These are three separate articles in today's Sunday Telegraph but
linked to one posting on the internet. I've left them together in
one posting but the issues are quite separate. So my comments below
only really relate to the first section, The other btwo are self-
explanatory, I think! appear
-------------------------------------------------------
The first article on the absence of deflation should not really
surprise readers of it here! Firstly I am confident that it will not
have escaped readers' notice that a falling pound causes rises in the
costs of imports and that separately and additionally the price of
oil has risen sharply. These lead inevitably to INflationary
pressures , Secondly in my " BRITAIN'S ECONOMY - BLEAK PROSPECTS" of
March 11 I wrote:--
"After DEflation is INflation the real killer?
The suggestion is that Deflation will continue for about 2 1/2 years
and during this period it is hoped that measures being taken will
restore the economy because during this period as prices fall debts
do not! [It's going to happen somewhat sooner -cs]
The follow-up to that is that with the economy awash with money from
all these stimuli that inflation is not likely, - IT IS CERTAIN!
Governments like inflation because they can borrow today and pay
back with devalued currency later. They cheat the savers with what
effectively is a "stealth" wealth tax"
xxxxxxxxxxxxxx cs
==================
SUNDAY TELEGRAPH 17.5.09n UK
1. So whatever happened to the deflation bogeyman?
Three months ago, the Bank of England published a Quarterly Inflation
Report that, amidst the usual macroeconomic forecasts, contained a
detailed analysis of the threat posed by deflation.
By Liam Halligan
The dreaded "d-word" received top-billing - evoking the traumas of
the Great Depression, rising real debt burdens, warped economic
incentives and Japan's "lost decade".
In its latest Inflation Report, published last week, the Bank made
less of the deflationary dangers we face. A lot less. The word
"deflation", in fact, didn't make a single appearance.
So let me get this straight. One minute the UK faces an issue so
dangerous, so imminent, that we take extremely drastic measures to
tackle it: "quantitative easing" and our debt-fuelled fiscal-boost
were both introduced "to fend off the threat of deflation".
Over the last few months, we've printed money on an unprecedented
scale and run up enormous extra liabilities. When sensible people
have protested, pointing out the clear dangers, we've been told such
"bold" measures were necessary for the UK to avoid getting sucked
into a deflationary spiral.
But now, just three months later, this looming threat has apparently
passed. It warrants not a mention in the Bank's Inflation Report. Has
deflation really gone away? Or did we never actually face such
dangers? Was the spectre of deflation conjured up, instead, for other
reasons - as an excuse for this ghastly Government to yank monetary
policy back off the Bank and nail interest rates to the floor, while
junking fiscal caution and borrowing in a fashion more akin to a
banana republic?
The Bank of England has stopped warning of deflation because it is no
longer credible to do so. In truth, it never was. CPI inflation
remains at 2.9pc - way above the Bank's target, as it has been for 31
of the last 33 months. As sterling has fallen, import prices have
surged. In an open economy like the UK, that's highly inflationary.
A few City economists are still banging the deflationary drum, so
desperate are their battered institutions to keep wringing "bail-out"
cash from the Government, or use QE to recapitalise themselves by the
back door.
But most of the financial markets, and the population as a whole,
know deflation is nonsense. Price pressures remain high. More than
that, concern is growing that our policy response to "sub-prime" -
cranking-up the Bank's printing presses and drowning ourselves in
more debt, and all against a backdrop of negative real interest rates
- is itself storing up high inflation.
At a recent Euromoney conference, a large, financially-savvy audience
was asked to choose which phrase - "deflation" [14%], "inflation
soon" [5%] or "big inflationary problems in the future" [81%] - best
describes their expectations. The result was decisive, with more than
four-fifths concerned there could be serious inflation to come.
That's why the Bank has done a handbrake turn. Three months ago, the
Inflation Report forecast that economic slowdown meant CPI inflation
would fall to 0.6pc by the end of 2010 - still not in negative
deflationary territory, but close. Last week, the Bank raised that
forecast sharply, predicting a CPI close to 1.5pc at the end of next
year.
