MoneyWeek roundup: What’s George Osborne up to?

We've just about exited recession here in Britain. But that doesn't mean we can be complacent, says John Stepek in Monday's Money Morning.

What's got John worried is a little-reported financial wheeze by the chancellor, George Osborne.

"As a result of quantitative easing (QE), the UK government owes the Bank of England a lot of money", says John. "Since March 2009, the Bank has printed enough money to buy up around a quarter of the government's total outstanding debt. It now holds £375bn in British government IOUs, (also known as gilts).

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"So what's it been doing with the interest payments on that debt? Nothing really. Up until now, the money has just been sitting in a bank account (called the Asset Purchase Facility', or APF). By March next year, the Bank will have racked up £35bn in interest payments."

But now Osborne has decided to snatch the lot, says John. The way Osborne sees it, it's stupid for the Treasury to pay interest to the Bank of England as it means the government has to borrow more money to do so. The logic is that rather than pay interest on the loans today, it makes more sense to use that money now to reduce the overall debt.

That might seem like common sense but it's taking us down a dangerous path, says John.

"The point of QE we're told is to get more money flowing around the economy somehow, and so prevent deflation. Whether you agree with that end goal or not is by the by. The point is, it's just an extension of what the Bank of England tries to do with interest rates."

But this latest move is different, says John. It's been driven by the Treasury. "It's money-printing done to benefit the government's finances, not the economy", and that's a policy that can only end badly.

George Osborne's sly move is tricky to summarise in a few short paragraphs. So try Tim Bennett's video tutorial where he reveals the grisly details using one of his trusty diagrams.

We also look at what the Bank of England's latest manoeuvres mean for investors in the latest issue of MoneyWeek. If you're not already a subscriber, subscribe to MoneyWeek magazine.

An alternative way to play gold

Regular readers will know that we're convinced that all this money printing will continue to push up the gold price. After all if paper money becomes worthless people are going to look for something else to store and transfer wealth. And history shows that gold does a pretty good job of both.

In Thursday's Money Morning Phil Oakley explains a great way to play a rising gold price gold royalty companies.

The best way to think about gold royalty, or streaming, companies is as "a halfway house between a miner and a gold bar", says Phil.

"Building and developing a gold mine can be expensive. Mining companies often don't want to borrow money from banks as the terms are often too restrictive. So they turn to investors, such as gold royalty companies, instead.

"These companies give the miners the money they need to help build their business. In return, the royalty company gets a percentage of the output of the mine for a specified period of time. For example, a royalty may be 5% of sales. So at $1,700 per ounce of gold at an output of 50,000 ounces, the royalty company would receive an income stream of $4.25m.

"Another alternative is for the company to get a gold stream. This usually means having to invest a lot more money in the mine than under a royalty agreement. Here, the company agrees to buy a proportion of the mine's output for a fixed price for a fixed period of time."

So what are the advantages of investing in a streaming or royalty company?

"The beauty of gold royalty and streaming companies is that they are not exposed to the running costs of the mine", says Phil. "If the costs go through the roof, they will not lose out like the owners of gold mining shares. But if the gold price goes up, they make lots of money.

"There are other benefits too. Because they usually have interests in lots of mining companies, you take on less risk. Gold royalty companies also often benefit from production increases, as their money has been invested in mines that are still being developed."

Of course, Phil isn't the only person to notice these advantages. Their share prices have rocketed in the last five years, leaving them looking expensive. Nonetheless Phil has found one firm in particular that he still thinks is worth holding onto.

Multinationals should pay their fair share

Back to the UK, and Merryn took to her blog to analyse the furore about the tax avoidance of multinational firms. Starbucks, Amazon and Google grabbed the headlines when they appeared before a parliamentary committee hearing this week. But, as Merryn pointed out, there are plenty more firms pulling the same tax tricks.

"The key point is that it is mostly perfectly legal and only to be expected in an era of globalisation", says Merryn. "These companies are entirely free to exploit the differences in the tax systems of the various countries in which they operate. And that is exactly what they do."

But this isn't just a question of companies trying to lower their tax bill, says Merryn. It affects the balance of the economy as it gives, for example, online, international retailers a huge advantage over their physical peers.

"How can a taxpaying business compete with the prices a non-taxpaying business can charge? The answer is on your high street."

Traditional forms of taxpaying media, such as magazines, are also being affected, says Merryn.

Governments will have to do something because "we need a level playing field for domestic companies to play on if scale and international mobility are to be the only drivers of corporate success in the future, the future is likely to be a pretty miserable place for most of us."

Merryn's call for action sparked a reader debate about the best way to tax multinationals.

Young investor' believes "tax will have to be applied to the selling of online goods as this is the only way in which they could be taxed to a great extent. Furthermore to stop giants like Starbucks why not add an additional national tax to the premises in which they sell their goods?"

However, Max Stirner had a completely different take. "You got it exactly the wrong way, we should crack down on taxes not on multinationals. Why is it that some 'economists' are so in love with the state. The income tax is a horrible thing. We need to get rid of it."

There were plenty more interesting suggestions. If you've got something to add to the debate, read the piece in full and have your say.

China's biotech boom

In his latest edition of his investment newsletter, Red Hot Penny Shares, Tom Bulford told the amazing story of biotechnology in China.

"Surprisingly, China has a long history with biotechnology. Back in the 1950s China based its science and technology system on that of the Soviet Union", writes Tom. "The system produced some successes, such as the chemical synthesis of bovine insulin for diabetes, but then collapsed as the Cultural Revolution outlawed academic activity of any sort."

But when reformist leader Deng Xiaoping came to power in 1978 he got the programme back on its feet and set up the National Centre for Biotechnology Development. Slowly the country improved its understanding and in 2009 Dr Fanyi Seng made history by breeding live mice from re-programmed stem cells.

But this story isn't about breeding mice, says Tom. The fact is, biotechnology could help the Chinese in lots of ways.

"Second generation bio-fuels, made from agricultural waste, can provide 'green' power, reduce China's dependence upon imported oil, and help clean up the country's damaged environment. Biotechnology can improve standards of food and hygiene, and meet the healthcare demands of an ageing population that is demanding the standards of healthcare that it sees in the Western world."

That's why last year China's government pledged $300bn to sciences and noted biotechnology as a priority, says Tom.

Private sector firms also recognise China's potential in the sector.

"Driven by local interest and foreign investment, China is becoming a biotechnology powerhouse. Following the lead of Silicon Valley it has developed life science 'clusters' vast business parks dedicated to the industry. One of these is at Chengdu, in a part of the country known as the 'Land of Heaven' and a centre for the production of the many biological materials that are the ingredients of traditional Chinese medicine.

"Today Chengdu is home to over 400 bioscience companies, over 80 colleges, universities and research centres, the West China Hospital which is one of the busiest in China, and the Ping'an Monkey Park where rhesus monkeys are bred for clinical purposes."

It's an exciting area and one that Tom will be keeping a close eye on in the months to come.

To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds we've listed them below.

Have a great weekend!

MoneyWeek

Merryn Somerset Webb

John Stepek

Tim Bennett

James McKeigue

Matthew Partridge

David Stevenson