5 Reasons To Be Worried About The Next 5 Years

He's done it. David William Donald Cameron and the Tory party have successfully gained a majority in a shock result to an election that was hyped up to be the closest in recent memory. Much of the country will of course be celebrating, but perhaps Britain should be cautious about how these next 5 years of Conservative government (potentially more) will pan out to be. Here are 5 major causes concern for Cameron's next term in government.


EU 
A significant point of discussion over the next couple of years will certainly be that of Britain's European Union membership. Cameron and the Conservatives, influenced no doubt by the wind of Euroskepticism on the right (à la Nigel Farage), have pledged to hold a referendum on EU membership by 2017. Of course, the public could vote yes and perhaps little will change, but should a no vote be the result, we could see some devastating results.

3,445,000 British jobs are dependent upon exports to the European Union, and many of these will come under threat as a result of the decrease in trade with the EU that an independent Britain would experience.. Of course trade with EU countries would not totally cease should Britain leave the EU, but we would become a far less attractive trade partner if we could not be a part of the EU trade concessions programme. As a non-EU country, it would cost more for France, Germany and the rest of Europe to trade with us; making us a less attractive trade partner. Furthermore, the price of our imports from Europe would be very likely to increase.

Cameron's consideration of an EU exit poses a real threat to the Britain, not just economically but socially. Britain enjoys numerous privileges as a result of its EU membership- such as the freedom of movement it grants and the advantages it brings for students wishing to study abroad. And let's not forget the clout of the EU on the global stage. We are no longer the Empire that the Sun never sets on- Britain would lose a great deal of global prominence should it leave the European Union.

Green Troubles
The Tories don't have the greatest record on Green energy, and it seems that environmentally the next five years may not be all rosy for Britain. David Cameron's reported remarks from 2 years ago that he wanted to get rid of the "green crap" that are the green levies on energy bills pretty much sums up the party's attitude to the environment.

Goodbye Wind Power- hello Fracking?

The Conservative Party Manifesto, however, tells us more about the energy policy Cameron seeks to pursue in office. Despite the party's pledge to invest in green energies that "represent value for money", plans to scrap subsidies for onshore wind farms (the cheapest form of carbon-neutral energy) are soon to go forward. The controversial fracking program is also to continue, despite the possibility it brings of contaminating water supplies and also releasing harmful methane and ozone gases.

Britain has seen terrible flooding problems in the past years, and many have claimed this to be partly attributable to a lack of spending on the part of the government building sustainable flood defences. Despite, this, the Conservative government have already cut spending on flood defences, and are seeking to further minimise spending on the flood issue in their next term- meaning parts of Britain are likely to suffer hugely yet again next time the flooding comes.

Cuts, Cuts and More Cuts
A signature of post-Thathcher Conservatism, we will undoubtedly see in the coming years a series of ruthless cuts made to government spending made in the name of streamlining the economy, reducing dependency on the government and cutting this 'deficit' that Chancellor George Osbourne has often milked for political points in the past 5 years.

In the past 5 years, many of the governments' austerity plans (such as scrapping housing benefits for young people) have been opposed and thus halted (or at least watered down) by the presence of the Liberal Democrats in the coalition.

With the Conservatives now in command of a majority in the House of Commons rather than being in coalition, they hold almost total autonomy over government policy. Now, they are set to go on an aggressive slimming down of public spending, according to the Office of Budget Responsibility, with a 'rollercoaster ride' of £30bn of cuts lined up for the next five years.

These cuts include a reduction of the annual benefits cap by £3k to £23,000 and a removal of the youth housing benefits (the ones eanumber of food bank users doubling to 2 million a year.
rlier mentioned, that the Lib Dems prevented being passed through). In total, the Conservatives have £12bn of welfare spendings cuts planned out that will hit the working class, poorest of society almost exclusively. The impact will be devastating: an Oxford University study claims this £12bn of social welfare cuts will result in the

Austerity arguably doesn't even work- the Economic Policy Institute (see graph) are just one of numerous organisations that have highlighted that Austerity impedes economic growth. That's primarily because austerity increases poverty, meaning demand is also shot down. Think of economic growth as a table, supported by consumer spending. Squeezing the public squeezes consumer spending, effectively chopping of the legs of the table and leading the whole thing to collapse.

'Flexible Hours'

The government have claimed to reduced unemployment during their last five years in office, which is in fact true: but as with most things, when it comes to jobs quality is just as important as quantity. According to the ONS, between October and December 2014, 697,000 people were working on 'zero-hour contracts'- a highly controversial form of employment in which there is no guarantee whatsoever of the employee being able to work a certain number of hours. People have often described turning up to work to find out they aren't needed, before having to head back home for a day without pay.

The uncertainty of a zero-hour contract creates problems for workers- not only does it waste time that could be spent being productive, but it creates huge instability for families that are most likely already riding the poverty line. It leaves hundreds of thousands of people unsure whether they will be able to afford their housing, their heating for the winter, or even their food.

Labour promised to put a ban to zero-hour contracts, and so did the Tories. Well, kind of- Iain Duncan Smith, the Tory Work and Pensions Secretary promised simply a paltry rebranding, to call them 'flexible hours'. So on this front we will see change- but unfortunately where it really matters to the poorest in Britain the status quo will continue under the Conservatives. 

A Government Run for the Wealthy, By The Wealthy

Amidst all the cuts that will devastate the poorest in British society, the following 5 years will probably be rather rosy for the upper-middle and upper class of British society.

£1.2bn could have been raised by a 'Mansion Tax' that would increase the contribution of the wealthiest to society, but it was ignored by the Tories, who chose to instead tax people on welfare with spare rooms in their house. This is just one of the many examples of the Conservative Party working for the wealthy elite, against the interests of the impoverished in Britain, those who really need the government's help.

This is where we come to the National Health Service, where perhaps the Conservatives will have the most devastating effect. Areas of the cherished national institution are already losing funds and being privatised. In the past five years, payments from the government to the NHS for each patient that is treated has been cut in effect by 10%, leading to problems that have already arisen such as a lack of beds and the infamous A&E waiting times. The government's response to this is, rather than taking the blame, often to criticise these areas of the NHS and push for their sale to private 'more efficient' hands. Just in the past month, the Tories signed off a £780m sale to a group of private companies that with dubious past records. 

Take one of these companies, Vanguard, that was previously given the responsibility for eye treatments in Musgrove Park Hospital, Taunton. The contract was terminated just 4 days after beginning, with HALF of the 60 patients it had treated facing post-treatment complications as severe as a complete loss of sight. 

This highlights the illusion that private companies provide the best results for the consumer. Of course, this is indeed often the case (no one would argue to nationalise Apple, for example), but health is a completely different ball game. As is clear in the United States, a profit-driven health sector is against the public's interests, but it is indeed in the interests of those big businesses that these services are handed to. 

And these are just a few of the results of the Tory squeeze on the NHS. Between 2010 and December 2014, 4000 nurses had lost their jobs. Those who haven't lost their jobs to the cuts have seen their pay frozen for a number of years. For the patients and the staff of the NHS, the next few years are not looking rosy. 

