Mark Carney continues his Open Mouth Operations..

Yesterday saw an outbreak of what we have come to call Open Mouth Operations as Bank of England Governor Mark Carney gave testimony to the House of Lords. There were fears of something of an early wire as a couple of hours beforehand the UK Pound £ took quite a dive. It quickly fell to US $1.21 leading Katie Martin of the Financial Times to report this.

“There are no natural buyers on any dip.” Fun times. The most fun.

So the price fell to zero or there were only unnatural buyers whatever they are! Perhaps it was just nervousness about what he might say. Although for some it was an apparent triumph for Governor Carney when the currency rebounded later. From Noreena Hertz of ITV.

Market responding positively to Mark Carney’s calm & sure demeanour. Pound recovering (slightly) during his Committee appearance.

That seemed to miss that he was the likeliest cause of the drop.

What did he say?

Here is his opening salvo from the Guardian.

He says monetary policy has been overburdened, it is the principal if not sole vehicle to provide stimulus to the UK. He welcomes the government is signalling a resetting of the balance between monetary, fiscal and structural policy.

This is yet another U-Turn from the man who denied that monetary policy was “maxxed-out” and it ignores the fact that UK austerity has in fact only seem lower fiscal deficits and not an end to them as seen for example in Germany. So in fact there has been fiscal stimulus in the UK on that definition so he was playing very fast and loose there. What he is arguing for is more fiscal stimulus which calls into question the effectiveness of the monetary policies he has implemented.

Also if monetary policy is overburdened well by cutting Bank Rate to 0.25%, introducing an extra £60 billion of QE (Quantitative Easing) as well as starting a Corporate Bond QE program he is responsible for overburdening it! Especially as he did so during a period of sustained currency weakness.

Next up was the issue of QE and the fact that it helps the already wealthy and does little for the less well-off. From the Guardian.

Carney says since QE, jobs have been created, GDP has grown. That is not due to QE, but the stance has helped the UK economy during a difficult period.

Different groups will benefit in different ways. Between 2009 and 2016, most have benefited, although some more than others.

In fact he was allowed to get away with an entirely unsubstantiated claim that QE  was responsible for nearly 3 million new jobs. The subject is something of a hot potato since Prime Minister May criticised the way that QE had affected the economy. This led naturally to something which will send a chill up the spine of savers.

He says he has sympathy with savers, but says the Bank’s focus is on its remit to get inflation where it needs to be.

Again it was sad that he was not pressed on this point as of course he has admitted that inflation will overshoot the target and that he is “comfortable” with that. This will at a time of near zero deposit rates hit savers and the Bank of England has recently started a new program called the Term Funding Scheme to keep deposit savings rates low. This is because cheap funding as now available from the Bank of England should they require it which means that they are under less pressure to get deposit funding.

The next issue was also awkward for a man who offered Forward Guidance that a rise in interest-rates could come sooner than markets expect and then did nothing. Of course later on he cut them casting adrift businesses and people with mortgages who had followed his advice.

Baroness Wheatcroft question: On the prime minister’s comments, she said monetary policy was an effective emergency measure and a change has to come. Does that mean monetary policy?

That area was quickly shuffled over as of course after 7 years of being on an emergency setting monetary policy was not tightened as promised it was eased even further.

Late on the consequences of QE were raised and the response was simply to claim it was all allowed for.

On side effects, we are mindful of side effects. We did look at impacts on pension funds, insurance companies, margins and profitablity of banks and building societies, to satisfy ourselves sum of side effects did not outweigh positives. Case was strong so we pursued it.

So there Ivory Tower told them that it would be okay. It of course could not possibly know where financial markets would go to and definitely could not know how businesses would respond. Actually the rise in pension deficits exceeded the amount of QE as the UK Gilt market soared although less so since it retraced some of the gains.

The Pound

This was perhaps the most extraordinary of Governor Carney’s claims so let us return to the Guardian.

Carney says there were four elements to August’s package, sterling barely moved, the market understood what we were doing.

This really takes the biscuit as of course some of the fall in the UK Pound £ was due to the fact that the next day after the EU leave vote Mark Carney spoke at the Bank of England and hinted at more monetary easing! For those who missed the hint he was more direct on the 30th of June.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

So the Pound had already fallen when the announcement was made something he is able to recognise when somebody else speaks.

The 6.5% movement in currency since the Conservative party conference has largely been driven by a single factor, not monetary policy.

Mark Carney’s Tenure

This is an issue mostly of his own making as he asked for a five-year term as opposed to the usual eight years when he took the job. Here again his Forward Guidance was found wanting as he now seems to want to stay the eight years. Why? Well Justin Trudeau seems to have ended the possibility of him leading the government of Canada and 2021 would coincide with the end of the term of Christine Lagarde at the IMF.

The Financial Times reviewed it thus.

Bank of England governor Mark Carney chuckled when asked at a House of Lords committee whether he intends to remain in his post for his full eight-year term, replying that his decision, which is due by Christmas, will be “entirely personal”.

The Bank of England puts it like this.

Mr Carney has indicated that he would serve to 30 June 2018.

