The people who run our country don't know what "investment" means.

It's very simple. Businesses 'invest' (in productive assets, tangible or intangible) and individuals (or pension funds on their behalf) 'save' (defer consumption), by either accumulating money in the bank or buying shares (directly or a pension fund does it on their behalf).

Individuals dissave (accelerate consumption) by cashing in a pension; withdrawing money from the bank and spending it; or selling shares and spending the proceeds. When one individual buys shares, another must have sold them, so the two sides cancel out and it's not even net saving, let alone net investment.

The actual businesses whose shares are bought and sold couldn't care less who buys and sells their shares and are unaffected. They make profits (hopefully), reinvest what is needed to make more profits in future and dish out the rest as dividends to whoever own the shares.

The people who run our country (from MPs to the Governor of the Bank of England) are too stupid to understand this not particularly subtle or difficult point. From City AM:

Three hundred MPs are calling on the trustees of the £700m Parliamentary Pension Fund to end their investments in fossil fuel companies...

The pledge, supporters of which include Labour leader Jeremy Corbyn, Lib Dem leader Jo Swinson, SNP Westminster leader Ian Blackford, and mayor of London Sadiq Khan, stated: “We believe members of parliament have a responsibility to act on climate change, and a unique opportunity to show leadership on climate action, responsible investment and the management of climate risk through addressing the practices of our own pension fund.”

Caroline Lucas MP, the leader of the Green Party, said: “I am encouraged by the huge number of MPs who now agree that we must move our investments away from the polluting industries of the past, and instead support policies that will bring about a clean energy future.”

Bank of England governor Mark Carney and the Environmental Audit Committee have warned that people’s pensions are exposed to overvalued carbon assets as the world moves quickly towards cheaper, greener renewables, and governments legislate for net-zero emissions.

OK, so all "ethical" pension funds simultaneously try to dump their shares in oil or mining companies, what happens? The price falls and they've lost a lot of money anyway - and the yield to future investors goes up. Other pension funds, whose very statutory duty is "getting the best return you  can for your pension savers" would be acting entirely unethically if they didn't snap up those cheap, high yielding oil and mining company shares on behalf of their pension savers. Oil companies won't care less either way.

And anybody who drives a car is contributing to oil companies' profits and encouraging them to continue extracting oil; there's no point them being squeamish about owning shares in oil companies and thereby getting a bit of their own money back.

Nobody move or everybody and everything gets hurt!

A delicious double dose of doolally today, both from BBC front page:

A no-deal Brexit would hit UK-EU security ties and have a "real impact" on protecting the public, security minister Ben Wallace is to warn.

In a speech to law enforcement leaders, he will say the "heart of effective security is close co-operation".

Mr Wallace will say Theresa May's deal, which MPs vote on next month, sets the foundations for the most comprehensive security relationship in EU history.

And...

Large parts of the British economy are not ready for a no-deal Brexit, Bank of England governor Mark Carney has said.

Fewer than half of businesses have initiated contingency plans, Mr Carney told BBC Radio 4's Today programme.

He said the UK would need a transition period to adapt to whatever form of departure from the EU Parliament chose.

He also denied that the Bank's warning no-deal could lead to a UK recession was intended to scare people into backing his favoured form of Brexit.

Remember kids, it's not true until they deny it.

Nobody move or the house prices get hurt!

They were really ramping up the propaganda yesterday (giving me raw material for this series for a whole week). This is clearly co-ordinated, by whom or what we might never find out.

From Sky News:

Bank of England governor Mark Carney has warned ministers that a "no-deal" Brexit could see house prices crash by a third, Sky sources say.

Briefing Theresa May and her top team in Downing Street, Mark Carney laid out three different scenarios the Bank believes could come to pass if Britain leaves the EU without a withdrawal agreement.

The worst case scenario would see Britain go into recession, a slump in the value of the pound and a crash in house prices.

Sky's political editor Faisal Islam said a source characterised the governor's comments as "not a prediction, a worst case scenario", adding Mr Carney's comments were received "respectfully" by those around the cabinet table.

It's well-tailored though.

