The “Occupy the London Stock Exchange” and “Occupy Wall Street” crowd have got the wrong target. Living standards are being deliberately and systematically undermined by central bankers not stockbrokers. The London protestors should head over to the Bank of England and their friends in NYC should head for DC. Inflation at 5% is robbing rich and poor alike of our earning power.
In consistently predicting this inflationary mess Guido would happily claim sagacity, but it is pretty basic economics that if the supply of something rises, unless demand increases, the value of it goes down. If you print more money, you get inflation. Simples.
Ben Bernanke and Mervyn King say inflation isn’t a problem, in fact the Bank of England’s official position is that deflation is the danger. The Chancellor says he agrees with the governor. George Osborne also claims he is a “monetary activist”, though since monetary policy is in the hands of the nominally independent Bank of England it is hard to understand how his activism can take effect. He also claims to be a “fiscal conservative” who, when not putting up taxes, spends and borrows more than Gordon Brown. Mervyn King is alright, his pension is inflation protected.
In the think-tanks and on the financial pages the likes of Allister Heath, Dan Hannan, the MPs Douglas Carswell and Steve Baker, as well as yours truly, are all sympathetic to a radical school of economics that is attracting growing interest. The father of this school was an Austrian economics professor, Ludwig von Mises, as the credit crisis deepens his books are selling better, in particular “Human Action” in which he warns
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Capitalism is widely understood as a profit and loss system, through trial and error in free markets we find a more optimal allocation of resources. If central banks deliberately provide cheap and easy credit the creative destruction that is part and parcel of capitalism ceases. The losses and errors are not destroyed, instead they are bailed out until an incredible €2 trillion €uro bailout is the consequence.
Banks under-priced risk because interest rates were too low for too long. The US housing bubble owes its existence to central bankers, the recklessness of investment banks was encouraged by the Fed rescuing investors in Long Term Capital because it was “too big too fail”. The credit crisis of the West is now, finally, approaching “too big to bail” territory. The catastrophe will be greater the longer we try to head off economic reality with short-term bailouts which make things worse in the long-run.
On the Today programme this morning George Osborne dismissed the inflation threat “Actually the problem at the moment is too little money… That’s why the independent monetary policy committee came to its judgement” Is that really true?
The MPC has failed for 60 months in a row to meet its inflation target of 2%, inflation will probably come in at 5% next month. That clearly isn’t a deflation problem, it is an inflation problem which gives savers and pensioners on fixed incomes negative real interest rates, deliberately halving the real value of their pensions in little over a decade. That isn’t an unfortunate consequence of government policy, it is a deliberate policy aim because it also halves the government’s debts in real terms as well.
Those dangerous radicals at SAGA, the retirees organisation, are describing QE as a “Titanic Disaster“,
“QE2 will damage pensions, impoverish pensioners and ultimately risk another crash. Inflation depletes spending power. It does not create growth. This inflation has undermined confidence and caused consumers to retrench, which has actually weakened the economy. The authorities must take heed of these dangers before it’s too late.”
The Monetary Policy Committee is simply no longer even trying to contain inflation, the Federal Reserve in Washington and the Bank of England in London are, in concert with their respective treasuries, deliberately letting inflation go to solve the government debt crisis on the backs of pensioners and prudent savers. The only reason they don’t say it explicitly is because if inflation expectations were to be higher it would feed, reflexively, into even still higher inflation. That is why Mervyn King has disingenuously claimed for 5 years that inflation is “a blip”. Some blip…
This from the party of sound money will hit a key voter demographic hardest, the demographic that is most loyal in voting for the Conservative Party, affluent retirees. David Cameron’s conference speech last week was nowhere near as good as his 2008 speech:
I believe that government’s main economic duty is to ensure sound money and low taxes. Sound money means controlling inflation, keeping spending under control and getting debt down. So we will rein in private borrowing by correcting that big mistake made by Gordon Brown, and restoring the Bank of England’s power to limit debt in the economy.
In government and at the Chancellor’s behest we are seeing the printing of money on a scale never seen before, inflation is uncontrolled, spending is rising, debt is being encouraged to rise. The Chancellor plans to facilitate more private borrowing from the Treasury by poor corporate credit risks and the Bank of England now holds on its books a third of all the government debt outstanding with no credible plan to unwind the hundreds of billions in QE driven government gilt purchases. Sound money? What a joke.
There is often more truth in satire than news reporting and yesterday gave us an amusing example. The Chancellor’s vague plan for the Treasury to buy small firm’s corporate bonds was reported on by the Daily Mash thus:
Osborne’s offer of credit to thousands of small businesses will make Britain the first conservative-led communist state when the loans are inevitably defaulted and the government ends up owning and running everything.
