The Ermine takes the shaft from the RDR and the FSA

Stirred from its long slumber of ages, the Financial Services Agency has decreed that trail commission has been a scam. And that It Will Stop, Forthwith.

And I’ve just taken the shaft. Not in a huge way, but it still pissed me off. I’ve always been a firm believer that organisations that charge me money just to hold an account with them are taking the mickey and to be avoided. I don’t mind paying for a service when I use it, but paying just because the account exists hacks me off.

Which is why I’ve used iii for my ISA. You can get more touchy-feely service with the likes of Hargreaves Lansdown but in the end as Monevator/TA keep on reminding us, fees kill your returns.

III didn’t charge any annual fees and their per-trade charges of £10, while not the lowest were reasonable. It appears what made this possible was the trail commission on active funds paid by other people 😉

I was dismayed to receive a missive (appended at the end of this post) to the effect that iii were going to charge £80 annually as well as £10 per trade. Geez. Thanks, guys. The only thing that is stopping me telling Tomas Carruthers to stick his fees where the sun doesn’t shine is that all other ISA platforms are probably either dearer or moving to charging annually (many others do). It is only when all this kerfuffle has settle down in a year or so that it’s worth looking at alternatives.

Moving a S&S ISA is a major pain, because you usually get ripped for a transfer cost per holding. So you have to sell everything down to cash, so a S&S ISA transfer to new provider, and then recreate your ISA on the new platform. Or not, if you come to the conclusion you don’t want the same holdings though then you should ask yourself the question why didn’t you change this on the old platform 😉

That of course invokes two lots of dealing charges plus a 0.5% hit on the total value from stamp duty. Even in the case of my modest 30k ISA that alone is a £150 hit, so in practice S&S ISAs are sticky because of the cost and hassle of moving. You can open another one for future year’s ISAs, but rebalancing across such an ISA estate gets hard and it’s all a right pain.

There are other subtle changes here. For instance I will get right out of funds on iii as they are now charged at the same rate as ETFs. I will sell my HSBC FTAS trackers holding I have built up over the last year or so and buy the corresponding Vanguard ETF product. The historical fund preference over ETF logic because of the absence of trading costs has now been eliminated, and the forward pricing model of funds is not worth tolerating so I may as well minimise the TER.

I may have to find another platform and use DW’s ISA allowance to implement this approach to Grexit  – I was about to start doing it for European index funds in my iii ISA but that’s been KO’d now. Of course, there are no guarantees that another platform may not do the same as III and start charging dealing charges on funds, so all in all I could have done without the friendly help of the FSA’s RDR to queer the pitch at this interesting time. Perhaps RDR will hammer the very raison d’etre of index funds as opposed to ETFs.

Anyway, here’s what III have to say:

Dear Ermine,

Here is a message from the CEO describing just how we are going to obfuscate our previously simple offering to you. We will obscure things by bundling some services, charging more for others and complicating the process of comparing our charges with other ISA providers. Of course we are going to make out that we are doing you a favour, but basically we want you to trade a lot more often so as we get more money. Geddit? No, well, what we will do is charge you for two trades a quarter, constraining what you can do, and enticing you to churn more. Oh and we’ll wrap it all up in fluffyness of how we believe in the stuff we’ve been forced to do. Unfortunately, Mr Ermine, you weren’t using any of the funds that we were stealing some of the proceeds from every year, because you identified them as a ripoff. So you get to take the shaft, this time, buster. That OK with you? Because if not you know what you can do but it’ll cost ya. Bwahahahahahaha

Obviously they didn’t say that, and dressed it up somewhat, but I think my version is more succinct a summary 😉 I’ve critiqued the Tomas Carruthers’ missive describing how I will be shafted in future using this colour.

Dear Ermine

Thank you for investing with Interactive Investor. More than ever individuals need to take increasing control of their own financial futures as successive governments and employers reduce their responsibilities in this area.

At Interactive Investor we consider it our duty to provide you with the dealing tools and information you require to actively manage your financial future, to do so with confidence and charged at a fair price. This is why we are now announcing important changes to our charging structure to take effect from 1 July 2012.

Funny you should say that, Tom old boy. Maybe the Ermine is getting a bit simple in his old age, but no annual fee and a straight £10 a trade charge or £1.50 batch trade sounded a lot more like a fair price than £80 a year whatever I do even if I don’t trade at all. This. Is. Not. An. Improvement.

New Pricing Changes

We are introducing a quarterly fee of £20, which gives you:

The first two real time trades (funds or equities) you make in each quarter, or

A combination of regular monthly investments and real time trades up to the value of £20 in each quarter.

To buy or sell funds we are introducing the standard charge of £10 for a real time trade or £1.50 for regular monthly investments.

Well that’s just pissed on the fireworks of this idea then, looks like IG index or another ISA provider may get that business instead.

We will pass on to you ALL income we receive from any fund investment you hold with us. On a typical fund with a 1.5% Annual Management Charge, this would be 0.64% of your investment every year

This is in addition to our existing highly competitive pricing that you will continue to benefit from:

  • Buying or selling shares at £10 per real time trade or £1.50 for regular monthly investments
  • International share trading also at £10
  • Our frequent trader rate, which allows you to buy or sell shares from just £5

Why introduce a £20 quarterly fee?

We believe that customers should be engaged with their investments and actively manage their portfolios. To support this, we are introducing a quarterly fee of £20. This fee is the only one we will charge you and you will not have to pay any other management, ISA or administration fee.

Ermine thinks to himself don’t bullshit me Carruthers, you’ll still charge me a dealing fee, which is not what the only fee we will charge you used to mean when I went to school!

If you already trade twice or more a quarter then this fee will make no difference to what you pay – it is effectively an advance payment of those first two trades for the quarter. If you are trading less than that then you will still have the right to your two trades in each quarter without any additional payment and hopefully feel encouraged to more actively manage your investments.

Well if you don’t mind me saying, Carruthers, you are a most impudent little toe-rag telling me when and how often I should trade. While I am in no way a passive investor, I aim to be a catatonic trader once I am fully invested, and that decision is up to me, not up to you you slimy little berk. Have you ever heard of Warren Buffet’s 20-ticket punch card investing model, ya sonofagun?

We will, of course, continue to provide you with the day-to-day custody services, including corporate actions and dividend processing, regardless of the investment types you choose.

We will repay all income we receive from your fund investment

We are not alone in believing that ongoing commission does not fit with independent investing. The FSA is banning it for investment business introduced by financial advisers from 1 January 2013. The FSA has not yet banned this income for execution only business, so we are leading the way by passing on all income that we receive back to our customers.

Writing, meet Wall is what I think you meant to say here Carruthers. Did it ever occur to you that salami-slicing your customer’s property would normally be considered stealing in any other walk of life? Howsabout you give me 1% of your income to Ermine Enterprises, after all, I enable your nice li’l lifestyle Tom? No, thought not. So why did you think this was okay until you got told not to, hein?

Still, it’s nice to see an old lag reformed, I guess, amazing what a little bit of heavy-handed regulation does to a chappy caught with his hand in the till. Any other offences you’d like the court to take into consideration?

Our competitors may repay a portion of the income they receive but do not always make it clear how much they are keeping.

No, you weren’t that clear on that front either until your Damascene moment, oddly enough coinciding with  when the FSA made you do it. Funny old world, Carruthers, isn’t it?

We will pass on ALL of the income we receive on your fund investments. This can make a significant difference to your overall returns, for example:

If you invested £10,000 each year for the next ten years, the rebate you’d receive with Interactive Investor would be worth £3,520. After 20 years, the total rebate would be £13,440. See how much you can save with our income rebate calculator

Oddly enough this calculation never appeared before as the fact that some iii customers have been ripped to the tune of £3k over the last decade. It really is a strange world we live in today, don’tcha think, Tom?

If you have fund holdings elsewhere, you can benefit even more by consolidating your fund investments with us.

