The Riksbank should have read The Hitchhikers Guide to the Galaxy

Today is an example of what the military call a target rich environment so let me open with the words of advice from The Hitchhikers Guide to the Galaxy.

Don’t Panic

An organisation which seems to have abandoned such sense over the past year or so has been the Riksbank of Sweden. It was only yesterday that in my article on the spread of negative interest-rates the comments section suggested there would be a further cut today. Apparently they did not want to disappoint us.

To provide support for inflation so that it rises and stabilises around 2 per cent in 2017, the Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.15 percentage points to −0.50 per cent.

There is much to consider here with the initial reports also coming with a tinge of reporting that the Swedish version of “More,More,More” was also being played. There is much to consider in an international context but let me open by discussing the consequences and problems which Sweden faces domestically. The first is a central bank that moved interest-rates in increments of 0.15%! How was that decided? So 0.1% silly but 0.15% is effective? You see back in 2008 the repo rate got as high as 4.75% so we see that if 5.1% of interest-rate reductions are not working you are as Britop in the film Snatch put it “on very thin ice my pedigree chums” arguing that another 0.15% will fix it.

The Swedish economy is doing rather well

Before we get to this bit let us dip into our textbook for the day.

A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.

You see the Riksbank is cutting because the economy of Sweden is going rather well!

Growth in the Swedish economy is high and unemployment is falling, which suggests that inflation will rise in the period ahead.

In fact like the song New York, New York it is so good they told us twice.

The Riksbank’s very expansionary monetary policy has helped to strengthen the economy and reduce unemployment, and has contributed to an upward trend in underlying inflation since the beginning of 2014.

Last February I pointed out the incongruity of economic growth of 2.7% and an official interest-rate of -0.1%. Well this February I can point out that the divergence has got worse as economic growth forecast to be 3.5% this year and 2.8% next is now accompanied by a repo rate of -0.5%.


This is all justified on the grounds of inflation being below its 2% target. At the moment it is 0.1% which of course will be welcomed by Sweden’s consumers and workers as they find that their wages and income go further in real terms. If we look at the private-sector then manual wages are rising at 1.8% and non-manual at 2.5% so the Swedish economy is being boosted by the consequences of the oil price fall as real wags rise.

Now we have a problem or in fact two problems. You see most people think that central banks operate to reduce inflation whereas here the Riksbank is doing exactly the opposite of this in boosting it. This happened when central banks magically produced a 2% inflation target out of a box without any better justification than it seemed okay. The justification that it allows relative price changes is made to look a fraud by the large oil price moves which are exactly that. So not only is the central bank raising inflation it is announcing an expansionary policy which has some and maybe a lot of deflation in it. What could go wrong?

If we step back a bit we see that Sweden is in effect seeing its monetary policy being set by the supermassive black hole that is the Euro and that the real rationale here is to try to weaken the Krona. Initially it fell by 1% but I shall return to a problem highlighted here later as we mull that everybody cannot devalue.

House prices

Speaking of things which could go wrong let me help out with one which already is. From Sweden Statistics this morning.

Real estate prices for one- or two-dwelling buildings increased by 3 percent during the last three-month period November 2015 – January 2016, compared to the previous period August – October 2015.

As West Ham won this week let me help out with their theme song.

I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.

If we look a little further back we see this.

Prices increased by 12 percent on an annual basis during the last three-month period November – January 2016, compared to the same period last year.

So real wages are up by around 2% and house prices are up by 12%. I await all the reports which if the UK is any guide will tell us how “affordable” all this is.

But never fear you see in the same way that the Bank of England is “vigilant” on the subject so is the Riksbank.

The Riksbank has highlighted the risks associated with the low interest rate level on many occasions.

However its message is rather like the bit in each Mario Draghi speech about reform in the Euro area.

It is also important that Finansinspektionen’s mandate for macroprudential policy is clarified.

Let me give you a clue, it is there in every meeting minute.

Anyway if things are under control this bit seems to be undertaking some form of guerilla warfare.

If no measures are taken, this, in combination with the low interest rate level, will further increase the risks. Such a development could ultimately be very costly for the national economy.

Back on July 2nd 2015 I gave my views on this.

Also I think that first-time buyers in Sweden will already be singing along to its most famous pop music export Abba.

S. O. S.

The international scene

Yesterday’s speech by and interview of Janet Yellen already seems from another world as the response was for the Japanese Yen to surge. It blasted through quite a few levels yesterday and overnight and is still through the 112 level versus the US Dollar as I type this. So we see a problem for the Riksbank which is that in rather short order the Yen has strengthened after an interest-rate cut into negative territory. Ooops!

Next we have bond yields and longer term interest-rates and again Janet Yellen seems to be rather like a Queen Canute. The US ten-year note yields 1.67% as opposed to the circa 2.2% when she raised interest-rates. Meanwhile even Forward Guidance 12.0 as well as all the previous versions of Mark Carney is in absolute disarray.

