Do negative interest-rates make you happy? And what about inflation?

Today I intend to take a broad sweep on two the major economic trends of our time. Firstly we have inflation which on the official CPI measure in the UK has been zero for two months in a row now. A major driving force in this has been the fall in the price of commodities particularly oil which have led to a particularly pleasant change in the “inflation nation” which is the UK. This has been worldwide trend with for example the US CPI in March some 0.1% lower than a year before mostly driven by an 18.3% fall in the energy index.

Secondly this has reinforced a trend which if I look back has been in force for the whole of my career which is the decline of interest-rates and yield. Back in the days when I was what is called green in America I asked a fund management group why they were buying a benchmark UK Gilt at 15% yield? It seemed illogical in that crisis. Well whilst that bond has matured there was a long-term  wisdom in such a move illustrated by the fact that an equivalent Gilt right now would yield 2%. Oh and over that period there was also an assumption that you would over longer periods always lose money if you valued Gilts in real terms due to inflation. That has been blown up by recent bond surges as even a relative underperformer like the UK Gilt market has blasted higher in terms of real returns. So like in many other ways in the credit crunch era  what was perceived as wisdom has been proved wrong. Indeed some bond markets have offered extraordinary returns as for example at the height of the Euro area crisis in Portugal early 2012 saw a ten-year bond yield peak over 18% compared to the 2% of now.

How they interrelate

The move to lower levels of consumer inflation has helped push bond yields even lower and given central banks an excuse to push official interest-rates not only to zero but below. It is not a fluke in my opinion that this has taken place in Europe nor that a particular outbreak is in the Nordic region but we got a classic explanation from the Riksbank of Sweden.

Low inflation over an even longer period of time increases the risk that long-term inflation expectations will fall and that the role of inflation as nominal anchor in price-setting and wage formation will weaken.

So we have two forces at play here. We start with a normal trend which is for interest-rates of all types to trend lower as inflation dips. However if we add this from the same Riksbank statement you see an all too common example of central banks giving this a further push as they felt this as well.

There are signs that inflation has bottomed out and is beginning to rise,

This is quite different as the -0.25% interest-rate and the QE purchases of government bonds are happening now when inflation is expected by them to pick-up. I will return to this crucial issue. But we see that like the European Central Bank and the Danish and Swiss central banks low inflation now is being used as an excuse for ever lower interest-rates and more expansionary monetary policy. But the monetary boost with its lags will operate some 18 months or so later when the economic environment is likely to be very different.

Is the fall in inflation all that it has been cracked up to be?

By this I mean what we might if we used the sort of language previously used by Adam Posen amongst others call “deflation nutters”. They and their media acolytes have presented falls in inflation and cheaper prices singing along to this from R.E.M.

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

However if we look looking into the detail of the recent inflation data demolishes their imagery of disinflation being like the Death Star in the film Star Wars. From the UK consumer inflation bulletin for March.

The CPI all goods index annual rate is -2.1%, down from -2.0% last month.


The CPI all services index annual rate is 2.4%, unchanged from last month.

As you can see there are two different inflation experiences at play here and I am reminded of Rudyard Kipling’s famous quote.

Oh, East is East and West is West, and never the twain shall meet,

Once we look deeper we see that what is by far the largest sector of the UK economy (approaching 80%) is behaving normally for the UK and seeing a stream of price rises. That gives us a clue to our future pattern as it would appear that more than a halving of the price of crude oil would be required for us to follow Taylor Swift and “Shake It Off. So now we are left with price falls in part of our economy which look very different to the official and media spinning of them. Indeed as I have regularly pointed out the ordinary consumer and worker responding to cheaper food and energy costs are much more likely to be represented by this from R.E.M.

Shiny happy people holding hands
Shiny happy people holding hands
Shiny happy people laughing

This is a major theme of our times where official bodies set out to mislead us and as so often George Orwell was on the case.

In a time of universal deceit – telling the truth is a revolutionary act.

What about inflation measurement?

The official view is that inflation is over-recorded. However when asked individuals give  a very different answer as for example in the UK the latest Bank of England survey finds that they think it has fallen but is still over 2%. The Bank of Japan survey got an answer of 5%!

One thing that is true is that modern “improved” measures do give lower answers. for example the UK CPI (0%) replaced the RPI (0.9%). So is deflation mania something we have done to ourselves by changing our view of reality?

A Major Problem

This comes from the fact that for there to be any real justification for interest-rates and yields to be where they are we need inflation not only to be low or even negative now but to be expected to be so in the future. A holder of a ten or twenty year bond may have a passing interest in inflation now but their real concern is for the future. So if we contend that actually baseline inflation for services has  fallen but is in fact still above the official target bond holders need goods prices to continue to fall. How likely is that?

In the decade preceding this we had goods price deflation from China but it has now moved on from that game. We have just had a sharp fall in the price of crude oil but that has ended for now such that 2015 has seen a rise in the price of Brent Crude by US $7 per barrel. Remember the “deflation nutters” require a continually falling oil price or something similar so even a stabilisation is not enough for them and a rise exposes them as swimming without shorts when the tide goes out to coin a famous phrase.

So if later this year we see inflation edge back into goods markets and services continue as before then 2016 will see us rise back to the 2% annual inflation target and perhaps above. That makes investing at negative yields somewhat problematic. How does negative yield go with positive inflation?

How are bond investors left?

Very exposed. In essence front-running asset purchases by central banks is the only game in town. This however puts economics at severe risk of failing the tests of the Lucas Critique and Goodhart’s Law. We will only know by how much we have failed them as events unfold but let me assess both sides of the coin.


Existing bond holders have had an extraordinary run and in general good luck to them. But in a world of Libor and FX fixing Pink was right to pose the question Who Knew? A genuine fear is that the 1% or rather the 0.01% have had easy pickings at our expense.


