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The centre of London is buzzing. The streets are crowded day and night. There are traffic jams at 11pm. The pavements are congested after dinner or the theatre. The shops are busy. There is a wide range of very expensive boutiques in a number of different high street locations. The central London economy has detached from the more humdrum reality in most provincial towns and suburbs. Rents are rising, property values have climbed part of the way out of the 2009 trough, and flats and houses go for incredible sums.

The main reason is that central London is now a very cosmopolitan place. Much of the new money coming in to buy the flats and the expensive clothes comes from overseas. There have been waves of money in the last year from Arab countries where people have been worried by the Arab spring and the Libyan war, from Greece, where rich people have wanted to get out before the euro collapse, and from the usual BRIC countries as successful people decide to diversify their asset base and own a safe home in the west. London makes people feel welcome, and provides that range of culture, shopping, top class property, and international society they want.

One side of me welcomes this. It is great to see enterprise thriving. The best of the retail is brilliantly done. The west end can afford good street furniture, great floral and light displays, wonderfully designed shop windows, and high quality merchandise. The property stock has never been in better condition. The high values encourage owners to spend more on perfecting the space they own, and expanding it wherever possible. If top of the range residential property is worth £2000 to £3000 a square foot, and an owner builds a high quality mansard or basement extension for under £1000 a square foot, there is every incentive to do so if they have the cash to splash.

That is where the other side of me has worries. The truth is very few UK citizens paying high UK taxes can now afford to buy a property in the centre of our capital city. Very few could afford to shop on a regular basis in the exclusive and expensive boutiques and grand stores that populate the West End. As I glance up at the blue plaques on the walls of comfortable London town houses commemorating where previous generations of UK artists, authors, inventors, business people, politicans and others lived , I am looking back on a lifestyle which has gone. Those houses now will be mainly owned or lived in by occasional visitors from abroad, or used by the more affluent institutions as Embassies, offices or smart blocks of flats.

The problem for someone like me who usually welcomes change and is not jealous of the success of others is the question of tax. Many of those who can afford the luxuries and properties of the west end enjoy much more favourable tax arrangements than the rest of us. That is how they can bid the prices of these places to heights we could not consider. London is acting as host to part of the world’s rich elite. They come because we do not make windows into men’s bank accounts. Just as we host Wimbledon for other countries’ tennis stars to win, so we host parts of central London for other countries’ rich to enjoy.

I do come down in favour of carrying on offering central London as our window for the world, our Wimbledon of first choice for the rich and successful. At least we can go and look at how such a society lives. UK ctiizens can make good livings out of providing services and goods to the rich who come. I accept that if we tried to enforce UK taxes on their incomes from out side the UK around the world, they would go somewhere else that was less demanding. By all means end the Stamp duty loophole, and ensure they pay UK taxes on UK incomes and businesses. On balance I think the UK and London is better for this cosmopolitan presence.

Maybe the moral of the story is that lower taxes work and help create and stimulate wealth and income. If Central London can enjoy some benefits from non dom tax status, why not try lower tax rates on income and enterprise for UK citizens living anywhere in the UK as well? Who knows, it might catch on, and generate more tax revenue in total.

There is a simple answer to this question which is usually correct – “No”.

If you regarded Central Banks as normal businesses, or even as normal banks, you would be mighty alarmed by their balance sheets today. Several of the leading western Central Banks are doing what they condemned commercial banks for doing in the run up the Credit bubble. They are gearing their balance sheets massively. The Bank of England has a £245 billion balance sheet, with equity and reserves of just £4.4 billion. In other words, its total liabilities are 55 times its capital.

The Governor and Directors of the Bank do however retain some sensible caution. The Bank of England’s balance sheet is massively distorted by the £200 billion of Quantitative easing the Bank has carried out so far. Here the acquired assets, UK government bonds, are matched by a Treasury loan. The Treasury gives a guarantee against loss. The UK state is expected to stand behind the Bank if it started losing significant sums on these assets at market prices, and it could hold them to redemption at par anyway. If you take this off the Bank’s balance sheet, it looks altogether more prudent.

Over at the European system of Central banks, before we factor in the mega loans to EU banks announced this week, a balance sheet of Euro 2.4 trillion is supported on Euro 81 billion of capital. That means they are 30 times geared.

These same central banks now think that maybe 10 times geared is about as risky as a commercial bank ought to go. So what makes them different?

