Posts Tagged ‘bank of england’

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According to a Halifax report, new mortgages are at their cheapest level in 14 years. Mortgages taken out during Q1 accounted for just 27 per cent of borrowers’ net income. In 2007 the ratio was 48 per cent; over the last 30 years the ratio was 36 per cent. Yippee to that.

It is just that…

Remember interest rates are at a record low. They are hardly likely to fall, but they are likely to rise. The Bank of England tries to re-assure us by saying rates are unlikely to go up until 2016. Alas, most new borrowers will not be repaying their mortgage in full between now and 2016. Who knows what rates will be in five years’ time, in ten years’ time or in 20 years’ time? It is anyone’s guess.

Remember that the markets have concluded that rates are rising sooner rather than later. The yield on UK government bonds is now at a two year high. Mortgage costs may rise in their wake.

Above all remember this. Sure, over the last 30 years mortgages on average took a higher proportion of new borrowers’ salary than they do now. But over the last 30 years wage inflation was ever present. Who cares about high borrowing to income ratios when incomes are rising so fast?

It is not like that now. Incomes are no longer rising fast, real incomes are falling. Those who celebrate the low cost of mortgages seem to have forgotten this.

© Investment & Business News 2013

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Technology is not always a good thing, it depends. Technology can kill jobs. As a result, fewer jobs may mean less demand, which may lead to less output. Innovation can lead to recession. This may have happened in 1930s. After all, the US Great Depression followed (with a time a lag of 16 years) the greatest 50 year period in innovation that has ever been known. Innovation is back in vogue. Now a company which specialises in finding jobs for young people has warned that automation is killing jobs. Is it right?

Will Davies, is the managing director of aspect.co.uk, a company which claims to be a pioneer in providing job training for young people.

Mr Davies said: “The growing number of unemployed young people in Britain is a major problem but, unfortunately, its causes run deeper than any short-term cause, such as a recession.” Almost one million people aged 16 to 24, 20.9 per cent, are unemployed across the UK, which is one of the highest rates since record keeping began in 1992, and Mr Davies says: “Automation is displacing traditional jobs – whether or not we are coming out of economic crisis.”

The Davies remedy is for the government: “to incentivise the private sector to develop new industries that have a need for manual labour.” He also says: “Young people’s minds are being cluttered by the Internet and their attention spans shortened. Many of them simply are not equipped to take the jobs that do remain out there.”

He makes good points.

But be careful not to view the future from the very narrow perspective of a country coming out of a very deep downturn. There is evidence that companies are re-shoring – that is to say, returning their manufacturing to home territories. That will help.

The government can also help by trying to create a more entrepreneurial minded country. New businesses create jobs. At least some unemployed people have skills and hobbies that could be translated into business ideas. But the money available is pitiful. It is odd that the Bank of England and UK government are willing to take the risk of creating a recovery from rising household debt, and house prices, but say using QE to fund investment into entrepreneurs is too risky.

It was also told today how there is evidence that graduates are good for the economy. See: We don’t need no education, we don’t need no thought control, well actually it appears we do. If nothing elsea good education, and especially an education to degree level, can help to overcome the problem Mr Davies alluded to – that of the internet shortening attention span.

And yet for all that, the problems and opportunities of innovation is not being grasped by economists. It does not help that they don’t seem to realise we are in the midst of a quite remarkable new technological revolution; one that may easily surpass the greatest era of innovation seen to date. See: Age of Symmetry

Economists are busy denying that innovation is having much impact, busy ignoring what’s staring them in the face because their faces are averted and they are immersed in theory. Consequently they miss the remarkable revolution that is occurring. They are letting us down. The near one million young Brits who are unemployed are among their victims.

© Investment & Business News 2013

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It is the new way of doing central banking. It is called forward guidance. It means that central bankers are telling us what they are going to do in the future under different circumstances. In one fell swoop they have done away with an industry; an industry called predicting interest rates. It has become a game, and in some cases a business. The media fill their pages with predictions on which way interest rates are going next. Now we know, if the data says one thing, rates will go in a certain direction. Yet here we are, just a few weeks into the era of forward guidance, and already cracks are appearing. As for the markets, rather than becoming more stable and predictable, they have become more nervous than ever.

“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said,” or so once and somewhat famously said the former Chairman of the US Federal Reserve Alan Greenspan. This was the era when Mr Greenspan was set on a pedestal so high that it is a wonder he didn’t need an oxygen mask and climbing ropes. What the markets really loved was the way in which Mr Greenspan had a veneer of knowing something they didn’t know; of having a plan – a cunning plan if you will – that always worked the way it was supposed to.

