Helicopter Money is not the answer to our economic problems

One of the features of the credit crunch era is the way that policies which seem extraordinary have a way of coming to fruition. We have seen many examples of this in the world of monetary policy. The two headliners would be negative interest-rates and Quantitative Easing or QE bond buying. The latter had previously only been a feature of the response to the “lost decade” in Japan but is now widespread. If it had worked we would not be discussing the “lost decades” but that seems to bother only me. Also these moves are invariably badged as temporary but so far none of them have gone away. Indeed in my home country the Bank of England is currently making QE look about as permanent as it can be.

As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).

It will reinvest another £1.27 billion today but it is tomorrow that will be the real example of “To Infinity! And Beyond!” when it buys long and ultra-long dated Gilts.

These themes were on my mind when I noted this in the Daily Telegraph.

A radical world of “helicopter money” – where central banks fund government spending – is “inevitable” as policymakers run out of ammunition ahead of the next recession, top economists have warned.

Central banks are likely to “explore more unconventional policies” in the next downturn and blur the lines between fiscal and monetary policy with radical new tools, such as monetary financing, Deutsche Bank argued.

Let us just mark the issue that Deutsche Bank are top economists and move on. As to the details here is the original suggestion from Milton Friedman.

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

Those of you who follow me on social media will know that I note the daily RAF Chinook flights over Battersea as they could carry a lot of notes. Perhaps they could name them “Carney’s Cash” and “Broadbent’s Bonanza” for the occasion.

The one time this sort of thing was tried it was in fact via a tax rebate in Japan and amounted to £142 if my memory serves me correctly. However being Japanese they mostly saved it so it was not repeated. So any UK repetition of this would be different as if you look at out habits we would be likely to spend it which starts well but then of course would be likely to make our current account deficit worse. Here from this morning is a reminder of it.

The UK current account deficit narrowed by £7.9 billion to £25.2 billion in Quarter 2 (Apr to June) 2019, or 4.6% of gross domestic product (GDP).

Whilst it is welcome we did better the overall picture is this.

The UK has run a current account deficit in each quarter since Quarter 3 (July to Sept) 1998 or, when considering annual totals, 1983.

So there is an issue although I have many doubts about the accuracy of the numbers especially when we get to investment flows. Let me give an example from the savings numbers released this morning.

The most notable recent revision was in 2017, when the previously published lowest annual saving ratio on record was revised upwards from 3.9% to 5.3%, meaning that the lowest annual saving ratio on record is now observed in 1971 where it stood at 4.8%.

If you remember the media furore at the time that is quite a big deal. Also it gets worse.

The annual households’ saving ratio in 2018 was revised upwards 1.9 percentage points to 6.1%.

Let’s us move on by noting how an emergency measure is being presented as almost normal which of course is more than familiar. We will know when they intend to begin it because we will see a phase of official denials as they get their PR spinning in first.

GDP Growth

This morning’s UK release was rather inconvenient for the monetary expansion apologists as we saw this.

UK gross domestic product (GDP) contracted by an unrevised 0.2% in Quarter 2 (Apr to June) 2019, having grown by an upwardly revised 0.6% in the first quarter of the year.

This meant that the annual rate of growth rose to 1.3% which is better than the Euro area’s 1.2%. I point this out because Michael Saunders of the Bank of England was telling us on Friday that we were in a weaker position. Also there was this.

Annual GDP growth in 2017 is now estimated at 1.9%, revised up from 1.8%,

So we move on knowing that the past was better than we thought. or if you prefer that economic growth has slowed by less than we thought.

Money Supply

There has been an improvement in recent months and here is this morning’s release from the Bank of England.

Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFCs) and NIOFCs. In August, money holdings rose by £10.4 billion, with positive contributions from all sectors.

 

The total amount of money held by households rose by £4.6 billion in August. This was primarily due to a large increase in non-interest bearing deposits. The total amount of money held by NIOFCs rose by £3.3 billion, while the amount held by PNFCs rose by £2.5 billion.

Sorry for their love of acronyms and NIOFCs are non intermediating financial companies.

This means that the annual rate of growth for broad money is 3.3% as opposed to the 1.8% registered in May. The main changes have come in July and now August.

If we switch to M4 lending which is sometimes a useful guide then things have improved considerably as the rate of annual growth has pushed up to 5.5%. As mortgage lending remained pretty similar it has been driven by this.

Borrowing by financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs), rose to £16.6 billion in August, the largest amount since monthly figures were first collected in 2009. Fund managers were the largest contributor to this strength.

