Sleepless nights

Here is a chart that should give everyone sleepless nights. During the last fiscal year, public expenditure amounted to 47.1 percent of GDP. Revenues, on the other hand, were only 37.2 percent of GDP. That left a hole in government finances amounting to a staggering 9.9 percent of GDP.

Here is the funny thing about government finances; although snotty economists might tell you otherwise, government finances are not a difficult to understand. There are four concepts one needs to grasp; revenues, expenditures, debt and deficits.  Moreover, it is all just common sense.

If expenditure is higher than revenues, then the government has a deficit and it must borrow to meet the shortfall. If countries keep running up deficits, then the overall level of debt will rise. That will work for a while, so long as creditors are willing to cover your shortfall. However, if a country keeps increasing its debts, at some point creditors might call time. That is what happened to Greece, Ireland, and Portugal. It is as simple as that.

How does a country escape from a deficit of almost 10 percent of GDP? The least painful option is economic growth. If GDP is rising faster than expenditures, then over time, the expenditures to GDP ratio will fall. Revenues are also closely linked to growth. If GDP is growing rapidly, then so are taxes. This of course, assumes that expenditures are kept under control while GDP and tax revenues are growing.

Sadly, the UK economy is barely growing. Instead, our much beloved coalition must rely on more painful methods to balance the books. It must either raise taxes or cut expenditures. Osborne has already hiked VAT. He has also started the painful process of downsizing the government.

But what about this man Keynes? Didn't he have a grand old theory about spending your way out of a recession? Well, the previous government tried that trick and it didn't work. Hard to say what went wrong, and in the grand scheme of things, it doesn't really matter. The plain facts are that the UK has a huge deficit, government debt is exploding, and this can't go on forever. The economy is not growing and therefore a return to fiscal sustainability will be painful.

The Treasury proposes a new framework for financial regulation

The Treasury has just produced a paper outlining a new framework for financial sector regulation. The paper proposes three new innovations:

• A new Financial Policy Committee (FPC) will be established in the Bank of England, with responsibility for ‘macro-prudential’ regulation, or regulation of stability and resilience of the financial system as a whole;

• Micro-prudential (that is, firm-specific) regulation of financial institutions that manage significant risks will be carried out by an independent subsidiary of the Bank of England, the Prudential Regulation Authority (PRA);

• Responsibility for business regulation will be transferred to a new regulator - the Financial Conduct Authority (FCA). The FCA will have responsibility for conduct issues across the entire spectrum of financial services.

The strategy has at least two commendable features; the Financial Services Agency will be, for all practical purposes, abolished. As such, we are witnessing a rare example of insitutional accountability. The FSA's failure is being justly punished.

Second, the Bank of England is now back in the driving seat. It has primary responsibility for overseeing the financial system. In practical terms, it is a return to the pre-1997 position, thus unwinding the nightmarish Brownite experimentation in financial sector supervision.

However, on more substantive regulatory reform, the strategy is disappointing. Instead of promptly pushing for higher capital and liquidity requirements, the strategy has placed its trust in Basel III - a multi-lateral approach to enhancing financial sector regulation.

We are likely to wait a long time for an international consensus for tighter capital and liquidity requirements. It would be far better to circumvent these tedious discussions, act unilaterally and decisively strengthen our national regulatory framework. The government should propose higher mandatory capital and liquidity requirements.

Bankers will inevitably complain that tighter regulation will reduce UK financial sector competitiveness. There are two ripostes to this argument. First, the UK is excessively dependent on financial services. We need to diversify, and some downsizing of the city of London would be no bad thing. Second, tighter regulation might have powerful reputational effects, strengthening UK bank balance sheets, which might limit some of this loss in competitiveness.

In any event, tighter regulation is needed in order to avoid a repetition of the 2008 financial crisis. The sooner the government acts to constrain reckless banking practices, the better.

