What can the UK do in the face of an economic depression?

We are facing quite a crisis and let us hope that we will end up looking at a period that might have been described by the famous Dickens quote from A Tale of Two Cities.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.

The reason I put it like that is because we have examples of the worst of times from food hoarders to examples of an extreme economic slowdown. On a personal level I had only just finished talking to a friend who had lost 2 of his 3 jobs when I passed someone on the street talking about her friend losing his job. Then yesterday I received this tweet.

Funny, Barclays quoted me 18% interest on a £10k business loan this morning to keep my employees paid, unfortunately the state will now need to pay them. Bonkers! ( @_insole )

If we look at events in the retail and leisure sector whilst there are small flickers of good news there are large dollops of really bad news. Accordingly this is a depression albeit like so many things these days it might be over relatively quickly for a depression in say a few months. Of course the latter is unknown in terms of timing. But people on low wages especially are going to need help as not only will they be unable to keep and feed themselves they will be forced to work if they can even if they are ill. In terms of public health that would be a disaster.

Also I fear this from the Bank of England Inflation Survey this morning may be too low.

Question 2b: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, remaining the same as in November.

Whilst there are factors which will reduce inflation such as the lower oil price will come into play there are factors the other way. Because of shortages there will be rises in the price of food and vital purchases as illustrated below from the BBC.

A pharmacy which priced bottles of Calpol at £19.99 has been criticised for the “extortionate” move.

A branch of West Midlands-based chain Jhoots had 200ml bottles of the liquid paracetamol advertised at about three times its usual price.

The UK Pound

If we now switch to financial markets we have seen some wild swings here. The UK Pound always comes under pressure in a financial crisis because of our large financial sector and as I looked at on Wednesday we are in a period of King Dollar strength. Or at least we were as it has weakened overnight with the UK Pound £ bouncing to above US $1.18 this morning. Now with markets as they are we could be in a lot of places by the time you read this but for now the extension of the Federal Reserve liquidity swaps to more countries has calmed things.

Perhaps we get more of a guide from the Euro where as discussed in the comments recently we have been in a poor run. But we have bounced over the past couple of days fro, 1.06 to 1.10 which I think teaches us that the UK Pound £ is a passenger really now. We get hit by any fund liquidations and then rally at any calmer point.

The Bank of England

It held an emergency meeting yesterday and then announced this.

At its special meeting on 19 March, the MPC judged that a further package of measures was warranted to meet its statutory objectives.  It therefore voted unanimously to increase the Bank of England’s holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion to a total of £645 billion, financed by the issuance of central bank reserves; and to reduce Bank Rate by 15 basis points to 0.1%.  The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME).

Let me start with the interest-rate reduction which is simply laughable especially if we note what the business owner was offered above. One of my earliest blog topics was the divergence between official and real world interest-rates and now a 0.1% Bank Rate faces 40% overdraft rates. Next we have the issue that 0.5% was supposed to be the emergency rate so 0.1% speaks for itself. Oh and for those wondering why they have chosen 0.1% as the lower bound ( their description not mine) it is because they still feel that the UK banks cannot take negative interest-rates and is nothing to do with the rest of the economy. So in an irony the banks are by default doing us a favour although we have certainly paid for it!

QE

Let us now move onto this and the Bank of England is proceeding at express pace.

Operations to make gilt purchases will commence on 20 March 2020 when the Bank intends to purchase £5.1bn of gilts spread evenly between short, medium and long maturity buckets.  These operations will last for 30 minutes from 12.15 (short), 13.15 (medium) and 14.15 (long).

But wait there is more.

Prior to the 19 March announcement the Bank was in the process of reinvesting of the £17.5bn cash flows associated with the maturity on 7 March 2016 of a gilt owned by the APF.

As noted above, and consistent with supporting current market conditions, the Bank will complete the remaining £10.2bn of gilt purchases by conducting sets of auctions (short, medium, long maturity sectors) on Friday 20 March and Monday 23 March (i.e. three auctions on each day).

So there will be a total of £10.2 billion of QE purchases today and although it has not explicitly said so presumably the same for Monday. As you can imagine this has had quite an impact on the Gilt market as the ten-year yield which had risen to 1% yesterday lunchtime is now 0.59%. The two-year yield has fallen to 0.08% so we are back in the zone where a negative Gilt yield is possible. Frankly it will depend on how aggressively the Bank of England buys its £200 billion.