These seem rather likely going forwards except we have various problems. For a start are losses in asset markets allowed any more? Please will someone as this at the next press conference by a central bank? But we seem ever more unable to even countenance losses or interest-rate rises at all. Yesterday in a reply to a comment I pointed out Deutsche Banks view on the impact of interest rate rises in the past. But in there is a fear that we coped then but cannot now without yet another form of economic armageddon. If so we are locked into a crisis loop and a downwards spiral caused mainly by a fear of a downwards loop.


This has changed as everything in bond markets becomes about the now and present as expressed by what the central planners will do next. Whereas the future which they are supposed to give us a guide to?

Is this the era of the death of not only the long-term but anything other than the short-term?


Actually pretty much the whole of today’s article has been a comment piece so let me offer some lighter relief. I noticed this from the World Happiness Report which was published earlier.

The report identifies the countries with the highest levels of happiness:


So do negative interest-rates make us happier? It would make a good examination question I think! Still let us end in that vein with the song that central bankers would love to be on permanent repeat.

Because I’m happy
Clap along if you feel like a room without a roof
Because I’m happy
Clap along if you feel like happiness is the truth
Because I’m happy
Clap along if you know what happiness is to you
Because I’m happy
Clap along if you feel like that’s what you wanna do






The election forecasts for the UK’s fiscal deficit and national debt are pretty much useless

Today has seen the last set of UK Public Finance figures before the upcoming General Election. So no pressure there then! Of course the UK political establishment keep misrepresenting the numbers and the statistical establishment has not helped either by its changes in the course of this Parliament. It is all quite a tangled web and the media does not help at times either for example Stephanie McGovern the business presenter assured us this morning that the UK fiscal deficit was of the order of £30 billion. Oh if only! Let us therefore go straight to the actual numbers and skip the hype and debate.

UK deficit and debt

The opening salvo is already rather ominous for the view that we only have a £30 billion problem.

In March 2015, PSNB ex was £7.4 billion; a decrease of £0.4 billion compared with March 2014.

Only one month of twelve in a year and nearly a quarter has been used. As we have just completed a financial year we can see the full picture for it.

In the financial year ending 2015, public sector net borrowing excluding public sector banks (PSNB ex) was £87.3 billion; a decrease of £11.1 billion compared with the same period in the financial year ending 2014.

From this number we see the general pattern which is that after a period earlier this fiscal year when there was no improvement in the data that latter part has seen us borrow less which is welcome. For example the income tax take in the self assessment period was an improvement on 2014 which replaced an earlier period where income tax receipts were lower year on year. So the UK economic boom is having an effect albeit one which is smaller than one might have expected or hoped if you had known how quickly the economy would grow. However if we return to what the next government will face it will be a still substantial deficit, one which is trending lower, but one that will take a long time to be eliminated at the current rate of decline.

It was not supposed to be like this

Back in the heady days of the beginning of this Parliament we were told by the then new Office for Budget Responsibility or OBR that the deficit would be well on its way to being eliminated by now. It was supposed to be £37 billion and having fallen by £23 billion on the year before. So quite a wide miss on both counts.

Or as the Rolling Stones put it.

You can’t always get what you want

What about the National Debt?

Our political establishment love to use phrases like “paying down the debt” whereas the reality is that the UK National Debt has sung along to the Electric Light Orchestra.

You took me, higher and higher
It’s a livin’ thing,

The rises in it are a consequence of the fact that not only have we have continued to borrow we have found ourselves borrowing at a much higher rate than expected.

At the end of March 2015, public sector net debt excluding public sector banks (PSND ex) was £1,484.3 billion (80.4% of GDP); an increase of £82.2 billion compared with March 2014.

It was supposed to be 69.4% of GDP and falling rather than rising.

Actually there is another problem as our numbers are much lower than if we used what is the international standard or benchmark.

At the end of March 2015, General Government Gross Debt (Maastricht debt) was £1,598.5 billion (86.6% of GDP) and General Government Net Borrowing (Maastricht deficit) in the calendar year 2014 was £102.4 billion (5.7% of GDP).

You may note that the borrowing figure is a fair bit higher too.


An awkward truth

This is in spite of the fact that the annual cost per unit of borrowing as represented by bond yields has dropped by a large amount. At the time of the UK 2010 election the ten-year Gilt yield was just over 4% and in spite of a jump up yesterday it ended less than half that at 1.7%. That saves a lot of money when you consider that new issuance for the UK is of the order of £150 billion per year. Also things which reduce your borrowing tend not to be emphasised by a government when it is overshooting its borrowing as it leads to the (correct) view that things are worse than it is claiming. If we were borrowing now at 5% as the OBR expected we would be paying a lot more on debt interest leading people to ask what happened to the money?

Reality was once a friend of mine

This Parliament has seen some extraordinary attempts at misrepresentation. Of course that is no surprise when reality has seen more borrowing than expected. But we saw the Royal Mail sell-off reduce the numbers by £28 billion when in fact it was an expected liability for UK taxpayers. The effect of Bank of England QE was to flush money in and out of the numbers on a large-scale with frankly bizarre Euro area rules on what counts – some £’s are more equal than others – meaning that the fog got thicker. Then of course the statisticians joined in as the effect of ESA  was to raise GDP by around 4% but also to raise our national debt by around £120 billion. Aren’t you glad that it is so clear?! The effect has been along the lines of this from Those Magnificent Men in their Flying Machines.

They can fly upside with their feet in the air,
They don”t think of danger, they really don”t care.
Newton would think he had made a mistake,
To see those young men and the chances they take.

Those magnificent men in their flying machines,
they go up tiddly up up,
they go down tiddly down down.

What do we know about what will happen post-election?

Much less than you might think. You see in spite of the wall to wall coverage that frankly has been tiresome for a while there is a lack of clarity and often no clarity at all. From today’s Institute of Fiscal Studies analysis.

