What will the Bank of England claim next?

This morning has seen Reuters publish the details of an interview with one of the Bank of England’s policymakers Ian McCafferty. So let us take a look at what he said.

The Bank of England should not delay raising interest rates again, one of its top policymakers said, pointing to the possibility of faster pay rises and the recent strong pick-up in the world economy.

This is already a little awkward for our self-proclaimed inflation warrior. This is because the Bank of England has been forecasting faster pay rises for several years now usually due to output gap theory.

Speaking in his office in the BoE on Monday, adorned with books on the economy and a framed page of The Times newspaper with a headline about inflation, McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labor market.

The slack issue has been a problem for him and his colleagues for some time as this from a speech of his four years ago illustrates.

That is why, in the second phase of forward guidance that came into effect this month as the unemployment
rate passed 7%, the MPC expanded the range of indicators of labour market slack that we are formally
monitoring.

The first phase of Forward Guidance lasted around 6 months and it is hard not to have a wry smile as we have left both the unemployment level originally indicated and the other measure suggested by Ian well behind.

At present, these indicators suggest that the current level of slack in the economy, as reported in the
February Inflation Report, is in the region of 1-1½% of GDP, suggesting that there remains some room for
demand to recover further without exerting upward pressure on inflation.

Even if we are generous that had gone by the end of the year and yet Bank Rate is where it was then having followed the strategy of the Grand Old Duke of York when it did move. Oh and did I mention problems with forecasting a wages boom?

So the pickup in January settlements reported by a number of data providers certainly suggests that nominal pay is finally on the rise.

That is because it is from 2014 but pretty much same rhetoric has been used by the Bank of England this year. Actually Ian was embarrassingly wrong back then was average earnings fell sharply in that April meaning that the rolling three-month measure was at -0.3% in July.

What is the current wages evidence?

Ian gives us yet another regurgitation of the output gap or slack style analysis that has worked so badly for him over the past four years.

Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure.

The official data does not give much of a backing for this as the three monthly average at 2.8% in January is higher than last year but by 0.6%. Also if you look back then this measure was around 3% in the late spring and summer of 2015 so it is a case of back to the future. If we move to the latest quarterly report of the Agents of the Bank of England we get what sounds like the same old scene.

Growth in total labour costs had remained modest, although average pay settlements this year were a little higher than in 2017 for many contacts (Chart 6). Most settlements were between 2½%–3½%, driven by a combination of improved profitability among exporters, the annual NLW increase and higher consumer price inflation.

As consumer inflation is set to fade there is an issue there and I will leave you to mull how government policy via the National Living Wage can lead to the Bank of England raising Bank Rate! Oh and many would regard exporters raising pay in response to higher profitability as a good thing.

There is more backing for the higher wages in prospect view from private-sector surveys such as this from this morning on Bloomberg.

U.K. firms facing a shortage of workers are pushing up starting salaries, according to IHS Markit and the Recruitment and Employment Confederation.

Pay for temporary or contract staff rose at the quickest pace in six months in March, as the supply of job candidates fell sharply, they said in a report on Tuesday. Vacancies grew across all categories, with engineers and IT workers the most sought after for permanent roles, and hotel and catering employees in highest demand for temporary jobs.

However City-AM has spotted something which Bloomberg seems to have overlooked.

However, signs of increasing pay pressure for staff in permanent roles have diminished since hitting an almost three-year high in January.

A Space Oddity

This is somewhere between confused and simply wrong and the emphasis is mine.

The BoE raised rates for the first time in more than a decade in November, saying that Britain, while growing more slowly than other rich countries because of the impact of the 2016 Brexit vote, was more prone to inflation than in the past.

If we look back to the past we have seen plenty of examples where inflation has been much higher. Ian should know this as I worked with him during one of them. But if we look more recently there are two reasons for using less not more. Firstly there has so far been no sign that the inflation caused by the fall in the UK Pound £ has had secondly and tertiary effects and rolled through the system like it used to. On the evidence so far it hit and then faded. Secondly inflation has not even gone as high as it did in the autumn of 2010.

The World Economy

This is an example of a type of space oddity.

the boost from the world economy’s strong recovery

This is an example of steering monetary policy via the rear window when you are supposed to be looking ahead via the front window. To set monetary policy correctly you would have needed to raise interest-rates around a year before this in fact you could argue somewhere around the time they cut them.

Andy Haldane

There is a clear problem in you being judge and jury on your own actions as Andy as attempted in Melbourne Australia today.

A detailed, disaggregated analysis of household balance sheets suggests the material loosening in UK
monetary policy after the financial crisis did not have significant adverse distributional consequences.

These days it only takes a couple of minutes for him to be challenged about reality which is very different to the lauding he used to get.

