My Interview With Ed Mitchell on Share Radio

Yesterday I was interviewed at lunch time by Ed Mitchell of Share Radio and below is excerpt of the discussion which covers developments in the Chinese economy and recent changes in the policy of the European Central Bank. This includes yesterday’s speech from ECB President Mario Draghi.

This was the first part of what was quite a wide-ranging interview and I will post the second part as soon as I receive it.

How will the UK Public Finances feature in the upcoming General Election?

This morning has seen another sign of a shift in the political landscape in the UK as the second member of parliament from the UK Independence Party has been elected. This does represent a change and I have to confess my first thought is to have a wry smile at all the “experts” who told us that this would not happen. In this respect politics is just like economics is it not?! However one area where the overall political situation is unchanged is the fact that we are approaching a General Election where our political parties are again indulging in fantasy economics and accountancy with regards to our fiscal deficit and national debt.

Back on the 30th of April 2009 just before the last election I quoted this from a comment to the Financial Times which seems just as apt now.

The modern career politician wants to BE something, not to DO something. To that end, they will say anything they have to say, and do anything they have to do to, and any problems they face in office are a bridge to be crossed when they come to it. A term in the hand is worth a dynasty in the bush.

This reinforced a theme of the last election campaign which I pointed out on the 23rd of April 2009.

If you look at the three published manifestoes there is a hole in each of them of a similar size, £30 billion. So in truth none of them are being transparent and honest in their spending pledges. So the answer to the question what are they not telling us? Is in economic terms £30 billion. This is just over 2% of our Gross Domestic Product (GDP). Put another way it is around a quarter of the annual cost of the National Health Service.

So last time around nobody told us the truth and I am reminded of a quote by Kenneth Clarke from back then which seems likely to apply one more time.

The most urgent question in this campaign is, quite simply, which party is capable of tackling public spending and getting a grip on the deficit.

Actually the debate has changed since then as the economics camp which argues that deficits are unimportant and do not matter have become ever more emboldened. Mostly I think that lower government bond yields have done this to them apparently bond yields can never rise again or something like that! My fundamental point is that this is bound to influence our political class as they are always happy to loosen the fiscal purse strings.

Just to be clear this is a critique of our political class not a political statement in itself but we are near to ending a parliament which was supposed to “deal with the (fiscal) deficit” and yet we find that it is still rather large. The first move of the brand new Office for Budget Responsibility involved telling us that the fiscal deficit would be 3.9% of GDP (Gross Domestic Product) this year and that the national debt would be 74.4% of GDP. Post the first Budget of the current government it is hard now to believe that we were told that the fiscal deficit would be 1.9% of GDP now and that the national debt would be declining. Please no sniggering at the back of the class and no this is not a spoof! Here is a direct quotation.

Public sector net debt (PSND) is forecast to peak at 69.7 per cent of GDP in 2013–14, then decline to 67.2 per cent of GDP in 2015-16,

Office for Budget Responsibility

I think that one post-election money-saving move should be to scrap this body which if we are being polite has had at best a hapless record. What actual good has it done apart from a minor boost for the economy via high paid jobs for establishment economists?

Today’s data

Let me offer a little initial ray of sunshine as this is the first time this has happened in the current fiscal year.

PSNB ex was £7.7 billion in October 2014, a decrease of £0.2 billion compared with October 2013. (They mean Public-Sector Net Borrowing excluding the banks).

Unfortunately the underlying picture is still disappointing when we allow for an economic growth rate of around 3% and rising employment.

Public sector net borrowing excluding public sector banks (PSNB ex) from April to October 2014 was £64.1 billion, an increase of £3.7 billion compared with the same period in 2013/14.

If we look back to the fantasy economic forecasts of the OBR the total borrowing for this year was supposed to be just under £35 billion. So we would have to repay £30 billion in the rest of this fiscal year to get there! Just as a reminder the National Debt was supposed to be 68.8% of GDP and falling whereas it is.

Public sector net debt excluding public sector banks (PSND ex) was £1,449.2 billion (79.5 % of GDP) in October 2014, an increase of £97.1 billion compared with October 2013.

I have discussed the way that austerity seems to actually involve higher public spending (up 2.9% in October on a year ago…) many times before so below I will give a different perspective and focus on one issue which is growing in importance.

The problem that is wages

Earlier this week we were told this.

In April 2014 median gross weekly earnings for full-time employees were £518, up 0.1% from £517 in 2013. This is the smallest annual growth since 1997.

Adjusted for inflation, weekly earnings decreased by 1.6% compared to 2013

So according to the official wages data we have had very little nominal growth and real wage falls. If we also factor in rises in the income tax personal allowance look where we now stand.

income tax related payments decreased by £0.3 billion, or 0.4%, to £81.5 billion;

The problem with wage growth is affecting us in more and more areas is it not?

