Teachers are supposed to make complex things simple. But these two guys are about as clear as mud, as they dance around monetary policy jargon like drunken nightclubbers.

I’ll get to Merv in a minute, since he had more dire things to say about the state of Britain’s economy this morning. First up, though, let’s wrestle with Mr. Bernanke’s latest explanation of current monetary policy…

What’s In A Name? A Lot If You Listen To These Guys

Let’s get one thing straight, folks… don’t call it “quantitative easing,” okay?

It’s “credit easing.”

Get it wrong and you’ll find yourself in detention with the guv’nors.

“Credit easing” is the term Bernanke uses to describe the Fed’s monetary policy, now that interest rates are practically at zero.

In “normal” times, banks use conventional methods like adjusting interest rates to control the flow of money into an economy. Low rates encourage consumers to buy more and financial institutions to lend more money. High rates are supposed to slow consumer buying and lending.

But these aren’t “normal” times. Simply put, there’s only so far you can go to make money cheap. And with rates cut just about as far as they can go, both the Fed and Bank of England have pretty much exhausted their traditional monetary policy tool. That’s when more drastic measures need to be considered.

Entering stage right… “quantitative easing.”

Or not.

If you listen to Messrs. Bernanke and King, they’re foxtrotting their way around the issue to avoid describing it this way.

Desperate Times Call For Quantitative Measures

Quantitative easing can include targeting the cash that commercial banks have with the central bank. But instead of using an interest rate, it sets a target on the balance that the banks have with the central bank. The central bank can then meet that target by purchasing the banks’ assets – which means cranking up the printing press and using new money to pay.

In theory, this boosts the amount of money that commercial banks have, who are then supposed to release it into the broader economy through increased lending, etc.

Trouble is… when that doesn’t happen, the policy is essentially a waste of time – as Japan discovered earlier this decade when the banks just kept the cash.

In a recent speech, Bernanke noted that the Fed’s current policy is “conceptually distinct” from quantitative easing. It’s called “credit easing” and involves not just buying assets like bonds from commercial banks, but from several markets.

This adds to the Fed’s own holdings and also boosts the overall liquidity flow, but despite Bernanke’s unnecessary semantics, the end goal is the same: To put more money into the financial system through quantitative measures.

Britain Braced To Go Deep In 2009

Over in Britain, Mervyn King is almost at the end of the monetary policy line, too.

After a series of heavy cuts, interest rates are now at 1% (down from 5% in October), and given the governor’s latest assessment of the economy this morning, it won’t be long before the Bank of England takes further action.

Warning that “the economy is in a deep recession,” with a 4% annual GDP contraction projected for the second quarter, King said the BoE will continue to use the “full range of instruments at its disposal” to tackle the situation. But he also said that the length and depth of the recession would hinge “to a significant extent” on the rest of the world (there’s that “globalization” thing gone awry again) and whether the coordinated measures to increase credit and spending are successful.

Despite having the power to boost the monetary base (and one option is through the quantitative easing mentioned above), there are uncertainties about whether it will work. Nevertheless, with King and his fellow bankers believing that the recent interest rate cuts are having less impact, they’re giving these extra measures a shot.

On the agenda: Buying assets to boost corporate spending, plus increasing the money supply. Loosely translated… “Crank up the printing presses, mate.”

But it also means, in King’s words, “unconventional policies,” too. Specifically, that means making purchases through the BoE’s Asset Purchase Facility, which means the money spent on assets will be matched by an equivalent amount of Treasury bills sold. Not so much quantitative easing, but matching. Nevertheless, these quantitative easing measures still exist. The BBC says the Bank of England’s additional stimulus efforts over the second half of 2008 increased its balance sheet by 160% and swelled the monetary base by 35%.

No matter what the governors call it, additional efforts like this to stimulate the U.S. and U.K. economies are still designed to “ease” more money into the financial system by printing it – just in a different, less well-known way.

But with interest rates at zero, we’re getting down to last resort-type measures here. If it doesn’t work, they’re going to have to work on some really flashy dance moves.

Source: Bernanke And King In The Last Chance Monetary Policy Saloon

- So says economist Michael Darda, chief economist at MKM Partners LP in Greenwich, who is quoted on Bloomberg this morning. According to Darda, “Banks won’t be throwing a lot of loans out there when they fear – rationally – those loans may not be paid back.”

- We’re reminded of the plight of the the unfortunate French ducks who have their livers forcefully fattened to produce foie gras (literally “fatty liver”). The Fed is determined to force feed debt down the throats of already indebted Americans so that said already indebted Americans can go out and spend said debt. The theory being that this “stimulates” the economy. Of course, in the case of the poor ducks, they end up dead.

- Things are so bad that even the Queen of England is pissed. “Why did no one see it coming?” asked Queen Elizabeth during a visit to the London School of Economics this month.

- The clear lack of foresight leading up to this crisis has also left a lot of egg on the face of policy makers, according to an article in the Financial Times. Prime among them is Fed head Ben Bernanke.

In his Senate nomination hearing of 2005, Ben Bernanke, the Federal Reserve chairman, said the US financial system had already benefited from a series of crises that had reinforced its ability to cope with difficult times. “The depths, the liquidity, the flexibility of the financial markets has increased greatly,” he said.

Depths, indeed.

Bernanke’s British counterpart, Bank of England governor Mervyn King, didn’t fare much better. In May, he insisted, “It’s quite possible that at some point we may get an odd quarter or two of negative growth. But recession is not the central projection at all.”

