Inventory? What inventory?

Does the lack of movement in published grain stocks invalidate any claim of a connnection between monetary policy and food price inflation?

New York journalist and one-time economist - Paul Krugman - thinks so. He doesn't see an "accumulation of inventory." Higher inventory would suggest hoarding, an important "signature" or marker of speculation. This point about inventory is mostly directed towards wheat, which has seen an extremely sharp run-up in prices.

Since Krugman lives in New York, it is perhaps understandable that his knowledge of farming is a little limited. There is no such thing as data on inventory. The USDA produces a time series called grain stocks.

This number is not the same as inventory, at least not in the sense used by Mr. Krugman. This stocks number has very limited coverage, focusing mainly on government holdings of grain. The USDA produces these estimates largely by looking at grain reserves in the US and reading reports produced by other governments.

Debloating

The bloated banking system is about to shrink. What is the right verb to describe this process? To debloat, perhaps. So, lets conjugate...

I debloat;
you debloat
He debloats,
She debloats..etc

From the Mail.....

More than a third of the Halifax branch network faces closure by its owner Lloyds in one of the biggest bank culls in history. The move, which immediately sparked bitter criticism, would wipe out 550 small branches and 'agency counters' inside the offices of estate agents, solicitors and financial consultants.

It would cause huge job losses and intensify fears that the historic Halifax name may disappear completely. Altogether, the Halifax, once Britain's biggest building society, has about 1,300 branches.

This time it is different

Between 1964 and 2007, the UK fiscal deficit averaged 2.7 percent of GDP. Some years it was higher, others it was lower.

However, no government ever attempted to push the deficit into double digits.

Until now......

UK retail banks struggling to return to profitability

Optimism gets mugged in the dark alley of reality. UK banks, especially the retail ones, are still in trouble.

LONDON (Reuters) - Britain's banks are likely to see their battered retail arms slide to a loss in the second half of 2009, as the cost of bad loans, tough competition and wholesale funding continues to weigh, a survey by accountants KPMG found.

"Retail banking is just profitable at lower levels, but with rising impairments. It seems probable that it will fall into loss making in the second half of this year," KMPG said in its UK Banks Performance Benchmarking Survey on Wednesday.

David Sayer, head of retail banking for KPMG's advisory practice, said he was "slightly pessimistic" about the second half, though banks' retail losses could reverse in early 2010.

"It's not a catastrophic shift, but if you are slightly pessimistic on house prices, if you believe there is a lagged effect on unemployment, and therefore you believe bad debts on credit cards and personal loans will rise, then you believe a marginal profit will become a marginal loss," he said.

At last some sanity...

The government needs to reverse this foolish VAT cut as soon as possible

From the Guardian....

The Treasury dashed hopes of an extension to the government's VAT holiday tonight after the latest figures for public borrowing revealed a collapse in tax revenues and prompted City forecasts of a £200bn deficit for the whole financial year.

With the City taken aback by the rapid deterioration in the state's finances, aides to the chancellor, Alistair Darling, stressed that the Treasury could not afford the £12bn cost of the VAT cut for a second year and the tax would return to 17.5% from January 1.

The US government ends car scrappage scheme

The US car scrappage scheme has been overwhelmed with applicants. The scale of demand has forced the administration to stop the scheme on Monday, as it became clear that the $3 billion allocated to pay for the cash giveaway may not be enough.

Apparently, the scheme was "overwhelming and overnight success". Forgive my skepticism, but it is hard to see how a scheme designed to give $4,500 away to every car buyer could fail.

However, what happens next? The surge in demand will fade away, leaving car manufacturers pretty much where they started. The US taxpayer will be left with the bill for paying for the ridiculous scheme.

From the FT....

The US cash-for-clunkers car scrappage scheme has become a victim of its own success, with the government announcing on Thursday that the incentives will come to an end on Monday evening, just a month after they were introduced.

The decision was taken to ensure that payments under the scheme do not exceed the $3bn allocated by Congress. A senior administration official described the scheme as “an overwhelming and overnight success – so much so that we need to wind this programme down”.

