Employee Share Options, model theory and the Greek/Irish Default Conundrum

Looks like the Irish have gone and joined the Greeks in causing trouble in the Eurozone paradise. It’s coming up to the end of the tax year, and The Firm informs me I haven’t used my employee share options yet. Stands to reason as I didn’t expect to be working there in five years’ time. However, it’s come to my notice that if I retire I get to spring these ESIP shares free of tax and NI without holding for five years. Now I don’t know about you but I loathe paying tax, so I prick up my ears and wonder if I’m about to miss an opportunity to stop that B’stard George Osborne stealing some of the Ermine’s heard-earned cash.

So what’s the Employee Share Incentive Plan about then?

Somewhere in the distant past it was deemed A Good Thing if employees had skin in the game relative to the share price, that’s even lowly grunts like me that are about five layers of management down from The Board. And Hector the Taxman lets you buy these shares before tax and NI have been taken off. If you are a higher rate taxpayer then you save losing 42% of your salary. Now I would be a HRT payer but I hate people stealing my money so much I pay all the excess over the HRT threshold into my pension AVCs so I am a basic rate tax payer. So I get to save 32% on this. The catch is that you do actually get to buy the shares at the time of taking the decision, and the shares are then embargoed for 5 years, take ’em out before then and you get tapped for the tax and NI you saved. You are also exposed to share price volatility, and you do get the dividends. Which is nice, as The Firm isn’t a bad divi payer at all.

What are the Risks and Rewards and How can I Mitigate them?

Let’s assume that The Firm is reasonably okay priced relative to its historical PE. The yield is about 3.5%, but I’m only aiming to hold the shares for sub a year, though I may change my mind once I am no longer working for them as they are a reasonable component for a HYP, and if The Firm is good enough for Neil Woodford’s High Income trust and I have no other exposure to its sector then perhaps I should just hold.


Depending on how you look at it, I pay £1020 of post-tax income to buy £1500 worth of shares, a gain of 47%. Or as I look at it, I started out with £1500 and stopped the taxman stealing 1/3 of it. Either way, a gain of £480. I can’t buy any more than £1500 of shares, that’s the rules. If The Firm or the market takes this sort of viewpoint then I get to take a slice of the upside, and also some reasonably good dividend yield. The implicit yield of The Firm is upped from about 3.5% to about 4.5 by the tax discount on purchase price alone.


If The Firm screws up and the share price goes down the toilet. It’s been known, worst case is it has been about a third of what it is now, but that was an exceptional cock-up that was perpetrated by some directors who wanted to pump the SP to get their options, then left before the SHTF. Can’t guarantee that’s not about to happen again, but cooler heads seem to be prevailing.

Estimated Probability – 40:60 up 10% or down by 10%

The Greeks and/or the Irish cause a huge ruckus that destroys the Eurozone. Another form of the SP going down the toilet, let’s say this slaughters the UK stock market by 50% of its value, and The Firm gets caught in the crossfire.

These are the main risks we suffer from. I could also add general Black Swan risks, such as getting hit by a meteorite at 625 to 1 but that would be facetious 🙂 There is, of course, a chance the stock market may go for a second near death experience as in 2007 but that might as well be lumped in with my estimate of the chance of the Greeks/Irish defaulting.

Estimated Probability of Eurozone crash (over the < 1 year holding period) 30%

Mitigation strategies

I could use IGIndex to short my shareholding, converting the volatile shareholding into a fixed cash holding (minus the cost of shorting, and the cost of dividends, but of course I would get the dividends to offset that)

I will represent this choice as a fixed cost of 5% of the holding, ie £75. I get rid of the risks of the Greeks, or The Firm screwing up, but I introduce some risk of IGIndex, the counterparty, going titsup.

Estimated Probability of IGIndex failing – 0.1%

Modelling My viewpoints

I joned the Model Thinking course called out by Monevator (vaguely at the behest of Charlie Munger ISTR). One of the lectures deal with Decision Trees, so I figured i would take this for a spin and see what it says I should do. My choices are to buy the ESIP shares or not, and to hedge them at IGIndex or not. There are three uncontrolled risks IMO – a Greek default halving the value of the shares (from analogy to what happened with the market in general with Lehmans), the possibly of The Firm being slightly overvalued IMO, modelled as a 40% change of the shares going up 10% as opposed to a 60% chance of them going down 10%, and the risk of IGIndex failing, which I put at 0.1%.