All four parties have said they would reduce borrowing in the coming parliament. None has managed to be completely specific about how much they want to reduce borrowing, or exactly how they would do it.

They mean the traditional 3 parties and the SNP. The next swerve comes on the subject of eliminating tax avoidance which is the got to area if your numbers are not adding up!

The Conservatives have squared this circle with an aspiration to raise 0.2% of national income (around £5 billion) from clamping down on tax avoidance

Ah an “aspiration” as we flick through my financial lexicon for these times to check its real meaning. Also if it is an aspiration we are left wondering where it has been the last five years? This is compounded by the fact that their colleagues claim to have been keen on it all along too.

The Liberal Democrats……. relying heavily on unspecified
measures to reduce tax avoidance and evasion (£7 billion)

Seems a bit weak after five years in government does it not? In a way it is a confession of failure although of course both will spin it very differently. Not to be left out Labour seem to have won the game of Top Trumps here as they predict an even larger number.

On top of this, Labour have also said that they would aim to raise a further £7.5 billion from tax-avoidance measures by the middle of the coming parliament.

As these three parties have been in government in the UK throughout the lifetime of everyone in the UK perhaps someone might sit them down and ask why they have not bothered with this before? I am reminded one more time of Alice In Wonderland.

Why, sometimes I’ve believed as many as six impossible things before breakfast

The SNP approach to this area is by contrast refreshing.

Unlike the other three parties, the SNP have not factored into their main plans any revenue increase from anti-avoidance measures.


The last five years have taught us that the economic and financial future is as hidden from us as it has ever been. You might think that the leaps in information technology would help but I note that the UK fiscal and national debt picture is nothing like what we were told. Of course some of that is due to the rose-tinted forecasts that were used back then. If you look at today’s forecasts we have not learned much! Accordingly the flood of media headlines about the expected world in 2019/20 are meaningless and to coin a phrase tomorrow’s fish and chip wrapping.

The deficit looks set to be with us for a while and the debt will continue to rise too. As long as interest-rates and bond yields remain low we can accomodate that but the catch of such can-kicking into the future is that our capital burden rises and we are weaker. It reminds me of the real question of these times, what happens when the next recession hits us?

When did Governors of the Bank of England morph into politicians?

Today sees the last formal record of the pre-election views of the Bank of England on the UK economy as the latest policy meeting  minutes are released. One thing that we can be sure of is that for the whole of this Parliament UK Bank Rate has remained at the emergency level of 0.5%. Considering all the changes and events which has taken place this is really rather extraordinary! Have official interest-rates been abandoned as a tool for influencing the UK economy? If they have been downgraded it is a tacit and implicit victory for my long-run theme that the links between official Bank Rate moves and the real economy are much weaker as we approach 0%.

What has the Bank of England done then?

In has added to its Quantitative Easing (QE) operation as to the original £200 billion an extra £175 billion was added ( £75 billion in October 2011; £50bn in February 2012 and £50bn in July 2012). Actually several members wanted to do more including the then Governor Mervyn King so they would have inflated the UK economy into the current boom in a clear example of policy failure. This is one instance where we should be grateful that we got a new Governor as otherwise the existing one might have eventually won over his colleagues.

Next the Bank of England switched to boosting the UK housing market as July 2012 saw the launch of the Funding for Lending Scheme. Boosting the banking sector via cheap liquidity which allowed them to cut mortgage rates by around 1% was potentially embarassing so we were told instead that this would boost lending to smaller businesses and companies. How is that going?

The twelve-month growth rate was -1.8%.

Actually after a long period of boom we are now seeing some months where it actually rises! Of course by contrast mortgage lending headed higher quickly and house prices leapt giving the UK economy more of a junkie boost as its favourite addiction got fed one more time.

But generically this phase involved switching from official interest-rate moves to more direct market involvement or if you prefer manipulation. Firstly bond yields and longer-term interest-rates via QE which was then reinforced by lower mortgage rates via another subsidy to our banking sector.

Forward Guidance

In the summer of 2013 there was a new Governor Mark Carney who was strongly influenced by the fashion of the time called Forward Guidance. The Kinks put this to music.

He flits from shop to shop just like a butterfly.
In matters of the cloth he is as fickle as can be,

‘Cause he’s a dedicated follower of fashion.
He’s a dedicated follower of fashion.

This has turned out to only involve “Open Mouth Operations” where Governor Carney and his colleagues promise to raise Bank Rate at some unspecified future date. Indeed they have done so only this morning.

all members agreed that it was more likely than not that Bank Rate would rise over the three-year forecast period

Could it be more unspecific and vague? Especially if we consider that we are at an emergency level of Bank Rate. The more I read it the weaker it looks especially if we consider what has fallen by the wayside in the meantime. Bank Rate was supposed to rise under the now redacted Forward Guidance Mark One when the employment rate declined below 7% and of course it is now 5.6%. Also remember this from June last year at Mansion House.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced. It could happen sooner than markets currently expect.

Well ten months later with no sign of “sooner” happening we can say that Governor Carney was wrong about that too! Apparently though continually making false promises and misleading people has this effect.

Guidance encouraged businesses to hire and spend, and helped keep expected interest rates low, even as the economy recovered strongly.

Imagine what it might have done if he and his colleagues had got things right rather than wrong?

But we saw a shift as whilst FLS was reducing actual interest-rates Governor Carney was promising future interest-rate rises. We shifted from actual action to promises and hype. It remains to be seen whether cuts will be part of reality and rises only figments of imagination going forwards. Perhaps Governor Carney will go to the Isle of Wight this summer to watch Fleetwood Mac.

