Four concerns about our economy

There are may positive opportunities for our economy. But before I come to those, in a later post, I’ve four concerns about our economy.

First: The government have one chance only in their decisions on spending cuts. They must not fudge the issue. The country is braced for severe cuts. Business, the markets, and the nation won’t be happy if the government come back for a second set of cuts because the first set of cuts weren’t enough to solve the problem. 

Second: A further round of quantitative easing by the Bank of England – the printing of money – to prop up our economy is likely to create more problems than it would solve.  Printing money, rather than earning money, is inflationary. Additional quantitative easing would be a ‘beggar thy neighbour’ policy, which may start a bout of competitive currency devaluation. Here, I’m in agreement with Liam Halligan that this is a dangerous policy.

Third: Inflation is not under control, with the Consumer Prices Index remaining stubbornly over 3%, a full percentage point or more over the BoE’s target.  As I’ve argued, earlier this year, inflation is pernicious. It penalises those of fixed incomes, and makes investment decisions uncertain. I’m hoping that the government will press the Bank of England to refocus on inflation.

Fourth and final concern: Our balance of payments, the difference between what we sell and what we buy as a nation, is negative, which means we have to borrow to finance this. By lowering our exchange rate, it makes imports more expensive. This means that the commodities we buy, such as oil, become more expensive [Producer price inflation is running at 9.5%]. Again, my favourite economist, Liam Halligan, has something to say about this.

These are the dangers. Later this week, after the spending cuts are announced, I’ll post the opportunities for our economy, and there are many.

Inflation the untamed tiger

Gadzooks, the December inflation increase is the highest on record. I’ll not witter on as I’ve done before on the dangers of inflation, This time I’ll point to some authoritative sources instead. Type inflation into the search box and you’ll soon see what I mean.

Let’s start with the bald facts, from the BBC’s report:

“The Office for National Statistics said Consumer Price Index (CPI) inflation rose 0.6% last month, with the annual rate up to 2.9% from 1.9% in November. That was the biggest monthly rise in the annual index since records began and exceeded the City’s expectations for an increase to 2.6%.”

Now some information for you to digest:

We are now seeing the long-term effects of Quantitative Easing and the use of debt to finance further government borrowing. A consequence of printing money is to devalue it – hence the collapse in Sterling and ever more expensive imports, notably crude oil, a commodity which itself has doubled in price over 12 months. With no current plans to arrest government spending and the VAT hike to kick in next month, the future looks miserable.

There’s an aspect to this inflation rate rise that is particularly worrying, and that is that the December inflation numbers were higher than predicted [data on this is in the Alphaville blog post]. Remember, there are hundreds if not thousands of people tracking this data, and both commenting on them and making predictions. These people don’t like surprises, and nor do we.

I’m sure I can guess what my favourite economist – Liam Halligan – will be writing about this weekend.

Inflation is a real and present danger

One novel side effect of writing a blog is that certain topics, about which one’s passionate, get returned to on a regular basis, and that you can read your earlier words. It’s not crime, the state of the NHS, or our weather that seems to regularly grab my attention. It’s our economy and more importantly, inflation.

Many economists, though not all by any means, consider that the Bank of England’s quantitative easing [pumping money into the economy to ward of recession/depression] is inherently inflationary. The two shades of opinion, Liam Halligan for, David Blanchflower not, I’ve discussed HERE. Last November I was taken aback at alarmist talk by some senior city types predicting high levels of inflation.

However, there wasn’t much widely available evidence on inflation forecasts, outside of the Bank of England. It’s good that Fraser Nelson, in the Spectator, noted the Citibank report – Sterling Weekly: Inflation Uptrend Continues, predicting a steep rise in inflation in 2010 towards 4%. The report says:

“We expect CPI inflation to rise close to 4% in mid-2010, with RPI inflation probably going well above 4% Year on Year this year.”

Key reasons for this, they say, are the weak pound and resultant higher import prices. They also say that their prediction doesn’t include the upward pressures on food prices from the recent cold weather in the UK and Europe.

