Taxation in the modern state is an attack on wealth and its creation.

Which is illogical, because without wealth creation there can be no tax base.

The Welfare State was founded, and is foundering, on conundrums such as these. So perhaps it is not surprising to see a Tory Chancellor of the Exchequer engaging in what amounts to left-wing style class warfare.

George Osborne has just announced that he is “going after the wealthy tax dodgers”. As reported in The Daily Telegraph, Tuesday 10th April, he has been examining “anonymised” tax returns furnished by HM Revenue and Customs which show the completely legal measures that some very rich people have been using to reduce their tax bills, through what the Chancellor and the Revenue are pleased to call “loopholes”.

If the measures are legal, how can those who use them be called “dodgers”? (And see here for another example of the Revenue being rude.)

Osborne has cleverly turned the issue into a moral one and in doing so has introduced a novel legal concept on the hoof. These schemes of tax avoidance have been dubbed “aggressive” avoidance, as if by hurling an adjective about what is legal is suddenly rendered “un”-legal.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

And it is to be observed that such charities find more efficient and targeted ways of spending the money they receive through such donations. Can the government be expected, can the government even promise, to spend the money that it thus intends to steal as efficiently? Of course not.

One obvious practical problem that also looms is that many of these allegedly “aggressive avoiders” are foreigners, who settled here because of the way the tax rules had already been drawn up: they run businesses, they spend – in other words, they are already “contributors” in various ways to the economic life of the country. If the rules that encouraged them to settle here are changed, then they will simply leave, or if they stay, the taxes imposed on them will dry up certain expenditures, which will amount to much the same as if they had departed.

So the plans to deal with people who have done nothing illegal will have the opposite effect: less wealth creation, less voluntary “distribution” through getting and spending of that created wealth through the rest of the economy and more government waste – of human resources as well as cash…

Once upon a time, these things were done so differently: here is the opening paragraph of A. J. P. Taylor’s volume in the Oxford History of England, “English History 1914-1915”:

Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without any restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home. For that matter, a foreigner could spend his life in this country without permit and without informing the police. Unlike the countries of the European continent, the state did not require its citizens to perform military service. An Englishman could enlist, if he chose, in the regular army, the navy, or the territorials. He could also ignore, if he chose, the demands of national defence. Substantial householders were occasionally called on for jury service. Otherwise, only those helped the state who wished to do so. The Englishman paid taxes on a modest scale: nearly £200 million in 1913-1914, or rather less than 8 per cent. of national income.

By Mark Rogers

For all practical purposes, it has looked for a very long time as if the gold standard has become a curiosity; reviled by Keynesians, found impractical by politicians (I wonder why?!), alleged to be unworkable as a medium for regulating international trade – these are just some of the reasons that anybody who advocates a possible return to it is regarded as a crank. (This does not stop governments from wanting to get their hands on gold or control it, as witness the buying of gold in China, and the curtailing of paying for gold in cash in Europe.)

That is not the only reason why I am, at least for the purposes of this article, putting the gold standard in the category of a curiosity. Although Britain came off the gold standard in 1931, at least as late as 1934 candidates sitting the Final Examination of the Institute of Chartered Accountants were still being asked questions on the gold standard.

I discovered this in a small crib published in 1934 for such candidates: “109 Examination Questions on General Financial Knowledge together with Answers Thereto” by R. Byrne (A.C.A, A.S.A.A., F.C.I.S), published by The Coaching Association Ltd, London E.C.2.

Here they are, giving as good and succinct a definition as one could wish for, written with essentially practical business in mind:

Q.77 Explain concisely what is meant by the gold standard, and mention the various forms of the gold standard.

By “the gold standard” is meant a system of monetary management whereby the currency of the country has a definite gold value, even though the circulating medium is a paper currency or a metal other than gold.

Any country which is on the gold standard undertakes that its standard coin shall contain a fixed and unalterable amount of pure gold. It also undertakes that such standard gold coins shall be legal tender to an unlimited amount, and that its central agent (the Bank of England in this country) shall buy and sell gold at certain fixed prices.

