. And the as yet unhatched junior junior junior Tylers will likely have gone too.

Hmmm. Maybe growth isn't quite such a get-of-jail free card after all.

Well, what about the good old inflation tax?

Unfortunately NL is pessimistic there too:

"On the inflation front, look at the £6.9 [7.9?] trillion number for true government debts.

What percentage is linked to inflation? Almost all of it. OK the CPI to RPI change cuts 15% off the debts linked to RPI. However, even the borrowing has a lot that is RPI linked. The PFI deals have RPI kickers. (Lender can convert to RPI at their choice).

ie. It's a myth that inflation deals with government debts."

You know what? He looks horribly right there too. As we ourselves have previously noted:

"Default via inflation only really works on the government's official debt. The much bigger £4 trillion unfunded pension debts will be trickier to deal with, since most of the pension payments are formally linked to the inflation index - higher inflation simply means higher payments."

So that's £4 trillion of the indexed pension debt, plus a quarter trillion of index-linked gilts, plus those largely indexed PFI contracts. Which means well over half our Real National Debt cannot be inflated away.

Uggh.

So what were those other two escape routes again?

Ah yes, repayment - that must be it.

Except, hang on - that's not an escape route at all. That's just the harsh cold turkey of taxpayers handing over more in taxes than they get in public services for years. Years and years and YEARS. The Tylers, the junior Tylers, the junior junior junior Tylers, everybody. Yea, even unto the nth generation.

Wait. The Major - who has been reading this over Tyler's shoulder - has just loaded his service revolver and wandered off alone into the woods. Surely things can't be this bad!

Well, there is one other final escape route left - default.

And the more you think about it, the more you realise that default is now pretty well inevitable.

And here's how it will work.

First, and most important, HMG has to step back from those £4 trillion of pension liabilities. Yes, they are liabilities to actual and future public sector and state pensioners that have already been incurred against past pension contributions and service. And yes, HMG has made solemn promises.

But the plain fact is that taxpayers can't afford to honour those promises. The pension age must be raised to at least 70 right across the state and public sector board right now. Either that, or the indexation promise must be abandoned, which would be much less fair on the real elderly.

Second, HMG needs to restructure the banks soonest, split wholesale and retail banking (as blogged many times), and withdraw from all guarantees explicit or implicit on the banks' wholesale liabilities. RBS and Lloyds should be split and flogged off pronto. Yes, the banks' shareholders and wholesale creditors will scream, but that's too bad.

The inflation tax? Well, as we've blogged before, we fear that's already out of the traps, and doubtless it will play its usual part in eroding the real value of HMG's unindexed fixed money debt.

And despite what we've said above, we still think growth will help by generating higher tax revenues from given tax rates.

But when you sit down and do some arithmetic, it does look horribly like default is the only real way of cutting the debt as much as it needs to be cut. Default on all those grandiose pension promises made by successive generations of politicos since Lloyd George launched the state pension one hundred years ago.

Never ever trust politicians who claim they can give you something for nothing. Try to remember that in future.

PS And here's how it looks from Dublin:

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Whose Debts Will We Take Over Next?

PIIGS stuffing

It sounds like George has buckled and that we're now in for £7bn of the Irish bail-out:

“Ireland is our closest neighbour. And it's in Britain's national interest that the Irish economy is successful and we have a stable banking system. Britain stands ready to support Ireland.”

Did he have a choice?

In the circs, probably not.

Take a look at the handy chart above. It's taken from last week's IMF report on the UK economy, and it shows UK banks' exposure (aka loans) to Ireland along with their exposure to three of the other PIIGS. As we can see, they are in for well over £100bn to the Emerald Isle, and getting on for £300bn to the group as a whole (ex Italy).

In theory of course, we should be able to say to the banks, that's your problem mate - you lent the money on all those housing estates in the peat bogs, now you can reap the rewards.

But in practice, we're stuffed. Post-Crock, we rediscovered the fact that taxpayers have to protect retail bank depositors here at home. And that means guaranteeing retail banks. Which as things stand, means guaranteeing all UK banks.

But let's hope George is at least insisting on some pretty tough conditions - no backsliding on spending cuts and close IMF monitoring.

We've only got to look at Greece to understand what could lie ahead in Ireland. Their existing government is going down, and its successors will look for every opportunity to backtrack and obfuscate. We must not accept that.

Who's next?