Lately he has come under some fire from politicians who disagree with his policies and if the media is accurate he has been given a vote of confidence by the Prime Minister. Is she a football fan as they know what that often means?


There is more than a few issues here as Mark Carney tries to rewrite history. Perhaps nobody has told him that history is usually written by the victors. This was the crux of his case yesterday according to the Guardian.

Should we raise rates in August and get it to 2%, at the cost of jobs and income in the economy. Or is it wiser to look through that exchange rate move and help economy adjust. In the view of every member, it was the right course of action to provide stimulus at that point. ( the 2% refers to the inflation target)

He has shuffled the debate to an interest-rate increase and thereby created something of a straw(wo)man because he could have made no policy move and let things develop. In my opinion the UK would be in better economic shape now if he and his colleagues had taken that course. As we stand the fall in the UK Pound is equivalent to a 3.25% Bank Rate cut or a bazooka compared to his pea shooter.

On the other side of the ledger his moves on the day after the vote to ensure financial stability were an example of how a central banker should behave. There is some truth in the fact that he was the only part of the UK establishment at work that day.


Fears of deflation turn to fears of inflation

The world inflation picture has changed in 2016. It is hard to note that without a wry smile as there was no shortage of so-called expert opinion that when inflation headed towards zero and in some cases to below it that sang along with REM.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

If we think back all sorts of downwards spirals were predicted from the lower inflation but in fact as I pointed out there were benefits such as improvements in real wages leading me to sing along with the next line of the song.

It’s the end of the world as we know it, and I feel fine.

Many workers and consumers will have been singing along with that too. Also the truth was that we were mostly seeing a relative price shift as commodity prices and in particular the oil price fell and reduced overall inflation. This was something which the Ivory Towers had told us could not happen as we apparently needed some inflation for relative price shifts to happen! Another fail for them. So let us take a look at where we are now.

The inflation base provided by services

There always was some inflation beneath the surface which was swamped by the effects of the oil and commodity price fall. Mostly it was to be found in the service sector. For example if we go back to September 2015 in the UK we see that whilst headline official CPI inflation dipped to -0.1% this was also true.

The CPI all services index annual rate is 2.5%, up from 2.3% last month.

Twelves months on in our latest reading it is in fact pretty more ignoring what has gone on elsewhere.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

A not dissimilar pattern has been found in the Euro area where is we go back to the preliminary forecast for March inflation an overall rise from -0.2% to -0.1% was accompanied by this.

services is expected to have the highest annual rate in March (1.3%, compared with 0.9% in February),

In essence services inflation has been running at an annual rate of around 1% in the euro area for a while.

If we move to the United States then last September this was reported.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today

However services inflation was running at an annual rate of 2.3%. A year later when headline inflation has risen services inflation is 3% and there is now focus on it although mostly because of this issue.

The index for prescription drugs increased 0.8 percent (on the month).

So as you can see in the UK and US in particular services inflation never went away and if we move from consumer measures to the wider economy that sector is of course the largest. The Euro area had the same experience but of a milder level.

Asset Prices

The whole deflation mythology rather ignored the fact that in more than a few places asset prices were rising. In the UK that was particularly noticeable in the rise of house prices which have become increasingly unaffordable whilst the official CPI measure ignores owner-occupied inflation. But there have also been concerns about house price rises in some of Europe, China,Canada, Australia and the US.

What about the oil price?

This was the main game changer for inflation and recently we have seen it rise. Indeed from the lows of below US $30 in January we have seen the price of Brent Crude Oil rise to US $51.73 as I type this. This puts it just under 8% up on a year ago which means that as this feeds into producer prices and then consumer prices the downwards influence from it will fade and then end. We are already seeing some of this effect as for example the energy price component of consumer inflation has seen its annual rate rise from just under -9% to -3% in the Euro area.

Some care is needed here as the oil price has established something of a habit of falling in the latter part of the year. OPEC seems to be doing its best to stop that at the moment but we do not know how that will play out. Should the oil price merely remain around here then we will see the annual rate of price inflation from it rise.

Commodity Prices

These are less clear-cut because a rally in the first half of 2016 has been followed by a decline since. If we look at the CRB ( Commodity Research Bureau) Index it opened 2016 at 373 rose to a peak just below 421 and is now just below 400.  There have been two quite contrary trends at play here where firstly the price of metals surged ( from 540 to 720) whilst foodstuffs at first followed this but then fell over the summer and are now lower than when they started 2016.

The US Dollar

This matters to everyone who does not have the US Dollar as their currency because the vast majority of commodity prices are in US Dollars. So this from does echo on the inflation front.

The dollar index was up 0.10% at 98.74 at 02:45 E, off a high of 98.81, its highest level since early February.

The interest-rate rise that is supposed to be driving this has been supposedly around the corner for all of 2016 but after a dip in April towards 93 the US Dollar Index has been rising since. It has even pushed the strong Japanese Yen back above 104 more recently.

Some of this is individual moves such as the post EU leave fall for the UK Pound but more generally we have seen the Euro decline a little recently and the Chinese continue to fix the Renminbi lower (6.77 today).


