Of course if you didn't laugh you'd cry....
Bank of England staff demand big pay rise (DT - paywall)
Well, considering that they print their own pay anyway, and always have done so, what are they bleating about?
Mickey and Taking does not cover it somehow.
From the print version of the DT Business Section:-
Bitcoin an environmental disaster with no real worth, warns 'bank of central bankers'.
Quote:
Crypto currencies "are not backed by the assets and revenues stream of an established state. Most can be rendered worthless by fraud or digital manipulation. They are essentially Ponzi schemes that masquerade as citizen currencies beyond government control."
Oh. Right. And just how well are those government controlled currencies doing then? £100 in 1945 buys what £4101 does in 2017 (https://www.officialdata.org/1945-GBP-in-2017).
Says the BBC.
Why is this a headline? Didn't everybody panic buy a year's supply a week or two ago?
Notwithstanding the stuff is wholly UK made and not imported anyway...
Yesterday's Project Fear output, via MBK:
From The Times:
Leaving the European Union would immediately cause the value of the pound to plummet by as much as 20 per cent, while income tax would have to rise to counter cuts in migration, a respected think tank has warned.
A vote to leave would result in a “significant shock to the UK economy”, the non-partisan National Institute for Economic and Social Research has said, as it presented prospects for the UK up to 2030 in the event of Brexit.
From The Telegraph:
The Bank of England will need to raise its key interest rate or Bank Rate to 3.5pc by the end of next year if Britain votes to leave the EU, the newest recruit to the Monetary Policy Committee has warned privately.
Michael Saunders, who was chief economist at Citibank, and will join the rate-setting MPC in August, said the drastic rise would be needed because Brexit would cause the pound to collapse, which would send inflation sharply higher.
If we were to stupid enough to reduce 'good' immigration (younger, healthier, skilled/working, ready to integrate) then yes, income tax rates on everybody else might rise a bit, some people say that would be a price worth paying. I don't think it is, but clearly, if we reduced 'bad' immigration, tax rates would go down a bit, which looks like a win-win to me.
The rest of their logic seems to be [unspecified cause] = GBP falls = inflation rises = Bank of England has to increase interest rates.
There's no particular reason to assume that Brexit would cause GBP to fall that dramatically, but even if it did, what would be the knock-on effects? No need to ponder too hard, let's just look at the last two instances of this happening - after Black Wednesday in 1992 and between 2008 and 2012, when GBP fell by a quarter each time.
There was surprisingly little impact on consumer prices (putting land prices to one side) in either instance, and the Bank of England did not increase interest rates - during both periods it actually reduced them (leading to land price inflation).
So nothing to worry about, as per usual.
On the face of it, this factoid trotted out by the gold bugs at MoneyWeek is quite true, it implies that average price inflation over the last hundred years was 5.3% per annum.
But that ignores the compound interest which £1 would have earned in the meantime. By and large, and in the grander scheme of things, the interest you can earn is equal to annual price inflation, sometimes a bit more, sometimes a bit less.
So if you'd stuck £1 in the bank a century ago and allowed the interest to roll up, you'd have about £235 and what you'd be able to buy with it today is much the same as what you'd have been able to buy with £1 a century ago.
And there are two further caveats:
1. The downward trend in the real price of manufactured goods. You can get a pretty decent TV or a mobile phone/camera/music player for £235 nowadays, you would not have been able to buy anything near as cool for £1 a century ago. Maybe a wind up 'phonograph' or something? Even if your compound interest less tax deducted is 'only' £100, you can still get a lot more manufactured for your money.
2. The upward trend in the real cost of land. Rents back in 1910 were between three and five shillings a week, so £1 was one or two months rent; nowadays £235 is more like one or two weeks rent (although the quality of rented accommodation is much better).
So all in all, so what? It is not price inflation itself which robs savers, it is negative real interest rates.