The problem, according to Stephen King, chief economist of HSBC, is that: “Almost all economic models assume that the financial system ‘works’.” Apparently, “economists in general did not foresee how the looser monetary policy of the early part of the decade could lead to an unprecedented credit expansion.” Where were they? On the moon?

- One of the best reads on this crisis is the FDIC’s quarterly list of “troubled banks,” banks at risk of going under thanks to toxic debt. One in four institutions lost money last quarter. Meanwhile, the number of banks on the FDIC’s failure watch list increased from 117 to 171 and the assets of “problem” institutions rose from $78.3bn to $115.6bn. As long as the number of banks on the deathwatch list keeps increasing, it’s difficult to see and end to the current mess.

- Still think the government is going to fix it all like some sort of happy-ending Humpty-Dumpty? How so? What exactly are the federal rescuers doing to solve the problem? This from the Financial Times blog, FT Alphaville:

The biggest problem now though is that “bad loans” just sit where they are – with the banks – quietly impairing balance sheets but not posing an outright threat because of various government support actions. This would be a Japan-like scenario. And it’s one that has quite a lot of currency, not just because of similarities in monetary and fiscal policy. Take the saving of Citi on Monday for example. The $300bn odd of problem assets are still there on Citi’s balance sheet… Citi is still exposed to take significant first losses on them. The government’s actions seem more a sop to shareholders – more specifically the share price – than anything else.

- Today, the last words go to the financial titans at Monty Python’s Flying Circus. It’s about as good an appraisal of the current economic blowup as we’ve come across.

This financial system is no more! It has ceased to be! ‘It’s expired and gone to meet its maker! ‘It’s a stiff! Bereft of life, it rests in peace! If you hadn’t nailed ‘it to the tax payer’s perch it’d be pushing up the daisies! ‘Its metabolic processes are now ‘istory! ‘It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir indivisible!! THIS IS AN EX-FINANCIAL SYSTEM!!

Good day… And a Wonderful Wednesday to you! Well, the Junk Yard Dog got a hold of the euro yesterday, and even though the U.S. Banks, thus the majority of currency desks, were observing Veteran’s Day, the move down in currencies VS the dollar, led by the euro, was drastic!

The Junk Yard Dog I’m talking about is Jean-Claude Juncker, chairman of the Euro group… I stopped the euro in its tracks from its nascent rise in the past month, by saying the “euro’s recent rise was undesirable”… He also deep sixed the euro, and thus all the currencies save yen, by saying he “didn’t see any reason there couldn’t be more rate cuts by the ECB”… (the ECB is of course the European Central Bank) Well… These two comments tore through any gains the currencies had mounted VS the dollar in recent weeks, like a Junk Yard Dog tears though some raw meat! It was a knife to the euro’s heart…

And so it was to be, a massive dollar rally, on Veteran’s Day. And it didn’t get any better in the overnight markets, as Japan, and then early European trading has taken the dollar even higher and the euro drops to the 1.25 handle… A handle it thought it had left in the rear view mirror back in October… Boy! If comments from a guy that’s not even the President of a Central Bank in the Eurozone, can deep six the euro like that, you have to sit back and wonder what’s going on… Was it simply a case of watching the euro rally in recent weeks, and even get within spittin’ distance of 1.31 last week, and needed to stem the rise? Well, if that’s the case, the plan worked! And like Col. John “Hannibal” Smith used to say… “I love it when a plan comes together!”

And it just so happens that Bank of England (BOE) head Gov. Mervyn King added to the currencies’ worries by announcing that the BOE policy makers are “prepared to cut interest rates again to prevent a recession pushing inflation below its target.” All this on a day when most U.S. currency desks were absent… Hmmm… Sure seems to me as though this was a “planned” jawbone intervention to support the dollar…

So… Like I said above, the currencies, save yen, got whacked yesterday… But not Japanese yen! When things get really dark in the U.S. and with all the investment choices except U.S. Treasuries getting sold, that’s when the dollar and Japanese yen shine… Which to me is still a strange phenomenon, that the dollar can be strong VS almost every currency on the face of the earth, but losing ground to yen. You would think that the other currencies would get some love just based on the dollar / yen cross!

Recall, I’ve explained the currency pairs and crosses before, and how one major pair’s (like dollar / yen) usually carries over to the other currencies… But since the dollar and yen were the two major currencies used to fund the Carry Trade, they are getting bought at the same time, causing all kinds of ripples in the currency karma…

Looks like the good folks over at Bank of America, have been reading their Pfennigs each and every day! I say that because, there is a report out this morning that Bank of America (BOA) issued a report that; “U.S. dollar gains are increasingly at risk toward year-end as declining credit market rates switch investors’ focus to the slowing economy.”

WOW! If that’s not just rewording what I’ve been saying in the Pfennig almost daily for a couple of months now, then I’m a monkey’s uncle! The go on to say that, “A weak economy and declining stock prices are not a solid foundation for any currency over time. Persistent strength in the dollar is more related to the unwinding of long positions in the euro and pound and not a sign of optimism about U.S. economic prospects.”

It’s nice to see someone other than me, keeping my eye on the ball here… OK, I know all too well that it’s not just me, but it sounds good, eh?

