Conjuring up growth

Shakassoc

'a slow-down in the economy becomes a terrific growth spurt!

And in just the same way the so-called cuts are in fact nothing more than a reduction in the rate of increase of spending.

These people are all liars. Economics isn't a magical discipline: it is just a conjuring trick.

We are the proles from Nineteen Eighty Four.

James Murphy

Economic reality darkens the horizon like a tidal wave: our response? Simply turn away from the sea. Truly, our capacity for denial is almost magical. Are we worse in this than previous ages? Probably not. Think the South Sea and Dot.com Bubbles... - All together now people: fingers in the dyke!!

Harold

Quarterly GDP figures are subject to large one-off effects and large subsequent revisions. Economists make a big deal of them if they work in the City and need to generate trading, if they work for the media and have to generate headlines, or for politicians and have to be up with the "news cycle". There is some information in the figures, but not enough to make all the commentary worthwhile.

Nosmo

Strange how the London stock market has greeted this 'good news'. The FTSE Index has gone down !

Edward McLaughlin

It's a trap. The more that any coalition trumpeting is sounded, the more they will regret it.

The media are building us up so that when the effects of the cuts start to bite, they can point at the bountiful age of Labour growth.

Too silly right now to think they might get away with this, but this time next year, it'll be ready to market.

City hand

Hear, hear, Mel.

Vis-a-vis these growth figures, I can do no better than recommend Dan Atkinson’s blog, which recently proffered this prognosis:

“Nothing in the spending review changed my view that the balance of probabilities would have Cameron and his team as broken men in about 18 months' time - not for the fatuous 'reasons' rolled out by the Opposition, but simply because the clouds of wishful thinking that surround economic and social policy can lead only to a crash into the nearest mountainside.”

http://atkinsonblog.dailymail.co.uk/2010/10/midweek-not-another-off-the-cuff-spending-review-analysis.html

And why have so many journalists been doing Mervyn King’s bidding and printing him his pantomime ‘surprise’ headline every time the inflation figures come out?

Behind you, Merv! It’s that old printing press. You know?

You think we don’t know what you’re doing with that machine? You just go right ahead and let the bankers take all that money to gamble on stocks again.

My favourite economic commentator (the b�te noire of the business desk canters, the Melanie Phillips of economic commentary) The Sunday Telegraph’s Liam Halligan has been banging on about this for ages (here’s his archive):

http://www.telegraph.co.uk/finance/comment/liamhalligan/

I can think of no other MSM commentator apart from Mr Halligan (I don’t read every national paper so I’m happy to be corrected) who was so vigorously opposed to quantitative easing.

This is by contrast with America where many commentators still believe in honest capitalism (not Cameron, Osborne, King and the US Fed’s crony capitalism) and that those who take foolhardy risks must face the consequences.

No QE. No bailouts. And my favourite tea party placard: “No more big plans with my money.”

Wall Street and the City should swing with the rest of us. ‘All in this together’? My foot.

And today we get Ambrose Evans-Pritchard telling us he no longer believes in QE, but that it was right ‘at that time’.

Come again?

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100008351/the-feds-impending-blunder/

Were you reading Mr Halligan’s columns, Mr Evans-Pritchard?

AT THAT TIME he was telling anyone who’d listen how dangerous it was.

Today Mr Evans-Pritchard is happy to quote from an author who says it’s like pouring petrol and waiting for a match to light it. No kidding.

Sadly, if my faith in Mr Halligan turns out to be as well-founded as my faith in Mel, then her assessment of Britain’s failing social policy will be causing the second part of Dan Atkinson’s prognosis that ‘the clouds of wishful thinking that surround economic and social policy can lead only to a crash into the nearest mountainside’ and Mr Halligan‘s the first.

What a mess. What an unholy mess.

Harold

City hand
October 27th, 2010 9:02pm
The central bank's job is to maintain price stability. There are circumstances where this requires it to curb growth in the money supply. The economy is now just coming out of recession. There is spare capacity. The government is intent on cutting its defict. The banks are intent on strengthening their balance sheets. Growth in the money supply is low, perhaps sufficient to sustain trend growth at best, which is not enough to bring spare capacity into production and certainly not enough to cause a persistent rise in inflation. In these circumstances, it is the central bank's job, not to curb growth in the money supply, but to encourage it. With bank lending constrained by the banks' need to restore their balance sheets, the central bank should step in and buy assets from the private sector. Quantitative easing is a perfectly orthodox, perfectly sound instrument of monetary policy, appropriate to current conditions.

Michael

�The central bank's job is to maintain price stability.� Eh? It clearly isn't doing that, is it?

Trebling the money supply is �certainly not enough to cause a persistent rise in inflation�? What planet are you on?

�Quantitative easing is a perfectly orthodox, perfectly sound instrument of monetary policy, appropriate to current conditions.� In your opinion it is, Harold. In reality, many of the pundits who thought so are now thinking again.

