Clash of the Titans.

Opinion

Whether you subscribe to conspiracy theories or not, it has to be said that the current financial crisis is certainly gearing up to be a Clash of the Titans. Could it be possible that all this was predicted by those in power in Europe many years ago, and so they decided to create a Super State to be in contention?

Peak oil, climate change, water and food shortages aside, the Bilderberg group met for the first time in 1954, and a European State was conceived. Ever since then it has slowly been crafted and we have today a group of Nations acting as one.

Is it possible that all those years ago, those that conceived the Euro Zone could predict that the USA and China were destined to be the world's financial super-powers, and that Europe needed to go forward as one in order to compete?

I believe it was, and we now see a Clash of the Titans as never before. If one takes a look at each crisis that occurs, it's like a world war. Each State, Europe, China and the US, is playing politics and driving the others into potential depression almost on a weekly basis. The Chinese with their pontifications of not letting the Yuan show it's true value, the Europeans with "Stress tests", and of course the US with the Federal Reserve constantly printing money and asserting it's muscle around the globe for resources. None of these are exclusive to any one State, in fact, they are all doing it in one way or another, but it has to be said, week by week, we get new data which put's one ahead of the other.

Of course, peak oil, water, food, climate, is a great leveller.

Those that have been left behind and having to play catch-up are catching up fast. The other BRIC countries especially, are speeding up the inside with the velocity of a bullet, determined not to be left behind thanks to the influence of the Chinese in their ranks. And of course, Russia supplies gas, so they have, in my opinion, the ultimate upper hand. Regardless of who uses the energy, the ripple effect means that even the US who don't get gas from Russia are dependent on their gas.

So we see a constant sprint race between these countries, and it's gearing up to be an economic war. Not a single shell will be fired but there will be one winner. And like corporations, they amalgamate in order to be stronger, so the smaller countries are siding up to those that they believe will be the winner in the end.

The losers of course are the people, no one can deny that without the worker termites keeping the mound running, the whole thing collapses. Only time will tell when that will be, but rest assured, it IS coming.

Kieran.

EU banks stress test? Shock surprise? Not on your Nelly!

A very brief post today, we are awaiting the results of a "European Banks Stress Test".


Even before the results are released (and it's 8:30 am UK time), I am doubtful about their authenticity. Let's not forget they are two weeks overdue. The tests were completed a while ago, but there were "delays", in releasing the results. It has to be said that no matter what the tests said about the banks, there is absolutely no room for manoevre for the EU to say anything other than "everything is fine". I've no doubt there has to be a few minor Spanish "Caja's" that will be facing intense scrutiny, but anything other than that (i.e a major financial institution in trouble) and that could trigger a complete collapse.

So in anticipation of the results, and the fact that there has been plenty of time to "sex-up" the report, leaves me in little doubt that there will be no surprises today. Overall, it is my gut feeling that the banks are still struggling for clean air, and so those that are aware of how figures are now being massaged to tell share holders and investors what they want to hear, will still be advised to exercise caution. Only today I read that Dell, the computer manufacturer (and I quote from the BBC): "Dell has agreed to pay $100m to settle charges that the computer maker used accounting fraud to make it appear it was meeting analysts' profit forecasts."

There is no way any report is going to say anything other than "all is wonderful". I have a gut feeling that Ben Bernanke was a test run for market confidence recently when he said that the US economy was "unusually uncertain". This sent markets tumbling, so on that basis, the EU now knows that any market confidence is quickly eradicated with bad news.

So no bad news today... and if I'm wrong, I'll leave this here anyway.

Of course, there may really be no bad news, but going by what I'm reading, and how various banks are still conducting themselves, I don't believe that for a moment, sorry. I predict confidently that barring another huge "quantitative easing" program, and more bail-outs, we will be in yet another recession very soon.

Finally, whilst this is conjecture and my promise is to give fair warning of such, have you noticed how there is no "bad news"? When we had the collapse of 2008, Michael Howard MP complained to the BBC that Robert Peston (Bongo Bob - the drum of the city as I call him), shouldn't have reported so quickly causing the markets to suffer even more.