Well, as the chart shows, UK banks have chunky exposure to Spain, and if you're going to do Spain you might as well chuck in Portugal. We Northern Europeans will soon be on the hook for the whole lot.

It doesn't bear thinking about, but here's a small suggestion - when it comes to the crunch (ie outright default) HMG should do a debt for villas swap. Hard-pressed UK taxpayers could then be offered cheap villa holidays in the sun to take their minds off their 70% tax rates.

Apart from that, Tyler can see no light in the Euro-gloom.

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Words Have No Meaning.

One of the great false assumptions that marketers make is that once you have someone's attention, then you've got them for good. Well I hope most marketers don't think that way, but I can't think of another explanation for this billboard ad I saw at a station today. Just look at all those words.

It starts with a few superfluous humanising sentences about how they used to be bad at explaining things but they're trying much harder now and then goes on to explain how. Thereafter they probably telling me some more of their greatness, but even I (with a blogpost in mind) couldn't be bothered to read further. In fact, I was bored after the first sentence - it was all about them and nothing about what they could do for me.

It's the sort of worthiness that would be ignored in a magazine or newspaper where the next page is crying out for your attention; around a billboard the number of distractions are even greater and yet they want to preach to me - if not in tone, certainly in verbosity.

If you want to transmit information in an ad, then think elevator pitch in a very fast elevator. Know what you want to say and say it quick and clearly. That way you might keep my attention.

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Ver Are You All Coming From?

From Smurfland ver ve belong.

Spot the difference between these two entertainers from Belgium:





Many years ago, Mrs T took the junior Tylers and friends for a birthday treat to see the Smurfs Show. The show was bad. Very bad. In fact, it was so bad the theatre gave a full refund to the entire audience. The entire audience of about 30, that is.

The Herman van Rompuy Show is a very similar offering - amateurish, Belgian, and incomprehensible. The only difference is that there are no refunds.

There is a well rehearsed theory that the EU is the Fourth Reich in disguise. But just clock Herman's performance in the midst of the biggest EU crisis ever - he's making it up as he goes along.

The Euro is bust. The one-size-fits-all currency doesn't fit, and in one way or another it will have to be dismantled. The PIIGS will have to be cut lose and the Euro shrunk back to its Germanic core.

Even the Smurfs would have understood that.

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The Real Question - Who Pays?

A seriously bum rap

Here's what's supposed to happen: you borrow some money, and then you repay it. And the emphasis is on the word "you".

Now, what's so hard about that? The practice has been around for centuries, and nobody can honestly claim ignorance of the rules.

Yet somehow, when borrowers decide they can't make their repayments, it's rarely seen as their fault. Instead, the blame is landed on the lender, either for making it too easy to borrow in the first place, or for demanding repayment in times of difficulty. Tyler has never thought it fair that poor old Shylock loses his ducats because some smart-ass amateur lawyer gets the borrower off on a technicality, especially when Shylock would still have had to honour his own debts to his depositors. But you're meant to cheer.

And so to the current Irish crisis.

The Irish have borrowed A Lot of money. Their citizens borrowed a lot to buy property, their government borrowed a lot to... ummm... spend, and their banks borrowed a lot to punt around, largely on property loans. Their external debt is now a staggering 1300% of GDP, most of it now effectively nationalised through the government formally guaranteeing its banks' debts.

Here's how it ramped up during the go-go years to reach its current €1.74 trillion (chart is in millions of Euros, taken from the highly informative Ireland After NAMA):

So who's to blame?

Well, yes, the Irish of course. For borrowing so much. Obvious.

But Tyler is just listening to J Humphrys summarising the situation for BBC R4 Today: "...the vultures are circling Ireland... the country may be forced to hold out the begging bowl... the vultures may then turn their rapacious attention elsewhere..."

Those greedy flesh-ripping lenders - why does anyone put up with them?

But what's the real question beyond the tabloid emotion? The real question - as we all surely understand by now - is who's going to pay? Not just for Ireland's debts, but for Greece, Portugal, Spain, Italy, etc etc.

As regular BOM readers may recall from this blog, traditionally there have only ever been four options for governments with too much debt. Let's review them to see who actually ends up paying:

1. Repayment - ie the government runs budget surpluses. Taxpayers pay.
2. Default - most likely in the form of a partial default via debt restructuring (aka haircuts, debt for equity conversions, or coupon conversions). Lenders pay. 
3. Inflation tax - where debt is denominated in fixed money terms (as most is), governments can work off their debts by engineering inflation - effectively a gigantic stealth tax on debt holders. Lenders pay, including anyone who has been foolish enough to save their nest egg in a building society account.
4. Growth - GDP growth is the holy grail of indebted governments. Growth makes a given amount of debt less significant relative to GDP and tax revenues with each passing year. It's a get-out-jail free card for both the borrower and the lender.

