I was at a session in he EU Parliament on the proposed reform of the EU Savings Tax Directive, speaking as an expert witness to the Economic and Monetary Affairs Committee.
One of the MEPs present asked if there was anyone in the room who would like to speak from the perspective of a 'tax haven'.
The Prince of Liechtenstein was there.
Colin Powell of Jersey Financial Services Commission was there.
A representative of Guernsey was there.
Not one offered to speak. Not one made a murmur in fact.
Why was that?
What are they so ashamed of?
Or is this offshore secrecy taken to its extreme?
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I have responded repeatedly, Richard. Four times, I believe, and without shame. Being, as you are, very well informed on this matter I continue eagerly to await a response.
Do you favour responsible middle class finance under which the middle class save for their future at savings rates that protect their capital from inflation?
Do you believe that savings accounts ought to be a valuable tool to safeguard capital when risky investments are not deemed appropriate?
If so, and I assume you do as you regularly criticise voodoo economics, then please explain how that can be achieved with the EU using a false measure of inflation (CPI) to underestimate it and so set base rates low (causing banks to pay interest below inflation).
As far as I understand your position you advocate a conservative approach to finance yet you advocate a situation which forces companies, and families, either to gamble with their capital on the stock market or watching it wither as governments falsely portray losses (interest lower than inflation) as income.
If the EU were more honest about inflation you would soon see more Brits depositing savings in onshore accounts.
Sebastian
I’m sorry to advise you that your convenience being used is not my emergency. Or to put it another way, much as it may appear otherwise I do have a life well beyond this blog and on occasion feel quite at liberty to ignore comments, or to take my time answering them.
I will however deal with your urgent question. I have no idea what you mean by middle-class finance. There is no such thing. If you are talking about saving for a pension, let me be clear: to a very great degree this is an entirely bogus activity as it is currently constructed because ‘ middle-class’ savers are encouraged to put their money into high risk, short term equity-based investments of limited supply where the only upside potential is created by ensuring that the flow of funds into the pension marketplace exceeds the supply of new equities for purchase, guaranteeing as a result that the stock market rise continually until subject to significant and dramatic price adjustment of the sort that we have seen recently.
When it comes to savings this is the absolute crisis that we are facing, and it has nothing to do with interest rates. It has everything to do with the fact that savings are wasted on financial speculation from which those in the financial services industry extract considerable value which they spend on the short-term consumption, and in the process is completely denied their obligation to those to whom they supposedly save money.
In economic terms this represents a failure to understand the equation that savings are not equivalent to investment, they are fundamentally different. only investment creates value, but we promote saving. Only investment can create the return that is due from one generation to the predecessor generation to the capital that they have created for the next generation to use, and that is the actual underlying fundamental economic relation which underpins all pension payments.
Again, this has little to do with interest rates except that long-term investment is only successful in creating value when long-term interest rates are low – as Keynes said, and which most economists do not understand.
So I am fundamentally in favour of long term low interest rates.
You appear to be fundamentally in favour of high interest rates because you use indicators of value which are inappropriate. You are simply endorsing the process of extraction of value from the economy when no value has been created. I can’t go along with that.
I cannot see any relationship between what you argue and any legitimacy in placing funds offshore.
Richard
CORRECTED – apologies
Dear Richard, Thank you for taking the time to reply. I shall endeavour to be succinct.
You state:
“If you are talking about saving for a pension… this is an entirely bogus activity…savers are encouraged to put their money into high risk, short term equity-based investments of limited supply”
I agree… those are the risky investments I mentioned.
You state:
“When it comes to savings this is the absolute crisis that we are facing, and it has nothing to do with interest rates. It has everything to do with the fact that savings are wasted on financial speculation…”
You re-make the risky investment point but include a obvious fallacy that interest rates have no bearing on saving. Every time the government has allowed tax free saving… such as ISAs… they have proved very popular and boosted saving. The reason that the risky investments we both mentioned became more popular in the 90s, when Thatcher advocated them was because the public hoped for better returns. The UK and EU should discourage risky investments by stopping taxing savings and promote spending what we have earned.
You state:
“In economic terms this represents a failure to understand the equation that savings are not equivalent to investment, they are fundamentally different, only investment creates value…”
Yes, you are right that investment creates value. You are wrong to say that ‘only’ investment creates value. The UK economy is about to grind to a halt trying to support baby boomers who have not saved for themselves. In order to achieve this immigration into a small country have passed it’s carrying capacity. That’s a biological term meaning that the resources of the UK cannot support it’s population long-term. Essentially the failure to save sufficiently has caused the government to promote a pyramid scheme which is unsustainable with finite resources. So a certain level of saving is essential for long-term sustainability of an economy. Ignore this and ‘value’ become unachievable. Just watch this same issue undermine the US economy. I believe the US currently has at least a $60 trillion deficit when the empty social security fund is taken into account (it is currently ‘off-balance-sheet’). So much for the value of not saving!
You state:
“but we promote saving.”
No we did not, we promoted gambling on stocks and house prices. We have just had a credit boom and some of the lowest rates of saving in our history. That credit boom inflated asset values and forced people to pay every higher percentages of disposable income to fund mortgages. Capital values reached levels that would obviously bankrupt mortgage holders with only moderate increases in interest rates. Economies such as France and Germany with higher levels of saving and lower levels credit are in a healthier state than the UK and will recover more quickly.