Go with my Gut or Model It?

My gut feeling was go for it, and probably don’t bother to short.

I ran all this lot into something called TreePlan, from www.treeplan.com. This is an add-on for Excel, and works okay, though it handles like a greased pig on an ice-rink; it is all too easy to blow away a branch of the tree at a stroke, there is no Undo with that. But it does the job.

The result was surprising

The results of the decision tree calculation. Computer says take branch 1 and 2. Buy the shares and short them.

So going with my gut would have sent me along the wrong track, slightly. Or I am not correctly quantifying my risk perception, either over-weighting the likelihood of failure or over-weighting the cost of failure. The costs of failure are pretty clear on this one, so I am probably either irrational or quantifying risk perception wrong.

Let me for a moment slough off my white pelt and pretend I am Ermevator, picking up some of Monevator‘s world-view. He tends to be more chipper about the stock market and the prospects for its investors even when being downbeat. He’d be more neutral to the Firm’s SP, if anything favouring a slight uptick, that I have represented by shortening the odds on a 10% uptick to 55% to 45%. And he probably wouldn’t let me get away with a 30% risk of Greek default, on the principle that the politicians will probably muddle through. So I’ve dropped that as low as I can go, to a 10% risk.

An Ermevator would probably buy the shares and find the 45% uplift provided by HMRC enough hedge against future downside risks.

Computer says buy the shares and wing it.

Interestingly, the difference in outcome isn’t all about the Greeks. Bear in mind that the time horizon for this exercise is less than a year, even I might concede that 10% is probably a better reflection of the Eurozone implosion risk over the next year than 30%. However, simply changing that in the top model doesn’t change the solution. It is only by being more optimistic all round, about both the Greeks and the Firm that the Ermevator’s path becomes favoured, ie hold the shares without shorting. So I need to reflect more on where I think The Firm’s SP is going to go, as well as collect more data on how much IG will charge to hedge this over about 9 months. I also need to refine my thinking inasmuch as it probably only makes sense to short the £1020 that I forego by taking ESIP, rather than the £1500 total stake. Which reduces my shorting costs by 30% and uncovers the value of 30% of the dividends.

All in all a surprising result from Model Thinking, which has taught me quite a lot about my worldview and its ramifications, and that this decision which looked fairly simple has more wrinkles than meets the eye. Whether it is worth so much mentation over £1500 worth of shares is a different matter, but it’s nice to actually apply something you’ve leanred at ‘vitual university’ to a real-world problem within a week of learning it. Charlie Munger was right, the old dog, and a hat tip to Charlie, Scott Page/UoM and Monevator for helping me think smarter 🙂




Middle Class Finances – Death by A Thousand Cuts

Another one in the complainypants section, but this one’s a more subtle object lesson in how not to lead a middle-class life. Perhaps the Ermine’s heart is softening as he gets older, or there’s a little bit of the there but for the grace of God since I screwed up with the toxic UK housing market too, though I don’t have 4 children 😉

Let’s hear it for the Daily Mail’s Shona Sibary, who sold her house and considers herself now in the rent trap.

Shona and family, before they got into the rent trap

Now I was able to see her fundamental problem, just from looking at the picture. In Britain today, a middle class family with both parents working will find it hard to raise four children. We normally associate big families with the undeserving poor because of the headlines, but thankfully they are not the only section of society that has large families, otherwise we would long ago have succumbed to the premise of the movie Idiocracy. The unsung other sector of society that often has larger than normal families seem to be those with a bob or two. Like David and Samantha Cameron, who ain’t short of a bean, or even IDS and Nick Clegg. Other wealthy families include Victoria & David Beckham (4) and Boris Johnson (4)

I first noticed this with older colleagues at work. The Firm was a prestigious operation in the 1970s and 1980s, and pay was probably upper middle class (in the eighth or ninth decile of the IFS income scales). There is a surprising prevalence of three-child families there, which I had found particularly surprising when I joined nearly a quarter of a century ago.

It’s not surprising that nowadays it is the poor and the wealthy that can go beyond the one and two-child norm. The former get us all to pay for it, and the latter are presumably rich enough to pay for it themselves. Anyway, ’nuff about families. How did Shona screw up?

Shona’s financial red cards

By failing to watch her back. Shona had a couple of big red cards,  I suspect that family was living way beyond its means for a long time.