Brexit = food prices will rise! That's bad!

Brexit = house prices will fall! That's bad!

Nope, the former is clearly bad (unless you're one of these obesity crisis wankers); the latter is A Very Good Thing Indeed.

The lunatics have taken over the asylum.

From the BBC:

The governor of the Bank of England has said the banking sector could double in size but still needs tough regulation.

Mark Carney told the Guardian the financial sector could be worth 20 times the UK's economic output in 25 years.

He said: "If the UK financial system thrives in a post-Brexit world... it will be 15 to 20 times GDP in another quarter of century. Well then you really have to hold your nerve and keep the focus."

What he is talking about is gross assets, not net assets. In other words, if you add up the 'loans' made by all individual banks in the UK, it adds up to something like £7 trillion (five times GDP). This is wildly exaggerated as two-thirds of that is inter-bank stuff and made-up figures.

So if all UK banks were to merge into one large bank, the gross lending to the non-financial sector is about £2 trillion (a tad more than one times GDP). If you then deduct all bank liabilities (mainly deposits but also bonds), the true net worth is pretty much close to zero (balancing figure between two large unknowns).

Nonetheless, doubling the gross lending and borrowing is a superbly shit idea.

He said: "We have a financial system that is [now] ten times the size of this economy… It brings many strengths, it brings a million jobs, it pays 11% of tax revenue, it is the biggest export industry by some token... all good things.

The million jobs is a made-up number. There is a minority with truly essential/irreducible jobs (staff at the bank counter, people who fill up cash machines and people who keep the software working, a few loan officers to check the bona fides of borrowers) and the rest are completely superfluous.

The "11% of tax revenue" is another made-up number. Most of what banks collect is just rent from the productive economy, they are not adding anything much to it. If they were to collect less rent, the amount of tax they pay goes down but people would have more money to spend on other stuff which would generate the same amount of tax. We might as well levy income tax on burglars and say that they pay 1% of tax revenue.

We could go further and deduct the value of the government guarantee for banks, which has been calculated as being approx. equal to the total amount of tax that banks pay.

Mark Carney says time will never be right for interest rate rise.

From The BBC:

The time will never be right for an interest rate rise, Bank of England governor Mark Carney has confirmed in his Mansion House speech for the fourth year running...

Mr Carney said: "From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment [rate rises].

"You see, there's good inflation - house prices, and bad inflation - wage growth. We'd do what we can to stifle the latter, in the unlikely event it ever happens, but we are relaxed about good inflation.

"In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.

"The Brexit negotiations will drag on for a few years, so that gives me a breathing space for the remaining four years of my tenure at The Bank of England. Waiting to see what the long term impacts of Brexit are should tide over my successor for the next few years after that.

"If the worst comes to the worst, we'll admit that inflation is through the roof and savers are losing money, but at that stage our main concern will be young families who might be pushed into negative equity.

"Come on guys, you know how it works."

Following Mr Carney's comments, the pound fell about 0.4% against the dollar to trade at $0.6682.

"Doom-laden Carney warns middle classes will be 'hollowed out' by new technology"

From The Daily Mail:

Robots could put 15 million Britons out of work, the Bank of England Governor declared last night.

In an alarming vision for workers, Mark Carney warned many jobs would be 'hollowed out' as huge technological advances meant roles could be automated instead. The Bank has said the march of the machines in the workplace puts administrative, clerical and production staff most under threat...

The 51-year-old, who earns £874,000 a year, said that as a cost-saving measure, he and the other members of the Bank of England's Monetary Policy Committee will be replaced with a flip chart with "0.25%" scribbled on it.

And now it all makes sense...

A quote from this intriguing article in the Mail...

"The other major stumbling block for those landlords worst affected by the tax changes has been a perceived need to refinance, the costs of which can prove to be astronomical and may result in losing preferable mortgage terms agreed prior to the credit crunch."

I've long suspected that Mark Carney's 'forward guidance' (and all those bland speeches he manages to get reported everywhere as 'interest rates are about to rise') is all about wrong-footing consumers into fixing their mortgage rates.  It's forgivable too, as his job as a macro-prudential regulator is to keep the banks safe.

