Friday, 25 February 2011

GDP revised downwards

Well there's a shock, the ONS has revised the GDP for Q4 2010 from -0.5% to -0.6%. Everyone was expecting a change but no one was expecting it to be down. It seems Q4 (Oct, Nov, Dec) was even worse than realised.

Inflation ended the year at 3.7% (CPI, RPI was higher.) It has subsequently gone higher, to 4.0%.

So it looks like we have stagflation: price inflation but GDP shrinkage.

The BoE is now being ground between a rock and a hard place. They claim interest rates cannot be raised to combat inflation because economic growth would be choked off if debt became more expensive, but growth is already negative. One member of the MPC, Adam Posen, even wants to inject more QE money into the economy to stimulate growth. But QE is inflationary. When they did the first round of QE there were deflationary pressures in the economy which meant the inflationary effect was delayed, but the delay has expired and we're seeing the inflation now. More QE now would be like spraying petrol onto a naked flame. There are now no deflationary pressures to delay the effect.

So to preserve the buying power of sterling we need higher interest rates. And yet there is no doubt MK and his ilk are right, higher interest rates will reduce growth - or rather increase economic shrinkage, since we don't have any growth.

(MK is fond of pointing out that higher interest rates leave less money in the pockets of borrowers so spending is reduced. He never adds that savers get more money. However he's not wrong that spending would be reduced since savers are, by definition, people who are less inclined to spend.)

So what's the answer? Go for growth or try to hold the line on inflation?

Basically there isn't an answer. You have to pick the lesser evil and let it happen. The Bank has clearly chosen inflation as the lesser evil. They'll take growth at the cost of inflation. This is the wrong decision though.

Inflation is like a vampire, sucking wealth from us all. You can kill it with a stake through the heart, but if the stake ever falls out the vampire gets back up again and comes straight at your throat. Trying to do a deal with the vampire is futile. You can say, "I'll let you suck a little blood for now and deal with you later," but all the time it's sucking blood the vampire grows stronger and it doesn't stop until you've died of hyperinflation.

The alternative is to keep the stake in the inflation vampire and have a recession instead. Recessions are of course painful, asset prices drop, house prices drop, jobs are lost, salaries of those lucky enough to have a job decline, but recessions are not self-fuelling. They don't grow stronger the longer they last. In fact they bring their own solutions with them. As jobs are lost, asset prices decline and wages decrease, the country becomes more competitive. Making something, anything, costs less. It costs less to buy the land, to build the factory, to hire the workers, and so exports pick up. Jobs are created, wages rise and the recession is over.

If the BoE had dealt with the inflation vampire years back, when this blog first started making the sign of the cross in the direction of inflation, it wouldn't be facing the current dilemma. However they didn't. They took the easy option and let the vampire have a little suck. A small stake could have fixed the problem back then. Now it will take a big stake and the resulting recession will be worse as a result.

But even now, the sooner they bite the bullet the better it will be.

If they refuse to bite the bullet the path ahead looks something like this.

Sterling will fall relative to other world currencies because there will be little point holding such a low-yielding currency. So commodity prices, set on the world markets, will rise. This will feed through into shop prices in the UK and choke off demand. There will be some attempt to get wages up, but this will mainly fail: in the public sector because of the government's determination to freeze public sector pay, and in the private sector because the profits won't be there to sustain pay rises.

Sterling will then fall further because of a lack of market confidence. One pound is essentially one share in UK plc. With the economy failing there will be little interest in owning such a share. And as sterling falls so imported inflation (oil prices etc) become relatively higher and the economy fails even more.

Then sooner or later the "wage freeze" breaks; it always does, and money will be borrowed or printed to fund pay hikes. Making money is inflationary and the only solution that governments see is to make even more money. And the more money they make, the less it's worth. The cycle is very difficult to break.

Frankly it's better not to get into that state in the first place.