Unprovable counterfactuals

Economic policy over the last two years was one huge Keynesian experiment. The fiscal deficit was pumped up, allegedly to prevent an apocalyptic depression. Can we see any evidence that this massive fiscal expansion had any practical impact on economic growth? In a word, no.

Despite this historically unprecedented policy intervention, real GDP collapsed in 2008. For six straight quarters, the economy contracted. There was a modest and decidedly anaemic recovery last year. Nevertheless, the economy remains about 4.5 percent smaller compared to its previous peak.

Nevertheless, there is the unobservable counterfactual. Deficit junkies argue that while it is true that the economy contracted as the fiscal deficit exploded, the contraction would have been even greater if the government had not tried to support demand.

It is an unprovable claim. Nevertheless, it remains a durable one. There are few economists who are prepared to come forward and admit that the Keynesian experiment was a disaster. It did nothing for growth and bequeathed a massive debt stock that will impoverish future generations for decades.

Perhaps things are really showing down

The Q4 GDP number looked like a weather-generated aberration. My view, for what it is worth, was that the UK economy would recover quickly this quarter. While I thought growth would continue to be anemic, I also believed that the UK GDP numbers would crawl into positive territory.

However, a couple of recent stories have recently made me reconsider this optimism.

First up; Primark....

Primark, the discount fashion retailer, warned of a "noticeable slowing down in UK consumer demand" in a further indication that Britons are tightening their belts.

Then, there is UK property lending....

State-backed lenders Royal Bank of Scotland and Lloyds Banking Group, the two largest European commercial property lenders, cut loans by a combined £14.5bn, stated Bloomberg. HSBC and Barclays reported a drop of £2.7bn pounds. The four banks lent £199bn between them, according to financial statements published this month.

Then there is the q4 growth downgrade. The UK economy actually shrank by 0.6 percent rather than 0.5 percent, as was previously announced.

Gross domestic product (GDP) fell 0.6pc quarter-on-quarter, the Office for National Statistics (ONS) said, a bigger drop than its initial 0.5pc estimate that had shocked markets.

After an unprecendeted fiscal expansion, near-zero interest rates and a £200 million helicopter drop of cash, the UK economy is again slowing. Only this time, it is slowing with a rapidly rising inflation rate. The post-crisis expansionary policy stance was always folly. It was unnecessary. It was never going to provide any support of economic growth.

Why? Loose monetary conditions always leads to higher inflation. Loose fiscal policy destabilizes expectations. The private sector, when it sees large deficits and rising government debt, expect higher future taxation. Therefore, they cut back on current consumption depressing growth.

Sadly, recent economic data seems to be bearing out sorry but entirely predictable scenario.

The terrible tyranny of public debt dynamics

Debt charts can often scare the crap out of you. If the line heads upwards, dark images of financial ruin and bankruptcy come to mind.

David Miles, external MPC member, produced this alarming picture in a recent speech. It highlights the UK debt-to-GDP ratio since the middle of the 19th century. If one includes the debts of recently nationalized bank, the current debt to GDP ratio stands at 150 percent. It must have had the audience nervously searching their handbags for the Valium.

Actually, that number is a little too alarmist. There are assets that one should place against those bank liabilities. The real level of public sector indebtedness is closer to 70 percent. Still, there is something shocking about that number. In the space of three years, the public sector debt has doubled as a percent of GDP.

Apart from the recent reckless rise in government borrowing, this chart points to a deeper truth about public debt. It warns us about debt dynamics and how a comparatively short period of fiscal irresponsibility can create decades of trouble.

To see why, consider the situation in 1914. The UK government had a comparatively low level of indebtedness. Along comes the First World War, and borrowing shoots up. Public sector debt continues to rise during the great depression. Who would have expected that? The interwar governments were actually Keynesians, borrowing to pump up the economy, with dismal results in terms of higher economic growth. Yes, the economic history of the interwar period is highly politicized and often grossly misrepresented.

As the second world war approaches, governments re-establish a degree of fiscal prudence, Debt levels start to fall, and economic growth picks up. However, borrowing again increases sharply during the second world war. By 1945, the debt to GDP ratio is at 250 percent.