The winds of change are blowing through the inflation landscape as we wait to see what the main mover the crude oil price does. Whilst technically it is a relative price shift it is picked up as inflation (or disinflation), and to be fair it does trigger price changes elsewhere. How much inflation will now rise depends on what it does but as I have explained there are factors in the background where the band never stopped playing as we were supposed to be hitting an iceberg. Oh and it means I would far rather be the Austrian government and taxpayer than an investor in this. From Bloomberg.

Austria’s 30-year bund yields were little changed at 1.01 percent as of 10:32 a.m. London time…….The initial price talk for the 70-year bond sale was 60 basis points more than the yield on the February 2047 security, the person said.

So 1.6% for 70 years? No thanks after all we are living in an era of this.

Meanwhile I note that according to FT Alphaville this has been the state of play on the inflation front.

inflation predictions are back in a big way and after more than eight years of being proved wrong time and time again, the inflationistas may finally get to have their day in the sun.

Actually if we look back I was right to suggest that UK inflation would rise back in 2010 as it then on both measures ( CPI & RPI) rose to above 5%. That is an extraordinary thing to have amnesia about as via its disastrous impact on real wages it is one of the most significant phases in post credit crunch UK.

Oh and you may note that for all the hot air (Open Mouth Operations) of central bankers and indeed their QE their efforts have had very little impact here. Of course that is partly to do with the fact that they impact on asset prices which are kept out of most official measures of consumer inflation. It is also partly to do with the fact that devaluing your currency is overall a zero sum game which may give to some but also takes away from others. However this paragraph needs to come with a so far…….


Greece sees its economic depression continue with ever more debt

This morning has seen yet another outbreak of a theme which has been positively shameful so far. That is the barrage of establishment and official rhetoric proclaiming an economic recovery in Greece or Grecovery for short. In some ways it was even present back at the original bailout agreement in May 2010 when the “shock and awe” turned out to be about this.

Just as a reminder Greece was supposed to return to growth in 2012 (1.1%) and then 2.1% for two years before growing at 2.7% until the end of time.

This morning’s Grecovery outbreak has been reported by The Greek Analyst.

Tsipras says is “entering growth stage,” calls on creditors 2 deliver debt relief.

The Prime Minister is also reporting that a 1.7 billion Euro tranche of debt relief will be provided today by the Euro area.

What about debt relief?

The Euro area partners are providing some of this to Greece via the way that their official vehicle the ESM or European Stability Mechanism lends to it so cheaply. Its President Klaus Regling pointed this out on the 10th of this month.

– because our loans have long maturities and very low interest rates, less than 1% for instance from the ESM. This provides savings for the Greek budget of over €8 billion every year in saved debt service payments, and that corresponds to about 4.5% of Greek GDP.

The problem for Greece is that it is piling up foreign debt albeit in the same currency as it uses in this instance. It would like to issue its own but this seems to be something which remains just around the corner. After all Greece can borrow at 1% and at what rate do you think markets would lend to it at?

One possible route where the Euro area could continue to provide help would be via the bond buying QE of the ECB. However that seems to have faded away as well probably due to what is implied by this from Mr. Regling.

but it depends if we get the missing information, the missing data, to be sure that the target on net arrears clearance has really been met by the end of September

For all the promises of reform and steps forward taken this all look rather, same as it ever was.

The debt continues to pile up

The official story was that the debt to GDP ratio would decline to 120% by 2020 but last week’s report to Eurostat told us this.

The deficit of General Government for 2015, in accordance with ESA 2010, is estimated at 13.2 billion euro (7.5% of Gross Domestic Product), while the gross consolidated General Government debt at year-end 2015 is estimated at a nominal value of 311.7 billion euro (177.4% of Gross Domestic Product).

Actually a fall in the total debt burden was reported there but sadly it has risen since to 315.3 billion Euros as of June according to Eurostat. So whilst the interest-rate paid has been slashed the overall or capital burden has continued to rise.

If we move to the fiscal deficit the numbers were affected by yet more banking bailouts to the tune of 7.71 billion Euros. That seems to be an eternally emptying pot doesn’t it? But you may also note that even after over 5 years of austerity there was still a fiscal deficit of around 6 billion Euros.


This can be summarised simply by reminding ourselves that the economy of Greece was supposed to grow from 2012 onwards and then looking at the actual numbers.

2012  GDP 191.2 Billion Euros

2013 GDP 180.7 Billion Euros

2014 GDP 177.9 Billion Euros

2015 GDP 175.7 Billion Euros

That is about as clear a definition of an economic depression as you can get. Greece was hit by the credit crunch then the Euro area crisis then the botched bailout and then of course saw the run on its banks last year.

Ordinarily a recovery out of this should be both strong and sharp or what is called a V-shaped recovery. However the latest (PMI) business survey was sadly more of the same.

The performance of Greece’s manufacturers during September followed the trend of inconsistency that has so far defined 2016. Again, the sector slipped back into contraction after declines in production and new orders were reported, with goods producers citing a combination of deteriorating demand conditions and a lack of liquidity at firms as the prominent factors behind the latest falls

The monetary position

There is a troubling issue to address and this is the amount of Emergency Liquidity Assistance still being provided by the ECB. Whilst this has fallen it is still at 51.8 billion Euros which reminds us of the E or Emergency part.