Under the gold specie or circulation standard – which is the most perfect form of gold standard – gold coins are actually in circulation and the central bank undertakes to redeem any of its bank notes in gold coin. Gold coin, therefore, is readily available for the settlement of debt. This is the system which was in operation in this country prior to 1914. The gold bullion standard, which was in operation in this country from 1925 until 1931, is a more restricted form of gold standard. Under this system the central bank is bound to buy and sell gold bullion at fixed prices. In England, the Bank of England was compelled to buy gold of standard fineness at the rate of £3 17s. 9d. per oz., and to sell it – in bars of not less than 400 ozs. – at £3 17s. 10½d. Consequently, gold was always available for shipment in payment of debts, and the £ always had a value fixed in relation to these prices. The gold exchange standard is that adopted by silver-using countries. Thus, a country such as India would maintain the gold standard by purchasing the exchange or securities of a country which was on the gold standard, e.g. England. These securities could be sold, and with the proceeds gold obtained from the Bank of England. This gold could then be transferred to India’s creditors so that the rupee, although silver, could be definitely linked to gold.

Q.78 Explain how the gold standard operates to adjust the balance of international trade.

The gold standard maintains stability of the exchanges, for when the currency of a gold standard country is convertible into gold at a fixed price, the value of that currency in terms of the currencies of other gold standard countries will only vary within small limits known as specie points. Therefore, international trade may proceed without any fear on the part of the trader of loss owing to exchange fluctuations.

In order that the gold standard shall operate freely, it is necessary that no restrictions shall be placed upon the free movement of gold from centre to centre, and that there should be some relationship between the internal and external purchasing power of a currency.

When a country has an adverse balance, payment will be made in the form of gold. The loss of gold will result in a contraction in the volume of money, and prices will tend to fall. In consequence, the country exporting gold is able to produce more cheaply, and its exports tend to increase. Its imports, however, tend to decrease because of the higher costs of production prevailing abroad. In the countries receiving the gold the opposite results will be noticed, i.e. more imports and fewer exports, so that in due course the country which had the unfavourable balance will tend towards equality with the others, and will ultimately have a favourable balance, resulting in the receipt of gold.

The gold standard therefore operates as a corrective, whereby the course of international trade is facilitated by the transfer of gold.

If the gold standard is not permitted to operate freely, i.e. by an inflationary policy on the part of the gold-losing country, or by excessive tariffs on the part of others, gold will tend to move one way only, resulting in the exhaustion of gold supplies of at least one country, and the eventual abandonment of the gold standard by that country.

For good measure, Q.79 is What are the disadvantages of a paper standard of currency? the last sentence of the answer reading emphatically: It may be remarked that inflation has always occurred in cases where a paper standard has been adopted.

[The author is, amongst other things, a dealer in secondhand books and is always picking up little gems such as this crib on his rambles!]

On 27th January 2012, The Daily Telegraph reported that a Civil Servant with the position of Permanent Secretary for Tax at Her Majesty’s Revenue and Customs, delivered himself of the opinion that those who pay tradesmen in cash are “diddling” the economy, “allowing them to evade VAT or income tax”.

The Permanent Secretary for Tax stated what taxpayers’ money is spent on:  “Tax provides the funding to run the country: hospitals, schools and everything else,” he says. “Every time someone pays cash in order not to pay VAT, the nation gets diddled.”

The Permanent Secretary for Tax has a pension pot, paid for by taxpayers, of £1.7 million pounds. He also said that those who contribute to the cash economy have no cause to complain about austerity. Clearly, £1.7 million pounds is no austerity – and so is very much open to objection.

H.M.R.C. – Stasi-style

H.M.R.C. is planning a “major clampdown”. In order to perform it, the government is to encourage sneaking: The Daily Telegraph reports: “Mr Hartnett encourages anyone who suspects wrongdoing to telephone the Revenue’s whistle-blower hotline and tip off inspectors.  He says: ‘Cash has been a problem for a long time. The people who are worried about it should use our whistle-blowing line to tell us. We are getting better and better at finding people who receive cash.’” Furthermore: “Tax disclosure rules introduced in 2004 had ‘massively changed the environment for tax avoidance and business’, he says. ‘We have now got to do the same with individuals’.”