By Thursday, the transportation department had recorded 457,000 transactions, worth $1.9bn in rebates.The official said that “the over-riding objective [in ending the programme] was to be conservative and to provide an adequate window for a soft landing”.

And why not.....

Retailers want a scrappage scheme for household appliances. Do you think the government might also give me a subsidy to replace my hair dryer. It uses lots of electricity...

From the Daily Mail.

Retailers are calling for the car scrappage scheme to be extended to washing machines, fridges and freezers. The British Retail Consortium (BRC) wants families to be given cash incentives to ditch energy-hungry old appliances for greener alternatives.

It said this could be done by removing VAT from energy-efficient machines, delivering a saving of 15 per cent. There are 15million fridges, freezers and washing machines more than ten years old in the country. If they were replaced, carbon dioxide emissions could be reduced by up to 1.3million tons a year by 2020.
New fridge freezers use less than half the energy of 1995 models, while today's washing machines operate effectively at lower temperatures. Modern dishwashers and washing machines also use less water.

B&B - huge losses for the taxpayer

I feel nauseous every time I hear the name "Bradford & Bingley". It is state-owned and it is, financially speaking, a stinking heap of toxic crap. It is not something that I can easily ignore since this mess now firmly belongs to UK taxpayers.

It has just announced a further £160 million of losses. Moreover, 40 percent of its mortgage book is now mired in negative equity. That is what you get when 60 percent of your loans were extended to buy-to-let and 20 per cent were self-certified loans.

However, I suspect that the B&B isn't something that can be safely filed away. It is not something that can be explained away as a past mistake. It As we move away from the terrifying events of September 2008, those commitments to tighten up banking sector supervision are being quietly watered down. Furthermore,We have yet to see a major overhaul of the FSA.

In short, five or ten years down the line, we could easily see another B&B turn up at the doorstep of her majesty's treasury, demanding a bailout.

Such complacency

Bernanke consistently got it wrong before the US housing bubble burst. Now, he is pumping up the money supply to revive the economy. Since his judgement has been so poor in the past, does anyone have any confidence that he is getting it right now?

UK house price to earnings ratio converging to long run average

According to the Halifax, the long run price to earnings ratio is almost exactly four. Currently, the ratio is 4.33, falling from an all time high of almost six.

The Halifax ratio was calculated using ₤36,576, which is apparently the national average wage for a man in full time employment. (I will let the obvious sexist implications of using that measure pass). The average house price is estimated to be ₤159,623.

What do you think? Is the crash over, and the boom about to begin? Should we believe the Halifax numbers?

Loan shark who charged 2,437 per cent

Obviously, Mr. Kiely didn't hear about the Bank of England's zero interest rate policy. From the Telegraph....

John Kiely, a loan shark, was branded a "ruthless individual" by a judge in Manchester as he was jailed. Kiely, 36, was sentenced to five years at Manchester Minshull Street Crown Court for offences including blackmail and illegal money lending.

Judge Adrian Smith told multi-millionaire Kiely: "It's clear to me you are a ruthless individual who has displayed a high degree of criminal sophistication." Kiely charged up to 2,437 per cent interest on loans and used an army of enforcers to collect debts owed by poor families on Manchester housing estates, the jury that convicted him last month heard.

One of his victims, Donna Ockerby, 45, claimed she was left fearing for her life and was forced to move to a secret location to escape him. Kiely was convicted of two counts of blackmail for his actions towards her.

Mrs Ockerby, an auxiliary nurse, borrowed £300 from "Johnny Boy Kiely" to pay for her wedding dress in January 2007 because she was "absolutely desperate", the jury heard. He dispensed the money from a roll of £20 notes from his black Range Rover, complete with the personalised number plate "B0Y".

Mrs Ockerby said she faced aggressive demands for money when she struggled to repay her debt because her working hours were cut. On one occasion Kiely turned up unannounced at her semi-detached house and grabbed hold of her. Another time he turned up and banged on her door early in the morning, the court heard. Mrs Ockerby told the jury she feared for her life when a concrete block was thrown at her window just hours after a debt collector called.