There are two characteristics of a Central Bank that enable it to gear much more than other businesses in certain conditions. The first is single country Central Banks have the country standing behind them. Like the Bank of England they are usually owned by the state on behalf of taxpayers. The full taxable capacity of the country stands behind them to pay any losses. If need arose the state could put in more capital.

The second is a Central Bank usually has the power to create more of its own currency, with or without the control of the government. So a Central Bank should always be able to meet its payment schedules, at least in the currency of the day, as it can create some more. If it does this on too big a scale it will of course damage the foreign exchange value and the purchasing power of the money it presides over, but should always be able to meet its legal nominal obligations.

We need, however, to ask if these two very special characteristics of single country state controlled Central Banks fully apply to the European central Bank. We have to ask which country or countries stands behind it? If the ECB lost large sums on its assets, would all the shareholder members of the ECB put in new capital in the amounts required? Do the countries standing behind it have enough taxable capacity to carry the risks their Bank is running?

We also need to ask how much new Euro money the ECB is empowered to create? Given the understandable German fears of excess money creation, and the rules against state financing by the ECB, can we rely on the Bank always being able to print its way out of pressing obligations, if tax revenue from member states is not forthcoming?

The European central Bank is building a portfolio of assets in the form of loans to weak banks, and a bond portfolio with the emphasis on weaker sovereigns. Armed with such assets, and given the high gearing of the Bank. we do need to know what if these assets cause substantial losses? Who stands behind the Bank? Is it now full Central Bank, with all the powers it needs to finance its large portfolio?
I assume the answer to our central question is for the ECB as for the others, that a Central Bank cannot go bust. It would be good to have official confirmation on how any possible future losses could be covered and how much conventional Central Bank power the ECB now has.

Don’t worry. I wrote this a few days ago, and do have better things to do today.

I want to wish you and yours a very happy Christmas. I also want to say a big thank you to the regulars who contribute. This blog does provide a forum for you to make your points and help win important national arguments. It is much richer for the diverse views and characters that populate it.

I look forward to many of your remarks. I find Dennis Cooper’s forensic reading of the EU documents most helpful in a public debate where too many opinion formers fail to read the source documents. Javelin often gives us good insights into financial markets. Peter Van Leeuwen bravely tries to explain the workings of the EU in a more favourable light to challenge many of us. Bazman makes us all think with his down to earth voice for modern welfarism. Uanime5 winds many of us up with a strange mixture of intelligence, odd ball comments and errant “facts”. Conrad Jones weighs in with an alternative view.

So often Alan Wheatley, Lola, Zorro, Sue, a different simon, Barbara Stevens, Electro-Kevin, APL, Mike Stallard, Bob, Brian Tomkinson, Gary, Rebecca Hanson and Alan Jutson come in with good insights and contributions. Then we have the distinctive voices of Lifelogic, Singleacts, Disaffected, English pensioner, Lojolondon,Tedgo, Oldtimer, Outsider, libertarian, Qietzaple, backofanenvelope and Figurewizard, who combine to provide wry and sceptical commentary on how we are governed.

It all makes for a lively forum, and an eye catching site that is read widely by opinion formers.
A Happy Christmas to one and all.

After Christmas I will be examining the UK’s role as a host to the super rich. It is our Wimbledon tendency, our willingness to invite in multi millionaire stars, business people and lucky inheritors of wealth to the UK who do not pay full UK taxes. They come enjoy our country, use our facilities, win some of the prizes.

Do you agree with it? Does it make us richer? Aren’t the jobs they create and the investments they make enriching the UK? Isn’t it just part of being a free society? Does it worry you that it raises the inequalities of wealth and income in our country? How much tax should we ask them to pay? Your thoughts would be appreciated.

Carols from Kings
Mulled wine for all
Joy to sing
Holly in the hall

Great aromas from the pot
Sauce and gammon hot
Mulled wine simmers
Outside shivers
Pudding steaming,
Of presents dreaming

Carols from Kings
Mulled wine for all
Joy to sing
Holly in the hall

Guest arriving,
As snow is driving.
Let past cares drift
Think of Noel gift
Christmas lights shine
Flames leap from the wine.