The finance crisis of 2008, and the fact that we appeared to miss a meltdown in capitalism by a whisker did leave Mr Greenspan’s reputation a little in tatters. Ben Bernanke, his replacement at the Fed, made a great play of saying what he thought; of letting us in, as it were, on his rationale. At first it didn’t go down well. The markets concluded he didn’t really seem to know what he was doing. It is the tragedy of the modern age. All of us stumble around in the dark most of the time, but we just don’t like to admit to it. And when our leaders admit to it, we think they are weak and uncertain.

These days, however, Ben’s stock is high. It was he, first among the central bankers, who came up with the idea of forward guidance, when he revealed that the Fed would keep pumping money into the economy via QE for as long as unemployment remained high. Now they are all at it. The Bank of England – under the leadership of Mark Carney – is now saying that rates will stay at half a per cent as long as unemployment is over 7 per cent.

It is just that the minutes from the latest Bank of England Monetary Policy Committee (MPC) meeting revealed that one member of the committee – Martin Weale – voted against the policy. It was not so much the idea of forward guidance he was against, it was the perceived timing. He appeared to fear that the 7 per cent target was too loose. Er, or maybe you could say that actually he was against forward guidance, because he wants a policy that one might describe as always flexible.

His dissent is important, because it rather put a question mark over the viability of the policy. You can interpret the Bank of England as saying if the economy does this, we will definitely do that, unless, that is, we change our mind. There are also hints that UK unemployment is set to fall much more rapidly than has been assumed. A survey from the CIPD and the latest Purchasing Managers’ Index both point to positive changes in UK unemployment in the pipeline. See: The UK jobs market boost . This has led to speculation that rates might be rising much sooner than the Bank of England has been suggesting.

It appears that the industry that grew up predicting what the MPC might do next has changed into one predicting what unemployment will do. If nothing else, jobs have become a more important economic indicator – and maybe that is no bad thing; after all common sense suggests it should be the most important indicator.

In the US, recent data has pointed to a sharp improvement in the jobs outlook, with the latest survey suggesting US unemployment is now at its lowest level since October 2007.

So let’s review the situation. The signs, both in the form of hard data and from surveys, point to a labour market that is improving faster than many had dared to hope for. That means monetary policy might be tightened faster than many had feared. The markets are spooked by it all. ‘Better than they dared hope for’ jobs data turned out to be less of a boon than ‘rates rising faster than they had feared’, – at least that is what they are saying at the moment.

But then the markets are fickle and how they react one day can be quite different on another. If you think the markets are making themselves clear, it probably means you “misunderstood what they are saying”.

© Investment & Business News 2013

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The hard data was not that good, but there are signs coming from elsewhere that the UK labour market is recovering. It may not be time to open the champagne, but is it time to at least put it in the fridge?

The number of people in employment rose 301,000 in the three months to June, compared to the same period a year ago. Look at unemployment, however, and the improvement was not so marked, with this number falling by 49,000. Compare the last three month period with the previous three months and unemployment was down by just 4,000.

On the face of it, this does not seem that special. Sure the labour market is improving, but oh so slowly. UK unemployment is 7.8 per cent, surprisingly low given where the economy is, but even so, many had hoped for better.

But then again, some are beginning to make bullish noises.

Take the latest Purchasing Managers’ Indices, which suggested that during July firms took on staff at their fastest rate since 2007. According to Markit, which compiles the Purchasing Managers Indices, the improvement was led by services, although construction employment grew at the sharpest rate since 2008 and meanwhile, manufacturers boosted workforce numbers at the greatest extent for two years.

Or take the CIPD. It has just released its latest labour market survey. The report shows that the net employment balance – which measures the difference between the proportion of employers who expect to increase staffing levels and the proportion who intend to reduce staffing levels – stands at +14. This is an increase from +9 in the previous quarter and the highest figure since the recession in 2008. So far this is all pretty promising. The Bank of England says that it will not increase interest rates until unemployment falls to 7.0 per cent. If the inference from the surveys is right, it seems quite plausible that this level may be reached within a year or so, and ahead, by the way, of what the Bank of England is predicting.

Then there are wages. For over two years now, the percentage increase in average wages has been less than the percentage rate of inflation, meaning that real wages have been falling.

The latest period was no exception, but then again average weekly earnings – including bonus payments – rose by 2.1 per cent, comparing April to June 2013 with the same period a year earlier. This is the first time the growth rate has exceeded 2 per cent since late 2011. Inflation in June was 2.9 per cent, so the gap between wage increases and inflation is still quite large. There is a growing view that UK inflation is set to fall too, and many are predicting an inflation rate of 2 per cent within a few months. So if wages can carry on rising at the rate at which they rose between April and June, and inflation falls as expected, within a few months – say the beginning of 2014 – real wages may be rising.

