Comments on: The Treasury and Bank declare war on the UK economy http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/ Incisive and topical campaigns and commentary on today's issues and tomorrow's problems Wed, 23 May 2012 13:35:04 +0000 hourly 1 By: mikestallard http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/#comment-3908 mikestallard Thu, 12 Jun 2008 20:42:44 +0000 http://www.johnredwoodsdiary.com/?p=1125#comment-3908 Some fragmentary remarks: 1. The Regional Authorities have decided to build a lot of eco towns. There is one just south of here. My brother who lives in the green belt is furious. Meanwhile, nobody round here can sell their homes - and a lot are up for sale too. It is strange how out of touch the government of the Regions is. 2. In 2003, I lived in a house which was owned by a milk farmer. He was going under. He was a good farmer too. But the price he was given for milk was derisory. He is now bust - and so is his loyal farmworker too, along with his family. 3. This is the finest land in the country. It is growing, as far as the eye can see, bio fuels. Almost no animals, no orchards, no strawberries, nothing but biofuel. 4. We have to go and collect my mother from Hertfordshire next week. We live in North Cambridgeshire. Total cost? £50 for petrol. Meanwhile, we watch as £1 billion here, £200 million there are just - well - wasted. Some fragmentary remarks:
1. The Regional Authorities have decided to build a lot of eco towns. There is one just south of here. My brother who lives in the green belt is furious. Meanwhile, nobody round here can sell their homes – and a lot are up for sale too. It is strange how out of touch the government of the Regions is.
2. In 2003, I lived in a house which was owned by a milk farmer. He was going under. He was a good farmer too. But the price he was given for milk was derisory. He is now bust – and so is his loyal farmworker too, along with his family.
3. This is the finest land in the country. It is growing, as far as the eye can see, bio fuels. Almost no animals, no orchards, no strawberries, nothing but biofuel.
4. We have to go and collect my mother from Hertfordshire next week. We live in North Cambridgeshire. Total cost? £50 for petrol.

Meanwhile, we watch as £1 billion here, £200 million there are just – well – wasted.