UK government borrowing costs lowest since Siege of Yorktown, 1781 (@minefornothing)

That refers to a ten-year Gilt yield of 1.32% which makes me think as I type it. But if we continue with the Carney debacle or as it has become called “Carnage” then the five-year yield has fallen to 0.71% and it is a benchmark for fixed-rate mortgages. Should it stay there Mark Carney should hang his head in shame whenever he meets anyone who remortgaged on the back of his Forward Guidance.

Meanwhile in the supermassive black hole which is the Euro area then the ten-year yield of Germany is 0.18% whilst that of Portugal is 4.2%. Plenty of work for the ECB hedge fund traders to do there.


It was only yesterday that I analysed the spread of negative interest-rates and I suggest readers remind themselves of that and also my past articles on Sweden. But for now let me note that helicopter money as a strategy is being mentioned in some quarters and our guidebook for the day tells us about that.

Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.

Meanwhile the Bank of Japan is on the case of the soaring Yen.

How low can interest-rates go?

The subject of negative interest-rates has been a theme of this website since back in 2010. It is also pleasing that the two main candidates from back then ( Bank of Japan and the European Central Bank ) have indeed plunged into the icy depths having official interest-rates of -0.3% and -0.1% respectively. Added to these we have seen nations on the periphery of the Euro area forced to join the club such as Sweden,Denmark and Switzerland. You can debate which has the lowest interest-rate as whilst the headline in Switzerland is -0.75% compared to Sweden’s -0.35% the Riksbank has set a deposit rate of -1.1%.

A Problem

In essence it is not working. The issue is complex as the central banks involved are invariably using other methods too such as QE (Quantitative Easing) or currency intervention. However if we look at Japan then Governor Kuroda would have expected a higher level for the equity market and a lower level for the exchange-rate of the Yen. What he has got is a Nikkei 225 falling this morning to 15,713 and a Yen which has strengthened through 115 versus the US Dollar. If we look at it versus the UK Pound £ then the initial effect was to weaken the Yen as it moved from 170 being required to buy a Pound £ to 173. But that reversed and it is now 116.4

The situation in the Euro area is that there has been an improvement in terms of economic growth but a relatively weak one when you consider that it has thrown the monetary equivalent of the kitchen sink at it! Or as we shall see in a bit what we thought was the kitchen sink. Also it finds itself mulling a measure of inflationary expectations that yesterday was worse than when it began its 60 billion Euros of QE a month in January 2015. Not much bang for your buck there.

Lower interest-rates are supposed to stimulate an economy however I have regularly argued on here that around the 1.5% area the effect fades and may well head the other way. So we have the risk that what is badged as a stimulus is in fact deflationary. Putting it another way consumers and workers decide to sing along with the Who.

Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

What is next?

Those who feared a race to the bottom on interest-rates have received quite a bit of grist to their mill over the past couple of days. The Jefferies strategist David Zervos opened the bidding on Monday on Bloomberg.

Looking ahead, I am not sure how quickly Mario [Draghi] and Haruhiko [Kuroda] will come to the conclusion that purchases need to be in the multiple hundreds of billions per month, and nominal short rates need to be LESS than MINUS 1 percent.”

I suggest when reading such thoughts you put this song by Andrea True Connection on.

More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it

Of course the ECB had already hinted promised and teased about an interest-rate cut in March. May I just point out the insanity of a 0.1% cut when 5% lower has not worked ( as otherwise why is more needed?). Anyway JP Morgan have leapt into the breach and suggested not only a cut to -0.5% in March but a further one to -0.7% in June. If you think about it then why not cut straight to -0.7%? Apparently highly paid strategists are not as talented as we are often told. Or they are admitting that this is in effect a Public Relations exercise.

At what level do we see real change?

It was thought in the past that even dipping a toe into the world of negative interest-rates would lead to a switch back towards cash. So far even as low as -0.75% this has not happened according to Denmark’s Nationalbanken.

Currently, there are no indications that negative interest rates have led to abnormal demand for cash. This indicates that the lower bound on monetary policy rates in Denmark is below the current level of the rate of interest on certificates of deposit of -0.75 per cent.

Yes that is the same lower bound that Bank of England Governor Mark Carney told us was at 0.5% before yet another u-turn. However there is a significant addition to this.

In this context, it is important that household deposits have not moved into negative territory.

So the move is going to work by not affecting most people? My argument gets reinforcement as does the idea of there being a type of what was called a liquidity trap being in play. Please note this as you will see in a minute that the proposed solution is that even fewer economic agents are affected.

The lower bound gets lower

JP Morgan have via Bloomberg suggested that official interest-rates could go much lower.

