Why is Mark Carney avoiding the “credit” for higher house prices?

We find ourselves in the middle of a concerted campaign by the Bank of England which is in a phase where it is barely out of the news and media. It was only yesterday we looked at the published views of its Chief Economist and now we find that Governor Carney has had plenty to say. There is one clear feature of these Open Mouth Operations from the Bank of England and that is that the headlines are about anything but monetary policy! Both seem very keen to discuss matters that are beyond their remit which to my mind is a confession that my critique that they made a policy error in August is troubling them.

Let me open with something about which the Governor and I can agree.

We meet today during the first lost decade since the 1860s

This first makes me think of his past claim that monetary policy was not “Maxxed-Out”, if so what has he been doing on his own terms? But let me continue with something else I can agree with because it is at the heart of my analysis.

Over the past decade real earnings have grown at the slowest rate since the mid-19th Century

Now that is a type of lost decade. But we immediately have a problem because our Mark is trying to deflect us away from a policy choice he has made which in my opinion will make the situation worse.

The MPC is choosing a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment

Having highlighted real wages he then attempts to ignore this.

this resolution is expected to occur as imported inflation begins to weigh on people’s real incomes, slowing consumption growth.

He even gives us the economic equivalent of a straw (wo)man to deflect us from the situation above.

For example, returning inflation to the 2% target in three years’ time would call for rates around 100 basis points higher over the next three years. Compared to the MPC’s November projections, that would increase unemployment by around 250,000 people.

No doubt the economics department at the Bank of England will produce any simulation the Governor wants but some of this is risible. For example this is very different to him simply not having cut interest-rates in August. Also his policy horizon is not 3 years unless he is now choosing his own one. If we move onto CPI inflation heading towards 3%+ and RPI inflation heading towards 4%+ how does that go with this rhetoric Mark?

The happy medium is a monetary policy framework with a credible commitment to low, stable, predictable inflation over the medium term, as in the UK’s tried and tested arrangements.

Incredible more like……

Distribution problems

We are hearing a lot about this from the Bank of England which is a clear sign that reality is proving inconvenient for it. There is quite a shift implied in the sentence below and my theme that Bank of England Governors morph into the same person gets support from the re-emergence of the word “rebalancing” as the spectre of Baron King of Lothbury appears like the Ghost of Christmas Past.

we must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.

Is he now responsible for these too or sing along to the “It wasn’t me” from Shaggy? Let us take the advice he gives below.

Acknowledge current challenges and address them, wherever possible.

Quantitative Easing

This is a big problem for Mark Carney on a day he had just bought another £1 billion of UK Gilts. The problem is that it has helped the rich or if you prefer those who own assets. As central banks have majored on “wealth effects” as a gain from easy monetary policy they have provided their own confession to this challenge. Mark gives us examples of the effect in America and the world but is a lot more shy about the UK.

The picture in the UK is complex but in general suggests relatively stable but high levels of overall inequality, with sharper disparities emerging in recent times for the top 1%.

I am not so sure why he is being so shy as you see back in 2012 the Bank of England’s own research hammered the point home.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Perhaps for Mark UK economic history only starts in June 2013. But if so he then has a problem because he seems a little shy about this as well!

Moreover, rising real house prices between the mid-1990s and the late 2000s has created a growing disparity between older home owners and younger renters

But house prices have been doing this on Mark’s watch.

Average house prices in the UK have increased by 7.7% in the year to September 2016 (unchanged from 7.7% in the year to August 2016), continuing the strong growth seen since the end of 2013. ( Office for National Statistics).

Surely he wants to take the credit for the wealth effects central bankers love? Or perhaps just not yesterday. Meanwhile ( and thank you to Andrew Baldwin for reminding us of regional inflation differences in yesterday’s comments) we see this in the official data.

In September 2016, the most expensive borough to live in was Kensington and Chelsea, where the cost of an average house was £1.4 million. In contrast, the cheapest area to purchase a property was Blaenau Gwent, where an average house cost £76,000.

I don’t know about you but the implications of that are an extraordinary distribution of wealth and resources?! Not every bit is his fault as capital cities especially London have been en vogue. But when we read of cheapest ever mortgage rates and the Funding for (Mortgage) Lending Scheme and now the MTFS a big arrow points at Governor Carney’s office. The banks always seem to pass go and collect £200 whilst the Go to jail, go directly to jail card seems to have disappeared from the version of Monopoly.

Does monetary policy float all boats?

There are obvious critiques of this above but let me add what is another major theme of mine and let me use Governor Carney’s own words to do it.

Few in positions of responsibility took theirs. Shareholders, taxpayers and citizens paid the heavy price.

QE and easy monetary policy bailed them out and ossified the financial system and thereby contributed heavily to this.

In the UK the shortfall, at 16%, is even worse ( GDP per capita)…The underlying reasons for the 16% shortfall of the UK’s productive capacity, relative to trend, are poorly understood.

I do not like projecting trends but in spite of the fact that doing so has been a disaster the Bank of England loves it, well for things that suit it anyway.