There is a problem, however. April was a good month for bonuses. If we look at regular pay (that’s without bonuses) in the three months to June, this rose by just 1.1 per cent. Furthermore – and returning to the CIPD survey – employers do not expect wage growth to accelerate significantly. Among those employers who took part in the survey the average anticipated settlement for basic pay (excluding bonuses) in the 12 months to February 2014 was 1.7 per cent, unchanged from the previous quarter.

The UK needs wage increases to exceed inflation in order for consumer demand to rise, which will push up GDP without the need to increase debt. At the moment, consumers are buying more, but they are doing this by reducing saving, and borrowing more, which is surely not sustainable.

But then again, wages can only really increase if productivity improves. And in this respect at least there has been some good news. Output per worker had been steadily falling since early 2011, except that is in Q1, when it improved. (It improved in Q3 last year, too.) Year on year output per worker is still falling, but the extent of the fall has reduced very significantly. Data for Q2 will be out in about six weeks, and that will tell us whether the April to June period saw further improvement in productivity. If it did, we may be able to start talking more confidently about rising wages, leading to sustainable improvements in demand.

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© Investment & Business News 2013

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If only interest rates were higher; it’s the lament of savers everywhere. Then they could enjoy a nice little income from hard-won savings. Some don’t merely sigh; they grimace; they are angry. They worked hard all their life. They saved hard, putting off holidays, sacrificed transitory pleasures today for security, and slowly built a nest egg. But, thanks to record low interest rates, and that policy straight from the devil’s workshop called quantitative easing, central banks seem to want to punish the prudent and reward the feckless. You can feel their anger, and you may share their anger. It is just that they are wrong. And they are wrong for a simple reason.

Dr Ros Altmann is very clever indeed. Until recently she was director general of SAGA, and is generally thought of as something of a guru; an expert on all things pensions. But she is especially famous for her hugely critical views relating to the Bank of England’s recent monetary policy. Her argument runs likes this: low interest rates penalise savers, they penalise those who are retired, and those who are trying to find a way to fund their retirement. She rarely misses an opportunity to slate the government and its central bank whenever it does anything to advance the course of low interest rates. If the anti-quantitative easing (QE) lobby has a face, it is that of Ms Altmann.

But think about this for a moment. If the economy is growing, if real incomes are rising, and if productivity is getting better all the time, then surely we can afford higher interest rates.

Or consider this. Why do we need savings? Across the global economy savings equal investment – they have to, it is a matter of definition. GDP equals consumption plus investment. Savings equals income minus consumption. Income equals GDP. For the economy as a whole, we need savings to fund investment. If we all try to save more, without a corresponding rise in investment, the result is an immediate fall in GDP.

So we save to fund investment. Does that not mean that in the long run, the reward for savings should be a function of the return on investment?

If our savings fund very low risk investment, that generates very little in the way of returns. Why do we think we should get a higher interest rate?

Consider the economy. It has had a very poor few years. There has been no shortage of money, no shortage of savings, but the money has found its way into bonds, and into mortgages. What money has not done – or at least has not done enough – is find its way into more risky assets.

“QE has hastened the demise of our pensions system,” said Dr Altmann earlier this year. She continued: “As scheme deficits rise, their sponsor company’s money is being forced into the scheme rather than expanding or modernising the company itself – thereby increasing the risk that the company will fail and the scheme will be forced into the PPF, with all members’ pensions reduced.”

She makes a good point. The return on bonds is incredibly low. Pension schemes need to generate a certain proportion of their income from bonds, and since bonds pay out such low yields that means pension schemes need to buy even more bonds to meet regulatory requirements.

The truth is that a good argument could be made to say that savers deserve a higher return on the money if their savings yielded better results, created more wealth. Borrowers could afford to pay higher interest rates if, as a result of their borrowing, they made more profits, and enjoyed higher income.

This connection between savings, investment and the return on savings versus the return on investment gets forgotten, overlooked.

It would be a good thing if interest rates rose, but only if they rose because all of a sudden savings were being used to fund innovation, and as result created more wealth.

This, of course, is why savers need to re-evaluate, and start looking at putting their savings in assets other than low risk, low yielding bonds.

© Investment & Business News 2013

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You may remember the ads – it must have been around 20 years ago. They were for a magazine called ‘Fast Forward’ and for a few months they were on TV all the time – or so it seemed. Jeremy Beadle features in the ads and the jingle went “fast, fast forward, forward forward’ and the tune went like this laa, laa, la, la, la. Okay you may not remember the ads, maybe you have subconsciously blocked them from your memory, but if you do remember them apologies. You may now hear that tune in your head every time you hear the phrase ‘forward guidance’. And so, forward guidance is out and now it appears we have an inkling about how long rates will stay at 0.5 per cent.

