An end to bubbles?

 

            When Mr Bernanke of the Fed speaks, the world listens.

             Last month he made the commonsense point that Quantitative Easing would not continue for ever. It is surprising so many people needed telling. He explained that sometime it woudl be  tapered back and eventually ended. Indeed, on two past occasions US programmes of QE have ended without major financial disruption.

            This week he provided a little more detail. QE will be tapered later this year, and ended possibly by the middle of next if the US economy continues to grow well. There did not seem to be anything surprising or even worrying about that. Surely it is good news if the world’s largest economy can soon manage without the artificial stimulus of printing extra dollars to buy its own debt.

              It fits in with the progress made to restore most US banks to health, to have more normal credit creation in the private sector, to see a recovery in growth, progress in getting more people into work and relatively low inflation. The US has experienced a sharp downward adjustment in property prices, and more recently a good bull run in shares reflecting the better prospects.

           So why has there been such a sell off around the world? These days large operators in markets move rapidly and together when the mood changes. They decided Mr Bernanke’s speech marked a change of mood. So now everyone is hunting bad news around the world to justify the sudden reversal in attitudes. They have been selling gold, usually a safe haven in a crisis, as well as selling  emerging market shares. Japan had a bear market in a  few days, falling 20%. They have sold bonds as well as shares, fearing and creating higher interest rates.

             Commentators looking for bad news turn to the Brazilian and Turkish riots, to the slowing of growth in India and the build up of credit in China. The outlook is not as bleak as some now suggest. Forecasters are beginning to move their forecasts for the US, the UK and even Euroland up . There is no likelihood of higher short term interest rates on either side of the Atlantic this year, and little likelihood of any increase in the UK or  Euroland next year either.

              There is still a big bond bubble, but the western authorities will not want to explode that too dramatically yet.

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61 Comments

  1. lifelogic
    Posted June 22, 2013 at 5:23 am | Permalink

    Indeed at least the US is slowly heading the right way with mush cheap energy than the UK too and a gentle recovery underway. I will stick with my mega cap US equities I think.

    I note Osborne has actually managed to increase the PSBR year on year, despite the vast amount of state sector fat, pointless activity and over remuneration available to be cut almost anywhere one looks.

    Are are the judges mad? Five and a half years for Mr Forrest seems to be absurdly harsh to me, relative to sentences often given for far more serious and violent crimes. He did not murder anyone and is clearly no danger to anyone just rather foolish. Six months is surely more than sufficient as a deterrent for other teachers. That would save Osborne a bit of money too.

    • Leslie Singleton
      Posted June 22, 2013 at 9:38 am | Permalink

      lifelogic–Our (that’s if you can call them our, these days) judges no longer seem to have any common sense. There is no God-given or precise correctness about the entirely arbitrary 16 years of age, and 15 is not so very short of that anyway. As I understand matters, if the girl were Scottish she’d have the vote. Puberty is of course much earlier than 16 and did I not recently read someone, somewhere, recommending a reduction to 14? One wonders who has done the girl’s life more harm, the Teacher or the Judge. I do not deny that the Teacher should not have behaved as he did but it has all been excessively over-egged and I agree that the sentence is plain bonkers. If the worry is as big as it has been hyped up to be, perhaps it should be pointed out that there was a time (before Boys and Girls became identical) when Girls were taught only by women in a single sex (sorry gender) school and quite right too. Mind you, having seen girls riding in the Horse Artillery at Trooping the Colour I’ll believe anything.

      Reply: Teachers have a duty of care towards the children in their charge, and should know not to become emotionally involved with pupils. They should also know that the law currently says a girl of 15 is a child.

      • uanime5
        Posted June 22, 2013 at 1:33 pm | Permalink

        When one party is in a position of trust, such as a teacher of a pupil, the age of consent is 18 to prevent the older party abusing their position. This law was introduced in 2000 when people were worried that lowering the age of consent for homosexual sex would lead to older men grooming 16 year old boys.

        http://news.bbc.co.uk/1/hi/uk/1045383.stm

        So perhaps the teacher should have waited until the pupil was legally considered an adult before beginning a relationship, rather than fleeing with her to France.

      • Dr. Sok
        Posted June 22, 2013 at 2:36 pm | Permalink

        It is, I suspect, more to do with the demonisation of The church of England.

      • Leslie Singleton
        Posted June 22, 2013 at 2:47 pm | Permalink

        Comment on Reply–The law these days says a lot of daft things but law or no law the sentence handed down was ridiculously OTT. Would other teachers tempted to transgress be any the less likely to do so by reason of such a sentence (and don’t forget he ruined his career) rather than a considerably shorter one? I beg leave to doubt it.

