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 and is equal to a mere two weeks of government borrowing.  This graph (first seen here) shows the difference in Labour and Tory coalition spending plans:

It doesn’t even begin to tackle the government’s indebtedness…

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 action on the deficit…

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 closeness of the race if key results are not counted until lunchtime market uncertainty will cause volatility.

The gilt market determines long term interest rates, which fix mortgage rates.  Labour losing the election is priced into the market, consequently gilt yields have dropped below the psychological 4% interest rate as the prospect of a change of government with a focus on bringing down the deficit has buoyed debt and currency markets.  If traders sense a re-run of the 1974 Lib-Lab pact is on the cards they will sell sterling and gilts to the floor.  The pound will be devalued by morning and the gilt yields which determine long term mortgage rates will rocket. It would be a nightmare on Threadneedle Street…

The price of a Labour government will be higher mortgage payments and higher inflation imported by a devalued pound.  If it goes wrong on Freaky Friday it will f**k the economy before the day is out…

*Threadneedle Street is the location of the Bank of England.

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 a Change Coalition with the LibDems – the only party with a leader that admits we need “savage spending cuts”, when the Tories and Labour are being disingenuous in pretending otherwise – the City wouldn’t have a problem.

The hard evidence is clear; since the prospects of a hung parliament jumped after the first TV debate (the bookies now make it an odds on 64% probability) both the pound and the gilt market have rallied. Why?  Well the City was worried about Labour being returned and kamikaze economics being implemented by Chancellor Balls.  A Lib-Con “Change Coalition government with both parties committed to public spending cuts and rapid deficit reduction will actually cheer the City.  Here’s the evidence so far:

The left hand chart is the probability of a hung parliament based on gambler’s bets, the middle chart is the gilt futures price and the right hand chart is the pound against the dollar.    Osborne just quoted a number of  investment banking analyst’s old notes, RBS capital markets analysis this morning concurs with Guido’s analysis:

Weekend press good for Gilts: a) talking up the Liberal Democrats right wing credentials and how they form more coalitions with Conservatives than Labour in councils, so allegedly not that Budget-negative/sclerosis if Con-Lib coalition, which is most likely outcome at this moment according to pollsters; b) polls shift 1-2% back to where they were pre-debates.

Osborne needs to switch on his Bloomberg terminal for a reality check, gilts are now yielding less than 4%, City confidence has risen as Labour’s polling figures have fallen…

+ + + GDP Growth Weak : 0.2% + + +

Consensus economists were predicting 0.4%.  Gordon will use this to spin that this means he can’t cut the deficit because it would take spending out of the economy.  Cutting taxes would of course boost the private sector and keep more money in the economy.  In recent years Cananda and Sweden have both cut government overspending by 10% in a recession and achieved strong economic growth…

Cable's Soothsaying Blip

Having been the front man for the entire LibDem campaign until 45 minutes into the Leader’s Debate, Vince has all but disappeared into the background this week.  No longer the nation’s favourite politician, his soothsaying sage act is also washing a little thin. Inflation figures released yesterday were higher than Cable expected again at 3.4%, leading him to claim that “the inflation rise appears to be a blip caused by things that are out of our control...”

But that’s not how he saw it when he was reading his magical economic runes three months ago in January, then he said with his characteristic bluffer’s confidence “these figures are almost certainly a temporary spike.”  Doesn’t seem too temporary to Guido,* in fact when you print £200 billion and call it quantitative easing (as supported by Cable), you inevitably get inflation.

Perhaps if Clegg would let him back on the platform, he might be able to explain why inflation has remained high and got even worse over the last three months. Could certainly liven up this afternoon’s Chancellor’s Debate…

*Have you taken Guido’s advice?

Brown Attacks "Moral Bankruptcy" of Goldman Sachs

On the Marr show Gordon raged against the moral bankruptcy of Goldman Sachs; “I want a special investigation done into what has happened at Goldman Sachs.”

Perhaps he could ask Gavyn Davies to investigate? For many years he has been advised by Gavyn Davies, who made some £150 million during his period as a Goldman Sachs partner.

It was Davies who last year urged Gordon to implement Mugabenomics, turn on the printing presses and call it quantitative easing. Davies has been a big donor to the Labour Party and a long-term supporter. Davies’ wife Sue Nye was Gordon’s private secretary in Downing Street and they are known to be good friends. Perhaps it was they who stole Gordon’s moral compass.

UPDATE : The more Guido thinks about this, the more he likes Gordon’s idea. Questions Guido would like the Goldman Sachs special investigator to get answered:

  • Exactly how many boardroom lunches and suchlike did Gordon Brown have with Goldman Sachs figures?
  • During the many lunches Gordon had with Goldman Sachs did he discuss policy or matters which they were able to exploit to their advantage in the markets?
  • Goldmans were known to be major sellers of gold before Brown announced his extraordinarily ill-conceived plan to sell the Bank of England’s gold reserves.
  • Gavyn Davies was an adviser to Gordon Brown during this period.  Did he recommend, advise on or know anything of the intended gold sales policy?  Did Sue Nye know of the intention to sell gold?


These are not matters of little import, Gordon’s gold sales debacle cost the Treasury £6 billion, the amount that Gordon claims will devastate the economy if the Tories cut it from public spending. The bank is known at rival firms as ‘Government Sachs’ because senior partners keep so close to governments and in particular finance ministries…

Brown's Bottom : Why the Decision to Sell Gold Still Matters It Shows Brown's Bad Judgement

The billions lost by Brown’s decision to sell Britain’s gold reserves are mounting as gold prices have more than quadrupled since that debacle.  He has the reverse Midas touch when it comes to market timing.  This chart shows what is known in the gold market as “Brown’s Bottom”:

Cameron brought it up on budget day, Labour spinners reckon it is ancient history, even though they constantly hark back further to Thatcher’s days. Guido thinks it is worth the Tories bringing up gold sales fiasco as emblematic of Brown’s bad decisions.