Oh no, not expenses again

I groaned when I saw this story about Lord Taylor and his apparently "non-existent" main residence. Have we become numb to the abuses perpetrated by members of the Lords? I suspect we have....

From today's Times....

A TORY peer received more than £70,000 in parliamentary expenses by making claims that were apparently based on a “non-existent” main home. Lord Taylor of Warwick claimed he lived with his sick mother in the Midlands until 2007, allowing him to claim overnight expenses while attending the House of Lords.

However, inquiries by The Sunday Times have established that his mother’s home was sold in 2001 and she died in the same year. The findings raise serious questions about the probity of Taylor’s expense claims and are likely to prompt an investigation by the House of Lords authorities or the police.

I really should be more grateful to banks

Yesterday, I received the following comment:

Alice handily ignores the increased quality of life brought to everyone in the UK over the past decade through the substantial contribution to the country's GDP by the financial services industry.

Net-net, this effect dwarfs the amount the Government will have spent re-capitalising the banks... it wouldn't surprise me if the UK taxpayer actually turned a profit when Northern Rock and RBS are sold off.

But don't let facts stand in the way of your vitriol Alice

I have been feeling pangs of guilt all day. Have I really been so ungrateful for all the wonderful things that the financial sector has done for me during the last 10 or so years? Will I be the lucky beneficiary of the bail-out as NRK and RBS are sold off for a profit? Oh, I do hope so.

But what of the relationship between the financial sector and GDP growth? Have I, buried deep in a pile of vitriol, missed the "substantial contribution" to the country's GDP generated by the financial system?

The financial sector can generate real increases in GDP in three ways. First, it offers an efficient payments system. However, banks have been doing this effectively for at least a century. Very little additional GDP was generated in the last 10 years because banks clear cheques and handle inter-bank transfers quickly.

Second, banks help finance investment, which increases the productive capacity of the economy and generates higher living standard. However, the sad truth is that these days most bank lending goes on financing consumption and housing related speculation. Investment levels in the UK have barely changed over the last ten years.

Which brings us onto the third channel through which banks can affect GDP - they can finance consumption. However, this kind of lending simply transfers disposable income from the future into today. If I take a loan to buy a plasma TV. Consumption goes up today, and this is reflected in GDP. However, I have to pay the loan back and this means lower consumption and GDP in the future.

This is why the UK economy enjoyed such strong growth over the last decade. We were spending money we expected to get in the future. Banks allowed us to do this, and we built up a massive pile of household debt. In fact, this debt stock is so high that banks can no longer rely on us to pay it back. This led to many of our banks sliding into insolvency, leading the government to commit 90 percent of GDP to clean up the mess.

For this, anonymous wants me to feel grateful. Sorry, I can't do it. Instead, I am angry about the excesses of the past that have led to this sorry state of affairs. I am fearful for the future because of the cost that the bank bailout will impose on my standard of living.

You can call that vitriol if you want, but that is how I feel.

The taxpayer put money in, and the bankers take it out

I think I am going to become a communist.

While taxpayers were pumping in uncountable billions into the US financial system, bankers took out multi-million dollar bonuses. How on earth could that be justified? If it wasn't for taxpayers, these banks would have been forced into bankruptcy.

At least in the US there is sufficient transparency to ensure that taxpayers know they have been ripped off. How many UK bankers in loss making banks received multi-million pound bonuses, generously financed by UK taxpayers?

From the Financial Times.

Citigroup and Merrill Lynch, which together lost $55bn in 2008, paid bonuses of more than $1m to a total of 1,400 employees, according to a New York state report on Thursday on bonus payments by banks propped up with taxpayer funds.

The study, compiled by Andrew Cuomo, New York attorney-general, showed that JPMorgan Chase and Goldman Sachs, which both finished in the black last year, paid the most million-dollar bonuses - 1,626 and 953, respectively.