The Chancellor seems to think the solution to the credit crisis is more debt, even though many businesses are doing the opposite and de-leveraging. Banks make money from lending and they lose money lending to bad credit risks. The government thinks the banks are being too cautious even though the markets think there is serious trouble ahead. Guido thinks the markets have it right.
When challenged to introduce growth-stimulating tax cuts the Chancellor refrains saying that he won’t because he is a “fiscal conservative”. George Osborne presumably would concede that Nigel Lawson was also a fiscal conservative, yet he managed to cut the top marginal tax rate from 60% to 40%. There is nothing fiscally conservative about maintaining a tax rate so perversely high it generates lower revenues by driving high earners out. This isn’t fiscal conservativism, it is political defeatism.
It is even less likely that fiscally conservative Nigel Lawson would countenance Osborne’s proposed socialisation of the corporate credit markets. When the government starts lending money to companies that no one else wants to lend to, you can be sure of one thing, they are going to lose a lot of taxpayers’ money. Billions.
Downing Street will not be best pleased that Twitter has chosen Dublin not London as its European base. Dave and Boris invested in a joint Twitter charm offensive, with No. 10 briefing the Telegraph: “All that matters is that they come to London.” They didn’t and Ireland’s business Minister Richard Bruton says it “is a massive win and shows there is real ground for Ireland’s claim to be the internet capital of Europe”.
Twitter joins Google, Facebook, Microsoft, Linked-In, Zynga, PayPal, eBay, AOL and Yahoo in Dublin, where the internet hub is generating thousands of high-tech jobs of the future. Can you blame them? Lower corporation tax rates and lower personal tax rates made it an easy decision for Ali Rowghani, the chief financial officer of Twitter. The UK has to become more tax competitive if it wants to attract geographically mobile internet firms.
Fiscally Ireland is doing what has to be done, an expansionary fiscal contraction is well on its way, GDP growth is well above the €urozone average, there is a healthy trade surplus. If the Irish political elite would steel themselves to exit the €uro, implement a controlled default on the bank debts and re-introduce an Irish punt pegged loosely against a basket of $, £ and €, the country would be free to thrive again. With UK banks holding £133 billion of Irish debt (equal to 6% of UK GDP), much of which is secured against London property, Britain’s fate is far more closely tied up with Ireland than Greece. The €uro as we know it is doomed, it is in Britain’s interest to focus on its trading near neighbour and leave Greece to Germany.
Back in July the government won a vote to send £9 billion to the IMF by just 28 votes, the tightest margin yet for the Coalition government. Despite the best efforts of the whips some thirty-two Tory MPs rebelled against the government.
Osborne’s former bag carrier Matthew Hancock thinks this was a bad thing, others (including Ed Balls, Guido and John Redwood) think they voted in the national interest. We were told at the time that this was not like £9 billion transfer which we would never see again, it was a “contingent liability” and the IMF has never failed to repay such borrowings. The IMF has never faced a financial crisis on this scale before, the US is in no position to be the leading lender of last resort if the Euro shatters the IMF.
Christine Lagarde of the IMF is now briefing that the IMF needs more funds to deal with the worst case scenario.
Osborne and the Treasury spin that if Britain wants to sit at the top table the taxpayers have to cough up to the IMF. Isn’t it time to let other people sit at the top table. Brazil, China and India should get a better seat. The menu doesn’t look that appealing and is overpriced.
For years the FT has portrayed investing in gold as akin to flat-earthism, Alan Beattie at the FT is perhaps the most prominent, if not sole, media supporter of Gordon Brown’s sell-off of gold a decade ago. Guido has long lamented the FT’s tendency to follow the latest intellectual fashions and it is no surprise the FT approved of the Balls/Brown sell-off of gold reserves. It was the newspaper that was the biggest cheerleader for the euro and all things EU, of which it is less effusive about nowadays. The FT’s comment pages are full of wishy-washy, centrist, establishment, hand-wringing of the limousine liberal kind – no surprise given they are overseen by a former editor of Prospect, the monthly journal of wishy-washy limousine liberals. FT readers from the City who don’t simmer with self-loathing know it is best to skip the comment pages and read the market reports and the surprisingly good arts pages.
So how would you have done if you had invested in the stock market instead of gold? Take a look at the charts below, gold out performed the stock market by 17% last month, that is not relative out performance, that is gold was up 12% and the stock market was down 5%. Over the year gold is up some 40%, over 5 years and 10 years gold is more than 100% ahead of stocks.