You do not need to take any action as these changes to pricing will take place automatically with effect from 1 July 2012. You can find out more information and contact details from the FAQs on our site.

Continuing to improve our service to you

We will also continue to introduce special trading days, new tools and research for trading customers to further support informed and confident trading decisions. For example:

  • Our free ISA and free US stock trading days
  • Our new mobile trading app available on iPhone and iPad being introduced this summer
  • Privileged access to trading insights and new tools coming later this year
  • Our recently launched model portfolios which invest in a range of different assets – and we’ll continue to expand this range

All set up to jolly us along to trade more on the old ‘special offer everything must go’ model? What happened to the old KISS model you used to run round there parts?

When we set up Interactive Investor 17 years ago it was to let private investors control their own trading activities and financial future – something that barely existed at the time.

Hmm, and I was such a cynical sonofagun as to be under the impression you were in it for the money you could rake off rather than as such a social service. Life’s such a bitch when you’re so misunderstood Carruthers.

Nearly two decades later the investing landscape has changed beyond recognition. We intend to stay at the forefront of that change and work on your behalf to give you better trading access, information, value and service.

We look forward to supporting your trading and investment plans now and in the years to come.

Yours sincerely


Tomas Carruthers


Ermine in the City – Westfield, a Cathedral to Wants, not Needs

Did some work on the Olympic Park today, while it was hot. It’s the devil’s own job to get a pass to get a vehicle on site, so we ended up carrying a load of test gear on site by hand. Now on TV it doesn’t look that big, but on the ground it’s very spread out, there’s a good 10 minutes walk from one venue to another. That probably isn’t an issue for the public, as you’ll be going to the venue for the sport that you’ve got a ticket for, and there will be a shuttle bus from the entrance direct to the venue.

But after carting a load of gear for a while, it was time for an Ermine to get some refreshment. And what indeed is that before my eyes, but Westfield, shopping centre extraordinaire. Not just any shopping centre, but Official Shopping Centre of London 2012, I’ll have you know.

Westfield, welcome to the Pleasuredome

Okay, so I don’t actually need a casino at the moment, but a bite to eat and a drink, perhaps, at less that £2 together?

Official shopping centre of London 2012, apparently

I’m chuffed that centre is still spelled centre and not center, Westfield presumably paid good money to say it’s the official shopping centre. Just in case you’re too dumb to spot it’s right outside the Olympic Park. Addles the brain, too much shopping does.

When I got into Westfield I realised why nobody in Britain who has got a credit card has got any money left. The place was a cathedral to manufactured wants and solutions to problems that had to be created to exist.

Does anybody use a watch these days? So how come theres a stall selling just watches

When I ask DW if she knows what time it is, she looks at her phone. So does every other person I know. With one exception, which is me, because I don’t generally carry a mobile phone with me. So how the hell does this stall, and the many other brand-specific watch shops like Breitling and DKNY make their money?

Presumably by parting fools from it at a brisk pace. Take Breitling for a moment. Nobody in Westfield needs a chronometer to go to the Moon. We haven’t been to the Moon for 40 years. It ain’t happening any more, because the economy is shot and the fire of innovation failed under the load of too much shopping so we can’t be arsed to invent anything any more. It mattered 50 years ago, but it doesn’t now. Hey, even Neil Amstrong would probably use his iPhone if he wants to know the time now.

Shoppers of Westfield, you ain’t going to the Moon. Just use your phone

You don’t need a watch, shoppers of Westfield. Think about what you do if you want to know the time. And while we’re at it, DxGF who did use a watch in those pre-smartphone days had a nice dainty thing, ‘cos she was a girl, y’know, with smaller wrists than mine. So WTF is up with all these whopping great big gauche things nowadays, even for the gurls? Extravagant exhibitionism is the hallmark of ill-breeding and a lack of any sense of aesthetics, chavvery, indeed…

Onwards in the quest for the essentials of life, the needs, not the aspirational wants. Unfortunately The Firm has screwed down on T&S for its staff, and since this is on the ermine’s dime I am still looking for something to eat and drink for under £2 all in.

Meet Peppa Pig, exclusive wristband only in advance extra. Click to enlarge if you feel the need to meet Peppa the Pig

I look up, drawn by the soft London sunlight. Ah, another advertising opportunity here – apparently, should I so wish, I can meet Peppa Pig. Was it the Jesuits that said

“Give me the child till the age of seven and I will show you the man.”

well, it seems that Mammon has barged in on the action. Get ’em into branded merchandise early, and you’ve got ’em hooked for life.Ah, talking of branded merchandise

Apple Store with adoring fanbois and iGroupies ogling the gear from outside

here’s the Apple Store, with a few of the punters basking in the reflected glory of all things Apple. Sweet, don’tcha think? Almost like a pilgrimage to The Source of All Joy and Coolness. At no other altar to Mammon did I see the cognoscenti gathered outside to pay homage like that.

Why do I need a network of brands in a cathedral of brands?

So red. So gaudy. What exactly is a network of brands? WTF do they sell, anyway? Or doesn’t it matter, just cut a few tenners loose from your flexible friend and you can get an essence of brandness? And a debt you can’t pay off.

Food. Overpriced and aspirational next to overpriced and junky. I’ll pass on that, thanks all the same

Of course there are plenty of eateries, to cater to all tastes, aspirational and clean-living-ish, or good honest junk.

Brands stretching as far as the eye can see

The Ermine is beginning to suffer from anomie, now. Looks like the Massage Angels have that taped, only chillaxed shoppers in this Cathedral of Wants, please. Does Sir want a massage treatment?

God knows how much that was, indeed, there’s a theme to Westfield that hardly anyone has prices clearly on show. I was brought up with the maxim that if you need to ask the price, you probably can’t afford it, but the credit card can fix that round here.

Do you need a massage, sir?

Here in this brandfest I see happy smiling people in thrall to Consumerism. I’d be nicked if I took a wet fish and slapped a few round the chops and said hey, there’s a real world out there, can’t you see this is the road to Debt Hell. Maybe I need to invoke Mr Money Mustache over from the States to deliver some good Mustachian Punches to the Face but then he’d get nicked. And I’m still hungry and above all thirsty.

Starbucks – hits you right in the face as you get off the station at Stratford

There’s the evil Starbucks, the trouble with that joint is it’s hard to get both a regular filter coffee rather than some poncy confection that has half a ton of sugar in it. And then their cup sizes are so huge. The last time I used to drink coffee by the pint was at university. And it doesn’t matter if it’s Jamaica Blue Mountain, if you serve coffee in a frickin cardboard cup it tastes of waxed cardboard first and coffee second. And you can’t get anything for under a pound in Starbucks. I guess for cost by volume it’s not so bad, but even two thirds of a pint of coffee is a bit much.

I spot a shop that sometimes sells needs, not wants, WH Smith. Look at the evil heart of darkness that stirs in the pricing structure of drinks.

How often do you drink two sodas in a row, eh?

Once again I see why we are all getting so fat, as the evil God of Consumerism decrees that chilled sodas are sold in Twos. Let us ignore, for the moment, the fact that nearly all of the stuff in this cabinet is basically chilled sugar water (or aspartame flavoured water) which costs about 10p to get here, and is stupendously unhealthy. The Buxton mineral water (a Coca cola franchise now ISTR) is okay, but you’re still being rushed at £1 a pop IF YOU BUY TWO. It’s the Starbucks problem again. I don’t want two. I want one, to drink now. Two would make me go looking for the toilet, and if I hang on to it the chill will go by the time I want to drink it. No wonder that we are all getting to be fat bastards, if we have to buy two sodas because the marketing is such that you buy one for £1.50 and two for £2. No. On yer bike, WH Smiths.

