Thursday, 9 February 2012

It's Thurdsday - QE day - or time for something else?

That's right folks, those kindly people at the Bank of England are lining up today to hand out another £50 billion of freshly minted electronic notes to had over to holds of UK Gilts - that will be our banks.

It's true, our poor banks desperately need to deleverage to try and get them back to health, without it they are not going to help the economy get back on its feet.

Today though I find myself in total agreement with Jeremy Warner of the Telegraph - which is rarely the case. But he is on the money today. The Big Issue in the UK is debt - Government debt, private debt and banking debt. We are awash with debt and the only solution is to reduce it.

Now government austerity to help get the debts down and we have tax rises too and the banks are deleveraging. The net effect of this is to push us into recession. This is going to last for years, at least another three but probably another five.

The Bank of England think they can speed up the process by offering 'free' money to help the banks deleverage quicker. However at some point the issue of free money to the banks is going to create a new bubble. When financing costs are so low for such a long time some terrible investment decisions are going to be made. Worse, when we try to normalise interest rates, lots of people and companies are going to go bust - creating a new recessionary wave. This is known as the Japan experience.

The US is doing a little better, because people on the whole have handed back the keys and walked away from their debts - this means the deleveraging has happened faster. Our policy is not having the same effect, deleveraging is going slowly because house prices and other debt laden assets are not falling in value and banks are not foreclosing - this helps to keep the economy limp along, but not to have the blow out which could lead to recovery.

The answer is not a Labour style government spending splurge - more debt is the last thing we need. If people won't walk away from their debts, then on a national scale we have to force it. We need to devalue the pound by 25%  - not to hard to do, let's just monetise the QE we have already done.

Devaluation is harsh but has the fairness of affecting everyone equally so it is pseudo democratic - except savers but they are losing anyway with negative interest rates. Inflation will spike, but at last we will be able to raise rates to fight it.

It's the tough love solution for a hardcore debt addicted Country.

27 comments:

Steven_L said...

to holds of UK Gilts - that will be our banks.

I'm sure I read that hardly any are held by banks. They are held by insurance/pension firm and private investors in the main.

Of course, whoever you buy them off, the new will always show up as a bank deposit somewhere in the system and probably be deposited in the reserve account by a bank - hence it looks like a bank sold it.

But really a gilt was converted into a bank deposit.

year of the frog said...

Don't give the QE money to the banks. Give it to the people with debts.
ALL mortgage holders since 2007, will receive a 30% reduction in their mortgage. Its a write down. they get it whether they need it or not.
THEN the rates can go up without the damage caused by foreclosures.

So feckless borrowers are bailed out. So what? The feckless banks got away with it. So now give cash to the people who will at least go and spend it. or possibly save it against a future crisis.

Its a national bailout scheme. That or have a 20 year Japanese style zero growth life support.

Anonymous said...

In the dwindling number of households where there's a wage earner, private deleveraging is impossible due to confiscatory taxation and real incomes plummeting. I'm not only being bled-white on PAYE, but spiralling fuel taxes and the Govt. set increases on rail fares etc. Plus tax-equivalents like fines for 'administrative' offences like not speeding.

hovis said...

Not so sure it will work as easily in the US. Remember that US homeowners are not liable for debt after they hand the keys back, (hence people have in the past few years kept up car loans - they at least keep the car - but defaulting on mortgages.) Here you are still liable unless you declare bankrupcy.

CityUnslicker said...

Agree Hovis, deleveraging easier in the US - so WHAY ARE'NT OUR GOVERNMENT LEGISLATING ON THIS!

sorry, instead they are mucking about with the NHS and lords reform. don't know why they bother with NHS legislation, just cut the funding and let the managers sort it out.

Budgie said...

Year of the frog said: "So feckless borrowers are bailed out. So what? The feckless banks got away with it."

No. Two wrongs do not make a right.

And the feckless [UK] banks did not get away with it. RBS is now 83% owed by the taxpayers, not by the shareholders who really did pay for unSir Fred's mistakes. Ordinary shareholders in other bust banks lost out completely.

The main "mistake" HBoS made was to depend almost entirely on the property markets which were pumped up by Gordon Brown. Lloyds shareholders were then shafted by Brown when he engineered the merger.