Even now, when reading the BBC and Bloomberg sites, it's scattered with good news, and yet, when I read further away from the mainstream, I still see some very worrying trends, especially in the US housing market.

Here is the Baltic Dry Index which is an indicator of good travelling around the world by sea. Reading this would you take comfort in the global economic recovery?

Baltic Dry Index

And this from JP Morgan is sobering.

It seems the phrase "No news is good news" has taken a new twist if it's not even being reported.



UPDATE Saturday 24th July 2010

Well we have the results and they have certainly been massaged as far as possible to show positivity, but, it has to be said, even with all that manipulation, they still don't look good.

I'm amazed how investors put up with even the most basic manipulation, the release of this data, after markets close on Friday afternoons. I know it's obvious, but that gives everyone the weekend to forget about the data and by Monday, they're chomping at the bit to buy up those cheap stocks.

As for the actual manipulation, it's appalling that we just can't seem to get any straight answers. Let's not forget, these ministers, politicians, civil servants are paid by us the general tax payers, and yet even now, after all what has happened, they are still messing around with the numbers. The most obvious is only accounting for sovereign debt.

I'm not going to critique in depth because The Daily Telegraph does a much better job here.

About the only decent thing to come out of these tests is that they were actually completed in some harmony by all 27 states. However, the opaqueness of the outcome doesn't inspire confidence at all, and my gut feeling is this was purely a way of all banks getting a gauge on each other.

So to summarise, these tests were only for the current sovereign debt held by the banks and not for the debt being held until maturity. The only conclusion is that this debt is so toxic, it doesn't bear contemplation... otherwise, why not include it?

Mass confusion

I read an article recently where the writer was insisting that "peak oil" was pure fantasy and that peak oil theorists (such as me) were only casting doubt and confusion which is hindering a potential economic recovery.

Whilst I do believe that public perception of pretty much anything, from climate change to water shortages has a huge influence, it has to be said, that questioning any theory is imperative. Not only to gain more knowledge and the truth as it were, but also to continue the debate and keep it at the top of the agenda when it comes to potential policy making at Government level.

However, we have to beware of confusion.

Confusion within the peak oil theory is wide ranging, but the most obvious is that of "oil running out". No peak oil proponent worth their salt would ever say that oil is "running out" that would be complete nonsense. Aside from anything else, oil we use today was created millions of years ago, and it is still being created somewhere deep underground as we speak, so it will always be around. We could never extract every single drop that would be impossible. It would be like trying to get that very last drop of cola from the bottom of a cup; no matter how much you suck, there will always be a bit left.

Confusion also exists when some people think of oil. The majority of us if asked about how we use oil, we would say for our cars. This is understandable as it's our most direct contact with oil, and it's how most people think, however let's get this into perspective.

Oil is involved in every single aspect of our everyday lives if you live in the "developed, "first" or "Western" world. The shirt on your back, to the paint on your walls, to the food in your belly, if you look around as you read this, you will not see a single thing that at some point hasn't been processed in some way or created by oil.

Even the water from the tap gets there via pumps run on electricity, created at coal power stations, with coal mined, processed and delivered by oil. The floor beneath your feet whether wood, concrete, tiles etc has been processed by oil.

So, to get back to our journalist friend, there is a confusion that oil affects us directly, only if we put it in our cars, when the truth is, that oil is involved in every aspect of everything.

The end of oil age is not the end of oil, but the end of "cheap oil". If oil becomes rare, and more expensive to extract, then the cost of it will rise. By how much no-one really knows, but as a simple example, think back to those Christmas shopping days when rare toys that every child wants are being sold at extortionate prices. When any supplier has a product that everyone wants, the price goes up. The thing with oil is that unlike the child's toy, we cannot survive without it. With expensive oil, comes expensive lorry trips, which means that costs have to be borne by the food on the supermarket shelf. How far away is the day when the loaf you buy costs more to ship to the store, than the loaf itself?

Well actually the answer to this is even more painful. Not only would it be more expensive to ship to the supermarket, but it would also be more expensive to grow, process and then ship. In fact, let's take a loaf of bread, and see how much it depends on oil before we finally have it in our belly.

