Fairer tax system to be adopted

Unexpected wonderful coalition
Conservative and Liberal Democrats form the new UK government

Events unfolded quite unexpectedly and quickly on Tuesday afternoon and now the UK has a new government based on the coalition between the Conservative and Liberal Democrat Parties.

I was against the idea of Conservative-Lib Dem coalition quite strongly. However by looking at their coalition deal and cabinet members, I like it. I think it's far better than anything that Labour-Lib Dem could have produced.

Liberal Democrat supporters should not feel let down and betrayed by Nick Clegg and the Party. If I were given a choice between a small opposition in the House of Commons or in the Cabinet, I would rather choose the latter one.

In fact, what they have is even better than the choice given above. First, their job is not to oppose, but work and make decisions alongside Conservative ministers. Second, they have already got a promise from the Conservatives to implement some of their policies and delay some of Conservatives policies.

I strongly disagree with the view that Lib Dem has given away too much in order to get into the government. In fact, their policies, especially on the economy and banking reforms have been adopted. Some of the policies that they could not get into the agreements are quite frankly not that important or some are irreversible or almost irreversible, for example joining the euro.

Some important new policies to be implemented (or indeed not to be implemented):

• Income allowance will be increased gradually from April 2011, by £1000 annually towards £10'000 level (Lib Dem policy)
• The capital gain tax (CGT) will be increased, to be streamlined with income tax (Lib Dem policy)
• The increase of inheritance tax threshold to £1m from its current level of £325'000 is to be delayed (Tory policy)
  

There are many other policies to be implemented and delayed, which is not number-based. Those policies are difficult to measure and some of them are nothing more than reviews and possible reforms, so they are not actually that substantial.

All in all, these new taxation system is the most radical change in decades, and it certainly reflects far fairer system as it relieves the burden on poor and middle income-earners, yet punishes the wealthy harshly.

This is very different from what Tories stood for and their image, protecting the rich and slaving the poor. This removes one big shield for wealthy individuals, very low CGT compared to income tax. Also, there is a serious planned "clampdown" on bankers bonuses and their "reckless" activities.




My thoughts on some issues related to the coalition government:
In today's BBC's "Question Time", some rather ridiculous issues were raised:

Melanie Phillips, the Daily Mail columnist: "3 quarters of the nation didn't want Lib Dem to be in the government"
- I am sorry, but this country has not produced that many election results which resulted in a certain party to be "not supported by less than half of the voters". So should they have had re-election every time when no single party had more than 50% of voters' vote?
First, the current "first past the post" system ignores the overall vote share. Indeed it's mathematically possible to win the election without the majority of the voters' support, if the constituency boundaries were drawn in a particular way. Second, with the coalition of Conservatives and Lib Dems, they have a total of more than 60% of the votes and more than 56% of the House of Common seats.

"They have put their interest first, rather than national interest, unlike what they are saying"
- If Tories really had put their interest first, they could have formed a minority government by themselves without compromising any of their policies or calling a second election, in which they will likely to win. I am not saying everything they say is the truth, but I think some people are being far too cynical and critical.

"Lib Dems compromised too much", "Nick Clegg only wants to get into government, and doesn't really care"
- Yes, they have compromised, and they must have compromised. How else, do they expect to form a coalition. In fact, given the number of Lib Dem MPs, they have done quite well both on their coalition policies and cabinet seat numbers. Of course, Nick Clegg wants to get into government, that's what every politician wants to do, however, it's too early to judge and tell if he has compromised his Party and his policies for the sake of it. At least at the moment, it doesn't look so.

There were many conflicting issues raised by both the panel and the audience. Melanie claimed that this coalition government cannot survive and will break down, then she says she wouldn't predict anything, when asked about how Theresa May will do in the cabinet. So stop predicting anything at all!

Then there was a non-white guy talking about immigration policy being loose, yet complaining about ethnic representation. He cannot have it both ways, first he is clearly a descendant of an immigrant or an immigrant himself. Then he cannot ask others not to come into the UK, yet demanding ethnic representation in the cabinet or in the Parliament. That's nothing, but a very very selfish act.