]]> By: Robert http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/#comment-3907 Robert Thu, 12 Jun 2008 16:43:19 +0000 http://www.johnredwoodsdiary.com/?p=1125#comment-3907 The cacophony of market and media noise is obscuring reality. The current fashion is the ‘blame game’. Politicians, central bankers, regulators, commercial banks, investors and voters are all throwing brickbats at each other. Pointless. In every downturn since the first fish walked out of the primordial soup, controls always fail. The regulators, whose rules are designed to prevent the previous downturn, are always unprepared for new twists. Central banks have little real power; their prime purpose is to 'ooze' stability, so will always be slow to react to sudden changes. Commercial bankers are paid to be greedy; it’s what their shareholders want so are doing their job. Politicians exert control at the margin only, usually making things worse. Supply and demand, also known as markets, will always rule and must always be cyclical. The problem with wasting time on name-calling is that conditions are about to get much worse. For the investment facts suggest accelerating stagflation. UK 10-year bond yields have risen 11% to 5.15% in three weeks and US bonds a bit more; sterling inter-bank has crept from its March quarter low of 5.35% to 5.97%. Panic buttons will be pressed when it rises over 6%, again. Markets are rightly forecasting inflation and weak growth. Debt markets closed last year to banks for new capital, now equity markets are about to follow.The myth of overseas immunity from the US housing downturn is as frail as pixie dust. UK, Irish, Spanish and Greek developers are dropping like flies (none ever held). Another myth is that homeowners, seeing an annual fall in the value of their homes greater than their salaries, will continue to buy BMWs. Retailers are in for a brutal collapse, from food to 'fripperies'. A third myth is that emerging markets are immune from a US downturn; it too is being exposed.China’s index has more than halved in seven months; it may well halve again.The UK Office of National Statistics announced input costs rose 27.9% in May, the highest headline rate since 1975, whilst factory gate (exit) prices rose 8.9%. Let’s keep it simple. It crudely implies manufacturing profits have been slashed by 19%, before falling sales. Consensus investment analysts, displaying a staggering ignorance of cycles, forecast corporate profits’ growth of 15%. The end of ever-rising oil prices is in sight: developing countries are funding their local energy subsidies that are unaffordable. A broad range of countries - China, India, Lithuania, Vietnam and Indonesia - have announced reductions. Grim news for their inflation stats of course. Since 1945 there have been only four years in which global oil consumption declined; 2009 will be the fifth! So there will be eventually some relief - so Tin hats on boys it is going to hell of a ride! The cacophony of market and media noise is obscuring reality. The current fashion is the ‘blame game’. Politicians, central bankers, regulators, commercial banks, investors and voters are all throwing brickbats at each other. Pointless. In every downturn since the first fish walked out of the primordial soup, controls always fail. The regulators, whose rules are designed to prevent the previous downturn, are always unprepared for new twists. Central
banks have little real power; their prime purpose is to 'ooze' stability, so will always be slow to react to sudden changes. Commercial bankers are paid to be greedy; it’s what their
shareholders want so are doing their job. Politicians exert control at the margin only, usually making things worse. Supply and demand, also known as markets, will always rule and must
always be cyclical. The problem with wasting time on name-calling is that conditions are about to get much worse. For the investment facts suggest accelerating stagflation. UK 10-year bond yields have risen 11% to 5.15% in three weeks and US bonds a bit more; sterling inter-bank has crept from its March quarter low of 5.35% to 5.97%. Panic buttons will be pressed when it rises over 6%,
again. Markets are rightly forecasting inflation and weak growth.
Debt markets closed last year to banks for new capital, now equity markets are about to follow.The myth of overseas immunity from the US housing downturn is as frail as pixie dust. UK,
Irish, Spanish and Greek developers are dropping like flies (none ever held). Another myth is that homeowners, seeing an annual fall in the value of their homes greater than their salaries, will continue to buy BMWs. Retailers are in for a brutal collapse, from food to 'fripperies'. A third myth is that emerging markets are immune from a US downturn; it too is being exposed.China’s index has more than halved in seven months; it may well halve again.The UK Office of National Statistics announced input costs rose 27.9% in May, the highest headline rate since 1975, whilst factory gate (exit) prices rose 8.9%. Let’s keep it simple. It crudely implies manufacturing profits have been slashed by 19%, before falling sales. Consensus investment analysts, displaying a staggering ignorance of cycles, forecast corporate profits’ growth of 15%.
The end of ever-rising oil prices is in sight: developing countries are funding their local energy subsidies that are unaffordable. A broad range of countries – China, India, Lithuania, Vietnam and
Indonesia – have announced reductions. Grim news for their inflation stats of course. Since 1945 there have been only four years in which global oil consumption declined; 2009 will be
the fifth! So there will be eventually some relief – so Tin hats on boys it is going to hell of a ride!

]]> By: William B. http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/#comment-3906 William B. Thu, 12 Jun 2008 15:19:36 +0000 http://www.johnredwoodsdiary.com/?p=1125#comment-3906 It seems a lifetime ago that inflation was the dominant economic issue in a general election. We saw throughout the 1960s and 1970s the appalling effects of government control and militant union power on inflation. It took a long time to drive out those deleterious forces and to show that allowing businesses to operate more freely, with less interference from government and unions, results in more stable prices because the interests of the customer become paramount. Over the last 11 years the government, partly as a result of EU directives, has imposed greater and greater regulation on business causing a raft of fixed administrative and "compliance" costs. Combined with substantially higher taxes, these increased costs have been a hidden inflationary force. I say "hidden" because the credit bubble kept them out of view - so many people have been adopting a personal strategy of "spend, spend, spend" that the weight of these wasteful fixed costs has been spread over a wide customer base. As individuals have less spare cash (through a combination of ever increasing taxes and the absence of cheap credit), so the dead-weight costs of regulation and tax will become a greater and greater percentage of overheads with an inevitable inflationary result. I agree that, at the moment, inflationary pay demands are not surfacing but I have no doubt that they will appear soon. People can only tighten their belts so far, eventually there are no more notches left. We cannot be far from that position now, in my view, particularly for those on lower incomes. You can only cut back on discretionary spending and put the money into essentials for so long as you have discretionary spending. Once everything you earn goes on essentials, any increase in the price of essentials simply cannot be met without an increase in income. Further, having to cut-back on discretionary spending is itself likely to cause demands for increased earnings because those who work and are accustomed to a couple of pints and a trip to the cinema as a treat at the end of the week will only tolerate the loss of their treat for a limited period of time. Without a sustained and substantial assault on tax and regulation these wage-inflationary pressures will continue. It seems a lifetime ago that inflation was the dominant economic issue in a general election. We saw throughout the 1960s and 1970s the appalling effects of government control and militant union power on inflation. It took a long time to drive out those deleterious forces and to show that allowing businesses to operate more freely, with less interference from government and unions, results in more stable prices because the interests of the customer become paramount.

