Dec 05 2008
The pound, our incomes and companies take another tumble
The Prime Minister may be in denial, but we have just lived through another week when many people’s living standards have been falling. The pound fell again, now trading at 87 pence to the Euro, and down at 136 yen. This has cut our purchasing power further for all those goods that are imported. There were large job losses announced. More companies put their employees onto three or four day working, or extended holiday closures. Pay rises remain below price increases.
The worrying thing was the immediate response to the 1% cut in the Bank’s base interest rate. The share market fell a little, when you would normally expect investors to see interest rate reductions as good news. Sterling fell, unlike the dollar when they slashed interest rates. International investors seemed to regard the monetary action in the US as good news, but here they are more concerned about a variety of issues, including the rapid build up of public borrowing.
The Bank of England’s latest weekly publication shows that its balance sheet has ballooned to a massive £260 billion as it tries to stimulate banking activity. The Bank of England has share capital of just £14.6 million, provided by taxpayers. At the 2007 annual balance sheet it had share capital and reserves of £1.86 billion. It is interesting that at a time when the Regulator is making the commercial banks put up more capital to improve the ratio between their share capital/ reserves and their total commitments, the Bank of England is going dramatically in the other direction. Of course it is not a worry, as the taxpayer stands behind the Bank, and the Bank concentrates on buying high quality and short term assets. It shows just how hard the authorities are trying to get something to happen, that the central Bank now has a balance sheet around 130 times its core shareholders funds when commercial banks are being asked to get their balance sheets down to around 12 times their shareholders funds. Restrictions on commercial bank capital ratios help prevent more of the injection being passed on to new borrowers.
For the time being the large monetary infusions into the markets and the active approach of the Bank of England are not inflationary. The tight regulations on the commercial banks, the poor state of the wholesale markets and their new caution means this money does not get passed on through the banks and multiplied by their lending. The authorities will need to be vigilant to withdraw this large liquidity when things do start to work again, otherwise it will become inflationary.
Today’s chosen subject for debate by the political classes is why the full interest rate cut by the Central bank is not being passed on by all the commercial banks. It gives politicians a marvellous opportuntiy to feel useful, by demanding that the banks cut their rates. They should try to understand why this is happening. There are some obvious reasons why some of the banks will not pass on some of the cut to some of their borrowers:
1. Savers need a reasonable rate on their savings. Banks need to keep and increase the deposits they take from the public, as other sources of money for the banks have dried up.
2. Banks need to make more profit to meet the Regulators’ demands for more shareholders funds (which include retained profit) to maintain their existing level of lending, let alone increase it.
3. Some people have signed contracts to borrow at fixed rates, so they do not get the benefit.
4. Banks think lending to people is becoming more risky, as many more people are unfortunately likely to lose their jobs as the recession bites harder, so banks feel they need a better margin and more reserves to deal with future losses on bad debts.
5. State owned banks(N Rock, RBS) have been losing money in the first half year and presumably at some point will be required to make a profit for the new involuntary shareholders.
It is ghastly watching the speed and size of the collapse now going on in much of the private sector. If the government does not mend the banks quickly, the recession will deepen more. That is why they do need to revisit their £450 billion package of loans and gurantees to see how it can be better spent to get some health back into the commercial banks, and why they need to review the regulatory framework again as it is clearly reinforcing caution and parsimony by banks. I hold no brief for the banks, and understand their current unpopularity. I do think, however, when something is n’t working well those in power should consider how to change the signals and the framework to alter conduct as they wish, rather than engaging in a public slanging match.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
It’s quite scary where I live (Norfolk) ; jobs seem to be going all over the place and I don’t think the full force of the unemployment hit will occur till after Christmas. Many of the shops in Norwich have sales already that are operating at giveaway levels ; the retailers must be desperate to shift at almost any price, including taking a loss. This can’t be good for the country, whatever the immediate benefit to the consumer.
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The prime minister and the chancellor still do not seem to be willing to admit that our economic woes are down to their debt-driven economic boom. The debt in the system is the problem and no amount of interest-rate cuts is going to revive consumer demand or prompt lending. Short of a monumental debt write-off the government has no choice but to wait for the debt to dissipate.
The current tailspin panic, with an eye on the next election, is helping no-one. Least of all our savers, who during the years of credit-excess, were the people who did the right thing, now they are being punished.
Mr Brown and Mr Darling need to now forget about miracle cures and set the focus on ensuring that we have price stability and a stable currency when we emerge the other side of the recession. History will point an accusing finger if the prime minister and the chancellor put party objectives ahead of the national interest.
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APL Reply:
December 5th, 2008 at 2:52 pm
Tony Makara: “The prime minister and the chancellor still do not seem to be willing to admit that our economic woes are down to their debt-driven economic boom.”
An astonishing statistic (from memory so take with a pinch of salt) at the end of eleven years of Labour boom, 35% of the population have no savings, only 13% have more than £100,000
At the same time we as a nation have the largest amount of personal indebtedness in the Western World.
Tony Makara: “Least of all our savers, [snip] now they are being punished.”
Absolutely. What is happening here Tony, I find myself agreeing with you.
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Tony Makara Reply:
December 5th, 2008 at 4:16 pm
APL, I’m happy we can agree for once. Labour’s part-time tax-credit economy could only survive with credit topping up disposible income. Now that the credit has dried up demand has collapsed. One has to wonder what exactly is the government’s economic blueprint for the future? They surely can’t go back to the failed credit-driven model, yet with so little by way of productive industry, low-wages and part-time work structures are never going provide the volume of demand needed without being backed up by credit. There is some hard thinking to be done by the government soothsayers. Perhaps a period in opposition might help focus their minds?
