Inflation Returns to Japan

Rob Mackrill — Sat, 26 Apr 2008 14:33:44 +0000

Now the days are not only longer but finally starting to warm, what happened in the financial world this week? Well, on Monday Mervyn King stepped up to the plate and offered a deal for UK banks. They could swap assets of unknown worth mortgage-backed securities for those of known worth government bonds .

Bankers rejoiced. Finally, they could shift the festering lumps polluting their balance sheets and move on. Crucially, the estimated £50bn measure leaves the risk with the banks and not the UK taxpayer via the Bank of England. The fall in the interbank lending rate suggests it has done something. The benchmark three-month Libor is now 5.88%, edging down from a high of 6% earlier in the month.

How bad a bind are UK banks in? The big four – RBS, Barclays, HBOS and Lloyds TSB – are short £37bn, calculates JP Morgan. And on Tuesday RBS announced itself as the first to go cap in hand to shareholders for £12bn. Others are expected to do the same, though Barclays later denied any such plans.

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In time the process will ensure the banks get stuffed with sufficient cash to avoid any threat they can bring down the financial system if they keel over. Whether that helps the rest of us sort out such mundane essentials as getting a mortgage at a decent rate remains less clear.. Abbey pulled their entire buy-to-let mortgage range this week and increased rates on their fixed interest mortgage offer. Ex-MPC member Charles Goodhart says the measures taken will ensure the credit crisis doesn’t deteriorate further but its chances of helping the mortgage market are “slim”.Away from the deflationary force of the credit crisis, we run into the inflationary forces of higher food and fuel prices. Both continue to stoke ‘flation around the globe with only occasional hints of flagging. Oil touched $120 dollars this week and petrol pump prices are further aggravated in the UK by the pending strike at Grangemouth refinery this week-end. The Scottish refinery is at the other end of the Forties pipeline which pipes more than 40% of Britain’s daily oil production from the North Sea.

Tight food supplies continue to make the news in the developing world and the World Bank warns of potential unrest in 33 countries as a consequence. Reports of rationing in the US continue, with even the likes of US retail giant Walmart restricting some food purchases and Costco considering a similar measure.

Ironically, one of the world’s bread baskets, Argentina, is suffering food shortages after farmers responded to a new export tax by blockading roads and restricting supply. The ongoing dispute claimed its first casualty on Friday when its Economy Minister, Martin Lousteau, quit.

In Japan $116 oil and dearer food may have actually killed off a decade long problem – deflation. Its core CPI inflation leapt to 1.2% and panicked investors fled the bond market.

In the equity markets, stocks look to be end the week on a firmer note. London’s FTSE recaptured the 6,000 level on Friday at 6,083. The Dow is at 12,848 in mid-Friday afternoon trade and gold has pulled back to $883. Oil, having hit $120 has shed around $5 as the dollar has strengthened.

Finally, there is no sermon again this week as Peter continues his well-earned break. He will be back next week.

Enjoy your week-end.

Regards,

Rob Mackrill
The Daily Reckoning

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Inflation Returns to Japan