For the purpose of simplicity, we'll avoid the other ingredients such as yeast, water, salt etc, and concentrate on the basics; the corn.

We plough the field > oil based tractor
We plant the corn > oil based tractor
We water the seed> oil based or electricity powered pumps
We fertilise the corn > oil based tractor/natural gas based fertiliser
We reap the corn > oil based combine
We transport the corn to silo's > oil based lorry
We dry the corn in silo's > Oil/gas based heaters
We ship the corn to a mill > oil based lorries
We turn corn into flour > oil/electric mill
We bag the flour, then ship it to bakery > oil based lorry
We bake the bread > oil/gas/electric machinery/ovens
We package the bread > oil based plastic bags
We load onto pallets, then onto lorries > oil/electric based forklifts
We ship to wholesaler > oil based lorry OR
We ship to straight to supermarket > oil based lorry
Unloaded by hand and stacked on the shelves > no oil energy, just human energy.
Consumer arrives at store > oil based vehicle (usually car/bus/train)
Bread purchased, packed in plastic bag (usually) > oil based plastic bags
Consumer journey's home > oil based vehicle (usually car/bus/train)
Consumer eats bread.

Is that the end? Unfortunately not.

Customer throws away plastic bag
Refuse vehicle collects bag > oil based vehicle
Tips refuse into landfill
Landfill vehicles move refuse around > oil based vehicle
Landfill finally full, covered in topsoil > oil based vehicle


Remove cheap oil out of that process and you have an extremely expensive loaf of bread. Take oil out of ALL of the process and that bread is almost priceless. The reason for this is because the processes still need to be completed, so the job will have to be done by human energy and that is more expensive than any other energy we have at our disposal.

To make this point, we only have to look at the initial step in the process, the ploughing and sowing of the seed. To grow the acreage of corn that we need today would take thousands of human beings using animals, and all that would take wages; billions of dollars worth!

As a statistic, a single barrel of oil (approx. $70 @ 14/7/10) contains the equivalent of 21,000 man hours of energy. That means that for human energy to compete with oil energy, human beings would need to work for $0.003 per hour. That's a third of a cent per hour!

I do hope you begin to understand the value of cheap oil and how we have no chance of ever matching it.

The problem of course, when cheap oil is in the past, is twofold. Firstly, if you have a barrel of expensive, hard to get oil, do you grow corn for food, or make plastic pumpkins for hallow e'en?
Secondly, how do you allocate that cheap oil? Is it right that some will starve because of higher food prices, and yet a celebrity can still buy a $30,000 handbag which has been made and shipped from China?

Any sensible reader will understand that the only losers will be those at the bottom end of the social spectrum, this will never change, despite all the will of the world. The people at the bottom will suffer more and more as the value of food increases. In fact, as time goes on, those with generous middle incomes will also join the poor in the struggle for food, there can be no doubt about that. The higher the cost, the more people will be in food poverty.

So the journalist I mentioned at the beginning of this article needs to think very carefully about what they are saying. Even a very slight decrease in the amount of oil we extract have will affect the prices of the most basic of goods, not just the fuel at the forecourt. This is a very short sighted view and despite being popular (because the writer is telling people what they want to hear; that everything is fine and the sky isn't falling), it is also patronising.

The question you need to ask is always the same:

Are we producing enough oil to meet demand?

At the moment, it is possible that we are, but there are a number of official institutions that are beginning to publish data suggesting we aren't or we won't in the very near future:

Joint Operating Environment (US Military review on energy security)

OPEC: Peak Oil Is Near.

Peak Oil will hinder world's development

International Energy Agency (IEA) Supplies are running out fast.

UK Official Parliamentary Panel on Peak Oil


I hope that gives a good perspective on how important cheap oil is to our Western way of life. It has to be said that over 1 billion people on the planet live as they did before the age of oil, so oil to them has never been and probably won't be an issue. Estimates on world population also suggest that there has been 115 billion people on Earth in it's entire history. This is an amazing statistic because if correct, that means that 6% of the entire human population of the planet is still alive today!

Of course as population increases, the need for our bread increases too, so we will need more and more cheap oil in the future.

Best regards.

Kieran.

Exponential growth.