Red flag #1 – they were remortgaging, not building equity in their home.

Look at how an old-skool repayment mortgage builds up equity in the house, by repaying some of the capital.

how a traditional mortgage builds equity

I pinched this from the excellent Mortgages Exposed website, which unfortunately uses infernal frames so I can’t link to the source itself, it’s under Capital Repayment in part 1. Now there are other ways of doing it. My original endowment mortgage was interest only, so in parallel with the mortgage there was an investment that should have been slowly rising to match the original loan. Either way, you should be building up equity, even if it takes the form of a separate asset.

Now the modern way to look at a mortgage is to take out an interest only loan, sit on your butt and whistle a dancing tune while the value of your house goes up. Voila, free money, you get equity without having to lift a finger. The catch is, of course, that the value of the house has to go up 🙂

Shona asserts that

After two decades of slogging to buy a house, maintain it and give our children security for the future

No, you did nothing of the sort. You’ve had that mortgage for seven years. If you look at the graph above, you should have a quarter of the equity in the house, assuming house prices hadn’t gone up at all from the start.
If you look at the equivalent graph for my mortgage career
an ermine's inflation-adjusted income and mortgage stupidity

You see that by 1996 I had at least reduced the total, by about a fifth in real terms (this graph is inflation adjusted to a nominal salary of 10k in 1984). That underestimates my repayment as it doesn’t show the value of my endowment.

So what did you do Shona? You remortgaged. Taking that equity out, and spending it. Doing that once is a bad sign – nothing wrong with remortgaging per se, but spending the proceeds is bad. Doing it another two times is more than careless, it’s positively greedy.It’s a big red sign in your finances that says “Wrong Way, Do Not Enter, Turn Back NOW”.

Your house is a place to live, it is not an ATM. Over the 25 year span of a mortgage, you will probably see at least two housing booms and busts. I bought in a boom, ate a 10-year bust, and discharged my mortgage in the next boom, that has now turned to a bust (my mortgage would have finished in February 2014 had I not discharged it early)

It is the foreknowledge of that next bust that should make you say “I will not take the money I gain from remortgaging and use it for anything other than buying an investment which will go towards buying this house”. For most people that investment is reducing the total amount of the next mortgage, which is tantamount to saying “never withdraw equity from your house, unless you are trading down”. There are some people who can do better than that. They are few and far between. Otherwise that bust is just round the corner, waiting to bite you.

Red Flag # 2 – your house is not your biggest cost!

This is awesome. If you really are middle class, and buying your house, then that house is nearly always your biggest cost. If it isn’t, you are either not middle class, you are rich/wealthy. Or you are in deep, deep, trouble. Nowadays it’s pretty marginal for the ‘middle class’ to be able to afford the typical ‘middle class’ three or four bed detached family home in the ‘burbs. If your house isn’t your biggest cost and you’re not rich, you’re skint.

Let’s take a look at what Shona spent the money on.

In our defence, we weren’t spending the money on expensive designer clothes, luxurious holidays or flash cars.

So glad to hear it. So what exactly was it that you overspent on then?

Much of it was going on school fees and upkeep of the house.

If you’re withdrawing equity from your house to keep the damn thing standing then you have got too much house for your income. However, that’s not really your problem. It’s the school fees. According to the ISC the average termly fee at a day school is £3655, about 11 grand p.a. A cursory look at your family photo puts three of those kids in school, ie £33k p.a. Assuming for sibling rivalry you aim to do that for all of them, you are looking at paying 4 * 11000 * (18-11) = £308,000 if you just pay school fees for secondary school 11 to 18 and £572,000 if you pay from 5 to 18.

That’s more than your house was worth at the peak. The house is not your biggest problem. It’s a combination of having too many children and looking down on the sort of education that dragged up scumbags like me. So for all the mawkish whingeing about losing your home, Shona, you have failed to clock the real problem with your finances. ‘Tis the fruit of your loins and the style in which you’d like to keep them. With their own rooms, if you please, nothing else will do for Shona’s little ones 😉 Since humans come in two genders and it is apparently not acceptable for brothers and sisters to share a room these days you actually only need three bedrooms if the family is boracic lint, fixed that for ya.

