Game Theory and Supermarkets (nothing to do with Pictionary)

I have been looking through some of my old blogs, and given that I now have many more readers than when I first began writing (thank you) I thought I would repost a couple. Here is one that’s hugely relevant to anyone who ever shops in a supermarket.

Why do Supermarkets Price Match?

      Does your local supermarket promise to price match? Have you heard them offer to refund your money if you can buy it cheaper elsewhere? Why do they do it – are they being nice to their loyal customers? Actually, no. Actually, the price match promise is not even aimed at their customers, it is sending a message to their competitors. To understand why, we need to look at something that economists call ‘Game Theory’ (don’t get too excited, Pictionary and Cluedo do not feature.)

Game Theory is something that John Nash made a big contribution to (you may have heard of him – he was the person who inspired the film A Beautiful Mind. ) He showed that when individuals (you and me) or companies (Sainsbury’s) make a decision, we do not just take into account the things that will benefit us, the things that we want. We also take into account other people and competitors. Companies, when making a decision, guess what other ‘players’ in the ‘game’ might do. Supermarkets know that if they reduce their prices, the supermarket up the road will also reduce theirs. So they will both lose money. They do not want this to happen, so they make their ‘price match’ to their customers. This is sending a clear message to the other supermarkets. It says,

“If you lower your prices, we will lower ours too, so both of us will make less profit and neither will get more customers. So don’t do it.”

Economists call this making a ‘strategic commitment’. (Economists like to make up fancy terms, it makes them feel important.) It means the shop has made itself inflexible, it has limited its own options (because when the customer tells them that baked beans cost less in Asda, they have to match that price, they can’t just say “Oh, we were only joking, sorry, you still have to pay the original price.”) They do this so their competitors will know they are serious. They are making a tough commitment (because they believe it will influence how the other shops behave and everyone will be better off. Except for the customers maybe.)

Supermarkets have been having price wars for years. All of their actions have to be visible (no point in matching prices if your competitor doesn’t know about it) credible (their competitor has to believe that they actually will do it. If Morrisons promise a free BMW with all their loaves of bread, no one will believe that they will actually do that. Well, some people might, but not the sort of people who will be reading this) and understandable.

But why bother with the price match thing at all? Why not just tell the other supermarkets that you will lower your price if they lower theirs, so don’t do it? Well, they are not allowed to. That would be called collusion, which is illegal. We will come to that in a little while.

Firstly, let’s look at another company that has made a tough commitment. I like Kelloggs cornflakes, no other cornflakes are quite the same in my opinion. They are known in the cereal making world as being price leaders. They have always aggressively matched any price of any comparative cereal (not that any other cornflakes really do compare with Kelloggs.) Now, they are not allowed to tell their competitors that they will do this (it would be collusion – illegal remember.) Plus their competitors would probably just laugh and not believe them. However, they have behaved like this for about 200 years (I am guessing the time) and so all cereal manufacturers know what to expect and they behave accordingly. No one tries to out-price Kelloggs, it just is not worth it, everyone loses (apart from the customers. Again.) Economists (the people who like using fancy phrases) would say the cereal companies are in ‘Nash Equilibrium’. They cannot individually change and still succeed because their competitors will step in and lower their prices too until eventually they go bust.

There is another kind of commitment that companies make. This is called a ‘soft commitment’ and it is less aggressive, it more involves sharing the market place. So, Dominoes and Pizza Hut do not open shops in the same town. They have not agreed to do this (that would be collusion) they simply do not do it. They share the customer base rather than trying to force the other company to lower their prices.

Another ‘soft commitment’ can be seen with Sony and Phillips. When CDs first came out in 1982, Sony produced them but Phillips (the main competitor) did not. It let Sony go first, spend lots of money on researching the new technology and then Sony flooded the market with them. It worked to both company’s advantage. Phillips had no risk, it did not invest in a new technology which might never take off, might just be a waste of money. Sony had the advantage of knowing that if it invested in new technology, it would then have an empty market place and could sell lots to recoup its expenditure. It suited both companies.

Another way that companies share the market place is by aiming their products at different people. So, Illy makes expensive but delicious coffee, Nescafe makes cheaper but still drinkable coffee, Asda own brand is pretty yukky but very cheap. It is almost a class system for coffee! This is called a ‘fragmented market’. Again, the coffee producers could not agree to do this (collusion) nor was it historical (like with kelloggs) but they could see which areas their competitors were investing in (like growing only highly refined coffee beans or investing in cheap transportation in Brazil) so they could predict what everyone was doing and make their own decisions accordingly. (This got a bit messed up when the US coffee people entered the scene, but it still makes for a good example and I rather like thinking that I prefer ‘upper class coffee’!)

Now, we have kept mentioning ‘collusion’. What is that about? Capitalism works with the belief that the market place works best if there is free competition, if everyone is trying to win the game. People believe this so strongly that they have created organisations to police this. In the UK we have the CMA (Competition Market Authority.) Other countries have different bodies, all trying to ensure a fair market place. Competition keeps the prices down and everything working efficiently.

The exception to this, is oil. The countries that produce oil (note, countries, not companies) do collude. Which is why oil is so expensive. The actual companies don’t talk – BP cannot have a price chat (over a cup of illy coffee) with DNO – but the UK can talk to Norway. They set the price of oil (by adding tax) where they want it. They try to limit how much oil people will use.

