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And a lot of the deficit spending was proactive, in addition to the automatic stabilizers.

They should continue to do relatively well, unless they take meaningful deficit reduction measures.

And as issuer of their own currency with no liquidity risk, it makes no sense, of course, that their CDS should be substantially higher than Germany or France, who are users of the euro, and subject to liquidity risks.

U.K. Has Worst Debt Ratio Damage of G-7: Chart of Day

U.K. Posts Largest December Budget Deficit on Record

U.K. Mortgage Approvals Stay Close to One-Year High

U.K. CBI January Factory Order Index Rises to Highest Since 2008

London Office Rents May Have Bottomed Out, RICS Survey Shows

Former U.K. Minister Hewitt Joins Barclays as Adviser

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Earlier this year I thought the UK was on track with their understanding of their monetary system.

Recent headlines don’t look so promising:

Conservatives Say Low Rates Are U.K.’s Best Route Out of Slump

By Robert Hutton and Jennifer Joan Lee

Oct. 28 (Bloomberg) — Philip Hammond, a lawmaker who speaks on Treasury policy for the Conservatives, said the opposition party wants the Bank of England to keep interest rates low and will cut the deficit to allow this to happen.

“It is essential that in the recovery we are able to continue to keep monetary policy relatively loose,” Hammond said in an interview at Bloomberg’s office in London. “We will only be able to do that if we have got the deficit under control.”

The focus on monetary policy contrasts with Prime Minister Gordon Brown’s argument that maintaining government spending is the best bring Britain out of the worst recession since World War II.

With an election due within seven months, the question of how and when to cut spending is at the heart of the debate between the ruling Labour Party and the opposition. Brown argues that maintaining spending and cutting taxes are the best ways to return to growth. The Conservatives say those steps risk lifting inflation and interest rates, choking off recovery.

“What has got Britain through the recession so far has been the activist monetary policy at the Bank of England, keeping interest rates low, supporting the economy through quantitative easing,” Hammond said. “We will only be able to do that if we have sent a clear signal to the markets that we intend to execute a plan to get the deficit under control. We need to make a start in 2010.”

‘Active Monetary Policy’

Conservative leader David Cameron yesterday said he was “a great believer in an active monetary policy,” a step away from previous comments that the bank’s quantitative easing program would have to end soon.

Cameron told journalists that a speech he’d made at the start of the month had been misunderstood. “The point I was making was about how easy or difficult to fund our debt, because the market for gilts hasn’t really been tested yet, because of QE,” he said. He repeated his point that the intervention will have to end some time. “You can’t go on indefinitely.”

Policy makers at the central bank will decide next week whether to extend their asset purchase program, which is pumping

175 bln pounds ($286 bln) in newly created money into the economy.

The program has increased demand for U.K. government bonds, known as gilts, as the Treasury sells a record 220 bln pounds of debt this year.

The Conservatives have repeatedly warned this year that Brown’s spending plans are putting the U.K.’s AAA debt rating at risk. Hammond’s boss, George Osborne, told an audience of financiers on Monday that it was only the likelihood of a Conservative victory at the next election that was keeping Britain’s debt costs down. Conservatives have led Labour in polls for two years.

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Risk of ‘quantitative easing’ which does nothing, both in theory and now in practice, but no ‘risk’ of ‘VAT holiday’ - eliminating the value added taxes - which would end the recession and lower prices?

And they are largely energy independent, as least in the short term.

UK: GDP SURPRISES ON THE DOWNSIDE; RISK OF MORE QE

The range of forecasts for GDP in Q3 was from unchanged to up
0.7% qoq. Not a single forecaster had expected negative growth,
but today’s figures showed the economy continuing to contract in
Q3. Growth has been negative now for 6 straight quarters - some-
thing we have never seen before in the UK. Output is down by 6%
since the peak - a similar fall to the contraction we saw in the
early 1980s recession. In its August Inflation Report, the BoE
had been forecasting growth of roughly 0.1% for Q3 - in other
words this is a 0.5pp downside surprise. This will, all things
being equal, raise the amount of spare capacity in the economy
and push down on the Bank’s inflation forecasts going forward.
The chance of more QE in Nov has been increased substantially.

