Carney in Jackson Hole

Mark Carney is due soon to return to Canada and make a political career in an environment free of worries about the pound sterling, the European Union and Theresa May. While Trump survives in the US presidency there will be a small risk for Canada in the future of the North American Free Trade Area, but in other respects Trump cannot hurt Canada; and if his failures drive down the value of the US dollar, this will be to the benefit of the Canadian currency and economy. Britain's problems may be of passing interest to Mark Carney post-Bank of England, but he will have [nor will he want] any part in addressing them.

George Osborne is a co-culprit with Cameron and Clegg in most of the disastrous aspects of the Coalition and subsequently the Conservatives' economic policies, but it is generally accepted that he alone drove through the decision to bypass Bank of England insiders, and all other Brits who might have had a claim to be considered as Governor of the Bank of England, and opt to advise the Queen to appoint the clever Canadian. Carney was appointed when the policy of Quantitative Easing and low interest rates had been entrenched by the previous management of the Bank, who had reacted to the meltdown of world banking as a crisis of moral hazard until Chancellor Alastair Darling sounded the alarm and compelled them to act positively [if not entirely sensibly]. Since his appointment, in retrospect, Carney has not had much to do. His 'forward looking' comments about the British economy in context, and what the Bank may or may not do about lending and about interest rates have all been falsified by events; to the extent that some journalists have made a joke of his predictive capabilities. He participated in 'project fear', the campaign to scare the British electorate into voting to remain in the European Union even after the continentals had grossly insulted David Cameron [and, by implication the country that he represented] by their contemptuous dismissal of his half-hearted attempt to make the"ever-closer union" less objectionable to sensible Brits. When the referendum result was announced, before there was time for any deep observation of its short-term impact on the economy and on the currency, Carney led his outfit into panicky and wrong decision to lower interest rates further and to continue 'printing money' that the banks could then lend and drive asset prices [especially house prices] ever higher even as real wages continued to fall.

Mark Carney seems a pleasant man, and has a reputation for high intelligence. His record in Canadian banking is excellent: his record at the Bank of England gains him nul points. Later this week he goes to the US ski resort of Jackson Hole to meet the other governors of central banks, with a massive audience of media, to exchange platitudes. The real meetings of central bankers, that matter, occur in the context of the Bank for International Settlements at Berne; and sometimes the governors have influence when they gather with their countries' finance minister in the context of the G20, G8 [or whatever number gather, dependent on which countries are in favour with the USA]. The annual performance at Jackson Hole, beside allowing opportunity for some private chatter and data swapping, allows some more speculative statements to be made. This year, it is expected that the Chair of the US Federal Reserve Board will indicate the approximate scheduling of future interest rate increases; and that the Chairman of the European Central Bank will indicate that it is his organisation's plan to begin policy tightening, within the next year. Carney will have nothing to say. The Bank of England is still stuck like the proverbial rabbit in the headlights, mesmerised by Brexit, Trump and the fear of Britain being alone in the world without a Churchill able to summon up the Few, the Dunkirk Spirit and the resources that were handed to stand-alone Britain by President F D Roosevelt.

Mr Carney's children have already gone back to their Canadian educational institutes, and he will follow them soon. He has learned a lot, but been unable to do anything. His experience in Britain has fitted him better for his future career in Canada; and Britain gained nothing from his presence with us here.

What Comes Next, After North Sea Oil?

Mrs Thatcher's government's economic and social policies were made viable only by the fact that her era coincided with the United Kingdom being able to exploit the oil and gas reserves that had been found under the North Sea over the previous couple of decades. The tax revenues derived from those resources largely funded the welfare state, enabled the government to give redundancy pay and early pensions to unwanted employees from the nationalised industries, and maintained the nation's defences. The material fact of having sufficient gas to meet the national need, and a significant oil supply that diminished the need for imports, enabled the country to shut down the coal industry almost completely. 

Those were the material conditions in which the financial revolution of 1986 was facilitated: and the financial services [with their related activities like the courts and arbitration services] were opened to the international community and became a significant earner of foreign exchange. The loss of the textile, crockery and steel industries was mitigated by the sale of financial and related service globally. In particular, Britain's membership of the European Economic Community as it went through the transition to the European Union enabled London to become the unchallenged financial hub of the Union. It will be interesting to see how far President Macron, as an ex-banker, is able to steal business for Paris in the coming years; but that will be a side-show compared to the issue that is being considered here.

