Brexit Aftermath: Printing Money, or Taxes?

I notice that recently (just before the tactical nuke went off) a bright spark amongst the Graun writers opined that there was not much for it than for Labour to "pivot to Revoke" (everyone has to 'pivot' these days - so much more delicate than U-turning or just plain changing your mind: and a lot more dignified than flip-flopping.)  This is in keeping with Polly Toynbee declaring 'civil war', as she has done in her bid to beat Owen Jones in the hyper-ventilation stakes. 

So, as the armies head off doggedly to Philippi, we are left to wonder about post-Brexit strategy - notwithstanding our musings earlier in the week as to whether Cummings/Johnson even has one, beyond a GE at any rate.

Aside from dealing with short term issues and civil commotion of various sorts (not so easily brushed aside in reality, I well realise) the question will surely arise: to print money, or to tax?  Nations have been perennially been confronted with this issue in times of War (Polly's coinage, not mine) and its aftermath.  It seems to me that (a) there is a very strong anti-tax camp within the Tories (rather like 18th & 19th century America, in fact - they always printed money); (b) Keynsian spending is getting a new lease of life in several quarters; and (c) even McDonnell hasn't sounded too bullish on tax, and the Corbyn-Left are toying with something called Modern Monetary Theory which seems to absolve them of the need to do anything so atavistic as smashing the rich with a supertax.

I freely admit to knowing nothing about macro-economc theory (even as I reckon to know quite a bit about practical micro-economics).  But I well recall how our good host Mr CU predicted Quantitative Easing last time around (and, for good measure, the £/$ collapse from 2.10).  

What do the highly knowledgeable, or even the more modest, C@W readers reckon (i) Boris / Javid; and (ii) McDonnell have up their sleeves for us, in the event they have their hands on the levers of power next year?

ND

Open Thread: Deflation, Am I Bovvered?

And so it has come to pass: nearly eight years after the financial crisis started, and despite years of QE, the UK is suffering deflation.

Or are we really suffering at all?  With the election safely behind them, will Osborne + Carney let rip?  Is this the strategy for 2020?  Or will the oil price take care of any slack in the economy?

Go for it, C@W people!

ND

One week left for the Euro?

It was interesting to see the currency traders panic last week when the Swiss National Bank suddenly decided to end its policy of shadowing the Euro for the Swiss Franc (CHF). A net +30% revaluation was not a trade to be on the wrong side of - which of course the Swiss National Bank was.

Noticeable for me too was the supposed surprise of the move and the lack of understanding of why the Bank had given up the peg so suddenly. There was some thoughts of it getting to expensive to maintain.

But the reality is twofold. There is imminent Quantitative Easing for Euroland being loaded up. €550 billion euro's of it in theory. This will push down the value of the Euro (so beware a UK Sterling appreciation event on a smaller, but similar path to the CHF). Whay hang around with a a peg when your neighbours are about to ruin you. The SNB made the sane choice.

However, the second issue is the more important one, albeit related. Syriza are very likely to be in Power in Greece in one weeks time from now. It is even possible that they will have an outright majority.

Their, leader Alex Tsiparas, has declared that his policy is to negotiate a huge debt write down for Greece and to end the Troika imposed austerity that has so ruined the Country. Either Greece or Germany will win, even a compromise will be a victory for Greece really.

Syriza are maintaining that they do no want Greece to leave the Eurozone, however it is highly likely that Germany will try to force this through. otherwise the principles of sound money, if there is such a thing, are for the birds as far as the Euro is concerned.

To me, it is clear that the QE that is being revved up is being put in place to help manage the euro crisis that will out in a better manner than was possible in 2011. Back then the whole continent was plunged into a terrible crisis which could have wrecked many of its economies. This time it seems better preparations are being put in place. It will still be a roller-coaster rise no doubt.