Over the last 11 years the government, partly as a result of EU directives, has imposed greater and greater regulation on business causing a raft of fixed administrative and "compliance" costs. Combined with substantially higher taxes, these increased costs have been a hidden inflationary force. I say "hidden" because the credit bubble kept them out of view – so many people have been adopting a personal strategy of "spend, spend, spend" that the weight of these wasteful fixed costs has been spread over a wide customer base.

As individuals have less spare cash (through a combination of ever increasing taxes and the absence of cheap credit), so the dead-weight costs of regulation and tax will become a greater and greater percentage of overheads with an inevitable inflationary result.

I agree that, at the moment, inflationary pay demands are not surfacing but I have no doubt that they will appear soon. People can only tighten their belts so far, eventually there are no more notches left. We cannot be far from that position now, in my view, particularly for those on lower incomes.

You can only cut back on discretionary spending and put the money into essentials for so long as you have discretionary spending. Once everything you earn goes on essentials, any increase in the price of essentials simply cannot be met without an increase in income. Further, having to cut-back on discretionary spending is itself likely to cause demands for increased earnings because those who work and are accustomed to a couple of pints and a trip to the cinema as a treat at the end of the week will only tolerate the loss of their treat for a limited period of time.

Without a sustained and substantial assault on tax and regulation these wage-inflationary pressures will continue.

]]> By: Richard Calhoun http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/#comment-3905 Richard Calhoun Thu, 12 Jun 2008 12:30:38 +0000 http://www.johnredwoodsdiary.com/?p=1125#comment-3905 Surely the only realistic response to the current financial crisis is to cut government spending radically. If this was done there would be no need to push up interest rates, there would be international confidence that we were tackling the problem seriously and sterling would benefit. It must surely be time for the Conservative party to spell this out to the electorate and bring forward their strategy for us all to understand. When you are overspending and no money in the bank you cut spending, the British public understand this. Surely the only realistic response to the current financial crisis is to cut government spending radically.

If this was done there would be no need to push up interest rates, there would be international confidence that we were tackling the problem seriously and sterling would benefit.

It must surely be time for the Conservative party to spell this out to the electorate and bring forward their strategy for us all to understand.

When you are overspending and no money in the bank you cut spending, the British public understand this.

]]> By: Mark Wadsworth http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/#comment-3904 Mark Wadsworth Thu, 12 Jun 2008 11:20:36 +0000 http://www.johnredwoodsdiary.com/?p=1125#comment-3904 Yes, there was a credit bubble, and the BoE/FSA would have done well to read its own training manual of 1997 (read the last couple of pages of <a href="http://www.bankofengland.co.uk/publications/fsr/1997/art7(Issue%202).pdf" rel="nofollow">this!</a>) on how to spot potential Northern Rocks. But the credit bubble is only one half of the equation. The other half is the asset price bubble (you can't really have one without the other - that was why the dotcom boom/bust caused relatively little damage - there was no credit bubble - duped investors were losing their own money; there was no 'debt hangover'). And which asset price bubble are we talking about? The property price bubble! Yet another reason for shifting to more local taxation in the form of land or property value tax - it acts like a higher interest rate and keeps property prices low and stable. I tried to explain this on <a href="http://conservativehome.blogs.com/platform/2008/03/mark-wadsworth.html" rel="nofollow">ConHome</a> a couple of months ago, but I am afraid it didn't go down very well. Yes, there was a credit bubble, and the BoE/FSA would have done well to read its own training manual of 1997 (read the last couple of pages of this!) on how to spot potential Northern Rocks.