Forget the Minimum Wage, Welcome to the 'Happiness Wage'

Dan Price, who founded Seattle-based credit card
processing startup Gravity at just the age of 19.

Earlier this week, Dan Price, the founder of a credit card processing company called Gravity, saw his salary drop from a million dollars to a figure around $70k- a drop of 93%.
This reduction, strangely, wasn't due to the company suffering or another authority acting upon him- on the contrary, he was the instigator of this unselfish act, part of his company's wage overhaul that has gained much attention in the past few days.

Price's announcement that his new wage would set the minimum wage for all of his 120 employees was not new in its nature- many companies, such as JP Morgan, Chelsea FC and Deloitte have already committed to giving all their employees a 'living wage', one that is above the minimum wage and in line with the ever increasing cost of living.

But minimum wage chosen by Dan Price itself is quite staggering. The new minimum of 70 thousand dollars (£47,000) means that 90 (70%) of Gravity's 120 staff will be receiving a pay rise, a staggering amount that clearly will take a toll on the company's finances.

Of course, this move has been calculated meticulously. If we take the average US wage of $51k to be representative of Gravity staff, Price's $930k wage decrease alone is enough to 49 of his staff to have their pay boosted to $70,000. Of course, that still leaves 41 staff to fund- but Price plans to spend up to 80% of the company's forecasted profits over the next three years to ensure this wage promise is met.

It is likely that Price will be receiving more than just his $70k salary, just as so many of those 'one dollar CEOs' do. Being a co-founder of the company, he's likely to have a sizeable amount of shares in the company.

So, what inspired Price make this bold move? According to The New York Times, inspiration came from multiple sources, most notably Price's own experiences of friends struggling to make ends meet on less than $40k. "It eats me inside," he stated.

With regards to the specific figure of $70k, the idea came from Princeton economists Daniel Kahneman and Angus Deaton, whose studies on potential causal effects of money on happiness concluded that "emotional well-being also rises with log income, but there is no further progress beyond approximately $75,000.". Essentially, they found that money buys happiness- but this causal effect wears away once surpassing $75k. Think of this as not a minimum wage but a kind of 'happiness wage'.

The USA currently is in an appalling state of income inequality across the socio-economic spectrum, with the executives of society clearly detached from the rest. The average American CEO salary of around $11.7m is 331 times that of their average employee- and this gap is something Price himself seeks to address with this minimum wage. "The market rate for me as a CEO compared to a regular person, it's absurd," he said in an NYT interview. "As much as I'm a capitalist, there's nothing in the market that is making me do it."

When Incentives Go Wrong: The Cobra Effect

A story goes that during their colonial rule of India, the British rulers were unhappy with the number of venomous Cobra snakes rolling around the streets of the capital Delhi.
They wondered- how could we get rid of these snakes?
They followed a financial route- offering a bounty for every dead cobra presented to the authorities. This seems perfectly rational- under colonial rule the natives were not exactly the most well off or comfortable people, so most would certainly be willing to kill snakes in exchange for payment. And the British were right, for a while- the number of cobras on the streets decreased initially.

But of course, we wouldn't be recalling this story if nothing went awry. After a while the British found that more cobras were on the streets, despite the same number, if not more, of Indians presenting them dead cobras. What was happening?

The answer was simple but ingenious. The natives were offered financial incentive to kill snakes for the British- but they were now not just from the streets of Delhi, but from farms- cobra farms specially created by the locals to provide a supply of cobras that could be killed and then exchanged for money. Of course some of these cobras managed to escape the farms and go onto the streets, explaining the lack of drop in number despite the incentive program.

This is an example of the Cobra Effect (named after this story)- the name given to a situation in which an attempted solution to a problem makes the situation worse rather than better.
Want to see a modern day example of the Cobra Effect? Check out the article on how it affected Mexico City here.

The Great Penny Debate Part II: Why The Penny Needs To Go.

Welcome back. Here in the second instalment of the debate on Pennies, we shall look at a selection of the arguments against the penny and for its abolition.

1) Value for Money
Many pro-pennyists counter-argue the idea that pennies are bad value for money for the government with the claim that, while pennies may well be financially inefficient, this doesn't mean their abolition will improve the financial efficiency of the Mint- in fact it may worsen it. They argue that should the penny be abolished, demand will rise for the next lowest coin- the silver nickel, worth 5 cents, which actually loses more money per coin than the penny. So, the argument goes, more investment will have to go into a bigger loss-making product should the coin be abolished.

With the cost of producing a nickel at 7.7 cents, and that of a penny at 1.26, this is theoretically true. Take the cost of making one dollar with either coin- it would cost (7.7*20) 154 cents to create a dollar with nickels, but just (1.26*100) 126 cents to do so with pennies. A 28 cent difference, quite decent proof that the penny is more cost-effective to produce. But this hits a snag- these figures are correct, but as of 2008. Seven years ago.

Today, the tables have figuratively turned. As of late 2014, a Nickel costs 8.1 cents to produce (a 3.1 cent loss), whereas a penny costs 1.7 cents to produce (a 0.7 cent loss). This may not seem to be a game-changing difference from 2008, but it makes all the difference. Today, making 1 dollars' worth of nickels costs 162 cents. Making the same from pennies costs 170 cents. The prices of the two have crossed, to the point at which nickels are now more cost-effective than pennies- rendering the pennies causing greater financial inefficiency.

2) Productivity
Just as the potential 'rounding tax' could have tiny but compounding impacts upon the spending of consumers, there already exists a tiny but recurrent way in which we lose because of pennies- not in terms of money, but time. Whether it's spending time rummaging in our pockets for a few remaining pennies, or waiting to receive them as change, it wastes time- not in the short term, but the seconds add up and become minutes, minutes, over the course of a year or two, hours. Hours that can be spent being more productive, whether it's a store employee gaining more time to perform other duties or the customer having more time to spend in town and buy other stuff.

It's difficult to imagine seconds making such a difference, but added up in the long term, they can. Economist Robert Whaples quantifies the losses that the penny can cause. Using the average American wage of $17 an hour, he evaluates every two seconds of the average American's work time to be worth a cent, and thereon estimates that time lost due to the complications brought on by pennies can cost around $300m per year to the US Economy.

Whaples proposes that rounded sale prices would help improve productivity of the economy as a whole, not by giving one significant boost but by trimming the excesses, the little seconds of time wasted because of the business of handling pennies.

3) Are they Useful?
Have a look at this menu here. The price of a full dinner with multiple courses, at just 25 cents, is one that you might think is ridiculous, but that was how things were in 1900, the year this American bistro menu comes from.

Go forward to 1931, and food was still ridiculously cheap in comparison to the modern day. A penny could buy you an egg, or a pound of flour.