I consider going to the toilets at the other end of the mall and cupping my hands under the tap, but it’ll taste of chlorine. I take a gander at M&S, who are selling ginger beer (yes, I know, sugary crap but I quite like it). Once again the Starbucks doctrine holds, 90p for one and £1.50 for two. I stick with one. Then go to Waitrose and get a sausage roll for 85p. So the Ermine managed to get out of Westfield without being fleeced, but boy, did I see an awful lot of other people being fleeced.

When you boil it down to the essence, there’s nothing that you can buy in Westfield that you need. Everything is a want, and most of these wants you didn’t know you want until you got there. And there are loads of happy people running up loads of happy debt. It’s called retail therapy, making yourself feel good by buying Stuff. No wonder Damian Thompson, channelling Paul Graham, claims that addiction will be the leitmotif of the 21st Century. I have seen the addictive future in Westfield, and it ain’t a pretty sight. I got out just £2 poorer, I’d imagine most of my fellow shoppers would have been skinned for at least £200 by the looks of the shopping bags 😉

Ermine 1, Westfield Cathedral of Wants 0


Treuhandanstalt for Greece – the first glimmer of a solution?

All the so-called ‘solutions’ for keeping Greece in the Eurozone have been targeted at the symptoms. Too much debt or not enough money; Greece spends more than it earns, so either cancel their debts or give them a load of money. That sort of thing works well enough to address the debt, but not the deficit.

Which is why Angela Merkel hates it. In there mind’s eye she sees Greece’s National Debt as some sort of nasty sawtooth function starting at 0 in 2001, dropping to -loadsamoney in 2011, injection of loadsamoney from someone probably Germany, rinse and repeat every 10 years.

Merkel's vision of Greece's finances. Nasty, eh? Each red oval is a injection of Someone Else's Cash

Meanwhile, over at FT Deutschland we have the Dutch finance minister de Jager snarling about the way club Med have taken over the ECB and the clowns are running the circus. You don’t need to speak German to understand the graphic showing the vicious circle (Teufelskreis). Basically the kitty is empty, the government goes to the IMF, IMF gives money with strings that include raising pension age, weakening employment protection etc, the voters go on the streets, kick the government out, new government forms, goes to IMF etc..

So de Jager wants to take the process out of the hands of the Greek government, by privatising the state organisations in a similar way to how West Germany bought out the East German state-owned organisations. He has to sell the money going to Greece to his own Dutch voters, insisting the money is only doled out via a Greek Treuhandanstalt.

It might be a solution. What needs to happen in Greece is for the rule of law to be broken – the contracts that established the absurdly low retirement age and overmanning would be annulled, just as the rules of the old East Germany were written off. There will be a lot of losers in that game.

Now you can’t impose that sort of thing from outside. But Greece will have an election in June, so a clear message ‘ we offer this solution, that has worked before, and the money to make it fix your problems’ together with the clear alternative ‘or you need to find a different way on your own’ is binary enough to be put to the vote.

The problems seems to be that the Greek constitution doesn’t work with the Eurozone – it can’t achieve enough productivity to have any hope of sorting the balance of payments. There’s not enough trust in the action of Government to get enough tax revenue to pay for what it does. Indeed, de Jager is most forthright about it –

Weite Teile der griechischen Wirtschaft sind nicht nur sozialistisch, sondern fast kommunistisch organisiert

Large parts of the Greek business are organised not so much along socialist lines, rather they almost organised along communist lines.

Before the Euro Greece could simply devalue to adjust. That’s the great thing about having your own currency – if you can’t be bothered to be productive, your currency will fall to make imports dearer to compensate, so your national lifestyle choice can be retained. Greece doesn’t have this luxury now, something has to change. Greece and Germany are outliers in Europe, and somehow thay have to become more alike. There are huge risks – a lot of what Greeks think of as rights and value will be written off.

Interestingly, there is a similarity between the Treuhandanstalt proposal for Greece and the analogy to the nascent USA drawn by Ray Dalio (hat tip to Monevator). At the moment Europe is a collection of countries each pursing their national self-interest. There is no executive tax-raising entity called Europe [1].

The early American states had many of the problems Europe has now, including trade imbalances and debt. This too took about a decade to show up, post Independence. What they did to resolve it was create the United States of America. Pretty wild, eh?

They had advantages over Eurozone Europeans, though.

  • no extensive history of fighting each other like rats in a sack
  • a single language
  • greater commonality of situation (all had recently become independent from Britain)
  • no common currency

East Germany compared to Greece

Although I see the Griechische Treuhandanstalt as a potential technical solution, I don’t think it will fly. East Germans shared a common pre-war history with West Germany, a common language and a common culture. There were obvious things wrong with their pre-unification existence in terms of material wealth and restrictions on movement. It’s interesting that even so, there was a lot of turmoil and discontent in the actions of the Treuhandanstalt, as things east Germans had taken for granted such as job security and some entitlements were wrecked in the upheaval and the shift to private enterprises from the old State run enterprises.

The West Germans weren’t all chuffed either. I recall my grandmother grouching about how her generation had rolled up their sleeves to rebuild Germany after the war and implement the Wirtschaftswunder (economic miracle of postware Germany under Adenauer) and now their pensions were being taxed another 1% to do the same for the East. The Hartz reforms of the early 20o0s in Germany reduced the level of unemployment benefits, and caused some public unrest.

The equivalent of the economic handouts to Greece was the acceptance of the OstMark at parity with the West German Deutschmark. The East German economy was a basket case and this vastly overvalued the Ostmark.

However, it would be churlish to say that the buying out of East Germany by the West has been anything other than a success

Let’s take a look at the comparison with Greece. Greeks have had a great time of the early 2000s, so all they see is loss in any move to a Griechische Treuhandanstalt. That’s the greatest problem – there’s no real upside. As Christine Lagarde said, it’s payback time for Greeks. That’s a hard sell, and voters are likely to flip the bird to such a suggestion, even if the alternative isn’t all milk and honey either.

So although it’s the first suggestion about the Greek crisis that might work at a fundamental level, I don’t expect to see Greeks to vote for a Greek THA. That’s the trouble with IMF tough love in a democracy, it’s not a vote winner. And herein lies the problem with democracy all round – it’s hard to get votes for tough  decisions. I’m still expecting a Grexit

[1]before UKIPpers jump in, if the British Government didn’t agree to the level of EU taxation it could secede which is not so much the case for say, Idaho.

Dysgenic fertility. People really are getting dumber over the years

Sometimes you get to read something and just have to go what the heck? Did I read that right?

Dysgenic fertility means that there is a negative correlation between intelligence and number of children. Its presence during the last century has been demonstrated in several countries. We show here that there is dysgenic fertility in the world population quantified by a correlation of − 0.73 between IQ and fertility across nations.

from The decline of the world’s IQ (Richard Lynn, John Harvey 2007)

What this paper is saying is that since about 1950 humanity is slowly getting more stupid because people who have loads of kids turn out not to be the sharpest tools in the box, on average.

You’re not usually allowed to even think that in polite society, never mind write it down in a scientific publication. It seems that the premise of the movie Idiocracy is correct. Warren Buffett needs to steady on talking about his much-vaunted human ingenuity. Looks like there’s going to be a lot less of that to go around in the years to come 😉


The problem is gathering momentum too

It is estimated that the effect of this has been a decline in the world’s genotypic IQ of 0.86 IQ points for the years 1950–2000. A further decline of 1.28 IQ points in the world’s genotypic IQ is projected for the years 2000–2050.


Robert Peston’s Great Euro Crash programme

It was time to dust off the Ermine Telly lurking the corner of the spare room to watch Robert Peston’s Great Euro Crash. Despite a histrionic presentation and less than mellifluous voice, Pesto’s usually worth a gander, because he takes us a little bit beyond the ‘oh God it’s all so awful and going to end in tears’ into at least why it’s all so awful.

