The Confidence Thing

But he's not weighed down with debt

As we all know, if you lay 100 economists' letters end to end they still won't reach a conclusion.

Except that this morning's two letters to the FT are packed with conclusions, especially the conclusion that we shouldn't cut public spending any time soon.

Labour peer Lord Layard and nine other eminent economists (including four previous members of the Bank of England Monetary Policy Committee and two Nobel Laureates) wrote in to say that a "short sharp shock now would be dangerous":

"History is littered with examples of premature withdrawal of the government stimulus... Britain’s level of government debt is not out of control. The net debt relative to GDP is lower than the Group of Seven average, and on present government plans it will peak at 78 per cent of annual GDP in 2014-15, and then fall. Even at its peak, the debt ratio will be lower than in the majority of peacetime years since 1815. Moreover British debt has a longer maturity than most other countries, and current interest rates on government debt at 4 per cent are also low by recent standards."

Labour/SDP/Tory/Bray peer Lord Skidelsky and scores of other eminent economists (including BOM's old friend Prof Blanchflower) wrote separately to lay into the other bunch of eminent economists who signed Sunday's letter:

"In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!

They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession?"

Ah yes, the confidence thing. As the great John Maynard told us all those years ago, confidence is key. Because without confidence, investors will not invest and consumers will not consume. Without confidence we face falling off the economic tightrope. Everyone can see that.
 
But the thing nobody has ever really got on top of is what exactly generates that confidence. And in particular, can deficit spending by governments do the trick?
 
According to today's economist letters, it can. And in fact, if such spending is cut prematurely, it risks undermining what confidence there is, sending us plunging to our certain doom.
 
But according to Sunday's economist letter, it is likely to have precisely the opposite effect. Deficit spending means high government borrowing which risks undermining confidence in financial markets, racking up interest rates and sending us plunging to our certain doom.
 
So who's right?
 
In truth, we don't know. It's always possible that Layard and Skidelsky are right. But they don't know any more than we do.

Meanwhile, they seem extraordinarily unconcerned about the way the government is running up debt. Sure, on Darling's projections the debt will peak in 2014-15 and then start falling, but does anyone actually believe Darling's wildly optimistic assumptions on growth? Or indeed, his ability to deliver on the unspecified spending cuts he's assuming?

Let's just remind ourselves of that most inconvenient truth: the government is spending way beyond its means.

And we're not talking about the fact that tax revenues have fallen because of the recession. No, we're talking about the fact that idiot Brown pushed public spending way beyond what the government's tax revenues could support even before the recession came along. Between 2000 and 2008, he increased public spending's share of GDP by an extraordinary 11 percentage points, far beyond what the economy could sustain.

That lunacy has left us with a huge structural fiscal deficit, that the OECD estimates to be nearly 10% of our GDP. So the vast bulk of our 13% total deficit this year is structural - ie nothing to do with the impact of the recession on tax receipts and social security payments.

And what that means - quite horribly - is that the eventual recovery from this Great Recession will not actually eliminate the deficit. We will still have to address this structural defict of 10% of GDP (c £150bn pa).

Now Layard et al sort of suggest that actually they do know that. It's just that they don't want to tackle the problem while the recession is continuing.

But the difficulty is that every year we delay means another £150bn added to government debt. And at the current gilt yield of around 4.7% that's another £7bn pa in debt interest payments.

That precious market confidence is already getting frayed. Now that the Bank of England has stopped its huge gilt purchase programme, yields are pushing up, rising 0.3% so far this month. Meaning even higher debt interest payments, and even higher borrowing to fund them. And we haven't even got to our hung Parliament yet...

One other thing - there's been a lot of complacent talk about how our debt situation was a lot worse in 1815 and how that never did us any harm (eg see Layard's letter above). But the world was very different back in the days of the Iron Duke, and HMG was able shaft gilt-holders in ways that would blow up in its face today (eg forcing investors to accept lower interest payments). We are investigating further and will report back.

