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Mervyn King increasingly comes across as being a buffoon of the highest order.

I have long felt that the Bank is the less mad of all the official bodies involved in the economy.

This does not make them free from sin, but I pick up a certain practicality in their judgements.

I would tend to defer to the worst case scenario with a very long climb out of recession. I had been hoping that things would find a floor by late spring but I would now consider that more likely to happen towards the end of the year.

The outlook is grim. This is going to catch a lot of people on the hop and produce life-changing events.

Quantative easing is inevitable but it needs to be for a limited period only. Even a stop-go approach will be acceptable.

After recession, I fear inflation the most.

As the Bank has now pulled its head out of the sand is it going to revisit and correct it's advice on short term steps to avoid a recession? eg. VAT cut by 2.5% for twelve months to be recovered from future tax. This will now merely act as a massive burden that stops recovery.
On a far more serious point, is there any chance it will reassess the economy of the last five years and realise that it was built on continually expanding household debt. This debt, expanding by over £100Bn per year gives the impression that the economy was expanding. In fact wealth generation was contracting.
Brown, Treasury and BoE flatter the UK claiming £1.4Trillion GDP but 5% of that is merely spending the money provided by securitised debt. Since this has stopped the economy must contract by 5%.
Yet the challenge is still larger we must start to repay some of the mountain of liabilities including the off balance sheet items.

2008 Political headless chickens -disaster

2009 No inflation crashing property -disaster

2010 Unemployment, poverty - disaster

2011 Inflation with avengence - disaster

What would we do without our political masters to guide us so well...................?

Enough is Enough

Are the models, the input data and software, that resulted in that chart available to the public? I would like to study them.

Collateral damage. Friendly fire. With extreme prejudice and now quantitative easing? Ok the first three are a bit unfair in context I admit.

When a term needs explaining - is it wrong of me to be suspicious that clear communication of its meaning is not being sought?

Printing money! Money being printed in order for others to spend to oil the wheels of commerce. Roll the money presses.

No. Whatever way I come at quantitative easing - it strikes me as an odd idea. And I remember how much I used to enjoy playing that board game, Monopoly.

Perhaps a different perspective on this would be helpful.

Most of the market activity is based on investors' comfort level with investment opportunities. So in essence, investors have to believe in the market and that it will improve in order to buy in. And if they do not think the market stable, they put their money elsewhere.

The market naturally self corrects and ebbs and flows. So by the Bank coming out and saying that there will be a continued downturn in 2009, well it is a self fulfilling prophecy. They are telling investors to stay out of the market.

So why the pessimism? Is it based on fact or on feeling? And why essentially to say to investors...stay away from the market now but come back next year?

I think the Bank should consider dropping the consensus approach and let the investors and the public have the facts, not the interpretation, of what is taking place so that they can make their own educated decisions.

You coloured the chart red when you reproduced it, the original was green. No colour adjustment in the interests of clarity was necessary in this case. Does editorial policy state all figures have to be red to match a brand template? I am not implying colour selection will make the sky fall, I am just curious to know in what circumstances the presentation of an ostensibly reproduced figure (with full citation, no less) might be altered and why it was done here.

The Bank of England is late and optimistic as usual, even though it seems the lower bound of their GDP growth projection would make a technical depression print with 5% confidence. Other commentators called for an incoming depression two years ago - the Bank of England is likely to cement its reputation as a lagging indicator.

We shall see what gilts and sterling have to say about their forthcoming discussions. Quantitative easing is not something one just does without negative (and unforeseen) consequences.

Why should we believe a word of it? They never saw it coming, it's worse than anything anyone at BoE has ever experienced, so how do they can they project the outcome... Normal rules of (un)scientific economics in the face of (ir)rational man were suspended some time ago!

Capitalism triumphed over communism, only to shoot itself in the foot - we need a new model, preferably not using fractional reserve banking as the foundation.

I still don't get it - lowering interest rates to their current level to promote borrowing means borrowers will take on debt they may not be able to repay when the base rate goes up again. Isn't that what's got us into the debt/bubble crisis in the first place?

Won't it just push the problem further down the line?

No wonder they're talking about the recovery taking a very long time.

"In many ways, their 2010 optimism is the flipside of their 2009 gloom - usually a steeper decline into recession means a steeper climb out. Mervyn King and his colleagues seem to think this time will be the same, with growth picking up sharply next spring."