Robert Peston in the Great Euro Crash

One of the interesting questions about the problems in the Eurozone is how the hell did Europe get itself into this mess in the first place. The answer isn’t as obvious as ‘there was too much ganja lying about in Paris and Berlin in 1998’. This muddle has been brewing for years arguably from before I was born 😉

One of the things that’s hard to appreciate from a large island on the northwestern edge of Europe is just how dear the United States of Europe is to many EU politicians, particularly those of a certain age. Most of ours in Britain just don’t have this either of personal conviction or because they know it isn’t something dear to the British electorate.

It was all about trade and the Common Market in 1975 (and presumably 1973)

I recall voting in the referendum of 1975 and it was all about trade and the benefits thereof rather than the creation of the USE. This referendum was about Britain’s continued membership of the Common Market – we had entered in 1973 ISTR. I wasn’t of voting age or even 16 by then; I believe the Daily Mail is wrong in throwing this hissy fit about the referendum that nobody under the age of 53 had the right to cast a vote. Either that or my own recollection of voting in this referendum as my first experience of democracy is wrong. I think you only had to be older than 14 to vote in this referendum. A flavour of the debate can be had from the text of the explanatory note. It’s about trade and given the same information I would vote yes again. What I did not sign up for was a USE. Most of the issues that yer swivel-eyed UKIPers get worked up about I don’t really give a toss about. I’m happy to drink beer by the half litre in Munich or the pint in Ipswich but if it gets to be the 500ml in Ipswich then so be it. But there’s no real appetite for a United States of Europe in terms of political union in the UK that I’m aware of.

Which is why the UK has always been looked at as the Island Kingdom from the EU political commentariat. From virtue of its geography and its 20th century history the UK doesn’t share some of the experiences that for good or for ill shaped the founding of the EU. But the virtues of a European common market and some harmonisation of trade standards seemed like a good idea in an increasingly globalised world and I still feel that way.

Somewhere the dream changed from a Common Market to a United States of Europe

Peston’s programme really highlighted the emotional hold of the dream of a United States of Europe on a lot of the people that drove the direction of the EU. Now I’m not even fundamentally against the concept of a USE but I think it is clear to see that there isn’t the common cause as yet across the people of Europe. And it seems the most bizarrely stupid idea to first go for economic harmonisation before political harmonisation. There are lots of superficial reasons why a common currency would be great and indeed I was all for it in the early days. But then I’m an engineer not an economist so all I saw was it was a right PITA to change currencies all the time. I was wrong about all that but it didn’t matter because I wasn’t part of making the decisions.

However I’m grateful that the old curmudgeon Gordon Brown inserted a hefty spanner in the works as far as the UK is concerned. Indeed I had personal unpleasant experience of currency unions before in paying 14% mortgage interest in the early 1990s when Britain was trying to match the Deutschemark.

We couldn’t do it, for the same reason as the Greeks can’t do it. Say it quietly, but we just aren’t prepared to work as hard as the Germans. So we like to have more inflation that the Germans to lose some of the difference by quietly eroding the value of capital assets. And in the end it’s more important that we live according to our cultural values of work and thrift as opposed to profligacy and ‘have it now’, as long as we’re prepared to eat the consequences as far as it affects our ability to buy foreign stuff.

Lose that ability like the Eurozone does and you need to reintroduce capital controls. Which is patently not the aim of the Eurozone, so we have the curious result of a Bretton Woods system of fixed exchange rates without the capital controls necessary to make it work. Result misery as Wilkins Micawber would say. Of course Germany could pay for the deficits other countries are running but for some strange reason that doesn’t play very well with the man on the Berlin S-Bahn even if the deadweight of some of that Greek deficit is keeping the Euro down and the man on the S-Bahn in a job.

Lest we forget the most obvious example of a United States, America shared a common language and a largely common culture but started off with a very different economic structure across the States. The slave-powered and agricultural Confederate South of the US was very different to the industrial and mercantilist Union of the North.

They had a bloody good punch-up in the mid 1800s to resolve their differences about how the economy should be run ISTR. I’m not all that sure that we want that sort of thing in Europe but looking at all the finger pointing and nationalist abuse going on between say Germany and Greece at the moment forcing both countries to agree on how to run an economy isn’t leading to peace, harmony and a collective outpouring of kum-bay-yah.

peace, harmony and a collective outpouring of kumbayah, apparently

If European politicians wanted a United States of Europe I’d say the experience of the United States of America should have warmed them up to that unifying economics isn’t the first place to start. I haven’t seen anything to date that changes this 😉 If a USE is such a great thing then it needs to be sold to the electorate first.

I have no idea how you sell the USE to a bunch of disparate nation-states most of which have centuries of ways of living differently to their neighbours. And I’ve got no idea of why this idea is so magnetic to particularly a certain generation of European politicians. The EU has done much for a more general understanding and interchange between Europeans – I led a working party in a EU RACE project in the 1990s and drank a lot of beer in European cities as well as getting some research done into optical transmission systems. As an incidental improvement of a bunch of young Europeans’ awareness of each other’s countries they did well.

However in the specific case of my team it didn’t lead to any of us having a greater desire for a United States of Europe, though we had an enhanced appreciation for the particular qualities of the various nations 😉

Give me a wet fish for Angela with her ‘the answer is More Europe’

Every time I hear Angela Merkel say the answer is more Europe I want to slap her round the chops with a wet haddock. The first answer to being in a dreadful muddle is to stop. Above all stop digging. Then to ask yourself how you got here and how you’re going to get out.

More Europe? Nah more haddock methinks...

More Europe ie hurrying up the creation of a United States of Europe is one answer. You’d probably have to kick out the island kingdom but perhaps that’s good riddance. However Merkel might want to look at the U.S. Europe she’s creating. It will be full of people who hate her guts with good reason. The Greeks have fouled up their economy, and will hate her guts for Austerity. The Germans will hate her guts for making them pay for the Greeks’ retiring at 50. Is this motley rabble really a recipe for lasting success? I never really understood why she wanted to go this way before I saw Peston’s programme, because the numinous quality of the United States of Europe just isn’t part of British culture. I don’t think it’s part of mainland European culture either but in the interviews with the politicians it does seem to be part of their culture.

If a USE is desirable then we should have started a lot earlier to make it a politically desirable destination, rather than fudge it by trying to slam the economics together to make people bow to the political union from a state of fear. Seems a strange way to carry on. Basically if you have to trap the people of Europe in a political union then either you haven’t made it attractive enough or you’re pushing something people just don’t want to do. Either way this is not what democratically elected politicians should be doing.

It also doesn’t look pretty when to get things done you have to eject elected politicians and start telling others what they should do. Merkel is perfectly within her rights to say you Greeks ain’t gonna be getting our lovely German Euros unless you sign up to our horrible austerity. Then she needs to back off, STFU and leave the Greeks to sort out what they’re going to do. It’s not going to be fun in Greece whatever happens. But it should be up to the Greeks which particular version of Hell they’re going to run with. More Europe is one answer. It’s not the answer until enough Europeans have decided that it is.

This is what real money looked like when Helmut Schlesinger was at work

Robert Peston left the conclusion open. So let’s leave it to the erstwhile president of the Bundesbank Helmut Schlesinger who saw Britain unceremoniously ejected from the ERM in 1992:

“One should consider that monetary unions, or more precisely, coin unions, have survived for a long time, but never for more than three or four decades.

“My personal experience with the German currency is that it has undergone changes at three occasions during my lifetime. When I was born, it was changed into the reichsmark. When I began to work, it became the deutsche mark. And when I became a pensioner, it became the euro.

“The average lifetime of a currency is, as you can see, limited, as a rule, except when it is a great state with an endlessly long, beautiful history, from the kings of the Middle Ages until the Queen nowadays. Then you have got a long monetary history.”

But in Europe, that is not the case. “And I would say that either we get the United States of Europe, that is an actual political union, and then that political union gets its own currency. But then it is no monetary union any longer, but the currency of that new state.

“Or let’s stay with the current situation which we find ourselves in at the moment, and then it could be that this monetary union will not necessarily dissolve, but change, extend, scale down. I do not know. My horizon, my prognosis is very limited in time.”

