Here’s how I remember it all.
I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970′s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70′s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70′s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70′s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.

Thatcher?
It was the blind leading the blind then and it’s the same now.
And that’s how I remember it/her.
And i care a whole lot more about what happens next than about what happened then.

:(

Stupid taken to new heights.

Retirement is about no longer producing real goods and services and instead living off of the real output of others, incuding China’s exports to you.

The only way this could make any sense is if China somehow was going to force the UK to net export at some time in the future, sort of like war reparations.

Not that the UK might not lose a war to China and be forced to export, but if history is any guide, China and the rest will still be pressing on with net export strategies, like Japan has done for the last 65 years and going strong.

And, of course, keeping millions who want to work from working (unemployment) is entirely counterproductive with regards to real output as well.

Brits May Have to Work Until 75, Thanks to China

By Katie Holliday

Feb 27 (CNBC) — A colossal savings glut in China, the world’s second largest economy, means British workers in their twenties will only be able to retire at 75, a report by the Center for Economic and Business Research (Cebr) showed on Thursday.

According to the report, excessive savings in emerging economies, especially in China, and the country’s growing share of the global economy will keep yields and interest rates down for many years. This will leave pension funds underfunded keeping annuity rates low.

“To retire at close to the standard of living that they (U.K. workers) have previously enjoyed, they will have to extend their working life and cut their number of years of retirement by working till they are much older than the present retirement age,” said Douglas McWilliams, executive chairman of economics consultancy Cebr.

The state pension age in the U.K. is 65 for men and 60 for women currently, but it is set to steadily rise to 66 for both by 2020, as set by the government’s Pensions Bill in October 2012.

McWilliams pinpointed China’s savings glut as a key driver behind this trend.

China’s population holds a staggering 25 percent of the world’s savings, the report found, rising from $153 billion in 1990 to a likely $4.5 trillion this year – a figure Cebr expects to grow further.

Austerity

Weak state finances following austerity measures will also make it difficult for British workers to retire before the age of 75, the report said.

The U.K. economy was stripped of its Triple-A rating by credit ratings agency Moody’s this week on concerns over its subdued growth prospects and rising debt burden.

The British government is currently undergoing vigorous austerity, but the cuts have come at the expense of growth. The economy emerged from a nine-month recession in the third quarter of last year with 0.9 percent growth, however , it then contracted more than expected by 0.3 percent in the final quarter of last year.

According to Cebr, the long-term cost of the austerity measures will outweigh the cost of bailing out banks during the financial crisis.

It estimates that the cost of bailing out the banks will have cost the British taxpayer about 120 billion pounds ($181 billion) eventually, while the problems of excess deficits built up since 2000 will have cost the economy 1.5 trillion pounds by 2025.

“It will be well in the late 2020s at the earliest before austerity policies can be eased up,” said McWilliams.

Interest rates in the U.K. meanwhile are likely to stay low for at least 20 years, the report from Cebr said.

“Even the [U.K.] Pensions Regulator admits that most pension schemes are underfunded and many will never be able to be fully funded while low yields persist without bankrupting their guarantors,” McWilliams said.

“And for those on direct contribution pension schemes, the annuity yields that they are able to buy are unlikely to rise much from today’s very depressed levels. Workers could save more. But they are unlikely to do so and if they did so around the world, they would only add to the glut of savings that is a fundamental cause of the problem,’ he added.

Direct contribution pension schemes are retirement plans where an employer matches its employee’s contribution of his or her earnings each year.

Time to Learn Mandarin?

The tendency towards saving in China means the Chinese will eventually own a quarter of the world’s assets, as they invest heavily abroad to use up their savings, said Cebr.

“So far the Chinese have invested heavily in areas like Africa and South America which the West has neglected as well as in U.S. Treasury bonds. But they will have to turn increasingly to other assets like companies and properties in the West including U.K. companies,” he said.

“Better start learning Mandarin – your next boss may be Chinese,” said McWilliams.

If they just wouldn’t add to the austerity measures the deficit is plenty high enough for a reasonable recovery, albeit from unconscionably low levels caused by their fiscal policies.