If this were a 'downturn' or even a 'recession' then this assumption would be credible. However, after Brown's slip of the toungue and the code in King's statement then we can see that the great and the good are now starting to acknowledge that we are in a Depression.

If that is the case, I know of nobody who would expect a "steep climb out".

Stephanie,

"From optimism to pessimism "

Sorry, don't think so. The Bank are just as optimistic now as they were last autumn. It is you, Stephanie, that have not smelt the cordite.

My experience of the Bank's forecasts is that they are generally on the realistic to optimistic side and I see no change now.

The problem lies in your perception along with those economists in HM Treasury that are briefing you.

I am on record as having no time at all for the skills of the Bank and its Governor (nor the MPC, the FSA [one down, lots to go] or HM Treasury) .

The Bank still has not grasped the fundamentals that to have a recovery there must be faith in money and that means sound money (realistic returns for savers and investors and a real cost to borrowers.)

My best guess is recover will start again the the middle of the next decade with growth returning to trend sometime in the middle of the decade one after that. (c.f. Ed Balls worse than the 1930's - recall that the special financial administrative measures started in 1933 were not finally wound up till 1952.)

These forecasts just seem to be on a downward trend month in and month out.

These seem to be only monthly forecasts so times that by twelve and what you get is truly horrendous.

Once it comes to printing money and I hesitate to use the term quantitive easing as things get worse then like everything else it becomes uncontrollable.
It is like chucking a bucket of water onto a chip pan on fire.

As he did not use the word deflation and his forecasts are that inflation will only be 0.5% in two years time but who can trust those figures either the over supply of extra money into the economy can only lead to one thing and that is hyperinflation.

The effect of that on those with fixed incomes and others on short time working will be absolutely devastating

To counteract it interest rates would have to rise so the effect on an already fragile housing market is unthinkable.

Gloomy it most certainly is and gloomier is yet to come unless we stop relying on computer models and come up with some creative and radical thinking.

The bank's fan chart has been wildly out for months. I don't know why they bother with it.

It basically says, in the near future we know something will be about here. In the far future we haven't a bloody clue.

What's the point of it?

Now that the bank have decided to rape savers, I think they'll stick out whatever fan chart suits them. There is the point of it. To support whatever half arsed policy they have at any time.

The central bank has been proven to be useless. They weren't able to stop the bubble and just stoked it. They either need to widen their remit or resign.

It strikes me that what is required is someone at the head of the Bank of England who is competent. Mervyn King seems to be far from that, perhaps being around Gordon Brown too long as addled his judgement, but he seems to be incapable of coming up with anything other than measures that have no effect on the problem. The time is now ripe for King to move over and let someone with new and better ideas run the Bank. Someone who can put the good of the country before the possible political advantages to Brown and his failed government.

I have just downloaded this report.

The first few graphs I looked at, showed they they were wrong in their predictions by miles, and each time they updated a projection, they got no closer.

The particular (red yes it was originally green) graph you show above for GPD (not output) up to 2012 -had notes attached.

The notes basically said that-
the darkest shaded area -which you would think was the prediction they were hanging their hat on........ er nope, is actually a prediction they think has a 1 in 10 chance of being correct.......... !
They also think they have a 1 in 10 chance of being the extreme positions (lightest shaded bands top and bottom.

In other words the Bank can't tell if it will by +6% growth at the start of 2011, or 1% shrinkage, .... or in fact anything in between. What a useless waste of paper.

They can't even hint what it might be.

And they think I should be able to plan my companies' future for the next three years on such information.............. !

Jeeezoh....

The Bank is optimistic. They still see this just in terms of the "credit crunch". Fix the banks and everything will go back to normal.... Wrong.

There is much more going on here. Many pressures that have built up over the past 20 years and have simultaneously "burst their banks" (no pun intended) in the wake of the banking disaster.

- The "consumer binge" is over. People buying loads of stuff that they didn't really need or want and didn't actually make them happy. It's what has kept unemployment at bay for the past decade, but it's over.

- The imbalances in world trade (where China makes loads of stuff and we consume it, but nothing goes back in the reverse direction) have hit breaking point.

- The ever-growing gulf between rich and poor - with the rich then lending money to the poor (at interest of course), so the poor get ever deeper in debt. Again it's hit breaking point.

We need to fix the banking system - yes. We need to manage the money supply so that the money that disappears from the system as the banks deleverage is replaced - yes again. But that's still not going to be enough. We need to recognise the other underlying problems and respond to each of those too, or we'll be looking at 1930's levels of unemployment.