Mark Carney opens his mouth and the interest rates futures market jumps.  Mark Carney makes the merest hint of rising rates and folk in my office all start panicking and fixing their mortgages.  It works.

I guess not only do the BTL reforms create the need for highly leveraged landlords to re-mortgage, it also pushes them into business banking, where they can be well and truly pillaged with almost utter impunity.

Any excuse is good enough for another land price/credit bubble...

From the BBC:

The Bank of England has warned there is evidence that risks it identified with Brexit are beginning to emerge. In a major report it states: "There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging."

To help lubricate the financial system it has eased special capital requirements for banks. The move potentially frees up £150bn for lending, the bank's Financial Policy Committee (FPC) said. That could help if uncertainty caused by leave vote causes the economy to slow down and banks to be cautious.

"This is a major change," said Bank of England governor Mark Carney. "It means that three-quarters of UK banks, accounting for 90% of the stock of UK lending, will immediately - immediately - have greater flexibility to supply credit to UK households and firms."

… It said there were risks apparent in the commercial property market, with vital foreign inflows falling by 50% in the first three months of 2016.

The FPC also has concerns over "the high level of UK household indebtedness [and] the vulnerability to higher unemployment and borrowing costs" for some households. House prices could also come under pressure, particularly if buy-to-let investors abandon the market, it said…

The Bank would reduce the level of the buffer - set to be introduced next year - from the planned 0.5% of a banks' lending "exposure" to 0%. The 0% rate would be maintained until at least June next year, the FPC said…

"These measures are really about Carney aligning the Bank of England's guns in case the UK economy enters a downturn. Markets are going to be reassured by his pro-activity," said James Athey from Aberdeen Asset Management Investment. "He's not waiting for anything bad to happen but rather acting in case it does. It also means that both halves of the BoE: the monetary policy and financial policy are pulling in the same direction."

A glorious mess of contradictions there. They've got "concerns over the high level of UK household indebtedness" and their knee jerk is to encourage more borrowing by scrapping one of the few sensible measures introduced the last time the land price/credit bubble looked like popping?

And how can they justify measures on the basis that "risks… are beginning to emerge" or "have begun to crystallise"? What sort of double-think is that? The commenter from Aberdeen Asset Management is a bit more honest about it at least - to paraphrase "We've got to take measures to pump up the land price and credit bubble as long as there is a perceived risk that Something Bad will happen. If we sit tight, the likelihood is that nothing bad will happen and we will have missed a golden opportunity."

Price Rigging

See here.

So, why aren't Carney and the rest of his crew and international mates also up before the beak?

Reader's Letter Of The Day

From The Evening Standard (20 May 2014, page 40):

It's disappointing that so many newspapers have allowed the Governor of the Bank of England to get away with blaming the UK house price bubble on lack of new supply and holding up his home country Canada as a counter-example.

Yes, per capita, Canada is building three times as many new homes as the UK, but they are suffering a house price bubble every bit as bad as ours - one which he presided over until his move to the UK.

Mark Wadsworth, Young People's Party.

"David Cameron 'alert' to housing bubble"

From the BBC:

Prime Minister David Cameron has said the government is "aware of the short term electoral boost" associated with rapidly rising house prices.

On BBC Radio 4's Today programme, he was asked to respond to Bank of England governor Mark Carney's statement that the booming housing market had resulted in the "biggest boost" to Conservative Party polling figures since 2010.

He said he agreed with Mr Carney. It was the Bank of England's responsibility to identify asset price bubbles and "stoke them in the run up to general elections", he added...

'Rocket boosters'

"It's absolutely right that we are alert to any dangers and problems affecting our chances of winning in 2015," Mr Cameron said.

"This government hasn't just talked about that, we appointed the former Canadian central banker who presided over the biggest house price bubble in his country's history to run the Bank of England."

Ministers have asked the Bank to examine the effect of the government's Help to Buy scheme, which enables people to take out mortgages on homes worth up to £600,000 with a deposit of just 5%.