"Exponential Growth"; a concept human beings will never appreciate nor fully understand. It is the process of accumulating very rapid growth in a short period of time, for instance:

2 x 2 = 4

However a simple calculation such as 2 x 2 x 2 x 2 x 2 x 2 = 64

We can see how by multiplying such small numbers together, we soon rack up some very big numbers indeed.

Here's another example. Just supposing we have a bank account that pays 5% interest per year.

We invest £100.

At the end of year one we have our original £100 + £5 interest giving us a balance of £105

Year two we take the £105 balance then add 5% interest (£5.25) which gives us £110.25. We continue the process as follows.

Year 3 £110.25 @ 5% interest = £115.76
Year 4 £115.76 @ 5% interest = £121.54
Year 5 £121.54 @ 5% interest = £127.62
Year 6 £127.63 @ 5% interest = £134.00
Year 7 £134.00 @5% interest = £140.70
Year 8 £140.70 @5% interest = £ 147.74
Year 9 £147.74 @ 5% interest = £155.13
Year 10 £155.13 @5% interest = £162.90
Year 11 £162.90 @5% interest = £171.05
Year 12 £171.05 @ 5% interest = £179.60
Year 13 £179.60 @5% interest = £188.58
Year 14 £188.85 @5% interest = £198.01
Year 15 £198.01 @5% interest = £207.91

So we can see that after 15 years of a modest 5% interest per year, our initial sum has doubled. This is called "compound interest" and it shows exponential growth by increasing a number by a percentage, then increasing the sum of the original number plus that percentage by another percentage and so on.

A 7% increase per year will mean the initial sum will double in 10 years.

If we take a 10% increase then the initial sum will double in roughly 7 years.

And, whether the timespan is years or days or centuries, the doubling will be the same pro rata.


So we can see that exponential growth has the potential to cause huge problems. Here are another couple of examples.


A headline saying a prison population will grow by 7% per year doesn't mean much, but saying a prison population will double in 10 years really hits home; and yet they mean the same thing.

The world economy doubles roughly every 28 years (about 3% per year), so exponential growth on a finite planet is impossible. Consequently, we will struggle to meet demands for raw materials very soon.

So when a politician talks about "economic growth at 3%" we feel this isn't a huge amount, but after 30 years it has the potential to double in size.

Another good example of exponential growth.

A bacteria sitting in a bottle doubles every minute and by 12 O'Clock the bottle is full. At what point is the bottle half full? 11:59 of course. The bacteria realise there is a problem at 11:57, when the bottle is just an eighth full and find a further three empty bottles. All that new space they breathe a sigh of relief, but at what point will all four bottles be full? 12:00 bottle one is full, 12:01 bottle 2 is now full and by 12:02 all four bottles are now full.


So how does this apply to us today?

Well, quite simply, we can see that in a short space of time with today's use of resources, exponential growth is a serious problem. Whatever sector you choose, the increases are dramatic. Population is a great example. The world population hit 1 billion in 1804. From the beginning of time until 1804, we only had an increase to 1 billion. Then in a mere 123 years to 1927 we hit 2 billion. Then it took just 33 years to hit 3 billion in 1960, then a mere 40 years to double from 3 billion to 6 billion people in 1999.

That is an exceptional statistic, and should make anyone pay attention to exponential growth.


But why did the population hit so high so quickly?

Some argue that it's advances in medical technology; some that it's the "green revolution" which was the use of mechanization and fertilisers in agriculture, but either way, this all has a common factor. The abundance of cheap fossil fuel energy.

We began to use coal in the 18th century as a fuel, which then gave rise to steam engines and hydraulics. The amount of energy packed in a sack of coal is phenominal, and inventions utilising this energy came thick and fast. Up until this point, we used animals to assist us with agriculture, but of course they are of limited use; the main problen being they get tired and can become ill.

Fossil fuels meant a machine could run indefinitely, and obediently. Even today we have steam engines still running that were built almost150 years ago.

When mechanization in agriculture increased the amount of food we could grow, consume and move around, and medicines based on petroleum products improved our healthcare, we had created the perfect storm for rapid population expansion.