The key fact is that material assets - oil and gas - enabled the immaterial activities of 'the City' to become established as major export markets. Simultaneously, the incomprehension of successive governments as to what was happening in the domestic financial services market was building up to the crash that almost brought down the entire economy in 2007-8. New forms of contract, most particularly securitisation, enabled the domestic financial sector to grow in an unprecedented ways to an extent that was way beyond the regulators' power to comprehend or to control it. Securitisation was developed simultaneously in the USA and the UK, as a means whereby borrowing by some firms and most individuals could be lifted off the books of the banks and building societies that made the original loans, and sold on as new forms of security to suddenly emerging 'wholesale' traders and investors. This meant that the retail banks reduced the amount of lending in their books, and could lend more again; which loans could then be securitised: and so on. The debts owed to their banks by small and medium-sized firms largely remained with the banks, because they were recognised to be too risky for securitisation. But the mortgages and credit card debts owed by millions of ordinary people were seen as safe debts to be securitised. Thus when the crash came, the banks faced the fact that they had many billions of pounds of debts from smaller companies on their balance sheets, most of which the companies could not settle in the depressed condition after the crash. So the debts were kept on the books, the Bank of England allowed the banks to cash in government bonds in sufficient volume and value to make those books look balanced, and a huge problem for the future in the form of 'zombie' companies was created [and it now seems almost permanent: impossible in the near term to resolve].

Meanwhile the financial institutions collectively have carried on lending pretty freely to house buyers with reliable incomes, fueling a boom in property prices for the sectors of society than can afford to maintain their repayments and causing a major social division between those who can 'buy' homes and those who can not. Juggling money to keep the mortgage market expanding, largely by expanding the money supply through the Bank of England's 'quantitative easing' trick, has maintained the illusion that 'owners' of property are asset-rich: and this has kept the economy buoyant with regularly reported 'growth' of the Gross Domestic Product of the economy. This is all based on a bubble of credit; about which the Bank of England is becoming increasingly concerned.

Meanwhile, the 'real economy' of goods made and imported and exported and consumed has shrunk to a minor proportion of the domestic economy. The country has become import dependent: to a degree that ongoing sales of financial and related services to the rest of the world will not enable he country to pay its way. Departure from the European Union, even if the UK is able to retain its status as the financial hub within the European Economic Area, will make this situation worse.

It is usually condemned as old-fashioned and uncomprehending to stress the overriding importance of the material economy. But the success of Germany as a material-exporting country [of high-value-added products] is the living demonstration of the point. The reckless use of North Sea assets to finance a material standard of living that the country can no longer afford, and to fund a finance sector that has exacerbated the nation's problems, is a horror story which will haunt economic reality for at least a generation to come: and no politicians are preparing to cope with it.

What the Fed is Doing

The Federal Reserve Board, the central bank of the USA, has announced that it will continue on a large scale to buy 'mortgage-backed securities'. A security is a promise-to-pay that has been issued by a firm or a government agency, that is considered to be highly likely to be cashed [or exchanged for another acceptable asset] when the owner demands payment in accordance with the terms on which the security was created. By concentrating primarily [though not necessarily exclusively] on mortgage-backed securities the Fed is slowly capturing the reckless expansion of credit during the nineteen-nineties and twenty-naughties, when the spending-power that was created was used to 'buy' houses. Hundreds of thousands of Americans were encouraged to participate in Bill Clinton's concept of a property-owning democracy by taking a material stake in the country - and gaining a material asset - through house purchase. Lending institutions, mutual funds and banks, were bullied by the agencies of federal government into making mortgage loans, even to people whose incomes and history of indebtedness indicated that they were incapable of resourcing and managing the repayments.