The graph above is just absolutely ridiculous. It has a 6 percent span. What use is it when +3 percent is regarded as a good thing when things are going well and riding on a bubble. It is quite clear the BoE is out of its depth. As if it was not indicated as short a time ago as last summer whe only one memebr of the commitee was saying there were problems ahead. And these perpetually drifting downward projections just reinforce the message. These are classic slip characteristics on project progress and when they occur you may as well tear any plan up because nothing you are using to forecast progress is any use. You are bust and cannot deliver. That is what the data being issued tells you.

8. WerringtonSilent wrote

''You coloured the chart red when you reproduced it, the original was green.''

I think red is more appropriate, indicative of the financial blood being splilt. Call it artistic interpretation. : )

"2. At 5:47pm on 11 Feb 2009, stanilic wrote:

After recession, I fear inflation the most."

We've had 40 years of vast inflation... Take a look at a chart sometime. If you want to stop inflation then you have to stop moneylenders from creating money.

hi stephanie; with my 25 year-old economics 101 course under my belt I predicted 6% year-on-year decline of our GDP in November last year by simply looking at some of the leading indicator figures coming out of the US, China and UK for production and consumption

after all we're all interconnected; I'll stick by my 6% prediction for 4 consecutive quarters, which is sadly very bad news, and I hope it won't happen

the BoE's fan chart is a joke; it is not based on inputting of objective data but just a reproduction of what they wish would happen (a short V-shaped slump); it would not do a GCSE student any credit and they should scrap it

let's see Ed Balls 100-year slump fan chart; it would have about as much statistical merit

I could also do a fan chart showing the decline of British GDP between the end of the Roman Empire in AD410 and King Alfred's victory over the Vikings in the late 9th century if anyone is interested........

Intuition tells me that this fan chart is an illustration of hope over adversity. If the recovery follows the BoE curve then I'll eat my laptop....

Stephanie,
The BoE projection on GDP and inflation is "unusually uncertain".

When QE expands bank reserves what good does this do if demand for credit for new investment/houses is falling ? When QE buys corporate bonds, other than creating non-bank credit lines/liquidity for corporates to help them reduce inventories and substitute for closed equity markets, how does this stimulate demand when export markets and home consumption is collapsing? Is this about demand stimulation ( interest rate mechanism) or credit lifeboating?

How will sterling be valued after QE,with all this new government issuance and new non gilt government asset portfolio?

Mervyn King is a big a fool as the rest of the so-called experts. They haven't a clue what they are doing and their predictions are thus meaningless.

They cannot understand what is happening because of their myopic appreciation of economics. It is now abundantly clear that the whole establishment - government, banks and businesses operated using a micro-economic model. Nobody sought to consider the macro-economic environment and that is the problem. Everybody operated in a vacuum not stopping for one minute to ask how their actions would impact on everyone else.

This is not a recession - remember only a few months back they all denied we were even going down that route - this is a depression.

The whole world economy was based on a bubble and it beggars belief that so many could not have seen the folly of that system. All the so-called growth and with that the jobs and lifestyles was based on a myth.

I believe that the whole lot of them are refusing to acknowldge this because to do so will a) reveal how their boom was a myth, and b) that we are heading for total economic oblivion, which will make the Great Depression look like a picnic.

Hi

Seeing as it takes 12/18 months for monetary policy to work in ordinary circumstances it is hard to know what will happen in these extraordinary ones.

However the bank has lost credibility in the way it has panicked and changed course. They and everyone else simply do not know what will happen and would get themselves more credibility if they announced that it is very difficult to tell.

On the other side of the coin when you have inflation it is very tempting to keep raising rates when the seeds of improvement are flowering because all economic figures are backward looking.They could be looking at the mirror image of this on the flipside. So zero interest rates and printing money could easily move us from recession to high inflation.

#16 ....

sorry GDP not GPD

can't edit text on this crappy ´óÏó´«Ã½ software, don't even know how to write in bold text using it .......

Regards,

optimism vs pessimism - what's the point? How about realism? I would call the prediction of a serious correction after an unprecedented borrowing binge realism, not pessimism.