There are a litany of issues here. For example I am no doctor but I cannot think of any cure that takes eight years not to work can you?

Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations. It has averted depression and helped advanced economies live to fight another day, so that measures to restore vitality can be taken.

8 years Mark? Anyway in these 8 years Mark has been busy marking his own exam paper.

What if the MPC had not acted? Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work. In short, monetary policy has been highly effective.

So in Spinal Tap terms Mark has awarded himself 11 out of 10. Or more likely some economist deep in the bowels of the Bank of England bunker has. On his road to being a supreme court of judge,jury and witness on himself he does not seem to have suffered from this “uncertainty is high”.

So there you have it a masterclass in a Sir Humphrey Appleby style speech where you attract favourable headlines and leave behind misleading messages. Oh and speaking of Yes Prime Minister I doff my cap one more time!

Leak inquiry into leaking of letter warning about leaks

Just as a reminder the purpose of a leak inquiry is merely not exist not to actually catch anyone. Otherwise it might catch the person who launched the inquiry….

Andy Haldane of the Bank of England is lost in his own land of confusion

Today I wish to examine the policies of Bank of England Chief Economist Andy Haldane who gave a speech on Friday. There was much to consider in it and to set the scene I would like to take you back to the 30th of June when Andy felt that the EU leave vote was along the lines of the end of the (economic) world as he knew it.

Second, even though the economy is unlikely to crash, it is likely to slow, perhaps materially, in the quarters ahead. ……. External economists expect the UK economy to tread water over the next few quarters…….But there is a strong sense of trim and singe.

So far of course he has been proven wrong and it turns out that a lot of this was in Andy’s mind.

This has generated considerable uncertainty about the economy, about policy and about politics – a heady cocktail.

Perhaps the most spectacular error was the implied view for household consumption and retail sales from this.

Meanwhile, among households there are signs of a significant slowing in both confidence and in the housing market, which are often inter-twined……..And where housing leads, the economy often tends to follow.

Whereas in the real world or “reality” which Andy wants other people to get in this is the official data we have.

In October 2016, the quantity of goods bought (volume) in the retail industry was estimated to have increased by 7.4% compared with October 2015; all store types showed growth with the largest contribution coming from non-store retailing. This is the highest rate of growth since April 2002.

Compared with September 2016, the quantity bought was estimated to have increased by 1.9%;

I suppose if Andy is a rugby fan he would have concluded from the first part of the England versus Australia Test Match that Australia were going to win 50-0 and may even have wondered about the future of coach Eddie Jones. Instead of course for those who do not follow rugby England’s unbeaten run continued making fans like me very happy.

What did Dr.Andy prescribe for the economy?

He wanted this.

Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same “luxury”.

Which meant what exactly?

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn

In case you missed the hint that he was suggesting a series of moves there was more.

Given the scale of insurance required………And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

The August Bank of England Minutes reinforced this view along the lines of “Stand By For Action!” from the opening scenes of the television series Stingray.

If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year. The MPC currently judges this bound to be close to, but a little above, zero.

I put the last sentence in because the early bits were later proven to be wrong whereas it was already known to be wrong! How can you say the “lower bound” for interest-rates is just above zero when the Euro area has -0.4%, Sweden has -0.5% and Switzerland -0.75%?

Of Inequality and Andy’s misrepresentation

This is a big area as Andy badges himself and is presented by the media as someone concerned about inequality. Yet part of his “sledgehammer” was an extra £60 billion of UK Gilt (government bond) purchases which the Bank of England has previously admitted made the rich richer. Actually back in June such a confession was tucked away in his speech.

the headline gains here have been impressive, with aggregate net wealth increasing by almost £3 trillion since 2009……..This suggests these gains have come principally from rises in property and pension wealth

Ah pension wealth! Yes that has soared for Bank of England policymakers but I suspect he is not referring to that as we recall he claims not to understand pensions. Anyway here is a clear consequence of the monetary easing Andy was so keen on more of.

In other words, the gains have been skewed towards those in society who own their own home or who have sizable pension pots.

Back in June he put it another way.

We’ve intentionally blown the biggest government bond bubble in history

Not the biggest Andy you blew a much larger one when you pushed the ten-year Gilt yield down to nearly 0.5%. Should anyone have hedged down there or up there is price terms – I am thinking pension funds and insurance companies here – then the blame should go straight to Andy’s door.

What does our Andy think now?

Presumably he is still on his “more,more,more” bandwagon? Well not quite.

My personal view is that this provides grounds for not proceeding too hastily with any tightening of the monetary policy stance.

There is a screeching hand brake U-Turn implied here as we move from promises of more interest-rate cuts and QE to a possible rise. Perhaps that is why the title of the speech was “red car, blue  car!. Also Andy has of course been part of a Bank of England which promised interest-rate rises via the ill-fated Forward Guidance and then cut before! Speaking of cars how is that sector doing?

UK new car market rises 2.9% in November, with 184,101 vehicles registered on British roads……The growth has helped deliver more than 2.5 million new cars on to British roads so far this year – the first time the milestone has been reached in November.

