Posts Tagged ‘qe’


The Dow Jones finished yesterday with a new all-time high closing price with a reading of 14,673. During the day it hit an inter day high of 14,716.

To be frank, the rise was too small to give a specific reason. Once the Dow hits an all-time high, it only needs to rise by a fraction of one point to hit a new high.

The overall trend is more interesting. So far this year, the Dow Jones is up 1,569, or by 12 per cent. The year started with lots of euphoria as US jobs improved. US consumer confidence played with a five year high, data from Germany and China suggested a pick-up, and a general feeling that the Eurozone was past its worst dominated sentiment.

Frankly, a lot of those reasons are now gone. The latest jobs report from the US was disappointing, US consumer confidence has fallen sharply, the German recovery appears to have slowed, and news out of China is ambiguous. As for the Eurozone, well: oh dear!

Yet still the markets rise. Part of the explanation is that corporate results continue to belie economic performance. A bigger explanation might be that the markets have given the thumbs up to Japan.

At last, or so they say, Japan is doing the right thing. Nobel Laureate Paul Krugman has described the latest moves out of Japan as very good news.

As for the rest of the markets: the FTSE 100 ended yesterday at 6313, up 36 points on the day before, and up 0.07 per cent so far this year. In Germany the DAX closed at 7637, down 25 points but up by just 0.3 per cent this year – that makes sense. As for Japan, the Nikkei 250 closed at 13,192. It saw modest falls on the day before but so far this year is up a very impressive 27 per cent.

That may just about say it all: Japan up 27 per cent so far this year, Germany flat.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here


The evidence is growing.

Take the IMF, for example. According to its latest report on currency reserves, developing countries rid themselves of $45 billion worth of dollars last year. Since Q2 2011 they have sold $90 billion dollars. Over the same period, the developed world has been a net buyer of dollars, and in 2012 was even a net buyer of sterling.

See: Currency Composition of Official Foreign Exchange Reserves (COFER)

Meanwhile, Bloomberg quoted Hans- Guenter Redeker, the head of global currency strategy at Morgan Stanley, who has predicted that within two and half years the euro will be back to parity with the dollar. Capital Economics cited data from the US Commodity Futures Trading Commission which showed that speculative “long futures positions against the euro, sterling and yen combined have topped 200,000 for the first time since last May and are not far off a record high.”

So what’s next? The recent movements in favour of the dollar can’t go on without interruption. Capital Economics predicts some kind of correction in the next few months, but says that looking further ahead to the end of this year and beyond, the dollar is likely to rise further against the euro.

No prizes for guessing why. Following the Cypriot debacle, there is now speculation that Slovenia will be the next Eurozone country to suffer a crisis, and the markets have become scared of the Eurozone. There is a good reason for this. But what about the yen and the good old pound? Central banks in the UK and Japan are expected to hit the QE button hard this year. But so what? Japan’s prime minister and arch dove Shinzo Abe has warned that achieving a 2 per cent inflation target in Japan may not prove possible.

There is an irony here. In the UK, the Bank of England has failed to get inflation even close to target. In Japan, the central bank may fail likewise but in the opposite direction. In Japan, the challenge is getting inflation up. Later this year, rises in commodity prices may lead to a temporary lift in Japanese inflation, but it is far from certain that this will last, and the central bank may yet prove to be impotent.

In the UK we have had £375 billion of QE so far, and while the initial burst may have kicked some life into the economy, subsequent rounds have done very little. The truth is that at a time when banks are being forced to raise capital levels, and the government is afraid to borrow the money, the markets want to lend to it at such cheap rates, QE is about as effective as a leadless pencil. In short, the Bank of England may be impotent too.

For that reason, Capital Economics reckons that while the dollar may well rise against the euro, against the yen and sterling it thinks the rises against the US currency are behind us. Against the euro, of course, it is a different story.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

It’s two for the price of one. A new acronym, and a new (ish) idea. And QE, by the way, is so very 2012.

The thing about QE is that it is not really money printing. The Bank of England buys government bonds – not from the government – but from banks. But one day the bonds will mature, and when that happens, the effects of QE will go into reverse. Besides, there is another point. To acquire this money from the Bank of England, banks have to give up what is considered to a very safe and liquid asset – namely bonds.