If we return to supermarkets, we can now see that their price match promise does not actually help us, the customers, very much. However, they are still trying to entice us into their shop. So, while they may not ever give away a BMW with a loaf of bread (sorry mother) they will offer us other things. We can still enjoy our free coffee and newspaper or our loyalty card or our free knife set. It all makes shopping a little less boring.

I hope you find some bargains this week. Next week I will show you some grammar which most supermarkets continually get wrong!
Take care.
Love, Anne x

Thanks for reading.
You can follow my blog at:

Can the Euro Survive?

Can the Euro Survive?


      What will happen to the euro in the light of the Greek crisis? Does it have a long term future or will it disintegrate?

     I have no real opinion on this. So I listened in on a debate between two of my sources: an economist and a city worker. We will call them T (Tomato Source) and B (Brown Source). The words in italics are mine – either questions, or explanations of some of the terms used.

     Do you think the euro will survive for much longer?

T: No, because Germany will soon start to want it’s own monetary policy. At the moment, the eurozone has a monetary policy but Germany will decide it needs it’s own one soon. At present, if say Greece, France, Italy have slow economies, they will want to lower interest rates across the euro zone. Germany would have to comply with this, even if their own economy is over heating. (If you cannot remember what this means, read the article on interest rates published 11-7-15)

     The bigger point though is the opposite of this. When Germany wants to lower interest rates to increase consumption but most other economies are over heating. Then they will ‘stagflate.’ (This is not a form of indigestion, it means the economy is not growing but inflation is. It’s bad.)

B: I don’t agree. The currency wont inflate because it will always be balanced by those other economies. True, if Greece now had the drachma, it could use different techniques to the rest of the eurozone to sort out its economy. However, the USA works because it is centrally run. (Central government decides on tax, government borrowing etc for the whole country. Individual states decide on only some financial points.) A new ‘United States of Europe’ would work financially but all the countries would need to agree to be centrally run.

T: At present, if France, has a fast growing economy, they cannot lower interest rates unless all the eurozone agree. All they can do is change their fiscal policy. Classical economists think this cannot work.

Fiscal policy is what the government spends and what it sets taxes at. In the eurozone, the other measures to control the economy, like interest rates and the number of euros in circulation, are all agreed centrally. So, Greece could not decide to just print more euros when it ran out of money. Germany cannot decide to lower its own interest rates.

B: California is as big as a eurozone country and central policy works for them. Detroit went bust recently, but it works because they have more central control. The eurozone would work if they decided tax and government borrowing centrally, if it became a full union, like the USA. However, the citizens of the countries, the people who get to vote for governments, have never wanted this, they want the control to remain in the individual countries. This is why they have a sort of ‘half way house’, despite the theorists wanting a full union. That halfway situation is why it went wrong. They have now centralised the regulation and insurance of banks. This was an important step. The central bank (called the ECB) now controls all the domestic banks in all the eurozone countries.

So why weren’t the Greek banks protected? Haven’t they just gone bust?

B: It doesn’t stop them going bust. The insurance just protects the deposit, the money of the general public.

T: Another big problem is, monetary policy is effectively free, but it takes a long time to take effect. We’re in a recession. If I want to encourage people to spend more (and speed up the economy) I will lower interest rates. But that takes a long time to be effective. So the public feels its not effective at all (people tend to be impatient. Especially when their money is involved.)

     A faster way to speed up the economy, is through fiscal policy. The eurozone can only work if fiscal policy works. Everyone believes this. (Classical economists believe that fiscal policy does NOT work, therefore they believe the eurozone will NEVER work!)

     Whether or not fiscal policy works depends on two different things. It depends on:
1)the size of the multiplier effect
2)the scale of the crowding out

     Hmm, complicated terms! Economists love to use fancy phrases. We need to know what each of them means.

      Let’s look first at the ‘multiplier effect’. This refers to the GDP of a country. The GDP is simply the amount of ‘stuff’ produced annually in a country. It stands for ‘Gross Domestic Product.’ We’ll use China as our example because they have a big ‘multiplier effect’.

     Pretend the government decides to build a bridge. It pays £5,000 to the builder. (Yes, I know it wouldn’t be in £, but we’re trying to make this simple!) Now, that builder spends £3,000 in China on Chinese products, spends £1,000 on imports, saves £500 and gives £500 in tax.

      This increases GDP by £8,000. (Are you keeping up? It’s the government’s first 5,000 plus the builder’s 3,000 – all spent in China on Chinese stuff.)

     Now, the £3,000 of the builder was spent on a Chinese car. The car man then spends that money. He spends £2,000 on Chinese stuff, saves £500, spends £500 on imports and tax. So now we have another £2,000 spent in China on Chinese stuff, so their GDP increases again.

      That same money keeps multiplying the increase to their GDP (I am getting a hint as to how they chose that name now.) In fact, that original injection of £5,000 (from the government to the builder) increases GDP by £20,000.

     We used China as an example because in China, no one saves much, no one buys many imports (most things are ‘made in China’) and no one pays much tax. So, the ‘multiplier’ is much higher than somewhere like Belgium. Therefore, government spending in China is very effective.

     Now let’s look at ‘crowding out’. Pretend a government wants to build that same bridge and to raise the money to do so, it sells government bonds. These are in effect a way the government can borrow with interest. It borrows from banks and individuals (perhaps through National Savings Bonds) for a set period and then pays it back with interest.

     That money, when it is lent to the government, stops circulating, which slows the economy. (If I put £100 in Savings Bonds, then I am not using it to buy a new tele.) This is called ‘crowding out’.