On that basis, they estimate if the ECB just focused on reserves equivalent to 2 percent of gross domestic product it could slice the rate it charges on bank deposits to minus 4.5 percent.

Okay and could everyone do that? Apparently not.

The Bank of Japan’s lower bound on a similar basis may be minus 3.45 percent, while Sweden’s is likely minus 3.27 percent, the economists said. Should they also go negative, the Fed could cut to minus 1.3 percent and the Bank of England to minus 2.69 percent in JPMorgan’s view, reflecting how the ratio of reserves to assets is higher in their economies than elsewhere.

There are two obvious flaws in what looks like the sort of cunning plan that may have been constructed by Baldrick from the television series Blackadder. Firstly narrowing the scope of the negative interest-rate regime means that it is even less likely to work. Secondly what if the amount of reserves changes in response to the new interest-rate? Central bankers could end up like a dog chasing its tail with the difference that dogs have the sense to stop this game after a while, whereas I am not so confident about central bankers.

Also central bankers place a lot of emphasis on Open Mouth Operations and confidence as expressed in Forward Guidance well how will this work for Mario Draghi if he cuts to -4.5%?

And now we are at the lower bound, where technical adjustments are not going to be possible any longer.

That lower bound was at -0.2% which of course has already been breached.

The United States

There are calls for negative interest-rates there too. But there may well be a problem according to Bloomberg.

Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority in this area.

Oh well I guess we might find a new act on its way….


There is much to consider and let me remind readers that it is my opinion that we will see the sort of response to negative interest-rates that everyone is afraid of – a dash to cash – at around 2%. This estimate is based on the costs of this and human psychology and inertia. However that assumes that there is cash to dash to and as I pointed out a week ago the establishment is on the case. From Harvard University.

Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note.

The justification is familiar.

Global financial crime flows are estimated to amount to over US$2tr per year. Corruption amounts to another US$1tr.

What they fail to address is the fact that most of the corruption and financial crime starts at the top these days! So their arrow will miss the target but not us.

Meanwhile the plan is to cut interest-rates ever lower and to make sure that the banks are not too badly affected by it . Yes it is always the banks. Meanwhile it troubles nobody seemingly apart from me that you only have higher doses of medicines which work not ones which fail. Anyway here is a song from The Cranberries for the latest proposals.

In your head, in your head
Zombie, zombie, zombie
Hey, hey
What’s in your head, in your head?
Zombie, zombie, zombie

In response to a request in the comments I have been looking at forums, does anyone have any thoughts on Simple Press?



The A grade economy of Ireland reminds us of the Celtic Tiger 2.0

The weekend just gone provided a reminder of how far the economy of Ireland has come.The troubled days of the Euro area crisis where it called for 85 billion Euros of  help from its Euro area partners and the IMF (International Monetary Fund) were replaced by this from the Fitch ratings agency.

Fitch Ratings has upgraded Ireland’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘A’ from ‘A-‘. The Outlooks are Stable.

So a promotion and one that is particularly significant when we note that only a few short years ago the debt dynamics of Ireland looked dreadful as the poor taxpayer found him and herself burdened as a large slug of banking debt was socialised.

What is the public debt situation now?

The situation is now much improved according to the research.

Public debt dynamics continue to improve, reflecting a combination of strong growth and a return to a primary budget surplus in 2014. Fitch now estimates gross general government debt/GDP at 96.6% at end-2015, compared with 105% in our previous review and from a high of 120.2% in 2012.

As you can see that is quite an improvement or a type of mirror image of Portugal. Then we get some cheerleading for the future.

According to our baseline scenario (which does not include any positive stock-flow adjustments from the banking sector), public debt will continue to fall steadily to 70% by 2024, although this is still well above the ‘A’ median of 44.5%.

Okay, so we learn that Ireland is not getting its upgrade to A status because it is there but because of the rapid change it has seen. Some care is needed here as back in late 2010 when Fitch twice downgraded Ireland things were heading in the opposite direction. Also there is something rather odd in this declaration.

The revision is partly the result of a much higher than expected GDP deflator in 2015, with Ireland benefiting substantially from positive terms of trade.

Really? I thought there was no inflation?!

If we look we see that the GDP deflator has risen  from 98 to 104.4 which is a little awkward for the “deflation nutters”. Actually it is another off quirk of national accounts as the Irish debt ratios look better because the Irish can buy less abroad due to the fall in the Euro!

A positive growth story

Back on September 11th last year I welcomed the Celtic Tiger Mark 2.0 with some music from U2 to celebrate the change in fortune.

I’m at a place called Vertigo (dónde estás?)

Or put more soberly Fitch put it like this.

Ireland’s economy continues to expand at a brisk pace, with real GDP growth averaging 7% in the first three quarters of 2015, the highest figure among developed economies……Fitch expects the economy will expand by around 4% this year, compared with 2.4% in our previous review.

