Category Archives: UK

My letter in the Times UK today

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Sir,

A ‘Payroll Tax Holiday’ as a follow up the ‘Troubled Asset Relief Programme’ (TARP).

I agree with Tim Congdon’s “Harsh arithmetic behind the banking crisis” (The Times, 2nd October, 2008). However, while the TARP may marginally improve asset prices, it does not directly address interbank liquidity nor aggregate demand.

While the Fed has relaxed collateral requirements, at this late stage, it needs to simply lend unsecured to its member banks to normalize bank liquidity.

To support aggregate demand- an even more pressing need- Congress can declare a ‘payroll tax holiday’ and reduce social security and medicare payroll deduction rates to zero, until aggregate demand is sufficiently restored. This would immediately end the current crisis via the ‘trickle up’ process of increasing take home pay for workers who can then make their mortgage payments, pay their bills, and sustain the domestic demand needed to support the US as well as the Euro economy.

Remaining issues include the increased demand for energy consumption as the world economy recovers, and associated price pressures, which are a separate matters.

Yours faithfully,

Warren Mosler
Senior Associate Fellow, Cambridge Centre for Economic and Public Policy
University of Cambridge; Chairman Valance Co.
5000 Estate Southgate, Christiansted, St. Croix, USVI 00820


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2008-10-01 UK News Highlights

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Yes, demand is weak over there but the last one, below, is of particular interest to me.

Seems the banks around the world need USD rather than their local currency.

Another failure of banking regulation that they probably still don’t understand and therefore won’t address going forward.

I’ve been watching external debt bring down governments (and their banks) for over 30 years and it still isn’t part of bank regulation.

Highlights

U.K. Manufacturing Shrinks the Most Since 1992
U.K. Services Industry Growth Stalls for First Time Since 2002
BOE Emergency Rate Meeting Is `Possible,’ Morgan Stanley Says
Financial crisis: Can the Bank of England’s Mervyn King survive?
Bank of England Offers $40 Billion in Dollar Auctions Today

Bank of England Offers $40 Billion in Dollar Auctions Today

Oct. 1 (Bloomberg) The Bank of England offered $30 billion of one-week funds and $10 billion overnight as part of a global coordinated emergency effort to stem the financial crisis.

The bank also will auction another $30 billion in one-week money on Oct. 3. At that sale and in subsequent dollar operations, the bank will accept the same extended collateral eligible for its three-month long-term sterling operations.


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2008-08-13 UK News Highlights

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Highlights:

BoE Cuts Growth Forecasts, Jobless Climbs
U.K. Unemployment Rose the Most Since 1992 in July
Surge in credit card debt charge-offs
U.K. Homebuilders Fall as Unemployment Rise May Worsen Slump

 
 
Article snip:

BoE Cuts Growth Forecasts, Jobless Climbs (Bloomberg) The BoE cut its forecast for U.K. economic growth and held out the prospect of lower interest rates as unemployment rose the most in almost 16 years in July. Governor Mervyn King said the inflation rate will fall below the 2 % target in two years if policy makers keep the benchmark interest rate at 5 %.

But not if they cut is the implication as well.


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2008-08-07 UK News Highlights

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Highlights:

ECB Leaves Interest Rates at Seven-Year High to Fight Inflation
German industrial orders drop
Western European Car Sales Fall by 6.7% in July, JD Power Says
German June Exports Rise the Most in Nearly Two Years
German Economy Contracted as Much as 1.5% in 2Q
French Trade Deficit Expands to Record as Euro Curbs Exports
Italian June Production Stalls as Record Oil Prices Damp Growth
Fall in output fuels Spanish recession fears

 
 
 
Article snip:

ECB Leaves Interest Rates at Seven-Year High to Fight Inflation (Bloomberg) – The ECBkept interest rates at a seven-year high to fight inflation even as evidence of an economic slump mounts. ECB policy makers meeting in Frankfurt left the benchmark lending rate at 4.25 %, as predicted by all 60 economists in a Bloomberg News survey. The bank, which raised rates last month, will wait until the second quarter of next year to cut borrowing costs, a separate survey shows. The ECB is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. At the same time, record energy costs and the stronger euro are strangling growth. Economic confidence dropped the most since the Sept. 11 terrorist attacks in July and Europe’s manufacturing and service industries contracted for a second month. ECB President Jean-Claude Trichet will hold a press conference 2:30 p.m. to explain today’s decision.

Same as UK, less costly to address inflation now rather than support growth and address inflation later if it gets worse.

