Can negative interest-rates prevent a recession in Denmark?

One of the features of the response to the credit crunch was a general reduction in interest-rates. This was followed later by Quantitative Easing and around the Euro area in particular by further reductions in interest-rates. This was evidenced by Denmark where its Nationalbanken cut its current account rate to 0% in June 2012 where it remains. Even more so by its certificate of deposit or CD rate which moved into negative territory in July 2012 at -0.2% and is now -0.65% having been as low as -0.75%. So after raising interest-rates almost unbelievably as the credit crunch hit the Nationalbanken became an enthusiastic cutter of them and before we get to the impact on the Danish economy we need to remind ourselves that there is an external or foreign restraint at play here.

Denmark maintains a fixed-exchange-rate policy vis-à-vis the euro area and participates in the European Exchange Rate Mechanism, ERM 2, at a central rate of 746.038 kroner per 100 euro with a fluctuation band of +/- 2.25 per cent.

So it is no great surprise to note that Danish interest-rates were in effect sucked lower by the impact of Mario Draghi’s “Whatever it takes ( to save the Euro) speech and policies. Of course all interest-rate policies have external and internal economic implications but when you have such an explicit one the external takes over at times of stress. For choice I would call it a pegged currency rather than fixed as whilst it is unlikely it could more easily change the rate than it could leave the “irreversible” Euro if it had joined it. Anyway here is how the Nationalbanken  reviewed events back in the summer of 2012.

For the first time in its nearly 200-year history, one of Danmarks Nationalbank’s interest rates is negative. Negative monetary-policy interest rates are also unique in an international perspective.

They were not lonely for long!

The economic situation

At the end of last month the Nationalbanken told us this.

The Danish economy is in a boom where the
growth outlook is slightly better than the potential……. There is consensus that labour market
pressures will intensify.

We get the picture although the discussion with the Danish Economic Council did have something from the left field.

In addition, the calculation assumes an increase in the retirement age by 12 years relative to today.

Really? It seems for best that they think that the public finances are in good shape. Although I note that the enthusiasm for easy monetary policy does not spread to fiscal policy.

This should not be perceived as scope for fiscal policy accommodation within a foreseeable time horizon. The cyclical position must be taken into account.

Returning to the economic situation we were told this back in March.

The upswing continued in the 2nd half of 2017 and the Danish economy has now entered a boom phase. Labour market pressures have increased, but so far the upswing has been balanced.

That is Danmarks Nationalbank’s conclusion in a new projection of the Danish economy, in which growth in the gross domestic product, GDP, is expected to be 1.9 per cent this year, 1.8 per cent next year and 1.7 per cent in 2020.

We need a caveat for those who think that these days we need recorded growth of 2%  per annum just to stand still but Nationalbanken Governor Lars Rhode is not one of them.

The Danish economy is booming

In fact the outlook is so good that the brakes may need to be applied although it is revealing that Governor Rhode seems to have forgotten that the task below is usually considered to be the role of monetary policy because it is more flexible.

So the government should be prepared to introduce preventive fiscal tightening at short notice if there are signs that the economy is overheating.

The boom

We get a new perspective on the concept of boom if we note that at current prices the GDP of Denmark was 537.9 billion Danish Krone in the first quarter of 2017 and 537.3 billion in the first quarter of this year. This was driven by this.

Gross domestic product fell 0.6 percent in the third quarter from the previous three-month period, Statistics Denmark said on Thursday ( Bloomberg).

In fact we know that on the measure looked at above it fell by 0.8% and unknown to Bloomberg back then it had also fallen by over 1% in the second quarter so there had in fact been a recession in the boom. How can this be? Well there was an element of the Irish problem.

The reason is primarily a large payment of a Danish owned patent which is temporarily accounted for as service exports in Q1 2017. That leaves Q1 GDP at a massive 2.3% q/q growth and Q2 at -1.2%. Q3 turned out even worse than previously suggested at -0.8% but it is largely attributed to negative stock building and the above mentioned sudden stop in car sales. ( Danske Bank ).

This meant that if you looked at 2017 as a calendar year things looked like a boom. From the Financial Times.

Gross domestic product increased 2.1 per cent for the year overall, the country’s best performance since 2006. Jan Størup Nielsen, chief analyst at Nordea, said the country is now “running at full capacity” for the first time in 10 years, and said the solid performance “will likely continue in 2018”.

Yet if you look from the latest data then the economy is smaller than a year before! If we move to the cause here is the likely factor.

