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Portugal: The next chapter

Stephanie Flanders | 12:15 UK time, Wednesday, 12 January 2011

The Portuguese government almost certainly has the ECB to thank for being able to borrow 10 year debt from the markets this morning at an interest rate of around 6.7%.

A Portuguese broker talks on the phone in Lisbon

But even with this auction, most now consider it a question of when, not if, Lisbon will join the list of eurozone governments turning to Europe and the IMF for emergency support.

Today's much anticipated auction will come as a relief. But Portugal's government needs to borrow around 20bn euros from the markets this year - a big chunk of it in the first few months. It is not plausible to anyone that they will finance that debt at an interest rate even close to 7%.

By my (very rough) reckoning, its long-term cost of borrowing needs to move below 6%, for it to have a chance of stabilising the stock of government debt relative to GDP within the next few years.

You might wonder what the fuss is all about. Like Greece and Ireland, Portugal represents a tiny fraction of the eurozone economy, and the eurozone bailout facility - the EFSF - has plenty of money in the kitty to back a joint IMF-European support programme that could keep Portugal from needing to return to the markets for a few years. The figures mentioned have been in the region of 50bn euros.

As I said on the Today programme this morning, European policy makers - and investors - worry about a Portuguese bailout, not because of any inherent concern for that country, but for what it symbolises - and for what might happen next.

The key point is that Portugal is not an outlier. Its government has borrowed more than it should, and delayed a bit too long in getting on top of that borrowing. The upcoming election is producing some unhelpful mood music on that subject. But even a year ago, you would not have said that its fiscal position was inherently unsustainable. It is not Greece.

Yes, Portugal's banks are being kept afloat by the ECB (like Ireland's have been in the past year). But they do not have a mountain of bad private debt sitting on their balance sheets. It is not Ireland.

As Robert Peston has described in the past, Portuguese banks would need to be re-capitalised as part of any bailout. But they have been made weak by lack of confidence in government debt: the contamination runs from the sovereign to the banks. This is not an Irish situation, where toxic private sector assets have contaminated the balance sheet of the government via a sweeping sovereign guarantee.

No, Portugal's problem is that whatever issues it has with its banks and its public borrowing are being greatly magnified by the country's weak prospects for growth.

The consensus forecast is for the Portuguese economy to shrink slightly in 2011, after very meagre growth in 2010. By contrast, Germany is expected to grow by at least 2.5% in 2011, after growth of around 3.6% in 2010.

If the Portuguese had that kind of recovery to look forward to, the world would have been a lot less interested in the results of today's auction. And investors would not be placing their bets now on a pre-emptive show of support for Portugal's much larger neighbour, Spain.

It would be easier for everyone if Portugal looked just like Greece - or Ireland. But it doesn't. Arguably, it has more in common with other countries on Europe's periphery that are being held back by a lack of confidence in future growth. If the markets are right, a Lisbon bailout is a matter of time. But after Portugal, it becomes more difficult to draw a line in the sand.

Comments

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  • Comment number 1.

    OK, what I don't understand about these Portuguese bonds is this:

    The interest rate on bonds goes up if investors consider them to be risky, right? So if prices are heading up towards 7%, then that suggests that the market things there is a risk that Portugal will default on its debts, right?

    Now I know Portugal has its problems, but I'm puzzled by why anyone would think there is a serious risk that they would default. Greece & Ireland haven't defaulted on anything, have they?

    It seems to me that what we've learned from what happened with Greece & Ireland is that the rest of the eurozone won't allow its weaker members to fail, and if the excrement hits the fan, then a bailout will be forthcoming.

    Surely that should mean that the government bonds of any eurozone country are an exceedingly low risk investment, right?

    But clearly it doesn't. What am I missing here?

  • Comment number 2.

    The interest rates are not too bad really. The rest of us should be paying similar rates really as the present ongoing financial destruction in the UK and elsewhere is being compounded by the insane base rates/ discount rate policies.

    I really can't understand why the market is still allowing the BoE (aka the Fools of Threadneedle Street) and the Fed to get away with it. Both the UK and the USA will have to raise rates soon to counter inflation.

  • Comment number 3.

    So a bailout is inevitable then. The policy of austerity (Micawber moneynomics) is failing so when the bailout surfaces what will Portugal be obliged to do? - more austerity and even worse growth prospects. One day the 'Europenny' will drop on policy makers and maybe they will try something different.

  • Comment number 4.

    Good old Portugal, our oldest ally in Europe, the fact that they have managed to sell their bonds will give us hope too. The interest rate of 6.7% reflects market rates, it won't be long however before our bonds yield 6.7% too and our savers get some respite from the entirely artificial rates of 0.5% set by the policy wonks at the BoE.

    Inflation is heading for 7% here why should savers put up with losing 5% per annum and have to pay tax on interest too.

  • Comment number 5.

    Where you are missing is the countries don't generate enough revenue to service the debts at these interest rates. If they fail to grow their way out of trouble the difference gap between the revenue they have and the revenue they need will grow.

    Currently they are just rolling the debt over, like a giant game of musical chairs. However investors are spooked it's clear that soon the music will stop and there won't be enough chairs for everyone (or in actuality any of them). So the more risk averse investors are trying to exit the market and the less risk averse want a higher interest rate to compensate for the possibility they won't be paid back. With every increase in the interest rate the end moves closer.

    The only thing that is keeping this orderly is the ECB buying the debt and backstopping the price. This is a very dangerous game as taken to it's logical conclusion the ECB will be financing all the debt of some of the sovereign members.

    Does the ECB really have the money? No and the losses it currently bearing (and that it is hiding) are truly eye watering.

    The danger comes at the point the bond buyers decide that the European Emperor has no clothes. Thats our pension funds by the way.

  • Comment number 6.

    Portugal will take a bailout after their election.

  • Comment number 7.

    Portugal does not only have to rely on GDP to finance its debt.

    Portugal does not have to refinance its debt.

    As with all nations, it can sell its real assets to pay off its debt.

    In the same sense that the United Kingdom began a round of privatization in the Eighties, that started to sell everything it owned, so too does this become the prospect for Portugal, Ireland, Greece etc.

    Now the question is, who wants to buy its real assets? Who will buy the land and the forests and the rain that falls on Portugal? Who can afford to buy it?

    Why, Germany of course. They are currently through the ECB creating a debt from Portugal to Germany, which can be repaid by selling Portugal to Germany. What will actually happen is that German companies and German investors will move into Portugal to set up factories, holiday resorts, etc. You think this has been done? It has, to some extent.

    And of course, not only Germany need buy Portugal. There are many people from Hong Kong, who are effectively capital investors from China, who know Portugal because of Macau, who will be happy to buy chunks of Portugal. A pleasant Mediterranean getaway from the hurly burly and pollution of modern China. It sells itself.

    This endless focus on Euro-bond financing is the usual short-sightedness of journalism, underwhelming the ability of the public to analyse and predict future outcomes. In that sense, journalism does not serve the public interest, but journalism serves the public ignorance.

  • Comment number 8.

    Portugal's problem is that, whatever other issues it has, are being greatly magnified by the country's weak prospects for growth.
    The ECB threw Portugal a lifeline by buying up its bonds, as market pressure mounted for Portugal to request an international bailout. Germany, France and other eurozone countries are pushing Portugal to seek an EU-IMF assistance program, like Greece and Ireland. The ECB appeared to be buying Greek and Irish bonds too, but not yet Spanish debt.
    Spanish Economy Minister Elena Salgado said Portugal did not need to apply for aid because it was meeting its commitments to reduce its budget deficit. In fact, it has worked extremely hard to reduce its deficits. The EU Commission said NO discussion was currently under way on assistance for Portugal or any other country. Economists however, feel that it is only a matter of time before high-deficit Portugal, with its stagnant economy, has to seek aid.
    Portuguese banks are facing a peak in their refinancing needs - January and February. It seems that it would be rational for Portugal to call for external help sooner rather than later. European finance ministers are due to consider a more comprehensive response to the continuing debt crisis (not just Portugal) at their next monthly meeting on Jan.17-18, 2011.
    A German Finance Ministry Spokeswoman said Portugal was NOT on the agenda, but that exploratory talks had begun.
    — Implementing austerity measures to reduce fiscal deficits (already on track in Portugal);
    — Completing the strengthening of the European financial system with tougher bank stress tests due in this quarter;
    — Implementing structural economic reforms of labor markets and pension systems on which the European Commission is expected to make country-specific recommendations this week.
    The toughest item on this agenda is the filling up of the financial basket because of German resistance to increasing the size of the 440B euro European Financial Stability Facility (EFSF). Berlin has also opposed allowing it to be used more flexibly to provide standby credit lines, buy government bonds, or fund bank recapitalization before a country hits the skids.
    Portuguese Prime Minister Jose Socrates has said Portugal has no need of outside assistance because it was ahead of schedule in reducing its budget deficit. Socrates, who heads a minority socialist government, is stubbornly digging in his heels.
    Why?
    He is mindfull, as are most Portuguese, of the traumatic history of Portugal's two International Monetary Fund rescues (after its return to democracy in 1974). The memory of the IMF's involvement, in 1977 and in 1983, is scratched onto Portuguese brains. Many Portuguese remember the loss of sovereignty and the hardship the country went through.
    My final, and perhaps most important question, is this:
    Is the ECB (EFSF) skittling to plug sovereign debt funding in order to really assis the PIIGS, or is it skittling to plug sovereign debt funding to stop the Chinese from doing likewise?
    The more I digest information, the more I wonder about American intervention to keep the EU away from its, Achilles' Heel, the ever-growing, reserve-rich China.

  • Comment number 9.

    #5, @ayshf_m

    OK, so what you're saying is that although Greece & Ireland have been bailed out by the stronger eurozone countries, that system of bailouts isn't sustainable as the dominoes continue to fall, right?

    You're saying that the markets are worried that at some stage, bailouts simply can't continue and a country like Portugual will indeed have no choice but to default on its debts?

    I must say I struggle to get my head around this. There's an element of self-fulfilling prophecy about it. If everyone believes that weaker countries will be bailed out if they fail, then they should be able to borrow at reasonable rates of interest, and they'll be less likely to fail as a result.