Today? Well, if you can find anything that I could buy with a penny in any store today I'll give you one (not that you'd probably appreciate it). The fact is that pennies were not always the lowest valued coin- until 1857 you could get a half-cent, and currencies throughout the world have seen smaller denominations than a penny (think, for example, the British shilling). But over time, they have been taken out of circulation, for a number of reasons, but primarily because of inflation. Rising prices nullify the value of all denominations of money- and at one point we must re-evaluate whether any certain coin is necessary. We have very little use for pennies- so why should we carry on keeping them in circulation?

Economist Greg Mankiw summarises it effectively, stating "the purpose of the monetary system is to facilitate exchange... the penny no longer serves that purpose."


RECOMMENDED READS

2014 Biennial Report to the Congress (US Mint) http://www.usmint.gov/about_the_mint/PDFs/2014-rd-biennial-report.pdf

Congress Looking At Steel Pennies And Nickels (2008) http://www.nbcnews.com/id/24491928/ns/business-stocks_and_economy/t/congress-looking-steel-pennies-nickels/#.VR2wlZPF8yA

How Much Does It Cost to Make A Penny? http://blogs.wsj.com/economics/2014/12/15/just-how-much-does-it-cost-to-make-a-penny/

The Penny's End Is Near http://www.consumeraffairs.com/news04/2006/07/penny_sense.html

The Great Penny Debate Part I: Why Pennies Should Be Kept.

The penny coin. The cent coin. Whatever you call it, we're all undoubtedly acquainted with the coin that holds the lowest value in your currency, whether you're from America or Britain or pretty much anywhere else. Except Canada, and a number of other countries who have decided to abolish the penny from their currency. But why have they done it, and does it mean the penny holds no point in our modern economies?

In this first of a two-parter, we'll look at the reasons why pennies should be kept in our economies.

1) 'Rounding Tax'
Perhaps the most prominent argument of the pro-pennyists, much research suggests that removing the penny from the currency would cause a change in price; naturally, if the penny was to be abolished we would no longer be seeing any '.99' prices. Instead, we would see either '.95' or '.00' prices- and considering that businesses would have to lose .4 on any purchase should they round it down, rounding up would seem an attractive option. This would have rather insignificant effects on the consumer in the short term, but in the long term it has the potential to further weaken those closer to the bottom of the economic ladder.

Data from the Federal Reserve indicates that Americans earning under $10k and also those with less than 12 years of education, use cash for over half of their purchases. This is opposed to credit cards, particularly spending online. Credit card real world spending would also be affected by 'rounding tax', though as no online transactions are made in cash they would be unlikely to be affected. This would put online spenders at a very slight advantage, whereas for the more disadvantaged it could make a huge number of tiny differences to their spending. These may not directly cost them in the short term, but in the long term the cost can aggregate into something considerable.

Canada has implemented a system of 'rounding' that charges credit card users differently from cash users in the real world- for example, something costing $2.98 would be rounded up to $3 for cash users, while the price remains the same for credit card users. This is an example of the potential imbalances that could arise and, in the long term, harm those who use cash.

2) Charity

The 'Common Cents' campaign has seen considerable success,
like many other charities, thanks to the penny.

Abolishing the penny is a move that is likely to work against the interests of charity organisations. Many charities rely significantly on spare change for funding, and though it may seem small, the total power of the penny shouldn't be underestimated: in 2009, the Leukemia and Lymphoma Society of the USA celebrated raising $150 million- entirely in the form of 1.5 billion pennies. The organisation 'Common Cents' organises what it calls 'Penny Harvests', and was able to collect $756k in 2009 exclusively by collecting pennies.

The penny holds a special place in this respect because in a way respect is just what it lacks; it is one of the most common items given to charity, and arguably one of the most beneficial for all parties. No one has bankrupted themselves by giving a penny to charity- yet all the pennies put together have been shown to make rather significant differences. The 'Common Cents' guys call the penny "the philanthropic property of young people"- and it seems they do have a point, so abolishing the penny could indeed harm charitable organisations.

3) Appeal to Tradition
This is not so much a practical argument for keeping the penny, but rather a sentimental one. Many feel an attachment to the penny, for various reasons- whether it is its role in infant numeracy development (who doesn't remember playing with penny coins while learning numbers), its historical/cultural value (Lincoln holds a cherished place on the penny in the USA) or just the traditional side of everyone who dislikes change (or should I say likes change, see what I did there? No? Sorry.).
Even one of the staunchest of critics of the penny, Professor of Economics at Wake Forest University Robert Whaples, admits this, stating "The vast majority want to keep a penny... it's a sentimental attachment."

3 Things to Note From the 2015 Budget Announcement.

Chancellor George Osbourne with his red Budget Box of policies. [EPA]

It's Budget Day! Today saw the announcement of the British Coalition Government's budget for the forthcoming fiscal year, by Chancellor George Osbourne. The Budget, in essence, evaluates the past year and sets out the plans for the next year with regards to economic policy; things like whether taxes on certain things should be raised or lowered, whether the government will invest further in a project and so on.

The whole event gives itself much reason to be sceptical; they are often used as more politically charged electioneering events, and even moreso with Britain just a couple of months away from an election. Here are three things I took away from the Chancellor's speech today.

1) Britain's economy is doing relatively well.
As Osbourne proudly announced today, Britain had the fastest growing economy of any developed nation in the world, as deemed by the International Monetary Fund, who estimated Britain's unemployment and inflation rates to be lower than they turned out. These two numbers are in fact lower than ever, with unemployment expected to fall to just 5.3% this year and inflation below 2%. But with regards to employment, there is a problem; because many of the jobs 'created' have been what are known as 'zero hours contracts'- these are job contracts within which the employer is under no obligation to give no minimum number of hours to its workers.
According to the Office of National Statistics, 697,000 people (over 2% of the British workforce) are employed under ZHCs, and over one third of them are unhappy about the number of hours they are receiving. These employees often receive so few hours that they are unable to afford the rising cost of living, but their employed status puts unemployment benefits out of their reach. Their lack of status as a full employee then puts them in a position where they can't access benefits such as holiday pay, leaving many in a worse financial situation than they would be if they were out of work. A significant proportion of the jobs created under the Conservative government have been ZHOs, with over 100,000 being created between 2013-14. So employment may be higher, but with cases such as those of Zero Hour Contracts, one must think more about the quality of employment being created than the job alone.

