Its official, the most recent recession was the longest in almost 100 years

Martin Weale, external member of the Monetary Policy Committee, Bank of England recently gave a speech, where he compared the recent recession with previous ones.  It was a shocking assessment.

"We are experiencing the slowest economic recovery since the First World War.There have been six recessions since 1920.... In Charts 1 and 2 I show the time profiles of these (recessions).

The 1932 trough, like the trough in the current recession, was about 7 percent below peak with the recession in 1979 being milder. But we can also see that, for the three completed cycles, the time needed for output to recover to its pre-recession level was no more than four years and one month.

We might now ask how long it is likely to be before output regains its level of early 2008. The central estimate of economic growth associated with the MPC’s latest forecast, published in the Inflation Report, shows this happening in the third quarter of 2013."

To summarize; the 2008 recession was deepest since the end of the second world war, and the recovery has been the weakest in almost 100 years.  The UK economy will not return to its pre-recession output level until the second half of 2013.

Here is a curious question; what is the key difference between this recession and previous ones?  Quantitative Easing - the Bank of England's attempt to systematically support commercial bank balance sheets by printing money, creating negative real interest rates and robbing savers. 

Rather than speeding up economic recovery, Quantitiative Easing has delayed it.

Guess which country has the highest inflation rate of any major industrialised economy?

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It is the UK, of course. Quantitative easing does exactly what economic theory would predict. If the Bank of England prints more money, the inflation rate increases.

Deja vu, all over again

The credit crunch is back.

The Financial Times reports that European Banks have sold only two thirds of the bonds required to cover the debt that matures this year. This has left a funding gap of $241 billion. That is a big nasty number.

This funding crisis is just another manifestation of the sovereign debt crisis. As the probability of a sovereign default has increased, investors have shied away from European banks holding government bonds.

Another terrible day for Europe

Can Europe survive another day like yesterday?  The financial pages and the news wires carried an unrelenting series of bad news stories.

Such a nice boy.....

What got him so mad....?

More leverage equals bigger housing bubbles.

Everyone knows it to be true; if the household sector increases its borrowing, then the housing market will explode.  The curious thing about this chart is some of the really leveraged countries we never hear about - like the Netherlands and Denmark.

What happened there, I wonder?  Will they suddenly jump out of the wardrobe and say "Boo"?

If Caesar were alive, you'd be chained to an oar

Public sector unions will be on strike on Wednesday. The cause of the dispute is pensions. The unions think that if they forego a day's pay, they will secure a post retirement income that will be multiples of what the rest of us will receive.

The strike reminds me of a latin proverb that would neatly resolve the matter:

"Caesar si viveret, ad remum dareris"

Roughly translated; "If Caesar were alive, you'd be chained to an oar."

Austerity will be a severe instructor

Another bad day....

Yields on government bonds are rising across the Eurozone. With each basis point increase, Europe's access to the bond market is slowly drying up. The policy options are closing up. Soon, the choice for Europe's over-indebted countries will be binary; austerity or default.

Before you ask, dismantling the Euro is not an option. The pain that may emerge from default or reducing the fiscal deficit will be seem mild compared to the chaos and collapse that will follow the demise of the single currency. The Euro may have been a disastrous project, but that discussion ceased to be meaningful over a decade ago. If the Euro falls, the economies of Europe will be wiped out. There might yet be a day for dismantling the single currency but it resides in the distant future.

The preferred option has to be austerity. It will provide governments will some limited ability to determine the timing and distribution of pain. A default will unleash another round of banking failures and sharp reductions in output. The consequences will be pernicious and arbitrary.

Austerity will also teach Europe a long overdue lesson; excessive government borrowing stores up trouble for the future. Sooner or later, there will be a reckoning. After thirty years of excess, that moment has come.

A day when everything was clear and people said what they meant.

Yesterday was a day of remarkable clarity and transparency.

The day began with the publication of a European Commission paper on the creation of a unified European bond. The EC's press release was blunt about the purpose and implications of the initiative.

Such common issuance of bonds by the euro-area Member States would imply a significant deepening of Economic and Monetary Union.

Will stability bonds, issued by the European Commission, save Europe?

Computer says no....

Forget about it; the ECB isn't going to bailout the Eurozone

Yesterday was rough for the eurozone. Government bond yields rose sharply. Countries that thought they were immune from the crisis - France, Austria and the Netherlands - are now seeing their borrowing costs rise. No one is now safe from the contagion.

There is "almost unanimous agreement" that only the ECB can save the eurozone. The rescue plan is disarmingly simple. The central bank should bail out eurozone governments directly through direct purchases of bonds.