Get real, Shona. You were on a middle class income but living a life not commensurate with your means. It’s hard enough for the middle class these days to buy one house in 25 years. To aim to do that and spend even more than that on the nice things in life on that middle class income is taking the piss. It cannae be done, and you’ve just found that out the hard way. To my eyes you’ve cut the wrong thing, but I respect it’s your call.

Shona shows me I need a financial Distant Early Warning Line

I learned something from Shona. Her family fell foul of slow changes that gradually overwhelmed them. Many things get imperceptibly worse day by day, as global imbalances right themselves but they’re resisted by the structures we have already built. The creeping rise of Digital Taylorism making the professional and technical job a stressful and unrewarding experience is an insidious change, little by little. I didn’t realise that until it became too much and my defences were overwelmed, hence the crash course over the last three years in becoming finacially independent as a counterattack.

In the 1950s the US instigated a distant early warning line to scan the northern skies at the 69th parallel north of the Arctic Circle. It was standing sentinel for the signs of incoming Russian nuclear bombers, and was located in the harsh North to give enough early warning to mount a counter-attack.

I need something analogous to stand watch for slow insidious creeping costs and sound the early warning. I plan to instigate an annual review of financial commitments as a percentage of resources. If I see a non-negotiable cost starting to rise proportionally I will consider that the alarm is sounding and it is time to attend to it. It is always easier to launch a counter-attack before it is upon you overwhelming your defences, and this annual review of commitments will be my distant early warning line against stealthy creeping costs.

Shona’s family could have used something like that. Okay, the alarm would probably have sounded as soon as it was set up, but certainly on the second child’s school fees. It would have been an easier call to make at that stage – do we want a big house, or do we believe in the value of public school education* makes it worth getting the girls to share a room?

While I am working I’ve generally lived sufficiently below my means that I didn’t need that sort of thing. Though I aim to have over 50% income in hand once I stop working, I’ve still got several decades, decades in which I believe living standards in the West will decline in a big way. Though I may be resistant to wages being eroded, I won’t be immune from inflation and its evil twin, rising prices and taxation. A financial DEWline will help me marshal resources ahead of time, and shift them to minimise taxation. Particularly with significant holdings in shares, it’s good to have as much advance warning if changes are needed, to average out the horrendous temporal volatility.

*NB for non UK readers, bizarrely schools that you pay fees for, those that Americans rationally call private schools are called ‘public schools’ in the UK, because we’re strange like that.

I was too poor to live in London, so I moved out. What’s so hard to understand?

The good old Grauniad had a bleeding heart article about the housing benefit cap squeezing the poor out of London.

I was there, once. I was born in London, grew up there, went to school there, and then went to university at Imperial College, in South Kensington (seriously upscale part of London for those who don’t know the city). I rented in sleazy dives in Earl’s Court, and for a while I rented a basement bedsit from a doctor which was behind Harrods, where I’d get my milk. Curiously enough, Harrods’ milk was a halfpennny cheaper than elsewhere in the neighbourhood, but it only lasted a couple of days without a fridge.

Then I looked for work. I worked in Beckenham, and then at the BBC in Television Centre. I shared a house with four other guys, then shared with two others, then settled on a bedsit in Ealing. London is probably even more damned expensive because it is holding the entire capital wealth of Greece embodied in its housing stock at the moment, but it was still dear way back in the 1980s.

It really, honestly, never occurred to me that what should happen is for the taxpayer to subsidise my rent. I looked around me, came to the conclusion that I couldn’t afford to buy a house, even on a reasonably okay wage. It was obvious to me, getting on for nearly a quarter of a century ago, that I would never be able to afford to buy a house or rent somewhere big enough to bring up a family. So guess what I did?

I moved out of London

It’s not hard, is it? 25 years ago it was obvious to me that Central/West London, where I’d have liked to live, somewhere near Bloomsbury, if you please, though Ealing would have done me too, was out of my reach. To be honest the place where my parents lived, 15 miles out and in sarf London, was out of my reach. I needed both a better paying job and cheaper houses. So why the hell are there any ordinary families at all in Westminster, which is a damned expensive part of the city? Not only are they competing with Greek shipowners, Russian plutocrats and general old money, the area is also prime commercial and office space. You don’t find ordinary Americans living in Beverley Hills or Manhattan, or ordinary Germans living in central Berlin.

And above all, why should the rest of us pay for people to live where it’s too dear for them? I wanted to live in London but it was too bloody expensive, so I moved out. Yes, in the end ordinary workers won’t be able to live in travelling distance of London, in which case the people that do live there will just have to stump up through their council tax to raise wages enough or pay for essential services privately. They are presumably rich enough to do that.