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EU warns UK’s debt is ‘unsustainable’

By Sean O’Grady

Oct. 15 (The Independent) —A damning report by the European Commission on the long-term prospects for Britain’s public finances warns that Britain is at “high risk” of running unsustainable debts – implying that the nation will be unable to service its debts and that only default or high inflation can relieve the burden.

That implies the high deficits will close the output gap to 0 with ultra low unemployment and high cap utilization.

And then taxes will have to go up to cool it down.

Sounds like a good plan to me!

The Commission’s 2009 Sustainability Report says that Britain will suffer a
“sustainability gap” of 12.4 per cent of GDP – meaning tax rises or spending
cuts amounting to close to £200bn a year.

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Thanks, Dave, if this is the new mainstream conventional wisdom it looks like the monetarists have somehow gotten back in control.

Their transmission mechanism that increases demand seems to be asset prices and the exchange rate for export growth and reduced imports via higher domestic prices with the implied currency depreciation.

In fact it’s a policy of ‘both feet on the brakes’ which would mean moving towards a Japan like rates environment.

Hard to believe this actually will happen. Very, very odd.

Interest rates in Britain are to stay low for years to compensate for a severe fiscal squeeze on the economy, a report to be published this week says.

The Centre for Economics and Business Research, in its latest UK Prospects, to be published tomorrow, predicts that Bank rate will remain at 0.5% until 2011 and not reach 2% until 2014.

It also expects further quantitative easing by the Bank of England on top of the £175 billion so far announced, and says that the programme of asset sales will not start to be rolled back until 2014 at the earliest.

Its forecast is based on the assumption that an incoming government will announce £100 billion of fiscal tightening, split between £20 billion of tax rises and £80 billion of spending cuts, over the lifetime of the next parliament.

With this fiscal tightening putting a brake on growth, the Bank will be obliged to keep interest rates down, the CEBR argues.

“We are likely to see an exciting policy mix, with the fiscal policy lever pulled right back while the monetary lever is fast forward,” said Doug McWilliams, chief executive of the CEBR and one of the report’s authors. “Our analysis says that this ought to work. If it does so, we are likely to see a re-rating of equities and property, which in turn, should stimulate economic growth after a lag.”

The forecast implies a good outlook for the stock market and house prices, but could put further downward pressure on sterling.

Charles Davis, a senior CEBR economist and co-author of the report, said the main risk was a rise in inflation from higher commodity prices, which could force the Bank’s hand.

Inflation figures this week should show a drop from 1.6% to 1.2%, which City economists expect to be the low point. Higher Vat at the turn of the year is likely to push inflation temporarily above the official target. Unemployment figures will also be released this week.

+ Profit warnings fell to a six-year low in the third quarter, Ernst & Young, the accountant, said. There were 52 warnings from quoted UK companies, a year-on-year drop of 53%, and 17% less than in the second quarter.

Ernst & Young said, however, that the decline did not mean the worst was over. “This dramatic fall is due to a complex mixture of previously withdrawn company guidance, already depressed market expectations and an improving economic outlook that has encouraged companies to look ahead with greater confidence, with the worst of the downturn seemingly past,” said Keith McGregor, restructuring partner at Ernst & Young.

“Nevertheless, confidence should not turn to complacency. The one-off effects of monetary and fiscal stimulus, and inventory rebuilding have put a gloss on current demand that could soon tarnish once this support is withdrawn.”

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Thanks, will distribute and post on my blog.

Known Wynne for quite a while.

He’s been doing sector analysis for maybe 50 years and has often been the UK’s top forecaster because of it.

Immediate cuts to budget deficit will worsen recession

Oct. 9 (FT) — Sir, George Osborne is committing himself unconditionally to making very large cuts in the budget deficit. I think he may be very seriously mistaken.

If these cuts were all to be made immediately he would obviously make the present recession very much worse than it already is.

To make sense of his proposed cuts it must be assumed that there is a rise in private expenditure relative to income (ie, a fall in net private saving) that roughly matches them in both scale and timing. But it is quite likely that private saving will not fall nearly enough. If, as I foresee, it does not do so, then Mr Osborne’s cuts will be much too large.