That leaves it a little behind the Central Bank of Ireland which is expecting a number close to 5% for economic growth this year.

Looking Forwards

The business surveys in essence repeat the up,up and away theme. The manufacturing PMI was at 54.3 in January and reported this.

A key highlight of today’s report is the New Orders component, which reveals a sharp and accelerated expansion, extending the current run of positive readings to 31 months

The only way to describe the services numbers is stellar.

in business activity at their companies compared to one month ago – rose to 64.0 in January from 61.8 in December. This signalled the sharpest expansion in services output since June 2006. Activity has now risen in each of the past 42 months.

This morning this has been backed up by the construction sector which recorded 63.6 according to Ulster Bank. So really good growth figures which in the past would have seen a central bank respond in the spirit provided below.

The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up   (William McChesney Martin US Federal Reserve 1955)

The European Central Bank (ECB)

By contrast the ECB has its pedal close to the metal and if we include its Open Mouth Operations maybe at it. We have an official interest-rate of -0.3% combined with hints and promised of a further reduction at the March policy meeting plus 60 billion a month of bond purchases where more more more is also promised.

So Ireland which has a surging economy has a negative interest-rate and has seen some 8.4 billion of its bonds bought by the ECB as of the end of January. That is an even more inappropriate policy than that of the Riksbank in Sweden especially if we add in that the ECB is keen to drive the value of the Euro lower too. Although the latter has reversed in 2016 so far with the 1.12 or so versus the US Dollar accompanied by the UK Pound £ dipping below 1.30.

Seeing as the Irish economy got itself into a pickle at least partly driven by interest-rates sets for another economy (Germany back then) then poses an obvious warning as we think of The Specials.

You’ve done too much,
Much too young

House prices

This is an obvious potential issue in an economy running hot so let us take a look.

In the year to December, residential property prices at a national level, increased by 6.6%. This compares with an increase of 6.5% in November and an increase of 16.3% recorded in the twelve months to December 2014.

As you can see the numbers pose their own problems as we note that the index at 86.8 compared to 2005 =100 makes it own statement. Against the previous peak we see this.

Overall, the national index is 33.5% lower than its highest level in 2007

Another way of looking at this is to see what is happening to rents. If we look at the consumer inflation report we see that whilst the overall view is that there is no inflation – current figure is 0.1% but in essence the report has been flat even before the current disinflationary phase elsewhere – we see this “higher rents”. If we look deeper we see that they have risen by 8.3% in 2015 and that as social rents fell then private-sector rents rose by 9.6%.

In other words the housing market is running pretty hot!

The banks

This is an obvious consideration as we note that so many banks elsewhere have found themselves having a rocky start to 2016, or to be more precise finding themselves forced to tell a little more of the truth. The IMF pointed out recently that in spite of the recent economic improvement the situation remains deeply troubled here.

As a result, the stock of mortgage accounts in deep arrears (over 720 days) continues to increase, reaching 55 percent of past-due loans (over 90 days) in mid-2015 from 49 percent at end-2014. About half of the CRE [Commercial Real Estate] loans are still nonperforming, despite promising trends in restructurings and write downs.


This is a good news story overall and let me present the best part.

The seasonally adjusted unemployment rate for January 2016 was 8.6%, down from 8.8% in December 2015 and down from 10.1% in January 2015

Still high but a vast improvement on where it was. Let me also note an elephant in the room which is that Ireland is perhaps the Euro area country which can hold a candle to the performance of Iceland and that too is welcome. At this point Irish eyes are smiling although of course Joe Stiglitz only recently pointed out that Ireland would have done even better if it had copied Iceland..

However on the other side of the coin we have the banking sector which remains troubled in spite of the house price rises. We also have monetary policy running at the speed of Usain Bolt in a boom which does echo the middle of the last decade. Also there is the Irish GDP/GNP problem.

The factor income outflows recorded in Q3 2015 were €2,063m higher compared with Q3 2014 resulting in the 7.0 per cent increase in GDP becoming a 3.2 per cent increase in GNP over the same period.

If we move to the low tax model and the economic consequences then that has been in the news today. Take a look at this from the Guardian.

Workers at Google Ireland, the search group’s European sales hub, earn less than half the £160,000 average wage of colleagues in London despite the British sales team only providing a supporting role to their Irish counterparts.

Now is that Ireland being competitive and winning or undercutting workers in the UK? Intriguing when you consider that UK employment gains have involved real wage falls. But let me throw something else into the mix because of course placing itself in Ireland helps Google to do this.

Google Ireland booked £5bn in sales from UK advertisers last year, but paid no tax in the UK. The group’s controversial corporate structure means the UK subsidiary provides marketing services to Google Ireland.

Mind you there is an element of a first world problem in the Guardian here.