We have found £522 billion down the back of the sofa!

No that is not a misprint as the Office for National Statistics explains.

Public sector net debt including public sector banks (PSND) was £2,285.3 billion (125.8% of GDP) in last month’s bulletin. This figure has now been revised down to £1,763.0 billion (97.0% of GDP), a decrease of £522.3 billion, primarily due to the re-classification of LBG to the private sector.

A song from the 1970s from the group Pilot is now playing in my mind.

Oh, ho, ho
It’s magic, you know
Never believe it’s not so
It’s magic, you know
Never believe, it’s not so

The National Audit Office (NAO) is not impressed

The NAO has compiled a report on UK tax reliefs and it does not make for pleasant reading. I could do a blog post on it alone but a summary of its disdain would be to quote the football terrace chant.

You don’t know what you’re doing!

Sadly the UK HMRC (Her Majesty’s Revenue and Customs) has been a shambles for some time now.


The Chancellor of the Exchequer should be facing the Autumn Statement with confidence as the economic growth surge in the UK should have given him the funds to pull a rabbit or two out of the hat. Of course he may yet do so,except that it will be from a weak rather than a strong position. If we look to the General Election we see that the political landscape on the deficit is a shambles. One party offers vague promises of more austerity combined with future income tax cuts whilst another offers a mansion tax proposal which struggles under the scrutiny of a violinist! All rather like last time is it not?

A combination of historically very low bond yields and the consequences of QE debt purchases by the Bank of England are what have glued this mess together. Oh and to some extent the recent economic growth as otherwise the situation would be even worse. On our current trajectory we may end up like Japan where the Bank of Japan is getting ever nearer to outright debt monetisation. As an illustration of the state of play let me give you our different official national debt measures.

Public sector net debt excluding public sector banks (PSND ex) was £1,449.2 billion (79.5 % of GDP) in October 2014, an increase of £97.1 billion compared with October 2013.

General Government Gross Debt (Maastricht debt) at the end of October 2014 was £1,569.7 billion and General Government Net Borrowing (Maastricht deficit) in 2013/14 was £100.6 billion.

Public sector net debt including public sector banks (PSND) …. has now been revised down to £1,763.0 billion (97.0% of GDP),

Are you glad that’s clear?

If there is an international standard it is the middle one which represents some 86% of our GDP.

What about Ireland?

The UK made a series of bilateral loans to Ireland as described below.

The aggregate amount of principal outstanding at 30 September 2014 was £3,226,960,000.

We charge Ireland this on it.

The new interest rate, which applies retrospectively, represents the UK’s cost of funding plus a service fee of 0.18 percentage points.

With Ireland having a ten-year bond yield of 1.53% and the UK 2.08% would it not be in everybodys interest for this to be repaid? That kind of begs a question…..

How do falling oil and commodity prices affect the world economy?

A feature of the latter part of 2014 has been the decline in both oil and commodity prices which has seen the world economy impacted by disinflationary winds of change. For example the Commodity Research Bureau Index peaked at 505 in early May and is now at 452 for a decline of 10.5%. A recent driving factor in this has been the 9% fall in the metals sub-index since the beginning of August and as we have discussed before on here the main player has been this below. From the Financial Review.

Iron ore out of the port of Qingdao in China slumped 4.4 per cent to $US71.80 a tonne, taking its total decline for the year to more than 46 per cent as oversupply and ongoing concerns over China’s economy continue to put pressure on the commodity.

This poses all sorts of distributional questions on its own especially for the South China Territories (Australia). That is reinforced by the fact that the HSBC Purchasing Managers Index for China came in at 50 or unchanged this morning. This reinforces the theme of a slowing Chinese economy.

The price of oil

This has been on a weaker path since the 19th of June when the Brent Crude Oil benchmark reached US $115.71 per barrel. Whereas this morning we find that it has gone as low as US $77.91 per barrel for a drop of 33%. This has been quite a sea change as past surges were replaced by a period where a Star Trek style tractor beam held the price around US $108 and now we have seen quite a fall. Obviously the theories surrounding Peak Oil have taken quite a pounding from this although one day no doubt they will be back.

There is an OPEC meeting on the 27th of this month but so far it has been rather supine in the face of these falls.

The media and modern conventional analysis hate this

I am going to look at some new thoughts from the Cleveland Federal Reserve on the economic impact but the quote below highlights the current official theme.

there is some concern that low oil prices, which have continued to remain below $90 a barrel through October, will keep inflation persistently below or even push it further from targeted levels.

You may note that rather than welcoming lower oil prices they have “concern” that inflation will go further below its target. They could not be clearer that their interests diverge from ours. I would make them and their media lackeys go to the nearest petrol/gas outlet and pay more! After all it is a good idea isn’t it?

However lower prices can be combined with good news as well as being good news themselves as today’s UK retail sales release has shown.