Wynne Godley,
King’s College,
Cambridge University, UK

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>   
>   (email exchange)
>   
>   On Thu, Oct 8, 2009 at 7:55 AM, wrote:
>   
>   Check Blanchflower comments … he’s pretty good on the deficit and QE as well.
>   

Yes, refreshing!

Blanchflower Says Now Is Not the Time to Cut Government Deficit

Oct. 8 (Bloomberg) — Former Bank of England policy maker David Blanchflower said it was too soon to cut Britain’s deficit and its debt. “Clearly you need to control the debt, but now?,” he said in an interview with Bloomberg Television today. “I don’t really think so.”

Blanchflower also said the aim of quantitative easing was to raise some asset prices and to restore confidence.

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Good to hear this kind of talk:

Darling Says Conservative Plans Risk ‘Crashing’ U.K. Economy

By Gonzalo Vina

Oct. 5 (Bloomberg) — Chancellor of the Exchequer Alistair Darling said the Conservative Party plans to cut spending and welfare programs risked “crashing” the British economy, his strongest attack yet on the opposition as the election nears. Darling said Conservative leader David Cameron’s plan to phase out the “New Deal” welfare programs built up by the Labour government would hurt the nation’s poorest people and that cutting the budget deficit now would threaten the recovery.

“Proposing to end support for the economy and scrap the New Deal is entirely wrong and downright daft,” Darling told reporters in Istanbul today after attending a meeting of finance ministers from the Group of Seven. “Either he doesn’t understand what he is doing or he is not coming clean about what he is doing. Nobody else is advocating what he is proposing.”

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Waiting to see if Brown gets any credit for his fiscal policies which in fact are responsible for stopping the slide.

As in the US, monetary policy has been contractionary with lower rates hurting demand from savers and borrowers gaining
little or nothing, and lenders replenishing lost reserves.

And QE per se does nothing apart from altering the term structure of rates and modestly reducing bank earnings.

• British house prices rise again in August
• City regulator seeks to deflate financial sector with global tax
• U.K. Retail Sales Index Falls, Outlook Improves, CBI Says
• U.K. Business Investment Fell Most Since 1985 in Second Quarter
• U.K. Two-Year Notes Rise as Chinese Curbs Boost Safety Demand
• U.K. Population Hits 61.4 Mln; Immigration Eases

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Bean does see the interest rate channel but misses the savings/income channel, and has it all wrong regarding the fact that causation runs from loans to deposits and reserves, not from reserves to loans. And he’s reading what happened in Japan incorrectly as well.

Also, the second article misses the point as well. The rising domestic savings/debt pay downs is being ‘funded’ by govt. deficit spending. The deficit spending, if sufficient, allows the consumer to both increase savings and spending. So the fact that savings went up says nothing about what consumption might have done.

Bean Says Impact of BOE Bond Purchases ‘Moderately Encouraging’

August 25 (Bloomberg) — “The initial responses in the United Kingdom to these measures (purchases of government and corporate debt) have been moderately encouraging,” BOE Deputy Governor Charles Bean said in a speech. Gilt yields “appear to be some 50 to 75 basis points lower than they would otherwise be. And there are also signs of beneficial effects on conditions in the relevant corporate credit markets.” “It is very early to draw conclusions on the efficacy of these measures, as the transmission lags through to nominal spending are likely to be quite long,” Bean said. “When banks are trying to de-leverage, ,such additional reserves are more likely to be hoarded” Bean said. “That appears to be what happened during the Japanese experiment with quantitative easing in the early part of this decade and a similar response is to be expected from banks at the current juncture.”

U.K. Home Lending Drops as Consumers Cut

August 25 (Bloomberg) — U.K. net mortgage lending slumped to the lowest in almost nine years as consumers used gains from lower interest rates to pay down debt rather than boost spending.

“It could be that people on low interest rates are keeping their mortgage payments the same to reduce their borrowing,”

Vicky Redwood, an economist at Capital Economics Ltd. said.

“It’s good news if you think consumers have taken on too much debt, but it’s bad news for the economy in the short term, as it means that money is not feeding back into the economy in increased spending.”