Far from maintaining price stability we are all about to be blown away by a wave of inflation. And never mind the morality of destroying pensioner savings so they�ve less and less to spend as this happens. I suppose the central banks shouldn�t worry about a little thing like that.

Michael

As to spare capacity, Harold, you�re as authoritative on that as you are with your warped views on Israel. Here�s what happened to your spare capacity:

�The major analytical blunder that UK deflationists have made, in my view, has been their focus on "spare capacity". For a long time, now, there has been a widely-held assumption that, in the aftermath of the sub-prime crisis, the Government could print money and borrow like crazy without provoking inflation because of "slack" in productive capacity created by the slowdown.

�This was always nonsense �“ the most indefensible element of the intellectual fa�§ade constructed in an attempt to justify Britain's deeply irresponsible policy-response to the credit crunch. During a regular downturn, production slows but spare capacity is preserved �“ ready to generate extra supply when demand returns. A severe credit squeeze, though, does lasting structural damage as the evaporation of bank lending curtails firms' inherent ability to produce.

�Many cash-strapped UK companies have been forced not only to lower their output as a result of this crisis, but to sell off large parts of their productive capacity in a bid to survive. Across the country, capital goods are being unbolted from the floor and flogged to companies based in China, India and the other new economic powers.

�Those who continue to argue that "spare capacity" will keep a lid on inflation point to relatively high UK unemployment �“ now almost 8pc of the workforce. But it's not as if legions of skilled British workers are standing idle, ready and waiting to produce the high value-add goods we need if we are to compete internationally once confidence returns. Many of our unemployed are unskilled �“ and, sadly, in the eyes of most firms, unemployable.

�In the minutes of its August meeting released last week, the Bank's Monetary Policy Committee began to acknowledge these flaws in the "spare capacity" argument. But it did so in a rather disingenuous manner. "Over time," the minutes said, "if weak demand were to persist, that might lead to some capacity being scrapped and individuals losing skills".
I'd say such events are already happening �“ and have been for a while.

�For the Bank to admit this, though, would seriously undermine its argument that inflation can be contained. For now, the MPC continues to vote 8-1 to keep base rates at their historic low of 0.5pc �“ where they've been since mid-2009.

�The longer rates stay there, the more the market believes the day of reckoning will be postponed. In the wake of successive "Inflation Reports" from the Bank, base rate futures prices have fallen. The latest minutes reveal, though, that the committee is now actively discussing raising rates and stands ready to "respond in either direction as the balance of risks evolves". As price pressures persist, rates could go up much sooner than the markets expect.

�The UK's loss of spare capacity is no "mystery" and neither is the inability of the country's export sector to respond to a fall in sterling. British exports were only 2pc higher during the second quarter of 2010 than a year earlier, while imports rose 11pc. So, despite a lower pound, the balance of trade got worse.

�At the heart of both these "puzzles" is the on-going reluctance of the British banking sector to lend. The MPC notes that "credit conditions have not improved as much as previously expected" �“ in spite of government shareholdings in banks and wide spreads.
�Business lending fell �£3.5bn in June, according to the Bank's latest "Trends in Lending" report �“ the ninth successive monthly contraction.

�While some companies are trying to pay down debt, the evidence is that smaller firms in particular are being starved of working capital they desperately need given their reliance on bank lending and lack of access to alternative funding sources.

�This is disastrous. Small firms are a major source of UK employment, innovation and growth. The economy simply cannot recover without them.

�Tackling this problem is tough �“ raising big questions not only about bank restructuring, inter-bank lending risk and massive undeclared sub-prime losses but also the incestuous relationship between our political and financial elite. Easier, then, for economists to treat it as a "mystery" �“ and place it in the "too hard to deal with" file.�

Harold is a lightweight. Much more difficult to crack is the �the incestuous relationship between our political and financial elite�.

http://www.telegraph.co.uk/finance/comment/liamhalligan/7958148/Inflation-comes-through-the-door-and-wisdom-flies-out-of-the-window.html

Harold

Michael,
I confess it, I am indeed a lightweight. I enjoyed your implication that you are not. Similarly humourous, but at the same time puzzling, is your reliance on Liam Halligan. I recall him as a journalist and (I believe) a hedge fund employee. I do not recall him as an economics guru. I do not recall him saying anything particularly sensible.

Two points only:

The destruction of productive capacity you consider unique to a credit crunch occurs in any downturn, indeed it occurs all the time to some extent or other.

You appear to have picked up on the fact that a government no longer able to raise revenues by taxation and no longer able to borrow from the private sector is reduced to relying on the central bank printing money, and that such reliance inevitably causes hyper-inflation. This much we can agree. You have made the mistake of assuming that quantitative easing in current circumstances will have the same effect. The two cases are entirely different.

No, I'm sorry, I will allow myself a third point:

You cannot require the banking sector both to strengthen its balance sheet in current conditions and increase its lending. The government has been making inconsistent demands.