    However, if people believe that the bailouts will have to stop, then countries like Portugal will really struggle to sell their bonds, and you get into a downwards spiral.

    And what you're saying is that the markets look like they're following the second scenario?

    Does that about sum it up?

  • Comment number 10.

    Whilst there will be some relief for Portugal those who follow the markets more closely will notice that interest-rates went up a lot on the shorter-dated bond issued compared to last time.Also the relief is tempered by the fact that not only has she had to rely on Europes Central Bank she has also had to rely on a curious bond issue yesterday which I read about.
    However the real problems may begin if she accepts a bailout for as notayesmanseconomics points out look what has happened to Greece under one.
    "She auctioned just under 2 billion Euros of 6 month Treasury Bills and paid an interest-rate of 4.9%. If we stop and think we can see that Greece is under a rescue package effectively backed by Germany’s credit rating and yet if she borrows for 6 months she is having to pay some 4.4% more as an interest-rate than Germany would have had to.So whilst commentators can debate Greece’s position and whether such an auction is relatively better than the last the reality is that investors are unwilling to lend her money at an interest-rate which would indicate they feel the bail out is credible and remember they are only loaning the money for 6 months!"
    So Greece with a bailout is worse off than Portugal who hasnt had one! Ireland with a bailout is worse off too..No wonder she is trying to avoid it.
    http://notayesmanseconomics.wordpress.com

  • Comment number 11.

    The ECB could easily fund the deficit spending needed to stimulate the growth needed to get out of the hole caused by private debt fueled growth and the fall in consumption paying off private sector debts.

    5% of Eurozone GNP in 2009 was about 600Billion Euros...distribute it to all Eurozone members on a per capita basis.

    That blows 20Billion out of the water.

  • Comment number 12.

    JfH the natural rate of interest is zero.

    http://bilbo.economicoutlook.net/blog/?p=4656

  • Comment number 13.

    People forget there is a real economy, one where people are responding to a perceived reality about where the future will be for our children, and confuse this with fiat economics. This confusion rules, and a prosperity for civilization isn't contemplated. Portugal should jettison the fraudulant economic ideas which resulted in thier troubles. Does debt mean they have to keep obeying these ideas? Or will they assume the stance of the South American countries of ten years ago. Where is the flexibility in this debt? Do you all have to think alike?

  • Comment number 14.

    • 1. At 12:32pm on 12 Jan 2011, DisgustedOfMitcham2 wrote:
    What am I missing here?
    You’re missing the Germans.

    The only way out of the folly is printing money to satisfy debt that ultimately cannot be paid. Trouble is everyone thinks the Germans won’t allow it, as it devalues the currency. Hence the interest rate (risk of default).

    But in the end Q.E. will prevail.
    The ECB will print money and give it to Ireland, and then print some more and give it Greece, Spain, Portugal et al.

    If Mervyn King can bypass article 104 then so can the ECB.
    The ECB simply doesn’t have somebody with great uncle Mervyn’s talent that’s all. Perhaps we could rent him out for a month or two.

    It will be stuff the prudent, and fire up the press, irrespective of whether the Germans like it or not.

    No Q.E. = No bailout
    No Bailout = No Union
    No Union = No need for Euro Politicians

    There’s an awful lot of stored energy in a moving train.
    And the Euro gravy train is the mother of all trains.

  • Comment number 15.

    Well, Germany is not a role model. Wait and see what really happens in Germany this year. Also, Germany is almost purely export-oriented, with little domestic demand (wages etc. have gone up minimally in comparison to all other Eurozone countries in the last 10 years). This is partly the problem for Portugal and other such countries. Germany's export surplus translates to Portugal's (and the others') deficit, to a significant degree.
    Have you looked at how much of the Irish debt is held by German banks, by the way? The Deutsche Bank in particular is guilty here - they have also been rated the biggest banking risk worldwide, apparently.
    Yet Germany continues to preach 'save, and ye shall be saved'. Where is the much-needed domestic growth to come from in Portugal and the other countries? Where is the much-needed tax revenue to come from? The neo-liberal economic ideology is truly bankrupt, and we are seeing the clear results of it in the current situation. You just cannot run a national or international economy as though it were Auntie Jane's corner shop.

  • Comment number 16.

    12. At 2:01pm on 12 Jan 2011, RNG wrote:

    JfH the natural rate of interest is zero.
    ~~~~~~~~~~~~~~~~~
    Interseting POV. One with which I sort-of-agree.

    Being a simple soul, I still think of money as a store of value. And value as a combination of usefulness and "remaining entropy". e.g. a bridge has more value than a pile of rocks beside the river. But the pile of rocks has higher entropy. However, a bridge between two parts of the same field, disconnected from any transport system, fails the usefulness test. This "usefulness" may be approximated by demand.

    For Portugal, like Britain, like all other nations, the issue seems to be that if you borrow, you have to spend wisely.

    And spending wisely means increasing value - building bridges.

    Because there is then more value, there needs to be more money issued to represent this extra value. This extra money supplies the premium that was requested by the lender as the price of the loan.

    If there is more money issued, but no more value created, then the only result has to be the devaluation of the currency. And the rate at which the currency devalues has to be re-couped by an interest rate charged by the lender.

    Now, I ask myself, in what way can the Portugese Government spend its new loans to increase the value of Portugal? What are the most useful investments? Solar stills for fresh water? Better Airports? Nuclear Power Stations?

    Or will it consume the loan supporting its peoples' lifestyle?

    Or worse yet, will it consume the new loan paying interest on previous loans that were frittered away?

    In any case, the requirement for Governments to "run a deficit" in order to maintain current levels of consumption looks like a tail-spin, to this puzzled mushroom.
    ~~~~~~~~~~~~~~~~~~~
    PS. Didn't we just get all ansty a few weeks ago becase we were charging Ireland 5% for their bail-out. I am puzzled why 7% isn't being thought of as "worse than an Irish bailout" crisis level?

  • Comment number 17.

    1. At 12:32pm on 12 Jan 2011, DisgustedOfMitcham2 wrote:
    What am I missing here?

    I think we are all missing the role of the GEMMS in this.

    Investment banks that underwrite the issue of this debt. i.e. they have control of the price at which the debt is eventually issued.
    Add in a dose of naked short selling prior to the issue. Price goes through the floor. Big Big money to be made.

    Barclays Capital, that highly successful British Investment bank are proud of their international role in government Debt issue.

    Have to say the above is all speculation on my part.
    Alledgedlies all round.

  • Comment number 18.

    So, had Portugal failed to get a reasonable rate or had the sale failed, it would be an indication of the weak economy and the lack of confidence in the market. Had they sold at a good rate, it would be an indication of their weak economy, and the reliance on a bailout, ie. a reflection of the rate available to Germany. Seems to me that you had this article written before the sale, then topped and tailed it to reflect whatever transpired. This isn't journalism, it's an opinion piece, at best.

    Given that any bail-out could potentially see investors getting burned and carrying part of the can, this is actually quite a decent rate for the bonds sale. But, like yesterday's piece on the US, economics reporting finds itself sexy nowadays, and knows that it needs Hollywood style plots to stay in headlines. The incredible variance in direction of the speculation shown on this site, reflecting perfectly the variance amongst the professional economists, demonstrates that economics is just hocus-pocus.

  • Comment number 19.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 20.

    Government and consumer bond holders' prices always rise when interest rates are low according to economic history.

    When interest rates are 'artificially low' for too long then the bulge of investment will over-heat bond markets, in all areas of investment?

    Combined with added inflationary taxation by Cameron & Co., - their only option is the usual Conservative way out of inflation - increase interest rates - therefore bringing down the temperature of bonds.

    Unfortunately, for Cameron & Co there is no excuse to raise interest rates as there is no wage inflation as their usual reasons. However, price inflation caused by the following may be enough:

    A whole new world that Britain's government have to re-consider on indirect taxation such as fuel duty increase and VAT @ 20% increase on top of more taxes.

    Tax on top of tax - is that legal under EU Law?

    Come April, another fuel duty rise with VAT @ 20% on top of that tax.

  • Comment number 21.

    I think that comment ten by Peter David Jones makes a very valid point. The countries that have gone into the so-called rescue scheme have seen their circumstances deteriorate rather than improve...This has happened to both Ireland and Greece.

    This means that Stephanie is wrong to say "It would be easier for everyone if Portugal looked just like Greece - or Ireland" as that only implies it would be easy to fail again. Maybe easier for her but not for Portugal.

  • Comment number 22.

    It is funny that a substantial devaluation of sterling has had negligible impact on the UK's borrowing costs. Presumably, this is because the loss has already been paid by existing bond holders. New debt is probably a good bet because there is a higher chance than 3 years ago that sterling will appreciate over lifetime of new bonds.
    Nonetheless, based on the opportunity cost of holding existing bonds purchased a few years ago, before sterling devaluation, investors in UK bonds have lost out. So the UKs ability to raise new debt, is not affected by existing bond holders losing out a bit on their investment.

    Portugal cannot devalue. But it can restructure. The problem is that restructuring (steeling a little from existing bond holders) also loses the confidence of potential new investors (i.e. if they can restructure now, they can in the future).
    Is there then a way to restructure now to such an extent that it actually makes new debt issues look much more attractive to new investors? Probably not.






  • Comment number 23.

    Plan A: Governments try to pay down debt by increasing tax and cutting spending. Result the economy contracts, taxation falls and Gov spending is forced up. It seems self deafeating.

    Plan B: Governments keep borrowing and hope economies keep growing. But debts will rise, yields will go up, and sooner or later Governments will be in an even worse situation than now and have to follow Plan A.

    But why should that surprise us? It is just the reverse of what has been happening for 100 years at least - public and private institutions have borrowed without having any idea when or how, the money was going to be paid back. But as long as the music played and borrowing could produce "growth", then what was borrowed yesterday could be paid for (plus interest) out of today's earnings. So it was called "sustainable". But any fool could see it couldn't go on forever. Now we are nearing the end of the road where we will have to pay down debt and accept that the economy will contract. The cycle is going into reverse.

    Who is to blame? We are, for voting in Governments who promised us that the good times would keep on rolling. Not enough of us were ever willing to vote for a party which talked economic reason, hence none have existed - at least not in my time.