You state:
“So I am fundamentally in favour of long term low interest rates.”
That is exactly what Mervyn King favours and is why house prices and credit rose unabated.
In a country such as the UK without the desire to build skyward or expand cities the capital value of housing, and rents, will tend to inflate to swallow all middle-class liquid income. The inflation is anxiety led and low interest rates take capital values to levels that eventually cause currency devaluation… as the US and the UK will experience over the coming years. This is the tied up useless capital you fear. A £400,000 family home is, with interest payments over 25 or 30 years, £800,000 of dead capital that cannot be invested in education or business. That is often from 60% to 100% of the liquid capital of a family and is the reality of the UK low interest rate experience. This is economic stagnation.
What a healthy economy needs is the ability to save liquid capital and the security to invest it. That it achieved by significant house building and moderate interest rates. Those that wish to be entrepreneurs have the capital to to do. The vast majority who don’t have the ability save modestly and do not become a burden on the state.
Very low interest rates favour the reckless, and harm the responsible. The last few years of the markets trying to corner everything from Brazil nuts to Brighton beach front property should spell out clearly enough how cheap capital in a limited resource planet causes people to borrow to take a punt on inflation. During this era of cheap credit the US and the UK gave up producing. Those that did moved manufacturing out – Dyson, Apple. Those that didn’t move out failed or are failing – Rover, GM, Ford, Chrysler.
Germany, France, Brazil, India and China continued growing real economies comparatively free of speculator driven inflation. Brazil despite high interest rates. Germany and France by regulating the rental market and demanding 20% deposits from property buyers.
You state:
“I have no idea what you mean by middle-class finance.”
A healthy middle-class is the basis of a healthy economy. The UK got to the point where opening a restaurant in London required a budget of £1.5 million. When basic businesses get inflated out of all affordability to the middle-class a country’s economy is stagnant. When multi-millionaire Madonna is complaining she doesn’t want to live in the UK because property prices are absurd that’s more than an issue for middle-class finance.
Britain is now seeing it’s credit bubble deflate and assets suggest deflation that might just take them back into middle-class territory. If the government ignores the temptation for another credit boom, which would hand the economy over to estate agents and bankers again, we might just see the middle-class rebuild the country’s real economy.
That’s what I mean by middle-class finance: a balance of saving incentive & credit availability: managed commodity and assent capital value inflation just below bank savings rates with the Bank of England basing base rate decisions on actual inflation and not falsely low CPI figures designed to stimulate a credit boom. Balanced credit availability/saving incentive creates middle-class choice for the ambitious to invest and others to save to remain independent of the state.
As for this savings phobia… it’s a myth put about to justify the spending of state pensions funds and borrowing instead. All savings return to the economy they just cause a delay… people like, and need, to spend to live. The real risk is asset inflation and gambling, as we have seen, putting most liquid capital in the hands of bankers who compete ever more irresponsibly while demanding ever greater deregulation, causing money over supply, devaluation and loss of confidence in the financial system…
… and the tool of their mischief? The very low interest rates we’ve seen.
Sebastian
Low interest rates are essential
But so are capital controls to make them work
Banks cannot create money at will
If that combination exists then we can have long term prosperity
Richard
I understand now. You believe government regulation of credit will keep easy credit based inflation in check.
The problem is that banks CAN create money at will. As you know they lend it into existence. Fractional reserve banking in the UK sets no reserve percentage for savings accounts. At only 5% reserve you know that banks multiple money supply 20 times.
The other major issue is that low rates did nothing for Japan in the last 20 years, despite 0% rates, the yen was borrowed to gamble on currency and BOVESPA. Japan needed a cure for high asset values and yet the Japanese did exactly what G Brown is doing now… hiding the asset bubble crash behind low interest rate inflation. The stagnation which resulted you know about.
To put it simply, bubbles need to burst and economies need to take their unpalatable medicine.
So you trust that, despite a history of promoting credit booms and deregulation, UK and US governments are going to stop and start regulation again.
I don’t trust successive governments to do that without one listening to their friends in the city and dismantling regulations again. It inevitably happens.
Accurate reporting of inflation and use of base rates applies the same moderation, with much less regulation necessary. It just requires a safe home for capital.
I suspect you are going to get your wish for more pressure on capital but you will be disappointed by the level of regulation and the result is going to be loss of faith in currency. As it is… despite falling commodity prices… all over the world currency is searching for a home… look at the purchases of US bonds despite horrific levels of debt. If the US looks at all shakey where’s that money going to go? Gold? There is no healthy currency home. All governments are busy devaluing in a race to the bottom. The panicky speculation isn’t over… you aren’t promoting enough stability. Investment must be encouraged, not forced by “use it or lose it” policies on capital. Making a bogey man out of capital makes gamblers of us all.
Richard,
Their is a very simple reason why no one responded to a call for a response from the tax havens. The term is derogatory and offensive, and totally uncalled for. The attendees from responsible offshore finance centres were right not to rise to the bait, and demonstrated admirable restraint.
Envy and insult are regular bedfellows.
Malcolm
If everyone calls you a taxation bar yourself you are a tax
haven.
I think you need to live in the real world. You’ve clearly been isolated in Douglas for too long
Small islands are fun, but you get a very strange perception of the horizon from them.
Richard