Well.. There’s another “bailout” plan, although the media now calls them “rescue plans”, being talked about… This one is for the automakers… The Speaker of the House wants the bailout package NOW! Unfortunately, for her, and the automakers, it doesn’t look like a bailout package will be passed with this “lame duck” Congress… The “new guys” don’t come into office until January 6th. Maybe, just maybe, this thought that every freaking business that runs into trouble because they didn’t run their business correctly, and therefore “deserves” a bailout from the Government, which will mean in the end, taxpayers, will go away… I doubt it… But there’s always a chance, somebody, someone, somewhere, at sometime, comes up with a hoola-hoop, and we don’t have to go down this bailout road any more!

Hey! What ever happened to U.S. Treasury Sec. Paulson’s “bazooka” that he threatened to aim at the U.S. credit crisis back in July? A quick check of the financial scorecard since then, shows that stocks are circling the bowl, the Fed has had to step in to conduct commercial paper operations, U.S. Consumer Confidence is at 1982 low levels, and loans are still difficult to get on the books… I’d say his bazooka was much like the bubble gum I used to chew as a kid, with the Bazooka Joe comic inside the wrapper… Sweet and satisfying at first, but soon petered out and the taste was gone, soon to be disposed of properly!

Speaking of Treasury Sec. Paulson, or King Henry, as I so named him during his ascent to the top of decision making with regard to the financial crisis, will be speaking today! King Henry will be giving an update on the Bailout packages… Should be interesting…

Our friends down under in New Zealand think they are far removed from the financial mess going on in the U.S. and Europe… But then, the European thought they were far removed from it too before the walls began crumbling down on top of them with bad debt! But, in New Zealand’s case, I think they are on top of it… Mainly because the strong Central Bank… The Reserve Bank of New Zealand, (RBNZ) is big on fiscal discipline, and stated in their quarterly Financial Stability Review, that… “we are far from seeing the final impact of the financial and economic disruption. However, Kiwi banks and the Australian parents of the majors, are well positioned to withstand the economic downturn.”

It would a HUGE feather in the RBNZ’s cap, and further the kiwi’s cap should the financial meltdown pass them by without causing major problems… The Kiwis get a glimpse at the state of their economy tonight when Sept Retail sales are printed.

Well… The euro is creeping back up as I get ready to head to the Big Finish this morning…

You know… On Monday I talked about the Chinese announcement to provide $586 Billion worth of renminbi liquidity to their economy, and how that had gotten the currencies around the world excited… And yesterday I talked about how that excitement dissipated… But there’s one more thing to discuss here… And that’s the fact that if the Chinese are going to focusing on keeping their economy going and their billions of citizens happy, they won’t be focusing on buying U.S. Treasuries… And the funding problem that still exists, even though its not the markets’ focus right now, will get even trickier for the U.S. and the U.S. dollar…

And… One more thing before I head to the Big Finish… Oil has fallen below $60 for the first time since March 2007! WOW!

Currencies today 11/12/08: A$ .6610, kiwi .5755, C$ .8260, euro 1.2590, sterling 1.5285, Swiss .8450, ISK 182, rand 10.45, krone 6.9830, SEK 8.0150, forint 215.50, zloty 2.9920, koruna 20.21, yen 97.30, baht 34.98, sing 1.5050, HKD 7.75, INR 49.25, China 6.8298, pesos 13.06, BRL 2.2665, dollar index 86.93, Oil $58.40, Silver $9.70, and Gold… $732.42

That’s it for today… Mervyn King also said… “we are living in unprecedented times” Oh, thanks! Like we didn’t already know that!

Source: The Junk Yard Dog Bites!

The American electoral system has never been designed to protect sound finance, and it has become more dangerous as the federal government and the Federal Reserve itself have become more skillful at manipulating the economy of the United States. The process of running before every gust of wind reached its limits under Alan Greenspan, who always chose to inflate, rather than deflate, a bubble. His successor, Ben Bernanke, is more cautious, but has made no attempt to reverse the Greenspan policy.

There has not been a chairman of the Federal Reserve Board with sound monetary instincts since Paul Volcker resigned in 1987. It was Volcker who brought the dollar back from the brink of hyperinflation in 1987.

On May 14, Volcker testified before Congress. Scattered around the monetary world, and particularly influential in Europe, there is a group of central bankers who admire Volcker, as I do myself, and share his analysis of the present situation. The Volcker analysis is very similar to that of the European Central Bank, and to that of Mervyn King, the governor of the Bank of England.

~~~~~~~~~~~~~Special~~~~~~~~~~~~~

Turn $1 Into $50

The Chaffee Royalty program, whose door has been shut for the last six years, is now open again.

This is the program that lets you collect $50 for every $1 invested. This is the way to make money while you sleep.

Click here for more details…

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Volcker testified that the Fed ought now tackle the threat of inflation more forcefully. He is particularly concerned about the danger of a return to the conditions of “stagflation” of the 1970s. The Bank of England also expects that the next two years will see the pressure of rising inflation combined with low rates of growth. In the 1970s, this unpleasant combination of economic trends resulted from the loose monetary conditions of the early 1970s and the oil shocks of the mid-1970s.

Those who experienced the 1970s were taught a painful lesson about the negative effects of inflation. In standard monetary theory, some emphasis is given to the initial phases of inflation, in which an increasing money supply funds economic expansion and tends to cause booms, bubbles, and speculation.

Less attention is usually given to the second stage of inflation, in which prices rise; interest rates are increased; and economic growth rates, after an acceleration, begin to slow down. There is an illusion that inflation is good for growth; that is true of the first stage, but only of the first stage. Staglation, in which rising prices are accompanied by reduced growth, comes as a second stage.

Volcker warned Congress that he saw a “resemblance” between present monetary conditions today and those of the early 1970s, when the economy had an overall tendency toward rising prices, including big increases in energy and agricultural prices. He observed, “If we lose confidence in the ability and the willingness of the Federal Reserve to deal with inflationary presses and to sustain confidence in the dollar, we’ll be in real trouble.”