Disclosure: The author of this blog keeps his savings in Swiss francs. In the 1960s £1 would have bought you more than 10 Swiss francs; as recently as a couple of years ago you could have bought over 2 Swiss francs for £1. Yesterday, for the first time, £1 was worth less than one and a half francs. Most likely in the medium term future we will have parity between the Swiss franc and sterling. Then after that 1 franc will buy you more than 1 pound. Somehow the Swiss have managed to hold the value of their currency while we haven't. The fault for this lies with the Bank of England.

Thursday, 24 February 2011

Meanwhile, in South Korea

They say it's the shark you don't see which will get you.

Perhaps the same is true in economics. The eyes of the world are on the Maghreb: revolution and fleeing dictators in Tunisia and Egypt; civil war in Libya - will Gaddafi survive or not? At the time of writing he seems to be made of sterner stuff than Mubarak and Ben Ali.

But the real concern is contagion to Saudi Arabia, Bahrain and other oil-rich states. That prospect has driven Brent crude up past $110 a barrel and will be putting 5p on litre at a gas station near you within the next week or so (anecdotal reports indicate some retailers have jumped the gun and prices are already up.)

And when the media has finished with North Africa and the Middle East, they turn down under - earthquake in New Zealand.

But no one's looking at South Korea!

In the last week six banks have run out of money and closed their doors in South Korea. At the other banks customers are queuing to get their savings out. The root problem is that construction loans have turned bad and liquidity has crunched.

This would be world-wide news if it weren't for all the other world-wide news going on at the moment. Ironically this may save the Korean banking system, because banking is all about not losing confidence, and no-one is even noticing South Korea.

Monday, 21 February 2011

Kepler telescope finds five Earth-like planets

Two years ago, almost to the day, I blogged about NASA launching the Kepler telescope after they calculated that there are probably a hundred billion Earth-sized planets in our galaxy alone. And now we have some results. Kepler has discovered 1,235 planets including 5 Earth-sized planets in their star's Goldilocks zone - the zone around a star in which water is liquid and life as we know it may be possible.

Kepler has also found six confirmed planets orbiting a sun-like star, Kepler-11. This is the largest group of transiting planets orbiting a single star yet discovered outside our solar system. The Kepler team reckon that one star in two has a planetary system.

The Daily Telegraph has published this photograph...


 ...which they amusingly claim is a photo taken by the Kepler telescope.

Of course there's no chance it's a real picture from Kepler; planets don't line up like that to be snapped in a single photo, and anyway those planets are far too large relative to the star.

What we need now is an even bigger telescope to peer closely at the 5 Earth-like planets to see what's going on down there. At the moment their presence is being inferred by a dimming of the parent star as the planet passes in front of it. But with a bigger telescope we could resolve the planets themselves. Will there be oceans? Greenery? Perhaps even a large herd of migratory animals could be made out! We live in interesting times for astronomers.

(Readers may be wondering what this all has to do with nationalism. Well continue wondering - this blog is about my interests, not yours!)

Saturday, 19 February 2011

So how did bad news week pan out?

Well CPI was 4.0% - twice target, RPI was 5.1%. Mervyn King was sanguine; Andrew Sentance of the MPC was hopping mad and said the UK was being sold by the pound. Unfortunately his time on the MPC comes to an end in May. It will make the doves happy to have the main hawk leave.

The Nationwide January Consumer Confidence Index fell to 47 from 54 in December, taking it back to just one point above its low of 46 in November.The spending index dropped to 70 from 90 in December, taking it to its lowest point since November 2008.  67% of consumers said the current economic situation was bad for them.

Unemployment was up, 7.9% of the workforce is now unemployed - about two and half million. The benefit claimant count was up by 2400 on the month.

On the plus side according to the ONS, consumer spending was up 1.9% in January compared with December. This may be spending postponed by snow taking place late.

New mortgages issued in January were 41,000 compared with 43,000 in December. So the housing market continues to stagnate. Next week we'll be getting a lot more data on housing, numbers from various lenders so this whole area will be topical.

Thursday, 17 February 2011

All UK inflation numbers since 1997 have been wrong

In its February Inflation Report the Bank of England has admitted that all inflation calculations between 1997 and 2009 were wrong!