Look at some of the rents in the article. £812pw, £525 pw. Crikey, I couldn’t afford to pay that on rent right now, at the peak of my earning career, well, not if I wanted to do much else. Think about it. £812pw is £42,224 p.a. You have to earn £53,000+ to be able to pay that after tax. Why are we subsidising familes to the tune of twice the national average household pretax income to live in Westminster?

The whole benefits thing seems to have got out of hand, with presumptive rights accruing to people to mask organic change from them. It is the job of the parents to look around them and put their families in a place where they can afford the rent. Had they done this before they had lots of children, they wouldn’t have to disrupt their precious children’s education by moving when the taxpayer says enough is enough. If they were rich enough to be able to afford the rent, they wouldn’t have to move.

It’s hard to find any sympathy for people who didn’t look around them and move, but took the easy option. This change happened slowly, over time, and should have been adapted to. As a young man I could just about afford to rent a bedsit, it’s been obvious for years that London is out of the reach of someone on the average UK wage. Benefits are there to help people that suddenly fall on hard times due to a short-term (couple of years) change in circumstances. They are not there to enable people to improve their standard of living at the taxpayer’s expense. If you can’t afford to live in London, then move the hell out like I did!

At least the Graun showed us the logical conclusion of what they want to happen.

Ben Denton, Westminster’s strategic director of housing, regeneration and worklessness, said: “Is it fair for the state to provide subsidy for people to live in places that are the most expensive? Is it correct for the state to support anyone to live wherever they want to live? That’s the philosophical question. If the answer is, anyone can live anywhere, then the state and the taxpayer has to subsidise that.”

and the last word to Westminster Council

The philosophy behind the new cap seems to be “if you can’t afford to live here, don’t expect to live here”. “To live in Westminster is a privilege, not a right, because so many people want to live here,” a Westminster council press officer explains.

Too bloody right. There are lots of things I’d like to do, but can’t afford. What happened to making do, changing your expectations or doing without?

Why the Demise of the Interest-Only Mortgage isn’t a bad thing

So you walk into a shop, and spot that nice new flat-screen TV you want. £500 to you, sir, or you can buy it interest-only for £2 a month. Wouldn’t you smell a rat somewhere? The rat is, of course, the small print that says you’ll have to pay £500 at the end of the interest-only loan.

Now I know that some people, particularly in the United States, buy their cars like this. It is called leasing, and the name gives it away, you never get to own the car. It’s a long term rent. It looks absolutely and stupendously daft to me, but if the image of driving a nearly new car is that important to you, well, ‘you pays your money and you takes your choice‘.

So what the heck makes buying a house on an interest-only mortgage any different? You still never get to own the house. What it the point of that? The interest only mortgage was a clever wheeze to ramp up house prices and for banks to make more money. The beautiful part of this game is that the buyers go all gooey-eyed and think the mortgage company is doing them a favour by lending them more than they can afford. Hey, that Mr Interest Only Bank can lend me £200,000 whereas Mean Old Prudent Bank will only lend me £150,000. Isn’t Mr Interest Only Bank such a nice guy?

Two words. Northern Rock. It didn’t work out well, even for the lenders.

A history lesson

1960 – the Repayment mortgage

When my Dad borrowed his first £500 mortgage, way back in the early 1960s, it was simple. He told them his income, they looked up in a table what they could lend him, and armed with that knowledge he could look for a house. He borrowed the £500, and then paid them the interest plus a proportion of the price of the house, the latter proportion increasing with time.

Repayment mortgages were all that were available, based on the simple premise that you pay your instalments for 25 years and when the last one is paid the house is yours.

1990 – the Endowment Mortgage

Fast forward thirty years, and I get to go to the Abbey National, and bamboozled by the choice of endowment and repayment I foolishly go for an endowment mortgage. This is still on the principle that I pay interest only to the mortgage company, but simultaneously to a life-insurance policy which supposedly grows with time till after 25 years it is worth at least the price of the house. So although I was only servicing the interest on the mortgage, I was in parallel accumulating an asset that matched the cash price of the house, which when paid to the mortgage firm would discharge the debt. And the house would be mine. The mortgage company took a charge over the endowment, so I couldn’t sneakily stop paying it without them knowing.

