TWO JEREBOAMS AND A METHUSELAH

About 4 million Americans travel to the United Kingdom each year, and, needless to say, London is their primary---if not only---port of call. But London has become horribly expensive in the last few years. Your travel budget might tell you to wait. London is not just a destination in its own right. It’s also the main jumping off point for tourists visiting other parts of Europe. But London has become so expensive that you might want to make other plans in you’re going across The Pond. I say that sorrowfully, because London is my favorite city. I’ve lived there and have visited there almost every year for the last two decades. But on my most recent trip I was stunned at the prices, enough to discourage me from returning in the near future. Getting Clipped at a Pizza Joint? First let me give you some examples. A ride on the Underground, as short as one stop in the center of the city: $8. That is not a misprint. Eight good (?) old American dollars. (You can buy a long term pass and your trip will cost only about $3, but even that’s a shocker.) We clipped a coupon from a local paper that offered a special deal at a nearby pizza joint---buy one, get the second at half price. My wife and I each had a small pizza and we shared a small salad. One beer. One glass of house wine. The bill---after getting credit for the coupon---$52. A taxi to or from Heathrow---$100 plus tip. And there might be a surcharge for extra luggage or at night. Figure $120 plus plus for Gatwick. Are you getting my drift? There are two main reasons for this exhorbitance. The most obvious is the weak U.S. dollar. Today one British pound will cost two U.S. dollars, give or take a penny or two. Comparison---during the many years I’ve been visiting London an average price for a pound was around $1.70, sometimes as low as $1.50. Why the upswing in the pound? Well, it’s more a downswing of the dollar, for which there are two reasons---psychological and political. You may have heard that the U.S. is having a bad time, public relations-wise, in most of the world. When we express resounding disapproval of our own government it should come as no surprise that other nations pick up on that. Uncle Sam is held in more disregard than we realize---and so echo the world’s money markets. In terms of politics, a cheap dollar makes the products we export more attractive to foreign buyers. Thus there is pressure by U.S. exporters to keep the dollar low. Since it’s the government that has the tightest controls on the value of our currency, the political influence on pricing the dollar can’t be denied. We may never know who twisted whose arm, but you can bet that they’re selling a lot of achy-muscle-ointment in D.C. On the other hand, the cheap dollar wreaks havoc on the travel budget of Americans going abroad. Boris Bigbucks Goes to London The other reason for London’s costliness is simply that prices there---regardless of the value of the dollar or the franc or the peso---have escalated out of sight because of an invasion of foreign billionaires. The U.K. has a tax structure that is very appealing to the wealthy of the world: If you are not domiciled in the U.K. (that is, it’s not your permanent home) you are taxed only very minimally on any income you generate in the U.K. or bring into the U.K. That tax rate has been in the 10% range---a pittance. U.S. citizens have to pay U.S. taxes on any earnings anywhere in the world, and the rates are upwards of 40%. By hook or by crook (?) the foreign billionaires---from Russia, China, India, Iran, the Middle East, Scandinavia and other places---are able to manipulate their income so that it is all taxed in the U.K. at unconscionably low rates, leaving them with gazillions to spend freely in the U.K. And spend they do! A domino effect takes place: Boris Bigbucks from Moscow buys a house in London, in effect saying to the real estate agent, “I want that house….here’s a check….you fill in the numbers.” It’s like play money to them, so what difference does it make how much they pay? Then all the houses in the vicinity suddenly spurt up in value, and their owners in turn become big spenders. And so it goes, spreading from neighborhood to neighborhood, from shop to shop and from pub to pub. The British government loves this because with all the wealth being spread around the government gets a nice big chunk from their V.A.T. (Value Added Tax) which is the equivalent of our sales taxes, and is 17.5%, which everyone pays. A Hefty Methuselah Some examples of conspicuous consumption were tallied in an Oct. 5 article in the Wall St. Journal. One stands out: in a London nightclub a customer from the Middle East recently ran up a tab of $216,400 in just one evening of partying, most of it on champagne, including a bottle of Dom Perignon in a white-gold case that cost $19,400. For one round, quoted the Journal, he ordered two Jereboams (the nickname for a huge bottle that holds four regular bottles) and one Methuselah, which holds the equivalent of eight bottles. The Methuselah had to be carried by two people, and it alone had a price tag of $61,200. You could call this a fairy tale, but I was there and with my own eyes saw countless Rolls Royces and BMWs and Mercedes clogging the streets….Boutiques with price tags that you used to see on houses…Not-so-fancy restaurant menus that could, in a blink, soak up $200 for a not-so-fancy dinner for two (with wine, thank you very much)…Homes for Sale classified ads that offered what looked like bungalows and barns starting a million pounds (and I’m sure the photos were doctored to make the places look more appealing.) So, dear travelers, if London is on your places-to-go list, do lots of homework and crunch lots of numbers. Your budget might dictate compromising on the type of hotel you’d stay in, on the types of restaurants you’d patronize, on the number of days you’d stay. My financial sources there speculate that prices might have hit their peak and could soon be coming down. As for the dollar strengthening, that’s a crapshoot. London is still a fabulous place, but is it worth paying an excessive premium? Pay it if you choose, but it sure takes some of the fun out of being there. This article supplements Chapter 3, pages 88-98 in Personal Finance. Access the textbook by clicking on the red box in the right column.