Average store prices fell by 1.5% in October 2014 compared with October 2013, this was the largest fall since December 2002 when prices also fell by 1.5%.

Continuing a sustained period of year-on-year growth, in October 2014, the quantity bought in the retail industry increased by 4.3% compared with October 2013,

Falling prices leading to higher volumes as disinflation is combined with a type of reflation?! Yes and you have my permission to put a clown’s hat on anyone who calls this deflation today. Or perhaps they should Bart Simpson style have to be writing “I must not call disinflation deflation” on the blackboard,say one thousand times.

What does the Cleveland Federal Reserve tell us?

The most direct impact that low oil prices, both domestic and international, have on other domestic prices is through a decline in retail gasoline prices.  While oil prices and gasoline prices follow the same trend, gasoline prices react with a delay to changes in oil prices. Gasoline prices have been trending around $3.50 a gallon for a few years, a level much higher than before the recession, but by the end of October, they had declined to $3.14 a gallon.

The Energy Information Agency now has US gasoline prices at US $2.98 per gallon. Also the drop has been larger than the Cleveland Fed would have you think as the price of gas averaged US $3.77 in June. Read that and weep UK readers as we pay some 2.43 times more if this week’s official figures are accurate. Perhaps the Cleveland Fed should buy its petrol/gas over here?

As an aside the US always mentions gasoline prices, is the diesel market very small?

What is the impact of this?

The authors of the Cleveland Fed paper seem desperate to avoid any favourable impacts from a falling oil price but even they tell us this.

The year-over-year percent change in the PPI for finished goods has been loosely related to international oil prices for the past 20 years. But when oil reached $60 a barrel in 2007, the two price series began to move more in sync. The year-over-year percent change in the PPI was lower in the most recent data release,

Ah so the effect has got stronger! Also the effect will be felt in other inflation indices.

Since the CPI is most directly influenced by oil price changes through its energy component, one question that remains is whether or not other components in the CPI are influenced by low oil prices…….A quick look at the year-over-year percent changes in the energy CPI and the CPI excluding energy suggests changes in energy prices are often followed by similar changes in the rest of the CPI’s components.

In fact apart from central bankers and their lackeys all of us will welcome such developments but predictably this paper does not.

The recent decline in oil prices is of less concern to many CPI forecasters, because it may not affect the “core” price level.  It would be a bit more concerning, however, if low oil prices also affected other domestic prices as well.

But Shaun you have told us this will give an economic boost?

You might think that the Cleveland Fed would highlight this is a report on the impact of a falling oil price would you not? Well I will leave readers to decide for themselves why such an important matter merits only part of one sentence.

However, as consumers use savings from lower energy prices for other goods and services,

So the hard-pressed consumer is able to spend more on other things as disinflation morphs into reflation (increased aggregate demand) one more time? Although the Cleveland Fed cheerily hopes that this impact will fade.

these prices are likely to rise in response, offsetting the initial disinflationary impact of lower oil prices.

Hooray! Hooray! Oh wait a minute……


Back on the 4th of this month I pointed out that there are a multitude of effects from falling oil and commodity prices. The net losers are places such as OPEC and Australia. The winners are the importing nations who not only get lower inflation but they get a host of reflationary impacts on their economies as import costs fall and demand is boosted. In other words they gain which is translated by the Cleveland Fed into “concern”.

It is very 1984 is it not where what we have previously been told is good for us is apparently now bad for us? Of course Pink Floyd did discuss this issue on the aptly named Dark Side of the Moon.

Us and Them
And after all we’re only ordinary men
Me, and you
God only knows it’s not what we would choose to do
Forward he cried from the rear
and the front rank died
And the General sat, as the lines on the map
moved from side to side
Black and Blue
And who knows which is which and who is who
Up and Down
And in the end it’s only round and round and round

What is the first casualty of an (economic) war? It is the truth I am sorry to have to tell you. Also let me add one more awkward fact which is that countries such as Japan which are pursuing a currency war objective of a lower exchange rate (118 and counting versus the US Dollar) are eroding some of the benefits of lower commodity and oil prices

What does the Bank of England think about Base Rates and the value of the Pound?

Yesterday I reviewed part of the picture of UK monetary policy. The two main features were an inflation rate now below its official 2% target (1.3%) and a currency which has been weakening. The nuance to this is that in my opinion the UK needs quite a lot of disinflationary pressure to keep inflation below target. Whilst the Euro area worries about inflation becoming “Too low for zero” as Elton John put it we have found ourselves going from above to below target. The tuition fee issue is an example of the way our economic system works to keep inflation going and like buses another example can be expected along soon. This is an important nuance as we wait to see if below target inflation is treated in the same manner is the above target version. After all above target inflation was ignored for around four years and at it worst it had an equivalent divergence to inflation nudging below -1%.