    I favour paying down debt even faster than proposed - the sooner we get this thing done, the better we will be. But at the same time, we will have to share the reducing cake more evenly. Job-sharing, longer working life, lower benefits, and, since we won't be able to afford it, less education, less health, less defense, less police and on and on.

    Happy New Year.

  • Comment number 24.

    It seems clear that Portugal is on life support.

    Because of its failure to invest in new industries over the past 10 years, it is stuck in a spiral of debt deflation with no obvious exit route.

    Its main sources of income are tourism and the export of paper/cork - neither of which are likely to produce the levels of growth needed to halt the decline. A global recession does not help.

    The best Portugal can hope for is a major shake-up of the Euro whereby national currencies are restored to run alongside the Euro. Businesses could choose to trade in either currency. This would allow them to devalue their local currency and grow their exports. It would also give them the time they desperately need to fight their way out of debt.

    The Euro would in this way be a 'policing currency' which would stop politicians taking the easy option by firing up the printing presses.

  • Comment number 25.

    #12. RNG wrote: and
    #16. stillpuzzled wrote:

    "JfH the natural rate of interest is zero.!"

    what utter rubbish!

    The whole economic edifice of capitalism collapses if money is worthless. There can be no fiscal policy or macroeconomic policy and of course no monetary policy - none of them work at all and there can be no regulation or checks and balances in the market economy if money is worthless and what is more there is no reason to run a business if the product of the labour and capital lands up being worthless - you might as well just print some or borrow some as it cost you nothing! You both have been had by the banking cabal!

  • Comment number 26.

    23. At 4:21pm on 12 Jan 2011, GPWC wrote:

    ... 'Who is to blame? We are, for voting in Governments who promised us that the good times would keep on rolling. Not enough of us were ever willing to vote for a party which talked economic reason, hence none have existed - at least not in my time.'

    =====================================================

    What a good post - clear, succinct, and grounded in reality.

    Sure the voters are to blame. But what do you do when you are trying to work out which of the candidates is the most deceitful?

    If you're lucky, you choose a good candidate only to watch helplessly as manifesto policies are dumped.

    It's roulette - much like banking actually.

  • Comment number 27.

    The ECB expect China and others to step in and buy EU bonds ... and in return the ECB will make it even easier for China to pump its flood of exports into the EU /UK as destroying EU/UK jobs.
    The UK is caught up in every aspect of this fiasco ... until either the EU crashes and/or the Euro with it!

  • Comment number 28.

    In response to thankgodianwelsh, I would like to point out that Portugal has invested greatly in environmental technologies such as solar & wind power, where they are considered a leading player in some areas.

    Portugal has also produced the Magalhaes laptop computer which is to be given free to every schoolchild - these have been so impressive that foreign countries such as Venezuela have ordered hundreds of thousands of them.

    The wine producing industry has been modernised. Portuguese workers are highly regarded by overseas firms who have opened or expanded factories in Portugal, such as the German car manufacturers.

    Sure Portugal has problems - who doesn't at the moment - but not everything is as negative as has been painted.

  • Comment number 29.

    DisgustedOfMitcham2 #1 wrote:

    "OK, what I don't understand about these Portuguese bonds is this:

    The interest rate on bonds goes up if investors consider them to be risky, right? So if prices are heading up towards 7%, then that suggests that the market things there is a risk that Portugal will default on its debts, right?

    Now I know Portugal has its problems, but I'm puzzled by why anyone would think there is a serious risk that they would default. Greece & Ireland haven't defaulted on anything, have they?"

    The explanation of this apparent contradiction is that it is not necessarily because speculators fear that there is a risk of default that prices are low. It is merely that they are gambling that the price will go down further in the near future.

    They realise that other Eurozone governments are attempting to force the government of Portugal to impose austerity on its citizens by witholding support until they agree to do so, and expect this standoff to go on for some days yet.

    This is an insane policy. The creditability of any currency depends on its stability. The ECB cannot do its job of maintaining the stability of the euro unless it is allowed, indeed required, to intervene, using its infinitely deep pocket of euros, as the Fed or the BoE would, if there were a similar attack on sovereign bonds denominated in their currencies.

    If the governments of Germany and France feel that they have to be able to determine the economic policies of other countries, they must negotiate a new treaty which explicitly gives them legitimate power to do so, instead of risking the stability of the euro.

  • Comment number 30.

    I still think the the Bail-out fund is a self-fulfilling prophesy. The money is there so some countries are being forced to use it. Ireland only needed the bailout because there was lots of media attention on them when they had to issue bonds last year which drove the price up and lead to them going for the cheaper money. Portugal looks like it will be hijacked into a bail-out too at some point. Spain is clearly on the list too at which point you start wondering whether anyone else is on the list and if there is enough money in the fund's kitty to cope.

    I'll admit that Greece was broke and needed the money, but I still think that the other economies were victimised by the press and pressure in Germany to artificially keep the Euro strong. Letting the Euro weaken would mean they would make more money from exports and Europe would be cheaper for tourists. Imports would be more expensive but that should encourage their domestic industries to produce more goods in a more competitive home market.

    A strong Euro sounds good but it may not be as good as it sounds, even for Germany.

  • Comment number 31.

    I felt compelled to comment not on Stephanie's views but rather on comments posted today describing BoE as imposing an insanely low base rate. Despite all efforts we see credit granted in the UK far down, be it mortgages, be it to companies. Want more for your savings? 6.7% forced on Portugal is great and frankly without risk. Though re BoE it is not idiotic. Once we see credit expansion in the UK, house prices picking up, etc, may be that will be the time for a rate hike. The contributors who commented BoE policy as silly are using bad language without a sound or well thought through argument.

  • Comment number 32.

    28. At 5:30pm on 12 Jan 2011, 19Luso78 wrote:

    ... 'Sure Portugal has problems - who doesn't at the moment - but not everything is as negative as has been painted.'

    ========================================================

    Environmental technologies are expensive and will take many years to generate profits (sorry about the pun). Wine production is experiencing a worldwide surplus and profit margins are collapsing.

    Don't misunderstand me - I think Portugal has suffered greatly because of the flaws in the Euro. It is not the fault of the Portuguese people.

    The economics of the EU are damaging its members. Germany/France and Portugal/Greece/Spain operate totally different models. One is not better than the other - just different.

    I believe the structure is plain wrong and Portugal is suffering because of a dogmatic refusal to recognize that change is needed.

  • Comment number 33.

    Think of it like this. My son had a credit card, and silly boy spent it to the max. He could only afford to make the minimum payment each month. My son could equate to: Ireland,Portugal or anybody within the PIIGS.
    The cardholder sensed the opportunity to make more profit and kept on increasing the interest rate.

    They were not interested in the capital repayment,that money had been borrowed from somebody else plus they hold payment default insurance. So they bullied up the interest rate, their profit.

    The card holder is equal to the "market", borrowing somebody elses money at a peppercorn rate (probably from your pensionfund)and then selling that money on at 3or4 times the rate of interest originally paid.

    Returning to my son, I took over his card and started paying off larger amounts. Guess what! The monthly interest rate went up again, because I was reducing their profit.

    The markets quite simply use any excuse, perceived or real as an opportunity to "bully" up interest rates. They know full well and good that Germany does not want to lend large amounts to Portugal via the Bailout fund, so they are simply trying to work out the maximum painpoint(interest rate)that Portugal can pay before it goes to Dad(Germany)and asks him to take over the Portugese National Credit Card.

    Rest assured they will try this with Spain and Italy when their bond sales arise

  • Comment number 34.

    Speculators don't care about breaking Portugal, the Euro or anything or anyone else, if they can smell a profit.

    But why do we let them? I'm sure that most of us common foot soldiers from all across Europe who are receiving close to zilch on our bank deposits would love to buy into anything that offered us over 5 %!

  • Comment number 35.

    I have a novel idea - what about the people who borrow and cannot pay bay go bust?

  • Comment number 36.

    #31. Phil wrote:

    "describing BoE as imposing an insanely low base rate"

    OK Phil, here is why they are insane.

    First the BoE Base rate may be 0.5%, but... in the market if one considers the relationship between actual interest rates paid and offered a different market base rate emerges. vis savers can get 2.5% borrowers pay well over 3 to 4 % so the effective 'market base rate' in the UK is somewhere between the two say 3% ish.

    What this shows is that the BoE Has entirely lost control of interest rates in the market - something that had never before happened in its over 300 years of existence. The is why the BoE are insane.

    I have also ignored the effects of QE and bail-outs which actually reduces the effective BoE base rate to well in negative territory which makes their stance sillier, dafter and more insane still.

    Further inflation is well above 3% and they are supposed to put up interest rates to bear down on inflation to get it back to the 2% range. Have you noticed them doing this which they are expressly compelled to do under the Bank of England Act?

    The BoE is an aberrant organisation completely out of touch and failing the Nation now just as it did in the whole of the last decade.

  • Comment number 37.

    #35. truths33k3r wrote:

    "I have a novel idea - what about the people who borrow and cannot pay back(?) go bust?"

    Trouble with this is that the loans that will have to be written off are of such a scale and have been repackaged and resold so many times and are insured by so many credit default swaps that the whole edifice of capitalism may (will!) collapse - or that is what the banks will tell you!!

  • Comment number 38.

    Regardless of State, Country or Union. it's all a matter of time until the Credit "house of cards" fall.

    The PIIGS are simply being leveraged by the auctions to postpone the inevitable. China has backed the US, but dropped holdings of T-Bills to 800 $B. Are now buying (secretly or not, like the Russians did years ago & no one was wiser until years later ) commodities (Gold, Silver, other Strategic Metals ), along with the Bonds from Portugal, ( soon to be into the bond auctions of Ireland, Spain etc, if not already done or doing so. Someday the US will suffer the same, when no one wants the Dollar, as the World's Reserve Currency. Look at the Yuan & Ruble Exchange just implemented days/months ago.

    Love the BBC ! Doing a great Job, Steph !!!

  • Comment number 39.

    Some interesting comments.

    Our essential problem is that we are all in thrall the the money lenders. Where once the markets moved with sense, based on the real prospect of an asset's growth or weakness, they are now all gambling wildly, with no rational basis.

    I suspect that the traders are being whipped by their masters to try and generate the level of profit that they used to have, rather than the 2-3% that the world can actually support today.

