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Once upon a time I wrote about how happy I was with my Bank of Scotland credit card. Not now though.

To put you in the picture, I do all of my banking online. (The bank has a paper-free banking option.) I have been out of the country for a few months but I made sure the credit card was paid in full before I left and I didn’t use it overseas. When I got back to the UK I was greeted by letters from the Bank of Scotland on my doormat telling me my credit limit had been slashed and that they were going to hand over my unpaid debts to a debt collection agency.

So, what prompted such an aggressive response from the bank. It turns out that a subscription I had forgotten about had resulted in a small payment (below £10) being charged to my card. When I didn’t pay this bill, (I didn’t know it existed,) what did the Bank of Scotland do? Rather than sending me an email (they regularly send me emails advertising useless gifts) they immediately started sending nasty letters to my street address – regardless of the fact that I’m meant to have paper free banking. Regardless of the fact that I had several thousand pounds in my current account, which I hadn’t touched while I was overseas, the BOS thought the right thing to do was to send me letters to me threatening me with a debt-collector and cutting my credit limit to a fraction of what it had been.

It’s mighty annoying to get home and have to deal with the prospect of your credit-rating being slashed and debt-collectors on your case.

So what did I do?

• I paid the outstanding sum plus a bit more to cover interest.
• I rang the number on the back of the credit card and told the rep. calmly told them my situation and pointed out that if there is any issue with a paper-free account, the right thing to do is email the person rather than sending them letters.
• I requested that my comments be forwarded to management as a formal complaint.

And what happened?

• I received a phone call from customer services apologising for what had happened.
• No debt collection agency became involved.
• I received a written apology from the bank along with the restoration of my credit limit.

I must admit, however, I’m still not happy with the bank’s procedures.

It would be interesting to know if anyone else with supposedly paperless banking ever gets caught or has been caught like this.

I expressed my feelings a couple of days ago about The Strange Judgements of Professional Economists. In this regard, I thought it would be worthwhile quoting Adam Smith, who wrote in The Wealth of Nations:

“This bank, no doubt, gave some temporary relief to those projectors, and enabled them to carry on their projects for about two years longer than they could otherwise have done. But it thereby only enabled them to get so much deeper into debt, so that, when ruin came, it fell so much the heavier both upon them and upon their creditors. The operations of this bank, therefore, instead of relieving, in reality aggravated in the long-run the distress which those projectors had brought both upon themselves and upon their country. It would have been much better for themselves, their creditors, and their country, had the greater part of them been obliged to stop two years sooner than they actually did.”

I shake my head in disbelief when politicians, in a desperate effort to win the so-called green vote, boast about how they have “offset” the carbon dioxide released during their travel activities by having one or two trees planted – particularly when the BBC reported this week that more often than not, these “offset” trees are already in the ground and were planted before “offsetting” was dreamt of.

Let’s get these trees in perspective. In the space of a few generations, we humans have released carbon dioxide that it took trees and other plants hundreds of millions of years to lock up in fossil fuels. To believe that planting a few trees now will “offset” or re-absorb this carbon dioxide is ludicrous. There isn’t enough land on earth to plant the number of trees needed to offset the carbon dioxide we have released (and shall continue to release in the years ahead).

To believe this sort of counting is just about as credible as believing that nations can grow wealthy in the long term by simply lowering interest rates to increase the money supply. The politicians boasting about their carbon-offsets and the economists who advocate wealth creation through inflationary monetary policies are well matched in their myopia.

Earlier this week, the Bank of England took the correct decision and raised interest rates – with the vote going 6-3 in favour of a rise.

Unsurprisingly, the BOE’s chief economist, Charlie “the printing press” Bean, was one of the three who voted against an increase.

I have no doubt that some day the so called “doves” on the monetary policy committee – who generally vote against interest rate rises will be right – but in the last two years they have been proved wrong again and again.

Since the bank’s vote, we have also learned that:

• The RPI, a better measure of “real inflation” than CPI, rose last month.
• The Council of Mortgage Lenders has reported that mortgage lending for June 2007, at £34.2 billion is more than five percent higher than at the same time last year – in other words people are still increasing their borrowing at a higher rate than their incomes are rising – despite five increases in interest rates since last summer.
• Halifax, the UK’s biggest mortgage lender, has today raised its house price inflation forecast for the year from 4% to 6%, despite higher interest rates.