After the war, it starts to decline, more or less continuously for 60 years. By the middle of the last decade, the debt-to-GDP ratio returns to pre-1914 levels. The punchline? It took almost one hundred years to work off the debt accumulation incurred during the first world war.

This chart illustrates the appalling tyranny of debt dynamics. Once a country accumulates a lot of debt, it has to use a large proportion of its future taxes to service that debt. With a huge chunk of taxes eaten up by interest payments, governments have strong bias towards higher fiscal deficits, and a continued accumulation of debt.

Higher inflation doesn't help in the long run. Nominal interest rates increase in line with higher inflation. The only way to pay down the debt is to run fiscal surpluses. That means cutting back expenditure and hiking taxes.

This is why the UK economy is in such a dangerous position right now. The debt ratio is rising rapidly. As we accumulate more debt, more of our future tax payments will have to be set aside for higher debt servicing costs. This means less money will be available for future social expenditures.

This is why arguing against an upfront fiscal consolidation is so dishonest. Those people who argue for an aggressive expenditure cuts today understand debt dynamics. We realize that the best way to preserve public expenditures over the long run is to maintain balanced public sector budgets. Every pound of debt avoided today, means more money available in the future for education, health and pensions.

At last, some good news about fiscal policy.

At last, we have some good fiscal news.

In January the government actually collected more tax than it spent. Tax receipts came in at £58 billion, some £6.4 billion higher than January last year. At the same time, government expenditures were £50.5 billion, just over £2 billion higher than last January. Collections on wealth and income related taxes were particularly strong.

Of course, January is always a good month for tax collections, and a single month doesn't make a trend. Let's keep the pessimism under control. The numbers were better than expected, and we should be thankful for that.

Finally, we can dare to hope that the public sector accounts might begin the long road to recovery.

Stop worrying about single mums, it is time to tackle corporate welfare

Welfare dependency isn't just confined to the inhabitants of our inner-city sink estates. Corporations also do nicely out of government largess. Unfortunately, corporate welfare was more difficult to detect than the stroller-pushing single mum in the high Street.

Nevertheless, things changed radically last year. Shortly after the election, the new coalition instructed ministries to publish data on expenditure over £500. We now hae extraordinary database that reveals in startling clarity that many firms now depend on handouts from the government.

Take, for example, the Ministry of Energy and Climate Change. Between September and November last year, the Ministry handed out almost £60 million in grants to private sector firms.

The language used in government accounting lacks a certain clarity. Nevertheless, the meaning of the word "grant" is clear enough. It is not a loan to be repaid later. It is a handout.

The Ministry of energy's database also provides a tantalising hint about how this money is used. The bulk of these handouts go on "asset creation". Perhaps I'm wildly wrong, but I doubt that these "created assets" will eventually belong to the public sector.

Judging by the names of the firms and a casual search on the Internet, many are working in the newly-minted climate change industry. Suddenly, one sees the environmental issue in an entirely different light. There is money to be made and government grants to receive if the climate change fear factor is ratcheted up. I always knew that the environmental lobby was vocal, but I didn't realise how expensive it had become.

Of course, there will be those who will justify this expenditure in terms of the global threat posed by CO2 emissions. I have no strong view on climate change; I am ready to be persuaded. However, I know two things. First, CO2 emissions are up 20 percent in the last decade. Second, two thirds of an increase is due to China. Those generous grants from Ministry of Energy will have absolutely no impact on either of these two trends.

But never let a few awkward facts get in the way of a government handout.

Back on the welfare reform trendmill

Haven't we been here before? Didn't the previous Labour government promise benefit reform?

Yesterday, David Cameron was before the cameras promising yet another welfare reform Bill. The grand idea behind this latest initiative seemed strangely familiar. The complex network of welfare benefits will be replaced by a single universal credit. There will also be hard-hitting new sanctions to punish those who want to remain idle.

