Wednesday 13 February 2013

Monetary defeat for the UK?

When the Bank of England is in such a terrible corner, mainly of its own making I may add, it is hard to know whether to laugh or cry.

For today, with ts Governor actively wringing his hands, the Bank announced that inflation will likely stay at over 3% for a year or two more. Not much we can do, says the Bank, the Pound is sinking and we can't raise rates as the economy won't be able to hack it.

What a disastrous situation to have ended in. Anyone who thinks we are nearly through the recession and the pain needs their head examining on this evidence. We are so anaemic in terms of GDP growth that even adding in nearly a year's worth of free GDP money in the form of QE has not revived much, if anything and in addition it has weakened the currency which is now sinking against the might QE powered Dollar and wasted Euro.

Any move to raise interest rates is considered insane, locking in further the zombie economy that we have now (and baking in the next financial scandal, when people got nuts as rates rise and they lose their houses in 2015-2017, this will be all the fault of rapacious bankers).

Is there another answer, it is hard to see now given the terrible position already created. Surely rates do start to need to rise a bit though, even if only 0.5% over the course of this year. Higher rates will mean better returns for investment which has been pathetic over the past few years. It will also spook bond buyers and push allocation of finance into more productive areas of the economy.

No chance of this though I fear, as the Bank accepts its defeat. The only hope is that Bank is always wrong, so we are in fact probably set for a nice period of deflation!

17 comments:

Steven_L said...

They'll keep lowering rates through madcap schemes like funding for lending and showering helicopter money on folk via interest rate swap 'mis selling' compensation and the like.

They'll need to bribe a lot of people to vote for them between now and May 2015 too. So they'll probably find all manner sly ways to print lots of money and give it to floating voters.

Travel agent said...

Cheer up mate. No doubt that Canadian whizz and his Goldilockssacks masters will come up with a solution to all your worries.

Better get your ticket to Australia booked early though as there might be a rush...

Sackerson said...

Surely it must be debt forgiveness/default. Raising interest rates will merely accelerate government accumulation of debt and/or further cuts which lead to further economic drag as people spend even less. We're paying in real blood and sweat for fictitious money.

Diogenes Sinope said...

What about the bigger picture?

http://www.youtube.com/watch?v=w8xj0MB_4RY&list=PL42AF1404E9568C37&index=4

It would seem we are now (?) in a time of overlapping bubbles where to solve the effects on one, we create another.

Central Banks can't do anything since they are part of the problem. Governments don't want to do anything about it as they get their share. Though stupidly they took the hit on the last one.

Tulips from the South Sea anyone?

Ryan said...

Um, a decline in the exchange rate is usually considered a good thing in a recession.

Also, higher rates of inflation and low savings rates are usually considered a good thing in a recession as it encourages immediate consumption rather tham hoarding cash.

The QE program was clearly aimed at buying government bonds for which there was no real market. Hence the government is offloading its debt at 2% here compared to 5% in Spain, despite having an economy in a worse state. It now owns 1/3rd of government debt with the possibility of buygin more - this debt could simply be written off. The BofE has really pulled of a bit of a blinder on this one.

Fact is that the economy is in a state almost as bad as Greece and certainly worse than Spain but we don't have unemployment rising to 30%. In fact unemployment is declining despite continued high immigration. No real rioting or big strikes. Banks slowly recovering. Looks like the worst is over for the UK. For the EZ it is noticeable that yields have been slowly rising again.

Give me a real figure that you can point to and say "see, we're all getting screwed!"


Clive said...

Hmmm... I'm wondering here if we're not confusing bugs with features. Watching King, the (as you rightly say) handwringing seemed just a little too hackneyed, the words a little too formulaic for me to take at face value.

As per John Maudlin, I'm getting more convinced that the unofficial policy is to "gently inflate your way out of a problem". Inflation reduces the true value of your outstanding debt -- certainly for individuals. Governments are a different matter of course, a lot of obligations are index-linked. But they can print their way out of that one or just defer by another mechanism.