It’s been said in the US that the Fed needs to firm up the economy first, and then address inflation. To most Central Bankers this makes no sense, as they use weakness to bring inflation down.

In their view that means the Fed wants to get the economy strong enough to then weaken it.

The Fed majority sees it differently.

They agree with the above.

However, for the last year they have been forecasting lower inflation and lower growth were willing to take the chance that supporting growth would not result in higher inflation.

Now, a year later, the FOMC is faced with higher inflation and more growth than the UK and Eurozone, and systemic ‘market functioning’ risk remains.

The FOMC continues to give the latter priority as they struggle with fundamental liquidity issues that stem from a continuing lack of understanding of monetary operations.


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TimesOnline: Latest on BoE rate setting

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The mainstream view remains the cost of a near term recession in order to bring prices under control now is far less than the cost of a recession later if you support growth now and let prices continue higher.

Bank of England holds interest rate at 5%

by Gary Duncan, Grainne Gilmore

The Bank of England rebuffed mounting concerns over the rapidly weakening economy today and held interest rates at 5 per cent as it pursued its drive to quell soaring inflation.

The tough verdict from the Bank’s rate-setting Monetary Policy Committee (MPC) brushed aside pleas from business leaders and trade unions for a cut in base rates to shore up Britain’s growth, amid growing fears that the country is on the brink of recession.

The Bank’s decision came after headline consumer price inflation leapt to a 10-year high of 3.8 per cent in June, well above the Bank’s 2 per cent target, and amid expectations that it could hit 5 per cent over the summer, following swingeing increases in household gas and electricity bills imposed by utility companies.

The MPC had been widely expected to spurn pressure for a rate cut today in a bid to make clear its determination to bring inflation back to the target set by the Chancellor. The committee will almost certainly have discussed raising rates this morning, as it did last month, when Professor Tim Besley, voted for an immediate increase. He is expected to have done so again today, and may have been joined by other hawkish MPC members.

The Bank will set out its thinking more clearly next week when it publishes its latest forecasts for the economy in its quarterly Inflation Report. That is expected to emphasise the dilemma that the MPC confronts, with inflation set to soar far above target in the next few months, even as the economy slides towards a severe downturn.

The quandary facing the Bank was underlined yesterday as the International Monetary Fund sharply cut its forecasts for Britain’s growth this year and next, while issuing a warning that it saw “little scope” for interest rates to fall, although it also saw no need for an immediate rate rise.

Today’s no-change verdict by the MPC came despite bleak economic news in recent days, which have produced danger signs of recession.

Concern that Britain’s growth had ground to a virtual halt last month, and could even be in the grip of recession, were inflamed this week after bleak figures revealed growing frailty in the most critical parts of the economy.

These included shrinking activity in the services sector, the economy’s engine room that account for three quarters of the UK’s output, as well as in manufacturing.

The services sector, spanning businesses from cafes and leisure centres to accountancy and law firms, shrank for a third month in succession last month, according to the latest purchasing managers’ survey, regarded by the Bank as a key gauge of economic conditions.

Although services activity edged up from a seven-year low that was plumbed in June, the survey pointed to an even sharper slowdown ahead, with levels of outstanding business for the sector’s companies falling for a tenth month in a row, and inflows of new business dropping to a record low.

At the same time, it emerged that manufacturing is suffering its first sustained run of decline since 2001, after its output fell in June for a fourth month in a row, dropping by 0.5 per cent.

The figures were among the latest data confirming the dire plight of the economy, and came after official confirmation that the pace of Britain’s overall growth slowed to just 0.2 per cent in the second quarter, its weakest rate of expansion for three years.

The falling housing market remains a key source of economic anxiety, with the Nationwide Building Society reporting that house prices tumbled by a further 1.7 per cent last month, leaving them down 8.1 per cent on last year – their sharpest annual pace of decline since 1991.

The high street is also being badly hit by the downturn, with official figures showing that retail sales plunged by 3.9 per cent in June – their biggest monthly drop for 22 years.

Yesterday, the International Monetary Fund added to the mood of pessimism as it cut its forecast for Britain’s growth this year and next to only 1.4 per cent, and 1.1 per cent, respectively. The prediction of the UK’s worst performance since the end of the last recession raised the spectre of two years of economic misery.

In May, Mervyn King, Governor of the Bank, was forced to write an explanatory letter to the Chancellor, required by law, explaining why inflation had risen more than 1 point above its 2 per cent target, after it climbed to its then-high of 3.3 per cent. Mr King has admitted that he expects to write more such letters this year.