Net mortgage lending at the end of July declined 74 % to 1.64 billion pounds ($2.69 billion) from 6.23 billion pounds in August 2007, the peak of Britain’s decade-long real estate boom, the British Bankers’ Association said yesterday. Mortgage approvals in July rose to the highest since February 2008. The data show new home lending is being outweighed by repayments, according to the BBA.

U.K. consumers’ debt reached a record 1.5 trillion pounds in January, according to the Bank of England. Consumer spending accounts for about 65 % of gross domestic product, while about 20 % of incomes are spent on mortgages, according to Simon Willis, an analyst at NCB Stockbrokers Ltd. in London.

“The household sector is far too highly leveraged,” said Ross Walker, economist at Royal Bank of Scotland Group Plc.

“There’s been a concerted effort to pay back credit cards and mortgages.”

U.K. Rate of Workless Households Increases to Highest in Decade

August 26 (Bloomberg) — The proportion of workless households rose to the highest in a decade in the second quarter as Britain experienced its worst recession in a generation.

The rate increased 1.1 %age points from a year earlier to 16.9 %, the most since 1999 and the biggest increase since records began in 1997, the Office for National Statistics said today. The number of people living in households where no adults work rose by 500,000 to 4.8 million.

Mounting job cuts threaten to hinder Prime Minister Gordon Brown’s prospects less than a year before he has to hold the next general election. Unemployment rose to the highest level in 14 years in the quarter through June, and joblessness is forecast to increase further as the economic slump forces companies to fire workers.

“We expect to see unemployment continuing to rise into the middle of next year and the number of jobless households with it,” said David Page, an economist at Investec Securities in London. “We’re going to have to get used to high levels of unemployment for quite a long time. It’s unlikely the labor market will provide Brown with anything to electioneer on.”

The workless household rate was highest in the northeast of England, at 23 %, with the lowest rate in the east of England at 12.2 %, today’s figures showed.

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So does Brown become the hero for his fiscal adjustments or the King for low rates and quantitative easing?

I do not even want to know…

• U.K. Services Index Rose to Highest Since February 2008 in July
• UK retailers say inflation at 6-month low
• UK house prices up 1.1 pct in July
• U.K. Consumer Confidence Rose to the Highest in a Year in July
• King to Halt Gilt Purchases on Economy, Dealers Say
• U.K. Factory Production Unexpectedly Jumped in June by 0.4%

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Deficit spending may be ‘working’
Who would have thought???…

On Mon, Jul 20, 2009 at 5:41 AM, Milo wrote:

• U.K. Mortgage Lending May Gain After Approvals Rose, BOE Says
• U.K. June Mortgage Lending Rises 17% From May, CML Says
• U.K. Office Demand Rises for First Time in Two Years
• U.K. Property Asking Prices Rebound, Rightmove Says
• Nissan to Build Battery-Manufacturing Plants in U.K., Portugal

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Yes, as previously discussed, announcing a term structure of Fed funds levels would be far more effective in bringing rates down than securities purchases.

But that closes the door to rate hikes for that period of time, which is exactly what markets discount with the current term rate structure.

Especially with crude and commodities going up and the dollar going down, as markets discount that at some point the Fed will react to that ‘imported inflation’ with rate hikes.

Meanwhile the current ‘mercantalist’ Fed is fine with a lower dollar hoping it will help the US export its way to trend GDP growth rather than get there by domestic debt and consumption. Or at least reduce the marginal propensity to import that they fear could drain demand and abort the recovery. Unfortunately the preference for exports over domestic consumption translates to a lower standard of living via a reduction in real terms of trade.

That’s what was happening last year about this time when the great Mike Masters inventory liquidation hit and it all went bad. This time around there isn’t any excess inventory to break prices and cap utilization/employment is way down and still falling some, and rest of world economies appear too weak to absorb substantial US exports.

And the Saudis are back in control of crude prices after a very surprisingly small fall in world consumption given the size and scope of the international slowdown.