It'll take a year and a half from when we start getting a viable infrastructure in place to turn the corner. That means:

no more magic circles in regulation - ie 3 months to get rid of the existing lot and find their replacements, three months for them to discover which way's up, nine months to get rid of the deadwood and get a grip, and only then does the year's deceleration from this nose-dive start.

no more insider dealing in the banks. The first step will be to crystallise the unassessed losses and do a preliminary analysis of the actual position and consequential second-order exposures. The second step will be to get those positions properly audited against the counterparties and unwound. The third step will be the real capitalisation and restart, banning all compound instruments and offsets, it's now clear they're unassessed even by the rocket scientists. That again is eighteen months, if it can be achieved at all - 4 to 1 they crash and burn before they get there.

cross-auditing of one bank by another bank's internal audit. Use their worst enemies to force the worst possible reporting viewpoint, on the basis a pessimist can only be happily surprised, an optimist can only be disappointed.

true valuation of all commodities in relation to their production cost. A pin for every bubble, no more 5m TV presenters, no more 50m soccer stars, no more 15m pickled fish. Houses at 120k, and an end to the car culture.

But first of all, the replacement of this government. One moment, they say, "trust us", and the next, "We don't know what we're doing". None of the above will even twitch before that happens, and that won't be before the Autumn according to Michael Wills and Jack Straw a fortnight ago. So it's two years minimum before it bottoms out, and that curve extended to 2 years reads in the neighbourhood of -30. That's comparable with the Black Death, and that took a generation to even restabilise from, quite apart from recover from and repay the debts built up in the mean time.

And that's without taking into account the imminent arrival of the bulk of the baby-boomers at retirement age in 2012, just at the time we think to recover, transformed overnight either from productive adults to unproductive pensioners or, worse, resentful wage-slaves forced to carry on until they drop. Because this much is also for certain, the airy-fairy policies of the Education profession over the last 20 years are now coming home to roost in a big, big way. I never thought myself particularly well-informed, certainly not at a level to shine in Oxbridge company, but of late, I've shot past them. It's not that I'm any cleverer, it's that they've dumbed down to a point where we can't replace key players as they retire. And that could be terminal for recovery.

Quantitative easing:

BoE buys gilts with money created for that purpose (monetising future tax receipts), thereby devaluing existing money due to the increased supply. The spending of the new money is controlled by the government, allowing them to buy goods and services which otherwise could have been bought by people who already had money which they had earned.

Stated aim: Increase supply by providing more demand. Suppliers need to acquire some of the new money because the existing money which was funding them before is now devalued.

Result: either suppliers don't produce more goods and services, leading to inflation as more money chases the same level of goods and services; or suppliers do produce more goods and services to meet the increased demand, but the costs of their inputs increase because the money has been devalued. Also, if this demand increase is to be more than a blip, it can only be sustained by a constant process of further quantitative easing, leading to further devaluation of the currency and further control of the allocation of goods and services being handed to the government.

Summary - quantitative easing is a forcible seizure of power by the government from the people. Don't stand for it.

No 23 asked: How will sterling be valued after QE,with all this new government issuance and new non gilt government asset portfolio?

----- ----- ----- -----

The answer is probably along the lines of it'll be valued below Monopoly money. And the buffoon Mervyn King and Gordon the Golem are certainly chucking money around as if it already were Monopoly money.

Can someone please clarify what the bank expects to give such a sharp recovery?

I see very little in the UK that will drive such a recovery unless we want to go back to the financial service boom. If the bank is hoping for massive external investment due to the falling pound and a subsequent rise in exports, then I do not see this happening in the 12 months the bank is expecting. Too many countries are suffering from their own crises.

My personal view is that too much of or GDP in the last years has been illusory money made by extrapolating debt on over-priced houses and that the true GDP level is significantly lower. Hence my personal expectation is that GDP will continue to contract for afew years, unless the banks stop messing about and properly devalue all their toxic assets. In that case the GDP expectations of the bank are wildly optimistic. I believe the Lehmann Brothers assets were sold at ca 10 cents on the dollar and are still making losses for their new owners. Do a similar exercise for the UK and the GDP drop would be in the 10-15% region.

I get the impression people are missing the point. QE will not have any noticeable effect. It's just one tool in a limited toolset that so called leaders feel compelled to use. It's lack of effectiveness will at least suffice to demonstrate to them that their understanding of the economy no longer applies.

The real point, and the reason why their mechanics is now redundant, is that the system is broken.

Ask yourselves this question - in a closed system, where does new money come from to pay the collective interest on private debt? Once you have the answer, ask how quantitive easing can have any effect on creation of money when no one is willing to borrow.