But this is where Ireland and the others have a problem. Because they're members of the Euro, and that pretty well nukes options 3 and 4. As everyone in the real world always understood, the Euro makes it impossible for individual members to crank their own printing presses. Ireland and the others can't impose an inflation tax, and can't depreciate their currencies to stimulate growth - they're locked in.

Which means the only options are either to repay - whatever the tax and spending implications - or to default.

Now, the average Irish/Greek/Portuguese/Spanish citizen is going to opt for default - no question. But sadly, the lenders aren't nearly so keen. And since the lenders largely comprise banks based in other member states of the EU (including Britain), those members are not keen either.

Which is why Ireland and the others' membership of the Euro has brought a fifth option into play - transfer the debt to taxpayers in other countries.

And that's precisely what is being done with the EU's €750bn bail-out package, agreed during the Greek crisis in May. Taxpayers elsewhere are being forced to guarantee up to €750bn of loans to basket cases like Ireland.

Fortunately, the UK's share of these guarantees is limited, because - thank God - we aren't members of the Euro (keeping us out was one of only two useful things G Brown ever achieved). But even so, it could still be well over £10bn (including both our €8bn share of the European Financial Stabilisation Mechanism and our €4bn share of increased IMF lending).

But spare a thought for the German taxpayer. They've always run a tight Lutheran ship in terms of their own borrowing, but now they're being called upon to guarantee tens of billions of Euros in loans to the wild free spending PIIGS. And they will note that the EU's announced €750bn bail-out fund only covers a fraction of the total external debt of the PIIGS, which comes in at over €5 trillion.

Of course, at the level of the entire Eurozone, there IS an alternative. As several commentators have argued over the last few days, the European Central Bank could fire up the presses. It could flood the world with Euros just as the Fed is flooding the world with dollars. It could do so until Euro inflation - currently around 2% - takes off.

But if you're a normal everyday punter in Germany, why would you feel any better about that? You almost certainly never wanted the Euro in the first place, and went along with it only because you were assured it would be the rock solid Deutschemark by another name. How are you going to react when your Euro savings are obliterated simply to shore up the PIIGS?

At the end of the day, a bout of Euro inflation looks increasingly likely - all the other options are simply too hard for Europe's rulers to swallow. German taxpayers are going to be left feeling just like these American furry animals feel about the Fed's antics on the dollar printing press (HTP JWK):



PS If by any slight chance anyone is reading this thinking the inflation storm won't affect us, today's re-acceleration of UK inflation to 3.2% - above market expectations - is an excellent reminder of reality.

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Spending Your Money

The short version

We assume everyone watched Martin Durkin's spirited assault on Big Government last week (clip above and you can watch again here).

But discussing it with various people since, Tyler has been struck by how few actually realised that government is now spending more of our money than it allows us to spend ourselves*.

Say it again - government is now spending more of our money than it allows us to spend ourselves.

According to the latest OECD stats, this year the UK government will spend an astonishing 53% of our national income. That's the figure quoted by Durkin in his film, and also the figure we show on BOM's sidebar (it relates to so-called General Government, comprising both central government and local authorities).

So - just to hammer home the point with an outsized mallet - for every pound we earn as a country, the government spends 53 pence of it, leaving us with just 47 pence.

And our government is spending more of our income than the government of virtually any other major economy, and way more than the OECD average:

Greece and Ireland, those notorious fiscal basket cases?

Yup, you guessed it - their governments are actually spending less than ours (48.8% in the case of Greece, and 46.9% in Ireland).

Now for some unfathomable reason, HMG does not admit to such a high percentage in its own figures. In fact, George's June budget reckoned the percentage of GDP spent by government this year will "only" be 47.3% (2010-11).

But as we've blogged before (eg here), there are some serious doubts about the official HMT figures. In particular, some of their spending figures are included net of receipts (eg spending on public sector pensions). We'd rather trust the OECD numbers which conform to an internationally agreed and monitored standard.

More fundamentally, the HMT figures calculate the government's share as a percentage of GDP at market prices, rather than the much more meaningful - and lower - GDP at factor cost.