2005 – The Interest Only Mortgage (Don’t Bother with the Capital, it’ll work out somehow)

Like an endowment, but endowments got a bad name, for not paying enough to match the price of the house. So just do away with the need for an endowment! How does that work? Well, you get to the end of your 25 year term, and you still owe for the house! Okay, so inflation hasd probably halved the real value of the debt, which is all to the good, but you still don’t owe your damn house at the end. It is a leasing arrangement. Why not just rent instead?

The assumption is that rampant house price inflation means that your house is worth so much at the end that the increase covers the total. But you still can’t sell off the chimney or your third bedroom to discharge the debt, and you are likely to be coming up for retirement. I wouldn’t want to have to stick my hand in my back pocket to come up with what I paid for my house over a decade years ago, though as it is I could just about do it.

increasing complexity, decreasing security and honesty

There’s a lot of bleating about interest only mortgages, because about a third of firt-time buyers bought their houses on an interest only basis.

Shockingly, I heard a father talking on Money Box about how it was so rotten that his son couldn’t find an interest only mortgage to buy his first house. David from Sussex said (13:45 on the iPlayer)

a bit surprised and disappointed to hear they’re only looking to offer capital repayment mortgages, and with my son’s circumstances, which I’m sure is the same for a lot of other first time buyers, the intention is not to stay in the property for that long

So how does that work, then, David? Are you saying your son doesn’t need the house after a while, can sell up, pay back the capital from the proceeds and stick a tent on the pavement? Or do you want him to be able to overpay for this house, so he doesnt’ spend the excess on booze and fast cars? Why exactly is it that you want him to borrow more money for a house he can’t afford the buy, only to lease? Do you realise, David, that your son is in an auction for houses, and if mortgage companies don’t let people borrow so much money then the auction price will fall?

It’s too late to save the people that did overpay for houses by going interest-only to the max, but we can at least not propagate the mistake. If you are going to buy a house, then buy the damn thing, don’t lease it for 25 years and then wonder why it isn’t yours…

Overall, look at the changing mortgage proposition over the years. My Dad was offered an honest and straightforward service. Pay this much for the next 25 years, and you will own your house.

I was offered a less honest service but at least one that in theory would end up with me owning the house. It didn’t work out that way because the complexity of a with-profits endowment hid untestable assumptions and I was stupid enough to buy a product that didn’t match my circumstances. In all fairness to my parents, they told me a repayment would be better for me, they told me why, and educated me well enough to be able to see why, but I was a damn fool and had eyes only for the potential gain, without the wisdom to look for the potential loss. That’s what being 28 did for me, I knew everything and nothing, so greed trumped wisdom.

Unlike my parents, David is failing his son in giving him only half the story. If he actually told his son, “look, you are taking a very serious risk here by going interest only, but you are in a profession where your pay will increase dramatically and as long as you start saving for the capital from then on you may consider this a calculated risk” then that would make all the difference.His son would still be taking a risk and would probably be just as cocky as I was, but at least David would have discharged his duty as a parent 😉

He sort of alludes to the early years being hard, but wage profiles may be flatter nowadays and young people start out with more debt, so the assumption that money will be easier after five years probably doesn’t hold. David needs either to underwrite his son’s migration from interest-only to capital repayment with the Bank of Mum and Dad, or not encourage his son to overpay. Because it’s simple to summarise the issue

if you can only afford to pay an interest-only mortgage on your house, then you can’t afford to buy that house.

Although I think the demise of the interest-only mortgage has been exaggerated, its death would be no bad thing at all.

A Feckless Family Fruitlessly Frittering Financial Future Away

It was news to me that there were people getting more that the £26,000 average household income from benefits, but it appears this is a problem, to be addressed by the Welfare Reform Bill. Which seems to have taken a kicking from some bleeding hearts in the House of Lords. The kicking is taking a kicking in the Commons as I write.

Let’s take a butcher’s hook at one of these offending families, kindly drawn to my attention by Lemondy, who was in the market for a good rant, pleased to oblige 😉

What’s been going on here? It doesn’t start well, we have a blended family of two of Ray’s daughters from a previous relationship and three of his wife Katherine’s kids from her previous relationship. Fair enough, these things happen, looks like there is no contribution from the other people who helped bring these children into the world.

Raymond, a former educational software writer, has been jobless since 2001. His wife Katherine suffers from bipolar disorder with an anxiety disorder and is also unable to work.