 

Personally I am disappointed that having invited Billy Bragg to give a talk at the Bank of England Andy has not produced one of these for him.

Some illustrative and tentative examples of these personal “monetary policy scorecards” have been shown.

Oh and I owe the Bank of England an apology as I though their version of sending Andy to Coventry was complete when they sent him to the Outer Hebrides whereas I now note he is giving speeches in Australia. Will he be the first man on Mars?

Also let me help him out on a subject which he has confessed to not understanding which is pensions. By my calculations his is worth at least £3.4 million will he be producing a personal scorecard?

Comment

There are two fundamental problems here. The first is the error made by the Bank of England back in August 2016 when it confused cut with raise something from which it has never fully recovered. It now has figured out that interest-rates are too low but in terms of timing would be raising in the face of falling inflation and signs of a weakening economic outlook.

Next is the issue of telling everyone it has made them better off. Apart from the obvious moral hazard involved if it was true then why does it need to keep telling us? Moving to a more technical issue it is difficult for a man who does not understand one of the biggest sources of wealth (pensions) to lecture us about it. Sweet summed it up back in the day.

Does anyone know the way, did we hear someone say?
We just haven’t got a clue what to do
Does anyone know the way, there’s got to be a way?
To Block Buster!

 

 

 

 

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Stresses abound at the Bank of England

The last 24 hours have seen something of a flurry of activity from the Bank of England. Yesterday Nishkam High School was the latest stop in what was supposed to be a grand tour of the country by its Chief Economist Andy Haldane. The was designed to show that he is a man of the people and combined with the expected ( by him) triumph of his shock and awe Sledgehammer QE and “muscular” monetary easing of August 2016 was supposed to lead for a chorus of calls for him to be the next Governor of the Bank of England. Whereas in fact he ended up revealing that at another school he had been asked this.

“Two questions”, she said. “Who are you? And why are you here?”

According to Andy this is in fact a triumph.

Several hours of introspection (and therapy) later, I now have an answer. The key comes in how you keep score. If in a classroom of 50 kids you reach only 1, what is
your score? Have you lost 49-1? No. You have won 1-0.

Perhaps that is the dreaded counterfactual in action. Could you imagine going to Roman Abramovich and saying that losing 49 games and winning one is a success? Of course you would be long gone by then. Anyway there is one girl at the “Needs Improvement” school who has shown distinct signs of intelligence as we note for later how Andy’s somewhat scrambled view of success might influence the bank stress tests released this morning.

What about monetary policy?

Andy has a real crisis here as of course he pushed so hard for the easing in August 2016 then a year later ( too late for the inflation it encouraged) started to push for a reversal of the bank rate cut and then voted for that earlier this month. Here is how he reflects on that.

The MPC’s policy actions in November were described as “taking its foot off the accelerator” to hold the car
within its “speed limit”. This was intended to convey the sense of monetary policy slowing the economy
slightly, towards its lower potential growth rate, while still propelling it forward overall.

According to Andy such a metaphor is another triumph.

It was a visual narrative. Because most people (from Derry to Doncaster, Dunfermline to Dunvant, Delphi to Delhi) drive cars, it was a local and personal narrative too. The car metaphor was used extensively by UK media.

Some are much less sure about Andy’s enthusiasm for dumbing down.

Andy Haldane cites the MPC’s recent use of the “car metaphor” as a success in attempting to engage the public. Which is fine. But I’d like to hear his thoughts on damage caused by bad/inaccurate metaphors (eg. “maxing out the country’s credit card”) ( Andy Bruce of Reuters )

Also there was a particularly arrogant section on inflation which I think I am the only person to point out.

This unfamiliarity with economic concepts extends to a lack of understanding of these concepts in practice.
For example, the Bank of England regularly surveys the general public to gauge their views on inflation.
When given a small number of options, less than a quarter of the public typically identify the correct range within which the current inflation rate lies. More than 40% simply say that they do not know.

Perhaps they find from their experience that they cannot believe the numbers and once you look at the data the 40% may simply be informed and honest.

Bank stress tests

The true purpose of a central bank stress test is to make it look like you are doing the job thoroughly whilst making sure that if any bank fails it is only a minor one. Also if any extra capital is required it needs to be kept to a minimum.This was illustrated in 2013 by the European Central Bank. From the Financial Times.

The European Central Bank has appointed consultants who said Anglo Irish was the best bank in the world, three years before it had to be nationalised, to advise on a review of lenders. Consultants Oliver Wyman, which made the embarrassing Anglo Irish assessment in 2006 in a “shareholder performance hall of fame”, has since been involved in bank stress tests in Spain last year and Slovenia this year.

To do this you need a certain degree of intellectual flexibility as Oliver Wyman pointed out.