        • uanime5
          Posted June 23, 2013 at 9:18 pm | Permalink

          The maximum sentences for abducting an underage girl and kidnapping is life (on average people serve 14 years), while unlawful intercourse with a girl under the age of 16 is 14 years (on average people serve 7 years). So getting 7 years (of which he will need to serve a minimum of 3.5 years) is lenient.

      • Handbags
        Posted June 22, 2013 at 3:00 pm | Permalink

        I’m not against sex – I believe that if you like each other there are ways to go about it.

        However, in this case, he deserves a stiff sentence.

        He was in a position of trust. He was well aware of the law. He researched the possible penalties. He realised she was vulnerable – and he had sex with her anyway.

        How is absconding supposed to help a vulnerable child?

        Goining on the run seems to be a fantasy-world response from an immature personality.

        He shouldn’t be anywhere near children.

      • Bazman
        Posted June 22, 2013 at 4:13 pm | Permalink

        Do you think the other boys will pick on him while he is in detention Leslie?

        • zorro
          Posted June 24, 2013 at 3:01 pm | Permalink

          They will probably make sure that he doesn’t feel lonely……

          zorro

      • Jerry
        Posted June 22, 2013 at 4:34 pm | Permalink

        Leslie Singleton: Actually the age in question is 18 [1] for the case you seem to be referring to, what ever the biological facts about maturity, puberty or whose idea running away was this was still an abuse of trust if nothing else. True that we can’t help who we fall in love with but as adults we need to also know when to say no and/or walk away.

        That said, Labour didn’t half make a right pigs ear of their sexual offences ‘review’ and Act/Bill in the early 2000s, even more so when it can criminalise a child for nothing more than childish “Show me yours and I’ll show you mine” type play, should one friend be 12 and the other 13, whilst if anything more serious happens the 13 year old can be facing a charge of rape…

        Wow, never has one of John’s blogs gone so way off topic!

        [1] not 16, that would have only been applicable had the case involved a fellow school friend

      • lifelogic
        Posted June 22, 2013 at 5:17 pm | Permalink

        To reply, indeed teachers should of course know that and behave better, but they are human and some make mistakes. Five and half years is just absurd, you get less for manslaughter and many vile and repeatedly violent crimes. Females can marry at 14 in the Vatican I understand and many other places.

        Meanwhile in the NHS thousands of pointless avoidable deaths and blatant cover ups yet no one even seems to get be off .

        • lifelogic
          Posted June 22, 2013 at 5:59 pm | Permalink

          sorry “no one even seems to get told off.” I meant.

        • Bazman
          Posted June 23, 2013 at 10:59 am | Permalink

          I’m not your nice Uncle I’m your nasty one. I’m like your Dad without the fun. LOL! Its like THAT. 21+ year olds are brought into the real world with this and this is what he should have said.
          You use the Vatican as an example? Find out the facts. This is the Cayman Islands argument right? As pointed out to you he did not make a mistake he has form for this. Fifteen year old girls are all over the place emotionally and in the future often see this as abuse by an adult. Interesting who the commentators feel is to blame for the Nigella story. That will be the paparazzi interfering in a private discussion and the BBC for reporting the story will it not by past comments? Interesting to see if this view would fit given the story involved a northern glamour model and her TV actor husband at a service station on the M6? The lack of comments by the commentators, especially woman in the newspapers are conspicuous by their absence. Wonder why. Ram it.

        • uanime5
          Posted June 23, 2013 at 9:44 pm | Permalink

          You’d only get less than 5 years for manslaughter if you were convicted of a type of voluntary manslaughter, such as diminished responsibility.

          Regarding violent crimes here is a list of such crimes and their sentences.

          Common Assault (minor injuries): 6 months (2 years if racially or religiously motivated).
          Actual bodily harm(minor fractures and cuts): 3-5 years (7 years if racially or religiously motivated).
          Grievous bodily harm (breaking bones or permanent disability): 4-5 years (7 years if racially or religiously motivated).
          Grievous bodily harm with intent (breaking bones or permanent disability): 3-16 years (judge can impose a life sentence).

          The difference between grievous bodily harm and grievous bodily harm with intent is that in the former the attacker was reckless as to whether this level of injury would occur, while in the latter they intended to cause this level of injury.

      • Hope
        Posted June 22, 2013 at 6:43 pm | Permalink

        Huhne was law maker and in a position of trust. He lied and lied and only changed plea at the very last moment causing the taxpayer to spend a fortune on the lawyers which he contests to pay. 8 weeks, yes just 8 weeks. Lords have gone back to work, no other profession would tolerate it.

        Scandals at the BBC, NHS and still no bonfire of quangos when they have proved to be beyond useless. Ofgem Ofwat -what do they actually achieve to reduce bills for the consumer? DECC the same.

        Greece in trouble because of the Stupifying Euro I see. Brilliant article by AEP in the DT about the Euro bubble and fate of small EU countries. Booker highlighting the disingenuous Cameron claim about the EU/US trade agreement. When will politicians be straight and honest with the electorate?

