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Yes, as previously discussed, announcing a term structure of Fed funds levels would be far more effective in bringing rates down than securities purchases.

But that closes the door to rate hikes for that period of time, which is exactly what markets discount with the current term rate structure.

Especially with crude and commodities going up and the dollar going down, as markets discount that at some point the Fed will react to that ‘imported inflation’ with rate hikes.

Meanwhile the current ‘mercantalist’ Fed is fine with a lower dollar hoping it will help the US export its way to trend GDP growth rather than get there by domestic debt and consumption. Or at least reduce the marginal propensity to import that they fear could drain demand and abort the recovery. Unfortunately the preference for exports over domestic consumption translates to a lower standard of living via a reduction in real terms of trade.

That’s what was happening last year about this time when the great Mike Masters inventory liquidation hit and it all went bad. This time around there isn’t any excess inventory to break prices and cap utilization/employment is way down and still falling some, and rest of world economies appear too weak to absorb substantial US exports.

And the Saudis are back in control of crude prices after a very surprisingly small fall in world consumption given the size and scope of the international slowdown.

BoE’s Barker says rates could stay low for “quite some time”

MPC member Kate Barker told the Leicester Mercury newspaper that there
remained question marks over the sustainability of the recovery and that
interest rates “could stay low for quite some time”. Ms Barker echoed
Paul Tucker’s comments yesterday in saying that it would take some
months yet for the MPC to judge how robust the turnaround in activity
was: “The really important question is (whether) there’s a pick up in
the economy and if people can sustain that so it continues on to autumn.
That would be one of the most encouraging signs,” she said.

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Starts off good and then goes bad.

Britain looks to the land of the rising sun with envy

by Ambrose Evans-Pritchard

May 22 (Telegraph) — Perhaps most surprising is that Japan fell in 1998, though it was by then
the world’s top creditor with more than $1.5 trillion of net foreign assets
(now $3 trillion). Lender abroad, it is a mega-debtor at home, the result of
Keynesian pump-priming to fight perma-slump. The stimulus vanished into
those famously empty bridges in Hokkaido.

“The Japanese didn’t take the downgrade seriously,” said Russell Jones, of
RBC Capital, a Japan veteran from the 1990s. “They didn’t think they would
have any trouble funding their debt.”

They were right. Yields on 10-year bonds fell to 1pc by the end of the
decade, and to 0.5pc in the deflation scare of 2003 – confounding those who
expected Japan’s emergency stimulus to stoke inflation and push up yields.

Eisuke Sakakibara, then the finance ministry’s “Mr Yen”, was insouciant
enough to swat aside the Moody’s downgrade as an irrelevance. “Personally, I
think if Moody’s continues to behave like that, the market evaluation of
Moody’s will go down,” he said.

Japan had a crucial advantage: its captive bond market. Some 95pc of
government debt was held by Japanese savers or the big pension funds.

Not! Does not matter. The funds to buy government securities ‘come
from’ the government deficit spending.

Deficit spending adds reserve balances at the central bank,
buying govt securities reduces reserve balances at the same central bank.

It is all a matter of data entry by the central bank its own spread sheet.

The foreign share of UK public debt has risen from 18pc to 34pc over the
past six years. The central banks of Asia, Russia and emerging economies
like gilts because they offered 1pc extra yield over bunds. This was the
“proxy euro” trade.

Does not matter.

“We’re far more vulnerable than Japan ever was,” said Albert Edwards, global
strategist at Société Générale.

Wrong!!!

“Japan had a huge current account surplus
and a strong currency. The UK is a deficit country, at risk of a sterling
collapse.

Yes, the currency might go down, but seems to be doing ok for the moment!

Years of UK macro-mismanagement have dragged the UK economy to the
edge of a precipice.”

As the BOE’s Charles Goodhart once responded,
Yes, they have been telling us that for 300 years.

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This highlights my macro themes.

Highlights

Rising crude prices driving up CPI.

No one believes fiscal policy works.

Everyone is afraid ‘quantitative easing’ has ramifications beyond dropping targeted rates a few basis points.

The income gap will only get wider with the recovery as unemployment keeps real wages in check and the real wealth flows upward.

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Right, Brown’s deficit spending to the rescue, as previously suggested, thanks!

>   
>   On Mon, Apr 20, 2009 at 4:34 AM, Marshall wrote:
>   
>   Further to my other recent comments on the UK. You should start posting this stuff on
>   your site, as the UK is a good test case for the validity of “Mosler economics”1
>   

UK House Asking Prices Increased in April, Rightmove Says

by Jennifer Ryan

Apr 20 (Bloomberg) — U.K. house prices rose for a third month in April after mortgage availability improved, Rightmove Plc said today.

The average asking price rose 1.8 percent from March to 222,077 pounds ($328,000), the operator of the biggest U.K. residential property Web site said today. It fell 3.2 percent in London, the only region of 10 surveyed to show a decline. Home prices are down 7.3 percent from a year earlier.

Mortgage approvals rose 19 percent in February as the Bank of England cut the key interest rate to a record low of 0.5 percent and started buying assets to ease credit strains in the economy. Policy maker Kate Barker said yesterday house prices may rebound as banks ease lending terms.

“It looks like we are now bumping along the bottom of the trough,” Miles Shipside, Rightmove’s commercial director, said in the statement. “For there to be any real sense of optimism that we’re on a sustainable road to recovery, the availability of mortgage finance needs to improve significantly.”

The increase in property prices demanded by sellers was led by East Anglia, where values increased 5.1 percent, and Wales, which showed a 4.8 percent gain.

The decline in London, where the average asking price was 403,505 pounds, was led by a 7.8 percent drop in Ealing. Average values in the capital’s most expensive neighborhood, Kensington & Chelsea, fell 3.3 percent on the month to 1.9 million pounds.

Central bank data show mortgage approvals climbed to 38,000 in February, the most since May. The reading is still down from 71,000 at the start of 2009.

“I expect house prices to move up again,” Barker told the Spectator magazine on April 16. Referring to restrictions on the proportion of a home’s value that banks are willing to finance, she said, “the big slide down to 75-80 percent may be overdone. So I would expect the mortgage market to move.”

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Notice how this corresponds to rising public sector deficits as counter cyclical fiscal policy does its thing:

UK Households Step Up Debt Repayments as Recession Deepens

Britons increased the equity in their homes at the fastest pace on record as the recession encouraged households to pay down existing mortgages rather than take out new ones. Individuals injected a net 8 bln pounds ($11.5 bln) into housing equity in the three months through December, the most since records began in 1970, the Bank of England said in London today. The credit crunch and falling house prices are making it harder to borrow against the value of housing. Concerns about job losses are also making homeowners reluctant to add to their 1.5 trillion pounds of debt as they endure the economy’s worst contraction since 1980.

“This is further evidence that households are retrenching sharply, sensibly paring down debt in the face of the credit crunch and fears about unemployment,” Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd., said in a note. Mortgage equity provided a key source of consumer finance for a decade as Britons used a property boom to finance everything from new furniture to vacations. After tripling in a decade, house prices fell an annual 17.7 % in February, Lloyds Banking Group Plc’s Halifax division said.

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Looks to me like the theory that a large output gap/high unemployment will control ‘inflation’ (for anything more than the very short term) is about to fall by the wayside, just like the theory that a small output gap would cause higher inflation fell by the wayside in the late 90’s.

UK Inflation Rate Unexpectedly Rose in February

by Svenja O’Donnell

Mar 24 (Bloomberg) — The U.K. inflation rate unexpectedly rose in February after higher food costs and the weakness of the pound sustained price pressures even as Britain’s recession deepened.

Consumer prices rose 3.2 percent from a year earlier, the Office for National Statistics said today in London. The median forecast of 28 economists was for 2.6 percent. Officials said that Bank of England Governor Mervyn King will explain the increase in a letter to the government today after the rate breached its 3 percent upper limit.

“We’ve got such huge spare capacity in the economy,” James Knightley, an economist at ING Financial Markets in London. “Inflation pressures are going to be very weak indeed in the months to come. The process will continue through this year and into the next.”

Maybe.

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And yet another central banker who doesn’t understand monetary operations…

Has to be a new low for the BOE.

Barker Says BOE Should Print Money as U.K. Recession Worsens

by Jennifer Ryan and Brian Swint

Mar 13 (Bloomberg) — Bank of England policy maker Kate Barker said the bank’s decision to buy assets with newly created money is necessary to prevent deflation as Britain’s recession shows signs of worsening.

Printing money “is the best course in order to achieve our objective of keeping inflation to target in the medium term.” “The downside risks to growth, and therefore to inflation, identified in the February inflation report were in danger of crystallizing,” she said. Barker said the impact of the reduction in the benchmark to lower levels had become “successively reduced” with each cut, and lower rates on their own would be insufficient to revive growth.

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In fact, lower rates are slowing things down by cutting government interest payments, and thereby requiring a higher fiscal adjustment.

Brown Says Monetary Policy Is Having Reduced Impact in UK

Jan 27 (Bloomberg) — Prime Minister Gordon Brown said the Bank of England’s ability to influence the economy with lower interest rates is being hurt by the impact of the financial crisis in the U.K. “Our financial system remains under such strain that this will reduce the impact of lower interest rates,” Brown said in a speech in London today. “We have to do more. We took the decision in the pre budget report to launch a major fiscal stimulus. Rather than cutting back on public investment, we have decided to stick to our spending plans.”

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First a brief discussion of what the public purpose might be for the banking sector:

In early American non monetary farming communities the community would come together to build one home at a time until each member had a house. Working together like this was more efficient than building the homes at the same time with only the owner’s family doing the work on his own house.

Individuals had to be willing to defer construction of their home and wait their turn while building a neighbor’s home.

Bank lending serves much the same function- to facilitate deferred consumption and investment across an indefinite period of time. By taking out a mortgage and paying workers to build your house, your getting to use more than your own output while the other workers don’t get to use any of their outputs.

Instead, the workers are satisfied to get paid in funds that they believe they can use in the future to hire you to enact the reverse- they get to then use more than their output of that period of time, and you don’t get to use any of your output in that future period.

Bank lending also serves to facilitate deferred use of output within a given period of time. In non monetary society, workers would work together to produce output in return for a share of that output.

With today’s monetary society, business borrow from banks to pay workers who can not consume the output until it is produced and offered for sale, at which time they can buy their share as represented by the amount they get paid.

That is the essence of the public purpose behind bank lending- to allow for sellers of real goods and services to forgo current use of their outputs in return for future use of other’s outputs.

Additionally, and also as a matter of public purpose, banks serve to facilitate payment in general. This entails safety and accuracy of reporting.

On the basis of public purpose, therefore, I would judge the success or failure of the of banking along the following lines:

Assuming the public purpose of mortgage lending was to promote housing construction and allowing people to move from one house to another, up until 2006 it was a success.

Assuming the public purpose regarding distribution was to grant housing to those who could afford it, this was not the case, as many homes wound up in the hands of owners who could not afford their monthly payments.

After 2006 these results reversed, and public purpose was no longer being served.

While there were several reasons for the sudden fall in the promotion of presumed public purpose, including the discovery of lender fraud and a budget deficit that was too small to sustain aggregate demand, the greatest attention as fallen on the issues and remedies raised by Goodhart, Crockett, and their co authors who recommend the following modifications for the banking system:

1. Larger down payments
2. Removal of credit ratings from the ratings agencies
3. Capital ratios and enforcement

Clearly these measures will not restore new home construction or aggregate demand in general.

Restoring housing construction, output, and employment requires a fiscal adjustment.

So the question is what public purpose is served by these three recommendations.

Larger down payments addresses the distribution issue, and serves to direct housing to those with available funds for down payments.

Removal of credit ratings obtained from the ratings agencies also addresses the distribution issue, as presumably better credit analysis can be obtained by internal analysis and therefore some of those less able statistically to afford housing will be excluded.

Higher capital ratios are a real cost and require banks to raise rates for borrowers to make sufficient returns on equity to attract shareholders. So this is also a distributional issue, as the higher rates again exclude lower income individuals. The same question arises- is this the intended public purpose?

The additional public purpose, and undoubtedly the one given the highest weight by the authors, is the sustainability of the banking system when things go wrong.

These measures do address the sustainability issue of banking, and allow banks to perhaps survive as solvent institutions should aggregate demand again fall. And while they do not prevent the fall of real output when aggregate demand falls, including the rate of construction of new homes, these measures presumably could be instrumental in not allowing a fall of aggregate demand to accelerate as it can do when banks fail to stay open for business.

However, as banks are necessarily pro cyclical as a matter of good business practice, it may matter little whether a bank ceases to stay open for business to fund mortgages and businesses because it is afraid of loss, or whether it ceases to function due to insolvency. This is evident today where even the most solvent banks are acting pro cyclically and have greatly tightened lending standards.

Again, it takes a fiscal adjustment to restore output and employment under current circumstances. And with each passing day the automatic stabilizers grow as transfer payments rise and tax revenue falls, as more jobs and incomes are lost. The federal deficit keeps going up that ugly way until it gets to where it’s large enough to add the net financial assets the private sector needs to again support output and employment.

Any proactive deficit spending will cut this process short. Hopefully we get a fiscal adjustment soon and of sufficient magnitude to reverse the slide.

The more conservative banking practices as outlined by the authors would likely result in fewer bank failures for a given size downturn, and most would agree that less of that type of disruption does serve public purpose.

The question that arises, however is whether requiring more conservative banking practices that result in higher interest rates for borrowers also supports the return of the disintermediation that funds non bank lenders. For example, we are already seeing the return of the wholesale markets including the commercial paper markets, that connect borrowers with lenders who have investors and shareholders that are willing to price risk lower than banks are legally allowed to do and still earn a high risk adjusted rate of return.

So while the authors can surely create a ’safe and sound’ banking system by legislating a higher price of risk, if they price risk too high, lending will again flow outside the banking system and reintroduce the instability of the business cycle.

To conclude, while I support the measures recommended by Goodhart/Crockett, they do not eliminate the business cycle, but by stabilizing banking and reducing disruptive banking insolvencies they do facilitate the fiscal adjustments needed to continuously sustain output and employment.

Goodhart, Crockett Say Central Banks Should Set Mortgage Rules

by Svenja O’Donnell

Jan 27 (Bloomberg) — Central banks should require mortgage lenders to set a minimum size for loan deposits as part of a package of measures to contain asset bubbles and prevent future financial crises, former policy makers said.

“The epicenter of the financial crisis occurred in the housing market,” economists including former Bank of England policy maker Charles Goodhart and former Bank for International Settlements General Manager Andrew Crockett said in a report. “We advocate the central bank setting maximum loan-to-value ratios for residential mortgages.’

British Prime Minister Gordon Brown says he’s angry at the role banks played in triggering the crisis by writing risky loans, which included mortgages requiring little or no down payment. The suggestions today aim to influence global debate among policy makers about how to rewrite the regulation of banks in areas from lending to capital requirements and pay policies.

“We propose that supervisors should formulate a set of remuneration guidelines,” the economists said. Banking regulators should “adjust capital ratios according to the degree of compliance.”

Other measures suggested include the removal of credit ratings as a formal factor in banking regulation.

“The greater problem is that the ratings provided by (fallible) credit ratings agencies, using fallible models, have been placed at the centre of the regulatory process itself,” the report said.

Capital Ratios

The economists said there’s a need to reform the way regulators set minimum capital ratio requirements for banks, and called for capital level targets which trigger sanctions set by law if they aren’t met.

The report suggests a maximum loan-to-value ratio on mortgages of 90 percent which can be decreased, “should house- price increases appear to be getting out of hand.”

“The boom/bust cycle was exacerbated by the conditions for mortgage lending becoming ever easier in the boom and tightening in the bust,” the authors said. “This was particularly so for loan-to-value ratios.”

Markus Brunnermeier and Hyun Shin at Princeton University and Avinash Persaud of Intelligence Capital also co-authored the report on the reform of financial regulation, published by the Centre for Economics and Policy Research.

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1. Immediately suspend all VAT and other national transactions taxes.
2. An immediate one time 1% of GDP fiscal transfer from the national government to regional governments.
3. A national service job for anyone willing and able to work to create an employed labor buffer stock for enhanced useful output price stability.

Regarding troubled banks, insolvent institutions should be taken over by government and reorganized to allow for the assets to be sold in an orderly manner and to avoid business interruption for bank clients. When this takes place, uninsured foreign currency liabilities of the insolvent institutions should all be dissolved.

Unfortunately, national budget deficit myths persist and will likely not allow this type of policy to be implemented.

On a technical level, the BOE should sell UK credit default insurance until the cows come home to get those premiums down and dispel notions of UK default risk.

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>   
>   On Thu, Jan 22, 2009 at 12:06 AM, Russell wrote:
>   
>   Warren:
>   
>   Is the UK going BK.
>   

Many private sector agents, but not the government. There is no such thing in local currency, and the FX debt is private, not public.

When government takes over a bank and declares it insolvent, the holders of foreign currency debt can become shareholders, general creditors in liquidation, or simply wiped out if not senior enough.

There is no reason for government to pay any FX.

>   
>   They are going to have to nationalize the banks and take interest rates to zero.
>   

Looks like they will be making those choices.

>   
>   The Pound is probably going to get par with the USD.
>   

There’s an ‘inventory liquidation’ of pounds going on, as players exit, as well as private sector agents short USD and other FX covering.

The low price of crude had dried up the dollar income of the rest of the world as our trade gap shrinks, leading to a dollar short squeeze.

(Russian and mid east oil dudes who were selling their dollar revenue for the pounds they were spending on London flats and entertainment when oil was high, have cut back on the way down.)

And the worlds portfolio managers and army of trend followers are piling in with their shorts.

While this is a ‘one time’ event, it’s a big one!

The pound has looked over valued to me on an anecdotal purchasing power parity basis for quite a while. Last time I was there seemed even at one to one with the dollar prices would still be way too high over there.

Fundamentally, apart from anecdotal purchasing power parity, the pound looks OK. Fiscal has been tight for a while and isn’t all that loose yet, though they are talking about larger deficits. Prices are in check, with asset prices falling. And borrowing to spend is way down, probably for a while. But the same is true for the US, so there’s no bias there.

Net net, the pound was an indirect beneficiary of the high oil prices, and getting hurt by the fall.

British pound

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Seems government has it wrong again?

First, government has not acted to sustain aggregate demand- the primary economic responsibility of a taxing authority.
Yes, it’s sort of trying in bits and pieces, but has not taken immediate action to restore demand at levels at least 5% higher than where it is currently.

What banks need most is borrowers who have the income to afford their payments.

This is a simple matter of immediate tax cuts as well as sustaining funding for desired government services.

This requires nothing more than data entry on their sterling spread sheet.

Regarding current bank solvency issues:

If the UK government wants its banks to continue to function they can do that by simply providing unsecured loans from the BOE to fund bank operations, including lending.

No bank need ever shut down if government understands its role of not making the liability side of banking the place for market discipline.

Government can and does outlaw any banking activity if deems does not meet the test of public purpose.

Bank capital is the loss buffer between losses and government guaranteed deposits.

If bank capital is below required government standards (presumably determined for public purpose) all that means is any risk of loss for the bank is that much closer to being a loss for the government.

Adding government capital doesn’t change that, so it’s redundant in that sense.

If the government wants to sustain the operations of a private bank with deficient capital and there is no private risk capital available, it does so (for what they determine to be further public purpose) at risk of loss.

Any such loss to government is the ‘cost’ of the public purpose of sustaining those banking services, just like other public services have ‘costs’ such as the military, public roads, etc.

(At the macro level, the real costs are the real resources tied up in banking vs the real benefits of enhanced useful output.)

What to do with the UK banking system?

1. Restore aggregate demand with an immediate fiscal package.

   They have all kinds of VAT type taxes that can be adjusted to immediately restore spending power and enable borrowers to make their loan payments.

   Waiting for current fiscal measures to do this will eventually work through the ‘automatic stabilizers’ but will take a lot longer with a much higher loss of real output.

2. Continue to support the liability side of banking institutions, banking functions, and bank management and policies that are deemed to exist for desirable further public purpose.
3. Sell the assets of insolvent institutions if it is deemed that action better suits further public purpose for particular institutions.

Some of this is happening, but it is not organized around an expressed agenda of ‘further public purpose’.

A clear vision statement regarding public purpose itself serves public purpose.

Unfortunately, the institutional structure in the eurozone does not allow for this type of government response.

They have to rewrite the treaty or wait through an ugly deflationary contraction for exports to recover, providing market participants continue to support them, which is doubtful at best.

(As always, feel free to distribute)

Irish, British Banks Head Towards Zero On Nationalization Concerns

Jan 19 (Global Economic Analysis) — Equity prices in the three remaining Publicly Traded Irish Banks Collapse after Anglo Irish Bank was nationalized.

In afternoon trade, Allied Irish shares were down 62%, Bank of Ireland fell 49% and mortgage and insurance specialist Irish Life & Permanent dropped 41%.

Analysts said shares in Allied Irish and Bank of Ireland were being hit particularly hard because of growing investor fears that the banks’ existing shares will be heavily diluted when both banks formally accept billions in government investment this spring. Shares in the Dublin-based bank had fallen 98% over the past year on the back of bad debts and corporate scandal.

The government had previously proposed taking a 75% stake in Anglo Irish at a cost of 1.5bn euros (£1.36bn; $1.97bn). But it dramatically opted for a full takeover on Thursday, on the eve of an emergency shareholder meeting called to approve the earlier government investment.

Nationalization Concerns Sink RBS

Bloomberg is reporting RBS Plummets Amid Concern Bank May Be Nationalized.

Royal Bank of Scotland Group Plc slumped by the most in two decades in London trading on concern the government may have to take full control of the bank after forecasting the biggest loss ever reported by a U.K. company.

The stock dropped 67 percent, the most since September 1988, to 11.6 pence, paring the Edinburgh-based lender’s market value to 4.6 billion pounds ($6.7 billion).

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They are being felt- the economy is getting worse, until the budget deficit gets large enough.

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Professor Goodhart is one of the rare central bankers who fully understands monetary operations and therefore recognizes as obvious that the treasury not selling securities is functionally equivalent to the treasury selling them and then having the Fed/CB buy them, apart from the transactions costs.

This also shows that those that understand monetary operations often have remaining differences on ‘theory’ aspects.

For example, Professor Goodhart sees interest rates as a much stronger force as regards the macro economy, output and employment than I do.

I have proposed that sales of treasury secs should be permanently suspended. They keep long term interest rates higher than otherwise and the long term rate ‘market’ is part of the ‘investment’ market.

However, I don’t see how not issuing treasury securities has any further effect, as Professor suggests, than that of the lower interest rate, as demonstrated by Japan and now the US with their zero interest policies and excess reserves.

In fact, while I support a permanent zero interest rate no treasury securities policy, I further recognize that an additional benefit is that it reduces aggregate demand and thereby allows for a higher federal deficit. Professor Goodhart would likely take the position that lower rates add to aggregate demand and therefore at least partially substitute for fiscal adjustments.

Goodhart Says ‘Sack’ DMO to Bolster U.K. Economy

by Svenja O’Donnell

Jan 13 (Bloomberg) — Prime Minister Gordon Brown should “sack” the UK Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy, former Bank of England policy maker Charles Goodhart said.

“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee today. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”

Policy makers are seeking new tools to fight the recession as interest rates approach zero. Brown’s government plans an unprecedented 146.4 bln pounds ($214.15 bln) of debt sales in the fiscal year ending March 31 to finance bank bailouts amid a decline in tax revenue.

“To keep the system sufficiently liquid and monetary growth sufficiently high, the government ought to be under- funding the deficit,” Goodhart said. “When banks are having difficulty in lending to the private sector, there needs to be a much greater expansion of lending to the public sector.”

Underfunding the gap would see the government selling fewer bonds than are necessary to pay for its budget deficit. That leaves more money in the hands of investors who may have spent them on gilts, keeping more money in the economy than would otherwise be the case. Brown forecasts a deficit of 118 bln pounds in the year through March 2010, or 8 % of gross domestic product, the most since modern records began in 1970.

“Under-funding the deficit would be far less damaging to the economy that to force some minimum of lending,” Goodhart said yesterday.

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(email exchange)

>   
>   On Tue, Dec 23, 2008 at 2:43 PM, Russell
>   wrote:
>   
>   Warren:
>   
>   You have known I have been negative on this
>   market collapse for a long time.
>   

Yes!

I was more hopeful for the right political response after it went bad in July. :(

>   
>   And what happens on a day to day basis only
>   stirs the pot. The reason for trucks not being
>   able to lift anything at the ports is that trade
>   finance has disappeared and the reason why
>   the Baltic Dry Index declined 98% in 90 days.
>   The banks are technically bankrupt. I said that
>   about Citi way back when.
>   

Yes, they weren’t bankrupt back then, and they were open for business. Now that the government has let it go bad after an OK Q2, previously sort of OK/money good assets have further deteriorated and are no longer money good if this is left to its own ways.

A $1 Trillion of the right fiscal response turns it all around.

Idle Cranes From Long Beach To Singapore

Idle shipping cranes at Frozen Ports From Long Beach to Singapore portend a bleak 2009-2010.

Chris Lytle, chief operating officer of the port of Long Beach, California, took in a panorama of the slumping world economy from his rooftop observation deck one day this month. Shipping cranes stood still, truck traffic trickled and a cargo vessel sat idle, moored to a pier.

“You never see that,” Lytle said. “It’s quiet. Too quiet.”

Port traffic has slowed from North America to Europe and Asia as a recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than 2 percent next year, the most since the World Bank began measuring it in 1971. Idle ports around the globe are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.

“Everybody expects 2009 to be a bleak year,” said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. “Now, it looks like 2010 is going to be just as bleak.”

Coal is piling up at the Mozambique port of Maputo. Brazil’s exports of cars, household appliances, machinery and furniture fell in November from a year earlier. The port in Singapore, the world’s busiest for containers, posted its first month-over-month decline in seven years in November, at 1.5 percent.

“You take it for granted until it blows up,” said Bernard Hoekman, trade economist at the World Bank, in an interview. “Now it’s blowing up.”

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Brown has it backwards, as most do. Lack of lending is a ‘good thing.’

It means ‘full employment’ can be sustained with much lower taxes for any desired level of government spending.

Too bad they are all out of paradigm and are letting things deteriorate while they agonize over the size of the deficit.

strong>Highlights

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(email exchange)

>   On 12/3/08, Kevin wrote:
>   
>   Hi Warren,
>   
>   The UK deficit and debt to GDP is increasing dramatically as the government
>   seeks to stabilize the economy.
>   

Yes, good move on their part. That will restore demand/output/employment.

>   
>   With the UK being a net importer of goods.
>   

Yes.

>   
>   And sterling not benefitting from being a “reserve” or “commodity based
>   price” currency.
>   

Whatever that means with floating FX.

>   
>   What impact does the increased reliance on foreign based capital as a funding
>   source for the government.
>   

The government is not reliant on foreign based capital with it’s currency of issue. It spends first by crediting accounts at its own central bank, the offers those accounts interest bearing alternatives like guilts, etc..

>   
>   have on the price of sterling and gilt yields in the medium term?
>   

The currency could go down relative to other currencies. It’s sure looked way over valued to me for quite a while. Even at one to one with the dollar prices would still be high there.

>   
>   Ask this question as it appears foreign investors are beginning to question
>   whether the UK, with its huge reliance on the financial services industry, very
>   low domestic savings ratio and a consumer that has incurred residential
>   property debt levels dramatically in excess of those in the US, should be
>   compared to Iceland and may suffer similar consequences if there was a
>   dramatic loss of confidence in the UKs economic prospects.
>   

Iceland’s problems are with external currency debt, and with a govt that doesn’t know how to best deal with private sector external currency issues.

>   
>   Many thanks
>   
>   Kevin
>   

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The combination of ‘automatic stabilizers’ and proactive fiscal will reverse the downturn in the UK.

Unfortunately they waited too long for the proactive adjustment so they are suffering with the forces that drive the automatic stabilizers-

Falling revenues and rising transfer payments:

U.K. Budget Deficit Widens as Recession Saps Taxes

By Jennifer Ryan

The U.K. budget deficit widened as the gathering recession pounded tax receipts, and analysts warned of worse to come as the economic slump deepens. The 37 bln-pound shortfall ($55 bln) in the first seven months of the fiscal year was the largest since records began in 1993, the Office for National Statistics said in London today. The deficit in October was 1.38 bln pounds, the first shortfall for the month since 1994 and more than triple the 400 million pounds forecast by economists in a Bloomberg News survey.

Chancellor of the Exchequer Alistair Darling is planning a package of tax cuts and infrastructure projects to limit the recession, forecast by the Bank of England to extend well into 2009. Tax increases or spending restraint will eventually be needed to bring down the level of borrowing, economists say.

“The likelihood is that the deficit will continue to escalate,” said Philip Shaw, chief economist at Investec Securities in London. “Patching up the public finances is going to be very, very hard work.”

Little more than half way through the fiscal year, the shortfall through October is just short of the 43 bln pounds forecast by Darling in March for the full fiscal year, which ends on March 31, 2009. In the same seven months last year, the deficit was 20.1 bln pounds. Darling will use his annual pre-budget report to Parliament on Nov. 24 to revise his economic forecasts. Economists in a Treasury survey this month predicted the deficit will reach 65 bln pounds this fiscal year and almost 90 bln pounds next year, or 6 % of national income, the most since 1995.

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Highlights

Confirms a lack of understanding of fiscal policy.

Brown sets out anti-recession plan

Gordon Brown on Friday heralded an anti-recession strategy founded on tax cuts for low earners and further cuts in interest rates. People on low incomes had “a higher propensity to spend if their credits are higher”, Mr Brown said, noting that recipients of a wider US fiscal stimulus of $170bn (£113.7bn) approved last February had saved half the money. “In the US, rates have been cut to 1 per cent but the European area has been slower with 3.25 per cent in the euro area and 3 per cent in the UK,” he said in a speech. Mr Brown said he endorsed the views of Mervyn King, BoE governor, that there was scope for further cuts. Mr Brown invoked the memory of John Maynard Keynes, whose plans to reflate the economy in the late 1920s were dismissed by the Treasury chief secretary of the time with three words: “Inflation, extravagance, bankruptcy.”

Brown says fiscal stimulus in UK will be temporary

Prime Minister Gordon Brown said Britain’s financial stimulus package will be “temporary.” Brown’s remark mirrors BOE Governor Mervyn King’s warning that the government must put forward a credible plan to reduce the deficit over time. “In these extraordinary circumstances, it would be perfectly reasonable to see some use of fiscal stimulus, provided two conditions are met,” King said on Nov. 12. “One, that it’s temporary. Secondly, that it would be clear there was a medium-term plan to bring tax and spending into balance.” The U.K. Treasury had a budget gap of 37.6 billion pounds ($57 billion) in the first half of its fiscal year. Since March, Brown’s government delivered tax cuts and spending increases worth 4.8 billion pounds to give relief to low-income earners, delay an increase in fuel duties and to help homeowners with mortgages and stamp-duty taxes.

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Europeans worry a lot more about inflation from falling currencies than the Fed does.

>   
>   On Wed, Nov 12, 2008 at 7:19 AM, Milo wrote:
>   

• BOE’s King says he has No Desire for ‘Sharp’ Drop in Pound
• BoE Signals Rate Cuts Needed as Economy Contracts
• U.K. Jobless Claims Rise 36,500, Most Since 1992
• Brown signals imminent tax cuts
• British retail sales fall for 1st time since 2005
• U.K. Housing Sales Drop to Record Low as Prices Fall, RICS Says
• U.K. Banks Pared Mortgages 13% After Rate Cut

BOE’s King Says He Has No Desire for ‘Sharp’ Drop in the Pound

The following are comments by BoE policy makers on inflation, economic growth and interest rates. Governor Mervyn King and colleagues made the remarks at a press conference following the central bank’s inflation report.

“Clearly if sterling falls far enough this will be a concern and it will have an impact on inflation. It’s not surprising that it’s fallen in the past year. We started by going into this with a significant trade deficit. We are seeing a rebalancing of the world economy.”

“That can be a helpful part of rebalancing the economy, provided it doesn’t affect our ability to meet the inflation target. It’s something we keep a very careful eye on. We have no wish to see it fall very sharply.”

“We have to accept that some fall back from the level we saw in 2007 is part of the rebalancing. Central bankers are prepared to worry almost every day, and I’m prepared for that.”

Regarding the current value of the pound, the bank’s Chief Economist Charles Bean said:

“That very considerable stimulus from the exchange rate should help to pull the economy out of its slow period.”

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