Interest Rates

I have been trying to follow the argument of Gerardo Coco in his interesting, but confusing, piece posted on the Cobden Centre website. I wonder if I have got the gist of his argument in the two short paragraphs below. 

Interest rates have to play several different roles.

(1) The first role that springs to mind is that of indicating the price of credit; interest being a regular (e.g. annual) fee paid to the lender for the temporary use of his capital. This capital may be invested in a productive investment, to buy tools, or a mill, or an extra field. A rational investor will pay no more in interest than he can gain (per annum) from his investment. Good times will allow interest rates to rise, and conversely bad times will hold interest rates down.

(2) For some people liquidity is the problem; they want cash in hand, not to invest, but to pay the bills. Their desperation will determine the upper limit of the interest rate they will pay. Let us call this process of turning credit into cash 'discounting'.

(3) People have grown to expect money to breed, to yield an annual income. The relationship between capital and income is of course the interest rate. There is a backwards way of thinking which says "My assets yield £100 a year; interest rate is 1%; so my assets are worth £10,000."  If interest rates were 5% I would value my assets at a mere £2,000. A form of this argument may be driving up current house prices; "My house is worth £300,000 and I can afford a mortgage (at 6%) costing £18,000 per annum. If mortgage rates drop to 3% I can sell my house for twice as much."

(4)  Central banks use their 'base rate' as a means (essentially their only means) of controlling the money supply, and with it the 'growth of the economy', 'unemployment', and 'inflation'.

It is hard for a single 'Interest Rate' to fulfill all the roles required of it. It is true that Bank Base Rate does not impinge directly on the high street borrower, for the normal citizen cannot borrow money at the present comically low rate of 0.5%. But it remains a problem that a lender does not always know to whom he is lending and for what purpose. If Central Banks set a very low interest rate, some entrepreneurs may borrow money (as it is so cheap); but others will conclude that 'times are bad' for investing and consequently will wait for better times. The Bank's one available signal of Bank Base Rate can have a damaging effect while trying to have a stimulatory effect.

How bad is debt?

Debt 6 —  How bad is debt?

"Neither a borrower nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry." Hamlet 1.3

These words have found resonnance in puritan heads from Shakespeare till the last part of the 20^th century. Polonius could have said more against borrowing. A debtor who is unable to repay his debts finds himself at a considerable disadvantage; he may lose his liberty, or his house, or find himself tied to a tredmill, paying interest he can ill afford without hope of escape. Furthermore, Polonius mentioned none of the advantages of debt.

Is debt, in general, a good thing or a bad thing?

Well, it is a good thing for the lenders who can expect a return on their capital of 2 or more % above inflation, even if their loans are of the non productive sort.  And it is a good thing for the entrepreneur who is trying to expand a winning business model (productive borrowing). But it is a bad thing for the "over indebted". Citizens Advice Bureaux (CAB) estimate that keeping up with bills and other financial commitments is a burden (or worse) for nine per cent of the population [2].

But the 90% who can manage their affairs intelligently can freely choose to enjoy a house and a car while they are young and pay as they get older. Inflation will considerably mitigate the amount they lose in interest payments. If they come on hard times they could lose their house; but end where they started, little the worse.  Many young people nowadays will take thought, and borrow. The case will depend on: [a] rate of inflation, [b] stability of the jobs market; but can be skewed by governmental tamperings  such as [c] capital gains legislation, [d] income tax relief, etc. Another factor is [e] temperament; cautious individuals will overestimate the chance of losing their job while the reckless will underestimate that.

Since 1975 the household debt as a fraction of annual disposable income rose in most western countries; in the UK it almost trebled  from 0.64 in 1975 to a peak in 2008 of 1.80, from which it has sunk in 2012 to 1.55 [1] We are more deeply indebted than the US, but trail Denmark, Norway and Switzerland. Since 2000, Germany has almost halved its debt/income ratio, while most other countries have only reduced personal debt in the last 5 years. One suspects that these data reflect a spectrum of several underlying factors: caution, stability, cost of the housing stock, age distribution of the population.