Stocks of course pay dividends but likewise gold can be leased out to short sellers for an income. Alan Beattie insists gold is speculative, Guido would say, on the contrary, it is an insurance against a collapse of paper assets. So far Guido has been right for a decade and Beattie has been wrong. He now reckons the gold bubble is really about to pop this time. Guido reckons the West’s government debt crisis is about to take off big time and would rather own hard assets like gold and farmland than paper assets. You pays your money and you takes your choice.
UPDATE: Alan Beattie tweets to complain that he never recommended stocks as an alternative to gold, above amended accordingly. Nevertheless gold is up nearly 600% since the Balls/Brown sell-off, which he supported. Beattie is emphasising that his injunctions against gold purchases applied to central banks not investors. But not the central banks of India and China apparently…
Over at the “evidence based” LeftFootFoward blog they have an opinion piece claiming “Osborne’s ‘safe haven’ view is delusional”. Let’s examine the evidence, starting with Sovereign Credit Default Swap rates:
CDS rates reflect the cost of insuring against the risk of default. UK gilts have got their edge back, German government bunds are now seen by international markets as a higher risk than British gilts. So Osborne is right to claim that Britain is seen as a safe haven, with the resultant benefit of lower cost long term borrowing. Guido’s second piece of evidence is the disparity between German and UK government borrowing rates:
German 5-year borrowing rate: 1.41%
UK 5-year borrowing rate: 1.29%
UK rates are lower, though not as low as that other traditional European safe haven, Switzerland, where interest rates have turned negative. This means that effectively you have to pay the bank to deposit Swiss francs. Below are last night’s closing money market rates for Swiss LIBOR futures, usually quoted as 100 minus the rate, they are now confusingly trading above 100 meaning that money market rates are now negative. Not something Guido has ever seen before…
Elsewhere in Europe the banking system teeters on the edge of disaster. Anecdotally there are tales of Italians driving their Alfa Romeos across the border to convert their paper euros into hard currency in Switzerland. To paraphrase Sarah Palin: How is that monetary unity thing working out for europhiles?
Nouriel Roubini tells the FT…
“Until last year policymakers could always produce a new rabbit from their hat to trigger asset reflation and economic recovery. Zero policy rates, QE1, QE2, credit easing, fiscal stimulus, ring-fencing, liquidity provision to the tune of trillions of dollars and bailing out banks and financial institutions – all have been tried. But now we have run out of rabbits to reveal.”
The inevitable is now in process, policy makers are not going to be able to avert inflation and economic retrenchment, markets are starting to recognise reality. The credit of the United States has been downgraded, the euro is in a death spiral, nations teeter on the brink of bankruptcy. Power and wealth are shifting eastwards on a tectonic scale. Ever since the 2008 credit crisis and the doomed attempt by central bankers to solve the underlying debt crisis with more debt and inflation. All predictable, in the case of the euro almost every eurosceptic from John Redwood to Nigel Farage predicted it down to even the exact catalyst – Greece – a decade ago.
Step forward Andrew, Lilico formerly at Policy Exchange, who is equally as pessimistic as Guido, as long ago as 2009 he predicted a double dip with“double digit inflation and probably a recession in 2013 – stagflation.”
At the same time Guido argued that
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…
Guido wrote in 2008
“holding gold will be insurance as much as an investment. If you have apocalyptic fears, holding physical gold coins is reassuring.“
In 2009 Guido marked the
“symbolic of the end of the twentieth century Anglo-American dominance of the world” with “the purchase by the Indian Central Bank of 200 tonnes of gold from the IMF. The Indian Central Bank paid an average of $1040 per ounce.”
Mr & Mrs David & Maureen Somers must be doing pretty well now.
Told you so…
See also : The Bank of England’s Great Inflation Swindle, 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
As speculation matures into full-blown witness statements and accusations, Trinity Mirror have called in the law firm Herbert Smith and launched an investigation into phone-hacking across its titles. Until now there have been only present tense denials of such actions.
One shareholder told the FT they expected “nothing less” than an investigation, but it hasn’t come in time to stop the company’s share price going into free fall, with a 9.8% plummet on Monday since Guido, swiftly followed by the BBC, and grudgingly some other papers, began lifting the lid. He’s not sure a mere review is going to do much to reassure investors…
A few moments ago in Committee Room 14 at the usually staid Statutory Instruments Committee, Labour members voted in the national interest. Government whips got it through 10/6. Something very rare happened in what is usually the dullest of committees. A dozen or so Tory non-members of the committee came and spoke against affirming the instrument. Government whips cajoled the pliant Tory and LibDem members of the committee to vote to affirm the instrument while Tory MPs spoke from the floor against it. Promising new boy Steve Baker and backbench eurosceptic Douglas Carswell were among those who spoke against affirming the instrument. If Guido’s grasp of arcane parliamentary procedure is correct this will now have to go to a silent vote of the whole house without a debate.
