Time up for QE

No one really understands it and because of this opinions are all the more divided and intransigent. Despite this incoherence the market has understood enough to know that it drives asset prices and confidence in future prices.  It is QE – quantitative easing.

Ben Bernanke - the Godfather of QE

QE is where Central Banks print themselves some money to buy bonds and other instruments from the banks, the idea is that this puts cash / liquidity into the economy increasing the money supply and making credit more freely available.  Under “normal” conditions of growth (+2-3% annually)and inflation (around 2% annually) equilibrium this would drive up aggregate demand (growth)  and inflation as the banks push this extra liquidity out into the market in the form of loans.

Solving Secular Stagnation

There is now a sense of gloom that pervades the corridors of power in the developed world, six years on from the Lehman Brothers' default and the ensuing “great recession” we are still in the economic dead-zone.  In particular Europe is marred by low growth, high unemployment, falling prices and the worry is that this is the “new normal”.  Most economist are satisfied that the problem is poor aggregate demand, caused by falling investment in both the private and public sectors combined with diminishing disposable income - wages have been flat for years.  This malaise has been characterised as “Secular Stagnation” (SS), a term made famous by Larry Summers a former Head of the US Treasury department.

Larry Summers - feeling the torpor of Secular Stagnation

The IMF gives more poor advice

The IMF have made some interesting pronouncements over the last few years – having missed the credit crunch and the “great recession” that followed they at first endorsed the UKs plan A and then decried it just as it was starting to work – so we shouldn’t hold up too much hope that the Fund will have anything sensible to say on the matter of European recovery.  No one was too interested when they published their World Economic Outlook, which is normally like a school report – “the UK could try harder”, “France needs to apply herself and complete home work on time” – you get the picture.  But this time round it was a bit more specific and surprisingly so; normally the IMF is reasonably hawkish, looking to solve problems through monetary policy (what would expect, it’s a bank) but in this report the IMF suggest substantially increased public spending on infrastructure investment, and across much of the world.   It asserts that when unemployment is high and interest rates are low, the benefits will be greater if investment is paid for by increased borrowing, rather than cutting other spending or raising taxes. Most interestingly, the IMF declares that good infrastructure investment will reduce rather than increase government debt burdens as public infrastructure investments pay for themselves.  Confusingly the whole 44 page synopsis of the WEO highlights a number of risks to the world economy – political risk in Russia, property bubbles, shortages of natural gas, etc;  but report hardly mentions the debts run up by governments and leverage in the banking system - convenient eh!

Christine Lagarde Head of the IMF points the way forward

Cutting Taxes and Axing Osborne

In 2010 the Tories had plan A, deficit reduction, and by and large the British public bought the idea, which was simple, “We have to cut the deficit because sky-high public debt will kill growth and investment and lead to long term depression”.  Some of this proved to be wrong but enough of the narrative still works.  In all polls that ask the question “who do you trust to manage the economy?” the Tories are in a comfortably lead. We Brits have a long memory and the Brown / Balls bubble will not be forgotten and more recently Ball’s idiotic call for a plan B made him the laughing stock of Westminster.

Despite the Tory’s hard talk on deficit reduction the reality is that progress has been hampered by the coalition’s bargaining (with the illiberal Lib Dems), which ring fenced welfare, the NHS and pensions from the ravages of austerity.  Nearly all the cuts imposed in this Parliament have been born by spending departments that receive less 40% of the entire public sector budget.  There have been some interesting results – less spending on police has reduce crime, less spending on “enterprise” has helped growth take off, lower spending on Europe has made Europe even less popular and a huge increase in international aid has seen our stock in the world fall dramatically!

Bonny Prince Alex

Prior to the union with England Scotland had a long and glorious tradition of following the wrong leader and creating the wrong alliances and this poor judgement eventually created the need for union with England 1706, when the Scottish Parliament voted by 106 votes to 69 for dependence.  Since the Union there have also been a number of moments when the Scots have thrown their lot in with leaders (Bonny Prince Charlie for one) and alliances (The French) who offered more than they were able to deliver.

Queen Anne's floral badge of Union

Germany's most important export is unemployment

Some time ago I posted a short piece entitled Austerity may be Wunderbar, the simple message in this blog was that Germany was the problem in the EuroZone not the solution.  Having joined the Euro at a grossly undervalued rate the German economy has been on the PIIGS back for the last fifteen years.  The net result of this competitiveness advantage was that in the years 1999-2008 German was able to re-boot its ailing economy by exporting cheaply to its European Partners where all control of credits markets had lapsed.  

It's not just cars, but unemployment, that Germany exports

Where no hawks dare to fly

The doves at the Fed led by the chief "cooer" Janet Yellen have found a new reason to keep interest rates at an historical low.

Not a hawk in sight

The latest buzz words are “Pent up wage deflation” and they provide an elaborate excuse for ultra loose monetary policy. The essence of the idea is that in the Great Recession of 2009-2011 the market rate for jobs fell appreciably but that because wages are "sticky" and actual wages remained flat. This stickiness of wages is a function organised labour (Trade unions), employee nervous to move jobs and employers who are reluctant to loose key staff.

Janet Yellen - barking up the wrong tree

Over the last 40 years (well up until 2008) the role of central bankers was pretty clear – keep inflation under control - and it’s no surprise that during the great inflationary period 1970-2000 monetarist held sway.  Interest rates were raised, money supply was squeezed, unemployment rocketed (and then fell) and it was possible to pronounce the demise of Keynesian economics with complete certainty.  The fun went out of economics - the “Great Moderation” proved that once and for all we were the masters of our own economic destiny.  Then the credit crunch struck and the financial crisis kicked off which in turn led to the “Great Recession”, from which the developed world is still trying to escape.

Central Bankers - from heroes to zeros

The Bank for International Settlements (BIS), the only institution to call the financial crisis in 2007, has weighed back into the macro economic debate in the last few days in its annual report.  The report sets out a significant criticism on the current crop of central bankers, in essence the BIS lays the blames Yellen and Co for the falling: growth, demand and employment.  The expansion of national balance sheets and negative real interest rates are now the problem not the solution. The Keynesian approach that all central bankers have followed is now coming under close scrutiny as the global economy struggles to gain economic momentum. The process of piling the "cart" with more and more debt means Central Bankers are running a huge risk as the road ahead may not be as smooth as the would like!

Let's hope there are no pot holes ahead

La Belle Époque - revisited

As we remember 1914 and the horrific shock that World War inflicted on Europe and the terrible waste of life the two World Wars inflicted it might also be sensible to recognise the economic shockwaves that these events triggered.  The two World Wars and the depression that was sandwiched between them, changed everything economically.  The old colonial powers lost their possessions and incomes from abroad; inflation was unleashed on the world as never before – destroying the inherited capital of the über- rich, labour organised and the world was changed. 1914 destroyed the La Belle Époque and changed almost everything!

By the '50s the old rich where on skid row!