Notionally the books balanced. The population collectively borrowed more money each month to buy an increasing housing stock, comprised of properties whose resale prices were increasing in line with the rising price of new homes. The public's debt to the banks notionally matched the liability of the banks in the form of the sums that they owed to the investors who had supplied them with the credit that they had advanced as mortgages. Month by month the vast majority of mortgaged householders paid the sums due to their mortgage lenders. The lenders used the inward cash flow to pay their business costs and to pay the interest that was due on the credit that they had borrowed, and to repay those creditors and depositors who asked for their money back: and they had enough left to carry on lending to more borrowers at higher prices. Then during 2006 economic conditions became tougher for low income groups. Unemployment and prices were increasing, and an increasing number of 'sub-prime' borrowers either surrendered their properties or were evicted from them as their arrears on mortgage payments were deemed intolerable by the lending institutions. The mortgages had partially been funded by sales of securities that were 'bundled' with other mortgage lenders' debts and with the ownership of loans that had been made for other things. These 'complex' securities  were said to be 'safe'  because they would not lose more than a fraction of their value if any one of the lending institutions became unable to pay out against the security on demand. During 2007, however, it became clear that several major mortgage lenders had so large an exposure to sub-prime mortgages that there could no longer be a guarantee of the value of the securities that they had issued; and it was unclear, in the case of many complex securities, how much of the asset had been eroded because it was not clear how much of the asset was devalued. So the only way to treat such a security was to assume that it had no determinable value. This caused the catastrophic collapse of banking confidence and of asset values generally that was quickly dubbed the 'credit crunch' and which spread around the world.

A variety of headline-grabbing measures was taken by governments and by central banks both to calm down the markets and to prop up the values of as many shares and securities as could still be seen to retain positive value. The banks were enabled to carry on allowing customers to access their own money, and to service those of their debts that it was necessary to pay off. Where it was deemed necessary the government took partial or even total ownership of the banks; though the most preferred method was to 're-capitalise' the banks by topping up the cash that they had available so that they could continue to met their obligations.

Though house prices fell significantly, valuations were still quoted and contracts for house purchase continued to be made; and the vast majority of mortgage holders carried on making all or most of their payments. For a while the mortgage backed securities could not be valued, but they continued to exist. But then in 2011-12 conditions became more stable, particularly in the US housing market, as the massive spending on infrastructure by the federal government and the constant increase of the amount received by the American people in welfare and unemployment pay and the sluggish creation of new jobs worked together to increase confidence in the valuations of most US house property. Significant value could again be attributed to the securities from the 'nineties and the 'noughties that had been in limbo since the credit crunch. The Federal Reserve has now announced the continuance of its programme of taking such securities into the asset registers of the banks that are members of the Fed, in turn for new credit that is given to the banks to support their ongoing operations.

The short-term impact of this policy will be slightly to stimulate activity in the US economy, adding to business turnovers and employment. The major impact of the policy of 'Quantitative Easing' will be to increase the notional money supply; to convert the inflation of credit that had been confined to the housing sector to general credit within the banking system. The excess debt that was accumulated in the housing sector is being nationalised in the hands of the Fed, and a huge amount of spending-power is placed in general circulation. It will create inflation of general prices; and will stimulate modest economic growth. Without allowing any other major default of a bank to occur since Lehman's disappeared at the height of the crunch, the absurd sectoral credit expansion from the bubble era is being legitimated. This will be a phenomenal achievement, if it can be brought to completion. The objective is clear. In Britain the promised continuance of quantitative easing is not similarly targeted at 'monetising' the inflation of house prices that went so disastrously wrong through the sub-prime experiment; it is principally helping the banks to continue to meet their obligations from past casino banking, and secondarily allowing them to perform the statistical tricks that are needed to 'strengthen' their balance sheets to meet new global capital requirements. However long it goes on, it is unlikely to assist the growth of the real economy.

Greek Bondage, Eurobonds and Project Bonds

Greece is likely to leave the eurozone: I have said it ever since the bubble was exposed and it becomes more likely every week. More and more Greeks resent the restraints on public spending that have been imposed [not just by the EU, but more significantly by the IMF] to correct the inane profligacy that the eurorats studiously ignored for more than a decade. So intoxicated were the Brussels sprouts by their power to exploit the inertia and ignorance of the pseudo-statesmen who were notionally their political masters that they just pressed on with the delusory agenda  of full integration that assumed - contrary to available evidence - that all eurozone members were behaving 'responsibly' according to EU treaties and agreements. Ancient Greece was a slave-powered society: Greece today is bound by truly oppressive rules imposed by aliens. The Greek situation is so extreme that once it is tackled by measures that can be given a fair chance of bringing the economy into balance, the other enfeebled eurozone economies can be ring-fenced affordably to the rest of the European Union; possibly even including contributions from Sweden and other EU states that are outside the eurozone.