Today one sees that differently.

Today’s results

Here is the scenario deployed by the Bank of England. From its Governor Mark Carney.

The economic scenario in the 2017 stress test is more severe than the deep recession that followed
the global financial crisis. Vulnerabilities in the global economy trigger a 2.4% fall in world GDP
and a 4.7% fall in UK GDP.
In the stress scenario, there is a sudden reduction in investor appetite for UK assets and sterling
falls sharply, as vulnerabilities associated with the UK’s large current account deficit crystallise.
Bank Rate rises sharply to 4.0% and unemployment more than doubles to 9.5%. UK residential
and commercial real estate prices fall by 33% and 40%, respectively.

Everybody at the Bank of England must have required a cup of calming chamomile tea or perhaps something stronger at the thought of all the hard won property “gains” being eroded. But what did this do to the banks? From the Financial Times.

In the BoE exercise, RBS’s capital ratio fell to a low point of 7 per cent – below its 7.4 per cent minimum “systemic reference point”, while Barclays’ capital ratio fell to a low point of 7.4 per cent – below its 7.9 per cent minimum requirement.

Regular readers will not be surprised to see issues at the still accident prone RBS which always appears to be a year away from improvement. Those who have followed the retrenchment of Barclays such as its retreat from Africa will not be shocked either. Students will also be hoping that falling below the minimum requirement will be graded as a pass by their examiners!

One move the Bank of England has made is this.

The FPC is raising the UK countercyclical capital buffer rate from 0.5% to 1%, with binding effect from
28 November 2018.  This will establish a system-wide UK countercyclical capital buffer of £11.4 billion.

This sounds grand and may be reported by some as such but it is in reality only a type of bureaucratic paper shuffling as the banks already had the capital so reality is unchanged. Oh and we cannot move on without noting the appearance of the central bankers favourite word in this area.

Given the tripling of its capital base and marked improvement in funding profiles over the past
decade, the UK banking system is resilient to the potential risks associated with a disorderly
Brexit.

Comment

We see the UK establishment in full cry. No I do not mean the royal marriage as that is not until next year. But we do see on what might be considered “a good day to bury bad news” with the bank stress tests occupying reporters time this from the Financial Conduct Authority.

The independent review found that there had been widespread inappropriate treatment of SME customers by RBS…….The independent review found that some elements of this inappropriate treatment of customers should also be considered systematic

We may end up wondering how independent the review is as we note it has only taken ten years to come to fruition! People who were bankrupted have suffered immensely in that dilatory time frame. Next on the establishment deployment came as I switched on the television earlier whilst doing some knee rehab to see the ex-wife of a cabinet minister Vicky Pryce expounding on the bank stress tests on BBC Breakfast. If only all convicted criminals saw such open-mindedness.

If we return to Andy Haldane then he deserves a little sympathy on the personal level after all it must be grim doing a tour of the UK when the purpose has long gone. It is revealing that his list of supporters has thinned out considerably although most have done so quietly rather than taking the mea culpa road. At what point will the criteria for success or failure that would be applied to you or I be applied to the Chief Economist at the Bank of England?

 

 

 

 

 

 

The Bank of England has driven a surge in UK unsecured credit

Today sees the latest UK consumer credit figures and shows us that a week can be a long time in central banking. After all at Mansion House we were told by Bank of England Governor Mark Carney that its surge was in fact a triumph for his policies.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.

Happy days indeed although of course his expectations were so low it was almost impossible not to outperform them. But of course it was not long before we saw some ch-ch-changes.

Consumer credit has increased rapidly……….Consumer credit grew by 10.3% in the twelve months to
April 2017 (Chart B) — markedly faster than nominal
household income growth. Credit card debt, personal loans
and motor finance all grew rapidly.

But this is a triumph surely for the last August easing of monetary policy and Sledgehammer QE? Apparently no longer as we note that a week is as long in central banking as it is in politics.

The FPC is increasing the UK countercyclical capital buffer
(CCyB) rate to 0.5%, from 0% (see Box 1). Absent a
material change in the outlook, and consistent with its
stated policy for a standard risk environment and of moving
gradually, the FPC expects to increase the rate to 1% at its
November meeting.

There is something of a (space) oddity here as monetary policy is supposed to be a secret – although if we go back to last July Governor Carney forgot that – whereas we see that the same institution is happy to pre announce financial policy moves. Also we need a explanation as to why financial policy was eased in a boom and now tightened in a slow down

But that was not the end of it as yesterday Governor Carney went into full “unreliable boyfriend” mode.

Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues
to lessen and the policy decision accordingly becomes more conventional.

This saw the UK Pound £ as the algo traders spotted this and created a sort of reverse “flash crash” meaning that it is at US $1.298 as I type this. Maybe they did not read the full piece as there was some can kicking involved.

