Thursday, 28 August 2008

EU really mad; Official

There is a lot of discussion about weirdo's and madness on the internet today, so perhaps I can join in....

The US Dollar fell from its six month highs today (phew, fingers crossed for me as I am going to NYC in a couple of weeks), but get this - here is why:

"The U.S. dollar tumbled from six-month peaks against the euro on Wednesday, as comments by a European Central bank official rekindled speculation about an interest rate increase in the euro zone to quell persistent inflation pressure."

Just for fun, go read Ambrose Evans-Pritchard in today's Telegrpah discussing the economic situation across Europe. Collapse everywhere, even Germany hurt by the strong currency, and the idea is to raise interest rates?

This 'inflation' we are suffering will end in tears for us all. As oil has dropped 20% in a month and money supply has dried up it is not so hard to predict a sharp drop in inflation - it is a lagging indicator in any event.

If the EU raise interest rates it will utterly wreck Spain, Denmark, the Baltics and Italy. Why would they do this unless they wanted to ruin the eurozone. They can't possibly want to do this, so the 'EU Official' who said this must be mad.

UPDATE: From a Bank of England MPC member today in the Guardian...
Blanchflower described the BoE's forecast earlier this month of the economy standing still over the next year as "wishful thinking" and said things could be easily a lot worse.
"We are going to see much more dramatic drops in output," Blanchflower said. "The way to get out of it is to act, by interest rate cuts and fiscal stimulus and other things to try help people who are hurt through this."
"Sitting by doing nothing is not going to get us out of this and hoping that a knight in shining armour will come and lift us out of this is optimistic in the extreme."
And he said that an expected boost to exports from a weaker pound was unlikely to prove the "great rescuer" of the economy.


Anonymous said...

I've had three different friends/family who are French and German nationals show off to me about the strength of the Euro vs. the pound and dollar... in all cases they did not seem to understand why this happened or what it meant for Europe. They all seemed to share the assumption that a currency is like a share in a company, and that people buy it because they think it is high quality and will prosper - relative interest rates did not enter their thinking. They took it as final recognition of the virtues of Europe and a triumph over the Americans. These were 'laymen' rather than economists, but they were all very highly educated professionals. It did make me wonder how these things are reported on the continent and, while the comments you mention are from somebody who should know better, it may also be that they didn't like (for whatever reasons...) to see their 'strength' against the dollar beginning to subside.

CityUnslicker said...

Anon- points well made. The general public are ignorant of exchange rates in the extreme. Witness the 'shame' felt about the UK falling out of the ERM system when in fact it was the best thing for us and led to years of economic prosperity.

Blue Eyes said...

Perhaps Sarko is right and there needs to be an ECB commitment to growth as well as price stability?

I am one of the ignorami as well, but I think that the BoE has actually done the right thing by not lurching one way or the other. When inflation does start to drop I expect it to cut rates aggressively.

Tim H said...

Oil and other commodity price drops have mainly been at the result of a stronger Dollar. The shock to in commodity prices has not been reversed in Sterling terms. There is a case for higher UK rates, not to soften economic activity and thereby reduce core inflation, but to strengthen the Pound which would cheapen imported commodities which is at the root of the explosion in non-core inflation that is causing so much trouble especially for the poorest in the country.

CityUnslicker said...

Tim H - that won't work. As the dollar falls again (which it will, there are no fundamentals behind the rally), the pound will rise, but so will the price of commodities. We would have to raise our rate specifically against the dollar, which means outperforming the USA.

Raising rates will sink businesses and further smash the housing market. This would be economic armageddon and the markets would de-rate the pound further.

The analysts won't see it as the BoE being brave, just mad - same as the ECB. Mad people don't earn trust and respect.

Newmania said...

I noticed to day that the dreaded HIPs which are not helping the housing market were actually a reponse to an EU directive.
( Ignormai also)

Anonymous said...

Rubbish. Interest rates rose under Geoffrey Howe and it was stage 1 in Britain's economic recovery after the last socialist disaster.

Low interest rates only allow the banks to inject yet more debt into the system. Since we are already awash with debt how the fuck can that be a solution? That's like suggesting that the cure to illness is to bleed the patient with leeches. Maybe you ar eunder the impression that the cure to being unable to pay your mortgage is the facility to run up a debt on your credit card?