    Anyhow the nett result is this panic driven movement in markets, based on rumour and desperation. Portugal is a case in point, as are current oil prices ( a small pipe goes down for a few days, global prices rise 3%).

    In this country, I understand JfH's point about base rates, but I suspect the the BoE, are not actually idiots, but simply aren't telling us the truth, for fear of the blind panic irrational market reaction. While the base rate has no bearing to the market rate, simply raising the rate to the market rate, won't bring everything into sync. Instead I see the lenders raising their rates by a simialr or larger figure, using the base rate as an excuse. This will put a lot , perhaps as large as 20% of the population out of work and homeless within a year, grapes of wrath styley, not a good recipe for the good of the Country as a whole.

    The effectiveness of interest base rates are so crude, that you can't be all things to all men, so instead a slow "inflate the debt away" process is being used to sort things out, and although painful for the non-inflation linked savers, will probably be better for the majority. Ultimately isn't this what the BoE should do - plan for the majority benefit?

  • Comment number 40.

    Perhaps the ECB could use the following system as a permanent solution to the Euro crisis. Each year it would allocate to each country in the Eurozone a 'Euro Borrowing Allowance' ('EBA'). A country's EBA would be assessed as the amount that the government of that country could borrow without straining its finances, using objective criteria depending upon the strength of its economy. Each government would be permitted to issue Euro debt up to, but not beyond, its EBA. Such debt would in effect be guaranteed by the ECB, that is by the Eurozone as a whole, and would enjoy a high credit rating & low rates of interest accordingly. Any other debt that such government wished to issue would have to be in a different currency, e.g. US$. It would enjoy no sort of ECB guarantee: on the contrary, one of the rules would be that non-Euro debt would be subordinated to Euro debt issued under EBA. It might therefore carry a higher rate of interest but that, & risk of default, would no longer be ECB's problem.

  • Comment number 41.

    No. 39:

    'Inflation' to cheat the domestic lenders.

    and

    'Devaluation' to cheat the external lenders.

    That's a neat strategy to get rid of your debts. The problem is of course that the lenders are not idiots - as the USA and Europe are about to discover.

  • Comment number 42.

    In response to point 39
    At some point in life your earning potential decreases and in retirement you hope to have enough money (and other investments) to pay future living expenses. For retired people, money is not just a unit of account or medium of exchange, but should hopefully be a means to store wealth. If they are lucky, the small amount of inflation needed to keep those in work on their toes to work smart to be able to justify a small pay rise each year, can be protected against by a low rate of interest paid by banks to temporarily reuse there savings some of the time.
    Why should sections of society with excess debt (e.g. government, banks, private firms, citizens with mortgage/credit-card dept) be given the bonus of low interest rates and higher inflation to help reduce their debts? Just because they are in the majority?
    Of course, it does make sense that goverment should frame policy to make the majority happy if they want to get re-elected; so your wish will probably come true.

    W.r.t point 41. Devaluation also cheats domestic lenders, since they could have invested abroad instead and would have been better off. So there is a loss for them. The fact that their unit of account (sterling) has devalued, and the nominal value of their UK investment is uneffected by the devsluation, doesn't mean that they have not lost wealth.

  • Comment number 43.

    @36 JfH.

    I keep wondering why. Why 0.5% when the Base Rate has never been below 2% before.? Why not 0.75% or even 1.0% ?

    What difference - to the economy and inflation - would it make if the Base rate doubled? I don't think it would make much difference at all - because of the "disconnect" with the markets.

    The only reason I can come up with is that 0.5% allows the retail banks to reduce interest on "everyday" deposit accounts to less than 1%. This allows the banks to rebuild their fortunes (as does QE) - paid for by the saver, who, because of low returns, are trying to save even more - Just the opposite of what Charlie Bean would like. Meanwhile, inflation rises.

    It's a game of economy "chicken". Will the great British public be forced to spend rather than see their savings eroded or will the MPC cave in when inflation reaches double-digits?

    It's crazy - the fools have taken over the asylum!

    Now back to Portugal - once a world power. Amazing!

  • Comment number 44.

    Sadly for Portugal it's not just a question of liquidity but more a structual problem of a weak or static economy that is unlikely to grow and therefore unable to afford to pay higher interest rates on it's ever increasing debt.

    If it was just a question of liquidity then why does Portugal not do a gold swap with the Chinese, as they would love to own more gold, but not sure they would want to buy Portuguese debt even at 7% in a currency that might devalue by 30%. However if Portuguese Govt's were back by gold then thats a more interesting scenario, which might explain why gold has come off 3.5% in the last few weeks. Perhaps Portugal is quitely swapping or even selling gold, lets face it they do have one of the world's largest reserves of gold and at $1360- 1410 an oz it would make sense.

    Or another alternative, perhaps the Portuguese Central Bank should open a US$ swap line with the Chinese so that the Chinese can dump their holdings of low yielding US Treasuries for higher yielding Portuguese debt. Then in turn the Portuguese Central Bank can dump the US Treasuries on the European Central Bank in exchange for euro funding.

    Finally for a more outragious answer to the Eurozone debt problem for Portugal & Spain perhaps the two Govenments should secretly talk to the South American countries and then announce one weekend that they are leaving the Euro to join a new trading block called the South American Peso along with all the countries in South America. However fat chance they could keep it secret so that's why it would never materialise but the ideal is worth exploring.

  • Comment number 45.

    @49 thankgodiamwelsh

    "'Inflation' to cheat the domestic lenders.

    and

    'Devaluation' to cheat the external lenders.

    That's a neat strategy to get rid of your debts. The problem is of course that the lenders are not idiots - as the USA and Europe are about to discover."



    Indeed. I am still amazed at the number of people that blithely recommend inflating away debt. It's even espoused as an 'advantage' of staying out of the Euro. Devaluation and inflation destroy economies, and are a measure of absolute last resort - long after IMF/bailout. Weakening the currency for Portugal would have the short term affect of wrecking debt sales (as buyers factor in inflation, even if they felt they could ever trust the government again). In the longer term it would only temporarily compensate for weak industry. Rival countries would buckle down and improve their cost base causing a repeat of events within 20 years, with Portugal needing to devalue to subsidise its uncompetitive industry.

    It's a sign of the scandalous way we treat debt that we're prepared to say to our creditors "that money you lent us, it's now worth 50% of its previous value" and then expect to continue to raise money. Devalue and inflate only when you never need to borrow from your own people or overseas investors again.

  • Comment number 46.

    FOR CRYING OUT LOUD!!!

    I'll invest my savings at 7% absolutely nil problemo. Does anyone in their right mind think that the EU is going to allow any country to default on its debt?? Even if there was some kind of restructuring they'll still offer me more than the bank ever will.

    Why, why, why aren't we having the MUCH MORE IMPORTANT debate: why isn't Joe Public able to fund this debt? The state sector would be better off and Joe Public would actually get a return as interest payments AS WELL as the services from the government.

    Why, why, why are we all being held over a knife edge by a handful of loony speculators working for the banks that manage our cash??? Ireland, for example, wouldn't be in the mess it is now if it wasn't for:
    a) Banks lending to the hilt and inflating the property bubble for private profit
    b) Banks interfering with local politics
    c) Banks in the aftermath of the bubble short selling government debt
    d) Banks failing to fund states that need Keynesian spending to avoid wholesale societal breakdown

    Isn't it about time that Joe Public should be being told that in all probability nothing is going to happen to the EU or Euro at all, and that the European stability fund is rock solid, and that they can be getting 7% on savings, instead of them being dumped into gold and food bubbles by manipulative fund managers!!!!!

  • Comment number 47.

    #44 chris plumb

    You've got to be joking. From what I have heard Chinese exporters are starting gradually to demand Euro payments instead of USD, and Brazil, as an exporter to China, might end up a recycling center for Chinese Euros.

    It would not surprise me if South American countries end up joining the Eurozone!

  • Comment number 48.

    43. At 06:50am on 13 Jan 2011, The-itinerant-ex-pat wrote:
    What difference - to the economy and inflation - would it make if the Base rate doubled? I don't think it would make much difference at all - because of the "disconnect" with the markets.
    __________________________________________________________________

    Good point and that applies the other way too. If the base rate was set to zero, all that would mean is that the central bank would not reward excess bank reserves at all.

    Doubling the base rates would however give banks and building societies the 'excuse' to push up retail rates despite the disconnect.

    Savers are being hit hard. I'm surprised they are taking the abuse so easily but perhaps that is the British way. Why don't they just take your money out and stick it into a Govt bond at 4.5% if they are just after an income?

  • Comment number 49.

    replying to 46

    why should Joe public be forced to pay for the failed economic policies of it's Government. If the Portuguese Govt. encouraged businesses to thrive in the country without taxing and regulating them up to the hilt then perhaps International companies would consider starting to use the cheap labour force and exports would increase. Until Portugal exports more and climbs up the European ladder then sadly it's going to have to pay 7% for it's money. Let's hope you get your money back after 2013 when bondholders will probably have to take a haircut.

  • Comment number 50.

    #48 EconomicsStudent

    Absolutely! (hence post 46)

    #49 Chris Plumb
    Pay? They'd be getting PAID! Why, if sovereign debt is a problem, and there are no other decent investments, don't you buy government bonds?

    Look at Japan - they're on the brink of debt deflation for over 20 years and how? Joey Nippon's got his cash with the government.

    Besides - these are not failed government policies we are dealing with here, they are failed markets. So countries with more social spending have a higher public debt to GDP ratio,but the private debt to GDP ratio is completely overlooked by the neoliberal media. Let's turn the tables: screw the public debt to GDP ratio: we know that can be funded by Joe Public (viz Japan) if the conditions are right - what we're really interested in is private debt to GDP. Result? The heartlands of free market fundamentalism start to look like wasteland. You tell me how the UK is ever going to "recover" with private debt at over 500% GDP (this is a fact)????

  • Comment number 51.

    The chickens are finally coming home to roost with these irresponsible high spending, high borrowing governments. Yet incredibly there are still some who deny reality and want to borrow even more money in the Micawberesque belief that 'something will turn up'. But we can all see that the only thing that is 'turning up' are the massive amounts these governments are having to repay every year because over the years their 'structural productivity' has been allowed to decay, relying far too much on the illusory gains in the financial sector. And these massive amounts are still increasing. Even under a Tory led coalition our debts are still racking up. What a stupid way to run a country.