These are some of the issues that the MPC will debate in the coming months.

So not August then? Also the Governor loaded the dice if you expect consumption to struggle and wage growth to be negative in real terms.

The extent to which the trade-off
moves in that direction will depend on the extent to which weaker consumption growth is offset by other
components of demand including business investment, whether wages and unit labour costs begin to firm,
and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit
negotiations.

Indeed as this week has been one for talk of central banks withdrawing stimulus let us return to reality a little. From @DeltaOne.

BOJ HARADA: NOT PLANNING TO REDUCE ETF PURCHASES UNTIL 2% INFLATION TARGET ACHIEVED – DJN

So it would appear that you might need to “live forever” Oasis style to see the Bank of Japan reverse course although they will run out of ETFs to buy much sooner.

Pinocchio

I spotted that Governor Carney told us this as he relaxed in the Portuguese resort of Sintra.

Net lending to private companies is been growing
following six years of contraction. Corporate bond spreads are well below their long-run averages.. And credit conditions among SMEs have been steadily improving.

Regular readers of my work will be aware that I have for several years now criticised policy on the ground that it has boosted consumer credit and mortgage lending but done nothing for smaller businesses. I will let today’s figures do they talking for me especially as they follow a long series.

Loans to small and medium-sized enterprises were broadly
unchanged

Also I have spotted that of the total of £164.3 billion to SMEs some £64.5 billion is to the “real estate” sector. Is that the property market again via the corporate buy to let sector we wondered about a couple of years ago?

Buy To Lets

Sometimes it feels like we are living in one of those opposite universes where everything is reversed like in Star Trek when Spock becomes emotional and spiteful. This happened to the max this week when former Bank of England policymaker David “I can see for” Miles spoke at New City Agenda this week about the house price boom. Yep the same one he created, anyway as you look at the chart below please remember that the “boost to business lending” or Funding for Lending Scheme started in the summer of 2013.

Today’s data

There is little sign of a slow down in this.

Annual growth in consumer credit remained strong at 10.3% in May, although below its peak in November 2016

I have been asked on Twitter how QE has driven this as the interest-rates are so high? Let me answer by agreeing with the questioner and noting that low interest-rates are for the banks not the borrowers as we note this from today’s data.

Effective rates on Individual’s and Individual trusts new ‘other loans’ fixed 1-5 years increased by 3bps to 7.68%,
whilst on outstanding business, effective rates decreased by 4bps to 7.38%.

I had to look a lot deeper for the credit card rate but it is 17.9% so in spite of all the interest-rate cuts it is broadly unchanged over our lost decade. My argument is that we need to look at the supply of credit which has been singing along to “Pump It Up” by Elvis Costello as we note £445 billion of QE, the FLS and now the £68.7 billion of the Term Funding Scheme. My fear would be why people have been so willing to borrow at such apparently high interest-rates?

The picture is not simple as some are no doubt using balance transfers which as people have pointed out in the comments section can be at 0%. But they do run out as we reach where the can is kicked too and a section of our community will then be facing frankly what looks like usury. The only thing which makes it look good is the official overdraft rate which is 19.7% according to the Bank of England.

Comment

The Bank of England is lost in its own land of confusion at the moment and this has been highlighted by its chief comedian excuse me economist Andy Haldane this morning.

Bank of England chief economist Andy Haldane said on Thursday that the central bank needs to “look seriously” at raising interest rates to keep a lid on inflation, even though he was happy with their current level.

Did anybody ask whether would also “look seriously” at cutting them too? Meanwhile for those of you who have read my warnings about consumer credit let me give you the alternative view from the Bank of England house journal called the Financial Times. Here is its chief economics editor Chris Giles from January 2016.

Britain is gripped by unsustainable debt-fuelled consumption. So fashionable has this charge become that Mark Carney was forced this week to deny that the Bank of England was responsible. The governor is right.

Indeed he took a swipe at well people like me.

Even armed with these inconvenient facts,ill-informed commentary accuses George Osborne of seeking to ramp up household debt.

As we make another addition to my financial lexicon for these times there was this which I will leave to you to consider.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

The big problem that is little productivity growth in the western world

It was only yesterday that we found ourselves looking at an apparent productivity miracle in China, or perhaps if official statistics are true! Yet in the western world we find ourselves wondering what has happened to it? I recall the Bank of England publishing a paper looking at an 18% productivity gap. Some care ( as ever ) is needed with their work as it assumed that we could carry on as we did before the credit crunch whereas some industries like banking were clearly misleading us. But the truth is that it does look like there has been a change even if we discount the projection of past performance forwards.

In some places it exists

This caught my eye as I was doing some research on the subject.