The responses to last week's Fun Online Poll were as follows:
Which of the following were just added to the CPI 'shopping basket' (multiple answers allowed)?
Craft ales - 25 votes
Spotify - 19 votes
Oversized headphones - 17 votes
Irony - 15 votes
Checked shirts, buttoned at the top - 8 votes
Brown lace-up shoes - 7 votes
Vinyl - 7 votes
Chunky knitwear - 6 votes
Skinny jeans - 6 votes
Tasteful tattoos - 6 votes
Red rimmed spectacles - 5 votes
By some miracle of the wisdom of crowds, the first three items were in fact the correct answers, I made the rest of them up just to go with the hipster theme.
Thank you everybody who took part.
----------------------------
Over the past few weeks, there has been the occasional hour or two where it was warm enough to sit outside, for the first time in months.
So I've decided that although I like Xmas best of all, summer is definitely my favourite season. I'd be quite happy if it were summer all year round, with winter restricted to a couple of weeks either side of Xmas, and with obligatory snow from Xmas Eve through to Boxing Day.
What does everybody else think?
Vote here or use the widget in the sidebar.
Inspired by The Daily Mail.
Vote here or use the widget in the sidebar.
This is another one which the Baby Boomers like to pull out of the bag, sub-text: todays' first time buyers have never had it so good; high house prices are not a problem etc.
Superficially, the sums are like this:
Nowadays: thirty year mortgage of five time wages, interest rate 3.5%, mortgage repayments incl. principal repayments as % of wages = 25%.
Good old days: twenty-five year mortgage of three times wages, long run average interest rates average 8%, mortgage repayments as % of wages = 25%.
If interest rates nearly double to 15%, superficially you would expect mortgage repayments to nearly double.
Nonsense.
What these people conveniently forget to mention is that inflation was pushing up their wages/eroding their mortgage at a rate of knots.
If you calculate annual mortgage payments as a percentage of inflation-adjusted wages, the picture for somebody who took at a twenty-five year mortgage of three times salary in 1970 is as shown.
In other words, there were a couple of years of pain at the onset, but after ten years, real mortgage payments had halved and after fifteen years they were a laughable 5% of wages:
It appears to be agreed that the rate of inflation is to a large extent down to what the government does (or doesn't do) and IMHO, the UK government stokes inflation as hard as it can once house prices peak and then start falling:
It's largely an electoral thing, because UK governments which allow house prices to slide nearly always lose the next election, so even if real house prices are sliding, the government can mask this by cranking up inflation.
Inflation also provides the Homeys with a wonderful justification: "Land is the only thing which beats inflation".
Well yes, of course, because the whole game is rigged. That's about as valid as saying "Solar panels and wind farms are a good investment." From the investor's narrow point of view, they almost certainly are... but only because of subsidies and tax breaks for the investor, which 'everybody else' has to pay in tax or higher electricity costs. Until and unless these forms of electricity generation become cheaper/more efficient than existing forms. It appears that solar panels will reach this stage in a couple of years, but that is a separate topic.
Suffice to say, the government and the subsidy collectors cannot justify the subsidies for solar on the basis that solar produces inflation-beating returns.
If the government were funded out of the rental value of land instead of taxes on earnings and profits, people would then get used to the idea that "Land is the only thing which doesn't beat inflation."
It's quite difficult to stoke inflation in the absence of currency controls, (in fact, currency controls are in themselves a cause of inflation), so after 1980 or so, inflation in the UK was never anywhere near what it had been in the 1970s and hopefully never will be, but that's not for lack of trying (0.5% bank base rate, QE, Funding for Lending, Help to Buy, VAT increases and so on):
This morning I attended a generally excellent seminar hosted by Vanguard. Vanguard are one of the foremost managers of index funds in the world. Their funds are useful and have very low costs.