Medicines dependent on oil? Yes indeed:

"Petrochemicals are used to manufacture analgesics, antihistamines, antibiotics, antibacterials, rectal suppositories, cough syrups, lubricants, creams, ointments, salves, and many gels. Processed plastics made with oil are used in heart valves and other esoteric medical equipment.

Petrochemicals are used in radiological dyes and films, intravenous tubing, syringes, and oxygen masks. In all but rare instances, fossil fuels heat and cool buildings and supply electricity. Ambulances and helicopter "life flights" depend on petroleum, as do personnel who travel to and from medical workplaces in motor vehicles. Supplies and equipment are shipped -- often from overseas -- in petroleum-powered carriers. In addition there are the subtle consequences of fossil fuel reliance."

http://www.alternet.org/health/57525

So it is safe to come to the conclusion, that thanks to fossil fuels, we live longer, multiply faster and eat more. And the more we increase the population, the more need for more "stuff" and the more need for jobs, houses, money etc etc etc.

So applying common sense to this scenario, what is the only thing that could halt this exponential existence?

Expensive fossil fuels. A decrease in the amount of fossil fuel available will increase the price which will put it out of reach for many people and many production systems. And oil is involved in everything that makes our world economy tick. Reduce the use of oil through either lack of it, rationing, price increases, in fact any way at all, and the world will begin a decline.

How does exponential growth apply to all this?

What goes up, must come down or so the saying goes. And as well as exponential growth, we also have exponential decline. If we double our economy by using 5% more fossil fuels every year, then the same occurs in reverse. If we lose 5% of our oil availabilty per year, then in just 15 years our oil supply has halved. Halving the oil supply means halving the economy, the abundance of food and probably sacariest of all, half the world population.

We currently increase our demand for oil by 2% per year, a tiny amount you may say, but remember those exponential growth figures? That means that in 35 years, we will have doubled the demand for oil at todays rate. If we cannot meet demand and the amount of oil we take out of the ground begins to decline, then the combination of 2% demand and 2% decline means that in a mere 17 years we will only be able to meet half the demand. This is potentially the most dangerous scenario human kind has ever faced.

Alternative energy - moving from fossil fuels.

Many people would argue that the increase in clean energy negates the increase in demand for fossil fuels. In simple terms, if we increase alternative energy sources by 2% per year then that will counteract the increase in demand for oil. Is it that simple?

Unfortunately not and for a number of reasons.

Firstly, that will only keep us at todays current consumption of approximately 85 million barrels per day or 40,000 gallons per second. In order to eat into that figure, we need to increase the alternative energy figure dramatically, however we have another problem.

Whilst wind turbines, solar arrays, hydro etc are wonderful concepts, our infrastructure depends on oil. There are no mass produced solar tractors, no electric sawmills; you get the idea. In fact, even if there were, we still need oil to make all the components that create wind turbines, solar arrays and electric cars. As an example, a single rubber car tyre takes 40 litres of oil to make and we haven't included the oil used to ship it, fit it or even repair it if we get a puncture.

Clean energy is unfortunately a folly in the current paradigm of the 21st century.

The answer?

There isn't one unfortunately. We can be sure of two things. 1) because of history, we know that the earth can sustain a human population of 1 billion and 2) oil is a finite resource. It may never "run out" but it will shift from a cheap energy to a very expensive energy, the questions are when, and how quickly?

My advice would be to prepare yourself as best you can. Get used to cheaper food, demand less "stuff" and start to learn basic skills.

As I have mentioned earlier, even if we could introduce alternative energy immediately, almost every product demands the use of oil, especially platics. So that new wind turbine needs a factory to create spare parts, and that requires a workforce, which require food and housing, which requires mechanized agriculture. I think we can see the problem is very clear.

So beware of exponential growth, because it creeps up like the tide on the beach and will catch us all by surprise very soon indeed.

Best regards to you and those you love.

Kieran.

Public sector jobs declining, Government bonds up, what does this mean for us the public?

Firstly, let's just establish a couple of definitions. And please don't be embarrassed that perhaps you didn't understand what these mean or how the work, you are among many that don't, or many that pretend they know, but haven't got a clue and bluff their knowledge to try and prove they are aware of what's going on.