I personally prefer a world with no boundaries. Why should anyone born by a chance to be in a specific country be confined in that country?

Also I am against the representation of ethnicity or women and ethnic equality, just for the sake of it. I am not against the women or a member of any ethnic group, but I am against appointing a woman or someone from an ethnic background just for the sake of it, why should they be appointed, if there is really someone better and more capable of doing the job, but a man from non-ethnic group?

Volume.1.03 (2010, Week 19)

Eventful week
Full of political, economical, financial, commercial and environmental events

The last week is one of the most eventful weeks I have ever seen. Only 2 weeks ago, on 28th April, there was pretty much nothing going on and BBC was reporting pretty much nothing, but about the Gordon Brown's incident with Gillian Duffy, which Brown called 'bigoted'.

However, from the middle of last week, things started changing, it was not only the general election in the UK. Markets around the world crashed last week, having one of the worst days ever on Thursday the 6th, which eventually resulted in the cancellation of trades made between 2pm and 3pm on 296 stocks out of listed 300 stocks on NASDAQ. Even more bizarrely, no-one quite seems to know exactly what happened and what resulted in leading US Stock Indexes to be dropped by almost 10% and then recovering quite magnificently, all within a very short period of time, withing just few minutes.

Euro crashed, hitting 14 months low and markets lost the gains since the year started. The panic continued on Friday, only to vanish on the next trading day-Monday and resulting in the best daily-gain in 14 months. The sudden vanish in the panic was due to EU finance ministers successful and quick decision on Sunday, which created an emergency fund of 750 billion euros to support the deficit ridden EU countries and more importantly to defend the euro and avoiding Lehman Brother-style collapse in the financial markets. 250 billion euros will be guaranteed by the IMF, 60 billion from EU fund and the rest coming from EU governments, largely from Germany and France.

On Monday, another big news hit the headline: Gordon Brown offers his resignation as a leader of Labour Party in public, hence in effect resigning as a Prime Minister. This could lead to a possible coalition between Labour and Liberal Democrats, although they still fall short of the overall majority within the House of Commons, totaling only 315 seats out of required 326 seats to be the overall majority. Hence, they will need support from smaller parties, but that will make the coalition unstable as they will need 2, 3 or even 4 smaller parties' support.

However, as the incumbent cabinet decided they would not choose its new leader until certain agreements have been made with the Lib Dem, it is uncertain who will become the next Prime Minister if the coalition between Labour and Lib Dem goes ahead. David Cameron probably used to hate Gordon Brown, now he must surely be hating him if the coalition goes ahead and David Cameron loses his chance to become the Prime Minister.

One of the top agendas, apart from the economy and budget, on Lib Dem is an electoral reform, which they say will be a condition for any coalition. It seems they will get it, as Conservative Party has offered they will hold a referendum on it and Labour already favours a reform. However, any electoral reform is going to hurt both Labour and Conservative badly, as they will probably never be able to govern by themselves only, especially if Lib Dem favoured proportional system replaces the current first-past-the-post system. The biggest winner will be, without a doubt, Lib Dem, as they will probably be always a part of the coalition in the future, giving them a power they never had.

If those events were not enough, there is a partial closure on the UK airspace due to Icelandic volcano ashes again and to top it off, BA cabin crew announced they will have 20 days strike within the next month. Now surely, people must be thinking to give up on air travel as chaos and uncertainty of their flights seem to be increasing.

Many more events have been happening within the last week, of which any of them may have hit the headlines during normal times, however it seems there is not much room for those events to be on the headline at the moment.

Volume.1.02 (2010, Week 10)

Obama urges China to adopt more market-oriented currency market and China rejects it (once again)
So called G-2 keeps disagreeing

This week the-same-old-argument came up once again, US calling for the devaluation of yuan (or renminbi, RMB) and China accusing US that US wants to solve its problem using China. On the face of it, yes, it looks like so, as the US trade deficit with China has been increasing steadily, from $68.7bn in 1999 to $266.3bn in 2008 (that's more than the entire GDP of Portugal or UAE, which consists of Adu Dhabi, Dubai and 5 more emirates).

