Liam Halligan is getting frantic and with good reason! We are on the brink of being unable to roll-over our sovereign debt. That would be worse economically than both World Wars. But we are continuing to borrow as if there were no tomorrow and throw the QE proceeds where they do the coluntry little good. .
Indeed unless this is sorted quickly there will be no tomorrow as far as an economic future is concerned. Britain would be a third-world country with a standard of living to match.
Christina
SUNDAY TELEGRAPH
19.7.09
If the Government fails to make cuts now it will be racked with gilts
Last week, we learnt the UK's CPI index grew by only 1.8pc in June. Given this column's hawkish stance, I suppose I should be happy inflation is now below the Bank of England's 2pc target.
By Liam Halligan
Instead, the way this news has been spun, and the media's willingness to swallow that spin, fills me with despair.
Inevitably, I suppose, the CPI's dip below target has been presented as "yet more evidence" the UK faces a Japanese-style "lost decade" of deflation. The only escape, we're told by City economists and their pet commentators, is for the Bank of England to keep printing money and the Government to rack up ever more debt in order to extend yet more unconditional cash to our bloated banking sector.
This, of course, allows the stone-faced bank executives who caused this crisis to once again pay themselves huge bonuses. Now, though, said bonuses are being financed not by profits gleaned from over-hyped capital markets, but by taxpayers – namely you, your children and grandchildren.
Politicians are now talking about cuts. So gallingly obvious is the need for restraint that even Peter Mandelson last week admitted state spending will be reined-in. But all the main parties – in cahoots with their banking friends – insist such actions are for the future. So, for now, the UK's fiscal and monetary policy remains wildly expansionary – with the wealthy few gaining from that largesse while the general public shoulders the costs in terms of higher taxes and high future inflation. If such a state-facilitated wealth transfer took place in a country with hotter weather, we'd purse our lips and call it kleptocracy.
Why is it suddenly a good idea to spend our way out of recession and print money? The debate over the Bank of England's "quantitative easing" scheme – or QE – has been practically
non-existent.
Those benefiting from QE – and the associated recapitalisation of insolvent, failed banks by the back door – have instead endlessly repeated the mantra "we simply must beat imminent deflation". In that context, the June CPI number bears closer examination – because it has about as much to do with deflation as Gordon Brown does with fiscal prudence.
The credit crunch has been in full swing since the summer of 2007. Yet June was the first month during that two-year period in which CPI inflation even fell below target, let alone risked going negative.
That's despite the fact that CPI grossly understates inflation. And had VAT not been cut last December, even the CPI would still be at 3pc – with the Bank writing a public letter explaining why inflation is so high.
The deflationists know this summer is the high water-mark in terms the validity of their argument. That's because it was in June and July 2008 that oil prices spiked above $140 a barrel – and lower fuel prices in the same months this year drag down the CPI.
During the next few months, though, these base effects will rapidly reverse. That's because oil plunged during the second half of last year – hitting $32 by December 2008. With crude currently above $60, and the futures market pricing-in a steady rise, it won't be long before instead of being 50pc cheaper than the same month last year, oil is 100pc more expensive. However, the numbers are rigged, that will push up the CPI.
This "inflation vs deflation" debate, though, is about far more than the methods being used to bail-out our failed banks in an opaque and deeply misguided manner. It is at the heart of the UK's future financial stability – and whether we can avoid the ignominy of being unable to roll-over our sovereign debt. Such a catastrophe would be second only to the two World Wars in terms of fiscal damage – and a bigger blow than Suez to the UK's national prestige.
Yet such a gilts strike looms. The danger signals are flashing. Since QE began in March, 10-year yields have risen as gilt prices have fallen – despite the fact that the Bank has spent £112bn of funny money buying almost half the gilts the Government has issued. And QE was supposed to stimulate the economy by bringing yields down!
Over the coming year, more and more recession-hit Western countries will be selling swathes of sovereign debt. But the UK is set to borrow twice as much in 2009 as France and Germany and more than three times as much as Italy.
That's why our political leaders must now state, extremely firmly, how we're going to cut spending and cut borrowing totals – and start the painful process of doing so. If we wait for an election, and endless reviews, the market could easily lose patience. And if UK firms and households are suffering from a lack of affordable credit now, the situation after a gilts strike would be many, many times worse.
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