So not much sign of the collapse in confidence that Andy was so confidently expecting. Another dose of reality for the man who prescribes it for others. Perhaps the discussion of an interest-rate rise is to distract the media from the ch-ch-changes here.

In the MPC’s judgement in November, managing this trade-off was best achieved by maintaining the current monetary policy stance, with a neutral bias on the direction of the next move in interest rates……..My own personal judgement on the appropriate monetary policy stance is close to the MPC consensus


In many ways the issue here has a background to be expected from a person who has been at the same institution for 27 years. A type of going stir crazy is only to be expected. The most extreme version of this is thinking that life in a bunker in Threadneedle Street in the heart of the City of London allows you to lecture others on reality.After all reality for many involves worries about pensions whereas back in September The Guardian reflected on the insulation and in fact isolation from such worries for Andy and his colleagues.

In a detailed analysis of the Bank’s pension scheme circulated to the media on Monday, Altmann said its employer contributions exceeded 50%.

If we move to the UK economy then the latest business survey from Markit has told us this today.

The three PMI surveys collectively indicate that the economy will grow by 0.5% in the fourth quarter

Of course the economy may dip in 2017 but if it does so it will be driven by something that Andy is cavalier about in my opinion.

The projections for inflation were the highest ever published by the Bank

These were made worse by Andy’s “Sledgehammer” pushing the value of the Pound lower.

expectations of inflation have picked up, largely as a result of sterling’s depreciation.

So we have a probable scene of real wages falling due to high inflation that supposed easing has made worse. On that road monetary easing has the problems of but not the gains from a tightening of policy and reality for Andy will be for a policy error. for those hurt by it the consequences will be much worse in terms of living-standards and (un)employment.

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



Time for The Italian Job?

In a year of events which were seemingly considered unexpected and at times unthinkable by the establishment we now face another role of the dice. This comes over the weekend in Italy. There is an irony that on the face of it the issues are domestic ones. As the Guardian describes below.

A series of major changes to the Italian political system. These reforms, which affect a third of the Italian constitution, have already been approved by parliament but by a slim margin, thus requiring that they also be passed by referendum……Under the proposed reforms, the Senate would lose almost all its power – the number of senators would be reduced from 315 to 100, and the remaining senators would no longer be elected directly.

The idea is to speed up legislation by in essence going from 2 political chambers to one to stop this sort of thing happening.

his means, put simply, that it can take a very long time for things to get done. For example, a law to give children born out-of-wedlock the same rights as children of married couples took nearly 1,300 days to be approved.

How very Italian! Which is of course part of Italy’s charm and also part of the problem. Another sign of this being Italy is that apparent reform involves creating an unelected second chamber. But the fundamental issue is that as so often happens the question on the ballot paper has morphed into becoming something of a vote on Prime Minister Renzi himself. Not perhaps the best plan when anti-establishment forces seem to have the upper hand. But as ever I will leave the political debate alone.

The economics

I recall that the appointment of Prime Minister Renzi was claimed as a new dawn for Italy and that his reforms would lead to much better economic growth. I remember asking supporters what changes were about to happen? If we look at yesterday’s update some 2 and a bit years down the road there seems to be little sign of progress.

In the third quarter of 2016 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.3 per cent with respect to the second quarter of 2016 and by 1.0 per cent in comparison with the third quarter of 2015.

The progress that there has been sees annual economic growth at 1% as opposed to 0.3%. So higher but of course feeds right into my theme that Italy struggles to get its economic growth rate above 1% in the good times. Are these good times? Well ECB President Mario Draghi keeps telling us that it is the negative interest-rates and QE bond buying of the ECB which has pushed economic growth higher. Also this has been a phase of a lower price for crude oil and indeed other commodities which should also have boosted the Italian economy. As per yesterday’s article that may be fading but as we look back it has certainly been in play.

Actually Mario Draghi may have been thinking of his home country when he said this in Wednesday.

Without concerted effort on structural reforms, per capita income growth in euro area is likely to stagnate or even decline

Per capita GDP has fallen by around 6% since it joined the Euro by my calculations. Whereas he is pointing out he things others have made ch-ch-changes.

Reforms in Spain in mid-2012 are example of a structural reform that has been successful in unblocking the labour market.

What country was he thinking of as a comparison with Spain here as he is interviwed by El Pais?

It is also true that Spain enacted reforms and repaired its financial sector earlier than others, which has proved crucial.

Every ECB meeting there is a part of Mario Draghi’s speech which is as nailed on as say Sergio Parisse in the Italian rugby team. It calls for structural reforms and is an example of rinse and repeat.

The banks

Last weekend the Financial Times shifted towards panic mode.

Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.

I guess you are wondering which 8?

Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Not Unicredit? That would make nine like say the Nazgul.

Monte Paschi

Let us stick with the world’s oldest bank for as moment and there is maybe a saviour on the horizon. From @creditmacro.

MontePaschi may sign preliminary investment agreement with Qatar Investment Authority between Saturday and Monday, Il Sole 24 Ore reports.

Mind you to that ying there is also a yang as Reuters have just reported.