Now if QE involved buying bonds at zero interest with no maturity date, directly from the government, that would be called creating money.

QE is not what they call helicopter money. It is not the equivalent of scattering money from a helicopter. It is more like scattering money from a helicopter, and sucking up certain assets from the ground at the same time.

What QE does do, is push up the price of bonds, making other assets look cheap, thereby either stopping certain assets from crashing, or indeed making them rise. So house prices or equities rise in price, and we may feel more confident and spend more, and businesses may invest more. That strategy does not work as well when the asset that rises is oil – or indeed gold.

But some say that the Bank of England needs to target its QE more precisely.

This is what happened in the US. Some QE was used to get rid of so called toxic waste from banks’ balance sheets and as a result – goes the argument – banks are in better shape. Some of it was used to buy corporate bonds, ergo – goes the argument – the US has seen a swifter recovery than the UK.

So what can the Bank of England do? Former MPC man Adam Posen wants to see it buy bonds in a kind of public bank, charged with investing into business.

Recently, Adair Turner – chairman of the FSA and one of the men who was at one point thought to be in the running for heading up the Bank of England after Mervyn King – called for what he described as overt monetary financing, or OMF. This is helicopter money, it is QE targeted at certain assets, and it is something Mervyn King is dead set against.

He said it’s not up the central bank to do such things, because then it would be engaging in fiscal policy. Rather, he says, it is up to the government. But the government wants to make cut backs. If the government spends money it is slated for being reckless. So we get £375 million of QE, and still the UK is limping along bottom.

Before we close, it may be worth reminding ourselves of words spoken by Adam Posen last year when speaking to the ‘FT’. He said: “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content.” He then added that the Bank of England holds “anguished religious ethics” about QE.

So maybe we need to move from QE to OMF. Or is that blasphemy?

For Lord Turner’s speech  discussing OMF, see: Debt, Money and Mephistopheles: How do we get out of this mess?

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Woe is us. The pound is crashing. You would need to rewind the clock back all the way to October 2011 to find the last time the sterling euro exchange rate was so low, or so was the case at 9.30 am 25 February 2013. Come to think of it, October 2011 wasn’t actually that long ago. But hey, let’s not ride against the tide, the media says the pound is crashing; that this is bad, so let’s run with the crowd.

Except before we do that, let’s turn to the minutes from the Bank of England’s MPC published a few days before Christmas last year. The minutes stated: “The gradual appreciation of sterling between mid-2011 and mid-2012, as prospects for the euro area had deteriorated, had been unwelcome.” Errr what was that? The appreciation of sterling has been “unwelcome.”  Can you say that a rise in the pound is bad, and a fall in the pound is bad? Does that add up?

The minutes continued: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness. In particular, a measure  based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation. It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Let’s put it this way, back in December, the MPC had a wish for a Christmas present. Their letter to the man in Lapland said: “Dear Santa, please may I have a cheaper pound”.  Their wish was not granted in one go. But it has been granted in stages. Sterling fell in January, stayed pretty static for the first half of February, then – after Moody’s cut the UK’s triple A credit rating – fell some more.

From the point of view of UK plc we may be getting the best of both worlds. Because of all that talk of currency wars at the recent G20, neither the UK government nor the Bank of England are allowed to deliberately push the pound downwards. Well there is no need. Moody’s is doing the job instead.

All praise be to the credit ratings agencies.

Some say that this shows the UK is bankrupt; on the road to ruin. Why can’t we do things like Japan, which lost its triple A credit rating years ago, or the US, or France, both of which lost their top notch rating some time ago.

It is embarrassing for poor old George. Mr Osborne invested a lot of political capital in saying he had to follow the policies he was adopting in order to avoid the disaster of the UK losing its triple A rating. Now that rating is lost, it is quite hard for him to say: “it doesn’t matter.” Although in truth it probably doesn’t.

In part sterling’s fall is down to the view that other economies are picking up. The Fed has hinted that QE may be drawing to a close; China’s central bank is tightening monetary policy. The markets still seem to think, somewhat inexplicably, that the euro is past its worst.

