+++ CPI Still High Above Bank of England Target +++

Every month consensus economists* and the Bank of England predict inflation will fall, Mervyn King even talks about the threat from deflation – Guido sees that merely as an excuse to justify printing even more money via quantitative easing (QE). QE means inflation is inevitable.

Get your wheelbarrows out, stock up on gold and baked beans. If you can, buy a productive asset, like farm land – it is an inflation hedge and you won’t go hungry. Here comes inflation – as it always does when governments turn on the printing presses…

See also : Coming Soon : Double Digit Inflation, Double Digit Inflation is a Black Swan, Bank of England Pension Fund Surges Betting on Inflation, Yo Dude, Where’s the Deflation?, UK Dec CPI Posts Largest Jump On Record to 2.9%, Growing Unease About Old Lady’s Secrecy, Something Odd in the Banking Bill

*Liam Halligan and Andrew Lilico being honourable exceptions

Quote of the Day

Nouriel Roubini writes that…

“The reopening of the fire hoses of credit and capital that occurred during the bubble years will happen again and intensify the boom-and-bust cycles. Driven by ever-more- desperate policymakers in the U.S., Europe and Japan, these cycles will both shorten and magnify. Political, policy and regulatory uncertainty will increase, and as a result, financial crises will become more frequent and costly, while risk aversion, volatility and uncertainty will rise.”

Do We Really Need the VAT Hike?

Osborne’s budget has convinced the bond markets that this coalition is serious about tackling the deficit. The rally in gilts since the election and budget has been strong, taking 10-year yields down from 4% to 3% in three months, bringing down long term borrowing rates for mortgage holders and capital hungry growth businesses alike.

There has at the same time been a slew of negative-to-soft data on the economic front, given that the deficit cutting credibility of the government is firmly established, to the nigh on elation of the bond markets, Osborne has now earned a bit of leeway. Having already achieved fiscal credibility, if we do get more soft numbers on the economic front, he could afford to suspend the VAT hike due in January. If he goes ahead with the VAT hike and we do see a double-dip, Ed Balls will be well justified in blaming him for adding to the woes of the consumer. The VAT hike will take £13 billion of spending out of the economy.

David Smith, chairman of the Shadow Monetary Policy Committee group of independent economists, says his budget model calculates the move could increase unemployment by 235,000 over the next decade and reduce GDP by 1.4% over the same period. Do we really need to be reducing GDP at this time? The fiscal flagellation is no longer required to appease the gilt market…

Spending Cuts: Real or Unreal?

Last week John Redwood advanced the argument that we will not see any overall cut in government spending during this parliament, Guido would add that the government isn’t planning on paying down a single penny of the national debt by 2015 either. Nobody challenged the Redwood-Guido contention that in cash terms there is no overall spending cut – the fact is the coalition budgets over the next 5 years to raise expenditure 15% – from some £600 billion to nearly £700 billion.  Some counter that specific expenditure programmes are already being cut because in real-terms, inflation adjusted, there will be an overall cut in government expenditure.

Last week Peter Hoskin on the Speccie’s CoffeeHouse blog produced a chart* showing an inflation adjusted real-terms spending cut of 2.7% after 5 years. Even this thinnest of salami slices doesn’t ring true, Guido is under the impression that the Treasury aims to keep spending flat in real terms. Peter was kind enough to supply the spreadsheet showing his workings.

Peter used a combination of HM Treasury sources to calculate his deflator (red). If however we plug in the Bank of England’s inflation target of 2% things come out different (orange). Mervyn King was warning us only last year, when he was making the case for printing money (QE), that it was deflation that was the coming threat. Nevertheless if we ignore his previous scaremongering and accept that he will meet the Bank of England’s 2% average inflation target over the term of the parliament, the result is a real terms cut of 0.2%. That is a rounding error, not a significant real terms cut in government expenditure. Based on the Bank of England’s inflation target, government spending by 2015 compared to 2010 will be flat in real terms.

Contrary to the BBC-Guardian cuts narrative, the reality is that there is going to be a real terms spending freeze, the coalition is planning a spending hike of 15% in cash terms, it isn’t planning real terms cuts and it isn’t planning to pay down a penny of the national debt. The deficit unfortunately will still be with us come the next general election…

*Fraser Nelson has other 21st century modernisation plans besides charts for the Speccie under his kilt. Expect to see changes to the magazine’s cover, look and feel.