Cameron's main sound bite was that he was ''finally going to make work pay - especially for the poorest people in society." Sadly, that quote provoked a deluge of pedantry from me. "There is only two kinds of work" I said ” paid and unpaid work, the latter being better known as either slavery or housework".

Anyway, I have left the pedantry in the kitchen. I am now before a computer and back on the theme of benefits. There isn't the slightest possibility that Cameron's welfare bill will reduce the numbers receiving financial assistance from the state.

The benefits debate has always been framed around the conflict between providing incentives to work and poverty alleviation. If the state provides a minimum level of income to the poor, the incentive to work is reduced. If the state introduces sanctions against the work shy, poverty increases.

At the margin, changing the rules behind welfare payments will affect a small number of the unemployed. Tighten the rules and some will return to gainful employment. Weaken the rules and more people will stay at home and watch the atrocious yet strangely compelling Jeremy Kyle show.

Incentives isn't really the problem; the key problem is the appallingly low productivity levels of the urban poor. The vast majority of people on benefits do not possess the necessary aptitude or skills to acquire a job in the mainsteam economy.

This wasn't always true. Fifty years ago, the country was full of factories which could offer people with limited capacities a place where they could perform menial tasks for a modest yet reasonable income stream.

Unfortunately, all those jobs have relocated to the developing world, where people are willing to do those repetitive and menial tasks for a fraction of what low skilled British workers are prepared to accept.

The obvious riposte to this argument is that benefits keep UK wage rates high and therefore act as a disincentive to the unemployed in accepting lower wage rates. This is absolutely true but isn’t the point.

How far would UK wages have to fall in order to attract back to Britain all those factories that left over the last 40 years? The answer, obviously, is that wage rates would have to fall to close to those currently paid in the developing world.

If the UK benefit system were abolished tomorrow, there is a fair chance that unskilled wages could fall sufficiently far so that unskilled British workers are competitive with their developing world counterparts. The obvious implication would be that the living standards of these newly employed Britons would also be comparable with those in the developing world. In other words, many UK cities would be transformed into the kinds of slums that one sees in the developing world.

When this obvious point is made, it usually generates a lot of sanctimonious nonsense about education. If only more money was spent on tooling up the unskilled, then welfare reform might work.

Policy makers in the developing also know about the importance of education. Those same unskilled workers that took those factory jobs are also acquiring new skills. The bar is being raised. It would take an unacceptably high amount of public investment in education in order that British low skilled workers acquired sufficient levels of productivity to effectively compete against their counterparts in the developing world.

Therefore, welfare benefits are the cheaper option. In effect, we are paying for the pretence of living in a competitive modern and thriving economy. Some parts of the UK economy are doing brilliantly. At the same time, there are large sections of the potential workforce are woefully uncompetitive.

Deep down, most of us know this sad reality, which is why we are prepared to tolerate the outrageous amounts of money that is devoted to keeping the unskilled from starvation. We complain and moan about the work-shy, we angrily demand welfare reform. Politicians like Cameron respond to this clamour, and deliver us a feast of anti-benefit rhetoric. At time same time, we wink at the politicians, “Don’t take us too seriously” we hint. After all, “we don’t want to turn London into Shanghai”.

The monetary miracle is over

One should never underestimate the importance of luck. For almost a decade, the Bank of England proved to be very fortunate. It managed to simultaneously keep interest rates low, dramatically increase the money supply, and at the same time meet its inflation target.

How did it pull off this monetary miracle? The chart above provides a comprehensive explanation. It breaks the CPI inflation rate down into two components; the rate for services, which are mostly produced domestically; and rate for goods, which are almost entirely imported into the UK.

As the chart illustrates, prices for domestically produced services have grown fairly consistently at between three and four percent a year. This is far in excess of the Bank of England's inflation target. Prices of goods, on the other hand, were falling between 2000 and 2006, exerting powerful downward pressure on the aggregate inflation rate.