      • Iain Gill
        Posted June 22, 2013 at 9:03 pm | Permalink

        The sentence in the case of the teacher is far too long. The judges have lost the plot as anyone sitting through a few cases would verify. I for one have zero faith in the so called justice system in this country, I was brought up to believe in it, but having seen it up close its all a bit of a sham. They may as well just use a random number generator for sentencing, it would get the sentencing right more often than the judges do. Personally I would get some fresh blood from outside the legal profession into judicial roles as quickly as possible.

        • uanime5
          Posted June 23, 2013 at 9:20 pm | Permalink

          The recommended punishment for the crimes this teacher was charged with is 14 years to life. So the sentence he got was short.

      • A different Simon
        Posted June 23, 2013 at 10:57 pm | Permalink

        Leslie ,

        You and I were not in court to hear the full details to determine whether this teacher just went off the deep end and did something incredibly stupid or whether he was predatory .

        Given that we don’t know , rather than giving the ex-teacher the benefit of the doubt perhaps we should give the judge the benefit of the doubt for understanding what actually happened and sentencing accordingly ?

    • Bazman
      Posted June 22, 2013 at 11:15 am | Permalink

      Your usual race to the bottom in this one will not be tolerated by society and will be self regulating outside the law for sure as the jail bait argument is finished.
      He is a bit more sinister than foolish and has previous form for this.
      http://www.dailymail.co.uk/news/article-2345665/Jeremy-Forrest-jailed-FIVE-AND-A-HALF-YEARS-guilty-abducting-pupil-15.html
      Crossed professional lines and now has to face the music. Outside of these responsibilities the conversation with fifteen year old girls is short and ends with ‘off’.

      • lifelogic
        Posted June 22, 2013 at 6:02 pm | Permalink

        Six months is more than sufficient.

        • Bazman
          Posted June 23, 2013 at 11:01 am | Permalink

          You are probably more upset that he spent eight weeks on holiday in France.

        • Jerry
          Posted June 24, 2013 at 1:36 pm | Permalink

          @Lifeligoic: You seem to have changed your tune on sexual crimes, after all you (amongst others) were not half wanting “heads on platters” only a month or so ago, but I now suspect that it had more to do with the fact that many in the frame worked at one time or other for the BBC and thus was a go opportunity to bash the Beeb…

  2. David Williams
    Posted June 22, 2013 at 6:30 am | Permalink

    It’s about rate of change.
    The interest rate cycle has turned.

  3. Brian Tomkinson
    Posted June 22, 2013 at 6:44 am | Permalink

    JR: “There is still a big bond bubble, but the western authorities will not want to explode that too dramatically yet.”
    What happens when they do?

  4. zorro
    Posted June 22, 2013 at 7:07 am | Permalink

    Taking some of the US figures with a pinch of salt, they have had better building blocks coming out the slump in economic activity…..more affordable house prices, cheaper energy, ,ore favourable business conditions etc…….However, this sell off was not unexpected, any threat to withdraw the drug supply will cause an adverse reaction in the addict……It is interesting that you seem to imply that the western governments have some control over when the bond bubble will burst……wishful thinking.

    zorro

  5. alan jutson
    Posted June 22, 2013 at 7:11 am | Permalink

    It seems daft that just when a Country as large as the USA says it no longer thinks it needs the artificial stimulus of printing money, that share prices drop.

    One would have thought that the end of the (fake money) QE programme would have pleased the market !

    Thus you have to ask, are the markets into promotion of fake value companies, and down grading those companies who run a tight ship and live within their means.

    Aware its all supposed to be about confidence in the future that drives up prices, so I am a little bemused that Mr Bernank has spooked the markets with his commonsense announcement that fake money is to end.

    • zorro
      Posted June 22, 2013 at 6:27 pm | Permalink

      The PTB in the ‘markets’ love fake money because it bumps up asset prices and the stock market hence the bull market from 2009 – 2013. Getting rid of the funny money will depress their assets. They want more funny money…..

      zorro

  6. Andyvan
    Posted June 22, 2013 at 7:13 am | Permalink

    Written like a government press release. Commentators looking for bad news need only examine the real facts behind the GDP figures which have as much relation to reality as I have to Santa Claus. All the “growth” has been as the expense of printing billions of dollars and pounds which at some point will come back and haunt central banks in the form of inflation. None of the issues of debt have been addressed- the US government has to print or borrow just to keep core functions going and pay it’s interest bill. The UK is as bad or worse. Private debt here is virtually as bad as it has ever been in history. House prices are beyond ridiculous. If interest rates were at a level that reflected reality more than half of all mortgage payers would be in severe difficulties and you’d see just how strong a recovery it really is. In the real world of every day business things are nowhere near as rosy as politicos might have us believe, most are not doing very well at all. Western governments are on a non stop drive to control and monitor every action of their populations. The only reason the EU is still holding together is the collective desperation of the political and financial elites. Democracy is a joke in most countries today. Sorry Mr Redwood but your version of reality doesn’t convince me.