Each generation has their own crisis. This one is ours. What do democracies do when the time has finally come to stop grabbing debt with both hands and start living within our means? I hope to God that if Schlesinger is right we have the Euro scaling down. Because IMO Europe is not politically ready for a political union. And I am still young enough to expect to see the European Civil War that would result within twenty or thirty years.

The sort of mutual fellow-feeling you build the United States of Europe on?

I don’t think Britain would enter a USE, there’s not the taste for it here. I hope  the Euro isn’t precious enough to the people of Europe to be prepared to die for it. I have nothing whatsoever against a United States of Europe but it has to be done the right way – by making it attractive and probably over several generations if that’s really what people want. Then it can have its own currency, which may or may not be called the Euro.

The problem with Kohl and Miterrand’s version of the United States of Europe is that it is forged in the light of a primeval fear of the power of the Third Reich. In fighting the shadows cast against the wall of their deepest fears they started to create another uncontrollable Beast in the same image. Let it go guys. Europe may have reason to be grateful to the Greeks if they are the extreme case that showed the folly of achieving political union via monetary union.

Fat Cat wants no Restrictions on Cream

Well, who’d have thunk it? Boss of Standard Chartered considers proposed European legislation to

cap bonuses to no more than salary

as preposterous. Usual codswallop “Bankers claim it could increase risk by leading to higher salaries. ”

Now I don’t think that’s such a bad idea at all. In fact it’s such a good idea I’m surprised it came out of the European Parliament 😉 Note it is not a restriction on pay. It is a restriction on the balance of pay and bonuses. The trouble with the bonus culture is not that the bonuses are large, it is the total lack of transparency and general moral hazard. The size of the bonus is only known after the fact.

There are some sorts of people we’ve always incentivised by bonuses, like the salesforce, who usually earn a low base pay and a larger bonus. However, in the not so distant past a decent salary and a modest bonus used to be enough to even get CEOs out of bed in the morning. The reason bonuses work for a salesforce is that the output can be easily quantified over the last year. Whereas the value added by a CEO is the devil’s own job to quantify. We can’t control for all the variables, so the default assumption is that he’s really great at this job. Why does that work for the CEO better than for some middle-management grunt? Because the CEO is the boss. What he says goes.

Businessweek seems to agree with me. It all started going wrong in the early 1990s, when Bill Clinton favoured bonuses related to performance. Now Clinton was a reasonably sharp cookie, but he achieved an epic fail here. “You get what you measure”, but if you’re in charge of the operation you also “measure what you get”.

That’s the rotten core at the heart of the whole performance related pay ethos. Who sets the Board’s targets – well they do. Quis custodiet ipsos custodes? So they inflate their pay, and good old Bill gave them the keys to the corporate safes. Company employees at the top have been looting it ever since, quite legally. Maybe it isn’t such a surprise that shareholder returns have been desultory since the dot-com bust, as this legalised thievery gathered pace.

What Diamond Geezer Bob did for Barclays shareholder value last year.

Now Diamond Bob might be worth every penny of his £17.7m pay over at Barclays, though some shareholders beg to differ. But wouldn’t it be so much more transparent to say this year we’ll pay him £9m, with a performance related bonus of £9m? It used to be how pay worked, it’s how it works (with the figures adjusted) for lowly grunts like me and everybody else below board level. And we’d see beforehand just how much Barclays is planning to pay it’s CEO.

Oh and we wouldn’t end up with reckless tossers taking excessive risks because when your bonus is 90% of your pay it incentivises you to bet the farm on nutty stuff that sometimes screws up so much that taxpayers have to bail you out.

In the end, what’s so wrong with a fair day’s pay for a fair day’s work, with the chance to double it if you fiddle the books right are a talented superstar with extremely rare talents capable of adding serious shareholder value? Shareholders, seeing all that awesome value you added last year may increase your pay this year and up the ante. Looks like a win-win here. There’s nothing wrong with high pay, if it really is necessary. But there’s everything wrong with a lack of transparency and control. It’s the shareholders that capitalise the company and take the risk, not particularly the employees. When Fred the Shred sunk RBS, all he lost was his job, it’s not like he was at risk of losing his life savings.

Thes Big Swinging Dicks need to relearn these facts of life, and that 50:50 pay:bonus split limit could be a good place to start IMO.

Back to Basics – What we learn from Milling Grain

Bread, the staff of life, has some interesting things to tell us when we compare making it from first principles compared to buying it as a finished product. Here’s a guest post from Mrs Ermine for whom food is a passion with the lowdown.

I buy bread wheat directly from some farmer friends who live close by, by sack of twenty or so kilograms for £8 each. This is above the wholesale price they are paid for wheat, to take into account the extra work entailed in organising collection, bagging the grain up, and so on.

Wheat in the fields

I pick a couple of sacks up whenever I am passing by, or visiting them, so there is no extra transport cost involved for me. To turn my wheat into flour I have a small, but sturdy, “Country Living” grain mill that I bought many years ago when I had a “proper job” that earned me a good deal more money than running The Oak Tree Farm  does now.

Mr Ermine, being a handy sort of chap with all things electrical, has grand plans to motorise the mill, but for the moment I turn the handle myself in the dead times when I am cooking something else. I don’t really need the extra exercise now, running a smallholding gives me quite enough of that, but I certainly did benefit from the effort  it took when I sat behind a desk all day.

American "Country Living" Grain Mill

My habit of making bread and pasta from wheat grains surprises a lot of people, but it really is quite a sensible way of carrying on. As soon as wheat is milled, the increased surface area of the tiny flour particles results in rapid oxidisation of the vitamins in the wheat. Flour that is stored for any length of time, even wholemeal flour, has a considerably lower nutrient content than freshly milled. And for the Ermine household, it has the great advantage of being cheap. Really cheap.

Your local, friendly, near-monopoly supermarket chain charges, at time of writing, £1.29 for 1.5kg of wholemeal flour. A rapid calculation shows I pay 60p, a mere 47% of the shop-bought price. When you start to make bread and pasta, the savings really add up, but you could just as well benefit from those savings by using shop bought flour.

So in short, thanks to a one-off investment in the grain mill, Mr and Mrs Ermine eat better food for less than half the price of supermarket supplies, thanks to a friendly transaction with a local farmer and a small amount of physical effort. Our food miles are vastly reduced too. What’s not to like?

Mr Ermine adds:

The cost difference suprised me, as it shows the invisible hand of the market is in full price-gouge mode. A 100% markup on a low-tech basic foodstuff which is a 1000-year old mature technology is really quite remarkable.

The grain mill is designed to run at 60rpm and needs about a 1/4 horsepower (200W) motor. An average human can achieve a sustained power output of about 1/10 horsepower. This accords with observation, I don’t hear the sound of this running for sustained periods of time, more 2-3 minute bursts 🙂

LOLcat lulz in your LOLs Dave

Hi Bex, LOL DC, dnt tl Sam...

The Ermine doesn’t expect politicians to speak the truth all the time, but it’s kinda nice to feel they know what it looks like even if they don’t call it 🙂 I like competence in them, even if they are doing back-handed deals with the Digger’s army. It doesn’t tremendously trouble me that David Cameron was sending ‘lots of love’ to flame-haired wingpeople of the Murdoch clan. What does trouble me is despite the finest education money can buy and all the flunkies around him our Dave was unaware that LOL doesn’t mean ‘lots of love’ to anybody else.

I even looked it up, to see it it has picked up that alternative meaning in txt spk. No, it still appears to have the same meaning as it did when I first saw it, on Usenet or CompuServe twenty years ago, in 1992. Looks like there’s lulz in your LOLs, Dave. So here’s a LOLcat, just for you.