     So, the ‘multiplier effect’ is the inverse of ‘crowding out’. (I wanted to write that it was the “opposite” of crowding out – because to my mind it is – but both my sources inform me that strictly that is not true, so we will stick with “inverse” knowing that for normal people that means “opposite”.) Whether or not fiscal policy works depends on which one – multiplier or crowding – is the most dominant

T: Therefore, fiscal policy will be less effective in places like Germany and France than somewhere like Poland. (Remember ‘fiscal policy’ is government spending and taxes.) So, even if the whole eurozone economy is slow, countries within the zone will disagree on how to speed it up, because fiscal policy will work better for some but not others. This is due to the diversity of countries within the eurozone. If they were all like France and Germany, then a central policy would be much more likely to be possible.

B: I don’t agree. In the USA, states have huge economic differences and yet a central policy works there.

T: That is because the culture across the states is broadly the same, the amount of stuff they import, the amount of tax they pay does not vary much between states. This allows a central policy.

B: Actually, I think it is because of central policy that they are similar. If all the countries across the eurozone accepted centralised government borrowing and taxation, then the euro would work. The Greek problem would probably never have happened.

     Politically, this is very unlikely to happen.

     So, can the euro continue?

B: The trouble is, politicians need to be popular to get votes. Democracy means that they are pressurised into continually borrowing as much as possible, so that life is good for the current population. They borrow from the future to keep voters happy today.

     This causes the temptation to behave rashly, to alleviate hardships today and to not live within their means. The euro takes away some of the consequences of over spending. Bad government decisions are spread across the eurozone. In the UK (not part of the eurozone) if the government overspends, then fairly soon it will face the consequences. Like Brazil had to. The countries in the eurozone can behave how they want and know that the other countries will bail them out.

     Maybe, the lessons learned in Greece will cause a change in behaviour. Maybe they will do things like set up a system of policing each other, auditing what is happening in each of the countries. Part of the Greece problem was caused because they lied about the amount of debt they had and no one checked. Even if they reject a central policy, they could introduce greater accountability. They could agree on tough consequences for governments who break the rules.

T: Whatever happens, I don’t think Germany will bail out another country. If Portugal follows Greece, I think the German people will just say no and Portugal would be forced to leave the euro. The eurozone would crumble.

     So, can the euro survive? If some new rules and tough consequences are introduced, then maybe. But it is far from certain…….

Interesting Interest Rates

Interesting Interest Rates……


       In the News this week, Janet Yellen (federal reserve chairwoman) has again said that the US central bank is likely to increase interest rates. Is this important? Will this affect you?

     Now, I have never met Janet Yellen. All I can tell you is that she has blonde hair and likes to wear dark lipstick. I can however, tell you a little about the Federal Reserve. This is the central bank of the US. It is the US equivalent of the Bank of England. So, what is a central bank?

     A central bank works for the country. In recent years, it has become acceptable for it to be independent of the government. It manages inflation and financial stability, in other words, it manages the economy. How? Well, that is a whole article in itself (not yet written but I’m working on it!) For now, lets just say that it sets interest rates.

      Now, people do not like to be shocked by what central banks do. Just like with the Swiss Pegg (see : which changed the markets by 20% in a single day. They therefore usually very carefully give hints, in tightly scripted statements. So, if someone senior (like Janet Yellen) makes a statement – trying to avoid a sudden shock – the market listens very attentively. So should we.

     Anyone who is young, may not realise that at the moment interest rates are low. Very low. Possibly the lowest they have ever been. This is due to the financial crisis – the central banks have all lowered interest rates.

     I used to own a Mercedes C class coupe. It was beautiful. It drove like a dream. It also had a ‘super charge’ button which I loved (made me feel like James Bond.) When I was stuck behind something slow, I could press my super charge button and whiz past at super fast speed. The central bank, in effect, has a ‘super charge’ button, which is to lower interest rates. If it lowers interest rates people change their behaviour. They are less likely to save (because their savings wont go up in value) it costs less to borrow money, so the population goes shopping. This creates jobs, creates income, leads to economic recovery. For the last five years, every central bank in the world has done this.

      However, central banks hate high inflation. Everyone is worse off if there is high inflation. Your money becomes worth less (what you can afford to buy with a pound this year will be less next year) it slows the economy and they do not like it. One thing that encourages high inflation is low interest rates. So central banks want to raise interest rates before this happens.

     At the moment, the US economy is going relatively well, which is why the central bank will probably begin to nudge up interest rates, before inflation creeps in.

     The other reason is that those ‘super charge’ buttons have been pressed for about five years now. They only really work for giving an extra ‘umph’ when needed, they are a back-up plan. They need to turn them off before we go into a new recession. The central banks need to get everything back to normal (with slightly higher interest rates) so their ‘secret weapon’ can go back into reserve.

     How will this affect the UK? Mark Carney (who I have met, at a dinner. He seemed like a very nice chap) is in charge of our central bank. He is saying that “nothing will change for now.” However, he is also saying that if interest rates move it “would be an increase rather than a cut.” These are those carefully scripted hints that we mentioned earlier. People (you and me) need to plan for interest rates to start going up before too long.

     Interest rates today are very low. This means that even a small increase has a big impact, even a 1% increase means big changes. For example, if you have borrowed £200,000 for a mortgage you might be paying it back at 2% interest. If interest goes up by 1%, so you are now paying 3%, then your monthly payment would go up by £100. For a normal family, finding an extra £100 every month in order to pay the mortgage, would be hard. Interest rates on other borrowing would also go up. Do you owe money on your credit cards? Have a car loan? Be prepared for the repayments to increase.