The next bit was really vague.

The Committee also voted unanimously that the Bank of England should enlarge the Term Funding Scheme with additional incentives for SMEs (TFSME)……

Following today’s special meeting of the MPC the Initial Borrowing Allowance for the TFSME will be increased from 5% to 10% of participants’ stock of real economy lending, based on the Base Stock of Applicable Loans.

Ah so it wasn’t going to be the triumph they told us only last week then? I hope this will do some good but the track record of such schemes is that they boost the banks ( cheap liquidity) and house prices ( more and cheaper mortgage finance).

We did also get some humour.

As part of the increase in APF asset purchases the MPC has approved an increase in the stock of purchases of sterling corporate bonds, financed by central bank reserves.

Last time around this was a complete joke as the Bank of England ended up buying foreign firms to fill its quota. For example I have nothing against the Danish shipping firm Maersk but even they must have been surprised to see the Bank of England buying their bonds.

Comment

There are people and businesses out there that need help and in the former case simply to eat. So there are real challenges here because if Bank of England action pushes prices higher it will make things worse. But the next steps are for the Chancellor who has difficult choices because on the other side of the coin many of the measures above will simply support the Zombie companies and banks which have held us back.

Also this is a dreadful time for economics 101. I opened by pointing out that unemployment will rise and maybe by a lot and so will prices and hence inflation. That is not supposed to happen. Then the UK announces more QE and the UK Pound £ rises although of course it is easier to state who is not doing QE now! I guess the Ivory Towers who so confidently made forecasts for the UK economy out to 2030 are now using their tippex, erasers and delete buttons. Meanwhile in some sort of Star Trek alternative universe style event Chris Giles of the Financial Times is tweeting this.

In a moment of irritation, am amazed at how little UK public science has learnt from economics – making mistakes no good economist has made in 50 years Economists have been beating themselves up for a decade Shoe now on other foot…

Podcast

 

32 thoughts on “What can the UK do in the face of an economic depression?

  1. The “financialisation” of the UK economy will be its undoing, as will the government and the Bank of England’s deliberate policy of inflating house prices over the last few decades. These very large overfed pigeons are coming home to roost.

    I have said on here many times there would be a terrible price to pay for all this house price inflation, and like everyone else, I just could not see what black swan would appear to actually deliver it. Well Covid-19 is that swan I think, and boy is the county going to pay in spades for the greed and incompetence that has allowed it and perpetuated it.

    My biggest fear is that the policies of the government and the Bank of England that try and prevent the necessary crash and realignment of the economy will hurt savers, pensioners and the very people who chose not to partake in the disgusting orgy of debt, speculation and greed, but as we all on here know, that is exactly what will happen.

    • In relation to your last paragraph and the comment in the article about people losing work.

      I’m a self employed contractor and for the last decade, like millions of others have been happy to grab the high day rates, and the ability to avoid paying higher rates of income tax buy using simple avoidance strategies of paying myself dividends and storing it in a pension.

      But whilst i’ve been grabbing the big bucks ive also been saving up for a rainy day, knowing the good times don’t last forever.

      Id be pretty sure i’ll not be working for the next few months, and as i’ve saved won’t be getting a penny off the govt (aka other people), what should happen for those who are out of work is they go on the dole like they used to when losing work instead of expecting this Mugabe like govt to print them some money.

      I do hope the outcome of this hysteria is companies and people start saving for a rainy day instead of borrowing for a shiny German car, i expect the reality will be even bigger govt. and more people wanting nanny to give them a spoonful of other peoples money more often.

      Hope everyone is positioning themselves the Tory party to totally destroy the currency, i have done so the past week, whether ive jumped in too early is something only time will tell, but it couldnt be clearer when that “good boy who does what he’s told Chancellor of ours speaks that vast inflation is the only aim.

      • I reckon Sajid Javid was told of the plans to borrow and spend before the budget – in other words “this is what you are going to say and do”, and was having none of it, hence his “resignation”. And that was BEFORE this Corona spending and borrowing splurge was announced.They are all socialists now, same policies, tax and spend.Governments don’t run countries anymore, they are just the puppets for the bankers and globalists, carrying out their policies.
        This current incumbent of Number 11 will do everything he is told and question nothing, hence why he got the job.

    • That’s my biggest fear too Kevin. I just feel that they’ll use the disaster caused by the coronavirus to inflate away all debt.

