Friday, 20 November 2009

What, if it had been Bread?

Caste your minds back to one day in October 2008, when the UK’s banks all collapsed.

Well perhaps it would be more accurate to actually date stamp the collapse one year earlier when Northern Rock failed and was rescued, an all too vivid memory, etched in High Street queues for us in the North East. UK Banking, in a commercial sense, ended on that date. We now have a state sponsored banking system. Some of you would disagree because banks such as Barclays have not actually swam for the lifeboat, but I see that decision as opting to play musical chairs with the deckchairs on the Titanic. If the Government removed support from the banks it has underwritten, today, this minute, then Barclays too I believe would fail, so in a sense the entire UK system is effectively nationalised.

Most politicians and media commentators appear to have accepted the State bailout as a reasonable response to the banking collapse. We are asked to believe that the lifeblood of the economy, bank lending, i.e. CREDIT is flowing again. However, data supporting this contention is hard to find. In fact borrowing money is harder than it has ever been in living memory. So, what little that does exist is artificially enhanced by the Government’s injection of artificial printed money.

The media and politicians attempt to soothe us with frequent assertions that the bailout and its sister policy, Quantitative Easing (QE), are working, but the reality may well become all too real when Quantitative Easing (QE) dries up, and dry up it will. The banking bailout combined with the QE policy taken together is the single worst economic decision ever made by any UK Government. Any commercial organisation, has to stand or fall by its product or service and the profitability that comes from that, deliver to your customer base competitively what they want, you survive and prosper, do not, then failure has to be the consequence.

Let me try to prove this by way of a simple analogy.

I know many are not schooled nor have working experience of dealing with money but I have done so for 20 years now. Admittedly my early years were fraught with mistakes and huge learning curves but I have matured and gained an insight into the behaviour of money and assets backed investments. I am no sage, nor do I pretend to be but I have learned that good judgment comes from experience and that experience comes from bad judgment. And I’m still learning!

So just for one moment let us imagine that October 2007 did not portend the banking crisis that would shortly unfold, but a different maybe even worse type of catastrophe. Let us pretend that we woke up that autumnal morning to discover that there would be no more food! (credit)

We all listened in silence as our solemn grim Prime Minister announced that all of the world’s soil had just been contaminated with a terrible and genocidal bug. There was no antidote to, nor means of arresting the spread of, this terrible bug. There was no hope of killing it.

Ergo we could no longer eat anything grown in the ground. Nor could we ever consume farm animals, because they of course graze on land. An emergency measure dictated that we put our pets to death to conserve precious food supplies. We could eat them now, but this would only delay the inevitable starvation for a few days.

We were all certain to die gruesomely if we ate any food harvested from October 2007. All our international trading partners had been similarly infected. No other country would send us any food; they all had the same problem. A raft of worldwide emergency measures would ensure that no food would be imported to or exported from the UK.

By the grace of God there was one exception, one strain of produce that was immune to the bug - wheat. There was one food we could still eat, BREAD.

Ironically the bread baking industry was going through its own mini crisis as this news broke. The bakers were all on the verge of bankruptcy because, a month earlier, the UK’s dominant retailing business, lets say Tescopoly, had decided to sell bread at 1p per loaf in order to rid the nation’s high streets of the few remaining independent bakers and shops that were preventing its continued expansion.

The Government had not worried about the strangulation of the high street baker or shopkeeper when Tescopoly had launched their sustained commercial attacks, but the new food crisis brought an immediate change of policy. Henceforth every baker in the UK was to be bailed out by the taxpayer. The practical measures were implemented in three parts. The Government would immediately and indefinitely:

1. Service the rents and business debts of every bakery in the UK;

2. Pay senior bakery staff their base salaries plus substantial bonuses in return merely for agreeing to keep their bakeries open and turning up for work;

3. Fix the price of all bread to be produced. Prior to the Tescopoly assault bakers were selling standard loaves at an average price of say £2. Even at that price they only made a 10% profit, or 20p per loaf. The deadly bug was hardly likely to lower the costs of wheat, and yet the Government decided to fix the price of a standard loaf at 40p, a reduction of 80%. (Most of you will have noticed that by October 2008 UK interest rates had been fixed at 1%, an 80% reduction from the pre-crash level of 5%)

The Government anticipated difficulties in selling this policy to the public. It easily persuaded the bakers (in return for the free money supply and debt subsidy they would enjoy) to issue statements to the effect that they would make “every effort” to bake as much bread and feed the starving population. However these palliative words were accompanied by the stark warning that, of course, the Government could not actually run the bakeries nor guarantee levels of bread production.

How much bread do you think the bakers produced after this bailout, more or less?

As soon as the disappointing news about continued bread shortages broke, the Government announced that it was surprised that the rate of increase of bread (credit) production was disappointing. Swathes of the population were starving to death. The Government spin machine turned on the bakers who were castigated as socially irresponsible. The press reported a new era of zombie bakers, and the nation’s patience was further tested when it was reported that many bakers were stockpiling wheat, not even turning their ovens on in the mornings, yet ordering lots of new Ferraris and other associated bling.

Desperate to defend itself, the Government dreamed up another wheeze designed to confuse the public and mask the problem: falsifying the wheat accounts. Because the original emergency measures had provided that the Government was now the sole auditor of the wheat supply, the Chancellor of the Wheat Exchequer decided simply to pretend that we had twice as much of it!

Eminent economists and nutritional experts were wheeled out to explain that “cooking the books” made sense. The public were brazenly told that the exercise was simple false accounting, but they did not object, so desperate were they for any hope of increased bread production to stave off starvation.

To maintain the pretence, the virtual wheat was treated as if it were real! It was manufactured on a computer overnight by the Chancellor and was kept in a virtual cold store. The policy was given a fancy name – “Quantitative Freezing”.

Incredibly this policy boosted morale for a year or so and was presented as working. Wheat (Equity) markets were fooled into thinking that the bread (money) supply was sustainable to meet the demand of a starving population. The Government basked in the glory of saving the nation from starvation. However the burial grounds were quietly but rapidly filling up (business closures and rising redundancy's) and the Emperor’s true nakedness was exposed when the crematoria sought permission from the Department for Climate Change to burn bodies 24/7.

“You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.” Abraham Lincoln

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