But the credit bubble is only one half of the equation. The other half is the asset price bubble (you can't really have one without the other – that was why the dotcom boom/bust caused relatively little damage – there was no credit bubble – duped investors were losing their own money; there was no 'debt hangover').

And which asset price bubble are we talking about? The property price bubble! Yet another reason for shifting to more local taxation in the form of land or property value tax – it acts like a higher interest rate and keeps property prices low and stable. I tried to explain this on ConHome a couple of months ago, but I am afraid it didn't go down very well.

]]> By: Tony Makara http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/#comment-3903 Tony Makara Thu, 12 Jun 2008 11:07:44 +0000 http://www.johnredwoodsdiary.com/?p=1125#comment-3903 I suspect that the MPC would like to cut rates, but they know they cannot cut rates without importing inflation. This again shows the dangers of becoming to dependent on imports. I have been monitoring the price of imported foodstuffs at my local store and a 2 litre carton of full fat EU milk has gone from 1.05 to 1.55 since the start of the year. Why on earth are we importing milk? It is true that imported goods can sometimes be cheaper, but they can also be more expensive too, depending on currency differentials. The more we can produce here at home the less we will be hostage to these swinging prices and the economic uncertainty they cause. Any moves now to increase liquidity are going to weaken Sterling and push the cost of imported goods up. For this reason Mervyn King is right to put price stability ahead of all other considerations. Once the ECB starts to cut rates we can do the same but perhaps it might be wise to hold on rates if the ECB were to cut and bring the cost of EU food imports down. Of course the MPC will have to play this as they find it, but one thing is for sure, a push for greater liquidity at the current time is going to de-stabilize Sterling and push the cost of imports up and up. I suspect that the MPC would like to cut rates, but they know they cannot cut rates without importing inflation. This again shows the dangers of becoming to dependent on imports. I have been monitoring the price of imported foodstuffs at my local store and a 2 litre carton of full fat EU milk has gone from 1.05 to 1.55 since the start of the year. Why on earth are we importing milk? It is true that imported goods can sometimes be cheaper, but they can also be more expensive too, depending on currency differentials. The more we can produce here at home the less we will be hostage to these swinging prices and the economic uncertainty they cause.

Any moves now to increase liquidity are going to weaken Sterling and push the cost of imported goods up. For this reason Mervyn King is right to put price stability ahead of all other considerations. Once the ECB starts to cut rates we can do the same but perhaps it might be wise to hold on rates if the ECB were to cut and bring the cost of EU food imports down. Of course the MPC will have to play this as they find it, but one thing is for sure, a push for greater liquidity at the current time is going to de-stabilize Sterling and push the cost of imports up and up.

]]> By: Neil Craig http://johnredwoodsdiary.com/2008/06/12/the-treasury-and-bank-declare-war-on-the-uk-economy/#comment-3902 Neil Craig Thu, 12 Jun 2008 10:43:13 +0000 http://www.johnredwoodsdiary.com/?p=1125#comment-3902 I think building 300,000 homes a year would be a good thing because a house price fall is in the best long term interests of the economy. Goods being cheaper is generally better than them being more expensive. The price of housing is overwhelmingly dictated by their scarcity which, in turn, is dictated by government restrictions. A house should be for living, investments should be something different. I grant that now is a particularly painful time (for owners only) to be allowing new building to undercut the stuff already standing. Britain's housing stock is 21.1 milliion homes so 300,000 is only 1.5% which, with an assumed lifetime of the average house of 100 years thus needing 1% to stay even, is not that great an increase in supply. I think building 300,000 homes a year would be a good thing because a house price fall is in the best long term interests of the economy. Goods being cheaper is generally better than them being more expensive. The price of housing is overwhelmingly dictated by their scarcity which, in turn, is dictated by government restrictions. A house should be for living, investments should be something different. I grant that now is a particularly painful time (for owners only) to be allowing new building to undercut the stuff already standing.

Britain's housing stock is 21.1 milliion homes so 300,000 is only 1.5% which, with an assumed lifetime of the average house of 100 years thus needing 1% to stay even, is not that great an increase in supply.

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