     We need to be wise, to start planning now for what is likely to happen in the near future. Listen to the hints.

The Hiccups of the Chinese Stock Exchange

The Hiccups of the Chinese Stock Exchange


     The Chinese economy is growing at 7% per year and has been doing so for a decade. It is a very healthy economy at the moment. Companies are doing well and China now has a good working stock exchange, so it is possible to buy shares in Chinese companies. So should we? Should we be taking advantage of the healthy Chinese economy and investing our money?

      We first need to understand about shares and the stock exchange. A stock exchange is simply the place where shares in companies are bought and sold. The average value of all the shares on the exchange tells you how companies are doing. If we look at the Chinese stock exchange, from July 2014 to May 2015, the average value of shares more than doubled in value. If you had invested £200 in July 2014, by the end of May 2015 it would have been worth over £500.

ImageSource: Bloomberg

     However, before you rush out to buy shares in a Chinese company, you need to know that today (July ’15) those same shares would be worth less than £400. The Chinese stock market is crashing. Why? What is happening? Their economy is growing steadily but their stock market seems to have hiccups – big jumps followed by big slumps.

     We first need to consider what actually decides the value of a share. Firstly, a share is part ownership of a company – a ‘share’ of the company. So if the company is doing well, the share should be worth more. So if you own 1% of the company (have a 1% share) and that company doubles its income in a year, then you will either receive your share of that profit in a dividend (a cheque in the mail) or your investment is worth more (you can sell it and make a profit.) So, if the Chinese companies are doing well (which they are) you would expect the shares to be also growing steadily in value.

      In the long term, this is likely to be true. The steady growth of the companies will be reflected in a steady overall increase in share values. However, in the short term it is more erratic. Why? What else influences share prices?

      The second influence on the value of prices is supply and demand. Confidence in the Chinese market pushes up prices of shares. (Refer back to the article on market places if you are unclear on this. Remember, it’s just like ebay. Something that is popular will go up in price.) Global confidence in the Chinese market pushes up share prices. The share prices might even be higher than the value of the company itself.

     An example of this (though not a Chinese one) is Uber. In London, only black cabs can be hailed. Regular taxis have to be prebooked. Uber has created an app whereby a customer wanting a taxi can ‘order’ one on their phone. Any taxi who is part of the Uber scheme can respond and pick up the customer. It links taxi drivers and passengers. Excellent idea. I predict the company will do well. Unfortunately for me, lots of other people also think it will do well. That has pushed up the price of its shares, because lots of people see it as a good investment and want to buy them. According to the share price, Uber is worth twice as much as Sainsburys (though Sainsburys is probably worth a lot more as a company.) If I want to make money on the stock exchange, I need to be ‘ahead of the pack’. When everyone notices the same trend, it pushes up the price of shares, which lowers the likely profit from a short term investment.

     Now, the Chinese stock market is unusual because the overwhelming majority of shares are owned by small time Chinese investors. It is a culture that likes to gamble. The share holders are not interested in long term investment, they want short term profit.

      The Chinese stock market is very new (has grown up in the last five years) so people have not really seen any big ‘crashes’. It is seen as a safe bet. This is a bit like when we bought our first house. We had only ever experienced house prices going up, we assumed that a house was a ‘safe’ investment. It was something of a shock when houses prices plummeted at the end of the 80s.

      At the moment, small time investors see the Chinese stock market as a ‘safe’ investment. A lot of people are investing in, gambling on, the stock exchange. The share prices have become driven by rumour and speculation as people try to predict the future value of companies. The stock market has become more linked to crowd behaviour and less to the real value of companies. This explains the hiccups.








 This week, the Bank of England announced that inflation is now negative – this is known as deflation – for the first time since the early 1960s. This means that buying basic goods is getting cheaper rather than more expensive. This is good right? It means we all save some money? Let’s have a look.

     Firstly, what has caused this deflation? Inflation is often driven by the price of oil. So much of both manufacturing and our every day lives are dependent on fuel, that a change in oil prices affects everything. If oil goes down in price, almost everything else does too. In the last six months, crude oil has halved in price.

     So, what has caused this? Why has oil, a commodity which cannot be made but only extracted and refined, suddenly become cheaper? Oil is produced by very few countries and many of them are in the middle East, including Saudi Arabia. Now, Saudi Arabia has deliberately increased the amount of oil it is extracting and selling. The oil markets are like any other market (see the article on the Swiss peg). If there is lots of oil, then the price goes down.

     Why though, would Saudi Arabia increase their supply? They have halved their income from $100 per barrel to $50 per barrel. Why would they do that? Good question! No one actually knows (apart from the Saudis I guess.) However, there has been lots of speculation and there are two different likely reasons:

     Possible Reason 1: Due to oil prices being so high, people had become very inventive at finding ways to not buy oil from Saudi Arabia. They started trying to find their own oil. One method is through fracking, removing oil from shale (in your own country). Fracking is expensive but if it is cheaper than buying oil from Saudi Arabia, then it is worth doing (unless you live above where they decide to it of course!)

      Now, Saudi Arabia sells a lot of oil to the US, they are not happy that the US is becoming self-sufficient with its oil production. If therefore, Saudi Arabia reduces the price of oil, just for a little while, just until all the new fracking companies go out of business, then in the long term, it will be better off. They can then raise the price again, having bankrupted all their competitors. Is this why they have increased production? Not good for the US frackers (I need to be very careful how I write that word!)