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I am a saver and was astonished to hear Darling refer to the banks being fair to customers by passing the rate on!about says it all.Do they really believe that if bank rate is zero savings rates should be zero what a nonsense world we live in.When will the Public get it, a credit crisis by definition is a debt crisis but by using the word credit it shifts perceptions of blame and responsibility.What will be the economic effect of taking good spending out of the savers income and put it into debt laden hands.If they behave sensibly than debt will be paid down and hence a negative stimulus effect.The revenue will lose both by income tax on savings and savers using capital all be it an offset to the previous point but then less inheritance tax.I will probably go into euro accounts taking the opportunity of currency and the potential that an IMF loan condition will be euro entry.I hear more frequently the words quantative measures and monetise without the explanation of the consequences I have a great fear that the
public will perceive it as an easy option!
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John, is it not possible that we are entering a phase where slashing interest rates is paradoxically damaging confidence across the economy by making it loud and clear to all just how dire its prospects are?
What is the solution?
Reply: I have set out a whole series of actions I wish they would take to restore confidence and get money moving through the system.
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It has been my contention for some time that no one in government has the slightest idea of how to resolve this crisis. Nor does it seem do those at the Bank of England. It’s hard to believe that it was less than two weeks ago that Darling made his Pre Budget Report. In that he stated that growth would recommence in the middle of next year. This at a time when the full effects of recession have yet to be felt. So the recession was to be short. Since then we have heard nothing but a further deterioration in the economic situation. Presumably Darling’s budgetary forecasts were based on this cloud cuckoo land projection. The daily messages coming from government and the BoE spread more doom and gloom whilst at the same time they say that people should have the confidence to spend. It is no wonder that international investors don’t see sterling as a good investment. At the same time the prudent British savers are being punished for the actions of the reckless. So from where is the government going to get all the money they want? It seems obvious that the printing more money will start soon. Who will relieve us of this prospect of doom?
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mikestallard Reply:
December 5th, 2008 at 4:41 pm
Personality is not a thing to bang on about - which of us could survive a personal attack? I know I couldn’t.
But let’s face it: Mr Brown is a socialist Scot who, although he has mishandled the country’s money now for a decade, is in no sense capable. I say “Scot” because, to my limited knowledge, they are the most extreme. Mr Darling is an Edinburgh lawyer who, in his youth, was a Trot. They have not registered the fall of Socialism yet.
The Balls family are economists of the highest calibre. However their knowledge seems to be purely theoretical - hence the 2% VAT debacle. There doesn’t seem to be anyone else in Downing Street who, like Mr Redwood our host here, has had any hands on experience with cash and running a company.
This, in itself, could explain quite a lot.
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Over the last 11 years, Gordon Brown’s schemes have fallen into 3 groups.
1. They don’t work
2. They do work, but not enough to be worthwhile
3. Their outcomes are not what he intended.
Therefore, nothing the government does will help us. In fact, he is busily making things worse.
I can’t imagine how many times over the last 11 years I have heard him praised for making the setting of interest rates independent. Group 1 I suppose.
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Can anyone see the EU Elephant in the room?
It’s sitting on Gordon
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jean baker Reply:
December 5th, 2008 at 1:29 pm
There’s no elephant - ‘white’ or grey. The reasons for Britain’s economic mess being the most dire in the EU are directly attributable to Brown both as Chancellor and PM.
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APL Reply:
December 5th, 2008 at 2:21 pm
Jean Baker: “There’s no elephant - ‘white’ or grey.”
That Jean, is a matter of opinion. In the current dire economic situation it is hardly prudent to be spending £10b + (billion) per year in subscriptions to maintain the Euro nobbery in the manner they have become accustomed.
Far better to ‘cut out the middle man’ and spend it (if appropriate) directly in this country.
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jean baker Reply:
December 5th, 2008 at 5:20 pm
It’s even less prudent for the government to have borrowed ill affordable (reported) £110 bn of taxpayers’ money for PFI’s - ’select contract’ profiteering from public services, i.e. NHS, care of the elderly etc.
I agree, EU ‘middle man’ costs are an additional burden to taxpayers; their accounting is reported to be so full of ‘loop holes’, auditors have been unable to ‘write off’ their accounts for the past 12 years.
The problem I see, is that the government appears to be making policy ad hoc and on the hoof, when instead they should have a real plan of action.
I believe it is now inevitable that many hundreds of thousands of jobs are in jeopardy and I can foresee a future figure of even 4 million looming closer each day that passes where the government fails to deal with underlying problems such as liquidity direct to business, a rational regulatory regime which accommodates the needs of business first to promote their services and thus produce sustainable levels of business, growth, proft and jobs. And lastly, it should reconsider the FSA’s directive that banks change their capital levels at a time where they need more ‘flexibility’ rather than rigidity when dealing with inter-bank lending and lending capacities.
I believe the FSA should be closed as there is sufficient consumer protection within common law to provide adequate protection to consumers.
Secondly, its activities in the banking sector border on nothing more than plain interference in markets they do not understand and have no liability as to the effects its directives create on the financial industry as a whole and thus inevitably on jobs.
I say it again. Close the FSA and revert to self-regulation which KNOWS the market it operates in. Brown is completely wrong to cast aside the 7 former regulators in a bout of political spin which underpins his own lack of knowledge of the markets and how they can only ever operate if “free enough” to do so.