Talking of inexplicable, some economists think the key to the UK’s recovery is lower inflation, so that wage growth outpaces growth in consumer prices. Others think the recovery lies with a cheaper pound giving exporters a lift. But since a falling pound will lead to inflation, you can’t have both.

The trouble with the UK exporting its way out of trouble is that such a strategy can only work if firstly, UK exporters combine their terms of trade advances with investment and productivity improvements, and secondly if demand abroad is growing.

The first condition requires more investment – something the banks seem unable to promote. Unless QE is directed more precisely, and targeted in the form of investment in companies, especially exporters and innovators, the first condition probably won’t be met. As for the second, there is nothing, absolutely nothing, that either the Bank of England or George Osborne can do about that.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

There is one snag with the argument that QE is set to unleash inflation, and there is one snag with the argument that today’s woes are caused by debt.

In fact the snag may be the same with both arguments, and the snag is that both arguments are probably wrong.

Certainly those who draw parallels with the 1970s, and say inflation is inevitable and we need to see a 21st century answer to Maggie may be drawing the wrong conclusions.

Back in the 1970s the problem in the UK was that wages had been rising too fast, and unions had grown too strong. Inflation was led by inflation in wages.

Now let’s take a look at November 2013. According to ONS data out on 23 January, average wages including bonuses rose by just 1.5 per cent in the three months to November. Inflation, measured by the retail price index, was 3 per cent.

Last year, many forecasters predicted that by the end of 2012 growth in average wages would have outstripped inflation, meaning  households would have become better off, and the UK could look forward to sustainable growth in demand.

Instead, growth in wages failed to move even close to inflation and in November the gap actually started to grow again.

The truth is that corporate profits and growth in GDP have barely been trickling down into wages for a very long time. The last few years have simply seen this trend become more exaggerated.

But this problem is not new. Nor is it specific to the UK. According to the US Congressional Budget Office, for the one per cent of the population with the highest income, average real after-tax household income grew by 275 per cent between 1979 and 2007. For others in the 20 per cent of the population with  the highest income (those in the 81st through 99th percentiles), average real after-tax household income  grew by 65 per cent over that period, much faster than it did for the remaining 80 per cent of the population, but not nearly as fast as for the top one per cent. For the 60 per cent of the population in the middle of the income scale (the 21st through 80th percentiles),  the growth in average real after-tax household income  was just under 40 per cent. For the 20 per cent of the population with the lowest income, average real after-tax household income was about 18 per cent higher in 2007 than it had been in 1979.

See: Trends in the Distribution of Household Income Between 1979 and 2007

This lack of trickle down should have led to falling demand creating one economic recession after another. It didn’t for this reason: The profits that were not trickling down, sloshed around the banking system eventually finding their way into more readily available credit, pushing up house prices, and encouraging households to borrow.

Household debt was not the cause of today’s crisis; it was a symptom of deeper problems.

During this era, we saw lending for mortgages rise, but business lending did not do so well. By the noughties, entrepreneurs had been transformed from innovators to buy-to-let investors.

Yet data out this week shows that the government funding for lending scheme is sort of working.  At least the Council of Mortgage Lenders reckons mortgage lending will hit its highest level since 2008 this year.

But data from the Bank of England shows that lending to business in the three months to November was £4 billion down on the previous three month period. See: House prices set for recovery as UK falls for same old illusion

In short, not much has changed.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

The thing about Japan is that it may have high debts – very high debts actually – but it has lots of savings too.

It’s classic stuff. Households saved rather a lot. This meant lack of demand across the economy, and the economy played with recession for nigh on two decades. But you might ask: where did all those savings go? Why they went into government bonds – or a lot of them did. Therefore, goes the argument, does it not make sense for Japan’s government to borrow this money which its people are so keen to lend to it, and spend it on their behalf?

This is what has happened. Some say it hasn’t happened enough, that Japan’s government has been too slow to borrow and spend this money, but even so, Japan’s public debt right now is around 250 per cent of GDP. That’s rather a lot.

Its new Prime Minister, Shinzo Abe (to be precise he is sort of new, for Mr Abe has been Prime Minister before), has ideas.

He wants to see Japan’s central bank print a lot more money. It has engaged in QE in the past, but this time he wants to see QE big time, and has pretty such said to the country’s independent central bank: ’You’d better independently decide to agree with me, or you might lose your independence’.