UK Headlines:

Bank of England Leaves Interest Rate Unchanged at 0.5 Percent
U.K. Fourth-Quarter Construction Increases More Than Estimated
Carney Plays Down Talk of Radical Policy Change
U.K. Jobs Grow Fastest in Almost 2 Years
Cameron Demands EU Budget Cuts as U.K. Tories Grow More Restive
U.K. Manufacturing Rises Most Since July on Machinery Output

U.K. Labour to Strip Benefits From Unemployed If Job Refused

By Kitty Donaldson

January 4 (Bloomberg) — The U.K.’s opposition Labour Party called for a compulsory jobs guarantee for the long-term unemployed, making state welfare payments dependent on paid employment.

The party’s treasury spokesman, Ed Balls, said the guarantee would initially be for adults who are out of work for 24 months or more, though Labour would seek to reduce this to 18 or 12 months over time. The party said there are currently 129,400 adults over the age of 25 who have been out of work for two years or more, a rise of 88 percent in a year.

To pay for the jobs guarantee, which Balls estimates would cost 1 billion pounds ($1.6 billion), he would restrict tax relief on pension contributions for people earning more than 150,000 pounds a year.

“A One Nation approach to welfare reform means government has a responsibility to help people into work and support those who cannot, but those who can work must be required to take up jobs or lose benefits as a result — no ifs or buts,” Balls wrote in an article for the Politics Home website today. “Britain needs real welfare reform that is tough, fair and that works, not divisive, nasty and misleading smears from an out-of- touch and failing government.”

‘Squeezed Middle’

Labour and Prime Minister David Cameron’s Conservatives are battling to attract what the premier calls the “strivers” and opposition leader Ed Miliband the “squeezed middle” of voters whose wages aren’t rising in line with inflation and who are suffering from cuts in public services.

An overhaul of the welfare system is at the heart of the debate, with the Tories seeking to portray themselves as defenders of hard-working families by cutting the welfare bill, and Labour saying it is protecting the most vulnerable in society. Today’s announcement by Balls seeks to show Labour will also be tough on the long-term unemployed.

The Conservative Party said Balls had already pledged in March last year to spend the 1 billion pounds from pension tax relief to increase tax credits for low-paid workers and families with children.

“We are taking firm action to help the long-term unemployed Labour left behind get back into work,” Conservative Party Chairman Grant Shapps said in an e-mailed statement. “Ed Balls is trying to spend the same money twice. That means more borrowing and more debt — exactly how Labour got us into this mess in the first place.”

Helps support the idea that an employed labor buffer stock works a lot better than an unemployed labor buffer stock, much like we’ve been suggesting for the last two decades:

Future Jobs Fund vindicated

By Tanweer Ali

November 27 — Last week the government finally published its impact report on Labour’s Future Jobs Fund. According to the report, two years after starting their jobs with the scheme, participants were 16 per cent less likely to be on benefits than if they had not taken part and 27 per cent more likely to be in unsubsidised employment. The net benefit to society of the scheme was £7,750 per participant, after accounting for a net cost of £3,100 to the Treasury . Not bad for a scheme condemned as a failure by the current government, and certainly better than anything that replaced it.

The Future Jobs Fund was introduced in 2009 to address the problem of long-term youth unemployment. About 100,000 people in the 18-24 age group out of work for a year or more were guaranteed a job for six months. Later the threshold was reduced to six months. An additional 50,000 guaranteed jobs were available for people of all ages in selected unemployment hotspots.

The idea of addressing long-term unemployment through job guarantees is not new. A number of such schemes were created in Depression-era America, putting young people to work in the National Parks, among other places. An economic rationale was provided by the economist Hyman Minsky. Many schemes for the unemployed focus on skills, and making people more employable, but don’t address the lack of demand for labour. Especially in times of recession and economic stagnation, the big problem is that there simply aren’t enough private sector jobs to go around. Minsky’s solution was for the state to act, in his terminology as ‘employer of last resort’, and provide work at the minimum wage (though I’d prefer to see people paid a living wage). This way the state is not competing with the private sector, merely providing a buffer in hard times.