At the same time, the Bank now sees the downturn getting deeper. The
economy will shrink 3.8pc this year, it says, before growing 1.1pc in
2010. Just three months ago, a 2.3pc growth rate was pencilled in for
next year.
So the Bank has raised its inflation forecast, but slashed its future
growth rate. Less growth would normally mean less inflation, not
more. But in this case, our efforts to avoid the inevitable fallout
from "sub-prime" - the money-printing and all the extra borrowing -
have stoked up future price pressures. In the coming months, these
policy excesses will weigh on sterling, raising import prices
further. Next year's VAT cut reversal will add to inflation too.
Oil prices are now up sharply - some 40pc above their mid-February
low. And crude could go much higher still, again feeding inflation.
But the Bank pointed to another source of inflation that, while
significant, has barely been discussed. By cutting working capital to
companies, the credit crunch has restricted their ability to supply
goods and services. Many firms are now folding, leaving competitors
with more pricing power.
The current lack of credit isn't only destroying demand, but also the
economy's ability to supply. As last's week's Inflation Report was
launched, Charlie Bean, the Bank's Deputy governor, warned the crunch
was curtailing investment and eroding skills. That lowers the output
level the economy can sustain without triggering inflation.
Its lately been argued that because the slowdown results in "spare
capacity", the Government can print money and borrow like crazy
without provoking inflation. But as Bean said: "The rise in spare
capacity isn't as large as you would think simply from the
projections of growth".
Inflation is coming - don't doubt it. The penny has now dropped.
================and---------->
2. Slipping up on PFI
Readers may recall my previous tirades against the private finance
initiative (PFI). Expensive and inefficient, PFI means taxpayers
often shell out ridiculous amounts for sub-standard schools,
hospitals and other public infrastructure.
Having been paid over the odds for the building, the private sector
then adds insult to injury by providing sloppy, overpriced services,
under 25-year contracts allowing them to do as little as possible
while extracting maximum public cash.
Why have Labour, and the Tories before them, signed PFI contracts
worth hundreds of billions when the private sector could have been
engaged on more flexible terms, providing far better taxpayer value?
Because a succession of clever-clever civil servants, supposedly
negotiating on our behalf, have cut deals stacked in the private
sector's favour. It is a complete coincidence some then went to work
for the PFI industry.
The main attraction, though, is that PFI allows ministers to park
billions of pounds of debt off-balance-sheet - a public-sector Enron.
Several years ago, HM Treasury agreed to heed IFRS accounting rules
by bringing all PFI liabilities onto its books. Last week, a low-key
announcement broke that promise. PFI debts will remain off-balance-
sheet but projects may have two sets of accounts - one meeting IFRS
standards, the other for internal consumption. Another small step
into banana republic territory.
================and---------->
3.Give us a new Glass-Steagall
Calls for a new "Glass-Steagall" are growing. Our politicians may
soon have to actually say something about how we prevent a repeat of
the "sub-prime" debacle.
Glass-Steagall was the centrepiece of America's regulatory response
to the 1929 Wall Street crash. Named after the two Senators who
sponsored it, the legislation insured the bank deposits of ordinary
US firms and households. [It was crucial to financial stability and
sound finance -cs]
Crucially, Glass-Steagall also threw up a firewall between commercial
banks (that take such deposits) and investment banks (which pursue
higher-risk investments, having raised finance elsewhere).
For more than 60 years, years Glass-Steagall kept such institutions
separate. Why? Because bonus-fuelled investment bankers could
otherwise get their hands on taxpayer-backed deposits - a recipe for
disaster, as we've seen. Said bankers "lever-up" by borrowing against
those deposits, then use them to gamble recklessly. If their bets
work, they win big. If not, the taxpayer foots the bill.
That's what has happened since Wall Street convinced Bill Clinton's
government to repeal Glass-Steagall in the late 1990s (the campaign
donations surely helped). We then saw the same "fusing" in the City
too. No other single act did more to cause this crisis.
