To nobody's surprise, the Bank of England's latest inflation forecast includes drastically lower growth projections, accompanied as always by an expression of confidence that inflation will soon fall much closer to the Bank's 2% target. Both in the report itself and in Governor Sir Mervyn King's remarks to the press, there's even more uncertainty than usual about the outlook for the UK economy. But there's one thing that Sir Merv is adamant about: whatever you don't like, whether it's slow growth or high inflation, it's NOT HIS FAULT!
That denial of responsibility even applies to the past. In the Bank's interpretation, the slow growth the economy has endured over the past year or so is a result of the squeeze on real household incomes. However, in his remarks at the media conference when the report was released, King was quick to deflect the blame:
"Real take-home pay should gradually begin to recover after a period in which prices have grown faster than wages. It would be wrong, though, to think that monetary policy was the reason for the sharp squeeze in real take-home pay. Instead the squeeze was an unavoidable consequence of movements in world energy and other commodity prices, the need to rebalance the UK economy, and the cost of the financial crisis in terms of lower productivity. Indeed, lower inflation would have been possible only with lower nominal pay growth and higher unemployment".
Just about everyone but the Bank is to blame, then, because "the need to rebalance the economy" is just code for "government cutbacks" -- and we all know how well that's working, with the Treasury quietly admitting that cumulative borrowing for 2010-2014 will be £100 billion higher than was projected in the budget. Leaving that aside, however, it remains difficult to accept that the Bank is blameless. UK inflation has been significantly higher than in the Eurozone, which is equally exposed to world commodity prices. Is Gov. King really saying that divergence has nothing to do with historically low interest rates, quantitative easing and the weakness in Sterling? Meanwhile UK growth has generally lagged behind not only that of larger Eurozone economies, notably Germany, but also that achieved by the United States, so the Bank can't even convincingly claim that it has accepted a bit more inflation in order to achieve higher growth. (Yes, I am aware you can't prove a counterfactual).
Looking forward, the Bank blames its downgrading of growth prospects for 2012 on the Eurozone crisis:
"The outlook for output growth is unusually uncertain. That reflects in particular the exposure of the UK economy to developments in the euro area. The euro area faces substantial challenges as several members seek to ensure the sustainability of their public and external debt and maintain financial stability. Implementation of a credible and effective policy response in the euro area would diminish uncertainty and so support the UK recovery. Even in this case, however, the scale of the imbalances means that there is likely to be a prolonged period of subdued growth within the euro area. But a failure to meet these challenges would almost certainly have significant implications for the UK economy."
Politicians from George Osborne to Barack Obama are eagerly shovelling all the blame for the world's ills in the direction of the poor old Eurozone, so King is unlikely to find much dissent about playing everyone's favourite get out of jail card. The big question is, what is the Bank planning to do about it? Most commentators seem to feel that the Bank is leaving the way wide open for yet more quantitative easing, despite the lack of clear evidence that this policy has had much impact on growth up until now. That media consensus may well prove to be accurate, but the Bank will need to be careful. For the first time in at least three years, the Bank's stale forecast of sharply falling inflation stands a reasonable chance of coming true. It will not want to risk reigniting inflation expectations with another bout of unproductive money printing.
When Chancellor Gordon Brown gave the Bank of England full independence back in 1997, the move was widely welcomed. Widely, but not universally. One dissenter was one of Brown's predecessors at the Treasury, Ken Clarke, who always felt it was a mistake to rob the government of the day of any overt role in setting monetary policy. Even now, Clarke's view would find very few adherents, but it's hard not to feel that the UK economy might be faring better with a slightly tighter monetary policy and slightly less fiscal retrenchment. That's just another of those counterfactuals that we'll never be able to prove.
Thursday, 17 November 2011
Heard on the news...
* The lead story on all UK news bulletins today is the government's sale of Newcastle-based bank Northern Rock to Sir Richard Branson's Virgin Money. The Rock was the first UK victim of the financial crisis. Virgin wanted to buy it when the crisis hit, but failed to agree terms. The price agreed now, £747 million, means the taxpayer takes a big hit on the deal, but Virgin's expression of confidence, given all the doom and gloom at the moment, is important, at least symbolically. And, just in case wrong stuff starts to appear in the media, no, a sale like this doesn't automatically reduce the budget deficit.
