Wednesday 30 September 2009

Gordon Brown addicted to stimulants

He really is you know, financial stimulants, the IMF say so. Forget all the gossip about Andrew Marr and his sudden desire to keep his BBC programme under a new Tory Government.

This is out from the IMF today and very damning it is too. Effectively, as Brown decided not to say in his speech yesterday, 2010 will be a horrendous year for the UK; in many ways even worse than 2009. Deflation, Public Debt Fiscal Disaster, Increasing Unemployment - the legacy of a scorched earth policy by Labour.

The Government banks of RBS and Lloyds face such huge losses that they will have to raise capital, possibly from the government. Certainly they will not be paying any back to the UK coffers. Plus of course the Asset Protection Scheme, where the taxpayers suffer 90% of the losses on bad loans, will mean that the loan losses will be another £10 billion or so drain on the public finances.

In his speech yesterday, Brown said nothing really about cutting Government expenditure. So we will have another huge budget deficit. the car scheme for supporting European manufacturing was also extended, another piece of stimulus for the Unions.

I can see no way the Government can raise another extra £180 billion next year in the gilt market without interest rates having to go up to say 3% from where they are now. This will nail any Property or Private sector recovery as lending collapses in a deflationary environment.

So the answer will be more Quantitative Easing (QE). John Redwood has an excellent post showing that as I have always said, QE in the UK is about propping up Government spending. I think QE is a great tool for increasing money supply and velocity - but it has not been used this way.

So Brown will have another £180 billion or so of Stimulus next year. He and is Government have left themselves with no alternative. Pucker up Public Sector, you are going to be buzzing with all the stimulus headed your way.

(Post on how to trade this to follow shortly).


Steven_L said...

Will look forward to the ideas on how to trade 2010. Wish I'm gone with your 'borrow as much money as you can and get it in the stock market' back in early 09.

Was thinking about gearing all my savings up using cfd's but didn't have the guts so went for a Vodafone bond, followed by Man Group shares (which I chickened out of only 12% up after listening to all the bears - I'd be 60% or 70% up now if I'd hung on) then Vodafone shares, then moved into absolute return/cautious funds. Nothing special but trounced the bank rate this year.

The oil trade is starting to look up, where's the axis of evil when you need it to lauch a few more rockets?

Budgie said...

Brown would not say he was cutting government spending to the 'bruvvers', would he? Neither Brown nor Labour have any idea of economic reality. They seem to think there is an unending supply of money (tax the rich; print more); that they can fiddle with the system as much as the fancy takes them (more insane bureaucracy), and there will be no bad consequences. Brown is Mugabe lite. The bad consequences are here, and we are heading for payback.

CityUnslicker said...

SL - Well we are nearing correction time. I have just pulled 50% of my money out.

You have been sensible though so don't be disappointed with your gains. I too was in Man at 260 and sold out - look at it today!

I would not be putting more money in now - just wait another 3 weeks and see what happens to the trend.

I stick by my bet that the FTSE will end at 4500 odd this year, so 10-15% off where it is now. Miners and Banks will feel the pain along with retailers.

Oil is in an unsure place - may go higher or lower. I don't know.

CityUnslicker said...

Budgie - Oh no, he knows there will be bad consequences, just not for his Government. That is the plan. I can see Labour getting in in 2014/15 as the economy will still be screwed then.

Steven_L said...

I don't class the oil bet as investing, my cfd account is just what i do instead of going to the casino like I used to.

If I ever win some decent money on a trade I'll probably spend it on clothes, fishign gear, holidays etc, or maybe even take it down the casino for some high-octane roulette.

Steven_L said...

Oh and I am gutted about putting the stop loss on Man Group, I spent ages reading annual reports to find a FTSE100 stock I thought would outperform the market over the year, then ditched what turned out to be a damned good pick after reading internet tittle tattle.

roym said...

The IMF say the banks have another 1.5 trillion dollars of losses to declare?! What will their total losses be? 4 trillion? 5?! these numbers start to lose all meaning after a while.

Steven_L said...

"these numbers start to lose all meaning after a while" (roym)

In hindsight, the solution to this crisis would have just been to seize all the bust banks, print lots of money, put it in the asset columns of their balance sheets, float it again, destroy the money from the float.

Wouldn't it?

Doppelganger said...

If I am getting this right the government is buyimg securities and paying for it with money which is effectively money the government has printed/issued in its own/our name? So government borrowing has gone up like a Saturn 5 rocket. But what about the assets they have aquired? Are they OK or are they junk? If the former prospects need not be so bleak; if the latter, it's bad news.

Demetrius said...

There is something nasty in the woodshed.

Guido Fawkes said...

Fantastic headline.

AntiCitizenOne said...

With large parts of the FTSE making most of their profits outside the UK will falls in sterling hold up the index?

CityUnslicker said...

Bill, the assets are Government bonds, they are valued by the market and are currently very high priced with low yield. I see a future forming...

ACO - Yes it will in the long-term as the earnings hold up, except the dollar is quite sickly too and this accounts for many of the resources, oil companies and HSBC.

Anonymous said...

CU: Deflation, Public Debt Fiscal Disaster, Increasing Unemployment - the legacy of a scorched earth policy by Labour.

No, never deflation.

The B of E will do whatever it takes to create inflation.

Deflationary spiral will not happen. It will be difficult to avoid.....

The weening away from QE, low interest rates etc, will be remarkably long term.
More so to balance any "cuts" made by whatever political numb-nuts get elected next year.

The "cuts" must be more than balanced.....

I still favour tax, direct and indirect, re-alignments, with dramatic cuts, with QE, and of course, exit EU.

Just won't happen, not in this universe!

Anonymous said...