    Reply I describe the world as it is – reality. You describe a miserable future world where more people are in poverty and financial distress. I would like to avoid that for them.

    • Mike Wilson
      Posted June 22, 2013 at 7:35 am | Permalink

      Reply to reply: But you are living in cloud cuckoo land.

      The facts are we had enormous growth in this country based on a growth in private sector debt. Much of that debt went into the housing market and has priced the next generation out of home ownership.

      New Labour used the tax revenues to create a much bigger and more expensive public sector and, now that the debt fuelled growth has gone and tax revenues are lower – we are having to borrow 120 thousand, million pounds a year just to pay our bills.

      The government, to keep afloat, has been printing money and using that money to buy its own debt in the bond markets. Putting a floor under bond prices and encouraging investors to buy new government debt on the basis that, no matter what happens, the government will ensure that (notionally) they will get their interest paid and the bond redeemed in due course. Quite how this all works baffles me, I must admit. The Bank of England prints money to buy government debt in the secondary market and the government has to pay interest on that debt to the Bank of England and, in due course, has to redeem those bonds with what? Real (i.e. taxpayers’ money). We truly are in an era of government lunacy.

      Inflation is not going to come to the rescue this time (as it has done in previous bubbles) because of globalisation. In the labour market now you are not competing just with people in your own country, you are competing with people all over the world. Most of whom can live on a much lower salary because, OF COURSE, their housing costs are much lower.

      To some extent costs such as food and energy are, these days, global. But the price of housing is very individual to countries. If a country’s government is stupid enough to allow its own banks to print as much money as they like and lend it into the housing market in the ludicrous belief that it creates wealth – they ought to be sectioned. HOW CAN WE COMPETE IN GLOBAL MARKETS WHEN A YOUNG PERSON IN THIS COUNTRY NEEDS TO EARN 80 GRAND A YEAR TO BE ABLE TO BUY A HOUSE?

      If, Mr. Redwood, you want to avoid a miserable future for people you need to start seriously addressing the size and cost of the state and you need to do something to allow people to reduce their housing costs – dramatically.

      As I have said before, we need to make land available, cheaply, for young people to self build.

      Reply I am trying to address the size of the state, and have put forward proposals to produce more affordable housing for people to buy.

      • Ralph Musgrave
        Posted June 22, 2013 at 12:13 pm | Permalink

        When the average house price was £160,000, this Policy Exchange work estimated that £45,000 of that was attributable to planning restrictions.

        http://www.policyexchange.org.uk/images/publications/making%20housing%20affordable%20-%20aug%2010.pdf

        I

        • Mike Wilson
          Posted June 22, 2013 at 2:06 pm | Permalink

          And, of course, we are all complicit. As soon as we are ‘alright, Jack’ – we are renting a house from the bank in the belief that we ‘own’ it – we don’t want anyone – particularly our children – being able to buy an affordable house anywhere near us.

          Well, actually that’s not true. None of want any housing near us, but we’d all like our kids to buy a house in the next street so we could be part of each other’s lives – and see the grandkids etc.

          Of course, if that is what you really want, time to stop being a NIMBY. Let’s get the building done on the TRL site at Crowthorne – just up the road from me – for a start. But let us insist it is fall of affordable homes for young families.

        • lifelogic
          Posted June 22, 2013 at 7:27 pm | Permalink

          Indeed and silly building regulations, excessive taxes, expensive and monopoly supply of utility connections all push building cost up and restrict supply.

        • lifelogic
          Posted June 23, 2013 at 6:58 am | Permalink

          There are also the back door taxes, when councils demand, planning gain, payments for them to waste and a proportion of social housing in return further pushing up costs and inconveniences for builders and some buyers.

          Not to mention all the costs of the bat/wildlife/traffic/impact surveys and the likes so often endlessly demanded.

          • Bazman
            Posted June 23, 2013 at 11:03 am | Permalink

            Some councils even force them to pay towards infrastructure for the new homes…

      • zorro
        Posted June 22, 2013 at 3:30 pm | Permalink

        John, what proposals have you put forward so that people can have more affordable housing costs, and thus avoid the miserable future which awaits them of ever rising housing costs and universal, poorly controlled surveillance by the authorities….? It is very reasonable to point out that the high costs of home renting/ownership are squeezing the life out of economic activity. People are short of cash, that’s for sure……..Another worrying sign was an advert I just saw on TV with those companies stating that they will buy your house in any state for cash. These were prevalent when the house were rising unsustainably previously. The government have abandoned sound interest rates and are using funny money to sustain/increase housing costs to give a veneer of economic activity. The only people to benefit are BTL and speculators.

        zorro

      • Jerry
        Posted June 22, 2013 at 4:58 pm | Permalink

        @Mike Wilson: I seem to remember about three house price booms (and a couple of busts) during the Thatcher/Major years, I also seem to remember that new home supply wasn’t all it could have been.