Today, China is not going to do what US wants them to do, or what EU or any other country and group of nations for that matter, wants them to do. China wants to be recognised as a super-power on its own, so why should it be listening to others and meeting their demands? China will devalue its currency at its own pace, as it sees fit. US calling for devaluation of yuan is only going to slow down the devaluation process, as China does not want to be seen as meeting US demand. So, it is best that topic of yuan and its devaluation to be left out of their conversation, if US wants to narrow its trade deficit.

However, the problem of US and other nations with big trade deficit maybe internal rather than external. For example, UK's trade deficit has risen in January 2010 to £3.8bn from £2.6bn in December last year despite a weaker pound, with trade deficit in physical goods increasing to £7.9bn, which is almost a billion higher than the the expected £7bn.

Volume.1.01 (2010, Week 09)

Pound Sterling in a free fall
Pound falls below $1.49

Today, just before midday Pound Sterling fell sharply from the valuation over $1.51 to less than $1.49. It fell against the other major currencies by a similar proportion. It reached its lowest point against USD since last May after continuous decline since mid-November 2009.


It was feared it may be a double-dip recession, however it seems unlikely, at least at the global level. However, it may just well be the case for Pound Sterling as it dives under $1.5. Since the end of 2003, Pound has been overvalued by a significant amount, reaching ridiculously high valuation at more than $2.1 in November 2007, then it became severely undervalued from end of January 2009 till April 2009. It has reached its relatively stable (and reasonable level in my opinion) of $1.6-$1.7 from June 2009. But from end of January this year, it has gone below $1.6 with the rest of the financial markets due to previously unseen problems starting with Greece's sovereign debt, weak economic results and still increasing unemployment in many industrialised nations. Markets started recovering from mid-February, yet Pound remains falling.

Some given explanations are UK's public debt, which has been ballooned in the last 18 months and set to increase further for next few years, and today's spectacular fall was attributed to the approaching general election, as hung-parliament is becoming more of a possibility in the UK, as Tory leader David Cameron's popularity with its party has fallen and the its lead over Labour is diminishing.

I don't think public debt problem can explain the whole story, as the problem is not confined to the UK. However today's fall maybe explained in terms of the upcoming general election, although it's questionable if it can explain the continuous fall.

Regulators (and public) are missing the point

Global Solution?
UK Prime Minister Gordon Brown talked a lot about global problem and global solution, but have they solved it now?

Today, G20 Leaders announced a deal, which is very impressive by the standards of their previous meetings. They have pledged an extra $750bn to IMF, $250bn to boost the world trade, and $100bn for the poorest nations. They also put forward to introduce a new and stricter financial regulations at both internaional and domestic levels.

Of course, the world leaders didn't fail to talk about bankers' pay and bonuses and tax havens, as they have been a hot topic, especially in US and UK. But I think the regulators are missing the point, largely because of an immense pressure from public. Tax havens and bankers' pay and bonuses are not the source of the global meltdown, and even if it were it is insignificant. Yes, it is disgusting to take millions of dollars home, while taxpayers have to bail-out your bank. But, it is small, let me give you an example: AIG, the once-mighty-giant-insurer of the world, now the biggest loser in history (breaking the record loss of $98.7bn made by AOL Time Warner in 2002). Its loss for the last quarter of 2008 amounted to more than $60bn and it paid out bonuses of worth $218 million since accepting the government bail-out in September 2008. I don't think it is right for the top executives to take bonuses when they are responsible for the group as a whole, but individuals deserve to be paid bonuses for the long extra hours they work for, especially if their divisions are turning a good profit.
Even if all the bonuses were to be returned, the group's loss remains at more than $60bn, and possibly those profitable divisions will no longer be profitable as the individuals may leave the group.
From what I see on the report, there is $12bn interest expense, to me that's a concern and not $218mn paid bonuses. Why should we spending all our times on a single lost dollar out of almost lost $300? The same goes with tax havens, the "missing" money is not as huge as many believes, probably smaller than "forgotten" taxes as the US Treasury Secratary himself had forgotten to pay more than $40'000 in taxes (but before taking the job).