 (Unscrupulous lending (offering money to someone unable to calculate the consequences) is a social evil, like drunkenness, and should be subject to social and even legal regulation. Predatory lending (where a secured loan is offered in the hope that it cannot be repaid so that the lender can acquire the security) would be criminal were it possible to prove.)

Though it goes against my gut feeling to let myself be beholden in that way, I conclude that there is little case against debt if it is entered into with due thought, but that it should not be encouraged by the state (to the benefit of the bankers and to the detriment of the economy and society generally. Furthermore, there should be closer scrutiny, and better means of regulation and redress.

Ref.1: http://www.zerohedge.com/news/2013-06-04/debt-nations

Ref.2: http://www.citizensadvice.org.uk/pdf_the_value_of_debt_advice.pdf

 

Ian West, 12 Longhirst Village, NE61 3LT

Payday Loans

Payday Loans

I believe that it would be socially beneficial if the rapacious activity of the payday loan industry could be reined in. Though it is possible to argue that these companies serve a useful, even a necessary, purpose, it is nevertheless clear that it is only the desperate (or the foolish) who use the loans. Meanwhile the general public wince at the extortionate rates of interest; it is painful to watch; it seem no less brutal than trussing a weak man and pulling out his toenails. But the evil goes further. The near indigent find themselves on a downward spiral of debt from which there is no (legal) escape.

My remedy is fair, logical, and (with a stroke of the legislative pen) could be made legal. It is not hyper-novel as it enshrines a principle accepted in most civilisations from Roman times till the modern barbarism of the capitalist era; the distinction between usury and capitalism.

As soon as the accumulated interest paid on a loan equals the amount borrowed, the loan should be regarded as discharged. A low interest rate (say,  inflation plus 1%) should then replace the original high rate, but calculated back to the beginning of the loan. 

It can be argued that a high rate of interest is justified if there is a high risk that the principal will not be repaid. That cannot be argued as soon as the borrowed sum has been repaid. Suppose I borrow £100 at 10% per month interest. If I pay the lender £10 a month and keep up the payments for 10 months, the loan company will say that I still owe £100, as I have only been paying the interest. But I will have paid £100, and to my way of looking at it I will have repaid the loan, but not yet the interest. It cannot be argued that I am a high risk, so the due interest should be a trivial £5 (if 5% p.a. Is appropriate).

Ian West, 12 Longhirst Village, NE61 3LT

Statins and Cholesterol

I have now read right through the Stephanie Seneff (2011) essay to the end. Very anti-statin, and full of challenges. But I have also just heard (25th Feb, 2014) Professor Ian Young, (Director of the Centre for Public Health, Queen's University Belfast) give the Albert Latner lecture at Newcastle University on "My cholesterol -- why is it so high?"; very pro-statin and a most frustrating affair.  I shall comment first on Ian Young.

The man presented no chink of doubt. We must all take statins from infancy up. He kept saying that a 1mM (mmol total cholesterol per litre blood) drop in total cholesterol causes a 25% lowering of risk of vascular event; but, while his curves showed a steep line of correlation for 40 year olds, it was an almost flat line for 80 years. (So for me there is practically no benefit).

In no case was the vertical axis on any of his graphs 'General health'; he was only talking about 'Rate (or risk) of vascular event'. To a hammer everything looks like a nail and to a cardiologist the object is to lower risk of a 'vascular event'. What about the adverse side-effects; the muscle pains, and increased risk of diabetes (both of which Young conceded), Alzheimer's, ALS, and Parkinson's (which were mentioned by Stephanie Seneff)?