Ok, is this a lot of hot air? No, inflation is on a definite upward trend. This will create problems for a post-election government trying to implement policies that freeze public sector pay rises and cut government spending. This is why it’s vital that the electorate understand this before they vote.

More ‘funny’ money from the Bank of England

Don’t want to drone on about economics, so will keep it short.

Today the Bank of England announced a £25billion increase to its asset purchase policy – otherwise known as quantitative easing, or printing ‘funny’ money. Two points to note, one from the Bank’s press release and the other from Stephanie Flanders, the BBC’s economics editor,

  • In the Bank of England’s press release is this comment about future inflation prospects,
    •  “Inflation is likely to rise sharply to above the 2% target in the near term, reflecting higher petrol price inflation and the reversal of last year’s reduction in VAT.
  • Stephanie Flanders comments that “… it is far from ideal” for the Bank to spend £173billion out of £175billion of QE on government debt, known as gilts. She says that the Bank would like to buy corporate bonds, but can’t because there’s an insufficient supply available to buy. Most odd. Don’t the likes of Rolls Royce, BAE Systems, or other very large businesses have a need for capital? I just wonder how hard the Bank tried.

Due next week is the Bank of England’s quarterly inflation report. Depressing reading, I imagine.

In this way lies madness

Dilatory posting today is a direct result of reading some troubling news about the sate of the UK. Particularly on the economy, and the policies advocated by the respected economist Roger Bootle of Capital Economics in today’s Daily Telegraph. More than a few cups of tea were needed to regain a semblance of personal balance.

The essence of his article is that we need more quantitative easing [QE], and that while Bootle recognises that it’s a dangerous policy, which also carries inflationary risk, it’s better than doing nothing. I’m not sure who he thinks is advocating doing nothing. I know of no one.

My view is that QE is a tactical policy, to finance our horrible debts, and to let the banks off the hook. What we need is a strategic policy. Having successfully transformed our economy from manufacturing to financial management, we should do all we can to press home that advantage, both for economic and employment reasons. The managers of wealth, whether national or private, were shaken to the core by the credit crunch crisis. They need to learn to trust financial markets and professional advice – that’s the market the UK needs to be, trusted.

The credit crunch has ‘gummed up’ the gears of enterprise. It needs freeing up. Credit needs to flow to the productive sector, not to support government profligacy. The UK’s entrepreneurial spirit and brain-power is being drained by over reliance on state funding. Just look at the excessive salaries of the many managers our ineffectual quango’s.  We should force the banks to ‘front up’ on their bad debts, introduce a ‘Glass-Steagall’ law that splits banks into ‘boring’ banks and ‘exciting’ banks, and direct QE ‘money’ directly to the private sector by buying corporate bonds, not government bonds.

I agree with Liam Halligan, time we, as a nation, took the lead in banking regulation, and fiscal responsibility.

Peston puts it perfectly

To my mind Robert Peston, the BBC’s business editor, is a print journalist. His words are better in print than when he speaks them in that odd halting way of his. No better example of this is there in his blog post today – Why are companies not borrowing?  Here’s a snippet,

“For me, that drop in the price of interbank lending – the fall in the rate charged by banks for borrowing from each other – tells an important story.

 It implies that a good deal of all that money created by the Bank of England in its quantitative easing programme – perhaps too much – is staying within the banking system, rather than stimulating activity in the real economy.

Why? Well, the Bank of England’s fear is that banks are being too averse to risk, that they don’t want to lend even to businesses that are fundamentally viable.”

My worry is that all we’ll get in the way of headlines is that things are getting better, so no need to worry. Meanwhile, businesses and entreprenuers are short of investment funds. Remove risk from investment and you remove growth. No growth means stagnation, which in the current climate might lead to stagflation.

I guess you wouldn’t know it from my posts on the economy, but I’m an optimist. It’s optimism that’s needed in the banks, who’ve managed to get their sticky hands on all that Bank of England ‘funny money’. What we need is for them to start putting it to work in the productive economy.