Carols from Kings,
Mulled wine for all
Joy to sing
Holly in the hall

Fill happy the home
Leave no-one alone
Carve the meat
Give all a treat
Christmas is tomorrow
So banish all sorrow

It was a good headline this morning. I do hope it is going to apply to the public sector as well. I seem to spend so much time these days complying with public sector rules, and making payments for permissions and to meet tax demands. The public sector has a habit of telling me that if I want to pay by credit card there is an extra payment, on top of the tax they are levying. Yesterday it was a demand for a surcharge in order to pay my road fund licence. Austerity UK so far has been about ever more tax to meet the public sector bills. Dropping the surcharges in public demands would be a nice Christmas present, but they will probably claim their surcharges are “reasonable additional transaction costs”.

When the UK and US banks got into trouble all the European friends put on a knowing look. There you are, they said. That’s what happens if you don’t have our system based on solidarity and friendship. Thank heavens we set up the Euro and turned our backs on all that Anglo Saxon stuff.

So it came as a dreadful shock one day when they heard that the wolves were back attacking them. The wretched wolves had worked out that although they couldn’t gobble them up in the currency markets any more, they could gobble them up in the bond markets.

All those friendly countries having such a good time kept on borrowing the money they needed by issuing things called bonds. Unfortunately the wolves could sell these bonds, just as they had the currencies. The more they sold, the more it cost the countries to borrow extra money. Because some of them had borrowed so much, they couldn’t afford a big rise in the cost of their loans.

The wolves soon mangled Greece. Then they devoured Ireland, and moved on to Portugal. Each time the friends met and decided it was too dear to stop the wolves. They had one of their friends in the IMF, and the good old IMF came along and started lending money to the countries in trouble. When he was attacked with some unfair allegations, they put another friend of theirs into the top job at the IMF. That all seemed fine, until one day they were told that it was difficult to keep Italy in the game without going to the IMF.

(there are two possible endings to the fairy tale. Ending one is the unhappy one. Ending two is the happy one. You can choose which you like best – or you may think I’ve got them the wrong way round)

Ending One
Because the wolves were so ravenous and angry, the friends met and decided they would feed the wolves so much they would slink away full or die of overeating. So they got what they said they wanted. They beat the wolves, and lived on with their single currency and their common bank account. The Germans just had to put up with printing lots of Euros, and with the value of their money going down.

Soon they started complaining that they had got what they wished for. The poorer countries did not grow. They had to keep cutting back what they spent. Their people got poorer. The richer countries kept bossing them about, telling them to tighten their belts more. Germany was not happy, because there was more inflation than they liked and they had been made to pay some big bills. They could not sell so much any more to the others, because they had all run out of money.

Ending Two

Because the wolves were so ravenous and angry the friends met and decided they could not beat them. So they decided to break up their currency, and recreate all the old currencies they used to have. Germany said she was fed up with paying so many of the bills. The poor countries said they were fed up with endless cuts and more commands. So they sadly ended the Euro. It was rough at first, but within a year the poorer countries were growing again and felt better about themselves. They could make more of their own decisions. And Germany found that just as she had before she could still export even though her currency had gone up. She just got more for what she sold. They were even allowed to choose their own governments again.

Were they downhearted by all the mess their currency plan had brought on them? No, not at all. They immediately saw the problems. They had let the wolves wreck things for them. They had not been friendly and European enough. The next time they were not to be thwarted.

They said to themselves, if the wolves can mess us up because they can sell our currencies when we want them to buy them, we should go straight to setting up the single currency. Then there will no currencies left to sell against each other. The wolves will be foiled.

So it came to pass. They moved to set up a new Bank to house their common bank accounts. They printed smart new bank notes with pretty bridges on. They thought up the catchy name, the Euro, for their new money. Because only one country, Luxembourg met all the silly detailed requirements the wisemen had proposed for the new currency, they decided that was all foolish old hat. Why not let everyone in who wanted to join, as none of them met the rules? They could sort it out afterwards, as the wolves could do nothing this time.

For several years it went very well. All those dour old Eurosceptics kept on banging on about how it would end in tears and how they needed to control the debts and deficits. The Eurosceptics now said they agreed with the wise men about that. They thought that you should not allow countries that had already borrowed too much to borrow even more at the new common low rates of interest. They queried how Greek debt could be as good as German debt, and asked if they really shared a bank account? Would Germany bail them out? No-one sensible believed the Eurosceptics. So the governments just kept saying these critics were mad or sad or bad, or possibly all three.

