Welcome to ANTI-CRISIS ECONOMICS

Hi,
Thanks for your your patience in tracking down the 'Anti-Crisis Economics' & 'X Economics' blogs. The reason there are two is that blogs have a tendency to disapear from the internet for reasons related to the content although the motives behind  this are unknown to Anti-Crisis Economics, X-Economics. Bets are simply being hedged in case one of them disapears again. Everything you see in the blogs are an un-biased analysis of Finance and economics, but not necessarily the point of view of the national press or media of your country. Economics has a unique problem as far as the media is concerned. This is that if journalists are looking for articles to be published they tend to ask the people who are in business which may be related in some way to economics but not necessarily the people who will be most affected by it. The problem is that the people being asked by journalists are not going to give you the whole picture, but simply the picture of econonomics that they want you to see.
Thanks for visiting.
Please continue to follow our blogs.
Gerry Douglas.

For 'X-Economics' just google 'http://x-economics.blogspot.com'. There is an other X-Economics which we have no links with.

Sir Bob Geldof to Front African Private Equity Fund.

In August 2011 Sir Bob Geldof became the'frontman' for a new $750 million private equity fund for investment in Africa.

The fund has been named "8 MILES", the distance between Europe and Africa.

The fund aims to be one of the biggest private equity funds to be invested in Africa.

The venture will be commercial rather than charitable.

Backing has been secured from the African Development Bank and The International Finance Corporation.
Several other investors are set to sign up.

Of all the imaginable combinations possible, Sir Bob Geldof and Private Equity getting together would have been the very last on the list.

One of the issue that Anti-Crisis Economics has not yet delved into is the effects that wayward investment into Private Equity, Stock Markets, Property Portfolios, Hedge funds etc has affected the developing nations of the world. This is possibly because it is the most difficult to put into words. However Sir Bob Geldof has brought us to this subject sooner than intended.

The problem with investment of savings, with the world banking system as it is today is that, the banking system vacuums up all those savings together and invests that money in whatever is the quickest and easiest way to get a return.

Unfortunately, the quickest and easiest ways to get a return on invested money with the current system are ways that do not generate employment. In fact this is what many of the banks' favourite investments have in common. The costs are low because of the scarcity of any man power. This leaves plenty of 'profit' to pay their own inflated costs...

Using past experience as a guide, the banks involved in lending and the private equity management company will require paying as well as investors in pension funds, and the bank account holders with accounts with the banks.

Basically what I'm saying is, the finance will be too expensive. The people of Africa are going to have to pay all of these costs on top of the actual man power costs of the projects being funded.

Of course I may have mis-understood the intentions of this private equity company. It maybe has no intention of setting up new projects which will be costly in the way of employment. It maybe they intend to use investment to buy up existing business in Africa and put their own label on it as if it had been dreamt up by themselves. Cost cutting measures could then be made to improve profits. Then more leverage from the banks involved could allow for the buyout of an overseas competitor. Then the doors could just keep on opening. I'm not saying this will happen, but its the trade mark of private equity as it stands today.

Sir Bob Geldof  may be the one to change the world, but for this to happen he will need to make the banks change the way they invest the savings of the ordinary people of the world before we can begin to bring back the optimism for Africa that Sir Bob Geldof generated in the eighties.

Landlords Set to Dominate Housing Market for Forseeable Future, As Home Ownership is to Fall to 1980's levels.

On the 1st September 2011, it was reported that the National Housing Federation (NHF) had predicted that;

Home  ownership will fall to levels of the mid 1980s.

High property prices, strict lending criteria from mortgage companies and the need for large deposits would lock millions of Britons out of the housing market.

London will be particularly affected by falling ownership. By the end of next year (2012), the number of Londoners renting their homes is expected to overtake the number of people who own their own homes for the first time in recent history.

In 2010 51.6% of Londoners owned their own homes, with the remainder renting.

It is predicted that by the end of 2012 the proportion of owners will fall to 49.9% as rising prices deter new buyers.

By 2021, the percentage owning their homes in London will be just 44%.

Across the U.K. home ownership is expected to fall to 63.8% in 2021 from a peak of 72.5% in 2001.
At present 67% of the U.K. population own their own home.

The average house price in England will rise by over a fifth over the next five years from £214,647 to £260,304 in 2016.

Oxford Economics produced these forecasts on behalf of the NHF.