The main speakers were Dr Peter Westaway Chief Economist Vanguard Europe and Dr John Velis, Senior Investment Analyst at Vanguard. Dr Velis was presenting about fixed interest investment. Overall both speakers were excellent and clearly seriously bright blokes. Dr Westaway has Three Degrees. His CV is here https://www.vanguard.co.uk/documents/portal/press_releases/peter-westaway-appointment.pdf
However, or rather, as ever, these people remain very confused as to what 'inflation' actually is.
In his presentation Dr Westaway seemed to say that inflation was the rise in prices, that is the RPI was inflation.
In his presentation, or rather in the questions, Dr Velis said that the increase in the price of equities could be attributed to inflation - as in the expansion of the money supply. Or rather that equities exhibited some automatic inflation hedging qualities.
So, either inflation is a function of money or it is a function of prices. I asked Dr Westaway this question and he insisted that inflation was the rise in prices, and qualified that by remarking that "anyway since we had not had much rise in prices then the expansion of the supply of money was not causing 'inflation'". At this point we were interrupted.
In any event in my view there have been considerable price rises - notably in land, commodities and financial assets, especially equities. Furthermore increases in the money supply take time to work through an economy (the pouring treacle analogy) and we may not yet see the effect generally.
I have increasingly noticed the circular arguments used by mainstream economists when talking about what inflation actually is. Have you?
Discuss.
From the FT:
Sir, It has been mentioned in a number of articles that Margaret Thatcher's greatest legacy (1) was in controlling inflation.
In 1980 inflation in the UK was 18 per cent and by 1986 it stood at 2 per cent. In France, under a socialist administration throughout the 1980s, the inflation rate in 1980 was 14 per cent and by 1986 it stood at 2 per cent.(2) Did Thatcher also help the French to reduce their inflation? (3)
David Peett, East Dean, West Sussex.
1) Yes, some people mention this, but the list of things which Thatcher allegedly achieved is very long indeed. So he's off to a poor start there.
2) This probably is true.
3) Clearly not. The Thatcherites would no doubt answer this with "yes", for them, her powers were virtually unbounded. Truth of the matter is that the fall in inflation was largely due to the end of currency controls in 1979 (and yes, we have Thatcher and whoever was her first Chancellor to thank for that). Of course, when the Thatcher government tried reintroducing currency controls (the ERM debacle) we had another short period of relatively high inflation.
UPDATE: Graeme in the comments reckons that the French simply adopted similar economic policies to those adopted in the UK. The Thatcherites will say "ah yes, that shows how influential she was" and the realists would say "well sod that, everybody was doing the same thing anyway".
From the BBC:
Energy policies which increase price rises this year will cushion consumers from future price rises, but only after consumers have paid in advance for lower percentage increases from a higher base rather than a larger percentage from a smaller base contributing to a rise in average household bills but only if you compare it with a third set of figures which assume larger rises from a larger base and which ignore the fact that part of the future price increases have been front loaded to the present, a report has said.
But it's all right now
By 2020, bills will be 11% - or £166 - lower than they would otherwise have been, but about £300 higher than they were a few years ago but they are still a lot less than they will be in five years time so actually the consumer is making a saving now and should be really happy at how cheap his fuel is, these are the good old days on which we will look back fondly, according to the Department of Energy and Climate Change's report. If you look at it that way, consumers are currently getting a massive discount, making them £100s a year better off.
In fact it's a gas
It looked at policies such as a drive to boost home insulation and promote energy efficient boiler installation. It also looked at policies to drive up the cost of domestic fuel to households. And chose the latter.
But quite expensive gas, obviously
Labour accused the government of doing exactly what they would be doing if they were still in government.
1. Prompted by an article about the Iranian currency collapse posted at HPC, my working theory on hyperinflation is that you only get it if there are currency controls, whether that's a peg (whether upwards or downwards), restrictions on movements in or out, split or official and grey-market exchange rates, artificially high or low interest rates etc.
