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Joel Bowman, checking in...and checking out... Your editors are heading back to their respective homes and residences around the world this weekend after our annual investment symposium here in British Columbia. Without a residence of his own, this particular editor is continuing on his wayfaring ramble. We'll let you know more about our upcoming "Coast to Coast Correction" tour next week. For now, let's check in with Adrian Ash, editor of Gold News and head of research at BullionVault. Credit Deflation Lands in Britain by Adrian Ash London, England Credit deflation just hit the UK for the first time on post-war records... HMMMM... This looks telling. UK banks will soon be able to post raw loans - rather than securitized loans that have been bundled into asset-backed bonds - as collateral against short-term liquidity aid from the Bank of England. This will mean lending central-bank cash against the commercial banks' major assets, as the Old Lady of Threadneedle Street puts it, rather than against that sliver of their balance-sheets held as securitized loans. Which seems prescient, for two reasons.
First, securitization of UK consumer, mortgage and business debt has all but collapsed. Net-net, there haven't been any sizeable securitizations of UK bank lending for six months running - the longest period since 1998. The two months before that actually saw securitizations paid back, and at the fastest pace on record, down by £26 billion. Which is a pity for the UK's formerly go-go-crazy-bones credit bonanza. In the 10 years ending Dec. 2009, securitization added £325 billion to the growth in UK bank lending, expanding new credit by more than 20%. And why not? Securitizing bank loans, by parceling them up and then selling the debt to investors both foreign and domestic, gave banks the chance to lend the same Pound twice, skimming a profit both times. It also gave insurance and pension funds the chance to invest in Britain's record debt bubble...a boom which ended with more people working more hours to service more debt than ever before in history. That bout of collective insanity has now got the DTs. Because second, and as a result of securitization's collapse (or so we guess here at BullionVault), private-sector UK loan growth overall last quarter did what it's never done before (not since records began in June 1963, at least) and actually turned negative.
The Bank of England's decision thus looks timely, if ineffective against the credit deflation already underway. To repeat: UK bank lending to the private sector has never previously shrunk, not in the 47 years of available data. And lending cash to commercial banks Walter Bagehot-style - albeit by accepting their debtors in turn as collateral, and not charging that "high rate" the 19th-century economist recommended either - is what central bankers are for, after all. Concluding her 3-month consultation with the banking sector, the Old Lady said Monday that she'll start accepting "raw loans" as collateral for short-term liquidity, dispensed via the Discount Window Facility, in 2011. That expands the list of eligible collateral which banks can post from securitized debt (those asset-backed bonds accepted since Dec. 2007 on top of government gilts), just so long as the loans are residential or commercial real-estate mortgages, consumer loans (but not including credit cards), or corporate loans to non-bank borrowers. Unlike the Bank's failed attempt to inject cash into the UK economy via Quantitative Easing, this latest wheeze to underwrite the credit-supply will at least keep the Old Lady's cash onshore. Because the raw loan's end-borrower "must be UK-based." Which should stop the tabloids screaming about "foreigners stealing" this particular chunk of Britain's monetary easing when it begins. Whether it stems the UK's credit deflation remains to be seen. And whether that deflation ever gets to stem the ongoing inflation in prices still awaits history's verdict, too. Because while private net lending shrank between April and July, quarterly consumer-price inflation meantime rose to 1.3%, knocking 3.3 pence off the purchasing power of each Pound Sterling compared with 12 months prior. Deflation in credit but inflation in prices? With the fastest GDP growth in four years coming in at 1.1% at market (i.e. unadjusted) prices across the quarter? Economists from Mervyn "monetarist" King to Paul "Keynes re-born" Krugman say this confluence of pain can never happen. So best wheel out the Bank of England's printing press yet again, just to get reality back on track with theory. Adrian Ash for The Daily Reckoning Joel's Note: Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault - winner of the Queen's Award for Enterprise Innovation, 2009 - where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees. Details Here. | |||
ALSO THIS WEEK in The Daily Reckoning... By Chris Mayer Gaithersburg, Maryland People need food. Food needs fertilizer. One of the world's most important fertilizers is in short supply. That fertilizer is potash. One of the first things people change as they emerge from poverty is their diet. They move toward more meat and a greater variety of fruits and vegetables. So while we may wonder about how many cars or toasters the brave new world's top consumers will want, we know for sure they'll eat more food. By Eric Fry Laguna Beach, California Are supermodels like Argentina's Yamila Diaz-Rahi or Brazil's Gisele Bündchen able to provide valuable investment insight? The answer may surprise you! Every winter, as arctic temperatures descend upon the Northeast, Sports Illustrated contributes a welcome dose of sunshine to our frigid landscape by releasing its infamous "swimsuit issue." Each issue contains the usual tiresome collection of impossibly beautiful women wearing - or not wearing - exotic bikinis in exotic locales. To which your editors respond, "Ho-hum." By Greg Guenthner Baltimore, Maryland I doubt the average person has any idea what the Pinks Sheets are, much less anything about its reputation. But the average investor probably has very few positive things to say about this over-the-counter stalwart. However, the Pink Sheets landscape is changing dramatically. And these changes could mean a more investor-friendly environment is finally making its way to the once-murky waters of bulletin boards. In fact, you might already be relying on the Pink Sheets for all of your over-the-counter trades - even if you've never put your money in a Pink Sheets stock before. By Addison Wiggin Vancouver, British Columbia That's right, gold. You know, the ultimate money. Or Gold: The Once and Future Money, as our friend Nathan Lewis titled his 2007 book, for which we were privileged to write the foreword. Hey, Wall Street can take a $250 million sewer project in Alabama and turn it into an insurmountable debt 20 times as big. So it can find a way to pervert the Midas metal, too. And the evidence is piling up: You don't have to be partial to conspiracy theories about the "manipulation" of gold to conclude something just doesn't look right. By Bill Bonner Vancouver, British Columbia "You can take your loans and shove them," the Hungarian economic minister, György Matolcsy, did not say. But that's what he was thinking. Watch out. The Hungarians are trendsetters. They ran a budget deficit of 9% of GDP back in 2006. They got a $20 billion bailout in 2008 and have been living with austerity measures ever since. The current budget is only in deficit by 3.8% of GDP - barely a third of the US level. The Weekly Endnote: If you're reading this weekend edition when and how you ought to be, that is to say on the weekend and in a deckchair, you still have a day or so before the price of our CD/MP3 conference recordings go up. Get 'em here while the going's good. Enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com | |||
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