Tuesday, 12 November 2013

In Denial About Inflation. Coinage in the UK.

This Blog returns to a subject of other recent Blogs published here

People tell us that "Being in Denial" is bad for you and me, for our relationships, for our businesses and for our politics. No one has a good word to say about being in denial. But, of course, it flourishes.

Governments and Central Banks in recent decades have crafted a real commitment to holding down price inflation to a couple of percentage points annually. They have also crafted a rhetoric which goes with that policy. In many - maybe most cases - they have succeeded and continue to succeed in controlling inflation.

Despite their success, governments and central banks seem hugely lacking in confidence about their ability to achieve what they have indubitably achieved. Faced with real examples of inflation, they sometimes go into complete Denial.

On the 15 February 1971, the pounds shillings and pence United Kingdom decimalised its currency and largely decimalised its coinage and banknotes. The coinage only became fully decimal in 1984 when the halfpenny coin was demonetised (a half is not a decimal unit). But ignore that anomaly and go back to 1971.

On the day of decimalisation, Royal Mail set the basic (now the First Class)  inland letter tariff  at 3p. Ignore the halfpenny and it is the case that you could not (even if you wanted to be difficult) pay for your 3p stamp with more than three coins.

Fast forward 42 years and you will find that the cost of sending an inland letter is 60p. But the coinage has not changed in those 42 years except for the addition of one higher value coin worth £2. The other coins in circulation remain these:

1p, 2p in "copper"
5p,10p, 20p, 50p in "silver"
£1 in "gold"

So if you wanted to be really difficult, you could now pay for your 60p First Class postage stamp with 60 coins. Coins which - incidentally - each cost more to mint than their 1p face value.

Something is wrong here. Why hasn't the 1p coin been withdrawn from circulation? Why are governments and the Bank of England allowing vast quantities of  expensive-to-produce and virtually worthless small coins to accumulate in jam jars throughout the United Kingdom? Why are they in denial about inflation which in the case I have chosen has seen  a 20-times (2000%) price increase?

If the coinage was tracking that level of inflation, then if you think three coins for a postage stamp (as in 1971) is a reasonable maximum, then the smallest coin should now be the 20p (since 3 x 20p = 60p).

Imagine trying to get that idea past those who guard us from Inflation. Why are they in such total Denial about what has happened over forty years?

There are two main reasons.

First, they don't want a discussion of long-term inflation. They don't want us to think beyond annual rates which have comfortingly low numbers like 2.2%

Second, looking at the total and pathetic failure to introduce the Metric system into the UK they don't want a repeat of those tabloid newspaper stories which held up Metric Martyrs  - sad people who refused to sell their bananas by the kilo - as heroes. From the perspective of the government and the Bank, Penny Martyrs in The Daily Express are too terrifying a prospect to even contemplate.

And so we are condemned to this junk coinage which is just a nuisance in people's purses and pockets. It costs more to produce than it's street value. Tons (or tonnes) and probably hundreds of tons (or tonnes) are stashed in jam jars, unused. Charities are supposed to be grateful if we dump these wretched coins  in their collecting boxes.

A rational approach would link the coinage to long-term inflation and would have a Target which looked something like this:

Specify the Maximum number of coins which a customer trying hard to be difficult could offer to a corner shop keeper for one single everyday commodity: a tabloid newspaper, a pint (or a liter ) of milk, a First Class postage stamp, a currant bun.

Three coins sounds a good number to me but I would compromise on five or six to allow the 10p coin to remain in use for a few more years. But even that compromise would meet a stone wall of resistance.

To be a bit fairer, this is not just a UK problem. In €uroland, they have their tiny 1 cent, 2 cents and 5 cents coins. And you can still see shop assistants struggling with these badly-designed and now virtually worthless coins, a dozen years after the introduction of the €uro.