Then, there are bigger problems with the deal: now they want early warnings from IMF about macro-economic and financial risks as they have not been told about the risks of possible breakdown in the banking and financial sector. Also authorites want to be able to identify macro-prudential risks, to me that is a big big question mark, HOW? I am guessing they will set up a group of so-called professionals or experts to calculate those risks, which will lead certainly fail without a doubt, provided those professionals will be using their-good-old models, which have worked in good times, but failed every now and then. But I applause for the extension of regulatory sight on rating agencies (as well as hedge funds).

Volume 09 (2009, Week 13)

G20 Leaders agree on $1.1 trillion deal
Is it over for all the gloom and doom?



For the past 3 weeks, the leaders and press as well as investors have been very optimistic despite some further bad economic news, for example, further fall in the industrial output of Japan, the second largest economy in the world. Last Monday (23rd March), the US Secretary Timothy Geithner announced a plan to buy toxic assets of up to $1 trillion, so the the mess of bankers can be cleaned. As a result, stock markets around the world have been on a bull-ish mood.

Today (2nd April), investors cheered once again on the news that G20 Leaders have agreed on a dreal worth $1.1 trillion. It was uncertain, whether G20 meeting would result in any significant agreement, and earlier this week French Finance Minister Christine Lagarde was threatening to walk away from the table if its demand for stricter financial regulations are met. While, German Chancellor Angela Merkel was not prepared for any more fiscal stimulus package as Germans protested that "We will not pay for your mess", meaning it was not Germany who got the world into economic crisis, but US and UK.

As it stands for now, all the fiscal package is worth $5 trillion till the end of next year, according to BBC estimate. That is equal to 5% of the world GDP on annual base (or 3.2% if we use higher approximation for the World GDP: $78 trillion by CIA). However, by Bloomberg estimate, US alone have pledged a stimulus package of worth $11.6 trillion, which is more than 4 fifth of its own entire annual output and more than one seventh of the world annual output. Whichever way you look at it, all these stimulus packages are absolutely enormous, and one has to ask all these money because of 2 dozen huge international banks difficulties? I ask if all these money was available, could not they have spent it on developing nations before, so they could have got developed and got richer and the world economy could have been ridden on the back of those-could-have-been-new-middle-class consumption.

Even though not a head of state, Dominique Strauss-Kahn, the head of IMF saw his importance and influence increased as a result of G20 deal. IMF is so-much-hated amongst developing nations, especially among Asian nations and less so by Latin American nations, yet now its reserve is tripled to $750bn and has a new "overdraft facility" worth $250bn in its own currency, Special Drawing Rights. However, this currency is not what Chinese were hoping, when its chief economists called for a new world reserve currency. At the moment, China has little choice, but to buy Treasury Bonds as US dollar is the world reserve currency and it is desperate to get out of that position and keep providing the money US so much needs now.

As I am not a fan of IMF, I am not really happy that $750bn of the deal actually goes to under the control of IMF. Another $250bn is pledged to boost the world trade, although I am not sure exactly how they are going to spend it and how they are going to achieve it. The only one, yet small, part of the deal, which may actually bring fruit in the long term is extra $100bn for international development banks to be lent to the poorest nations.

That's all for the quantity of the deal. Now, to the non-quantifiable part of the deal - the part French and German leaders were interested in the most. I quote from the statement:

We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:

· to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;

· that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;

· to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;

· to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;

· to endorse and implement the FSF's tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;

· to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;

· to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;

· to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and

· to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.

It's quite an impressive list and it seems after all regulators have heard the voice of many critics.

Volume 08 (2009, Week 09)

Turbulent weeks for Stock Markets
FTSE 100 loses almost 10% in the last two weeks.

Investors have not been as optimistic as I have been, and my prediction could not have been more wrong, all the stockmarkets continued to be battered, hitting many years-lows one after another. FTSE 100 reached a low of under 3500, which has not been seen since October 1995. Dow Jones Industrial Average hit a low point not seen since April 1997. Meantime, in Asia, Nikkei 225 went below a 26 year-low of October 1982, reaching 7088.47 during the trading day of March 3, 2009.