The reason for this negative inflation rate for goods is well understood. China industrialised, and exported huge quantities of clothes, footwear, and electronics. Prices for these items fell massively. In contrast, domestically produced prices increased rapidly in response the the extraordinary surge of Bank of England inspired monetary growth.

For many of us, this inflationary dichotomy between its goods and services will ring true. Anyone who regularly hired an accountant or chose to educate their children privately will be familiar with the four percent a year price hike.

So, it is fairly easy to see how the Bank of England got away with loose monetary policy and low inflation. Nevertheless, there is a more intriguing question embedded in this chart. To what extent did the surge in goods prices trigger a financial crisis?

To see how the turn-around in import prices might have precipitated the crisis, it is worth remembering how monetary policy worked in the past. In previous decades, rapid credit growth would have quickly fed through into prices. Eventually, interest rates would have increased, credit growth would have subsided, the economy would have slowed, and eventually inflation would have moderated.

This didn't happen in a decade before the crisis. Credit exploded while the overall inflation rate remains subdued on account of cheap imports. The Bank of England didn't feel obliged to raise rates, and the credit bubble just kept on growing.

Unfortunately, the old trade-off, like an unwelcome relative, returned in 2006. Inflationary pressures were building in the East,and import prices began to increase.

There were tentative signs of trouble in 2005. The Bank of England made a half-hearted attempt to raise interest rates to stem inflationary pressures. But the monetary policy committee took fright when it saw the property market weaken. Rather than tackle the growing inflationary menace, the committee buckled, reduced the bank rate and gave the housing bubble a new lease of life.

This weakness before the inflationary enemy resulted in renewed price pressures. In the early months of 2007, the Bank of England and its sister institutions in the US and Europe, were belatedly hiking interest rates.

This changing policy stance was sufficient to expose all the poor lending practices and financial sector abuses that had built up through the previous decade. Many banks, particularly small ones like Northern Rock, had cut interest margins to the bone and jacked up their leverage ratios. The slightest perturbation of interest rates and the financial system was in deep trouble.

The rest of the story you know.

So here we are - four years on from the crisis - and inflation has hit 4 percent, and it is likely to go higher. The Bank of England now believes itself to be trapped. It fears to raise interest rates on account of what it thinks a rate hike might do to the frail recovery. As for dealing with inflation, it has no strategy. There is no plan, just a vague hope that somehow things will turn out alright in the long run.

In fact, there never was a plan. The only thing that kept inflation down for ten years before 2006 was luck and a flotilla of Chinese cargo ships packed full of goods.

Pulling away from the fiscal precipice

The last couple of days, I've been raging about inflation. This is partly in anticipation of this week's Inflation Report. Doubtless, the report will contain the usual incoherence that we have come to expect from the Bank of England.

On fiscal policy, I have been more muted of late. I am quietly hopeful that the coalition's fiscal consolidation plans will pull us from the precipice. Perhaps I'm being too blinkered, but I really don't care one way or another about David Cameron's disappointment in multiculturalism or his vision of the big society. For me, if he manages to save us from fiscal disaster, then he has my support.

Gordon Brown would have had that support too, if he had been more true to his earlier rhetoric of prudence and an end to boom and bust. Personally, I don't much care for political parties, but I care passionately about policies.

Large, unsustainable fiscal deficits are frightening. They always represent a victory of short-term political expediency over the long term needs of the nation. deficits are about pandering to the electorate without considering the long-term implications of irresponsible fiscal policies.No sensible person would blow all their savings or accumulate huge debts in a mad frenzy of spending. The same is true of the governments.

Any government that continues run up large deficits and accumulate debts will sooner or later reach the threshold when it can no longer borrow. When that point is reached, the adjustment back to fiscal balance will be violent and disorderly. The expenditure cuts will be brutal, with little consideration for the usual niceties such as protecting the poor and maintaining key public services such as health and education.

This is why I find all this whining about the coalitions expenditure cuts so irritating. Of course they will be painful, but it is better to administer these difficult decisions while financial markets are still willing to keep credit lines open.