  • Comment number 52.

    Even with a haircut, it's still a better deal than anything else apart from gold at the moment.

  • Comment number 53.

    Re 42.

    I'm not saying that inflation is good, or clever, nor particularly advocating it. However any alteration in market rates will affect various sections of the population.

    It's such a crude tool, and I can't see that there is any one rate that will make everybody happy.

    So the question is, if you had the power, and the responsibility for the health of the Nation, both short term and long term, what would you do?

    And could you live with the real life consequences of your actions?

    And in these times, how certain could you be that your decision would have the outcome you intended?

    It is not an easy decision to make, and whatever you do, it is guaranteed to upset and hurt a section of the populus.

  • Comment number 54.

    replying to 50

    I,ll stick with German and Swiss equities thanks very much, at least they have world class quality companies who's exports the rest of the world still demand in ever increasing amounts.

  • Comment number 55.

    #53 Crookwood

    The core of the problem is that for the last 30 or 40 years debt increases have been driving aggregate demand, and that the debt has been used for speculation, which drives up asset prices to bubbles, which then burst: the overall effect of which is that over the life of the debt fueled bubble, debt levels have increased while productivity has not.

    Because debt-driven consumerism has been the norm for 30 or 40 years, people have grown accustomed to it, and are surprised that the paradigm is ended. Just as it was in Japan, they are now stagnated in a daydream of potential "recovery" for over 20 years. The same has happened to the UK and the US.

    There is only one way forward: government funded investment in new infrastructure and technology (to disconnect from USD and oil), and private debt writeoffs, reductions, and any other policy that frees people from the results of the previous paradigm. Paralysis is the endgame of the debt-fueled consumerist way, so to move on means to move out: there's no moral hazard here.

  • Comment number 56.

    #54 Chris Plumb

    Yes but those German and Swiss equities depend on foreign investment to Portugal, Greece and Spain.

    Look at the German Balance of Payments - how is it possible that for 20 years they have huge trade surpluses but current account balances annually to nearly zero? Fritz has been spending his hard-won surpluses abroad. They don't want surplus-driven asset price expansion - they want employment and industry.

    Germany's surpluses have been partially to blame for the cheap availability of credit in the PIIGs up until the crisis, plus asset price expansion beyond the means of the nation in that nation.

    So, now German banks are up to the hilt with foreign investments in PIIG nations. Probably over a trillion euros worth if you total 20years worth of surpluses.

    What happens if you do over the PIIGs? Insta-crisis and Deutschebank goes Weimar Kaput meine freunde...

  • Comment number 57.

    25. At 4:56pm on 12 Jan 2011, John_from_Hendon wrote:

    #12. RNG wrote: and
    #16. stillpuzzled wrote:

    "JfH the natural rate of interest is zero.!"

    what utter rubbish!
    ~~~~~~~~~~~~~~~~~~~~~
    John,

    I think we are using different definitions.
    Savings vs loans.
    Me: Money as a store of value. (Previous earnings not yet spent.)
    You: Money as a promise to pay.(Future earnings being spent today.)

    Now, it puzzles me greatly that these two have been disconnected by the introduction of "Fiat currencies". But that is part of the confusopoly that makes it easier for the public to get shafted by the moneylenders.

    Rehetorical questions...
    Q. Is a day spent labouring in the fields last week less valuable than a day's labour in the fields today?
    A. Positive interest rates would say "yes".
    (Your savings will devalue over time)

    Q. Is a day's labour today more valuable than a day's labour next week?
    A. Positive interest rates would say "yes" again.
    (Your loans have to be paid back with interest)

    The existence of positive interest rates therefore produces a disincentive against either saving or borrowing, unless you happen to be a moneylender. (Big clue, huh?)

    Now, moneylending is a service, which has costs, and those costs need to be be paid (preferably by the customer of that service). But usury is not the only way to reclaim the cost of running a bank.

    So, yes, I agree with you, loans have to have a price...but mushroom is puzzled why we built "institutional devaluation of the currency" or "exponential growth in the net value of entire countries/the world" as the only two options in our existing currency system.

    With banks being the only people to profit from positive interest rates, the rest of the society is falling apart.

    As other posters have pointed out, what chance is there for joe public to buy these Portugese bonds and get a 7% return on their savings?

    As the old saw goes, "the problem with the rat-race is that the rats are winning."

  • Comment number 58.

    This is fascinating.

    Markets and economists clearly do not understand exponential growth as an engineer does. Growth (continual growth) is seen as the 'solution' but resources are limited and this approach is doomed to fail. Meanwhile lots of money is being made by storing up bigger and bigger problems for the future (derivative contracts for example that amount to more than the GDP of the world).

    As bigger and bigger countries in the euro zone are bailed (or baled, as 'bailed' has connotations of conviction and imprisonment) out, the cost falling on ALL countires in the euro zone (including those who have been bailed out) rises exponentially. Spain will be too big but by then 'self destructing' bonds will be invented that impose haircuts on purchasers but that will simply prompt the failure of the euro as a currency.

    When debts get too big, defaulting is the solution. And always has been. Growth will end up simply as inflation (i.e. negative in real terms) so that debt interest can be generated to pay off spiralling repayments as interest rates rise in sympathy.

  • Comment number 59.

    #56 Chris

    ...oh and just to add, that's another rock solid reason why there is not a snowball's hope in the underworld of a PIIG-based meltdown, not while Fritz and Pierre are at the helm.

  • Comment number 60.

    Re 36 "What this shows is that the BoE Has entirely lost control of interest rates in the market - something that had never before happened in its over 300 years of existence. The is why the BoE are insane."

    I would say naive rather than insane. There has been a change in the last month - the latest VAT rise is different from other inflationary pressures on a supplier's cost base. All the way up the chain, but excluding the retail customer, transactions are valued 'ex-VAT' and thus not negotiable. Lots of inflationary pressures have been suppressed and prices held down, but all the way down the chain. Now a further 2.1% increase appears as a step change but only affects the retail interface.

    The retailer is now forced into a price increase (which involves a lot of work) and so he makes sure 'the price is right'. Perhaps more than a 2.1% rise.

    So in February will be published an new inflation figure showing a 'step change' of +2.1% in the year on year figure for January 2011 amounting to about 5.5% CPI or 6.7% RPI. The control system known as the MPC must respond.

    As an engineer I can predict the behaviour of a properly regulated control system to a step change in the parameter being controlled. A good control system with integral action (if I recall correctly) would increase the bank rate today - to perhaps 1% or 2%. A less responsive control system would increase the bank rate next month - to perhaps 4% or 10% (as a 'minimum lending rate' it needs to be above market interest rates for loans to have any effect).

    It will be interesting to read the Minutes of today's MPC meeting.

  • Comment number 61.

    #43. The-itinerant-ex-pat wrote:

    "@36 JfH. ...the banks to rebuild their fortunes (as does QE) - paid for by the saver"

    I think you grasp what is going on. However the casino banks make most money from gambling and borrowers not from savers. It is the deliberate political choice of the BoE to discriminate against the small saver and 'steal the widow's mite'. QE is of course free money to the big banks and the low rate of interest is also necessary to make QE attractive.

    The one thing that nugatory interest rates and QE can't do is get banks lending to business and industry, particularly to small business and industry. Indeed low rate of interest have a negative effect on lending from the commercial banks' point of view - why lend at a low rate when the management costs of loans remain the same and the returns are next to nothing - particularly when your balance sheet is full of non-performing assets and you need to rebuild this - indeed when you are being encouraged to re-build your balance sheet by the same regulators who 'says' publicly they want you to lend! This is the contradiction at the heart of policy. When money is worthless there is neither an incentive to save nor to lend - this is just the effect of arithmetic!

    By the way, the same type of arithmetic drove the commercial banks to 'create' more and more money as interest rates dropped or remained too low for the last decade. All of the exotic consolidate 'products' and the drive to create evermore of these was actually the predictable an predicted result of interest rates being too low for the last decade. If the 'Fools of Threadneedle Street' had been awake and doing their job they should have noticed - even without independent people telling them it was happening and very economically dangerous!

    The BoE is being just as incompetent now as it was during the noughties - not surprising as the same people are in post!

  • Comment number 62.

    Do you remember what happened to the inflation figures in January 2010 when VAT returned to 17.5%? A step change of at least +3% - have a look at the ONS web site. This is what will appear in the February 2011 figures.

    MPC you have been warned!

  • Comment number 63.

    @60 - "...The control system known as the MPC must respond.....":

    I don't see "must". I see another split with the majority voting for "wait" - because the banks need to wring a bit more money out of savers.....

  • Comment number 64.

    #58. Chris wrote:

    "Markets and economists clearly do not understand exponential growth as an engineer does. etc..."

    Exponential growth? I think you are edging towards an understanding of just how poor the whole 'science' of economics actually is! The 'schools' of economics just never seem to get a grip on reality. I speculate if this is because they are funded by the casino financial services industry.

    There is another point: the way that growth is measured and many statistical measures are produced seem to have been progressively altered to show growth when there is none. For example: does a TV with more features or a bigger screen represent growth over one with fewer - the statisticians would have us believe that it does. The statisticians are driven by the political 'necessity' to show that things are getting better and better and hence they will alter their assessments to satisfy their paymasters. If you consider this element of the growth figures then perhaps the growth that is apparent from the figures is nothing of the sort - just a statistical fiddle for political purposes.

    Growth in the productive labour force should represent growth when for example it allows the more complete use of the land to grow crops - as does the introduction of more productive ways (via mechanisation for example) of using the labour force - but all of this is mediated and measured via money (which at present is worthless! - as to the major borrowers it costs nothing to create.)

    So one man's exponential growth is another man's slow decline. Don't believe the figures at face value!

  • Comment number 65.

    @61 JfH ..."....However the casino banks make most money from gambling and borrowers not from savers..."


    Yes, I know; but every little helps and anyway I'm a saver now, not a gambler or borrower. So I have a vested interest in savings rates (no pun intended!)