Direct job creation schemes fell out of favour in the 1970s and 1980s, and the focus shifted to other active labour market policies. Poorly designed job creation programmes are beset by a number of serious problems. The FJF was designed after a careful study of the failure of earlier schemes, drawing on best practices from around the world, and ironing out potential faults. The scheme provided real jobs, not workfare, which created real benefits in the community, paid at the national minimum wage, with time off to look for other, unsubsidised jobs. It seems that the current government never understood the idea of transitional jobs. Anyway it was Labour’s idea, so it must have been bad, right?

Job guarantees have big advantages. For building confidence and job-readiness it’s hard to beat – the best way to prepare people for the job market is to give them a job. It is also visibly fair. Rather than leaving people idle, we are deploying our nation’s key resource in carrying out important work, be it caring in the community, working in schools, or preserving the environment. Also, boosting the incomes of people who would otherwise be unemployed constitutes a highly economic effective stimulus, one that, at a relatively low wage level, is unlikely to be inflationary. Finally, such a scheme will be cost-effective. A job guarantee is a more efficient use of money than other, broader stimulus schemes, as it is specifically targeted at a clear objective. The job guarantee is cheap for what it can achieve, far from being unaffordable.

Labour should be proud of the FJF and of its 2010 manifesto pledge to extend it to all adults out of work for two years or more. Now that the FJF has been vindicated, it’s time to reaffirm our commitment to a job guarantee, and make it a central part of a full employment policy. A robust job guarantee, once turned into an enduring institution, may not be a silver bullet for all our problems, but will go some way to addressing the misery and waste of long-term unemployment, in this downturn and in future recessions.

It’s Not the Deficit, Stupid!

By Warren Mosler

Deficit finally large enough for a bit of stability and growth?

U.K. Economy Surges 1% as Britain Exits Double-Dip Recession

By Scott Hamilton and Jennifer Ryan

October 25 (Bloomberg) — Britain exited a double-dip recession in the third quarter with the strongest growth in five years as Olympic ticket sales and a surge in services helped boost the rebound.

Gross domestic product rose 1 percent from the three months through June, the fastest growth since 2007, the Office for National Statistics said in London today. That exceeded the highest estimate in a Bloomberg News survey for growth of 0.8 percent. The median forecast of 33 economists was 0.6 percent. The pound rose after the data were published.

The growth surge reflects a boost from the Olympics and a rebound from the second quarter, when GDP was affected by an extra public holiday. While the data may give some short-term relief to Prime Minister David Cameron’s struggling government, Bank of England Governor Mervyn King said this week that the recovery is “slow and uncertain.” That suggests the figures mask underlying weakness that could warrant further stimulus from the central bank.

“We’re still concerned the U.K. economy is going to be pretty much flat throughout next year,” James Shugg, an economist at Westpac Banking Corp. (WBC) in London, said on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “It all depends how rigidly determined the government is to stick to its deficit reduction plan.”

Ticket Sales

Services, which make up about three quarters of GDP, surged 1.3 percent in the third quarter from the previous three months, the most in five years, the ONS said. Olympic ticket sales are estimated to have added 0.2 percentage points to GDP. Production rose 1.1 percent, the most in more than two years, while manufacturing increased 1 percent. Construction output fell 2.5 percent, a third straight quarterly decline.

The pound extended its gain against the dollar after the report and was trading at $1.6134 as of 10:52 a.m. in London, up 0.6 percent on the day. Bonds declined, pushing the yield on the 10-year government bond up 8 basis points to 1.93 percent.

From a year earlier, GDP was unchanged in the third quarter, the ONS said. That compared with a decline of 0.5 percent forecast by economists in a separate Bloomberg survey.

While today’s data confirm Britain exited its first double- dip recession since 1975, GDP is still 3.1 percent below its peak in the first quarter of 2008. The report also showed that the economy has grown 0.6 percent since the third quarter of 2010, just after Cameron’s coalition government came to power.

Economy ‘Healing’

Cameron urged caution on the GDP data, saying there is “still much to do.” The opposition Labour Party has accused his government of exacerbating the economic slump by sticking to its fiscal squeeze. Ed Balls, Labour’s finance spokesman, said today the economy “remains weak” and “is only just back to the size it was a year ago.”