The issue of the UK Pound’s exchange rate is an interesting one as what one might call “benign neglect” of it has seen some of the beneficial effect of falling oil and commodity prices eroded by it. It makes me wonder if Mark Carney has morphed into Mervyn King who of course loved it when the Pound fell in value. Putting it another way since the Pound’s peak the oil price has fallen by 29% but 9% of this has been offset by a fall in our exchange rate versus the US Dollar. That is awkward as which is the easing of policy now? We are seeing both an output and an inflation boost.

Kristin Forbes

Issues surrounding the exchange rate were discussed by Kristin Forbes yesterday in a speech given to Queen Mary University. For those unfamiliar with her she is one of the two Carney’s cronies we imported from international organisations to boost the number of women at the Bank of England. A worthy cause although it remains a shame that no British women were considered worthy. If you wish to distinguish between Kristin Forbes and Nemat Shafik then so far Ms Forbes has shown signs of intelligence as opposed to the lack of it showed so far by the other.

In essence the analysis suggest that the banking sector in the UK has contracted its operations internationally by a considerable amount.

This recent financial deglobalization is driven by a massive contraction in international banking flows – in which the UK plays a critical role. Not only have UK resident banks withdrawn more cross-border lending than any other
banking system, but other countries’ banks have reduced their cross-border lending exposure to the UK on a
scale that is large even when measured relative to the scope of the UK economy.

Indeed she thinks that we have in this area taken the advice of Kylie Minogue to “Step Back In Time” a considerable distance.

Cross-border financial flows for these countries (scaled by the size of their economies) are now as “globalized” as they were in the year 1983.

There is plenty of food for thought there as we consider the impact of the credit crunch in this area. But one cannot avoid the main implication which is that the UK banking sector has retrenched so much that it seems unlikely to be much of a positive influence on our economy. This has considerable implications as shown in the quote below and the emphasis is mine.


A reduced international banking network could affect: access to credit for certain sectors; the safety and transparency of international banks; liquidity and volatility in some markets; the role for other countries and shadow banking in providing financial services; and how the UK current account deficit is financed

So if we continue the theme then a struggling current account is likely to need a lower exchange rate on average going forwards if it is to be financed. A central banker is unlikely to be much clearer than that as we appear to return to the philosophy of past Bank of England Governor Mervyn King! I guess he is saying “I told you so” as puts on his ermine and attends the House of Lords.

What about Base Rates?

There is a clear implication for the path of Base Rates from that analysis. An economy which is weakened via the sort of analysis undertaken above is less likely to need future interest-rate rises. This is reinforced by the section below and gain the emphasis is mine.

But it does suggest that as global banking networks contract, there may be less room for cross-border banking flows to counteract the lending channel for monetary policy. As a result, traditional monetary policy could become more effective in a world of less globalized banking networks.

That is a fascinating conclusion because you could argue (as I would tend too) that it would make monetary policy less effective. However we are clearly being fed tow things here. Firstly any need for interest-rate rises is being downgraded and should they be required the scale of them is being downgraded. My apologies to any savers reading this! As Elton John put it “Please do not shoot the piano player”.

What about the Beatles?

Ms Forbes references the fab four and their impact on the UK Current Account back in their time and the details are intriguing.

Their ticket sales, appearance fees, music royalties, merchandise licensing, and performance rights earned them large sums of foreign currency, which they then brought home and converted to sterling.1 From 1964 to 1966 the Beatles toured in the United States and other foreign countries, earning world-record dollar concert receipts. Media reported that they could earn as much as $650/second in today’s dollars. These foreign receipts are booked as “service exports” in international accounting terms and helped reduce the UK’s current account deficit.

I find it fascinating that their sales were material on a country-wide scale. Perhaps if John Lennon could have been persuaded to continue touring then the UK’s 1967 currency devaluation could have been avoided. How bizarre.

The mention of the Beatles is intriguing from someone who has been criticised for having virtually no experience of the UK (she once spent a holiday here is about the sum of it and does not live here now). Of course the Beatles were also extremely popular in the United States.

What about today’s wages data?

The latest annual survey results for the UK are in and the headline is stunning,albeit sadly stunningly bad!

In April 2014 median gross weekly earnings for full-time employees were £518, up 0.1% from £517 in 2013. This is the smallest annual growth since 1997, the first year for which ASHE data are available.

Adjusted for inflation, weekly earnings decreased by 1.6% compared to 2013. The largest decrease was between 2010 and 2011, but inflation-adjusted earnings have continued to
decrease every year since 2008, to levels last seen in the early 2000s.

I think that scotches any Base Rate rise talk for now don’t you? Also we are reminded of the difference between now and the pre credit crunch era.

 Up until 2008, growth was fairly steady, averaging at around 4% each year.

Here is a real nuance for you which is that around 70% of us are still getting that sort of pay rise (h/t @statsjamie ) but the rest of us must be getting pay cuts for the numbers to work.