      It’s be the greedy, the reckless and the feckless who’ll come out of it all as the winners when all debt has been inflated away. Savers, pensioners and the responsible will all be told that they have been lucky as “at least you have some money unlike so many”, and also to feel good as “we’ll all come out of this financially stronger as a country.”

      I wonder how long it will be after the debt has been inflated away that we will be told that we’re not saving enough for our retirements and that everyone needs to save more.

        • Thank you Shaun.

          My first message offering you a big thank you for your blog has vanished! I probably forgot to post.

          I just wanted to say thank you for your brilliant blog. You’re one of the few people who make any sense to me these days regarding the subject of finance.

          The world which I was brought up in – one in which I was taught to study, work hard and put some money away for a rainy day looks to me to have turned into one of greed.

          I’ve personally known a few bitcoin gamblers (sorry “investors”), house price maniacs and stock market addicts set themselves up for life due to what I see as ultimately the actions of the central banks.

          I ask myself daily, is it really worth working hard any more? I just see massive inflation coming out of all this insanity. Do we have all have to turn into gamblers now to make it in life?

          Thank you again for making some sense out of all this Shaun!!!

  2. Hello Shaun,

    What can the UK do in the face of an economic depression?

    rhetorical ? I mean there’s little left on the shelf to try but stealth UBI …. wage subs on their way!

    Forbin

    • Hi Forbin

      From the Chancellor this evening. So you didn’t have to wait long.

      “Today I can announce that, for the first time in our history, the government is going to step in and help to pay people’s wages.

      We’re setting up a new Coronavirus Job Retention Scheme.

      Any employer in the country – small or large, charitable or non-profit – will be eligible for the scheme.

      Employers will be able to contact HMRC for a grant to cover most of the wages of people who are not working but are furloughed and kept on payroll, rather than being laid off.

      Government grants will cover 80% of the salary of retained workers up to a total of £2,500 a month – that’s above the median income……The Coronavirus Job Retention Scheme will cover the cost of wages backdated to March 1st and will be open initially for at least three months – and I will extend the scheme for longer if necessary.”

  3. Great ideas to help the economy, but can they deliver in time? Companies need the money now, not in three months time after filling in a 60 page application form!

  4. Hello Shaun,

    of course the “Green” party won , here we are on the way to a new Utopia! Yay!!

    1, nationalizations – check !
    2, severe flight cut backs ( it’s only 2.5% but every little helps and its only the plebs that will be affected – how dare they go on ” holiday” ! ) – check!
    3, reduced personal transport – check !
    4, HMG pays the plebs wages – check !
    5, Supermarket shelves empty – check ! ( ah the good old days of East Germany ;-). , brings a tear to your eyes – or was that the baton to stomach? eheheh ) .

    but think , the national parks are free now …… well they have t be as you’re not allowed to drive there ….

    IngSoc here we come……

    Forbin

    • Hi Forbin

      On the issue of empty supermarket shelves I was leaving Battersea Park Tesco when I met a friend who grew up in Russia, but what is now Lithuania. He told me that he had seen things like that in his youth there but never expected to see it here.

      As to the flights it is noticeable here ( for those unaware Battersea is often on the Heathrow flightpath) that if they wake me up in the morning there seem to be fewer now. Greta will be pleased.

  5. “What can the UK do in the face of an economic depression?”

    Well more people out of work means lower production which in turn must equate to higher debt for the next generation to pick up the bill.

    There is only so long this can go on before the realization is someone has to suffer the pain.

    What should happen in a fair world is the rich pick up the burden but that doesn’t always happen.

    In reality living standards will probably fall, its all very well the government making all the various promises recently but as Shaun quoted yesterday and today an 18% interest rate will penalize many a business, bear in mind an ordinary personal overdraft is much higher than that and the poor will become even poorer.

    Unfortunately in a world wide depression which looks like its coming there isn’t much chance of digging the UK out of the mire.

    As to where all this is heading, and some people will not like these remarks there is plenty of reading in the book of Revelations as a warning to all.in Mathew 24.7 or the book of Revelations.

    I await to see how many posters give me the thumbs up or thumbs down on this subject.

    • Hi Peter

      If we are going to get biblical everyone was worried about a plague of locusts ( which had reached Pakistan if I recall correctly). Also there was the swine flu issue which like the locusts has got swamped by all the Corona Virus news.

  6. Hi Shaun

    Oddly enough I think the answer to this might be elsewhere.