Cholesterol is essential. Ian Young correctly remarked that blocking the synthetic pathway at HMGCoA synthase (as statins do) will indeed cause a shortage of cholesterol and lead to scavenging pathways and the relocation of existing cholesterol. If the scavenged cholesterol is from coronary plaques, well-and-good; but what if it is in brain myelin or muscle cell membranes (as emphasised by Stephanie Seneff)? And what about ubiquinone and dolicol, which are also essential and also on the pathway blocked by statins  (as emphasised by Stephanie Seneff )? If there ARE INDEED adverse side effects of statins it is easy to see why!

So the clinical debate should be about the side effects versus benefits. I heard a paper in a Glasgow Heart meeting in the late 1990s  which concluded that for over 40 year olds (or over 50) the OVERALL benefits of statins do not outweigh the OVERALL damage. I was impressed (staggered, indeed) at the failure of the clinical cardiologists to see that this trumped the (undenied) fact that statins lower cardiovascular risk.

I am certainly not going to take statins. I do not feel I need them. And whether or not I should lower blood cholesterol there is something too utterly daft about poisoning myself at great expense in order to achieve that; and simply to switch from a healthy death from a coronary to a lingering death from mental, muscular and neurological decay. If I were under 40 and had familial hypercholesterolaemia, I think I would try diet, red-wine, and niacin (e.g. brewer's yeast) before I tried statins. (There are many types of familial hypercholesterolaemia; the most common by a factor of 2 is a defective LDL-receptor, which presumably hoicks LDL particles out of the circulation and into some (presumably) removal pathway.

Professor Ian Young talked away about nuts, expensive margarine, salt, exercise, the 'J'-curve for alcohol, etc. But he conceded that only 10% of our cholesterol comes from diet. So, surely the question is why do we MAKE too much? What regulates the synthetic pathway? [**]  Does alcohol in excess of 2 units per day, or smoking, etc, up-regulate the synthetic pathway, or affect the partitioning between pools of cholesterol, e;g; by enhancing oxidative damage. What is the rôle of lipid oxidation (briefly mentioned by Young)?   [** My colleague Loranne Agius suggests that excess carbohydrate feeds into fat production in the liver which requires cholesterol for its excretion]

Young pointed out that HDL-cholesterol is "good"; that low 'cardiovascular risk' correlates with higher HDL (in the 1 - 2 mM range, independently of LDL or total Ch.); in fact high HDL-Ch is 10-fold healthier than low HDL-Ch (while low LDL-Ch is only 3 times healthier than high); the best predictor of heart disease is therefore the ratio LDL/HDL, the next best is HDL, the least good is LDL or total blood cholesterol. So, what determines partitioning between the various 'pools' of cholesterol: HDL, LDL, its 'locus operandi' (where it is needed, in muscle and nerve membranes), and its 'locus morbidus' (i.e. coronary plaques where it is not wanted - we suppose)?  What is the rôle of lipid oxidation (briefly mentioned by Young) in affecting the partitioning?  Presumably the HDL particle is picking up and re-locating cholesterol and is wholly good. But it is HDL-cholesterol that is measured, so we do not know if the HDL is largely unloaded or nearly full; the latter giving the impression of plenty of HDL particle, but actually being nearly useless as a scavenger. There is a route for elimination of lipid, lipid-cholesterol-ester and cholesterol which involves liver, bile and gut. Guessing here, and maybe naively, but is it damaged (e.g. oxidized) fat/cholesterol that is eliminated, rather than merely surplus?   So many unanswered questions.

Perhaps the coronary plaques are, in a wider sense, beneficial. After all, they protect us against Alzheimer's disease, and a lingering death! What are the evolutionary benefits (to the genes) of surviving beyond age 70?  They must be very small and may be negative; a little 'grandparenting', and 'advice' (perhaps), but is that sufficient to pay for the food and space?