Gilt yields, Credit Default Swap rates, inflation projections, Public Sector Borrowing Requirements and Quantitative Easing are incredibly important for an understanding of the economy, but they are unfortunately almost incomprehensible to the general public.

Selling off the Bank of England’s gold reserves is easy to understand, it was an act of monumental stupidity and it was executed incredibly badly (Brown tipped the market off to his future intentions).  Anybody who watches TV at the moment is bombarded with adverts offering to buy people’s gold (cheap), Dale Winton is telling viewers day and night that gold is up, the demographic that this is aimed at are C1s and D1s.  These voters might not be interested in the finer points of monetary policy, but they all know one thing for sure, it was a catastrophically expensive  economic error to sell the Bank of England’s gold reserves.  Driving home that simple message graphically will undermine  Brown’s claims to making the right judgements.  Whenever he says that he should be asked Was it the right judgement to sell gold at the bottom? In the past he has retorted that he bought euros, that has had very little return over above what the Bank of England could have got from leasing gold out to short sellers and nothing like the 300% return from holding gold over the same period.  It is easy to understand that selling gold was Brown’s £7 billion misjudgement…

Moodys : Britain "Substantially Closer" to Losing 'AAA' Rating

Update :

March 15 (Bloomberg) — The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

Update : II : Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said under the ratings company’s so-called baseline scenario the UK will spend more on debt service as a percentage of revenue this year than any other AAA rated country: “We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing … This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.” Moodys predicts the UK will spend 7% of tax revenue servicing debt this year and between 9% and 12% in 2013. Financing costs above 10% automatically put countries outside of the AAA ratings category.

Update : III : For a completely different take, see the BBC –  UK Credit Rating Viewed As Safe

Even After Earthquake, Chilean Debt Safer than UK Debt

Just how much debt-fuelled danger is Gordon risking with the UK economy?  A reasonable question and the only place we can get hope to get objective answers is from the debt default insurance market place.  Harriet claimed at PMQs yesterday that it is unpatriotic to ask questions about the British economy.  As an Irishman that doesn’t apply to Guido.

Chile has just had an 8.8 on the richter scale earthquake, looting and rioting are commonplace.  Even so, U.S. investors still prefer Chilean government debt to UK government debt as measured by CDS rates.  Do you get how bad things are?

Data source : Morgan Stanley

Wall Street is Getting Worried Tories Won't Win

Gordon loves to quote the policy endorsements of Paul Krugman, the New York Times columnist and Nobel Prize winner – always neglecting to mention that Krugman is a friend and ally.  The New York Times today however is not so keen on Britain’s economy.

The business section is mainly read by Wall Street liberals, nevertheless they run investment funds that move markets.  The UK this morning is bracketed with Greece, the NYT warning that if the Tories don’t get a strong majority:

“… investors could start to make it greatly more expensive for the government to raise funds, setting the stage for a potential double-dip recession, if not worse… If you really want a fiscal problem, look at the U.K… In Europe, the average deficit is about 6% of G.D.P. and in the U.K. it’s 12%. It is only just beginning… the British government … has been able to finance a budget deficit of 12.5% of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.”

As the pound slid Nick Clegg tried to reassure investors that if there is a hung parliament the LibDems would not risk Britain’s creditworthiness – surely that effectively means he can’t prop up Gordon Brown.  Clegg said this because he realises that once foreign investors realise the only buyer of government gilts last year was the Bank of England and they lose confidence in a Tory election victory, they could rush for the exit.  Foreign holdings of gilts fell from 35% to 29% last year.  Capital flight is already starting…

Pound Sinking on Hung Parliament Fears

The pound has just fallen through the psychologically important €0.90 cents to the pound level, if it were not Greece we would now have £/€ parity.  It is sinking against the dollar as well. Think what a hung parliament and the inevitable political paralysis would mean for deficit reduction.  Markets would go into a tailspin, the cost of borrowing would rise. We would be looking at a Greek tragedy…

UPDATE : Gilt market has opened down as well.   The market has already removed the Triple-A rating on UK government debt.

S.T.U.P.I.D. : Gordon Meeting Greek PM

The papers are reporting an emergency EU meeting over Greece.  Gordon is attending despite the UK not being in the Euro.  At the end of last week Guido learnt that next week Gordon is scheduled to meet George Papandreou, the socialist Greek prime minister who has led his country to ruin. Perhaps they can compare notes or put in a joint application to the IMF?

Until the recent Irish austerity budget the financial world talked about the risk of the P.I.G.S. (Portugal, Ireland, Greece and Spain) defaulting on their sovereign debt. Now Ireland is controlling government spending with swingeing public sector cuts they are not being talked about so much. Attention has shifted to the S.T.U.P.I.D. countries: Spain, Turkey, UK, Portugual, Italy and Dubai. These are the countries the City now fears to be at risk of sovereign default.

ZeroHedge has created a S.T.U.P.I.D. index, which they are charting, it is a Credit Default Swap index, so bad news means the chart goes up.  For the record, Guido thinks there is no chance of the U.K. defaulting because we still control our own currency, though losing our AAA credit rating and devaluing is a very real possibility.  The market is pricing in the credit risk from Gordon’s economic stupidity nevertheless…

+ + + Gilts Plunge on End of Q.E. + + +

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Peter Mandelson tells Emma Barnett…

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