    The Eurozone and the associated paraphernalia of the Stability and Growth Pact and the ECB are of course part of a nexus of rigid rules that are gloriously, indeed almost comically, out of place in the current situation.

    However, the wind seems to be changing quite markedly in the last few days. Macron has announced a huge fiscal package and even Merkel is now realising that fiscal policy needs to be ramped up hugely or the whole house will fall down. Even the anodyne Lagarde has woken up to the threat and is now positioning the ECB to act as quasi lender of last resort.

    What this amounts to is a welcome, indeed necessary, binning of the rules as this truly existential threat rears its head. If it goes on, and that is likely, it might well waken the German hawks and the German Constitutional Court who will see all this as the thin end of a very big wedge which can only end with massive and continuous transfers from the North to the South. However in the interim it would seem that common sense has not entirely departed.

    If the UK were faced with an EU determined to preserve these rigid rules in this crisis then the collateral damage would make our own position immensely more difficult. Although we are leaving the EU it is not in our interest to see the EU fail; the huge adaptations our economy will have to make in the coming years will be much worse if the EU is in turmoil.

    • Its in everyones interests for the EU to fail, well apart from the crony capitalists, corporations and those running it.

      Its being in the EU that has caused nations to fail, such as Greece, Italy etc..

  7. Shaun,
    HMG seem unable you identify those at risk groups – I suggest using NI numbers as I’D for age related policies & job guarantee payments.
    Possibly close supermarkets on Sundays for restocking then rationing as needed?

    • I suggest the govt to apologise for creating this mass hysteria and to admit it’ll not be much worse than any other flu doing the rounds.

      But it seems the “advisers” aka academics have told the govt 80% of us will get this flu …. and that they’ve used modelling systems to come up with this figure.

      Wonder if they’ve borrowed the modelling systems from the BoE, as if so someone needs to tell them they’ve been on the blink for 20 years now.

      • Hi Arthur,
        What does seem strange and highly suspicious, is that the government have switched their policy from letting it spread quickly to avoid a spike in cases later in the year, to that employed by the rest of the world, of containment so that health services are not overwhelmed.
        I haven’t seen much criticism or even questioning of this 18 in the media, but if you or anyone else have, please feel free to contradict.

        • What seems strange to me is the way it slowly creeps from China to Europe … and then a month or so later is going to hit America with a big bang. (after they close the country)

          Did they stop planes flying and boats sailing from China to America in the first couple of months of 2020, as surely with the millions from between the nations it’d have got there just as quick.

          Strange times we live in, only those in the upper echelons of inner party know what financial moves to make.

          Its all doubleplus unusual.

          • What seems strange to me is that we are not hearing about this plague going through the third world cities with all their squalid conditions. Why is Milan shut down, but not Lagos or Cairo?

      • Is the results of these measures to make the death toll higher?
        Lack of jobs, lack of food, lack of relaxation going to lead to more stress and anger, more mental illness, heart attacks, strokes, overdoses, murder even?
        UK cannot be in this position for too long.

        • IN reply to davehmba

          Hong Kong wasnt shut down, my brother was in work every day apart from when he was flying to Singapore, Bangkok and such places.

          And there was no money printing bailouts, and HK is part of a communist state.

      • lArthur Cox
        on March 20, 2020 at 2:49 pm said:
        I suggest the govt to apologise for creating this mass hysteria and to admit it’ll not be much worse than any other flu doing the rounds.
        ______
        Saul Alinsky: “Never waste a crisis.”

      • I think the reality is that no one knows, at this fairly early stage, exactly what this virus will do. Unfortunately you can’t trust statistics from China and so until we have a history of this spread and it’s infection rate and death toll, we don’t know what we are up against and neither do the authorities. Predictably concerns for human rights, freedom of travel and even racism got in the way of taking early drastic measures that could have put the genie back in the bottle. We are now enforcing the foreign travel restrictions that should have applied when the outbreak occurred in Wuhan. I do believe that when mass screening takes place in the UK, they will find that this virus is far wider spread than we now believe, which will actually turn out to be good news for the population as a whole, as the seriousness will diminish for all those other than vulnerable groups. This should reduce the panic pressure on the NHS allowing them to concentrate on those who need emergency treatment and who are most likely to die from this disease. This is in contrast to the earlier plan to only save those who might survive.
        At this stage we simply do not know, however I totally support drastic action at this stage to buy time to work out exactly what we are facing. I am cautiously optimistic that it may not turn out to be too serious and what a wonderful thing that will be. I don’t think we should be too critical of the government or the health experts at this stage as they grapple with an unknown enemy. Hopefully the whole world will learn a lesson from this in future and faster action will be taken, irrespective of peoples or governments sensitivities, should another outbreak of a dangerous pathogen occur. Maybe we will now see significant investment in antibiotic research to counteract superbugs which could pose a similar threat.