        I know that my parents made a nice fat ‘profit’ on their house (at that time) when they sold it, bought for a song just before the Thatcher Era began and sold for a mint a year or so before the Major Era ended. In those 18 or so years property went from something most people simply thought off as a place to live and raise their family to something people considered an investment, thus the problem you talk of was not caused by Labour.

        • Mike Wilson
          Posted June 23, 2013 at 2:29 pm | Permalink

          @Jerry – Spot on. The problem was not started by Labour.

          I have mentioned, often, the Tory housing boom and bust in the 1980s that culminated with probably the single biggest act of stupidity I have seen by a chancellor, the flagging in advance of the removal of joint tax relief. This poured petrol on the flames of a house price boom (caused, as always, by de-regulation of credit) and, on July 31st 1988 – at midnight – when the joint mortgage tax relief was removed – the housing market STOPPED. And, (in London and the South East where the boom was concentrated (it was quick and did not have time to ripple out to other regions))prices fell dramatically. I bought a house in 1991 for 40% less than it had sold for in the boom in 1987.

          We then had a stagnant economy for the first half of the 1990s with lots of people losing their jobs and homes.

          New Labour capitalised on the stagnant economy and won a landslide in 1997. New Labour said they were going to be prudent and would not make the same mistakes the Tories had made – they would not allow ‘boom and bust’.

          But, as we all know, they did. They allowed the banks to lend 125% mortgages! 5 x joint salary mortgage multiples! Anything in fact to keep the house price bubble going. They did precisely what they said they would not.

          House price inflation in the 1960s and 1970s was generally connected to, and caused by, general inflation. Wages and prices went up and up and up in those days.

          House price inflation in the 1980s was caused partially by inflation and partially by the de-regulation of lenders.

          House price inflation from the late 1990s to 2008 was caused entirely by a massive increase in lending following the change to the way banks were regulated – made, by New Labour, in 1997. Inflation paid little part. Wage inflation was very low against the backdrop of globalisation really getting into its stride.

          So, if one describe the Tories in the 1980s as stupid, reckless and incompetent how on earth would you describe New Labour. They watched the Tories’ mistakes, said they had learnt from them, said they would not make the same mistake – and then did exactly the same thing – but to a much greater degree.

          Personally, having between them created a situation where housing is amongst the most expensive in the world and is a big contributory factor to our uncompetitiveness in the global economy – and where the next generation is on the hook for our debts – I wouldn’t let the Tories or Labour anywhere near government. They are, simply, incompetent.

      • Gary
        Posted June 23, 2013 at 1:11 pm | Permalink

        Why are people beating themselves up trying to buy an overpriced house in a property bubble ? Just refuse to be a mug and rent the house instead. Throwing rent coupons at a landlord is still preferable to the risk of capital gains losses in a property correction , even if it takes years for the bubble to burst. Why are people so keen to get in a the top of a pyramid scheme? It will kill you financially when, not if, it bursts.

    • margaret brandreth-j
      Posted June 22, 2013 at 10:41 am | Permalink

      Well said John. A good commentator does not add or take away the facts. Instead all the scenes and acts should be viewed by the audience so that they can take the good out of everything and any moral used for betterment.

    • Iain Gill
      Posted June 22, 2013 at 8:52 pm | Permalink

      In response to Johns reply:

      Andyvan is correct. We pay our leaders to be realistic. When even you are spouting this nonsense it really does make things look bad.

      Short sharp crashes would have been better than building them up into bigger and bigger waves which will be massive by the time they are too big for governments to stop.

      Lots of people are already in poverty and financial distress.

  7. Gary
    Posted June 22, 2013 at 8:57 am | Permalink

    There is a bond bubble due to QE, and the stock market also behaves as a bond in aggregate, with the dividend being the yield on that bond. As bond prices fall the yields rise and so goes the stock market. The stock markets are already richly priced wrt earnings. There is a risk that the money coming out of the stock and bond markets will go into consumer price inflation. Stock and bond liquidations trigger margin calls and that leads to everything else being sold to meet the margin calls.

    History is not on the side of easy money being able to be switched off and on without adverse consequences. If easy money was the solution there would never be any economic problems.

    • forthurst
      Posted June 22, 2013 at 3:04 pm | Permalink

      “There is a risk that the money coming out of the stock and bond markets will go into consumer price inflation.”

