SUNDAY TELEGRAPH 3.5.09
1.Benefits of new money go abroad
Billions of pounds "printed" by the Bank of England as part of its
quantitative easing programme have been leaking overseas, it has
emerged.
By Edmund Conway
Billions of pounds worth of 'new' money has been leaking overseas
In a development which will raise doubts over the effectiveness of
the Bank's plan to rescue the economy,
Figures have shown that foreign investors were the biggest sellers
of gilts in the first month of the scheme. Pension funds, which the
Bank had hoped would be the biggest recipients of the newly-created
money, received far less of the estimated £15bn spent by the Bank
during March.
The news comes ahead of the Bank's next Monetary Policy Committee
meeting on Thursday, at which it is expected to reaffirm its
commitment to the project, which aims to spend £75bn on government
debt over three months. However, the figures, published deep in a
Bank document on Friday, shed light on the fact that the system has
fallen short of expectations in its infancy. [This was "deep in
the" ST's Business News today at the bottom of page 2 and given no
prominencw! -cs]
The statistics show that the Bank spent £15bn on gilts in March but
that the biggest sellers of these in that period were overseas
investors, who cut their gilts portfolios by £7bn. Investment banks,
meanwhile, sold £2bn, while non-bank investors, which includes the
pension funds and insurance groups which the Bank had intended to be
the chief recipients of the quantitative easing money, sold only £5.9bn.
The Bank's primary intention upon launching the programme was not
merely to increase the amount of money flowing around the economy by
£75bn but to put it in the pockets of the pension funds, who they
believe are most likely to spend it. Anecdotal evidence suggests the
money has instead ended up in the hands of overseas investors, hedge
funds or investment banks, some of which have apparently been making
profits by buying the Government's debt from the Debt Management
Office, before selling it on to the Bank and pocketing a return.
These fears have also been supported by statistics showing that
despite this extra cash poured into the system, the money has been
hoarded by banks and savers rather than spent on goods and
stimulating consumption.
Michael Saunders, economist at Citigroup, said the recovery in the
stock market in recent months may persuade the Bank to suspend the
programme at the end of the month, for fear of pumping too much money
into the system and encouraging inflation. [SEE Halligan below -cs]
Nevertheless, many economists expect the Bank to increase the amount
it will spend on gilts to £150bn - the amount it was mandated to
spend by the Chancellor in March.
===============AND ----->
2.Cameron must tackle debt 's ugly truths
The debate on UK public spending is moving fast, but not nearly fast
enough.
By Liam Halligan
David Cameron warns we face "an age of austerity" and that a Tory
government would implement "what could be one of the most painful
round of cuts since Sir Geoffrey Howe's Budget in 1981".
By harking back to the "tough choices" of the Thatcher years, Cameron
is starting to sound like a leader. But he's not yet even close to
showing he understands the scale of the problem we face. Unless he
corrects that fast, Cameron's caution will make this country's
predicament so much worse.
The UK will soon have a budget deficit of 15pc of GDP. The Government
will be selling gilts equivalent to 20pc of our national income for
at least three successive years. To say this is the worst fiscal
crisis in this country's peace-time history is an understatement.
We're now in banana republic territory.
For many years, this column has warned about Brown's excessive
borrowing and the billions of off-balance-sheet liabilities. The
importance to our tax base of financial services and housing meant
the bursting of the credit bubble was bound to hammer government
revenues. Combine that with the retirement of millions of baby-
boomers and 2010-14 was always going to be difficult. [It is being
made worse by companies relocating to lower tax home bases -cs]
Yet until quite recently, Cameron's Tories were pledging to "match
Labour's spending plans". Rather than showing they understood the
need to tame the state, the Cameroons tried to have it both ways by
"sharing the proceeds of growth".
It's because the current Tory leadership spouted such vapid nonsense
on the public finances for so long that Cameron now needs to
demonstrate he "gets it". Repeat after me, David: "the Tories WILL
implement a painful round of cuts GOING WAY BEYOND Sir Geoffrey
Howe's Budget in 1981".
If Cameron doesn't say this the UK will soon lose its Triple-A credit
rating. Big institutions will then be forced to dump UK gilts -
leading to a disastrous spike in yields. Interest rates right across
the economy will balloon, whatever the Bank of England does.
[Here I must add that I have been warning this independently for
months while calling for massike cuts in spending. On the coming
inflation please see my report on City consensus dated 11.03.09
entitled "BRITAIN'S ECONOMY - BLEAK PROSPECTS" -cs]
For international debt markets, the name of the game is supply - how
many gilts will be issued, and when. So if the Tories don't show how
they'll issue fewer gilts, the Government will have to pay much more
for credit, leading to even deeper spending cuts. (See Edmund
Conway above -cs]
Unless Cameron starts building the political consensus now, getting
the country squarely behind the need to spend less, the markets
simply won't believe he'll actually will cut spending when he gets
into office.
The political classes will say I'm bonkers. They said I was bonkers
several months ago when I went on the BBC's Today programme to warn
the UK could face a gilts strike. Yet the markets are now warning the
game could be up. "Treasury projections are definitely a cause for
concern", says Arnaud Mares of Moody's ratings agency. "The
Government faces the high probability of a serious buyers' strike,"
says Don Smith, Chief Economist at ICAP, one of the world's leading
brokerages. The stark truth is that the UK's ability to roll over its
debts is in grave danger. For now, lenders judge that UK deflation is
around the corner, making non-indexed gilts (the vast majority of
those issued) seem a better bet.
But fears are growing that "quantitative easing" - printing money -
will soon push inflation up. [See Conway again -cs] When that
happens, gilts will look much less attractive. As sterling keeps
falling, that's also weakening the demand for UK government
debt.Cameron's advisors tell him to say nothing, and he'll soon be
Prime Minister. That shows just how out of touch the political
classes are. The country knows full well we've long lived beyond our
means. The public is screaming for someone to take control.
Last week, David Davis, the former Tory leadership candidate, wrote a
newspaper article calling for "the debate to start on how to cut
public spending". He mentioned some "unmentionables" - including
Trident, public sector pensions and the renegotiation of PFI contracts.
This was a valuable contribution and Cameron reacted by toughening
his rhetoric a smidgeon, before his spin-doctors reined the language
back in.
Politics is tough.
During the coming few years, our fiscal meltdown will make it tougher
than under Thatcher, tougher than the IMF debacle of the mid-1970s.
Cameron has the chutzpah to be Prime Minister but has he got the
stomach to lead? That's what the public wants to know - and what the
debt markets are waiting to find out.
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