Thus as so often with this sort of data ( bank lending) we are left wondering what the economic impact will be?

Consumer Credit

This continues on its merry way.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.9 billion in August, slightly below the £1.0 billion average since July 2018.

The Bank of England are keen to point out this.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%. This remains considerably lower than its peak of 10.9% in November 2016, and is the lowest level since February 2014.

There are several elements of context to this. Firstly the rate of growth has been so fast it has raised the total to £218.6 billion so percentages would naturally fall. Also the weakening of the car market has contributed. Next the numbers are still much higher than anything else in the economy.

Small Business Loans

Remember when the monetary easing was supposedly for smaller businesses? Well there is a reason why that went quiet.

In contrast, the growth rate of borrowing by SMEs weakened slightly to 0.7%.

Comment

If we consider the overall situation we find several problems with helicopter money. The first is that it is supposed to be an emergency response when we keep being told we are not in an emergency but rather a recovery. It is a bit like putting an electric shock on a heart which is still beating. The next is that it would be an extraordinary move and yet again a big change would be made by unelected technocrats. This reminds me that some years ago I made the case for Bank of England policymakers to be elected. Finally it is just another way of the establishment making things easier for itself at the expense of the wider population.

This is because the wider population would be at risk of inflation and maybe much more inflation. This need not be consumer inflation as so far in the credit crunch era we have seen moves in asset prices such as bonds, equities and house prices. The latter of course allows the establishment to claim people are better off when first-time buyers are clearly worse off. Putting it another way this is why they are so resistant to putting house prices in the inflation indices and the new push to use fantasy rents suggests they fear helicopter money and negative interest-rates are on the horizon.

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The UK gets an upgrade and a downgrade in a single day

The weekend just past saw plenty of action but my concentration is on Friday. As you see there were two clear events which operated in opposite directions in terms of views on the UK economy.  Let me open with the one which was reported much less but is in line with one of the themes of this blog which is that economic statistics are much less reliable that many would have you believe. From the Office for National Statistics ( ONS) on Friday morning.

The impact of the new data is largest in 2015 due to forestalling in advance of an increase in tax on dividends; the dividends revision in 2016 will be published on 29 September 2017.

Okay if you recall we thought that was happening back then but wait until you see the new estimate of the impact.

In 2015, the indicative estimate of the household and NPISH (non profit institutions serving households) saving ratio is 9.2%, revised up from the latest published value of 6.5%. The indicative estimate for growth in real household and NPISH gross disposable income is 5.3%, revised up from the latest published value of 3.6%.

Let me start with the savings issue where an extra £41.6 billion of household savings have been found in 2015. In terms of light entertainment we see that “Improvements to Illegal Activities” were £1.6 billion of that where apparently people are doing these to build a savings nest egg. Also as rent and imputed rent total some £1.9 billion I am left wondering how much imputed rent which is of course never received as it is a theoretical construct is saved? Of course Sir Charles Bean will be disappointed as well because it previously looked as though people might have listened to his calls for people not to save whereas now it looks like he was ignored.

But more seriously this update changes the whole trajectory of the UK economy as on this ratio the savings ratio has been ~9% since 2011. This is rather different to the previous number of slightly under 9% declining to 6.1%! If we move to economics we see that those who do sectoral equations and assure us that they cannot be wrong have a problem as if one bit is larger another has to be smaller. For example the ONS now think that UK companies borrowed some £41.1 billion less than in 2015 than previously reported.

Also we should note that disposable income rose considerably more quickly than previously reported.

Surpluses everywhere!

If we move to trade we see yet another example of what would have Lindsey Buckingham singing ” I think I’m in trouble”. From the Financial Times.

 

Statisticians are investigating the delicate matter of why the trade balance between the UK and the US does not balance. At various times over the past decade, the UK and the US have both simultaneously recorded a trade surplus with each other.

Excellent isn’t it? Imagine a world where in football matches both teams win!

 

Last year, for example, the UK claimed a £10bn goods trade surplus with the US, according to official statistics, while the US said it had recorded a surplus of $1bn.

Actually the real problem is below and regular readers will be aware that I have pointed out time and time again that the UK services data leaves a lot to be desired.

 

In services, COMTRADE, the UN trade statistics database, shows that the US claims a services trade surplus of $13bn with the UK, which claims a services surplus of more than $34bn with the US.

Either the FT journalists are unaware of or chose not to report this.

The UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.

Oh and the US figures may be as bad it is just that I have spent quite a bit of time looking at the problems in the UK.

Moodys

More publicised in spite of the fact it was not produced until late Friday evening UK time was this.

Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts.

Which led according to their analysis to this.

Moody’s Investors Service, (“Moody’s”) has today downgraded the United Kingdom’s long-term issuer rating to Aa2 from Aa1 and changed the outlook to stable from negative.

It was a little awkward for them to forecast weaker public finances in a week which had seen better numbers released but some of the arguments seem sound. For example a minority government is likely to spend more than a majority one. Also they expect the UK economy to continue to be on a weaker trajectory.

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period.

That puts them in conflict with the Bank of England which of course is now expecting a bit of a pick-up. If we look at track records we are left with problem that neither have a good track record, can they both be wrong? Also after the problems with statistics we have already looked at today can one state the sentence below with any confidence?

Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty.

In essence though the opinion and downgrade has been driven by this view.

Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.

Comment

Let us start with Moodys where there is some sense to be found in their view of public expenditure I think. The pattern looks set to be higher due to the consequences of minority government and that is consistent with ratings agencies often picking out useful bits of detail. Their problem is their tendency to be behind the times and of course the existence of a credit crunch driven by them labelling instruments as “AAA” which were anything but. If we move to financial markets we see something which shows what power they now have. If you project a worse fiscal position then you would expect bond yields to rise in response whereas at the time of typing this the UK 10 year Gilt yield has fallen to 1.33%. Or perhaps the currency to fall? Not that either as it has moved back above US $1.35 and Euro 1.13.

If we move back to economics the problems are very serious for those who base their work only on statistics and equations. You see it is not only the future which is uncertain it is the present and past too. There is no Dune style Bene Gesserit for the past nor a Muad-Dib for the future. Those who tell you that an economic variable has to be something because of what another is should be made to face a critique every time. This brings me to something which regularly comes back into fashion like a weed in a garden which is targeting nominal GDP ( Gross Domestic Product). This will require adjusting policy based on a variable which is often wrong and sometimes very wrong.

As to the specific data for the UK we saved more in the period up to 2015 which means that more recent figures come from a stronger base. How much the more recent ones will be revised is hard to say as you see some of the changes today have happened in the last month.

Knee Op

After the false dawn of a fortnight ago I am booked in for tomorrow morning for my ACL reconstruction so I will be taking a break of at least a couple of days. On that subject let me wish Billy Vunnipola  well as at least I managed more than 20 years between incidents.

 

 

 

Whatever happened to savers and the savings ratio?

A feature of the credit crunch era has been the fall and some would say plummet in quite a range of interest-rates and bond yields. This opened with central banks cutting official short-term interest-rates heavily in response to the initial impact with the Bank of England for example trimming around 4% off its Bank Rate to reduce it to 0.5%. If we go to market rates the drop was even larger because it is often forgotten now that one-year interest-rates in the UK rose to 7% for around a year or so as the credit crunch built up in what was a last hurrah of sorts for savers. Next central banks moved to reduce bond yields via purchases of sovereign bonds via QE ( Quantitative Easing) programmes. In the UK this was followed by some Bank of England rhetoric heading towards the First World War pictures of Lord Kitchener saying your country needs you.

Here is Bank of England Deputy Governor Charlie Bean from September 2010.

“What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.

Our Charlie was keen to point out that this was a temporary situation.

“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.

Mr.Bean was displaying his usual forecasting accuracy here as of course savers have seen only swings and no roundabouts as the Bank Rate got cut even further to 0.25% and the £79.6 billion of the Term Funding Scheme means that banks rarely have to compete for their deposits. This next bit may put savers teeth on edge.

“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.”

In May 2014 Charlie was at the same game according to the Financial Times.

BoE’s Charlie Bean expects 3% interest rate within 5 years

There is little sign of that so far although of course Sir Charlie is unlikely to be bothered much with his index-linked pension worth around £4 million if I recall correctly plus his role at the Office for Budget Responsibility.

House prices

I add this in because the UK saw an establishment move to get them back into buying houses. This involved subsidies such as the Bank of England starting the Funding for Lending Scheme in the summer of 2013 to reduce mortgage rates ( by around 1% initially then up to 2%) which continues with the Term Funding Scheme. Also there was the Help to Buy Scheme of the government. I raise these because why would you save when all you have to do is buy a house and the price accelerates into the stratosphere?

The picture on saving gets complex here. Some may save for a deposit but of course the official pressure for larger deposits soon faded. Also the net worth gains are the equivalent of saving in theoretical terms at least but only apply to some and make first time buyers poorer. Also care is needed with net worth gains as people can hardly withdraw them en masse and what goes up can come down. Furthermore there are regional differences here as for example the gains are by far the largest in London which leads to a clear irony as official regional policy is supposed to be spreading wealth, funds and money out of London.

