Sunday 12 June 2011

Sunday, June 12, 2011 Posted by Jake No comments Labels: , , , , , , , ,
Posted by Jake on Sunday, June 12, 2011 with No comments | Labels: , , , , , , , ,

Getting ripped-off is not just a question of companies and governments grabbing a chunk of your assets. There is another more insidious way to make you worse off.  A common thief (mugger, burglar) or a respectable company (bank, energy company, supermarket) robs you by taking your money. All very crude stuff. On the other hand, the government can rob you without laying a finger on you or on what you own.

The government is currently pulling off a massive heist on ordinary Britons using inflation:
a)      changing the indexation of payments to certain categories of people including pensioners and those on benefits. Up until now, these payments have risen with the Retail Price Index. This is being changed to link to the Consumer Price Index, which will result is lower increases.
b)      Putting a pay-freeze on public sector workers, who comprise just over 20% of UK workers (6.195 million people in the 4Q 2010, compared to 22.962 million in the private sector).

The cruelty of this inflation heist is that it will leave a permanent scar on its victims. Losing a few percentage points from a pension builds the growing loss into the future value of that pension forever. In contrast to this inflationary scar on ordinary Britons, the £2.5billion super-tax on the banks is more like a haircut. It grows back. And in any case, it:

a)     doesn't affect the bankers, as the tax is on the bank and not on the staff
b)     has to be paid by shareholders (in lower dividends) and customers (in higher charges)
c)     will inevitably be stopped.

As Mervyn King, governor of the Bank of England, stated:

Inflation is just one of the ways Ripped-off Britons are being made to bear the cost of the crisis. It is the power and it is the weakness of money that it is nothing more than a token. You can do a lot of things with money. In fact, that is the entire point of money – you can do a lot of things with it. Money, after all, is the lifeblood of liquidity. The economy is ultimately based on people exchanging goods and services produced by their own labour and assets for goods and services produced by other people’s labour and assets. Money is nothing more than the token used to conduct this exchange. Nothing more, and nothing less.

If money didn’t exist, the only way a carpenter could get his teeth fixed would be by finding a dentist who happened to need some carpentering. The carpenter would build the dentist some shelves, and in return, the dentist would fix the carpenter’s teeth. The dentist too would only be able to employ those tradesmen who happened to have a toothache. All our skilled carpenters, bakers, butchers, doctors, dentists, computer programmers, and everyone else would spend virtually all their time finding a counter-party who not only needed their particular skill but could also provide the particular skill they needed in exchange.  And have very little time left to use their actual skills. Imagine, if the dentist’s house was burning down and the fire truck arrived, only those firemen with bad teeth would take the trouble to fight the flames!

Under these circumstances, the only way to have a Rapid Response fire brigade would be to have literally thousands of firemen waiting at the station. When there is a fire at, say, a butcher’s shop, it would require a show of hands of those fancying a pork chop for dinner to raise a crew.

Money is the token that enables people to offer their skills and products to anyone with money. The dentist pays the fireman, through his taxes, with money – so even those fire fighters with good teeth will save his house, chattels, and loved ones. The dentist fixes the teeth of tradesmen he has no need of, providing his dentistry skills in exchange for their money. And he uses that money to pay for, among other things, his taxes which makes sure firemen are available regardless of the state of their molars.

And therein lies the danger of money. Governments don’t need to take your money to make you poorer – they can simply reduce the value of your money. They do this by stoking inflation, by printing new money, for instance by Quantitative Easing.

The government protects from inflation those they want to protect by
  • Allowing rises in pay to certain individuals and sectors.
  • Making higher payments to certain suppliers.
  • Allowing regulated corporations put their prices up, such as the energy companies and the transport companies.
If there is more money printed, and the amount of goods and services stays the same, then the share of stuff each pound can buy will fall. The value of the pound drops. Those without protection, whose incomes are not effectively indexed, are poorer.

Indexation is supposed to provide protection by creating a link to prices. Broadly speaking wage, pension and benefits increases should at least ensure people are not worse off as time goes by. While freezing public sector salaries, the Government intends to change indexation of pensions and benefits from RPI to CPI. So is CPI or RPI a better representation of the cost of living?

The Bank of England publishes a survey of the public’s experience of inflation. The public was asked how they felt the cost of living was changing. The graph shows the average (median) of the public experience, plotted against CPI and RPI between 1999 and 2010. Experience is clearly aligned with RPI and not CPI.

To show the figures in cash, the inflated value of £100 using each measure of inflation over this period or time reveals that RPI is the best representation of reality:
  • Public Experience:        £100 cost grew to £139.85
  • RPI:                             £100 cost grew to £137.96
  • CPI:                             £100 cost grew to £125.93

A Treasury report shows retail price inflation currently within a whisker of 5% and forecast to remain above 3% for the next few years. The Public Sector wage bill, about £182 billion in 2009, by being frozen will contribute billions more than George Osborne’s £2.5 billion tax on the banks.

The change linking indexation of pensions to CPI instead of RPI is clear from the graph below. This shows that, assuming the next 22 years of inflation is like the last 22 years, a pension linked to CPI would be worth 16% less than a pension linked to RPI.

Why is the Government moving indexation of salaries, pensions, and benefits from RPI to CPI? While leaving something like the interest rate charged on student loans by the Government’s Students Loan Company linked to RPI? The Student Loan Company's website states the following:

Interest rates for income based [student] loans

The rate will be the lower of the Retail Price Index (RPI) in March 2010, or 1% above the highest base rate of a nominated group of banks. The maximum rate of interest that may be charged between 1 September 2010 and 31 August 2011 is 4.4%; this was the RPI in March 2010.

Interest rates for fixed term [student] loans

Fixed term loans were taken out before 1998. They do not attract the same rate of interest as income based loans. They are repaid over a fixed term (also known as 'mortgage-style') and the interest is linked solely to the RPI.

The interest rate from 1 September 2010 - 31 August 2011 will be 4.4%.

I think the name of this blog, Ripped-Off Britons, gives you a clue.


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