If we look at Greek bank deposits (household and business) we see that they nudged higher in August to 123. 9 billion Euros. But this compares to a past peak of above 164 billion Euros in the autumn and early winter of 2014. So a clear credit crunch which has loosened a little but not much.

House Prices

If we move to assets backing bank lending then there is little good news for the banks from this reported by Kathimerini yesterday.

The biggest drop in house prices since the outbreak of the crisis has been recorded in the northern and northeastern suburbs of Attica, and to a somewhat lesser extent in the south of the region, with rate declines exceeding 50 percent against an average drop of 40-45 percent across Athens, according to Bank of Greece figures since 2009.

The impact of the economic depression has been added to by rises in property taxation as part of the austerity measures. Looking at the new index provided by the Bank of Greece I see that the most recent numbers for the second quarter of this year show new properties falling in price by 0.6% and older ones by 0.5% making them 2.5% and 2.3% cheaper than a year before respectively.

If we move to a deeper perspective then the numbers are chilling. The older properties index was based at 100 in 2007 made 101.7 in the third quarter of 2008 and is now 58.5. That is another sign of an economic depression especially as we note that annual growth has been negative every reading since 2009 began.


This had been a bright spot for the Greek economy but these latest numbers do not help. From Kathimerini.

August saw a major decline in tourism revenues, which dropped 9.2 percent on an annual basis, according to data released on Friday by the Bank of Greece. This has brought the losses for the economy in the first eight months of 2016 to 750 million euros year-on-year.


The Greek economic depression continues to inflict suffering and pain on its people as Keep Talking Greece has pointed out this morning.

230,000 children live in households without any income and 39.9% of Greece’s population cannot afford basic goods and services, like food and heating.

According to the latest report published by the Greek Statistics Authority (ELSTAT)

Whilst the Euro area has seen growth return and maybe edge higher if today’s business survey is accurate Greece seems to have been left behind one more time. The industrial turnover figures for August did show a rise of 0.2% on a year before but the previous number had shown a decline of 18%.

Even Japonica who are the biggest investors in Greek government debt admit this.

From 2001 to 2015, Greece added only 10 cents in GDP for each additional euro of debt, compared to EZ peer average 45 cents.

Actually according to them Greece has very little debt at all.

Greece 2015 YE Balance Sheet Net Debt, correctly calculated in accordance with international accounting or statistics rules is 41% and 58% of GDP, respectively.

Meanwhile the best way out for Greece is as I have argued all along as Sheryl Crow reminds us.

A change would do you good
A change would do you good



The UK Public Finances continue to underperform the economy

A feature of the modern era is that way that the establishment economic debate has changed. There was a spell post credit crunch that we were told that fiscal deficits were a bad idea and most countries then set about trying to reduce them. The UK headed on that road although the reductions in the deficit came more slowly than promised and the surplus that was supposed to be achieved now somehow found itself some 3/4 years away. More recently there has been a shift in favour of fiscal stimuli both generally and in the UK. Even Mario Draghi of the ECB (European Central Bank) was at this game yesterday.

Fiscal policies should also support the economic recovery, while remaining in compliance with the fiscal rules of the European Union………At the same time, all countries should strive for a more growth-friendly composition of fiscal policies.

This is of course the same ECB which has enforced exactly the reverse in places like Greece and still supports the Growth and Stability Pact that even Germany ignores! Also Mario has driven many bonds including corporate ones into negative yields but still has the chutzpah to proclaim this.

so far we haven’t seen evidence of bubbles.

Although should Portugal be downgraded later it will fall out of the ECB QE criteria and would be forced to head in the opposite direction.

The UK

The impact of the vote to leave the EU was likely to have two impacts according to the Institute for Fiscal Studies. First a gain.

In principle, the UK’s public finances could be strengthened by that full £14.4 billion a year if we were to leave the EU. However, the EU returns a significant fraction of that each year. The amount varies, but on average our net contribution stands at around £8 billion a year.

But as they forecast a weakening of the UK economy there was also a loss depending on how much it weakened.

We estimate that if NIESR has broadly the right range of possible outcomes for GDP, then the budget deficit in 2019–20 would be between about £20 billion and £40 billion higher than otherwise.

Earlier this month The Times waded into the issue with a claimed leak of cabinet papers that actually turned out to be the pre vote Treasury analysis.

The net impact on public sector receipts – assuming no contributions to the EU and current receipts from the EU are replicated in full – would be a loss of between £38 billion and £66 billion per year after 15 years, driven by the smaller size of the economy.

There are obvious issues looking so far ahead and depend on the assumptions made. What we know so far is that the UK economy has not been plunged into a recession as some claimed but here at least we expect an impact next year as inflation rises in response to the lower UK Pound. Although of course indirect taxes gain from inflation on the one hand and index-linked Gilts mean the government pays out more so the picture is as ever complex.

Today’s numbers

Actually one is left wondering whether the proposed plan for an easing of fiscal policy in the UK is already in play.

Central government expenditure (current and capital) in September 2016 was £57.2 billion, an increase of £2.4 billion, or 4.3%, compared with September 2015.