 The NHF then goes on to say "Steep rises are forecast in the rental sector, huge social housing waiting lists and a house price boom.- All fueled by a chronic under supply of homes.

 House building has slumped to a 90 year low, plunging the country even deeper into the mire.

In 2011 just 105,000 new homes were built in England.

Plans for more than 220,000 new homes have been abandoned by local authorities since the government announced the abolition of regional house building targets last year.


These figures will no doubt surprise many people as it may not be clear as to where a boom in house prices is likely to materialise from. It is clearly not going to be from first time buyers getting a foot on the ladder.

One of the most notable figures here is that home ownership in London has actually been falling since 2001. This surely must bring the boom years into question. Back as early as the early noughties ordinary home buyers were fighting a losing battle against the landlords in the purchase of property in London.

Even though ordinary potential home buyers are many times in number compared to Landlords it is clear that the Landlords were able to buy up property much easier than the rest of us. Not so much because they had the money to buy the property but because of 'safety nets' which are in place for the landlords, such as housing benefits paying mortgages for the landlord. Obtaining mortgages was therefore easier, remains that way today and is unlikely to change without reform of the system of financing landlords or more general changes to regulations which control the pointless lending of money by financial businesses. 

The figures also show that without any doubt landlords and the banks' favouritism towards them was a major part of the boom years. For home ownership to be falling all these years means landlords have been buying up at least 50% of all the homes that have been going on sale including the ones that had just been built. What kind of a boom would cause less of us to be living in our own homes? It would have to a boom of the sort that only benefits a minority of the people.  

Arcadia to close 250 stores.

On 24th November 2011, Sir Philip Green owner of the Arcadia Group which owns BHS, Top Shop, Burton, Dorothy Perkins, Wallis etc announced that around 250 stores would be closed.

Reasons for the closures are a 38% reduction in profits. Pre-tax profits were £133.1 Million last year.

Philip Green and his Wife have an estimated worth of £4.2 Billion.

The Arcadia Group has 450 plus stores where leases expire in the next three years.

A Commercial lease is basically a property rental cotract which lasts usually up to ten years.

Unfortunately commercial leases and general costs of commercial property have been influenced by a couple of factors which are of interest to Anti-Crisis Economics....

The first is that many businesses like the Arcadia Group who aquire other businesses by borrowing from banks, soon after purchase (or acquisition ) of the company will sell off property owned by the business. This has short term benefits which include a sudden improvement in cash flow, an illusion that the company is performing better 'under it's new owners', then it really is. This is because sales of property will be added onto the profits for the company at the end of year accounts.

This company performance illusion will be a beneficial factor for all the following reasons;
1) Improved profits will be beneficial if the owner wants to sell a company either complete to a Private Equity Management Company.
2)Improved profits will boost potential share price if the company is to sell shares.
3)Improved profits will improve potential for raising capital from banks for further company acquisitions.
4)A sudden, but temporary cash flow improvement.

Sir Philip Green has sold off property owned by his businesses and to add to this, he has recommended to other big businesses that they should do the same in order to increase share holder divdends.

Sir Philip Green has sold off property owned by the Arcadia Group for any of the above reasons. The problem is that these benefits are only short term as Philip Green has found out to his own cost that selling of property ( and then renting it back ) means you lose control of the future costs.

Due to investments in property financed by banks, commercial property rents will continue to rise. This will have an inevitable affect on businesses which sell off their property. They will be closed down or atleast close down outlets where leases can not be agreed upon.

You may think that the free markets economy would adapt to this quickly to prevent closures on such a scale occcuring like those about to affect the Arcadia Group. Unfortunately, the way that the initial investors are so distanced from their actual investments ( in fact they do't know what their money is being invested in) they are unable to react in a way which would improve the situation. Banks have been lending money to property tycoons to buy up commercial property from many business like Arcadia. This is only adding to the for ever mounting problems being caused by the banks. If the initial investors with investment accounts or pension funds were told that their investment was actually going to be used to create problems for us all including the closure of shops and adding un-necessary costs to businesses the investor may choose a more sustainable type of investment.














 

TATA to British Industry

On 2nd December 2011 the media announced the 'mothballing' of Llanwern Steel Works in Wales. It has been blamed by its owners Tata Steel on the current Eurozone crisis.

However, there may be other factors in the Way Tata finances its expansion which may have contributed to this closure and also the Tata group's plans for the future.