      Possible Reason 2: Depending on your political/religious viewpoint, some of the dodgiest regimes in the world are completely dependent on selling oil. (Places like Russia and Iran.) The most effective way to defeat a regime is thought to be economic – people who cannot have what they want to have are generally dissatisfied, dissatisfied people try to change their government. Up until now, sanctions against these countries have been less than effective because they both have oil. That oil is now worth less (because Saudi Arabia has flooded the market, so to speak.) This will put a lot of pressure on those regimes. The US will like that, so maybe Saudi Arabia is acting in unison with the US.

     Let’s go back to the original question, is deflation good or bad? Governments, on the whole, do not like deflation, they think it is bad for the economy. If everyone is spending, moving money around, that is good for the economy. If companies are investing (buying new equipment) then that too is good for the economy. However, if people see prices coming down, if they know that if they wait for a month, that new television will probably cost less, then they delay spending money. Delayed spending means less money moving around, which is bad for the economy. Therefore governments like to have low inflation. Now, this present deflation is probably going to be fairly short in duration and will not plummet too far, so it will make very little difference. It is an interesting occurrence though and shows what a completely connected world we live in.

A financial article is posted every Saturday.

The Swiss Peg (Nothing to do with Clothes Lines)

The Swiss Peg

In January 2015, the Swiss Central Bank de-pegged the Swiss Franc. Within a few hours, the amount of euro you could buy with Swiss francs decreased by 20%. What does this mean and why was this significant?

Let’s start at the very beginning (in the words of a famous song.) In the global society that we live in, people want to buy and sell stuff between countries. That means, buying things that use different currencies. For centuries now we have had exchange rates, which decide what one currency is worth compared with another. They determine how many euro you can buy with your pound when you go on holiday.

Who decides what the exchange rate should be ? Who decides how many euro you will get for your pound (or dollar or yen) Well, in most Western countries the exchange rate is set by “the market”. Every day the banks match up buyers and sellers of currency across the world and that decides the price, ie the exchange rate. People want to change currency for a number of reasons, pushing and pulling the exchange rate up and down. For example, maybe millions of Americans want to come to the UK to watch the Olympics, that will put up the exchange rate – they will get fewer pounds for their dollars. But at the same time, Apple might bring out an exciting new iphone that everyone wants to buy, that will raise the price of the dollar, making it even again.

We can see how the foreign exchange markets work by looking at ebay. Pretend you want to sell your VW beetle lego model on ebay. If you set the price too high, no one will want to buy it but other people who own a lego VW will see it and decide that they want to sell theirs too. There would be too many sellers and no buyers and the price would start to go down. The opposite is also true. If you put your lego model on ebay at a low price, no one else in the lego community would think it was worth selling theirs. Then lots of buyers would bid for your model, which would push the price up. At a certain point, other lego bods would decide it was worth selling their models too and the price would stabilize. It finds a natural level.

Now, some countries do not want to be part of the free market, so they control their currency. The government sets a price and their currency can only be bought and sold at that price. It reduces the amount that other countries want to trade. (In recent years, this has happened in China and the old USSR.) Or, sometimes a dictator will decide to set the price of their currency too high (in recent times, this happened in Zimbabwe) then people decide to just ignore it and an illegal black market is formed.

In the open market place prices are also affected by fashions, rumours and what people think will happen in the future. So, when the Conservative government won the last election, whatever your own personal views might be on that, the international market thought that the UK was worth more and the price of the pound went up by 4%. Nothing had changed, we didn’t suddenly have great weather and become a tourist destination, it was just that people’s view of our economy changed and that altered the markets. It reflects what causes most changes in the exchange rate. It is more about optimism and fashion and less about physical things, real economy or cash flow.

In the last five years, there have been lots of worries about Europe. There have been worries that some countries (Portugal, Ireland, Greece) might collapse and the Euro might go down in value. In comparison, the Swiss franc has looked very stable, very safe and so its value has gone up. That’s good for the Swiss people right? Well, not necessarily. It means their foreign holidays will be cheaper. But if they are an exporter, wanting to sell their chocolate, watches or knives abroad, then it makes their goods more expensive, fewer people will buy them. For the Swiss, their core industries are their exporters (if you have forgotten what that means, read the article about the European Union.) Therefore, too high an exchange rate is generally bad for Switzerland.

So, the Swiss government decided to do something. In 2011 the Swiss Central Bank set a target maximum price for Swiss francs, they said they would act in the markets so it would not go above a certain rate. This is called pegging. They agreed they would always sell Swiss francs at a certain price, so no one would go elsewhere and buy them at a higher price, therefore no one bothered to try and sell them at a higher price. The bank then had to actually sell francs at the declared price (to make it real) so it was regularly buying other currency (which it stored.) Now, because they were a strong, trusted bank, saying they would buy other currency, which kept the Swiss franc below a certain price, everyone believed them. This continued for several years.

Then, in January 2015, they announced that they were removing the peg. The exchange rate changed by nearly 20% in a morning, the biggest one day change in a single major currency for decades. Wow.

The European Union: A Benefit or a Hindrance?

The European Union: A Benefit or a Hindrance?
Anne E Thompson


      In society, people have different economic roles. Some work for the government (nurses, teachers) and provide a service. Some work in the private sector (this just means ‘not government worker’ – sounds more complicated than it needs to!) In the private sector, some people provide a service (coffee shop worker, plumber) and some increase the stock of assets of the community. In other words, some people add something (farmer grows grain, factory makes cars.)