If we bring this up to date then the Bank of England Agents tell us that not much has changed.

Pay settlements had mostly remained modest. A tightening
labour market had led to some upward wage pressure in
subsectors with skills shortages.


So what have we learnt today? Firstly if we also take in the Bank of England Minutes that in the words of the Pet Shop Boys the majority of the MPC will take the latter of the two choices below.

Which do you choose, a hard or soft option?

There is something of a rationale for this right now if we look at the current state of play and especially the new data on wage growth or rather the lack of it. Although of course that ignores the fact that the Bank of England is supposed to be looking two years ahead. Mind you in the words of the Style Council there seems to be an example of “Ever changing moods” in play about timing.

As the impact of the latter waned and the
margin of spare capacity was eroded, inflation was expected to return to the 2% target by the end of
the three-year forecast period.

What happens in three years? Well Mark Carney will be (nearly gone)…….

Oh and if you recall the Ben Broadbent speech that told us that in essence current account problems do not matter much, one of his colleagues has just contradicted him.

Low inflation is good for workers and consumers but not indebted governments

Today sees the latest inflation numbers for the UK and I would like to open by presenting something you rarely read these days which is to give an example of how low inflation is good for the majority of us. It can be found in the development of real wages in the UK which after a circa 10% drop finally nudged in positive territory in September compared to the official inflation measure. It was only a small gain as average earnings were rising at an annual rate of 1.4% compared to the CPI rising at 1.2% but after a long winter for UK real wages it was a hint of some upcoming spring sunshine. Whilst wage growth has nudged a little higher it has been the fall in the rate of consumer inflation that has been the major factor here. Accordingly both workers and consumers have been made better off which apparently if you read the mainstream media is bad for us and them!

Let me now contrast this with the state of play in Japan where the Japanese are being told by the Prime Minister Shinzo Abe and the Bank of Japan that higher inflation is good for them. The CPI rose by 3.2% in September so some 2 and two-thirds faster than the UK -how often has one been able to write that?- which meant that real wages fell by 3% which has been revised higher than the 2.9% as I discussed only yesterday. So the Japanese worker is definitely worse off and the stereotypical consumer Mrs Watanabe will be facing higher prices at the shops. Neither of them will welcome this however much official sources and their media lackeys tell them that higher inflation is good for them. Of course it is good for the state which has been facing a falling nominal GDP for some time making the public-sector debt burden a brick or two higher.

The same message is being repeated right now in Europe and will be repeated in the UK should our inflation rate dip further. However low inflation is something to be welcomed and does not have to turn into the disinflation and deflation which have affected Greece. For us in the UK there is much “excess” inflation to wash out of the system as we had a sustained period of above target inflation when the credit crunch bit pushing real wages lower. This is something that the mainstream media has failed to call the Bank of England to account for. There is a military dictum that the best place to hide something is in plain sight and that seems to have worked for the Bank of England.

UK Inflation numbers

There was a slight uptick in the official UK inflation rate this month.

The all items CPI annual rate is 1.3%, up from 1.2% in September.

So still well below target but a nudge higher. As I looked through the detail there were a couple of perhaps surprising influences. Those who have watched the price of Brent Crude Oil plummet may be confused to see fuel prices as a factor but the nuance is that they fell more slowly in October than they did in October 2013. Also the rise in tuition fees was back nudging inflation higher as whilst the actual increase was smaller the impact of the past increase means its weight in the numbers has risen.

What is in the pipeline?

The numbers for producer price inflation show that disinflation is in play here particularly at the input level.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 0.5% in
the year to October, unchanged from last month.

Total input prices fell 1.5% between September and October, compared with a fall of 0.6% between August and September.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 8.4% in the year to October, compared with a fall of 7.4% in the year to September.

A little care is needed as the production sector of our economy is reducing in importance over time but it is clear that there is a strong disinflationary influence at play there.

If we look wider we see that downward pressure on many prices continues to be applied by a weak oil price and a barrel of Brent Crude Oil is around US $79 as I type this.

Inflationary pressure

Against this has been something which has mostly escaped mainstream attention which is the dip in the value of the UK Pound versus the US Dollar. This has fallen by 9% since the peak of US $1.717 on the second of July and is offsetting some of the oil and commodity price falls.

On such a road Mark Carney is silently morphing into Mervyn King who was never happier than when the value of the pound was falling. Also if we factor in the change in the UK trade or effective exchange rate UK monetary policy has been eased by the equivalent of nearly a 0.75% base rate cut since the peak of this summer. As a lot of our fall has been against the US Dollar my contention is that monetary policy has in fact weakened or been loosened by more than that.

Oh house prices!

These are not slowing according to the official data. In fact we are seeing the reverse according to the Office for National Statistics.