There is only two difficulties with the plan. First, that "almost unanimous agreement" does not extend to Germany or the ECB itself. Second, the ECB is legally prevented from providing credit to member state governments, the EC or any other EU institution.  So, an ECB-centered  bailout isn't happening, and there is no other credible bailout plan on the table. So where does the Eurozone go from here?

Broadly speaking, there are two answers to this question. The first tries to re-establish the ECB bailout plan by designing an elaborate financially engineered scam whereby the ECB provides credit indirectly to illiquid governments. Almost weekly, these plans emerge. They stir up excitement in financial markets and policy circles.  Then an official from the German finance ministry or the ECB describe the plan as either unworkable or illegal and the excitement dies down.

The second answer is austerity. Illiquid governments like Italy and Spain have to balance their books. They have to rein in expenditures and raise more taxes. If austerity results in a recession that reduces tax revenues, and increases the fiscal deficit, then another round of cuts and tax hikes are required. Governments just have to keep cutting and taxing until they can convince bond markets that their fiscal position is sustainable. Greece, Ireland, and Portugal have all gone down that road. So far, none of these countries have been able to successfully return to the bond market.

Many Eurozone policy makers balk at the idea of supervising brutal cuts in living standards. However, the bond market has no time for squeamish polititicans. The choice is cut the fiscal deficit or face being shut out of capital markets. Slowly, European politicians are getting the message.

But what of Germany and the ECB? Wouldn't things be so much easier if they quietly acquiesed and allowed the ECB to fund eurozone fiscal deficits? Once the central bank begins printing money to keep those Southern European wastrels afloat, when will it stop? Will it be any easier to adjust after two years of funding Italian public sector wages than it is today? Once the ECB starts bailing out Southern Europe, the incentive to cut deficits will vanish. Germany knows that a bailout will only prolong the crisis. The ECB knows it too.

Four more years

The Bank of England are forecasting a sharp downturn in economic growth next year.

After four years of negative interest rates, double digit fiscal deficits, quantitative easing, a 25 percent exchange rate depreciation, and massive bank bailouts, the UK economy is heading for another recession.

The Bank of England's response to the crisis isn't the solution, it is the problem.

The disturbances this summer may be only a foretaste of what is to come from a generation this government seems to have abandoned

Diane Abbot produced a long whinge about youth unemployment in the Huffington Post.

"It seems as if a whole generation of young people is going to pay the price of this government's economic policies.

A whole generation may be doomed to a lifetime on the fringes of the job market."

How to make simple things really, really complicated

By Alma Acevedo

A modern philosophy professor zigzags during the eighty minutes lecture between derisively questioning the term “truth” and passionately recycling the usual departmental politics.

A doctor of ethics categorically concludes that ethics cannot be taught and that, consequently, no judgments (ethical or otherwise) will be allowed during the course. Ethics, he contends, “is not a matter of content, but bringing students to reflection by means of problematization.”

Their colleague from the humanities mockingly queries the very concept of “human nature” while rhetorically wondering why so much thought has been invested in attempts to define it.

Should the Bank of England hand out free money to everyone?

The UK economy is barely growing. To stimulate demand, should the Bank of England mail out a voucher worth fifty quid to every citizen of this fair land and tell them to go out and spend it on beer, fags and cheap Chinese electronics? It sounds like a mad idea, but is it any stranger than the Bank of England printing money to buy up goverment debt?

In a recent speech to the Council of Mortgage lenders - Charlie Bean, Deputy Governor for Monetary Policy, Bank of England - seriously discussed the voucher distribution idea:

"Several commentators have suggested that the effectiveness of quantitative easing could be enhanced by spending the newly created money on something other than government debt.

No lender of last resort for the Eurozone

Jens Weidmann, Bundesbank president, recently gave an interview to the Financial Times. Here is what he said about the role of the European Central Bank and whether it should start to fund the deficits of eurozone member states like Italy, Greece and Spain.

His answer was remarkably direct and honest, leaving little room for the argument that the ECB should come to the rescue of bankrupt Eurozone countries.

Financial Times: Can you explain why the ECB cannot be lender of last resort (for Eurozone governments)?


Jens Weidmann: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.

I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability. This is a very fundamental issue. If we now overstep that mandate, we call into question our own independence.

European debt heat map

Notice the high debt ratios in France, Germany and Belgium - three key players in the Eurozone core.

From the Economist

Worst case scenarios

The German chancellor - Angela Merkel - described the European debt crisis as "maybe Europe's most difficult hours since world war two". Merkel doesn't seem the kind of politician that over-cooks her messages. If this is indeed a moment of extreme crisis, then it is time to examine worst-case scenarios.

