What is happening in the housing and mortgage markets of the UK?

As summer has turned to autumn in 2014 we have begun to see various signs of a slowing in the UK housing market. As the past growth was a trigger for the UK’s economic boomlet it poses not a few questions as to what happens next there too and it seems that such matters have also been on the mind of Bank of England Chief Economist Andy Haldane. From an interview with the BBC.

For the forseeable future, those headwinds to growth will be with us,they will be holding us back to a degree. Why is that? Because we are still paying for some of the cost of the crisis. Debt levels are still too high.

The last part about debt is a little awkward as Mr.Haldane is part of a Bank of England which used its Funding for Lending Scheme to boost debt via mortgage lending. As he was not on the Monetary Policy Committee back then perhaps this is a type of implicit criticism although for someone as “gloomy” as him it does beg the question of what he would have done?!

One area where if he was a dog he might catch a frisbee is where Andy Haldane points out that we as people have changed.

One interpretation is just that people are scared. People are scarred by the risk of something else going wrong, and are seeking safety, safety almost at any price

That is particularly awkward as you see when Andy Haldane was head of UK banking supervision he pushed them towards more safety and lower risk. Yes exactly what he is critiquing now! Sadly this is a regular feature of central banking where they are allowed to get away with criticising the consequences of their own actions by a largely supine media. Perhaps this is one of the behavioural biases he wrote about on the 17th of November. Central bankers put on one hat and ask for more bank lending then when they put on the other hat they set rules which restrict bank lending.

So Mr Haldane is in my view in a world described by the band Genesis.

This is a land of confusion.

Of course in the modern world this translate to him being selected by Time magazine as one of the world’s 100 most influential leaders. However my thoughts return to the same song.

Superman where are you now
When everything’s gone wrong somehow
The men of steel, men of power
Are losing control by the hour.

How does this affect the mortgage market?

There are two timing impacts here. Firstly Andy Haldane is telling us that the economic recovery is likely to struggle as we move into 2015. However if we look forwards those with variable-rate mortgages are likely to be cheered by his “lower for longer” view on UK official Base Rates. Regular readers will be aware of my view that an interest-rate cut is about as likely as a rise and Mr.Haldane may not be far away from that. Of course the danger remains that he contradicts himself again.

The Nationwide Building Society

It released its six monthly figures today and they gave a very downbeat view on activity in the UK housing market. Gross lending was down but look at net lending. From the BBC.

Britain’s biggest building society said that the figure was £13.1bn for the six months to September 30, down £900m from the six months to March 30.

Net lending was £2bn lower at £3.6bn.

So not only did total lending see a decline perhaps the “People are scarred by the risk of something else going wrong” factor apply as mortgages were repaid leading to a 36% fall in net mortgage lending. I have commented on this feature before as it is something that has become a regular in the credit crunch era. For example it took an extraordinary effort from the Bank of England’s Funding for Lending Scheme ( a near 1% fall in mortgage rates) to get the overall net mortgage lending figures to be consistently positive.

Of course this is only one lender and others may have done better but the Nationwide thinks not and the emphasis is theirs.

the Society accounted for almost a quarter (24.8%) of all net mortgage lending, ahead of its par market share.

Interestingly the new ISA rules seem to have provoked a burst of saving although much of it is no doubt switching for tax-free status.

Nationwide accounted for more than 20% (20.7%) of the growth in ISA balances.

I wonder about this a lot as a trend towards saving is in direct contradiction of what our central banking Supermen and Wonder Women want us to do.

Today’s overall mortgage numbers

The opening salvo from the British Bankers Association (BBA) has a theme of weakening to it.

Today’s figures suggest that the cooling of the property market has continued in recent weeks. Approvals were 16% lower in October than in the same month last year – the corresponding figure for September was a 10% decline.

Actually those are the new buyers approvals, the situation for remortgages is worse at -21% and the equity release situation is worse still at -34%. If we look back at past mortgage approvals for some perspective the average of the previous six months had been 41,549 and October was 37,076 or 10.8% lower.

We can see more signs of a slow down in house prices to come from these numbers as demand is being drained from the system. In the end this will affect prices and pull them back.

Interestingly demand seems to have shifted to unsecured borrowing.

Annual growth in unsecured borrowing is running at 2.8% – the highest rate since 2008.

