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Telling The Truth About Debt

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http://www.emilewoolfwrites.co.uk/2015/11/03/telling-truth-debt/

Last month I referred to the recent opinion of George Bompas QC that IFRS accounting criteria do not meet the statutory obligation for UK and EU financial statements to give a true and fair view. I also noted that IFRS 9, the latest attempt of standard-setters to endow loan-loss provisioning with a requisite degree of prudence and objectivity, hardly improves matters because it allows management to assess, subjectively, the probable loss on impaired loans over the following 12 months.

And not just banks: sub-prime lender Cattles Plc was pushed into administration with huge irrecoverable losses in its loan portfolio that were not reflected in its accounts under IFRS accounting rules. Its claim on behalf of unpaid creditors against auditor PwC has now been settled on confidential terms.

A multi-million pound compensation claim has been brought against former directors of Lloyds TSB (now Lloyds Banking Group) by more than 6,000 former shareholders, alleging that the HBOS loan book was vastly overvalued when Lloyds took it over in 2009 – again due to flawed accounting that failed to provide for losses. This issue will not go away until the rules require lifetime provisioning at a loan’s inception.

A case study in economic disintegration

Debt management is the order of the day at all levels. Bankers have to lend money in order to make money – even in Greece, where most self-employed business people live on credit and spend a high proportion of their income on debt servicing.

But since basic lending criteria are stymied by untrustworthy credit data, tax evasion being the norm, Greek banks have had to devise their own “correction” model for estimating real (rather than reported) income.

Greece is a case-study in economic disintegration. Its government is even considering enforced use of credit cards, just to be able to trace the money. Yet co-operating with officialdom is impossible when government itself is perceived to be corrupt, officials demanding bribes before performing any ordinary duty. Even tax enforcement officials have a “bribe schedule” which shows the size of bribe required to get a tax liability reduced.

It is no wonder that the digital currency Bitcoin has become so popular in Greece: its embedded characteristic of absolute anonymity is a charter for money launderers and tax evaders.

The Greek breakdown sounds a clear warning of the inescapable consequences when (a) legal tender laws compel traders to adopt a currency susceptible to debasement by bureaucrats holding the money-printing levers; (B) purposeless regulation drives enterprise into an administrative straitjacket; and © penal tax levels are arbitrarily assessed and collected.

Demand stimulus has not worked

Repeated dosages of quantitative easing to kick-start economic recovery have proved totally ineffective everywhere. Yet central bankers are talking about doing it again – in larger amounts. Vast billions of counterfeit do nothing for the wider economy. The beneficiaries are those in financial sectors who get their hands on the new money before its ink is dry, and cannot wait to blow it – extravagant cars, yachts, private planes, and (quoting Prospero) all thosecloud-capp’d towers andgorgeous palaces” – not to mention stock value bubbles in those sectors.

Benighted economics gurus will try anything before they recognise that production – not demand – holds the key: with low taxes, low regulation, sound money and free trade, who would need demand stimulus?

The obsession with spending rather than saving has led governments everywhere to suppress interest rates to near zero. Under this destructive economic model governments are the worst offenders. In their craze to spend cheap money they allocate resources blindly into projects of dubious viability, for which there was no public demand in the first place. Result: huge taxpayer-borne losses.

No one can tell the truth because then a lot of rich people will suddenly become poor like the rest of us.

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For me, I am starting to equate the word "debt" with "promise".

Many people are performing activities based on a promise to be kept in future. I don't think enough weight is being applied to the probability that those promises will be honoured in any meaningful way.

We have got used to £'s (promises) being inflated away. When/if deflation rules the day, those promises will simply be broken. Money (promises) really has meaning only if the value of it doesn't change significantly (either up, down or defaulted).

When people buy houses with large mortgages, I don't think they really understand what a huge percentage of their lifetime labour they are really promising to hand over, especially considering it comes from after-tax income. Low-interest rates makes it worse, they just hand over their labour for longer.

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When people buy houses with large mortgages, I don't think they really understand what a huge percentage of their lifetime labour they are really promising to hand over, especially considering it comes from after-tax income. Low-interest rates makes it worse, they just hand over their labour for longer.

People do not want to understand this concept. They want to spend Saturday in Ikea choosing curtains.

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When people buy houses with large mortgages, I don't think they really understand what a huge percentage of their lifetime labour they are really promising to hand over, especially considering it comes from after-tax income. Low-interest rates makes it worse, they just hand over their labour for longer.

Exactly. People celebrate when rates fall and they repay less every month, but they fail to realise that the total debt burden gets larger as rates fall. The total amount repayable rises as the rates fall. Deflation is an increasing burden on the debtor.

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People do not want to understand this concept. They want to spend Saturday in Ikea choosing curtains.

Spot on, most people fall into the trap of seeing reduced interest payments as a means to spend more money on stuff they don't need. If mortgage interest payments are reduced, the correct thing to do is to increase capital repayments, not buy tat.

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the correct thing to do is to increase capital repayments, not buy tat.

Exactly.

But the problem with people is that when you are swimming against the tide you begin to notice how deluded people's idea of wealth is and the poor financial decisions they make on a daily basis.. Living frugally and investing vs credit backed spending, hpc vs forever hpi, I'm rich because I have £350k locked away in a house I won't downsize.. I don't even need to continue you all know.

The problem is when you give good analysis, advice (granted unqualified financial advice but hey ho..) and give them resources to learn they will just disregard what you say and continue on the path to modern slavery and it gets to a point where you need not waste your breath. Leave them to it whilst smiling like a Cheshire Cat whilst you watch them make decisions that could bankrupt them should one small kick occur.

People don't want to learn they want to live 'the' life of non stop partying, they want to have the newest phones (previously guilty) and aspire to become landlords or property ladder baffoons shackled round the ankle and slaves to the banks by debt..

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The western financial system is debt based. Debt=money. If you hold the reigns of debt creation or are close to printing presses you can benefit. Due to this model of money creation, ponzi schemes emerge which enable a few average serfs to ride the ups in the hope of future gains.

The BoE said in a working paper in May that with banks creating 97% of our money supply, money creation (debt money out of thin air) comes first then savings. This is a direct contradiction to the mainstream ILF model where banks are a go between savers and borrowers.

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