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www.gudanggrosiran.com Categories: debt, slump

The East Is Red

New sky-scrapers: old fears

You may have missed Piers Morgan does Shanghai last night, but the message was pretty clear: not for the first time in our history, we 're about to succumb to the yellow peril. The Chinese can now do pretty well everything we can, except 100 times bigger, 100 times better, and 100 times cheaper. We are well and truly Pek Ducked.

By a strange coincidence, the Governor of the Bank of England also spent last night fretting about our relations with the East. Only he presented it as "Soduku for Economists", which proved a tad less gripping than Morgan's glitzy high-rolling version.

The Governor's basic point will be familiar: because China now produces virtually everything we in the West consume, and because they save virtually all their incomes rather than spending it on our overpriced stuff, there is now a huge imbalance in the global economy. The only way we can survive is by borrowing from them and hoping they don't want the cash back any time soon. Sort of idea.

Specifically, whereas we and the Yanks are running massive current account deficits (ie we're still spending way more than we're earning), the Chinese are running a near $400bn pa surplus. And  the western economies are now in hock to the Chinese government for a staggering $2 trillion plus. For us, the Great Account Ledger in the East is most decidedly red.

To be fair to the Governor, he pitched the problem as a global one. We may be in hock to the Chinese, but they need us to buy their goods. And if the whole teetering stack of international debt should somehow topple over, we'd all be in trouble. So we'd better find some global solutions pronto.

But however you spin the global issue, the Governor is in no doubt about the UK's grim future - we are going to have to stop eating and tighten our belts by seven or eight notches. Or in Governorspeak:

"The need for a rebalancing of our economy has been apparent for some time. The proportion of our domestic output that we save has fallen by around a third over the past decade, as the share of consumption, especially public consumption, has risen sharply. Looking ahead, monetary and fiscal policy together must help to bring about a switch of demand from private and public consumption to net exports and business investment as the recovery takes hold.

A key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances. Of course, there is a perfectly sensible debate about the appropriate timing of the withdrawal of the temporary fiscal stimulus... but uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving."

And just to make sure we all get the message loud and clear, he added:

"The patience of UK households is likely to be sorely tried over the next couple of years. There is little scope for growth in real take-home pay, which may remain weak even as output recovers. It is clear that inflation is likely to pick up markedly in the first half of this year."

Patience sorely tried - I'm afraid that's spot on. And the Governor's bleak warning was heavily underlined this evening on Sky, when the ever excellent Jeff Randall interviewed HSBC's CEO, Michael Geoghegan.

Geoghegan is one of the few top British businessmen who really do bestride the world, and can talk authoritatively about the UK, China, and all points in between. Which is why it's so alarming that he's about to pack his bags and relocate HSBC's HQ back to Hong Kong. He told Jeff the UK has recently become much less attractive to banks like his:

"I think when you start moving taxation for political reasons, the trouble is that it is an industry that can move. I know a large number of bankers are moving out of the UK... they are moving out possibly for personal reasons. They can move because they have opportunities in Switzerland and other places to set up their businesses... the UK because the City has all the rights to win and it would be a terrible shame for it not to benefit from all the expertise that is in our industry...

...Hong Kong has surpluses... it raises enough taxation every year to pay for running Hong Kong and it makes surpluses. I think one has to look at how money is spent in a country, if taxation is being raised because the expenditure wasn’t correct, that then is going to impact on the UK as a financial centre."

So does it worry him that the UK is facing the growing challenge from the East already laden down with debt?

"It does and it disappoints me. People talk about China, the excesses of China, the excesses of Asia and then you see the savings rates of Asia. People save first, they educate their children and then they spend. If you want to go and see where consumer goods are least used and bought, it’s in Asia. If you want to see where the most money is spent on education and health, it will be in Asia. You’ll see the people, the hours they work and the products they produce and I know that the UK can produce a lot more products. People say well the renminbi [Chinese currency] should be stronger. No, actually we should be more efficient. If we could be as efficient here in the UK as other manufacturers are around the world and cut away a lot of the government bureaucracy that makes it very expensive to do manufacturing in the UK...