As for the anticipated recovery and ensuing hyperinflation as reserve multipliers are applied to all this new base money, ask yourself why it is necessary to assume that the banks will be entitled to extend credit as they have done in the past and why reserve multipliers would look anything like they do today, especially when banks are nationalised.

By the way. Have a look at Steve Keen's debtdeflation blog at debtdeflation dot com. There you can find articles and research papers that not only describe but accurately predicted events. Another one is Richard Duncan's book "The Dollar Crisis" which accurately predicted this crisis as far back as 2002. The latter advocates a return to a gold standard and what is essentially a global government. Mr Soros also seems to advocate similarly improved global regulation. I think that is the way things will go, but we are looking at 5 to 10 years before any kind of new order starts to shape.

All this talk of QE is scaring the horses again. Sterling is falling against all world currencies.

Sterling remains inherently weak. If Britain manufactured "necessities", or had a large trade surplus, I wouldn't mind, but it doesn't; so a weak sterling is a problem and not a solution.

No. 32. FrankSz
Don't forget certain celebrity chefs would bite your hand off to borrow money, to bail out their loss making negative cashflow businesses. It's important to keep those loss making unviable businesses going.....

No. 29. striped-pad

Well presented argument. I agree with you.

Also:

"Monetising future tax receipts" = Securitisation

BoE buys gilts and distressed assets and holds them on its balance sheet for future resale = Collateralized Debt Obligations


Where have I seen that process before, and didn't it end badly?

I still think the actions of SWFs are going to become the focus of attention soon. These people are just waiting for things to drop a little more, but not too long (they don't want to be competing with other buyers), and they'll be establishing corporate bases of their own in the West. There is a chance that they could create the next and new paradigm entirely by themselves

Q1. Who is going to pay for all this and how?
Q2. How is QE different from what Zimbabwe's been doing? (And, yeah, how is
Q3. Where is the growth going to come from? Who is going to produce actual wealth (goods), with what money (if the pound just keeps losing its value)?
Q4. Stephanie keeps using the phrase "whatever it takes", but what if it took DOING NOTHING, i.e. stopping interfering and instead letting the market work?
Shorely "whatever it takes" isn't code for "unlimited government debt creation and spending", i.e. indentured serfdom for generations to come, i.e. Keynesianism on steroids?!? Despite the fact that Keynesianism doesn't work, it will never be abandoned by governments because it gives them licence to do what they want: spend more and gain more power. If only there were an alternative vision.

#29

I think it is not a 'forcible seizure' but a 'misguided seizure'. I do not agree that this QE can devalue money. This is flawed reasoning - it does not suffice to work in abstract concepts like 'increase supply'.

What does 'increase supply' mean?
a) The government can print a lot of money - if it goes into debt reduction then the end result if a greatly accelerated reduction in supply of money.
b) Supply is not relevant, supply in circulation is relevant.

#31. agc3167 wrote:

"Can someone please clarify what the bank expects to give such a sharp recovery?"

The may be several reasons for their prediction:

1. Because all recessions in their lifetime have looked a bit like this - remember also that they are predicting rates of decline year on year so if the rate of decline reduces it appears as an upturn in the way that they present their figures.

2. They are being forced to give a prediction about something that they know their models cannot predict, but they know that if the give the impression that recovery may occur soon the prediction itself may give rise to a recovery because the market may act as though there is a recover and thus create one - so it would be almost irresponsible of them not to predict a recovery.

3. They are wrong - as they were about not predicting the collapse. It is totally untrue that they were not warded of the inevitable correction in UK housing prices - I can say this with absolute authority and certainty as I myself (along with many others) warned the Governor about the inevitability of such a collapse.

As an aside: how can we give any credence to a prediction of a recovery when the Bank did not see the collapse coming?

Clearly, if this is the state of the art of economic prediction then all economists (including Stephanie Flanders) have a defective education and are not worthy of calling themselves economists who apply a pseudo-scientific gibberish to prediction, much as the three witches in the Scottish Play (eye of newt ...)

However we all want to see a recover (I assume?) so should we not all go along with the optimistic predictions?

No. 36 FrankSz

Good morning Frank.

Related to your point regarding SWFs, I see that a Chinese company has doubled its stake in Rio Tinto. With a weak sterling, foreign investors can buy British assets more cheaply than previously.

We'll be forced to sell off more of our "family silver" in the future.

Stephanie, we haven't seen any basis for how these predictions are arrived at so here's my prediction and how I arrived at it:

If we say that we built up £3 trillion in total debt (personal, company and government) in 10 years, then that means that we were collectively spending £300 billion a year more than we earned.