~~~~~~~~~~~~~Special~~~~~~~~~~~~~

Tight Supplies Push Oil Prices Higher

As the United States enters warmer months, somehow the price for home heating oil in North America is still rising. Supply concerns have taken the international diesel markets and combined them with the heating oil market.

This has created another problem in the already problematic oil markets. So what should you be doing? Click here to find out…

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

On the same day, the Bank of England published its latest quarterly forecasts and came to much the same conclusions. The bank’s inflation projections will not return to the 2% target figure until early 2010, which suggest that it will have no room for rate cuts until then.

Britain and the United States have different political cycles. The next presidential election in the United States will come nearly two years earlier than the next British general election; the latest date for a British general election will be June 2010. The Bank of England’s economic forecast suggests that there is little chance of interest rate cuts much before that time. The government’s reluctant tax cut on the lowest income tax band will strengthen the bank’s hand in keeping interest rates at their present level.

Mervyn King observed that “The consequences of price increases would be a squeeze on real take-home pay that will slow consumer spending and output growth, perhaps sharply.”

There exists what might be termed the Volcker consensus that inflation has returned as the real threat to world economic conditions. This consensus includes Paul Volcker himself, the Bank of England, and the European Central Bank. It does not include Ben Bernanke, the Fed, or the current president of the United States. After November, we may find out whether it includes the next president of the U.S.

Regards,
Lord William Rees-Mogg

“Whiskey & Gunpowder”

Greg’s Endnote: Stagflation: Yep, that’s one of them. One of the five supershocks that are threatening the very existence of our stock markets. These shocks are looking less and less like mere theories. They’re coming soon, and the markets as we know them may not be safe. Have you started making your plan for survival? Click here to become prepared…

Source: The Danger of Stagflation

So it’s fitting that now the UK property boom is well and truly over, he’s decided to go out and buy some houses.

Not many houses right enough – less than a couple of thousand at going rates. The plan is to spend £200m on unsold new-build flats, which would then be rented to low income families, or sold on as shared ownership properties.

This bad idea alone is enough to show that the Government is now in full-blown panic mode and running around the yard like a recently decapitated chicken. But this was just one of a frenzied morass of bad ideas, clearly slung together at the last minute, to try to rescue the country from the inevitable consequences of 11 years of Mr Brown’s ‘prudence’.

That is, complete and utter economic meltdown…

Inflation is out of control

This week, the grim truth about the UK economy really has been dragged kicking and screaming into the light.

Bank of England governor, Mervyn King, didn’t pull any punches in the inflation report yesterday. Mr King, to his credit, has been trying to warn people for a long time that the good days were behind us, and so he feels quite comfortable with being bluntly honest about the UK’s prospects going ahead. It’s a refreshing change from the usual spin-dried fluff and downright lies we get fed by government officials, so ten out of ten to him for that.

Not that it’s a message any of us will be glad to hear. Inflation is out of control, much worse than any City ‘experts’ predicted. It could hit as much as 4% in the coming months – and that’s judging by the rather forgiving Consumer Price Index (CPI) measure.

Figures out yesterday showed that unemployment is rising too, yet so are wage settlements. The housing market is falling off a cliff, with builders reporting massive falls in reservations, and surveyors’ confidence at its lowest point ever recorded.

News from the banking sector keeps getting worse – Bradford & Bingley did a massive U-turn yesterday and admitted that it did need a rights issue after all. It leaves B&B’s credibility (what was left of it) in utter shreds, and also just confirms to investors that they can’t trust a word that any bank says at the moment.

Who knows? We might even go a week without the Sunday supplements running a feature on what good value the banking sector looks just now – though that might be going too far.

Why the government and Bank of England should not intervene

Anyway, with all that bad news, it might not have come as a surprise when Mr King became the first high-profile figure to officially acknowledge that Britain is facing recession. It’s not, he said, “the central projection – but clearly further shocks could push us in that direction.”

And there’s nothing that Mr King thinks he can do about it. “We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot and should not try to prevent that adjustment… we have to be patient.”

Mr King’s advice is sound. Interference in the markets in the form of central bank and government intervention is what brought us to this point. It’s time to stand back and let the cards fall where they will so that we can plan for picking up the pieces once the worst is over.

But patience is a virtue. So it’s inevitable that the Government possesses none. Gordon Brown’s response to the end of his economic ‘miracle’ is to rattle off yet another succession of bills. You’d think he’d realise that the British consumer is sick of bills by now. But no. The man once laughably described as the Iron Chancellor has thrown off all pretence of fiscal competence and is now flinging money he doesn’t have at problems he can’t solve.

Brown is over-spending on unworkable novelty policies

The move to spend £200m on buying unsold homes from builders is a case in point. This is meant to help first-time buyers by expanding shared ownership. Well, first-time buyers don’t need any help. The housing market is in freefall. They’ll soon be able to afford all the houses they want. For those who argue that a 20% fall “would still only take prices to 2004 levels” – well, the answer to that is, clearly house prices will fall further than 20%.

As for the rest, we have more promises to get more people off welfare. Promises for “elected representatives” to fiddle with policing. Promises to get rid of bad teachers and bad schools. Promises for a new banking regulation system to replace the one that failed to stop Northern Rock – a system that Mr Brown himself put in place about ten years ago.