As for poor Greece, there is no good end to the story. Tsiparas will be deeply unpopular if he leads Greece back to the drachma as this will entail the savings of the Country being wiped out entirely. Neither will be be popular if he negotiates only a partial deal with Europe that still leaves Greece with an untenable debt burden. So, as with most radicals, he will be forced to become centrist or mad. My bet would be on centrist which will come as a shock to many of his followers.

Forever Blowing Bubbles

Who said Quantitative Easing would help to improve the real economy then?

A cursory glance at the main three assets markets for this year in the UK:

Gilts are still at all time highs, see below and ETF Gilt tracker which is a great procy for the combined market. Even this year things re steady at near all time highs. Not surprising with interest rates still at historic lows after 4 years.

 

Then we have the UK FTSE 100 - having a very strong year thus far (now actually I think this is more grounded in reality, its still below highs seen 14 years ago and is really hovering along its long term average)

And finally, House Prices, this chart from Zero Hedge helpfully pointing out a still historic 30% over-valuation...

So there we are 3 huge bubbles in the main asset classes and we have not even got into the Debt side yet. All the while the real economy slowly gathers pace for very modest recovery.

What could possibly go wrong with this picture? My main concern is that we tend to have recessions every 8-10 years. The last one started in 2008, so we are now on the climb to the top of the economic cycle. In 2015 we will likely reach the peak, juiced on stimulus - will this peak even be as high as 2007/8 in terms of overall GDP - probably not.

All the while, we are stealing from the future to pay for today's stimulus.

Stop QE and raise UK interest rates

QE is not working, we have tried this now for several years, since 2010. Every time the UK tries it the effect gets less and less - the law of diminishing returns.

Worse the more we continue the more likely people will realise the fallacy of pretend money printed to help the Government keep the deficit rising. There is no plan for paying back QE. I have asked several of the leading economists in the City in recent days and all are baffled by the answer. Some say it will be run off, others that it will be monetised. Not one of them seriously believes the bank will put it back to into the market - demand would crash and rates spike.

So the more we do, the more difficulty we are getting into. Worse now, is that the effect is so weak, yes the stock market is stronger and the banks are fully zombified without breaking. But the economy is flat. No new companies are coming in to take out the heavily indebted and so spark a wave of consolidation. The banks roll over loans they know cannot be repaid in nominal terms.

If we raised rates, the situation would change, savers would get a return, as would investors. More normal market disciplines would return - maybe even the banks would be forced to write off more loans and de-zombify the economy.

The pain would be worth the gain, of course, as it would stall house price inflation and favour exports over imports, no Government is going to want to do this. But surely this is the sensible option, going back to normality and away from fantasy? instead we have prediciotns of 3 more years of ultra-low interest rates; and so 3 more years at least of grindin nothingness for the UK economy. My only hope is the notes of the Bank of England meetings show that at least a new way is being discussed, even if only by a minority.

Oil Price Quandry

As much as with my long, high risk, equity positions I am keen for global markets to continue their advances, there is the odd risk factor at play. Economically, the only game in town is oil price. The price of oil has accurately predicted every recession of the post war, even in 2008 there was the massive spike up to $147 preceeding the Great Crash.

The driver of oil price rises (and falls after a sharp fall yesterday remains unexplained) is more of a mystery. In a time fo falling demand across the world, in US, China and Europe, one would not expect a run up in prices. Of course, this is driven by political and macro factors too. Israel faces a choice of striking Iran soon or learning to live with a nuclear armed terror state. A strike on Iran and the price of oil will shoot north of $200 a barrell for sure on a gigantic spike.

Plus there is huge volumes of speculative trading, the more monetary stimulus is pumped into the world, the higher the price of commodities will go. No doubt oil is being affected by this. However the lasting condundrum of this point is that more QE is really becoming self-defeating. As prices rise and inflation is created by the devaulation of fiat currencies, then the consumers of the world have less money to spend, feel poorer and so reduce their demand further - financial repression sets in, even with liquidity at high levels.

Many people suggest watching the gold price to see the true effects of QE; I demur, the price of oil, the driver of all human activity on a global scale, is the key price to monitor.

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.

What did QE do?