Welcome to 2017! The future is here. Workers at Fukoku Mutual Life Insurance are being replaced with an artificial intelligence system. ( @izzyroberts )

So we can see changes in service industries as well where 34 employees are to be replaced by an AI ( artificial intelligence) system . This of course will boost productivity especially the labour measure but may end up with us worrying about unemployment. The more conventional view is the use of robots and automation in the manufacturing and industrial sector.

The apparent problem

This has been highlighted by John Fernald of the US Federal Reserve and here is a summary from the Wall Street Journal.

His research found that the information technology boom of the 1990s helped businesses become more efficient until about 2003. But that boost began fading by 2004, and now the benefits of tech innovation flow more to leisure activities, such as social media and smartphone apps……..Total factor productivity grew an average 1.8% a year from the end of 1995 through 2004, but growth has slowed since then to an average 0.5% annually.

This type of view changes things and is a critique of the Bank of England projecting the past forwards work but the immediate impact is to move productivity falls from a consequence of the credit crunch to one of the causes of it. Also as we look forwards it has its own consequence which is something we have discussed many times here.

He puts the new normal for U.S. economic growth at 1.5% to 1.75% a year—roughly half the typical range of 3% to 4% from the end of World War II to 2005.

Again care is needed as a clear challenge here is how we measure productivity. There is clearly a large amount of technical innovation going on right now but it has shifted into areas that do not feature in conventional productivity analysis. These days most of the gains come for leisure rather than business.

Today’s UK data

Firstly let is have some good news which is that we have some productivity growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.4% from Quarter 2 (Apr to June) 2016 to Quarter 3 (July to Sept) 2016;

Although it has been driven not by what might be expected.

Productivity grew in the services industries but not in the manufacturing industries; services productivity is estimated to have grown by 0.3% on the previous quarter, while manufacturing productivity is estimated to have fallen by 0.2% on the previous quarter.

So heartening in itself although an old problem may be resurfacing as you see this from an accompanying release.

Tower Hamlets (79% above the UK average) was the local area with the highest labour productivity in 2015

Welcome back the City of London, let us hope the gains are genuine and not just an illusion this time around.

As to the overall issue the UK ONS seems as keen as the Bank of England to try to assume that the credit crunch was some form of blip.

Productivity in Quarter 3 2016, as measured by output per hour, stood 15.5% below its pre-downturn trend – or, equivalently, productivity would have been 18.4% higher had it followed this pre-downturn trend.

This is what is called the “productivity puzzle” but a bit like the Bitcoin price moves over the past 24 hours or so we can again consider the genius of the simple “It’s Gone” from South Park on the banking crisis. For those who have not followed it the bull market surge in Bitcoin was followed by a plunge in an hour which put it in a bear market, then a rebound then another drop. Of course I need to add so far to that……

Does the type of innovation in these alternative electronic currencies show up anywhere in the productivity data?

Andy Haldane

The Bank of England’s Chief Economist had some thoughts on productivity yesterday. Of course he has his own issues as he confessed to past mistakes – although not yet about his “Sledgehammer” which will hit many people in 2017 – yet again. If we measured his own productivity it would be very negative but let us move onto his analysis.

He blamed decades of education policies – that had left numeracy levels in England only just above Albania – for holding back improvements in productivity. He said the lack of numeracy skills was stark in comparison with other countries, which placed more emphasis on workers having more than a basic level of maths……….He added that the UK’s lack of numeracy skills across more than half the working population was a key reason for its lack of productivity growth since the financial crisis.

This raises a wry smile with me because I feature fairly regularly in the business live section of the Guardian and the original contact point was my pointing out that an article was innumerate. Perhaps it made a change from people pointing our spelling errors! In broad terms I welcome this issue although we need to decide in this technological era what level of numeracy people actually need. I remember reading a report from the 1860s where we were unhappy with our education system though and we did not do too bad back then.

Sadly the Bank of England has not provided a speech but we do have his past views which in their bi-modal, bifurcated day are a sort of tale of two cities. From 2014.

The upper peak of the labour market is clearly thriving in both employment and wage terms. The mid-tier is languishing in both employment and real wage terms. And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole. This has been a jobs-rich, but pay-poor, recovery.

Productivity as well? It is hard to avoid that thought.

A feature of our times

I will simply ask you to look at the time period here and will leave you to draw your own conclusions.

 

Comment

There is much to consider here. But it is clear to me that the problem for us in what we like to call the first world began well before the credit crunch. Secondly as so often we find ourselves with data simply unfit for the task. We can look at that several ways of which the technical one is that if we do not bother to put the earnings of the self-employed into the average earnings numbers then we are likely to be clueless about their productivity. More hopefully we need to include the technological changes in the area of leisure in some form as other wise we are likely in the future to get another “surprise” when a big move happens in the business world as a result.