As someone that works in the automotive components industry I can tell you that the scrappage scheme is only propping up the Korean car industry. Makes sense - if you have a crappy ten year old car worth nothing until the government decided to pay you £2000 of my money to trade it in, then the only NEW car you can afford is a Hyundai.

The Korean car inductry is going gangbusters at the mo. They literally can't meet demand. German car manufacturers are still on a 4 day week.

CityUnslicker said...

Anon - deflation is dictated by the collapse of M4..we are already in deflation..unless we QE like mad and stoke real Zimbabwe like hyperinflation.

I like neither so much.

Check our Nadeem Walayat at market oracle.

AntiCitizenOne said...


I disagree Credit-deflation is in the M4 figures.

But there was too much credit.

QE Is monetary inflation.

I'm looking at Import inflation and credit deflation and the government claiming that between these two peaks it nets out! When it really means that inflation figures are meaningless.

Anonymous said...


This is a consumer led economy.
Net disposable income dictates most everything.
That remains true until a manufacturing base, capable of
a) supplanting imports,
b) creating exports,

can be created.

Finance is leaving for the far east, the EU wants to castrate the hedgies, companies are listing abroad, and the IMF publishes reports that say the global trade patterns can not be rationalised at todays forex levels.

In other words the £ has to sink, like a lead balloon, and the IMF welcomes it!

Since we have a negative trade balance, we will import price inflation from countries who have stronger currencies.

Therefor QE must play on, to keep interest rates low while industry re-establishes. This can take years.
The IMF says 15% of GDP, I have been saying 14% for quite a while, now, it may go higher than the IMF is projecting.

Nadeem is good. He says that inflation is missing. That maybe true NOW, but the tone of the article said that the B of E was looking for inflation, ie, it will create it, - - it must. A fiat system cannot tolerate deflation with sinking bank balance sheets.

China is currently pegged to the $. There is pressure for a de-peg, resisted at the moment, but I see it coming. The assent of Chinese currency will be slow and controlled vs the $. I'm not sure whether the £ will fall faster, or slower than the $. Either way, the £ will diverge from the entire exporting countries, until we earn our way.

Nadeem is an excellent guy, I know him, but sometimes Nadeem is wrong, IMO. He has been wrong on gold and the $ in the recent past, and it is movements in exchange rates where this will play out in the future.

The fall in the $ will cushion the effects of the falling £ until the Chinese de-peg. I think that won't come until the Chinese can turn their population mindset into consuming more, or they find other export markets. Japan is re-aligning to S E Asia rapidly under their new gov't.

We may see a UK £ carry trade develop.

Anonymous said...

IMF and FOREX levels, - rebalancing

Anonymous said...

Derivatives and monkeys

CityUnslicker said...

Anon - Well we will see, I still can't see any real inflation in the economy when it is stuck in a death spiral next year. But you are quite right that the BOW is trying to create it.

No doubt we are headed for a 19770's style rollercoaster.

Anonymous said...

CU :-

I hope you get to read this...........

You've got to look beyond theoretical national economics at times like this.

The IMF is about to issue loans, SDRs to emerging economies strangled by having to pay their debts in $, or Euro or SwF, etc. It is pure Fiat, with nothing to back it!

They have $500B of SDRs to play with.

The emerging economies will not see this money. The IMF will negotiate restructuring their economics, and they will be tied to (probably) 30 year repayment ball and chains. (poor buggers) It will likely be a replay of the 1960s, 70, 80s, in S America, and the 1980s, 90s, in S E Asia. Since this time, the debt is to the IMF, not individual western banks, default is unlikely. Serial renegotiations are likely however, as the countries realise the extent of the upcoming screwing.

The loot will go direct to the western banks to whom the emerging nations debt is owed. Bingo, the western banks are recapitalised, and able to lend, but there is a lot of international fiat flying about, looking for a home!
The IMF will hold the debt as an asset on its balance sheet.

It is this basket of IMF Fiat that the BRIC economies want representation in.

The purchase of 403 tonnes of gold by China from the IMF is to avoid the ignominy of western central banks selling to the Chinese direct!

Entities currently defending the $, GS, JPM, etc, as the scenario of the IMF SDR becoming the International currency plays out and gathers momentum, will move from supporting the dollar, to shorting it, and become an integral part of the dollar carry trade. Lack of Yen response to recent currency fluctuations show that that carry trade is damn near totally reversed. Significantly, because it is such a small market, it is observed that currently gold varies inversely to the $. Part of the other side of the trade could become long gold!

Shorts involved in carry trade actions are not short term! Just look at the history of the Yen. They also take some dislodging once entered, just ask the B of J.

The Fed is now monetising the entirety of the housing mortgage market debt, and probably 50% + of the T bills, gov't debt.

In the UK the Bof E is monetising (probably) 100% of gov't debt.

And the BIS and IMF are encouraging both.

They both MUST find a way of getting that into circulation, and they will.

Significantly, the Wall St banks "own" the IMF. The global financial centre of gravity is shifting to the IMF, but the players remain almost the same, but their allegencies change, and have been changing for several years!!! It has just not been recognised!!

Since whatever nation that becomes the reserve currency must run massive deficits to create international liquidity, that nations economic destiny must always be ignominious. The many manipulations steadily built to hide that ignominity will gradually dissolve.

China may be going part the way on the currency liquidity route, with all the currency swaps, and bond issuances denominated in its own currency. These actions are clearly taken to insulate from the coming financial disruptions as the $ and the £ are displaced, together with the probable destruction of other pillars. We shall see.

The IMF SDRs are another version of the 2 types of $ mooted in the 1980s, but this time carrying international authority.

The current market take down will not be drastic. Higher asset values are part of the bank re-capitalisation formula.

Anonymous said...

Ellen Brown and IMF

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