“There are always one-off figures in all of these announcements but they do show an underlying picture of good and positive growth,” Cameron said. “We’ve got to stick with the program.”

The data today are an initial estimate and the figures are subject to revision when the ONS gets more information. In the second quarter, the decline in GDP was revised up to 0.4 percent from an initially reported 0.7 percent.

Britain is the first of the Group of Seven nations to report GDP data for the third quarter. U.S. growth probably accelerated to a 1.9 percent annual rate after expanding at a 1.3 percent pace the prior quarter, according to a Bloomberg survey before a Commerce Department report tomorrow. It would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.

Deficit Reduction

The U.K. data come two weeks before the Bank of England’s Monetary Policy Committee must decide whether to end its stimulus program or extend it beyond 375 billion pounds ($605 billion). Governor Mervyn King said this week that a “zig-zag” pattern of recovery is likely to persist.

Debenhams Plc (DEB), Britain’s second-largest department-store chain, said today that the U.K. experienced “challenging trading conditions during 2012.” Whitbread Plc (WTB) Chief Executive Officer Andy Harrison said the consumer market is “pretty flat” and generating any growth is “jolly difficult.”

Stripping out one-time distortions, the National Institute of Economic and Social Research said on Oct. 9 that third- quarter growth was closer to between 0.2 percent and 0.3 percent.

Inflation Cools

Still, recent data have shown pressure on consumers easing. Inflation cooled to the slowest in almost three years in September, while retail sales increased more than forecast. Payrolls rose to a record in the quarter through August, pushing the unemployment rate down to 7.9 percent from 8.1 percent.

“At this stage, it is difficult to know whether some of the recent more positive signs will persist,” King said on Oct. 23. “The MPC will think long and hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready.”

Elsewhere in Europe, Sweden’s Riksbank kept benchmark interest rates unchanged at their lowest level since early 2011 and said further easing has become more probable as growth slows in the largest Nordic economy.

I know it’s a stretch at this point, but I keep looking for evidence their budget deficits are large enough to support GDP at current (depressed) levels.

And yes, further austerity works against this.

French Industrial Production Unexpectedly Rose 1.5% in August

October 10 (Bloomberg) — French industrial production unexpectedly rose in August, driven by manufacturing of transport equipment. Production gained 1.5 percent in the month from July, Insee said.

Italian Industrial Output Unexpectedly Rises 1.7% in August

October 10 (Bloomberg) — Italian industrial production unexpectedly rose in August. Output rose 1.7 percent from July, when it contracted a revised 0.1 percent, Istat said. Production fell 5.2 percent from a year earlier on a workday-adjusted basis, the 12th annual decline. The euro region’s third-biggest economy will probably contract 2.4 percent this year and 0.2 percent next, the government said last month. Industrial production fell 0.9 percent in the third quarter from the previous three months, employers lobby Confindustria predicted on Oct. 1. Output declined 0.3 percent in September from the previous month, according to the survey. Istat had originally reported a 0.2 percent drop industrial production in July.

Same goes for the UK:

U.K. Third-Quarter GDP Jumps the Most in Five Years, Niesr Says

October 10 (Bloomberg) — The U.K. economy grew at its fastest pace in five years in the third quarter after a rebound from one-off disruptions in the prior three months, the National Institute of Economic and Social Research said. Gross domestic product rose 0.8 percent, compared with 0.1 percent in the quarter through August, Niesr said. Underlying growth was weaker than suggested by the headline number, Niesr said. Stripping out distortions stemming from June’s extra public holiday for Queen Elizabeth II’s Diamond Jubilee, it measured the economy’s pace of expansion as closer to between 0.2 percent and 0.3 percent. “The strength of the figure for the three months to September is largely an artefact of special events,” it said.

I wonder what, if anything, it would take to reverse all this self inflicted global destruction.

Clearly evidence and theory isn’t enough.
Too often change comes from some form of ‘blood in the streets’

Draghi Says No Alternative to Austerity as Economies Shrink

By John Fraher and Jeff Black

October 9 (Bloomberg) — European Central Bank President Mario Draghi said there is no alternative to austerity as Italian and Spanish officials balk at asking for bailouts that may impose more budget cuts.

