The rising strength of China and Brazil, of India and the Civets, is based on hard work and free enterprise. Economies which have been kept poor by too much state control and by bad government in past decades, are being progressively liberated. As this occurs, so more businesses are set up, more jobs created, more people are better educated. A virtuous circle has been created.

The declining relative strength of the west, especially of Europe, is based on the opposite process. There is growing government interference in every aspect of economic life. The top down Euro scheme, little wanted by the German and French people, let alone the British, is doing untold damage to economic prospects. It is proving to be the ultimate ill judged intervention by the political classes, the final expression of governing power that is damaging families, businesses and job prospects.

It is of course true that the emerging nations have two natural advantages which should make it inevitable that they overtake the west in terms of total income and output. They are much more populous. They can catch up with western living standards by applying western technology and ideas to less productive economies.

In a way the surprise is just how big the gap was in favour of the west for many years given how few people live in the richer countries. Chinese communism prior to the enterprise reforms held the Chinese people back. Brazilian incompetence at macro economic policy led to many years of disappointment in Brazil. Russian communism combined with reliance on the Soviet empire restrained Russia for several decades and diverted a very high proportion of its low income into military spending. The west, led by US capitalism, powered on , from innovation to innovation. Waves of new technology, electrical, electronic, and then digital fuelled growth and rising living standards.

Listening to the Today programme under guest editors this week, we still hear the same complacent western mantra. Yesterday we were told that Africa needed an EU style market to make it rich. A BBC correspondent blamed global warming for the failure of the continent to feed themselves. Evan Davis was a breath of fresh air when he pointed out that crops were going to waste in fields because the trucks could not get to them to take them to market owing to poor roads.

I had hoped we might get a guest editor who would ask the big question – Is western decline inevitable? Was the Credit explosion of 2005-8 the last fling? Does the west have to accept a 10% cut in living standards to get off its diet of debts? Or can it bounce back with new energy, new ideas, a new wave of technology the world just has to have? How can it grow itself out of too much borrowing? How will we earn our combined livings in the new world which is emerging, where energetic Asian and Latin American countries make so much of what the world needs?

It would be good to go on from the big picture question to the role of the Euro and European government in hastening the western decline. Why not interview the enthusiasts for the Euro scheme and ask them how much more damage they want to do? Are they pleased to have brought the European banking system to its knees, to dependence on artificial injections of cash from the ECB? Did they learn nothing from the diaster of the ERM? Why is the Euro scheme different? Do they regret cobbling economies together that were performing so differently? Have they any idea on how to channel the German surpluses to cover the southern deficits? Was it part of the plan to create a world where the EU sends in technical administrators to distressed EU countries to put through large cuts in public spending? Did they realise they were creating a mutual austerity machine?

Do they think the industrial companies will hang around in western Europe to pay the high energy prices they impose in the name of anti global warming? Does making them conform with the growing libraries of rules help, when they can go to cheaper and easier jurisdictions to make their goods? Are they yet alarmed by the amount of industry that has decamped to Asia and Latin America?

There is dramatic change sweeping through the economies of the world. The west is not owed a living by the rest. The inequalities which affront many can be reduced by the west experiencing falling living standards, as well as by the rest enjoying rising ones. This may not be what the architects of Euroland had in mind, but it is the necessary consequence of their folly. It is high time the west asked itself more fundamental questions about how it will earn its future living and whether that needs a new approach from governments to do so.

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.