This ‘freedom and flexibility is what made British financial markets so industrious and successful, and yes, lucrative to investors ( which we need ).
People and their mortgages are secondary to the promotion of growth which provides jobs to those people in order that they can continue to afford to pay them.
What he is doing is plainly not right, it will not work, he cannot change it and he cannot DO much unless he begins to understand that whilst it may make good headlines to offer the public protection, it is an entirely different thing to promoting the culture of enterprise which will eventualy avoid the need for such over-protection if the bureaucratic rules are relaxed, and money is spent wisely by government rather than throwing it against a bank wall which cannot pick it up because it it too rigid.
Interest rate cuts will help a few million on trackers but that’s all it will help, because as you say, many are on fixed rates. But also there are many on Libor rates too, and the rate won’t really affect them either so much as it will a person who happens to have a Bank of England based mortgage.
A cull is required in the market of anything which gets in the way of free enterprise otherwise the only inevitable conclusion is austerity for all and a long depression until ’someone’ touches the accelerator and gets us out of the mud we are stuck in in Brown’s Bureaucratic Britain.
Honda incidentally has just made 800 people redundant.
General Motors (will be in trouble ) into 2009.
Volvo trucks are knackered.
Peugeot is static.
BMW has been belted.
Nissan is away on ‘holiday’.
Ford has declined to a rivulet.
And all these car manufacturers survive on consumer confidence of which there is none.
The auto industry reputedly carries 5 to 6 jobs for every manufacturing job, so these job losses are going to start filtering through the economy quite seriously unless Brown takes a U-Turn soon.
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jean baker Reply:
December 5th, 2008 at 5:29 pm
I agree and many believe government unemployment figures, current and forecast, are grossly underestimated and misleading.
Brown’s attitude can be likened to the Captain of the Titanic assuring passengers that the leak isn’t serious - icebergs being a global problem.
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To help rebuild their balance sheets more quickly what about a debt of equity swap? New Star have just set out to do this. Why won’t it work for the banks?
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Still, even after the exposure of the grossly incompetent (word left out) Brown, I see letters, saying how wonderful he is, and that the writers think he is the man to steer us through the global problems that have been caused by the United States. This seems to me to be that apart from the “Me farver and ‘is farver before ‘im were labour.” syndrome, either nulabour is doing a good job of brainwashing the public, or, the opposition parties are doing a bad one. The fact that the banks are not doing what the government wants them to is not looked on as government uselessness, but the failure of big business. Your column is very succinct, but the words you use are not the ones that would sway labour voters, even if they were in an organ that they read. The issues are complicated but it should not be beyond people like yourself to put them in very simple language in the tabloid press.
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mikestallard Reply:
December 5th, 2008 at 4:47 pm
Our host regularly posts stuff in the local paper which he dutifully puts out for us to read. And, yes, it really does explain his thoughts very fairly and in a way which local people can understand. I just wish our (excellent) MP did the same here in the Fens.
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John Reply:
December 6th, 2008 at 9:59 am
I’m glad JR uses the local paper, but with his expertise he should be aiming for the national dailys. I also saw something on “Have I got New for You.” It was Brown defending his publication of leaks to Frank Bough in an interview. This should be required viewing in the House of Commons at PMQ’s
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“The Primeminister may be in denial…..”
Well it was Mandy who compared GB to Moses.
Both ‘basketcases’ and both found in deNile.
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Suppose the pound does collapse to the point where the government wants to join the euro. In effect the government would then be admitting that it had failed in its stewardship of the currency.
According to http://en.wikipedia.org/wiki/Pound_sterling the pound was first used in Saxon times, when 240 silver pennies equalled one pound. In other words, the pound survived the Norman conquest, a thousand years of history, two World Wars—and yet it is possible that it may not survive Gordon Brown.
For much of this period, of course, there was no obvious alternative currency. It is still true, though, that each government took over responsibility for the currency, and had to manage it in a way that retained confidence. If any government had failed to do this between King Offa of Mercia and John Major, we would no longer be using pounds. The pound has certainly had its moments, but it has always been a store of value that we could continue to use.
Is Gordon Brown about to fail this fundamental test, which has been passed by every British government in the last thousand years?
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APL Reply:
December 5th, 2008 at 2:27 pm
“Suppose the pound does collapse to the point where the government wants to join the euro.”
1. Brown will be unable to print £ since the EUro central bank will have control of that. Granted they have recently changed their tune, inflation now taking a back seat.
2. In the circumstances you describe, the Euro Nobs would be insane to take the UK in in such a condition.
3. The Euro Zone has more than enough problems of its own without taking the UK too.
Competitive devaluation is what we can expect now. No country can afford to allow its currency to remain stable when all the others are falling like a stone. Even the Chinese are talking about devaluation.
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adam Reply:
December 5th, 2008 at 10:48 pm
They would see joining the euro as a success not a failure.
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It seems to me we would have done better, all in all, if the State had not been involved at all.
There may be some good that has been done, but there has been more harm; and since you cannot have them seperately (either you have State intervention or you do not) you would be doing better without, rather than with.
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mikestallard Reply:
December 5th, 2008 at 4:52 pm
Mr Brown and Mr Darling (to say nothing of any of their advisors (sic)) are both Socialists. Mr Darling was once a Trot at University. Mr Brown is Scottish Labour. They know that the State should run things because, in their minds, that is what happens under Socialism.