As Guido mentioned yesterday, the Statutory Instruments Committee meets today to debate the £9.5 billion the government proposes to export to the IMF en route to Greece and probably the ECB. He hears it is a lively debate and that Labour are set possibly to vote against or abstain from supporting the transfer, potentially forcing a full Commons vote tomorrow…
The day Christine Legarde moves in to the IMF.
Tomorrow morning the Statutory Instruments Committee in Committee Room 14 of the Commons will consider for 90 minutes the extra £9.5 billion the government proposes to export to the IMF en route to Greece and probably the ECB. That is some £105 million per minute of debate. £9.5 billion is a lot of care for the aged.
Hat-tip: John Redwood
Monetary policy arguments can sometimes seem other-worldly, the modern equivalent of the medieval intellectual battle over how many angels can dance on the head of a pinhead? Guido (neo-Hayekian) has been rowing with Will Straw (neo-Keynesian) for years – our latest skirmish is here. It is a difficult subject to popularise in an accessible way. Straw often cites David Blanchflower, formerly of the MPC and a favourite of Gordon Brown, to back his case. Blanchflower it was who predicted a year ago that if Chancellor Osborne didn’t undertake a £90 billion stimulus package, unemployment would hit 4 million. Osborne ignored him and unemployment is down as we undergo an expansionary fiscal contraction.
In turn Guido cites the noted American actress and legendary redhead bad-girl Lindsay Lohan. She has a manifestly clearer grasp of the inflationary dangers of quantitative easing than David Blanchflower:
Lohan’s analysis is right…
Hat-tip: Fraser Nelson
It seems a long time ago that Will Straw, the former Treasury spin doctor under Gordon Brown now turned blogger and think-tanker, was arguing about the need for the Balls/Brown tax, borrow and spend stimulus plan. The voters and the 2010 general election put paid to that and George Osborne has resisted the calls of Balls (and Will) for more government borrowing to spend on boosting short-term growth. Will Straw argued, citing research by a “progressive” American economist, that spending increases were the most efficient form of deficit spending. The theory can now be tested against the outcome.
Obama did implement a massive $787 billion stimulus programme financed by more borrowing of the kind that Will Straw and Ed Balls still advocate. The chart above shows the results versus the predictions. Unemployment is far higher than the supporters of the “porkulus” projected, higher even than they projected it would be without wasting three-quarters of a trillion dollars. Not since the 1930s has US unemployment been so high for so long. Told you so.
Chancellor tells assembled great and good in the Mansion House that Northern Rock is for sale. Get the taxpayers’ money back!
Douglas Carswell has spotted a Statutory Instrument slipped in before parliament without prior debate, two pages of legislation which will cost the British taxpayer £9 billion, the equivalent of adding some 1½p to the basic rate of income tax. No debate, no big announcement, just another day of propping up the Eurozone on the backs of UK taxpayers.
The Chancellor was at the Bilderberg conference this weekend, where the global elite discuss important matters without tiresome worries like democracy or transparency, among the attendees were central bankers, financiers and investment bankers – the guilty men of the financial crisis. The Chancellor has clearly fallen in with a bad crowd…
UPDATE: Osborne’s PPS Greg Hands has been rolled out to defend the £9 billion loan. The crucial point he makes is that “Because this is a loan, it has no impact on our borrowing – it is a financial asset that will be repaid.” All being well, however all is not well. Institutions like the ECB itself are in trouble, the US Treasury is on credit watch. We may be approaching the financial equivalent of the rapture, when all the reckoning for decades of loose credit will be made. One only has to look at the price of gold to see that people are losing faith in the paper-money financial system.
The whole Ed Balls alternative economic strategy was first predicated on a double-dip recession, we hear no more of that nowadays, then it shifted from warning of a double-dip to lamenting slow GDP growth – even though UK GDP growth is above the EU average. But most incessantly Ed Balls wants George Osborne to stop reductions in the bloated public sector headcount “to hold down unemployment”. Coincidentally Labour’s paymasters are public sector unions…
In reality small firms are hiring workers, driving job creation, and according to the authoritative Manpower survey [PDF] hiring intentions are up 8% in the coming quarter and overall nationally recruitment is 3% above trend, a level not seen since the height of the financial crisis 3 years ago. Balls’ ideological adherence to Plan B is now rendered totally unnecessary…
Growth is anaemic, that much of the Balls critique is true, the cause is not the government’s spending cuts, they have barely started, the £6 billion down payment on deficit reduction is not even 1% of GDP. Some of the reasons are external; US economic doldrums, Japanese earthquake related supply-chain disruption, cost push inflation and some are internal; lack of business and consumer confidence, difficult credit markets and rising interest rate expectations.[…] Read the rest