As we look into the detail we see that expenditure is indeed higher but that there was another factor at play.

debt interest in September 2016 increased by £0.9 billion, or 34.6%, to £3.3 billion;

This initially looks odd because as I pointed out on Tuesday UK Gilt yields remain extraordinarily low in spite of the efforts of the Financial Times on Monday to convince us that the end of the world is nigh. Of course it may be but not this week (so far)! However just as I was remembering that September is a “heavy” month for index-linked Gilts Fraser Munro of the ONS kindly reinforced my thoughts.

We are seeing the recovery of the RPI impact on the uplift on index linked gilts and pushing up interest.

So we are already seeing costs arise from higher inflation and I do hope that fans of higher inflation will admit this rather than parking it at the back of their darkest cupboard.

Actually revenue growth was not to bad at 2.6% but the increased expenditure meant this.

In September 2016, public sector net borrowing (excluding public sector banks) was £10.6 billion; an increase of £1.3 billion, or 14.5% compared with September 2015.

This meant that the official plan to chop another £20 billion or so of UK annual borrowing is struggling so far this financial year.

In the financial year-to-date (April to September 2016), public sector net borrowing excluding public sector banks (PSNB ex) was £45.5 billion; a decrease of £2.3 billion, or 4.8% compared with the same period in 2015.


Over this period the debt interest position is much more favourable showing that we will continue to benefit from low conventional Gilt yields ( assuming they stay low) but see an upwards push from index-linkers from time to time. Those of you with longer memories will recall that several years ago I suggested that if the UK was to borrow it should be via conventional Gilts when Jonathan Portes was arguing we should use index-linked ones. If you take his forecasts going forwards ( inflation and maybe a recession) you will see why.

What about the national debt?

An objective of the previous Chancellor George Osborne has been achieved again but of course to late for him.

This month debt as a percentage of GDP fell by 1.0 percentage point compared with September 2015. This is the fourth successive month of debt falling on the year as a percentage of GDP and indicates that GDP is currently increasing (year-on-year) faster than net debt excluding public sector banks.

The official numbers tell us this.

Public sector net debt (excluding public sector banks) at the end of September 2016 was £1,627.2 billion, equivalent to 83.3% of gross domestic product (GDP); an increase of £39.5 billion compared with September 2015.

However these are different to what is the usual international standard so here is that version.

At the end of the financial year ending March 2016, UK government gross debt was £1,651.9 billion (87.8% of GDP).

Unfortunately those numbers are from further back but whilst the total is rising the percentage ratio to GDP has also been falling.

Term Funding Scheme

The new bank assistance scheme of the Bank of England will raise the national debt but reduce borrowing.

that (all else being equal) Public Sector Net Debt will be increased by the liability relating to the creation of the central bank reserves and Public Sector Net Borrowing will be decreased by the net interest flows relating to the TFS loans and central bank reserves.

So far it amounts to £1.279 billion.


We find ourselves noting yet again that the UK fiscal performance is disappointing. Or at least it was under the old plan! Maybe now borrowing a little extra is considered a success. Of course this means that the room for extra borrowing by the Chancellor Phillip Hammond in the upcoming Autumn Statement declines. Oh what a tangled web and all that. Also because we have had economic growth we have seen our national debt to GDP ratio fall as growth exceeds borrowing.

The next challenge will come in 2017 as inflation continues to pick up and the UK faces a benefit as indirect taxes are on nominal not real spending but also a loss as it will have to pay extra on index-linked debt. The government could win as the ordinary person loses but the bigger picture depends on economic growth. If we continue to grow then there will be a range of choices,if we do not then it will get harder. Meanwhile it is hard not to have a wry smile at one of the reasons for the increase in government expenditure both in September and in the fiscal year so far.

along with subsidies and contributions to the EU


Even central bankers struggle to provide proof that QE works

Today is ECB day with its President Mario Draghi taking centre stage at its press conference later on this afternoon. That is unless he is asked a particularly awkward question in which case the afternoon nap of Vice President Constancio is disturbed. In terms of actual decisions I do expect the ECB to extend its QE beyond program beyond next March but central banks tend to act when they have a new set of economic forecasts and they are not due until the December meeting. Also on the QE point we have in a way already been told. Here is Mario from the last press conference.

And I remind you again that our programme is meant to run to the end of March 2017 or beyond if necessary.

Today I wish to examine one of his other claims from that press conference.

So I would conclude that our policy has been very effective.

There is an obvious moral hazard in him reviewing his own policies and declaring them successful and when pressed for detail even he only made relatively small specific claims.

I think it’s 0.5% over the forecast horizon as far as growth is concerned, and I think it’s 0.3% as far as inflation

We can review the overall concept via a Working Paper on the subject issued by the Bank of England yesterday. However we need to note first that there is a large moral hazard here. After all the Bank of England is being judge and jury on itself. Also what do you think would happen to the careers of Andrew G Haldane,  Matt Roberts-Sklar,  Tomasz Wieladek  and Chris Young if they concluded that QE had not worked?

The QE experience

Accordingly our four intrepid economists must have had sweaty palms and a fast heart beta as they reported this.