Public Sector Employment.

Anyone that relies on the state to pay their wages. However it also has to be remembered that many private sector employment relies heavily on the public sector. For instance, if a company supplies a local council with goods or services, then they too will be affected by cuts.

Should there be cuts? Well this is the big question, after all, if the jobs weren't needed in the first place, then why were they created? Governments sometimes increase the size of the public sector to hide poor employment. There is no evidence of this in the UK or US, it's merely an observation generally. It's easy for a Government to instruct local councils etc. to employ and create new tiers of employment because it does two (of many) important things. Firstly, it keeps the unemployment figure down, secondly, the public feel more confident in Government if they see more police, firefighters, better libraries etc.

Finally, please remember the basic, common sense figures for public sector wages. If, for example and for the sake of simplicity, you work in the private sector, earn £10,000 per annum, and pay £2,500 in taxation from that wage, then there needs to be at least three more like you to cover one public sector wage earner also earning £10,000. All public sector wages come from taxation. This is very simplistic, but the principle is sound. Governments also take money from other taxation such as VAT, Capital Gains, Inheritance etc. but this shows that you need a lot of private secor wage earners to cover the public sector. Therefore, with 8 million public sector wage earners, we need at least 36 million private sector workers to cover their wage bill in taxation.

But there aren't so where does all this come from?


Government debt, gilts and treasury bonds.

So how does government make up the shortfall in this public sector expense? And, public sector wages make up a relatively small amount of Government spending, what about roads, libraries, new ambulances... the list is endless.

Some money will come from the private sector investment. A private company may invest in an airport for instance, and get a return on their investment at a later date through exploitation of the site. This helps the Government by them not having to find public money from taxation, and also the company assumes (in most cases) responsibility for running the site.

Other money will come from Government Treasury Bonds (or gilts as they are sometimes called). A government will issue a Bond and promise to pay the bearer of the Bond their original investment plus interest.

So, as an example and with simplistic figures, a Government issues a bond for £100 with a 5 year term and promises a 5% return. That means that at the end of the term, the investor can cash in the bond and receive £105, a profit of £5. The Government takes the original £100 and invests it in the country (better trains for instance), this hopefully improves the economy, and allows the payment of £105 at the end of the 5 year term.

The Government is basically saying that although they haven't got the £100 today to pay for the new trains, they believe that they can increase the countries profits within the 5 years to pay that bit extra to the investor.

Bonds are a loan like any other. Government borrows and pays back the original sum with interest at a later date.

So governments use this money to make up for the shortfall in money they need to run the country, and the money they take in taxation.

Why don't they just take more in taxation, rather than pay more at a later date?

Here's the rub. Governments are not popular when they increase taxes, so they don't. They borrow and pay back later. Investors have confidence that no matter what happens, the Government will find the money to pay them back as promised when the bonds are cashed in at the end of the term.

If a Government doesn't, or can't pay back the money, then they "default". Much like you or I, when we fail to pay back a loan, our credit rating goes down and we find it more difficult to borrow in future. We are considered a higher risk because we have shown we don't pay when we must, therefore, with increased risk comes increased interest. You may find fewer lenders willing to offer you credit at reasonable rates if you have a poor credit history. You will probably get a loan, but at a much higher rate than someone who has never defaulted.

The same goes for countries. Investors will stop buying their bonds (or government debt as it is sometimes called), if they can't pay back when the bonds are due for redemption.

So, in prder for Governments to reduce their debt, and have the money to pay for the bonds that come due, they decrease public spending (usually public sector jobs and services) and increase taxation from the population.

This is where many countries are today, including the UK. It doesn't take a genius to work out that if one were to pay back a credit card using another credit card, there will be a point where it cannot continue. Governments such as Greece are doing just this, which is why they are needing "Bail-outs", or to put it another way, another financial institution promises to cover their debt, in the case of Greece, the European Central Bank and the IMF (amongst others).


What does that mean for the population?

It means that the Government needs the population to work harder, for less, to pay more in taxation to cover the debt. Investors know that the Government won't default unless it really has to, so they demand ever higher returns. 5%, 8%, in some cases such as Greece, 13%+ !