In itself it’s no big deal, but it does make you wonder about David Cameron’s situational awareness. BTW Dave, there’s a shitstorm brewing in the Eurozone, and it’s coming our way. Just in case you hadn’t noticed, LOL

Where an Ermine learned his first ideas on Finance and What He learned

Warning. This turned out to be a rant, though unlike the Tax one it doesn’t completely lack the milk of human kindness. However, if you’re a parent that believes More Stuff compensates for Less Time with your kids you might not want to read further than Has Anything Changed since the 1960s to make life harder for Modern Parents. It’s reactionary, unprogressive and not Right On.

Sometimes an Ermine looks at himself in the mirror and thinks

Self, you have become a cynical old sonofagun

So it is with Rob (Self-Employed Investor) and Lee’s (Five Pence Piece) Call to Arms – Campaign to Introduce Compulsory Personal Finance Education in Schools. Don’t get me wrong, I’m absolutely behind them, if it happens to be the case that this is necessary.

But I have to admit, that the first thing that sprang to mind when I read Rob’s piece Personal Finance in Schools was

Eh? Don’t these children have parents? Why aren’t they learning about this at home, what’s it got to do with the school anyway?

You see, success in personal finance isn’t about making the figures add up. It isn’t about the book-keeping, though that’s important. Most people have  on-line bank access and tallying the figures isn’t the main problem.

Personal finance is about personal values, not the adding-up

Success in personal finance is about values, not about arithmetic. Money is crystallised power. It’s a claim upon future work, yours if you owe money and someone else’s if you have money. How you use power is all part of your beliefs and value system. You learn that from your parents, watching how they live life by their values.  Children who see their parents solve problems with a fist-fight learn that a fight is an effective way to get things done, children who see their parents defer purchases and buy with cash rather than credit will buy their own flat panel TV with cash rather than a credit card. Rob cites an example to prove the point

when I was given money for a summer fete as a kid, I was also told that I could keep that I wouldn’t spend[…]. That sub-clause taught me that spending 20p on a 1m cart ride was unlikely to be the best use of my money.

Here’s what I learned as as child about finance, and where I learned it from.

the Ermine is a child of the 1960s

It’s very hard to put across just how different 1960s London was compared the the Britain of today. Money was short, and there were still many bomb-sites in London left over from the war, though that had ended more than two decades beforehand. The freedom that I had as a child to wander seems out of all proportion to what is typical now. For instance, I went to primary school in New Cross, London, and walked the 500 yards home alone from when I was 8 I believe, before then my mum or other adults had helped me across roads –

early school route

The school and my parents’ house have both been demolished since then so the start and destination are approximate. The halls of residence for what is shown as Goldsmith’s College were a building site, and that supplied endless fascination for us kids, we’d play all over them after school on the way back. Building sites weren’t the regimented walled off things with dogs and security they are now – then you’d occasionally get yelled at if a builder saw you. A friend lived on Barriedale, and occasionally we’d go through the gate at the end of the garden into the allotments and climb trees on the railway embankment at the back. We were obviously instructed not to go near the track, but there was nothing seen as wrong about playing on the vegetation fifty yards away. I get the feeling that sort of thing would be frowned on nowadays 🙂

A London of Hire-Purchase, coal fires and credit controls

This was a Britain without credit cards, though many people bought consumer goods on hire purchase. TVs were rented and black and white, and most people’s radios still had vacuum tubes in them. Central heating was rare until the 1970s, most people used coal fires.

My Dad worked as a maintenance fitter for a glassmaking firm, then at a brewery in the City of London for over 20 years. My Mum was a SAHM – though it sounds odd nowadays this was typical of the 1960s and 70s. But it did mean that I had more chance to learn from my parents, simply because I saw more of them than is typical now I believe. So I wasn’t born to parents who had masses of wealth living in a manor house. But they did have time to spend with me, and pass some of their knowledge on.

My Mum helped my Dad do the mortgage application for the house, in those days you had to put a suit on and have an interview with the building society manager, who would ask you about your income, your prospects, your outgoings, your savings, whether you were going to have more children. This was when I was in primary school, and of course I didn’t go to the interview – this was simply my own parents sharing the ways of the world with their son. I recognise the diagram below (taken from Mortgages Exposed) from my mother’s description, though I think she drew the graph as a line graph of capital repayments 😉

how a traditional mortgage builds equity

She took the time out to explain the issue of the interest and the principal (as what we now know of as the capital) get paid off, starting off mainly with the interest every year, but then as time went on more and more of the capital gets paid off until after 25 years the house would be yours. Now I know in the modern world that looks terribly old-fashioned, but we should remember than in 1960s Britain the very basics of life, food, energy, rent, took up the vast majority of people’s income. People ate out a lot less, and generally needs were a much larger part of their budget than wants. You couldn’t just wing it on interest-only and hope something would turn up by the time you retired.

It was a much more stable world, however, and because accumulating wealth was so slow, people planned things ahead more. Jobs were easier to come by though pay was average, and there was a much wider range of manual and semi-skilled jobs for labourers and chargehands as upto the skilled trades, before the big divide to salaried white-collar workers. Blue collar workers tended to be paid weekly, in cash, and have opportunities for overtime, whereas white collar workers were paid for a fixed workign week, monthly, into a bank account.

A world of Hire Purchase but no  Credit Cards

My parents also explained about how hire-purchase worked. In those days there were no credit cards in Britain, but that didn’t stop people living beyond their means. That’s what hire-purchase was for. If you bought a TV on hire-purchase then you’d pay about twice the capital cost for it over five years. But you could have it right away. In many ways it was better than credit cards, because if you stopped paying, I believe the goods were taken back and you lost what you’d paid so far, but that was it. The seller still technically owned the goods until the last instalment was paid. My parents were pretty disparaging about this as a way to carry on.

There were some cases where it made sense – for instance TVs were unreliable then, and since the title of the product remained with the seller until the end, if a hire-purchase TV broke down you could either get it fixed at the seller’s cost or be entitled to a replacement. It all sounds like a better way to do it than a credit card – say you bought an iPad on hire-purchase. If you lost your job you’d lose the iPad, but you wouldn’t have jack-booted goons from some debt recovery agency chasing you for the money outstanding on the credit card.

They’d also share their opinons on the news and why. Because my Mum was German and still had a lot of connections there, they were more attuned to international affiars than people were generally. I recall them making some pretty disparaging remarks when Harold Wilson got on the radio and told us all that the pound in your pocket here in Britain had not been devalued, despite his devaluation. They explained how he was a lying sack of shit by describing how my Grandma, when she came over with her Deutschmarks would find a cup of coffee cheaper, whereas if we went over there a cup of coffee would be dearer, and that this would affect the price of things like wine imported from Germany.

Although I learned a lot from my parents, I also recall learning about preference shares from a children’s magazine called Treasure. It described, at a high level the principles of equity and debt, how debt is senior to equity. My recollection is that they said that preference shares were senior to ordinary shares, but that on the liquidation of the company ordinary shareholders obligations stop, whereas preference shareholders may be called upon for unlimited liability.

Although the debt seniority to ordinary shares is one of the advantages listed in this modern descripton of pereference shares, the unlimited liability either means my juvenile mind distorted the description in the magazine, or this has changed over the intervening forty years.

This magazine (and its successors World of Wonder and Look and Learn) was a great investment by my parents – it expanded my general knowledge no end and as this piece shows, some of the information even stuck. It used illustrations well – the description of how the newfangled central heating systems worked, with the cold-water tank, hot water cylinder and the feed and expansion tanks in the loft is still one of the clearest I have seen.

Treasure or its successor also described how fractional reserve banking worked, though it didn’t call it exactly like that. Remember this was a magazine aimed at 11 to 16 year olds, so I don’t know what’s gone wrong with people’s greneral knowledge because this seems to come as a desperate surprise to members of Occupy.