+ + + UK GDP Increased 1.1% in Q2 + + +

The ONS today reported that Gross Domestic Product (GDP) increased 1.1% in the second quarter of 2010, compared with an increase of 0.3% in the previous quarter. That is much higher than expected, almost double what consensus economists were forecasting. Good news for the economy but terrible news for the agreed Balls-Byrne line that public sector cuts “risk a double dip recession”. If this number is not rogue it blows IMF and OBR predictions out of the water on the upside. It also blows Labour’s political strategy…

This will cause anguish in Labour circles (whatever they say publicly) because if the Coalition gets the economy to bounce and grow strongly by 2014, Labour faces becoming the third party. Labour needs bad news to thrive electorally…

€uropean Debt Crisis Explained

Australia based Kiwi satirist John Clarke explains the €uro Debt Crisis with some wit. The Aussies are laughing at us because they are literally sitting on thousands of tonnes of gold…

Via the Devil.

Markets Like the Change Coalition

Before the election George Osborne and many Tory leaning pundits were claiming that a coalition government would wreak havoc in financial markets.  Guido argued the opposite – that a “Change Coalition” would see gilts rocket upwards – only a government involving the Labour Party would wreak more financial havoc.

The gilt market has seen yields drop a full 50 basis points, in plain english that is the gilt market taking ½% off the ten year interest rate against which many mortgages are set.

This immediate £6 billion reduction in unfunded over-spending is seen in the City as confimation that the LibDems are fully signed up to the savage cuts to come next year.  Britain has now moved out of the P I I G S bracket of nations (Portugal, Ireland, Italy, Greece and Spain) in danger of sovereign default.* The chart above shows it all clearly, during the days when the City feared a Lib-Lab government the markets declined and once the Lib-Con government was in the bag they rallied.

The Spectre of Sovereign Collapse Haunts Europe

Most of the non-financial Dead Tree Press has been so focused on the election that they haven’t noticed that Europe’s financial markets are in meltdown, the euro is plunging and a spectre is haunting Europe — the spectre of sovereign collapse. All the powers of old Euro have entered into a holy alliance to exorcise this spectre:
The latest down-payment for the euro-project is a €14.5 billion bail-out of Greece propped up by Germany, France, Italy, Spain and six other EU countries.  The German banking sector is thought to have a €34 billion exposure to Greece, panic has hit not just the euro, but the banks hitherto lauded by the likes of Will Hutton as paragons of financial rectitude so unlike the risk-taking City of London.

The German authorities are in panic and have banned short-selling in Allianz, Commerzbank, Deutsche Bank and Deutsche Postbank – the most blue chip of German banking pride – in a move which will surely see foreign investors sell their holdings it has already driven the euro to a four-year low overnight.  The euro project is built to fail without a unified fiscal and tax regime, sooner or late, as eurosceptics have predicted from the outset, the euro will be torn apart.

Euro politicians are now blaming speculators – a sure sign that they want to shoot the messenger – speculators are the harbingers of economic reality, not the creators.  The euro is at a four-year low for good economic reasons, not because traders are shorting it.

Britain is spared this financial contagion as it stands in splendid isolation from the European Central Bank.  Let us hear no more from europhiles on the laughable “stability” that joining the euro will bring.

Reality Check on Cuts

As Labour begins to scream hysterically about the planned £6 billion reduction in over-spending which will be made in Osborne-Law’s Emergency Budget, it falls to Guido to remind readers again that £6 billion is less than 1% of government spending […]

+ READ MORE +

Markets Stable, Sterling Rising

Sterling is rising from lows against the dollar as the City expects a Lib-Con deal, gilts are going sideways, the EU Greece-Euro bailout is also cheering markets. Gilts are a buy if you believe a Lib-Con regime will take tough […]

+ READ MORE +

Freaky Friday Fears Give City Nightmare on Threadneedle Street*

London’s financial futures exchange will, in an unprecedented move, open at 1 a.m. on Friday to allow investors to trade gilts as the election results come in.  Investment banks and hedge funds will be at their desks overnight.  Given the […]

+ READ MORE +

Tories Panic, City Relaxes

George Osborne this afternoon is trying to convince us that a hung parliament will mean higher interest rates as investors panic and the gilt market plunges.   Guido begs to differ, arguing that if on May 7 the Tories went into […]

+ READ MORE +



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Ed Balls on his defeat:

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