Given Newcastle's well-earned reputation as Party Central, there must be all sorts of jokes to be made about Virgins, but we're above that sort of thing here.
* About the sixth item on the radio news bulletins this morning, and warranting only one sentence, was the report that UK retail sales rose 0.6% in October. Pop quiz folks: if sales had fallen 0.6%, do you think it would still have merited sixth place and only a single sentence? Me neither.
* FIFA President Sepp Blatter's cretinous comments about racism in football have attracted well-earned contempt from all quarters. Amazingly, Blatter has attempted to respond by posting a picture of himself hugging a black politician, the wonderfully-named South African, Tokyo Sexwale. Unsurprisingly, Sexwale jumped to the top of the Twitter trending topics list, where one wag has dubbed him "Blatter's Biggus Dickus". Sexwale, a businessman as well as an ANC stalwart, is one of the richest black men in South Africa, which means he's pretty damn rich. Second pop quiz then: does Tokyo Sexwale get his picture taken with Sepp Blatter (a) because he's black or (b) because he's rich.
Given Newcastle's well-earned reputation as Party Central, there must be all sorts of jokes to be made about Virgins, but we're above that sort of thing here.
* About the sixth item on the radio news bulletins this morning, and warranting only one sentence, was the report that UK retail sales rose 0.6% in October. Pop quiz folks: if sales had fallen 0.6%, do you think it would still have merited sixth place and only a single sentence? Me neither.
* FIFA President Sepp Blatter's cretinous comments about racism in football have attracted well-earned contempt from all quarters. Amazingly, Blatter has attempted to respond by posting a picture of himself hugging a black politician, the wonderfully-named South African, Tokyo Sexwale. Unsurprisingly, Sexwale jumped to the top of the Twitter trending topics list, where one wag has dubbed him "Blatter's Biggus Dickus". Sexwale, a businessman as well as an ANC stalwart, is one of the richest black men in South Africa, which means he's pretty damn rich. Second pop quiz then: does Tokyo Sexwale get his picture taken with Sepp Blatter (a) because he's black or (b) because he's rich.
Monday, 14 November 2011
At least try to get your facts straight
The Bank of England's quarterly report on "Project Merlin", its oddly-named agreement with the main UK banks to try to boost business lending, was released today. (BBC story here.)As the relative paucity of screaming, bank-bashing headlines in the online media would suggest, the four banks involved have largely met the targets they agreed back in February. In fact, lending for the first three quarters of this year was running at a rate about 11% above the target.
But wait! Small businesses are feeling short changed. There's a separate target of £75 billion for new lending to SMEs (small and medium sized enterprises). Hitting that target would imply a three-quarter figure of £56.8 billion, and the actual number in today's report was....£56.1 billion!
Most people would think that marginal shortfall wasn't worth blowing a gasket about, but then most people don't work for small business lobby groups. Let's hear from someone who does, via the BBC website:
John Walker, national chairman of the Federation of Small Businesses, said the banks had "yet again missed the small business target".
He added that the lending targets failed to address the "lack of competition" in the banking sector.
"We need to see a clear change: more competition and new lines of credit opening for small firms if they are to help boost the recovery," said Mr Walker.
"Yet again missed the small business target", is it? Let's look at it another way i.e. by examining the facts. The £75 billion annual SME target equates to £18.3 billion per quarter. The actual figure for Q3 was £18.8 billion. The figure for Q2 was £20.5 billion. In other words, pace Mr Walker, the banks have in fact exceeded the SME target in each of the last two quarters. The only time they failed to do so this year was in Q1, when SME lending was £16.1 billion -- but as the Project Merlin agreement was not signed until mid-February, that seems a very pardonable lapse.
Elsewhere in the media today (in The Times, behind the paywall), we read that the "help" promised by the Government to small businesses affected by the rioting in August has been slow to materialise. According to Libby Purves, "Of £250 million worth of claims filed, only £3,584 has been paid out. Small traders complain of a chaotic, slow, repetitive bureaucratic process, shunted between five or six different people and bodies.". In the meantime private insurers have paid out £200 million in riot-related claims. Perhaps Mr Walker and his members should recognise that the banks just might not be their biggest problem.