I think there has to be a full understanding that we cannot have the style of living that we’ve had in the UK on somebody else’s money. The government can’t spend more than it actually collects in taxes, people can’t really live without savings and to do that, there has to be a mindset change and maybe the politicians and the electorate will say we actually want this to happen in this country."

Ah yes, a mindset change.

The trouble with mindset changes is they're a great idea, but they don't happen unless there has been pain. A lot of pain.

And right now, as we've blogged before, most of us have simply not had that pain. Mortgage rates are low, house prices are sailing on as if nothing ever happened, even the job losses somehow seem to have stopped.

You and I may believe we're in cuckoo land, and that the longer we leave the belt-tightening, the worse it will be, but why should the average punter listen to us? Life's not so bad... maybe the Great Helmsman was right after all... maybe he has saved us... maybe we can just keep calm and carry on.

Right, that's it - enough depression for one evening.

PS I realise we've said it before, but Randall's 7.30pm prog on Sky News is streets ahead of anything the BBC broadcasts on business and the economy. Now, what was that about needing a tax-funded broadcaster because otherwise we'll lose all our quality news coverage?

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www.gudanggrosiran.com Categories: cuts, debt, slump, tax

Have Yourself A Merry Little Christmas, It May Be Your Last

Wartime cheer

Tyler's Mum was a great Judy Garland fan, so he's pretty familiar with the back catalogue. And this particular number from the 1944 film Meet Me in St Louis seems to sum up Xmas 2009 quite well. Especially with its original lyrics, which were so depressing they had to be toned down for Garland to sing in the film - play the vid and read along with the original below to see how comprehensively MGM wimped out:

"Have yourself a merry little Christmas, it may be your last,
Next year we may all be living in the past
Have yourself a merry little Christmas, pop that champagne cork,
Next year we will all be living in New York.

No good times like the olden days, happy golden days of yore,
Faithful friends who were dear to us, will be near to us no more.
But at least we all will be together, if the Fates allow,
From now on we'll have to muddle through somehow.

So have yourself a merry little Christmas now."

Now that's Xmas 2009. Because with GDP down 6% from its peak, unemployment already up by a million, government debt fast heading for 100% of GDP, and inflation on the rise, this yuletide is likely be your last champagne cork popping for a while.

Except that somehow, out there, it just doesn't feel like that.

For example, Tyler has an irritating (to Mrs T) habit of asking shop assistants how biz is going, and right now, they all seem pretty happy. "Last year was terrible," they shout above the din of jingling cash registers, "but this year we're well up."

And they're not spinning a line. According to the official ONS stats, retail sales have increased by 3% over the last 12 months. Even more extraordinary, they've also increased over the last 24 months - ie from before when the crisis broke. In fact, retail sales volumes (ie adjusted for inflation) are currently the highest they have ever been:

Compare that to the last recession in the early 1990s, when retail sales fell by 5% and took three years to regain their previous high.

Yes, OK, there has been a big fall in other spending not included in the ONS definition of retail sales - like tourism and cars. But the fact is, whatever professional doomsters like Tyler may say, most people in the real world don't seem terribly fussed about the impending economic apocalypse. Everybody can see there was a banking crisis, and everyone probably knows someone who's lost their job, but the general view is that it's all over bar the shooting of those greedy bankers.

Now in one sense this is good. As Keynes preached so strikingly back in the Depression, the economy ultimately depends on confidence. If people are fearful, they don't spend, they don't invest, and the economy goes into a nosedive. So confidence is good.

But false confidence, that's something else altogether. False confidence leads to people spending beyond their means, borrowing up to the hilt, and sooner or later facing bills they cannot pay.

Which brings us to a very striking chart in the Bank of England's latest Financial Stability Report (see here - 4mb):

The chart shows the proportion of the average UK household's income that is taken up by interest payments on mortgages and other loans. And as we can see, the current low level of interest rates has helped them out considerably, freeing up nearly 3% of household income for use elsewhere.