Despite comparatively modest pay for staff and directors,




The rise and fall of the economic central planners

Yesterday was a day which was not a good one for Bank of England Governor Mark Carney. Even the usually supine and tame press corps have spotted that Forward Guidance has been a dismal failure especially for those who remortgaged on the hints and promises of higher mortgage rates only to find that they have fallen. In fact the situation was so bad we got an official denial that it had failed. Also the man who told us that monetary policy was not “maxxed out” ended up going down a familiar road with hints of lower interest-rates and more QE (Quantitative Easing). That does not go well with his mantra of higher interest-rate soon! Indeed this was the theme of the Open Mouth Operations as inflation and interest-rates were to be “higher…….or lower”.


We can take this theme wider as the attempts at central planning abroad are not going so well either. If we look at the Far East and Japan the policy of the Bank of Japan which is only a week old is already looking to be in dissarray. What I mean by this is that the mechanisms by which it is supposed to work are via a lower exchange-rate and via wealth effects from a higher stock market. If you boil Abenomics down to its basics then you have these two.

If we start with the value of the Yen then the main transmission mechanism is via the US Dollar exchange rate because it is the reserve currency in which most commodities are priced. But it is now at 116.9 which is stronger than it was before Governor Kuroda announced the move to an interest-rate of -0.1%. Yes the Yen shot lower as an initial response but since it has regained the ground and some. If we move to the Nikkei 225 equity index we see a similar theme where it shot higher on the announcement but since has come back to where it started and is now at 16,819 for the weekend.

The other mechanism that economic theory would suggest to be at play involves lower interest-rates stimulating the economy. We certainly have lower interest-rates although there are exceptions to the official -0.1% and bond yields too are now ultra-low with the ten-year JGB (Japanese Government Bond) falling as low as 0.01% this morning. But if lower interest-rates provided much of a stimulus in Japan we would not have the concept of the “lost decade(s)” would we?

The Euro

The situation described above has echoes for Mario Draghi and the ECB (European Central Bank). They have cut interest-rates to -0.3% promised further cuts to around -0.5% and are spending 60 billion Euros a month on QE bond purchases. Yet the Euro has gone boing like Zebedee in The Magic Roundabout and is now around 1.12 to the US Dollar. It has also risen to 1.30 versus the UK Pound £. Bloomberg sums it up thus.

The European Central Bank’s own calculation of the single currency’s effective exchange rate against a trade-weighted basket of 38 other currencies stood at 119.9056 on Thursday. That means that the real-world value of the euro has risen faster than the more commonly tracked exchange rate against the dollar.

Trade-weighted, the euro is at the highest level since Jan. 2, 2015,

The rally in 2016 so far has been approximately equivalent to a 0.6% increase in the ECB interest-rate. So we see that in the currency wars which are the major mover and shaker these days the central planners are seeing that their tanks are in retreat. Awkward. Although the ECB is in a better position than Japan because it is seeing some growth it must be wondering if that will now fade a bit.

US Federal Reserve

This is in disarray too right now. I do not particularly mean the response to the 0.25% interest-rate rise which has its own issues. I mean the Forward Guidance that we would get “3-5” more rises of that size in 2016. That has now disappeared with Federal Reserve members suggesting that financial markets have done much of their work for them. In the complicated world in which we live the US Dollar has fallen leading to partly cause the consequences discussed above and the US economy appears to have slowed.

Not good for our “masters of the universe” and the nearest to a world central bank we have.

Are bond yields signaling a recession?

In old-fashioned terms bond yields where they currently are would be signalling more of a depression than a recession. But of course the situation has been distorted by the trillions of bond purchases in the various QE programmes. However if we look at the yield curve we are seeing a reinforcement of this view. From Reuters.

The U.S. two-year/10-year yield curve, the difference between two-year and 10-year borrowing costs, this week fell to 110 basis points, the flattest in eight years…….A flattening yield curve has in the past been a reasonably accurate portent of slowing growth and an inverted curve, when the long-dated yield falls below the short-dated yield, an even more accurate guide to looming recession.

This has worked as a signal reliably in the past although the danger is of course that bond markets are now so distorted and manipulated that it may have changed. One thing we can say is that it is a failure for Forward Guidance that people are discussing it as confidence and psychology matter.

The Baltic Dry Index

This has been falling for a while now. It became fashionable for the economic commentariat to dismiss it hence the phrase Baltic Dry Index Twitter came to be. However rather awkwardly for them it continued to fall.

I know that a move of a particular percentage should have the same impact everywhere but it is at least more symbolic when you see a change from 3 to 2 as the big figure.

Harpex Shipping Index

There are challenges to the methodology of the BDI so let us also take a look at the Harpex which is based on rates for container ships. It hit a high of 646 last summer and since then it too has been falling and seems to have stabilised in 2016 around 364. As you can see it too is signalling in the words of Taylor Swift “trouble,trouble,trouble”.