In August 2007, Tata Steel Bought U.K based Corus Steel. The cost was 12.9 Billion U.S. Dollars. The biggest ever acquisition by an Indian company.

Many companies in this industry have not grown due to their superior product or management but due to their ability to borrow vast amounts of money to buy other companies. In doing so conveniently eliminating competition. Tata Steel is one of many of these companies.

Immediately after completing the deal Tata were in debt to the tune of around 10 Billion U.S. Dollars as a result of the deal. Of this total $6.14 Billion dollars was with U.K. Banks.

Tata were only able to finance this deal as they could feed off the needs of investors into shares via their pension funds and investment accounts who were just trying to save for the future. The banks willingness to lend the money to Tata was because of the availability of money to be leant which belonged to investors, With the added incentive of a few hundred million dollars interest per year plus the set up fees.

Although Tata Steel is cutting back in the U.K. it has big expansion plans else where;

1..India....Orissa-New 6 million tonne plant.
2..India....Jarkhand-6.8 million tonne plant.
3..India...Chhattisgarh-5 million tonne plant.
4..Iran                          3 million tonne plant.
5..Bangladesh               2.4 million tonne plant.
6..India....Jamshedpur- 5 million tonne expansion.
7..Vietnam                   10.5 million tonne plant.

Also of interest is that the Tata Group also own 50% of the recently constructed Dhamra Port which which is expected to handle 100 million tonnes of cargo per year.

It is likely that the debt which has been added to the british steel industry combined with what are clearly going to be lower costs at the new Tata plants is going to create market conditions which could affect the future of other British steel plants. Conditions which will have been contributed by Tata along with the banks that provided the initial finance.

You have to ask why does a company like Tata need to buy up steel companies like Corus and Land Rover when it is quite capable of setting up new steel plants and car manufacturing plants.

Should the British steel plants now owned by Tata close, this would very possibly lead to the closure of Land Rover and Jaguar, both owned by Tata. Tata have produced vehicles of the type Land Rover build for some time in India. Closing the British car plants would make business sence. You don't need entrepeneurial skills to work out that they could be produced cheaper in India than in the U.K. Tatas profits would surely increase, pleasing the banks no end  and encouraging them to lend again for buyouts.

By lending vast amounts of cash to multi-national companies the banks are creating what is an endless recession in the developed world. Until the governments work together to control the way banks invest our money while it is in their hands we will not see any significant improvement in the economy which has a positive affect on the lives of ordinary people. The only beneficiaries will be the managers of these companies and the bankers who make fortunes from the debt they burden the companies with. The interest on the investments which are paid to the individual investors is of little significance when weighed up against the damage being done by putting workers jobs at risk.

Most disapointing of all is that there will be workers paying into pension funds at Tata Steel and Land Rover who have been mis-led by investment companies and banks about the way the money they pay into their investment is used by banks, stock brokers, investment managers etc. The fact is many people have lost jobs in the U.K., the U.S., and many other developed countries as a result of the mis-use of these pension funds and this has contributed to the current crisis. Companies have been bought up by conglomerates in developed countries only to be closed down as the conglomerate owns similar plants where labour is cheaper, where health and safety rules are less stringent, and where there are generally lower standards of working conditions.

Democratic nations need to be run by Presidents and Prime Ministers who will prioritize the policing of the financial system. There are apparently regulators and Ombudsman which we are all paying for through taxes who are supposed prevent abuse of the system but they would appear to be highly over paid and totally un-affective. 
                        

How pension plans, savings & other investments can distort the value of anything. Homes, gold, oil,gas, shares and big businesses....1

Here is our first example of how the abuse of innocently invested money can distort values in the stock markets as well as the cost of many products and services we use every day including homes. In this particular example the victim is a business.

Example 1:

   A tycoon buys a company with private equity money borrowed from a bank with a loan that is being initially paid for by 100,000 individual pension plans.
   A tycoon colleague with the help of another investment company could buy the same company later in exactly the same way. Only this time there are 120,000 individual pension funds. Even though the company may have changed little since the previous buy out, because the tycoon has as good as guaranteed the mortgage payments on a 20% higher amount (with the pension fund), the bank could be tempted into lending 20% more money.
   All the major players in this deal can benefit from it.
i)The private equity management company selling will benefit from a good profit from the sale of the company which will allow them to pay off their own mortgage on the subject company and leave a large profit that will have been relatively easily achieved.
ii)Both banks involved will benefit on the selling side of the deal and the buying side. The bank on the selling side of the deal will receive there mortgage completely paid off as well as an early repayment charge which will no doubt give bankers bonuses a boost. The bank on the buying side of the deal will receive fees involved in a new mortgage, as well as the interest which will continue to flow in. These could actually be the same bank, which would add to its vested interest in making this deal happen as double the fees would be received. .. You can see exactly why banks and private equity companies have struck up such a good relationship in the years leading up to the economic crisis!
iii)Individual investors will benefit from interest on their investments which is paid by the private equity management company when successful.