But the Bank knows - as we do - that these low interest rates cannot last, and the two blue diamonds on the chart are what the Bank calculates will happen to the interest burden when rates go back up to pre-crisis levels. There will be a significant squeeze on average household spending power.

Of course, for savers the opposite applies. They have been squeezed savagely by the fall in interest rates, and they will benefit from a reversal. But savers tend to be prudent, and they will not be rushing out to take up the spending slack.

So all those shop assistants Tyler chats up had better make the most of this merry little Christmas - it may be their last for some considerable time.

And you? What should you do?

Eat, drink, and be merry.

And think seriously about where you're going to move to next year (despite Garland we suggest not NY - their top rate of income tax next year will be 35% Federal plus 9% state).

******

BOM will now be taking  its seasonal break. Happy Christmas, and try not to worry. The events depicted on BOM over the last year are very rare and almost certainly won't happen to you. Unless you're a UK taxpayer, that is.

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www.gudanggrosiran.com Categories: slump

Thank God For Mandy

Even the horriblest truths can't touch Mandy

On a morning when unemployment soared to a 14 year high, we listened to Mandy being interviewed by Evan Davis on BBC R4 Today. It reminded Tyler precisely why he must bust his gut to get Dave and co elected next May.

Yes, we do want Dave et al to be far more radical on public sector reform. And yes, we do think they should be much more ambitious on rolling back Big Government, tougher on crime, more focused on controlling immigration, etc etc etc.

But compared to another five years under the slithery Commissar Mendacity, Dave is offering the way, the truth, and the light.

There's something deeply unsettling about a man who can be quite so brazenly deceitful as Mandy. I mean, they all lie - we understand that - but only Mandy seems to thrive on it. The very act of lying seems to nourish him - he positively grows as the slings and arrows of outrageous truth bounce off his reptilian scales.

This morning poor Evan did his best to confront him with The Facts - the huge black hole in the public finances, the obvious reality that any future government will need to cut savagely, etc etc. But The Facts just fuelled His Lordship's dark powers:

"My dear Evan, your puny weapons cannot harm me. Soon I will be more powerful than you can possibly imagine. I am the Master now."

One issue that came up was the oft repeated claim that Labour's reflationary policies have saved 500,000 jobs - jobs that would have been lost had the evil Tories been in power. Davis did immediately challenge the second half of that claim, and he also pointed out that much of the reflation is down to the Bank of England's monetary policy not fiscal action by the government, but Mandy just pressed on regardless.

As it happens, this claim is something I've been meaning to look into anyway. So I've done some digging.

As far as I can see, the claim first surfaced in Brown's interview with the Times on 26 June. He said:

“That means we will return to growth more quickly and we will probably have saved up to 500,000 jobs that would otherwise have been lost. People will see we have made a difference to the path of the recession.”

Later at a press conference on 22 July, he turned up the gas:

"If we had not intervened and acted decisively, at least another 500,000 jobs would have been lost in this recession."

Needless to say, in Mandy's hands the claim has become even more grandiose. He now claims there would have been:

“...far in excess of 500,000 more jobs lost in the recession had it not been for the government and the Bank of England’s intervention.”

So in six weeks we've slithered all the way from "up to", to "at least", to "far in excess of".

But where did the half-million figure come from in the first place?

According to Mandy, it was the Treasury.

Is that even slightly true? All we can find on the HMT website is the following sentence in the Budget Report:

"5.23 Action the Government has taken from the 2008 Pre-Budget Report onwards has already had a critical impact in supporting employment. In addition to the fiscal stimulus and support for Jobcentre Plus, the January Employment Summit announced a further £500 million package, offering support for up to 500,000 jobseekers."

Could that be the original source of the figure? A pie-in-the-sky aspiration tossed out at one of those famous "summits"?

In the absence of some proper chapter and verse, we reckon that is precisely where the figure came from. It is complete and utter vapourware.