There are plenty of signals right now that are flashing yellow alert about economic developments. We will have to see how they unfold but there very existence is a challenge to the central planners who bestride the globe proclaiming success as they overlook the moral hazards and junkie culture their polices and actions have encouraged. Eight years into the credit crunch they are in danger of repeating the lost decade from Japan.

Meanwhile the usually sensible and intelligent Gillian Tett has joined the control freak squad in the Financial Times today and returned us to the subject of banning cash so that negative interest-rates would be more effective.

For better or worse, the nature of money is changing. And who knows? If this revolution helps curtail tax evasion and terrorist finance — and makes our lives more convenient along the way, too — it might turn out to be one of the better developments to have emerged from the finance industry in recent years.

There is a good reply pointing out that terrorists use cars and mobile phones so should we ban them too? But underlying this is the fact that the central planners feel they need “More,More,More”

RIP Maurice White

it has been a bad year for music with one of the founders of Earth Wind & Fire dying overnight. Let me leave you with the opening verse of my favourite song of theirs.

Do you remember the
21st night of September?
Love was changing the minds of pretenders
While chasing the clouds away



A not so Super Thursday for Mark Carney and the Bank of England

Today is Super Thursday in the UK where the Bank of England not only makes its policy announcement and releases the meeting minutes but also we get the Quarterly Inflation Report. The latter may well go some way to justifying the “Super” moniker as the continuation of 7 years of an emergency Bank Rate of 0.5% plainly does not! There will be changes to the Inflation Report as the Bank of England shuffles its feet looks embarrassed and announces its economic forecasts in the manner of Phil Collins.

Or did I miss again
I think I missed again oh
Or did I miss again
I think I missed again oh

If we go back to the Inflation Report of 2015 there was this from Governor Mark Carney.

That a gently rising path of Bank Rate delivers inflation to the target reflects the underlying dynamics of the economy.

Er what rising path of Bank Rate Mark? Those who followed his Forward Guidance and remortgaged are likely to want to use much sterner language. Why? Well look at this quote from Twitter yesterday.

@GabrielSterne Markets pricing in a 25% prob that next UK rate change is down.

Up is indeed the new down for interest-rates may rise “sooner than markets expect” (June 2014) and “around the turn of the year” (September 2015) anti-seer Mark Carney. Does it bother him?

Absolutely not. I have No regrets.

If we return to the subject of inflation then it was forecast to be accelerating upwards right now on its way to the 2% per annum target by the summer as opposed to being zero. The continuing falls in oil and commodity prices have torpedoed such a forecast and this does matter because monetary policy is set a fair way ahead.

It takes time for monetary policy to affect the economy – its peak effect is generally estimated between 18 and 24 months

This is a big issue that those who advocate very activist monetary policy close their eyes too as by the time it impacts it is as likely to be heading in the wrong direction as the right one.

This was illustrated at the last Inflation Report press conference by Ed Conway of Sky News.

Governor, five years ago in the Inflation Report, markets were expecting rates to be about 3.75% now. About a year ago the Inflation Report was – looking at market forecasts – saying that the rate was going to be about 1% now, little bit below 1%. All the time the markets have been forecasting that rates are going to be going up at some point about a year hence or a little bit more. Do you – are you really sure this time around that it’s even worth endorsing those forecasts, given how many times they’ve been wrong in the past?

Ah 3.75% to 1% and now the grim reality that it remains at an emergency 0.5%. Could it have been more wrong? Still if I may be permitted to blow my own trumpet readers here have been much better prepared. From December 2013.

So should we see any slowing of the UK economy in 2014 and the exchange rate of the pound continues to be strong there are factors pointing towards a base rate cut.

As I pointed out earlier markets have come round to that way of thinking that rises are a mirage so what about a cut?

The International Environment

This has changed considerably too as events have unfolded. If we look to the Far East it was only on Friday that we saw the Bank of Japan overcome its aversion to negative interest-rates. Except in a familiar theme of the times the half-life of such moves is getting ever shorter. If you think that this was a move in the Currency Wars then the Yen has regained all its losses and is at 117.6 versus the US Dollar as I type this. The response is yet more rhetoric and Open Mouth Operations.

‏@fxmacro Kuroda Ally Says BOJ Has No Rate Limit, May Cut to Negative 1%

If we switch to Europe the Euro has rallied to 1.116 versus the US Dollar when Mario Draghi and the European Central Bank are spending 60 billion Euro’s a month on QE to drive it lower. Using the Draghi Rule the rise in the Euro in 2016 so far is equivalent to a 0.5% increase in interest-rates. This leads to speculation as shown below.

@fwred My concern right now: with this kind of market reaction to Draghi, and Buba’s QE hate, the ECB might favour a larger rate cut.

Just to be clear that is for a larger cut than to the -0.5% now expected.