So there are no losers in this situation?
Well, there are, but you can see all about that in depth elsewhere in Anti-Crisis Economics.

Those directly involved in the deal can all benefit from the buyout deal, but unfortunately there are constraints on the buyout business which can become more restrictive on this type of 'business' with the passing of time.
   For the private equity buyout business to be successful, certain specific economic conditions are required. One condition is that there needs to be a growing amount of available money for investment into pension funds. If the total amount of money going into the financial system for these types of investments was to stop growing, it would affect the size of the loans that could be made available by the banks. This would make it difficult to sell big businesses at a profit. Basically when everyone who can afford a pension fund has one, and the rest of the population can not afford one, this business is likely to hit a wall. In this event pension funds invested in private equity  buyouts would suffer. However, whilst this may happen, bankers and private equity company staff will continue to collect their salaries even though bad decisions have been made on how the pension funds were invested.

   In the example explained above, a second pension fund has increased the value of the private equity subject company. The problem is the company does not have to actually improve its product or service or make any other changes to the business for this to happen. But in financial system that was based on reality, major changes in the purchased company would have been required for the value to grow this substantially. The first reason being that the company was in substantial debt after the first buyout, which should have de-valued it immediately.

NORTHERN ROCK ; The New Owners, The Virgin Group.

On 17th November 2011 it was announced that 'Virgin Money' were going to buy Northern Rock PLC for £747 Million.

Virgin Group is a British Branded Venture Capital Conglomerate and consists of more than 400 companies around the world.
A Venture Capital Conglomerate  borrows from banks to buy businesses which obviously increases the costs of those businesses as the debt for the buyout increases its costs until the finance is paid back to the bank.

Although it may be that Richard Branson has paid his own money for this bank the normal procedure would be to borrow 80% to 90% of the money from a bank and back the mortgage with a pension fund which would initially pay the mortgage. This would also remove most of the risk from Virgin Group.

As far as we are aware there are no rules which would prevent the Northern Rock Bank from providing the mortgage to Virgin Money to buy the bank.

Although the Bank will be in debt for some time, the price paid is judged by many to be a give away. If so the debt incurred will hopefully not become a problem for the new bank.

What is of more significance to us is how the new bank will operate.

The failure of Northern Rock was blamed mostly by the media on Sub-prime Loans. But what was not made quite so clear by parts of the media was that the debt for the U.S. sub prime loans had also been mixed with other types of U.S. debt which for some reason has had far less publicity. This debt included debt linked with Private Equity Buyouts. The problem with Private Equity Buyouts is that it adds costs to a business often without adding any benefits to the business.

-In the run up to the crisis, many businesses which were owned by private equity management companies in the U.S. were running into problems due to the debt they were burdened with. Due to the way that banks mix up debt, mortgages were being affected by failures in private equity and other precarious investments in banking. Endowment type mortgages were failing as a consequence. (Endowment mortgages are funds where your mortgage does not immediately pay for your home, but will pay for other business investments instead. The return on this investment should then pay your mortgage unless of course these investments should go wrong.-Anti-Crisis Economics explains why these investments go wrong!). In addition to this, many people were losing their jobs as companies managed by private equity management companies were going out of business.-Some had sub-prime loans, but if they still had their job they would still be paying their mortgages. 

The future of the Northern Rock Bank must be to learn from the mistakes of the past. Linking the business of putting roofs over peoples heads of ordinary working people and their families to the pointless and            un-sustainable re-mortgaging of businesses and property portfolios as well as investing in 'casino banking' in the stock markets is what led to the bank having to be bailed out. It was not caused by lending money to buy homes for the working people and families of Britain.

We would therefore wish good fortune on the Virgin Group and the new bank. But we do hope that the bank gives priority to the needs of the British people in the way of mortgages for people to buy their own homes as opposed to the kinds of investment which contributed to the crisis which has been high-lighted in Anti-Crisis Economics.