There is also the issue of rents as those affected here have no house price gains to give them theoretical wealth. However the impact of the fact that real wages are still below the credit crunch peak has meant that rents have increasingly become reported as a burden. So the chance to save may be treated with a wry smile by those in Generation rent especially if they are repaying Student Loans.

Share Prices

This is a by now familiar situation. If we skip for a moment the issue of whether it involves an investment or saving as it is mostly both we find yet another side effect of central bank action. In spite of the recent impact of the North Korea situation stock markets are mostly at or near all time highs. The UK FTSE 100 is still around 7300 which is good for existing shareholders but perhaps not so good for those planning to save.

Number Crunching

There are various ways of looking at the state of play or rather as to what the state of play was as we are at best usually a few months behind events. From the Financial Times at the end of June.

UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years. According to new figures from the Office for National Statistics, 1.7 per cent of income was left unspent in the first quarter of 2017, the lowest savings ratio since comparable records began in 1963.

This compares to what?

The savings ratio has averaged 9.2 per cent of disposable income over the past 54 years,

Some of the move was supposed to be temporary which poses its own question but if we move onto July was added to by this.

In Quarter 1 2017, the households and NPISH saving ratio on a cash basis fell to negative 4.8%, which implies that households and NPISH spent more than they earned in income during the quarter.

The above number is a new one which excludes “imputed” numbers a trend I hope will spread further across our official statistics. It also came with a troubling reminder.

This is the lowest quarterly saving ratio on a cash basis since Quarter 1 2008, when it was negative 6.7%.

As they say on the BBC’s Question of Sport television programme, what happened next?

The United States

We in the UK are not entirely alone as this from the Financial Times Alphaville section a week ago points out.

Newly revised data from the Bureau of Economic Analysis show that American consumers have spent the past two years embracing option 2. The average American now saves about 35 per cent less than in 2015……….Not since the beginning of 2008 have Americans saved so little — and that’s before accounting for inflation.

Comment

One of the features of the credit crunch was that central banks changed balance between savers and debtors massively in the latter’s favour. Measure after measure has been applied and along this road the claims of “temporary” have looked ever more permanent. Therefore it is hardly a surprise that savings seem to be out of favour just as it is really no surprise that unsecured credit has been booming. It is after all official policy albeit one which is only confessed to in back corridors and in the shadows. After all look at the central bank panic when inflation fell to ~0% and gave savers some relief relative to inflation. If we consider inflation there has been another campaign going on as measures exclude the asset prices that central banks try to push higher. Fears of bank deposits being confiscated will only add to all of this.

Meanwhile as we find so often the numbers are unreliable. In addition to the revisions above from the US I note that yesterday Ireland revised its savings ratio lower and the UK reshuffled its definitions a couple of years or so ago. I do not know whether to laugh or cry at the view that the changed would boost the numbers?! I doubt the ch-ch-changes are entirely a statistical illusion but the scale may be, aren’t you glad that is clear? We are left mulling what is saving? What is investment?

But we travel a road where many cheerleaders for central bank actions now want us to panic over an entirely predictable consequence. Or to put it another way that poor battered can that was kicked into the future trips us up every now and then.

 

 

 

What has happened to savers in the credit crunch era?

Sometimes official new releases are more revealing than they would wish to be. For example there is a planned Help To Save scheme being floated ahead of tomorrow’s Budget. As the Help To Buy scheme for houses indicates a situation in distress with house prices far too high to be affordable we are immediately on yellow alert as to the state of play in the savings market. From the BBC.

Millions of low-paid workers who put aside savings could receive a top-up of up to £1,200 over four years, the government has announced.

Employees on in-work benefits who put aside £50 a month would get a bonus of 50% after two years – worth up to £600.

That could then be continued for another two years with account holders receiving another £600.

These schemes always initially look a good idea although those who are in similar circumstances but are excluded will no doubt find it frustrating. One may also have a wry smile at the fact that this is very similar to the Labour governments plan for a savings gateway which was abandoned because it was “not affordable” But fundamentally we are left wondering why savings needs such help.

The Bank of England is not so keen

Back in September 2010 Deputy Governor Bean of the Bank of England made a right Charlie of himself in a car crash style interview with Channel 4.

Indeed when asked this question.

This bad news for savers is the point of what you are doing?

He replied “yes”.

Mr Bean continued.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.”