However, most of Denmark’s most valuable patents are held by pharmaceuticals companies and several economists pointed to a payment made to Danish group Forward Pharma last January. Nasdaq-listed Forward received a $1.25bn payment from US biotech Biogen as part of a dispute over patents for multiple sclerosis treatments. Forward chief executive Claus Bo Svendsen said the data showed “a nice time-wise correlation with our deal with Biogen”.

House Prices

From the Nationalbanken.

As a result of the gradual shift from bank loans to
mortgage loans in recent years, mortgage lending
continues to drive lending growth.

They will need to drive it a bit faster as at the end of 2017 there was a dip in house prices after a spell of rises which in the light of the negative interest-rates era you may not be surprised to learn began in 2012.  The 85.7 of the index was replaced by 111 in the autumn of last year but it ended the year at 109.1 . Like many capital cities Copenhagen is now under much cooler pressures than were seen before.


Let me open with this from Bloomberg yesterday.

In the world-record holder of negative rates, there’s been another eye-catching development.

Danes are richer than ever before, according to central bank data on savings and home equity. But they’re spending less, in relative terms. The gap between private consumption and household wealth is the biggest it’s been in three decades.

Those familiar with my analysis will not be surprised unlike those Bloomberg go on to quote. This is because there is a large group of losers as those who do not own property face inflation which does not show up in the Consumer Price Index which is at 102.2 compared to 100 in 2015. Whereas the winners are really only those who have sold and made a profit or more implicitly those who have used higher prices to borrow more.

So wealth is not what is used to be as we get another reminder that GDP isn’t either.

Though private consumption did inch up 0.9 percent in the first quarter, it wasn’t enough to prevent the economy from shrinking on an annual basis.  Danske says GDP growth this year probably won’t exceed 2 percent.

Furthermore will Denmark be influenced by the slowing in the UK and Euro area and with interest-rates already negative how would it respond in such a scenario?



Have Apple Unilever and the makers of Digestive biscuits somehow missed the rally in the £?

This morning brings us the first official data covering December and in particular the retail sector and how it performed over Christmas. So after yesterday’s rays of sunshine which boosted the recorded performance of the telecoms sector over the past decade or so we wonder if a winter chill has arrived today? But before we get there we have much to look at and the opening salvo is fired by this.

GBP back to pre-Brexit levels against the USD. Interesting. ( @ericlonners )

To be more specific it has risen over US $1.39 this morning which does mark a change in UK economic conditions. We are now 15 cents higher than we were a year ago which means that we have switched from the boost to inflation from the past fall to a brake on it from the new higher level. I note he sent this to various journalists perhaps mulling how so many of them told us the only way was down for the UK Pound or perhaps noting the disappearance of polls asking if we are going to parity with the US Dollar? So lesson one is to get very nervous if places like the Financial Times and Wall Street Journal go bullish on the UK Pound £!

But before I move on an excellent question was asked.

So will Apple and Unilever be dropping their prices then, Eric? ( @AndrewaStuart )

After all they did raise prices when the UK Pound £ fell.

Monetary Policy

There is less impact here than you might think. There has been an overall tightening of monetary policy but only by the equivalent of a 0.5% Bank Rate rise as the effective or trade-weighted index has risen from 77 to 79. If you are wondering where the rise against the US Dollar has gone well some of it has been offset by the fall against the Euro where the 1.19+ of last April is 1.13 or so now.

This is something which economists who look at the UK economy have dreamed of in the past and today’s test if you will is to see if any mention it?! What we wanted was a rally against the US Dollar to reduce inflation via its role as the base for commodity prices and a fall against the Euro to improve our price competitiveness for trade. In essence we have had that over the past year or so albeit after the fall in the UK Pound £ after the EU Leave referendum.

Gilt Yields

Here we do not quite get what you might assume from all the media reports of rising bond yields  or from the Professor ( from Glasgow university I think) who was not challenged on BBC News 24 last night when he claimed the UK could borrow for nothing. Whilst it is hardly exorbitant 1.34% is not the “nothing” that you might argue for Germany or especially Switzerland. As to the change in yields they are lower than a year ago because the real change in world bond markets happened early last September when the UK ten-year Gilt yield was below 1%. So since then monetary policy has tightened via this route as well.

Wealth and House Prices

After offering views likely to upset the digestion of Bank of England Governor Mark Carney let me move onto a subject to make him smile. From the Financial Times today.


The value of all the homes in the UK has risen by more than third in the past decade, to £7.14tn, with older homeowners and landlords winning the biggest share of the new wealth as young people continue to be priced out of the market. After several flat years of growth following the financial crisis, the value of the UK’s property market began picking up strongly after 2013, according to analysis by Savills, the estate agent.

Governor Carney  will grin like a Cheshire Cat and perhaps order his favourite Martini as he notes it coincides with his watch.