No, I can't help myself (that's the trouble with us lightweights). A fourth point:

What is the current rate of broad money growth? Is it something like 3%pa? If we work on the hopeful assumption that trend growth in the economy is somewhere between 2% and 3%pa; and that the inflation target given the BoE is 2% (setting aside discussion of whether this is a more accurate definition of price stability than zero inflation, or not); then over periods longer than a few quarters, say over 1-2years, broad money growth should be around 5%pa to sustain trend growth consistent with the inflation target. Your alarm about monetary expansion is unwarranted.

pterodactyl

We have a full representative democracy. The voters chose politicians who hand out unsustainable levels of welfare and housing benefit to their favoured groups. It is what the people want, and their representatives in parliament demand it and will not take kindly to being told we have to stop borrowing. That is not how to get elected or to stay in favour with the BBC. But by saying 'no' to real cuts at this stage, it just means that when reality hits, the big 'NO! there is no more!' will be all the worse when it arrives.
It is like the difference between someone in debt who makes arrangements to pay of his creditors, and someone who ignores the debts. In the end the consequences of the second way are greater and quite sudden.

E Hart

Well put.

A low pound; bank parsimony re. business lending; stagnant exports; rising unemployment; limited job creation in the private sector; falling consumer demand; rising welfare payments (including NI and council tax payments for the unemployed); falling receipts from tax, NI (employee and employer) and council tax...

All this before the cuts have really started and with quantitative easing still in place. Add a cut of 30% in public sector employment (which will kick off in the first quarter of 2011) and the knock-on effect of this on the private sector and unemployment will be well over three million and growing.

What kind of credit rating will Piss & Poors give the economy then? We've already got a Triple AAA rating, so where do we go from there?

All that twaddle about burdening future generations... will be seen for what it is - specious nonsense. They are going to be left with any one from three and possibly a combination of all of them: debt, unemployment and a fragmented, dysfunctional economy.

Hassocks

Harold, you ignore people who debate Israel with you and do likewise here. You mentioned spare capacity but then have it pointed out to you that it's shrinking. What makes that journalist any less valid than you?

"You cannot require the banking sector both to strengthen its balance sheet in current conditions and increase its lending."

What you can do is protect retail depositors 100% and let badly run banks and overborrowed tycoons go bust.

There's no need to make the rest of us pick up the tab via QE etc. Overborrowed property barons and bank bondholders who didn't do due diligence should be taking haircuts - not getting even richer. With no rules to play by, they'll just do what ASBO kids do and just take it as a licence to rip off everybody again.

Harold

Hassocks
October 30th, 2010 5:41pm
I think you are mostly wrong.

First, I do not ignore those who debate Israel with me. If they make good points, I respond; if they sink to insults and misrepresentation (John Roosevelt is a particularly egregious example), I do not. (And I have spent considerable time trying to reason with even John Roosevelt.)

On spare capacity, if you read my response, I said the destruction of spare capacity is a feature common to all recessions, not just the one just past. Indeed, the destruction of capacity goes on all the time. Growth in the economy reflects the net effect of successful and unsuccessful investments. Sometimes, successful investments predominate. Sometimes, unsuccessful. Sometimes, the main cause is monetary. Sometimes, it is to be found in the real economy.

As a matter of fact, the government did in effect guarantee retail deposits.

Those who make risky investments should certainly make a loss if the investment goes bad. They generally do.

The incentives bank executives and traders face are certainly skewed and reward excessive risk-taking. This should be changed. It will be difficult, because the financial sector has great influence on politicians - but it is not impossible.

It is not a good idea to let banks go bust (which is part of the problem in creating appropriate incentives for those who work in them). Our payment system depends on the banking system working, and the banking system is unlikely to work if there is any suspicion that there are banks on the verge of going bust. This need not mean that the existing management of a bank should be saved along with their bank.

Quantitative easing has nothing to do with bailing out the banks and has everything to do with stopping the problems in the banking sector causing a slump in the rest of the economy. The tax levied by quantitative easing only becomes significant if it generates high inflation. There is no tab to pick up that need influence the decision now whether or not to continue with quantitative easing.

Harold

Hassocks
October 30th, 2010 5:41pm
Harold, you ignore people who debate Israel with you and do likewise here.

- Thank you. I enjoyed the irony of your comment.

Dave M

I've seen dozens of long established manufacturing industries close down. These were factories that even at the time of the Thatcher Government employed hundreds of people. That is basically the key issue, manufacturing. The worst failure of the New Labour Government was to fail to aid and try and preserve those companies. Any money they had should have been aimed in that direction and production costs lowered. Instead, politicians were more concerned over issues such as racism, diversity, bureaucracy, form filling and so forth. Another major problem is the country is now almost totally reliant on foreign labour and skills imported from abroad. I see little evidence of a system that's training people with skills for the future. Unlike in China, university education is so expensive, it's reserved for people with rich parents or overseas students. By contrast India and China are churning out thousands of highly skilled graduates. So, I'm also highly skeptical of any economic miracle. It will never happen unless there's a huge overhaul of the entire system. That means, free education, a return to manufacturing, far better education as a whole and more emphasis on trade skills.