Yesterday saw an improvement again in world equity markets as their recovery goes on. For example the US Dow Jones Industrial Average rose by 69 points to 12,161 a new post credit crunch high. European equity markets followed suit with the pan-European Eurofirst 300 equity index rising some 1% to 1177 making a rally of 7% in 2011 so far. Perhaps this was a sign of a further review of the US employment/unemployment numbers I discussed yesterday or hope following the fact that US consumer credit had risen by some US $6.1 billion in December. This credit increase included within it an increase in borrowing on credit cards which may help the economy in the short-term but is just as likely to unsettle those who worry about the implications for the long-term!
Central Bankers in the news
It is used to be that central bankers hid in the shadows, a bit like the Victorian dictum for children (“seen but not heard”). One of the features of this recession is that because of the way that their activities have increased they have come out of the shadows and become quite public figures. I have argued many times that policies such as Quantitative Easing have compromised central banking independence and the wide range of their interference in markets has compromised them and led to the creation of false markets. For example the way that the European Central Bank has purchased peripheral Euro zone government debt has often created a false market in the government debt of Ireland, Greece and Portugal. The US Federal Reserve by becoming the biggest holder of US Treasury Bonds has created a false market in its own countries debt. In fact if you think about it this is the main objective of the policy.
Few have been willing to point out that if anybody else did this it would be declared illegal! Even fewer have been willing to join me in pointing out that the world’s central bankers do not have the necessary expertise for this and that they are operating above their pay grade. But the New York Times joined in on Sunday with its view on the Governor of the Bank of England Mervyn King.
The New York Times on Mervyn King
A central banker need not be loved, but at the least he should command respect — and in Britain these days Mervyn King cannot count on either.
As for the issue on which he may have most closely staked his reputation — that Britain’s large banks must increase capital levels well beyond international standards — he so far has been ignored.
Mr. King, the donnish governor of the Bank of England, has been accused of presiding over the worst stagflation — a dreaded combination of stagnant economic activity and rising inflation — happening in any major developed economy.
As you can see he is under fire and the attack is not only on his policies as there is this quote “Mervyn is not blessed with any doubts about his abilities.” Of course the way things are going he should have doubts and this point seems horribly familiar to Ben Bernanke’s “100% confidence”. Spare us from those who are that sure please! Arrogance and failure do not make a good mixture.
The Chairman of the Dallas Federal Reserve Bank: Mr.Fisher
Perhaps the New York Times might have looked a little closer to home as let me remind you of my article quoting from a speech from Mr.Fisher back on October 20th last year.
The problem is that, presently, the efficacy of further accommodation using nonconventional policies is not all that clear.
In other words he has doubts because he is not sure what,if any,good such a policy would do. But then we got the most stunning part of the speech which said the following.
In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.
One might have concluded from this ( I certainly did) that Mr.Fisher would not be a fan of the new asset purchase programme called QE2. He was quit clear I think. However at the recent meeting of the FOMC which he had just joined as a voting member he voted with the policy. Yesterday in an interview with Bloomberg radio he said this.
You can never say never, but I cannot imagine a convincing argument for further quantitative easing after this round, given what is developing now in the economy.
The obvious reply to this would have been to quote his previous speech and point out that he said that about QE2 so why should anybody believe him if a QE3 started to head down the slipway. If these are his views he should have dissented at the last meeting it is no good talking of a fait accompli. After all should QE3 begin after the first vote he would again be facing a fait accompli!
As you can see the mainstream media is beginning to catch up albeit slowly with the problem of increased central bank intervention in the world. In some ways central bankers are now more like politicians and must expect to be in the limelight. I have put forward a proposal for the UK Monetary Policy Committee to be elected and maybe this should spread to other countries. Some responses have suggested that the electorate are not up to this. To this I have two main replies. Firstly this has been the response of every attempt to improve/extend democracy since it began. Secondly you think that politician’s are up to it? In my view we are at an unfortunate crossroads where politicians influence if you look at the increased share of governments in economies just at the moment we have politicians who in general have no experience of anything other than the political system.
If I may return to Mr.Fisher effectively promising one thing and doing another in my view, makes him look much more like a politician than a central banker. Of course we live in a world where a politician has become a central banker as Dominique Strauss-Khan the head of the International Monetary Fund is a French politician who is expected to stand for France’s Presidency at the next election. Those who read the London Evening Standard may have seen an article by Jenni Russell yesterday which completely missed this point.
UK Manufacturing: A Recovery?
Over the credit crunch recession UK manufacturing took a dreadful pounding. According to the Office of National Statistics if 2006 output is equal to 100 then output in 2009 was 87.2. The worst point of the fall was February 2009 when the annualised fall in output reached -14.3%. However as information is being released it seems as though it is recovering strongly.
CBI Small and Medium Sized Enterprise Trends Survey
30% of the 366 respondents said the volume of output rose, and 17% reported a fall, giving a balance of +13%…….Output was lifted by an improvement in domestic orders growth, with 28% of firms reporting a rise in volumes, and 20% a fall, giving a balance of +8%. That is the fastest increase since January 1997.
So it would appear that the smaller companies sector is recovering well. If we think back to last week the Purchasing Mangers Index told us this. From February 2nd.
The Markit/CIPS survey for the purchasing managers’ index rose to 62 in January from 58.7 in December, the highest reading since the survey was created in 1992. Levels of new orders rose at the fastest rate in the survey’s history.
The latest figures from the ONS were for November 2010 and were also strongly positive.
Total manufacturing output increased by 5.6 per cent in November 2010 compared to the same month a year ago…….Manufacturing output per job was 8.0 per cent higher than the same quarter of 2009, up from growth of 6.8 per cent in the previous quarter. The increase in the growth rate is due to an increase in the growth rate of manufacturing output.
As you can see I hope for further good news when the December manufacturing numbers are released on Thursday. I wanted to point the apparent recovery out earlier to prepare the ground and because the day itself may be swamped by speculation about a possible rise in interest-rates. This recovery is significant in that manufacturing often recovers more slowly than the economy in general after a recession but this time is looking different. So we have one more example of this time it’s different! This leads me to the thought that those who keep arguing for the same old policies seem to be ignoring the fact that this time many things are different. The irony is that it is booms which come with the cry “This time it is different!” As it happens this pattern of a strong (early) apparent recovery is true in the United States too.
Also tomorrow we get some new Balance of Payments figures. Perhaps finally we will see signs of an improvement! However whilst a better manufacturing performance should help the 2007/08 devaluation of sterling has so far helped these figures very little.
UK Bank Levy
This morning the Chancellor has announced that this levy will be charged at its full rate of UK £2.5 billion a year for this tax year as well as future ones which will raise extra revenue of £800 million. As a concept I have written in the past that I feel that in effect charging banks an insurance premium for the implicit and explicit support that the UK taxpayer provides is a good idea. However there are potential flies in the ointment.
1. With interest-rates so low the taxpayer is in effect subsidising the banks as much of their profits will come from this. We are giving with one hand and taking away with another.
2. A way has to be found that means this levy applies to bank salaries and bonuses ( i mean for investment bankers not branch staff) rather than simply being passed onto the consumer and contributing to inflation.
3. With new taxes there is the danger of “revenue/spending creep”. This money should be used to pay off the deficit but is likely instead to go into the general exchequer fund and one thing we do know is that our political class loves to spend. So it could lead to an expansion of an already large public-sector.