It is the feckless politicians like Brown who have "got away with it". Borrower Brown and the man who extended his mortgage to buy a BMW should pay, not savers.

Blue Eyes said...

What do you think to the idea of nominal GDP targeting? I like the idea of it, partly because instead of the perpetual "will they, won't they?" on QE we will know exactly when the party will stop/be reversed.

Also, for all the debt you talk about, there are equivalent assets somewhere. Not everyone can be in debt simultaneously. I am not in debt overall, for example. In fact I bet most people have assets to balance their debts.

The sticking point for the recovery is that the people with piles of cash are sitting on them rather than investing in stuff. A more proactive BoE could get the money out of the door very quickly if it wanted to.

Bill Quango MP said...

"In the light of its most recent economic projections, the Committee judged ... without further monetary stimulus, it was more likely than not that inflation would undershoot the 2% target in the medium term."

Are we also still at war with Eurasia?

hovis said...

CU: I therfore fear the tough love /medicine (truly it's for your own good ..) gives us the downside with little up.

Aside indeed the NHS is an illogical and blood sucking relic. (It's a scam for corporate and producer interests dressed up in sanctimony- scrap it - but thats another topic)

BE: Isn't one feature of this blip/depression/crisis that assets were/are phenominally overpriced hence don't really balance out with the debt?

Blue Eyes said...

For sure, for some people there is negative equity. But my point is that the economy overall is surely not in debt overall. Think of the millions of people with small or no mortgages, for example. Yes, a huge amount of wealth has been destroyed since 2007 but that doesn't mean that there is less than none left.

Blue Eyes said...

BQ it is entirely plausible that inflation could fall below 2%, the economy is in a massive depression. Have you not noticed?

Electro-Kevin said...

I think house prices should crash.

"That would definitely have the middle classes reaching for their pitch forks"

Exactly.

While they spoon feed us they fuck us.

formertory said...

Just wait until the hordes of baby-boomers on income drawdown (without the £20k "guaranteed") get their next reviews with GAD rates on the floor, and going lower as the Bank of England's eyelids flutter and it heaves an anticipatory sigh as it reaches for the pleasure button once again (the one with "QE" stamped on it).

Halving of income? Oh yes, sir. Terribly sorry. You didn't actually believe all that horseshit about deregulating pensions, and saving for your future, did you?

You did?

Oh.

Budgie said...

BE said: "the [UK] economy overall is surely not in debt overall."

Well, it would be possible for the UK to be in overall debt. Like you I think it is not so. It does depend on how much of 'our' wealth is actually owned by foreigners (debts and assets).

But looking at assets vs debts, that is our overall wealth, is I agree with you, a more sane way of measuring our economy than GDP ('turnover is vanity, profit is sanity').

Anonymous said...

Just give everbody aged 18+ and under 70 £2000 which they must spend in the next 3 months.
More effective a stimulus than giving it to banks to convert into bonus to piss up the wall.

CityUnslicker said...

BE we are of course not in debt overall, we are vastly wealthy compared to most countries in the world.

The issue is say the total gross economic value was £5 trillion. Now say the debt build up equals, um £3 trillion - but that this debt is not split evenly, nor the savings. many many people are now screwed, whilst other are ok. Without communism there are few ways of trying to equal this.

What we are not though, is worth £5 trillion and able to spend money like that it our net worth when it is in fact our gross.

My devaluation idea, addresses this by the way. Albeit it is just a talking point.

Blue Eyes said...

CU and I agree with more QE/a higher inflation target/outright devaluation*. In fact I think I have argued for it against you in the past!!

But it really bakes my noodle when lazy journalists (not you!) refer to the debt mountain as if the whole nation owes the rest of the world something which isn't quite right.

* and, dare I say it, I think the government has it about right as it is: a steady but not rampant inflation policy allowing people to ease away some of the worst debts and allowing a rebalancing of the economy.

Anonymous said...

I feel that it would cause lots of negative equity and people would lose their homes and would owe lots of money.

Wouldn't these people never vote for the Government again?

Surely not a politically acceptable plan.

Steven_L said...

I've just started reading a new book called 'Planet Ponzi' by some hedgie into carbon trading.

It's more US than UK focused, but he is arguing that the economy ticks all the boxes to be a ponzi scheme.