Tell me lies
Tell me sweet little lies
(Tell me lies, tell me, tell me lies)
Oh, no, no you can’t disguise
(You can’t disguise, no you can’t disguise)
Tell me lies
Tell me sweet little lies

Another forecasting failure

The Bank of England has another entry in this ledger and it edges forwards in the race with such bodies as the OBR and IMF to be the worst forecasting body in the world. The evidence comes from as recently as the February Inflation Report. Here is Governor Carney.

we expect the strongest real income growth in over
a decade actually…..I think the thing that we have seen in recent months is the start of the turn of wages, and consistent with the change in slack in the labour market. We are seeing tangible increases in wages.

Today we see a rather different tune.

Annual whole-economy regular pay growth on the AWE measure had fallen back to 1.6% in the three months to January and bonuses had been weak. Bank staff had revised down their expectation for annual total AWE growth in Q2 to 2.3%, from 2.6% at the time of the February Inflation Report.

Actually we are then warmed up for stagnation in wages which is a complete contradiction of two months ago. Still pretty much every base has now been covered! Also with the new view on wages exactly how and why will they raise Bank Rate?

Central Bankers as Politicans

In the current environment we are reading a lot of political statements which most take with a fair bit more than a pinch of salt. Well how familiar does this sound?

The Committee’s guidance on the likely pace and extent of interest rate rises was an expectation, not a promise.

Are these different from a “hope” or an “aspiration” or a “manifesto promise”?

Somewhere along the way giving technocrats authority over monetary policy has turned them into individuals who walk and talk like politicians. I do not mean that as a compliment! The official word for this is “independence”. One disturbing effect is that they have been able to implement policies which governments would have not been able to.

The Policy Failure

This was when inflation was allowed to exceed 5% in the autumn of 2011. Here we see another political link as this was badged as an easing of policy to help the economy. Of course high inflation does help our political establishment but it hurt our economy via its effect on real wages. Back on October 18th 2011 I pointed this out.

Last week on the 13th of October I suggested that as wage growth was slower than price inflation that real wages were falling and that this was acting as a break on the UK economy. Furthermore that this unintended consequence of all the monetary stimulus in our economy was contributing to this meaning that it was acting as a brake on itself.

These days nearly everyone is all over the real wages problem including those who supported the Bank of England in an effort which reduced them! Back then pointing out the truth was as ever a lonely road and many still fail to admit the role of above target inflation. The word redaction does not only apply to out political class.


One way of looking at the Bank of England is to use one of its favourite measures which is productivity. We find that over the Parliament its productivity on the Bank Rate front have been a big fat zero! If we move to what are called “extraordinary measures” we find that they are now ordinary in another perversion of language but that have struggled to reverse a failure of inflation forecasting. Does a panic over negative inflation forecasts sound familiar? A bit like a golfer who misses a put and soon gets a similar one to take central bankers often find that mistakes have a habit of following the advice of Carly Simon.

Coming Around Again

Along this road our central bankers have become indistinguishable from politicians and of all the brickbats I have hurled in their direction it should be the most hurtful.

Number Crunching


How on earth did it manage this in a property boom?

includes £(4.7)bn fixed asset impairment

With losses of that size will it too get a bailout from the taxpayer?

Food Banks

The Trussell Trust has been doing a little redacting of its own today as Full Fact has challenged its claim shown below.

The latest figures published by the Trussell Trust show that over 1,000,000 people have received at least three days’ emergency food from the charity’s foodbanks in the last twelve months” – Trussell Trust, 22nd April 2015

Here is the Full fact response.

The Trussell Trust say that on average people needed two food bank vouchers annually, so the number of people using food banks is likely to be around half of the 1.1 million figure.

Still worrying but some accuracy is welcome.

Greece faces a cash crunch just as the Euro area is awash with liquidity

It was only on Friday that Greece was the subject of the analysis on this website and it is a sign of the times that it has pushed itself to the top of the agenda yet again. It really is extraordinary that a country which only provides some 2.9% of the capital for the European Central Bank is the source of such continual angst and worry, to say nothing about the suffering of the ordinary Greek citizen. But it finds itself being squeezed between the rock of the fact that it needs more financing and cash and the hard place which is that more Euro area austerity and hence likely suffering is required to get it.

The number of the day is Greece’s national debt to GDP ratio at the end of 2014 which was 177.1%. Why well it was 171.3% in 2011 before the PSI (Private Sector Involvement) which was supposed with reforms to put it on course for 120%. Up is the new down yet again!

Raiding the piggy-bank

Yesterday the Greek government acted to get its hands on any cash deposits held by local and municipal authorities. From Kathimerini

the government on Monday signed a legal degree obliging state bodies, with the exception of pension funds, to transfer their reserves to the Bank of Greece for the state’s use.

If you are wondering if pension funds will be exempt next time then I am sure that you are far from the only one?! This is estimated to raise some 1.2 billion Euros and will keep the wolf from the door for now. But of course he will keep knocking. There are obvious side-effects from this of which the simplest is that the bodies which had the cash mostly did so for a reason and what if they need it? Of course the elephant in the room is how far down this road is the new Greek government willing to travel?

Reverse Course

A crunch is being accelerated by the way that the Greek government is making extra spending commitments. In the instance quoted below by Kathimerini it is reversing previously planned cuts to pensions.

The government’s general secretariat has already received the draft amendments that will suspend the application of the zero-deficit clause on supplementary pensions, which would have led to cuts of 7 percent since the start of the year and 8 percent from July 1 onward.

The mathematical equation for the calculation of the retirement lump sum will also be revised, so the amount will not be less than that given to those who retired before August 31, 2013.

Could Greece raise its own funding?

The answer is yes as to a limited extent it already does so. Only last week on the 15th of April it issued some 13 week Treasury Bills. However in these times of ultra-low interest-rates a yield of 2.7% is a warning sign. You see my subject of yesterday Finland has a two-year yield of -0.21% and another seven of its Euro area colleagues also have negative bond yields at this maturity. Those of a nervous disposition might like to look away before I point out that the Greek equivalent is at 29% and nudging 30% today. An enormous gap which questions the whole concept of these nations being together in a single currency as we wonder what happened to the convergence of interest-rates which was promised? Yes the  official short-term rate can be set but the dreams of the same set of interest-rates applying  to each national economy have turned into a nightmare on Greece street.