These are highly charged statements; whatever other tasks a Permanent Secretary for Tax may perform, making political remarks is not one of them: they are beyond the brief of a mere Civil Servant.

Where does it all go?

Let’s see what we can make of these allegations and proposals. In the first place, having taken it upon himself, as a Civil Servant, to tell us that our taxes go on “hospitals, schools and everything else”, before making accusations about “diddlers”, perhaps he should justify this statement: is he certain that the taxpayer gets value for money?

The “everything else” is a bit suspicious, too: foreign aid that is declined by its recipients (here); MPs’ expenses; Civil Servants’ expense credit cards that leave no audit trail; one third of the national budget being spent on social workers, who routinely fail to save infants from horrible fates, while a mere 3% of what is spent on social workers is spent on the Armed Forces – which nevertheless face savage cuts; inordinately high salaries for local authority CEOs; vast sums wasted on government computer schemes, which just get written off; those in the private sector on the state pension seeing their pensions vanish, while those in the public sector have guaranteed pensions…. the welfarist list goes on (The Taxpayers’ Alliance are the experts on government waste). And while there is no guarantee whatsoever that this money is well spent, the government is so profligate that the Bank of England is indulging in massive Quantitative Easing so that the government can pay its debts… which is another way of saying that the government is able to write off its responsibility and accountability.

There’s the rub

“Cash” is indeed the problem. QE, while allowing the government to pay its debts, while decreasing the value of borrower’s liabilities, has a huge negative impact on pensions, annuities and savings.

So perhaps Mr Permanent Secretary for Tax had better be careful who he accuses of “diddling”. With the Welfare State seemingly beyond reform – but also beyond the nation’s pocket, and with QE devaluing the efforts of the prudent, why shouldn’t people find ways of doing what they can to hang on to their wealth? In an encouraging addendum to The Daily Telegraph’s story, an online poll shows 68.36% of respondents agreeing with the statement that “It’s not up to me to force other people to pay their tax”, while 18.98% agreed that they were “not willing to pay more if [they] can get a good deal with cash”.

In other words, prudence is valued. Savings, trying to do well for oneself and one’s family, are only regarded as “selfish” in the moral vacuum that the Welfare state creates. What a long way from the ringing endorsement of individuality and wealth creation that Gladstone made: “Let the wealth of the people fructify in the pockets of the people.”

There is a particularly ugly aspect to this move by H.M.R.C., which is very worrying in constitutional terms: the Customs and Excise, being the body that raised the King’s money, has always had stronger, almost extra-legal powers, than the Inland Revenue, the distinction being that Customs was practically a police force, founded in the days before income tax and granted powers to, for example, deal with smugglers. It was always a concern that VAT had been deemed a Customs’ matter; now given the merger of the Revenue with the Customs by Gordon Brown, there was always the possibility that this was a way of granting an extension of the sort of powers Customs officers enjoyed to the Revenue. And the remarks quoted above, including references to income tax, suggest that this indeed is what it happening….

Monopoly?

But let’s suggest a deal, taking our cue from the Permanent Secretary for Tax: those who operate in the cash economy shouldn’t complain of austerity – well, if they don’t complain, will they be left alone? After all, their activities may in their own small way help revive the economy.

And if the government can simply print money to pay its debts, will the Revenue have cause to complain if the rest of us decide to pay our taxes in Monopoly money?

(The manufacturers of Monopoly print more money every day than the U.S. Federal Reserve – although not, perhaps, for much longer……)

The scandals over inflated expenses could, perhaps, have once been regarded as a small price to pay to avoid professional salaries; besides, of course, in those days Parliament only convened when there was business to conduct. The MPs expenses scandal of recent years shows how right Burke was: here were professional MPs, on fairly generous salaries, with expense accounts that allowed them to employ family members as staff – and capable of being stretched to cover all sorts of things not related to their duties.

