Alchemy

The Grumpy Goat doesn’t normally do requests. However, an impassioned plea from one ‘Shishkabob’ for a take on what one might euphemistically describe as the economic downturn has inspired this ill-informed piece.

Loads of traditional alchemists have over the centuries wasted an appalling amount of time, effort and money trying to transmute metals. In their ultimately futile attempts to get something for nothing, all the medieval alchemists achieved - apart from inventing a science that would become chemistry - was to turn gold into less gold. Meanwhile, the manufacturers of crucibles and esoteric glassware made a packet. The Philosopher’s Stone was supposedly able to turn base material into gold: it certainly worked for J. K. Rowling.

I am indebted to those luminaries of the financial services industry who seem to be a modern parallel to those medieval alchemists. Taking my gold, they promise returns that will outstrip bank interest and insist that this is the only way to beat inflation. If the bank’s paying 4% and inflation is 5%, the result is Mr Micawber’s ‘misery.’

When these allegedly high-yield, tax-free, low-risk investments all go pear-shaped, those same alchemists say that such a downturn was unprecedented and completely unpredictable. My own funds, managed by paid professionals in that industry because I’m a complete duffer, have an unerring habit of creeping slowly up during the good times, yet at the merest hint of a downturn they get sucked down like someone who realises where the Titanic is going but can’t find a lifeboat. Sure enough, gold turns into less gold. In recent weeks, scary news of 50% drops will of course require 100% rises just to get back to where they were. I would have been better off ignoring those ‘this is the only way to beat inflation’ pundits and instead spending the last decade piling up cash in old socks under the mattress. I would have been a lot better off sticking my savings in a bank deposit account. The current arrangement has all the disadvantages of a long-term deposit account - no immediate access to the money - without the benefit of fund growth.

As for the sub-prime meltdown, who in his right mind lends money to someone who demonstrably can’t make the repayments? Perhaps the type who realises exactly what he’s mis-sold, takes his big bonus and then does a runner before the borrower defaults and leaves taxpayers to sort out the unholy yet wholly predictable mess. It is unreasonable to expect that property prices will increase for ever to cover the debt. House prices cannot outstrip salaries ad infinitum. Eventually property becomes prohibitively expensive and the real-estate market goes pop experiences a correction.

Clearly the Goat has a PhD in Applied Hindsight.

I do not pretend to understand how the oil price is affected by all these machinations. It is however obvious that fluctuations in oil will have a major effect on the local Middle East hydrocarbon-based economies. I have an article from BusinessWeek, 13 March 2006. In it, there is a discussion to the effect that with oil at around $50 a barrel for the foreseeable future, Gulf states have never had it so good. They’re all flushed with cash and are able to invest at levels never before seen:

‘This year, with oil prices stuck in the $55-to-$65-per-barrel range, perhaps half a trillion dollars will land in OPEC coffers -- more than at any time since the boom of the 1970s and 1980s. The Mideast oil states alone will gather in $320 billion in oil and gas export revenues.’

Yet in January 2009, with oil at around that same $50 a barrel, those same Gulf states have joined the Greek chorus of financial hand-wringing. It’s amazing how quickly everyone forgets that $140 a barrel was a temporary spike, preferring to imagine that this has been the prevailing price since the dawn of Time.

My understanding is that budgets were previously based on anticipated income from flogging oil at say $30 a barrel. And then the 2009 budgets were set assuming an unending rise past $200 ‘to infinity and beyond.’ Hence the curtailing of spending plans once it became apparent that oil revenue would be lower and income wouldn’t keep pace with expenditure.

This is rather like me looking at my regular salary and working out that I can afford to make the payments on a Toyota Camry. Then, after receiving a one-off annual bonus, I extrapolate that as if I’ll get the same bonus every month for ever. So I go and buy a Bugatti Veyron. It all ends in tears, of course. Having reverted to my previous ‘real’ salary, I can barely keep up with the speeding fines let alone the bank repayments.

No-one can actually predict numbers accurately. If I could, there’s no way I’d be fiddling about with stocks, shares, equities, precious metals, real-estate or bank interest. I’d make my million every week by predicting the lottery results.

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