Investments that might be made in Greece after exit from the euro, by public sector and private investors from Europe and beyond, could support substantial growth of the 'real economy': but only if the investors are sure of the security of the investments. Foreigners will not invest if their assets could be written off by hyperinflation, or if they faced a high probability of being nationalised, or be immobilised by strikes that freeze the stream of revenue. Similar strictures would apply in any eurozone country where investment was sought for projects devised to strengthen productive resources or improve the infrastructure: Italy, Spain, Ireland, Portugal and - potentially - France.

The experience of several countries that have tried quantitative easing [usually explained as 'printing money'] is that the 'new money' is not used to buy industrial assets or  stock in material trade, but to enable the central bank to buy bonds that might otherwise plummet in price if there were no buyers. The propaganda machine says that the intention is to sustain real economic growth: in reality quantitative easing is an additional way of shoring-up 'banks' that brings a huge threat of future inflation of costs and prices [and an additional erosion of personal wealth]. The players in financial markets are very clear of the real nature of this charade and they will not support any such policy by buying bonds issued by a government that is not pursuing serious economic discipline. Thus in Europe there is a strong lobby - led by the less-responsible governments - for the creation of 'eurobonds' that would be guaranteed by all eurozone governments. The funds thus accumulated would be lent to countries and to banks that found it difficult to raise funds in other ways. In effect it would be slightly covert way of getting Germany to shore up financial institutions in Spain, Italy, Ireland, France [and possibly even Greece]. It is absolutely unsurprising that Germany is resisting this.

But now the evidence is unequivocal that the eurozone is in danger of collapsing, with or without Greece, so the Germans have indicated a willingness to consider issuing 'project bonds' with some sort of eurozone backing [perhaps through the European Central Bank]. This would stimulate employment and spending in member countries by building roads, airports, housing estates and other infrastructure that would have demonstrable material existence. The buyers of the bonds would become the indirect owners of the assets, and could be recipients of interest payments directly raised from the assets: this would give a limited guarantee that the money would be properly used according to the intention of the investors. That guarantee would only be as good as the legal system and the economic order within which the investment would take place. Politicians are fantasisers, liars and cheats: the investments would have to be ring-fenced from political  chicanery; then the idea may begin to take up some serious attention.

Price Inflation: the Peak?

Today sees the publication of a figure reporting the increase in prices between September 2010 and September 2011. Even on the scaled-down index that government now prefers shows this to be in excess of 5%.

The only significant segment of the population whose incomes will at least have increased to match price increases are the elite at the top of organisations who are able to negotiate bumper increases: senior executives in companies and the owners of successful businesses. It is notorious that their incomes have increased by more than inflation [on average] usually as a 'package' of a generous salary combined with a bonus linked to an easily-changed performance target, generous expenses and large contributions to the 'top hat' personal pension fund. Despite the envy and anger that many people express about this disparity, it is notable that many jobs exist in luxury shops, restaurants and other services that supply the rich: the British super-salariat and the many rich foreigners who resort to London as a place to spend parts of the year. If that trade was reduced dramatically unemployment would rise as activity declined in London and around the major racecourses and golf clubs, and in the many firms and farms that supply the luxury trades. The great majority of employees have accepted static wages, or just slight increases, rather than try to force their employers to pay them more that might lead to a reduction in the number of people employed. Even so, there is a growing apprehension that in the absence of rising demand firms will begin to shed labour that they have 'hoarded' over the past couple of years in order to keep their skills base intact.

Economic growth is negligible, consumer demand is declining for many everyday products, and there is no sign that this pattern will change. Just now, the Bank of England has begun to extend the pattern of quantitative easing by which the money supply is expanded. While there is a vigorous debate on how far this activity will assist growth in the 'real economy' there is very little doubt that it will cause devaluation - a further drop in the value of the pound against other currencies - so imports to Britain will become more expensive and that will add more to the pattern of price rises in this import-dependent country. There is no sign of an end to the grim round: and the government has no plan to change policy.