2) "Football, beer, and above all gambling, filled up the horizon of their minds. To keep them in control was not difficult."
I'm often reminded of this poignant quote from George Orwell's literary masterpiece, 1984, whenever rumours are abound of government plans to reduce taxes. No doubt Osbourne and Co. have announced this with the election fast approaching in mind, and with the Chief Executive of the British Beer and Pub Association calling him a "hat-trick hero" because of it, there's no doubt it will work in gaining Tory support with many. As Osbourne announced tax duty of a pint of beer and cider are to drop by 1p and 2p respectively. For the third year in a row, Osbourne announced tax duty of a pint of beer and cider are to drop by 1p and 2p respectively. He claims it has the potential to create 3,800 jobs in the forthcoming year, but I wonder: is this really the way we should go trying to create employment?
The government seems to be continuing (rightly IMO) its efforts to minimise the nation's consumption, following up on its previous promise to increase tobacco duty by 2% starting today, but why is it doing the opposite with alcohol? Alcohol is an equally damaging drug, if not more damaging due to how much more common it is and its association with events such road accidents and street violence. One-third of the visitors to our already suffering A&E facilities are there due to alcohol- even more during the weekends. 2014 saw almost 6000 more people having to receive alcohol treatment than 2013. The total cost of alcohol-related harm to society is £21bn, and it is costing the NHS £3.5bn a year.
The state of our society with regards to alcohol, why it may not be spectacularly poor on a global stage, has much much to improve. And in my opinion, lowering taxes on alcohol, making it cheaper, is no way to solve the problems that are worth far more than 3800 jobs this could bring.


3) Google and Co. will soon have to pay their taxes
In 2012, Starbucks made profits of over £400m in Britain- yet paid £0 to the Treasury as corporation tax that every registered company operating in the country is obligated to pay. Google had a turnover of £395m in the same year, yet paid just £6m. And it's not just these two companies; six major technology firms including Apple, Google and Facebook made profits of over £14bn in Britain, but paid just 0.3% of this in the form of tax. It sounds scandalous, but the thing is that these companies didn't technically break the law- they didn't evade tax, they avoided it thanks to loopholes that allowed them to store their profits in accounts abroad, avoiding the tax radar of Britain. This left the government pretty powerless to prosecute, but what Osbourne has announced here today is a plan to close that loophole to prevent such behaviour continuing.
Dubbed the 'Google Tax', the 'Diverted Profits Tax' plans were announced today- to put it simply, companies will have to report themselves to the HMRC (Tax authorities) if they are making annual turnovers of over £10m, and will have to comply with investigations that determine how much of the profits have been moved abroad, and pay the taxes determined as a result. The government expects to make £3.1bn from this move over the next five years- not a significant amount, considering the scale of government finances, and it is something that clever corporate lawyers are probably going to flout sometime soon. But nevertheless, it's an important move from the government to let multinationals like Google and Starbucks know that there is no place for tax avoiders in Britain.


Recommended reads: 

Budget Calculator: How Will The Budget Affect You [BBC] http://www.bbc.co.uk/news/business-17442946

The Budget- Official Document https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413949/47881_Budget_2015_Web_Accessible.pdf

Alcohol treatment in England 2013-14 http://www.nta.nhs.uk/uploads/adult-alcohol-statistics-2013-14-commentary.pdf

Why You'd Be Mad To Buy A $17000 Apple Watch.

So just earlier today, Apple announced to an excited bunch of journalists in San Francisco their plans to release their new Apple Watch in the coming months. The much awaited product is to go on sale on April the 24th, with a wide range of watches and accompanying straps ranging from £300 to a whopping £13500 ($350 and $17k in the USA respectively).
The lower end of that price range gets you an Aluminium watch case, and a 'Sport Band', something that appears to be essentially rubber/plastic strap (though probably one very well made). But it gets more spicy looking at the higher end of the range- for £13500 you can get an 18-Carat Rose Gold Case with a 'Rose Grey Modern Buckle' (a leather strap, pictured). Especially considering this watch performs no more or fewer functions than its £300 sibling, it seems a steep price to pay indeed.

But no, Apple are not going crazy with their pricing strategy. The watch is one of the widest ranging products in the world; you can get a £10 classic from your local Argos, or opt for something like this Blancpain Tourbillon (I'll let you check the price of that one for yourself). Watches can be quite extraordinarily luxurious goods, along with things like Fountain Pens and perhaps cars.

So why spend such extravagant amounts on a timepiece? An argument that holds for most other consumer goods is that the product's function is better if more is spent on it. A basic example is how spending more money on a TV will probably get you a bigger screen, or how a more expensive sports car is likely to be faster than a cheaper one.
However this fails to hold for most luxury goods, simply because there is usually a limit to just how good something can be. Much is made of the precision and smoothness of higher end timepieces, but for most people this is a bogus excuse for buying a watch. The owner of a cheap watch is very unlikely to be disadvantaged in comparison to a Rolex owner because his time is a few seconds inaccurate, or his watch hands don't move in a buttery smooth way. Being honest, the function of a cheap and expensive watch is usually identical; yes, more expensive watches may gain you extra gauges and measurements, but the basic function (that is, telling the time) is not improved upon in a way that reflects the extra premium.

However, the design is, of course, a significant area of difference between cheap and more expensive watches, as is quality of material- and this is indeed a more significant reason why people buy expensive watches. They are more likely to look good, and the quality is likely to be such that they last for a much longer time. This allows, in many cases, for watches to be passed on as family heirlooms, as items passed down through generations.

The Six Million Dollar Patek Phillippe

And that long-term aspect brings me onto a significant economic reason for buying an expensive watch. Expensive watches are arguably very strong investments to make; if they are kept safe and maintained well enough, their price can rise exponentially over time as they become rarer and more cherished. The world's most expensive watch was a vintage Patek Philippe- sold in 2010 for almost $6m, kept since the 1940s. Investment is where expensive watches are necessary- firstly a cheaper watch, even if it is 100 years old, is unlikely to have much visual or brand appeal, and secondly it would be far less likely to be in working order after a long period of time. Expensive watches, integrated with various precious metals and crystals to keep it durable, are thus far more likely to be appreciating assets.

This brings me to the $17000 Apple Watch Edition. Here are just a couple of reasons why you may want to buy it, and my opinion why you'd be mad to:

1) The looks. Not only do you want the latest Apple device on your wrist, but the most expensive and shiny one. You overlook the fact that the actual software, function and quality of timekeeping of your watch you spent thousands on is pretty much identical to the $350 base Apple Watch, and not so different from a cheaper smart watch either. Not $17k different, anyway.

2) Investment. Though a more credible reason than just simply wanting to show off, you'd have to use it pretty conservatively to keep it maintained for a significant time enough for it to appreciate. Being a used luxury product it is likely to steeply depreciate for the first few years, after which numerous iterations of the Apple Watch are likely to have been released and yours will be running far from perfectly (anyone who owns an Apple product more than 3 years old will know this). Vintage watches are usually running as they were when new- but being a battery operated, software-running device, it is unlikely that there will be much interest in a laggy 20 year old Apple Watch, if it even still works. Too much modification to the watch (new batteries, hardware) will be likely to remove the original 'vintage' appeal of the watch and thus fail to increase its value, if anything decrease it.

3) You are an Apple fan with genuinely too much spare money to spend, and you buy it knowing you're gonna buy the next Apple Watch when it comes out anyway. If so, good for you mate.

Of course, this isn't to say you shouldn't buy an Apple Watch Edition or an Apple Watch generally. If you have the money and the interest in the product, go ahead, as I'm certain many people will. The functionality and competence of the watch against its smartwatch competitors would be unquestionable, Apple is likely to be at the forefront of this new technology with companies like Pebble, Samsung and Motorola.