How cheap dresses and fancy shoes led to the financial crisis

Fashion has never been cheaper.

Since 2000, the ratio of clothes and footwear prices to hourly earnings fell by almost 60 percent. Around half of that decline was due to the direct effects of lower prices; the other half came from higher nominal wages.

This chart illustrates this spectacular fall in the real price of clothing. It also demonstrates the extraordinary structural change that has occurred in the world economy over the last 10 years. There was a time, and it wasn't so long ago, that Britain had a textile industry. That industry has all but disappeared. Instead, all our clothes are produced overseas, mostly in East Asia, particularly in China.

This chart doesn't just highlight the disappearance of a single British industry and the rise of China as an economic superpower. It also explains how the Bank of England made some profound errors in the conduct of monetary policy. The bank wasn't looking too closely at the sudden profusion of style around Threadneedle street or the meteoric rise of Jimmy Choo. If they had noticed, they might have avoided the greatest economic and financial disaster for generations.

As clothing and footwear prices fell, it should have provided powerful downward pressure on the overall price level. Yet throughout the last decade, consumer prices continued to increase.

Until 2006, that increase was around 2 percent a year. Although this inflation rate doesn't sound too serious, it obscured huge shifts in relative prices. If clothes prices were falling sharply, other items had to be going up in order for the overall inflation rate to be two percent. In reality, cheap Chinese imports were hiding a lot of inflation.

Low headline inflation lulled the Bank of England into a false sense of security. It chose to ignore the fact that cheaper imports were distorting true underlying inflationary dynamics. Since the headline inflation rate was within its mandated target of two percent, all was well with the world. Therefore, the only sensible thing to do was to reduce interest rates to historically low levels.

This provoked a borrowing frenzy. The primary destination for cheap credit was the housing market. The Bank of England couldn't fail to notice the double digit increase in house prices. However, it argued that it wasn't the job of a central bank to target asset prices. The CPI was the thing that mattered, and that was under control.

Despite this neat excuse, the borrowing frenzy wasn't just confined to the bubblicious real estate sector. Lower interest rates also encouraged households to fund consumption expenditure with a huge increase in personal debt. Flat screen TVs, new cars, home extensions, and extravagant holidays to Asia were all funded by cheap loans from high street banks. Behind all this debt accumulation was the Bank of England, with its low interest rates, and a belief that inflation was under control.

Then, it all fell apart. There is no need to recycle the sequence of events that led to the financial crisis. It is suffice to say that from 2007 onwards, banks failed and households either could not or would not continue borrowing to finance consumption. Aggregage demand crashed, and GDP fell through the floor, taking a sizable chunk of tax revenues with it.

As the crisis unfolded, the Bank of England impotently tried to revive the economy with lower interest rates. Despite the dramatic cuts in the bank rate, the UK economy dived into the deepest recession since the war. The Bank of England was also suckered into resuscitating the banks, who quickly sucked in huge amounts of taxpayer’s money. Before you could say "Clements Ribeiro makes nicer dresses than Georges Chakra" every major economic indicator was pointing in the wrong direction.

What was it that drove Britain into this sorry mess? Superficially, it looks like interest rates. Search a little deeper and we see that for 10 years the Bank of England ignored the fact that clothing and footwear prices were falling in absolute terms. Instead, they focused on the aggregate price index and an inflation target that was almost certainly too high. This negligence gave them the justification for excessively low interest rates.

This chart has a twist. Since the beginning of 2009, clothing and footwear prices are no longer falling. In fact, over the last year, clothes and footwear prices have increased by two percent. While this is lower than the overall level of inflation, it points out that the Bank of England can no longer rely on low wages in China to keep UK inflation down.

Those days are over.

Good end-December production numbers for the UK

Nothing to worry about; the UK economy is still in recovery mode. The q4 GDP number, which showed a 0.5 percent decline in activity, was almost certainly a blip.

Today, the ONS printed the December production index numbers. They looked pretty good to me.