The first 3 boxes are:

* exponentially increasing liabilities - or, in plain English rapidly mounting debt;

* crappy, nonexistent, or inadequate assets;

* deceitful or nonexistent accounting;


There are 4 more boxes, he argues we're ticking all of them and I can see his point!

hovis said...

Stephen L sounds similar to this stuff

http://www.tullettprebon.com/strategyinsights/index.aspx

Anonymous said...

Mervyn King was one of the 364"economists" who signed a letter to The Times in the early 1980's, stating as a fact that Mrs Thatcher's tight monetary policies would not succeed in reducing inflation.

Now, as Governor of the Bank of England, he is in the process of proving her right, all over again!

JJx386 said...

@CU
"don't know why they bother with NHS legislation, just cut the funding and let the managers sort it out."

I like it. Funny guy. Leave the loonies to run the asylum.

year of the frog said...

"today,Federal and state officials announced Thursday the largest agreement yet to address the effects of the housing crisis, in which five of the nation's largest banks will pay $26 billion to help current and former homeowners."

If the Americans have done it, why not us? Or why not agree to allow every homeowner/loan holder/ to renegotiate onto fixed 5 year mortgage at 2% /10 year at 3.5%. Loans at say 6.5%?
Everyone has 6 months to take advantage. After that rates will rise as BOE puts them up. It won't immediately damage business or increase homelessness as people have fixed their payments at a {hopefully} manageable level.

The gov forces our banks to do this as penance for causing the crash in the first place.

After a 6 month period its business as usual for the banks. They can go back to not lending, excessively charging as much as they like.

Seriously. Its a good plan. Its an effective debt write down without having to write the debt down. Mortgage holders know what their bill will be for the next 10 years. That will free up 'x' cash for the short term. It won't cause a bubble either as the offer is not available to new borrowers. Just existing.
New homebuyers still have to save as the bank wish for a 33% deposit so cutting out 1st time buyers and slowly reducing house prices to incomes, or allowing inflation to price wages up to match house prices over 10 years.

that's only what everyone expected would happen anyway. Instead of the crash. A gentle running out of steam and a slow glide to a soft landing.

CityUnslicker said...

No sure Frog, interesting. But those first time buyers, they are those young people who have not beenfited from the housing boom - and now have higher taxes to pay for all the consumption their parents did a decade ago.

But they should be punished?

Hmm...morally (I don't believe in such as concept, but imagine I did for a minute..) my way is better it hurts the rich much, much more than the poor and those with wealth lots and those with none, hardly at all.

We have to have an asset bust in housing or else its the current alternative of a 5 year depression out from here.

CityUnslicker said...

BE - at least you are not accusing me of consistency...that I would be affronted by.

Blue Eyes said...

CU, that is why I think an overt switch from inflation targeting (which has been de facto abandoned in the short term) to nominal GDP targeting would sort some of this stuff out. Those with lots of liquid assets would soon rush to the exit and hopefully get us out of this stalemate more quickly than a slow grind.

It would be interesting to try, anyway.

Anonymous said...

deleveraging = deflation = economic stagnation = prolonged recession.

We really don't want to go there. Forget it. This is what happened in Japan. Banking sector collapsed in bad debt. Then even when the Japanese governmentr started creating money at zero interest nobody wanted it - except foreigners which resulted in the yen carry trade. Japan still isn't out of the mire.

I'm with Frog - give £2500p.a. of freshly printed money to every adult in the country for ten years on the proviso that debt must be paid off first, highest interest rate first. Set interest rates back up to 10% and make it illegal to sell mortgages more than 3x earnings.

Result: all repossesion, personal debt, liquidity problems, house price crash, deflation, deleveraging issues solved. Everything put back where it should have been before the Gordon Brown debt binge. Banks lose out because they get the debt back but its not actually worth as much. People are repaid for their overvalued houses that came about as a result of a "how much debt do I dare to get into" game financed by the laughing boys at the banks.

Should this happen? Certainly. We should CAMPAIGN for it. It is a disgrace that our money is being devalued to suite the banks and not us, while our debts remain.

Will it happen? No, because the political system is run by a bunch of public school boys that are only in the game to line the pockets of their mates at our expense.