UK house prices increased by 12.1% in the year to September 2014, up from 11.7% in the year to August 2014.

Indeed many will be troubled by the fact that if we take out the London effect we get this.

Excluding London and the South East, UK house prices increased by 9.1% in the 12 months to September 2014.

Am I wrong to think that the house price boom is fading? Maybe not if we look deeper.

In September 2014, the UK mix-adjusted House Price Index reached 207.3 (Figure 2). This is 0.2% lower than August 2014, when the index reached a record level of 207.7

Of Rock Concerts and inflation

Back in June 1980 a young man/boy who  we shall call Shaun went to see Fleetwood Mac at Wembley Arena and paid some £8 for his ticket. This was back in the days of the Tusk tour and was a great show which I excuse me he thoroughly enjoyed! As they are touring again and the nearest like for like comparison is a ticket at the O2 I took a look at some prices at which the better seats were £138.50 and £89. Whereas if we use the retail price index to adjust the price it should be £30.60 and they tell us there is no money in being a rock star these days!

Also to make the comparison I used the measure in play then which was the Retail Price Index. Is it rude to point out the gap between the version of it used for inflation targeting it and the more recent official inflation measure?

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.4%, up from 2.3% last month.


There are two main themes for today. The first is that the UK is seeing a battle between the worldwide disinflationary influences I have regularly discussed on here and its natural tendency to institutionalised inflation. In this instance the institutionalised inflation has been exhibited by the university tuition fee changes. The second is related as one of the forces pushing inflation higher in the UK has been Bank of England policy in the credit crunch era and with the recent falls in the value of the UK Pound £ it is back. This is equivalent to a 0.75% base rate cut and hopefully you will forgive me a wry smile at the thought that this is happening under the noses of those who are discussing and analysing a base rate rise in the UK. As Fleetwood Mac put it.

But don’t ask me what I think of you
I might not give the answer that you want me to

Oh well

Also as we move into the 6th year of this blog yesterday was the best day for views stand alone Notayesmanseconomics has had. So thank you to all of you who have supported it along the way.

Worrying news for chocoholics

The Washington Post seems to think we are in danger of running out of it. Eeek!

Both Japan and Abenomics are in crisis as the country returns to recession

This morning has seen some disturbing news from the Far East. This came as rather a contradiction to the promises of the G20 conference which had only just ended in Brisbane.

The combined growth strategies of G20 member nations presented at the Brisbane Leaders’ Summit will equate to 2.1 per cent new growth and inject an additional $2 trillion into the world economy and create millions of jobs.

The Brisbane Action Plan contains close to 1,000 measures, including more than 800 new ones, which the IMF and OECD estimate will boost the collective GDP of G20 nations by 2.1 per cent by 2018.

I suspect that many of those promises will be forgotten on the flights home.

The news flow took a darker turn as the latest economic growth figures for Japan were released. From the Financial Times.

July-September data defies consensus, contracts again: July-September real GDP shrank by 1.6% qoq (quarter on quarter) annualized, defying market consensus for growth (+2.1%), as GDP (Gross Domestic Product) remained negative following the April-June print (-7.3% qoq annualized, revised downward from -7.1%).

Just to be clear that was a 0.4% fall as we usually measure GDP in the UK and it followed on from a quarter where the economy had shrunk by 1.9%. So we see that the Japanese economy has in fact not only returned to recession but has in fact faced a sharp one. This in itself poses more than a few questions for the official policy of Abenomics in Japan of which more later although of course regular readers will be aware that I have challenged it from its inception. If we go back to the 30th of October 2012 here were my thoughts.

I always felt that rather than conclude that the policy is a disappointment they would instead conclude that what had happened was that it had not been applied with enough size and vigour……….So in spite of the grand declaration of a “Measures Aimed at Overcoming Deflation” by the Japanese government and the Bank of Japan I expect there to be a QE10,11,12….. as time goes by.

This caught the “experts” somewhat by surprise as the Financial Times highlights.

those atrocious GDP forecasts in full: Credit Suisse: +3.4pc Morgan Stanley: +2.8 Bank of America: +2.5 Barclays: +2.2 JPMorgan: +2 Banque Nationale Paris: +1.6

As you can see up is indeed the new down one more time!

Perhaps they have spent too much time reading Paul Krugman in the New York Times who has been a cheerleader for Abenomics since its inception. He added this in April 2013.

I’ve made it clear that I very much approve of Japan’s new monetary aggressiveness.

Also Paul Krugman was kind enough in that article to confirm that for him you can never “Pump It Up” enough.

The hope now is that things have changed enough at the Bank of Japan that this time it can, as I put it all those years ago, “credibly promise to be irresponsible”.


What about QE 11?

Some nuance is needed here as whilst events have progressed as I argued and Mr.Krugman has seen the Bank of Japan “credibly promise to be (even more) irresponsible” as QE 11 was announced by the Bank of Japan on the 31st of October the latest move came after the quarter in discussion here.

