23 November, 2017

UK Govt scrap stamp duty for first time buyers

Let me give an example of critical thought in action.

As the title suggests, the UK government is helping first time buyers by scrapping stamp duty on houses up to £300,000

So, no need for critical thought. or is there?

Stamp duty is just a fee you have to give the govt for no real reason when you buy a home in the UK. Now first time buyers have no need to pay it but is this helpful?

A first order analysis says yes but let us go deeper. Imagine a young couple able to afford a £600 a month mortgage on a £100,000 home. Imagine interest rates for first time buyers were govt subsidised and the young couple only had to pay £300 a month. A first order analysis tells us that the govt is helping the young couple. However, the sellers now realise that the couple can actually afford to pay £200,000 and so the house is now twice as expensive.

This second order analysis tells us that the unintended consequences of making house buying easier for first time buyers is to increase the price of the least expensive housing. Which is the opposite of what the government said they were doing. Likewise, anyone selling for £300,000 or less who does not increase the price will find selling easier. All the govt interference has achieved is to make selling easier or transfer more wealth to the sellers from the buyers.

At this point we can laugh at govt incompetence or continue our analysis and deepen our understanding. To actually make house buying easier for new buyers the govt needs to INCREASE interest rates. This sounds bizarre unless we have actually understood the previous paragraphs. Each time house buying is made easier, house prices rise.

Let us imagine a massive increase in interest rates, the couple can still afford £600 each month but this only buys a £50,000 home. House prices then definitely do not rise, they fall. Imagine how easy it is saving for a deposit when interest rates are high. Imagine how easy house buying is when house prices STOP rising. This is a third order analysis.

We can then summarise what the govt is actually doing, not helping buyers but sellers.

This is how society works. Govt gets to pick winners and losers. So, would you care to take a guess at who advised our govt that this was a great idea to help first time buyers / good youth vote winning strategy. Well, as a seasoned critical thinker I can tell you it was bank sector lobbying. I mean, it wasn't the oil and gas lobbyist was it? I know that this is the realm of conspiracy theorist but it is obvious once you apply critical thought. Why would the banking sector want this new policy?

We have already done the heavy lifting, high interest rates would help first time buyers but crush house prices. That would not encourage people to take out second and third mortgages on their homes. Many people would struggle to pay high interest rates, so defaults would spike. The banks have done their sums and this is their best current strategy for squeezing more wealth out of us. Let us keep the analysis going.

Whilst banks can make money by making home buying easier, they will. Eventually, this strategy will no longer yield as much wealth as allowing interest rates to rise. I think you know what happens then. Yes, interest rates start to climb upwards, slowly at first. A gentle rise, not enough to cause too much critical thought by the masses. As the defaults start, the bank lobbyist will spin a new tale about careful lending and talk at length about increased risks. Interest payments will continue to rise slowly. You can perhaps imagine the rest. If not, time will reveal it all to you anyway.

Now, to be able to critically think you don't need a high IQ. You need to have a calm and well disciplined mind. Which is what book one of my trilogy helps you develop.

I hope that helps with your understanding of the 'real world' and where we are in this current financial cycle. Critical thought could prove to be a highly valuable skill. Well worth the effort to acquire.

You are welcome








17 November, 2017

Monthly Musing

Last month I mentioned free schools and free sweets. One was apparently the best idea ever to a headmistress. The other the best idea ever to a six year old.

As you can see, humans are predisposed to ideas that greatly benefit themselves but like to explain that the actual benefits are for everybody to enjoy. I called this cognitive dissonance.

I shall assume that society is more or less the best that it can be. Nothing is actually free but society can and does provide certain things for free, for the common good.

So, this should be a short blog.

Now, the word free stirs up a great deal of highly emotional debate. So it should. Free school meals, free this and free that all costs society something. What strikes me as odd is that very few of us realise that central banks get to create any sum of currency their little hearts desire for free.

Boom.

This isn't like getting a free school meal or unemployment benefit. No, any sum for any reason can be created in an instant by these central bank currency wizards.

Do your core beliefs see this as a problem? A worry? A concern?

Or nothing whatsoever to do with you?

The Bank of England is a very solemn entity. Black shoes and nice suits. Even Brown shoes are frowned upon. This central bank bunch of suits do not, under any circumstances, want you to think they are simply creating currency and giving it to their chums.

Despite the fact that they are. They even tell us that this is indeed what they are doing. Obviously, they tell us with solemn faces and mention the words 'sound' and 'rules' fairly often. Never the less. They are legally allowed to create currency and give it to whom they please.

Boom.

Is your spider sense tingling? Are your core beliefs untroubled?

Obviously, most are not concerned otherwise it would not be happening.

Currently, ten billion each month is given by the bank of England to their corporate chums. Fifty billion a month to their financial friends. Free pounds sterling to whoever they wish to give it to.

At the same time, benefits to physically and mentally challenged folks is cut, saving millions. Whilst billions are freely given to the already wealthy.

This dear readers is not a problem. It is simply a case of central planners allocating resources. Your resources.

I think the masses need to do some of their own critical thought on resource allocation. You can clearly see where central planners determine resources are best allocated, do you agree?

Boom.

Or just a quiet nod of appreciation that these central planners know best?

Yes but I hear many of you say, the currency they give out has to be paid back. Well, yes. In theory. However, the government has never ever paid back a single copper penny of any of this free currency ever.

BOOM?

This free currency issued by central banks, borrowed by government which is never paid back, flows into our pension funds.

BOOM?

No BOOM?

Is this sixty billion a month of free currency a concern, really?
Allow me to share my insight and my arithmetic skills.
Sixty billion a month shared by sixty million people is £4,000 per household of mummy, daddy and two little ones. Obviously, it isn't politically advisable to take this £4,000 each month from their bank account. So, where is this apparent wealth coming from? It is coming from this families expected pension fund. Again, the nominal value of their pension fund is not being decreased by £4,000 each month. Just its value.

At some stage the value of this young families pension fund will match its numerical value. Which is unfortunate. There is a far greater threat than these four people never having the opportunity to retire. That is, the free currency issued by vast numbers by the central banks, which is helicoptered over to their financial friends and corporate chums, could abruptly change the value of the cash in our wallets to zero too.

BOOM or NO BOOM?

Again, we are back to your core beliefs. Facts can prove anything, therefore facts can prove nothing.

To be fair, a central banker has far more credibility than I have. They have doctorates and degrees and expense accounts and gold watches and solemn faces and black shoes.

The average set of core beliefs the average person has will inform them that I am a conspiracy nut or just scaring you into buying gold or simply a little scamp  causing trouble for his own amusement. You wouldn't be wrong.

However, a broken watch is right twice a day. Is there a sliver of a chance that I have imparted, accidentally, some information that would make me worth my own body weight in silver? (Currently £33,333)

Doesn't matter either way. I have suggested something that might happen only once in a thousand galaxies. If it did happen it would be massively damaging to those who have not considered its possibility. On this basis, I would strongly recommend that you risk a portion of your time critically thinking about it.

If you don't know how to even begin critically thinking about something so potentially huge. Well, work your way through my posts from the beginning where I blather on about watches! (It was for your benefit not mine.) Or read my trilogy of books.

Next month is the end of year round up where I shall list all the booms!