Here are the highlights:

• Year on year, overall production output in December 2010 was 3.6 per cent higher than in December 2009.

• Total manufacturing output increased by 4.4 per cent in December 2010 compared to the same month a year ago.

• Output increased in nine of the 13 sub-sectors and fell in four sub-sectors.

The food price shock - lets talk timing before we blame the weather

Over the weekend, I wrote a post on the recent surge in world food prices. Happily, it turned up as a link on a number of websites, so was one of my more widely read pieces. The post argued that the recent food price shock was primarily due to the world wide decline in interest rates.

This isn't a terribly popular view. The prevailing wisdom says that world food markets have undergone a radical structural change. On the demand side, Asia is growing, both in economic terms and waist bands. The continent is munching on burgers and pastries and it now firmly on the road towards obesity; a path that Western economies have been treading for nearly half a century.

There have also been a couple of well publicised supply problems. Certain commodities, such as sugar, and to a lesser extent, wheat have suffered bad harvests. As a practical matter, most of these shocks have been quite recent are therefore likely to affect future rather than current supply. Nevertheless, these poor harvests have been described in apocalyptic terms. The end times are near, and judgement day will soon be upon us. Climate change has wrecked agriculture from the Russian steppe to snowy mountains in Australia.

To summarize, there are three parts to the conventional view; higher world demand, supply shocks, and climate change. How seriously should we take these arguments.

Lets pick the easiest off first - climate change. I am fairly agnostic about whether the world is warming up. I just don't know. I am not a meteorologist. Nevertheless, I know one thing. This process, if true, will take many decades. Climate change won't burst upon us in six months and wreck our food supply.

The Asian demand argument is also unconvincing. Why? Take a look at the chart above. It traces out the UK CPI price index for all food items, divided by average earnings. This chart tells us how much food costs in terms of the price of UK labour.

The chart tells us that between 1996 and 2007, food in the UK became a lot cheaper relative to labour. There could be some honest debate about the precise turning point. Nevertheless, the chart points out that food prices rose sharply relative to UK wage rates as soon as the financial crisis took hold. So where is the Asian growth story in this picture. I would say it isn't there. Asia was growing rapidly throughout the decade before the crisis and food was becoming cheaper; much cheaper.

Now, I know that this chart is picking up a lot of other things; like the sterling depreciation, and the recession. My point is just about timing. Just to make that point one more time, could Asian growth explain that chart.? Could the weather in Russia or the floods in Australia? Call me a weathergirl, but I don't think so.

The last argument - the supply shocks - is the most difficult. There have been shocks, and prices should rise in response. The issue is one of magnitude - should these shocks have generated double digit increases? All commodity prices are on the rise, including those that have experienced no such supply shocks.

Supply shocks are in the mix, but it is monetary policy that is baking the inflationary pie. There is lots of liquidity pouring into commodity markets. Speculators are doing their thing; responding to incentives, and trying to turn a buck. Meanwhile, the rest of us are paying more for our food.

Land Registry confirms falling prices

(click on the graphic for a larger version)

According to the Land Registry , UK property prices dropped by 0.2 percent in December - the fourth successive monthly fall in prices.

Nevertheless, the Guardian helpfully located the few remaining bubble boom towns.

Lots of good stuff

Just click...


"I helped cause the financial crisis, and I'm sorry."

"The perception among the general public is that mortgage salespeople were sleazy, greedy and immoral. This was partly true. I worked with some people who would have sold their own mother to make a buck. I literally knew of drug dealers who had gone into mortgages because it was less risky and more profitable than selling cocaine."

New York Times discovers that corporations pay little or no taxes

I am shocked by this revelation -

"Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent."

The Davos Horror show

Personally, I am still recovering from the shock of Davos. The Peterson institute has a nice piece that has the measure of the event.

"In terms of public policy, the big players in the financial sector have prevailed—no responsible European, for example, can imagine a major bank being allowed to fail (in the sense of defaulting on any debt). And this government support for banks has translated into easier credit conditions for the major global corporations represented at Davos."