This corruption must be seen as just one element of the moral corruption of the contemporary political class, as well as a wider corruption of the parliamentary system. For the question needs to be asked: what are professional politicians? Are they persons, scholarly of mind, who are learned in the history of the Common Law Constitution? Far from it; so far indeed that they are not even versed in the legislation that they pass: for example, when Gordon Brown as Chancellor introduced his unnecessarily complex Income Tax return forms, it was found that a sizeable number of MPs did not understand them. They were not, however, thrown back at the government on the grounds that if MPs couldn’t understand them, it was fair to assume that many of their constituents wouldn’t either.

One particularly corrupting influence is the habit of delegated legislation, now so widespread that it could be said that all legislation has become delegated legislation. Delegated legislation entails framing the intentions of an Act of Parliament in obscurely wide-ranging terms and concluding that for all practical outworkings and impositions of the Act, the relevant Minister is empowered, without further consultation with Parliament, to act as he sees fit.
That is, MPs pass the supervisory function over the executive that they are supposed to exercise, straight back to the executive. Presumably so that they can spend more time with their moats, ducks, first class railway tickets and McVitie’s biscuits, while lying to their mortgage providers….

This is not only moral corruption but dereliction of duty, indeed outright subversion of the very functions of a representative parliament. Burke’s prophecy has come to pass: a salariat professing political virtue and competence has become a self-interested cabal whose interests are diametrically opposed to those who elected them. Are these the people to be entrusted with overseeing the wealth of nations?

by Mark Rogers

With most people unable to purchase a property outright, a “mortgage loan” is arranged, which is actually the opposite of a mortgage: you choose the house you would like to rent from your bank/building society, which purchases it and rents it to you for a fixed term (typically 25 years in the U.K.). If you maintain the “rental” payments, after the term has elapsed you get to keep the house.

If you do not maintain them, the house is “repossessed” – another odd term, given that you do not possess it, your bank/building society does – and all that money paid over by you has done no more than what an ordinary rent would have achieved, somewhere to live pro tem, rather than an investment and/or a property you can pass on to your children.

At the end of the boom of the mid- to late-1980s, a wave of “repossessions” swept South-east England: young upwardly-mobile traders had bought substantial properties in the Home Counties on mortgages paid out of the commissions they were earning on City of London trading floors.

This was not all: they invested in furnishings and adornments appropriate to their new and their properties’ traditional status. All was lost! Bailiffs repossessed the properties and took possession of antiques, period furniture and antiquarian books and first editions.

A colleague of mine owned a small bookshop in the heart of a traditionally affluent part of west Surrey, a natural place for these traders to gravitate to. Bailiffs knew the value of the furniture they were appropriating: that went into auction. My colleague benefited from their lack of interest in books, and for months at the end of 1989 and well into 1990, estate cars would stop at his shop, packed with books at a tenner a box. Each box contained several valuable books.

A home is not just a house: it is how you decorate it and what you put in it, the sum creating a value you would, presumably, wish to preserve and cash in when the assets have appreciated, and/or pass through your family unto the last generation… So why would one try to do so on a modern mortgage? Especially as if anything is being “mortgaged”, it is your earnings. If your earnings are in an already precarious sector – such as the trading floors, with their complete lack of job security (one reason commissions are so high: compensation for potential instant dismissal) – this only increases the risks of property ownership. The matter is just as serious for the average earner on a wage: there is no guaranteed future in any job.

Of course there is value in realty, but the modern mortgage gets it exactly the wrong way round: your earnings dry up, you lose everything.

So why mortgage your salary?

By Mark Rogers

The investigation is well under way and involves the major Financial Service Regulators of the US and UK amongst others.
The scale is breath-taking and the accusations extremely serious as indicated by the issuing of subpoenas to retrieve sensitive documents for the prosecutor’s evidence.

Here are the details as reported by C Powell of GATA following a report in the Financial Times:

Regulators in the United States, Japan, and UK are investigating whether some of the biggest banks conspired to “manipulate” the benchmark interest rate used to calculate the cost of billions of dollars of debt.

The investigation centres on the panel of 16 banks that help the British Bankers’ Association set the London interbank offered rate, or Libor — the estimated cost of borrowing for banks between each other.

In particular, the investigation was looking at how Libor was set for US dollars during 2006 to 2008, immediately before and during the financial crisis, people familiar with the probes said.