Meanwhile if we return to Andy Haldane the media have failed to point out that he has been directly responsible for a fall in productivity. I do not mean the reduction in annual Bank of England meetings from 12 to 8 as that was the “improvement” driven by its dedicated follower of fashion Mark Carney. What I mean is the way that zombie companies have been propped up by his Sledgehammer QE and even worse corporate bond QE which also props up foreign companies. This contributes to situations like this having a particular dark side.

Despite having fallen by almost 10% since the crisis, real wages among the top 10% are still over 20% higher than in 1997. But wages for the bottom 20% have fallen by almost 20% since 2007 and are essentially back to where they were in 1997.

What about the 0.1%?

 

 

 

 

Even central bankers struggle to provide proof that QE works

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

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

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

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

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

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

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

The QE experience

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

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

Even worse this.

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

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

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

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

So what do they conclude then?

We are told this.

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

Actually for the effort involved the impact is rather small.

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

Anything else? Er well yes.

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

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

How does this boost the real economy?

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

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

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

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

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

But it’s just a sweet sweet fantasy baby

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

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

Indeed this bit looks a little desperate.

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

Especially as it apparently needs some sort of confidence fairy.

People need to believe QE will improve the economic outlook.

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

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

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

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

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

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

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

These results are dependent on the parameters I have selected.

Anyway we are left with this conclusion.

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

 

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

Comment

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

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

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

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

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

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

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

Me on TipTVFinance

The Bank of England is piling up problems for UK pensions and savers

Yesterday Bank of England Chief Economist Andy Haldane took to The Sunday Times to reinforce his views. Presumably he felt that the print equivalent of more Open Mouth Operations would tell us more about what he means by a monetary “sledgehammer”. In it he offered very cold comfort to savers who will be affected by the interest-rate cuts and QE (Quantitative Easing ) he is such a fan boy of.

Understandably, some savers are feeling short-changed. Although I have enormous sympathy for their plight, the decision to ease monetary policy was, for me, not a difficult one.

Actually punishing savers is not a new policy for the Bank of England as Deputy Governor Sir Charlie Bean – just about to arrive at the Office for Budget Responsibility which is ever more breathtakingly described as independent – told savers this back in September 2010.

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.”

Sir Charlie then used the forecasting skills he will apply at the OBR to predict better times ahead for savers.

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.

Actually the swings only go backwards and the roundabouts long stopped spinning. An example of that has happened overnight according to MoneySavingExpert.

Depressing news for savers. Santander 123, the bank account that’s topped savings tables for over four years, will take a hammer to the interest it pays from 1 November. It comes on the back of this month’s base rate cut of 0.25 of a percentage point from 0.5% to 0.25%, but it’s slashing its rate far beyond that, cutting the headline interest from 3% to just 1.5%.

Of course such cuts do not apply to Sir Charlie who has his Bank of England pension linked to the Retail Price Index as well as his salary from the OBR.

Annuities

The issue here is a consequence of the rise in the price of long-term UK Gilts and the consequent fall in yield. Last week Bank of England Governor Calamity Carney sent in his bond buyers in this area but was gamed by the holders and ended up pushing prices much higher than intended. Of course Andy Haldane will consider this to be a success as he explained to Parliament in from June 2013.

Let’s be clear, we have intentionally blown the biggest government bond bubble in history.

The bubble is of course a lot bigger now and is much larger than any West Han fan will be able to blow later. The thirty-year UK Gilt yield is a mere 1.24% so let us review the consequences for annuities which of course depend on such yields. From This Is Money.

A decade ago, a 65-year-old with a £100,000 pot could get £7,092 a year from an annuity, though without any link to inflation…….At the beginning of July, a 65-year-old saver would have been offered just £4,800 for each £100,000 by insurance giant Legal & General……Today it offers £4,462 a year on the same deal — 8 per cent less than a few weeks ago, according to research by annuity expert William Burrows.

The numbers quoted will be lower should annuitants want inflation protection or to provide an income for their spouse.

A clear consequence of this can be seen below. This is from the Association of British Insurers on the first year of pension freedom where the rules on how you take your pension were relaxed.

£4.3 billion has been paid out in 300,000 lump sum payments, with an average payment of £14,500.
£4.2 billion has been invested in 80,000 annuities, with an average fund of £52,500.

We do not know the individual circumstances behind this but I note that money has shifted from being for future consumption ( an annuity) to presumably consumption now ( cold hard cash). Another way of describing this is borrowing from the future. A problem is that annuities pay out for the rest of you life whereas if you take the money and run it may well run out. Please do not misunderstand me annuity rates now are so poor I can understand why people do not take them and I wonder how many of those taking them are getting higher rates due to ill-health.

