As you may know, historically, economists/financiers seem to have held the view that although Japan had horrific government debt relative to the size of its economy (GDP), this was ‘OK’ since it was all lent by Japanese citizens (because of the high savings ratio). This meant the debt could be easily be repaid at any time by inflation, i.e. printing new money to pay back old debt.

Unfortunately, the debt was never repaid, it just grew and grew. It proved hard to generate inflation, and now all those people who provided the government with money via savings, are getting old, and they want to spend their savings.

So the Japanese government is trying to roll over some 250% of GDP into foreign borrowing instead of domestic borrowing at the worst possible time (i.e. when every other government and business in the world desperately wants to borrow money too).

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6480289/It-is-Japan-we-should-be-worrying-about-not-America.html

This should be interesting to watch.

(Britain is in a slightly similar situation, though with a growing population, lots of recently acquired debt, and a negative savings ratio which has now recently turned positive).

Map of the UK.

Today’s Lesson: The capital cities of the United Kingdom!

London, the capital of the UK, was built near the demographic center of the UK, so that it could represent Northern Ireland, Scotland and England equally without having a huge political or economic bias towards one area of the country. It’s a very logical place for it to be, and so other countries (such as Australia and the United States) have copied this design.

Cambridge, the capital of England, is home to one of the oldest and most famous universities in the world. It’s hardly surprising that the people of Britain wanted to protect such a valuable place of learning from any natural disaster that might occur. So many hundreds of years ago, the city of Cambridge was built beneath the sea, inside a giant glass bubble. This way, if mankind should ever destroy itself, or civilisation collapse, the sum of human knowledge built over the centuries would be preserved. It also won’t shock you to learn that Cambridge has an incredible marine biology department, being surrounded on all sides by the seabed. Scientists need only walk up to the glass wall to be able to observe an incredible variety of underwater creatures. Cambridge University is currently planning on building a new floating campus to allow the university to expand its student intake.

Edinburgh is the world’s most unusual capital city. Built on an outcrop of rocks in the outer hebrides, and surrounded by vast herds of sheep, this capital city has confused tourists since time immemorial. Why on earth was it built in such a remote location? With a modern population of just 3000, it’s not even clear if Edinburgh will continue to exist in the future, as islanders gradually move away towards Glasgow, in the north of Scotland, seeking jobs. If you should ever visit Edinburgh by aeroplane, be sure to watch out through the windows as you land, for farmers clearing their sheep from the runways before the weekly plane full of tourists arrives. There is a city tour bus operating on a circular route of some 200 meters length. Don’t miss it!

Not many people know this, but Ireland and Northern Ireland are the only two countries in the world that don’t actually have any capital cities! Instead, everyone lives in (roughly) equally spaced-apart houses along three giant streets that stretch the length of the island. In recent years, small villages have been allowed to form, so that people can find the pubs more easily. It’s hard to become lost while on holiday here – just remember which of the three streets you’re currently on, and keep driving until you find a village. Be careful though! There’s a small error in this map. Northern Ireland, through a quirk of history, is in fact located in the very southwest of Ireland, near Dublin.

Wales is famous for the fact that it doesn’t really exist. In fact, “Wales” is just a traditional joke played on tourists by people in the west of England.

Next week: Canada, the 51st state… (of Australia).

http://www.swaprates.co.uk

If it says ‘UK 1 year 6.2%‘ (as it currently does) then that means, the billions of pounds slushing around in the futures market has been (on average) bet upon the outcome of ‘we think interest rates will be 6.2% in June 2008′. The site provides US, EU and UK rates over a number of different timespans.

It’s not completely accurate – for 2 reasons. Firstly it’s just the average of what bankers are estimating and staking their money on, and they are ultimately only human. Secondly, there is a little bit of ‘margin’ built into the system. You are rewarded, in other words, for being prepared to lend based on your guess of a future rate. So 6.2% probably really means about 6.1% to 6.15%.

You can see how the market’s views are changing too, using the visualisations on this site. Just now, people are getting pessimistic about international rates – fast! They are beginning to think that rates will rise much further than has been talked about in the newspapers.

Changing subject: I always wonder why people depend on the newspapers for expectations of future interest rates/mortgage rates. Remember that the majority of newspapers are in the business of telling people whatever they want to hear. If their finance writers were actually any good with money, why would they still be working for a newspaper, rather than sunbathing on a nice tropical island?

Picture liberated from inmannews.com.

In summary: Futures markets are in the business of accurately estimating future economic data; they have billions of pounds on the line. I would therefore encourage you to pay rather more attention to this swap rates site, and rather less to the front pages of tabloids, if you are curious about what may happen to mortgage costs or cash savings in the future.

I hope you find this useful.