The Irish were having a ball, borrowing loads of money at the nice low rates they got in the new currency. They built plenty of houses, and thousands of Irish returned home to join in the fun. The Spaniards enjoyed a lovely property boom, with big banks lending loads on mortgage and to companies. The Greeks basked in the sunshine and spent billions on more soldiers, earlier retirements and better public services, as it was so cheap to borrow. Even the Germans were happy. They worked hard and made millions of motor cars, as all the people elsewhere in Euroland could now afford to borrow the money to buy new cars. The Germans piled up all their savings, and were very good at selling lots of goods to everyone else.

The currency wolves had slunk away. The Euro did quite well. What could possibly go wrong? Wasn’t the Euro about to replace the dollar? Wasn’t it to become the world’s mightiest currency? Wouldn’t the silly UK have to join after all? Didn’t they always get there in the end, but were just a bit slow about it? Wasn’t it good that those Eurosceptics were so wrong.

Today the ECB hosed the European banks down with long term money. The Germans may be able to stop them lending directly to near bankrupt countries, but they can’t stop them lending to commercial banks. The Treaty allows the one and bans the other.

The money lent achieves two purposes. It eases liquidity for the banks, who can borrow very little in the usual way in the inter bank markets, where fear stalks the computer screens and dealing rooms. It allows the banks to be more relaxed where they have to refinance their own bond loans, where these come up for renewal over the next twelve months. The ECB has come to the rescue.

Some think they will buy sovereign bonds of the weaker countries – they hope that the ECB has created a kind of QE by the back door. It would be imprudent for the banks to buy too much weak sovereign debt. What they gain on the interest payments they may lose on capital account if fears strengthen for repayment.

Meanwhile Moodys has reminded us that the UK’s AAA rating needs to be looked at from time to time in the light of the figures. They have not put the UK on negative watch or forecast a downgrade. It is just a reminder that the UK is a heavily indebted country that needs to succeed with its deficit reduction programme. Today’s figures of £18 billion for last month are presented as a success, remaining on target. They are also a reminder that the targets for this year still allow very large borrowings. It gets tougher from here.

Once upon a time lots of European countries decided they wanted to be friends with each other.That was a very good idea.
They had a history of being enemies, and fighting. That was a very bad idea.

They formed a club. They did a few things together. They planned what to grow and farm together. They did a bit more trade with each other. They managed to stay friends for many years. Emboldened by their success, some of the ring leaders of these countries said, “let’s now become very special friends. It’s boring just being good neighbours. I know how to show we are the best of friends. We will share a bank account with each other.”

They asked some wise men (yes they were mostly men) how you could do that. They said it was all a bit complicated for countries to do that sort of thing. You first had to share a currency, and to do that you needed to bring all your different currencies closer together.

All the country ring leaders said they thought that sounded lovely. They would do just as the wise men told them. They would make their currencies stay at the same rate against each other for ever so long. Once they had done that, they could easily then swap all the currencies into their shiny new common currency. Hey presto they would be sharing a bank account together. It all sounded ever so modern. They said it would mean they would all show great solidarity. Some said they liked solidarity though they were not quite sure what it meant or entailed. It would be All for One, and One for All, they were told. Who could disagree with that?

So they told all the world that they now had a special relationship. They told all the nasty wolves in the financial markets that if they tried to mess them up, they would spend loads of money stopping the wolves. The wolves would be foolish to try to take them on.

The problem with wolves is they can’t help themselves. They often don’t believe nice people like government leaders. So when they were told what rates the currencies would trade at, they said “We don’t agree. We think you’ve got it wrong”.

So every time the wolves sold a currency, to try to get it down below the European prices, the countries spent billions of money stopping them. The trouble was, the more they bought, the more the wolves sold. The debts got bigger and bigger, as the governments tried harder and harder to keep their currencies up. The Germans, who had the best currency, got fed up with owning more and more of the weak currencies. They started asking themselevs why they had to do that.

Then one day the governments saw they had spent too much, but still the nasty wolves were selling. So they gave up. It turned out that though they really did want to show solidarity to each other, propping up the pound sterling was just too dear for them. Italy and the UK and other smaller countries were pushed out of the super friendly money club. The Germans were no longer prepared to spend loads of their money keeping it all going. There had to be some limits to solidarity after all.

Tomorrow we will learn how the doughty European governments were not to be beaten by the nasty wolves. They were going to have their common bank account after all.

PS Whilst I am writing the fairy tale (3 day serial) please write in with your issues and worries.