      But what about the gold price? Was this held up speculatively and thus part of the sell off of everything including commodities (JR thinks its a commodity), or has there been more hanky-bernanke in GLD, or does it presage higher interest rates and a lower inflationary outlook (for those who regard gold as money to be assayed against fiat) with the Treasury responding to a buyers’ market in deficit funding?

  8. Bert Young
    Posted June 22, 2013 at 9:13 am | Permalink

    Stock markets have never been logical , or , even sensible , in the way they react and behave . Values did get a bit “heavy” and a correction was inevitable ; Bernanke’s statement was not the best timed , but , it made sense . The combination of his announcement and “sell in May ” was enough to create a tumble in values and put the Bond markets into a frenzy . Come October all will be reversed .

    • Mike Wilson
      Posted June 22, 2013 at 2:09 pm | Permalink

      I don’t pretend to be able to forecast the stock market. All I know is that it is has not provided returns for 15 years and the days of buying shares within a pension fund and having them increase enough over the years to actually be worth something when you retire are gone. The world changes too fast these days.

      The only people who make money from the stock market are brokers.

      • A different Simon
        Posted June 23, 2013 at 3:43 pm | Permalink

        Blue chips have gone up so that the P/E ratio’s are now absurd and of course the potential returns are the inverse of the P/E .

        Shares in SME’s have been smashed up as all risk is off .

        My honest opinion is that the stricter capital requirements for banks and their reluctance to lend is designed to restrict the capital available to smaller companies to drive them into insolvency and that the Govt is complicit in this .

        This is the “squeeze phase” of the Great Financial Scam . Squeeze the small players out of business so you can offload all that worthless fiat tat for real assets at extra-depressed prices before the currency really crashes .

        Puffing existing assets , be they land , houses or blue chip shares will not help the economy .

        Only investing in creating something new – which is inherently risky – will do this .

        London is not the right place for investing in anything new and inherently risky .

        Somehow businesses in the real economy needs access to money directly without having to go through London .

        The monopoly of London when it comes to controlling access to money must be broken .

  9. Denis Cooper
    Posted June 22, 2013 at 9:21 am | Permalink

    I’m looking at this chart for the yield on 10 year gilts since 1998:

    http://www.telegraph.co.uk/finance/personalfinance/investing/10134841/Fed-ends-QE-what-it-means-for-bond-investors.html

    and thinking that it still has a long way to rise to get back to the levels before Darling got the Bank of England to embark on large scale rigging of the gilts market.

    And thinking further that when that movement has been completed gilts investors will have suffered heavy losses, and that as the Bank of England is by far the largest single gilts investor, holding something like a third of all gilts now in issue, notionally worth £375 billion, in its Asset Purchase Facility:

    http://www.bankofengland.co.uk/markets/Pages/apf/results.aspx

    it too will have suffered heavy losses, maybe even in excess of £100 billion?

    And therefore far from Osborne being able to continue to withdraw part of the profits to help fund public spending, instead at some point the Treasury will have to start coming through on its promise that it would cover any losses suffered by the Bank in connection with its asset purchases, and the money for that will have to come from taxpayers but probably spread over a decade or more as the gilts owned by the Bank successively mature.

    So while at present Osborne may still be able to boast about how low interest rates are reducing the cost of government borrowing, in the future Chancellors will have to keep quiet about the cost of compensating the Bank for the cost of rigging the gilts market to get those low interest rates.

    Reply: The potential loss on the gilt book bought by the B of E is the premium over repayment value paid for the book. That is unlikely to be as high as £100bn – I do not have the figure to hand. Of course we will lose that money unless the Bank were to suddenly be able and willing to sell all those bonds before maturity at the same premium as they paid – all very unlikely.

    • Denis Cooper
      Posted June 22, 2013 at 3:55 pm | Permalink

      The greatest losses will be on the gilts that the Bank bought for £175 billion from late 2011 through to late 2012, because from the chart it is clear that gilts were already over-priced before those additional tranches of QE were commenced.

      I imagine somebody with more detailed knowledge may come along with estimates of the potential losses which will have to be borne by taxpayers.

  10. Contravariant
    Posted June 22, 2013 at 10:21 am | Permalink

    “These days large operators in markets move rapidly and together when the mood changes”
    A recipe for instability and volatility indeed (and in the process the small operators get screwed). Is a transaction tax or some other sort of market friction such a bad idea?

    • Jerry
      Posted June 22, 2013 at 5:27 pm | Permalink

      @Contravariant: Makes on think that perhaps a reverse of the “Big Bang” is needed, it used to be said of the jet-age that one can catch a cold in one continent at breakfast and pass it onto another continent by lunch/dinner-time – these days a dealer can sneeze at the keyboard and cause a run on a country within an hour, I exaggerate of course but not by much!

      I don’t think a FTT will help, it is the speed at which people can trade that is the real problem.