Says Ray: “The market for my skills dried up 10 years ago – there’s a total lack of work in my area of expertise.”

There are two problems here. One is that Ray, despite being unemployed for the last ten years, decided to sire a son five years ago. At least it was with his wife. Ray, me old mucker, precisely why did you decide to produce this child when you knew you were unable to support it? Perhaps you ought to take a look at what the NHS has to say about stopping this happening in future…

Don’t get me wrong, I am open to taxpayers supporting families up to three children in some cases. After that I believe family support should be supplied in kind – food stamps, clothing vouchers for named individuals with a photo, and free school meals. Why is that? Because having children when you can’t afford them should seriously screw up your standard of living!

I am happy with supporting normal sized families (that’s up to 3) through the tax and benefits system, though they’ll have to move to cheaper areas. However, larger familes should be actively discouraged if you’re going to do it on the public purse. In the past, when I asked myself whether I could have children, the answer was no, I couldn’t afford it. So I didn’t do it, FFS! What makes Ray and Katherine so damn special that not only do I not get to have the experience. I have to pay for them to do it?

When I was growing up, when parents couldn’t support their children longterm the children were taken into care. There was a lot wrong with that, but there’s a lot wrong with people like me paying for the likes of  Ray and Katherine to have that special experience of having a child of their own blood too. Supporting these children and only the children via food and clothing vouchers would at least screw up the parents’ living standard a bit while protecting the child’s essential needs.

The second thing wrong here is Ray’s assertion

“The market for my skills dried up 10 years ago – there’s a total lack of work in my area of expertise.”

Don’tcha think it might be time to learn something new, then, rather than sitting on your big hairy butt firing out children on the taxpayers’ dime then, Ray? You have sat on your lazy ass for longer than I aim to retire early. For a quarter of your potential working life you have done diddly squat, while Gordon Brown, in addition to saving the world solved child poverty by dropping money from helicopters to people like you. Solving child poverty was a laudable aim, but not if you start creating more of it by making it easier for people like Ray to sit on their Lay-Z-Boy recliners watching Sky TV….

Talking of which, let’s move on to the spending of this feckless bunch of time-wasters

‘There are four children to supply school uniforms – including gym kits – each year. The school trips aren’t days out to Alton Towers – they’re educational trips for several of the courses, like history, geography and media studies, that the school tells us will form an important part of their course. Then there are seven birthdays a year, and seven children to make Christmas happen for each year.’

Whenever anything that looks like frippery is given the adjective ‘educational’ we know we are being rooked. In the 1960s and 70s families sometimes just had to say ‘we can’t afford it’ to school trips. If enough families didn’t sign up, the trip was cancelled. It wasn’t the end of the world. And I’m sorry, but media studies isn’t even worth the time it takes in the school day, and it definitely isn’t worth some of my money to send Ray’s children on school trips for.

As for the seven birthdays and Christmases, well, used to be if you couldn’t afford Christmas you’d make the presents yourself. Ray and Katherine need a spine transplant, so they can say to their kids “we can’t be bothered to go to work to give you that iPod you wanted, so you’ll have to do with this tube of Smarties instead”. Instead they tell their children the lie that the fairness fairy will given them their heart’s desires, propagating the entitlement gene across the generations. Oh and you, dear reader, and I get to pay for it, too…

‘We get the Sky Movies package because we’re stuck in the house all week – otherwise we wouldn’t have any entertainment.’

Bit of a battle for the old remote control, eh? And why are we paying the Digger £780 a year, Ray? Tell you what, since you’re so keen on things ‘educational’ howsabout you haul your lazy ass down to the library and borrow some of those flat things called books, and get your lot to read?

Anybody who has Sky TV should have benefits docked to the same amount. It’s a want, not a need. My TV delivers enough entertainment without Sky, I reused the dish for FreeSat. Want Sky to watch the footy? Get a flippin’ job, Ray!

‘Most of this goes on our eldest son’s bus fares to college and back. For me, if it’s less than five miles, I’ll walk.’

For the first time, I tip my hat to you, sir. That’s the right attitude. Heck, I’d be okay with putting some of the saving from the Sky TV package I’d cancel to get you a reasonable pushbike.

‘My wife and I have mobile phones, and so do all of the teenage children. You try telling teenagers they’re going to have to do without their mobiles and there’ll be hell to pay.’