The probe came to light on Tuesday when the Swiss bank UBS disclosed in its annual report that it had received subpoenas from three US agencies and an information demand from the Japanese Financial Supervisory Agency.
The bank said the regulators were focusing on “whether there were improper attempts by UBS, either acting on its own or together with others, to manipulate Libor rates at certain times.”
All the panel members are believed to have received at least an informal request for information — an earlier stage in an investigative process before a subpoena.

Witnesses had been interviewed by investigators from the US Securities and Exchange Commission, the Department of Justice, and the UK’s Financial Services Authority, people familiar with the probe said.

The inquiry has been under way for some months. At least one bank received its initial request for information in October, people familiar with the matter said.

The BBA produces Libor rates for 10 currencies using eight to 20 contributor banks. The contributors submit the rates at which they think they could borrow on the open market. Outlying submissions are tossed out and the reported rate is the mean of the middle values.

Critics of the process for setting Libor — which is used as a reference rate for about $350,000 Billion in financial products — have long claimed it is antiquated and lacking in transparency. Commentators complained bitterly during the financial crisis that the rates were distorted because they believed weaker banks were unwilling to admit higher borrowing costs.

UBS declined to comment beyond its disclosure. The regulators declined to comment. The other banks on the panel at the time covered by the probe either declined to comment or spokesmen could not be reached.

They are: Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds, Rabobank, Royal Bank of Canada, Bank of Tokyo-Mitsubishi, Norinchukin Bank, Royal Bank of Scotland, and West LB.

HBOS, which has since merged with Lloyds, was also a member.

The BBA said: “We are committed to retaining the reputation and integrity of BBA Libor, which continues to be the authoritative benchmark of the wholesale money market. It has a straightforward and unambiguous calculation method, which excludes any rates which are significant outliers. It is fully transparent — all of the data inputted by the contributor banks is publicly available, as is our methodology.”
(By Brooke Masters, Patrick Jenkins, and Justin Baer , Financial Times)

Banks outside the law?

This type of activity is typical of the banking sector who operate amongst themselves as if they are untouchable and above law and regulation.
They believe in their own importance because of their size and apparent power which disregards national boundaries because of their global clout. They play by their own rules and we know where that leads us.

Even then, when they cause misery, mayhem and crisis for the whole world by their own greedy practices and mistakes they still come begging for more money to play with – and the worse thing is that incompetent governments full of over-educated, posh, millionaires who have absolutely no notion of the real world because of a privileged, sheltered, upbringing give them our taxes. I believe this should also be investigated as it stinks of incestuous, undeclared interests by senators and ministers who post politics suddenly appear on boards of directors doing nothing (consultants) for some enormous salary.

Do you trust your bank?

Do you know what they do with your money?

If there’s another crisis where will your money be?

If your bank gets into trouble will they have enough money to pay back all their customers?

Who do you think they will pay first? You? Yeah right!

If you’re not part of the Politocrat & Banking club you’ve got no chance.

I believe that Bankers should be personally responsible for their actions, decisions, judgements and huge mistakes they make and personally bankrupted to repay some of the missing funds. It should be in their contracts and not some huge retirement pay off for complete incompetence like Fred Goodwin (RBS).

Let’s face it they’re quick enough to give themselves performance related bonuses (when there’s the slightest positive news) so why doesn’t it work both ways? When a bank underperforms they should be responsible and pay for it just as they like to cream off their “rewards” for guessing right.

Stop bailing out incompetence – Let them fail!

I also believe that Banks that get themselves into a mess should get themselves out of it or let them go bust like any other business that fails – after all that’s why we have the word Bankrupt isn’t it?

It is two words combined – Bank & Corrupt! That about explains it!

The increasing problems of disasters and political unrest are putting further strains on all these large institutions that are exceptionally nervous because they know they are exposed and overstretched as pre-2008. Another feature is they never learn by experience!
In 2011 we will witness an economic crisis on a scale not yet seen.

The foundations of Countries economic policies and Financial Institutions “Good Practice” have not been prepared for the shock that is gathering strength and they will not withstand the shock and its magnitude.

Can you afford for them to go down with all your savings?