  11. lojolondon
    Posted June 22, 2013 at 11:24 am | Permalink

    John, Bernanke, just like King, is highly regarded by insiders, but viewed from the outside, he was custodian of his country’s money over a time when everything went about as wrong as it could, and he has been lauded instead of criticised or fired.

  12. Gary
    Posted June 22, 2013 at 12:23 pm | Permalink

    And despite what we are told about our long maturity dates on gilts being a virtue, longer dated maturities values are more susceptible to rate changes, the deflator, in present value calculations. Rising rates will ripple through the economy, not least lowering house prices and in turn will adversely affect banks’ balance sheets, including the BoE. There is not enough(or any) growth to offset any of this.

    Exiting QE will be very, very difficult. Announcing victory is premature.

    BTW: there is a fly in the USA recovery ointment. The USA exported inflation to China because of the yuan/dollar currency peg. The yuan was pegged lower than the dollar. Now China has all sorts of structural problems and asset bubbles, not least in property. When, not if , that peg break the pent up forces created come flooding out and that means the USA gets the inflation. The premise of continuing with QE was a benign local US inflation picture, what will happen if they suddenly get high inflation ? Triffon’s dilemma states that it is ultimately impossible for a fiat reserve currency to last indefinitely because permanent trade deficits must be maintained by the reserve currency issuing country as that currency is demanded by foreign countries for reserves while in the issuing country inflation is stoked. There is no way to resolve this dichotomy and eventually the reserve currency collapses. We are into the last years (statistically they can last a maximum of about 40 years) of such a regime and I think the volatility in world markets is reflecting this. Ultimately when this snaps gold will have to be valued much higher, because gold is the only non-debt currency that can liquidate the irredeemable reserve currency. In the short term gold reflects the currency volatility, both up and down.

    It is going to be a rough few years.

  13. uanime5
    Posted June 22, 2013 at 1:44 pm | Permalink

    Even if the USA ends its QE it will still have a large deficit.

  14. Neil Craig
    Posted June 22, 2013 at 2:07 pm | Permalink

    Bubbles normally happen when there is a fear that production of something cannot be increased to match demand – thus the fact of rising demand itself creates an extra demand. eg the South Sea Company, having a government monopoly, could not have market share taken by competitors expanding the market.

    Thus many such bubbles depend on government restriction of competition. The UK/US housing markets being examples – house prices rise purely because government restricts housebuildi8ng irrespective of demand. The answer, if those in charge sincerely don’t want bubble speculation, is obvious.

  15. APL
    Posted June 22, 2013 at 2:16 pm | Permalink

    JR: “An end to bubbles?”

    Well Obama did more or less fire him earlier this week.

    Barak Obama: “Ben Bernanke’s a little bit like Bob Mueller, the head of the FBI, where he’s already stayed a lot longer than he wanted or he was supposed to.”

    So if you mean an end to ‘Bubbles Benanke’? Hurrah!

    The problem is the Fed nor come to that, the BOE can withdraw from QE without leaving a black smoking crater where the economy used to be.

    In both cases QE is doing two things, it is allowing the government to continue to spend way WAY beyond its means. But more importantly it is strangling any hope of growth. QE will never, ever result in the growth that the governments need to be able to withdraw QE with out an economic disaster.

    Eventually QE will result in a negative return – and the economy will go into a tail spin and then we are all f***** anyway.

  16. zorro
    Posted June 22, 2013 at 3:53 pm | Permalink

    Off topic John, but I’m interested on your position with regards to the NHS and its future operations…….What do you think about the Minister’s comments on how the safety of NHS hospitals is under question/cannot be guaranteed….http://www.bbc.co.uk/news/health-22998570

    zorro

  17. Terry
    Posted June 22, 2013 at 6:09 pm | Permalink

    Helicopter Ben has just realised how stupid and naive was his QE plan. Effectively, borrowing the way out of a recession that has been brought about by too much credit against too little and far too insecure collateral .

    Common sense should have told him that it is dumb to repeat the same mistakes of the past, expecting a different result this time around. Perpetual ultra-low interest rates have been the root cause of the problems and contrary to their anticipated effect, they have actually created a deflation environment.

    So we have and ex-Goldman Sachs Banker, providing almost unlimited credit at very near zero interest rates to his ex-fellow bankers at G-S and other such institutions. Whereas they were on scouts honour to lend that money to the business community, (who did not really want the extra baggage when sales were collapsing), the bankers adopted the safer route, buying up new Government Bonds and making a 300% profit in the process. (0.5% QE v 2% T Bond coupon). More recently it appears the banks are not satisfied with that ‘paltry return’ and have ploughed into the Stock Markets around the world. Before them it was the Commodity Markets.