2. The precise transmission mechanism is a bit of a mystery to me, as it does not seem to make much difference in which direction the government interferes, it always leads to inflation. With Iran of course, it is not the Iranian government which is imposing the restrictions, it is the US government still pursuing some petty vendetta after thirty years, but the effect is the same.
3. The Market Oracle have published a handy table, and the conclusion is that "Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, the transition from a command to market-based economy", which from scanning their table seems like a fair summary.
4. The conspiracy nutters will always mumble about "fiat currencies" but these are usually the same people muttering about "printing money" and "the burden of taxation" in the same breath. Any MMTer can tell you that governments print money by spending it and un-print money by taxing it away again; ultimately, the point of taxation is to prevent inflation rather than to fund the spending side.
5. In a UK context, there is another factor, the aftershock of house price bubbles, the government desperately creates credit in order to either prop up house prices or to stoke inflation with the sole purpose of masking real house price falls (Home-Owner-Ism is not a hedge against inflation; it is the reason for inflation; it is a self-fulfilling prophecy)
6. So in which periods did the UK have the highest inflation? Chart from here
7. Yup, in the 1970s when they had to mask fifty per cent real house price falls and when we still had quite strict currency controls; then there was another bout around 1990 when we tried to peg GBP to other European currencies (i.e. basically the Deutschmark).
8. As we learn from Japan, the amount of deficit a government is running or the amount of credit it is creating, doesn't really cause inflation as long as there are no currency controls.
9. Which is why I am quite sanguine about the possibility of the UK government trying the same trick as they did in the 1970s and masking the twenty or thirty per cent real house price falls yet to come with very high inflation - they can't do it unless they re-introduce currency controls, and I don't think the banks will like that very much, so I don't think it will happen. And if it does, we are all doomed anyway. The highest inflation rate they can achieve nowadays is about five per cent inflation a year, as the chart shows, which has come down slightly since.
From the BBC:
The government is considering ending the automatic annual increase in benefits in line with inflation, sources have told BBC Newsnight. If implemented, the move would see many benefits frozen for two years, then rising only in line with average pay...
Ah... why's that then?
In recent years inflation has risen at a far higher rate than average earnings - Whitehall officials say a switch since 2008/9 would have saved £14bn.
If and when the depression is ever over and the normal pattern re-established, i.e. wage increases are higher then inflation, the Tories (and probably Labour) will change tack and say that benefits should be increased with inflation again, so there's no logic to this other than choosing whichever figure is lower.
What about pensions then?
One benefit that will not be affected is the state pension. Pensions are now protected by a "triple lock" which means they will go up annually by either inflation, earnings, or 2.5%, whichever is higher. Having introduced this measure, the coalition will not touch it. But all other benefits are not protected in this way.
Which illustrates my general point: you can have anything you want, provided enough of you are prepared to go out and vote for it.
From The Telegraph:
The Bank [of England] has been under attack for months from pensioner groups(1) who have claimed the Bank’s £375bn of money printing has triggered a "death spiral" in pensions, by slashing income from annuity rates.
However, the Bank fought back on Thursday by claiming pensioners have gained from QE and that the effect on those preparing to retire has been “broadly neutral”. Those to have suffered from the Bank’s response to the financial crisis and recession have been the young and the poor,(2) the study found, while the richest 10pc the population are estimated to have seen their wealth rise by more than £120,000 per household.(3)
Pensioner groups have argued that QE has forced down gilt yields and, consequently, reduced the value of annuities bought on retirement. However, the Bank claimed that the lower interest payments had been offset by an increase in the size of the pension pot used to buy the annuity.(4)
In addition, the Bank said that QE had helped “boosted the value of households’ financial wealth held outside pension funds” by about £600bn. More than half of those holdings are held by people aged 55 and over, and roughly 40pc by the richest 5pc of households, the study said.
1) Yes, that means you, Save Our Savers. So what if those pensioners who actually squirrelled away some cash for a rainy day are losing money - house prices are being kept higher than otherwise which makes you richer!