“It’s without doubt that the process of fiscal consolidation has depressed output in parts of the euro area,”

Draghi told lawmakers in testimony to the European Parliament in Brussels today. “But what’s the alternative? We need to do that, we need to do that in the best possible way, as effective and as short as possible, complying with basic grounds of social justice.”

European officials are pushing debt-strapped nations across southern European for more cuts despite the risk that they will worsen recessions gripping the region. Draghi last month said that the ECB is prepared to take the unprecedented step of buying unlimited quantities of Spanish and Italian bonds if they sign up to certain conditions.

At the same time, Italian Prime Minister Mario Monti said in an interview last month that uncertainty about what those terms will look like is making him and his Spanish counterpart reluctant to apply for help.

International Monetary Fund Chief Economist Olivier Blanchard today suggested bond yields in Spain and Italy may resume rising if the countries don’t meet investor expectations and seek aid.

Cameron Says U.K. Needs to Implement Plan A Plus on Economy

October 9 (Bloomberg) — Prime Minister David Cameron said the U.K. government needs to implement an economic policy that he called “Plan A Plus,” without abandoning its deficit-reduction strategy.

Cameron was speaking after the International Monetary Fund cut its U.K. economic outlook and said the government may need to ease its fiscal squeeze if Bank of England stimulus fails to help the economy gather momentum. The Washington-based lender said today it sees the economy shrinking 0.4 percent this year before expanding 1.1 percent in 2013. It previously projected growth of 0.2 percent and 1.4 percent in those years.

“What we need is Plan A Plus” Cameron told Sky News television today from his Conservative Party’s annual conference in Birmingham, central England. He said that means pursuing deficit reduction alongside adopting fiscal measures to help businesses as well as easing planning rules to spur enterprise.

His opponents in the Labour Party have called on Cameron to reduce the speed and depth at which he is imposing government spending cuts, saying the government should alter its course to a “Plan B.”

The IMF is “not advising us to change course,” Cameron told BBC Radio 5. “What they says is we should stick to our plans unless things get dramatically worse.”

He said that while “there are signs that the economy is rebalancing,” including an increase in private-sector employment, “we need to do more and we need to do it faster.”

Healing Process

The prime minister said the IMF’s move meant it was falling into line with other forecasters, underlining the need for the government to ensure that its plans to spur growth are “firing on all cylinders.

Speaking to BBC Radio 4’s “Today” program, Cameron said the government is doing everything it can to encourage growth and a “slow and difficult healing process” is now under way.

He said there will be a new crackdown on tax evasion and “aggressive avoidance,” when asked to give details of his promise to take further action to increase taxes on the rich.

Chancellor of the Exchequer George Osborne told the party conference yesterday the U.K. economy is “taking longer” to heal than hoped. Still, he pledged to “finish the job” of reducing the deficit and signaled that deep cuts to welfare will be needed after the next general election in 2015.

Cameron Says IMF Forecast for U.K. Coming Into Line With Others

October 9 (Bloomberg) —Prime Minister David Cameron said the International Monetary Fund’s decision to cut its economic outlook for Britain meant the IMF was falling into line with other forecasters.

Cameron told BBC television from his Conservative Party’s annual conference in Birmingham, central England, that the goverment needs to ensure that its plans to spur growth are “firing on all cylinders,” rejecting calls for more borrowing to fund extra spending. He pointed to an increase in private- sector employment as a sign that the government’s policies are working.

Yet no funding crisis…

U.K. Deficit to Exceed Greece’s Next Year, Sunday Times Says

Sept 23 (Bloomberg) — U.K. deficit will be £126b ($204b), or 7.8% of GDP, in 2013-14, Times says, citing Morgan Stanley analysis.

Greece’s deficit to be 6.3%, Italy’s 1.7%, Spain’s 5.8%:

Nice to see they are getting challenged on this.

With govt the net payer of interest to the economy the critics should ultimately win this one. You would need some seriously skewed propensities to spend to overcome the raw interest rate channels.