In other words, Mr Brown is doing what he always does. Embarking on a frenzy of micro-management and over-spending on unworkable novelty policies. But this time there’s no more slack in the system to indulge his bureaucratic fantasies. As Edmund Conway puts it in The Telegraph: “The twilight years of Labour governments are always like this: the pound in freefall, the economy sliding towards a possible recession, and the public finances out of control. And the ultimate bill left in the hands of households.”

Just change the ‘possible’ to ‘certain’, and we have a nice summary of the UK’s near-term future.

Turning to the wider markets…

On Wall Street, US stocks were higher as inflation data came in tamer than expected, though many analysts were sceptical about the long-term outlook. The Dow Jones gained 66 points to end at 12,898. The broader S&P 500 climbed 6 points to close at 1,408, while the tech-heavy Nasdaq rose 1 point to close at 2,496.

In Asia this morning, Japanese stocks made gains, hitting a four-month high after export giant Sony predicted higher earnings, partly because it is increasing overseas production and is thus less reliant on a favourable exchange rate. The Nikkei 225 rose 133 points to 14,251.

Crude oil was trading at $124.70 in New York. Meanwhile Brent spot was trading at $121.87.

Spot gold was trading at around $866 an ounce this morning, while silver was trading at $16.59. Platinum traded around $2,016.

Turning to forex, sterling was trading at 1.9471 against the dollar, and at 1.2542 against the euro. The dollar was last trading at 0.6443 against the euro and 104.80 against the Japanese yen.

This morning, Barclays reported that first quarter profits fell, after it took a £1bn hit to credit crunch-related assets at its investment banking arm, Barclays Capital. It expects its tier 1 capital ratio to be “slightly lower at the end of June than the 5.1% it reported at the end of 2007”, reports Reuters, though it will raise that to 5.25% “in time”.

Source: Gordon Brown: The World’s Best Contrarian Indicator 

Economic climate change…

Relentless rises in commodity price emissions is increasing the inflation content of the world’s economic atmosphere threatening the universal life force of the world economy – ie growth.

Economic climatologists aka central bankers are beavering away trying to contain the inflation content while scratching their heads about how to tackle spiralling commodity prices.

Or as Mervyn King would have it at a press conference this morning, a sequence of cost shocks is coming from abroad. No prizes for guessing what – oil, food, energy yada yada. OPEC’s not pumping enough, Indians eating too much (see below) etc. This is the increasingly heavy monkey on the back of a Bank looking to loosen monetary policy – mainly by cutting interest rates.

Dear readers looking for good news stop reading now and return in what Mr King calls the medium term, say 2010ish. By that time the economy may be growing at trend again, inflation may be back around 2%, a deflated sterling will have helped iron out the current account deficit and boost tourism and this increasingly wounded government finally will have been put out of its misery by the electorate. Recapitalised banks will be expanding their lending as they report bumper profits from the higher margin business they have been doing for the past couple of years…

Consumers will have rediscovered the wonderful bargains at charity shops and the benefits of making do. They have bought a cash ISA or two. First time buyers have returned to a more affordable housing market to snap up the bargain repos and negative equity distressed sellers. There’s a dearth of estate agents to help them out, though.

Meantime, back in the present, fasten your seatbelts say the Bank of England Inflation Report: “The near term outlook for inflation has deteriorated markedly over the past three months,” it begins. Rising prices will squeeze consumer spending and so cut growth “perhaps sharply”. Commercial property prices have fallen 16% since last summer and house prices are now falling too. Though Mr King agrees with your editor on one point on the housing market…

The ‘90s house price crash was precipitated by a doubling of interest rates he said (as a consequence of the ERM straightjacket) and a big increase in unemployment. Neither of which are present today. At least not yet. The Evening Standard reports the City is clocking up job losses at the rate of 300 a week. But are these the kind of types to linger on the rock and roll (dole) for months on end? Odds against methinks. New opportunities no doubt beckon in Dubai, Singapore and all points East. Time to follow the money.

The net net for the UK economy is the climate’s changed and we’re all affected. Or in Bank speak, the economy is “rebalancing”. It’s a process that’s going to take some time and could yet be torpedoed by Johnny Foreigner and those unwelcome “shocks from abroad”.

*** Americans should go on a diet…

They should rethink their energy policy too.

That’s the angry response from India at perceived slights from the Bush administration. Official comments appeared to lay the blame for rising food prices on India reports the International Herald Tribune.

Americans on average consume 50% more calories than Indians says Pradeep Mehta, the secretary general for the Centre for International Trade, Economics and the Environment. And if they would slim down to the weight of the average middle class Indian “many people in sub-Saharan Africa would find food on their plates.” He added money saved from the fall in liposuctions could be channelled into famine relief. Lardy Brits could no doubt chip in a bob or two on that score as well.

As to the comments, we can’t be sure but there appears to have been something lost in translation here. According to reports Bush commented in a press conference that “ when you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.” In our book that is no more than stating how it is. Basic economics.

Aggregate demand goes up; price follows it to a new place where supply can once again eyeball demand. If there was criticism in Bush’s words, it was of a subtle and coded nature which belies his plain speaking Texan reputation.

Perhaps the Indians are being a little sensitive…certainly more assertive. 300m middle class Indians is an awesome prospect. It’s the equivalent of the entire US population driving SUVs… demanding air conditioning, flat screen TVs and more calories. Their economic progress, amongst others, will prove an increasing shock to ours.