2) Yes, that means you, Priced Out. Paying rent and trying to build up a deposit? Ain't gonna happen, because low interest rates insulate BTL landlords against their bad decisions and the value of your pathetic 'savings' is being eroded. It's your own fault that you weren't born a decade or two earlier,
3) This is the whole foundation and basis of UK government's Home-Owner-ist policies. Rig things to benefit the One Percent but ensure that enough illusory wealth trickles down to enough people to trick them into voting for you again at the next election, it's worked perfectly for decades.
4) That's sort-of true, actually, if you are on the verge of retirement and your tax-favoured pension fund is largely invested in gilts, which is what you are traditionally supposed to do, then the two effects more or less cancel out in the short term.
Spotted by Stillthinking at HPC.
The Daily Mail compares and contrasts inflation and deflation (in the everyday meanings that nominal prices are either going up or going down, let's not get too technical):
The fear has been that with Britain's colossal debts, the authorities would collude to create inflation, which would steadily erode away the borrowing problem.
With more than £1 trillion of government debt and nearly £1.5 trillion owed by consumers, Britain is ranked just behind Japan on the world league table of debtors. But inflation is no longer doing the heavy-lifting on our debt problem.
Strange that he first uses the word "fear" suggesting that inflation is A Bad Thing, when he actually means "hope": he then explains why inflation is - from the point of view of the Home-Owner-Ists - A Very Good Thing indeed, because it reduces their "debt problem" (nearly all that £1.5 trillion owed by consumers is in fact mortgages secured on land and buildings). The borrower's gain is the saver's loss, so that's just the usual transfer of wealth to land owners and banks.
At the start of the financial crisis, deflation was regarded as the bigger danger. Once it takes hold, it can be difficult to reverse as consumers put off buying goods on the hope of buying them cheaper further down the line, especially economy-boosting, big-ticket goods like cars.
More menacingly, it also means those debts - and more than £1 trillion in mortgages, effectively grows relative to wages and other prices. Japan's experience is a parable for central bankers. The country had a property boom that peaked in 1989 and turned to banking collapse, followed by two decades of on-off falling share prices and property values.
The second paragraph is quite correct: nominal price and wage deflation is what the Homeys fear most. It's the first paragraph which irks.
As Drewster at HPC says: That's a bare-faced lie. Nobody who needs a new car waits 12 months for a measly 2.5% fall in prices. Just look at flat panel TVs or computers - they get cheaper every year, yet if anything we buy more of them!
It is conceivable that the cause and effect are the other way round. If people become more and more worried about the economy, they spend less and less each year and this leads to falling prices. This is because there is only a certain speed at which output will contract because manufacturers have high fixed costs and as long as they can at least cover their marginal costs, they will keep churning stuff out until the original capital investment is used up or worn out.
Once output has contracted to the new lower long term level of demand, prices will stop falling, and will then gradually return to their old higher level, because the old fixed costs have been amortised, used up, written off etc and prices now have to be high enough to justify new investment. Or you could say that the price elasticity of output is inelastic in the short term (when demand falls, output falls a bit and prices fall a lot) but elastic in the long term (when demand falls, output falls a lot and prices only fall a bit).
But it is more likely the case that with debts at a level which people simply cannot afford to service, the financial sector is just sucking the life blood out of the economy; people spend any spare cash they have on debt interest and simply don't have any money left over for spending on genuine goods and services.
This is a bit like what the banks do to developing countries, as Geldof once said: "They can't even afford to pay the interest on the interest." Prof Michael Hudson started his working life at a bank, and he says that their modus operandi was to work out how much a dictator could siphon off from his people every year, then they would lend that dictator whatever amount incurred enough interest to soak up that entire surplus.
Implicit in this is the assumption that the dictator just steals the money instead of spending it on infrastructure or education or anything which would grow the economy and enable the country to repay the principal) and that the interest (the entire steal-able surplus of the country) would thus be paid to the bank in perpetuity.