Even in models which admit some role for central bank balance sheet expansions, the channels through which QE works are still the subject of debate, academically and practically.

Even worse this.

Schematically, the transmission mechanism for QE can be thought to comprise two legs: an expansion of the central bank’s balance sheet, creating new reserves to purchase short-term bills; and a maturity extension programme, swapping these bills for longer-term bonds. In many standard macroeconomic models, neither leg has an effect on economic activity.

Ah so that is why the Bank of England changed its economic models!

Along the way we also get a confession that it makes the rich well richer.

This would tend to put upward pressure on the prices of those assets.

So what do they conclude then?

We are told this.

It finds reasonably strong evidence of QE having had a material impact on financial markets, generating a significant loosening in credit conditions.

Actually for the effort involved the impact is rather small.

Looking across the first £375bn of Bank of England QE, Meaning and Warren (2015) estimate that QE reduced yields by around 25bps. ( They mean UK Gilt yields).

Anything else? Er well yes.

QE announcements are, in general, associated with higher equity prices……Over this period, asset prices movements were much more pronounced. ……..And there was a sustained rise in the FTSE index of around 50%. It would be heroic to attribute all of these gains to QE, but it seems plausible it made some contribution.

I think that it is true that expansionary monetary policy of the sort we have seen has boosted equity prices considerably but being specific is very difficult. For example how much is down to lower official interest-rates and how much to QE? We know that cash will have been looking for a home and some will have gone to equities but then the trail gets colder.

How does this boost the real economy?

Things get more difficult and I wonder whether to laugh or cry as I read this bit.

Anything economic agents learn about the path of future monetary policy.

What did they learn from the Forward Guidance of the Bank of England which promised interest-rates rises and then cut them? Here is former Bank of England policymaker Adam Posen demonstrating his forecasting skills from February about an EU leave vote.

And if it occurred, you’d probably see very high interest rates,

If we move to the US whatever happened to the 3-5 interest-rate rises that were hinted at back at the start of 2016. So this gain is singing along to Mariah Carey.

But it’s just a sweet sweet fantasy baby

If we move onto other possible connections we get heavy going and the working paper ends up admitting this.

The effectiveness of QE policies does vary, however, both across countries and time.

Indeed this bit looks a little desperate.

QE improves the economic outlook/reduces risk of bad outcomes (via any mechanism)

Especially as it apparently needs some sort of confidence fairy.

People need to believe QE will improve the economic outlook.

Ah, so if it does not work it is all our fault for being non-believers? As to actual reasons for it working the issue is indeed troubled. There is also a blatant contradiction as you see we are told that part of it is by making other countries less competitive.

Impact on the exchange rate, through changing interest rate differentials and/or risk premia and long-term exchange rate expectations.

Yet those with the new less competitive exchange-rate are apparently winners too.

There is also evidence of strong positive international spill-over effects of QE from one country to another.

According to one of the research tables UK GDP benefits more from US QE than US GDP does! Also it appears that such research is taking the credit for nearly all the economic growth seen in the credit crunch era.

evidence in the US (Figure B1.7 in Appendix B) suggests that a 10% of GDP central bank balance sheet expansion has a peak impact on output of around 6% after three years and a peak impact on CPI of around 6% after around seven quarters.

Actually the research admits that the UK gets more inflation than implied by this but for some reason omits to specify this. Also as the main author was one of those who implemented UK QE Martin Weale is hardly unbiased. Even so one of the slides tells us this.

These results are dependent on the parameters I have selected.

Anyway we are left with this conclusion.

There is also evidence of QE having served to boost temporarily output and prices, in a way not associated with other central bank balance sheet expansions.


This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.


We get a lot of central banker hyperbole about the apparent effectiveness of their policies. One subject they skip is why more than 7 years down the road we need ever more of it!?That sounds more like a snake oil sales(wo)man than someone with any sort of fix or cure. An example of this was provided by the UK Chancellor Phillip Hammond only yesterday.

An easier monetary policy in this country over the past six years has also delivered us 2.7 million jobs and there will be a lot of people out there today who may not own assets, but do have a job that they may not otherwise have had.

Sadly it did nor appear to be challenged. Meanwhile obvious problems such as QE benefiting the already wealthy find that they are kicked into the long grass.

This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.

Until after they have retired? Also I note that the distributional problems are somewhat breath-takingly being placed at the hands of government leaving Mark Carney and the Bank of England singing along with Shaggy.

She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the scream get louder (It wasn’t me)

If we consider the UK Gilt market and likely inflation it is plain that it is at completely the wrong level. From this mis- pricing there are maybe more costs than benefits.

Me on TipTVFinance

As the prospect of further UK real wage growth fades what about the self-employed?

Today brings us to the labour market report for the UK. Over the period of the credit crunch the quantity numbers have performed very well and scare stories from some economists of 3 or 4 million unemployed have been replaced by record employment and falling unemployment. However we are now in a phase where we are much less sure that unemployment will continue to fall. Also the quality number or wage growth has been somewhere between poor and not so good. In spite of an economy recovery which began in 2013 wage growth has only managed about half of what we would have expected pre credit crunch.We can put this into numbers as those in the Ivory Tower of the Office for Budget Responsibility predicted this back in 2010.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

This reminds us that the long-term trend here has been for wage growth to decline. The improvement in the real wages picture which has been extremely welcome in boosting both consumption and living-standards mostly came about because consumer inflation fell to historically low levels.