But as we say, at least this has served to remind us all why these corrupt black-hearted people must be thrown out.

They must join the swelling ranks of the unemployed they have done so much to create.

PS One question that arises from today's dreadful unemployment numbers is why the increase in the number of registered Jobseekers is so much less than the increase in the number of unemployed? There are now an estimated 2.43m unemployed, compared to "only" 1.58m registered and claiming Jobseekers Allowance. The answer of course is that many of the newly unemployed know that the JobCentres cannot help them. The experience of our acqaintances who've lost jobs is that JobCentres can help you fill in your benefit claim, but are next to useless in terms of finding a new job. You are much better saving your time to do your own job search. All you will get at a Job Centre is depression.

Update 13.8.09 - The Telegraph reports that the Treasury has disowned Mandy's employment claim (see here).

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www.gudanggrosiran.com Categories: slump, spin, Unemployment

Not A Bad Dream

Aren't they supposed to be green?

After a week dependent on BBC World for his news, Tyler had begun to wonder if it had all been a bad dream. Surely the BBC wouldn't be focused exclusively on environmental issues, arts projects in Africa, and celebrity gossip, if the world was really in economic meltdown.

On the plane back, five minutes with the Daily Mail reassured him he hadn't been dreaming. If anything, things have got even worse.

So what have we missed?

First, those green shoots have been cruelly blasted by the heatwave. The CSO says that when last sighted, GDP was still spiralling down. It fell by a scary 2.4% in Q1 (9.3% annualised):

So in the first year of Brown's slump, GDP has fallen by 4.9%. That's three times worse than the 1.6% decline in the first year (1990-91) of Major's recession. And 50% worse than the 3.3% fall in the first year (1979-80) of Thatcher's recession.

In other words, nomoreboomandbust Brown has smashed our economy far more comprehensively than most of us have ever experienced in our entire lifetimes.

Worse, whereas Thatcher and Major could both argue they'd simply been the unfortunate inheritors of someone else's recession, this one is of Brown's own making (yes, yes, I realise there are also global factors at play - but there always are).

So what else?

Well, the "government" is continuing its policy of rule by porkie pie. They have decided to ditch their scheduled review of public spending (the Comprehensive Spending Review), claiming that nobody knows how the economy will be in 2011.

The real reason of course, is that this side of the election they do not want to admit to the savage public spending cuts any government will have to make. It fools nobody, but since they are going to lose the election anyway, they presumably intend to spin the inevitable cuts as Tory Cuts made by The Evil Tories specifically to Grind The Faces of The Poor. Labour would never have done it.

Just how dumb do they think we are?

Meanwhile, the row between the government and the Bank of England is bubbling up quite nicely. As we've blogged before, the Bank thinks the government needs to get real about the dire fiscal outlook. They know only too well what happens once the markets lose confidence in a government's commitment to living within its means (cf the lamentable performance of H Wislon).

They're also concerned that Brown still hasn't understood just how pants his tripartite system of financial regulation actually is. They want their pre-97 powers of bank regulation restored - as do most outside commentators - whereas Brown is mainly concerned to save his own face.

His latest face-saving wheeze is to sell the Crock to Tesco. Not only would that show that his period of temporary public ownership really is temporary, but it would actually raise some much-needed cash.

Ah, but hang on a cotton-pickin' minute... will Tesco be taking the whole shebang, warts and toxic loans and all?

Er, no. Tesco will take the good stuff - ie the retail customer base - and we'll get left with all the rubbish. Which is more or less the self-same deal Branson and others wanted to do last year. The deal that stuffs taxpayers with all the losses, and none of the potential upside from the good bits.

You know, I'm so relieved I wasn't dreaming any of this stuff out there by the pool.

More to follow once I've caught up.