Bob E has read between the lines of an article in The Independent:
The UK economy may have to adopt a more aggressive routine monthly injection of cash from next month after figures today showed a surprise drop in inflation. Falling petrol prices meant the Consumer Price Index (CPI) rate of inflation dropped to 2.8% in May, down from 3% in April and to the lowest level since November 2009. City analysts expect that without intervention the rate may remain unchanged or move below the currently recognised "danger level" of 2%.
Inflation has already fallen from 5.2% since last September and with further declines predicted, the Bank of England is expected to beef up its quantitative easing (QE) programme, which currently stands at only £325 billion following the, in hindsight, rash decision in February by members of the Monetary Policy Committee to suspend the £50 billion a month structured interventions.
Exhibiting his customary prescience, Governor Sir Mervyn King's gave a strong hint that more and more regular QE was needed during his annual Mansion House speech last week. Analysts said it looked likely that the necessary action would nevertheless have to wait until July 5, when the committee concludes its next two-day meeting.
Vicky Redwood, UK economist at Capital Economics, said: "Mervyn King has already hinted strongly that more quantitative easing will soon be forthcoming and these worrying figures today should ensure members vote to renew the programme at the upcoming meeting"...
The waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices have also contributed to the problem. Last month, inflation moved to within 1% of the Government's 2% minimum rate, meaning Sir Mervyn had to send a fulsome private letter of explanation to the Chancellor.
A Treasury spokesman today said: "Inflation is now open letter territory. For the second month in a row the rate has fallen, provoking dismay."
In further evidence that some retailers may have been foolhardily cutting prices to draw in customers, overall food and drink prices rose by just 0.3%, compared with the better levels of 1.3% achieved last year.
The ONS said this 0.3% was also driven by declines in the price of fruit, particularly grapes, bananas, peaches and nectarines. The price of vegetables, mineral waters, soft drinks and juices also fell. Consideration is being given to attaching special import duties on these goods to address the problem.
From today's Evening Standard, here's the paper version in case they change the online edition:
From the BBC:
The government's draft energy bill, designed to encourage major increases in electricity bills, could result in higher consumer bills, critics have said.
But Energy Secretary Ed Davey told the BBC these did not amount to increases in the cost of domestic fuel. He said bills will be even higher when the next set of measures are introduced.
The government needs to increase billing capacity to compensate generators for the loss of income from the closure of a number of coal and nuclear plants, and to reduce their reliance on actually providing electricity.
"We need to make sure the bias towards lower profits is dealt with... and that inefficient generators can enjoy playing on an unlevel playing field," Mr Davey said. "With nuclear capacity and coal capacity coming offline, we need a market structure to keep the lights on in the homes of power company executives. To cover their salary and bonuses, we need to give investors certainty that will lower the cost of capital. There will be no blank cheque for power companies - unless we give them one."
From the BBC:
Retail prices in the UK are barely higher than a year ago, according to the government's Retail Price Index.
The Office for National Statistics (ONS) said prices in February had risen by just 0.3% over the past year. There are big regional variations, with prices rising in London, the South East and Scotland, but falling sharply in Northern Ireland and the North East.
Russell Quirk, of online retailers eStuff.co.uk, said retail prices in London were "in a league of their own". "Average prices in England are only in the black due to the strength of London," he said, "If it weren't for the capital, the overall retail price picture would be a lot less pretty."
Also from the BBC:
House price inflation rose unexpectedly to 3.5% in March from 3.4% in February, according to the Office for National Statistics (ONS).
Scotiabank economist Alan Clarke said the central bank faced a tough balancing act. "In the context of the Bank of England, we are not growing and certainly not growing fast enough, and that argues for more QE," he said. "But uncomfortably high house prices are a significant obstruction. So it is not going to be an easy decision for the Bank of England in May."