Italy is discussing with the European Commission the terms of a state bailout of ailing bank Monte dei Paschi (BMPS.MI) that has already been requested and could be launched next week if needed, Italian daily Corriere della Sera reported on Friday.

Italy’s third-largest bank needs to raise 5 billion euros ($5.3 billion) by the end of the year to plug a capital shortfall identified by European Central Bank stress tests or face the risk of being wound down.

Care is needed as we have “may” on one side and “could be” on the other. But we do at least have an official denial and we know what they mean! From @livesquawk.

Italian Govt Undersecretary: MontePaschi Will Not Need State Help – ANSA

Anyway the Bank of Italy is dreaming of the future as it let is know on Wednesday.

The Bank of Italy has identified the UniCredit, Intesa Sanpaolo and Monte dei Paschi di Siena banking groups as other systemically important institutions (O-SIIs) authorized to operate in Italy in 2017. The three groups will have to maintain a capital buffer for the O-SIIs of 1.00, 0.75 and 0.25 per cent respectively of their total risk exposure, to be achieved within four years according to the transitional period shown in Table 1.

So SII has replaced SIGI which replaced TBTF ( Too Big To fail) as we go acronym crazy. Do I have that right?

Oh and if you are systemically important should they not all have the same thresholds?


We find ourselves facing for the first time in 2016 an event where this time the “shock” result is the expected one. Accordingly financial markets should have made much of their adjustment already. Although on the face of it I find it is hard to see much insurance in an Italian two-year government bond yielding 0.22% or indeed a five-year one yielding 0.89%. But perhaps as Reuters reports Mario Draghi has a put option ready for them.

The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone’s largest debtor, central bank sources told Reuters.

Ah that word “temporarily” again! Those most annoyed by this should be the Portuguese who have much higher bond yields but by contrast have seen fewer bond purchases than their theoretical share.

As for the Euro it has drifted lower recently as we note an exchange-rate around 1.06 to the US Dollar and the UK Pound has regained ground to 1.18. The trade-weighted move has been from 96.1 to 94.4 so relatively minor. However looking forwards whilst there could be a knee-jerk fall surely an increase in the possibility of Italy leaving the Euro makes it more of a “hard” and “safe-haven” currency so it could later rise.

Don’t get a job involving numbers

This is from a Bank of Italy working paper on undeclared assets.

Third, it estimates the portion of tax evasion connected to the underreporting of foreign assets to range between $20 trillion and $42 billion a year over the period 2001-2013 for capital income tax,

Thanks for that!


What is the economic impact of a higher crude oil price?

One piece of economic news dominated all other yesterday and it was at least a change for the Trump and Brexit circuses to take something of a break. Instead we had the OPEC circus which finally came up with something. Of course we know that announcements are one thing and implementation another but there was an immediate impact on the crude oil price. From Reuters.

The price for Brent crude futures (LCOc1), the international benchmark for oil prices, jumped as much as 13 percent from below $50 on Wednesday and was at $52.10 per barrel at 0806 GMT, although traders pointed out that part of the jump was down to contract roll-over from January to February for Brent’s front-month futures.

U.S. West Texas Intermediate (WTI) crude futures rose back above $50 briefly before easing to $49.63 a barrel at 0806 GMT, though still up 20 cents from its last settlement.

Volumes were very high too which makes a past futures traders heart lighter although of course we need to note that this is a result of yet more central planning.

The second front-month Brent crude futures contract, currently March 2017, traded a record 783,000 lots of 1,000 barrels each on Wednesday, worth around $39 billion and easily beating a previous record of just over 600,000 reached in September. That’s more than eight times actual daily global crude oil consumption.

Also as we note the influence at times of banks on commodity markets ( I believed their trading desks helped drive the last commodity price boom) maybe such high volumes are a warning signal too. But if this lasts we have the potential for a type of oil price shock as we have become used to relatively low oil prices. Also central banks may have to make yet another U-Turn as of course they may find that they push inflation above target as a higher oil price adds to all their interest-rate cuts and QE style bond buying.

Let us have a little light relief before we come to the analysis and look at this from February of this year. From Bloomberg.

Oil could drop below $20 a barrel as the search for a level that brings supply and demand back into balance makes prices even more volatile, Goldman Sachs Group Inc. predicted.

Oh well…

A higher oil price is good for us?

I made a note of this when I first saw it as it is the opposite of my view. I also note that it is Goldman Sachs again. From Bloomberg.

Higher oil prices would be a boon for the global economy, according to Goldman Sachs Group Inc.

Really! How so?

Pricey crude means economies such as Saudi Arabia take in more money than they can spend, which financial markets help distribute through the rest of the world, boosting asset values and consumer confidence, the bank’s analysts Jeff Currie and Mikhail Sprogis wrote in a Nov. 22 research note.

Apparently we can ignore the elephant in the room.

Forget the stagflation of the 1970s.

Here is the explanation.

“The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system,” Currie and Sprogis wrote. “More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe.”