But it would be wrong to treat it as a 'traditional' clockwork watch. It seems unlikely that it will be anywhere near as effective in appreciating over time. It appears the watch is evolving as we speak- we are indeed entering the new generation of timepiece, for better or for worse.


RECOMMENDED READS

Apple Watch: Timekeeping https://www.apple.com/uk/watch/timekeeping/

Why Watches Are A Timely Investment http://www.thisismoney.co.uk/money/investing/article-2631408/Why-watches-timely-investment-100-years-First-World-War.html

Top 5 Best Investment Luxury Watches http://acl90210.com/best-investment-luxury-watches/

Is A Rolex A Good Investment? http://www.borro.com/uk/borro-blog/is-a-rolex-watch-a-good-investment

A Basic Guide to Tanking Petrol Prices.

Recent months have seen staggering developments unfolding in the petroleum market. The price of Brent Crude Oil has fallen from roughly $110 per barrel in July 2014 to its current rate of $62.04 (as of the 17th of February), a change that has had huge effects on businesses, individuals and entire economies.

Why has it happened?
Simply put, there has been an oversupply of oil in the market, exacerbated hugely by the decision of OPEC (the Organisation of Petroleum Exporting Countries) in November 2014 to avoid cutting output. More oil, more supply, means cheaper and more open availability.

Source: BBC News

How does it affect me?

Provided that you're neither a business owner nor a Head of State, the most likely effect has been that you will have seen the prices at the petrol pumps fall dramatically. In the UK, the past year has seen petrol and diesel prices fall by around 16.2%, making petrol far cheaper as it approaches the £1 mark. This has meant that, in general, the cost of living has fallen for the public- not only do we need to spend less on petrol now, but the fall in prices have stalled inflation rates. 

Governor of the Bank of England Mark Carney claims that inflation is likely to turn to deflation in the following months, highlighting the economy's deep dependence on petrol; something we must see as potentially threatening as well as beneficial as this appears. Imagine if petrol prices had risen. Devastating events like the 1973 Oil Crisis, when Arab oil producers enforced an embargo on Western Israel-supporting nations, leading to the quadrupling of oil prices in the USA, have shown the chaos our dependence on oil can cause.
Oil plays a massive role in all of our lives; directly through our own use, and indirectly through its use to create and bring to us what we consume. Therefore the fall in prices inevitably has knock on effects that change life for us.

Is there a threat of spiralling deflation?
Not quite. Spiralling deflation is usually caused by an oversupply of money, or overproduction of goods in the economy. A hole is dug that the economy must climb out of itself in this case. However, the deflation caused by falling oil prices is different. Oil prices are more in the hands of oil producing superpowers rather than most Western nations, which in this case is good. Oil prices will inevitably plateau and begin to climb back up, and this will provide the effective counterbalance to deflation experienced in the West. Provided that this occurs before any major deflationary disasters, this means we are relatively safe from spiralling deflation- we are in a hole, but think of it as a whole with an elevator out available to us.

How does it affect national economies?
The price fall has certainly been bad news for countries heavily dependent on oil revenues such as Russia, Venezuela and Iran. Collapsing prices for these nations hit them hard as it means falling oil revenues. The International Energy Agency (IEA) claims Russia will be the hardest hit by this the hardest, as the country is already being hit my Western economic sanctions and a suffering ruble. And indeed, earlier this month the Russian central bank estimated that the price drop will lead to a $160bn fall in government revenue over the next year. According to Alejandro Werner, director of the IMF's Western Hemisphere division, the fall in oil prices is having devastating effects on the Venezuelan economy as well- stating "each $10 decline in oil prices worsens Venezuela's trade balance by 3.5 percent of GDP, a bigger effect by far than for any other country in the region", causing spiralling inflation and intense economic turmoil in the South American oil giant.

How does it affect the environment?
Undoubtedly, the fall in oil prices will have negative effects on the environment. It will cause not just travelling by car but also by plane to become more affordable, and people are likely to try to take advantage of this while they can; leading to increased greenhouse emissions and further damage to the environment. Whether the period of low oil prices will be long enough to make this damage of a substantial nature is yet to be seen, however. 

So what does the future hold for petrol prices?
It is of course impossible to predict the future exactly, but it seems that a relatively unspectacular equilibration of the market will take place. As prices fall, consumers are likely to become more carefree in their spending, enjoying the reduced costs of travelling and goods in general. This will cut down the world's supply of oil, leading to prices rising once more and resurfacing to roughly where they were before they fell. On the other hand, deflation could spiral down if the oil producing nations maintain or increase their oil output, economic crisis could hit the world yet again and a global conflict could emerge as nations suffering from the falling oil prices seek to exact revenge for the world's relative lack of movement over the matter.
Let's hope for the former.

Pros and Cons #2: Quantitative Easing

One of the most prominent national economic policies that has emerged in the 21st century is Quantitative Easing. A practice originating from the Bank of Japan to fight falling spending that was causing damaging deflation in the 1990s, it consists of the purchasing of financial assets (intangible assets, such as stocks and bonds as opposed to properties) from commercial banks by a country's central banking authority. The money these banks gain, theoretically, will allow them to take increased risks in lending more money to individuals and businesses, who, in spending and investing the loaned money, will help spur economic growth. Essentially, the central bank is pumping extra money into the economy- but not, as popular belief goes, in the form of masses of newly printed cash, but rather electronic money that, sometime down the road, becomes part of the national flow of money.

QE is something of a last resort for a faltering economy. Usually interest rates are manipulated; in times of deflation, when more consumer spending is needed, interest rates are lowered, which makes borrowing money cheaper and thus more popular. QE comes in when interest rates head closer towards 0%, and cannot be lowered further.

So, for our second instalment of Pros and Cons, let's look at Quantitative Easing.

PRO - Economic Stimulus
More lending by the banks usually translates into higher spending by businesses. Whether it is on new facilities such as factories or retail stores, or office renovation, extra money is pumped into the economy. When deflation is becoming an issue, spending is low and business as a result is not good for most- however making money more available will mean businesses are more likely to spend more money.
Employment is a particular focal point for QE- hopes are that, being able to lend more money, businesses will invest in more jobs. With more people in work, consumer spending is likely to increase, further revitalising the economy.
It's a stimulus, like a bump-start for a car; the hope is that putting the economy back into motion, even by money created out of thin air, will allow it to recover itself and eventually become independent of such stimulus.

CON - Misuse
However, a dangerous possibility with regards to monetary stimulus such as QE is that the money will be misused; giving extra money to banks has not been such a popular policy in recent times, and perhaps rightly so. Despite the faltering global economy of the past decades, bankers' bonuses and bank profits as a whole have been booming- and there is certainly a strong case for arguing that QE, as well as the bailouts of 2007/08 have only contributed to this.
Companies who benefit from the greater lending power are also not guaranteed to use the money how theory suggests. Executive pay has been just as much an issue as that of bankers, and while it may not be considered a misuse, much of the extra money may go into investments abroad, such it into offshore tax schemes or outsourced employment- these may result in increased profits for the business but not the overall economic stimulus QE is designed to provide to a nation's economy.