Reducing interest rates will only delay the inevitable, allowing the train wreck to last longer and get bigger. If the solution was to re-inflate the economy then injecting more debt is not the answer. The only twats taking more debt now are those that are using the debt to bail themselves out of the debts they are already carrying, like the banks are right now. Cutting off the supply of easy money will will force these debtors to the wall, allowing the debts (which should never have been run up in the first place) to be written off and the cash to flow from weak hands to strong. The only other solution would be to print real cash, which would at least allow us to inflate our way out of the problem without a corresponding increase in the levels of debt. This would, in effect, write off our debts over a period of time but hopefully without anyone noticing and getting upset. Problem is that £1.00 would end up buying the equivalent of £0.10 and we would spend the next 20 years striking for higher pay to compensate for it.

Fact is that there is no easy way out of this mess, but at least the Europeans are headed for some sort of solution by purging the bad debt from the system. Britain and the US are just sitting on their hands hoping the problems will go away by themselves. Every step they take is the easy way out for the short-term and will lead to far bigger problems in the future. Where is the plan for the US to actually pay off its $10trillion of government debt? We had better pray for better government in the US and the UK in the next few years or we will end up like Turkey, with persistent hyperinflation, total lack of business confidence, limited opportunity for new business and high unemployment.

hovis said...

O/T Anonymous@7.52 I have several relations who have married into the wider family - Greek, French and German, none have boasted about the euro. Indeed all they have done is complained that the Euro has done nothing but raise prices ...

CityUnslicker said...

Anon - raising rates will destroy the economy. 'the forcing to the wall' that you talk about could well be the majority of the population under 40 and a lot of our companies.

a 100% effective way to eliminate a disease is to kill the patient......I won't argue with the statistics on that!

Anonymous said...

"Anon - raising rates will destroy the economy. 'the forcing to the wall' that you talk about could well be the majority of the population under 40"

Utter bullshit. People under 40 are already suffering from the massive inflation caused by low interest rates. This pushed house prices up out of their reach. 4million people refuse to work because they can go on benefits instead - they can't afford a house so why bother working? Meanwhile Polish people that have no interest in buying a house in the UK flood the UK job market.

We have an economy that is seriously out of kilter as a result of ridiculously low interest rates that offer no kind of return on an investment and where the only way a bank can make any money is by pushing enormous volumes and ever growing volumes of debt onto the consumer.

Take all the paper money and debt out of the system, put it in a big pile and burn it. What would you be left with? Farms and houses and hospitals and factories and workers and all manner of things. It is the financiers unwillingness to admit this that will screw us.

The economy is ALREADY wrecked. Just not all the symptoms are apparent now.

Let me explain to you where your thinking will get us. We reduce lending rates. Debt increases and injects more money into the system causing more inflation. The economy starts to grind to a halt again as the economy can no longer finance the interest on the enormous amount of total debt in the system. We therefore reduce interest rates again. The economy expands again until the debt can no longer be afforded. We therefore reduce rates again. And again. Eventually rates approach 1%. We can no longer reduce rates. The economy eventually grinds to a halt with humunguous debt, no flexibility on rates and no way out. This is what happened in Japan. The only way out would be to start writing off the debt. But why struggle along for 20 years trying to escape the debt trap when we could simply grow up and cure the problem now?

The debt should never have happened. It should never have been allowed to grow out of control like this. Debtors and creditors are to blame together. They will take the pain of their foolishness one way or another.

dearieme said...

A few years ago I was explaining to a German colleague why I thought we shouldn't join the Euro. I alluded to exchange rates. "Oh" he said grandly "exchange rates don't matter nowadays".

Blue Eyes said...

Tell me, what will be the value of throwing people like me out of their jobs and houses?

I am under 40, mortgaged to the hilt and totally aware that it was my choice and my fault if borrowing a huge multiple was a bad idea. BUT: how will raising rates and trashing my employer who will make me redundant and lose my home help anyone? I work in an export industry.

There *is* too much debt, but the credit crunch is cutting that down nicely. Why deliberately make it worse? I don't think cutting rates soon (not immediately) will cause debt to balloon again - people's appetite has gone now.

CityUnslicker said...

OK Anon (I like names by the way) you make some good points:

1 - this should never have been allowed to happen (last year I strongly advocated raising rates)

2- We don't want a Japan to happen here. Japan entered deflation, the real killer that ensures debts hang around for ever. Squeezingg all inflation out of the system is not the answer - neither is encouraging hyper-inflation.

3- The economy is out of kilter, thus we need to reduce government spending, not raise interest rates. This is one of the largest causes of domestic inflation too - so good thing all round.

Your position is defensible; but to my mind confuses yesterday's problems with tomorrow's/ You fight the last war. 2 years ago we needed to stop the credit balloon, we didn't and it burst. Next we face deflation, to which the answer is not to stamp on the deflated balloon.

The answer is life support for the patient to avoid flatlining. The answer is to reduce rates enought o stimulate growth and guard against hyper-inflation. Rates need to be a 100 basis points lower by this time next year.