    I did my borrowing when Mortgage rates were 12% - They got my money in 1977.

  • Comment number 66.

    If there was any real risk of default, wouldn't the bond sales be shunned or rates be much, much higher ?

    Given the ultimate backstop of the ECB purchases/swaps, isn't the driving up of rates a symptom of the purchasers propagating and exacerbating bad news in the short term to gain that little extra by driving down the prices ?

    What seems to be happening is two things:
    - Central Banks lending at extremely low rates e.g. 0.5% so that banks can then lend out at 5-6% thus rebuilding their balance sheets
    - Sovereigns raising at 6-7% so that banks can offer their savers 1% and again rebuild their balance sheets.

    Either way, it seems to be sparing the banks & debtors by transferring the pain to savers and Sovereigns (taxpayers)

  • Comment number 67.

    61. At 09:51am on 13 Jan 2011, John_from_Hendon wrote:

    When money is worthless there is neither an incentive to save nor to lend - this is just the effect of arithmetic!
    ~~~~~~~~~~~
    Isn't this only true if the only thing you are trading is money, and the only time it can be "price discovered" is "today"?

    There are other things to trade, such as food, where supply, demand, and therefore price may go up or down based on real factors such as climate, population, technology advance etc.

    IOW, there used to be such a thing as "saving for a rainy day."

    Even with zero interest rates, there would still be that long-term incentive, would there not?

  • Comment number 68.

    Re 64: "Exponential growth? I think you are edging towards an understanding of just how poor the whole 'science' of economics actually is!"

    That explains why the top stream at the grammar school did Latin, the next stream German and the thickos (if I recall correctly) did extra French, Woodwork, Economics or Technical Drawing. I also seem to remember that 'O' level Economics was an alternative to a third 'A' level in the Sixth Form - perhaps for those who struggled with difficult subjects like Mathematics or Science.

    Economics exams, as I recall them from observation I hasten to add, tested the ability to work an adding machine as quickly as possible (it had a handle on the side) rather than any attempt to think.

  • Comment number 69.

    60. At 09:43am on 13 Jan 2011, Chris wrote:

    So in February will be published an new inflation figure showing a 'step change' of +2.1% in the year on year figure for January 2011 amounting to about 5.5% CPI or 6.7% RPI. The control system known as the MPC must respond.

    As an engineer I can predict the behaviour of a properly regulated control system to a step change in the parameter being controlled. A good control system with integral action (if I recall correctly) would increase the bank rate today - to perhaps 1% or 2%. A less responsive control system would increase the bank rate next month - to perhaps 4% or 10% (as a 'minimum lending rate' it needs to be above market interest rates for loans to have any effect).
    ~~~~~~~~~~~~~~~~
    If you are thinking of PID control systems, the key factors are loop gain and phase shift.

    In other words, how much does the control input affect the output, and how long does it take for a change in the input to affect the output.

    Since I am currently locked into the (probably misunderstanding) that both increasing the money supply and increasing the interest rate devalues the currency, I find it hard to see how an increase in base rate can affect the stored value of the currency.

    It might make the currency more attractive to traders if they can get a higher short-term return, but that would simply make it more attractive to the moneylenders to create more of the stuff.

    All I can see from the mushroom farm is positive feedback, not negative. And there is a general rule of thumb in control theory, which goes something like "positive feedback plus phase shift produces oscillations". (Boom and Bust)

    I fail to see where the damping function is being applied. I suspect it used to be that money was only profitable when traded for actual things.

    Now money itself is traded for profit there is no damping function.

    I read last year that the majority of Forex holdings last less than a second. Computer generted trade.

    Somebody please put the brakes on?

  • Comment number 70.

    59. At 09:38am on 13 Jan 2011, Oblivion wrote:
    oh and just to add, that's another rock solid reason why there is not a snowball's hope in the underworld of a PIIG-based meltdown, not while Fritz and Pierre are at the helm.
    =========================================================================
    Very interesting that you dropped the "S" off the PIIGS. If you bothered to read and listen to the economic commentators and economists then you would realise that there is some major concerns about all the PIIGS. As for the Franco / German input, this has changed in its form. Germany has ensured it is supporting the ECB rather than the individual countries. This although a subtle move is a significant one as they are reducing their exposure. There is also a move within their own home nations to stop what is seen as bankrolling those countries who have at best been economically incompetent and at worst corupt both morally and criminally. It should also be noted that Portugal has had to pay a significant premium in its last auction. Which is unsustainable and this fact is agreed by all. So will they now move on Portugal and offer or even force a bail out. However the wise men are looking at the elephant in the room and that is Spain. If Spain needs a bail out it is given that the ECB don't have enough and so the EU and Euro would be dependant on the IMF and WB. A fact that is worrying all those within the EU and ECB for there is a definite probability that if this was the case questions would be asked about the viability of the EURO as too many of its members are or close to insolvency and are totally reliant on support from their own currency and club.

    We should not forget all those who have gone before, Greece are still in deep trouble as are Ireland. Both of whom are in a lot worse position than was first thought and with Portugal probably next the wobble has very much started and something needs to be done and done very soon if meltdown is not to happen.


  • Comment number 71.

    For those who think government bond rates are all about its debt levels rather than asymmetric shocks, Paul Krugman blog January 10 2011: "What I mean by that is that the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. Greece was excessive government borrowing; Ireland and Spain, housing bubbles. Portugal, by contrast, wasn’t all that bad fiscally — debt/GDP on the eve of the crisis roughly comparable to Germany. But it also didn’t have surging house prices. There was a lot of private-sector borrowing, but it’s not that easy to explain exactly why. What’s clear, however, is that at this point Portugal faces adjustment problems similar to those of Spain, and possibly worse. Prices and labor costs are out of line with the rest of the eurozone; getting them back in line will require painful internal devaluation, aka deflation; and given the high levels of private debt, deflation will have nasty side effects. Tolstoy was wrong: many unhappy countries, at least in Europe right now, are pretty much alike."

  • Comment number 72.

    68. At 10:26am on 13 Jan 2011, Chris wrote:
    =========================================================================
    Economics is not as simple as maths and is open to interpretation as well as being able to think outside the box. It uses many tool such as maths, statistics Etc. Now where there is a problem is where economists just look at history to either forecast or put forward theories. Too many are no more than historians rather than true economists who think, evaluate and model ideas to formulate theories. Then once that theory is put into practice they should continue to monitor outcomes and should be the first to shout if it is not delivering the desired outcome.

    No economics is not a science but more a mixture of all.....

  • Comment number 73.

    Chris London

    There is also a move within their own home nations to stop what is seen as bankrolling those countries who have at best been economically incompetent and at worst corupt both morally and criminally

    Dont believe the hype!

    Less than a year ago in several countries there were general elections where social-democratic parties were ousted in favour of more neoliberal parties, on the agenda of state debt. In order to force the issue, completely new right wing political parties sprung up out of nowhere, pushing countries that had had a basically two-party system into a multiparty system, thus distorting the vote in favour of the parties with an anti-state agenda.

    The media hype recently about state debt is nothing but hype for those who are interested in it.

    You are also being selective about what you understand.

    I ask you again to take on board the contrary perspective, the following that could also be the prevailing opinion should the media and interests be blowing that way:
    Why is there a focus on public debt? Why is there not a focus on private debt and unemployment? Why is it that a 120% of GDP as public debt matters in Portugal , but 500% private debt in the UK does not? Why is that public spending is bad, but mass unemployment is not? Why is that nominal public debt is bad, but GDP is not?

    I am pretty sure that up until the MARKET failures, the GDP level was sound. Did public debt go UP, or did GDP go DOWN?


    It's all hype. What you are a victim of is a neoliberal, pro-Bank, pro-USD agenda. It's just a simple fact. The conservative elite would rather you suffer unemployment, riots and hunger, than have to finally give up the fight against socialist policy, lose face, and lose property and status to the proletariat.

  • Comment number 74.

    If you want to see how growth really works have a look at this.
    Its a small series of lectures which are well worth watching, and actually frighteningly correct! It shows why we don't want growth in anything, just stability and then a reduction in everything.

    http://www.youtube.com/watch?v=F-QA2rkpBSY


    60 Chris....

    I think that this this controller needs the 3rd parameter setting into motion...derivative action...which would have have seen the high inflation numbers that are coming and slowly started taking action ie raising intrest rates many months ago.

  • Comment number 75.

    71. At 10:47am on 13 Jan 2011, ntp3 wrote:
    =========================================================================
    Portugal as you have pointed out is a little different fro the other PIIGS, but not as well placed prior to the crash as you have stated. Their public debt was stable at £60 billion in 2004 rising to £66 in 2009 and now jumping to £77 billion in 2010. Which at it's best in 2004 was still over 60% of GDP and now in 2010 well over 80% of GDP. A position for a stagnant economy which was even then unsustainable and was only hidden by a ponzi scheme run by the state. Private debt was also well out of line with Portugal owing over £100 billion on property loans alone. Couple this with an oversupply of property and unoccupied property and things are only going to get worse. There is also the fact that the Portuguese economy is so dependant on the EU along with tourism which with both in decline means that there is little in the way of recovery on the horizon. In fact this has been the situation for a number of years with the only blip being in the early 2000's with the building sector taking off. The problem is that Portugal has been stagnant for too long with wages running well above where they should be supported by a goverment which was living off credit. A question that is still to be answered as is the same as with Greece and Ireland is how bad is it actually? We wont know until it is too late for they have already sold their soul to the devil and mortgaged their burial plot with this last auction........

  • Comment number 76.

    Re 74

    Yes I meant derivative action (not integral) - clearly the MPC is one of those poor control systems that does not have derivative action.

  • Comment number 77.

    73. At 11:11am on 13 Jan 2011, Oblivion wrote:
    =========================================================================
    Two points

    1. Portugal's private debt is now estimated at over 300% of GDP

    2. It is all about the ability to pay and Portugal are now getting to the point that they cant pay. With yesterdays auction rising to 5.4% their own economists have said that they have reached the point where the scales have tipped over and now expect a bail out in the near future as was the case with Ireland not if but when.