The simple reason for the difference is the default risk for Greece is very high. If you are wondering why Italy and Portugal who also possess a substantial if lower default risk than Greece are not on the same boat that is because the ECB is keeping their yields low via its QE (Quantitative Easing) purchases. It has a problem with buying existing bonds in Greece because it and the various bailout mechanisms own so much of it (~80%) already. As to buying freshly minted ones well that would be pretty explicit debt monetisation and the ECB prefers to keep that implicit.

In case you are wondering why in such circumstance investors only ask for 2.7% yield on Greek Treasury Bills? The answer is twofold. Firstly there is a type of convention that these are backed by the central bank which can always print to repay them. Of course that is dangerous in a country which has led to so many conventions being broken. But more crucially the Greek banks have been the major purchasers in recent times and as to the risks well when this has happened to you I guess your view of risk gets twisted and distorted.

Greek bank stocks index in Oct 2007: 78,000 points

Greek bank stocks index in April 2015: 431 points (H/T @ReutersJamie )

What about the central bank?

This can be a source of funding but as hinted at earlier the ECB has been active in this area for some time. ECB President Mario Draghi pointed this out at his latest monetary policy press conference.

As you know, we approved the ELA and we’ll continue to do so, extending liquidity to the Greek banks while they are solvent and they have adequate collateral. So far, we have reached an exposure to Greece of €110 billion, which is the highest in the euro area in relation to GDP.

Here we have an awkward situation where the ECB has splashed the cash in the past but now finds itself keeping the Bank of Greece on a very short leash. The amount of Emergency Liquidity Assistance or ELA is being increased in the hundreds of millions most weeks rather than the larger amounts the Greek authorities would like. No doubt the ECB is nervous about the 74 billion Euros of ELA already sitting on the balance sheet of the Bank of Greece and what would happen to it in a default.

As an aside this sort of situation covers what I meant when I wrote in the past about issues with the ECB performing the “lender of last resort” role as we can see circumstances where it would say no. In addition it is considering a tightening of its terms. From Bloomberg this morning.

ECB staff have produced a proposal to increase the haircuts banks take on the collateral they post when borrowing from the Bank of Greece, the people said, asking not to be named as the matter is private.

I will put “the matter is private” is my financial lexicon for these times! But we see that the heat is on although in a more optimistic vein I suppose one might argue that at least the Greek banks presumably have some collateral left!

A 2/3rds vote on the Governing Council of the ECB is required for such changes.

Yet more negativity

This has arrived this morning.


And yes it is time for Foreigner to get out their guitars and sing.

Feels like the first time, it feels like the first time
It feels like the very first time.

Someone has a sense of humour making the move so marginal but there has been a clear trend and we now know what tends to happen when this particular Rubicon is crossed. Also this one matters as many instruments,loans and structured products are indexed to 3 month Euribor as this from Patricia Kowsman of the Wall Street Journal highlights.

Some 43% of Portuguese mortgages with variable rates are linked to the 3-mo euribor

This is a watch this space moment and some may consider it to be like “lost in space”.

The bailout mechanisms

These have money to lend but not on terms –  austerity – which the current Greek government is willing to contemplate.


In the Euro area crisis few phrases have been as apt as that of, “Never believe anything until it is officially denied” variously credited to Otto Von Bismarck and Jim Hacker. On that front I bring you this mornings word from officialdom via TO BHMA.

The chief of the European Commission Jean-Claude Junker has ruled out the possibility of a Greek default and departure from the Eurozone.

Mind you he has previously incriminated himself.

When the going gets tough, you have to lie.

If we move to the economics and finance we see yet another quandary of the Euro area and credit crunch crisis. There is a flood of liquidity in the Euro area as evidenced by  another interest-rate benchmark plunging through the ice into below zero territory. Yet the place that most needs it,Greece, finds itself in a desert lacking liquidity and after last night’s move by its government there must be fears of another deposit outflow. This is a cycle which sucks ever more breath out of the Greek monetary system.

Meanwhile the world watches in a manner described by The Police.

Every breath you take
Every move you make
Every bond you break
Every step you take
I’ll be watching you

Every single day
Every word you say
Every game you play
Every night you stay
I’ll be watching you

Finland is facing its own economic crisis

On Friday I discussed a problem in the southern reaches of the Euro area as the Greek tragedy continues to unfold. Today my attention goes to the northern nordic reaches of Finland which is posing its own series of problems. It has come up before in passing via the travails of the phone company Nokia and my articles are read there and get used. Sadly the trail then runs very cold as Finnish is pretty much unpenetrable to an outsider! However if we return to the economic situation it was one which was lauded by many as this from the Atlantic as recently as July 2013.

My cousin is a recent immigrant, and while she was learning the language and training for jobs, the state gave her €700 a month to live on.

They had another kid six years ago, and though they both work, they’ll collect 100 euros a month from the government until the day she turns 17.

Indeed even the unemployed had little to worry about.

Can’t get a job? Not to worry. Unemployment insurance in Finland lasts for 500 days, after which you can collect a means-tested Labor Market Subsidy for an essentially indefinite period of time.

It is not my purpose to challenge the welfare model outright in Finland simply to point out that such lauding invariably comes at the top of the cycle and that we know what happens next.

Finland’s economy

If we only skip forwards to February 2014 the OECD tried also to laud the Finnish economic model but found itself having to admit this.

More recently, however, competitiveness has deteriorated and output has fallen, as electronics and forestry collapsed.

Okay so what does that mean?