Regards,

Rob Mackrill
The Daily Reckoning

Source: Cost Shocks From Abroad 

But a far simpler truth often gets lost in all the noise. We’re feeling poorer because we are poorer. And we’re poorer because the things we import — like food and oil — are getting much more expensive.

Oil sets a new record high practically every week these days. Last Friday it breached the $126 mark. It’s since fallen slightly, but Garry White explains below why those taking profits now are making a mistake.

High oil prices are damaging the British economy. They push up the price not just of petrol, but of heating, lighting, and any goods that have to be moved from one place to another. That’s pretty much everything you buy.

This inflationary effect is something that Bank of England Governor Mervyn King knows only too well.

Big Merv is stocking up on writing paper and feather quills. Why? Because Consumer Price Index (CPI) inflation for April was at 3.0%. A whisker higher and Merv will have to explain himself in an open letter to the Chancellor, just like he had to in March last year.

And there are signs that inflation will rise. Factory-gate inflation was 7.5% last month. This is yet to feed into the main, targeted figure.

The latest data are a blow to all those hoping for an interest rate cut in June. But it’s doubtful a cut would do much good anyway. It might temporarily mask Britain’s fundamental problem. But it won’t solve it. In fact, cutting rates will weaken the pound, making imports even more expensive.

That problem is that we must now pay more for our basic necessities. Oil is one of those. In real terms, we’re worse off. On the other side of the trade, oil-rich countries are better-off. Britain’s wealth is flowing abroad.

So what can you do about it? The answer is to divert some of that wealth back into your own pocket. There are several ways you can do this. We’ll be taking a look at some in the days and weeks ahead.

For today, I recommend you take a look at Garry’s Smart Commodities piece. With oil more valuable than at any time in history, Garry believes oil-exposure is a must for all investors.

High oil prices will continue to hit you in the pocket. But you can use oil profits to soften the blow.

NOT made in China

For years the west has spent a fortune on manufactured goods that are ‘Made in China’. But where do the Chinese turn when they themselves crave cheap manufactures?

Emerging markets expert Manraaj Singh believes he’s found the answer.

“Earlier in the decade was a great time to put your money in China,” he says. “We in the west couldn’t get enough of Chinese products.”

Thanks largely to this export market, China boomed. And China is still booming.

“China’s still a great place to put your money,” says Manraaj. “But I’ve found somewhere even better. A country where even Chinese manufacturers are setting up shop — because it’s just so cheap!”

Is this country about to take-off China-style? Manraaj reckons so — in fact, he says this investment is even better than China!

“Taking oil profits now is a huge mistake!”

“These oil traders must think China’s growth story is over!” says commodities guru Garry White.

The price of oil dipped by $2 yesterday, to around $123 a barrel. This was in part caused by China importing less oil last month than it had in April 2007.

But a quick look at the facts, says Garry, tells us why this is a temporary blip.

“A slight fall after a massive jump is not the same as a new trend,” he says. “Taking oil profits now is a huge mistake!”

Rising oil prices push up everything from heating bills to grocery prices. So what better way to hedge against this inflation than by investing in the stuff itself?

Find out which investment Garry believes is the very best way to play oil right now…

Until tomorrow,

Ben Traynor

House prices are falling and retail sales are down. In the normal way of things, that spells deflation. But raw materials prices are soaring, and that spells inflation.

So what are we facing? Well, let’s look at that data in a bit more detail…

First things first. The latest survey from the Royal Institution of Chartered Surveyors found that 19 in every 20 surveyors reported falling prices in April. That’s the worst reading in the survey’s 30-year history. I probably don’t need to point out that this includes the 1990s crash. Meanwhile, inquiries by new buyers are falling at the fastest rate since Rics began recording the data 10 years ago.

Unsurprisingly, this is all having an effect on consumer spending. The British Retail Consortium reported that the total value of retail sales was up 1.9% year-on-year in the three months to April. That doesn’t sound too bad – but in the quarter to March it was 3.5%.

The “horrific” rise in the price of manufactured goods

But at the same time, inflation is rocketing. The price of manufactured goods rose 7.5% in the year to April, the fastest since 1986. The rise was far greater than City forecasts, and was described as “horrific” by Ben Broadbent of Goldman Sachs, and “nothing short of terrible” by Paul Dales at Capital Economics. Even if you cut out food, alcohol and petrol costs, ‘core’ inflation was still higher than at any time since 1995 (for more on this story, see: UK inflation soars past City forecasts.

And the breaking news this morning is that consumer price inflation has hit an annual rate of 3%, way higher than the City had expected, and just a tenth of a percentage point away from triggering another letter to the Chancellor. Bank of England governor Mervyn King had better get his pencil sharpener out. We’ll be following up this story on the website later today.

Meanwhile, import prices are climbing too, as the pound weakens. Import prices in the first quarter were up 10.1% year-on-year, reports the FT. “There is a wall of costs waiting out there to dump on the UK consumer,” said Geoffrey Dicks of the Royal Bank of Scotland.

But consumers are spending less, and house prices are falling. That points to falling sales, which makes price hikes a hard sell. And even if prices do rise, rising employment insecurity will mean workers have a tough time demanding higher wages.

Good argument. But as John Plender pointed out in the FT a couple of weeks ago, there is a problem with it. The whole wage-price spiral might not be happening in the developed world. But the developing world – the erstwhile workshop of the world – is another matter.