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jean baker Reply:
December 6th, 2008 at 11:02 am
“Socialism is a philosophy of failure, the creed of ignorance and the gospel of envy, it’s inherent value is the sharing of misery ”
Winston Churchill.
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Listening to Radio 5 this morning, I despair at the lack of financial knowledge of these media pundits. “The government must force the banks to lend all this money and pass on the full cut in interest rates”. The banks are doing exactly what Joe Public will be doing from Xmas into next year; saving.
For all the reasons JR has mentioned above; the banks are trying to rebuild their capital base. The difference between what they lend at and what they borrow at - the “Average Net Spread” - is one of the principle ways they do that. If the regulator rules that they must hold a reserve ratio of 12 - around eight percent - then that has to come out of the spread. Many of these banks still have “toxics” on their books that have yet to have a market value, they will be attempting to cover known risks on these as well.
“Banks are intermediaries which borrow from one section of the community and lend to another. In the normal course, they cannot give their borrowers a larger cut in loan interest rates than their depositors are willing to give to them. Banks must earn reasonable profits if they are to remain viable and be in a
position to meet the financing needs of the community in the future. On the other hand, when bank managements make mistakes it is appropriate that their shareholders bear the
brunt of this through lower profits and dividends.” (RBofA).
With governments intervening left right and centre, large quantities of uncertainty are being introduced; bond prices are being distorted deliberately by central banks for their own ends. Markets are good at pricing risk; they are not good at pricing uncertainty. So, uncertainty gets interpreted as high risk.
If you are a central banker holding large liabilities that are foreign owned, the best way to reduce those liabilities - borrowings - is to create inflation to make them into small liabilities. If you can engineer a devaluation of your currency, even better. The last thing that the BoE wants at this time is a strong pound. The fact that your booze cruise to a French hypermarket is going to cost you a lot more, is of no consequence to the BoE. It will be a consequence for politicians at the next election.
Hence, do you still think we have an independent BoE? … Discuss.
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APL Reply:
December 5th, 2008 at 3:45 pm
Acorn: “For all the reasons JR has mentioned above; the banks are trying to rebuild their capital base.”
An alternative option.
1. Allow the old banks to sink or swim. NO MORE PUBLIC MONEY FOR ANY OF THEM. Let them raise any capital they need from their shareholders. NO MORE NATIONALISATION.
2. Government should set up two or three completely new banks. And capitalize them with the money they were planning to give to the old banks in the rash of Nationalizations. The government would take stock in relation to the amount of capital injected.
3. These banks could now loan money in the UK economy. With a sensible restriction on the loans they were permitted to make, say maintaining a capital ratio of 10:1 maximum.
So if the government set up one National bank of England it would be debt free in the first instance, secondly it would be able to loan out at commercial rates ten times the capital the government had injected.
Do something similar for the other regions of the UK. We could have four banks lending at commercial rates to maintain the UK economy.
The old banks could go off and die quietly someplace.
Hopefully, sometime in the future, the government would sell its holding of the new banks stock to the market and repay the UK tax payer the initial float. there is a very good chance, since the new banks would be debt free initially, that the tax payer might get a real return on his money.
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Not an Economist Reply:
December 5th, 2008 at 3:58 pm
“If you are a central banker holding large liabilities that are foreign owned, the best way to reduce those liabilities - borrowings - is to create inflation to make them into small liabilities. If you can engineer a devaluation of your currency, even better.”
I don’t disagree with what you say. That is their attitude. But it amounts to madness in my view. If foreign investors are faced with a government that seems hell bent on inflation then I really don’t think they (the foreign investors) are going to continue to prop that govt up by continuing to soak up its public debt. That will leave excessive monetary expansion as the only answer the ultimate result of which will be levels of inflation we have never experienced in this country. That will inturn hasten the collapse of the currency.
Talk of deflation by commentators is very much a misnomer. The demand for money may have increased recently but there will come a point when it will rise again, sparked by a collapse in public confidence in their own currency as people begin to suspect that the monetary authorities polices are misguided and inherently inflationary. And events are changing very rapidly such that i doubt that they will tighten the hatches back down when required.
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One other thing…not to put too fine a point on it, but I am doing very well out of this, for I am paid in euros. My debt is denominated in pounds (and so has been reduced by 15% in the last few months) and my big ticket items are often in pounds, since I tend to buy from the UK.
To put it correctly; a transfer of wealth is occurring, whereby wealth is being transferred to me (since I have borrowed in pounds) from people who have saved in pounds. This is the result of Government policy. It is an injustice - a form a theft in fact - on a *national* scale.
People I think aren’t necessarily quite fully aware of what the strength of the currency actually means *to their real as opposed to nominal standards of living*, or what it means in ethical terms. Those who have saved are having their wealth removed from them and given to those who have borrowed. Is this just? is it ethical? is this what Labour stands for?
To me it is directly apparent, because it costs me less and less each month (since I have to convert euros in to pounds) now to service debt and buy new purchases.
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Acorn Reply:
December 6th, 2008 at 10:31 am
Dear Blank X
You lucky b*****d. Stop buying those big ticket items and start buying my government debt. I have devalued the currency to make it much cheaper for you to buy; (and easier for us to flog the bloody stuff).
Ok, I know I am not offering a lot of interest but don’t believe everything you read in the papers, that’s for the plebes. Your IFA may have told you to hang on till next year when I will be getting a bit desperate. And yes, if those bloody banks start lending to people, I may have to up the interest rates - the ones the media don’t understand - to keep them coming into our Threadneedle Street shop.