This may not seem a high rate but this does represent quite a change on previous trends as if we go back the spring of 2013 the annual change looked like it was heading for a double-digit fall in percentage terms. Has the Bank of England engineered a switch from secured to unsecured borrowing in what would be yet another own goal?

Business lending

The Funding for Lending Scheme was and indeed still is supposed to be boosting this. It deserves a mention as the abject failure is ongoing.

Outside of real estate annual growth in borrowing by the real economy in October is the same as it was a year ago at

If you are willing to only count the sectors where borrowing is rising then the situation is satisfactory.

There is positive and sustained growth in
the manufacturing, wholesale and retail


Today has seen more evidence that whatever steam the UK housing market has is fading and waning. This will in time move further into house prices as well as the wider UK economy. Should we see house price falls then it will be the first time for a while that houses will become genuinely more affordable. But the danger remains of yet more panic action by the government and the Bank of England and on this road we return to the possibility of more monetary easing which has become a modern theme of this blog. On that front there has been this from Bank of England Governor Mark Carney today.

Carney says MPC discussions on timing of tightening, not easing

Never believe anything until it is officially denied!

Also Mark Carney seems to be morphing into Mervyn King.

A more balanced recovery

Perhaps he has not looked at the trade of fiscal deficits lately. Or perhaps like Time Lords Bank of England Governors look different but are in fact the same person.

If you wish for a Matrix style blue pill

From Businessday.

The cooling impact of global economy, low interest rates and political activities leading to May 2015 general elections have created opportunity for investors and home buyers in the UK property market.

What is the economic monetary and fiscal policy of the UK Independence Party?

It was only on Friday that I discussed the fact that what were previously considered to be the main political parties in the UK shared one thing which was dissembling about how they would deal with the UK fiscal deficit problem. I also pointed out that there is a new kid on the block which has posed a challenge to them especially now that UKIP (United Kingdom Independence Party) has actually won two by-elections. Added to this the three electoral polls published in the press yesterday showed UKIP to be at 19%,16% and 15% respectively. If we add this to the fact no party looks likely to win a majority it is far from inconceivable that a party which until recently had no MPs (Members of Palrliament) could be part of a coalition government next May. So it is time to examine its economic policies and for newer readers the rules here are that I express no political view and simply examine the economics.

Monetary policy

This is a subject close to my heart and accordingly regular readers will not be surprised that I noted this in April 2013 when UKip party leader Nigel Farage wrote an article in City-AM. In it he rather echoed the Japanese Prime Minister Shinzo Abe as he repeated at least some of what has been called Abenomics.

That is why I want to be the first UK political leader to commit my party to changing the Bank of England’s mandate.

Nigel Farage also echoed Abenomics with his promise of other changes.

Altering the mandate of the Bank of England is just the first of those fundamental changes we need to make.

If we look for some policy meat on the bone then the paragraph below gives us more than a few hints as to what would be required and the emphasis is mine.

The mandate of the Bank has been focused on avoiding a repeat of the last crisis, instead of addressing the root of the problem we face today. Its negative focus on fighting inflation is put to shame by the positive objectives of the US Federal Reserve’s dual mandate that it “shall maintain long-run growth of the monetary and credit aggregates, commensurate with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” That is the language of Ukip economics – maximum employment, growth, and a positive outlook.

What does this mean?

Firstly I am sure it will come as a surprise to many that UKip policy is in monetary terms very expansionary. At that point the US Federal Reserve was still expanding its QE (Quantitative Easing) operations and was the most expansionary of the main central banks with monthly purchases totalling some US $85 bIllion. If we take Nigel Farage at his word we must assume he was suggesting that the Bank of England should itself have been conducting a more expansionary policy back then which presumably would have meant re-starting its own QE purchases.

Here we have an immediate problem as this policy prescription would have opened the QE floodgates just as the economy was picking up anyway! I have been very critical of the Bank of England Governor back then Mervyn King who was voting for more QE for the reason that his policy prescription would have given a booming economy a boost and maybe overheated the housing market (even more). My view is that the policy was inappropriate.

Added to this is something of a problem as a party which presents itself as revolutionary and on the side of “the struggling people of Britain” prescribing QE which if it is on the side of the people it has had a very odd way of showing it! The consequences of QE has involved increased inequality, more feather-bedding for the banking sector and a distorted economy. I do not know about you but that hardly seems to be much of a help for people who are struggling.