After several flat years of growth following the financial crisis, the value of the UK’s property market began picking up strongly after 2013, according to analysis by Savills, the estate agent.

For newer readers please look up my posts on the Funding for Lending Scheme and its impact. Also there is a signal of a problem in the UK economy which is rather familiar.

Landlords more than doubled the value of their equity from £600bn in 2007 to £1.3tn in 2017.

I have nothing against individual landlords trying to make some money but I do have criticisms for the way that so much UK economic effort is incentivised to flow into this area and arena.

Also in a week where the economics editor of the Financial Times has railed against statistical fake news there are a couple of issues here. Firstly there is the use of marginal prices ( current house prices) to value a stock as for example you would never get those prices if you actually tried to sell the lot. Next there is the issue of pretty much copy and pasting a view on the housing position from an estate agent and turning a blind eye to the moral hazard involved. On those issues let us note they end with a stock of this nature compared to a flow which is government income.

As a type of critique let me point out this from the FT’s twitter feed.

The share of UK families’ budgets devoted to housing costs has more than doubled over the past 60 years.

Retail Sales

This was likely to be an awkward Christmas season for two reasons. Over the year we had seen falling real wages slowly erode UK retail sales growth that had been particularly strong at the end of 2016. Also some of the spending has shifted to November via the advent of what is called Black Friday which only makes an already erratic series harder to analyse. So we are left with this.

In the latest three months the quantity bought in retail sales increased by 0.4% compared with the previous three months; while the underlying pattern remains one of growth, this is the weakest quarterly growth since the decline of 1.2% in Quarter 1 (Jan to Mar) 2017……..In December 2017, the quantity bought increased by 1.4% when compared with December 2016, with positive contributions from all stores except food stores.

So we have some growth but not a lot of it and we had a curiosity because we had been told by individual company reports that it had been food sales which had saved Christmas yet on the collective level we see the opposite. Next we face the prospect that as winter moves into spring the numbers may be okay as we note that it was a rough start to 2017 for retail sales.


As ever we have much to consider. Let me start with the end of last year where the fourth quarter looked good but retail sales are not helping much and there was the shut down of the Forties pipeline. Thus it seems set to be at the weaker end of expectations followed by a bounce back in the first quarter as the pipeline re-opens all other things being equal.

Meanwhile some and in particular those who invested/punted/bought houses near to my locale may not be enjoying things that much. From Property Industry Eye.

The foreign investor market in London is on its knees – with ‘hundreds’ of buyers of homes purchased off-plan over the last four years nursing huge losses.

The problem, says one large London agent, has been ‘massively under-reported’ by the media.

With values of such properties having dropped like a stone, some investors are unable to complete on their purchases, with the developers taking possession.

Others are having to sell at almost a one-third loss to avoid having to hand back distressed properties to developers, and then risking legal action and greater losses.

Yet some still seem to be taking the blue pills. From Bloomberg.

Malaysia’s Permodalan Nasional Bhd will buy a stake in London’s Battersea Power Station building where Apple Inc. plan to occupy a new U.K. headquarters.

The sovereign wealth fund will own the building with the Employees Provident Fund in a deal which values the power station building at about 1.6 billion pounds ($2.2 billion), Battersea Power Station Development Co. said in a statement Thursday.

Oh and someone seems to have missed the rally in the £ completely.


The issue of house prices in both Australia and China

Earlier today there was this announcement from Australia or if you prefer the south china territories.

Residential property prices rose 1.9 per cent in the June quarter 2017, according to figures released today by the Australian Bureau of Statistics (ABS)……..Through the year growth in residential property prices reached 10.2 per cent in the June quarter 2017. Sydney and Melbourne recorded the largest through the year growth of all capital cities, both rising 13.8 per cent followed by Hobart, which rose 12.4 per cent.

So we see something which is a familiar pattern as we see a country with a double-digit rate of inflation in this area albeit only just. Also adding to the deja vu is that the capital city seems to be leader of the pack.

However there is quite a bit of variation to be seen on the undercard so to speak.

“Residential property prices, while continuing to rise in Melbourne and Sydney this quarter, have begun to moderate. Annual price movements ranged from -4.9 per cent in Darwin to +13.8 per cent in Sydney and Melbourne. These results highlight the diverse housing market and economic conditions in Australia’s capital cities,” Chief Economist for the ABS, Bruce Hockman said.

The statistics agency seems to be implying it is a sort of race if the tweet below is any guide.

“Sydney and Melbourne drive property price rise of 1.9%” – how did your state perform?


There was something added to the official house price release that will lead to smiles and maybe cheers at the Reserve Bank of Australia.