PRO - Combat Deflation
The problem of deflation (which you can read more about here) is, in a nutshell, caused by a shortage of money supply in circulation. This means everyones' purses are tightened and thus spending in the economy falls with wages, and subsequently prices fall also. QE is primarily designed to act against falling prices and wages- by increasing the amount of money in the economy, the hope is that spending will recover and prevent spiralling deflation.

CON - Inflation
On the other side of the coin, there is a fear that monetary programs such as Quantitative Easing could tilt the economy the other way. If too much money floods the economy, its worth will fall too much, resulting in inflation, the drastic rise in prices. While the central financial authority can control how much money can enter the economy, it becomes very difficult once it becomes part of it- it's like adding a selection of straws of hay to a haystack and trying to pick out those exact straws after it's all been mixed up. While many claim inflation is a more desirable alternative to deflation, and central banks have of course made reassurances that inflation could be controlled at the end of a course of QE, the world's inexperience of whole QE cycles mean the inflationary potential of the stimulus remains a grey area.

PRO/CON - Alternative to Austerity
This is a more subjective pro; QE is an alternative to austerity with regards to dealing with deficit and growth issues. While a policy of austerity would involve cutting of government spending, balancing the books by cutting spending, the expansionist QE policy is designed more to deal with the deficit by boosting productivity, though at the cost of maintaining spending.
Austerity would be arguably a more risk-free way to deal with the deficits, but its negative effects on government services such as social welfare and public services such as education and health. On the other hand QE would maintain such services, and in many cases would lead to improvements in infrastructure as spending increases as a result of the more accessible money. However some doubt that spending extra to reduce the deficit is the optimal solution, due to risks it presents if the spending does not produce results. This is particularly an argument for those who believe in small government, that the private entities are more successful and efficient participants in the economy than the state.

Pros and Cons: Mixed Economy

A mixed economy is the most common in today's world, and seems to be the most efficient balance of private and state participation in the economy. It is positioned between a complete command economy (in which the economy is totally run and planned by the governing authorities), and a totally laissez-faire, free market economy in which the government has little/no role, rather private companies and individuals operate everything (though no economy has yet fully devoted itself to this, not even the US).

The concept of a mixed economy is by no means a recent discovery, but perhaps its greatest proponent was John Maynard Keynes. Arguably the greatest economist of the 20th century, much of his work investigating the potentially positive effects of state intervention in the economy was particularly relevant in times of crises- FD Roosevelt, US President who led the nation's recovery out of the Great Depression of the 1930s attributed much of his policy decisions to Keynes.

So, let's look deeper into the idea of mixed economy by evaluating the pros and cons of a market economy.

PRO- Monopoly.

Government involvement in the economy can prevent market failures, such as the emergence of monopolies (for more information on these see this previous article). This is largely done by government regulation; the UK has 'competition laws', designed to prevent massive business blocking smaller ones from entering a market. This means companies that, for example, block competition by setting rock bottom prices for their products that they know their smaller competition won't be able to maintain (a practice known as predatory pricing), can be prosecuted and penalised by authorities. Shell and Esso were two fuel companies accused of this malpractice in 2013.

The breaking up/prevention of monopolies means that all businesses in the economy are able to compete on a level playing field, and ensures that the most efficient and popular businesses are those that succeed most.

CON- Monopoly.

There is another side of this argument, however; that is that certain types of government involvement in a mixed economy can itself create monopolies. This was a significant argument behind the privatisation of the Royal Mail; despite its supposed 'loss of monopoly' in 2005 when other competitors were allowed to enter the market, the state-owned Royal Mail, though slightly weakened, maintained its domination of the postal market. Monopoly can encourage complacency- and the Royal Mail was accused of gross inefficiency when the idea of privatisation was being kicked about.

Some argue that state ownership leads to sector monopolies- the energy market a couple of decades ago was another example- and thus reduce competition and innovation. The private sector on the other hand is seen to encourage competition, as long as the barriers to entry are low.


PRO- Motives.

The actions of the government in an economy hold an advantage over those of private entities in that the government is directly accountable to its people. The government is less likely to act against the wishes of its citizens because if it does so it is far less likely to be re-elected and maintain power.

Furthermore, the profit-making motive is not ingrained in state institutions as it is in the private sector. State institutions such as the NHS and (formerly) the Royal Mail were created not to make the government money, but rather to serve the people of Britain; ultimately creating a service more helpful to the patient. Compare the NHS with private health systems across the world; the lack of a profit motive is the reason why, for example, no doctor in Britain will advise for extra treatments/medicines solely to extract money from you, and it is a major reason why the British healthcare is renowned across the world.

Open access to healthcare for all citizens has been of huge benefit to Britain; looking at the masses of debt accumulated by people across the world due to circumstances out of their control (such as accidents), one can see how effective and beneficial for the people the NHS is. It allows the poor to have access to healthcare, and thus prevents the socio-economic gap in Britain increasing to the extent of countries such as the USA.

The governments' motives to maintain favour with the public and genuinely serve the public rather than make profits makes it often more effective in improving the lives of the citizens.

CON- Motives.

One the other side of the coin, however, government economic policy is occasionally branded as short-termist, unsustainable electioneering. Gaining favour with the voting public can often be done via short term economic boosts. The MacMillan government of the 1950s is an example of this; two major tax cuts in 1954 and 1959 (just before elections) of a combined value of £504m certainly gained favour with the people, but this ultimately contributed to a massive deficit of over £800m five years later. Had the tax cuts not been made, it is likely the economic situation later would not be so dire; but the desire of the government to instantly win votes led to pursuit of short term policies that ultimately damaged the economy as a whole more than it benefited it.

Libertarians argue this as a reason why the government should have little/no role at all in economic management; that the primary motive of a politician is to be re-elected rather than benefit the country, reasoning that certainly has credence. Whether there is a better alternative or not though, remains an open question.


PRO- Investment.

Linked to the earlier pro of motives, one of JM Keynes' major contributions to the arena of public economic policy was that the government should intervene in times of trouble to invest in employment, through state-led projects. These could be anything, such as a development of infrastructure (hiring people to design and build roads, public buildings, etc.), or more employment in publicly owned entities like the NHS.

For private companies chasing profits, the best way to do so is often not to try to increase income but to decrease expenditure- and a way to do this is to cut down on employment. In recent times this has not just come in the form of job cuts but outsourcing also; the cheap labour available throughout the world has encouraged companies to cut on jobs domestically and save money by hiring labour elsewhere.

This is something the government would be less prepared to do- Britain's recovery from the 1930s crisis showed this, as the government invested more in jobs in order to get out of its hole, upon Keynes' advice. More people found work, boosting spending again and eventually bringing the economy into recovery.

