Britannia Radio

Ambrose Evans-Pritchard paints a terrifying picture of the whole world tipping into deflation, where incomes and tax receipts fall but debts merely  - as a result - get more expensive.  This makes all the posturing of the G20 over Bankers’ bonuses seem ludicrous for what could happen here makes what has already happened seem chickenfeed. 

Meanwhile the G20 produces more and subtly different proposed rules by the hour.  The last one here has really upset the French-German axis, who overplayed their hand on bonuses!  Wherever you look there is lack of confidence or consensus

Then again back here at home is a fact of political significance to take on board!  The government - or should I say “We”? - owns a clutch of banks and  just look what’s happening on the pay-rise front this year! :-

1. Median figure +2%

2. Public Service workers +2. 4%

3. Royal Bank of Scotland (state-owned) +3% 

4. Lloyds Banking Group (state-owned) +4 + % 

5. RPI -1.4%

6. Car parts maker Thyssen Krupp Tallent -5% 

So why do they preach at us ? 

Christina

TELEGRAPH 7.9.09

1. Does the world have the courage to deal with its debts?

Deflation is spreading from the core of the global system to the most unexpected regions of the world. It has even reached Latin America. Prices are sliding in Peru, Chile, Colombia, Paraguay, Bolivia, Ecuador, Guatemala, and El Salvador, to the consternation of everybody.

 

By Ambrose Evans-Pritchard

Enough of the world has already fallen so far into pre-deflation conditions that any misjudgment by the big central banks from now risks setting off a chain-reaction that may prove very hard to stop.

CPI inflation has dropped to –2.2pc in Japan (a modern record), -2.1pc in the US, -1.8pc in China, -1.4pc in Spain, -0.7pc in France, and -0.6pc in Germany.

This was not anticipated by the authorities anywhere, so we should be wary of their assurances now that we face nothing more than a brief dip in prices before rising energy costs bring inflation back into familiar and safe territory. No doubt prices will rebound as the "base effect" of oil prices kicks in. But by how much; for how long?

The sum of economists in the world (outside Japan) familiar with the cultural and psychological dynamics of deflation can fit into one London bus, and most are historians of the 1930s.

If PIMCO guru Bill Gross and hedge fund manager Paul Tudor Jones are right in fearing that the US economy will tip back into a "W-shaped" recession as the sugar rush of fiscal stimulus fades, we may wake up to find that we have baked deep deflation into the pie for 2010 and 2011. The G20's talk of "exit strategies" and rate rises will seem surreal.

White House aides are already mulling another blast of spending. It won't fly. We have hit the political limits of such extravagance almost everywhere. 

The fiscal crutches of recovery are going to be knocked away, with outright tightening in a slew of states nearing the danger point of debt-compound spirals. This will occur in a world where excess capacity is already at post-War highs. It reeks of deflation.

Irving Fisher explained why the self-correcting mechanism of economies breaks down in his Debt Deflation Theory of Great Depressions in 1933: "Over indebtedness to start with, and deflation following soon after". Most of the West has exactly that, but worse – debt is much higher.

He coined the term "swelling dollar" to describe how falling prices and incomes raise the real burden of debts, leading to asphyxiation. There is a "swelling yen" in Japan today. Earnings were down 4.8pc in July from a year earlier. Bonuses fell 11pc. Wholesale prices fell a record 8.5pc.

Yes, Japan rebounded in the second quarter as shipping finance came back from the dead. The free fall has stopped. That is all. Industrial output was still down 23pc in July year-on-year.

What matters for debt service is that Japan's economy has shrunk by a tenth. Debt has not shrunk. It is rising. The public debt will rocket to 215pc this year.

China is in better shape but it is remarkable that there should be any deflation at all in a year when banks have let rip on credit, doubling lending to $1.1 trillion in the first six months.

The money has leaked into property and the Shanghai stock market; or worse, it has been spent building yet more excess plants to produce goods the world cannot yet absorb. This is much like the late phase of America's Roaring Twenties when asset prices reached their crescendo even as the underlying economy – burdened with over-capacity – tipped into deflation.

Beijing is at last tightening credit, mostly by stealth. We will learn soon whether Market Maoists are better at pricking asset bubbles than Ben Strong's Fed in the 1920s, or Ben Bernanke's Fed today.

I suspect that Dr Bernanke is more worried about deflation than he dares to let on. His ex-colleague Frederic Mishkin let slip last month that the Fed would be showering more money on the economy (buying US Treasuries), not less, were it not for market angst over the monetization of US deficits.

Bernanke is learning that he cannot in fact administer the anti-deflation medicine he talked about so confidently seven years ago. He can act only if and when the danger is so blindingly obvious that resistance crumbles.

There are three ways out of our mess. We can pursue 1930s liquidation that purges debt through mass default. Such Calvinist destruction cannot be imposed on a modern democracy.

We can devalue debt by deliberate inflation. This will backfire as bond vigilantes boycott government debt - unless rigged by capital controls or "administrative measures". You see where this leads.

Or we can try to right the ship by paying down our debts, very slowly, by sweat and toil, navigating a treacherous course between the Scylla and Charybdis of the twin-flations, for as long as it takes. This is the only responsible course left we as we face the devastating consequences of our own credit delusions. Are we up it?

2. G20 rules spark fears of more bank bail-outs

France and Germany may be forced to semi-nationalise more of their stricken banks after the G20 imposed new, stricter rules on banks' balance sheets.

 

Edmund Conway and Roland Gribben 

Despite resistance from French and German finance ministers, the G20 has insisted that banks will in the future have to raise more capital to shore up their balance sheets, and that only the highest quality of capital - such as shareholder equity - will be counted. According to G20 insiders, the move is a particular blow to some of the leading European banks, which are likely as to have to raise more capital, implying further taxpayer bail-outs.

Although coverage of the summit in London on Saturday was dominated by the G20's proposed clampdown on bonuses, sources say that the agreement on capital may be far more important for the banking system in the long run.

 

In a move which is intended to bolster the Basel rules on banking regulation, the G20 said that in the future banks must raise more capital, must devise so-called "living wills" to ensure they can be dismantled less painfully and must be subject to an overall leverage ratio.

The rules imply that it will be extremely difficult in the future for banks to generate the high levels of profits they did in the run-up to the crisis.

US Treasury Secretary Tim Geithner has proposed setting up a new system of bank accounting rules by 2012, but the French and Germans lobbied hard behind the scenes at the weekend to scrap such plans, instead falling back on the existing Basel II rules, which the US has not yet adopted.

Insiders said this owed much to the fact that to meet the more stringent US proposals Continental European banks would likely have to raise significantly more equity. Suspicions abound that while Anglo-Saxon banks faced instant writedowns in the early months of the crisis, their European counterparts may suffer far more in its closing stages.

The G20 meeting, which precedes a heads-of-state summit in Pittsburgh later this month, agreed to impose unprecedented new restraints on bankers' pay. Under the new proposals, to be firmed up by the Financial Stability Board in the next fortnight, banks will have to spread out bonus payments over three years, and will have to insist on being able to claw back cash payments if their own health deteriorates after the bonus has been paid.

Angela Knight, chief executive of the British Bankers' Association, said the majority of the recommendations had already been taken on board in Britain but expressed concern about the claw-back proposal. She said: "This will require careful consideration and I'm not sure about the legal framework."

She added: "We have gone a lot further on pay in this country than France and Germany. They were making the most of it but there's a lot of difference between rhetoric and what countries actually do."