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www.gudanggrosiran.com Categories: cuts, debt, Gordo, politicos, slump

Down In The Jungle

Some inflation survival tips from Ray

By common consent, the Second Great Depression has been averted. Thanks to Decisive Action by Great Statesmen, the green shoots are back in view. As Mr Kaletsky puts it:

"Green shoots are sprouting into a jungle around the world... British house prices have risen in two of the past three months. Japan has experienced its biggest monthly increase in industrial production since the Fifties. Consumer and business sentiment are rising strongly in the United States and Britain and are even showing some signs of life in Europe. In America, where all the trouble started, unemployment claims have fallen, durable goods orders and property sales have bounced back and house prices have stabilised...

...world share prices have enjoyed a three-month rally, led by commodities, retailers and financials, capital markets have re-opened, with record issuance of equities and corporate bonds, credit spreads have narrowed and government bond prices have fallen in exactly the way they did at the start of the recovery in 2003."

So hurrah! The Depression is behind us, and the relief boom is about to lift off.

On Saturday, Tyler experienced the forthcoming boom first hand. Accompanying a couple of first-time home buyers (junior Tyler and his young lady) he journied to Sarf London, where they met with a financial advisor blandishing large wodges of freshly printed mortgage cash.

The advisor was alarmingly young - certainly no more than 14 - and bore a striking resemblence to the Artful Dodger. Clacking away on his keyboard he maintained a terrific apples and pears patter:

"A free bed house for less than two-fifty? You can't go wrong. I'll tell you what - back in '07 you'd have paid free two five for that. Free two five! Cuh!" Clack clack. "As it 'appens, one of my clients - love him to bits - just bought half of Mitcham for free seventy. We did the deal, bish bosh. Course, he'll split it into flats. Not that you'd like Mitcham - it's a bit of a jungle. Cuh!"

He swivelled the screen so we could see the deals he'd pulled up.

"There we go - looks like Northern Rock is gonna be best - two year fix on 3.9%, or five years on 4.8%. Course, back in '07, I could have got you ten years on 2.4% - unless you'd been an asylum seeker, that is... then it might have cost 2.5%. Lovely stuff."

Tyler furrowed his brow. "Sorry, did you say Northern Rock? I thought Northern Rock had gone bust... surely they're in no position to offer the best deal."

Dodger tapped the side of his nose. "You'd be surprised! As long as your credit record is OK, they love you to bits. Love you to bits! Course, my mate who got divorced and had his Porsche repossessed, he gets letters all the time from Northern Rock asking if he'd like to switch his existing mortgage to someone else. Love him to bits! Cuh!"

The bottom line was quite clear - as long as you can scrape a deposit together, and as long as you have a job, and as long as your credit history is OK, mortgage finance is flowing again.

And house prices?

Certainly in Sarf London, prices for first-time buyers seem to be bottoming. Cutprice offers are being rejected, houses "priced to sell" are selling, and the agents seem to be doing business again. Which is exactly what we'd expect.

Let's just remind ourselves of some highlights from Teach Yourself Monetary Economics.

When the government/central bank pumps up the money supply, the first big visible impact is on asset prices - with money flooding the markets, the value of things like stocks and shares, and houses gets bid up. Which is pretty well what's happening right now.

But what happens next?

Ideally, what you want is for the uplift in asset prices to stimulate new investment - as for example, companies find it cheaper to borrow. But given what's been happening recently, do people want to invest right now? Probably not.

Instead, they might well decide to consume more. Fine - in a recession, that's exactly what the government wants.

But what if large chunks of that consumption are imported? And what if that puts further downward pressure on the currency? And what if the markets take fright at that prospect and accelerate the process?

And what if some of the initial uplift in asset prices worldwide spills into commodities? And what if that gives a upward push to inflation?

You can see where this is going...

Those green shoots may well be sprouting into a jungle. But Ray Mears aside, jungles are not terribly hospitable places. The giant snakes of inflation wait coiled behind every tree, ready to strike.

PS Guilty pleasures - if you haven't seen the revival of Oliver! you really should. Meanwhile, I'm quite convinced this guy is our financial advisor:

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www.gudanggrosiran.com Categories: inflation, slump