Should you wait until it starts and it’s on the Tele before you do something?

Should you buy fire insurance before or after a fire?
Act now and preserve some of your wealth by investing in tangible assets that will survive a crisis.

Act now to put your money into something that you own, that is not linked to a failing or devalued currency that will be a means of survival when you need it most.

Put your wealth into gold which has been the universal “currency” throughout history.

Don’t invest in “paper promises”.

Get Physical!

Own gold and gold coins.

People survived wars, crises, recession and depression because they owned Gold.

People also perished – because they didn’t!

What would you rather do? Survive or Perish?

Make your choice!

We need to go that way to avoid the rocks

The European Union is facing an economic and political crisis that threatens the single currency, exposes greed, bureaucratic strangulation, unsustainable social welfare programmes, raises questions on protectionism and the very fabric of the free market. If that was not enough, the weakness of its leaders becomes apparent and two of the giants France and Germany support a different solution. There is a very English phrase “ to muddle through” and that is what European leaders have been doing and hope they can continue doing so as not to put emphasis on radical change that can upset the apple cart either internally or externally. Muddling through depends on growth.

The European Union is still the world’s largest economy supporting over 500 million people of diverse race, cultures and languages. However, the EU is facing both an economic and a political crisis as governments and companies cannot easily borrow money and the euro wobbles. Initially the weakness of the euro was shrugged off as speculation and Anglo-Saxon conspiracy, but the real problem is that social welfare in many countries is so protected and expensive that it is strangling the economies. Europe has to grow just to maintain its welfare systems and innovation just to pay for increasing old age pensions and unemployment is not inspirational. Of the 27 countries in the EU only Poland managed positive growth in 2009, while it is true that recently many have now turned positive, but it can only be described as mediocre. Outside of Europe the perception is that the protectionist policies for citizen welfare indicate that there is no longer the guts to tackle the problems. A sick Europe benefits nobody and arguably, were it healthy, then the worst of the global crisis would be over.

It is the courage of Europe’s leaders to initiate structural reform that comes into question. As Jean-Claude Juncker, prime minister of Luxembourg, said memorably in 2007-  “We all know what to do, but we don’t know how to get re-elected once we have done it.”  Many of Europe’s problems stem from election seeking misallocation of public spending with years of subsidizing powerful interest groups, increasing civil service payrolls, early retirement schemes, job protection and unemployment benefits. Between 2005 and 2030 the working-age population of the European Union will shrink by 20m, and the number of those over 65 will increase by 40m. In Belgium only 35% of citizens over the age of 55 work. It is almost impossible to sack a person in Spain, great for those in work but for the 40% youth unemployment that it generates, it is immoral.   European leaders underestimate the realism of the voters and proposals in the UK and Netherland to raise the retirement age to as high as 70 have met with moans but no angry protest.  In France, according to an opinion poll proposals to increase the retirement age were unjust and did produce the usual French protest, few disagree that the current state pension scheme faces insolvency.

The single market does not truly exist and the EU is almost a third less productive than its American counter parts in services, because countries hide behind national barriers and so do not gain full economies of scale. Anyone who has worked in a multi national industry knows how difficult it is to get policies implemented, products introduced or to comply with a European directive that has been interpreted 27 different ways into national law. No company with any sense would open a factory or an office in France, Italy and some other EU countries, where protectionist employment laws could kill that company. I personally know of a case where a multi national company was trying to tighten its purse strings to remain solvent and Italian law forced that company to increase the salary of Italian employees and maintain periodic pay rises. In desperate times protectionism has raised its head. In France with Mr. Sakozy suggesting that French cars for French drivers should not be made in former Eastern bloc countries and the EC had to intervene to stop Germany offering incentives to a consortium proposing to buy the failing Opel company, to keep the German factories open to the detriment of more cost effective plants elsewhere.