The population is taxed more, public sector jobs and services are cut, all to keep up with the debt. So for a worker within the UK, it is now up to you to pay back all that debt. You may have to get two jobs to pay your bills as they rise, take pay cuts or shorter hours (or both!) because credit is in short supply, and worst of all, you may borrow more to continue a lifestyle you are accustomed to.

All of this is bad news for an economy and for the citizen.


Inflation.

Inflation is simple. As time goes on, the money within a country increases. This is called "the money supply". The more fiat (or paper) money within an economic system, they less value it has. For instance, if grass was used for money, very soon, you would need mountains of it to pay for goods and services. This is because it's everywhere and if you need more, you grow some!

So grass would never work.

However if banknotes are very difficult to counterfeit, and everyone accepts them as money then that's fine. So we use paper money.

Over time, more and more paper money comes into circulation, not just through printing, but through the fractional reserve system. This means that a bank can lend money it doesn't have, by "creating" it from thin air.

Yes, it's absolutely true. They literally "print" new money and it's perfectly legal.

When you borrow from a bank for a car, house, boat, credit card, in fact anything, the bank opens a new loan account for you on a computer, and types in the amount you have borrowed. Then, you must pay that back over time plus interest.

This is why, over time, things get more expensive through inflation. If there's lots of new money getting into the system, the value of that money decreases, because iit's everywhere! Your £100 this year may buy 100 loaves of bread, but by next year, because of 5% inflation, those loaves now cost £1.05, so you will only get 95. If inflation stays at 5% the following year, then with your £100, you'll only get 91 (because they are now £1.10) and so on. This again is simplistic figures for easy reference, but the principle is correct.

Of course for Governments with bonds this is wonderful. High inflation is a tempting way to pay back bonds. Afer all, if the bond you issued for £100 is now worth £105, but your inflation is 10%, you actually win! However it doesn't work like that. As inflation increases, governments need to increase the return on the bonds because investors can see they won't make any money. The trick for an investor is to guess the right term length, with the state of the country, and if they have any doubt, then they turn to a new country to spend their money. Inflation kills investment leaving the taxpayer to cover the money not raised in selling bonds.

The upshot is....

As inflation and public debt rises, the population is forced to work harder, and some will lose their jobs. They are almost enslaved because at some point, the amount they are working doesn't give them the luxuries they work for such as holidays, nice clothes etc. they are literally working to eat, live and pay taxes.

This has happened many times in history, most recently in Zimbabwe where people saw their savings in banks worthless due to inflation. Don't forget, if you have £100 in the bank, unless the bank has a good interest rate to cover inflation, then you are losing money. Plus, if inflation is so high that very quickly you need that £100 to buy a loaf of bread, your savings have evaporated. This is why people buy assets such as houses, wine, gold, paintings, jewellry etc. As inflation goes up, so does the value of your investment, therefore protecting your wealth.

How many times have you heard someone say that "I bought this house in 1990 for £50,000 and now it's worth £150,000. I've made a £100,000 profit!" This is just nonsense. If that same person had've bought £50,000 of coal and stored them in a shed, today they would be worth £150,000. The house's value has not increased at all, the perception of increase is all that has happened. However, if you had put the £50,000 in the bank at poor interest, it would now perhaps be worth just £75,000. This is because inflation has taken it's toll on it. It is after all just pieces of paper, given a vlue because someone is willing to exchange something tangible for it such as goods or services.

Do not be fooled by this illusion. This is why when you put £100 in a pension pot today, when you retire in say, 40 years time, it will barely buy you a beer. So when you retire, you need a LOT of £100, and they rely on the markets to increase their value through investment in tangible assets and companies. This was one of the big pension scams of the 20th Century, which today is beginning to unravel at an alarming rate.

We are moving into a world of unemployment, no money, more debt and the workforce having to work harder for longer (yes that's why the retirement age has increased). There is no quick fix, so it's up to you as an individual how you deal with it. As I've said many times before, this is not difficult to understand, but if you make the effort you are many steps ahead of everyone else and will fair much better in the years ahead.

Good luck.

Kieran.