The Bank’s inflation headache has been further aggravated by signs of further severe price pressures in the pipeline to the consumer, Manufacturers’ costs rose at a record 30 per cent annual rate in June, and prices for goods leaving factories rose by a record 10 per cent. Inflation is being stoked by a sharp slide in the pound, by about 12 per cent over the past year, which lifts Britain’s bills for imported products.

However, there has been some let up in international food and energy costs, with oil prices tumbling by 13 per cent in a month, and prices for food products are also on the slide.

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Re: UK economy

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(an email exchange)

>   
>   
>   On Wed, Aug 6, 2008 at 12:25 AM, Prof. P. Arestis wrote:
>   
>   Dear Warren,
>   
>   Just received the piece below. The situation over here is getting
>   worse but pretty much as expected.
>   
>   Recession signalled by key indicators of British economy
>   
>   
>   Best wishes, Philip
>   

Dear Philip,

Yes, seems tight fiscal has finally taken its toll and is now reversing the ugly way – falling revenues and rising transfer payments.

Without support from government deficit spending, consumer debt increases sufficient to support modest growth are unsustainable.

And with a foreign monopolist setting crude oil prices ‘inflation’ will persist until there is a large enough supply response,

It’s the BoE’s choice which to respond to, though ironically changing interest rates is for the most part ceremonial.

All the best,
Warren


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2008-07-28 UK News Highlights

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Highlights:

U.K. Hometrack House Prices Fall the Most Since 2001
Brown Says He Won’t Turn to ’70s Agenda After Defeat
Darling Considers Expanding Mortgage Bond-Swap Scheme, FT Says

 
 

U.K. Hometrack House Prices Fall the Most Since 2001

by Brian Swint

(Bloomberg) The average cost of a residential property in England and Wales slipped 4.4 % in July from a year earlier to 168,500 pounds ($336,000), Hometrack Ltd. said. Prices fell 1.2 % from June. “With no immediate end in sight to the current uncertainty, activity levels are likely to remain suppressed with prices remaining under pressure into the autumn,” said Richard Donnell, director of research at Hometrack. Prices “are now back to levels last seen in October 2006.” Demand for housing has declined 20 % in the past three months, Hometrack said.

Note how much higher prices are vs the US.

It’s another case of going up very fast and now working its way down towards a more historically normal trend line.

But as in the US, they never come down quite that far before turning up on a new path from a higher base as much of past ‘inflation’ remains indefinitely.


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AFP: British finances

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The deficit will go higher. The only question is whether it will go higher the nice way (proactive spending or tax cut to restore demand and growth), or the ugly way (revenues fall and transfer payments go up until the deficit is large enough to restore financial equity and aggregate demand).
Solvency is not an issue. The choice is purely political.

British finance minister paints bleak picture of economy

Britain’s economic downturn is worse than previously thought and there is no extra money available for public spending, Chancellor of the Exchequer Alistair Darling said in an interview published Saturday.

There’s the problem. They’ve got it backwards – the money to pay taxes comes from government spending, not vice versa as they think.

Darling also told The Times newspaper that taxpayers were at the limit of what they were willing to pay, a day after official data showed a record deficit in Britain’s public finances, and reports that the government might bend its budget rules.

“At Christmas most people remained hopeful there would be an improvement by the autumn,” he said.

“Most people would now say it’s far more profound. It’s affecting every economy and everybody. I can’t say how long it will last.”

He added: “We are going through a very, very difficult time.”

Yes, and the government is making it worse.

Darling said that the economic picture was “at the bottom end of my range” set out in his annual budget in March.

On public spending, the finance minister said he has been “very clear with my colleagues that there is no point them writing in saying, ‘Can we have some more money?’ because the reply is already on its way and it’s a very short reply.”

“I told them at the last meeting of Cabinet they’ve got to manage within the money they’ve got.”

Again, they’ve got it backwards – the money to pay taxes comes from govt spending, not vice versa as they think.

The Office for National Statistics said on Friday that public sector debt at the end of June was at 38.3 percent of GDP, but increased to 44.2 percent when the impact of nationalised mortgage lender Northern Rock is included.

Japan’s been at 150%. Doesn’t matter. It’s all a function of private/non-government savings desires which are a function of institutional structure, including tax advantages for not spending income for the likes of pension fund contributions, ins reserves, etc.