What about the self-employed?

Regular readers will be aware that the official average earnings numbers exclude the self-employed and in fact the smaller businesses. This has led to concerns expressed both by me and in the comments section that there would at least be sections of those self-employed with a poorer record for wages growth (and perhaps falls) than stated in the official statistics. This has become an increasingly important issue as the number of people self-employed has grown.

Yesterday the Resolution Foundation released some new research on this subject and it did attract attention for this.

Remarkably, this data suggests that typical earnings for the self-employed were lower in 2014-15 than in 1994-95, twenty years earlier. …….. From their peak (2006-07) to trough (2013-14), typical self-employment earnings fell by 32% – £100 per week.

Ouch! So self-employed earnings have had their own private economic depression. How does this compare with the overall picture?

A fall of 15% compares to a rise of 14% in typical employee earnings

As with ordinary earnings it found that some of this was compositional as in caused by the fact that the newly self-employed were less likely to employ others and worked fewer hours leading to this conclusion.

This analysis suggests that, over the 2001-02 to 2014-15 period as a whole, compositional effects were responsible for over 60% of the fall in average earnings (and there may be other compositional factors that we have not accounted for here), with the remainder being a purer earnings effect.

That still leaves a large gap with the official average earnings series to explain. Also the grim truth is that the credit crunch era did bring outright falls in income for the self-employed.

However, between 2008-09 and 2013-14, while there was still a negative compositional drag, the large majority (86%) of the substantial fall over this period is not explained by compositional effects.

More than a few questions are posed here and some of the answers are hard to find. Some may have been happy to switch from employment to self-employment and others may have been happy to work fewer hours, but it is hard to avoid the few that some were forced to and others were involved in underemployment. As the numbers grow this becomes a bigger issue.

the number of self-employed has grown from 3.3m (11.9% of the workforce) in 2001-02 to 4.5m (14.7%) in 2014-15

There was a flicker of better news at the end which suggested that the economic recovery had finally fed through to the self-employed.

More recently, compositional changes played a positive role and together with strong growth within groups meant a rise in average income in 2014-15

So we hope that this trend continued but we do not do so. The analysis above relies on the Family Resources Survey which has considerable lags in the data it provides.

Back in the day (2008) this was all reviewed by Martin Weale latterly of the Bank of England and recently appointed a Fellow of the ONS. In all his Ivory Tower pages of maths the little people slipped through his net.

Note that firms employing fewer than 20 employees are not surveyed.

I doubt it seemed important to him at the time….

Today’s numbers

Let us open with what remains good news.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.5%, the joint highest since comparable records began in 1971…….There were 23.23 million people working full-time, 362,000 more than for a year earlier. There were 8.58 million people working part-time, 198,000 more than for a year earlier.

Thus we see that more people are employed and the growth these days is not as heavily biased to part-time work as it was. Wages growth nudged higher than we were told last month too.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.3% both including and excluding bonuses compared with a year earlier.

In the meantime so of last month’s data has been revised higher too.

Not so good news

This comes from a nudge higher in unemployment.

There were 1.66 million unemployed people (people not in work but seeking and available to work), 10,000 more than for March to May 2016 but 118,000 fewer than for a year earlier.

Actually this was a type of sexism if you note this.

There were 765,000 unemployed women, 23,000 more than for March to May 2016 but 37,000 fewer than for a year earlier.

I would welcome readers thoughts on why male unemployment fell but women’s rose?

Real Wages

There is an issue here as in spite of the fact that in the latest 3 months wage growth was 2.3% we know that inflation is on the rise. Indeed if we look at the monthly series wage growth in August was 2%. That seems to have been driven by a big swing in bonuses payments from up 8% to -6% but nonetheless we face a position where our real wage growth fades a fair bit if this continues into September and meets an official CPI inflation rate of 1%.

If you look at Retail Price Inflation (2%) then we are now facing the distinct possibility that real wage growth has either ended or faded to a low-level.


Whilst the situation remains strong overall there is an obvious concern with the rise in unemployment which whilst small overall will matter to the 10,000 concerned. Also there is the issue that we are seeing unemployment rise for women which may be a quirk but may not. But for real wages it would appear that the words of the latest Nobel winning poet are appropriate.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin’
And the first one now
Will later be last
For the times they are a-changin’.

Will that end the apparent improvement for the self-employed?





UK inflation begins its rise whilst the Bank of England looks away

Today is in terms of statistics inflation day in the UK as we receive pretty much all of our inflation data in one burst. It did not use to be that way but the powers that be decided that it was better to have all the bad news in one go rather than have several days of high inflation being reported. As ever their sense of timing saw inflation actually go below target! However we will see the seeds of change today as I forecast back on the 2nd of March.

There is also the issue of the UK Pound £ which has been falling in 2016 against the US Dollar which is the currency the majority of commodities are priced in. It is down just over 9% on a year ago……….Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use.