What about the United States and the promised 3-5 interest-rate rises in 2016? Sober Look takes up the story for us.

Thus we see that 3-5 seems to have morphed into a big fat zero as we discover a numerical addition to my financial lexicon for these times.

In short the international environment has shifted away from interest-rate rises in the United States and towards more interest-rate cuts in the Euro area and Japan. Or as Tom Petty so eloquently put it.

And I’m free, free fallin’
Yeah I’m free, free fallin’
Free fallin’, now I’m free fallin’, now I’m
Free fallin’, now I’m free fallin’,


The UK Pound £

It has already been a year of two halves for the UK Pound £. I wrote and the beginning of the year  that I expected a drop and as it swept lower from US $1.48 to US $1.42 it backed that up. But the last couple of days or so it has regained strength -although much of this is US Dollar weakness as prospects there change- and is now above US $1.46. I guess a lot of people got short at US $1.42. Putting it another way the rally over the past few days is equivalent to a 0.25% increase in Bank Rate but since the last Inflation Report more like a 1% cut!

Bond Yields

UK Gilt or bond yields are also not what you might expect from a country where an interest-rate rise is continually promised. The ten-year Gilt yield is a mere 1.58% and in a subject I will return to in a minute the five-year yield has fallen to 0.9%.

Mortgage Rates

The five-year Gilt yield rose to over 2.1% after Mark Carney hinted at higher UK interest-rates in the summer of 2014 and to 1.4% in late autumn last year. As this is something of a benchmark for fixed-rate mortgages we can see that he has given people exactly the wrong advice!

Putting that into numbers the Bank of England calculated the new mortgage rate back in June 2014 as 3.15% and it is now.

the new secured loan rate was unchanged at 2.55%.

So 0.6% lower not higher as Forward Guidance is laid bare and down is the new up. I doubt there will be a protest group of those who remortgaged on his advice today at the Bank of England but maybe there should be.


The mainstream media honeymoon for Mark Carney is definitely over with even the BBC producing this today.

The governor of the Bank of England has been “too aggressive” in suggesting interest rates may rise

It is a shame they are using a fund manager with an obvious vested interest and moral hazard problem as an authority but perhaps we should not be too churlish. However what does this mean for monetary policy? In reality less than you might think as it has been my opinion for a while that on any economic dip the Bank of England would ease again. What has changed is the international environment where other central banks are engaging in a race to the bottom on interest-rates which is like the Supermassive Black Hole that Muse sung about.

Meanwhile if you look there are signs of both institutionalised and general inflation in today’s news alone if you bother to look.

Energy industry regulator Ofgem is to examine a claim that charity Age UK has been promoting unfavourable gas and electricity deals in return for cash.

The charity sector in the UK is having a dreadful run which is sad news but does offer the opportunity for reform and improvement. Meanwhile in a house near you…

Halifax: House prices increased by 1.7% between December and January……Prices in the three months to January were 9.7% higher than in the same three months a year earlier.

Or for Londoners from City-AM

House prices have broached the £500,000 barrier across 51 per cent of London postcode districts, new research has found – backing up evidence the capital’s homes are becoming increasingly unaffordable.

The report, by estate agent Stirling Ackroyd, found even areas such as Peckham, which were traditionally seen as pretty affordable, have now joined the half-a-million club, with average house prices of £503,000.

Meanwhile away from the spotlight there has been another £4.2 billion of Operation Twist style QE this week.





What is the true situation about UK household debt?

The issue of debt and what to do about it was of course one of the causes of the credit crunch and has been debated constantly during it. Today as it is often misrepresented I wish to look at household debt in the UK. But before I turn to it the national debt of the United States passed another threshold on Monday so let us doff our caps to the US $19 trillion threshold and move on. Oh and in case you were wondering about the debt ceiling it has been suspended until March next year which if you consider the chaos it created for no particular sustained gain that is probably the for the best.

UK Household debt

There has been some rather chilling research on this subject released this morning so let’s get straight to it. From City-AM.

The average Brit will not pay off unsecured debt, like credit cards and certain loans, until they are 64, a survey by the Centre for Economics & Business Research (Cebr) for peer-to-peer lender Zopa found.

That rises to 69 once mortgages are included.

Well at least they are being sensible and paying off the most expensive debt first! Actually if you read it again that is not what it is saying. So it is not only the younger generation who are facing a lifetime of debt singing along to LunchMoney Lewis.

I got Bills I gotta pay
So I’m gonn’ work, work, work every day
I got mouths I gotta feed
So I’m gonn’ make sure everybody eats
I got Bills

Perhaps the prospect of all this is behind this reported by the Office for National Statistics yesterday.

Ratings of life satisfaction and happiness were at their lowest, on average, for those aged 45 to 59.