The Pensions Disaster Intensifies

Newspapers have today emphasised the disastrous impact of the economic situation - and of 'quantitative easing' -on people who are close to retirement and who are in funded pension schemes [both the few remaining 'final salary' schemes and the now-predominant 'money purchase' schemes]. The headline figure is that the funds that retirees in the next few months will receive at least 30% income less, as compared to to someone who retired with the same amount of credit in their pension 'pot' just three years ago, in 2008 when the credit crunch became clearly discernible.
This alarming fact follows on from a decade during which the incomes receivable by retiring pensioners declined steeply. In 1997 the income receivable in a typical annuity for each £1,000 of assets held in the fund was £77.41.
After Gordon Brown's notorious 'raid' on pension funds, by which the tax advantages given to people who were providing for their old age [and to the payments-in made by employers who helped them to save by contributing to each individual's pension] were removed, the rate at which funds were added to each fund-member's 'pot' declined dramatically: so by 2000 it was very much harder to save each £1,000 - which only yielded £58.00 in pension. The decline in the yield per £1,000 was largely due to the fact that pension funds had been 'advised' to shift their assets from equities [shares in real-world companies] to bonds, especially including government bonds, which over subsequent years have produced much lower income yields than did equities.
The effect of 'quantitative easing' has been to reduce still further the income that is paid out per £1,000 on bonds. So pension funds can pay only reduced cash sums on retirement: after which the providers of annuities can only produce lower pensions than they previously did for each £1,000 that is used to purchase the annuity. There is no basis on which one can expect the situation to improve: so each pensionable person who comes to retirement will feel more comprehensively 'cheated' by the system. Saving will be seen to be decreasingly beneficial: and the children and grandchildren of the embittered pensioners will have a lifelong memory of this disaster.
Hence when politicians to urge people to be prudent and to save - and invest - this will seem hypocritical and hollow. The psychological impact of such aspects of the 'financial crisis' will be profound but unfathomable.

Quantitative Easing into Credit Easing

The Governor of the Bank of England was yesterday apocalyptic in his description of the present risk of a massive world financial crisis, when he announced another wave of money-creation that is euphemistically called Quantitative Easing
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If this money simply goes to bolster wholesale banks' balance sheets - as the previous tranches did - this will do nothing for the 'real economy'. Only if the money is handed out as extended and increased funding of 'real' businesses can it help to stimulate demand and supply in the economic system that living people inhabit.

But there is a real problem here. Even if the Bank and the Treasury demand that some of the money is made available to businesses, they will hand it for allocation to the old lags in the retail banks who have been so cautious and cynical in lending to businesses in recent years. It is commonplace to hear from businesspeople that the only firms that can get money are those who don't need it. Business owners who want funding for small, often start-up businesses, have to offer their own homes as security, making the funding effectively a personal loan. In really hard times [such as the Governor expects to get worse] the risk for an entrepreneur of placing their house as well as their income into dependency on their business seems too great for many people to take. It is precisely these people and their ideas that should be funded: they are a large portion of the potential that exists as latent force in the economy that needs to be exploited.

Whoever hands out new money to businesses should be prepared to risk funding failures to an extent that bankers cannot comprehend. The greatest need is for an increase in activity and spending - and of productive potential - as soon as possible. Most businesses grow slowly; but they can be empowered to start spending quickly. There is no sure way of picking medium-term winners. The Bank and the government must accept that a significant proportion of properly-allocated easier credit will never be repaid. New methods are needed for getting it into the right hands. The Open Risk Exchange is one such concept: there should be many others: so where are they?

While I wrote this I paused to listen to an interview on the TODAY programme of the Chancellor. He spoke in obvious oblivion to the real current situation. He still argues that the multiply failed banks are the only agencies that could extend additional credit: oh dear!

Quantitative Easing

So, to nobody's surprise, it was announced to day that the Bank of England has decided to spend another £25 billion buying 'old' government bonds, to put the cash into the hands of firms that will use it buy new bonds and maybe a few old shares.
Meanwhile the government is selling the 'new' bonds at an unprecedented rate for peacetime.
The release of at least £200 billion of 'new money' into the economy from the QE programme will inevitably cause inflation of costs and prices at some time in the next few years.
The people who should be most concerned about this 'financial engineering' are those in employment who plan to become pensioners - with company pensions or personal pensions - in the next few years. The value of their 'pension pots' has been eroded massively over the past decade, and the trend of the last  few years for fund trustees to hold bonds has set fund members up for further significant losses. The consensus of commentators has decreed that it will probably never be knowable whether quantitative easing has 'worked' or not, at the macro-economic level: it is certain at the micro-economic level that it will be disastrous for members of pension funds.
It is probable that a majority of members of pension funds who are old enough voted for Thatcher in the 'eighties, and for Blair-Brown in 1997: so did they in so doing earn the misfortune that the succession of governments has brought upon them?