This was a world without electronic calculators until the mid 1970s, so financial stuff was hard, and compound interest and mortgage calculations often used paper lookup tables and rules of thumb. I learned long division because there was no alternative, and scientific calculations were done with logarithm tables and sometimes slide rules. I saw a mechanical calculator in the business office of the school, a huge beast with a handle on the side you cranked after you’d set dials. Through some remarkable mechanical engineering in the guts it could add numbers, subtract and multlply, but division was beyond it.

Dad was an early shareholder, when ordinary people didn’t hold shares

Unusually for people at the time, as time went on and I was in grammar school, Dad bought shares. He bought a lot of shares in his employer, I believe as part of the Save As You Earn schemes. However, the Wikipedia entry indicates these only started in 1980, so perhaps there were other incentive schemes before then. It’s difficult to understand now just how unusual share ownership was for ordinary people, and it was especially unusual among blue collar workers. He also held shares in some investment trusts, and it was either he or my Mum that explained to be how the net asset value was not necessarily the same as the average share price of the IT and how this was sometimes good for you and sometimes bad. I was to recognise this when I read this modern explanation, but it came easy to me because I had heard about investment trust discounts and premiums thirty odd years beforehand, and indeed a high-level view of what investment trusts were. They also described what share splits were and scrip dividends.

I started at Imperial College in the late 1970s, and unlike the unseemly hurried mess I made of my own retirement plans, it appears that my Dad took a measured and strategic approach to his retirement in the second half of the 1980s. He had been in every sharesave scheme, and amassed these shares over time, his employer was a decent dividend payer that served him well in retirement. He had also paid off his mortgage by the time he was in his late forties. In his favour he had the stagflation of the mid 1970s that made his house debt look cheap. He begans to ramp up his pension AVCs – like nearly everyone else in private industry at the time he had a final salary pension, and I believe his AVC strategy was basically the same as mine, but operated in a civilised mannner over five years or more, rather than in a mad rush over three years. Somewhere in this period  I recall borrowing three hundred pounds interest free from Dad to buy the inaugural public issue of shares in British Telecommunications in 1984 I think, which I paid back from wages when I was working at the BBC.

An unexpected challenge to the workplace financial adviser

When he came to retire, Dad must have had the option of a free session with a financial adviser paid by his workplace, in a similar way to the pre-retirement seminars I’ve been on. That can’t have been that adviser’s lucky day. Not only was Dad experienced as a shareholder, and largely of the high-dividend buy and hold mentality, he was also a believer in investment trusts. I recall him spitting bricks about unit trust costs and this FA pushing unit trusts for his pension commencement lump sum, and high fees and stuff, so he’d have none of it, putting his PCLS into investment trusts and various high div shares.

Dad was basically of the same opinion about the financial adviser industry as Monevator over here, but Dad got there earlier. This must have been a nasty surprise for that adviser. After all, advising a bunch of blue collar workers on how to use their pension commencement lump sum, which was probably the largest amount of money they’s seen in their lives, and at the same time rake off pretty stupendous fees in those heady days of the 1980s must have been an easy ride with easy pickings. Except for one right old awkward bastard, step forward Dad.

He’s getting on a bit, well into his 80s these days, but he still doing well. Some of Dad’s approach to shares looks unusual to me, for instance he takes the actual price of a stock into account, never buying anything > about £8 a share and I believe he has a minimum target. He doesn’t use computers – he used to use the FT and now simply uses Teletext (or the red button alternative).

And yet Dad’s track record is far better than mine. To get where he is, bearing in mind he’s been drawing a penson for nigh on a quarter of a century, he must have preserved the real value of his PCLS and grown it while drawing some income from it. He’s done it across the decades, he wasn’t wiped out in the dot-com bust like I was, he wasn’t destroyed in 2007-8 crunch. Dad doesn’t do index investing, he’s a stock picker, because that’s all he could do when he was starting out and learning. He’s not Warren Buffett either, but he’s still there and his portfolio is doing for him exactly what I want mine to do for me. Great as they are, it wasn’t Monevator or TMF who convinced me that I could top up my foreshortened pension with income from shares. It was my Dad. You can’t argue with track record. Buy and hold works for him. His shares normally only change because of corporate actions 😉 I’m trying to get to his Zen-like approach. I don’t want to have to buy a smartphone when I am retired and track the stock market all the time. I want to sit in a boat on the middle of a lake and contemplate the meaning of life, not stress about how my shares are doing, and if I should sell TSCO and buy RDSB.

What my parents taught me, largely by example

Do not borrow money for consumption

That’s the main one, basically Micawber’s rule.They lived it – they just didn’t borrow money, with the one exception of the mortgage. They never bought anything on hire purchase. And yes, other people did have more consumer goods than my family did. But my parents took the time out to explain that sometimes men in suits with thick necks and bad manners came to some of these neighbour’s houses to take their fancy goods away, and they didn’t want that to happen to them.

Yes, I knew how a mortgage worked and don’t borrow unless against productive assets, and a motley collection of bits and bobs about shares. It was going to be ten years before I did anything with any of that, and by then I was my own man. My parents sent me out in the world knowing not to borrow money, and with some basic cynicism for advertising. That’s good enough. I’m not sure there’s any need to teach kids about ISAs and stuff. The number one biggie is don’t borrow money – essentially Do No Harm to your finances. All that stuff about investment trust NAVs was thirty years before I’d use it, and there were people like Monevator about who could tell me about that when the time had come anyway.

Other financial stuff my parents passed on was

  • how a repayment mortgage worked
  • a general impression of compound interest (this was shown in Treasure magazine, though their example lived in a delightful inflationless world ISTR)
  • how equity and debt finance worked for companies (from the aptly named Treasure magazine)
  • what shares and dividends were
  • what scrip dividends were (dividends in the form of extra shares)
  • what an investment trust was
  • how the gold standard had worked (Nixon had gone off it in 1971 ISTR)
  • the principles of the Bretton Woods system of fixed exchange rates (overtaken by events in 1971)
  • what hyperinflation did to people’s savings
  • howa savings account was different to a current account, and what you used for which
  • what standing orders were (there were no Direct Debits in those days)
  • How you needed to keep a certain amount in a current account to avoid charges (it was about £50 in the 1970s, unlike now, though the charges were not punitive as now)
  • how to fill out a cheque and what A/C payee meant. There was a time when you had to write that in manually else anyone could cash a cheque, from the days when few blue collar worers hada bank account.
  • what the difference was between a bankers draft and a cheque was in terms of repudiability
  • some idea of foreign exchange variation, and how you couldn’t devalue without increasing the cost of imports
  • a general awareness of the balance of payments, though my parents had a  mercantilist viewpoint by today’s standards

Not all of it was with a view to being used, the Ermine was of an inquisitive nature (aren’t all children?) so some of this was accumulated from ‘why are you doing that’ sort of things.

Has anything changed since the 1960s to make life harder for modern parents to do what mine did?

The young Ermine was raised, in a stable family, by both biological parents who were married to each other. And my Mum was SAHM, which was common at that time

We’ve made a different compact with the world of economics since then. The world I grew up in was stable, with plenty of jobs at all levels, and somebody who was prepared to work reasonably hard and save diligently could raise a small family and buy a house on a single man’s wage.

You just can’t do that nowadays. Not only are jobs less secure, though they pay a little better, indeed some people a heck of a lot better, but we have driven up the price of housing in the UK so that the average household needs both parents working to be able to pay the mortgage.

Housing in general is very dysfunctional now compared to then. Margaret Thatcher deeply damaged the British housing situation when she sold off council houses that had been built in the post-war period. She did this for the sugar rush of buying votes, selling off the capital assets of the country cheap.

She claimed this was to enable aspirational people to own their own home. There was a perfectly good system in Britain for people who wanted to own their own home, and as a self-styled free market advocate she would have known about it.

It was the open market – my parents never lived in a council house, they bought on the open market. They started in rented accommodation with just the shirts on their backs – when they got married they used upturned orange boxes as seats and secondhand tables. But they bought their house later. They didn’t need Thatcher’s largesse to do it. Basically if you rent from the council then you can’t afford to buy a house. That’s what council houses were for, and there was no stigma in raising a family in one. Many of the kids at my grammar school lived in council houses.