But for you and I and the rest of Joe Public (which is in my opinion where the real problem of debt overhang is) inflation is Good News -- so long as we're all not collectively stupid enough to go leveraging up again. The main piece of this puzzle which is still missing is the ability of labour (little labour, as in working people, not the Labour Party, heaven forbid) to extract a bigger piece of the pie through higher wages which at least match and preferably exceed the rate of inflation. So far, labour has been incipient and still seems to be happy to acquiesce to being given a good rodgering by capital. That is a psychological and social phenomena rather than an economic one. My hunch is that the Middle Class (which needs to exert bargaining power) has been too averse to acting like Red Robbo at British Leyland and getting a bit arsey with the management. "Too posh to stand around a dustbin with a fire made out of newspapers in it looking a bit, well, common" is my slightly unwieldy description. Certainly how I feel about it anyway, do I want to look like I'm a care worker holding a placard in frond of the council offices ? No, thank you very much. The neighbours might think I'm really desperate for the money.

However, once pride gives way and enough of us really are desperate for the money, well, the floodgates could open. Four or five years of 4%+ CPI and 5+% wage increases will make today's debt overhang seem, erm, not quite so much of a hangover.

As with any such policy, no-one in government or the BoE can actually come right out and say this. King looked like he was giving the best hints he can given the constraints he lives under.

CityUnslicker said...

Ryan, the worst is over, depsite absolutely zero progress on fiscal consolidation despite quite big efforts. Despite high inflation reducing real wages, which is reducing demand and thus keeping the economy shrinking.

As for writing off the QE debt - Sure if you want the pound to be 4 to the dollar then this is an option. Back in reality, it is merely a rather large box we have driven into,

I am really wondering what they questions were when we have come up with these as the answers.

Blue Eyes said...

CU you post the same post every few months and I ask the same question. How does raising rates get the economy going? Low rates and higher inflation expectations drive people out of cash and into either consumption or investment in the hope of getting a better return on their cash. How does raising rates encourage people to invest rather than sit on their cash? Or is having money sitting around doing nothing supposed to be good for activity and growth?

I agree with Ryan, the government has managed to get this far into the crisis without a spike in unemployment or a complete housing crash. That HAS to be seen as a positive. Yes we've also ended up with a zombie economy. But the alternative is far, far worse (see Spain, Ireland).

If the Bank and Chancellor could press a button to get the economy moving they would not hesitate.

CityUnslicker said...

We do indeed disagree BE. I see a big bubble being stored up with super low rates and a zombie economy. I am not suggesting rates at 6%, for it would crash the economy. But right now, in the markets, there is no certainty to the value of anything due to the monetary distortions that are in place. This is VERY BAD NEWS in my book but ignored by the Government and macro-economists who just look at unemployment and think happy thoughts.

The longer this goes on the worse the distortions and the worse the mess will be later on. 2006/7 bubble was caused by the greenspan put, we have the smae thing in place now. You may want a 10 year zombie recession, but we may get instead a double down dip.

Also, whilst we are at it, explain how not having a house price crash is 'good' for the economy other than for those of us lucky enough to be in the property owning class.

Jan said...

Personally I would love a little bit of deflation...

Blue Eyes said...

I agree the housing market is stuffed. The only property owners who gain from house-price inflation are those who will never need to upsize. You think I enjoy looking out of the window of my slum flat at houses that are increasing in price literally infinitely faster than my income??

But then again leaving millions in negative equity also doesn't really help anyone: we can't have the same "foreclosure" based slump that the US benefited from.

So while it would be ideal to have house prices fall in real terms I doubt many would want that to happen overnight.

Unless you are proposing some kind of debt jubilee at the same time as the crash? Or alternatively we could allow these things to happen over time. Maybe be allowing a bit of inflation to soften the blow of falling real-terms house prices (outside London), and financing the government by the printing press so that 50% of economic activity doesn't have to stop in its tracks.