BOE Says QE Benefits to Economy Counter Harm Done to Savers

By Jennifer Ryan

August 23 (Bloomberg) — The Bank of England defended its quantitative-easing program against criticism that it affected savers, saying these costs must be weighed against the economic benefits and that the plan limited the depth of the slump.

“Without the bank’s asset purchases, most people in the U.K. would have been worse off,” the central bank said in a report published in London today. “This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of the effect of asset purchases must be seen in this light.”

The report is a response to a government request that the central bank explain the impact of its bond purchases, which began in March 2009 and will reach 375 billion pounds ($596 billion) in November. It aims to counter a government claim that loose monetary policy penalizes “savers, those with ‘drawdown pensions’ and those retiring now.”

The central bank said QE widened the deficits in defined-benefit pension plans that were already facing a shortfall before the program started, though that burden may fall on employers and future employees rather than those nearing retirement now. The impact on defined contribution plans has been “broadly neutral.”

Asset-Price Impact

The central bank also said that QE helped to boost other asset prices, benefiting returns on pensions and other savings. The comments echo those made by Deputy Governor Charles Bean in February, when he said the impact of QE on assets such as equities provides an “offset to the fall in annuity rates.”

The effect “is thus more complex than it seems at first blush,” Bean said in a speech that month.

“By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds,” today’s report said. However, those holdings “are heavily skewed, with the top 5 percent of households holding 40 percent of these assets.”

The Bank of England said the biggest factor in the drop in interest income that savers receive from deposits was the reduction in the key interest rate to a record low of 0.5 percent, not asset purchases.

Explaining the widening of deficits in defined benefit pension plans and the fall in the annuity income that can be purchased from other pension funds, it said the “main factor” has been the fall in equity prices relative to gilt prices.

This “was not caused by QE,” the central bank said. “It happened in all the major economies, much of it occurred prior to the start of asset purchases, and stemmed in large part from the reluctance of investors to hold risky assets, such as equities, given the deterioration in the economic outlook. Indeed, by boosting the economy, monetary policy actions in the U.K. and overseas probably dampened this effect.”

More hints from europe that deficits may be high enough to support a bit of GDP growth?

Euro-Region Construction Output Advanced in May, Led by Germany

By Simone Meier

July 18 (Bloomberg) — Euro-area construction output rose in May, as gains in Germany and Portugal offset declining production in Italy, Spain and the Netherlands.

Construction in the 17-nation euro area advanced 0.1 percent from April, when it dropped 3.7 percent, the European Union’s statistics office in Luxembourg said today. From a year earlier, construction output declined 8.4 percent.

In Germany, Europe’s biggest economy, construction output increased 3.1 percent from April, when it fell 5.5 percent, today’s report showed. Portugal and France reported increases of 3.6 percent and 0.4 percent, respectively. In Italy, output fell 1.4 percent from the previous month, when it dropped 4.3 percent. Spanish output slumped 3.3 percent after a 3 percent drop in April, and the Netherlands had a decline of 0.7 percent.

In the 27-nation EU, output rose 1.6 percent from April, when it fell 6.9 percent. Ireland and Greece are not required to provide monthly data on construction output.

U.K. Unemployment Rate Hits 9-Month Low, Defying Recession

By Scott Hamilton

July 18 (Bloomberg) — U.K. unemployment fell to a nine- month low in the quarter through May. Unemployment based on International Labour Organization methods fell to 8.1 percent of the workforce from 8.2 percent in the period through April. Jobless-benefit claims rose 6,100 in June. The number of people in work climbed 181,000 to 29.4 million with full- time work accounting for most of the increase. London gained 61,000, partly reflecting hiring for the Olympic Games that open on July 27. The claimant-count rate was 4.9 percent. Claims rose 6,900 in May instead of the 8,100 rise initially reported. June was affected by a rule change that forced more lone parents to claim Jobseeker’s Allowance.