The total value of Australia’s 9.9 million residential dwellings increased $145.9 billion to $6.7 trillion. The mean price of dwellings in Australia rose by $12,100 over the quarter to $679,100.

Central bankers will cheer the idea that wealth has increased in response to the house price rises but there are plenty of issues with this. Firstly you are using the prices of relatively few houses and flats to give a value for the whole housing stock. Has anybody made an offer for every dwelling in Australia? I write that partly in jest but the principle of the valuation idea being a fantasy is sound. Marginal prices ( the last sale) do not give an average value. Also the implication given that wealth has increased ignores first-time buyers and those wishing or needing to move to a larger dwelling as they face inflation rather than have wealth gains.

This sort of thinking has also infested the overall wealth figures for Australia and the emphasis is mine.

The average net worth for all Australian households in 2015–16 was $929,400, up from $835,300 in 2013–14 and $722,200 in 2005-06. Rising property values are the main contributor to this increase. Total average property values have increased to $626,700 in 2015–16 from $548,500 in 2013–14 and $433,500 in 2005-06.

If we look at impacts on different groups we see it driving inequality. One way of looking at this is to use a Gini coefficient which in adjusted terms for disposable income is 0.323 and for wealth is 0.605 . Another way is to just simply look at the ch-ch-changes over time.

One factor driving the increase in net wealth of high income households is the value of owner-occupied and other property. For high wealth households, average total property value increased by $878,000 between 2003-04 and 2015-16 from $829,200 to $1.7 million. For middle wealth households average property values increased by $211,200 (from $258,000 to $469,200). Low wealth households that owned property had much lower growth of $5,600 to $28,500 over the twelve years.

As you can see the “wealth effects” are rather concentrated as I note that the percentage increase is larger for the wealthier as well of course as the absolute amount. Those at the lower end of the scale gain very little if anything. What group do we think central bankers and their friends are likely to be in?


This has been rising too.

Average household debt has almost doubled since 2003-04 according to the latest figures from the Survey of Income and Housing, released by the Australian Bureau of Statistics (ABS).

ABS Chief Economist Bruce Hockman said average household debt had risen to $169,000 in 2015-16, an increase of $75,000 on the 2003-04 average of $94,000.

The ABS analysis tells us this.

Growth in debt has outpaced income and asset growth since 2003-04. Rising property values, low interest rates and a growing appetite for larger debts have all contributed to increased over-indebtedness. The proportion of over-indebted households has climbed to 29 per cent of all households with debt in 2015-16, up from 21 per cent in 2003-04.

They define over-indebtedness as having debts of more than 3 years income or more than 75% of their assets. That must include rather a lot of first-time buyers.

Younger property owners in particular have taken on greater debt.

Also the statistic below makes me think that some are either punting the property market or had no choice but to take out a large loan.

“Nearly half of our most wealthy households (47 per cent) who have a property debt are over-indebted, holding an average property debt of $924,000. This makes them particularly susceptible if market conditions or household economic circumstances change,” explained Mr Hockman.

So something of an illusion of wealth combined with the hard reality of debt.

Ever more familiar

Such situations invariably involve “Help” for first-time buyers and here it is Aussie style.

In Australia every State government provides first home buyer with incentives such as the First Home Owners Grant (FHOG) ( FHBA)

In New South Wales you get 10,000 Aussie Dollars plus since July purchases up to 650,000 Aussie Dollars are free of state stamp duty.


If we head north to China we see a logical response to ever higher house prices.

Local governments are directly buying up large quantities of houses developers haven’t been able to sell and filling them with citizens relocated from what they call “slums”—old, sometimes dilapidated neighborhoods. ( Wall Street Journal).

We have discussed on here more than a few times that the end game could easily be a socialisation of losses in the property market which of course would be yet another subsidy for the banks.

The scale of the program is large, accounting for 18% of floor space sold in 2016, according to Rosealea Yao, senior analyst at Gavekal Dragonomics, and is being partly funded by state policy banks like China Development Bank. ( WSJ)

Will they turn out to be like the Bank of Japan in equity markets and be a sort of Beijing Whale? Each time the market dips the Bank of Japan provides a put option although of course there are not that many Exchange Traded Funds for it to buy these days because it has bought so many already.


There is a fair bit to consider here so let me open with a breakdown of changes in the situation in Australia over the last decade or so.

This growth in household debt was larger than the growth in income and assets over the same period. The mean household debt has increased by 83% in real terms since 2003-04. By comparison, the mean asset value increased by 49% and gross income by 38%.

Lower interest-rates have oiled the difference between the growth of debt and income. But as we move on so has the rise in perceived wealth. The reason I call it perceived wealth is that those who sell genuinely gain when they do so but for the rest it is simply a paper profit based on a relatively small number of transactions.