Next comes the implicit downgrading of an inflation target. Back then the US Federal Reserve was explicitly nudging it’s from 2% to 2.5% with some members arguing for a 4% target. There was no specific prescription in Nigel Farage’s article but there was a clear hint that he would accept more inflation in return for extra growth. Sadly such a choice is much more rarely available in real life than in economics textbooks. Also inflation expansionism is something which when the Bank of England pursued it in 2010/11 led to economic pain via for example its impact on real wages a problem that is still with us.

What is its fiscal policy?

If we look at the UKip website we do see some more echoes of Abenomics as there is some fiscal expansionism on show here. However some care is needed as the expansionism is mostly via tax cuts as shown below.

UKIP will support a personal allowance that is equivalent to full-time minimum wage earnings – expected to be around £13,500 by the time of the general election.

Also those higher up the wage scale will get an extra boost on top of this.

At the last Budget, UKIP said that our policy would be to raise the 40% tax threshold to at least £45,000. Well, today we are able to make a better offer.

The policy we will take into the next parliament will be to cut the 40% rate where it starts to 35%. So a 35% rate would start at earnings just above £42,000 and apply all the way up to £55,000. Only at earnings of £55,000 would the 40% rate become payable.

This would be a staging post to a situation where the position would be as shown below.

An eventual tax structure of a personal allowance at the level of the full-time minimum wage, followed by a 20p standard rate, a 30p intermediate rate and a 40p top rate would be simpler, flatter and in my view compatible with both a dynamic economy and a fair society.

As you can see there would be quite a boost to the UK economy from this. At least initially we would see a further fall in the UK income tax take which would see our fiscal deficit rise further. Also there is another tax cut planned.

Well, let me tell you what UKIP wants to do to inheritance tax; scrap it altogether

According to the House of Commons library inheritance tax was expected to raise some £3.3 billion  last year.

In terms of expenditure we have received various promises of more which are hard to quantify. For example what does this mean in practice?

We will resource fully our military assets and personnel.

We have also seen promises around the NHS (National Health Service) and the police which look extremely likely to raise spending but are so far unquantified.

There are some cuts planned

In general UKip intends to finance as much as possible from spending overseas in particular from the European Union and also from the UK aid budget.

UKIP will leave the EU and save at least £8bn pa in net contributions.

– UKIP will cut the foreign aid budget by £9bn pa, prioritising disaster relief and schemes which provide water and inoculation against preventable diseases.

Also in an unashamedly populist move it targets two of the main policy props of the UK political class.

UKIP will scrap the HS2 project which is uneconomical and unjustified.

– UKIP will abolish the Department of Energy and Climate Change and scrap green subsidies.

There was a suggestion for a luxury rate of VAT but there seems to have been some controversy over this and I am not sure if it is still in play. Also UKip is in favour of a turnover tax on big businesses as a response to our reduced tax take in this area.

Every major company would have to show it had paid a set proportion of its turnover in corporation and other taxes or would face an additional charge to bring it up to the minimum.


One factor that I wish to make clear is that all the party manifestoes have obvious weaknesses and contradictions. We are continually told how intelligent our political class are which of course is immediately contradicted by their actions! However if we return to the economic policies of UKip the outstanding one to my mind is not the obvious but rather the espoused monetary expansionism. Of course Nigel Farage will be far from the first politician to suffer from a case of bad timing but QE is hardly for the people.

Added to the hints of Abenomics comes if you like some Reaganomics where there are a swath of tax cuts including some sweeping income tax cuts. These (presumably) would according to UKip be financed by cuts in our payments to the European Union and our foreign aid budget. Also there are more than a few spending promises which make one wonder why we would need such monetary expansionism.

One though I have about this is that the monetary expansionism would likely to involve a fall in the value of the UK Pound which sits oddly with the theme of the party itself.

Finally I have two nuances for you. Firstly critiques of UKip policy should have the rider that the polices of the other political parties rarely make a coherent plan either! Also UKip’s first MP Douglas Carswell would have to undergo a second road to Damascus style conversion to espouse the monetary policy indicated. So some things we do know but some we do not.

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!