However, the totals at a profitable bank like Goldman were nearly matched by two of the year’s biggest losers on Wall Street. Citi, which suffered a $27.7bn loss, paid million-dollar bonuses to 738 employees. Merrill, which lost $27.6bn, paid 696 bonuses of $1m or more.

Lets roll those loaded dice

There is something deeply disturbing about this chart. It shows that mortgage approvals have picked up over the last four months. While lending activity hasn't yet reached the levels seen during the bubble, there is no doubt that banks are returning to the housing market.

This chart is disturbing because mortgage lending is the only credit market that has seen a pick up in activity. Credit to the corporate sector is contracting. Firms are, on a net basis, actually paying loans back. Things aren't much better for consumers. Interest rate spreads on credit cards have actually increased, and consumer credit growth is close to zero.

So why are banks ready to return to the housing market and at the same time abandon other credit activities? Well, I have my answer. This is a classic case of moral hazard.

Regardless of what the government said in public, the recent bailout had only one objective in mind - put a floor under house prices. The liquidity support and the guarantees were all aimed at stabilizing the housing market. In effect, the government offered to insure banks and their property speculating clientele. The message from Brown and Darling is clear - "we will support house prices no matter how much it will cost".

Banks have picked up on this commitment. Bankers understand all too clearly that the government didn't offer any real support to corporate or consumer lending. Only property matters. Therefore, it is rational for banks to return to mortgage lending while at the same time, cut back on other credit activities.

With this huge de facto insurance contract in their back pocket, banks are cranking up another housing bubble, and it is happening with the financial support of the taxpayer. Moreover, as recent RICS data suggests, there is army of potential house buyers out there ready to dive in and speculate again on property prices.

It is the rational response. After all, we have a government that is ready to guarantee that no one will lose if they speculate on housing. If there are any losses, the government will ensure that the hapless taxpayer will pick up the bill.

Quantitative easing - what next?

Edmund Conway of the Telegraph today.....

As Charlie Bean, deputy governor of the Bank, has said repeatedly on his tour of the UK to explain the unusual monetary medicine, it may take as many as nine months to show its full effects. But so far the results have hardly been encouraging. The fact is that the vast majority of this money is being funnelled into banks' reserves – the cash they keep with the Bank of England – and is not finding its way out again.

According to data from the British Bankers' Association, the level of reserves held by major banks rose to £110bn in June, compared with £27bn before quantitative easing began. Indeed, a full 3pc of total banks' assets are now sitting in reserves – a proportion not seen since comparable records began in 1987.

What is alarming is that something very similar happened in Japan, when it experimented with quantitative easing. The Bank of Japan poured cash into the system but it was merely soaked up by the zombified banks, where those who managed them were too scared of losses, under-capitalisation and the threat of collapse to do anything other than put it under the figurative mattress.

We can't keep spending like this.....

During the boom years, Brown boosted public expenditure dramatically. Between 2004-8, New Labour increased the budget by 28 percent. In 2005 alone, the budget increased by over 8.1 percent.

When the economy was growing at 3 percent, Brown could plausibly argue that these increases were affordable. Today, he has no such defence. The economy is shrinking, yet New Labour have just kept on spending. This year, the government plans to increase expenditure by a staggering 6.5 percent, while next year, it will grow by a scarcely credible 8.2 percent.

The UK economy simply can not afford these extraordinary increases in public expenditure. Something has to give, and come the next election, it is likely to be Brown. The UK electorate simply will not stand for this kind of wanton recklessness.

We were warned

"Growing domestic and international debt has created the conditions for global and financial crises".

Bank for International Settlements, 2005

Bank interest rate mark-ups increase to a 20 year high

Well, someone has to pay for those bonuses.....

At last - a chart for estate agents

According to the RICS, there is an army of buyers out there, ready to jump into the property market and stabilize prices. Estate agents are inundated with enquiries. In fact, the volume of enquiries is actually higher than during the bubble years.

Hungry buyers, the lowest interest rates in 400 years, and a government committment to stabilise house prices at any cost - that sounds like a recipe for a housing bubble.