The problem that is fiscal policy

If you think  that Japan has a problem with monetary policy wait until we get to fiscal policy! Not only does Japan have a very high level of gross government debt (245% of GDP) but it is also running a relatively large annual fiscal deficit (7% of GDP in 2014 according to the Cabinet Office). As you can see real problems are posed here by the size of the numbers. For example 24% of all Japanese government expenditure is projected to go on debt costs this year and that is in spite of what are extraordinarily low government bond yields. Or if you prefer debt costs are 43% of all government revenue. Japan’s official debt measure excludes some of what is counted elsewhere but  even so it is some 17.5 times the expected central government revenue this year (Cabinet Office figures).

If we look further ahead in time then there are clear challenges for fiscal policy from Japan’s population which is both ageing and shrinking. Of all the countries in the world Japan is suffering from the most severe case of this with regular falls in its population combined with a low birth-rate and a rising life expectancy. Please do not misunderstand me in most respects the latter is welcome. But in the world of what is sometimes called the dismal science it poses plenty of challenges right now.

Even with the fiscal consolidation measures planned Japan expects to run a fiscal deficit of around 5% per annum in the future as the forecasts go to 2023. Of course we are left wondering if the phrase “Too infinity  and beyond!” applies?

Actually those forecasts assume measures which now are much less likely to take place such as the second phase of the planned consumption tax rises.

Speaking of the consumption  tax increase

This has become something of an elephant in the room as I have been involved in a debate this morning as to whether this was part of Abenomics at all. I agree with this from the Japan Times from  the 13th of June 2013.

The Abe administration appears inclined to raise the consumption tax from April 2014.


Whilst the bill was in   existence pre the Shinzo Abe government it is a bit much  to argue that a “revolutionary” economic policy could not have changed course on this if it wanted! Also I note that like the Bank of Japan the Japan Times was very concerned about  the historical precedents from past consumption tax rises.

The Finance Ministry had expected that the tax hike would increase total tax revenues, thus contributing to the government’s financial reconstruction. What happened was the opposite. Although consumption tax revenues went up, total tax revenues fell because the tax raise broke the back of the economic recovery.


It would appear from the evidence so far that history can indeed repeat itself. Back on the 17th of December 2012 I pointed out that Abenomics arrow number two or fiscal expansionism would have to face up to the issue of what to do about the consumption tax.

If the LDP spends more and delays or ends the planned rise in the sales tax rate then the national debt will rise even faster.


I suppose those at the more fanatical end of Abenomics support with argue that Shinzo Abe “bottled it”.


There is much to consider here but let me start  with the forecasting community. They have had yet another bad day as estimates of growth of the order of 0.5% turned into a -0.4% reading. Actually that is pretty much the history of Abenomics which has received an extremely favourable press with some news organisations willing to misrepresent wage patterns. The reality is as I put it on the 20th of October that Japan is stuck between a rock and a hard place.

Of course the story is not yet over (although if an election is called and Shinzo Abe loses it presumably would be…). My main measure involves looking at wage growth. As of the latest figures released earlier this month real wages were falling at an annual rate of 2.9% in Japan. Exactly how will the economy improve with this being the state of play?Also as higher inflation is official policy and as the numbers indicate the often promised wages fairy has not turned up in Japan how will the promised higher inflation help with this? Perhaps in an example of another definition from my financial lexicon for these times help is now defined as a hindrance.

In musical terms Japan is singing along with Coldplay.

Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,

Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,




Oh Italy! When will your economy escape its economic depression?

Today has opened with economic growth news across much of Europe and including the Euro area. Of course people are keen to know the numbers are several of the countries involved are right on the margin of positive and negative growth. However as I explained to listeners of Share Radio earlier I counsel some caution as we are placing more pressure on these numbers than they are capable of dealing with. These are preliminary estimates which do not have the full data set and there is a margin for error with them which is widely ignored. This is even before we get to the question of whether Gross Domestic Product numbers provide the right answers to our economic questions.

Euro area leaders will no doubt have heaved a sigh of relief when they were told (probably yesterday) that Germany had grown by 0.1%, France by 0.3% and the Netherlands by 0.2% as that is just over half the Euro area economy. With Spain (which is something of a home banker at the moment) having already declared an anticipated 0.5% economic growth Euro area leaders were quickly safe from the headlines of an overall contraction. However there was some food for thought with one stereotypical move and one being very anti-stereotype. The stereotype was that France saw this.

General government expenditure increased by 0.8% in the last quarter (after +0.5%)

What price austerity now? If we move onto the reverse we see that the German economy was driven by domestic consumption and that this happened.

gross fixed capital formation especially in machinery and equipment in the third quarter was considerably down on the previous quarter (adjusted for price, seasonal and calendar variations).