I was expecting these two more domestic factors to add to the end of the impact of lower oil prices.

But whatever happens we are now unlikely to see a continuation of this reported by Eurostat in its consumer prices release….energy (annual rate) -8.0%, compared with -5.4% in January.

It fell to -3% on an annual basis yesterday and rose by 1% on a monthly basis.

Thus I was expecting this.

However from now they need to look a year or two ahead and after a few months of continued oil price disinflationary pressure we see an increasing chance of inflation rising.


What has happened since then has been the further fall in the UK Pound £ post the EU leave vote which will put more pressure on inflation. Regular readers will be aware that I expect a boost to inflation of the order of 1.5% from this impact although we do not know yet where the value of the UK Pound will settle. Many prices will take some time to change so we will not see their impact until 2017 but the area which changes quickly is petrol prices which have had a double whammy. Firstly the oil price has risen to US $52 per barrel and secondly the exchange-rate of the UK Pound has fallen quite a bit against the US Dollar and is now 20% lower than a year ago. So we see this.

The price of ULSP is 3.4p/litre higher, with the price of ULSD 3.6p/litre higher than the equivalent week in 2015.

Today’s numbers

As you can see from the points made above it was no great surprise when this was reported today.

The all items CPI annual rate is 1.0%, up from 0.6% in August…….The all items CPI is 101.1, up from 100.9 in August.

Actually it could have been more as I note that something I have been flagging all year had a slight dip.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

Interestingly a lot of the move was in clothing and footwear and I would be interested in readers views on this.

the upward effect came primarily from garments (in particular women’s outerwear), for which prices rose by 6.0% between August and September 2016, compared with a rise of 3.3% a year ago.

The only article which got cheaper for women was coats,everything else got more expensive.

What is in prospect?

We see that the producer price numbers are also suggesting a rise in inflation going forwards.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016.

This is the third month of rises in this indicator which previously registered a couple of years of declines. In turn it will be pushed higher by this.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.2% in the year to September 2016, compared with a rise of 7.8% in the year to August 2016.

So input prices will put upwards pressure on output prices and the largest riser was the price of imported metals which rose by over 19% on a year before. Also at this stage of the chain the value of the UK Pound is a major factor.

In trade weighted-terms, sterling depreciated by 14.4% in the year to September 2016.

Actually the main driver is of course the US Dollar but in this instance it had a similar decline.

What about the RPI?

Our old inflation measure which is still used for index-linked Gilts amongst other things did this in September.

Annual rate +2.0%, up from +1.8% last month

The version we used for inflation targeting edged quite close to its old target of 2.2%.

Annual rate +2.2%, up from +1.9% last month

This meant that the wide divergence between it and out new official measure of inflation continues.

The difference between the CPI and RPI unrounded annual rates in September 2016 was -1.08 percentage points, narrowing from -1.11 percentage points in August 2016.

In other words changing the inflation target by only 0.5% back in 2003 was a loosening of policy which many places which should know better simply ignore.

What about housing costs and house prices?

The main way the official UK inflation measure is kept low is by its exclusion of owner-occupied housing costs. This means that the numbers reported today are ignored.

Average house prices in the UK have increased by 8.4% in the year to August 2016 (up from 8.0% in the year to July 2016), continuing the strong growth seen since the end of 2013.

There is an official version which includes such costs but as I argued from the beginning it is the equivalent of a chocolate teapot. This is because it uses rents and thereby end up with this.

The OOH component annual rate is 2.4%, unchanged from last month. ( OOH is Owner Occupied Housing )

The plan is for this to be our main measure of inflation although frankly such a recommendation did a lot of damage to the soon to be Sir Paul Johnson of the Institute for Fiscal Studies. Let me highlight yet another problem with the series which begs belief in many ways.

OOH currently accounts for 16.5% of the expenditure weight of CPIH. This compares with a weight of 19.5% in 2005.

There have been a lot of revising of such numbers which applies also to the imputed rent numbers which mean that no-one can even be sure what the past was from one year to the next. The Alice In Wonderland critique applies.

“How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.”


We see that as pointed out in the spring UK consumer inflation is heading on an upwards path. There is statistical noise in the exact monthly numbers but the trend was already clear back then although we know now that it will go higher and be more sustained because of the additional impact of the lower UK Pound £. We will head towards 3% on the CPI and 4% on the RPI if things remain as they are.

The Bank of England should of course respond to this for two reasons. It is supposed to target annual CPI inflation of 2% and also because higher inflation will reduce and perhaps eliminate real wage growth and thus have a contractionary impact on the economy. In response to this we have been told this by Governor Carney. From the BBC.

Earlier, Mr Carney said that the Bank of England was willing to see an “overshoot” of its 2% inflation target if it meant supporting economic growth and protecting jobs.

Perhaps our dedicated follower of fashion has been listening to Janet Yellen of the US Federal Reserve. From MarketWatch.

Fed’s Yellen sees benefits in letting inflation exceed central bank’s 2% target

Benefits for who exactly? Certainly not workers or consumers….

Women’s Coats

Lucy Meakin of Bloomberg has given us a hint of a quality change here.

Possibly because this season most of them don’t have lining for some reason