The end of cheap labour

The global share of the pie taken by labour (the workers) has fallen to a historic low. But now, “emerging market workers are battling for their income share.” When we’re talking about the end of cheap shoes, and the end of cheap vests, what we’re really talking about is the end of cheap labour. That means “the developed world will have to pay more for its imports.”

The other problem, Plender notes, is that even though emerging economies are experiencing rapid inflation (which would usually be bad for the currency – no one wants to be in a currency which is losing value), many are pegged to the dollar. So even though there’s more money around, in dollar terms, it can still buy the same quantity of goods. That puts more pressure on commodity prices as emerging markets gain more purchasing power over “globally traded commodities.”

So developing economies have stopped exporting deflation, and are now fuelling inflation both in raw materials (as they have always done), which is now feeding through to their exported goods too.

Why our government has good reason to seek inflation

And the truth is that here in the developed world, our policy makers have a very strong incentive to pursue inflationary policies. Why? Because our big problem is debt. And inflation decreases the value of debt. Good news if you’re in debt – bad news if you’re a creditor or a saver.

Of course, the flipside is that if the developed world can’t afford to buy all those exports from the developing world anymore, then China and other export-dependent economies could also face rising unemployment and slowing growth. That might take some of the pressure off prices, but would lead to more social unrest with potentially explosive consequences.

So what’s it going to be? Inflation or deflation? In the short term, Mervyn King will have to write another letter or two to the Treasury, that’s for sure. In the longer term, it’s hard to say, and it’s a subject we’ll be returning to regularly in the months ahead – but whichever we end up with, it’s going to be nasty.

Turning to the wider markets…

The FTSE 100 ended up 16 points at 6,220. Oil companies were among the main gainers as oil prices remained high.

Across the Channel yesterday, the Paris CAC-40 rose 15 points to end the day at 4,976. And in Frankfurt, the DAX-30 rose 32 points to 7,035.

On Wall Street, US stocks moved higher amid news that Hewlett Packard is nearing a deal to buy technology services group Electronic Data Systems Corporation for up to $13bn, reports the Wall Street Journal. The Dow Jones rose 130 points to end at 12,876. The broader S&P 500 closed up 15 points, at 1,403, while the tech-heavy Nasdaq jumped 42 points to close at 2,488.

In Asia this morning, Japanese stocks made gains, with the Nikkei 225 rising 210 points to close at 13,953, as higher earnings forecasts from camera maker Nikon and computer services group Fujitsu boosted confidence that the economy can withstand a US slowdown.

Crude oil was trading at $123.82 in New York. Meanwhile Brent spot was trading at $121.95.

Spot gold was trading at around $877 an ounce this morning, while silver was trading at $17.09. Platinum traded around $2,073.

Turning to forex, sterling was trading at 1.9524 against the dollar, and at 1.2571 against the euro. The dollar was last trading at 0.6440 against the euro and 103.60 against the Japanese yen.

This morning, more bad news for the housing market. Homebuilder Redrow said that reservations are running 50% below last year’s level, while its order book had shrunk by 27% to the end of April. Sales in the year through June will be 10% lower than its previous forecast, reports Bloomberg.

Source:http://www.moneyweek.com/file/46954/is-inflation-or-deflation-the-biggest-threat-to-the-global-economy.html 

But, at the same time, inflation is above target and it’s likely that governor Mervyn King will have to get his biro out more than once this year as CPI overshoots the upper limit of 3%, forcing him to write a letter to the Treasury explaining why.

So it’s hard to say whether rates will stay put or fall. But more to the point, whatever the Bank does, will it make much difference to anything?

The economy is in even worse shape than feared

Until this week, the consensus was that the Bank of England would keep interest rates on hold this month, then probably cut them next month. Now markets aren’t so sure. The pound fell sharply against both the dollar and the euro yesterday, as economic data suggested the economy is in even worse shape than feared.

Manufacturing output fell 0.5% in March, the biggest decline in six months, rather undermining the notion that the UK can economy can be saved by that much-neglected sector. Meanwhile, Nationwide reported that consumer confidence is at its lowest since the building society began producing the survey in May 2004. That’s not a terribly long time to be fair, but do remember that summer 2004 was when the property market had its little blip which the bulls had hoped would be duplicated this time round.

More worrying was news earlier this week that service sector activity is slowing sharply. With the vast majority of the UK economy dependent on services, any slowdown or shrinkage will hit us hard. This of course, is inevitable. People don’t have as much money as they did, and with estate agents, City banks and builders already slashing jobs, it won’t be long before the impact of rising redundancies starts to be felt in earnest on the UK high street.

This is all bad news for the economy. But bear in mind, that unlike the Federal Reserve, the Bank of England specifically has to fight inflation. Right now inflation is above target (2.5% according to the consumer price index (CPI)). And although the Bank might suspect that a shrinking economy and falling house prices could put a lid on it, that’s not something it can rely on right now.

With oil prices hitting new records every day (Goldman Sachs now reckons we could see a ‘super-spike’ to $200 a barrel), and food prices doing the same, trying to argue that inflation’s not a problem just won’t wash. Given that the Bank’s job is so specific – to keep CPI at 2% – it’ll be hard for the Monetary Policy Committee to justify cutting rates without acknowledging that the economy is in a truly awful state.

But the bigger question is – what difference will a cut in rates make? Well, it won’t help house prices. Banks are now no longer interested in splashing money all over the housing market, so interest rates on new mortgages will keep rising or stay static pretty much regardless of what happens to the base rate. And in any case, with prices now clearly falling, any sensible buyer will stay firmly out of the market, regardless of what the banks are offering.