Convinced? Me neither and it is hard to know where to start. One view is that the world economic expansion drove the oil price higher. Another is that greater global liquidity is an illusion as we see so many markets these days which seem to lack it. For example we are seeing more “flash crashes” like the one which happened to the UK Pound overnight a few weeks or so ago. This is of course in spite of the fact that central banks have been doing their best to create global liquidity and indeed cutting interest-rates.. Still if it created “increased asset values” the 0.01% who no doubt represent Goldman Sachs best clients will be pleased. As a final rebuttal this ignores the impact of lower oil prices on inflation and the key economic metric which is real wage growth.

Did the credit crunch never happen?

From 2001 to 2014, excess savings outside the U.S. grew to $7 trillion from $1 trillion as oil climbed, according to Currie and Sprogis. The savings helped drive up values of things like homes and financial assets and loosened credit markets for consumers.

I guess this is the economics version of all those strings of alternative universes in physics where Goldman Sachs is in another one to the rest of us, or simply taking us for well, Muppets.

They are not the only ones as the IMF got itself into quite a mess on this front back in February.

Persistently low oil prices complicate the conduct of monetary policy, risking further inroads by unanchored inflation expectations. What is more, the current episode of historically low oil prices could ignite a variety of dislocations including corporate and sovereign defaults, dislocations that can feed back into already jittery financial markets.

Are these “jittery financial markets” the same ones that Goldmans think are full of liquidity? Also you may note the obsession with central banks and monetary policy and yes asset values are in there as well.

Returning to Reality

There is an income and indeed wealth exchange between energy importers and exporters. For example Oxford Economics did some work which suggested that a US $30 fall in the oil price would boost GDP in Hong Kong by 1.5% but cut it in Norway by 1.3%. So we get an idea albeit with issues in the detail as I doubt the UK (0.8%) would get double the GDP benefit of Japan (0.4%) which of course is the largest energy importer in relative terms of the major economies. Oh and there are bigger negative effects with Russia at -5% of GDP and Saudi Arabia at -4%.

However the conclusion was this.

Lower oil prices should give a sizeable boost to world GDP in 2015 and 2016

There was a time (July 2015) when the IMF thought this as well.

Although oil price gains and losses across producers and consumers sum to zero, the net effect on global activity is positive. The reasons are twofold: simply put, the increase in spending by oil importers is likely to exceed the decline in spending by exporters, and lower production costs will stimulate supply in other sectors for which oil is an input…… the fall in oil prices should boost global growth by about ½ percentage point in 2015–16,

It would also produce a fall in inflation which will be welcome to those who are not central bankers.


Should the oil price remain higher it will reduce global economic growth and raise inflation. If we compare it with a year ago it is around 10 US Dollars higher but we also need to note that in December 2015 the oil price fell to the Mid US $30s so we need to do the same to prevent an inflationary effect. As I have been writing for some months now unless we see large oil price falls inflation is on it way back. We are of course nowhere near the US $108 that a Star Trek style tractor beam seemed to hold us at a while back. But as I note the rise in some metals prices ( Zinc and Lead in particular) commodity price rises are back in vogue. So there will be plenty of work for those economists who want higher inflation explaining how they are right be being wrong.

There will also be relative shifts as consumers will be poorer as real wages fall but say shops in Knightsbridge and the like seem set to see more Arab customers. Japan will be especially unhappy at a higher oil price. But US shale oil wildcatters might be the happiest of all right now and may even boost US manufacturing as well. In the UK there will be a likely boost for the Aberdeen area.

Me on TipTV Finance

“Outlook for RBS is dreadful”, says Shaun Richards – Not A Yes Man Economics







How many promises about Royal Bank of Scotland have been broken today?

One of the main features of the credit crunch in the UK were the collapse of Royal Bank of Scotland and the UK taxpayer bailout of it. Since then we have been regularly informed that it has recovered and that the sunlit uplands are not only in sight but have arrived. The 27th of January this year was an example of this.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

I am not sure how you can move “further and faster” on something you have supposedly fixed several times before! If we look back to September 2014 we were told something which is likely to echo later in this article.

we expect to spend much of the next 18 months simply marvelling at the sheet size of the RBS’ capital surplus and wondering why it is just sitting there gathering dust,’ he said.

Back in 2012 my old employer Union Bank of Scotland was on the case sort of.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues

The International Financing Review put its oar in as well.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Mind you at least someone had a sense of humour on the way.

If we advance to the figures released in January of 2014 we see that BlueBullet on Twitter had a wry take on events.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Royal Bank of Scotland Today

Which pack was RBS “well ahead of” here?

The Royal Bank of Scotland Group (RBS) did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate.

The rhetoric carries on as Mark Carney is telling us “they (RBS) have made progress” in this morning’s press conference. Although there is a clear warning signal as he deflects a question about it to a colleague. This happens on difficult questions and means that the Governor cannot be quoted in future on the details for RBS.

Reuters sums up the tale of woe for RBS here.

The unexpected result underlines the litany of problems RBS is grappling with, which include a mounting legal bill for misconduct ahead of the 2008 financial crisis and difficulties selling off assets such as its Williams & Glyn banking business.

So “litany of problems” is the new “stronger,safer bank”? So what will it do about this?