BoE’s Barker says rates could stay low for “quite some time”

MPC member Kate Barker told the Leicester Mercury newspaper that there
remained question marks over the sustainability of the recovery and that
interest rates “could stay low for quite some time”. Ms Barker echoed
Paul Tucker’s comments yesterday in saying that it would take some
months yet for the MPC to judge how robust the turnaround in activity
was: “The really important question is (whether) there’s a pick up in
the economy and if people can sustain that so it continues on to autumn.
That would be one of the most encouraging signs,” she said.

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Starts off good and then goes bad.

Britain looks to the land of the rising sun with envy

by Ambrose Evans-Pritchard

May 22 (Telegraph) — Perhaps most surprising is that Japan fell in 1998, though it was by then
the world’s top creditor with more than $1.5 trillion of net foreign assets
(now $3 trillion). Lender abroad, it is a mega-debtor at home, the result of
Keynesian pump-priming to fight perma-slump. The stimulus vanished into
those famously empty bridges in Hokkaido.

“The Japanese didn’t take the downgrade seriously,” said Russell Jones, of
RBC Capital, a Japan veteran from the 1990s. “They didn’t think they would
have any trouble funding their debt.”

They were right. Yields on 10-year bonds fell to 1pc by the end of the
decade, and to 0.5pc in the deflation scare of 2003 – confounding those who
expected Japan’s emergency stimulus to stoke inflation and push up yields.

Eisuke Sakakibara, then the finance ministry’s “Mr Yen”, was insouciant
enough to swat aside the Moody’s downgrade as an irrelevance. “Personally, I
think if Moody’s continues to behave like that, the market evaluation of
Moody’s will go down,” he said.

Japan had a crucial advantage: its captive bond market. Some 95pc of
government debt was held by Japanese savers or the big pension funds.

Not! Does not matter. The funds to buy government securities ‘come
from’ the government deficit spending.

Deficit spending adds reserve balances at the central bank,
buying govt securities reduces reserve balances at the same central bank.

It is all a matter of data entry by the central bank its own spread sheet.

The foreign share of UK public debt has risen from 18pc to 34pc over the
past six years. The central banks of Asia, Russia and emerging economies
like gilts because they offered 1pc extra yield over bunds. This was the
“proxy euro” trade.

Does not matter.

“We’re far more vulnerable than Japan ever was,” said Albert Edwards, global
strategist at Société Générale.

Wrong!!!

“Japan had a huge current account surplus
and a strong currency. The UK is a deficit country, at risk of a sterling
collapse.

Yes, the currency might go down, but seems to be doing ok for the moment!

Years of UK macro-mismanagement have dragged the UK economy to the
edge of a precipice.”

As the BOE’s Charles Goodhart once responded,
Yes, they have been telling us that for 300 years.

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This highlights my macro themes.

Highlights

Rising crude prices driving up CPI.

No one believes fiscal policy works.

Everyone is afraid ‘quantitative easing’ has ramifications beyond dropping targeted rates a few basis points.

The income gap will only get wider with the recovery as unemployment keeps real wages in check and the real wealth flows upward.

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Right, Brown’s deficit spending to the rescue, as previously suggested, thanks!

>   
>   On Mon, Apr 20, 2009 at 4:34 AM, Marshall wrote:
>   
>   Further to my other recent comments on the UK. You should start posting this stuff on
>   your site, as the UK is a good test case for the validity of “Mosler economics”1
>   

UK House Asking Prices Increased in April, Rightmove Says

by Jennifer Ryan

Apr 20 (Bloomberg) — U.K. house prices rose for a third month in April after mortgage availability improved, Rightmove Plc said today.

The average asking price rose 1.8 percent from March to 222,077 pounds ($328,000), the operator of the biggest U.K. residential property Web site said today. It fell 3.2 percent in London, the only region of 10 surveyed to show a decline. Home prices are down 7.3 percent from a year earlier.

Mortgage approvals rose 19 percent in February as the Bank of England cut the key interest rate to a record low of 0.5 percent and started buying assets to ease credit strains in the economy. Policy maker Kate Barker said yesterday house prices may rebound as banks ease lending terms.

“It looks like we are now bumping along the bottom of the trough,” Miles Shipside, Rightmove’s commercial director, said in the statement. “For there to be any real sense of optimism that we’re on a sustainable road to recovery, the availability of mortgage finance needs to improve significantly.”