Public finances were at a record deficit of 15.5 billion pounds in June compared with the same time last year, well over market expectations of a 12.3-billion-pound deficit.

So? If demand is deemed too low it’s not enough, whatever it is.

The Financial Times, meanwhile, reported that finance ministry officials were working on plans to revise the rules to allow for increased borrowing without raising taxes amid the current economic downturn.

In actual fact they spend first, then borrow, but they don’t know that either.

One of the fiscal rules sets a government borrowing limit of 40 percent of national income.

Yes, a self imposed constraint not inherent in the system.

In The Times interview, Darling played down the report and reiterated comments made Friday that the Treasury constantly reviews its fiscal rules.

He noted, however, that while voters will “pay their fair share … you can’t push that.”

“My judgment is that there are a lot of people in this country who feel they work hard, they make their contribution and they’re feeling squeezed.”

Yes they are, but the deficit isn’t the problem.


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The Independent: UK Bank deputy chief warning

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Bank deputy chief warns of market trouble to come

by Ben Russell, Political Correspondent and Sean O’Grady

Britain is facing the risk of renewed turmoil in the financial markets, the new deputy governor of the Bank of England warned yesterday.

Professor Charlie Bean, the deputy governor for monetary policy and a former chief economist at the Bank, raised the prospect of a slowing global economy triggering a new round of problems with corporate loans and said that the impact of the credit squeeze could be greater than Bank projections.

Yes, but unlike the Eurozone, the BoE is permitted to ‘write the check’ as in the treasury.

National solvency is not an issue in the UK as it is in the Eurozone when weakness is addressed.

He told members of the Commons Treasury Select Committee that Britain faced “major conflicting risks” threatening the Government’s inflation target from the problems of a slowing economy and rising commodity prices.

Yes, the twin themes of weakness and inflation.

In a memorandum to the committee, Professor Bean warned that the “dislocation” in the financial markets “probably has further to run, especially if a slowing economy here and abroad generates a second round of write-downs, this time associated with corporate loans. Moreover, the impact of the tightening in the terms of availability of credit could prove greater than is embodied in the central case in our most recent set of projections”.

Agreed. And while ‘writing the check’ can readily address these issues with no risk to government solvency, it will also support the higher prices he next discusses:

He said that increasing oil and other commodity price rises would lead to higher inflation becoming “embedded in the economy”, warning that people might seek to offset price increases by making higher wage demands. He said: “There is no doubt that the UK economy presently faces the most challenging set of circumstances since at least the early 1990s and probably earlier.”

Professor Bean said oil prices could continue to rise for another two years and cautioned that Britain faced the danger of a pay-price spiral if workers tried to compensate by pushing up wages. He said: “It certainly poses a significant challenge. There is no doubt about that at all. It may be a relatively unlikely event but it could be particularly unfortunate if it happened, if households and businesses start losing faith in the idea that inflation will stay low, round about the target, they start building it into their pay and prices and inflation becomes much more embedded into the system… Provided pay growth remains subdued, the current pick-up in inflation will be temporary.”

Living standards, the deputy governor stressed, will inevitably be lower because of the global inflation in commodity prices.

Agreed. It’s all about real terms of trade, which have also been declining rapidly in the US as evidenced by the drop in growth of GDP and the drop in non-oil trade deficit.

My guess is the most likely political response in the US and the UK is proactive deficit spending from the treasury to address the weakness and higher interest rates to address the inflation.

Unfortunately the deficit spending that supports domestic demand will also support crude consumption (as well as housing) and ‘monetize’ the ever higher crude prices being set by the Saudis, thereby supporting ‘inflation’ in general.

And this will trigger ever higher interest rates from the Central Bank as inflation trends even higher.

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Bloomberg: U.K. government worker union ‘prepares for battle’ on wages

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Here’s how relative value stories ultimately change to inflation stories:

U.K. Government Worker Union ‘Prepares for Battle’ on Wages

By Mark Deen

(Bloomberg) Britain’s largest union for government employees urged members to “prepare for battle” and be ready to strike, stepping up pressure on Prime Minister Gordon Brown to hand out pay awards that meet the rising cost of living.

“Working people, our people, are taking a hit,” said David Prentis, general secretary of Unison, which represents 1.3 million public sector workers. “Our union will organize the most powerful campaign ever seen in support of public services.”

The comments, made in a speech and accompanied by advertisements in U.K. newspapers today, rebuff Chancellor of the Exchequer Alistair Darling’s call for wage restraint as he seeks to combat rising food and energy prices and a slowing economy.


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