If we look at that last group, they increase the stock of assets in various ways. Some reap from nature (miners, farmers). Some create/make things (factory workers, writers of computer software). Some bring in wealth from other countries (tourist industry). Lets call these three groups “the core industries”. Remember, they are adding to what a country has.

In the long term, the prosperity of a country depends on these core industries. The people who provide services are important ( I am particularly fond of Costa coffee) but they just move money in circles. It is the core industries who actually add to what a country owns.

We have just had a general election. The politicians spent a lot of time discussing how they planned to move money around, to spread the wealth between rich people and poorer people. There was very little said about actually helping those core industries (the industries who actually add to how much is owned.)

Now, I am really enjoying watching Bear Gryll’s series The Island. I sit and shout at my television, giving them all lots of advice. The two groups spend a lot of time discussing who spends too long sunbathing, how much water they can all drink every day. However, none of them will survive unless someone actually collects the water or finds some food. In other words, they need some core industry.

We live today in a globally connected world. Within that world, the UK needs some core industries, something that it is really good at. We do not, compared to places like Australia, have great mining resources. We do not manufacture as well as the Germans. Our computer industry is not as advanced as the US. We do not farm on the scale of Brazil.

So what does the UK have? We are the world’s trusted market place. We have a sensible legal system, a stable government, a city that is geared up to helping the world do business. And we are good at it. The Chinese, the Russians, the Indians, they all trust the UK. This is the place where they trust they will be treated fairly, they want to conduct their business here. English has become the international language of business.

Now, if you talk to a German, they know that keeping Volkswagon, Mercedes, BMW, Porsche, Audi strong is important. They know that these are their core industries. If they go down, their economy will be in trouble. In the UK, most people do not seem to realise that our lawyers, insurers, bankers, traders, accountants (the people who operate that global market place) are our best core industry. The money they take from the rest of the world ripples down to the rest of us.

If we want to remain as the world’s market place (and remember, we don’t really have anything else that’s as good at increasing our country’s wealth) then we need to stay connected to the rest of world. We need as few barriers as possible.

In the last twenty years, the European Union has been a huge part of that market place for the UK. People from around the world use the UK as a gateway to trade with Europe.

It is clear, even to me, that the European Union is far from perfect. I think they have some silly laws and we have a problem with immigration. However, we need to be wise. These may be things we have to endure in order to protect our core industry. Leaving the European Union would severely damage our status as the world’s market place. The knock on effect of that would affect all of us.

If we think again of Bear Grylls, someone has to kill the pigs.

Manipulation of the Financial Markets

Manipulation of Financial Markets


This week, a bank was fined two and a half billion US dollars for manipulating Libor. There was also an English man who had his bail set at five million for spoofing Futures markets. What do these terms mean? What did they actually do that was so bad?

Let’s go to Rabbit Town. They have a big fruit and vegetable market. Jim has a stall where he buys and sells carrots. The market has a big carrot section, there are about fifteen other carrot stalls. Every day, the town publishes the average price for carrots. People use the Town Price when they are doing their deals. For example, the Rabbit Town school buys 20 carrots every day from the farmer and they agree they will pay the farmer whatever the published price is.

The town calculates the Town Price very carefully. They ask all fifteen stall holders what their price is for that day. They then take off the top two (most expensive) and the bottom two (cheapest) and work out the average of all the others. That then becomes the Town Price for that day. People do not have to use it, but it’s a helpful guide.

Now, Jim has two brothers. One brother is a carrot farmer and he sells carrots. The other brother owns a soup factory, so once a month, he buys carrots. Both brothers have contracts with other people and they have agreed to buy and sell carrots at the Town Price. They know that the price that Jim gives in to the town hall, very slightly affects what the Town Price is set at. When they have carrots to buy or sell, they go to see Jim and ask him to slightly move the price on his stall. Not too much, because he doesn’t want to be in the top or bottom, but just enough that it alters the average a tiny bit, moving it to be in their favour. Jim likes to help his brothers, so he agrees. Sometimes he even persuades his friends to change their prices a little too.

If carrots are interest rates, then Libor is the Town Price. It stands for London Interbank Offer Rate. It is the interest rate that banks use when they lend to each other.

Jim was meant to give in the actual price that he thought he could buy and sell carrots at, not a price that would help his brothers. Even though, due to averaging, it doesn’t change the price much, it is still corrupt. The fines given to banks who do this have been huge. Now, as Jim’s false price sometimes went up and sometimes went down, it is unclear how other people were impacted. The big fine does not seem to really correspond to the financial damage that was caused. We’ll discuss this a bit more later.

Let’s take a look at ‘spoofing’ now. What is it? Well, imagine Jim has loads of carrots and he wants to sell them to other stalls. He wants the price to be as high as possible, so he makes up a rumour. The rumour says that a big carrot buyer is about to visit the market and he needs lots of carrots. Jim then sends anonymous notes to all the other stall holders, putting in orders for lots of carrots. All the stall holders quickly put up their prices, ready for when the big buyer comes to town. Jim then quickly cancels the false orders, sells his carrots to them at the higher price and makes a nice profit. This is called spoofing. It is against the law in financial markets.