Our GDP (how much we actually earn) is £1.2 trillion. Then we were spending 25% more than we were earning, i.e. £1.5 trillion/year.

In order for use to spend at sustainable level (i.e. no more than we earn) our spending has to shrink by 20%.

Therefore, I predict a total shrink in the economy of 20%!

Of course, this is just a ballpark figure, but it is based on actual numbers and the fact that you cannot sustainably spend more than you actually earn. Naturally, there will be other factors involved, such as actually paying off the debt mountain with interest, which will only make it worse. Therefore, I would say that the BoE is still optimistic because what it is predicting is still nowhere near what needs to happen.

I do not have any economic qualifications but I can read and I can investigate.

First of all, CPI is a nonsense. It does not cover housing costs. If it had, just maybe, interest rates would have been higher and housing demand would have been dampened slowly but surely. To use CPI as a target for inflation is barmy. Even RPI is a little odd but if you'd used this as the statistic to target you'd see inflation way above the 2% target for years until recently. In fact RPI is now way below the 2% target - what a surprise.

Who changed the measure from RPI to CPI - the then chancellor of the Exchequer, one Mr G Brown.

Then, IMHO, the bank has just got their approach back to front.

It seems from the report that a number of foreign lenders have withdrawn from the market.

Well of course they have. Until mid 2008, you could still get a good comparative return from lending in the UK. Its Libor rates were much higher than the US or Japan (3% or more). That differential just isn't there any more and lenders now want to protect their 'money' rather than take a punt for a paltry return. Rates went down, money was pulled out, the exchange rate fell.

That's why the various US treasury auctions are oversubscribed and yields are low and this 'money', that might have been lent elsewhere is tied up for three or six or twelve months.

This means there is less money for the UK corporate sector.

Alot of UK debt needs to be re-financed in 2009

The quality end of the corporate world and companies that are seen to be focussed on the future are raising cash through the bond market at rates up to 5% above 'borrowing rates'. I'd guess that some of these companies are in cost cutting mode to cover increased costs of money. Anyway, its the 'sub-prime' companies and, I suspect the banks, that are being hit.

Many of these companies have borrowings tied to LIBOR. Until recently, Libor has been around 5% or above. Now Libor is in the 2% range. So, if you have long-dated debt, things look quite nice, thank you. Otherwise, who is going to take a punt on UK companies when the returns are no different than anywhere else in the world and you have the vagaries of exchange rate fluctuations

So, if I wanted to stimulate lending again, without impacting on CPI or for that matter RPI, I'd raise interest rates probably by 2%. It wouldn't disadvantage the long term debt holders, would stimulate demand for UK debt and might strengthen the pound a little, offsetting the cost of imports including raw materials. I might even hit my self imposed 2% inflation target, who knows.

On the other hand, I might be barmy

To QE or not to QE - now there is the question.

Now I'm not an economist (my background is in the study of Corporate and Marketing Strategy), but the prospect of moving to the rarefied extreemes Monertry Theory scares me. We are now about to embark upon a plan that is fraught with danger; has never been successfully employed and is being denied by those who are employing it (typically British).

Why, why why are the economists amongst you not raising your voices to extol alternatives? For all of our sakes there must be an alternative!

"Now the worst outcome is approaching a scary minus 7%.

They hate translating these charts into a single forecast for growth. But a rough calculation suggests that the Bank's central forecast is now for the economy to shrink about 2.9% in 2009.

That would be the worst decline in a single year in the UK since comparable records began in 1949. The worst year in recent memory was 1980, when GDP shrank 2.1%."

But we are also told that GDP grew for 65 consecutive quarters averaging 2.5% a year, so even 7% would take us back about 3 years to 2005 would it not? Given that so much of our growth has been premised on illusion, spin, debt, anarchic de-regulation and duplicity, why is a large correction/contraction so 'scary'? Wouldn't anything else be even more 'scary'? Wouldn't that keep the whole mess growing?

#40

Good afternoon MrTweedy.

I also notice that Barclays (as of 2008?) has some part of it held by China Investment Corporation, where CIC seem to be using Barclays as a know-how source and vehicle for EU acquisitions. No wonder they are crisis-proof.