Hamish McRae in The Independent argues that “cuts in rates, however, are not intended to rescue house prices; they are to rescue the economy.” He acknowledges that there will be “quite a painful adjustment in household spending” as Roger Bootle has pointed out. “But then we have over the past decade experienced the fastest growth in overall demand of any of the major developed economies… the three or four slim years would follow a decade of fat ones.”

I’m not meaning to pick on Mr McRae specifically here, but his views sum up nicely the general feeling that still exists among mainstream economists. This is the idea that things won’t get that bad. After all, the housing market’s not the be all and end all of the UK economy, is it? And we have had a long period of growth – it had to slow down sometime, didn’t it?

It’s too late to save the economy from recession

The trouble is, this long period of growth was an illusion built on debt. Consumers have spent too much, and the government has spent too much. Both of those trends are now ending. Consumers no longer have access to cheap debt, and the government will have to tighten its belt too, particularly with so many big companies threatening to take their taxes elsewhere.

And cheaper money won’t help. That’s partly because the cheap money won’t make its way to consumers, but mainly because the massive bubble that’s now exploding, was caused by cheap money in the first place.

So cutting interest rates won’t stop the economy from heading down into recession. What it will do is weaken sterling. And that will make the impact of high commodity prices even worse as sterling weakens against the dollar. So, like it or not, a rate cut today would be inflationary, and probably should be avoided.

That doesn’t mean it will be of course. But I suspect that Mervyn King will be putting up quite a fight this month to keep rates on hold.

Source: Why an interest rate cut will only make things worse

The fur is flying in the City.

The heavyweights are pulling no punches. In the blue corner is Bank of England Governor Mervyn King. In a blistering tirade against his City colleagues he roared, ‘Banks have come to realize they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves.’

Well, bankers were not standing for that! So into the ring stepped their representative Angela Knight.

The fair Knight is the Chief Executive of the Banking Association, and would speak up for the industry even if the banks were to take all our money and fire it into outer space. Pouring scorn upon the central banker she blasted him with the following withering words. ‘This is a financial services industry on which a lot of jobs are hanging. I don’t think we should have the luxury of public squabbles.’

Wow! Strong stuff, eh? And not to be left out of a good scrap Doug McWilliams, the chief executive of the Centre for Economic and Business Research has also lambasted the reeling banking industry.

‘It does look,’ he blazed, ‘as if bonuses got paid on the basis of risks which turned out not to be justified.’ Phew! All we need now is for the Archbishop of Canterbury to weigh in with his views and the very foundations of our financial system could shake.

But what is this! He has done just that! Dr Rowan Williams has jumped over the ropes with fists flying. ‘Ministers,’ he snarled, ‘should be a little more worried about the disproportionate salaries enjoyed by City high-fliers.’

‘A little more worried’. Ouch! Steady on!

Who would be a City banker now, attacked on all sides by the Bank of England, by the economics profession and now by the Church itself?

Has the banker been left with any self-respect? How can he face his family, pilloried by the community, held in contempt by the highest moral authority, and accused by one and all of destroying the dreams of house buyers?

After kissing the tears from the cheeks of his sobbing children, does he crawl upstairs to the spare bedroom and count his money? Does he vow to buy a pearl necklace for his poor wife, ashamed and unable as she is to meet the damning gaze of her neighbours?

 Change is unlikely

I doubt it. Because he knows that nothing much is likely to change. The moral lectures of the great and good will make no difference. Although the City is not quite the cosy club it once was, Mervyn King may still find himself sitting next to Angela Knight at a Mansion House dinner. And neither of them would want the atmosphere to be too frosty.

Whatever they might say for public consumption there is not much these leaders can do about bankers’ pay. And anyway, as Angela Knight has kindly reminded us, it is not really the fault of British bankers who, in the true national spirit of self-restraint and service, would gladly work for much less. It is all the fault of the foreigners.

ADVERTISEMENT

30-year City veteran blows lid on secret that could TRIPLE your investment returns!

It’s a secret those in-the-know call the “Invisible Stock Market’.

Brokers, fund managers and financial advisers NEVER tell you about this kind of investment.

But this guy tells you three specific ‘invisible market’ stocks that he believes will soar in the months ahead… even as panic and uncertainty grips the financial industry.

Don’t waste any time. Click here for the full report.

Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

I am not thankful for any of this. And I agree with two other comments of Mervyn King.

He told the Treasury Select Committee ‘There was a lot of hubris around in thinking that the expansion of financial services was a good in itself. It is not; it is a means to an end.’ Exactly. The financial services industry should serve. It should serve savers, borrowers, and business. It is not there to profit from exotic trading and to find ever more inventive ways of ripping money out of the hands of the rest of us.

And the second comment with which I agree is this. ‘I do think it is rather unattractive that so many young people when contemplating careers look at the compensation packages available in the City and think that these dominate almost any other kind of career.’

Too right.

We need our best and brightest people in industry, in medicine, in teaching, in the arts – in fact in anything other than what should be the humdrum business of looking after people’s spare cash and lending to government and industry.

The big question is – how can this be achieved? No doubt bankers will issue a little humility in the next few months. But unless there is some radical change in the system, once the engine of economic expansion has been cranked up again the City greed machine will be up and running and a whole new generation of thrusting number-crunchers will be chasing City riches instead of doing something useful.

What can be done? Next Tuesday, in this column, I’ll give you some ideas.

Regards,

Tom Bulford
for The Penny Sleuth