CON- Taxes

Taxes, the bane of any proponent of 'laissez-faire'. More state intervention in the economy, of course, requires greater investment from the government, which largely comes from tax revenues. Therefore an argument against intervention is that the more there is, the more people must be taxed- and higher income tax for example, is claimed to be a cause of a reduction in motivation to work, as an individual will see a large proportion of the money he earns go to the taxman.

Therefore libertarians often argue that less state intervention in the economy allows taxes to fall, increasing peoples' motivation to work as they see more of the money they earn go directly to them.

15 Scary Facts About The US Economy

1. 1 in 5 American families are totally unemployed- that is no family member holds a job, according to the Bureau of Labour Statistics.

2. Research from UC Berkeley academic Emmanuel Saez shows that while incomes of the top 1% increased by over 11% since the end of the recession, the other 99% saw a decrease in salary of 0.8%.

3. Multinational Corporations have accumulated almost two trillion dollars in accounts outside of the USA in order to avoid domestic taxes.

4. The proportion of US families holding ownership in small business reached an all-time low of 11.7% in 2013.

5. According to the University of Arizona, two years after graduation almost half of college graduates are still relying on parents or family members for financial support, due to a lack of prosperous employment opportunities.

6. Median household income has fallen for the past 5 consecutive years. In today's terms, the average household wage was almost $88,000 in 2003- a decade later, this figure was just $56,335- a 36% decline.

7. US National Debt grew by over a trillion dollars in 2014.

8. The percentage of Americans who own their homes (64.8%) is the lowest since 1995.

9. An estimated 49 million Americans have limited/uncertain access to a sufficient amount of food.

10. During 2013, the Chinese sold $440bn worth of exports to the US, who sold $121bn to China, creating the largest recorded trade deficit in history. 

11. In 2012, there were more American women relying on food stamps than women with full time jobs.

12. One third of Americans would not be able to afford more than a month of mortgage payments if they lost their job.

13. In 2013, female full-time workers were paid on average 78% of that which their male counterparts were paid.

14. Between 2001 and 2011, over 56,000 American manufacturing facilities were shut down- a rate of 15 per day.

15. American consumer debt has increased by 1700% (multiplied by 17!) in the past 40 years.

Sources for these facts can be found in links within.

What are Economic Bubbles?

We reflected earlier in a previous article on whether we, as humans, were rational actors- to be rational is to be objective and well reasoned in all decision-making (it’s an unclear concept, one could say there’s no real definition for it).

Anyway, the main conclusion arose that we are not rational actors as individuals- though perhaps as a large population irrationalities may balance each other out, even still we are humans- subject to emotion (we often get excited easily, and make silly decisions as a result), and often a basic lack of knowledge of the effects of what we are doing- sometimes we are at fault for this, sometimes not. 

Now let’s explore something that perhaps exemplifies human irrationality best in the field of economics- bubbles.

No, not the soapy ones, but economic bubbles are certainly similar in nature (hence the name)- in essence, an economic bubble is a massive economic boom that has grown so quickly and expansively that it is, like a soap bubble, in danger of being popped in an instant. An economic expansion, followed by a prompt plunge- that’s pretty much the basic structure of an economic bubble.

The South Sea Bubble caused spectacular devastation.

Bubbles aren’t some abstract theoretical idea, they have occurred numerous times throughout history- the earliest formally recorded bubble is believed to be from the early 18th century. The bursting of the South Sea Bubble of 1720 was the result of wildly heightened expectations of the South Sea Company, which had taken responsibility of the entire British national debt in exchange for total control of all trade in the South Sea. In January 1720, SSC stocks were priced at £128. February 1720, £175. April 1720, £330. By June, a whopping £1050- almost 10 times what it had been just 6 months ago. 

But this was the peak. The bubble had grown too much. 

Pop.

By September, just 3 months after South Sea Company stocks had reached a record price, it was almost back to square one- stock price shrunk to just £175. 

This had devastated numerous investors- who were caught up in the initial hype of this company ambitiously taking on all of Britain’s debt in promise of finding profit. But in truth, the South Sea Company had little chance at all. They were a massive failure; partly during to their own mismanagement, partly due to the crippling debt they had just taken on and partly due to the huge reduction in South Sea trade after the Treaty of Utrecht was signed in 1713. Whatever/whoever was responsible, the bubble had burst and proven all the hype, all the investment, all the trust, to be false.

The California Gold Rush, the ‘dotcom' bubble of the 1990s and early 200s, the 2008 financial crisis- all examples of bubbles and/or their catastrophic burstings. 

Take the most recent financial crisis of 2008. Now there’s much to talk about when it comes to the causes of the crash, but simply put, it was caused by a massive housing bubble that had developed not just in the US (although perhaps most seriously here), but throughout the world. 

Like all bubbles, the housing market in the USA had initially seen a massive boom- caused by radically low interest rates (which had been at an all time low of 1% in 2004), irresponsible lending from financial institutions and the power given to banks to be able to conduct such activity.

Low interest rates made purchasing housing a very attractive option- a rate of 1%, set by the Federal Reserve with the aim of boosting spending after the 2002 post-dotcom recession, was almost a free loan, and therefore many Americans went on to grab the opportunity and buy their own houses.

For the financial institutions (the banks), this 1% provided an issue- it meant their profit margins would be far lower than before, when the rate was closer to 5%. In seeking increased profits, they took on more loan requests. The regular system of financial discretion was almost abandoned, and banks began lending to more and more risky individuals, many of whom ended up being unable to pay their loan and thus homeless.

The banks had such a huge pot to lend from because every bank has customers- people who deposit their money, in the trust that the bank will keep it available for them whenever they need it. But gradual recession of the Glass-Steagall Act, which initially prevented the lending side of banks to use the customers’ deposits, meant that banks eventually were able to use money deposited by customers to fund lending and other investment activity. This gave them a huge amount of money- and thus the banks could afford to be more reckless and risky with their money management. 

Wall St.- responsible for the 2008 financial crisis?

This increase in house buying caused a surge in house prices- causing even more people to jump onto the bandwagon, presenting what seemed to be a great investment in an asset that appeared to be endlessly growing in value. The bubble was pumped up more and more- house prices peaked in 2006, then the big burst came in 2008- the burst that cost the USA an estimated $648 billion lost in economic growth between September 2008-December 2009, roughly $5,800 in lost income for every US household, and is still haunting the global economy.

The bubble had popped, and the liquid stains are going to take a long time to rub off. 

The problem with bubbles is that their usual steps of boom then bust are very tricky to work out. The initial boom is by no means a promise of an oncoming burst; indeed an economic boom is often good, providing employment, wealth that can potentially itself prevent a bubble from arising.  

Economist Hyman Minsky is famous for calling out symptoms of an oncoming bubble- yet mystery still hovers over which booms of today are going to become the popped bubbles of tomorrow. Will it be the housing market again? The technology industry, again? Another industry altogether, or none of them?

Only time will tell.