This crisis has the ability to pull countries closer together or pull them further The key is Germany where they are furious that they have to bail out other countries until they realize that they created the situation in the first place. Germany companies have done very well and the economy has grown with exports particularly to Greece where they have risen by 130% in the last 10 years. So how did Greece pay for these exports. with loans from German banks. Therefore, it is essential that they and the French to a lesser extent rally around the single currency as they are sat on a large amount of southern Europe sovereign debt. That has been the pattern the industrious north has done well but those around the Mediterranean have been affected by the sun leaving the idyllic life but unable to pay for it. Great for a holiday but not for life, in fact Greece has become the most obese in Europe where once they had one of the healthiest diets.

The alternative approach is to a number of separatist theories with retraction from the Euro or a North South divide where the super efficient North have a strong euro and the languid south another. Which would France join?

Practically what can EU leaders do and which direction can they take and what have they done so far?  To date there have been last gasp austerity measures that may well in the short term pacify the bond market but is a risky course of action. These measures will inevitably lead to a weakening growth rate and increased unemployment. The same arguments were the difference between Labour and the coalition in how to solve the UK’s financial problems where at least there is time as the UK’s debt has the longest due date of all in Europe. Now Spain, Greece and Portugal face a log hard struggle to rebalance their economies

Markets have lost faith in the euro and the hope was that the economies of the 16 countries that use the euro would converge. The struggle to regain creditability with markets has lead to a divergence on the course to be taken by Germany and France. Germany has gone for stricter rules and discipline on borrowing and spending, sanctioning governments who fail to toe the line to the extent of freezing funds for EU mega projects and suspension of voting rights. The French favour a system of redistribution from richer to poorer members with some fiscal and social harmonization.

Germany’s proposals are unworkable, the reaction to losing voting rights is unacceptable particularly to the former communist countries where there has been such hard work to lead to democracy. Stopping funding on EU mega products where they cross boarders could penalize other countries. To redistribute, as the French recommend, to save the euro would require an equally unacceptable step towards political union.

What is the likely outcome?. It is likely to be a  form of compromise with temporary rescue packages, informal and semi formal discussions and agreements – in other words a muddle through.

It is possible for the EU to agree and force through essential legislation when it is a matter of survival. A key demand to European business is an EU wide patent that has been stuck for years over the status given languages in Spain and Italy. On 1^st July the EC forced this through to be valid in all 27 countries. Another example of the power of the EU market is where Germany was told it could not spend taxpayer’s money to protect Opel jobs in Germany without the same support to other countries. It is possible that the people understand the need for a free market economy better than their leaders where in a recent pole 73% of Germans and 67% of French said they were better off in a free market. Interestingly a greater percentage than in the middle of the boom and greater than America. We have already mentioned the need to pay for pensions and the less than feared reaction to raising the pension age. In the countries brought to the brink of disaster, the civil unrest was much less than expected and dominated by public sector workers with safe jobs. The leaders should have courage as this crisis gives the excuses for radical reform and there are hints that citizens are prepared to take there medicine.

However, the best bet would be a muddle through and hope for the growth that is needed to sustain it. An opportunity lost.

Maurice Hall

The failure rate was lower than expect as many experts predicted that as many as 12 would fail. Of the seven that failed 5 were from Spain (Diada, Espiga, Bianca Civica,Unnim and Cajasur, one from Germany (Hypo Real Estate) and one from Greece (ATEBank).

By conducting these tests it was hoped that international confidence would be restored to help finance economic recovery and to overcome the worry that European banks were either not strong enough to withstand a double dip recession or have large exposure to countries that might default on their debts. Also to identify any vulnerable bank so steps can be take to strengthen them. The aim is to continually test out the resilience of banks in the EU periodically and undertake a continuing program of improvement.

The banks were tested in scenarios where different assets might fall significantly in value, such as the collapse of a property market and if this resulted in losses so great that the banks capital was wiped out, then insolvency would result. E.g. if a loan cannot be recovered the bank writes down its capital by the amount of the loss and the investors take that loss and if the banks assets cannot repay all of its borrowings then insolvency follows.

The banks that failed will have to agree a plan over given time period to resolve their shortcomings.  The five Spanish banks to fail were regional savings banks with heavy losses due the downturn in the Spanish property market, but savings banks have been undertaking a restructuring process by the Bank of Spain so the overall picture in Spain is was considered sound.