At least German export growth remained to keep one stereotype going!

However there is still a shark in the water which is will the Euro area economy contract in the fourth quarter of 2014? Or if you like the game goes on which is the fundamental question for the Euro area right now. Can it escape the black hole which keeps pulling it back towards zero and at times negative economic growth? Otherwise more and more Euro area members will be singing along with David Byrne and Talking Heads.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

Oh Italy!

First let us examine the headline announcement which tells a by-now familiar tale of woe.

In the third quarter of 2014 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.1 per cent with respect to the second quarter of 2014 and by 0.4 per cent in comparison with the third quarter of 2013.

But Shaun you told us that such small numbers are within the margin for error? They are but you see it is now some twelve quarters in a row since Italy has had a positive  annual economic growth rate. Putting it another way the last time its economy grew quarter on quarter was in the early summer of 2011 and it was by the not so giddy heights of 0.2%! The initial dataset goes back to the first quarter of 2010 when Italian GDP (based to 2005) was 397.36 billion Euro’s and this latest quarter it was some 3% smaller at 385.3 billion.

Some perspective

Newer readers may not be aware that the economy of Italy struggled to grow even in the supposedly better economic climes of the pre credit crunch era. If you like you can call it the Italian problem and it is one of the themes of this blog. Accordingly Italy arrived at the credit crunch in poor shape and the situation has gone from bad to worse. It is being rammed home right now as of course as I pointed out only yesterday with regards to Greece this is the “recovery” period.

In fact Italy has been in an economic depression for some time now. If we look at its annual GDP it was some 0.5% lower in 2013 than it was in the year 2000. Now we know that its economy has also been shrinking so far in 2014 so the situation is even worse now. There was a discussion on here a while ago as to what the definition of a depression is, well I think we have found at least part of it. This also means that Italy is in “lost decade” territory and that this has extended almost to a decade and a half now. Many of you will have spotted that this period of economic decline has coincided with its period of Euro area membership. It would seem that Beppe Grillo.

Beppe Grillo, the leader of the Italian Five Star Movement, has visited the European Parliament to present his programme to get a referendum in Italy on leaving the euro “as soon as possible”.

Is it not a sign of the times that even a comedian can spot what politicians cannot?

There is a grimmer measure of the depression which has hit Italy which is to factor in the population growth which has taken place over this period. The Italian population has expanded by just under 7% over this period so we can say that GDP per person has now fallen by around 8% this century. I think that is a measure of a depression and frankly in all respects.

Did ESA 10 help?

The “improvements” did raise Italy’s level of GDP by 3.7% in 2011 which was used as the base year. Recorded investment surged by 6.9% as we discovered what sort of impact double-counting Research and Development has! Also some of you will no doubt be waiting for this bit.

(including the inclusion of some illegal activities, which contributed 1.0 percentage points to the revaluation of the Gdp)

Imagine the boost to Italian GDP if they could fully account for the activities of the Mafia?! Taxing it might prove to be more than a bit of a problem though.

The national debt

This mornings bulletin from the Bank of Italy tells us that the national debt is 2.134 trillion Euros. If we compare that to the central government revenue of 464.75 billion Euros in 2013 we see that the ratio is 4.6 which of course is unstable.

As we stand this is just about affordable because Italian government bond yields are so low right now. The benchmark ten-year yield is 2.39% as I type this which is remarkably low considering the public-sector data. It would not take much of a rise for Italy’s position to look very different and on such a road there would have to be some form of default. Because of the size of Italy’s national debt this would be a very serious matter way beyond Italy’s borders.

We may be explaining to ourselves here why the European Central Bank under the leadership of the Italian Mario Draghi is considering some sovereign bond Quantitative Easing or QE.


The state of play for the economy is best summed up by its statistics agency Istat and remember such forecasts are invariably rose-tinted.

In 2014, GDP is expected to decrease by 0.3 percent, expanding by 0.5 percent in 2015 and growing by 1.0 percent in 2016, in real terms. The recovery will be mainly driven by domestic demand.

They do at least manage a promise of some jam tomorrow but it is not much is it? Also we find that for Italy such optimism disappears time and time again as tomorrow becomes today. Maybe it already has as the domestic demand growth has morphed into this below if Markit are correct.

Retail sales fell at faster rate in October, with the gap between actual performance and targets the widest in three months…..This relentless downturn in trading is affecting all those involved in the industry, with jobs being cut and suppliers seeing orders for goods dropping markedly.

So on and on it apparently goes and it is such a shame as it is a beautiful country with much to recommend it. But economic reform is not one of those things.

Songs for the Italian economy 

Road to Nowhere by Talking Heads

I started out with nothing and I ‘ve still got most of it left! by Seasick Steve

Down,Down by Status Quo

Deeper and Deeper by Madonna

Other suggestions welcome…..