The state-backed lender rushed out a statement following the announcement to say it would take a range of actions, including selling off bad loans and cutting costs to make up the capital shortfall identified by the tests of around 2 billion pounds ($2.49 billion).

“Rushed out a statement” is really rather poor when it will have been given advance notice about this but this does echo its response to the 2008 crisis. Meanwhile I guess it cannot go back to the UK taxpayer for more cash as of course it did this only in March.

Royal Bank of Scotland is paying £1.2bn to the Treasury to buy out a crucial part of its £45bn bailout in a step towards returning the bank to the private sector.

This was a way that Chancellor George Osborne massaged and manipulated the UK public finances back then. Was this from Earth Wind & Fire the backing track?

Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

I do hope that he will be called in front of the Treasury Select Committee to explain this and that his diary is not too full as he collects new titles. As I suspect we can file this in the bin.

George Osborne has already said he is hoping to generate £25bn from the sale of three-quarters of its RBS shares in this parliament,

The share price is down nearly 3% at 191.5 pence as I type this and perhaps it should be another 3%. The breakeven for the UK taxpayer is just over £5.

Other UK banks

There were more technical and minor failures to be seen.

Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan…..Standard Chartered…. did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position, including the AT1 it has issued during 2016, the PRA Board did not require Standard Chartered to submit a revised capital plan.

A confession from Mark Carney

We got yet another U-Turn as we were told that household debt is now an issue which I summarised on Twitter like this.

Mark Carney says “thanks” to a question about household debt which means of course the opposite!

The fact that the subject got a mention is extremely revealing. As nobody at the press conference had either the gumption or the courage to ask Governor Carney how his Bank Rate cut and extra QE would improve household debt we were left with a sinking feeling. Which of course is what Governor Carney had been telling us was happening to house hold debt. Also he has a pretty odd view about lending for cars and automobiles.

Does Mark Carney really think “auto lending” is secured debt as he just claimed? What about depreciation?

There used to be quite a few adverts on the radio for Buy To Let lending for cars which I always thought was bizarre. Either Governor Carney wants to boost this or he used his £250,000 a year rent allowance to have a punt. Oh excuse me, long-term investment.

We were also told that he has plenty of “tools” although when I enquired about a definition of them some were ones he may or may not agree with.

A bunch of them, they sit on the committee with me.

I have been warning about the rise of unsecured lending in the UK and my latest piece on the issue was only yesterday. Perhaps the Governor read it.


There are several issues to consider here. I think that the way Governor Carney has used it to highlight claimed concerns about the rise of household lending is revealing. It enabled him to get this on record with little chance of being challenged as the media rushes to print about RBS. I also note that he shuffled the question about Buy To Let lending to someone else.

Meanwhile RBS continues on its own private ( albeit publicly owned) Road To Nowhere. We have almost infinite inflation in false dawns but a reality of disappointment and failure. After 8 years of this is it time to file the claims of reform in the “Liars Lexicon” mentioned in the comments section yesterday.

Meanwhile we have an example of another of my themes in play. Actual helicopter money from the Indian Air Force.


UK Broad Money growth shows that the Bank of England has been wrong again

Today gives us an opportunity to take a look at the data for the UK money supply and look at the trends. Before we do so the subject of economic forecasting has come up and according to the BBC economics editor Kamal Ahmed a person fairly regularly featured on here has given a “withering response” to a suggestion that “economics is in crisis”. Of course the economics in crisis theme was even expressed by the Queen on a visit to the LSE in  November 2008. From the Daily Telegraph.

Prof Garicano said: “She was asking me if these things were so large how come everyone missed it.” He told the Queen: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.”

Well that’s all right then apparently. Actually the economics profession did act true to form when 4 years later on a visit to the Bank of England one of its economists offered an answer. However let us return to our individual.

One of Britain’s most highly respected economists has hit back at criticisms of economic forecasts.

When I discovered the identity and that it was Martin Weale I asked by whom he was respected? But let us continue with the piece itself.

They could not be expected to precisely predict the economic future but were based on “sensible inferences from past patterns,” he said.

Briefly I agree with him but there are two major problems here. These forecasts are made several years ahead to an accuracy of 0.1% when in fact they struggle to know whether the numbers are in fact going up or down. The quarter just past was an example of even a short-term forecast being very wrong. Also in an era of considerable change “sensible inferences from past patterns” are in fact not sensible at all. On the way even Martin Weale found himself admitting this.

“People say forecasts all turn out to be wrong,” he said.

“I regard that as a silly comment, forecasting is uncertain, that’s the nature of things, forecasts aren’t wrong or right, they are simply the best you can do.

You may note that the higher you get up the establishment food and pay chain the less responsible you are for anything “forecasts are wrong or right”, and yet those at the lower and middle ends of the scale would find themselves sacked for consistently being wrong.

Martin Weale’s Record

If we look back he was involved in the flawed monthly average earnings series and perhaps it was to him a “sensible inference” to ignore the self-employed. Also he has been an implicit supporter of rental equivalence in CPIH. That’s before we get to his U-Turns as he twice had a series of votes for Bank Rate rises from the Bank of England before changing his mind. In fact on the last occasion he appeared to do so with his tail between his legs. Even the  Financial Times had to put it like this in late July.