How about telling them where to get a paper round if they want a mobile? It’s back to spine transplant time for you, Ray, my boy. And why the bloomin’ heck is this costing you over £1500 a year? What part of PAYG and ‘shut yer gob’ do you and yours not understand? I have never paid £1500 a year for mobile phone service. Nor even £200, which is the per head rate, and I don’t plan to start. Ever heard of Skype, since your lot seems to spend most of the time at home?

‘Gas and electricity bills have gone up massively over the last couple of years – two years ago we were paying £20 a week. If they do cut our benefit we are going to have to choose between eating and heating the house properly.’

Even when I was running a video conversion firm with loads of electrical gear I never paid that much for heat and power. Presumably the jumper is not an item of clothing your family is familiar with? Or the clothesline, though I accept that may have limited use in Wales.

‘ Rent £76: This is social housing in Wales, so the rent is hardly massive. If we rented privately in this area, then the cost would be four or five times as much.’

Nicely played, sir. At least it is a different bunch of taxpayers keeping a roof over your head… There’s a lot to be said for diverisfying your income.

Weekly shopping £240, Includes food and household goods, 24 cans of lager, 200 cigarettes and a large
pouch of tobacco:

‘Our biggest expense. We do all our shopping at Tesco or Morrisons in one big go. Mostly we buy the “value” range – tinned meatballs, baked beans etc. On the cigarettes, my wife tried to give up, but she missed one appointment on the course and they threw her off it.’

Looks like tobacco is £65 then. So I can sort your £82.40 weekly saving at one fell swoop. Cut the ciggies right out, drop the Sky TV and the remaining couple of quid can either come off the children’s Christmas and Birthday presents or you can drop a tinnie or two of the lager. They do have Aldi or Lidl in Wales?

There you go, Ray. Fixed that for you, and you’ll have your no doubt lovely wife with you for that much longer because she doesn’t smoke now 🙂

For far too long the goal of reducing child poverty has led us astray.We did not raise our eyes to the monster that we were creating as a byproduct, of increasing the ranks of the undeserving poor.

It’s all very Victorian, but we need to start discriminating again between the deserving and the undeserving poor, because at the current rate of progress we are all going to be poor.

We could start by making access to a higher level of welfare payments contingent on having paid into the system in the last few years, like many European countries. I wouldn’t mind paying toward’s Ray’s brood if he’d been working for the last 10 years and then lost his job in the current downturn. What incenses me is that he had another child while on benefits! We could make child benefit payable in kind, particulary if the child appears more than 9 months after you’ve been claiming!

Something that always puzzles me is how many poor people smoke, or is it that smoking makes you poor. In the end if you can afford it I don’t give a toss if you smoke or not, as long as you don’t do it near me. If you’re on benefits then I do mind. If I were on benefits I would expect to have to drink less!!!

A first step of capping benefits at £26,000 (the average wage) seems like a pretty good start. Bring on the Welfare Reform Bill. £26,000 is a high proportion of my annual wage. Hearing slackers like Ray and his bunch get it for free make me feel like a right mug for working for a living and going without to try and buy myself a few years out of work.

Hearing him whingeing about having to choose between heating and eating when outing the tobacco and the Sky TV would more than bridge the gap makes me want to slap him round the face with a wet fish and insert a bit of steel into his spine, and tell him to man up and sort out his responsibilities rather than moaning about his rights.

Oh and I’ve borrowed the concept of a complainypants from Mr Money Mustache. And tagged the posts about moaning benefit recipients as such. In the end if you get benefits, then that’s nice. Just don’t build a lifestyle on it, OK?

Why do I say that? Look at the words of Bill Gross from PIMCO where he asks where credit goes to die.

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound.

We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.

Your frickin’ benefits are being paid from that abundance. Austerity won’t be paying them in future. Child poverty will reappear. All benefits will fade away. I’d be surprised if I get to draw a State Pension in 16 years’ time, it will probably be means tested and hopefully I will have too much capital, though Bill’s prognosis isn’t so good for that either. That is the trouble with relying on benefits – governments can take them away, just like they did for people that paid into SERPS who took the shaft recently.

So don’t have kids on benefits so that you get more CTC. You’re likely to see that kid go short over the next 18 years unless you get a job. The writing is on the wall, pal, and it’s going to stay up there for a long time.

We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.