The culprit is clothing, which has been consistently under-counted. This has made CPI 0.3% lower than it should have been. The report says the impact on RPI is larger but doesn't quantify it. The basic error seems to have been they were counting sales prices not everyday prices. [Page 39 of the report.]

Obviously this is very embarrassing for the Office of National Statistics which does the sums, and it may go some way towards explaining why the Bank of England's fight against inflation has been consistently failing. (A year ago the Bank was predicting that CPI today would be 1% - actually it's 4% - that's a substantial deviation.)

Dr Andrew Sentance, MPC hawk, in a speech to the Institute of Economic Affairs today claimed that the Bank is selling out the country by the pound. (It's a reference to a 1973 Genesis album.) By this he means that putting the bank rate up would raise the value of sterling and so cause our imported costs, eg oil, to fall. Hence inflation would fall. Contrast this with the attitude of Mervyn King who claims imported inflation is beyond our control and should be ignored. (Did he ignore the imported deflation we had between 2000 and 2007 when the country was flooded with cheap Chinese tat? No, he took the credit for the low inflation without comment!)

There is also another big problem with all the inflation numbers being wrong since the year dot; something which might prove expensive for the government. People holding index-linked gilts, people owning index-linked national savings certificates, people receiving index-linked pensions and people with index-linked benefits have all been short-changed. These items are all RPI-linked and it seems holders are due a back-dated payment of around 0.6% per year, going back twelve years.

Recipients of pensions and benefits will probably just have to lump it. The government can claim parliament sets the rate and that's an end to it. But holders of gilts, mainly large city funds, may already be peering at the small print of their contracts. There may be some compo to be had here.

Tuesday, 15 February 2011

Bad news week

This week a lot of UK economic data will be published, and most of it is likely to be bad.

A few minutes ago the ONS released the inflation numbers for January. CPI was 4.0% and RPI 5.1%.

So CPI is now exactly twice the Bank of England's target. Last week a sanguine MPC, which already knew today's CPI number, decided there was still no need to take any action to head off inflation. In fact the great and the good regard inflation in UK as close to zero. Vince Cable, the Business Secretary, and Mervyn King the Governor of the BoE are both on the record as saying that all UK inflation is due to "one off" and "external" factors such as the rise in VAT, the fall in sterling, and the rising cost of imported commodities such as crude oil and food. Taking a very narrow view they have decided that factors outside their control don't count so can be ignored.

Of course these factors aren't really outside their control. It's true they can't make the oil price go down, but they can make sterling go up (by raising the bank rate) which is just as good from our point of view. As for factors genuinely outside their control (eg the failed Russian grain harvest) well they should be offsetting this by bearing down harder on factors they can control.

Mervyn King has three more years until he retires, at which time he will qualify for a pension of £220,000 pa, RPI-linked. This blog considers it very unlikely he will refuse his RPI-linked pay rises just because the cost of living is increasing by one-off or external factors!

Moving on, tomorrow the Nationwide will release its consumer confidence survey result. This is expected to be gloomy. The unemployment data, claimant count and number of unemployed, will be released. We will also see the Bank of England's Inflation Report - likely to be a bland whitewash, written by people not much personally affected by real world data.

Then on Thursday the CBI publishes its industrial orders expectation. Manufacturing has been the one sector of the UK economy showing some resistance to the current economic woes so this number might not be too bad. Unfortunately manufacturing is only 12% of our economy.

Then next week we have quite a lot of data on housing and house prices; and a possible revision to the -0.5% GDP number for the last quarter of 2010. It's unlikely to be revised enough to make it go positive though.

However if you want good news - well the bank reporting season has just started. Barclays has kicked off by announcing a £6bn profit on the year, 30% up on last year Of course this is mainly good news if you're a banker.

Thursday, 10 February 2011

Eric Illsley jailed

Further to this post the disgraced former MP for Barnsley, Eric Illsley has just been sentenced to one year in jail. He fraudulently obtained £14,000 by fiddling his expenses, but pleading guilty will have got him a third off - so the base sentence would have been 18 months.