Don’t worry about inflation, I have lots of ways of controlling inflation; bank reserve ratios; interest rates; open market operations and stuff like that. (I haven’t got a clue how you control deflation, horses, water and drink, you know what I mean;!!!! banks).
If you must buy big ticket items, can you get the ones that say “made in UK” on them. It is a bit of pain if I have to pay the Chinese to send us a washing machine, just to sell it to you at a fire sale price. (I am trying to get the nations trade deficit down and a merry-go-round of Korean washing machines I don’t need!)
And, stop inviting your relatives over to Euroland, they don’t understand that a foreign holiday is an import on my books. At least get the b*****ds to fly on a British airline. (But they must give up their seat to anybody who is paying in dollars or yen.)
And, stop going on about the value of the pound, you are upsetting our voters. Remember what Wilson said, “… this will not affect the pound in your pocket …”: I wish I could get away with that one again.
Give my love to Jean-Claude Trichet at the Eurobank, tell him the cheque’s in the post.
All the breast; Merv King.
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mikestallard Reply:
December 7th, 2008 at 6:08 pm
I hope I have never corrected anyone else’s spelling before but, Acorn old chap, this is turning into a habit:
“plebs” is a feminine singular collective noun. It is never used in the plural (ie “plebes”.)
Sorry, I just cannot bear it any longer! I should have had a Latin Dictionary thrown at my adolescent head, had I made that mistake.
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Acorn Reply:
December 8th, 2008 at 9:14 am
Dear Patrician Stallard.
Plebes is the plural of Plebe and Plebs. Apologies, I have spent too much time with Yanks.
Plebes are the thickest of the thick at a US military academy, they also use it for a remedial class in a college.
http://dictionary.reference.com/browse/plebes&
jean baker Reply:
December 6th, 2008 at 11:10 am
Likewise, Brown’s raid on pension funds is ‘a form of theft on a national scale’. The pensions of Woolworth staff are (reportedly) long gone - borrowed and spent. This exemplifies the lack of concern for ‘workers’ by ’socialist’ lack of financial regulation.
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APL Reply:
December 7th, 2008 at 10:19 am
Of course given that Brown has already dipped his hand into the pensions pot once, he will have a taste for the sweeties in there. Given that brown is the worst sort of Socialist, what is to stop him nationalizing the UK pension funds as they have done in Argentina?
It was always clear to me that much of the UKs success in the financial sector was down to the fact that the Government had the restraint of law applied to its actions.
Today, that is no longer true.
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“Remember, the last time when the interest rates came down 1.5 per cent we had to talk to the banks before things moved forward but things did move forward,’ he told GMTV, adding: ‘And we will be talking to the banks again.”
I really do think that power has gone to this man’s head.
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Not an Economist Reply:
December 5th, 2008 at 3:38 pm
Brwon is looking at he headlines and doing little else. Being seen to be doing sthg is NOT the same as solving the problems the economy has. Rendering banks loss making relics of a bygone age and at the same time discouraging the savings that are needed to provide a source of funds for the future investment we require to grow the economy is self defeating. I don’t accept that the answer to where we are is increasing consumer demand thru monetary or fiscal policy as Brown’s govt assumes. Fiscal policy simply cannot not inject new money into the economy. It will simply move it from one sector to another. Increasing the money supply will simply … errr … increase the money supply. It can’t generate wealth as such. For that to happen there has to be an increase in savings to provide the funds for new investment. But those savings are not there. Labour saw to that with its monotonous mantra of “spend, spend, spend” for the last ten years based on “O” Level schoolboy economics. In 1997 the income/savings ratios stood at 9.6%. In 2007 it stood at a paltry 2.5% And yet puiblic borrowing is catastrophically high. Hence what potential saving funds there are for investors are likely to get gobbled up by the Govt’s wreckless mistake for an economic policy.
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“The authorities will need to be vigilant to withdraw this large liquidity when things do start to work again, otherwise it will become inflationary.”
That’s what terrifies me. How can I possibly invest in gilts when they will become nugatory after Gordon Brown lets inflation rip (which will suit Labour just fine: their clients are the indebted ones and would very much like their debts deflated away)? Will we follow Zimbabwe into the abyss?
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mikestallard Reply:
December 5th, 2008 at 5:06 pm
Let’s look at the ultra worst case scenario for a brief, scary second.
OK, so the UK pound goes South even faster. Because we are British, we start to get agitated because this has never happened before, etc etc. So we go to the IMF as the last Labour government had to after Harold Wilson’s excesses.
Oh dear - they are (now, 2008) down to their last couple of £100 billions. And on their books are a number of other countries. Iceland, Hungary, etc which need bailing out too. So no help there.
Gordon Brown has gone round begging from a lot of countries recently, but I do not think he has come up with very much because he hasn’t been crowing about it.
So who bails us out?
In which case, (Zimbabwe took a decade or two), we go down the shoot into Iceland - with absolutely no reprieve.
Meanwhile, say USA crashed too under a spend spend spend Obama, the entire world economy might go like Zimbabwe.
But, fear not! there are several “experts” ready to restore our fortunes: what rough beast, his hour come round at last struggles towards Bethlehem to be born?
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jean baker Reply:
December 6th, 2008 at 11:22 am
Zimbabwe is a prime example of the results of a lengthy self serving destructive dictatorship.
Obama (and his team) operate under the principles of democracy for the good of their nation.