Meanwhile, in this morning’s Times, Principal Economic Commentator Anatole Kaletsky tells us to “enjoy our holidays” because “interest rates have peaked”. In a plea for fecklessness, Mr. Kaletsky writes:

“Most homeowners in Britain still enjoy a very comfortable cushion of equity in their property values and as long as this is the case they will be perfectly rational to borrow, in moderation, to go on holiday or buy a car or offset a temporary decline in real income.”

I’m sorry Mr. Kaletsky, but it is never financially perfectly rational to borrow money and spend it on depreciating assets. It is, however, an excellent recipe for wage slavery. It ensures you will have to keep working, not for your own economic advancement, but for the bank’s economic advancement.

Mr. Kaletsky writes:

“While it is true that incomes have recently fallen in real terms, the average British family is still far better off than it was a year ago because of the increase in its property, pensions and stock market wealth – and this favourable wealth effect will allow most people to keep borrowing to maintain their spending patterns, despite the squeeze on their real incomes.”

Ah, I see – the “favourable” wealth effect of a property bubble should encourage us all to continue to increase our debt and sacrifice our economic freedom for two weeks in Greece or a shiny car to boost our egos but about which no other human being could give two hoots.

Mr. Kaletsky is also wrong about further rises in interest rates. Interest rates will rise again – and not just because of continuing inflationary pressures from within the UK. Sooner or later, China will revalue its currency. The renminbi has been too low, for too long. Surging exports of Chinese manufactured goods, partly on the back of the undervalued renminbi have played an important role in keeping British (and most of the developed world’s) inflation and interest rates low.

When the renminbi is revalued upwards, Chinese goods will cost more, increasing inflationary pressures in the British economy. Make no mistake, the long term prognosis for inflation and interest rates is upward, not downward.

I have a Bank of Scotland credit card.

I paid my latest bill online from my Bank of Scotland cheque account on June 29. The due date for the credit card payment was July 2. The payment actually went through on July 3. As a result of the payment being a day late, I was charged a £12 late fee.

I phoned yesterday to query the fact that it had taken so long for my payment to be processed and to request a refund.

When I got through to the bank’s call centre, I told the rep that I was phoning to query the £12 late fee. She immediately told me that as my account is in good standing and that I have always paid my bill on time in the past, she would have the fee refunded on my next statement.

I was pleasantly surprised by how easily the refund was given. It works to the bank’s advantage too in that I would currently describe myself as a very satisfied customer. It also reinforces my determination to always pay my credit card bills in full and on time. Not only does it save me a fortune in interest payments, if things do go wrong, the bank will look on me much more favourably than it views its “problem customers”.

A few years ago, I was buying a house. The estate agent was very helpful, and very pushy. He not only wanted to sell us the house; he wanted to sell us an endowment mortgage, for which he would receive a big commission. He went out of his way to be helpful to us, creating a sense of obligation. This is a common sales tactic used by less scrupulous salesmen. They find a way of making you feel that you owe them a favour. Once they have achieved this, most customers will repay them by buying whatever they are selling.

He was a very skilful salesman. I did not like his endowment product, but when I tried to get out of buying it, he always found some way of keeping me on track to buy it.

Then, salvation! I learned about the assertion message.

When someone is trying to get you to do something you’d rather not do, you give them the assertion message. You do this by responding to them, as often as you need to, with the same words. Do not vary from your chosen message. The telephone conversation I had with the salesman went something like this:

Me: I don’t want an endowment mortgage.

Salesman: But you said you did. You said it looked good.

Me (refusing to discuss what had or had not been said before): I don’t want an endowment mortgage.

Salesman: I can get it cheaper for you.

Me (sorely tempted to ask how – but I’m determined to do what the book said): I don’t want an endowment mortgage.

Salesman: I’ve got my target to reach this month and if you don’t take the mortgage, I’ll miss it. I’ll get you a really good deal – the best.

Me: I don’t want an endowment mortgage.