Thatcher fixed an awful lot of things that were wrong in 1970s Britain, but she did untold damage to the delicately balanced housing system, that succeeding generations have been paying for and fighting against ever since. The house I am living in is a semi-detached house, similar to that my Dad bought. I bought it on a single wage for various reasons, but I needed a white-collar job to do it in a provincial town and not London. If I had been in Dad’s generation I could have bought a detached house in the stockbroker belt of London. I couldn’t even afford to buy a house in London – the damage Thatcher perpetrated to the housing market in 1980 had already had that effect within ten years. It still echoes onwards – if I were 28 on the graduate scale at The Firm I would struggle to buy the first two-up two-down that I bought in Ipswich in 1988, as a single man.

It’s unfashionable and considered terribly reactionary, to say it, but over the years we have sold spending time with our children for time at the office, and buried the extra money we’ve earned in house price equity and consumer baubles. We have averted our eyes to the impact on those we claim to hold most dear, and tried to outsource some of the work that used to be done by parents to the State. Heck, the State is making significant transfers from those without children to those with in an attempt to fight back.

And we aren’t acknowledging the fact that raising children is work, it seriously degrades the material living standards of the parents, and reduces their ability for self-actualisation. People, my own parents included, tell me that there are great rewards to be had that outweigh those factors 😉

But unlike my parents’ generation, we now often refuse to accept that compromise. We want to Have It All, and We Want It All Now. How has it come to pass that it’s very right-on to say that It Takes A Village to Raise A Child, but you aren’t allowed to say It Takes Two Biological Parents To Raise a Child in polite company? The house sparrows outside my window know that it takes a cock sparrow and hen sparrow to raise a fledgeling, so how come we have tried to erase this awkward fact of human life in the last 40 years?

Humans have a long and difficult journey from newborn to young adult, the longest relative period of dependency of all animals. The modern world is an increasingly complex place and if anything it needs better parenting, not less parenting.

I’m not such a reactionary old git as to say there aren’t any exceptions to the two parent ideal, and humans are resilient and adaptable, we’ve always had exceptions to the historic norm of two biological parents raising a child. Countering that, we had extended families then which could take up some of the slack.

The proof is in the results. Far too often parents are sending kids out into Britain ill prepared for it, and finance seems to be just one of the areas where we have problems, then they aren’t stepping up to the plate as well as their predecessors did. If you don’t want to make the compromises that having chidren entails, then don’t have them FFS, the means to go about that are free on the NHS I believe.

As a society we could do with being less mawkish about children and actually roll up our sleeves and make life better for them. Government has mucked around with building schools and throwing benefits at families which only seems to have encourages the wrong sort of people to increase their fertility, and make the middle classes who ought to know better dependent on benefits to buy distractions for their children rather than actually spend time with them.

If Government really wants to do something for children then top of my list would be when we do build social housing for families, suspend a very sharp sword above jerks like Cameron who wants to sell it off cheap to buy aspirational votes. Then get a small monkey, say Nick Clegg or Ed Miliband, to cut the rope when bollocks like this comes out of his mouth

£75,000 discounts will help get tenants across the threshold

No. Get your damned mitts out of the housing market. Leave it alone, FFS. It’s going to take another generation of parents away from their kids, and it will reduce labour mobility. Use that £75,000 to build more frickin’ council houses, chump!

My childhood had a lot less stuff in it that current kids, But it had more adult attention in it than is often the case now. Although I’ve fingered Thatcher’s much-vaunted right to buy revolution for what has been a major source of damage for British parents’ finances, the obvious challenge is that I’m an outsider looking in. I don’t know what it’s like to raise children in modern Britain, I merely get to observe the results. Here is a view from a modern parent raising kids in an Anglo-Saxon economy who talks about kids needing their parents’ time.

In the black-and-white discourse that poses as dialectic at times, people will no doubt get on my case for saying every British parent makes a pig’s ear of this in the modern world. Of course they don’t, the vast majority of parents are doing the best they can with the resources they have to hand. Unfortunately, more and more of the marginal cases are losing the battle, and Gordon Brown’s attempts to eliminate child poverty incentivised some pretty rotten prospective parents to become parents. So an increasing percentage of kids are being sent unprepared into the tender mercies of the economic system which does its best to eat their finances. The marginal cases get themselves into trouble and in some cases make life hell for the rest of us.

Parents, you are failing your children if you aren’t preparing them for the basics of life which includes finance. Live your values and pass them on by example, and leave the schools to teach the academic stuff.

We aren’t born wards of the State, and if things are getting to the stage where schools and the State has to teach children how to become competent citizens then we have gone an awful long way wrong. We need to stop, back up a bit and cut the crap.

Parents, your job doesn’t end with bringing the egg and the sperm together. If you want a decent world for your children, then start at home. Build that decent world within your own four walls. Express your values, and live them by example. Show your kids how you save for a plasma TV and explain that if you slapped it on the credit card it would cost you 120% of the purchase price, which would bugger up Christmas.  In the specific area of finance share the basics, and tell them how the world works. Tell them over the twenty odd years they’re in your care –

  1. What money is – crystallised power, and a claim on future work
  2. Don’t spend more than you have for consumables
  3. Advertisers are corporate liars, don’t believe a world that they say
  4. They need to develop their own values and live them, not buy them in brand names and empty dreams
  5. The true odds of the National Lottery, that it is a scam designed to tax the poor and mathematically challenged and that it fosters empty dreams and it should be treated like a dog turd
  6. If something looks too good to be true it probably is
  7. There is no free lunch
  8. People matter more than Stuff
  9. Shit happens, so save towards that rainy day
  10. Paying things by instalments is nearly always dearer than saving up and paying in one go. That applies to mobile phones and expensive contracts too
  11. Markets like housing are cyclical. If they are a long way off long-term average they will probably revert to the mean
  12. Markets can stay irrational for longer than you can stay solvent, particularly housing
  13. How mortgages work. You are actually meant to pay off the capital
  14. to ask themselves whether university is an unaffordable luxury, but also to understand that this debt is atypical of other debt
  15. How a man without savings is always running

As they get into their teens and towards young adulthood, perhaps share some fundamental principles. These five aren’t a bad start.

A child is for life, not just for the Social Security claim. I can’t think of a better reason to sort your life out and get your shit together that to stand as a decent, honest example and be there for your kids.  I’m not quite yet ready to advocate applying a pair of house bricks to the offending organs for the sort of rabble that drag their kids up without equipping them with some of the basics about how the world works. But I’m getting there. Quite honestly if we are getting such rotten parenting then we are encouraging the wrong sort of people into being parents. You don’t have to teach your kids how the NAV of an investment trust works. Just start with the basics of Micawber’s rule. It simple.

Don’t buy shit you can’t afford, son. Save up for that iPad first. There are only two possible exceptions to that in life. Your education and your house, one day.

Neither of those are automatic exceptions. The reason they may be exceptions is one may make you money and the other may save you money, as long as you pay the capital off. None of this interest only malarkey, son, unless you have a plan to shift to repayment as your pay increases.

It incenses me that things have got so bad that good people have to start thinking up ways to outsource this sort of thing to schools. At this rate we’ll be expecting schools to teach kids how to use the toilet and making up for poor parenting in other ways.

It’s the parents’ job to send a child out into the world fit for life. There are always going to be some kids who are slow starters, fall into bad ways or otherwise lose their way. That’s fair enough, but make the effort, guys, then society can handle these kids as exceptions, not the norm!

In the meantime, I’m happy to support Lee and Rob’s  Campaign to Introduce Compulsory Personal Finance Education in Schools. I just want to see a Campaign For Better Parenting at the same time. We need to fight the cause, not just firefight the symptoms 😉