Rebalancing the economy can't be done overnight. Or maybe it can and the government and all the economists in the world just haven't worked out how?

Ryan said...

"Also, whilst we are at it, explain how not having a house price crash is 'good' for the economy other than for those of us lucky enough to be in the property owning class."

The fact that we aren't having a house price crash is little to do with the economic situation. Fact is people are still struggling to get mortgages. So why are houses selling at ever increasing prices?
Largely because local councils are being forced to buy them to house immigrants that have realised if they just turn up and have a baby then the local council will be forced to not only house them but also subsidise the rent at the expense of UK taxpayers. It is a sick joke started by Labour but which the Tories seem unwilling to do anything about. Consequently I am effectively paying to have the rest of the world trash my home nation. It's a bit like paying people to come and shit on my living room carpet.

Ryan said...

"I see a big bubble being stored up with super low rates"

A big bubble of what exactly? Measures of broad money M4 from both the Treasury and the BofE shows M4 money supply decling. This means that as a nation we are paying back our debt.

Now since we are paying back our debt, and since much of our debt is absorbed in non-productive activities such as property ownership, our GDP figures can decline suggesting a shrinking economy whilst employment actually increases.

GDP is really only a measure of money supply, since it is calculated by how much a government spends added to how much money the private sector earns. It really isn't a good measure of how well an economy is performing and wasn't used widely until after the Thatcher years. Until then the balance of payments and the unemployment figures were used to measure how well the economy was doing. It is time we went back to those days, or at least found a more reliable economic indicator than GDP (by the way, GDP is a complete disaster when used to measure the performance of outsourcing economies like China and Ireland, because it assumes that [exports-imports] will leave you with the profit remaining in the host nation, which of course is no longer the case in a globalised economy).

Blue Eyes said...

Ryan one of the bonkers things that seems to be happening is that instead of selling gilts to the Bank, the banks are now buying them because there is a bubble. So as soon as the Bank stops printing money to buy gilts there will be another crash. Presumably whatever the new version of collateralised mortgages are also "difficult to value properly" because the Bank is pumping so much cash into that market too.

The financial markets have disconnected with "real" economy investments because the "real" money supply has collapsed to be replaced by this weird funny money that only gets spent on certain things.

Ryan said...

"Ryan one of the bonkers things that seems to be happening is that instead of selling gilts to the Bank, the banks are now buying them because there is a bubble."

No, the banks are buying them because they have been told they must have more funds in reserve. Bonds are considered as good as cash (rightly or wrongly) and therefore banks can hold them as reserves instead of cash - which is better than holding cash because bonds are interest bearing of course, and better still if they are UK gilts since then there are no ForEx losses to worry about. (One might say that the pressure to hold greater reserves and for those reserves to be in bonds was conveniently arranged by the BofE to create an artificial market in UK bonds, so in that sense you might consider that the move is anti-market and could in theory lead to a bubble, but since the BofE can also print cash to buy back the bonds at will it is difficult to see how it could be a real problem. Unless, of course, Labour were to get back into power, because the ability to print money to paper over existing debt cracks and then go on to use it to fund government spending might be too tempting for Milliband and would lead to the kind of hyper-inflation we had in the 70s).

Blue Eyes said...

Maybe CU is right and I am talking rubbish!

Agence communication said...

"" What a disastrous situation to have ended in. Anyone who thinks we are nearly through the recession and the pain needs their head examining on this evidence. We are so anaemic in terms of GDP growth that even adding in nearly a year's worth of free GDP money in the form of QE has not revived much, if anything and in addition it has weakened the currency which is now sinking against the might QE powered Dollar and wasted Euro.

Any move to raise interest rates is considered insane, locking in further the zombie economy that we have now (and baking in the next financial scandal, when people got nuts as rates rise and they lose their houses in 2015-2017, this will be all the fault of rapacious bankers). ""