As the Bank of England blunders into the UK Gilt market I can only see annuities getting less attractive and looking even poorer value.

The Millennial problem

There is a consequence from all of this from younger workers and present and future pension savers as summed up by Bloomberg.

Younger workers will “have to save more — which they appear reluctant to do — or be prepared to work much longer.”

As I have pointed out before such age groups (millennials are 35 and under) have tended to be more affected by the credit crunch in terms of real wages. So they have less money out of which they are expected to pay more whilst in many cases paying off student debt and facing ever higher house prices. That road leads to such phrases as “Generational Theft”

This will not be helped by the Lifetime ISA situation which as recently as the beginning of this month was described like this by City-AM.

A YouGov poll said that 44 per cent of Britons between the age of 18 and 39 would favour using the government’s new lifetime Isa in order to put money aside for older age. Such a decision would put them on a “collision course” with auto-enrolment.

So even then one government policy was clashing with another. Well today the Lifetime ISA concept itself seems to be struggling. From The Financial Times.

The planned launch of a new savings account for under-40s in April is in doubt after providers warned that the government’s failure to provide key details means they will not have enough time to hit the deadline.

The UK pension system has seen far to many ch-ch-changes and these have progressively weakened confidence in the system. A decade ago I passed one of the advanced examinations on the subject only for there to be changes year after year!

Defined Benefit Pensions

On the 9th of this month I pointed out the pensions desert which would suck up the extra £70 billion of Bank of England QE liquidity.

The deficit of defined benefit pensions, which pay out an income linked to an employee’s final salary, jumped £70bn as a direct consequence of the decision to reduce interest rates by 0.25 per cent, according to Hymans Robertson, the consultancy.

We should not be surprised as this as the architect confessed to this only in May.

Yet I confess to not being able to make the remotest sense of pensions. ( Bank of England Chief Economist Andy Haldane).

He and his colleagues are proving it almost daily. Rather like at the Emirates yesterday there is a danger of “You don’t know what you’re doing” being sung.

Comment

We see that as I have pointed out many times before the savings and pensions sector of the UK economy have been targeted by the Bank of England. The  doing “very well” promised by the then Mr.Bean back in September 2010 has not only failed to appear things are getting worse. This makes the economy unbalanced and creates real damage as the corporate sector acts to fill pension deficits and younger workers face have to put ever larger sums of money away. Meanwhile though in an Ivory Tower in Threadneedle Street.

The purpose was to support growth and jobs.

No mention of the inflation target Andy? Oh and even he does not seem to think it will work.

At the same time, no one on the MPC is under any illusion that monetary policy can fully insulate Britain from the long-term effects of the decision to leave the EU.

He looks a rather dangerous gambler who by his own confession is responsible for one of the largest shifts of wealth in history.

Over recent years, there have been fairly rapid rises in UK asset prices — houses, shares and bonds. These have increased measured national wealth by as much as £2.7 trillion since 2009.

Yet apparently the consequences are nothing to do with him and we need ever more. My view on the consequences comes from the Red Hot Chilli Peppers.

Scar tissue that I wish you saw

 

Has the ordinary person seen any economic recovery in the UK?

A long running theme of this website has been that the collective economic experience in the UK has been much better than the individual one. In other words the aggregate size of the economy has risen but the benefits have been much weaker by the time they arrive at you or me. There are various issues here such as the rise in the UK population and no doubt many of you will be wondering if some funds have been siphoned off by the 0.1%?! However on Friday the Chief Economist of the Bank of England addressed this issue so let us take a look at what he thinks about it. If you want it in a nutshell he put it like this.

The language of “recovery” simply did not fit their facts

The aggregate performance

This was covered here.

Since 2009, however, all three measures have begun to recover: GDP has risen by around 14%, employment by around 8.5% and wealth by around 35%. These are strong recoveries. Indeed, all three measures now exceed their pre-crisis peaks: GDP is 7% higher, employment 6% higher and wealth over 30% higher than in 2008.

So far so conventional, in terms of view although there is something in there so central bankerish that perhaps our central banker does not see it. I am referring to him using an increase in wealth which via house and equity prices is something he has helped to drive. This of course disproportionately benefits the already well-off.

Just as a reminder this recovery has not been great if we look back at others.

Even after the Great Depression of the 1930s, GDP was 16% higher. For those with a long enough memory, this time’s recovery is likely to feel quite anaemic, relative to those in the past.

What never seems to occur to central planners is to wonder if there would have been a better recovery without them! Instead of course we get a call for “More! More! More” or as our Andy puts it “muscular easing”.

The individual experience

Andy brings up a metric that will be very familiar to readers of my work.