It went through a double dip and output is still about 6% below its late 2007 peak . More recently, GDP has expanded weakly since the second quarter of 2013 and the recovery is expected to be slow.

Not quite what you expect is it? A casual observer might consider Finland to be part of the Germanic bloc which marches on in economic terms whereas in fact the credit crunch performance belies its geography and is much more southern than northern.There have been two major drivers of the present malaise.

The electronics sector has collapsed, falling from 6% of total value added in 2007 to little more than 1% recently, led by Nokia’s tumble in the mobile phone market. The erosion of wood and paper production has been more gradual, but of almost similar magnitude.

Also there is something of a time-bomb awaiting it.

Population is ageing more rapidly in Finland than in most OECD countries. The old-age dependency ratio has risen steadily over the past four decades and is projected to go up even faster between now and 2060.

This poses a list of issues for the Finnish economic and social model going forwards and one of them has been ticking away for some time.

The ratio of pension expenditure to GDP rose by around 3.5 percentage points between 1980 and 2009 to more than 9% of GDP, reflecting a rising old-age dependency ratio and the maturation of the earnings-related pension system.

There are familiar issues here of the current generation retiring earlier when it is plain that subsequent generations will have to face higher retirement ages unless a positive Black Swan event occurs. Of course this theme exists for so much of what we consider to be  the first world but Finland has added some icing to this cake via its generous social system and a weak age structure in economic terms.

Housing Risks

At a time of ultra-low interest-rates  where Euro area membership gives Finland an official deposit rate of -0.2% one might wonder about household borrowing and especially the housing market.

In May 2012 more than half of first-time
buyers had a loan-to-value ratio (LTV) in excess of 90% and more than 40% had a LTV over 100% (FINFSA,
2012)………. The government is reducing allowances for mortgage interest tax deduction, making borrowing less attractive.

Ah! Low, no and indeed negative deposits with tax subsidies and now negative interest-rates. What could go wrong?!

Simple bad luck

If we wonder what happened next? Well of events in a big neighbour reminded us of this.

As a small open economy, Finland is vulnerable to faltering global demand, but also to a slowdown in particular in Russia or other Nordic countries.

Accordingly a Russian bear with a sore head was pretty much exactly what Finland did not need as 2014 developed.

Where are we now?

Sadly the economic boost expected from a lower oil price and indeed a lower overall value of the Euro has not yet arrived in Finland. Last Wednesday Finland Statistics told us this.

Seasonally adjusted output fell by 0.7 per cent in February from the month before. Adjusted for working days, output was 0.5 per cent lower than in February 2014.

As someone who doubts the reliability of quarterly GDP data and therefore even more so for monthly I note with a wry smile that January was revised downwards by 0.6%.If we look at the overall pattern we see that the credit crunch hit Finland hard. If we use 2010 as a benchmark of 100 it is ominous to see September 2008 at 108.91 but that does not fully prepare us for the shock of May 2009 being at 95.42. Whilst we have the issue of monthly estimates a 12% drop is the most severe I can think of as an initial credit crunch output shock. There was then better news for a couple of years returning to 102 in late 2011 but since then matters have deteriorated down to the 97.96 of February.

So we had a sharp shock followed by six years of only marginally better than flat-lining.Indeed the industrial sector has seen another dip.

Industrial output decreased by 5.1 per cent year-on-year in February.

This was a widespread job and yes the electronics sector (Nokia) and forestry both fell too by 5.6% and 5.3% respectively.

Like in so many places information on the services sector is more opaque however in the quarter to January it rose by 0.8% to offset the production decline above. Having raised the housing issue this did not escape my attention.

 real estate activities (grew) by 6.8 per cent from one year ago.

Trade Problems

These are symbolised by the latest numbers.

The current account showed a deficit of EUR 0.5 billion in February.

In essence we see a very similar timetable here. Pre credit crunch saw many years of surpluses followed by a lurch downwards and then a recovery but in late 2011 it was deficit time and that remains the state of play. A little care is needed however as the reduction in exports due to the problems with forestry and at Nokia is the same problem as above not necessarily a new one, although it adds to it. But it is an issue that worries the Bank of Finland.

Since the onset of the international
financial crisis, Finnish exports have declined
by approximately one fifth, which is more
than in any other advanced economy.


The moral of this particular tale is that there are troubles for the Euro area at its northern as well as its southern borders. There is an irony in this as Finland has often pushed for a hard bargain in its involvement in the bailout of Greece including a demand for collateral. From the Financial Times in May 2013.

the Finnish agreed to forgo the income they’d otherwise have got back from EFSF operations in return for their guarantee.

However we find that Finland may be facing an adjustment similar to that imposed on Greece.

Price competitiveness has also eroded, as unit labour costs have increased faster than in many other European countries since 2000.

Actually much of that has happened since 2007 and it amounts to around 10%. Taking a prescription you have suggested for others will be no fun at all.Also the social model so praised by the Atlantic will be under pressure from the lack of economic growth and the fact that the unemployment rate is now 9.1% and has risen from 8.4% over the year to February. A clear lesson from this is to be afraid if your economic model becomes internationally fashionable!

One would hope that the lower Euro and oil price will provide a boost although it is a complex mix as a higher oil price would provide a boost via the Russian economy. But there is a long road ahead for the Finnish economy and the long road has an uphill struggle due to this.

In 2014, altogether 57,232 children were born, which was 902 fewer than in the year before. Last time the number of births was lower in 2003, when 56,630 children were born. The number of births has now decreased for the fourth year in succession.

In a land which loves heavy metal let us consider if the Finns will take the advice of Metallica?

Life’s for my own, to live my own way
Life’s for my own, to live my own way
Life’s for my own, to live my own way

Grexit is something to welcome rather than be afraid of for Greece

Over the past few years there have not be many subjects which have come up on this website more often than the travails in Greece which led to its current economic depression. Yesterday in an echo of the brilliant line from the film Snatch we discovered that all bets are now off at least with one bookmaker. From Digital Look.