"The public policy issue of the day, from the point of view of such CEOs, is simple. There needs to be sufficient fiscal austerity to strengthen public balance sheets—so that states can more effectively stand behind their banks in the future, and to keep currencies from moving too much."

Where is the rage?

First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic.

In 2000, suddenly among the richest people in Europe,the Irish decided to buy their country–from one another. After which their banks and government really screwed them.

So where’s the rage?

There is no rage because everyone was implicated. There are many victims, but there were far too many perpetrators. Thank you to Dearieme for the link.

Iceland right, Ireland wrong

On his second day as head of Iceland’s third-largest bank, Arni Tomasson faced a crisis: The firm he had been asked by regulators to run was out of cash.

Michael Lewis on the Politicians That Sank Ireland

“In an era when capitalists went out of their way to destroy capitalism, the Irish bankers set some kind of record for destruction.”

The Next Global Banking Crisis Is 3 Years Away

Its commodities, stoooopid.....

Let's start in 2011. The world is in a three-speed recovery, with Europe at the bottom, the U.S. in the middle, and Asia growing between 6 and 10 percent. If you're an investment bank looking for high returns, where do you look? The fastest gains are in the hottest markets, and the hottest markets are in the developing world. In particular, commodities investments (gold, silver, platinum, rare earth metals, oil) have soaked up lots of excess global money supply and central banks have dropped their interest rates. Commodities-rich economies like Russia, Brazil and the rest of Latin America have been key beneficiaries.


The victory of the bulb

“The best way for government to boost energy efficiency isn’t to micromanage by picking winners and losers, a job better suited to free-market innovation. It is to set a reasonable standard — miles per gallon or light per watt, for example — and let the market sort it out,” spins the editorial in support of picking winners and losers.“ That’s what Congress did in 2007” in banning the bulb.

War is Peace. Freedom is Slavery. Ignorance is Strength. Banning is choice. Regulation is freedom.

UK house prices slip again

Today, the Nationwide printed its first house price number for the year. It was a bad one. Year-on-year, property prices are down 1.1 percent. Compared to December, prices are down 0.5 percent. It was the sixth consecutive month of declining prices.

A trend has now emerged; banks appear to be less willing to lend into the property market. As the credit has stopped flowing, prices have started to slip. In short, we seem to have entered a second credit crunch.

UK property market is weakening

Recently, there have been a string of new numbers pointing to a weakening UK property market. The latest was mortgage approvals. On a seasonally adjusted basis, approvals in December fell. Year on year, the flow of new credit to the housing market is down about £2 billion. That is a big number. In December 2009, monthly mortgage approvals were running at £8 billion; in December 2010, the number was just £6 billion.

Banks are again tightening credit. A new and more gentle credit crunch seems to be underway. It is less dramatic that the post-Lehman crunch. Nevertheless, it points to a further near term weakening of property prices.

UK property market; less than two percent of post codes report a price increase

More evidence of a weakening UK property market; in January less than two percent of postcodes saw an increase in home prices.

(Data is from the Hometrack January 2011 report)

The interest rate hike is on its way

A rate hike is looking more likely. Here is Martin Weale, the newest member of the Monetary Policy Committee, writing in the Guardian.

As we cast our votes at the January meeting of the Bank of England's monetary policy committee – ahead of last week's GDP figures – I saw a compelling case for an increase in the bank rate.

My concern is that, if businesses and pay-bargainers come to regard an inflation rate of 3%-4% as normal, it will become more costly for the MPC to keep inflation close to the government's 2% target.

The longer inflation stays above the target and the further it rises, the greater the risk that inflationary expectations will become built in.

A rate hike at the next MPC meeting looks very likely.

UK property market; sellers now offering 9 percent discounts

The January Hometrack report provided plenty of evidence that that the UK housing market was again weakening. Sellers are, on average, offering a 9 percent discount on asking prices.

In fact, asking prices have been sliding since early summer last year.