Salesman: Okay.

I did what I had steeled myself to do, and it worked! I was not swayed by the salesman’s attempts to entice me with a cheaper offer or by his attempt to make me feel I should help him achieve his sales target. These I realised, with hindsight, were just sales tricks. He was a very good salesman and he knew that my soft spot was saving money. In the end, I saved a lot of money by getting a normal repayment mortgage from a building society rather than the high-commission endowment product the estate agent wanted to sell me.

Money Saving Tip:

Get rid of persistent salesmen with an assertion message. Whatever they say, simply respond, calmly: “I don’t want a <insert name of product here>,” as often as you need to.

The Bank of England’s Chief Economist, Charles Bean, gave an interesting talk yesterday – interesting for the future direction of house prices in the UK. In addition to being the BOE’s top economist, Charles Bean is also part of the team that decides whether interest rates will rise, fall, or stick each month.

Bean is one of the less hawkish members of the Monetary Policy Committee. (In the June meeting, he was one of the five who voted down the four – including the BOE Governor, Mervyn King – who were pushing for higher interest rates.)

What did Bean Say?

In his Friday 13 talk, Bean says:

“. . . once excessive credit/asset-price growth has been diagnosed, the lags in the monetary transmission mechanism seriously complicate the calibration of an appropriate policy. Raising official interest rates will be counterproductive if the boom turns to bust, so that the economy is subject to twin deflationary impulses both from the asset price collapse and any associated credit crunch, and from the effect of the policy tightening. Indeed, in the unlikely event that the policymaker knew that an asset price collapse was imminent, monetary relaxation, rather than tightening, would be called for.”

What does Bean Mean?

Put more simply, rather than allow house prices to crash, Bean would press for lower interest rates.

What would the consequences of lower Interest Rates be?

If interest rates were lowered there would be an explosion of money – just like the bad old days when printing presses worked overtime printing ever more money, with ever less value.

Sterling would fall in value – the US dollar is weak right now precisely because excess dollars were “created” by Alan Greenspan after the Y2K stock market crash. This glut of dollars has led to a weaker dollar and an American consumer more weighed down by debt than ever before in history.

The excess dollars also found a home in the notorious sub-prime mortgage market. Lenders, clutching vast quantities of newly created Greenspan cash, had to find someone to borrow it. The “someone” turned out to be millions of Americans who had previously been denied mortgages because the lenders (rightly) doubted their ability to ever repay the debt. The fact that this sub-prime market is now unravelling and is possibly going to drag down the US economy with it (the jury is still out) doesn’t seem to disturb Dr. Bean. He talks happily about lowering UK interest rates in the event of a sharp fall in house prices.

Charlie Bean’s Vision of the UK’s Future seems to be:

a. If house prices keep rising or fall slightly, he would say interest rates are about right and leave them alone.

OR

b. If house prices fall sharply, he would lower interest rates.

Either way, Charlie Bean seems to be offering a guarantee on UK house prices. He will try to ensure that, if there are price falls, they will be modest; he will allow price rises to continue without limit provided the headline inflation rate remains low.

Whichever way you look at it, you’d be better to put your money in property or some other asset because Charlie Bean says he will create more money (devaluing the pound in the process) to maintain property prices. The fact that, in order to prop up house values, he will need to push ever more people into ever more debt doesn’t seem to concern him.

It’s not wise – in my opinion – for Charlie to publicise these views because, if people believe him, it’s going to help keep the property bubble inflated a bit longer – and that’s not good news for the long-term prosperity of the UK. On the other hand, Charlie Bean is but one member of the Monetary Policy Committee. I sincerely hope that at least five other members hold more robust views on the dangers of creating new money than those expressed yesterday by Charlie “the printing press” Bean.

I’m going to show you two graphs that tell a story.

The first is a graph from Council of Mortgage Lenders’ figures.

Percentage of Income Needed to Pay a Mortgage

The graph shows how much of people’s income goes into their mortgage. The 2007 figure is not yet available. We can estimate it and add it to the graph because we know that the Bank of England interest rate in 2006 was 4.75 percent. It’s now 5.75 percent. That’s a real increase of 21 percent.