Que?

In plain English, GDP at market prices is measured including the taxes government levies on goods and services, including VAT. Thus, the more government taxes our spending - by for example increasing VAT to 20% - the higher is GDP at market prices. Which means that government spending as a percentage of GDP is correspondingly reduced.

Or in other words, by increasing spending taxes, HMG can manipulate down its own share of GDP.

GDP at factor cost excludes such sales taxes and gives a much truer measure of our real national income, and the share taken up by government.

BOM's old friend Prof David Smith has spent his entire distinguished career monitoring Big Government (or Leviathan as he prefers to call it - see clip above). And he has calculated his own measure of government's share in GDP, measured at the more meaningful factor cost. Here's one of his charts showing what happened over the last century:

Take a moment to study that chart (click on image to enlarge).

A hundred years ago, before WW1, government spent 10 - 15% of our national income, and private citizens got to spend all the rest - ie the money they'd earned. But in the following 70 years, successive governments grabbed more and more, so that by the early 80s they were spending over half our national income.

There then ensued nearly two decades of real struggle under Thatcher, Major, and Prudence, to rein back. Even so, government's take never fell below 41.8% (touched briefly in 1999).

Over the last disastrous decade, of course, it's been one-way traffic. Nay More Boom 'n' Bust Brown let rip, we hit the inevitable bust, and once again we find ourselves with government spending more than half what we earn.

Now let's all remember that simple fact. And let's all try to make sure we tell others around us.

And next time some self-serving Big Gov type pops up on telly saying we could solve the fiscal problem by increasing taxes, feel free to shout at him/her.

The problem is not too little tax.

The problem is too much government spending.

*Footnote - It should be noted that the OECD's 53% figure covers all categories of government spending, including transfer payments (mainly welfare benefits and increasingly debt interest payments). That of course is normal fiscal accounting practice, as also applied by HMT. It shows the proportion of our national income spent by the government. Now, clearly we aren't saying it all goes on direct consumption by the government, because around one-third of it goes on those transfer payments, which the government routes into somebody else's pocket. But the key point is that the government is taking 53% of national income away from those who have actually generated it. For sure, the government then hands a chunk of it out to citizens it considers deserving, but that shouldn't detract from the essential point. The burden on those famous wealth creators (via current and future taxation) is 53%.

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Inflation Squeeze

Are your pips squeaking yet?

Much squawking over British Gas putting up its prices by 7% - surely they're profiteering at our expense.

As so often, it depends which hand you use to look at it. On the one hand, wholesale gas prices have risen by 25% since the spring, so British Gas is being perfectly reasonable in passing it on. But on the other hand, the previous fall in wholesale prices was not passed on so it's a bit rich to pass on this latest increase.

The truth is that the energy companies have to earn a crust - ie they have to make a profit. They set their prices to us on the basis of prices in the world wholesale market. But the latter fluctuate all the time, whereas we consumers expect tariffs that stick around for a while. So the companies have to smooth things out by taking a view on future wholesale prices.

And they don't always get it right. This chart from Ofgem shows how their net profit margin per customer has varied over the last few years, from a peak of about £75 pa right down to a loss of £150.

Tyler fully understands that the energy companies are not our friends, and given half a chance would rip our faces off without compunction. But we cannot expect them to protect us from cost increases on the world markets where they buy their supplies. All companies have to make profits to pay shareholders for the use of capital. They are not - nor can they ever be - charities.

Unfortunately, it isn't just energy prices - what's happening in the energy market today looks horribly like a portent of what's about to happen right across our economy.

Consider. A couple of weeks ago we blogged the alarming explosion in world commodity prices. At the time we noted that the Economist's commodity price index was up by 35% over the preceeding 12 months in sterling terms. That was bad enough, but the picture now - just two weeks later - is even worse. After a further 6% hike in the last week alone, the 12 month increase in commodity prices now stands at a 1970s apocalypse-style 44%.

44%!

In just one year.

And understand this - the bulk of that increase has not yet fed through to us in our homes and high streets.

Meanwhile the inflation rate in China has jumped by nearly one percentage point in just one month.

Frankly, we're scared. What can we do?

We turn to the appointed guardians of the Pound in Your Pocket - the Bank of England. How do they propose to protect us against the inflationary dragons rising in the East? What do they have to say in their latest Inflation Report?