He also wants to see a lot more fiscal stimulus and as an aside (it’s an important aside, but not relevant to this article) wants to ditch Japan’s pacifist constitution and play hardball with China. (As another irrelevant but important aside, that worries some people.)

There are snags.

Snag number one is that Japan still has lots of zombies, and could well benefit from some creative destruction. (As a kind of aside of an aside: have you seen the drubbing experienced by Japan’s consumer electronics industry at the hands of Apple, Samsung and co?)

There is another snag. And that is savings.

For alas Japan’s households are not saving like they used to. Its saving ratio is now down to 2 per cent; why it’s higher than that in the UK. Some fear that as more of Japan’s public debt is funded externally, interest rates will rise.

So what happens if Japan’s households stop saving, but public debt keeps rising? Oh and what happens if Japans’ population shrinks at the same time?  Let’s put it this way – if Japan’s population shrinks, GDP per capita stays put and public debt does not fall, then Japan‘s public debt to GDP per capita will start looking pretty scary.

There is another point. Japan’s demographics are like those in the West, but just further advanced.

At stage one, many Japanese looked at their forthcoming retirement and said: ’Cripes, I need to save more’. So they did, hence the rise in Japan’s saving.

The West, including the UK, is at that stage now.

But Japan may have passed to stage two. Now big chunks of its population are no longer worrying about how they will fund their retirement because they are retired. This means they are now drawing down savings, hence the fall in savings ratios.

In the UK the baby boomers are just beginning to retire. The process of their retirement will last around 20 years. If you want to know what that means for the economy, look at Japan.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

In November, UK exports to Ireland were worth £1.45 billion. We sold £2.09 billion worth of stuff to the Netherlands, £1.785 billion to France, and £1.21 billion to Belgium/Luxembourg.

In short, UK exports to its nearest neighbours were worth around six and a half billion pounds in November.

Exports to China were worth just £840 million.

Alas, data for November is not available yet, but In October, exports to Brazil were worth just £207 million, to India they were worth £397 million and to Russia £381 million.

In short, the UK sold almost more goods and services to little old and deeply troubled Ireland than it did to all the BRICs put together.

Be grateful for small mercies. At least it was a case of almost as much. Until recently, exports to Ireland were trouncing our combined exports to the BRICs.

But now take a look at Germany. In 2011, 59.2 per cent of German exports were to countries in the EU, which was a 20 year low.

According to ‘Spiegel’, in 2012 growth in exports outside the EU will make up for the decline in exports within the area.

‘Spiegel’ stated: “German exports are set to hit a new record for 2012 as strong sales to the US and emerging economies like China offset falling demand from austerity-hit Europe. Exports rose 4.3 per cent in the first 11 months, thanks to a jump in sales outside the crisis-hit Continent.” See: German Exports Seen Hitting New Record in 2012

According to the ‘China Daily’, unit sales of cars in China are now greater than sales into Europe. It quoted a Germany analyst predicting that it won’t be long before the Chinese auto market is bigger than that of Europe and the US combined. See: Vehicle sales overtake Europe in 2012

You don’t need a PhD in anything to know that Germany will do rather well out of the exploding Chinese auto market.

We can speculate as to why. Here are a few observations.

Germany is benefiting from the euro. Because it shares its currency with the likes of Greece and Spain, its currency is much cheaper than it would be if it still had the Deutschmark.

The UK may be losing out thanks to North Sea oil and the City. Both bring in tax receipts. But both push up sterling.  It’s hard to say whether that is a net positive or negative.

The Bank of England is worried about the strength of sterling, and may well use QE to try to push the pound down later this year.

If Scotland does indeed gain independence, it will probably stay in the sterling area. Scotland may benefit from North Sea oil tax receipts, but North Sea oil will also have the effect of distorting the value of sterling. That means the rest of the UK will pay the price of North Sea oil via a terms of trade disadvantage, but won’t gain the benefits. That won’t go down well.

But here is a question.

Given the UK’s ethnic diversity, why is it not able to use its pool of labour with its global roots to sell worldwide? Is the problem that this potentially world class sales force, doesn’t have enough to sell?

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here