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Its not just the banks shafting private business either. Amidst all the fuss over the staggering 2.5 point drop in VAT it appears the govt slipped thru a provision whereby Councils will be able to levy supplementary business rate increases. To quote the IEA site:
“Under the cover of the Queen’s speech, a Business Rates Supplements Bill was published contempraneously, giving town halls powers to raise and retain local supplements of up to 2p in the pound above the national business rate.”
See the blog post “Taxing Times” by Philip Salter on 04/12/08 at this link:
http://www.adamsmith.org/blog/
So when faced with tough choices - inflationary costs, wrestling with demand led budgets and Central Govt posturing about clamping down on council tax increases - councils will be able to bail themselves out at the expense of local businesses.
Money supply inflation combined with policies designed to cripple both business and the banking industry is really NOT the right thing to do Gordon. Now mass resignation of the entire cabinet - well maybe ….
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John,
Would Richard Branson’s proposed vested interest in Northern Rock (at the outset of their woes) have been in shareholders’/taxpayers/ best interests ?
Reply: A private sector solution would have been better for taxpayers and the mortgage market.
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jean baker Reply:
December 5th, 2008 at 5:36 pm
And shareholders ?
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The reduction of bank rate has become counter productive and irrelevant. The vast majority outside the Government saw the VAT temporary drop as wasteful, if not useless. This could also now be seen as the further economic incompetence of the Government with the attendant loss in confidence. Brown and Co. choose not see, amongst other matters, the see saw effect between savers and borrowers. It is no wonder the banks are hugely reluctant to drop lending rates when their lifeline of savers will be alienated. Additionally savers are voters and their being written off is poor politics as well as poor economics.My previous comments about removing standard rate income tax from savings interest looks more necessary than ever to balance the divide between savers and borrowers.
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As the pound falls and the govt tries to get lenders to take on its new debt I do wo-mnder what the future is for interest rates. The govt could force them to remain at he low they have reached, forcing banks to take the new debt on. Alternatively they will to start raise interest rates again borh the defend the pound and encourage takers of the new debt.
I dont deny that Labour has got away with this to date. I initially thoguht rates wouldn’t come down as much as they did last month as I assumed the BoE would be cautious in the faqce of the govts fiscal policy. But to my mind thta just suggests the authoriites are playing with fire and taking risks they feel are worthwhile in the face of the recession they have created. That in itself does not mean they ar erioght to be doing what they are doing.
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John,
One absolutely key reason for failing to ‘pass on’ the rate cut is that there has been no rate cut. The official headline BoE rate is approaching meaningless. Banks can only pass on what they can borrow - which is LIBOR. UK interest rates are NOT at 2%. They are not.
Even if LIBOR was at 2% banks could only pass it on if they could actually borrow from each other at that rate. But they can’t as they all want to haord cash - there’s no credit right now. Unless the BoE will lend to banks at it’s headline rate then anything the MPC does is just noise.
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Stuart Fairney Reply:
December 6th, 2008 at 6:56 am
Patrick, thank God there is at least one other sane person in the country. The BBC/Pravda had some God-awful phone-in the other morning where proles were encouraged to ‘ring-in’ and hector the banks over this. The fact that the BBC were effectively organising a ’spontaneous’ demonstration of ‘public outrage’ which exactly parroted the PM’s line seemd to escape most contributors. (Incidentally, this is exactly what that charming model of balanced government, Iran does. When ever you see some demo on TV, it’s almost always state organised).
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This Globalism racket is not so good after all is it.
Maybe we should look for Party that will look at British Interests first, and get our Industries back online, Building cars, ships so we can transport Oil, traded ( rather than stolen through illegal war(s) )
And what exactly has happened to the Oil revenue, why are we £1Trillion in debt.
A party that would demand the return of of our fishing grounds, widely regarded as some of the best in the World.
We should stop the EU ( and other agents ) from hobbling our farming.
That way at least we could feed ourselves.
We have always traded with Europe and the World, we didn’t need an EU 200 yrs ago, so what exactly has the tens or is it hundreds of Billions been spent on, we will never know because 80% of its budget is unnacounted for, it has not had it saccounts signed off for 14ys In my view this is the very definition of a Mugging and the Police should be brought in, Unfortunately the very fact that they have not investigated this themselves suggests that they too have been subverted, clearly someone somewhere chooses not to see a crime of immense proportions has been and is being carried out Against this country.
We are being taken down, economically, militarily and psychologically who is it that promoted 24hr drinking, relaxed the drug laws, who was it that prohibited parents and teachers from disciplining children.
Imagine a situation where you pointed out to a child only the negatives of their behaviour, eventually that negative stereotyping would begin to work its magic, the child would lose self esteem, it would begin to believe what it was being told, it woud soon become a self fulfilling prophecy.
Now imagine doing this to a nation via the Mass media for 40 yrs.
Routinely describing the British people as Lazy, Fat, Drunken, Drugged up murdering Racists.
Look at Programmes like the Jeremy Kyle show, and their carefully selected Big Brother contestants, an insidious plot to set up the British people.
(para re immigration removed-ed)
National Unity is not helped when we invade their countries for oil.
Are Iraqi’s and Afghans all Terrorists or are they simply protecting their countries from plunder by Western powers.
The real enemy of the British people is not the Immigrants, the real enemy of the British people is Westminster and the think tanks, Globalist lobby interests orchestrating this war, behind closed doors Against our country and the Great British people.