    One other point which was raised is where will the money come from for the countries that are now being asked to front up are themselves struggling at best and Italy for example has said that it would not be in a position to offer anymore in the way of finacail aid. In fact there are questions being asked about their ability to survive without support themselves. The other strange thing that is happening is that even the PIIGS are being asked to commit to the fund even Spain which is probably the next one to need a bail out after Portugal.

    Not hype but facts and the markets will want their pound of flesh if they are to be asked to take on the risk as is the case with Portuguese bonds at 5.4%. As Norman Lamont said earlier where is the money comming from?

  • Comment number 78.


    60.At 09:43am on 13 Jan 2011, Chris wrote: and
    74.At 11:15am on 13 Jan 2011, Smog_in_Warsaw wrote:
    -*-*-*-*

    Whilst I think I understand where you are coming from, in looking at the UK economy, it seems to me to probably be short on demand. Sales in the shops have not been outstandingly successful and we will shortly see the effect of the public sector cuts. We have high-ish unemployment. All this leads to a reduction in demand. If interest rates are increased, inflation will rise yet again; demand will surely go down. (I realise that some bits of industry are doing OK, but its patchy.)

    The government want us to both pay back debt and maintain our purchases – which seems a bit of an incompatible wish list. We, in the non-government sector, will find it difficult in the best of circumstances; in the current situation, it will be impossible. As more of the population feel their income is threatened so they will cutback. We will see what happens over the coming months, but I am expecting a downturn, that may well become a recession if the policies stay as they are.

    Where is the inflation coming from?

    The imported increases, like the price of oil, we can do little about unless we can have a thriving economy resulting in a more favourable exchange rate. We just have to live with this.

    The other increases are home grown. Many are due to the government tax rises. Business have held there prices down for a period, but the VAT rise is giving an ideal opportunity for rises to be blamed on the government.

    Economically, this is not a good place to be. It seems that government policies will lead to price rises during a period of falling demand – stagflation. The UK has been here before. The population is re-learning the lessons of the 30's. Debt at significant levels is bad for us, particularly if you loose your job. Uncertainty about a continuing income reduces demand also.

    For many years we have been consuming using debt, industry has responded and it has become the norm. Now we are having to accept that the merry-go-round has to stop. Our economy has to shrink if we have high levels of unemployment/under-employment. Only other option is to grow exports, unlikely at the moment.

    In these conditions, will industry invest? Where's the return for them? The fact that banks are not lending is sending message, but it is misinterpreted. They will lend, they have the money. What they don't have is the high level of confidence they will get their money back. They don't want, and cannot afford a significant default rate. So they have imposed tough conditions. Customers think they are being unreasonable, maybe. But their expectations are perhaps predicated on the world up to 2007, not the one we are now entering and have to adjust to.

    Government policies should be geared to allow us to move as painlessly as possible from a high debt world to one in which lower debts are the norm. Policies that simply remove money from the non-government sector [to sort out the government sector's financial situation] will leave the non-government sector's finances in tatters.

  • Comment number 79.

    76. At 11:43am on 13 Jan 2011, Chris wrote:

    Re 74

    Yes I meant derivative action (not integral) - clearly the MPC is one of those poor control systems that does not have derivative action.
    ~~~~~~~~~~~~~~~
    Chris,
    If you don't mind I'll try one last attempt to improve my understanding.

    Basically, I don't see how base rate can be used to control inflation because inflation seems to me to be controlled by the quantity of money in circulation measured against the net value of assets that need to be traded in that currency. (Money as the facilitator of trade, rather than being the commodity traded).

    In simple terms, at a base rate of 4%, savers get 2% and borrowers are charged 6%. The moneylenders cream off the differential (4%).
    At a base rate of 6%, savers get 4%, and borrowers are charged 8%, same differential.(4%)

    Now if moneylenders want to maximise profits, they can either widen the differential, or make bigger loans.

    We have observed them do both in the last 10 years, both of which have led to an exponential increase in the money supply, and to stop this creating an exponential rise in the "market" rate of devaluation, future earnings and future "growth" have had to be "brought forward" to balance the books.

    Increasing the base rate does not, therefore, appear connected to the control input of money supply, or of its price.

    They are turning a valve which is not connected to the steam pipes, while the engine is about to run dry.

    Or perhaps trying to steer a car with a broken sterering column.

    The reason I try to talk to people here is because this mushroom has been kept in the dark and fed a load of @@@ for too long.

    Would anyone care to enlighten me?

  • Comment number 80.

    Chris London @ 77

    I didn't think they were using control theory at all. Isn't the neutral interest rate mentioned near the top just a basic linear model? I think the neutral interest rate idea isn't such a bad thing if its limitations are recognised. I see this as analogous to reading a map. You don't have to believe that the world is flat to use a map.

    I'd like to comment on the concept of rationality in economics. This concept seems to tie together some of the themes that are mentioned in this thread and also the situation that Stephanie is commenting on (the market's attitude to European sovereign debt). It has been stated many times in the media that classical models assume rational markets yet markets behave in an irrational way. I don't think either of these statements is true. Economic models seem to largely assume utilitarian behaviour, i.e. that people act for good. This isn't the same as rational behaviour. As I see it there are some principles that are rational but not utilitarian. One is system gaming. Financial organisations and individuals within these organisations practice system gaming for personal gain. This isn't necessarily illegal but it's an abuse of the financial system. The second principle is memes. Group behaviour is driven by memes. Whenever groups spontaneously decide to act it's always in response to a popular meme. This is because groups are not capable of complex reasoning. I'm sure there's some way of analysing this using information theory but I haven't tried.

    As I see it, markets are currently driven by gaming and memes and this is why we have a financial system that's broken. Unlike the Fed and BOE who seem to rely overly on models, the ECB seems to be playing the game and at the moment it's game of poker. In my opinion the ECB has a good poker face.

  • Comment number 81.

    78. At 12:21pm on 13 Jan 2011, SleepyDormouse wrote:


    60.At 09:43am on 13 Jan 2011, Chris wrote: and
    74.At 11:15am on 13 Jan 2011, Smog_in_Warsaw wrote:
    -*-*-*-*

    Whilst I think I understand where you are coming from, in looking at the UK economy, it seems to me to probably be short on demand.
    ~~~~~~~~~~~~~~~
    I agree.

    Here, Portugal, the US, and everywhere else.

    This the hangover of a debt-fuelled consumer boom. For Joe public is waking up to realise that we didn't actually need all those new gadgets. The level of demand for basic necessities has not changed significantly in the last 5 years, but the disposable fripperies are beginning to be seen for what they were, a mechanism to keep the financial sector growing fat at the expense of the rest of us.

    Value, tied to demand, tied to usefulness.

    What do the people of Portugal, Spain, Italy, Greece, the UK or the US actually need? Untapped Demand looks to me like the only real opportunity for sustainable growth.

    Just digging holes and filling them in again to keep GDP and employment figures high doesn't seem to cut it, somehow.

  • Comment number 82.

    Sorry I meant Chris @ 76. I apologise to both Chris and Chris London.

  • Comment number 83.

    The Portugal issue us just one for step towards the inevitable collapse. The underlying problem is debt and Governments and Banks can massage figures all they want, the world is less willing to take on more debt. Only the greedy capitalist parasites that contribute nothing to society and employ money to make more money are keeping the wheels greased.

    By bailing out the banks we just transferred the debt to the Governement and therefore the tax payers. The tax payers are paying down their debt which is a prudent thing to do, however the ponzi scheme of fractional reserve banking means that each payment recieved by the banks is written off as the money never existed in the first place. That means as debt is paid off the economy shrinks.

    So the banks just used the cheap central bank base rates to borrow money and buy Government bonds increasing the debt even more and contributing to the next bubble in bonds. How long before this bubble bursts, time will only tell. The question is not which country will be next for a bailout or who's GDP is growing/shrinking its when will it all come crashing down,

    I'll take a stab at June 2011 and I hope to God im wrong.

  • Comment number 84.

    What is so frustrating is the "death by a thousand cuts" approach of all those in positions of power. So Spain managed to sell its bonds today, hooray, all is well with the world for another day. I don't think I have seen a strategic thinker amongst any of the European leaders including our own, unless you call cutting the deficit and hoping for private sector growth as a strategy.

  • Comment number 85.

    81. At 1:00pm on 13 Jan 2011, stillpuzzled wrote:

    "Just digging holes and filling them in again to keep GDP and employment figures high doesn't seem to cut it, somehow."
    -----------------------------
    Agreed, but we can invest in infrastructure. In the past, governments have led. Roads have been built, bridges etc. Now we have infrastructure that needs to be refurbished, renewed/rebuilt.

    Also we need new IT infrastructure. Industry will only roll this out if they can get a return. People will buy if they have a good well paid job. If they haven't, they cannot and discontent rises. But government can invest for the long term.

    Most of all we need a very well educated workforce, so that's why the government policy is so crass, in my view. Higher education should be free but it needs to actually provide people at the end that industry can employ, not people who have worked 'hard' but have gained nothing to suit the jobs market.

    Government also need to consider those who are 60+ and how they will be employed. As you get older, health fails perhaps in small ways. For some its catastrophic and partners have to become carers. There is no alternative, little support and, from what I have seen, the government don't care. But this is a growth area for the next 40 years, so what is the government doing to provide younger people with the skills to cope in the 'caring' industry. Not a lot, leaving it to the third sector. They'll struggle no the economy is probably entering a downward phase (prolonged?).

    So, there is a lot that could be done, people in employment will create demand, but it needs to be largely debt free. [We need to get out of the 'I see it, I want it, I buy it now' culture.}

  • Comment number 86.

    83. At 1:36pm on 13 Jan 2011, stennylfc wrote:

    ".... How long before this bubble bursts, time will only tell. The question is not which country will be next for a bailout or who's GDP is growing/shrinking its when will it all come crashing down,

    I'll take a stab at June 2011 and I hope to God im wrong.
    --------------------------------------------------------

    Just in time for us to run the paupers Olympics!!

  • Comment number 87.

    The sale of Portugese bonds and purchase of many of them by the ECB means that the Euro lives to die another day, and that day is not far off.

  • Comment number 88.

    87. At 2:59pm on 13 Jan 2011, busby2 wrote:

    The sale of Portugese bonds and purchase of many of them by the ECB means that the Euro lives to die another day, and that day is not far off.