The increase in property prices demanded by sellers was led by East Anglia, where values increased 5.1 percent, and Wales, which showed a 4.8 percent gain.

The decline in London, where the average asking price was 403,505 pounds, was led by a 7.8 percent drop in Ealing. Average values in the capital’s most expensive neighborhood, Kensington & Chelsea, fell 3.3 percent on the month to 1.9 million pounds.

Central bank data show mortgage approvals climbed to 38,000 in February, the most since May. The reading is still down from 71,000 at the start of 2009.

“I expect house prices to move up again,” Barker told the Spectator magazine on April 16. Referring to restrictions on the proportion of a home’s value that banks are willing to finance, she said, “the big slide down to 75-80 percent may be overdone. So I would expect the mortgage market to move.”

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Notice how this corresponds to rising public sector deficits as counter cyclical fiscal policy does its thing:

UK Households Step Up Debt Repayments as Recession Deepens

Britons increased the equity in their homes at the fastest pace on record as the recession encouraged households to pay down existing mortgages rather than take out new ones. Individuals injected a net 8 bln pounds ($11.5 bln) into housing equity in the three months through December, the most since records began in 1970, the Bank of England said in London today. The credit crunch and falling house prices are making it harder to borrow against the value of housing. Concerns about job losses are also making homeowners reluctant to add to their 1.5 trillion pounds of debt as they endure the economy’s worst contraction since 1980.

“This is further evidence that households are retrenching sharply, sensibly paring down debt in the face of the credit crunch and fears about unemployment,” Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd., said in a note. Mortgage equity provided a key source of consumer finance for a decade as Britons used a property boom to finance everything from new furniture to vacations. After tripling in a decade, house prices fell an annual 17.7 % in February, Lloyds Banking Group Plc’s Halifax division said.

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Looks to me like the theory that a large output gap/high unemployment will control ‘inflation’ (for anything more than the very short term) is about to fall by the wayside, just like the theory that a small output gap would cause higher inflation fell by the wayside in the late 90’s.

UK Inflation Rate Unexpectedly Rose in February

by Svenja O’Donnell

Mar 24 (Bloomberg) — The U.K. inflation rate unexpectedly rose in February after higher food costs and the weakness of the pound sustained price pressures even as Britain’s recession deepened.

Consumer prices rose 3.2 percent from a year earlier, the Office for National Statistics said today in London. The median forecast of 28 economists was for 2.6 percent. Officials said that Bank of England Governor Mervyn King will explain the increase in a letter to the government today after the rate breached its 3 percent upper limit.

“We’ve got such huge spare capacity in the economy,” James Knightley, an economist at ING Financial Markets in London. “Inflation pressures are going to be very weak indeed in the months to come. The process will continue through this year and into the next.”

Maybe.

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And yet another central banker who doesn’t understand monetary operations…

Has to be a new low for the BOE.

Barker Says BOE Should Print Money as U.K. Recession Worsens

by Jennifer Ryan and Brian Swint

Mar 13 (Bloomberg) — Bank of England policy maker Kate Barker said the bank’s decision to buy assets with newly created money is necessary to prevent deflation as Britain’s recession shows signs of worsening.

Printing money “is the best course in order to achieve our objective of keeping inflation to target in the medium term.” “The downside risks to growth, and therefore to inflation, identified in the February inflation report were in danger of crystallizing,” she said. Barker said the impact of the reduction in the benchmark to lower levels had become “successively reduced” with each cut, and lower rates on their own would be insufficient to revive growth.

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In fact, lower rates are slowing things down by cutting government interest payments, and thereby requiring a higher fiscal adjustment.

Brown Says Monetary Policy Is Having Reduced Impact in UK

Jan 27 (Bloomberg) — Prime Minister Gordon Brown said the Bank of England’s ability to influence the economy with lower interest rates is being hurt by the impact of the financial crisis in the U.K. “Our financial system remains under such strain that this will reduce the impact of lower interest rates,” Brown said in a speech in London today. “We have to do more. We took the decision in the pre budget report to launch a major fiscal stimulus. Rather than cutting back on public investment, we have decided to stick to our spending plans.”

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