Bookmaker William Hill has suspended betting on Greece leaving the Eurozone in 2015 after heavy betting on the ‘Grexit’.

Many see this as something to fear but I do not as I started on this road a long time ago. From May 3rd 2010.

Should her economic growth disappoint over the next 2/3 years, and there are grounds for supposing that they will, then this package will make her position worse and she will be less solvent at the end than at the beginning.

And the next day.

I still feel that a restructuring of Greece’s debt has only been postponed and it would have been better to do it now.

Of course both were right and the latter was something from my deepest fears then as it turned out a restructuring was delayed until 2012 to give Euro area banks time to unload their liabilities -in every sense of the word- mainly onto Euro area taxpayers but also world taxpayers via the International Monetary Fund (IMF).

By Christmas 2011 it had become clear to me that default and devaluation or what has become called Grexit was the best way forwards for Greece.

If I was Greece I would default and devalue this Christmas

Of course the official story was believe it or believe it not was that the Greek economy would collapse. Oh the shame of it for those who argued thus as of course it was their plan which plunged Greece into an economic depression. Later it emerged that US Treasury Secretary Timmy Geithner was troubled by the discussions taking place back then.

We’re going to teach the Greeks a lesson. They are really terrible. They lied to us. They suck and they were profligate and took advantage of the whole basic thing and we’re going to crush them.’ [That] was their basic attitude, all of them.

That excerpt is from a November 2014 article by Yanis Varoufakis, whatever happened to him?

Why is Grexit presented as something to be afraid of?


This is because for the establishment it would expose one of the misrepresentations which they have pushed for years and indeed decades. It concerns the IMF and some of you have noticed the panicky way that even the merest suggestion that Greece may not repay the IMF is treated by officialdom and by much of the media. Back on November 28th 2011 in an explainer article on Mindful Money I pointed out a fault line.

Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong. Any proper accounting system allows for the possibility of things going wrong.

Of course proper accounting systems are in very short supply these days! But as I also pointed out there is another problem as the role of the IMF was changed under the French politician Dominique Strass-Khan to allow the Euro area bailouts.

It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which increasingly includes themselves.

The situation got even more intertwined when the next leader of the IMF was not only yet another French politician but in Christine Lagarde one who was explicitly involved in the “shock and awe” disaster.

Underlying all this is the fact that the IMF has increasingly been gaining funds from developing and emerging nations who no doubt would be as a minimum underwhelmed to find out that it was used to facilitate a first world stitch up! This from Euobserver highlights the hard bargain it is driving.

On Thursday (16 April), IMF chief Christine Lagarde ruled out giving Greece more time to pay back the €1 billion it owes to the fund in May.

You might think that the IMF should feel that it owes Greece a favour but apparently not on Christine Lagarde’s watch.

Greece versus Germany

This is somewhat unfair in a way as Germany is only a little over a quarter of the capital of the Euro area rescue mechanisms so it could be outvoted. Indeed it often is on the European Central Bank Governing Council. Also the IMF has been run by the French for some time. However you spin it though the Greek Finance Minister Yanis Varoufakis was correct to point this out at the Brookings Institute yesterday.

The problem with the take or leave it resolution is that we tried that medicine and it didn’t work…..We have the right to be heard, and we have the right to challenge the logic of a program that has clearly failed.

And perhaps the most uncompromising statement of all.

Greece went from Ponzi scheme of unsustainable borrowing to the scheme of Ponzi austerity.


A story of bond yields

Yes these are merely a financial instrument but we do learn something from the fact that the ten-year sovereign bond yields are currently 0.08% for Germany and 12.4% for Greece. A world apart! However there is another clear difference as you see Germany is funding itself at such levels but Greece is not as it is much cheaper to take bailout cash. Although the story twists again as of course new bailout cash looks as though it may be in short supply or not available at all.

If we continue with the German theme we see that it has gained substantially over the Greek bailout period from this. What do I mean? Back in the “shock and awe” days it was paying 3% for ten-year borrowing. It would be interesting to do the mathematics of how much it has gained would it not? Could it also borrow for say five-years at a negative yield and give the money to Greece? Of course the problem is one from another sphere the likelihood of repayment as Mariah Carey reminds us.

It’s so deep in my daydreams
But it’s just a sweet sweet fantasy baby


Things are going badly right now as the new government in Greece is dithering. It needs to make up its mind as whilst it is so doing the Greek economy is continuing to struggle and the Greek people suffer as shown by this report into medical care from rural Crete.

Patient 179 said “During the pharmacists’ strike I realised my symptoms got worst, but I couldn’t buy my inhalers so in the end I had an asthma attack.’’ Patient 183 said “I didn’t have the money to buy the medications for my hypertension and diabetes and this made me even more stressed.’’ Patient 246 said “I couldn’t buy my medications, and I felt my old depression reappear.’’’ Patient 283 said ‘I often have the dilemma do I pay the taxes and the electricity bills or
do I pay for medications. I know I will suffer no matter what I decide. ’’ Patient 286 said “ Doctor I really can’t afford the medication costs anymore, my bank account is close to zero, and if this continues for long I will have to ask you to select for me the most important ones to continue.’’

Whilst it would have been better to have done so before my advice is the same as I think it is the only way to shatter the Greek establishment which has done so much harm to the rest of the population default and devalue. As Hotel California puts it.

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before.


There are building signs of a global property bubble

It was only yesterday that I discussed and analysed the impact of the 60 billion Euros a month QE (Quantitative Easing) program of the European Central Bank. Later that day ECB President Mario Draghi gave himself and his colleagues a slap on the back by describing it thus.

In addition, there is clear evidence that the monetary policy measures we have put in place are effective.