There is no doubt in my mind that we are under attack, I hope that when the British people wake up, they realise who the real enemy is.
http://www.dailymail.co.uk/pages/live/articles/showbiz/showbiznews.html?in_article_id=458340&in_page_id=1773
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John,
Any comment on this (from Guido)? What’s going on here?
http://www.order-order.com/2008/12/something-odd-in-banking-bill.html
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As a schoolteacher, I have been trained in keeping order. I am also an expert, since the age of 10 years old, in spotting when a teacher loses control of their class.
A statement is made, a threat given, and it is ignored.
I believe in order, myself. So did Thomas Hobbes. I am not alone in this.
Speaker Martin lost control this week.
Now the Bank of England has lost control too. The Banks who are already on the government’s payroll are pretending obedience, but, on Monday, I go to see my Bank Manager at Nationwide, (which is free of government money and interference), to make sure that my 5% is still coming in on our savings. The 2% settlement, therefore, once again, goes straight over my head.
The Euro is a gymcrack currency, (Southern Europe riding on the back of the D Mark). Now it is €1.25 or so to the pound. That really is disconcerting. Are we really that bad?
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Mr Redwood.
I copy below what Guido Fawkes has put on his blog…are you aware and is it as sinister as it appears?
Something Odd in the Banking Bill
Guido is suspicious about this seemingly innocuous amendment in the new Banking Bill:
Banking Bill
Part 7 — Miscellaneous
Weekly return
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect. !!
The 1844 Banking Bill ensured transparency in the operations of the Bank of England. It has been good enough for over 164 years.The section the new Banking Bill seeks to abolish reads as follows:
And be it enacted, That an Account of the Amount of Bank of England Notes issued by the Issue Department of the Bank of England, and of Gold Coin and of Gold and Silver Bullion respectively, and of Securities in the said Issue Department, and also an Account of the Capital Stock, and the Deposits, and of the Money and Securities belonging to the said Governor and Company in the Banking Department of the Bank of England, on some Day in every Week to be fixed by the Commissioners of Stamps and Taxes, shall be transmitted by the said Governor and Company weekly to the said Commissioners in the Form prescribed in the Schedule hereto annexed marked (A.), and shall be published….
Surely it can’t be that they don’t want us to know how fast the Bank of England’s printing presses are going to be running?
Reply: Yes, of course that is sinister. Glad we can still see this info.
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Dear John,
What do you think of the change to B of E policy as per Guido Fawkes blog?
Are they seriously planning hyperinflation? or “quantitive easing”
Reply: Please read yesterday and today’s blog
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Not an economist
Labour saw to that with its monotonous mantra of “spend, spend, spend” for the last ten years based on “O” Level schoolboy economics.
That is an insult to people like myself, who have an O Level in economics.
It is my understanding that the more qualified an economist becomes the more Marxist they are. The LSE is endemically infested by Marxists and Marxism.
Radical politics is the art of changing things. Nothing changes things quicker then ‘events’ such as economic busts. Nothing more hides radical change then economic booms. Hence booms and busts. It is not done just to scam the savings and wealth out of the people. It is deliberately done to increase establishment control over the entire population.
The people with the REALLY big money ( ie the establishment ) have been involving themselves in effectively running this country and much of the planet for a very long time. In the past this was known as The Roman and British Empires, it is now more commonly known as The New World Order.
If you take time to find out who exactly these people are, and what they believe, John Redwood and others may, or indeed may not be very surprised by what they find.
At university these chaps where always aristocrats and almost to a man MARXISTS, not free market capitalists, and certainly not small c conservatives. The very last thing any of them were was what most perceive as being Thatcherite. Although what Thatcherite actually did mean, is very much up for a large amount of revisionism right now.
The free market is about wealth creation and the personal retention of same, independent of the state. A freedom that is also reflected in general prosperity, real democracy, leading ultimately to true down-up liberalism.
This however never has been the ultimate plan for The British Empires so called capitalist system for which the sun is still not setting, or even become close to doing so.
The establishment only like the free market when it is COMPLETELY controlled by them, so that they can effectively carry on controlling us. They don’t need more cash, they own it all already, they need an ever growing amount of power, simply to keep them at the very top of their pyramid, and the vast majority, ( dependent on their sometimes good, but far more often extremely evil and destructive nature, ) well at the bottom of their pyramid.
They were at the top looking down in Communist Russia for the best part of 80 years, and still are. So why should they give a toss , whether they are at the top looking down, of a Communist Europe or more to the point a Fascist/Communist World?
John:
Why does the concept that, ” Boom and Bust don’t just happen under ANY repeat ANY circumstances, they are directly and systematically DESIGNED to happen.” So far beyond your imagination, to fully understand?
My O level economic strongly indicated to me at least. That in a truly FREE market, operating in a truly FREE country, which contains a truly FREE media, all backing up a truly FREE written constitution. Serious Boom and busts simply cant happen. This because the market would adjust on a second by second basis to successfully accommodate all changing social, political and economic conditions.
I contend that we have not been living in anything like a free country, or within a free market, anytime in our entire history. Nor have we had a free media to educate and therefore protect us from establishment exploitation, enabled by The BBC’s outright lies and cruel disinformation.
Therefore
We are ALL totally and completely at the mercy of our own ruling elites.
At no other time in my life has the above statement been so obviously true. It is indeed a long since been so, TRUISM.
In the past they contrived and conspired to start international and civil wars to help cement their power and vast wealth. This is a well established and documented historical fact of life that no sane historian of any description would seriously dispute.
IMO
They are still doing the same, when not also contriving and conspiring to cause apocalyptic economic boom and busts. Why should we expect the old establishments dogs of war to have come up with any new original tricks, simply because it is now 2008?