The vested interests against a new Glass-Steagall are enormous, but
credible people are now speaking out. Mervyn King has called for a
debate on Glass-Steagall. So has ex-Tory Chancellor Nigel Lawson.
Respected former Fed Chairman Paul Volcker wants the safeguard back,
as does Vince Cable.
The need to separate taxpayer-backed money from investment banking is
paramount. I'm disappointed the Tories aren't making the running on
this issue. Disappointed, but not surprised.
------------------------------------------------------------------------
--------------
. Liam Halligan is chief economist at Prosperity Capital Management
SUNDAY TELEGRAPH 17.5.09n UK
1. So whatever happened to the deflation bogeyman?
Three months ago, the Bank of England published a Quarterly Inflation
Report that, amidst the usual macroeconomic forecasts, contained a
detailed analysis of the threat posed by deflation.
By Liam Halligan
The dreaded "d-word" received top-billing - evoking the traumas of
the Great Depression, rising real debt burdens, warped economic
incentives and Japan's "lost decade".
In its latest Inflation Report, published last week, the Bank made
less of the deflationary dangers we face. A lot less. The word
"deflation", in fact, didn't make a single appearance.
So let me get this straight. One minute the UK faces an issue so
dangerous, so imminent, that we take extremely drastic measures to
tackle it: "quantitative easing" and our debt-fuelled fiscal-boost
were both introduced "to fend off the threat of deflation".
Over the last few months, we've printed money on an unprecedented
scale and run up enormous extra liabilities. When sensible people
have protested, pointing out the clear dangers, we've been told such
"bold" measures were necessary for the UK to avoid getting sucked
into a deflationary spiral.
But now, just three months later, this looming threat has apparently
passed. It warrants not a mention in the Bank's Inflation Report. Has
deflation really gone away? Or did we never actually face such
dangers? Was the spectre of deflation conjured up, instead, for other
reasons - as an excuse for this ghastly Government to yank monetary
policy back off the Bank and nail interest rates to the floor, while
junking fiscal caution and borrowing in a fashion more akin to a
banana republic?
The Bank of England has stopped warning of deflation because it is no
longer credible to do so. In truth, it never was. CPI inflation
remains at 2.9pc - way above the Bank's target, as it has been for 31
of the last 33 months. As sterling has fallen, import prices have
surged. In an open economy like the UK, that's highly inflationary.
A few City economists are still banging the deflationary drum, so
desperate are their battered institutions to keep wringing "bail-out"
cash from the Government, or use QE to recapitalise themselves by the
back door.
But most of the financial markets, and the population as a whole,
know deflation is nonsense. Price pressures remain high. More than
that, concern is growing that our policy response to "sub-prime" -
cranking-up the Bank's printing presses and drowning ourselves in
more debt, and all against a backdrop of negative real interest rates
- is itself storing up high inflation.
At a recent Euromoney conference, a large, financially-savvy audience
was asked to choose which phrase - "deflation" [14%], "inflation
soon" [5%] or "big inflationary problems in the future" [81%] - best
describes their expectations. The result was decisive, with more than
four-fifths concerned there could be serious inflation to come.
That's why the Bank has done a handbrake turn. Three months ago, the
Inflation Report forecast that economic slowdown meant CPI inflation
would fall to 0.6pc by the end of 2010 - still not in negative
deflationary territory, but close. Last week, the Bank raised that
forecast sharply, predicting a CPI close to 1.5pc at the end of next
year.
At the same time, the Bank now sees the downturn getting deeper. The
economy will shrink 3.8pc this year, it says, before growing 1.1pc in
2010. Just three months ago, a 2.3pc growth rate was pencilled in for
next year.
So the Bank has raised its inflation forecast, but slashed its future
growth rate. Less growth would normally mean less inflation, not
more. But in this case, our efforts to avoid the inevitable fallout
from "sub-prime" - the money-printing and all the extra borrowing -
have stoked up future price pressures. In the coming months, these
policy excesses will weigh on sterling, raising import prices
further. Next year's VAT cut reversal will add to inflation too.