But wait! Small businesses are feeling short changed. There's a separate target of £75 billion for new lending to SMEs (small and medium sized enterprises). Hitting that target would imply a three-quarter figure of £56.8 billion, and the actual number in today's report was....£56.1 billion!
Most people would think that marginal shortfall wasn't worth blowing a gasket about, but then most people don't work for small business lobby groups. Let's hear from someone who does, via the BBC website:
John Walker, national chairman of the Federation of Small Businesses, said the banks had "yet again missed the small business target".
He added that the lending targets failed to address the "lack of competition" in the banking sector.
"We need to see a clear change: more competition and new lines of credit opening for small firms if they are to help boost the recovery," said Mr Walker.
"Yet again missed the small business target", is it? Let's look at it another way i.e. by examining the facts. The £75 billion annual SME target equates to £18.3 billion per quarter. The actual figure for Q3 was £18.8 billion. The figure for Q2 was £20.5 billion. In other words, pace Mr Walker, the banks have in fact exceeded the SME target in each of the last two quarters. The only time they failed to do so this year was in Q1, when SME lending was £16.1 billion -- but as the Project Merlin agreement was not signed until mid-February, that seems a very pardonable lapse.
Elsewhere in the media today (in The Times, behind the paywall), we read that the "help" promised by the Government to small businesses affected by the rioting in August has been slow to materialise. According to Libby Purves, "Of £250 million worth of claims filed, only £3,584 has been paid out. Small traders complain of a chaotic, slow, repetitive bureaucratic process, shunted between five or six different people and bodies.". In the meantime private insurers have paid out £200 million in riot-related claims. Perhaps Mr Walker and his members should recognise that the banks just might not be their biggest problem.
Friday, 11 November 2011
Mamma mia!
The Eurozone debt crisis seems to be causing a few folks at the News International media outlets in the UK to become a bit unhinged. In The Times today there was a long, finger-wagging editorial saying that to solve the debt crisis, it would be necessary for Germany to overcome its qualms about inflation, and allow the ECB to print money and wade into the bond markets.
Meanwhile, over in the business section, editor Ian King was sounding off against the ECB for....getting involved in the market in advance of Thursday's Italian debt auction! (To the chagrin of doomsayers everywhere, this went surprisingly well, with a bid-to-cover of almost 2). According to Ian King, if any private company intervened in the market just before it issued securities, the people involved would very soon find themselves locked up. Which may be true, at least theoretically, but is of dubious relevance here. Every central bank in the world involves itself in securities markets around the time of new government issues, and in most cases is itself a bidder for the bonds that are being auctioned.
Apparently in Ian King's world, it's fine for short sellers to push up the yields on the paper in advance of the auction, but it ought to be forbidden for the ECB to intervene to keep the market orderly. It's not as if the ECB's action pushed the yields down so low that it caused investors to boycott the auction -- the healthy bid-to-cover is clear evidence of that. As I've written here in the past, ensuring that primary debt sales proceed smoothly is one of the main things that the ECB should be doing as it attempts to navigate its way through the crisis.
Maybe before the next Italian debt sale (next week!), Ian King and The Times editorialists can get together and decide whether they want the ECB to step up its involvement in the market or not. Possibly to help them make a decision, News International stablemate SKY News has recruited a new expert to explain the Italian situation. Step up, on today's "Boulton and Co." lunchtime news broadcast.....Nancy Dell'Olio! Yes, the permatanned, permapouting celebrity hanger-on herself, described on screen as a "former advisor to Silvio Berlusconi". Words fail me, though alas, they did not fail her.
Meanwhile, over in the business section, editor Ian King was sounding off against the ECB for....getting involved in the market in advance of Thursday's Italian debt auction! (To the chagrin of doomsayers everywhere, this went surprisingly well, with a bid-to-cover of almost 2). According to Ian King, if any private company intervened in the market just before it issued securities, the people involved would very soon find themselves locked up. Which may be true, at least theoretically, but is of dubious relevance here. Every central bank in the world involves itself in securities markets around the time of new government issues, and in most cases is itself a bidder for the bonds that are being auctioned.