The EVIDENCE for such vast manipulation, not to say utter evil, is largely circumstantial. However there is simply such a vast amount of this highly conclusive circumstantial evidence, along with a motive, as incredibly motivating as a motive can be. That only a blind brain dead idiot, or a dishonest/brainwashed politician could not easily find and understand its full implications.
John please don’t feel obligated to reply. I already know what your answer is basically going to be. Just think about it please. We are not all as ignorant or stupidly trusting as our elected, or more accurately selected politicians often seem to be.
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May I recommend a book, called the Creature from Jekyl Island detailing the creation of the Federal Reserve as a Private Bank.
http://video.google.com/videoplay?docid=-8484911570371055528
Also a Film which supports the Books allegation that the Federal Reserve and the Bank of England are Both Private Companies.
http://uk.youtube.com/watch?v=_dmPchuXIXQ
And another.
http://video.google.co.uk/videosearch?q=money+masters&src=2#
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Mike Lazenby, of Kent Reliance where I hold my savings, has basically told Gordon Brown to stick his interest rate cut where the sun don’t shine:
http://news.bbc.co.uk/1/hi/england/7768476.stm
His reasoning is it’s out-of-order on savers. Quite right.
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APL Reply:
December 7th, 2008 at 10:44 am
From the link provided by Adam @ 06 Dec 5:40am
BBC: “A building society in Kent has said it would be refusing to reduce its mortgage rates despite enjoying large profits.”
Isn’t that just typical of the lying deceitful BBC. The subject is a Building Society, last I heard a building society is a mutual society, that is one run for the benefit of its members.
Yet the BBC talks about ‘profits’, no, ‘large profits’, implying such things are evil.
Not only is the BBC giving a false impression of what a mutual society does, it is also implying that ‘profits’ are bad.
Meanwhile any person in his right mind would wish that more banks were showing profits just now.
Really, the BBC is a cancer gnawing away at society.
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To anyone who thinks good sense will prevail and the British govt will not, in a moment of utter madness, set the printing presses into hyperdrive and print money like there is no tommorrow, then catch this link to the telegraph:
http://www.telegraph.co.uk/finance/economics/interestrates/3551328/Bank-of-England-mulls-nuclear-option-of-cash-injection.html
There are two things standing in the way of massive monetary inflation on this scale:
1) Interest rates have to reach zero first. Well that is on the cards ‘cos the stimuli implemented to date have not worked and they won’t cos the problem is not the need for stimulus but the need to allow a resurgence in savings (i.e., the source of funding for business’ to invest and grow) and the collapse of the rotten investments built up during the monetary expansion of the last 7 or so years so they can be replaced by new investment.
2) The EC will stop us.
I don’t agree.
If, as a result of Brown’s misguided interventionist policies, things get worse, then the govt will become increasingly bold and arrogant and so less likely to be steered by a dissenting Europe. I don’t object to this per se - Europe as a supranational inst. telling us what to do can take a running jump, but Brown’s policy initiatives in opposition to the EU will be more of the misguided same and so will push us even closer to the brink of a depression.
That said we may find many govts in Europe adopting a similar line to Brown’s (with the odd notable exceptions such as Ms Merkel). Hence I am not sure that the EC would offer much opposition to this monetary madness. The same reckless irresponsibility is on show in America where Mr Bernanke (Fed chairman) has made clear he will put the printing presses on full speed if he feels the need to do so.
The same fate awaits America. If you destabilise your own currency, if you engage in excessive levels of monetary creation then you will undermine confidence in that currency. Demand for the currency can increase to offset the increase in supply but its unlikley demand will remain at the higher levels for too long. People save with a purpose in mind and when that objective is reached their demand for goods and service will pick up again, releasing the full force of the monetary hurricane that has been built up by thje central bank’s policies onto the econonomy. Thats when the inflation will burgeon to levels not known for some 80 or so years in Europe. More recenlty if you live in Zimbwabe. Being a reserve currency - as the dollar is - does not protect you from this if your central banker is stupid enough. Yes the dollar has rallied recently but that is a short term response to this crises. As confidence in the dollar collapses - a collapse bought about by the Fed’s actions - then so demand for the dollar will collapse.
With each passing day I get increasingly nervous about the path Brown and his coterie are leading us down. As Alistair and Gordon tell us we will get thru this but no thanks to them.
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Mr Redwood,
I’m retired, average cliche saver with most of a small nest-egg (just into six figures) in cash. I am deeply worried about the inflationary implications of the govt’s policies. I cannot accumulate more capital, and the effects of the loss of my current stash on my sense of security, not to mention my ability to provide for my grandchildren’s education, would be dire.
What I need is an authoritative analysis of the likely outcomes of what is going on. Then advice on how to cover myself against the worst of them.
I suspect that there may be quite a lot of people in a similar position - and we are of the generation and class that bothers to vote.
Can we look to you for such leadership?
Reply: By law I cannot offer investment advice on this site. Investment is a regulated activity, and an adviser needs to ask about your individual circusmtances before offering advice. There are numerous regulated advisers, and regulated investment websites that you can turn to.
This site does provide economic and market analysis useful to those who make investment decisions. There are ways of controlling risk and making a return, even in these dangerous times.
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May i suggest that a better, or at the very least an alternative viewpoint of world events might be gleaned from :-
http://www.prisonplanet.com
Now that they have all the Wealth and all the Power Is this to be the future of us and our children,
Gordon Brown would say no, my natural human instincts say otherwise.
http://www.endgamethemovie.com
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