If we move to the detail we see that if there is to be Taylor Swift style “trouble,trouble, trouble” it does not have to be in the whole market. What I mean by that is that lower wealth groups have gained very little if anything from the asset price rises so any debt issues there are a problem. Also those at the upper end may be more vulnerable than one might initially assume.

High income households were also more likely to be over-indebted. One quarter of the households in the top income quintile were over-indebted compared to one-in-six (16%) low income households (in the bottom 20%).

Should one day they head down the road that China is currently on then the chart below may suggest that those who have rented may be none too pleased.

Never Tear Us Apart ( INXS )

I was standing
You were there
Two worlds collided
And they could never ever tear us apart

UK real wage growth is even worse if you factor in house price growth

After yesterday’s higher inflation data and it was across the board as the annual rate of hose price inflation increased as well we move to the labour market today and in particular wages. Unless we see a surge in wage growth in the UK real wages are set to fade and then go into decline this year but before we get to them we have another source of comparison. Something which immediately has us on alert as it will cheer the Bank of England.


This is what the Bank of England would call this from the Financial Times today.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group.

It will be slapping itself on the back for the success of its Funding for (Mortgage) Lending Scheme or FLS which officially was supposed to boost bank lending to smaller businesses but of course was in reality to subsidise bank property lending.  The FLS does not get much publicity now but there is still some £61 billion of it around as of the last quarterly update, since when some has no doubt been rolled into the new Term Funding Scheme. Oh yes there is always a new bank subsidy scheme on the cards.

Whilst the Bank of England will continue to like the next bit those with any sort of independent mind will start to think “hang on”.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016.

Only on Tuesday night Governor Carney was lauded for his work on “distributional issues” but here is a case of something he and the Bank of England have contributed to which is a transfer from first time buyers and those climbing the property ladder to those who own property.

If we move to wages then the UK average is still around 6% below the previous peak which poses a question immediately for the wealth gains claimed above. Indeed last November the Institute for Fiscal Studies suggested this.

Britons face more than a decade of lost wage growth and will earn no more by 2021 than they did in 2008 ( Financial Times).

There has been an enormous divergence here where claimed housing wealth has soared whilst real wages have in fact fallen. That is not healthy especially as the main age group which has gained has benefited in other areas as well.

The income of those aged 60 and over was 11 per cent higher in 2014 than in 2007. In contrast, the income of households aged 22-30 in 2014 was still 7 per cent below its 2007 level. The average income of households aged 31-59 was the same in 2014 as in 2007.

As an aside some of the property numbers are really rather extraordinary.

The value of homes in London and south-east England has topped £3tn for the first time, meaning almost half the total is accounted for by a quarter of UK dwellings. This concentration of wealth is most evident in the richest London boroughs, Westminster and Kensington & Chelsea, where housing stock adds up to £232bn, more than all of the homes in Wales, according to analysis based on official data.

Another shift was something I noted yesterday which was the fall in house prices seen in Northern Ireland where wealth under this measure has declined sharply. Has that influenced its political problems? However you look at it there has been a regional switch with London and the South-East gaining. Also there is a worrying sign for UK cricketer Jimmy Anderson or the “Burnley Lara”.

Likewise, homes in Burnley, Lancashire, declined in value over five years, even as most of the UK market boomed.

One area where care is needed with these wealth numbers is that a marginal price ( the last sale for example) is used to value a whole stock which is unrealistic.Before I move on there is another distributional effect at play although the effect here is on incomes rather than wages as Paul Lewis reminds us.

As inflation rises to 1.6%/2.5% the policy of freezing working age benefits for four years becomes less and less sustainable.

Before we move on the Resolution Foundation has provided us with a chart of the nominal as in not adjusted for inflation figures.


Today’s Data

The crucial number showed a welcome sign of improvement.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.8% including bonuses and by 2.7% excluding bonuses compared with a year earlier……average total pay (including bonuses) for employees in Great Britain was £509 per week before tax and other deductions from pay, up from £495 per week for a year earlier

So a pick-up on the period before of 0.2% and at we retain some real wage growth which helps to explain the persistently strong retail sales data.

Comparing the 3 months to November 2016 with the same period in 2015, real AWE (total pay) grew by 1.8%, which was 0.1 percentage points larger than the growth seen in the 3 months to October. Nominal AWE (total pay) grew by 2.8% in the 3 months to November 2016, while the CPI increased by 1.2% in the year to November.

There is obviously some rounding in the numbers above and the inflation measure used is around 1% lower than the RPI these days.