It seems that the support for asset prices thesis was about right, that is quite a drop in the FTSE. The AIM and FTSE 205 is even worse and these track more closely the UK economy:

AIM taking it hard today,

FTSE250 above-  a reflection on the real UK economy this year...

End QE, but not because of Inflation

Surveying the blogs today there are some sound and not so sound commentys. Guido is keen that we end Quantitative Easing today. Rightly, he points out that is is impossible to tell if it has really done anything. I can see a recovery in the stock market and a Government able to spend as a result, so it has done something. Whether those two things are worth £200 billion is another story.

Here I am torn becuase personally I saw QE was going to put the market on rocket fuel and invested accordingly. Taking a wider view, removing £200 billion of future spend to help the election today is pure theft and a con on the public who do not understand the trick. That the Tories do not explain what is being done is shameful.

Without QE demand may have fallen further, but with a floating currency the UK could have gotten through with a lower value Pound. With the end of QE it seems as if the pound will fall further in any event; Perhaps it was all for nothing?

Finally, John Redwood, the most sound Tory on economic policy, agrees with Guido that the threat now is inflation. I don't see it myself, inflation is a backwards looking indicator not a forward one. There is too much unemployment for wages to be pushed up, Government spending is going to fall, VAT tax rises are netural because they put up the price of goods but they reduce demand, income tax rises reduce demand. The one factor pushing inflation is the fall of the Pound - unless that is catastrophic we are not going to have inflation over 3% or 4% for years. We won't have the GDP growth either, sadly, instead it looks more like a Jpan style form of low level stagflation as compared to the 1970's. The effect is the same though unfortunately.

End QE, but not becuase of inflation, but becuase there is little evidence it has revived the private sector or achieved much apart formget us further into debt and call our Soverieng rating into question - it has only succeeded in propping up our discredited Government.

UK money printing not working

This is the latest analysis from the Bank of England, the money supply M4 measure fell 0.7% in October, month on month. This means that there is less money in the economy than before.

As such it does not bode very well for future growth, whatever the politicians may be saying.

Also it shows that either quantitative easing is not working at all or not working yet. Either way that makes it a dangerous policy as it is potenitally increasing our debts for no reason or is storing up for a huge inflationary boom when it kicks in sometime next year (see my post of last week on predicted interest rates, this is what the banks are thinking).

The solution from the Bank of England though may well be to keep up the quantitative easing binge. in fact as I have said repeatedly I will not be surprised to see the amount of money printed eqaul the UK Government spending deficit for 2009/10 which could come in as high as £225 billion.

At the rate we are going QE is never going to stop, which was one of my underlying fears when it started even thoughI have been supported of limited QE to stop and economic collapse.

On a happier note, the reason the money supply is falling is that people are paying back their debts, total mortgage and unsecured lending is falling. In the long-term a less debt-fuelled economy is going to be a good thing, it is just going to be a very painful journey to get there.

Quatitiatve Easing: Alchemy at work

If house prices are stabilising, this is one of the signs that low interest rates and quantitative easing are working. Now the question becomes...when to stop? How to prevent hyper-inflation and not a double dip bust?

This is no mean feat and and one that will require much thought and swift policy. Sadly, we have a regulatory mess and a fag-end Government, so I don't give us much chance. The alchemy of money for nothing to boost a housing bubble is a nasty brew.

How long before a UK gilts strike?

Yesterday's failed auction caused rumblings in the City. Effectively, the City trading desks want to buy short-term guilts off the government and sell them back to the bank of England at a profit.

In this way, the taxpayer is transferring money to the Banks for re-capitalisation. Easy, risk free profit for the City Traders.

QE (Quantitative Easing) was not meant to do this, as longer-term buyers were supposed to be involved, but it is the law of unintended consequences. When the Government tried an issue of long-term debt though, there was a strike, whereas the short-term debt auction today, which has a nice guaranteed bonus on it from HMT, goes without a hitch.