This sets the benchmark for Lord Taylor who has been found guilty of fiddling £11,000 but didn't plead guilty. He will be sentenced in due course.

Monday, 7 February 2011

Tories turning back the clock

Pleasingly, our Tory-led coalition government seems to be quite systematically dismantling the oppressive legislation imposed by New Labour.

Speaking at the European Security Conference PM "Dave" Cameron said that multiculturalism has failed. He wants to promote a stronger national identity to combat extremism "of all kinds." Identity? Which party is it which puts "identity" as one of its top policy items? Yes, the BNP, which has been pointing out that multiculturalism is a failed experiment for at least the last ten years. So it looks like the Tories are slipping into some BNP clothes and finding they quite like the fit.

Next up is the Criminal Records Bureau. CRB checks seem to have become mandatory for about half the jobs in the country. New Labour was draconian in its severity. The slightest blemish on a person's record, eg accepting a caution for a misdemeanour, could bar a person from any number of professions for ten years. The new policy is going to be that only jobs requiring intensive contact with children will require this kind of vetting.

And last up: ASBOs. Anti-Social Behaviour Orders were a travesty of justice when they were first introduced; they allow someones freedom to be curtailed without the safeguards of a criminal trial; and in any event are now regarded as a badge of honour by the criminal classes. They are to be replaced by a series of other orders which one hopes will not violate the fundamental tenets of justice, such as the right to a trial before punishment is imposed.

Friday, 4 February 2011

Muslims behaving badly

We seemed to be deluged with stories about rogue muslims at the moment.

First, meet Rajib Karim, 31...

 Karim: On trial for plotting terrorism

A British Airways employee, a well-educated software engineer, Bangladesh-born Karim is currently being tried at Woolwich Crown Court accused of preparing an atrocity costing many lives. The court has heard that he exchanged several encrypted emails with terror mastermind Anwar al-Awlaki in which he reported his progress in recruiting like-minded individuals amongst airport staff and speculated on the possibility of getting 'a package' onto an aircraft.

The jury was told that Karim acted as a terrorist mole for American-born al-Awlaki – the commander of the Yemen-based Al Qaeda in the Arabian Peninsula – passing him crucial information on the airline’s computer and security systems.

Karim came to the UK in 2006 to make use of the NHS. He thought his baby son had cancer - he didn't but Karim stayed here. His wife is a British-national.

The prosecution said that from his arrival Karim was ‘entirely committed to an extreme Jihadist and religious cause.' And that Karim believes that terrorism, including the murder of civilians, is permissible to establish, as he views it, a true Islamic state'

The Daily Mail has extracts of his emails...

You have new mail!

The trial continues.

Meanwhile, back in Bangladesh, which Karim seems to miss so much, what with all us "kuffars" over here, in this pleasant river-side village...

 Primitive village, near Dhaka, full of superstitious idiots

...a 14-year-old girl has been whipped to death. Mosammet Hena was raped by a cousin and in Islam this counts as "having an affair". The local cleric decreed 100 lashes. Mosammet survived the first seventy.

Closer to home we have more muslim scum. Two muslim councillors at Birmingham City Council have refused to stand or clap when George Cross winner L/Cpl Matthew Croucher was being feted by the Council for throwing himself on a Taliban hand grenade to save his colleagues' lives.

L/Cpl Matthew Croucher GC: Hero

Royal Marine Matthew Croucher was largely unhurt in the incident, due to his backpack taking the force of the blast - much to the muslim councillors' regret no doubt. Both councillors are members of the "Respect" party. (You couldn't make it up, could you?)

Meanwhile the Wikileaks revelations continue. Today we learn that SIS (aka MI6) thinks that the problem of home-grown terrorists will blight Britain for years to come. The warning was given in a private briefing from a senior MI6 official to visiting American Congressmen amid growing US fears over the radicalisation of young British Muslims. Nice!

Wednesday, 2 February 2011

Michael Lewis does Ireland

Michael Lewis, the Vanity Fair writer whose article on Greece I recommended back in September last year has done it again: fully explained and encapsulated the economic problems of the Republic of Ireland. It's a long read but worth it. Read it here.