Coming to Stephanie Seneff (2011), I believe this contains errors, and her fundamental technique is strange and (I suspect) fallible; that of looking at a bunch of statin-based and non-statin-based reviews and counting in each the incidence of words like 'dementia'. If 'Statin' reviews mention dementia, that does not necessarily mean that Statins cause dementia. What if statins PROTECT against dementia, or the paper says STATIN DOES NOT CAUSE dementia, while on the other hand diuretic pharmacologists may focus on salt balance and blood volume, even it their drugs do actually cause hallucinations. I do not follow Seneff's argument about lactate and acidosis; splitting ATP to ADP and Pi generates H+, but there is 10 - 100 times as much lactic acid synthesized as ATP split (and ATP is resynthesised while lactate accumulates). I think she has the oxidation of cholesterol-sulphate to cholesterol-sulphide wrong, for that is surely a reduction, and I have never heard of there being any useful energy available from that. (Indeed, I had not heard about cholesterol-sulphate or cholesterol-sulphide.) But she is right about cholesterol being needed. And statins being toxic. Is she right about statins causing raised fructose, or dementia, or ALS, etc? That needs checking, not dismissing.

But I am no expert.
Ian West,  (12 Longhirst Village, MORPETH, NE61 3LT)

Re: Your Amazon.co.uk Enquiry

Dear Jason,

You have been very helpful. However, I shall still warn everyone I
know to beware of "Amazon Prime". I found a page on your website which
said "click this button to begin a 30 day free trial". It DID NOT say
that I would automatically upgrade to a paying member after 30 days.
And in any case I DID NOT PRESS that button. Furthermore, I looked at
all three emails from Amazon sent on 13th Jan and NONE of them say
anything about Amazon Prime, let alone automatic conversion to full
Fee Paying Membership after 30 days.

I may well have opted for "1 day delivery and free 30 day trial of
Amazon Prime", thinking that it was indeed 'Free'. (How naif can you
get!). But as you rightly observe I do not know what Amazon Prime is
and certainly did not wish to join that. The 30 day period was,
however, very educational; I know I want nothing to do with Amazon
Prime; and I did not know that before.

Unfortunately I have stopped that Credit Card. Not, I should say,
because of the erroneous £49.00 charge, for I had stopped the card for
another fraud before I noticed this entry. I think TSB should manage
to credit my account, but there may be some problem.

You have been very helpful. If you are this helpful to all customers I
think this 'Amazon Prime' idea must count as one of Amazon's few
failures.

Best wishes, Ian West
--
Ian West
12 Longhirst Village,
MORPETH, NE61 3LT, UK
Tel: 01670 791880
*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-*-
On 24 Feb 2014, at 17:25, Amazon.co.uk wrote:

Your Account
Amazon.co.uk
Message From Customer Service
Hello Ian,

This is Jason from Amazon Customer Services.

 
Further to our conversation I've checked your account and found that
the charge of GBP 49.00 relates to Amazon Prime. When you placed an
order on the 13 January 2014, you chose the following delivery option:
"One-Day Delivery with a free trial of Amazon Prime (1 business day)".

While you weren't charged at sign-up, your membership is upgraded to a
paid membership plan for your own convenience once the trial period
ends.

As you didn't cancel your membership once the trial period ended, our
system automatically charged you the annual subscription fee for
Amazon Prime, GBP 49.00.

However, our records indicate that you haven't used your Amazon Prime
membership, so it doesn't seem that the Amazon Prime service is
something you'd benefit from.

I've now cancelled your Amazon Prime membership and requested a refund
of GBP 49.00 for the membership fee.

Refunds usually go through in 2 to 3 business days so you should see
this credited to your account on your next statement. Please note,
this does not include your bank's processing time.

Cancelling your Prime membership means that you'll lose your Prime
benefits. Any new or pending orders may be subject to delivery costs.
Cancelling your membership will also cancel the membership benefits of
any invited household members. You will also lose access to Kindle
Owners Lending Library.

For more information about Amazon Prime, including the Terms &
Conditions, please visit our Help pages at:

http://www.amazon.co.uk/gp/help/customer/display.html?nodeId=200182130

I hope this helps. We look forward to seeing you again soon.