UK Bank Results out
RBS made an officially the biggest loss in UK Corporate-History.

RBS became a biggest loser in UK-Corporate History, making £24.1bn loss for year 2008. However the loss is smaller than the earlier expeced loss of £28bn. The large part of the loss comes from the goodwill write-downs related to its hostile take-over of ABN Amro. Lloyds Banking Group announced a loss of £10bn. Lloyds TSB would have made a profit of £800mn, if it was running as a separate bank, but the loss from HBOS amounted to £10.8bn, which made many people to question whether the merger between the two banks was the right thing to do. The UK government stands firm on its support for the merger, which now owns 65% stake in the new bank up from 43%. The government also has 68% controlling stake in RBS, and owns Northern Rock, which announced £1.4bn loss for year 2008.

The government is now the biggest player in UK Banking Sector. Three remaining independent biggest players announced a profit for 2008, Barclays announced a pre-tax profit of £6.1bn last month. HSBC announced a profit of $9.3bn (£6.5bn), which is 62% lower than that of 2007 and Standard Chartered made a profit of £3.4bn, up by 19% from the year earlier. HSBC is seeking to raise £12.5bn from shareholder through a rights-issue in the UK. The bank is offereing 5 new shares for every 12 shares held at a discounted price of 254 pence. As a result, HSBC became one of the biggest loser in the stockmarket last week, tumbling by more than 26% in the last week. Its North-American division made a loss of $15.5bn. Last year its North-American division made profit of only $91mn out of total profit of $24'212mn (or $24.2bn). Its Commercial Banking remains the biggest source of profit, generating $7.2bn profit, meanwhile the fortune of Personal Financial Services has reversed completely: turning from $5.9 profit in 2007 to $11bn loss in 2008 (or equivalent to negative 118% of the total profit for the Banking Group).

RBS and Lloyds would be feeling much worse, if AIG has not made its loss. American International Group (AIG), once the mighty insurer of the world, made a loss of $61.7bn in the last quarter of 2008 alone, bringing its total loss for the year 2008 to close to $100bn!


Bank of England lowers its base-rate
Bank of England goes into a completely new territory.

I am becoming sick of seeing the interest going down a month after a month. Now it has been lowered to a ridiculous level of 0.5%! That means, now you would be getting an interest on your savings equal to only a tenth of what it was before October 2008. In order to get the same amount of money, now you have to wait for 10 months for a single month's earning before October 2008 or you have to increase your savings by 10 times! Meanwhile borrowers can only dream of getting credits, which is not available. Many small businesses don't care if the interest rate had remained at 5.0%, all they care now is if they can credit at all.
(my earlier articles on interest rate cuts: Feb, Jan)

However, Bank of England is doing something which they have been reluctant to do so far: quantitative easing (a fancy term for increasing the money supply in the economy). The Bank said it would increase the money supply by $75bn in the economy. The Governor of the Bank of England, Meryn King said "I don't know how long it will take, much depends on the situation in the rest of the world. But if countries work together, these measures will I believe eventually work." The economists' rule of thumb is monetary policies take 12-18 months till its full effect is felt in the economy. The bank will not print more money to increase the money supply, but it will be buying government and corporate bonds.


Some other news
Manufacturers around the world continue to be hit.

General Motors (GM) announced $30.9bn loss for 2008. GM is trimming down by selling of its assets. One such an asset is Saab, its Swedish unit. Swedish government refused a bail-out for the company and as a result Saab filed for bankruptcy for protection. Other assets include its Hummer brand and its medium-duty truck business, which makes the Chevrolet Kodiak and GMC TopKick.

Exportig nation of Japan saw its export drop by staggering 45.7% in January from a year earlier. It is a result of two combinations: the falling demand for goods (with very few exceptions, such as food and medicine) worldide and strong yen, which makes Japanese producers at disadvantage, as they become less price-competitive in the world market.