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
| U.K. Producer Prices Increase Most in 10 Months |
Rising crude prices driving up CPI.
| U.K. Homebuyers Bet Property Recovery to Be Illusory |
No one believes fiscal policy works.
| Julius Says BOE Risks Woes of ‘Love Affair’ By Printing Money |
Everyone is afraid ‘quantitative easing’ has ramifications beyond dropping targeted rates a few basis points.
| U.K. Income Gap Reaches Widest in Five Decades, Researchers Say |
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.â€ÂÂ
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.â€ÂÂ
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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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Brown ‘Terribly Fragile’ After Bond Auction Flops
by Robert Hutton and Mark Dean
Mar 26 (Bloomberg) — The first failed British bond auction in more than seven years leaves Prime Minister Gordon Brown’s reputation for economic competence even more tarnished as he battles recession and a rising tide of voter anger.
Brown, who had the backing of 30 percent of the electorate in a ComRes Ltd. poll last week, must now cope with what amounts to a vote of no confidence by investors in his ability to end the recession. Bank of England Governor Mervyn King, his ally for much of the past decade, warned a day earlier that there’s no more money for further spending.
Wrong! Spending is not inherently constrained by revenues.
King must not understand how the monetary system works.
“The notion that Brown is leading us to the promised land is laughable,†said Ruth Lea, economic adviser to the Arbuthnot Banking Group Plc in Solihull, England. “He cannot get to grips with how other people see this country now, as the sick man of Europe.â€ÂÂ
Yes, that’s how most see it, but they don’t understand how the monetary system works.
The Treasury yesterday tried to sell 1.75 billion pounds ($2.6 billion) of 40-year gilts and got 1.63 billion pounds of bids, a sign that investors are reluctant to finance his record borrowing.
No, a sign at that point in time that investors didn’t want to buy that many bonds of that maturity.
This does not constrain government spending.
“Brown’s strategy now looks terribly fragile,†said Mark Wickham-Jones, a professor of politics at Bristol University. “His situation is economically extremely uncertain, politically risky and this auction again highlights how we are now in un-chartered territory.â€ÂÂ
He doesn’t seem to understand the monetary system either.
G-20 Tour
The auction failure couldn’t have come at a worse time for Brown, who set off on a five-day tour this week to win support for his economic-reform plans before a summit of leaders from the Group of 20 nations he’s hosting in London on April 2. He’s in Brasilia today and due to visit Chile after speaking in New York yesterday.
He does understand that he does not need their support for anything regarding the UK economy.
German Chancellor Angela Merkel has resisted Brown’s push for a new fiscal stimulus, saying her country already has committed to a boost worth 4.7 percent of gross domestic product.
Germany does have funding constraints the UK doesn’t have as per the eurozone institutional arrangements.
Brown’s Agenda
The government says the G-20 will focus on stabilizing financial markets, reforming global financial institutions and helping people get through the recession. Brown wants them to agree on a fiscal stimulus to support growth, something King warned might not be affordable.
More evidence King doesn’t understand the monetary system. ‘Affordable’ is not an applicable concept regarding nominal spending with a non convertible currency.
“Given how big these deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits,†King said in Parliament on March 24.
Brown’s spokesman Tom Hoskin said yesterday the prime minister wasn’t troubled by the auction failure. “There have been other auctions that have been uncovered in other countries,†he told reporters in London. “The underlying strength of the market in gilts is there.â€ÂÂ
More to the point, it’s not a necessary condition for deficit spending. The economics of deficit spending are the same whether or not guilts are sold. The difference is long term rates are higher if the Treasury issues long term securities. They should listen to Goodhart and not issue or sell them at all.
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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 ’90s.
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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