After Friday’s surge in world equity markets yesterday saw a little indigestion with the Dow Jones Industrial Average falling some 48 points to 10812. This morning has seen concerns about tomorrows Tankan survey in Japan (where the Bank of Japan surveys economic conditions) lead to a fall in the Nikkei 225 equity index of 107 points to 9495. This means that the spread between the two indices has widened further to 1317 points. One cause of the discrepancy the recent Yen strength that led to Bank of Japan intervention has been quieter the last 24 hours or so and has remained around 84.20.
Japan’s Government Bond Market
The recent moves in Japan to intervene against the currency combined with fears about the impact of its rally has impacted on the Japanese government bond market. We can also add another reason for recent gains which was Prime Minister Kan defeating the leadership challenge he was subjected too as he was considered to be the most fiscally conservative candidate.The combination of these factors has led to ten-year Japanese Government bond yields falling to 0.96%. Today there was an auction of 2 year bonds which had a coupon of 0.1% and were issued at a price of 99.92, not much return there is there? Just to add to the enigma that is Japan this is the place with a national debt to GDP ratio of over 200% and rising.
Channel Four interviews Mr.Bean
There was a rather extraordinary interview given by Charlie Bean yesterday to Channel Four news. This leads to obvious headlines like Deputy Governor is Mr Bean with the implications of the hapless comedic character played by Rowan Atkinson and with the speech he gave the image is not so far wrong.
What did he say?
“What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.
“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.
“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”
The Deputy Governor said the Bank’s 0.5 per cent base rate was part of an “aggressive policy” to deal with a “once-in-a-century” financial crisis. He continued with the theme that he felt that savers should eat into their capital. Furthermore he also said that he said he “fully sympathised” with the plight of older people who depended on their savings, but then added that they had enjoyed high interest rates in the past and had seen huge rises in property values in a rather patronising addition.
I am sure that this intervention will make many savers blood boil and I notice one reply which pointed out that it was much easier for a man with a guaranteed index-linked pension to make such suggestions than someone struggling to get by. However let us look at what the Deputy Governor is saying. He wants savers to spend to help boost consumption in the economy. Indeed when asked this question.
This bad news for savers is the point of what you are doing?
He replied “yes”. Now there are two sides to the balance sheet and let us consider the moral hazard the Deputy Governor has leapt into.
1. He expects savers to be rational and to think ahead for better times for them and to spend now in advance of this (in spite of telling them interest rates will be low for a long time in something of a contradiction).
2. Yet he continually bails out borrowers and does not expect to expect them to shoulder any of the burden as there was no mention of them at all.
We now get to the Bank of England’s view of the “paradox of thrift”. Apparently Mr.Bean after telling people to save for years now wants them to spend just at the moment it looks as though people may be willing to save. He is afraid of the consequences of them saving but is apparently not bothered by the implication of his words that the Bank of England will bail out borrowers. On that basis if savers are as rational as he thinks then they will see that saving under his regime is unlikely to be rewarded and if they follow this tenet the he has managed to accelerate the next crisis as in case he has forgotten one of the causes of current problems was too much borrowing and too little saving! He will solve the problem of this being a “once-in-a-century” but not in a good way.
Mr.Bean revealed that savers often wrote to the Bank of England,after his words I hope the postman/woman does not have a bad back.
The International Monetary Fund is full of praise for the UK’s austerity programme.
A provisional report from the IMF on the UK must have sounded like Chancellor George Osbourne’s favourite music yesterday. He would have struggled to write a better one himself.
Economic recovery is underway, unemployment has stabilized, and financial sector health has improved. The government’s strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability. The plan greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery. Fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus……………
Our central scenario envisages real GDP growth of 2 percent in 2011, rising gradually to 2½ percent in the medium term
As Mr. Osbourne starts to read the good news even his Office of Budget Responsibility which has had teething problems gets praise.
The establishment of a new independent Office for Budget Responsibility (OBR) is a welcome step toward strengthening the budget process
The conclusion is full of praise too.
With steadfast fiscal adjustment, forward-looking monetary policy aimed at achieving the inflation target, and gradual implementation of strong financial sector reforms, economic fundamentals should strengthen and establish the basis for sustainable recovery.
One needs to remember that the IMF is an organisation which often recommends austerity programmes to nations so it was always likely to approve Chancellor Osbourne’s willingness to don a fiscal “hair shirt”. It probably would have had some praise for ex-chancellor Darling’s plans too. Also it is also true that it as an organisation is by no means infallible and currently has problems with its strategy in Latvia and Hungary and to my mind Greece too. I have criticised it in the past for having the same answer to all problems and this report is another indication of that line of thought.
Tucked away in the report on the section on the Bank of England’s monetary policy is this section and the emphasis is mine.
With inflation projected to fall back to target over the policy horizon, the Bank of England’s accommodative stance reflects the need to maintain overall policy stimulus as fiscal tightening takes hold and financial intermediation normalizes only gradually……..Conversely, the central bank must stand ready to start a gradual tightening if output recovers apace and inflation continues to surprise on the upside.
Here we see two plain flaws. The Bank of England virtually always predicts inflation will fall back to target over the policy horizon but as I have discussed many times before its problem is that inflation does not do as it is told and has consistently exceeded its target (41 out of the latest 50 months). Accordingly the phrase has little meaning or relevance. Also inflation surprises have not led to any policy tightening so the section on the Bank of England lacks intellectual credibility. One section I do agree with is.
Developments in labor costs, other input prices, and inflation expectations warrant particularly close monitoring.
If you think about it this sentence tells you that the IMF has its concerns too.
Ireland, Portugal and the European Financial Stabilisation Fund
One or two of the news services are having problems with the government bond yields in Ireland and are over-stating them. Her ten-year yield is at 6.63% and rose on a day when other were falling for a poor day. Portugal is not far behind at 6.55% on the same measure. There were rumours yesterday that the European Central Bank had looked at a bailout for Ireland which if true should never have been released. I was asked a question about the EFSF yesterday and would like to put here my view of some of the problems with it. The full version is in the comments section but here is how it would operate and I am sure that many of the potential flaws are plain to see.
“A eurozone member state seeking financial assistance must initially agree a Memorandum of Understanding (MoU) with the European Commission, in liaison with the IMF and the ECB. This MoU will set out the budgetary and economic policy conditions which the eurozone member state must comply with in order to receive financial assistance. The detailed terms and conditions would then be set out in a Loan Facility Agreement which is subject to the agreement of all the guarantors (i.e. those countries in the EFSF). The company running the EFSF will be responsible for raising the funds it requires to advance the loans to the borrower.”
As I pointed out it is hardly likely to be Mr.Speedy. It is a deal for bureaucrats and officials rather than something which can act quickly.