Government Official Loses Bet on the Economy

This time last year an economist wonk at the liberal-leaning CentreForum took a dislike to Guido’s economic foresight. Deficit denying Liberal Conspiracy made a predictably over the top attempt at playing up the difference of opinion calling Guido innumerate, an allegation later quietly withdrawn.

Subsequently a wager was drawn up with the Freethinking Economist Giles Wilkes: a book of the loser’s choice would be sent to the winner. After a year of month-after-month of above target inflation announcements by the Bank of England, Giles, a good sport and former bookie, has decided to admit early that deflation just isn’t going to happen. In fact the realisation is becoming mainstream that the danger is quite the opposite, as Guido has long pointed out, of runaway inflation resulting from QE. Inflation is always and everywhere a monetary phenomenon. Guido doesn’t want to worry anyone, but Mr Wilkes is now Vince Cable’s Special Advisor…

Double Dip Fears Grow

The half-point fall in GDP has serious political ramifications. If we get a second quarter of what Gordon Brown would call “negative growth” we will be in recession. Ed Balls will have been proved right and George Osborne’s credibility will be shattered. One policy change could prevent that happening. Suspend the VAT hike.

The short-term political hit of executing a u-turn versus the wrecking of the long-term mission to cut the deficit is a calculation that George Osborne won’t like to make. He is touring the studios saying that he “won’t be blown off course by bad weather”. The trouble is he is making the bad weather with this VAT hike.

The VAT hike depresses GDP growth, adds to already rampant inflation and hits the poorest hardest. If GDP in this forthcoming quarter is slightly negative, he’ll have only himself to blame. Why maintain a tax hike that suppresses the very consumer spending necessary for growth?

Iceland Shows the Way Forward for Ireland:
Decouple, Default, Devalue and Develop

Iceland’s President, Olafur R. Grimsson, told Bloomberg TV on Friday that his country is better off than Ireland because they allowed the banks to fail two years ago and devalued the krona:

“The difference is that in Iceland we allowed the banks to fail. These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

The Irish bank bail-out is being foisted on them by the EU and the IMF whereas sovereign Iceland let the banks go bust and restructured the financial sector to keep the commercial sector serviced. As a consequence, “Iceland is faring much better than anybody expected” says Grimsson:

“How far can we ask ordinary people – farmers and fishermen and teachers and doctors and nurses – to shoulder the responsibility of failed private banks… That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”

Under this plan 20 cents of every euro of Irish taxes will go to pay the interest on the bank bail-out debts. The Irish bail-out plan will cost €54,800 per Irish household. Ireland’s future thus looks a lot more bleak than Iceland’s path of debt default and a devaluation of 60% two years ago which has the country rebounding: exports and manufacturing are growing by 20%, tourism is back near all-time highs, real wages are rising, unemployment is declining sharply, interest rates fell from 18% to 5.5% and the stock market has rebounded 50% from its lows. In contrast this euro-banker’s bail-out will only burden the next generation of Irish who don’t flee with crushing debts not of their making…

Britain and europe should keep their bail-out billions rather than foist them on Irish taxpayers to cover the responsibility for bad investments made by their own private banks. They can use the billions to bail-out their own banks directly if they want, without involving the Irish taxpayers…

Britain’s Trillion Pound Horror Story

Guido is watching a preview of film maker Martin Durkin’s very accessible look at the economic situation we are in. As Ireland’s political class mortgages future generations to keep the ECB and bondholders happy it explains the full extent of the financial mess the UK is in. Not quite at Irish levels, but if Gordon had won the election…

Durkin’s film is polemical, but he is right, inflation and debt are going to impoverish us for generations. Worth watching tonight on Channel 4 at 9pm. Though it may give you nightmares…

Quote of the Day

Nassim Nicholas Taleb said…

“Obama did exactly the opposite of what should have been done… He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse… Total debt is higher than it was in 2008 and unemployment is worse.”

+++ 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 […]

+ READ MORE +

+ + + 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. […]

+ READ MORE +

€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.[…]

+ READ MORE +

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 […]

+ READ MORE +



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Quote of the Day

Liam Fox shreds Cameron’s Calais scaremongering:

“Sad and disappointed to see our Prime Minister stoop to this level of scaremongering, especially as he knows the Calais agreement is nothing to do with the EU and agreed between the two govts”

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