    -----------------------------------------------------
    You may well be correct, but the trick is to see in advance [and the further the better] what the event(s) will be that will push it over the edge.

    In the past, I have frequently taken what has turned out to be an overly pessimistic view. I have been wrong because there is always great reluctance to move away from the status quo. People work hard to maintain their position. People will work even harder to keep their money, even if it means others koose theirs.

    Those currently investing in the Euro, irrespective of which country, know that those in the eurozone will beggar themselves and many others before admitting that the euro was a big mistake, even though others see its demise as inevitable even now. Its not an event I wish for. It takes the world into new unpredictable territory, one in which we will all suffer.

    So what will cause its failure? The trigger may not even be in the eurozone itself, but an event that finally shows the unsustainability of the Euro. Will it be an unexpected failure of a bond auction? Unbearable civil unrest? Who knows?

    Would anyone like to make suggestions?

  • Comment number 89.

    83. At 1:36pm on 13 Jan 2011, stennylfc wrote:

    I'll take a stab at June 2011 and I hope to God im wrong.

    Yep. I reckon so too. Somewhere between May and November.

    I'll be amazed if the house of cards stays standing into 2012. Awful times ahead. Fascinating too, but awful.

  • Comment number 90.

    88. At 3:40pm on 13 Jan 2011, SleepyDormouse wrote:

    So what will cause its failure? The trigger may not even be in the eurozone itself, but an event that finally shows the unsustainability of the Euro. Will it be an unexpected failure of a bond auction? Unbearable civil unrest? Who knows?

    Would anyone like to make suggestions?

    -------------------------------------------

    I imagine it will be the same thing that popped the bubble in 2007 - rising oil prices and probably food prices too.

    The problem is that the whole financial system is so weak that it won't take much disruption for it to collapse. It should have collapsed in 2007 but the taxpayers were used to allow the financial insitutions to take a couple more bites of the cherry before it all goes to hell.

    They're still doing it.

    Collapse is almost inevitable, I think.

  • Comment number 91.

    Stephanie Flanders hit right upon it.
    Right on Portugal's weak spot - the one and only that belies current woes in the markets.
    A heavily indebted country for the economy it has and, critically, for its growth prospects as perceived by just about everybody.From market analysts to the common man in the street up and down the country no-one quite knows how the economy is to be kick started, let alone flourish in the years ahead.
    It is not about achieving meagre growth rates. Anything below 2.5% is not good enough.A rate above 3% would allow debts to be financed and redeemed and cool the markets.

    It is now a hazardous time that each time Portugal takes to the markets will feel like a hurdle to jump over at an affordable price.

    In the meantime the PM has correctly identified the only way forward in the quest for economic growth.
    He has for quite sometime been playing the role of a tradesman too.
    If only a large enough section of the country's business community should succeed in their endeavours and Portugal's export-drive might give the country the growth impetus so direly needed.
    That alone won't do the trick but remains very much the only option in the years ahead.
    The government is still hoping to narrowly avoid recession this year.
    It is, however, all-round uncertainty that prevails as 2011 rolls on...

  • Comment number 92.

    There are blogs above proposing euro disaster in the coming months. In my view, this would result in a total disruption of all supply chains. No payments could be made for a time so nothing would be delivered.

    I wonder if this government still has any workable plans for all they should do in the face of a countrywide disaster?

    Does anyone know?

    How long could the country keep going, not long I suspect as we are totally dependent on fuel and past events have shown what happens when there are no fuel deliveries.

    Just keep fit and well, have a well stocked larder. I believe they assume you can survive for 10-14 days after a major disaster – well, could you??

    A better solution is for the disaster event never to happen, not even be wished for. Just work hard to avoid it.

  • Comment number 93.

    Steady on Sleepy.

    The Euro is not going to collapse. The countries just need to get together and have a tete a tete. If they do that it may end up as the world reserve currency. They have to have the political will to let go of their own fiscal powers and get rid of the countries that won't sign up to that. Together they can beat the speculators.

    OK the signs up to now have not been good but I'm still not betting against them. The UK can carry on procrastinating from the sidelines but frankly who cares what we think ? We are not even in the game.

  • Comment number 94.

    90. At 4:01pm on 13 Jan 2011, K756ET wrote:
    "I imagine it will be the same thing that popped the bubble in 2007 - rising oil prices and probably food prices too."
    --------------------------------

    Many thanks for your comments. You may well be correct about the rising prices being a trigger, particularly food and oil.

    If this is the case, we might expect any collapse to be gradual, if it were to happen, over a week or two, rather than overnight.

    One candidate (amongst a number) for me is the foreclosure gate scandal in US. Courts seem, from the reports I have read, to be against any organisation that incorrect paperwork [thats what the law is for, after all] and much of the paperwork does seem to be inaccurate. Eventually, the US will realise the extent of the resultant paralysis in the property market, both residential and business.

    No property sales = stagnation, paralysis and huge losses = no US economic powerhouse = very reduced exports from us[the world] to them = large lost markets = unsustainable loans by banks to business = panic

    Bailouts unlikely to be possible, short of total nationalisation - seems unlikely given the mood of the US as a nation and their apparent hatred of anything that smacks of socialism.

    It doesn't even need to be the euro.

  • Comment number 95.

    93. At 4:36pm on 13 Jan 2011, EconomicsStudent wrote:

    Steady on Sleepy. ....
    -----------------------------------------
    Yes, I am perhaps exaggerating, but reading some of the other blogs they are stating that collapse will happen. I am trying to understand what they see as the trigger for this.

    Note I did say at the end of #92, "A better solution is for the disaster event never to happen, not even be wished for. Just work hard to avoid it."

    The euro is probably OK unless Italy or France are seen to have difficulties, and then the Germans will throw their teddy into the corner.

    As I said in #94, problems can come from anywhere, and I still see the US as a major problem area. I haven't really resolved my views on China [or India] yet.

  • Comment number 96.

    85. At 1:53pm on 13 Jan 2011, SleepyDormouse wrote:

    Agreed, but we can invest in infrastructure. In the past, governments have led. Roads have been built, bridges etc. Now we have infrastructure that needs to be refurbished, renewed/rebuilt.

    Also we need new IT infrastructure. Industry will only roll this out if they can get a return.
    ~~~~~~~~~~~~~~~~~
    Actually, as I think I said above, I don't think anybody should roll anything out unless they can get a return. (Usefulness => demand => price)

    The price of borrowing should be an incentive to make sure that your investment will (probably) pay back the initial outlay and then some.

    If money is not spent usefully, it is wasted. Including Government spending.

    Why did Portugal need a Bond Auction? What do they want the money for? To roll over an already unpayable debt?
    What has Portugal got that it can sell to the rest of the world?
    What has the rest of the World got that Portugal needs/wants?

    Where is the required 'Export Demand' going to come from? Countries in worse straits such as those in sub-Saharan Africa? Can they afford to pay for what Portugal produces?

    If Portugal's balance of trade is all within the Eurozone, then the whole thing nets to zero, and the Euro is safe, (Although,as mentioned by other people above, the might of 'German Buying Power' might bring a change of culture in the Algarve.)

    But if Portugal has unsustainable debts, AND needs to trade with non-Euro nations, then all the ECB has done by buying Portugese debt is to devalue the Euro against the currencies of Portugal's trading partners, and bought Portugal a bit more time to keep wasting its money on consumables and servicing the usury of the moneylenders.

    When I was younger, people went round with a "Live Now - Pay Later" badge sewn on their jeans.

    It is now "Later".

  • Comment number 97.

    Re 76:
    I think the bank rate should be slightly above the RPI. Perhaps as much as 0.5% above it if the RPI is high. Perhaps as much as 0.5% below it if the RPI is low. That way the base rate costs borrowers nothing and returns savers nothing (when you allow for inflation). Of course banks need to make their profit and the government taxes the banks' profits and (rather inconsiderately) taxes the savers' gross return (rather than their gain over and above inflation). Ah well, life's unfair, I suppose.

  • Comment number 98.

    What we want is debt deflation. Punish those who have borrowed recklessly. Reward the prudent. It will also allow interest rates to stay low - keep them at around 0.5% for five or ten years. But first we need to get inflation down, so we need interest rates at around 10% or 15% for a year or two. Once deflation sets in then the interest rates can come back down.

    Of course the easy way is to reduce VAT in 1% steps every three or six months or so to push down RPI to about 1% and then interest rates can stay where they are.

    Then we are no longer in need of continual growth: oil is finite and continual growth is impossible anyway.

  • Comment number 99.

    96. At 5:05pm on 13 Jan 2011, stillpuzzled wrote:


    Actually, as I think I said above, I don't think anybody should roll anything out unless they can get a return. (Usefulness => demand => price)
    --------------------
    Interesting statement. I am not sure I would fully accept it.

    A simple silly example - Philips produced a small tape player and the casettes to go with it. There was no pre-existing market. It had, at the time of its inception no demand for it. But look what it spawned, the whole of the portable music player industry and the subsequent developments of portable games toys who just copied the theme previously developed.

    We, in UK invested money time an effort in Liquid crystal material research. It had no real outlet at the time, OK flat panel displays would be nice, but the technology wasn't even at first base except on StarTrek. We were a long way from the market we see now, 30 years away.

    Would you have funded Einstein in his research. Newtonian mechanics did it all didn't it? I suggest by your argument, there would have been no funding. But what depends on relativity now that is used by many of us? GPS positioning! Without the equations produced by Einstein, GPS is rubbish. Relativity has to be taken into account.

    So, as I write this, I am sorry, but your equivalence
    Usefulness => demand => price
    is only part of the story. Stick with that line and as a society we will stagnate.

    This is the human dilemma; we like taking risks as they can pay off, but at the moment, the economic and financial risks being taken are not paying off, they haunt us and likely or children too. Darwin had a word for it, evolution; and we're now in an evolutionary deadend.[but our politicians and most economists have yet to realise this].

    [sorry, I didn't really mean this to sound harsh, I just want to point to some counter examples].

  • Comment number 100.

    #94 SleepyDormouse

    It's not just Foreclosuregate (where banks allegedly fraudulently claimed title to property in order to repossess), there is something called Parallel Foreclosure and HAMP which might be a bigger can of worms, if reports are true Barack himself might be impeachable.


 

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