  8. Great blog and great podcast as usual, Shaun.
    My wife Sonja, unlike most retail workers in Ontario, has kept her job because she works in the bakery at one of the stores in the Metro chain, but just yesterday the work got a lot more arduous. The store closed at 8 p.m. two hours before it usual would, but she and the rest of the staff were kept working until 10 p.m. to clean to protect against COVID-19. It will be the same thing tonight. I don’t know if this is also happening in British retail stores.
    Interesting that Andrew Bailey has boldly gone where no Governor of the Bank of England has gone before, with a cut of the bank rate to 10 basis points. As far as I know this is still the way the Bank of Canada’s overnight rate works, as described in a 2016 Bank of Canada paper by Witmer et al: “The Bank of Canada operates a corridor system with no reserve requirements. Its target for the overnight rate is at the midpoint of a 50-basis-point corridor. Participants in the Large Value Transfer System are charged the rate at the upper limit of the corridor (the Bank Rate) for overdraft loans from the Bank. Participants with end-of-day excess balances with the Bank are compensated at the rate at the lower limit of the corridor (the deposit rate).” With an overnight rate of 25 basis points, which is the lowest that it has ever gone, the deposit rate would already have been at the zero lower bound. Keeping to the same framework, an overnight rate of 10 basis points would mean a bank rate of 35 basis points and a deposit rate of -15 basis points, i.e. the Bank of Canada would already, in a sense, be dipping its toe into negative interest rates. As you say, once the rate is down to 25 basis points, a 15-basis-point cut really doesn’t make much difference, but I wouldn’t be surprised to see the Bank of Canada match the Bank of England’s official rate just the same. It seems unlikely the Bank of Canada will do it as early as the April announcement, but who really knows.

    • Hi Andrew and thank you

      I am pleased for your wife and hope she can stay safe as well. As to the store cleanliness issue I hope although on my travels I note that not everyone is taking this seriously.

      The equivalent of the “corridor” you mention was something I recall the ECB making something of a big deal of back in the day. They must have been approaching 0% and thinking about the same issues. So do not be surprised should the Bank of Canada cut to 0% that it cuts the corridor as well. Central banks like to avoid charging banks via negative rates if they call although of course it boosts their coffers ( the Swiss National Bank made around 2 billion Swiss Francs out of it last year).

      You could get an asymmetric corridor keeping the 0.25% above but maybe only 0.1% below.

  9. More from Alinsky:
    How to create a social state by Saul Alinsky:
    There are eight levels of control that must be obtained before you are able to create a social state. The first is the most important.
    1) Healthcare – Control healthcare and you control the people.
    2) Poverty – Increase the Poverty level as high as possible; poor people are easier to control and will not fight back if you are providing everything for them to live.
    3) Debt – Increase the debt to an unsustainable level. That way you are able to increase taxes, and this will produce more poverty.
    4) Gun Control – Remove the ability to defend themselves from the government. That way you are able to create a police state.
    5) Welfare – Take control of every aspect of their lives (Food, Housing, and Income).
    6) Education – Take control of what people read and listen to – take control of what children learn in school.
    7) Religion – Remove the belief in the God from the government and schools.
    8) Class Welfare – Divide the people into the wealthy and the poor. This will cause more disconnect, and it will be easier to take (tax) the wealthy with the support of the poor.
    ________________
    I’m not suggesting that Globalists deliberately created this coronavirus, but with the Anthropogenic Climate Change fraud likely to be unmasked with the new CMIP6 generation of models, (Thunberg is the last, desperate throw of the dice) their Agenda has to be met in other ways.
    This hysterical economic over-reaction is designed to do what AGW failed to: redistribute wealth away from ordinary Western folk.

    • It is a pretty authoritarian Bill that Boris has dreamed up and the powers will last two years. It makes you wonder whether The Big Lie about house prices has finally failed. Certainly, go on some sites and criticise the BoE and others and it will not get published.

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