Savers are still waiting Charlie! Meanwhile he revealed the plan such as it was.

What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.

The attempt at sympathy fell rather flat too.

“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.”

Charlie himself was doing the opposite as his index-linked pension grew by £522,900 that year according to the accounts published by the Bank of England. Of course he has been provided with additional work in retirement via the Bean Review of UK Economic Statistics making his pronouncements head down the ” let them eat cake” road. Or as Hall and Oates pointed out.

You’re out of touch
I’m out of time (time)

Help To Buy

Whilst lower mortgage rates can improve mortgage affordability for a time they cannot help with the issue of raising a deposit or equity. So we have the Help To Buy ISA.

If you are saving to buy your first home, save money into a Help to Buy: ISA and the government will boost your savings by 25%. So, for every £200 you save, receive a government bonus of £50. The maximum government bonus you can receive is £3,000.

Such is the desperation on this front that the providers seem willing to make a loss on it. From Moneywise.

First-time buyers can now get 4% interest from Santander’s Help to Buy ISA as the bank has today matched Halifax’s market leading best-buy rate.

These interest-rates as I shall explain later are far higher than can be got in other circumstances. Perhaps we get a clue here as to how much banks make from their UK mortgage books and can afford to subsidise deposits to get borrowers on the hook.

For those unaware of the UK system Individual Savings Accounts or ISAs offer income tax relief.

Savings and Deposit Interest-Rates

Moneywise gives us a theme that keeps being repeated or as the great Yogi Berra put it “It is just like deja vu all over again”

Banks and building societies continue to cut rates on both their fixed rate bonds and cash Isas…….On easy-access cash Isas, Post Office has cut its Online Isa rate from 1.45% to 1.2% for new savers. Virgin Money pays the top rate at 1.41% on its Defined Access Isa, but you are restricted to three withdrawals a year. Coventry BS Easy Isa pays 1.4%.

You may note that the Post Office has acted as if there has just been a Bank Rate cut of 0.25%, are they getting ready? The Bank of England records it like this.

The effective rate paid on households’ outstanding time deposits decreased by 2bps to 1.44% in January and the rate for households’ new time deposits increased by 4bps to 1.36%.

Interesting isn’t it how everybody seems to get the top rate? Perhaps they should invest everyone’s savings.. Oh hang on maybe not.

The Bank of England has chopped and changed in the savings rates used in its database ( I wonder why…) but the ISA rate nearly goes back to Charlie’s speech as we have 2.41% in January of 2011 as opposed to the 0.81% of February. So savers have continued to lose over time as interest-rates have fallen as they wonder when they will be doing very well as Charlie Bean promised? Oh and is 0.81% the new 1.4%.

How much do we save?

This is measured except the number produced includes imputed saving described as “conceptual payments” and yes our old friend imputed rents gets a mention. Well to its credit (sorry…) the Office for National Statistics tried again last month and sang along to this from Stevie V.

Dirty cash
Dirty cash
Dirty cash
Dirty cash

On this basis negative saving began in 2003 and might reasonably be considered a sign of the times and a warning. This fell to an annual rate of around -6% in 2008 before springing up like Zebedee from The Magic Roundabout to just over 5% in early 2009 in a clear reaction to the credit crunch as fear led to more saving as well as more fear at the Bank of England! Next we saved for a bit until it went negative again in late 2013 where it has remained.

Under the series including imputed saving the savings ratio is usually some 5% or so higher.

Comment

In essence official policy in the credit crunch era has been to reward debtors and to punish savers. Charlie Bean made that plain and this was reinforced in the summer of 2012 as the Funding for Lending Scheme was brought in to reduce further mortgage and savings interest-rates. Unlike Lewis Carroll it is always “Jam Today” for the UK establishment. It is a bit like the famous saying of St.Augustine.

Lord, make me chaste (sexually pure) – but not yet!

This has even moved into the world of inflation as savers have recently benefited from the fact that it has fallen. If we move beyond which measure to use then real rather than nominal interest-rates have improved especially compared to 2011 when the dilatory efforts of the Bank of England saw most inflation measures go above 5% per annum. It failed to spot that punishing workers, consumers and savers would have only one result. However of course it wants inflation higher as the game continues! The moral hazard issue continues also as Lewis Carroll reminds us.

Alice:How long is forever? White Rabbit:Sometimes, just one second

Meanwhile today we get an update on the basket for the UK official inflation measure. Apparently it is more important to include coffee pods and cream liqueur than owner-occupied housing.

I will be on Share Radio which has gone national on Dab after the 1pm news today.