Apparently in Ian King's world, it's fine for short sellers to push up the yields on the paper in advance of the auction, but it ought to be forbidden for the ECB to intervene to keep the market orderly. It's not as if the ECB's action pushed the yields down so low that it caused investors to boycott the auction -- the healthy bid-to-cover is clear evidence of that. As I've written here in the past, ensuring that primary debt sales proceed smoothly is one of the main things that the ECB should be doing as it attempts to navigate its way through the crisis.
Maybe before the next Italian debt sale (next week!), Ian King and The Times editorialists can get together and decide whether they want the ECB to step up its involvement in the market or not. Possibly to help them make a decision, News International stablemate SKY News has recruited a new expert to explain the Italian situation. Step up, on today's "Boulton and Co." lunchtime news broadcast.....Nancy Dell'Olio! Yes, the permatanned, permapouting celebrity hanger-on herself, described on screen as a "former advisor to Silvio Berlusconi". Words fail me, though alas, they did not fail her.
Tuesday, 8 November 2011
On, swiftly, to the next
The likely appointment of Lucas Papademos as Greece's new Prime Minister, charged with implementing the Eurozone bailout deal, should be received positively by the markets. Papademos served as deputy to Jean-Claude Trichet at the ECB a few years ago, and has a high level of credibility with both investors and Eurocrats. That credibility is, apparently, untarnished by the fact that before going to the ECB, he was head of the Bank of Greece, at a time when data about the country's economic and financial performance may have been subject to, how can we put this delicately, a certain amount of massaging.
There's an obvious comparison, though it may not be one that resonates too much with the Greeks, with the role played by Kemal Dervis in Turkey during that country's severe economic crisis at the start of the last decade. Dervis, a long-time player at the World Bank, was parachuted back into Ankara as Minister of Economic Affairs, and deserves much of the credit for the remarkable turnaround that Turkey has since achieved. If Papademos can do as well, both Greece and the Eurozone will be able to breathe a lot easier.
Of course, with things looking a mite more stable in Greece, markets have shifted their focus. The media formulation is that investors are now "worried" about Italy, but a more accurate way of putting it is that some investors have identified Italy as the next place they can make money by stirring up trouble.
Italy's main problem (aside from the ludicrous Silvio Berlusconi) is the level of its outstanding debt, which equates to about 120% of GDP. Its current budget deficit of less than 5% of GDP is well below those of many of its Eurozone partners, not to mention the US and UK. Moreover, and again in contrast to the US and the UK, Italy is a nation of savers, and has not historically relied to any great extent on foreign buyers to support its government bond market. That has, of course, changed somewhat since the inception of the Euro, which has led more banks to become involved in the market. Even so, Italy's debt situation cannot reasonably be compared with that of Greece.
Be that as it may, the result of the market's "worries" is, according to the media, that "Italy's borrowing costs have soared to unsustainable levels". As usual, this says more about the media than it does about Italy. While the effective yield to maturity on Italy's outstanding debt has certainly risen, the actual interest cost that the country has to pay has risen only slightly, if at all. The higher rates demanded by the market only have an impact when Italy is forced to raise new money, or to roll over previous debt. Even if an interest rate of 7% is "unsustainable", as media pundits keep saying (and just where does that figure come from anyway?), it would take several years of refinancing and new borrowing at current interest rates before Italy's actual interest costs even approached the 7% level.
This suggests that the ECB and EFSF should resolve to worry less about the falling value of Italy's outstanding bonds, and focus more on ensuring that the country's upcoming borrowing needs can be met smoothly. That in itself will be a challenge: a large tranche of Italy's debt comes due before the end of 2012. Still, it is a lot less daunting than pouring money into trying to preserve the secondary market value of Italy's entire existing debt stock, especially as only the most pessimistic believe that Italy will not ultimately be able to meet its obligations.
That last point -- that Italy is still solvent -- was cast in an interesting light by the recent failure of MF Global, supposedly as a result of its high exposure to peripheral Eurozone bond markets. Discussing the situation on CNBC, one commentator blurted out that MF's holdings of Italian and other PIIGS' bonds were almost certainly "money good". In other words, they would almost without doubt be repaid in full when due. What this means is that MF didn't collapse because Italy's or Portugal's balance sheet was rubbish; it collapsed because its own balance sheet was rubbish.
Debt markets, dysfunctional? You might think that. I, as a former international bond guy, couldn't possibly comment.
