The end of QE remains unplanned - why?

There is an interesting article by Douglas Carswell on Unherd today.


In it he shows both his grasp of the situation and also the lack of any nous to deal with it.


Correctly, he identifies QE as being one of the main drivers of social ill over the past decade. The rich indeed have got richer through no effort other than pure financial alchemy - assets have gone up in price, if you owned assets, then yippee!


Meanwhile debt has been too cheap, now everyone has debt and even the Government is overly keen on saddling people such as students with debt. The Government has both too much deficit and debt - as do most around Europe.


That this is the fault of the Central Bankers is undeniable - conservative types, as you would want, they have done very little for the past 5 years. Last year in the UK they even decreased rates further.


Worse, there is still no plan for unwinding QE, in an off-guard moment last year one leave to the Bank was busily promoting the opposite - suggesting QE was here forever and interest rates could never be raised back to what were considered normal levels.


I find this very hard to buy, it is the classic "this time, its different" mantra that never works out as its proponents say. What happened was that the economies of the West, loaded by too much private sector debt due to the banking bubble, collapsed and to avoid destruction, the Government took on the debt.


Thanks to that, the Government's are prepared to wait a generation or two for the debt to inflate away (this time via currency depreciation, hence the currency depreciation war of the past 7 years). So there is limited immediate pain. I can see why civil service mandarins and central bankers think this is the best way forward, which for them it is. It sees continuity of service for themselves and their class.


Where Carswell goes well off target is endorsing the mad Labour plans for more debt and financial alchemy to double-down on the mistakes of the past! How even more QE is supposed to fix the current problems is beyond me - asset prices (this time of chosen assets, remember Gordon Brown and the Gold sale!) would still rise and the side effect maybe some more infrastructure - but the main event would be crippling Japan style debt.


The only sensible course is to wean us off QE. This will be painful, reversing QE will reduce Government revenue, which means less spending, because today it is getting on for £10 billion in Government income - all from money printed by its own bank and lent to itself.


We can't raise rates too high, as that affects those most hurt by the debt bubble, those without assets. We will likely need higher taxes on capital gains, including houses, to make up the hole in Government finances.


I don't like ever advocating tax rises, so I won't - the balance to increasing capital gains taxes must be reducing income taxes further - perhaps not quite in balance as their is QE to be unwound and a deficit to clear. But a re-basing of the tax system based on the current economic environment is long-overdue. Really, the most surprising thing is that is a necessity of the change in Central Bank monetary policy and you would think they might raise is sometime, that they don't is a bug of the system where monetary and fiscal oversight are separated.

What will happen to all those shiny new buildings?

All those new hospitals and schools buildings coming on line between now and -20??. All the PFI builds that have to be paid for out of a dwindling budget.

Will they be staffed? Will they be opened at all? If the budgets are cut isn't it easier and cheaper to just not open a building than to lay off existing staff elsewhere. Just a thought as I walked past my new local hospital, scheduled to open in 2011.

Or maybe, as in the Yes Minister episode The compassionate society, the hospital will open and is fully staffed. It meets all of the governments targets. Lowest infection rates, fewest complaints, shortest waiting lists, cleanest wards, lowest absenteeism. Its just that there are no patients. The place is left with scaffolding up and cement mixers on the lawn to disguise that it is open.

I met a traveller from an antique land
Who said: “Two vast and trunkless legs of stone
Stand in the desert.

Near them on the sand,
Half sunk, a shattered visage lies, whose frown
And wrinkled lip and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear:

`My name is Gordymandias, King of Kings:
Look on my works, ye mighty, and despair!’

Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away”.

Cash for Gold

Remember those reports of why Cash for Gold companies are shockingly bad value?
In some cases just 6% of the product value was offered. In others a rejection of the companies first offer led to a big increase on their second offer.
But there was one firm in particular that has been preying on misguided and gullible individuals to part with their jewelery and then receiving very, very little in return.

EU shoots wrong target

As ever with the financial crisis, the Authorities in Europe are taking aim at the wrong targets. Today we can see the Private Equity and Hedge Fund industry being targeted for bonus payments like the banks.

Yet, the history of the crisis shows the Hedge Funds had very little to do with anything, the short selling crisis was made up; bank share prices fell more after the short selling ban. When it ended the share prices of banks rose!

However, a victim needs to be found, and the Eu authorities don't want the people to know that many of the problems are in fact regulatory failures; exploited by the Hedge Funds.

Also it so happens that this industry is in London, outside the Euro and with an incoming Euro-sceptic Government. A nice target to hit. The Hedgies are going to Switzerland; personally I can see benefits for the UK to copy the Swiss model of co-operation with the EU rather than membership if we are simply going to be targeted as evil Anglo-Saxons at every opportunity.

Privatise the profits: LLoyds Banking Group

Lloyds Banking Group has had a fairly good couple of weeks on the stock market,. The market has gone up 10% in the last two week, Lloyds has gone up 25% in the same time. Why could this be?

Well for one, the bank has been hinting at making a profit in the second half. As one would expect though, there is more to this than meets the eye, as actually profits are being 'brought forward' (what a great new Labour spin term that is!) to help Lloyds now. Later come the losses when hopefully the economy has recovered.

Secondly, the end of the process of putting loans into the Government's Insurance Scheme is nigh. Here Lloyds have made a huge winning bet. All their worst loans are going into this scheme - so most of HBOS in fact. As taxpayer's we are responsible for 90% of the losses. So the most Lloyds could ever lose is £25 billion, but it is likely to be far short of this, even in worst case models.

Thanks to these two events, even the bearish banking broking community is upgrading Lloyds to a buy at 80p odd. taxpayer's are going to lose their shirts and shareholders are going to to well at his rate; therefore if you want to help mitigate your future tax rises, buy some share in Lloyds or RBS!

The losses are being socialised; go private.

National Express Disaster

The too-clever-by-half CEO is gone and now the very existence of National Express is in doubt. Lord Adonis has said this morning that the East Coast mainline franchise is to be nationalised and NE's other franchises are in jeopardy due to contract terms.

A fine mess, here comes the Government to clear up a poor private sector bid. The Government will say they have done nothing wrong; are they right?

I don't think so, by setting up auctions that allow prices to be bid up to high they set themselves up for a fall. Down the line companies won't be able to make the payments so they will fail and the contracts will be handed back.

Think of it like a bank offering you too much on a mortgage, when you fall into negative equity it is the Bank that loses more than yourself. The Government are too obsessed by getting the money in. Not enough due diligence was done on the winning bid, end of story.

We have seen this many times before with the Government, perhaps the 3G mobile auctions being the best example. The UK went from having some huge international dominant operators in O2, Orange and Vodafone to having the first two swallowed up by weak competition as they struggled with the debts they had saddled themselves.

Of course, the companies make the bids and so should be held to account, this is not all the fault of Government. But in desperation for money, both private and public sector are wasting it on a colossal scale instead. More thought by Government could stop this, as could more thought by the private sector.