Only a week ago, Mr Weale gave a speech urging the BoE to wait “for firmer evidence” before cutting rates or expanding its quantitative easing programme to encourage spending.

So he then did what?

One of the UK’s top monetary policymakers has indicated he has changed his mind after a series of negative business surveys and now favours an immediate stimulus for the UK economy.

You may note how a man with a consistent record of failure is described by the media “top monetary policymaker” and “highly respected”. Is this what they mean by post-truth news? Oh and the basis of his change of mind must have been an unclear signal.

Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes.”

A concerted plan by the Bank of England

This has happened too often now in a short space of time. The Forward Guidance of not only higher interest-rates but soon of 2013/14 was obviously completely wrong. The initial post-Brexit guidance was wrong too as Kristin Forbes admitted last week. Now things which were issued as guides and people remortgaged on the back of are retrospectively described as subject to uncertainty. I believe that is called re-writing history.

Oh and should Professor Weale have the time from his role as a fellow of the ONS – it is hard not to recall Sir Humphrey Appleby pointing out that people got such roles to help cover up past mistakes- perhaps he is thinking of a way of filling it.

Mr Weale, who sat on the MPC between 2010 and 2016, said the OBR was “rightly” set up to take the politics out of Treasury forecasting and that it had done so successfully.

So in my financial lexicon for these times both “uncertain” and “successfully” are sub-sections of the word wrong.

Broad Money Surges

This is a real problem for Martin Weale and his media spinners. You see whilst Martin was spinning like a top with every business survey that came out the UK Pound had fallen and UK Broad Money growth was pushing higher. We now know that this has continued.

M4ex increased by £11.7 billion in October, compared to the average monthly increase of £14.5 billion over the previous six months. The three-month annualised and twelve-month growth rates were 6.9% and 7.8% respectively.

So we see that the taps are fully open although perhaps not everyone as bank lending dipped which means that the precious banking sector which the Bank of England has supposedly reformed is a barrier again. But as we look through the numbers there are other signs of easy credit.

Consumer credit increased by £1.6 billion in October, broadly in line with the average over the previous six months. The three month annualised and twelve-month growth rates were 10.6% and 10.5% respectively.

Okay but we have been told that Martin ( until July) and his colleagues have been prioritising lending to smaller businesses since the summer of 2013 with the Funding for Lending Scheme. So that must be really through the roof?!

Within this, loans to small and medium-sized enterprises (SMEs) decreased by £0.2 billion, compared to an average monthly increase of £0.3 billion over the previous six months. The twelve-month growth rate was 1.7%.

Er well no but the mortgage lending it is no longer supposed to help still seems to be rumbling on.

Lending secured on dwellings increased by £3.3 billion in October, compared to an average monthly increase of £2.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 3.0% and 3.1% respectively.


As you can see the “withering” response is from a man who looks set to be wrong yet again. If we step aside from the politics which are around here we see a Bank of England which has eased policy into a currency decline and now sees Broad Money growing quickly. In fact if we only grow by say 1.5% next year as many forecasters have recently upgraded us to then there is quite a road to 7.8% isn’t there? A rule of thumb would be that we might expect inflationary pressure of 6%. A lot of care is needed here because the leads and lags in such calculations can be unpredictable and if the money supply remains firm then growth will likely be higher. This is an area where in the 1980s a lot of mathematical models or what Dr.Weale would call “sensible inferences” blew up and had a HAL-9000 style moment. But there is a link and a causal relationship at play here which will mean that the Bank of England will have plenty of opportunity to mull the word “successfully” as defined above.

There was another sense of establishment entitlement at play when Dr.Weale left the Bank of England as it payed for his leaving do. From the Evening Standard.

The Old Lady of Threadneedle Street spent £3,324 on a retirement reception for the ex-monetary policy committee (MPC) member, who stepped down on August 8.

Dr Weale was also presented with a bound set of speeches covering his tenure, costing the Bank a further £416.

I do not know about you but I have had to pay for mine. Mind you was the bound set of speeches considered a punishment?

The ECB drives Euro area short-dated yields even more negative

The recent trend for world bond yields has been for them to rise. This has been particularly evident at the longer maturities. The clearest example of this comes from the US Long Bond or thirty-year yield which spent late summer around 2.3% and is now 3%. There was a rise before the advent of President-Elect Trump which accelerated quickly afterwards. We will never know now what effect a President- Elect Clinton would have had but I suspect it would have been similar. As to the pre-Trump rise in US bond yields this was mostly driven by hints and promises or what is called Forward Guidance from the US Federal Reserve about a second interest-rate rise. Although of course it has been hinting that for all of 2016 so far without delivering it yet.