There's an obvious comparison, though it may not be one that resonates too much with the Greeks, with the role played by Kemal Dervis in Turkey during that country's severe economic crisis at the start of the last decade. Dervis, a long-time player at the World Bank, was parachuted back into Ankara as Minister of Economic Affairs, and deserves much of the credit for the remarkable turnaround that Turkey has since achieved. If Papademos can do as well, both Greece and the Eurozone will be able to breathe a lot easier.
Of course, with things looking a mite more stable in Greece, markets have shifted their focus. The media formulation is that investors are now "worried" about Italy, but a more accurate way of putting it is that some investors have identified Italy as the next place they can make money by stirring up trouble.
Italy's main problem (aside from the ludicrous Silvio Berlusconi) is the level of its outstanding debt, which equates to about 120% of GDP. Its current budget deficit of less than 5% of GDP is well below those of many of its Eurozone partners, not to mention the US and UK. Moreover, and again in contrast to the US and the UK, Italy is a nation of savers, and has not historically relied to any great extent on foreign buyers to support its government bond market. That has, of course, changed somewhat since the inception of the Euro, which has led more banks to become involved in the market. Even so, Italy's debt situation cannot reasonably be compared with that of Greece.
Be that as it may, the result of the market's "worries" is, according to the media, that "Italy's borrowing costs have soared to unsustainable levels". As usual, this says more about the media than it does about Italy. While the effective yield to maturity on Italy's outstanding debt has certainly risen, the actual interest cost that the country has to pay has risen only slightly, if at all. The higher rates demanded by the market only have an impact when Italy is forced to raise new money, or to roll over previous debt. Even if an interest rate of 7% is "unsustainable", as media pundits keep saying (and just where does that figure come from anyway?), it would take several years of refinancing and new borrowing at current interest rates before Italy's actual interest costs even approached the 7% level.
This suggests that the ECB and EFSF should resolve to worry less about the falling value of Italy's outstanding bonds, and focus more on ensuring that the country's upcoming borrowing needs can be met smoothly. That in itself will be a challenge: a large tranche of Italy's debt comes due before the end of 2012. Still, it is a lot less daunting than pouring money into trying to preserve the secondary market value of Italy's entire existing debt stock, especially as only the most pessimistic believe that Italy will not ultimately be able to meet its obligations.
That last point -- that Italy is still solvent -- was cast in an interesting light by the recent failure of MF Global, supposedly as a result of its high exposure to peripheral Eurozone bond markets. Discussing the situation on CNBC, one commentator blurted out that MF's holdings of Italian and other PIIGS' bonds were almost certainly "money good". In other words, they would almost without doubt be repaid in full when due. What this means is that MF didn't collapse because Italy's or Portugal's balance sheet was rubbish; it collapsed because its own balance sheet was rubbish.
Debt markets, dysfunctional? You might think that. I, as a former international bond guy, couldn't possibly comment.
Monday, 7 November 2011
St Paul's epistle to the Occupiers
The OccupyLSX crowd are still camped outside St Paul's Cathedral in London, still displaying their "What would Jesus do?" banner and still occasionally brandishing crucifixes. It seemed a good idea to take a look and see whether St Paul might have had anything to say to the protesters...
"We gave you a rule when we were with you: not to let anyone have any food if he refused to do any work. Now we hear that there are some of you living in idleness, doing no work themselves but interfering with everyone else's." (2 Thessalonians, Ch. 3 v. 10-11)
"We do urge you, brothers, to go on making even greater progress and to make a point of living quietly, attending to your own business and earning your living, just as we told you to, so that you are seen to be respectable by those outside the Church, though you do not have to depend on them." (1 Thessalonians, Ch. 4 v. 10-12)
"Beware of dogs! Watch out for the people who are making mischief. Watch out for the cutters." (Philippians Ch. 3 v. 3)
Phew -- that's a relief. It was starting to sound as if maybe St Paul wasn't exactly on the side of the protesters, but that last sentence is amazing -- St Paul was obviously trying to warn people about Cameron and Osborne! Well, not exactly. The "cutters" referred to pagan self-harm practices. Either way, though, it looks like good advice.