3 Reasons Why Advertising Works (With Textbook Examples)

Advertising is perhaps the most omnipresent symptom of the modern global economic system. It is something that is not just pretty much unavoidable in one's regular daily life, but something that has grown to become far more than just a piece of material promoting a single product. Prominent pioneer of media studies Marshall McLuhan famously dubbed advertising "the greatest art form of the 20th century": look at the tearjerking recent Sainsburys ad, or Aleksandr Orlov from 'Compare the Market', and one could argue this claim to be applicable to today. 

Advertising has developed rapidly along all forms of media. Beginning largely in newspapers, ads moved onto our streets, onto our radios, onto our tv screens, onto the internet, and now, onto our smartphones and computer technology. 

The very fact that Britain's expenditure on advertising is set to hit £20bn next year shows that it is a method clearly relied upon by businesses to attract customers. Research suggests that on average, US supermarket sales increased by $89 per $1 spent on advertising. 

While many of us would attest that we are unaffected by advertising ("we know it's not real!"), one cannot deny that it does what it is intended to do: seduce us, make us want more- unleashing the consumers within us, as well as the money out of our pockets. 

So why exactly is advertising so effective? And furthermore, why is it so when most of us understand that advertisements are not always accurate representations of the real world/product? There are numerous answers to this of course, but let's have a look at three such reasons why advertising is so effective that even we are not always aware of its charm.

1. Personal Connection

A key to unlocking the minds of those a company is advertising to is the development of a close connection with the target audience. This creates trust, confidence and a love for the brand that simply cannot be bought.

One way in which this is done is by marketing their products as something the audience will genuinely like and lead to self betterment. Take 'Special K' cereal for example- this ad connects with women, by particularly attaching itself to the 'embrace yourself' movement. Many women (well, people in general) have worries about their size- and this ad allays those worries by spreading the message that size does not matter, that those potential customers watching are 'More than a number'. 

The advert does not actually feature anything related to cereal, it shows no more of the product than its logo, and it potentially goes against Special K cereal's appeal as a product consumed to lose weight- but this ad develops trust and admiration for the brand in the viewer that arguably is more powerful when it comes to buying decisions than the cereal itself. 

Another way a personal connection can be developed is by identifying with the viewer via a familiar face. Think George Clooney advertising Nespresso coffee, Taylor Swift advertising Diet Coke or Gary Lineker opening a pack of Walkers crisps; these are faces that people trust, admire, and brands can use them effectively to translate this trust with their products.

2. Exaggeration 

It goes without saying that a major way that advertisers rope us in is by simply exaggerating their product or service. 
Whether it's that internet provider's exaggeration of its download speeds or the over the top claimed health benefits of a familiar blackcurrant soft beverage, exaggeration is part and parcel of any modern advertisement, and it comes in many forms. 

Take a quick look at this Samsung Note advert, in particular the small text at the bottom of the screen beginning 0:04- "Screen images simulated... sequences shortened". This message must appear for legal reasons, but most people are unlikely to pay much heed to it- they will watch the entire ad thinking that all that watching-film-while-simultaneously-checking-emails action will be as buttery smooth in real life as in the video (if you've owned any multitasking smartphone of any sort you may understand that this is rarely the case). 

Another form of exaggeration that really needs little introduction is most commonly seen in fashion-related advertisements- that is the copious amount of editing of the bodies of the participants. Again, they exaggerate the effects of the product- unless the product they are selling is Photoshop, that is. 

But exaggeration is certainly only part of the art of advertising. Its effect is arguably dulled by the fact that most of us know it is there in almost every ad we see: a Lab42 survey of 500 consumers reported that just 3% of respondents described claims made in advertisements to be very accurate. 
So why are we still enticed by adverts when we know they are likely to be exaggerating? The next and final reason may perhaps be the most subtle yet significant.

3. Development of Inadequacy

This is the big one, that pretty much all the other advertising techniques culminate in. 

Advertisements make us feel incomplete, insufficient, inadequate. It's their job- to make us feel like we have a hole in our lives shaped exactly like their product.

This is a feature of every advert. Feeling hungry? Walkers' crisps will fill you up. Bad hair day? L'Oreal shampoo will ensure it never happens again. In need of entertainment? Buy a PS4.

But the most prominent, exaggerated use of this technique can be seen particularly in the advertising of upmarket, luxury products. This Mercedes 'Video Brochure' for example, promotes far more than just the car itself. Yes the car is indeed the main feature of the video but subtle things, like the house we are shown at the beginning that the 'owner' lives in, the 'owner's' clothes, the conveniently handsome young 'owner' himself.

The video promotes not just the car but the whole lifestyle, packaging the car as a part of it. Chances are, most people don't have a house that nice and clean, and aren't that photo (or video)-genic- and so we compare, we re-evaluate our own lifestyle in comparison with what we see on the screen and, unfortunately, many of us see our own as incomplete, inadequate, because we don't have a mansion or a luxury sports car.

One could ask- if most viewers of the promotional material can't afford to buy such an expensive product, why do companies like Mercedes bother with marketing? The answer is pretty straightforward, and it's why we see more adverts on TV from broader car companies like Mercedes rather than niche brands like Ferrari. One could call it the 'halo effect' of advertising, branding. We may take a look with our jaws dropped at the beauty of the Merc in the ad- and although we know we can't afford it, the company does sell cars at a considerably cheaper price, but ones that follow a similar design template. The S-Class Coupe in the video costs well over £100k, but the Mercedes C Class Coupe costs closer to £30k. So we may not be able to afford the former, but the latter may appear more attractive an option due to it being from the same carmaker. So the viewer may not buy the car directly advertised, but they'll still be more likely to buy a Mercedes. Ferrari don't sell cheap cars, so this halo effect is not present because if you can't afford one Ferrari model, you probably can't afford any of them.

The rose-tinted lifestyles presented in advertisements have the negative effect of constantly unsettling viewers, creating 'aspirations' that are often disguises for being unhappy with what may have previously been a perfectly comfortable life. You may have been happy with your 40 inch Sony TV, but when you see some celebrity showing off a 60 inch 4K curved-screen TV, your perception of your TV may completely change. You may therefore strive to be able to afford said 60 inch TV by working yourself harder while sacrificing social and family commitments, stressing more over finances, and generally in more of a rut. Should you finally make the purchase, after a few years your TV will soon inevitably be dwarfed by some new technology shown off on your TV. Your perception of your TV may change, and the deadly cycle of stress and consumption starts again.


Advertisements are not inherently dangerous. They can in fact be incredibly informative and entertaining, but that's not to say one should not be careful in assessing the impact of promotional material on our lives. Over-susceptibility to the bells and whistles of adverts can lead to dangerous consequences indeed.

SOURCES: 

http://www.theguardian.com/media/2014/apr/28/britain-advertising-spend-20bn-2015

http://blackinkroi.com/blog/does-your-advertising-increase-your-sales/

http://www.telegraph.co.uk/technology/news/10301661/BT-Infinity-broadband-ad-banned-due-to-misleading-speed-claims.html

http://www.cmo.com/articles/2014/5/7/ribena_ad_banned_for.html

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