Let’s look at one other thing that might affect prices. Jim has some special carrots. They are bigger and more orange than all his other carrots. He keeps them on a special shelf and they are not the same price as all the other carrots. That is allowed – he can have a special price for special carrots. What he is NOT allowed to do, is to wait until a customer arrives and then change the price for what he thinks he can get. He cannot look at Mrs Bunny and think, “Ah, nice watch, designer handbag, new shoes, I will charge her fifty quid a carrot for my special carrots.” This might be what your plumber does (“Big house, that’s a £70 call out fee” or “Small house, old lady, that’s a £30 call out fee.”) but banks are increasingly not allowed to. It is called ‘price discrimination.’

Now, we can see that banks are expected to behave differently to other institutions. If a car company does something bad, even something which is negligent and causes people to die, they will probably be given less big fines than the banks. Why? Is this fair? Personally, I think it is right. I think that the fine is not related to the injury caused financially, but the injury that has been caused to the bank’s reputation.

Our society relies on banks. We need them to be completely trustworthy and so the standard set for banks needs to be higher than the standard set for shops or manufacturers or plumbers. The financial stability of a country depends on the banks, so we need stringent rules set in place to keep them honest. They used to have similar rules to other companies but that has changed and they are now much more tightly regulated. If the laws are clearly set in place and applied to all banks equally, I think that is fair. I want to be able to trust my bank. In the same way as I want to be able to trust my legal system.

There are some politicians who like to bash banks, who think that if they impose big fines then they will be elected to a higher office, they will personally look good. Personally, I think this is cheap and they are stupid. Don’t vote for them.

The New Tax……

101 Tax (Yuk)


       Here is a first very simple guide to tax in the UK. Due to the proximity of the next election and the possibility of a new mansion tax, I will explain what that might mean.
However, please note that I am definitely NOT promoting any particular party. Tax is just one issue amongst many.

     At the moment, there are three main types of tax. This will possibly increase to four types if Labour win the election. No one enjoys paying tax but probably it is worth understanding the different types so you can have a view about which are essential and which are unfair.

Tax on Earnings
This is tax on anything that you earn, including your salary, capital gains (if you sell something and it makes a profit), interest on your savings.
In some ways it seems a fair tax. The amount you pay goes up depending on how much you earn and most people pay it.
However, it can be unfair because some people manage to avoid it, to cheat the system (which means the rest of us have to pay more, because those people still use the roads, NHS, police, etc.) If you are an employee, then you have no options at all, the tax is removed at source – in other words, your employer kindly (!) removes it from your pay packet before you are given your salary. So, someone who works in a shop will be given their monthly pay minus the income tax. Someone who is self employed has more opportunity to be clever and cheat the system. The nice old builder who says, “Pay me cash, it’ll be cheaper for you,” is possibly not declaring those earnings and therefore not paying tax on them. Wealthy people with clever accountants can also avoid paying by hiding their investments in offshore accounts. The government doesn’t see them and so does not remove tax from the interest.

Inheritance Tax
This is a one-off tax on everything you own at the time you die.
Again, this seems reasonably fair. If Bob works hard his whole life and is a jolly clever chap, why shouldn’t he enjoy a nice amount of cash? However, we might not feel that Bob’s son also deserves to have an easy life just because his Dad was talented, so the government can take a slice of the wealth and use it for the rest of us.
However, it does feel rather a personal tax, especially if you are the person who was related to dear old Bob. Plus, if Bob worked hard and wants to leave a valuable painting to his son, is it fair that the son has to sell it just so he can pay the inheritance tax? Should people be allowed to keep heirlooms within their family or should they be sold to pay tax? There is also the point that it does not seem to actually generate much cash for society. It certainly used to be the case that the admin costs involved in collecting inheritance tax were pretty much equal to the amount of tax collected. So actually, no one benefits. It is interesting that UKIP plan to abolish this tax if they come to power.

Consumption Tax
This is a tax on everything that you buy. It includes VAT (currently 17½%) and stamp duty (tax when you buy a house.)
This seems quite a good tax. Everyone pays (apart from a few dodgy builders who tell you there is no VAT if you pay cash) and no one can cheat. It is easy to collect and everyone pays.
The unfairness comes in when you consider that everyone pays the same amount. So the poor old lady and Bob the millionaire, both pay the same amount of VAT when they buy a washing machine.

     So, there we have the three main types of tax that are currently in use. The are a pain to pay but are mostly fair. We all hate paying them but we all know that if we want roads, police, schools, health service, etc, the money has to come from somewhere. Now we come to the new tax that Labour are proposing:

Mansion Tax
This is a tax on an asset, something you already own. The proposal is that every year, if you own a house above a certain value, you will have to pay an extra tax on it. You will still pay the normal taxes when you buy it and when you sell it, this is a tax for just owning it.
Firstly, this will probably be popular. It will initially only affect very rich people (who we are all a bit jealous of) and most of us will only benefit from the extra revenue.

      However, is it fair? It only targets one type of asset:houses. You can be wealthy and own other things, like jewelry, paintings, land, even pensions (I’ll come back to that one) and you will not have to pay the tax. There are other assets which cannot possibly be taxed, like being beautiful or healthy or living in a fantastic location and unless they generate income, you will not be taxed on them.

      Let’s come back to pensions. (If you haven’t read my article on pensions, read it now.) Now, government workers all receive defined benefit pensions. This is a HUGE asset. When they start to receive the pension they will pay income tax, just like when someone sells their mansion they will pay tax, but in the meantime it is a highly valuable asset which they own. Just like a house. Strangely, no politicians are suggesting that anyone should be taxed just for owning this hugely valuable asset of a valuable pension. Even though some other people (those not on defined benefits pensions) have invested in their home, expecting that when they are older they will sell it and use the money as part of their pension.