Warmest regards,
Jason S
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The Big Six Power Companies

Big Six Energy Companies

" It looks as though Capital Gains Tax is too low in Britain, and too high on the continent."

We read that the profits of the Big Six energy companies have (when averaged) increased five fold since the financial crisis of 2008/9; increasing from 0.22 B£ to 1.2 B£. That has been due to price hikes and hard winters. There was a major hike in 2012 which lifted all 6 into profitability. So why a hike in 2013? One suspects that the companies saw that they got away with it in 2012, and were tempted to try it again. 

Back in February this year I pointed out (Ref.1) that Centrica¨ (i.e. British Gas) announced increased profits of 11% over the previous year. I also showed that share prices rose by a similar 11%. , and concluded that the shareholders expected to see those profits. It was clear they had no intention of investing them in the business. Nor was that extra money destined to insulating the homes of chilly customers; nor to pay for more expensive raw materials, for those prices had fallen.

In the Table 1 below I look at all six of our biggest energy providers. One feature is immediately obvious; only two of the six are British owned — Centrica and SSE. Of the others, 2 are German, 1 French and 1 Spanish (Iberdrola). The next point that strikes the eye is that there seem to be two types of business strategy; while the 2 British-owned companies return a piffling divident (P/E over 1000), the continental companies return a handsome dividend of between 7% p.a. on the capital invested in EDF, to 9.6% for shares in Iberdrola¨. On the other hand shares in the continental companies have all slumped steadily over the 5 years from Jan 2009, while shares in the British companies have shown a steady and sustained rise over the same 5 years with a smoothed average of 8% p.a (for SSE) to a staggering 18% p.a. (for Centrica). Who needs a dividend if the share itself increases in value at a rate that is 9 times greater than inflation!

 

It looks as though Capital Gains Tax is too low in Britain, and too high on the continent; with the possibility of a compensating imbalance in corporation tax levels such that in Britain, companies find it prudent not to make a profit if that can be legally avoided.

Table 1

Data for Northumberland, including VAT (5%), 'standard' direct debit rate, unit cost (pence/kwh), standing charge (pence/day)

 

Company	Curr. Unit (p/kwh)	Standing Charge (p/day)	P/E ratio	Smoothed 5 yr. ann. share rise%
Npower (RWE AG)	14.879	10.0	10.5	-20%
British Gas (Centrica Plc)	12.320	26.000	1,561.97	+18%
SSE (SSE Plc)	14.35	16.45	1,617.76	+8%
E.On (EOAN.DE)	Not revealed	Not revealed	12.23	-12%
Scottish Power (Iberdrola )	9.689	28.70	10.36	-5%
EDF (ƒElectriciteŽ de France)	13.78	18.90	14.17

References:

[1] http://occidentis.blogspot.co.uk/2013/02/centricas-profit_27.html

Cawstein
cawstein@gmail.com

Autumn

"Season of mists"

I find autumn to be a deeply satisfactory season. Such used not to be the case, when I was young, but now that I have completed my 'three score years and ten' and am enjoying these supernumerary years, it seems different.

The leaves turn and fall, the trees drip gently, the fallen apples rot, the unpicked beans dry and rattle in their pods. Things are tidying themselves up for the long sleep. In my early twenties, the golden days of autumn were just as beautiful on the banks of the Cherwell as here on the Longhirst burn, but they chided me. My unassuaged longings chided me. The fleeing swallows mocked me.  Another wasted summer gone!

Do I kid myself that I also shall sleep to wake in a new springtime? Is it thus that the 'obviously false' hope of a new life-after-death enters our minds; hard wired; like our 'obviously false' belief in causation, simultaneity, gravity. To my conscious mind it is clear that it is not I that will be born again, to learn to walk, to talk, to read, to love. It may not be my children, or my grandchildren, any more than they will be my swallows, or my roses that will return. But there is a confidence that this will all come again.

And I can return to raking leaves, refreshed from my little pause for thought.

Cawstein
cawstein@gmail.com