Mr Cameron said: "Of course we will consider any changes that are proposed by Mark Carney, just as we expect him to do and say exactly what we want him to without us even having to spell it out."

Carney's Canada comedy

From the BBC:

Mr Carney will say: "When we look at domestic risk, the biggest risk to financial stability and therefore to the durability of the expansion [of the economy] those risks centre in the housing market."

Mr Carney says the fundamental problem was a shortage of homes - and the Bank of England had no solution to that...

He will say in the interview: "There are not sufficient houses built in the UK. To go back to Canada, there are half as many people in Canada as in the UK, twice as many houses are built every year in Canada as in the UK and we can't influence that.

So as a result, there was no house price bubble in Canada..?

From CBC News:

Vancouver ranks second only to Hong Kong in having the least affordable housing, according to Demographia's 10th annual survey of 360 housing markets in nine Western countries.

The survey divided median housing prices in Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the U.K. and the U.S. against median gross household income to come up with its ratings.

Under this rating system, homes in Vancouver cost 10 times median income compared with 15 times income in Hong Kong. Three times median income is considered affordable.

Read the full Demographia report.

More nonsense on currencies

From the BBC:

The Bank of England governor has said an independent Scotland would need to give up some power to make a currency union with the rest of the UK work.

Mark Carney said such a move, proposed by the Scottish government, "requires some ceding of national sovereignty". He also said the risks of not having a strong agreement had been demonstrated by problems in the Eurozone.

Nope.

There are plenty of examples of countries using "somebody else's" currency, i.e. countries not actually in the official Euro-zone which use the Euro or whose currencies are pegged to the Euro.

For sure, notes and coins issued by those countries might not be accepted as legal tender in the Euro-zone itself, but so what? We always had that with Scottish bank notes in the UK, and this is a bit of a red herring as 99%* of transactions by value are entirely electronic nowadays.

Would Scotland have to pay a slightly higher interest rate on GBP-denominated borrowing that England and Wales, or a higher interest rate on EUR-denominated borrowing than Germany or The Netherlands?

Quite possibly, that depends entirely on Scotland's credit rating. We know that interest rates on government debt are different in different countries in the Euro-zone. That's no different to UK businesses all using GBP but paying different interest rates on their borrowings.

If Scotland reduced public sector waste, ran a sensible tax system, got their economy going and didn't run large deficits, then they'd end up being able to borrow more cheaply than England & Wales or the PIIGS, that's for them to sort out.

The size of the country or economy plays little role in this. The Netherlands has lower borrowing costs than Germany because they run a tight ship. See also: Switzerland.

But what we have learned is that currency unions benefit the wealthier, central and more productive regions and make things even worse for the poorer, peripheral and marginal regions, and much the same applies to using a common currency, even if there is no formal arrangement in place.

So basically an independent Scotland can use whatever currency it wants, GBP, EUR, SCP, USD, that is a relatively minor decision (see also: Vaclav Klaus' comment about sorting all this out in an afternoon when Czechosovakia was split up).

All that matters is whether Scotland is run properly. If they mess up, then whichever currency they use, it will end badly for them.

* Made-up figure, I couldn't be bothered looking it up.

Great British Understatement

From The Guardian, no less:

... in a letter to Treasury select committee chairman Andrew Tyrie, published on Thursday, Carney makes clear that while the Bank's financial policy committee (FPC) could advise the government at any time if Help to Buy is putting financial stability at risk, the final decision about if it should continue will lie with the Treasury.

"The FPC has no power to require the Treasury to vary the terms of, or close, the Help to Buy scheme," Carney writes in reply to a letter from Tyrie earlier this month asking him to clarify the Bank's role. "The FPC only has the authority to make recommendations in connection with such matters … the FPC is not constrained by the government's timetable for any such advice; it could make recommendations at any time."

That message appeared to contradict statements by senior coalition figures, including Conservative chairman Grant Shapps, who told BBC Radio in September: "We put the Bank of England solidly in charge of this scheme. We've said to them: 'You look at this every year, and if you're not happy with this Help to Buy Scheme, then you'll be [able] to cancel it."