     The new tax will cause house prices to be distorted (because who will want to buy a house that is just inside the amount where they have to start paying the tax? Remember, it is every year, not when the house is purchased.)
It is also unfair. No one is suggesting that other assets should be taxed, that if you own a valuable painting you should have to pay tax every year while you own it. Sometimes, things that are unfair are worth fighting against, even if we are not affected.

      Once the new tax has been introduced, it will not be difficult for governments to lower the threshold when they do the budget. At the moment, the house price they are suggesting is huge, way above what most of us could afford. However, what will stop that from creeping downwards? How long before most people in senior positions, our doctors, head teachers, managers, who have worked hard and invested their savings in a house, will start to lose those savings? It is called a ‘mansion tax’ but if someone lives in London it might actually be an ‘apartment’ tax.
We do not know if there will be a cap on the tax or if someone who lives for many years in these houses could eventually end up owing more than the house is actually worth.

       Personally, I am very unlikely to ever be able to afford a house that will be charged the mansion tax. However, I do not like the thought that a tax could be introduced which is blatantly unfair. It is just not very British……

The Mystery of Pensions

The Mystery of Pensions


      Okay, so this week the UK Chancellor of the Exchequer, George Osbourne, announced in his new budget that when you retire, you now have more choices about taking out some money from your pension pot as a lump sum. There was then some discussion on chat shows and daytime TV (the sort of programmes that you deny to friends ever watching) about being able to buy that sports car or luxury boat you have always wanted with money from your pension pot. Hmmmm. This needs some further thought. Here follows a simple guide to pensions.

     First, we need to know that there are two different kinds of pension. The first kind is called “Defined Benefit”. This guarantees that when you retire you will receive a certain percentage of your final salary. For life. So, if you been a teacher your whole working life and retire earning say £30,000, you might receive £15,000 every year for the rest of your life plus a £45,000 lump sum at the beginning. It will be index linked (which means if inflation goes up, so will your pension.) When you die, your spouse will get half of that. If you are lucky enough to have one of these pensions (and most companies do not now offer these, so really only government workers have them) then you are very fortunate. My advice is do not leave your job!

     However, most of us mere mortals will have what is called a “Defined Contribution” pension. (Yes, I know, very similar name. That is because financial people like to muddle us normal people. It makes them look clever. Really, they should be called “final salary pension” and “cross your fingers or pray hard pension.” That would be more accurate.) In this instance, when you retire, all the money you have paid in (plus any interest etc) is used to buy an annuity. An annuity is a financial product – you give in a lump sum, they then pay out an amount every month for the rest of your life. Some are index linked (goes up if inflation goes up), some are not.

     So, if you worked your whole life earning the same as a teacher, paying diligently into a pension fund, I estimate that you will retire with a pension pot worth £245,000. This would buy you an annuity (index linked and half for spouse on death) of £6,400 per year, with no lump sum. Pause for a moment. You have paid about £200 every month into a pension fund. That is a lot of money. You will receive about £6,000 a year to live on. That is not a lot of money. It will not allow for many ice-creams. Or even much bread.

     Now, the amount of money in your pension pot, the amount you have to buy an annuity, might have gone up or down depending on how the pension company has invested it. You need to keep an eye on it from time to time. Do not just trust it will “be enough”.

      The new rules that were announced in the budget apply to defined contribution pensions. These are what this article will be discussing.

     My first point is that if, when you retire, you take out a quarter of your pension as a lump sum, then your pension (what you receive each year for the rest of your life) will be a quarter less. This is not difficult maths! So, before you buy that yacht/ferrari/cruise/conservatory, check that when you are eighty you will still have enough money for food and heating.

     Secondly, do not over estimate how much you will receive. Pension companies are run by people who like numbers. They may wear glasses and polo shirts but they are not necessarily bad nor do they wave magic wands at things. You might work for forty years and pay (what feels like a lot) into a pension pot. You may then be retired for thirty years or more. The amount you have paid in, when spread over those retirement years may be a lot less than you think. You need to check now, before you retire and think about the numbers (brace yourself. This is your income for a long time. Force yourself to check.)You might want some chocolate when you have retired. You might even want electricity or some new clothes.

     Thirdly, when you retire, choose your next pension company – the one who will pay the annuity – carefully. It might be the same company who you have been saving with but it doesn’t have to be. Look at how much you have saved and then ‘shop around’, ask how much different companies will offer you each year that you are retired.

     Finally, think about how pension companies work. As I said before, they are maths people. When they are deciding what annuities to offer they consider things like life expectancy, stock market predictions and interest rates. Interest rates are very important. At the moment, March 2015, interest rates are at an all time low. This means annuities (remember, thats the amount you actually receive to live on) are also at an all time low. However, everyone who knows about these things, expects them to go up again. So, (big point, get ready) people about to retire should consider delaying buying their annuity. Got it? If you can work a couple of extra years or leave your pension in it’s pot for a while and not start the annuity, you might be a lot better off. Your income might be significantly higher for your whole retirement if you can wait until interest rates go up a bit.

     Some of these issues are uncomfortable to think about and if you do not enjoy numbers then they are a bit of an effort. However, think about how much you would like to receive every month when you have retired and then check how much you are likely to receive. Do not wait until it’s too late. Everyone needs chocolate, it’s a basic human right…..

More articles, stories and poems at: