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Ben and the Fed's excellent adventure

Stephanie Flanders | 23:16 UK time, Wednesday, 27 April 2011

The Federal Reserve chairman's first regular press conference in the US central bank's 98-year history was supposed to make more news when it was announced than when it actually took place. And so it proved. There was nothing much to rile the markets in Ben Bernanke's comments - on the dollar, interest rates or the US deficit.

The news, such as it was, had come earlier, in official confirmation that the second round of quantitative easing would be completed, on schedule, by June. Oh yes, and central bank has revised down its US growth forecast for 2011, from a midpoint of around 3.65% to 3.2%. (We should be so unlucky.)

Here were the few nuggets from the press conference that caught my ear.

First was the gloomy tone on inflation, in what seemed to be almost a throwaway comment from the Fed chairman. Officially, the Fed does not think that inflation poses a long-term risk to the economy, and it does not see any immediate reason to tighten policy to confront it. That was what the markets took from the official statement. But Bernanke had this to say, later on, when asked whether the Fed could, or should, be doing more to raise employment:

"... the trade-offs are getting less attractive at this point. Inflation is higher... inflation expectations are higher, and it's not clear we can get additional improvements in payrolls without extra inflation risk... in my view if we're going to have a sustainable recovery with healthy job growth, we need to keep inflation under control."

The UK's Monetary Policy Committee would surely agree. Though the Bank, unlike the Fed, doesn't have a dual mandate to achieve high employment as well as low inflation.
Mervyn King, Charlie Bean and the rest would also be pleased to hear Bernanke echo their "stock" view of quantitative easing, where the stimulative effect comes not from the speed of bond purchases, but the scale. The Fed chairman took the opportunity to spell this out, once again to journalists.

In line with market speculation, Bernanke suggested that the first and most likely step towards the exit would be to stop reinvesting in the market as the bonds mature, but he underlined that this step wouldn't be a mere formality, but a conscious step toward tightening, which would need to be based on the economic outlook in the same way that a rise in interest rates would.

Finally - and most interesting, perhaps, to a UK audience - the Fed chairman was asked about the risk that US spending cuts to tackle the deficit would hurt the recovery (the questioner did mention the UK as an example). Bernanke started by affirming that cutting the deficit was the "single greatest priority" facing the US, which he hoped the recent warning from the ratings agency Standard and Poor's would help underscore. But then he said this:

"My preference would be for taking a long-term perspective. If [Congress] can make credible commitments to cutting programmes over a long period of time, that seems to be the most constructive way to address what is a long-term problem. If [the cuts] are focused entirely on the short run, they might have consequences for growth" (which the Federal Reserve would take into account in setting its policy going forward).

I suspect even Ed Balls would hesitate to turn this into a full-fronted assault on coalition policy. The last time he tried to do that, after a similar comment by the US treasury secretary at Davos, Timothy Geithner miraculously (as it happens, directly after meeting Mr Osborne) decided to offer up a full endorsement of the coalition's strategy in an interview for the BBC. But it's an interesting comment for a fairly hawkish Fed chairman to make.

I don't think Mervyn King will be taking lessons in giving press conference from Mr Bernanke any time soon. But it was a decent performance - and an important step toward Fed transparency. Not so long ago, the Fed didn't even think it necessary to inform the public when its monetary policy had changed. The rest of us can think about what it would be like to live in an economy expecting "subpar" growth this year of 3.3%.

Comments

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  • Comment number 1.

    "There was nothing much to rile the markets in Ben Bernanke's comments - on the dollar, interest rates or the US deficit."

    Strange that the US dollar exchange rate fell to a three-year low then....

  • Comment number 2.

    Expect more pronouncements of "Too Far, Too Fast" from Ed Balls.

  • Comment number 3.

    Same basic question should be asked: Growth based economy - where does this growth come from? For example, 3.5% growth means that we will double our requirements (Landfill, energy, food, . . . .) in approx 70/3.5 = 20 years. In 20 years time can we do that??

  • Comment number 4.

    The US are not monetising the debt. They will pay back their obligations at full value. The USD is a good long term store of value. Unemployment is falling, jobs growth is rising. Go back to sleep.

  • Comment number 5.

    Not long now before the dollar collapses along with all the fictitious capital that has artifically inflated reported profit rates.

  • Comment number 6.

    The figures many governments use for economic growth are suspect - perhaps a debate on that.
    The figures used for inflation are also suspect - perhaps a debate on that.
    The ability to successfully compete in manufacturing with the emerging markets is unlikely with labour costs in these markets and a comparison of the cost of living. The talk of High technology developments providing the jobs is pie in the sky thinking. Many technological developments are being done by small numbers of people but in cooperation with the far east.
    Plus remember kids Ben Bernanke wants you to pay off the debts run up by the previous generation and the usual price of quantitative easing - that is inflation.

    Stephanie, ignoring the manipulation over the years of the inflation figures could you please explain why the US QE is apparently non inflationary when history tells us it is.

    A quote from the past.
    If, therefore currency is multiplied, it is a delusion to suppose that capital is multiplied...If banks not only lend capital but also lend "coined credit" some time or other a liquidation must come, there must be an effort to touch the capital with the notes pretend to convey. When it is found that they represent nothing; "then credit breaks down," and there must be a settlement a liquidation, a dividend a new start......The real amount of capital we posses is divided up, and we have to make up our minds that we possess only 50 to 75% of what we thought we possessed. We put smaller figures to everything, and reconcile ourselves to smaller hopes, but the experience is soon forgotten, and the old process of inflation and delusion begins again.
    William Graham Sumner from the 1870s
    For printing money - replace that with the only boom in manufacturing - that of debt creation! The debt is supposed to relate to some asset. Why not ask Mr Bernanke what do all those trillions of US debt relate to?

  • Comment number 7.

    'The rest of us can think about what it would be like to live in an economy expecting "subpar" growth this year of 3.3%.'

    ...............

    But it isn't 'growth' ... it's inflation ... more or less the same as what we have in the UK with the UK economy heavily reliant on imports as the Anglo-Saxon laissez faire global trade model breaks down as the greedy establishment realise that they're also dependent on the plebs going out and spending on their credit cards ... 'fed' to them by their greedie bankers ... and the pleb's incomes, living standards and prospects are falling too.

    At least we know why its called 'the FED'

  • Comment number 8.

    "My preference would be for taking a long-term perspective" The economist's stock "whenever" statement, well - whatever.

    Did he specify what long term was?

    1) End of the universe
    2) End of fiat currencies
    3) Kondratiev cycle
    4) Business cycle
    5) Before oil isn't priced in dollars?

    No reasoning on this would be rather sloppy, I hope he specified and it is reported elsewhere.

  • Comment number 9.

    The re-investment point is not one I have come across before and it raises interesting quetions. As understand QE, the Fed/BoE have bought Government bonds on the market. They could sell them again (an exit) but if they are planning to re-invest that would appear to mean that they will be holding them to maturity.

    If that's the case, then would it not be the Government who redeems the bonds: presumably paying the Fed?

    Will the Fed then reinvests by buying more bonds from the market?

    But how did the Government find the money to pay the Fed, if not by borrowing?

    Is there not a circularity here, with the Government borrowing to pay off its old debt and then using the money to buy back the new debt? Is this sustainable? Is it not likely that each time they go round this loop the cost, to the Government, of borrowing will increase (and the corresponding returns to lenders will rise) and it will create a machine directing taxpayers' money to bondholders?

  • Comment number 10.

    There seems to be a better understanding in the US of the relationship between government spending, growth and the deficit than resident in the Micawber moneynomics of the Coalition. Time will tell what is the best approach but I think the writing is on the wall if we look at the Irish experiment and the Greek experience which seem like a death spiral of cuts and deficit but with the ordinary people shouldering the increasing burdens.

  • Comment number 11.

    #4. At 07:11am 28th Apr 2011, Libert_arian wrote:

    "The US are not monetising the debt. They will pay back their obligations at full value. The USD is a good long term store of value. Unemployment is falling, jobs growth is rising. Go back to sleep"
    -------------------------------------------------------------------------------

    Ben, is that you?

    The way I see it the US has three choices,

    Stop QE - The market tanks
    More QE - The dollar tanks
    Raise Interest Rates - Everything tanks

    The US is a basket case, and we're pretty much in the same basket.

  • Comment number 12.

    10. At 08:51am 28th Apr 2011, watriler wrote:There seems to be a better understanding in the US of the relationship between government spending, growth and the deficit.

    Some Government spending is right and proper - but dare one suggest all government spending is not. With the so called cuts we are only reducing some of our deficit not our debt and so far this year we have actually borrowed more than under the previous administration.
    The Irish and Greeks did not want the EEC/IMF bail out packages. They should have been allowed a mechanism to devalue their currency restructure their debt and be helped to live more within their means. These "bailouts," which are in fact illegal under EEC law, are only helping to prop up the Euro in its existing form and the people of these countries are paying the price for this failed political and economic experiment.
    From 1837 William Leggett
    Any person who has soberly observed the course of events for the last three years must have forseen the very state of things that now exists....He will see that the banks... have been striving, with all their might, each emulating the other, to force their issues into circulation, and flood the land with their wretched substitute for money. He will see that they have used every art of cajolery and allurement to entice men to accept their proffered aid; that, in this way they gradually excited a thirst for speculation, which they sedulously stimulated, until it increased to a delirious fever, and men, in the epidemic frenzy of the hour, wildly rushed upon all sorts of desperate adventures. They dug canals, where no commerce asked for the means of transportation; they opened roads where no travellers desired to penetrate; and they built cities where there were none to inhabit....

    If you don't agree with the sentiments - don't you just love the language.
    It does have parallels with Ireland surely?

  • Comment number 13.

    He managed to confirm what everyone who knows anything about economics has known now for 2 years, namely: the debt spiral continues.
    He mentioned that there may be a need for further stimulus when QE2 concludes which is an initial broach of the subject when in reality it will materialise as QE3 which everyone was expecting to occur.
    There is no way this spiral can now be stopped because to do so would create just as much harm as the uncontrolled crash that is coming.
    The World should place its head between its collective knees and brace for impact.

  • Comment number 14.

    The other member of the foolish duo, Ben - at last brakes his silence to say what?

    "Oh my god we got it so wrong, so fundamentally wrong we have no idea how to fix it!"

    Ben start by keeping proper accounts! (that include the nation's assets!)

    The idiot economists have only one answer a multi decade depression. We have to have the depression as we have lived on money borrowed from our children and our children's children until there is simply no more possibility of extending our credit any more - that is why the Fed can't either raise interest rates or raise any more money from foreigners or by tax from Americans. This is the real story.

    Why is this? --- Because economists do not keep proper accounts - they simply ignore a nation's assets and only do cash accounting - this means that totally irrational activities such as flogging off a nation's natural resources are seen as a costless source of profit fro this year - absolute idiocy.

    That said, we are where we are.

    Now economists (Ben and Merve) and their sidekicks have no room to manoeuvre. But they have to get economics of the nation's private sectors going again and to make productive use of the country's more valuable natural resources - its people. In shorts the people costs have to become international competitive again. So the cost of 'running' an employee must be competitive - and that means house prices have to be slashed.

    This will inevitably destroy the banks - but as they are are already dead men walking because their balance sheets are supported by essentially grossly overpriced assets then this must happen before a recovery can take place.

    All those that argue that this is impossible are arguing fro a repeat of the Long Depression of the 1870's which was itself caused by a property bubble (and too over twenty five years to work itself through).

    So we have to enact the steps that do the opposite - that is put up interest rates. In the interests of avoiding a very long and far more damaging long term Depression.

    This step will also signal a return to prudence, and savings and pensions becoming again valuable and sensible activities - we have to escape the madness of the last twenty years!

  • Comment number 15.

    Actually many seem to think that there were some significant statements in the press conference given by Ben Bernanke. Certainly markets thought so as is described here.

    "So bond markets responded to this quickly with the thirty-year US government bond falling by just under one point on the news........Either way the trade weighted dollar index has now fallen to 73.50 which is some 3.18 or 4% below my benchmark......So we can see that there are problems with this unless you were short the US dollar and long gold"
    http://t.co/XaUU7K3

    So we can see that many markets did move as inflation expectations were adjusted and yet again a talk by Ben Bernanke led to fall in the US dollar and a rise in the price of gold.





  • Comment number 16.

    #1 LadyEcon,

    Go easy on Stephanie; based on her last few efforts she has obviously taken her self-censorship to such extremes, she is no longer reporting bad news!

    On the other hand, it was ecomonists blindly believing that all was just dandy in the world that was partially to blame for landing us in the brown stuff in the first place!

  • Comment number 17.

    America is in a Great Depression and the US government
    will never admit it because it will create a panic.
    There are no jobs. More and more Americans want the
    Fed abolished for being so secretive and intrusive.
    Everything has been outsourced to India and China
    in terms of good jobs.

  • Comment number 18.

    US into deflation first, then Eurozone, then the UK (unless the cuts speed up that process for us). Who would have thought that the Milton Friedman inspired QE would go the same way, politically, as a Keynesian stimulus - all shrivelled in size because the politicians think that gestures work. I suppose no new political ideas until this happens.

    Krugman blog April 27, 2011, 'When Is A Target Not A Target?':

    "A further thought on Bernanke’s press conference, not too different from what Yglesias says, but I’ll put in in economese rather than English.
    So here it is: it turns out that the Fed’s 2 percent target for core inflation is not a target, it’s an upper bound.
    That’s not supposed to be how it works. If you really think that around 2 percent inflation is right (I’d prefer 4, but that’s a different issue), you’re supposed to view 1 percent inflation as being just as bad as 3 percent; in a situation in which inflation is below the target rate, you’re supposed to see a rise in that rate as a good thing. And correspondingly, if you’re where we are now, with below target core inflation and high unemployment, all lights should be flashing green for expansion.
    Instead, however, it’s clear that below-target inflation is considered no big deal, but that the Fed is extremely averse to seeing inflation rise above target, even temporarily.
    This is really bad, especially when you combine it with the strong evidence that slight positive inflation can be consistent with a persistently depressed economy.
    My verdict is that the Fed has now been bullied into ineffectuality."

  • Comment number 19.

    Perhaps we should add employment to the MPC's remit - given they fail to hit a single target giving them more rope may do the trick!

  • Comment number 20.

    16 says:

    "On the other hand, it was ecomonists blindly believing that all was just dandy in the world that was partially to blame for landing us in the brown stuff in the first place!"

    Interesting, the phrase used at the end, but there is a capital missing: what really happened was that we were "landed in the Brown stuff"!

  • Comment number 21.

    I know that in the past I have taken issue with the phrase "most economists" used frequently (and with what I felt was impressionistic intent) in this blog. I noted this, which looks at the US and UK economies:

    Krugman blog, April 27, 2011, 'UK, Not OK':

    "The bad GDP number for the UK isn’t a surprise — in fact, judging from market response, investors seem to have expected something even worse. Still, if you step back and look at what has been happening, it’s doubleplusungood: zero growth over the past 6 months, with every reason to be worried on the downside looking forward, as Cameron’s austerity bites deeper.

    Jonathan Portes gets to the nub of it:
    'On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved…Meanwhile, the argument that fiscal overkill was necessary to appease the credit rating agencies has again been disproved by market reaction – or the lack of it – to the Standard & Poor’s outlook warning last week in America, where US Treasury yields hardly budged. In short, there is no confidence fairy; and S&P can call invisible bond vigilantes from the vasty deep, but they won’t actually come when called.”
    Portes hits, in particular, on a point I’ve tried to make a number of times, here and more recently here: right now, we’re living in a world in which basic economics points to conclusions utterly at odds with what Very Serious People are supposed to believe, in which radical outsiders base their views on standard economics while orthodox types turn to heterodox, highly dubious speculations.'

    Econ 101, buttressed if you like by fancier New Keynesian models, says that contractionary fiscal policy is, well, contractionary. Yet much of the world of movers and shakers bought into the exotic notion that expectational effects — the confidence fairy — would make contractionary policy expansionary. And they clung to this belief even as the supposed historical evidence in favor of expansionary austerity was thoroughly debunked.
    And now we’re watching Econ 101 in the process of being confirmed. I wish I thought this would change anyone’s mind."

  • Comment number 22.

    Ben Benancke beware, WE have Ed Ballsup watching your every move, he is the UKs politico economist sanspareil, ask him he will tell you when he takes a time-out from saving the UK economic and financial disaster, he and Brown masterminded.

  • Comment number 23.

    A system that allows a single currency to be endlessly debased by massive new issues that are pumped out into the global economy as the dollar has been cannot go on doing so for ever - in the end the true underlying value it represents must be driven by market sentiment.

    The historical accident of the dollar becoming the world reserve currency and the commodity trading currency is just that - an accident - and the only reason that the Greenback has been able to continue as it has since WWII and the Marshal Plan is simply primacy.

    The buck is massively over-issued - and the twin deficits of government spending and the US balance of payments deficit cannot go on allowing the US citizens to live massively beyond their means in terms of imported energy, food and consumption of manufactured goods.

    The only thing holding this all up now is the Chinese government's willingness to accept dollars in return for their exports to keep their industry working - ditto the oil exporting nations - but in the end someone will blink and there will be a massive sell off of the dollar and the bubble will burst.

    If there is an effective devaluation of the dollar by 50%, this translates into a collapse in living standards within the US and an implosion in demand which would in turn dislocate the exporting countries, who would see their markets evaporate - it is this stalemate that has meant the printing presses can still roll in the USA.

    Currency markets and dollar holdings are mediated through the financial services industry, so if we applied any sort of objective assessment of the true market values of the dollar, virtually all of it would be insolvent.

    It would be these global markets that would detect the initial sell off of the dollar, then pile in to multiply the effect and drive its value down hard, so I think that behind the scenes there must be a move to decouple the dollar from currency trading to end the free market in currencies to try and prevent meltdown.

    There is another compelling factor here - the scale of the world's population and its demand for resources that are rapidly running out. At what point do the Chinese middle class demand that they receive the scarce food, fuel and goods rather than the USA, if they are bankrolling US consumption?

    When this happens I feel we will have reached the crunch point and Beijing will signal that the game is over and dump the dollar. US consumers will be replaced by Chinese consumers and there will be a catastrophic collapse in the US economy - which will probably take a lot of the other western nations with it.

  • Comment number 24.

    #22. At 10:31am 28th Apr 2011, Geoff Berry wrote:

    "Ben Benancke beware, WE have Ed Ballsup watching your every move, he is the UKs politico economist sanspareil, ask him he will tell you when he takes a time-out from saving the UK economic and financial disaster, he and Brown masterminded."

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

    They must have been incredibly influential to bring an entire planet to financial ruin.

    The UK budget has been in net deficit for over 60 years......... oh forget it the blinkers are obviously screwed in place.


  • Comment number 25.

    As I've blogged repeatedly before, they'll be NO BANK RATE INCREASE UNTIL 'THE CITY' IS CONFIDENT THAT GROWTH IS RECOVERING. None was EVER likely in May: either US or UK.

    The idea that the BoE's MPC is an autonomous decision making body is somewhat short of reality. Of Course the BoE - and the US Fed's OMC - takes account of what the financial markets are signalling and chatting about. Right now there is nervousness that the Coalition has clobbered growth so hard that the deficit reduction will fall below plan and have to change.

    Consequently, what is emerging is a less sudden version of the Sept 1992 forced devaluation. Common-sense market opinion in 1992 was that Tory austerity measures were unsustainable and that an abrupt change was likely. So traders anticipated that by selling pounds.

    This time, the pound has already been floated downwards to enable the UK to grab a bigger share of European consumption markets as an offset to massive cuts in domestic incomes and spending. That's part of the MPC's economic policy begun well before the change in Westminster Government, of which financial markets don't so much as approve as consent to.

    In short, they'll be NO INTEREST HIKES in either the US or the UK until either central banks see from market behaviours and comments that their respective national recoveries are SAFELY under-way. Meantime, note that UK GDP per capita is down slightly and the US is flat-lining. Stimulation MUST continue until recovery is assured.

  • Comment number 26.

    11. At 09:31am 28th Apr 2011, NorthSeaHalibut wrote:
    #4. At 07:11am 28th Apr 2011, Libert_arian wrote:

    "The US are not monetising the debt. They will pay back their obligations at full value. The USD is a good long term store of value. Unemployment is falling, jobs growth is rising. Go back to sleep"
    -------------------------------------------------------------------------------

    Ben, is that you?

    The way I see it the US has three choices,

    Stop QE - The market tanks
    More QE - The dollar tanks
    Raise Interest Rates - Everything tanks

    ....
    An excellent summary NSH. Indeed the US is a dead man walking, and perhaps all 3 scenarios will show themselves in due course. Of course if the US goes down, then the rest of the world will be pulled down as well. The only question is when. Still why worry about that, just get them rose tinted goggles back on.

  • Comment number 27.

    #24. NorthSeaHalibut wrote:

    "They (Ben, Merv, etc) must have been incredibly influential to bring an entire planet to financial ruin"

    Isn't the whole point that they acted negligently and ignorantly!

    If someone is so stupid, ignorant and ill-educated that they don't understand how appallingly bad the consequences of their action will be that it is quite easy to be so calamitous! (such as: looking for a gas leak with a lighted match.)

    Turning my own argument round: - becasue we have seen the consequences of their (in) actions then it follows that they 'must' therefore be ignorant, stupid and economically ill-educated.

    Hence my demand for an entire re-formation of economics!

    I also further believe that there is a good argument that the (disastrous) blind spot of economics is the valuation(and pricing) of assets. (Which itself flows naturally through to the necessity to always maintain the proper pricing of money.)

  • Comment number 28.

    23. At 10:57am 28th Apr 2011, richard bunning wrote:
    .....
    The rise in the price of gold and silver shows how much the dollar is sliding. When the dollar is dumped, the US will become a third world country as prices rocket to reflect the true value of the dollar. At that point, there is a possiblity that the american population might be a little cheesed off.

  • Comment number 29.

    #25. leftie wrote:

    "Stimulation MUST continue until recovery is assured."

    But the huge flaw in your argument is that zero interest rates WILL stimulate anything! There is ample evidences that nugatory interest rates depress an economy further and are actually incapable of stimulating the economy. This is the fundamental error in your (and Ben's and Merv's) policy.

    The price of money has more than one effect - you seem to think it only has one to stimulate borrowing - when in fact the evidence is that below a certain level the effect is the opposite. (As can be seen by the continued and accelerating repayment of borrowings over the last two years.) The other effect of zero rates is for those with money to hoard it in such places as gold! This is precisely what we are seeing and what is more it is exactly what can be and is predicted in such circumstances.

    The only way out of the vicious downwards spiral is to stick up rates! The longer the delay to longer it will be until the recovery can start.

  • Comment number 30.

    ". . . in my view if we're going to have a sustainable recovery with healthy job growth, we need to keep inflation under control."

    Keeping inflation under control is a grand-sounding phrase but rather more difficult to do when
    (1) the money supply is essentially in the control of many banks rather than the Fed
    (2) the Fed's lever (interest rates) is only marginally effective if at all,
    (3) long-term currency depreciation raises import prices;
    (4) other concerns, both party-political and economic, create demands which are in direct or indirect conflict with the strict control of inflation.

    So, 'sub-optimal' growth rates much higher than the UK or not, the USA's problems are far from over. And I haven't even mentioned property prices, the construction industry, the car industry, and whatever bubble is going to replace property if this stays a busted flush . . . :-)

  • Comment number 31.

    SF you say US growth -'we should be so lucky'. The only sure information we have is the historic data which shows 1.8% annualised to the end of Q1. This coincidently is the same as ours for the last 12 months.

    The US undoubtably has greater potential than ours to rebound (less dependent on public spending and a far greater range of natural resources and industry) but is about to enter the same phase of sluggish growth as the other western countries with high inflation/deficit combinations.

    They are in the fortunate position of having the worlds reserve currency to fall back on but as this is an increasingly soft currency they feel dollar for dollar the full impact of commodity price inflation.

    In a pre BRIC world any softness in the US economy was automatically fed through to commodity prices - reducing inflation and stimulating the ecomonmy. This no long holds true - welcome to the 1st world economy stagflation club.

  • Comment number 32.

    The rest of us can think about what it would be like to live in an economy expecting "subpar" growth this year of 3.3%.

    Growth in the US economy slows to 1.8%

    The figure is a first estimate, and could be revised either up or down in the coming months
    Continue reading the main story
    Related Stories
    From the BBC web site
    Growth in the US economy Slows
    Official figures show US economic growth slowed in the first three months of 2011 to an annualised rate of 1.8%.The figure is a first estimate, and could be revised either up or down in the coming months.

    Kind of says it all really

  • Comment number 33.

    The US has simply printed money in a naive belief that a magic upturn in the economy would miraculously come riding along and save the day. Sooner or later they and us here in the UK will realise that with a rising world population and the end of cheap energy and natural resources we can not maintain economic growth per capita with a rising population. There is not going to be an economic growth miracle for them or us. Technology can only put small dints in the drop in living standards that we will all have to face up to (sorry the majority of us, because there will always be success stories against any tide).
    When we start adapting to the inevitable and addressing it with population control and realistic labour and wealth distribution policies the better off we will all be.

    We have overdone it on the debt, overdone it on population, and overdone it on our urbanised lifestyle and economic dependance on non renewable energy and non renewable resources. We still continue to overdo it on all of the above and indeed many think our cure is more of the same (more debt, more people, more urbanisation, more industrialisation built on non renewable energy resources). We need to face these basic facts and plan and ACT accordingly.

    Growth of travel, growth of consumption of resources, growth of calories of energy expended to produce a calorie of food is over. If we do not accept and adapt to this we will see a human catastrophe that makes world war two look like a small mishap.

  • Comment number 34.

    I watched some of the press conference on Bloomberg last night. Has anyone else noticed how "wobbly" Bernanke's voice sounds or is it just my imagination ?

    I hope it doesn't mean there's something he knows which we don't !

  • Comment number 35.

    Nice title Stephanie...now when are we going to get, "Crisis, what crisis?"

    Or maybe "Brown's World"...most excellent bodacious babe.

    Anyway, if inflation does become a priority for the US govt. they only have to repeal the futures-trading concessions granted to the 16 biggest banks in the US "and lo, commodity prices did descend from on high like manna in the wilderness."

    See attached chart for what happens when the money supply goes stupid.

    http://www.rba.gov.au/statistics/frequency/commodity-prices.html

    As the man says...keep calm, and carry on.

  • Comment number 36.

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

  • Comment number 37.

    25. At 12:10pm 28th Apr 2011, leftie wrote:Consequently, what is emerging is a less sudden version of the Sept 1992 forced devaluation. Common-sense market opinion in 1992 was that Tory austerity measures were unsustainable and that an abrupt change was likely. So traders anticipated that by selling pounds.

    There is also the view that Britain joined the ERM at to high a rate that was not sustainable. Our inflation rate was higher than Germany's - interest rates were at 15% (I remember it well) and by joining the ERM if the exchange rate ever neared the bottom of its permitted range, DM 2.778, the government would be obliged to intervene. The conditions for joining the ERM were not favourable at that time. The effect of the high German interest rates, and high British interest rates, had been, arguably, to put Britain into recession as large numbers of businesses failed and the housing market crashed. Joining the ERM was dumb and not just for Britain at that time.

    We started our own business just before 1992, interest our business loans went up to 20%. Now those sort of rates cause problems for business. Needless to say we survived but it certainly left some scars (probably on my liver.)

  • Comment number 38.

    Same guys that were supposed to be regulating the markets during the great banking fraud and theft. Lobbyist for the bankers and investors. If there were anything like a free market these things might work but since the financial markets are controlled by the big banks and investors everything is just a pretense. The ruling class is still ruling. Congress is owned by the banks so anything they do must have the bankers approval if not having arms twisted to get done. Nothing has really changed.

  • Comment number 39.

    "23. At 10:57am 28th Apr 2011, richard bunning wrote:"

    Firstly, thanks for that excellent top quality post.

    Secondly, regarding your comment...

    "The only thing holding this all up now is the Chinese government's willingness to accept dollars in return for their exports to keep their industry working - ditto the oil exporting nations - but in the end someone will blink and there will be a massive sell off of the dollar and the bubble will burst."

    I think it may have already begun but will it burst or just carry on deflating ?

  • Comment number 40.

    Wasn't only a few days ago that the Chinese spoke of their willingness, in fact of the necessity, of getting rid of 2 trillion USD from its foreign currency reserves?

  • Comment number 41.

    #39. At 14:55pm 28th Apr 2011, Sigmar wrote:

    "I think it may have already begun but will it [$] burst or just carry on deflating ?

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

    I think we're looking at deflation fuelled by QE3, QE4 and maybe QE5. Quite probably the decline will accelerate exponentially such that the rate becomes so severe it eventually looks like a bust but the dollar will be worthless by then, along with two other well known currencies.

  • Comment number 42.

    35. At 14:30pm 28th Apr 2011, stillpuzzled wrote:
    Anyway, if inflation does become a priority for the US govt. they only have to repeal the futures-trading concessions granted to the 16 biggest banks in the US "and lo, commodity prices did descend from on high like manna in the wilderness."


    It would help if they also stopped the increase in the world population and persuaded the burgeoning middle classes in China, India etc. that they did not want to eat more meat, buy more goods etc.


  • Comment number 43.

    Who in their right mind is going to believe Bernanke?
    After all, this is the man who could not see the potential tsunami created by the sub-prime crisis.
    His recent appearance in front of Congress to testify that his policies have no impact upon inflation in commodities or emerging markets show just how completely out of touch he is with reality. The man is in denial. Worse still, he now believes his own hype regarding his determination to follow his views about the Great Depression and to stop at nothing with flooding the world (not just the US) with dollars. The Fed will be behind the curve when inflation really starts to bite hard. After all, their emphasis upon core inflation figures which strip out fuel and food costs show how much they want to 'spin' their news. No doubt in his Washinton post, Ben does not have to worry about such niceties.
    This latest 'press appearance' is in my opinion less about trying to be transparent and more about managing the ''spin'.
    The dollar is to be sacrificed in the name of Helicopter Ben's obsessional belief that the US will dodge the inflation bullet and that being a puppet of Wall Street has no consequences.
    Given the trillions of dollars that he has chucked at the problem, the growth figures for the US are pretty appalling in the real economy; U6 unemployment hovers around 16%. The US stock market rise returns pension funds and the portfolios of the rich to more healthy levels, (assuming the funds manager has backed the right horse), but such things do not make the average person in the US feel wealthy. The wealth effect is fine for high paid professionals, but the vast majority of US citizens do not feel wealthier at present and many anticipate their children will grow up to be poorer in living stadards.
    According to the Case/Schiller index the housing market is moving into a double dip in the US, unemployment is only reducing slowly within US borders, because multinational US companies are mainly hiring overseas, real inflation reflects $4 a gallon in many states as back in the peak 2008 period for oil, food prices are rising, energy prices are rising, yet Helicopter Ben is going to keep interest rates at record lows and continue to depress the dollar.
    This is black comedy at its worst!

  • Comment number 44.

    "40. At 15:04pm 28th Apr 2011, SeanBroseley wrote:
    Wasn't only a few days ago that the Chinese spoke of their willingness, in fact of the necessity, of getting rid of 2 trillion USD from its foreign currency reserves?"

    I believe I read that China started to diversify sometime ago and the proportion of US debt they hold has already started declining.

    "41. At 15:19pm 28th Apr 2011, NorthSeaHalibut wrote:
    I think we're looking at deflation fuelled by QE3, QE4 and maybe QE5."

    It will be interesting if there is more QE because Ben said there would not be a QE3 last night although he always stresses that they are prepared to act as the situation requires.

  • Comment number 45.

    @42. AE, did you look at the graph?

  • Comment number 46.

    Re Ben the Bernank...

    We probaly would have got more sense out of Bill and Ted!

  • Comment number 47.

    AT 23,
    "At what point do the Chinese middle class demand that they receive the scarce food, fuel and goods rather than the USA, if they are bankrolling US consumption?"

    I was with you until this point the problem is the means of exchange not the availability of resources its the money that is scarce not the productive potential and resources. ( This is true of course only up to a point ) All of this talk of GDP and medium term quantative easing and so on is completely divorced from the real world, real production real Added Value. In fact real economics.

    Money is an abstract concept so is inflation its a game that has been allowed to get out of hand. The banking system is badly managed and badly designed and the economic orthodoxy's that have grown up to perpetuate a wrong headed approach to a proper means of exchange rooted in reality is also now showing itself to be inadequate for the job of managing real economy.

    As other posters have mentioned none of this is new the main surprise is that another generation of leaders in Banking and Government managed to convince themselves that they were somehow cleverer and knew better than previous generations.

    Rather than trying to save the Babylonian false god of debt money it is obvious that it is time for a new system if anyone thinks this is remotely about democratic processes and has anything to do with the wider society and populations larger interests surely its time to cut to the chase.

  • Comment number 48.

    Has anybody else thought that if you were a professional snooker player wandering round the table with cue in hand it would prove irresistible at times to give Michaela Tabb a quick poke as she leant over to respot a colour?

    Perhaps I'm on the wrong blog.............but the point I'm trying to make is that the action required is probably as obvious to the clever people in power as it is to us bloggers however who wants to be remembered for all history as the person who brought the global economy crashing down.

    There must be a lot of very nervous people in high places desperately trying to work out their next moves and cover their backsides!

  • Comment number 49.

    Some people still don't get it. You can't buy sustainable growth with borrowed money. You have to earn it.

  • Comment number 50.

    #44. At 15:52pm 28th Apr 2011, Sigmar wrote:

    "It will be interesting if there is more QE because Ben said there would not be a QE3 last night although he always stresses that they are prepared to act as the situation requires."

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

    I've been quite interested in what he says recently and noticed he's turning away from QE in public, maybe to keep the markets guessing, the faintest hint of QE3 will have them salivating at the prospect. I do however think he'll go down that route (eventually) for two reasons, it allows the US to kick the can down the road a bit longer without incurring instant pain plus he's already on the QE path so removing stimulus so quickly will be too harsh too fast for his liking. To be honest either way he's tanked it, it's just a matter of when he hits the wall but I think he'll go for the option of least immediate US pain hence QE and hope.

  • Comment number 51.

    The US State is bankrupt! Accept it!

    Rampant inflation is heading its way!

    The Fed and Ben are feeding the fire of future hyper inflation! Low interest rates and money printing - QE - is the only game in town, with more inflation and eventually a dramatic increase in interest rates to try to prevent further inflation! Their system is finished! The banks and their fiat capitalist monetary system must collapse!

    Ben, like former Fed Chairman Paul Volcker before*, has a narrow vision and like Gideon the UK Chancellor and Merv at Bank of England can't prevent it!

    An inflation lesson from history (1979 and the early 1980s):

    * ''Determined to wring inflation out of the economy, Federal Reserve chairman Paul Volcker slowed the rate of growth of the money supply and raised interest rates. The federal funds rate, which was about 11% in 1979, rose to 20% by June 1981. The prime interest rate, a highly important economic measure, eventually reached 21.5% in June 1982.''

    Source: http://en.wikipedia.org/wiki/Early_1980s_recession



  • Comment number 52.

    The UK economy: another inflation lesson from history - in 1980 UK inflation hit 22%!

    'Mrs Thatcher's battle against inflation resulted in the closure of... factories, shipyards and coalpits – mostly during her first four-year term in power. This helped bring inflation below 10% by the turn of 1982 (having peaked at 22% in 1980) and by spring 1983 it had fallen to a 15-year low of 4%....

    'However, it also resulted in unemployment reaching 3,000,000 by January 1982 – a level not seen for 50 years.''*

    To try save the bankrupt UK bankers and bankrupt UK capitalism!

    Today in 2011 the Cameron regime is tying to do the same by smashing up the Welfare state and privitising the NHS -to save the same bankrupt UK banks and failed and collapsing bankrupt capitalist system!

    *Source: http://en.wikipedia.org/wiki/Early_1980s_recession

  • Comment number 53.

    Ben was pretty well pounding the ground, softening it for "QE3".
    Imagine!
    Everyone KNOWS QE2 is destroying the Global Economy; it's doing no good at all for the American people - other than those who speculate on the markets. The rest of the sheeplings - dumbfounded - watch the in/action of their financial leaders.
    As the US plays QE3, not all countries ares going to sit back and play their part - not anymore.
    China is no light-weight and China is saying it's over for Ben & his policies; they are saying this on the front page of the China Securities Journal: China’s foreign exchange reserves increased by 197.4B US dollars in the first three months of this year to 3 TRILLION US dollars. Zhou Xiaochuan, Governor of China’s central bank, said on Monday that China’s foreign exchange reserves "exceed our reasonable requirement" and that the government should upgrade, diversify its foreign exchange management using the excessive reserves.
    As the US dollar keeps declining, many economists have criticized the US Government and the Federal Reserve for implementing policies they say have increased INFLATION (PRICES) globally. A weaker dollar helps US exporters to sell their products.
    The Chinese are not the only ones just saying no to the United States. Tell me how a cheap dollar builds jobs or encourages American manufacturing? Only the sheeplings swallow this. It's a lie. The only growth that has occurred in the US is a consequence of INFLATION; other nations have a slightly healthier combination of actual growth plus inflation that may prove sustainable. In fact, without the commodity inflation that THE AMERICANS ARE EXPORTING AROUND THE WORLD, we might very well have an actual recovery.
    Meanwhile, Barclays (BCS) is trying to stay ahead of the Fed by auctioning off $900M in commercial real estate assets, including the St. Regis in Washington, DC and the 4 Seasons in Vail. In case you missed the point: This is a dump of almost 1/3 of their US commercial holdings - a wise move because commercial real estate is likely the next BIG bubble.
    We are at a "Keynesian Endpoint". What does this mean?
    It means the "QE2 Ponzi Scheme" will end in June.
    The world should be calling for a shift to proper stimulus in the US, including infrastructure spending as the only sensible way to get the US back on their feet. US paper is looking more and more like JUNK BONDS. Soon, the Fed will remain as the ONLY buyer of our own debt. How do you sustain that!
    QE3?

  • Comment number 54.

    The entire capitalist banking and financial system is a giant 'Ponzi Scheme' - accoding to small fry Ponzi Scheme merchant Madoff! He should know he worked in their Ponzi Scheme financial casino banking system! And was encouraged by the big Ponzi Scheme casino banks and bankers and the US banking authorities!

    The same Ponzi banking Scheme operated and operates here too in the UK!

    Moreover, without UK HM Treasury / Bank of England taxpayer State support of cash injections, loans and toxic debt guarantees ALL the UK banks would be declared bankrupt! The same applies in the US and Europe!

    If the UK private casino bankers and banks want to gamble the UK Government should pass a new Corporation Banking law to return them to their former 19th century status of Unlimited Liability! In that way the bank shareholders and Directors take the hit when they fail! Not the public taxpayer!

    Remember the Lloyds' Names!

    Unlimited Bank Liability now for bank shareholders and bank Directors!

    No more public purse taxpayer State support guarantees for private banks!


  • Comment number 55.

    The US can do what they like at the end of the day. The dollar is just a candy coating to the military power that allows them to shove around those countries that produce the raw materials it needs. So the coating might look a bit thin these days because the bankers took a little too big a slice. That won't change a thing. The military power is still there.

    The only solace I take is that Obama is clearly looking toward a more sustainable future. If he needs to rip off BP in the process to fund it, or needs to create more dollars, or borrow more, or bribe the bankers to not collapse the markets through QE, so be it. His real challenge is not outside the US borders but in the retrenched positions of its own citizens. Clearly he is trying to build a collaborative mentality in the US, no easy task, but the memories of the Bush wars and the absurdity of the Republicans' representatives should help him.

    My only regret is that the coalition is not taking the same bold leadership to change the mentality in our country.

  • Comment number 56.

    47

    IMHO the squillions of dollars out there cannot but become the problem because in the real world they are only any good as toilet paper in the long run - the US could never honour its debts if they were all called in -and new dollars are being created all the time at close to the speed of light.

    Take oil - its already at the point where the price has spiked because demand outstrips supply.

    Take food - the burgeoning new middle classes in China & India are demanding meat on their plates, so grain is diverted away from primary consumption to produce meat as animal feed, so the price of grain of all forms has skyrocketed.

    Take raw materials - the Chinese are scouring the world and doing all sorts of dirty deeds in Africa to gain access to minerals, timber and farmland.

    The merry-ground looks something like this - the US demands manufactured goods and pays for them in freshly printed dollars - the Chinese take the dollars in return for their goods - they pay for the raw materials in dollars, which are falling in value all the time. Most of these new dollars end up in the Chinese banking system, which invests in US Treasury stock (i.e. debt) which has been issued to... fund the borrowing of the government and balance the nation's trade imbalance with.... China.

    Now all this trade and investment in the Chinese economy has created a big new middle class, who want the trappings of western lifestyles. They want beef on the table, a nice house & car - to drive domestic consumption, the Chinese government allows incomes to rise, so diverting demand from exports to home consumption.

    Now the money to pay for the raw materials needed to make the goods for home consumption comes from the home market - production no longer needs to be mainly driven by exports - but the cost of the raw materials continues to rise as total demand rises.

    The Chinese then realise that they are paying higher prices for their imports because their currency is being held low to make their exports competitive into the US market which is also the major competitor in the market for the same raw materials they are struggling to pay for.

    Clearly there will be tipping point eventually - as their domestic market expands their dependence on exports to the USA in return for toilet paper currency will reduce - and the tide will turn and they will reverse the currency position, ditch their dollar holdings and deal directly with the raw materials exporters without mediating trade via the dollar.

    The logic is IMHO inescapable - its not a question of if - its when the tipping point is reached.

  • Comment number 57.

    North Sea Halibut @24,

    Not quite sure where you are coming from, is rhetorical satire not your strong suit?

    Remember Brown, he was the UK Prime Minister who on three separate occasions between 2005/7 stood at the Despatch Box, TV live to the world, and proudly announced that he with help from his useless toadies like Balls, had abolished the boom and bust of the worlds economic cycle.

    When every thing went to ratshit in September 2007, Northern Rock, he and Balls, Browns Economic Advisor for 8 years, invited the financial and economic big hitters from the G7 nations to a London crisis summit declaring that the UK government had the solutions to the global meltdown.

    One thing in Brown's favour, unlike Balls he has had the courtesy to disappear.

    Hope this clarifies my postion on the Brown/Balls axis of incompetence, did I see the price of gold has busted the $1500 mark? What was it Brown/Balls sold at?

  • Comment number 58.

    #56 Richard Bunning The tipping point is if the price of oil gets too expensive to produce food at a cost that keeps their population happy. At that point all bets are off and those countries that can, will defend their resources militarily if necessary.

    By the way are the Chinese dirty tricks any worse than what the US has done for the last 50 years in the Middle East, South America and Africa (via Apartheid South Africa)? They are in no way as bad but like the US and Europe they will look after their own interests.

  • Comment number 59.

    John from Hendon,

    Reform the system, yes, yes and make it big. Let's start with a core fact.

    Given all the complexities of the contemporary global and UK domestic financial and economic structures and operations why do we in the UK rely entirely on the talent resources available from the elected political party of the day to make the decisions of this criticality and magnitude?

    Economics is now a tool of the politicians used exclusely to retain power.

    Enjoy your many contributions, have a nice weekend.

  • Comment number 60.

    56. At 17:42pm 28th Apr 2011, richard bunning wrote:

    Perhaps many of the reasons that globalism does not equal Big is beautiful the means of exchange employed past the economies of scale point years ago the returns are now not just diminishing you are right they are past Tipping Point.
    The old story about the guy with the hot dog stand that hadn't realised there was a recession must be out there on the web somewhere look it up.
    Hold on a minute I'll Go and find it.
    http://www.freepromotips.com/index.php/library/resource-articles/321-a-hot-dog-vendor-has-a-timely-story-to-tell.html
    Think about it.

  • Comment number 61.

    Re unlimited liability for banks.

    A warning and salutary lesson for bankers and from banking and unlimited banking history!


    ''In the early days of banking, liability was not just unlimited; it was often as much personal as financial. In 1360, a Barcelona banker was executed in front of his failed bank, presumably as a way of discouraging generations of future bankers from excessive risk-taking.16 It has not been conspicuously successful. From the Middle Ages, debtor prisons replaced the gallows. They were a common feature of many developed countries, including the US and UK, right up until the 19th century.
    The switch to limited liability at that time was a conscious attempt to encourage risk capital into the banking system to help finance growth. In essence, this meant trading off financial risk against future productivity. At first, equity in banks often carried “double liability”, with shareholders liable for losses on the purchase price of their shares plus their par value at issuance. Among state banks in the US during the 19th and early 20th centuries, double liability is believed to have helped constrain risk-taking.17

    ''This practice was ended at the time of the Great Depression in the US. Given the likely need to rebuild bank equity in the future, now may not be the time to return to unlimited liability.''*



    Of course, for bankers and former BoE MPC members ''the time to return to unlimited liability'' is never the right time!

    But it is necessary now more than ever!





    *Source: http://www.bis.org/review/r091111e.pdf

    *Author: Andrew G Haldane: Banking on the state





  • Comment number 62.

    Bernanke/Flanders: 'First was the gloomy tone on inflation, in what seemed to be almost a throwaway comment from the Fed chairman. Officially, the Fed does not think that inflation poses a long-term risk to the economy, and it does not see any immediate reason to tighten policy to confront it. That was what the markets took from the official statement. But Bernanke had this to say, later on, when asked whether the Fed could, or should, be doing more to raise employment:

    "... the trade-offs are getting less attractive at this point. Inflation is higher... inflation expectations are higher, and it's not clear we can get additional improvements in payrolls without extra inflation risk... in my view if we're going to have a sustainable recovery with healthy job growth, we need to keep inflation under control."'
    ------------------------------------------------------------------------------
    Inflation is not normally a threat to an economy. Inflation was relatively rampant from 1997-2007 in the UK economy and didn't hurt it. It may have hurt employment here and it certainly hurt the benefits system and therefore the taxpayer but not our economy. You need inflation consistently and constantly heading towards Weimar/Latin American/Zimbabwean levels to damage an economy.

    It has to be remembered that the UK economy is not like that of the USA, or Europe for that matter. We sit somewhere in between. The US can carry a deficit and build sufficient growth on the back of it to still survive at the top table.

    It is notable that Bernanke sees inflation as an eventual hit on employment.

    There's a message for GO there.

  • Comment number 63.

    59. At 18:26pm 28th Apr 2011, Geoff Berry wrote, inter alia:

    ''Economics is now a tool of the politicians used exclusely to retain power.''

    Correction: to ratain the power of their City of London casino banker friends and banks and to retain their obscene bank bonuses and ''profits'' [sic] extracted from the citizens' deposits from which they create 'money from thin air' and guaranteed by the public purse and public taxpayers courtesy of politicians and the HM Treasury State support subsidy of banks and bankers' (see above).

    Return to Unlimited private bank Liability to avoid another public taxpayer bank bailout!


  • Comment number 64.

    Post #63

    Typo correction* ...*retain...

  • Comment number 65.

    A simple mans view: -

    What caused the original financial collapse – it was a property bubble which started in the US and quite slowly at first emancipated itself across the western hemisphere (and beyond when investments are taken into account), this was exasperated by the banks which by now had realised that (in fact) they were all “bust” bar none when measured by assets – vs - liabilities.

    Only the liabilities side of the equation has been shored up (temporarily by QE) the asset side in the U.K. has yet to be dealt with… as is the situation in the US but to a lesser extent.

    Property speculators from all continents (big and small) have sunk hundreds of billions of dollars into “talking up” property prices over almost a decade… spurred on by brainwashing programmes on various TV channels in the US the UK and the EU.

    John_from_Hendon is right in this respect, that being that you need to treat the cause and not the symptoms, property values must come down, and soon, or we all face decades of pain as opposed to just a few years.

    Its not so much asset prices but asset valuation sitting on bank balance sheets that need to be re-evaluated, of course the longer this is left the more serious the issue becomes.

    Interest rates in the U.K. should now be (as a guestimate) 7% not 5% or 0.5%.

  • Comment number 66.

    58 & 60

    Agree with both of you - I've acted on precisely these insights by moving out of the city, we've got a small farm and am rapidly getting self-sufficient in food, energy and water - the price of land has gone up 4 times in 8 years and the price of cattle/sheep etc is now treble what it was three years ago - I'm sure you know how much oil, electricity and retail food prices have risen... and it's going to get a lot worse, if it ever gets any better.

    In terms of falling investment profitability, I've got out of pension investments and put my savings into my own renewable energy and land - bye bye casino capitalism!

    This is my personal Plan B - no food, energy or utility bills other than the TV and phone - I intend to get an electric car and run it on micro-hydro electricity - I've my own water supply and have 140 tons of wood to be chipped for our heating for the next 5 years. We've come full circle from the Enclosures and clearances of people from the land 500 years ago back to a personally completely sustainable way of living.

    However I accept this is simply not an option for 99% of people in the UK, but it is the direction of travel we must take - slash imports of fuel, food and manufactured goods, become much more self-sufficient by producing what we consume, creating sustainable jobs in the UK.

    In other words, reverse globalisation, close down the City of London and end our addiction to imported goods, redirect investment into sustainable, local production and re-skill the workforce to make what we need in the UK.

    I'm afraid I don't see this happening, so a darker future looms of living standards falling, food, energy and imported goods simply go on getting more expensive and living standards steadily falling.

    I now no longer need to earn £12,000+ pa simply to pay the bills we used to have, but my quality of life and standard of living have risen significantly - Plan B works!

  • Comment number 67.

    John from Hendon (29 above) complains that 'the only way out of the vicious downwards spiral' is to raise interest rates. Because, John asserts, at current very low interest rates, folk have been paying down debt. So, QED, stimulation of our economy is self-defeating (John says).
    In some ways I have to agree with you John. It's certainly true that many mortgage borrowers probably don't adjust their standing orders fully to either reflect increases or decreases in their lender's interest rate changes. That possibility was also given by Prof John Muellbauer in his explanation as to why no one knew whether or not changes in Euro interest rates might have a disproportionate effect in the UK - were we to adopt the Euro. [Which we didn't, of course].
    It's equally true that a great many borrowers who're fearful of their future earnings and employment cut their spending and pay down debts. So I agree with that too.
    By reducing our outstanding debts, we also reduce the supply of money in circulation. That's because each debt is both a Bank's asset and represents deposits made into the banking system by those who've been paid with those debts. [because we can't spend money without someone else receiving that money!]. So in a financial crisis it's very important to arrest a steep decline in money supply - otherwise the general level of prices will fall and we'll enter the sort of deflationary spiral Japan has been trapped in for nearly 20 years. As spenders wait for prices to fall further, which cuts both demand and jobs.
    The optimum way to stop financial panic spreading into a 1930s Depression (where output and employment fell by over 20%) is for Governments to cut taxes and increase spending until consumer confidence recovers. An additional stimulation is for a central bank to buy Bonds from banks as a way of raising the market price of Bonds and, usually, bringing down long-term interest rates.
    I'm sceptical of the view that the BoE actually sets interest rates that matter. The really big borrowings are in the Bond Markets and those are outwith either BoE or Fed spheres. But keeping interest rates very low certainly helps the cash-flows of most households, and that extra cash probably does keep them spending.

    For all of the above reasons - and a few more - I suggest to you both that stimulation of our economy has been done by a variety of means between 2008 and late summer of 2010, and that that approach should continue until recession has been abated. Which is definitely NOT the policy of our Government: hence the stagnation phase reported by the ONS for the last six months.
    I hope this has helped.

  • Comment number 68.

    Ben has made previous pres conferences and taken questions, for example at the Press Club in Washington a few months ago. It was so informative and yet the messages are still not out there.

    Here are some of Ben's messages:

    -he wishes to make more press conferences and will embark on more.

    -he wishes the financial journalists to be better informed as it is they who distribute his messages and take whatever take on them that they wish. The more debate and data the better.

    -he had a swathing attack on the deficit. Something had to be done about it. It is unfortunate that Mervin King cannot speak on such issues.

    -Ben pointed out that since starting the $1.7t QE the S&P had doubled and this was his goal. This would be great news for investors if only they had know about it.

    -the extra $600b of QE was for the same goal. Investors take heed.

    The financial press are usually good but some strange myths have developed as follows:

    -Reuters always express market changes in Chartist terms, which is a psuedo-science whilst economics is a science.

    -There is wholesale acceptance that if you ask two economists a question you will get three answers when the truth is that one or both will be wrong.

    -The Arab spring is a myth. It is not their Belin Wall moment. It is food and energy price inflation stupid. It was just a great myth to be on message with but the truth is that Mubarak had been there for 30 years and Gadaffi for 42 years so why didn't the protest happen before? Because the people were surviving on the breadline before but not after 50% food price inflation. Non Arab countries will also fall to food price inflation.

    -we can fix the PIIGS with bailouts. No. They can only fix themselves by good management and statesmanship like the UK. More debt is not the answer to a debt problem. Ireland, Greece and Portugal should only be given advances that are collateralised or they will do a runner like Iceland.

    -US sovereign debt is not a problem. No. It is the biggest problem in the world today and threatens world stability. They have nowhere to turn for a bailout. Sovereigns have no lender of last resort and they don't have a mechanism to milk the Germans.

    There is only one answer to expenditure being greater than income and that is to tighten your belt.

    The US is dismissing economic realities for votes. The loss of 7m jobs should have been the primer for a recovery. 7m workers prepared to accept lower pay. But this incentive has been qua

  • Comment number 69.

    @35. At 14:30pm 28th Apr 2011, stillpuzzled wrote:
    "See attached chart for what happens when the money supply goes stupid.
    http://www.rba.gov.au/statistics/frequency/commodity-prices.html
    As the man says...keep calm, and carry on."

    Do you (or does anyone else) know precisely what caused the dip in the index in 2010? I don't recall any alarm bells ringing in 2006 when the commodity index far surpassed that of 1987-ish when I presume was the last economic tank, but I didn't think it was global. (I admit I was ignorant at the time but then I'm not an economist).

    My first reaction on seeing that graph was yelling "Don't panic Mr Manwaring!"...

  • Comment number 70.

    #67. leftie wrote:

    "So in a financial crisis it's very important to arrest a steep decline in money supply...the general level of prices will fall and we'll enter the sort of deflationary spiral Japan has been trapped in for nearly 20 years"

    But ask yourself if the reason that the Japanese are stuck is that they have not deflated their private debt (yet)? [Thus keeping their cost of production higher than is needed to be internationally comp0etitive and depressing investment by keeping returns from investment derisory and thus 'forcing' investors to invest overseas.]

    The Japanese have been doing for the past two decades exactly what we are starting to do now.

    To prevent a prolonged depression caused by the insane asset prices we have to decisively break the vicious circle and the only way to do that is to act so as to encourage debt-deflation. [i.e. put up interest rates.]

    Analysis of the 1930's and the way that that depression ended [look up 1930s and debt deflation in a search engine] shows that only after the debt is deflated can the economy begin to recover. Economic nostrums about keeping up the money supply have ceased to work and are essentially wrong in the economic conditions that prevail now. We have had a crash caused by a property boom (inflation) that have taken prices to levels that prevent the return to normal economic activity that generates jobs. This is very similar to the crash of the 1870s caused by property inflation and it took the the country some 23 years to recover from that.

    Policies that are essentially resistant to the deflation of the bubble economy just prolong the Depression - this includes keeping up the money supply, lest investment falls as all that happens is that investment goes into propping up bubble assets and their excessively overpriced condition.

    You also wrote:

    "But keeping interest rates very low certainly helps the cash-flows of most households, and that extra cash probably does keep them spending."

    If that was the case why hasn't the economy boomed in the last two years? Money is worth almost nothing in long term price so it should have created a massive boom - it hasn't.

    So might I suggest that your assumptions are wrong. That is that keeping interest rates low helps household cash flow. It can't have done so - because the result hasn't happened. I also suggest that you are obsessed with borrowers - the 10% of the Nation - and have forgotten that the squeeze on the 90% of savers has far outweighed the boost to borrowers.

    Your economic model is flawed and that is why it pushes you towards the old 'certainties' when analysis shows that for nugatory interest rates (i.e. money price) these 'certainties' are wrong and indeed hugely damaging.

    Hence the need to push up interest rates to get the economy going!

  • Comment number 71.

    Another case of, he would say that, wouldn't he? On what cosy planet do any of these global economic commentators live on? Obviously not ours? The only difference is that they tow their comfortable line, and we have to tow ours.

    Consumer confidence in the UK is shattered by fear of losing our jobs at any minute. Prices of basics like food, water, heat, and light is increasing - plus VAT of 20% on top of most, and we all know that VAT affects the most vulnerable - such as low paid workers and pensioners.

    All those high street crowds of obese people constantly portrayed on the news - we don't see that in our ordinary town. What we do see, is Local Authorities digging up and 're-designing' our high streets and market towns all over England - destroying local business and costing millions in wasted time in traffic queues, plus billions in wasted petrol and diesel pumping out pollution, yet getting nowhere!

    Just stop those Local Authorities wasting all of the above - NOW!

  • Comment number 72.

    re #66
    Richard,
    Do you realise how much the financial services industry (and London) contributes to the economy of this country and to the receipts for HM Treasury?

    If you close it down, you will have to instantly shut off a large chunk of Government expenditure while increasing the benefits bill and racheting up taxation for everyone. Is that really a good idea?

    You rightly point out that 99% of the population cannot live as you do now. (Actually that may be an underestimate - it could be as many as 99.99% of the population.) What do you want to do? Drastically reduce the population by sickness, disease and hunger to the point where the ratio is more favourable in your eyes?

    Posting pie in the sky solutions to our current problems can make for entertainment, stimulate some thinking and debate but if they are not reasonably practical they are destined for the digital equivalent of the WPB in fairly short order.

  • Comment number 73.

    67. At 22:36pm 28th Apr 2011, leftie wrote:
    The optimum way to stop financial panic spreading into a 1930s Depression (where output and employment fell by over 20%) is for Governments to cut taxes and increase spending until consumer confidence recovers. An additional stimulation is for a central bank to buy Bonds from banks as a way of raising the market price of Bonds and, usually, bringing down long-term interest rates.
    -------------------------------------------------------------------------------
    While the final para of my above post (@ #72) applies here as well, leftie, I feel I should actually be celebrating something of a conversion. The Left (and I assume you as well, in the past) usually advocate taxing MORE and spending more as an antidote to our present situation.

    But being able to tax LESS and spend MORE means having to do one other thing: carry an increasing amount of debt. Unfortunately, we as a nation are not really in a position to do so. Even Ed Balls would reluctantly have to agree to that at present, as a rather feeble Martha Kearney managed to elicit from him earlier this week.

    I would suggest a compromise. Taxing some things less, taxing other things more, paying down some National Debt and spending a little less while achieving better value for money from the DfE, the DfH and the MoD to name but three Offices of State. That, I think, is a practical solution.

    I am left wondering which Party will offer that at Election time and whether the Electorate will be brave enough to vote them into office.

    Low interest rates really only help those over-borrowed on mortgage - assuming they do not lose their jobs because of cuts or inflation - banks and, to a certain extent, exporters who might have to put in extra effort to contain costs and sell more effectively abroad if the pound was standing higher to other currencies. Low rates do not help most mortgagors, particularly the under-borrowed especially when high inflation is taken into account.

    Low rates hurt others, especially pensioners and savers, which will include young people in employment seeking to save for their first home.

    I think it is important to remember that the world is a very different place - economically and business-wise - to the 1930's and the UK economy has similarities with, but is also distinctively different from those of Japan and the USA.

    Some very new thinking - and action - may be needed here if we are to avoid creating the same environment where 2007/08/09 can happen here (if not

  • Comment number 74.

    Bernanke's problem is that he has finally raised his head above the parapet and has therefore opened up the floodgates for waves of legitimate criticism.
    Please excuse the clichés.
    Nevertheless people will be debunking his ideas.
    Folk will realize that he is presiding over a game of Mornington Crescent.
    Same rules, same procedure.

  • Comment number 75.

    America always does her thing - the largest insular continent on the planet who appear to be still run by one of the most insular countries in the world. Guess who?

  • Comment number 76.

    I'm sorry to be somewhat off the topic, but there's another adventure afoot that I find exceedingly more impressive: The EU Commission is investigating whether sixteen banks active in the so-called CDS (credit default swap) market colluded to pass on insider data to one particular firm.
    In addition, the EU is also investigating whether nine of these banks received preferential treatment from ICE Clear Europe, the largest CDS clearing house in Europe.
    The investigation has been announced by EU Competition Commissioner Joaquin Almunia, and the potential miscreants reads like a Who's Who of the global banking:
    JP Morgan, Goldman Sachs, Bank of America, Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, First Boston, Deutsche Bank, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo/Wachovia, Credit Agricole and
    Societe Generale.
    Almunia said the 16 banks MAY HAVE colluded with British-based Markit. Markit is the leading provider of financial information on credit default swap trading.
    Why would these sixteen banks and Markit collude?
    To shut out other competitors from the market. (Here's a smile: Markit was originally established to enhance the transparency of the CDS market.)
    preliminary probes of current practices appear to evidence the bypassing competition rules. Credit default swaps are a form of insurance against a specific economic event, such as a sovereign government defaulting.
    I always thought there was a problem with credit default swaps and sovereign debt; so I have to admit I was watching for this investigation.
    The probes announced by Almunia come on the heels of separate moves by the EU Commission to regulate the CDS market and other types of exotic financial instruments that I agree have complicated & exacerbated the euro-zone's sovereign debt crisis and thus prolonged recovery.
    Criticism has focused on so-called naked CDS trading, which is when an investor buys such a policy without holding a stake, such as a government bond in a particular country, thus providing the buyer with incentive to speculate AGAINST the country's finances i.e. force it to default.
    Greek Prime Minister George Papandreou said last year that such practices had forced his country into taking an EU bailout, and if you recollect: that's exactly what I've been saying, only I said it about all PIGS.
    Commissioner Almunia said that the lack of transparency appeared to be leading to abusive behavior and facilitating attempts to bypass competition rules. “I hope our investigation will contribute to a better functioni

  • Comment number 77.

    #76. BluesBerry wrote:

    "CDS (credit default swap) market colluded to pass on insider data to one particular firm. "

    Isn't this prima-facie evidence of a cartel operating?

    The one thing that must change is transparency - all trading must be done through public exchanges will full transparency - nothing must ever be hidden again on penalty of immediate corporate legal dissolution. (This must hold equally true for all and any legal or real persons no matter where they are domiciled or resident.)

    Further any participant in any from of quasi insurance transaction must have a direct interest in the underlying transaction - all third party gambling 'contracts' must be unenforceable at law and treated as a wager.

  • Comment number 78.

    72

    1. We have already bailed out the UK banking system - twice - once under the last government and then again via our support for the Irish government to prevent UK banks from being exposed to the speculative bad debt in the Irish property bubble.

    2. The risk of the need for a third bank bailout is very real - both from the EuroLand situation and from other risks such as a UK property bust, as in Eire. The reality is that we simply cannot afford to do another bailout - so if it happens, the UK banks wil be nationaised as in Eire if there is a third crisis - I think it is only a question of time until this happens and if the banks actually reported their liabilities and exposure accurately, we'd see that they are massively at risk.

    3. We have already stumped up £40,000 (or even more) for every man, woman & child in the UK to bail out the banks - there is no way we are going to do this again - politically it's a non starter.

    4. Much of what goes on in the City is socially and economically pointless and poses a massive risk to the nation for little or no practical benefit - if they were miners, ship builders or car workers, the plug would have been pulled long ago - and the resources it consumes should be applied to productive industry, not high salaries and bonuses for parasites.

    5. Even David Cameron says we need to restructure the economy away from financial services towards manufacturing - he's right - the model based on milking the City to fund our welfare system and import addiction is unsustainable and the sooner we bite the bullet and recognise this, the better.

    I'm not asking for a firesale in the City - it will take time - but the current model is never, ever going to work again - the sooner we begin the process, the less pain will be incurred - IMHO the alternative is to wait for the next banking crisis and be faced with the sort of situation the Irish now have - unsustainable levels of debt, emergency nationalisation of the entire banking sector, plus a collapsing currency and a deep, longlasting recession we are powerless to address.

    It's way past time people such as your good self realised that the game is up - the City is an accident of history - it developed off the back of the Empire, which ended quite some time ago now. The economic power is shifting eastwards and the risk/reward profile for the UK finance sector simply doesn't stack up anymore - we cannot and will not go on backrolling the City to gamble with our f

  • Comment number 79.

    #73. Up2snuff wrote:
    67. At 22:36pm 28th Apr 2011, leftie wrote:

    "....................Low interest rates really only help those over-borrowed on mortgage................."

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

    Not quite as simple as that.

    Raising interest rates will do nothing to help the wider economy, which is in real trouble and far from "recovery" mode.

    A recent study by Legal & General Investment Management, indicated that a massive 90% of borrowers are on a variable rate mortgage, leaving them completely exposed to any hike in interest rates.

    This is a far higher figure than the, already high, 68% figure which was recently published by the Financial Services Authority.

    The higher figure is suggested to take into account the enormous number of borrowers who reverted to a variable rate at the end of their fixed rate deal, the fees involved in fixing at what would also be a higher interest rate than a base rate tracker, should one have been available, being prohibitive.

    If these figures are correct, a base rate increase will affect nearly all mortgage borrowers in the UK.

    Shelter has previously warned that as many as 2.8 million homeowners could be completely unprepared for the costs of rising interest rates. Apparently the number of homeowners struggling to pay their mortgage, already, has increased by 78% in the last 12 months.

    A spiral of debt, repossession and possible homelessness will do nothing to cure the country's economic woes, particularly with the resultant increase to the welfare bill.

    Low interest rates, it would appear, are not just helping those which would usually have been considered to have over-borrowed on mortgage - many have already & will continue to lose their jobs, directly & indirectly because of the cuts, together with pay freezes for those who manage to keep them - many ordinary families are & will continue to be, affected & struggle to keep a roof over their heads. This will place further burdens on awelfare system, that this government is currently in the process of scaling back.

    What's for sure, is that with public and private sector jobs cuts, high fuel & utility costs squeezing the budgets of ordinary families, an increase in the Base Rate will see a subsequent rise in mortgage arrears and repossessions with many British homeowners becoming further statistics of the economic malaise.

    Due to the governments inability to engender policies that foster growth, more & more households are feeling the impact on their real incomes which of course is not being helped by inflation, but those losing their job are & will feel a far greater proportion of that pain. Raising interest rates, at present, will damage any prospects of growth & increase the pain for even more people.

    Of course the above is subject to the economy having to adhere & operate in the the debt based monetary system, which has been shown to have failed most, with the exception of a certain group of people. Unfortunately without the acceptance that this is the case & the will to change it, that is all we have.

  • Comment number 80.

    #78. richard bunning wrote:

    "Even David Cameron says we need to restructure the economy away from financial services towards manufacturing - he's right "

    Yes he is right - however manufacturing needs to be internationally competitive so that it can recover - short term subsidies will not work. In my analysed opinion what manufacturing needs is an internationally competitive cost base. This means that wages need to be at internationally competitive levels. But it is completely unreasonable to expect workers to be squeezed till their pips squeak. What therefore is also needed is to squeeze workers own private costs even more. The major constituent of every worker's costs is the cost of housing so this has to be cut.

    Hence, house prices must fall drastically (along with rents) to make the UK competitive so that manufacturing can arise again!

  • Comment number 81.

    #79. History Repeats wrote:

    "the governments inability to engender policies that foster growth..."

    [also see #80]

    Unfortunately fro you History presents us with a prospect of a recovery delayed until private debt is deflated which means house prices have fallen substantially. (See the many studies of the debt deflation stage of the recovery from both the 1930s and the 1870s Depressions.)

    This will have undesirable personal and corporate consequences for those engaged in the property bubble, just as it had in the stock market bubble of the late 1920s and the property bubble of the 1860s. It is necessary to address the issue of crippling debt. Indeed it has to be addressed or there will be no recovery, just stagnation and depression.

    The property lenders (building societies and banks) have on/behind their balance sheets securities that are not worth the values ascribed to them (as in Eire, Spain etc.) Also individual borrowers have worthless assets and indeed total gross liabilities rather than homes. These are facts of arithmetic if a rebalanced recovery - with jobs- is possible. Many banks and building societies will need to be liquidated in an orderly manner and many, if not the majority, of the securitized bundles of loans (CDOs) are in fact in need of at least a substantial haircut. Individual house borrowers cannot, and will not, be protected - their choice is to continue paying for a loan whose face value is far higher than the price of their home if they can, or default and loose their home. In the end, the housing market will correct at the longest after the borrowers die - this is why the 1870s depression took over twenty year to be resolved.

    But the upside is that we will get a rebalancing of the economy and a resurgence in internationally competitive manufacturing jobs - but there is no short term painless fix. We have to face the fact that we have spent far more than we have earned in the last decade or more and are thus living still in a fools paradise - we have quite literally borrowed our children's future incomes and spent them - now our children will have to pay, or default - which is the same thing in the end!

    But to get through this terrible situation the key is to do it as quickly as possible - hence interest rates must rise to at least 5% NOW.

  • Comment number 82.

    78 Richard. I agree entirely with all your numbered points in particular your arguments on unproductive financial services and our need to bite the difficult short term bullet on this.
    JFH I agree with your views on interest rates and house prices, however, both of you we have to be realistic. Firstly, global commodity shortages, particularly energy, are game changing facts for our economy which will become more and more obvious to more and more people over the next four to five years. A paradigm shift must occur in our societal structure and will be forced by these shortages.

    Secondly the level of debt personal and public that we have built up will have to be defaulted on or inflated away or both over the next decade and this in itself will change the landscape for our national and world economy thereafter. Other OECD countries are in similar situations and their outcomes will be likewise to ours.

    There are many economic millstones that we have tied around our collective necks over the past sixty years since WW2 but the really big one is over population. It is a massive challenge for humanity now to avoid a correction in this excess by war and terrible ensuing disease and famine. My great hope is that we recognise this problem and make the necessary plans and sacrifices to lifestyle and current growth focus to mitigate and bring this down to sustainable levels this century.

    I believe we need to do many things to achieve a peaceful and sustainable future, but that the biggest by far is tacking population growth and managing it's immediate decline. Reduce population and everything else becomes manageable with human ingenuity and technological progress. Quality of life not quantity has to be the focus in order for humanity to avoid catastrophe in the current century.

  • Comment number 83.

    #81. John_from_Hendon wrote:
    #79. History Repeats wrote:

    "the governments inability to engender policies that foster growth..."

    [also see #80]

    Unfortunately fro you History presents us with a prospect of a recovery delayed until private debt is deflated which means house prices have fallen substantially. (See the many studies of the debt deflation stage of the recovery from both the 1930s and the 1870s Depressions.).. .........................................................................................................................................................................................................................................But to get through this terrible situation the key is to do it as quickly as possible - hence interest rates must rise to at least 5% NOW.

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

    I assume your opening line should have meant unfortunately for me?

    I'm afraid, if you'd read my post correctly you'd have realised such an adjustment as you advocate, would be unfortunate for far too many people.

    It's far too simplistic a view, as we now live in far different times to the 1860's/70's & 1920's/30's. Home ownership has increased exponentially.

    The realisation that in this time of high ownership, as many as 90% of borrowers are on a variable rate mortgage, leaving them completely exposed to any hike in interest rates is one of the reasons the hike you advocate will not be allowed to happen. The defaults & subsequent repossessions & collapse in prices would be off the scale, the only winners being cash rich property landlords who would then buy up those properties for a song. After all, people & THEIR CHILDREN will still need to be housed & the resultant increase to the welfare bill would cripple the government's deficit reduction plans.

    Your comment that individual house borrowers cannot, and will not, be protected - takes no account of the number we are actually talking about. The fact that their loans face value would be far higher than the price of their home would mean they would have no choice but to default & lose their home. However, they will still need to be housed, otherwise anarchy will ensue. Expecting the housing market to correct after borrowers die will not happen either. For most, other than property speculators & second & holiday home owners, their home is where they & their families live & are simply inherited by the next generation.

    What an earth makes you suggest that any of the above will lead to a rebalancing of the economy and a resurgence in internationally competitive manufacturing jobs? where is the link?.

    People have to have a roof over their head, hence the buoyancy of the rental market & the fact people still put their money in bricks & mortar. What you are advocating will only serve to increase the imbalance between the rich & poor in society & is no panacea to cheap home ownership. Our children will not benefit from what you advocate, neither in the immediate (displaced families losing their homes) or long term (property speculators buying up repossessed homes that people have no choice but to rent will simply cause future bubbles).

    If the rebalancing that you suggest was to happen, it should have occurred back in 2007/8 at the time of the banking crises. Had the banks been allowed to fail, as some have since advocated, yes people would have lost their savings, but it would have necessitated a new world economics order. However governments stepped in & underwrote the banks with taxpayers money (many of whom are mortgage holders).

    As previously stated the decision was made then, rightly or wrongly, to stick with economies having to adhere & operate within the debt based monetary system It failed but was propped up. For good or bad the decision has been made to work within it.



  • Comment number 84.

    #83. History Repeats wrote:

    "I assume your opening line should have meant unfortunately for me?" Sorry about that - I was having a go at your tag!

    Now to the substance:

    "What an earth makes you suggest that any of the above will lead to a rebalancing of the economy and a resurgence in internationally competitive manufacturing jobs? where is the link?. "

    I showed you the link - to make things again we have to have a competitive cost base. The majority of our manufacturers costs are wages and these are mainly used fro housing - further we cannot expect our fellow workers to have to work for wages that give then no disposable income after paying for essentials. Hence housing casts have to fall - now housing costs are mainly the fee for renting the price ('rent' included interest payments). Without bearing down on house prices commercial property prices remain over priced so house prices must fall and fall dramatically.

    Further you are also in error to state as your do "Your comment that individual house borrowers cannot, and will not, be protected - takes no account of the number we are actually talking about" - here you are wrong - most mortgages are for far less than half the present price of a property and so a 50% reduction would not hurt them at all. You are ridiculously over egging that case for doing nothing to the point of being ridiculous. Go look up the facts!

  • Comment number 85.

    more on 84...

    #83 wrote: "As previously stated the decision was made then, rightly or wrongly, to stick with economies having to adhere & operate within the debt based monetary system It failed but was propped up. For good or bad the decision has been made to work within it."

    THE BANKS HAVE FAILED. You are fooling yourself to believe otherwise. There simply isn't the ability to prop them up ad-infinitum without either hyper-inflation or a dramatic reduction in the price of the currency. Either way workers' pay will move towards becoming internationally competitive again.

  • Comment number 86.

    Up2snuff (73) claims that: " The left usually advocate taxing MORE and spending more as an antidote ..."
    Well 'the left' is a very broad description. It's worth pointing out that the UK's recent Labour Government (arguably of the 'left') reduced base rate income tax from 23% to 20%, reduced Corporation Tax from 36% to 28% and, in November 2008 and to save the UK quickly - within weeks of the Wall Street Crash - from falling into a deflationary spiral, that 'left' government reduced VAT from 17.5% to 15%. Hardly the actions of a tax-and-spend regime.
    The Left is primarily interested in correcting the slide into aristocratic hierarchies that is the normal consequence of creating institutions that protect private wealth. That doesn't necessarily involve either more taxes or more spending. Moreover, that 'left' movement argues that raising VAT to 20%, cutting family investment allowances (ie, child benefit) and increasing NIC will each raise taxes and exacerbate the economic decline and - therefore - increase the deficit.

    Once again I find myself in agreement with John-from-Hendon!
    I readily agree (77) that CDO transactions should ALL be made public (as most SEx trades are) and that they should be treated under contract law in the same manner as other insurance contracts: only valid where there is an identifiable interest in the insured risk. Both moves would enable those assets to be valued by market criteria. Which (I suggest) would help Auditors value Banks' assets more realistically. Had it been possible to put a market-value on both CDOs and CDSs in 2007 omwards, the worst of the Wall Street Crash might well have been avoided. So says this vigorous Leftie!

    History Repeats (@ 79) claims that I wrote that low interest rates only help the over-borrowed.
    I cannot find anything in my writing that says that at all. Nor, anything that would construe such a statement. Largely because it wouldn't be true.

    There has been excessive saving in world-wide markets and since at almost ten years ago. It was the prime starting cause of the Wall Street Crash that has hit every nation in our world. I admit that I knew interest rates were too low in 2003 because for the first time in 35 years I took out a fixed rate mortgage because the interest rate was the same as for variable rate mortgages. I thought those were barmy offers.
    Moreover, I guessed that variable rates would soon rise: which they did a few weeks later! So I freely admit that I read the signs of impending disaster that were certainly plain for me to see.
    [In mitigation, I point to the failure of very many others to foresee the need for international action at that time and since].
    Interest rates that really matter are in the Markets for Sovereign and Corporate Bonds. If supply of funding exceeds the supply of Bonds then their prices rise and interest rates fall proportionately. Sometimes those equations adversely affect borrowers, and sometimes savers.
    What pensioners and others overlook is that we're all very lucky to live in part of the world where governments enable us to accumulate and enforce claims on the income of workers in the future. That's what 'savings' are: legal claims on someone else's earnings.
    Without those gross interventions by government, none of us could 'save' any money at all!

  • Comment number 87.

    80. At 08:42am 30th Apr 2011, John_from_Hendon wrote:

    This means that wages need to be at internationally competitive levels.

    Surely you mean productivity (or unit labour costs) not wages.

    Someone on $2 an hour and $10 worth of investment cannot compete with someone on $10 an hour and $1000 worth of investment.

    The Germans are competitive (for now) but wages are high.

  • Comment number 88.

    #84. & 85 John_from_Hendon wrote:

    "to make things again we have to have a competitive cost base. The majority of our manufacturers costs are wages and these are mainly used for housing - further we cannot expect our fellow workers to have to work for wages that give then no disposable income after paying for essentials. Hence housing casts have to fall - now housing costs are mainly the fee for renting the price ('rent' included interest payments). Without bearing down on house prices commercial property prices remain over priced so house prices must fall and fall dramatically.".........................

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

    "we cannot expect our fellow workers to have to work for wages that give then no disposable income after paying for essentials" is very condescending, I & many other mortgage holders you seek to penalise, are those very workers!

    It's also far too simplistic to suggest that house prices are the reason for the manufacturing not being able to compete, even if you consider that manufacturing is in some way the panacea & forget that decades of neglect by successive governments mean it is neither sizeable enough nor in any position to lead a recovery. Whilst also, conveniently, forgetting that those workers still have to live somewhere.

    As I said, in a posted comment on another blog, "It is those that inflated the bubble, with second, third, buy-to-let & holiday homes that caused the over inflation (of house prices) due to supply & demand".

    If you can think of a way of drastically reducing property prices & at the same time reduce the outgoings of those struggling to keep a roof over their heads, all in a dour economy, I'm sure you'd have a lot of support.

    The alternative will be the cash rich will take advantage of the collapsing property market to snaffle all those cheaper properties as second, third, buy-to-let & holiday homes! causing another bubble."

    Your advocation of 5% base rates, short of solving problems will only lead to much of the same! No new laws are or are likely to be passed on property ownership as homes for the purchaser only. It is probably this that needs to change, so that a home is a home, not another vehicle for monetary speculation. However that is not going to happen in my lifetime, humanity as a species is way off that level of enlightenment.

    It is the supply problem that causes over inflated house prices. After all, people still need a place to live, there aren't enough of them & land, as a resource is finite.

    http://www.communities.gov.uk/housing/homeownership/

    Quoted from the site: "The most important step the Government can take to help promote homeownership is to achieve economic and financial stability by addressing the public deficit. This will help to keep interest rates low and improve credit availability."

    Your comment............"THE BANKS HAVE FAILED. You are fooling yourself to believe otherwise. There simply isn't the ability to prop them up ad-infinitum without either hyper-inflation or a dramatic reduction in the price of the currency. Either way workers' pay will move towards becoming internationally competitive again."

    If you'd read by comment properly, you'd have seen that I don't disagree with you that the Banks failed, but WORLD economic policy dictated that they then be propped up!

    As I said, the government have made there choice, rightly or wrongly. Practicalities mean we have to work within the system adopted & only hope some degree of fairness is applied. After all, you did not refute what I commented regarding :

    "If the rebalancing that you suggest was to happen, it should have occurred back in 2007/8 at the time of the banking crises. Had the banks been allowed to fail, as some have since advocated, yes, people would have lost their savings, but it would have necessitated a new world economics order. However governments stepped in & underwrote the banks with taxpayers money (many of whom are mortgage holders)."

    What makes you think it right to be constantly advocating penalising one group of people, when all they are guilty of was trying to live & put a roof over their heads, at the going market rate at the time...........after all, most homeowners/mortgage holders weren't speculating to accumulate. This after decisions made by world leaders prevented savers from losing their savings in the worst financial meltdown in history.........The repercussions for which, everyone is paying!






  • Comment number 89.

    #86. leftie wrote:

    "History Repeats (@ 79) claims that I wrote that low interest rates only help the over-borrowed.
    I cannot find anything in my writing that says that at all. Nor, anything that would construe such a statement. Largely because it wouldn't be true."

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

    My apologies for the confusion, leftie. Having re-read the post it should have been made clearer that the quote appears to belong to Up2snuff.

  • Comment number 90.

    QE and devaluation are ways forward in some situations. Devalue your currency and your debt with it. Print money and pay off your debt. Certainly, it would help Greece, Portugal and Ireland to resolve their short-term problems.

    For the US, it’s a fine policy. The US can afford QE 2, 3, 4 and more for a long time. The US can afford to devalue the dollar to worthless. Why, because it has an enormous agricultural and raw materials base and it still has some manufacturing industry. No doubt its manufacturing industry might even strengthen from devaluation. Of course, Chinese, German and Japanese products would become more expensive, but so what?

    The UK is in a different boat. We import almost everything, including the raw materials and components of the few things we manufacture. For us devaluation leads rapidly to inflation and misery. For us there is no short-term, magic pill. The only way to recover is hard work, creativity and wise spending, but especially the long forgotten ‘blood, toil, tears and sweat’. We might try to learn from how Germany, France and Japan progressed to where they are now from where they were in 1945. They got a lot of things wrong, but also a lot right, especially on ‘wise spending’.

  • Comment number 91.

    Allowing banks to fail and people lose their savings would have been disastrous, dishonest and evil. Letting banks fail and guaranteeing all depositors an identical account with the Bank of England would have been difficult, but acceptable. Taking banks into state ownership and imposing a very different way of working would have been a step forward from what UKGov did.

    A house price collapse is much more acceptable than a loss of bank deposits. Provided, of course, that the 'very different way of working' required from banks involves sharing responsibility with individuals sliding into negative equity. Indeed, given the role of irresponsible lending in inflating house prices and encouraging over borrowing, it should be expected.

    Perhaps a 30 or 40 % cut in house prices is exactly the kick start the economy needs? It might be difficult to get the idea across to estate agents. I understand the average asking price is more than one and a half times the average selling price.

  • Comment number 92.

    'NorthSeaHalibut' - flip and flap on your oxygen deficit visit to blog land. Swimming, no doubt in seas of wide-eyed economists; idiotic and manipulated politicians, and ripped-off ordinary citizens by the banking echelons who won't be fishing for you - nor your opinion - as you are part of that clique or just enjoy patronising the human pond life or the human plankton that keep the giant predators alive? Just hope this gets past the Mods.

  • Comment number 93.

    "...Officially, the Fed does not think that inflation poses a long-term risk to the economy, and it does not see any immediate reason to tighten policy to confront it..."

    +++++++++++++++++++++++++++++++++++++++++

    That would appear the position here too.

    However, there is the world of difference between the words "the economy" and "people" in this context, and the two are not interchangeable, especially where those people are savers or money-purchase pensioners.

  • Comment number 94.

    84. At 11:56am 30th Apr 2011, John_from_Hendon wrote:
    #83. History Repeats wrote:
    83. At 11:03am 30th Apr 2011, History Repeats wrote:
    #81. John_from_Hendon wrote:
    #79. History Repeats wrote:

    I’m enjoying the banter.

    I see and understand both of your arguments. One will result in an instant crime wave that is violent in nature. The other argument results in 60 years of depression. But as the kids grow in number and disillusionment because they can’t get a job and earn a living because they are paying off the folly of our financial mistakes it will result in a crime wave that is violent in nature. Or, due to their increasing technical savvyness they can use technology to fundamentally destroy the global economy resulting in a crime wave that is violent in nature.

    Instead of us going round and round in circles debating this; surely the question should be…

    Who gets to make the directional choice?

  • Comment number 95.

    #94

    I favour the righthanded circle but only because we drive on the left, I can see the continentals favouring the opposite circle for the same reason.

    I'm sure we can meet somewhere in the middle.



  • Comment number 96.

    To BR @95

    I'm sure we will.

  • Comment number 97.

    80

    A drastic fall in housing prices = insolvency of the banks = bailout Take 3 = completely impossible -so you are totally deluded about this - you are a victim of a very carefully crafted political deception and it's time you realised where it will lead.

    A drastic realignment of UK manufacturing costs to be competive in a market where the exchange rate is rigged, the labour market is based on forcing subsistence Chinese/other peasants off the land at the point of a gun into sweat shop factories that chuck out pollution to work in a society with zero welfare provision, that are dangerous and deeply exploitative is immoral, impactical and laughable - ain't going to happen.

    Face it - globalisation simply rips jobs, income and GDP out of our country and lines the pockets of the Communist Party of the Peoples' Republic of China - and their co-conspirators, who make a good margin on sweating chinese workers to sell to western consumers.

    You don't strike me as a supporter of the Comintern - do you really want the Chinese Communists to destroy the global free market by appearing to side with it in their plan to harness capitalism to develop their socialist economy, then ditech it? That's exactly what is happening.

    This is not a free market - this is not fair competition - this is the systematic abuse of trade to further political ends - and you free marketeers have been conned into believing that what is going on in totalitarian China is legit - it isn't.

    To argue that the UK labour market needs to sink to the levels of what used to be disparagingly known as "the coolie economy" is so ludicrous it beggars belief.

    There is no such thing as "the magic of the market" - the price mechanism is just that - a mechanism - it is not some quasi religious phenomen that lefties tamper with and screw up, that must be kept pure and unregulated at all costs. MAMMON IN NOT GOD - please stop this belief in the supernatural purity of the market - it's flawed and imperfect and will always be so, as all all creations of humanity.

    If the western economies moved against the rigged market and started imposing perfectly reasonable anti dumping tarriffs, if we insisted on a much broader fare trade policy of banning imports not only of goods made by child labour, but also ones made with slave labour wages without a welfare system, polluting & dangerous factories, then UK production would be competitive.

    Your "race to the bottom" is a non starter - as is your plan to bankru

  • Comment number 98.

    Rest of above:

    Your "race to the bottom" is a non starter - as is your plan to bankrupt the banks as the lenders of the money we all use to fund our mortgages.

    Are you really so naive? Do you really think all we need to do is scrap the regulation and leave it to the perfection of the free market to sort it out?

    You are playing with fire here - advocating policies that risk seeing the end of private sector banking in the UK would leave the State as the only player left on the stage in terms of finance and investment in the UK- are you really prepared to take that risk? I suspect this is the very opposite of your own politics, isn't it?

    You're being conned by the twin influences of the Communist who run China and the multinational companies creaming it by buying cheap in China and selling dear in the UK - WAKE UP!

  • Comment number 99.

    This Blog is very interesting. I am from Brazil and I am economist, but my english is not good. Here I will practice my english reading articles that I love! Thanks!!!

  • Comment number 100.

    Now we have it! The Fed has bailed out Wall Street again but not Main Street. So we all get told that recovery is at hand.

    The issue is that the alleged recovery is just statistics but is not real. What the US is now exporting is not manufactured in the USA but designed in the USA and made in China. The Uk has exactly the same problem. No real value, just trading on margin.

    What we have is an elite bailing itself out with other people's money whilst announcing that all will be well as a consequence. It is all snake-oil and dissimulation.

    Recovery is self-sustaining growth in Main Street: anything else is just shoe-mending.

    To say we are being short-changed is an understatement.

 

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