Headlines:
U.K. House Prices Rise for a Second Month in June, Halifax Says
U.K. Pay Growth Accelerates to 10-Month High, VocaLink Says
German Factory Orders Unexpectedly Rose on Euro-Area Demand
Eurozone PMI rises in June but still signals steep rate of contraction
Euro-Region Retail Sales Unexpectedly Increased in May on France
Italy First-Quarter Deficit Rises to Highest in Three Years
Italy Plans More Than 8 Billion Euros of Spending Cuts This Year

From Sam Brittan. Veteran FT writer.

A permanent secretary under an earlier Labour administration once asked me what I thought were the limits to permissible Budget deficits. My answer was: “Up to the point where the gains to output and employment are offset by the inflationary effects of a fall in the exchange rate.”

As suspected, signs that UK deficit spending is looking large enough to support a bit of growth. Now watch for the proclamations about how austerity works…

UK Headlines:
U.K. Manufacturing Demand Strengthened in June, CBI Report Shows

CML Says U.K. Gross Mortgage Lending Rose 24% in May From April

U.K. Retail Sales Rise More Than Forecast After April Slump

Another hint the austerity induced deficit may have gotten large enough to stabilize things and promote a bit of growth.

U.K. Economy Barely Grew In Quarter Through May, Niesr Estimates

By Svenja O’Donnell

June 12 (Bloomberg) — The U.K. economy barely grew in the quarter through May after contracting in the previous three months, according to the National Institute of Economic and Social Research.

Gross domestic product grew 0.1 percent in the period, after declining at the same rate in the three months through April, Niesr, whose clients include the Bank of England and the U.K. Treasury, said in an e-mailed statement in London today.

Data today showed U.K. manufacturing fell more than economists forecast in April, while industrial production was unchanged, pointing to continued weakness in the economy at the start of the second quarter. Britain has slipped back into recession and Bank of England policy makers have warned of threats to the economy from the euro-area crisis.

“Economic activity remains very weak,” the institute said. “We expect the U.K. economy to remain broadly ‘flat’ over the next six months.”

The U.K. economy is forecast to recover in 2013, Niesr said, though “significant downside risks persist.”

Some hints the deficit may be large enough to sustain some growth.

No doubt this will be spun as ‘see, austerity works’, when the same deficit could have been achieved proactively with a tax cut and/or spending increase before the austerity increased the deficit the ugly way, via depressing GDP and elevating unemployment.

Headlines:

U.K. House Prices Rise as Halifax Sees Stagnation in Second Half
U.K. Retail Sales Increased in May on Warm Weather, BRC Says
U.K. Services Unexpectedly Sustains Pace of Expansion in May

Functionally, this would be the same as ‘ordinary’ govt deficit spending on the same goods and services, and likewise add to GDP and add to the economy’s savings of net financial assets, to the pence.

U.K. Plans ‘Growth Bonds’ to Tap Into Savings, Independent Says

June 6 (Bloomberg) — U.K. Chancellor of the Exchequer George Osborne hopes to persuade households to invest billions of pounds of savings in new government “growth bonds,” the Independent reported, citing unidentified people with knowledge of the matter.

Tax breaks would be offered and cash raised would be invested in projects such as toll roads, green energy and housebuilding, the newspaper said.

The government might lessen risks for small investors by underwriting a proportion of any potential losses, the Independent said.

A “senior government source” told the newspaper cash-rich households have nowhere secure to put their money and be guaranteed good returns because interest rates are low; growth bonds would provide them with an investment opportunity and boost the economy at the same time.

As expected, the export channel doesn’t look to be able to save Europe this time around. That leaves only domestic demand and net public sector spending via ‘borrowing to spend’ to do the trick, which doesn’t look all that promising either.

U.K. Factory Index Falls More Than Forecast on Export Slump

By Scott Hamilton

May 1 (Bloomberg) — A U.K. factory index fell more than economists forecast in April and U.S. manufacturing probably slowed as the world economy stayed reliant on China to drive economic growth.

The gauge of British factory output dropped to 50.5 from 51.9 in March, London-based Markit Economics said today. The median forecast of 27 economists in a Bloomberg News survey was for a decline to 51.5. The Institute for Supply Management’s U.S. index probably eased to 53 last month from 53.4, according to the median of 77 forecasts. A Chinese purchasing managers’ index rose to 53.3 from 53.1. A level above 50 indicates growth.