GDP is a measure of the size of the economic pie, a pie that has grown substantially larger since 2009. But so too has the number of people eating it. Taking the two together, GDP per head has risen significantly more slowly than aggregate GDP since 2009. Indeed, GDP per head today is only around 1% above its pre-crisis peak

So 1% is the new 7% if you wish to put it like that.

Going Wider

Andy heads towards a metric that covers the flaw in GDP numbers which I regularly cover concerning Ireland. Indeed as recently as last Wednesday I wrote about my concerns re the 21% increase in GDP recorded in a single quarter.

GDP measures income from all UK-based activities. But not all of that income flows to UK citizens…….

Okay what is the answer then?

If we take net overseas income out of GDP, to give a measure of net national disposable income per head, it has recovered even more slowly than GDP per head. It is currently at levels little different than its pre-crisis peak. National income per head suggests there has scarcely been any recovery.

As discussed in the comments section on here over the weekend ( h/t Andrew Baldwin) there is a problem with scarcely any recovery. You see the chart provided shows a fall of ~2%. If a 1% rise merits a mention which is a ~2% fall brushed over? I have looked at the data and note that in 2007 we saw £24,068 and in 2015 we saw £23,718. Or a drop which turns out to be of 1.5%.

Now some care is needed here as what Ireland with its wild swings in recorded exports and imports for 2015 taught us is that official data is unreliable in this area.In my opinion the recording of investment flows is even worse. But if you take them as they are then in fact “there has scarcely been any recovery” is the new down.

Indeed for a substantial group the problem predated the credit crunch.

Half of all UK households have seen no material recovery in their real disposable incomes since around 2005.

Generation X face a worrying future

Regular readers will be aware of the factors at play here but the Resolution Foundation has some new data on the subject and skipping the politicisation as ever let us take a look.

Young people have experienced the biggest pay squeeze in the aftermath of the financial crisis, seen their dreams of home ownership drift out of sight.

Indeed the meat of the situation comes here.

In contrast to the taken-for-granted promise that each generation will do better than the last, today’s 27 year olds (born in 1988) are earning the same amount that 27 year olds did a quarter of a century ago. Indeed, a typical millennial has actually earned £8,000 less during their twenties than those in the preceding generation – generation X.

A little care is needed here as we have been through a sharo downturn in this period but even before it there were signs that there may be trouble ahead.

there are signs that problems preceded the recent crisis. Those millennials who were 25 years old before the financial crisis hit were already seeing no pay progress on preceding cohorts.

This is a clear change after more than a few generations of progress but I would now lile to make a point which the Resolution Foundation does not. Please think again about the policies that Andy Haldane has supported before reading the bits below.

evidence that the pay of today’s workers has been suppressed by firms filling deficits in defined benefit pension schemes that provide for older or retired workers. Some estimates suggest that as much as £35 billion is being diverted to this effort each year by businesses.

This is an example of how QE has sucked money out of businesses rather than boosting the. So it has weakened businesses whilst supporting gains for shareholders on it way to creating exactly the wrong set of economic incentives. For those who are unaware of the methodology the lower Gilt yields driven by QE style policies make (defined scheme) pension benefits larger which means that company funds are diverted to fill the perceived gap. Stealers Wheel were kind enough to summarise my views on those who have not only let this state of affairs exist but have in fact made it worse.

Clowns to the left of me jokers to the right

Also rental costs are higher which of course relates to the fact that house prices have been driven higher by the Bank of England.

With more people in such accommodation and renting costs rising over time, millennials are spending an average of £44,000 more on rent in their 20s than baby boomers did

Comment

There is much to consider here as the Chief Economist of the Bank of England echoes two of the main themes of mine. Firstly that just looking at GDP is misleading and secondly that different groups have been impacted very differently by the impact of the credit crunch. However the favourable view of him weakens when you see that he seems blind to the way that policies he not only has supported but wants more of have contributed to this state of affairs. The Resolution Foundation gives us some data on the adverse impacts of QE via pension schemes.

If we stick to Generation X the band rather than the age group we did get this albeit via John Winston Lennon.

All I want is the truth now
Just gimme some truth now
All I want is the truth
Just gimme some truth
All I want is the truth
Just gimme some truth

ARM Holdings

The proposed takeover by SoftBank of Japan is of course big news. However as I see so many today trying to fit square pegs into round holes in weak attempts to explain it there is the issue of the fall in the UK Pound £ versus the Yen of 21% in 2016. Actually the timing fits with a reversal of the Yen more recently and perhaps getting ahead of the next move of the Bank of Japan.

I also see that the Financial Times is sending out messages about a “‘sad loss of independence’” and cannot help wonder if this also applies to its own recent takeover by a Japanese company?