    If anyone needed proof of this, it lays there on the front pages. Ben says he is slowing QE and what happens? The markets react adversely. His dire action and those around the world who emulated them have merely prolonged and exacerbated the inevitable agony that lies ahead.

    That is the continuation of the financial super bear market that started way back in 2000. And it is almost certain to bring down all assets with it. That is commodities, precious metals, stocks and bonds. This is the way Capitalism works and why Government should not tamper with it. Relieve the problems, yes but try to solve them with more money, NO!!

    Cash is going to be king, again. And after the muck hits the fans of the world, just how many bankers and Governments will put up their hands and admit they got it wrong? And how many will be punished for it?

  18. Richard1
    Posted June 22, 2013 at 11:22 pm | Permalink

    I congratulate you on the passing of two policies which you have recommended consistently in recent years moving from the fringe to the mainstream. The most important is that, following the Co-op re-capitalisation, it seems now to be accepted that UK banks will not in future be bailed out by the state, they will rather be restructured as any other insolvent business would be, by their owners and creditors.

    This development demonstrates that the Brown bank bailout and taxpayer investment in 2008 was completely unnecessary. Readers of this blog should note that John Redwood was I think the only(?) MP arguing this at the time.

    The second is the RBS break-up. It does seem pointless for the civil service to include ownership of commercial businesses such as a US commercial bank and an investment bank which would be worth more, and would be freer to act, in other hands. Again I think you have argued this for 3 years or so. (Obviously had a Co-op solution been imposed on RBS this wouldn’t be relevant as RBS wouldn’t be state owned).

    In the same week the Labour Party seems to have begun a retreat from its opposition to the Coalition’s policies on the deficit, on education and on welfare.

    It shows that in the end the right ideas will prevail. All we need is free media and calm and articulate presentation. Next target: ‘green’ policies.

    • Neil Craig
      Posted June 24, 2013 at 12:52 pm | Permalink

      Indeed, I also add my congratulations.

      It also shows that not holding a ministerial position, because it allows you to speak out, may actually give you more real power than many ministers who not only are prevented from saying what they would do but can’t see the wood for the trees of paper shuffling.

  19. Gary
    Posted June 23, 2013 at 10:59 am | Permalink

    We know know for sure gold gets manipulated. That is what the London Gold Pool in the 60s was all about. Bretton Woods was falling apart because govts do what govts always do and they were spending beyond their means and by doing so were inflating their currencies and the price of gold was rising to reflect this. So, instead of stopping the nonsense and cutting back expenditure and living within their means, they instead formed the gold pool and attempted to cap the price of gold by selling gold from the pool into the market when the price rose.

    Of course, they had the tiger by the tail and they were depleting their gold stocks trying to maintain the cap. Rueff, advisor to de Gaulle saw the writing on the wall and France sent a gunboat to NY to retrieve French gold. Shortly after that Bretton Woods collapses when the USA defaulted on their gold payment obligations.

    Now we apparently have a different ruse, same intent. Make the price of gold not the physical price but the derivative price, you can sell infinite amounts of paper gold to cap that, and also create gold ETF funds , which are also paper of dubious gold backing , and lure investors away from physical gold into paper gold ETFs. This worked a treat until gold went into backwardation and the paper price, the official price, became lower than the actual physical price, and arbs took advantage and bought paper gold but took delivery of physical gold, in various schemes. They are effectively getting $1 for $0.90 cents.

    This has set up huge imbalances and something has got to give. What exactly that is remains to be seen. There is no way markets can be rigged forever. History shows that this ends badly and it won’t be bad for gold. Gold has a 6000 years track record of winning. Sometimes all you need is patience.

  20. Lindsay McDougall
    Posted June 24, 2013 at 1:44 pm | Permalink

    “Surely it is good news if the world’s largest economy can soon manage without the artificial stimulus of printing extra dollars to buy its own debt.”

    Indeed yes, and the policy of QE, which is neatly summed up in that sentence, is and always was completely crazy. It creates only inflation, not real growth. This applies not only in the US but in the UK too. QE has had 3 motives (1) to encourage households to take on more debt in order to continue spending (2) to take advantage of the inflation generated to repay creditor countries in clipped coinage and (3) to prop up zombie banks that should be allowed to fail. All of these motives are disgraceful.

    “There is still a big bond bubble, but the western authorities will not want to explode that too dramatically yet.”

    The authorities do not owe protection to people who have bought bonds on the open market. It was their decision and theirs alone.

  21. Bazman
    Posted June 24, 2013 at 6:31 pm | Permalink

    Why do we need affordable housing? Whenever house are built they get sold so they must be affordable, but not the the ones who cannot afford them? They need to move to areas where they can afford them or find another way such as house sharing or a bedsit like what is expected of unemployed northerners who should also pay twice to support their families back home. Staying at home is seen as scrounging, so get on your bikes and stop expecting handouts because of where you live. Ram it.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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