If we move to the detail we see that average earning also rose by 2.8% annually in the year to the month of November alone and the areas driving it were construction (5%) and wholesale and retail (4.2%). Sadly the construction numbers look like they might be fading as they were 8.8% but the UK overall has just seen tow strong months with 2.9% overall wage growth in October being followed by 2.8% in November.

Employment and Unemployment

The quantity numbers continue their strong trend.

There were 31.80 million people in work, little changed compared with June to August 2016 but 294,000 more than for a year earlier…….There were 1.60 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for June to August 2016 and 81,000 fewer than for a year earlier.

The next number might be good or bad.

Total hours worked per week were 1.02 billion for September to November 2016. This was 1.2 million fewer than for June to August 2016 but 4.8 million more than for a year earlier.

The fall may be troubling but as the economy grew over this period ( if the signals we have are accurate) might represent an improvement in productivity.

It is nice that the claimant count fell in December “10,100 fewer than for November 2016” but I am unsure as to what that really tells us.


We have seen today some good news which is a pick-up in the UK official wages data. This will help real wages although sadly seems likely to be small relative to the inflation rise which is on its way. However if we widen our definition of real wages we see that the credit crunch era has brought quite a problem. This is that the claimed “wealth effects” from much higher house prices make them look ever higher in real terms as we return to the argument as to how much of the rise is economic growth and how much inflation.

My view is that much of this is inflationary and that once we allow for this then we start to wonder how much of an economic recovery we have seen in reality as opposed to the official pronouncements.

Also we have my regular monthly reminder that the wages figures exclude the self-employed and indeed smaller businesses.

The winners in the UK Wealth Experience have been homeowners and the top 20%

Today has seen some research published into the UK’s experience over the credit crunch era by the Social Market Foundation. Regular readers will recall that it was only last Wednesday that I analysed this claim from the Institute of Fiscal Studies.

Average income back to around pre-recession level


It turned out that the conclusion was in fact driven by the inflation measure used and that changing this assumption gave very different answers.

In total, this means that projected 2014–15 real median income is further below its 2007–08 level if CPI is used (3.0%) than if RPIJ is used (0.4%).


That is a fair bit lower! If we used the headline RPI then you can add around another 3% so it would be 6% lower. I guess that living-standards are 0.4% lower or 3% lower or 6% lower does not make such a great headline does it?! I wonder how much of the media will spot that?


Accordingly we were left with the conclusion that UK living-standards had in fact fallen with the amount determined by the inflation measure you feel is the most accurate. Sadly for the IFS this is the opposite of what they broadcast through the media. Perhaps we now know why politicians recommend the IFS!

What does the Social Market Foundation say?

It opens with something we have discussed many times on here.

Following the financial crisis, UK households experienced the longest period of falling real wages  since records began. They were poorly prepared for this, having run down savings and taken on increasing amounts of debt during the 2000s.


This is a somewhat different emphasis to that provided by the IFS and I would think that the majority of readers would think that it is much more in line with their personal experience. Also tucked away is something that deserves more exposure.

saving dramatically increased and indebtedness fell.


This highlights one of the policy errors of the Bank of England as the hapless Mr Bean (Deputy Governor Charlie Bean) urged savers to spend their cash.

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 will of course still be wondering when “they will be doing very well” as deposit rates have fallen even further since then. By contrast Sir Charles Bean retired on an index-linked (none of the CPI rubbish for Charlie as he receives the full RPI!) of £119,600 per annum at age 60 I am sure our pension experts can value this for us. For some reason the Bank of England has stopped doing so! Anyway we can conclude that Charlie will not need to dip into his savings in retirement.

The SMF conclude that there are very different experiences

Just like Charlie those at the top of the spectrum – mostly defined by themselves – seem to have done very well.

The top 20%: The top income group are far more financially secure today than those in the top incomes going into the downturn. Median financial wealth in this group increased by 64% between 2005 and 2012-13. They are now less likely to be in debt compared to the middle-income group – a reversal of the pre-crisis trend…The top 40% have also seen an improvement, although the increase in financial security is not as substantial.


Also the next group of winners is perhaps even less of a surprise.

Homeowners have been able to add more to their savings than other individuals, as they have benefited from lower housing costs. ……This is above and beyond the
any gains made from increases in property values.



We can add to this as we know that since the surveys above were taken then house prices have risen substantially. From the UK ONS.

UK average house prices increased by 9.8% over the year to December 2014


Indeed we can also factor in that the top 20% are of course more likely to live in London where in spite of a recent cooling the rises have been more substantial.

Annual house price increases in England were driven by an annual increase in London of 13.3%


The house price boom will mostly have taken place after the period of these surveys as UK house prices turned  in April 2012.