The international context

This new trend has had effects in places like Portugal where the ten-year yield is 3.6% and Italy where it is 2.1%. This is of course nothing like the levels seen at the peak of the Euro area crisis but there are two points to note. Firstly government’s tend to spend the gains from lower bond yields ( as the gains are not widely understood politicians can take the credit for their largesse) meaning any reversal can create fiscal issues. Secondly the ECB is of course buying considerable numbers of these bonds as it purchases around a billion Euros of Portuguese government bonds and 13 billion Euros of Italian government bonds each month. So we see a rise in spite of all this buying.

A similar situation has arisen in the UK where the “sledgehammer” QE bond buying of Chief Economist Andy Haldane has been swept aside in yield terms by the recent moves. So far an extra £38 billion of Gilts purchases have been made but whilst the ten-year yield is now at 1.37% below the level at which this started it is not be much and this particular phase is underwater overall. Some of the purchases are well underwater in price terms. Perhaps this is why Bank of England Governor seems to be finding the time to do this according to the Financial Times.

Mark Carney has urged the government to seek transitional arrangements with the 27 remaining members of the EU as it negotiates Brexit in an attempt to smooth the path of leaving the EU for companies and for financial stability.

I guess anything is better than discussing why he eased monetary policy into a currency decline and economic growth which one of his colleagues ( Kristin Forbes) admitted is faster than last year’s! I guess some will also be mulling how Mark Carney rejects politicians interfering in his work yet seems happy to interfere in theirs. I wonder how he would define independence. Still if monetary policy gets any worse I guess we can expect more speeches on climate change.

This higher yield trend has also seen some bond yields depart the negative zone. For example the ten-year bund yield of Germany has risen to the not so giddy heights of 0.22% pulling other Euro area yields out of negative territory as well. Even Japan has seen its ten-year yield nudge above zero albeit marginally and ended at 0.016% today. This is a bit awkward for the Bank of Japan as yields have risen in spite of its rhetoric about “unlimited purchases” as I discussed only last Monday.

A problem for the ECB

This arises at the shorter maturities and is especially evident in Germany. As you review the chart below please remind yourselves that under its rules the ECB QE bond buying cannot buy at yields below its own deposit rate which is currently -0.4%.

This is what are called Schatz bonds in Germany and they have pulled prices on other Euro area bonds higher and yields lower as well. For example the two-years in both Belgium and France yield -0.68%. Perhaps the Italian two-year is a clearer example because in spite of the risks around the upcoming referendum the yield is a mere 0.22%. There was a time yields shot higher in response to such risks!

A Technical Issue

The essential problem here comes from something I have pointed out before which is that central bank bond buying tends to freeze up bond markets. Of course it also destroys the price discovery mechanism but volumes and liquidity dry up. This was quite noticeable in the early days of the Greek crisis where buying by the Securities Markets Programme saw volumes drop to a tenth of what they were. That remains an issue which has recurred in Japan but the current phase is being driven by the repo market. Reuters looked at this last Wednesday.

The European Central Bank is looking for ways to lend out more of its huge pile of government debt to avert a freeze in the 5.5 trillion-euro short-term funding market that underpins the financial system, central bank sources told Reuters.

Why should it care about this?

it has taken away the key ingredient for repurchase agreements, or repos, whereby financial firms lend to each other against collateral, typically high-rated government bonds such as Germany’s.

So it has inadvertently damaged the “precious” which is the banking system. Also it has shot itself in the foot as regards its own objectives.

Repo is used by investment funds to finance trading and is regarded by the ECB as a key avenue to transmit its own monetary stimulus to the economy.

A freeze in repo activity risks undoing some of the ECB’s stimulus by hampering lending between financial companies and leaving bond markets vulnerable to sharp sell offs.

The situation was so bad we even got an official denial that anything was wrong!

“The ECB’s securities lending is proving valuable for smooth market functioning, and it is being reviewed on an ongoing basis,” an ECB spokesman said.

The situation is driven by the way that derivative portfolios now need more collateral to be held against them whilst there is less top-notch collateral to be had.

With the ECB now owning more than a quarter of all outstanding German bonds, funds pay up to 1.5 percent to borrow a 10-year Bund, up from some 0.40 percent a year ago, according to Icap data.

Another problem on the list for pension funds and hence in time pensioners.


As you can see the side-effects from the ever-growing amounts of central bank QE are growing. This was met with an official denial which sat oddly with the recent changes made by both the Bundesbank and the ECB to try to ameliorate things. It sat even more oddly with the market reversal on the 23rd in response to hopes/hints of a change of policy as shown in the chart about . Since then those hopes have been extinguished, until the next set of rumours anyway. So we get a bond market where the battle between central banks ( price highs) and inflation trends leading to price falls continues.

Meanwhile thank you to @sallycopper C for highlighting an issue which I think may lead to problems for the game of paper, scissors,stone. From Bloomberg.

Paper made from rock tempts Japan’s biggest printer to invest.

Meanwhile I pointed out earlier to the Financial Times that for an article telling us this “the cost of Christmas dinners is almost unchanged from a year ago ” the headline on Twitter from its commodities editor gave a rather different impression.

Christmas pudding pricier after Brexit hits pound

As a Christmas pudding fan I in fact have already bought two rather nice ones for £3 but  one has already gone, after all I had to find out how good it was!