"We gave you a rule when we were with you: not to let anyone have any food if he refused to do any work. Now we hear that there are some of you living in idleness, doing no work themselves but interfering with everyone else's." (2 Thessalonians, Ch. 3 v. 10-11)
"We do urge you, brothers, to go on making even greater progress and to make a point of living quietly, attending to your own business and earning your living, just as we told you to, so that you are seen to be respectable by those outside the Church, though you do not have to depend on them." (1 Thessalonians, Ch. 4 v. 10-12)
"Beware of dogs! Watch out for the people who are making mischief. Watch out for the cutters." (Philippians Ch. 3 v. 3)
Phew -- that's a relief. It was starting to sound as if maybe St Paul wasn't exactly on the side of the protesters, but that last sentence is amazing -- St Paul was obviously trying to warn people about Cameron and Osborne! Well, not exactly. The "cutters" referred to pagan self-harm practices. Either way, though, it looks like good advice.
Sunday, 6 November 2011
O tempora! O mores!
You wait for months for a "racism in sport" furore to come along, and then two arrive at the same time. Here in the UK, the England football captain John Terry is in trouble for allegedly calling an opponent, Anton Ferdinand, a "f***ing black c***". The unloveable Terry's bizarre defence is that he did indeed yell those words at Ferdinand, but only for the purpose of denying that he had yelled them as an insult. Good luck with that, John.
Meanwhile, in the US, Tiger Woods's former caddie, Steve Williams, won a minor award a couple of days ago, and announced in accepting it that he was glad to be able to "stick it up that black a******", meaning Woods. Williams is by all accounts just as nice a man as John Terry is, but Woods has, probably sensibly, chosen simply to express his regret at the outburst, rather than going off on one and threatening to sue Williams's (white) a******.
Here's the puzzling part about all this. Neither Terry nor Williams resorted to any of the proscribed words that were once used to insult people of colour. The term "black" was by far the least insulting of the terms either man used (even though it's not entirely accurate -- both Ferdinand and Woods are of mixed race), yet it's that word, rather than any of the other thoroughly unpleasant insults, that have got them into trouble. Am I missing something?
Meanwhile, over at the Church of England, more evidence of changing times and values. Attempting to show his solidarity with the protesters at St Paul's Cathedral, the admirable Archbishop of York, John Sentamu, has a remarkable proposal:
"....the Archbishop of York yesterday entered the debate about the church’s relationship with City financiers, arguing that greed should be made as socially unacceptable as racism, sexism and homophobia".
A quick check of the 'net reveals that greed is still listed as one of the Seven Deadly Sins*, so it's a bit unclear whether Dr Sentamu thinks it would have to be upgraded or demoted to be in line with the other ills he mentions. One suspects, alas, that it's the former. It's news to no-one that our society has almost completely lost touch with religious values, but it's a bit of a shock to think that one of the most senior figures in the Church of England may have done the same.
* They have their own website!
Meanwhile, in the US, Tiger Woods's former caddie, Steve Williams, won a minor award a couple of days ago, and announced in accepting it that he was glad to be able to "stick it up that black a******", meaning Woods. Williams is by all accounts just as nice a man as John Terry is, but Woods has, probably sensibly, chosen simply to express his regret at the outburst, rather than going off on one and threatening to sue Williams's (white) a******.
Here's the puzzling part about all this. Neither Terry nor Williams resorted to any of the proscribed words that were once used to insult people of colour. The term "black" was by far the least insulting of the terms either man used (even though it's not entirely accurate -- both Ferdinand and Woods are of mixed race), yet it's that word, rather than any of the other thoroughly unpleasant insults, that have got them into trouble. Am I missing something?
Meanwhile, over at the Church of England, more evidence of changing times and values. Attempting to show his solidarity with the protesters at St Paul's Cathedral, the admirable Archbishop of York, John Sentamu, has a remarkable proposal:
"....the Archbishop of York yesterday entered the debate about the church’s relationship with City financiers, arguing that greed should be made as socially unacceptable as racism, sexism and homophobia".
A quick check of the 'net reveals that greed is still listed as one of the Seven Deadly Sins*, so it's a bit unclear whether Dr Sentamu thinks it would have to be upgraded or demoted to be in line with the other ills he mentions. One suspects, alas, that it's the former. It's news to no-one that our society has almost completely lost touch with religious values, but it's a bit of a shock to think that one of the most senior figures in the Church of England may have done the same.
* They have their own website!
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