POSTSCRIPT 13 November 2013 : The  Big Flaw in the Above Argument

I should have thought forward from my argument. If the smallest coin is 20p, then when Royal Mail wants to increase the price of a stamp from 60p it has to jump to 80p - an increase of 33%. If the smallest coin is 10p, it has to jump to 70p - an increase of nearly 17%.

In other words, the smaller the smallest coin, the smaller the minimum price increase which is possible. In principle, you can jump from 60p to 61p with existing coinage, which is under 2%.

Small coins thus serve an anti-inflationary purpose.

Go back to 1971 and you could say that the new decimal coinage was itself a contributor to inflation. Even making use of the 1/2 p coin, Royal Mail would have to jump from 3p to 3 1/2 p at one go - an increase of nearly 17%. Using only the 1p coin as a point of reference, the increase from 3p to 4p is 33%

Doh! (But I did think this up myself, over my £4.39 ready meal)

Big State, Small State? That's not really the Big Issue

The Prime Minister of the United Kingdom, Mr David Cameron, has come out in favour of a smaller state - what he calls a leaner, more efficient state. Of course, not quite a Tea Party state since this is the United Kingdom and we like to think we're not that stupid.

But Mr Cameron is, as usual, floundering. His white tie speech to the Lord Mayor of London's annual banquet was merely meant to make his audience think that if he is re-elected he will cut taxes paid by the rich. So a bit like George Bush. And not to be taken as an argument.

But if you do take it as an argument, then what matters is not how big a state is but what a state does and how well it does it. Faced with the choice between a big state which specialises in repression and a small state which ditto, there may not be much to choose between them. If you are on the receiving end of repression the Big Issue is how to stop it. You are not much interested in what percentage of GDP is absorbed by the state or how big is the fiscal deficit. That's something for those in the repressive state apparatus to have bun-fights about.

Nor is Big State vs Small State a timeless issue. It all depends on where you are. In war time, all states grow - sometimes hugely. They have a tendency not to shrink back to their previous size - too many people (like the whole of the arms industry) may  have acquired too big a stake in a big state. So it may take a deliberate political effort to shrink back the state.

Big State and Small State don't actually split between Left and Right. In France, there are no liberals. Every one thinks along Statist lines, left or right. Voters across the spectrum demand a Nanny State; they just disagree about whose bottoms should be smacked. France is a country of authoritarians - most of France embraced Nazism quite readily - and everyone expects the State to look after them and clamp down on everyone else.

Some states manage to be large  - in terms of the proportion of GDP they absorb - and efficient. This appears to be the case with the small Scandinavian countries. Others are large and grossly inefficient, like the United Kingdom. A recent book by Anthony King and Ivor Crewe, The Blunders of Our Governments documents this for the past thirty years. The satirical magazine Private Eye documents it on a continuing basis.

So for the UK and at this time, I  favour  a smaller state. I see no virtue in giving Them money to waste.

There are some very big areas which are easily cut back. We don't need nuclear weapons. They give our politicians ideas above themselves and they are extremely dangerous. Accidents can happen. We don't really need armed forces on the scale we have them. We only end up fighting colonial wars which we lose. Other countries don't seem to feel the need to be engaged in perpetual conflict. Let's join them.

Like France, we have a lot of Imperial pomp surrounding our government of which the House of Lords and the Royal Family are the most obvious parts. They should  be shut down. So should the Church of England. A state church is never going to be a spiritually significant organisation. Ours has far too many assets. They should be confiscated and applied to Good Works in the community.

And so on. Just in case you think I am being very one sided, I don't see any benefits to a Benefits-Culture. But one should remember that the Benefits-Culture is the deliberate creation of the Conservative Party which under Mrs Thatcher found it a convenient alternative to having an industrial policy  or a housing policy or a regeneration policy or indeed any policy other than handing out money.

Wednesday, 6 November 2013

Dogs or Children. The Choice is Yours

Every time a child is killed by a dog or seriously mauled, there are demands that the Government do something. It is happening again this week. The victim this time was four years old and she is dead from a sudden and unstoppable attack by the family pet in the family home.