If the public knows the truth about the economy it is difficult for the politicians to pull the wool over our eyes. Of course, they hate that, so they try to keep us in the dark as much as possible. But we need always to bear in mind that armed with facts we can make intelligent assessments of policy initiatives, and try to nip them in the bud if they threaten disaster. Likely as not, we will have little success; we can but try.

The proposal for quantitative easing is now being floated seriously by the Governor of the Bank of England. We may know that all of our money is printed and we may wonder how the new quantitatively eased money will differ from it. To grasp the difference we need to realise that our currency is backed by nothing more than foreign confidence in it. It is nothing other that pretend money. Indeed, it is called fiat money by economists, and fiat is the subjunctive form of the Latin verb meaning to be. What the word means is let it be. In other words economists are recognising that we call it money but that it is backed by nothing. At one time our money was backed by gold. Today it has no substantive backing whatsoever. If it is all pretend money, what then is the difference between the money already in circulation and money produced by quantitative easing? The answer is that in the case of quantitative easing the BoE will be printing money in greater quantities than ever before. Already we have too much money in existence. We know that by the fact that the world has decided that out pound is getting progressively less valuable and has devalued it accordingly. Put the printing presses to work aggressively and you are compounding an already unhealthy situation. Once the money has been printed, as Stephanie Flanders explains, it will be used to buy up public and private debt. This in turn will mean more money in circulation and banks and companies freed of debt burdens by the easing will spend in the case of companies, and lend in the case of banks thus re-starting the cycle of boom and bust. But let us examine the quantity of debt that needs to be bought up.

The gross external debt of central government and its monetary authorities is $390bn. The banks alone have external debt of a colossal $7,070bn (i.e. $7trillion). Other sectors have external debts of $2,997bn (i.e. $2.9 r), and external debt at the level of intercompany lending is a further $813bn. The gross external debt of the UK as a whole is an unbelievable $11,270bn (i.e. $11.2tr). As a percentage of GDP (what our economy produces in a year) that is an eye-watering 400%+. Our gross external debt is only about $1tr less than the debt of the USA and economic commentators there are agreed that it is an unsustainable level of debt. But in terms of USA GDP their debt is a mere 99% of GDP. Ireland alone of the first world countries is worse off than us with debt of over 1,000% in relation to GDP. We have the second largest external debt of all those countries if debt is expressed as a percentage of GDP.

What these grim figures tell us is that quantitative easing is a deeply flawed proposal, and cannot possibly work unless it is on such a vast scale that it will wipe out a significant amount of UK external debt. And that would make the pound about as valuable as the Zimbabwean dollar - zero.

President Sarkozy has, with Gallic brutality, hit the nail bang on the head. The UK response to the financial crisis is catastrophically flawed. He is also dead to rights when he says that the problem is in the mind. People are terrified to spend. They do not trust their banks, their politicians, their local authorities, their economists, or any others of the ruling establishment. So what do they want to do? They want to save their money. And that, in the long term, is precisely where our salvation lies. What does the Government do to encourage this? Nothing at all! In fact it discourages savings by having a bank rate of 1% and set to fall further. These are the policies of an economic madhouse and they will send us spiralling into depression from which we will emerge with all the significance of the once grand Ottoman Empire in 1920 - obscurity.

Once we realise this, we understand that the BoE is at the moment as effective as a garage helplessly inflating and deflating the tyres of our stationary vehicle without realising that it is the spark plugs that have gone dead. All the tinkering with reductions in the bank rate is self-defeating. What this country needs at the moment is quite massive savings by the population. Low interest rates drive savers away to put their money into gold, foreign currency, land, and whatever. We need a bank rate of 6% not 1% to attract savers. The increased bank rate will not affect the availability of credit one jot or title because there is hardly any lending happening anyway.

But where are people, now so frightened of banks, to put their money? We need to cut the Post Office loose from its disastrous partnership with an Irish bank and make the post office bank a commercial arm of the Bank of England, able to provide retail banking facilities to the population. It would have to be subject to a proper set of controls, an idea which impossible to develop in a blog comment.

#43

The alternative is to nationalise banks, write off debt and invest labour resources heavily into technology.

If lowering the rate has not helped why are the bank of England members continuing to go down this route. Are they deliberately talking the £ down?

So far it is now encouraging peple to withdraw money OUT of banks and building societies and this will be felt ,as there will not be the money to lend to the mortgage and business areas.

It seems a bit shortsighted as these are the areas where we need the money to go. Seems to me that the thinking is not joined up.
Savers do have a choice and are exercising it.