Whilst confettigate occurred soon afterwards I do not think that the protestor who shouted “end the ECB Dicktatorship” was protesting this point,sadly. After all Mario was fulfilling one of the themes of this blog by shamefully attempting to take the credit for the economic boost to the area provided by the fall in the price. Perhaps with the Brent Crude Oil benchmark surging through the US $60 level he felt he had better be quick before it fades away!

However more quietly there was another impact on the day which was a further fall in bond yields as for example the ten-year yield of Germany has now fallen to 0.1% and in some ways even more extraordinarily the equivalent for France is 0.29%. Yesterday I pointed out that this was likely to be causing asset price inflation. So let us now also factor in the preceding efforts at QE from the Federal Reserve, Bank of Japan, Bank of England and Swiss National Bank (via investing its foreign currency reserves) and look at an impact of this.

Global Property

As bond yields fall in so many places investors looking for an income find it ever harder and they have to look elsewhere. This is symbolised in a way by the fact that the time it has taken me to write a paragraph the German ten-year yield has fallen to 0.09%! In such an environment bricks and mortar are something which investors can turn to as they appear physically at least to be an oasis of stability. But what happens if a tidal wave of cash heads in its direction? MSCI have pointed out some consequences. From the Financial Times.

Globally, property generated total average returns of 9.9 per cent in 2014 thanks to rapid capital value appreciation, MSCI found — the best performance since 2007 and the fifth consecutive year of increasing returns.

Okay so happy days for existing investors as well as hinting at how we got into our current malaise. You will not be surprised to read about the leaders of this particular pack.

UK real estate returned 17.9 per cent in 2014 while the US returned 11.5 per cent…..In London returns topped 20 per cent…… price rises in Dublin drove the total return in its real estate markets to hit a record 44.7 per cent — the best performer of all world cities in MSCI’s analysis.

Celtic Tiger mark two anyone?

But there is more.

MSCI found listed real estate companies had also significantly outperformed the world’s booming equity markets. Globally equities generated a 10.4 per cent return, but property stocks returned 19.5 per cent.

So the equity markets which of course are seeing their own QE boost with new high after new high being reported are being left behind by global property markets right now.

Yield and Rent

In essence this is the driving force as places which used to provide it such as sovereign bonds no longer do. So is it all about the rent? The catch is that whilst it is doing well when compared to a plummeting bond yield the outright position is much less cheery.

This is particularly the case in the US, where investors’ returns from rental income are now lower than before 2008, when a crash in massively overleveraged property triggered an international banking slump.

What could go wrong? Also the US is by no means alone.

Most global markets are at or close to historic low [yield] levels,

Of course faced with such a situation there is an inevitable response.

People are moving up the risk curve into riskier locations and taking on higher levels of debt and more challenging development activity.


To get a proper bubble we need for there to be substantial flows of money into that area from new and sadly usually credulous investors so what signs of that can we see?

the voracious spending — dubbed a “wall of capital” — has now spread out into riskier markets…….European QE was likely to boost real estate prices further, Mr Hobbs warned. “QE is sucking in real estate capital because debt finance is so cheap,” he said.

In the past year investment cash has poured into continental Europe — particularly the periphery — MSCI found.


Just under a year ago a sports shop on the Kings Road in Chelsea closed and it did so due to this. From the Evening Standard.

Michael Conitzer, who runs the shop, said he can no longer afford the rent, which was raised by 50 per cent at the review last year to more than £700,000.

My custom of the occasional T-Shirt and shorts purchase was clearly never going to finance that! But if we travel to a land down under to coin a phrase  we see the same thing according to the comments to the FT article.

In a suburb of Melbourne, in the high street and across the lane from a railway station, there is a shop that was brand-new 5 years ago and that has remained empty ever since. The asking rent was too high. Now, it has two adjoining shops that are also empty. (Alfred Nassim).

It got this reply from across the atlantic.

In a suburb of New York City, many of our favourite local restaurants have closed down over the last several years – the reason given by the owners was invariably:  “rent increases, can’t make ends meet”. (User_7995).

Not Everybody Agrees

The OECD compiles a price to rent database and concludes that whilst there are countries with severe imbalances (New Zealand heads the list) overall the situation is actually undervalued. Mind you it shows Ireland as undervalued as we wonder how  last years surge in prices in Dublin will impact the next set of data.

Also Jonathan Gray of Blackstone disagrees but then you could argue that he has a vested interest here.

Blackstone,the world’s largest private real estate investor,,,,,,Mr Gray just made a $26.5bn bet on the global property market.


There is much to consider here as we observe central bankers pumping up the volume in terms of providing liquidity and wonder where the hammer will fall? Of course consumer inflation measures are invariably neutered in this area as they mostly exclude asset prices. Thus asset price gains are presented as an increase in wealth and expected to increase economic output. For those who own property some of that is true as house price growth in the UK for example, has in the last couple of years has exceeded wider inflation and wages by quite a margin. But what about those who do not own property? Either they are left out or they face even higher prices and so they are not richer but are poorer. This leads to a generational issue as the asset rich are mostly older and the asset poor mostly younger. Accordingly my view is that this is more of an asset and wealth transfer than an increase in it.

But if we return to the QE reducing yields issue then we find ourselves mulling this from Germany. The numbers are for institutional property investment.

 The rental yield, including sunk costs, works out around 3%, with tax breaks if you hold for 12 years.

Or a bond yield fast heading to zero. Again what could go wrong?

Once this plays out and these matters invariably take longer than you think which market will central bankers pump up next? As to a musical accompaniment whilst you are thinking this through let us try Joe Walsh of the Eagles.

So I’m floating on a bubble while the world goes down the drain.
Slipping on the soap, running out of rope,
But all and all I can’t complain,
And that’s the rub according to the rules of the game.
The world’s going down the drain,
When the bubble bursts you might as well drink the cork and pop the champagne.
When the bubble bursts, the world goes down the drain.