On current trends they may well have to raise the ages named here.

those aged 65 to 79 tended to report the highest average levels of personal well-being

Actually for Londoners like me there may well be quite a different set of age bands.

Londoners may have to wait until they reach 77 to live debt-free, according to new research…….Londoners are saddled the longest as they typically take on more unsecured debt and secure mortgages later, despite their higher wages.

Those of you who live in the North-East can have a laugh at our expenses as you pass the threshold at 57. In fact you are the only group of people who have expectations that approach reality.

The survey also found a big gap in expectations: Britons expect to start a debt-free life when they hit 57 – 12 years earlier than they are likely to.

I am not sure if it is a good thing or a bad think that the younger generation are the most out with their view of their future.

Those aged 16 to 24 are the most optimistic – they expect to be rid of unsecured debt at just 38.

That also makes them wildly wrong: if they buy a home with a mortgage they’ll be waiting until age 74.

There are obvious caveats in such research but it does highlight existing trends.

A space oddity

There is an institutional problem in having debts at ever later ages in the UK and it has been given the oxygen of publicity this week too. From

Peter Day wanted to extend his mortgage in order to pay for his daughter’s wedding. At the time he was 59 and close to paying off his mortgage, but asked to extend his term by five years.

However, despite having three final salary pensions ready to cover him in retirement, he was turned down for the mortgage extension by Co-operative Bank.

For foreign readers UK mortgage providers have long had rules that say that you have to have a provable income to repay it which poses problems at retirement so the state retirement age of 65 was a potential issue as was 60 for those who were lucky enough to have a pension from then. It would seem that much of the financial sector has not kept up with the times. Who da thunk it? As Turkish pointed out in the film Snatch.

That by the way is the same financial sector who requires very highly paid staff because they have such valuable skills and abilities.

Number crunching

The research quotes these numbers.

The average British debt per household was £53,904 in December including mortgages, according to the Money Charity.

That works out at £28,891 per adult, which is 112 per cent of average earnings.

Based on December’s figures, Brits each spend an average of £1,037 on interest repayments every year –four per cent of a typical salary.

The debt figure quoted is in fact including mortgages and if you want a total it comes to this.


Apologies for the capitals and the estimated cost of this is shown below.


 The official denial

We know how to treat these and at Davos Mark Carney gave us one and the Financial Times joined it as it prepared for the first question at the next Bank of England press conference.

But household consumption has grown slower than the economy since the recovery started and the appetite for debt has fallen sharply. Households have increased their outstanding debts £5.1bn on average every quarter since 2009, nearly four times less than the £22bn rate between 1997 and 2009.

These numbers are no doubt true but miss some important points. If you argue that the amount of debt was an issue pre credit crunch then the fact it has risen since poses a question. Also yes household consumption and debt have slowed over the time period quoted but more recently they have picked up. For example retail sales were very strong in 2015 and the December lending data told us this.

The three-month annualised and twelve-month growth rates were 4.0% and 3.3% respectively.

So the economy is growing at around 2% per annum but we have no inflation so debt has risen relatively here. Also there is an important sectoral shift which matters as some groups are piling up debt as others repay creating quite different groups. This is highlighted by the mortgage data.

Gross lending secured on dwellings was £19.5 billion and repayments were £16.0 billion.

Also unsecured credit is on something of a tear.

Consumer credit increased by £1.2 billion in December, compared to the average monthly increase of £1.3 billion over the previous six months. The three-month annualised and twelve-month growth rates were 9.1% and 8.6% respectively.

The acceleration which began in late summer 2014 continues.


The Financial Times also made the point that if you look at debt you need to look at assets and here is its view.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

The point is valid but of course it is using a marginal price and I would argue an inflated one for house prices which are the biggest asset by far. As Feeling QEzy points out in the comments what could go wrong?

For example UK housing stock annual turnover is circa 4% while 30% of homes have a mortgage, and as we all know it is the marginal seller that drives the price in a weak market.

Whilst I am no fan of the projections of the Office for Budget Responsibility they do pose a question as they project rises in household debt although typically they have changed it in 2021 to 163% of income from 172%. That shows a danger in this sort of analysis.

So where do we stand? Not quite in the quicksand that some argue. But we are seeing rises in unsecured debt again and you do not have to take my word for this just check the absence of the phrase “household debt levels are falling” in recent Bank of England speeches. This poses a problem as for a start how can they raise interest-rates in such an environment? Also if you are wondering what is the big deal here the US National Bureau of Economic Research takes up the story.

In a study summarized in the January edition of The NBER Digest, researchers find that a rise in household debt relative to a nation’s GDP is often associated with a subsequent economic contraction, and that this debt ratio increased in many countries prior to the decline in global GDP growth in 2007-12.

Oh and the area which is supposed to be benefiting from Bank of England policy smaller businesses how is that going?

Net lending to SMEs was £0.0 billion ( in December 2015)