In 2006, 15.6 percent of incomes went into mortgage payments. In 2007, it’s 15.6 x 1.21 which gives 18.9 percent.

The second graph is from the Nationwide, showing inflation-adjusted house prices since 1975.

Inflation-adjusted House Prices since 1975

What the Graphs Tell Us.

• The graphs tell us that when the percentage of people’s incomes needed to fund a mortgage rises sharply, house prices fall. You can see there was a dramatic fall in house prices in the early 1990s when payments exceed 20 percent of income.
• With further interest rate rises expected later this year, rises that will push mortgage payments out to beyond 20 percent of income, this is not a time to expect a high return from buying property.
• The Nationwide graph shows that house prices are currently well above trend. When prices go far above or below trend, the likelyhood of a correction, pulling them back to trend, grows higher with each passing year.

Notes

There are two significant effects I’ve not accounted for in the calculation of 2007′s mortgage payments:

1. People buying a house in 2007 are paying on average 10% more than they did in 2006 – because house prices are up 10%. The proportion of people buying in 2007 compared with those just sitting in existing property – who don’t have to pay more – is low. The effect of ignoring these buyers is to underestimate the proportion of income going into mortgage payments.
2. I’m ignoring the fact that many people have fixed rate mortgages and won’t be paying more interest this year than last. The effect of ignoring these people is to overestimate the proportion of income going into mortgage payments – until they have to re-fix their interest rate.

There’s been an announcement today from the government that, in future, schools will deliver lessons in money management. I’ve often wondered how such a crucial aspect of life could be so roundly ignored by the education system. It will be ignored no longer; I just hope it will be taught effectively.

The schools minister – Ed Balls – says “economic wellbeing and financial capability” will be made a key focus of teaching for 11 to 16-year-olds.

Not before time – in today’s Britain, around two-thirds of adults have trouble with basic financial terms and we have more personal debt than any other country in Europe.

The government says it wants to encourage schools to teach teenagers about personal finance and enterprise. Schools will teach lessons in taxation, personal budgeting, money management, personal savings as well as pensions, interest rates, trade and investment.

They said it:

Ed Balls (schools secretary): “It is essential that we equip our children with the financial skills they will need as adults and get young people thinking about careers and how to fulfil their ambitions.”

Michael Gove (shadow schools secretary): “It’s particularly ironic that Ed Balls should want children to learn to manage debt when it’s his government’s approach to student finance and the housing market which has landed so many young people with such significant debts.”

Rob Coe (secondary education research at Durham University): “Schools are fed up of new initiatives.”

Further Reading:

http://www.timesonline.co.uk/tol/news/uk/education/article2045615.ece

http://education.guardian.co.uk/secondaries/story/0,,2122267,00.html

The Fall and Rise of Reginald Perrin is one of my favourite TV comedies.

I’ve never owned it on DVD, but I’ve been watching its price on amazon.co.uk.

As I write, the complete boxed set is selling at £24.97 with free postage.

A few weeks ago, the set was selling for around £39.

Earlier this year I saw it selling for around the £20 mark.

This is typical of most DVDs on Amazon.

If you buy several DVDs each year, the savings you can make by exercising patience are substantial.

Money Saving Tip: Only buy when Amazon offers a 33% discount or better.

What about buying from Amazon’s Used and New

Currently the lowest price of the Reginald Perrin box set on Amazon’s Used and New section is £17.01 plus £1.24 postage. Unfortunately, the seller has just 93% positive feedback. I prefer to buy only from sellers with 99%+ feedback. The lowest price from a 99%+ seller is £24.50 plus £1.24 postage. So, it’s cheaper to buy from Amazon itself.

What about eBay?

In my experience, a discounted price from Amazon is usually lower than new prices from dealers on ebay. Often, the prices on Amazon’s Used and New are lower than the selling price on ebay auctions.

Money Saving Tip: Always check Amazon’s Used and New price before bidding on ebay. It will help you not to overbid.

For the sake of comparison, the buy-it-now prices on ebay today for the complete Fall and Rise of Reginald Perrin offered by two sellers are £34.95 plus £3.00 postage and £28.95 plus £3.00 postage. Amazon is cheaper.