The Losers

If there are winners then sadly there also have to be losers in this arrangement and we see some familiar concepts at play starting with our poorest citizens.

The bottom 20%: The lowest income group are less financially secure today than those on the lowest incomes going into the downturn. By 2012-13, median financial wealth among the lowest income group was 57% lower than in 2005. Over the same period, the proportion of those on the lowest incomes with non-mortgage debt increased; and the value of that debt rose faster than incomes – by 67%.


Have they borrowed to keep going? There are all sorts of troubling consequences here.

Also the generational war which I have discussed previously pops up in the SMF analysis. The emphasis used is mine

26-35 year olds: The intergenerational gap in incomes and wealth has widened. Wages for younger workers fell substantially during the downturn – at a greater rate than the average. 26-35 year-olds today are less likely to own a home. In 2005, 74% of 26-35 year olds owned a home; by 2012-13, this had dropped to 54%.


Are these the individuals that “Help To Buy” is “helping” to buy what I consider to be overpriced houses? What could go wrong here?

I guess younger readers will be singing along to Paul Simon right now.

We work our jobs
Collect our pay
Believe we’re gliding down the highway
When in fact we’re slip slidin’ away
Slip slidin’ away
Slip slidin’ away


Indeed the gaps have widened

Most of the deleveraging that took place in the aftermath of the crisis happened among the top income group. Those on the lowest incomes have not built up their financial resilience. On average, they have less than six days’ worth of income in savings.


Two of my themes are at play here. Firstly the disastrous policy error made by the Bank of England when it “looked through” higher inflation and let it rip apart the earnings of our youngest and weakest. Secondly the interrelated theme that there is a high standard deviation of experiences or more simply we are splitting apart as a nation.


There is much to consider here and in so far as it goes we see a conclusion which is broadly in line with what we might have expected. However it does have weaknesses as highlighted below.

Pension wealth, the purpose of which is to provide an income in later life, rather than to help cope with hardship
during working lives, is excluded from our analysis.12 Similarly, housing, whilst an important component of overall wealth, is not examined in detail in this report due to the fact that, as an asset, it is relatively illiquid.


Slightly bizarre don’t you think to exclude the largest -especially these days!- and one of the largest sources of wealth! I have helped out already with a view on the ever growing household wealth or at least what it is perceived as. So let me now look at pensions. One rough and ready indicator is the value of the FTSE 100 equity index which passed 6000 to wards the end of 2012 and has recently nudged towards 7000. Those who have invested abroad such as in Germany or Japan have done a lot better as we mull the way that the QE era has increased wealth for the better-off one more time.

In a separate release we have been told this by the UK Office for National Statistics.

Our new analysis shows that between 2007 and 2012, of those aged 18 to 59 who were in income poverty1, but then entered employment, 70% moved out of poverty. The other 30% remained in poverty, despite entering employment.


This is heartening for the 70% who benefit but for the other 30% well the same song strikes up again.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away


Or as Seasick Steve puts it.

Cause I started out with nothing
and I’ve still got most of it left

How much has expansionary monetary policy such as QE raised inequality?

Sometimes the strands of the news flow link together as if they have been constructed into a chain. One of these at the moment concerns the way that central banks have pumped money and funds into the world economy via Quantitative Easing. This is a hot topic on its own right now as we await the European Central Bank policy announcement on Thursday and I am sure that the midnight oil was being burnt in its Frankfurt towers over the weekend. That is of course without the event that redistributed wealth last Thursday when the Swiss National Bank abandoned its Swiss Franc cap against the Euro which then saw the Swiss Franc end the week some 18% higher against the US Dollar than it started it. Happy Days for those long the Swiss Franc but unhappy days for those short it or indeed brokerages with client short it as Alpari UK bit the dust.

What about inequality?

The theme of the 1% and the 99% or rather the 0.1% and the 99.9% has haunted the credit crunch era. Furthermore the issue of how much of this has been created by central bank policy has been hotly debated. I will return to that subject in a moment but let us first examine today’s report from Oxfam on world inequality.

Oxfam steps into the fray

Some of today’s release is certainly eye-catching to say the least.

In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just
5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years, as shown on Figure 2, with the wealth share of the top 1% exceeding 50% by 2016.

There is plenty of food for thought in a statement that the world’s richest 1% are soon to own a majority of world wealth. But was it always like this? Apparently not.

Data from Credit Suisse shows that since 2010, the richest 1% of adults in the world have been increasing their share of total global wealth.

Actually if you look at the chart in the report the statement above is simultaneously true and misleading. You see if we go back to the beginning of this century the top 1% were pretty much in the position they are now and they were then hit by the credit crunch but have regained ground since. I guess that global wealth held by the top 1% is less than in the year 2000 does not make as good a headline.