The long-term is an issue though, QE is going to cause inflation and long-term bonds at under 5% return with no inflation guarantee does not look like a great investment, hence the lack of buyers. Do you think inflation will stay so low for the next 40 years?

If the Bank of England ends QE early, then we will see if there is a short-term strike too. To fob off yesterday as a blip is incorrect, it is still a big warning. Hence Mervyn King sounding off earlier this week.

The Government is going to have funding issues big time if it follows a route of spending more money without any cuts in other expenditure.

Bonus points is you can associtate the picture in the comments.

Gold Rockets on back of US money printing

Typical , just as I was waiting to pounce on a new 'in' to Gold at around $880 an ounce, what happens...this!

The US is to copy UK Quantitative easing, although not on the same scale (would have to be about $1 trillion of bonds to reflect the economic and currency difference of our £75 billion).

This is what Gold bugs have been waiting for and if it all goes wrong is the slip road to US default on its debts.

Looks like I missed my window, Gold was headed down to $880, now up over $930, (nope $942 now) in the space of a few minutes.

Printing our money

A short film about some of the risks of increasing the money supply

http://www.youtube.com/watch?v=59ib5npKTBk

Radical pound devaluation strategy begins

Here we go then. I postulated some time ago, before all the talk started I may add, that there was a window for printing money in a real deflationary trap. The basic idea being, that with money being destroyed by the collapse in asset values so quickly, then the replacement of it into the system will not cause immediate hyperinflation.

However, the markets are not going to take this lightly and the Pound will sink further. This is now being actively encouraged by the Government. I cannot remember when Government last public wanted a lower currency ( I don't think the 1992 ERM crisis can be referred to here, as it finished the Tories for a generation, I am sure they did not want that). It is perhaps a sign of the times that we are to be congratulated for being amongst the first to join the race to the bottom.

However, the window the Bank of England have is actually very small. Despite all the assurances, CPI inflation is not negative and may only be so for a quarter or so this year. The UK is not Japan and the weakened Pound will ignite inflation.

The key here is that hyperinflation does not happen over many months, it happens very, very quickly. The Government and Bank of England are courageous try the 'Quantitative Easing' experiment for now, but I would suggest one very small burst at best is enough to see if it works or not. Further efforts will kill the patient due to political interference.

Sound Pound for the weekend

The pound rallied strongly after yesterday's rate cut. This is the opposite of what normally happens, as lower rates mean that money is transferred out of a currency.

However the reason behind this is that the market assumed the bank of England would say more about quantitative easing - i.e. printing money. The Bank shied away from this, pushing the likelihood of this out by a few months.

The markets like this, printing money is a move of a very bankrupt country - see Zimbabwe, USA etc. Not the sort of thing the Pound should be associated with.

On the downside, we have deflation now, so if we were ever going to print money, now is the time. if we don't ever do it, well and good. If 'QE' happens in 6 months, when the worst of the deleveraging is over, then we will get 1970's style stagflation.

Don't be led by all the talking heads on TV and in the newspapers. Vince Cable on Newsnight was particularly bad last night, he is only feted because Osborne and Darling refuse to speak on Newsnight. QE is a bad idea but if taken is medicine for the worst of the fever, which is now. Not in a few months time....

Printing Money to be hidden

Guido has written this week about the wheel barrow based monetary policy. We wrote here a while ago about the loss of control over monetary policy by the Bank of England and also noted the change in the Banking Bill which will provide a get out.3

The Telegraph reports this today, hopefully to wider audience. Despite my kite flying of a couple of months ago I am utterly against quantitative easing. The only reason the Yanks can get away with it is that they have the Dollar, the world's reserve currency. We don't, we have the sickly British Krona.

This will collapse as capital flies the UK when we begin printing money. The Government will then get its guilt's strike that it is angling for with its insane borrowing policies to escape the borrowing crisis.

Personally, I could do well from high inflation, hugely in debt and with no cash savings, I would find a way out. We will discuss on the blog as time gets nearer how we can all avoid being wiped out; but many won't escape and they will be the oldest and poorest in society.

This will be the legacy of New Labour.