"I say Jeeves, Mr Mervyn King, the Bank of England chap is coming up the road on a horse and cart."

"Really, sir? What is he doing along here, I wonder."

"He appears to be shouting ".....any old assets.....any old assets...".

"It would appear he's behaving rather like an up-market rag and bone man, sir."

"I'm going to see if I can sell him those old corporate bonds I originally bought from Catsmeat Potter-Pirbright, when he started that car import company of his."

"Very good, sir".
"You'll find them pushed to the back of the draw containing your un-darned socks."


"Jeeves, you'll never guess what!! Mr King paid me 100 pence in the pound for those old bonds. I simply can't believe it. The odds on Catsmeat's company surviving the year are long indeed. I'd be a fool to look a gift horse in the mouth; so I accepted Mr King's money."

"I see you've raised a whole GBP1,000 by selling those bonds, sir. That should be enough to buy a loaf of bread."

"A loaf of bread.......? The bread you bought last week was only GBP700 a loaf; the price can't have increased that quickly, surely Jeeves?"

"I fear it is the inflation, sir."

"Inflation, eh?; blasted nuisance!! And another thing, Jeeves; when I go into town these days it's overflowing with French and German tourists. They keep buying all the things I can't afford anymore. I went into Burlington Arcade the other day, to buy an antique cow creamer for Aunt Agatha, and the blasted shop keeper refused to accept payment in sterling. He kept going on about "hard currency only". Well the cheek of it, Jeeves; I've heard of hard boiled eggs but hard currencies are just beyond me; dashed if I can understand any of it. What's causing all this Jeeves?"

"I really couldn't say sir........"

i am sick to death of this whole affair.

can we not line up the BOE, HMG and all the bosses against a wall and have at them.

Its not even the fact that they have screwed up the economy that winds me up, its the fact they are still doing it.

Im sure all posters on this site will be very pleased to here im going to find a nice piece of canada to call my own, cos this country is led by complete and utter morons.

so i shall bother you no more.

p.s. If you ever do kick these walking lumps of lard out of power i shall be very happy to return. until then enjoy the depression, the recovery will be hell.

#49

Replace "French and German" with "Chinese and Arab" and I'll publish your screenplay for royalties paid in Yuan.

@46

whilst I agree even 390billion is eye watering I dont follow how we the UK ( even given we are now large shareholders on some of the banks) can assume the total debt of the banks at £7 trillion
and the other £2 trillion as these are private entities, not national ones.

reading this blog more as Milfenomics is more appealing to look at than Robert Peston :)

For two reasons, the reproduced BoE graph, that turned from green to red, should actually be Brown. One is because it shows where the sh*t will hit the Fan chart.
And so is the other....


28. rahere
excellent, your year and a half is optimistsic but there's no harm in trying.

46. newProtectorCromwell
if your data is good then we are indeed staring at the abyss.
By the way, where is a Gerard Winstanly for our times?

It's now obvious what needs to be doen and why. Any economy needs the correct amount of money, matching the level of economic activity, it used to be the role of the state to manage the money supply, but this has in recent years been devovled to banks. Banks have essentially been creating (virtually printing) money by gearing ever easier sources of foreign lending to create credit, thus increasing the money supply and at the same time enriching themselves without generating any wealth at all. Now that the credit generating mechanism has faltered, it is time for the state to resume its proper role of matching money supply to the level of economic potential. If we print money, our exchange rate will fall, we will export more, import less and repay our debts. Easy!

neillark wrote:

2011 Inflation with avengence - disaster

What would we do without our political masters to guide us so well...................?

Enough is Enough

You like graphs? courtesy of
Instructive, isn't it?

#55. Can you be more specific about Japan's great ideas? Links? News stories?

Here is the latest from Daryl Schoon about the collapse of the debt based "money" system. We live in interesting times, if not pleasant ones.

#54

Very much agree. Apart from the last sentence. Notice how money quantities are reducing and yet Sterling falls.

#57, IIRC it was a passing remark in a blog I read, so hard to know how genuine it was.

Nonetheless, given how the massive losses some Japanese manufacturers are enduring and the corresponding redundancies which have ensued, it's fairly obvious Japan is i serious trouble, and as such we'd expect drastic measures for drastic times.

Please will somebody tell me where the fat cats who have made so many millions in bonuses have invested their money? If they're short of somewhere safe from public contempt, I could offer them a newly built holiday flat on a mediterrnean island with free winter use offering a return of 3900 euros...