Friday 22 June 2007

The Bank of "England" is out of control

There's been a lot of talk recently about private equity funds. The latest criticism addresses the low taxes paid by the funds' bosses. It's even being suggested that the current tax regime that applies to these funds may lead to a general disillusionment with capitalism itself:
...Such people may pay income at 40 per cent on their salaries and bonuses.

But by far the greatest part of their income comes from the money they make out of taking companies private. On these vast sums, they pay capital gains tax at a rate of just 10 per cent.

This means that a number of very fortunate individuals in private equity companies are paying very little tax on huge earnings.

Nicholas Ferguson, the chairman of SVG Capital, recently said that he felt uncomfortable with paying lower taxes than his cleaner. A smaller number of buy- out partners who can claim nondomiciled status in this country pay no tax at all.

I don't know enough about these funds to know whether it's correct to apply the 10% CGT rate instead of the 40% rate that a normal salary or bonus would attract. Instead, I wish to address a point made in today's Money Week by editor Merryn Somerset Webb.

The reason why private equity funds have been doing so well is not so much the low taxes paid by their owners but rather that artificially low interest rates give equity funds an advantage over financing by shares. The UK's bizarrely-named Bank of "England" has been on a binge:

If you wanted to keep everyone happy in the short term (the very short term, that is), you could just dole out 0% credit cards and limitless interest-free overdrafts to anyone who asked for one.

The trouble with that approach of course, is that if you give everyone free money, then eventually prices end up rising.

The Bank hasn't exactly set interest rates at zero but targeting the extremely low Chavs' Price Index (CPI) doesn't help. Man does not live by iPod alone.

Money supply is growing at way over 10% pa. Inevitably, that feeds through into higher prices, including asset prices. Hence the private equity funds and hence also the house price boom. It will, as always, end in tears. The "independent" Bank of England's inflationist policies steal from savers - often pensioners - and give to the undeserving rich. That's not real capitalism; it's socialism for the pensioner and capitalism for Gordon Brown's mates in the City.

We need to remove the state from the money business entirely. Let's go back to the good old Scottish tradition of free banking. I want my savings backed by private enterprise not by the government's own pet bankers who haven't got a clue.

1 comment:

David Farrer said...

Comments made on previous template:

Bill (Scotland)
Just like the B of E's notes being legal tender throughout the UK but Scottish notes not even being legal tender up here. 
Indeed, for a 'unionist' such as me this is very irritating. When I first worked in London in the very early 1970s I was offered 19/6 for my Scottish banknotes at my own bank (i.e. the bank where I worked); as a very junior management trainee I created a stink about this and they backed down and gave me parity when crediting my account with my banknotes. 
Interestingly, many years later, when the bank I still worked for bid for RBS (against StanChart) our Chairman (a Scot) changed our own internal rules so that all branches worldwide had to accept all Scottish banknotes, not just BofE, as part of our retail exchange business, as we had always done before; of course it made no business sense as we couldn't resell any of these Scottish banknotes to any of our own customers planning a visit to the UK as they all naturally wanted BofE notes (as spending Scottish banknotes in London always proves a bit of a trauma, in my experience), we then had to ship all these Scottish banknotes back to our Edinburgh branch (through London) to get rid of. 
Purely at a business level we were always pretty chary about taking Irish banknotes, too, as there was simply no market for them amongst our own customers; it'd be the same I expect if Scotland ever becomes independent. Most people abroad want USD or EUR (formerly DEM) or perhaps JPY in parts of the Far East; CHF are of course always popular

22 June 2007, 20:22:58 GMT+01:00
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David Farrer
the admittedly bizarre name of our UK central bank (Bank of 'England') is a direct result of the terms of the original Act of Union 
Good point Bill. 
I do think that the B of E's national (UK) role warrants a new name. Its current one is just the sort of niggly thing that drives so many Scots into the arms of the Nats. Just like the B of E's notes being legal tender throughout the UK but Scottish notes not even being legal tender up here.

22 June 2007, 19:32:07 GMT+01:00
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Bill (Scotland)
I agree with a lot of what you say, but I think that the Bank of England's 'independence' whilst better than the situation before is highly-circumscribed by the political criteria it has been set by its Labour masters with Brown's/Blair's ultimately redistributive agenda which has, as you write, stored up huge levels of underlying real inflation, however carefully massaged by the government's clever shofting of the goalposts by changing the way it is calculated and by blatantly manipulating the start/end dates of the spurious 'economic cycle' to allow Borwn to claim, fraudulently, that he is sticking to even his own rules. 
However, and the real reason why I wrote this comment, the admittedly bizarre name of our UK central bank (Bank of 'England') is a direct result of the terms of the original Act of Union which permitted various Scottish banks to continue to issue banknotes, just as various English banks (other than the Bank of England) at one time did, too. The Bank of England was only nationalised, formally, following World War II - and we all know which government was in power then - and it is only since then that it acquired its dominant role in the economy.

22 June 2007, 19:22:55 GMT+01:00