We will soon see which of us is correct. Appreciate all your comments.

1st Anon said...

I was the first anon, at 7.52am, not the other anons...
Hovis, my Europeans have complained about the cost of living under the Euro too, but they've alternated this with chuckling when they hear about the weak dollar.
My father-in-law's favourite thing is to mime a downhill graph in the air while whistling whenever sterling is mentioned.
Misery loves company, and imagining others are more miserable can be fun too.

Anonymous said...

If the money supply was flat or contracting in the UK then keeping interest rates flat would be fine - but money supply continues to grow as the appetite for debt to roll-over existing bad debt is not being flushed from the system. This socialises the problems of debt overall, because the inflation caused by the debt hurts everyone, not just those that were imprudent with their finances. However, because there is more debt in the system the problem isn't going away, the money supply figures show that the amounts of debt is continuing to grow, albeit at a lower rate than previously.

Monetizing debt does not cause inflation, by the way. All that happens is that debt is replaced with printed cash but the overall money supply remains the same. Central banks don't like it because it is a default on the debt which can harm relationships with foreign investors. Since we are defaulting on our debts anyway, that hardly seems to be an issue.

Anonymous said...

I would point out that central banks manipulating interest rates can hardly be considered "free market". It is no surprise that command economies like China are happy to indulge in the same kind of thing. The difference between LIBOR rates and BoE rates are a sign that market forces have taken precedence over government interference and are demanding higher rates - just as they have in Europe. Naturally, with banks being in financial difficulties and the BoE offering rates much lower than the banks would consider themselves they have been only to happy to whip the begging bowl out at the lender of last resort. This is classing socialism even though it is dressed up as capitalism - socialising the financial problems of institutions that really should have known better. The problem of socialising the debt in this way has become particularly acute in the EU, where bad debts recklessly run up by Spanish banks are now being socialised across the Eurozone economy causing political tensions.

If you want to prove your free-market credentials then campaign for an end to the BoE and central government fixing of interest rates. But you will first be forced to admit that the free market is demanding higher interest rates, not lower.

CityUnslicker said...

I don't see how these BOE stats equate to growth in money supply (M4), it is flat year on year, but with a huge dip in the middle. i.e a contraction.

30-Jun-07 48241
30-Sep-07 54510
31-Dec-07 35695
31-Mar-08 41695
30-Jun-08 48315

Re Anon point about free market. The idea is the bank is independent of the government, thus in theory you cannot equate them as one and the same anymore. Brown cannot order rates reduced - so we have a freer market than we used to.

As for LIBOR being higher, well can't argue with that, but there is more to interest rates/money supply than purely banks being scared of each others balance sheets. Having said that, I am not against banks setting their own interest rates in most normal environments - which incidentally is why traditionally LIBOR and the BOE are highly correlated.

Anonymous said...

"The idea is the bank is independent of the government"

Utter, utter bullshit. Who sets the growth target? Government. Who sets the inflation target? Government. Who gives the BoE the inflation figures to work to? The ONS which is now a branch of government. That's like saying the engine of my Merc runs independently of the driver.

That LIBOR rates story about LIBOR being high because banks don't trust each other is bullshit. They all sit behind closed doors and set LIBOR. Its a gentlemans club. How the hell can they be scared about what they are hiding from each other when they are running a special cartel? Don't you know how banks work? Bank rates are high simply because banks need to call in more cash and reduce the amounts of money going out so that they can cover their bad debts. Free market forces at work.

Those M4 figures only show a contraction in the rate at which money is being created, not a contraction in the total amount of money in the system that is debt. The amount of debt in the system is growing, just not as fast as it was previously. Please learn to read the figures properly.

You are sounding more and more like a propagandist for the City "Please bail us out with public money or I'll lose my overpaid job". My heart bleeds.

CityUnslicker said...

I am not a propogandist for the City; I don't work for a bank.

M4 this past year shows virtually no growth in money supply. With inflation at 4% you would assume their should be some growth- instead we have a contraction; which in turn suggests strongly that inflation will tail off fast. hence the possibility of lowering rates now.

As for banks being a cartel, this is untrue in this sense. They do not trust that they are all exposing their debts. Look how they acted when doing the rights issue for HBOS - they would all sell their own grandmothers. LIBOR is high because they do need money and to balance this against risk. Something they neglected to do during the credit bubble.

Re the bank, I never said it was independent - your points are right. I said it was freer than it used to be. A good thing, even better if it was to be really independent.

Rates can come down a bit, they don't need to go to 2%, but 5 or 4 and a half will help nurse the patient through. It will be a long illness, I don't want a fatality.

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