The Government is reluctant to act for two reasons. First, it is (apparently) unclear what would be an effective thing to do. Second, it looks at the supermarket aisles stacked with dog food and reminds itself of the voting power of the Dog Lobby. Austerity hasn't bitten into dog keeping and still less into the hopeless sentimentality which surrounds these creatures.

One thing the Government could do is to reflect on how over decades it has tried to improve Road Safety and discourage Smoking. Legislation has been important - the introduction of breathalysers and seat belts, for example - but so too have publicity campaigns.

People should be made to think more carefully before they take in a dog, often free from some re-homing centre for unwanted dogs. The dog may be unwanted for very good reasons and the re-homing centre has very limited obligations to certify that it is not psychotic.

To be effective advertising needs to be blunt:

Dogs or Children. The Choice is Yours
Dogs and Children Don't Mix
Are you sure your dog is safe?

As for legislation, it needs to be better thought-through than the Dangerous Dogs Act of 1990. There should be costs to dog keeping just as there are costs to smoking. Here are some possible measures:

 -  Dogs should be licensed.
-  They should be limited to one per household.
-  When passed from one person to another, or from a re-homing centre to an end-user, they should need an MOT certifying that they are safe to own.
-  There should be an additional tax on dog food to fund the rehabilitation to those who have been mauled and traumatised.
-  There should be a One Strike rule. If a dog bites, it should be destroyed.

It might also be no bad thing to remind people that there are child-friendly alternatives to dogs: mice, hamsters, rabbits, guinea pigs, goldfish, budgerigars, cats. And that's a short list. Some of those pets have additional advantages: they don't bark and they don't shit on the pavements.

Think about it. Sentimentality often carries a high price.

Monday, 4 November 2013

The Case for Cash

Here in the United Kingdom, the largest bank note in common use is the £20. You would need five of them to pay for a cheap hotel room in central London and ten to pay for a moderately expensive one. A £50 note exists but is not in common use. Present one to pay for goods and both you and the bank note will be subject to very suspicious scrutiny. Normal people don't have £50 notes. In reality, most £50 notes have left the country. They are in Poland where they have been remitted by Polish workers in the UK.

In contrast, the UK groans under the weight of small coins - the 1p, 2p, 5p - which are kept in circulation as if there has been zero price Inflation since they were introduced over 40 years ago. You would need  200 penny coins to take out a coffee from a cheap chain coffee shop. You would need 250 coins to buy the daily newspaper I read (The Financial Times).

In €uroland, the 50€ note is in common use - at today's rate, it's worth £42.30. In the supposedly poor ex- Soviet Bloc Czech Republic, the 1000 Koruna note is in general use. That's £32.70.

So why does the UK not have cash in appropriate denominations, freely available and accepted?

The short answer is: the Banks. They find it cumbersome and expensive to handle cash, to take it in and to hand it out. But they make money when you use their debit cards and credit cards to pay for purchases. So do the credit card companies. As a result, we have a very big Lobby which would like to move us into a "cashless economy".And they want us to pay for it. And they don't care how irritating it is to stand in a queue while someone pays for their cigarettes or their bottle of milk with a card.

Then there are the Retailers. They don't want cash on their premises because it can be stolen. Fair enough. Perhaps more importantly, if you pay by card - and especially if you combine your credit card with their Loyalty card - then they can study your spending habits and target you accordingly.

Retailers are probably more interested in your spending habits than the NSA is in your emails.

Of course, there are other groups interested in your spending habits, notably criminals trying to steal your credit card or, nowadays, just the necessary name and numbers.

So we have two (or three if you count the criminals) powerful Lobbies opposed to what could be a fast and convenient way of paying - which is what Cash is.

If you want to make the Case for Cash, just start using it. Especially the £50 notes. And when they give you 1p, 2p and 5p  coins in your change - well, just hand them back or drop them in the Charity box beside the till. If enough people refused these coins, it would force them out of circulation.