Britannia Radio

Here's background information from Stephanie Flanders about the cost
of all the measures so far plus the start of QE itself.

On the latter point Denis Cooper - known to many readers - adds - - -
"Why on earth is the Bank of England using £100 billion of newly
created money to buy up gilts at all, irrespective of these
subtleties around their various maturities?

Gilts are not problem assets - they're among the highest grade,
safest, assets available - and there's a liquid market for anyone who
wants to either sell some of his holdings, or add to his holdings.

It only makes sense if this is understood:

At the same time as the bank of england will buy up existing gilts,
the treasury's debt management office will sell new gilts to fund the
government's budget deficit.

So - if the Bank is in the market to buy existing gilts, will that
make it easier, or harder, for the Debt Management Office to sell new
gilts? The answer is in the [Rogerr Bootle's] article: "This policy
has already caused gilt yields to drop sharply".

In other words, gilt prices have gone up, in anticipation of a
shortage - a shortage which the Debt Management Office will be very
happy to make good with new issues, thus raising the money the
government requires to maintain and increase its expenditure at a
time of collapsing tax revenues.

Government revenues go into, and government spending comes out of, an
account it holds at the Bank of England - the Consolidated Fund
account - and it would have been more transparent if Alistair Darling
had simply sent a written instruction to Mervyn King: "Please
credit £100 billion of new money to the Consolidated Fund account".

Because that must be the end effect of the Bank of England buying
existing gilts, while the Treasury is selling new gilts."

The argument will doubtless continue
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This is followed by today's "shorts" on economics
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BBC ONLINE 9.3 09
How much is it all going to cost?
. Stephanie Flanders

The International Monetary Fund often saves its best stuff for Friday
afternoons. So it was last week, with the release of no fewer than
eight weighty reports on the costs of the financial crisis so far. I
wish I could tell you that I had now read every word. But I've read
enough to think them worth sharing.

Here are the headlines for the UK.

The IMF reckons that the British government has spent nearly 20% of
our GDP - £285bn - in up-front support for the financial sector since
the crisis began. That compares to a figure of 6.3% of GDP for the US
and an average of 5.2% for the advanced economies within the G20.

That's the money that has actually gone out the door. Adding up the
"headline" amounts for all the various schemes to support the banking
sector, the IMF reaches a grand total of 47.5% of GDP - or £684bn.

That sounds like a lot, but on this wider (probably less meaningful)
measure, we're not even in the top three.

The Irish government, with its blanket guarantee for all the nation's
retail deposits, has made financial sector promises with a paper
value of 263% of GDP, while the headline commitments of both the US
and Swedish governments come to upwards of 70% of GDP.
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QE Day (2) [5.3.09]
. Stephanie Flanders

The Bank of England has pressed the button on quantitative easing.
The initial size of the scheme - £75bn over the next few months - is
smaller than some analysts have suggested, but it's a lot more than
if they were dipping their toes in the water.

To give some perspective, £75bn is the equivalent of about 5% of GDP.
And the fact that the chancellor has authorised purchases up to
£150bn shows that the Monetary Policy Committee (MPC) also knows it
may have to do more.

One quick conclusion I might draw from both the headline amounts and
the content of the statements is that the MPC thinks that the asset
price (or yield) effect of the policy is going to be more important
than the traditional money channel.

I don't know for sure, of course - but, as we saw, if you thought
that the money multiplier was in good shape, you would be talking
much smaller amounts.

The Bank might demur. Officials tend to say that they don't care how
it works if it achieves the right result. By making the purchases
over several months, the MPC is also giving itself room to stop, if
the effect is much greater than anyone expects.

But in his letter to the chancellor, the Governor, Mervyn King also
highlights that £50bn of the total allowed purchases of £150bn should
be of corporate securities, "in recognition of the importance of
supporting the flow of corporate credit".

Given the size of the two markets and the dangers of taking too much
corporate risk onto the Bank's balance sheet, the majority of the
purchases will have to be gilts. They don't want to increase the risk
premium on government assets, which would push up borrowing rates for
everyone and defeat the purpose of the exercise.

But the governor's emphasis is striking. Of course, by emphasising
the credit aspects to the policy, King also wants to draw as sharp a
contrast as possible between this policy and a policy of printing
money simply to finance government deficits. As he will continue to
remind us, buying government bonds as part of QE is a means to an
end. It is not, as in Zimbabwe, an end in itself.

As I've discussed before, it's an important political and practical
difference, even if the short-term effect of what the Bank is doing
is the same: namely, monetising part of the government's debt. [see
introduction ! -cs]
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ECONOMIC 'Shorts' 9.3.09

TIMES
=Japan account in first deficit since 1996
'Stunningly bad' figures reveal that country's trade position is
expected to remain in the red for several months

TELEGRAPH
=Vauxhall 'in terrible trouble', says Mandelson
The global automotive industry faces a crunch week as insolvency
looms for a number of the industry's key players.
Lord Mandelson will come under pressure from UK-based car makers as
they seek access to a promised £2.3bn in government support, which
was originally announced in January.
Yesterday the Business Secretary conceded that Vauxhall was in
"terrible trouble" and said that he planned to work with Germany to
try to save the European subsidiaries of General Motors.
=John Lewis staff in line for bonus cut
The 70,000 staff employed at John Lewis stores and Waitrose
supermarkets are bracing themselves for a severe cut in their annual
bonuses when the partnership releases its full-year results on
Wednesday.
Last year's payout equated to 20pc of their salary, but this year it
is expected to fall to 12pc or lower.
=Unemployment 'to hit 3.2 million'
Unemployment will hit 3.2 million as the economy shrinks by even more
than had been feared, business leaders at the British Chambers of
Commerce have predicted.

FINANCIAL TIMES
=Industry freezes pay in bid to save jobs
Two-thirds of UK manufacturers have frozen pay or are considering
doing so in an attempt to stave off redundancies and hold on to
skilled staff according to an industry survey - Mar-09
=Manifesto leaves room for manoeuvre
Financial Times analysis outlines the main Tory election pledges and
key questions that remain over what is widely seen in Westminster as
the policy platform of the next government


BBC ONLINE
=Toyota planning new UK cutbacks
Toyota is finalising plans for fresh cutbacks in production at its UK
factories as it seeks to cut costs, the BBC learn