Here's what:

"... recent increases in commodity and other world export prices could lead to renewed upward pressure on inflation. That upward pressure could be heightened if some companies need to rebuild their profit margins, which were compressed during the recession...

...there is a risk that commodity prices will continue to rise. That would cause further increases in companies’ costs, and lead to higher inflation over the forecast period... That would also exacerbate the risk that the prolonged period of above-target inflation might cause companies’ and households’ expectations of future inflation to increase. That could feed into price and wage-setting decisions, offsetting the downward pressure on prices from spare capacity."

Hmmm...

Could... would...?

Is and will, more likely.

The Bank must surely be getting embarrassed about these quarterly inflation reports. For as long as anyone can remember, their forecasts of inflation have almost always turned out to be too low - far too optimistic. We've blogged this many times (eg here), but just as a reminder, here is a selection of the Bank's forecasts, starting from February 2009 and ending with this week's. Focus hard and spot the pattern:

Chart 1 - Bank of England inflation forecast February 2009

Chart 2 - Bank of England inflation forecast February 2010

Chart 3 - Bank of England inflation forecast November 2010

Spot it?

Back in February 2009, the Bank forecast that the inflation rate today would most probably be between 0% and 1%. They reckoned there was a 1-in-4 chance that prices would actually be falling (ie the Dreaded Deflation), and the chance of inflation being over 2% was put at well under 1-in-10.

Crank forward to February 2010 (just 9 months ago), and the Bank had nudged up their forecasts a bit - they now said inflation would most likely be between 0.5% and 1.5% by now. But they still thought there was a good chance of lower inflation, and still a 1-in-5 chance of deflation (despite the fact that the printing presses had been running in overdrive for a year).

And now? Well, today's CPI inflation has actually turned out to be over 3%. And even the Bank's own November forecast acknowledges it's back on a rising track.

And yet - despite their obvious inflation optimism in the past, despite their massive money printing, despite the further weakening of sterling, and despite the world commodity price boom - they still reckon that inflation will fall back below 2% pa within a year. It's almost as if they start all their forecasts from already knowing the answer - ie inflation will somehow soon be back below the 2% target.

Look, can we all agree on what's really going on here?

For years Britain has been consuming beyond its means, and in future we'll have to consume less. We're going to be squeezed. The real question is who's going to be squeezed the most?

Here's the abbrieviated list of squeeze options:

• Squeeze the rich - aka raise the top rate of tax and execute tax avoiders - popular with the Grun, the BBC, and the Bishop, but the rich simply up sticks and leave
• Squeeze the poor - aka means tested welfare cuts - very unpopular with the poor, the Grun, the BBC, and the Bishop, and looks like the same old Tories
• Squeeze the middle class - aka general tax rises and universal welfare cuts - very unpopular with the middle class, the Mail and the Telegraph... oh, and the Grun, the BBC, and the Bishop as well
• Squeeze the public sector - very unpopular with the public sector, the unions, the Grun, the BBC, etc etc

Now, if you're at the controls, you look at that and decide none of it looks altogether appealing - the losers are far too obvious.

But inflation, well, that's different.

You see, inflation is one of those things that not only spreads the misery far and wide, but you can also blame it on someone else. Ah yes, you say, those fiendish Orientals with their monstrous appetite for commodities... I gave them a damned good talking to in Seoul, but what can you do? They've made our lives a misery! And what about those crazy Yanks?! I haven't the faintest idea what they thought they were playing at with that huge printing press - it was sheer madness! All out of our hands though - we are victims of global circumstance (we'll conveniently overlook the fact that much of the inflation reflects sterling's 25% depreciation).

The Bank of England makes much of the fact that higher price inflation has not fed though to higher pay rises in the manner of a 70s wage-price spiral. And that is perfectly true - so far.

But while that may give some comfort on the prospects for inflation, it does nothing for those who are currently being squeezed by inflation itself. Obviously that includes pensioners and others whose savings income has plummeted, but it also includes those still at work. Because since the crisis broke back in 2008, inflation has already exceeded average pay growth by 2%, implying  a 2% cut in real living standards (even before taking account of higher taxes).

This squeeze is set to get worse as inflation ticks up. Those with inflation linked incomes (such as public sector pensioners) will be protected. Everyone else - including those still in work - will be squeezed.

So next time you get whacked in the wallet by some headline grabbing price rise, don't blame British Gas and don't blame Mr Sainsbury.

This is being done to you quite deliberately by those at the very top. Somebody has to pay, and they've decided it should be you.

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