Oil prices are now up sharply - some 40pc above their mid-February
low. And crude could go much higher still, again feeding inflation.
But the Bank pointed to another source of inflation that, while
significant, has barely been discussed. By cutting working capital to
companies, the credit crunch has restricted their ability to supply
goods and services. Many firms are now folding, leaving competitors
with more pricing power.
The current lack of credit isn't only destroying demand, but also the
economy's ability to supply. As last's week's Inflation Report was
launched, Charlie Bean, the Bank's Deputy governor, warned the crunch
was curtailing investment and eroding skills. That lowers the output
level the economy can sustain without triggering inflation.
Its lately been argued that because the slowdown results in "spare
capacity", the Government can print money and borrow like crazy
without provoking inflation. But as Bean said: "The rise in spare
capacity isn't as large as you would think simply from the
projections of growth".
Inflation is coming - don't doubt it. The penny has now dropped.
================and---------->
2. Slipping up on PFI
Readers may recall my previous tirades against the private finance
initiative (PFI). Expensive and inefficient, PFI means taxpayers
often shell out ridiculous amounts for sub-standard schools,
hospitals and other public infrastructure.
Having been paid over the odds for the building, the private sector
then adds insult to injury by providing sloppy, overpriced services,
under 25-year contracts allowing them to do as little as possible
while extracting maximum public cash.
Why have Labour, and the Tories before them, signed PFI contracts
worth hundreds of billions when the private sector could have been
engaged on more flexible terms, providing far better taxpayer value?
Because a succession of clever-clever civil servants, supposedly
negotiating on our behalf, have cut deals stacked in the private
sector's favour. It is a complete coincidence some then went to work
for the PFI industry.
The main attraction, though, is that PFI allows ministers to park
billions of pounds of debt off-balance-sheet - a public-sector Enron.
Several years ago, HM Treasury agreed to heed IFRS accounting rules
by bringing all PFI liabilities onto its books. Last week, a low-key
announcement broke that promise. PFI debts will remain off-balance-
sheet but projects may have two sets of accounts - one meeting IFRS
standards, the other for internal consumption. Another small step
into banana republic territory.
================and---------->
3.Give us a new Glass-Steagall
Calls for a new "Glass-Steagall" are growing. Our politicians may
soon have to actually say something about how we prevent a repeat of
the "sub-prime" debacle.
Glass-Steagall was the centrepiece of America's regulatory response
to the 1929 Wall Street crash. Named after the two Senators who
sponsored it, the legislation insured the bank deposits of ordinary
US firms and households. [It was crucial to financial stability and
sound finance -cs]
Crucially, Glass-Steagall also threw up a firewall between commercial
banks (that take such deposits) and investment banks (which pursue
higher-risk investments, having raised finance elsewhere).
For more than 60 years, years Glass-Steagall kept such institutions
separate. Why? Because bonus-fuelled investment bankers could
otherwise get their hands on taxpayer-backed deposits - a recipe for
disaster, as we've seen. Said bankers "lever-up" by borrowing against
those deposits, then use them to gamble recklessly. If their bets
work, they win big. If not, the taxpayer foots the bill.
That's what has happened since Wall Street convinced Bill Clinton's
government to repeal Glass-Steagall in the late 1990s (the campaign
donations surely helped). We then saw the same "fusing" in the City
too. No other single act did more to cause this crisis.
The vested interests against a new Glass-Steagall are enormous, but
credible people are now speaking out. Mervyn King has called for a
debate on Glass-Steagall. So has ex-Tory Chancellor Nigel Lawson.
Respected former Fed Chairman Paul Volcker wants the safeguard back,
as does Vince Cable.
The need to separate taxpayer-backed money from investment banking is
paramount. I'm disappointed the Tories aren't making the running on
this issue. Disappointed, but not surprised.
------------------------------------------------------------------------
--------------
. Liam Halligan is chief economist at Prosperity Capital Management
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