The British Bankers Association said that work had already been  put in to strengthen UK banks and the four major UK banks RBS, Lloyds, HSBC and Barclays exceeded the standards set.  Also tested and passed was the Spanish giant Santander who own Abbey, Bradford and Bingley and the Alliance & Leicester in the UK, as was the Bank of Ireland who provide the banking services for the UK Post Office.

There are market concerns as although the EU set the parameters for these tests, they were conducted by national regulators who may have been lenient on their own banks. The test is against a ratio of tier one capital (capital of the highest quality) which is a core measure of the banks financial strength and a measure of insurance against loss. The trouble is that some of the forms of capital used in the test proved useless against losses in the recent crisis, thus the measure is more favourable to the bank. This pales into insignificance against the real problem with these tests and that is there is no test against sovereign debt, which is what brought us to crisis with Greece on the verge of bankruptcy.  So this appears to be more of a political exercise, as the EU will not even contemplate that a country within it, would default on its debt

However, the test that confidence has returned will be if today, the interbank lending market makes it easier for banks to borrow.

Read full report and results

Maurice Hall

It is remarkable and a tribute to the sovereign that it remained legal currency long after the war due to the unstable drachma until eventually in 1965  the Greek government placed restrictions on trading resulting in many hoarders cashing in their stocks. Even so at the slightest hint of uncertainty, and there have been many, the Greeks turned to their favourite foreign gold coin.

Greece has not really had a true period of financial stability for decades and markets are wondering whether they will default on repaying their debt given past behaviour  so the uncertainties  are understandable. The population is in panic resorting to strikes and riots and fear that Greece may leave the eurozone.

Once again  have returned to their known safe haven, the sovereign, as a hedge against financial collapse causing the the demand to increase year on year and the price to rise dramatically. For weeks citizens have been queueing at Athens central bank to buy sovereigns and have been prepared to pay the highest prices. It is estimated that in the first 4 months of the year 50,000 sovereigns were sold legally and as the demand increased so did the black market  and at least 100,000 were sold illegally with price up to €300 (£252).  The uncertainty and fear has driven people to pay a huge premium of almost 40% over the current value of the gold content to protect their wealth.

Without doubt the British sovereign has been the gold coin that has world wide recognition as mechanism for survival  whether it be a financial or physical crisis – see our article “Gold sovereigns open doors”

Maurice Hall

We have seen a pull back in the gold price, but is this down to austerity which is the new buzz word in the UK and Europe. So as we start to live within our means does that mean that the need for gold as an insurance is weakened ?. We are rightly entangled in European economics as this is what affects our daily lives, but we found in 2008 that greed and subsequent collapse in America created an economic crisis in Europe, the worse since 1929 and the great depression. We are still feeling the affects and the steps taken to pump the economy lead to unprecedented sovereign debts and the collapse of economies in southern Europe. However, gold is intrinsically linked to the dollar so nothing has changed as the US try and spend there way out of the downturn, print more money to devalue the currency and have huge sovereign debt.

In the UK with CPI above 3% and more significantly the RPI above 5% it is virtually impossible after taxation  to get a ROI that does not lose money over the year. So that combined with economic fragility that could still lead to contagion means the case for gold is still strong.

What we are seeing is the seasonal adjustment that has been running for the last 40 years.  Gold has followed both seasonal and super cycles for decades and we are in the summer adjustment as predicted by my article on this blog in March (When is a good time to buy gold ?). However, gold has been stronger than my prediction by more than $100 per ounce, driven by more exposure to the fragility of world economies and unprecedented demand.  In fact we reached the end of year high I predicted before going into the summer recess so I would expect the price to now rise in Q4 to beyond $1300.  Traditionally investors who bought in summer made money by selling in Q4 a simple short term gain that has been repeated time and again.  Look also to the supercycle where the cycle and the seasonality meet in Q4 2011 and expect at least $1500 per ounce for the longer term investment.

The case for gold has not weakened and now is the time to buy gold the bull has a long way to run. Think also about ROI as gold and particularly legal tender gold coins (sovereigns and Britannias) stand out as a way to beat inflation and taxation. We have the best conditions in the UK for investing in gold coins no VAT or TAX applied.

Maurice Hall