Deputy prime minister Nick Clegg said of the policy last month: "Of course we need to moderate it, even turn it off if we think it is not appropriate and is providing inappropriate stimulation to the housing market. That is precisely why we have transferred the right to do that to the Bank of England so they can keep an eye on it – not politicians, not George Osborne, not the Treasury."

Slow news day

From the BBC:

The rate of unemployment in the UK dropped to 7.7% between May and July from 7.8% in the previous three months. The number of people unemployed fell 24,000 in the period to 2.487 million.

The governor of the Bank of England, Mark Carney, has said that interest rates are unlikely to be raised before the rate falls to 7%.

Our new Homey-in-chief can whistle for it, long term rates have doubled over the twelve months (from an all-time low of 1.5% to a historically still very low 3%).

From the BBC: Wales unemployment falls by 7,000

From the BBC: Northern Ireland unemployment rate continues to fall

Three hundred fewer people claimed the dole in August, bringing the total claimant count to 62,200.

From the BBC: Scottish unemployment up by 10,000

As per usual, they don't publish a separate figure for England, let alone dedicate a whole article to it, but by adding and subtracting, it appears the number of "unemployed" in England has fallen by 26,700.

Glad to have cleared that up.

Mark Carnage

The Carney Short Straddle*

From that recent paper...

We find that rises in the home- ownership rate in a U.S. state are a precursor to eventual sharp rises in unemployment in that state...

What mechanism might explain this? We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility, (ii) greater commuting times, and (iii) fewer new businesses. Our argument is not that owners themselves are disproportionately unemployed. The evidence suggests, instead, that the housing market can produce negative 'externalities' upon the labor market. The time lags are long. That gradualness may explain why these important patterns are so little-known.

Let's add a possible explanation (iv) to that list as follows:

Politicians mainly want to stay in power, so they target the median or marginal voter; tyranny of the majority etc.

* Two-thirds of adults in the UK are owner-occupiers, so tenants don't matter (especially as most politicians seem to be BTL landlords nowadays).
* The bulk of owner-occupiers and landlords subscribe to the insane assumption that rising house prices make them richer.
* Two-thirds of working age adults in the UK are in work, so the unemployed don't matter.
* A third of voters are pensioners, but their votes can reliably be bought with promises of higher state pensions next year, they play little further part in the debate. Low interest rates are a two-edged sword - they don't like losing income from their savings, but they can be bribed with rising house prices the same as everybody else.

The largest easily identifiable sub-set of lowest-common-denominator target voters is thus owner-occupiers who are in work who believe that rising house prices make them richer, and the majority of these also have a mortgage and little in the way of savings.

The new Bank of England governor (who is of course entirely independent and did not discuss and agree this with the government beforehand) came up with a fantastic win-win strategy:

The promise that interest rates would not go up as long as unemployment stays fairly high!

The median target voter might be ever slightly worried about losing his job but as long as that is fairly safe, his next biggest concern is the amount he has to pay on his mortgage every month (or so the thinking goes).

Broadly speaking, the median target voter couldn't care less about other people who are unemployed because "it's all their fault" and he has little interest in there being an increase in employment because he already has a job; but now he has every interest in there being no increase in employment (or fall in unemployment) because high unemployment guarantees him a monthly windfall gain of several hundred pounds - as well as pushing up house prices (DoublePlusGood).

So in political terms, assuming that it is these median target voters who decide the outcome of the next general election, the UK government has absolutely zero interest in getting unemployment down.

There's your explanation (iv) on a plate.
---------------------------------------------------------------------------------
* People have often referred to the Greenspan/Bernanke Put, which basically says that if share prices or land prices threaten to fall, interest rates will be cut to push them back up again. So they guarantee a floor price for owners of shares or land.

What the UK government is doing is now akin to a Short Straddle. They are gambling on everything staying pretty much the same - high unemployment (but not so high as to cause social unrest - blaming the unemployed for unemployment only gets you so far) combined with low interest rates.

If everything stays much the same, they are quids in. it's only if it tips too far in either direction, they are in big trouble, but they won't be the ones paying to sort out the mess, so what do they care?