However of course there is another possible scenario at play here which is that the moves such as QE are in effect an attempt by the global elite to regain their previous position and maybe even improve it as we move forwards. Indeed the ultra-rich seem to be doing just nicely out of events.

The very richest of the top 1%, the billionaires on the Forbes list, have seen their wealth accumulate even faster over this period. In 2010, the richest 80 people in the world had a net wealth of $1.3tn. By 2014, the 80 people who top the Forbes
rich list had a collective wealth of $1.9tn; an increase of $600bn in just 4 years, or 50% in nominal terms.

Of course correlation does not prove causation but it is the mother and father of thousands of conspiracy theories! Although some care is needed here as in the credit crunch era conspiracy theories have developed a habit of actually being true.

What about QE and timing?

If we look back we see that extraordinary monetary policies do seem to fit with the timescale here. If we examine the moves of the Bank of England where QE began in March 2009 and some £200 billion was spent on bond purchases by January 2010 followed by later tranches making the total some £375 we do see that the timing is indeed consistent with the wealth increases above.

Of course on a world scale the biggest player by far has been the US Federal Reserve. The first effort now called QE1 came down the slipway in December 2008 and was followed by QE2, Operation Twist and then QE3. It’s balance sheet has expanded in total by £3.6 trillion on top of the just under US $0.9 trillion of the run up to the credit crunch. What has been in doubt throughout this period has been where the money went!

To this we can add on and off actions by the Bank of Japan which has been proclaiming “bold action” until it really let rip recently and the ECB with its trillion Euro LTROs.

Never believe anything until it is officially denied

We have seen a litany of denials that the policies of central banks have indeed led to rising inequality. Instead they tell us that such policies have boosted economic growth and “saved the world”. Every now and then even a main player such as Federal Reserve Chair Janet Yellen goes off message. From October 17th.

It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,

The distribution of wealth is even more unequal than that of income, and the SCF shows that wealth inequality has increased more than income inequality since 1989.

She of course avoided the impact of the policies of which she has been an avid supporter.

The Bank of England in its enthusiasm to demonstrate some sort of benefit from QE ended up firing a bullet or two into its feet back in July 2012.

this in turn has led to an increase in demand for other assets, including corporate bonds and equities. As a result, the Bank’s asset purchases have increased the prices of a wide range of assets, not just gilts. In fact, the Bank’s assessment is that asset purchases have pushed up
the price of equities by at least as much as they have pushed up the price of gilts.

Who owns the most equities? The richest and wealthiest of course. So we see something of a QED for QE.

What about the bond party?

This is a more recent trend which most data will miss. But we are now seeing extraordinary surges in many government bond prices and it is not an exaggeration to say that some falls in yields have become collapses. Last week saw even ten-year yields in Switzerland dice with negativity and this morning has seen the same maturity in Japan have a yield of below 0.2%. I note these as Japan is into I think QE 13 and the Swiss currency cap was a type of QE in drag. Oh and a consequence of the Swiss policy was that it bought a lot of Euro area bonds.

Who is likely to be holding such bonds? You do not have to be a conspiracy theorist to believe that they and their advisers will be aware of the plans of central bankers. After all they will all be meeting up at the World Economic Forum in Davos later this week won’t they?


There is much to consider on the subject on inequality and the first issue is getting any sort of accurate data. The Oxfam Report quoted from above uses data collected from Credit Suisse which makes them an odd couple for a start! But there are issues with the methodology as Felix Salmon pointed out last year.

How is it that the US can have 7.5% of the bottom decile, when it has only 0.21% of the second decile and 0.16% of the third? The answer: we’re talking about net worth, here: assets minus debts. And if you add up the net worth of the world’s bottom decile, it comes to minus a trillion dollars.

My niece, who just got her first 50 cents in pocket money, has more money than the poorest 2 billion people in the world combined.

So perhaps the one thing we are left with is that the ultra-rich are getting richer. Also we are left wondering about Oxfam as an organisation which publishes such a report but also does this. This is from Forbes about Oxfam America.

Top Person: Raymond C. Offenheiser
Top Pay:4 $355,941

Fiscal Year ending on 10/31/10

So what have we learnt? That such analysis has a litany of problems. But that we do these days have more availability of information which means that we know more about this than we did. So was it always true? Probably. There is an element of irony in the impact of the credit crunch reducing inequality but we are left with the thought that whether it was deliberate or by chance that policies like QE have increased inequality since and are likely to continue doing so. Something to think about as we see them take the stage at the World Economic Forum at Davos from Wednesday.