The latest inflation report, out yesterday, came with a section talking about forward guidance. The Bank of England says that monetary policy will remain ultra-loose for as long as UK unemployment is greater than 7 per cent.

In forward guidance, if inflation does this, and jobs do that, says the Bank of England we will do as follows.

Accept that it’s forward guidance that may change as we move forward. The 7 per cent unemployment rate does not necessarily represent the end of the line for record low rates; rather it is, as Mark Carney called it, a ‘way station’.

Based on Bank of England predictions, for UK unemployment, it appears the first rate hike will be in late 2015.

Then again, if inflation picks up, and even if unemployment is still quite high, Mr Carney suggested the bank may change policy.

So it is a kind of forward guidance, based on current thinking. Well, Carney is human. He can’t do much more than that, but it does leave you wondering what the fuss is about.

It is tempting to say that forward guidance is little more than PR; a communication tool. But then again, the markets seem to be taking to it like proverbial ducks to water.

It does rather seem that forward guidance means the bank does not need to engage in any more QE. If you see QE as kind of weapon of mass financial destruction, then the threat that you may use it means that it is not necessary to do so.

© Investment & Business News 2013

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Now some surveys are suggesting that parts of the UK economy are enjoying their best growth since 2006. So is that it then? Is the crisis that began in 2008 well and truly over? And here is another question: does it just go to show the government was right all along? Austerity works, QE, or quantitative easing, is best?

There are reasons to think the recovery this time around is for real, unlike in 2009/2010 when the UK saw something of a false dawn. This time real things seem to be happening. UK exporters are enjoying more success selling their wares outside the Eurozone, and the success enjoyed by the car industry is a good example of this. Then there is evidence of reshoring, as companies look at return at least some of their manufacturing to their home markets.

But does this really prove that austerity works? Does this really prove QE was the right thing to do all along?

There is something quite ironic about something George Osborne has said. He has often laughed off ideas that the way to solve a crisis caused by having too much debt was to borrow more. That was how he has defended austerity. And yet, by encouraging a new housing boom, it could be argued that Mr Osborne is trying to solve an economic crisis caused by too much household debt, by getting households to borrow more.

It boils down to whether you think government debt is worse than private debt. Just remember that in many parts of the world, such as Spain for example, household debt became government debt.

Now let’s focus some more on UK household debt. In the year 2000 UK household debt to disposable income, according to the OECD, was 112 per cent. In 2007 it was 174 per cent, and in 2012 it was back down to 146 per cent. The Office of Budget Responsibility recently forecast that UK household debt is set to rise again – albeit not by a great deal. This differs, by the way, from the US which has seen the ratio fall to a much lower level, and which is expected to fall even further.

Household debt keeps getting forgotten. It was household debt across the UK, the US and Europe which explained why QE was never going to lead to hyperinflation. Households had become afraid to spend, to borrow. The money supply, the broad money supply, which economists believe is associated with inflation, is as much determined by debt and borrowing levels as anything.

Despite the Bank of England issuing £375 billion in QE over the last few years, the broad money supply has only seen very slight growth. See it terms of a bath with a big hole in it. You turn the tap on full, to make up for the water leaking out of the bottom, and many, who seem to be oblivious to the hole, fret that the bath will overflow.

QE was never going to lead to hyperinflation and the biggest failing of the European Central Bank was not to realise this.

But just because QE was not going to create hyperinflation that does not mean it is a good idea. If you have a bath with a hole in it, what is the best thing to do? Is it to turn the taps up full, or try to fix the leak? QE amounts to taking the former approach.

The trouble with austerity is that it can work when tried in isolation. But it has not been tried in isolation; rather it has been a Europe wide thing. This has had disastrous consequences for the UK and Eurozone.

The UK had a worse downturn than most of the Europe because the UK was more reliant on its banking sector. The UK is enjoying a faster recovery than the Eurozone partly because it is not in the euro and has a cheaper currency, and partly because of QE.

But while QE has not created hyperinflation, it has led to higher asset prices. To misquote George Osborne: “How can you solve a crisis caused by asset prices being too high, by getting asset prices to rise?”

What the UK, the US and Europe need is for central bank money printing to fund investment to enable the world’s developed economies to start fulfilling the potential of the fantastic innovations we have seen in recent years.

Instead, we have seen the UK return to old habits. Central bank policy via QE and government policy are combining to push up house prices and household debt when what we need is more investment. This is not a good development.

© Investment & Business News 2013