The European single currency is close to collapse. Already French and German civil servants are putting together a strategy whereby some of the Eurozone members re-introduce national currencies. When chaos is raging, technocratic solutions are beguiling. They provide a reassuring sense of order and calm.

If only the world could be crafted like the outlines of PowerPoint presentations and strategy papers. Unfortunately, once the Eurozone begin to disintegrate, those carefully drafted plans will be quickly consigned to the circular filing cabinets below minister's desks. There will be no orderly departures from the single currency. The eurozone collapse will be ugly and brutal.

It will start with Greece, who will set off a chain reaction of Eurozone departures. Like falling dominos, one Eurozone country after another will be forced to reintroduce their national currency. There will be a race to the bottom as each exiting country devalues to steal jobs from their neighbours. The likeliest outcome will be 17 European currencies where there is currently only one.

Eurozone disintegration will be immediately followed by a massive surge in inflation. Countries like Greece can reasonably expect the value of the new currencies to drop by half, as exchange rates realign with underlying fundamentals. If Europe is lucky, it will avoid hyperinflation. If not, we can expect the value all European financial assets to be wiped out within months. Imagine a continent of ageing hippies without savings, and you will be about 10 percent of the way towards understanding what the post-EMU Europe will look like.

Inevitably, output will collapse, the financial system will disintegrate, and unemployment will go through the proverbial roof. The great depression will look like a gentle blip compared to the implosion of the Europe.

These are just the short run consequences of Eurozone disintegration.It is anyone's guess as to the political consequences of the total destruction of the European economy. Nevertheless, the very idea of the European Union will suffer catastrophic shock. Member countries will naturally begin a long and vicious period of mutual recrimination. Germany will blame Southern Europe; France will blame Germany, while many in Britain will say "I told you so". Efforts to create an "ever closer union" will be abandoned, probably forever. In the short run, the infrastructure of union is likely to remain, but few will take it seriously. The European Union would become a wretched institutional mess hanging over Europe.

Many will welcome the demise of the European Union. Certainly, European integration has been running at a pace far faster than the vast majority of ordinary Europeans were willing to accept. Animosity towards the EU had been growing across Europe long before the current crisis. European integration had become a cynical exercise where politicians routinely ignored the wishes of their electorates.

However, the European enterprise was created to conceal the deep and unpleasant truth. There was a time when Europe dominated the world, but for at least 50 years or possibly longer, Europe has been in decline. This retreat has taken many forms; political, demographic, military, economic, and cultural.

The creation of a quasi-European state sustained the pretense that Europe still mattered. European politicians in rapidly diminishing states like France, Italy and the UK could argue that Europe still mattered. Rather like the Greek public debt numbers, the claim was based on false accounting. Adding together 27 decrepit and ossified countries does not create a dynamic superstate. Once the Eurozone goes, that conceit will be finally exposed.

"It is not a solution to divide, the solution is to integrate. We have to create a stronger European Union"

That is what Jose Manuel Barroso - the EU Commission President - thinks.

The crisis of the moment is Italy, which needs to find money to cover its deficit. It also needs to convince bondholders to keep buying its debt.

Italian bondholders want to know one thing; will they get back all the money they lent to Italy on time? The Italian state is broke. Economic growth is negligible, while the outstanding debt stock is massive. There are good reasons to think they might not.

Therefore, Mr. Barroso's statement is loaded with financial implications. He's saying "if we have more European integration, then Italy gets more money".

So, if there is more integration, as Mr. Barroso suggests, then who is going to pony up with the cash to cover Italy's debts?

Germany is reluctant, France is almost as broke as Italy, and the UK government would fall if it began to support the bankrupt Italian state. Other European economies to too small to matter.

Integration doesn't pay off debt; only money can do that. So, Mr. Barroso's causality between integration and problem resolution seems a little faulty.

I don't think we have heard the last of him

Berlusconi may have resigned but he remains head of one of Italy's largest party.

He still owns all the main TV stations.

Italy's crushing debt stock is still there.

So is the corruption.

Italy is still in the eurozone.

Just watch what happens next in Italy, political infighting, chaos and ultimately collapse.

In other words, it is a re-run of the Greek debacle.

Getting the priorities right

I love the concluding sentence from this article from the Telegraph. UK passport controls were relaxed because the French authorities were complaining about congestion.

Bureaucratic necessity wins out every time.

All but the most cursory checks were abandoned on passengers on British-registered coaches as they arrived at Dover, Britain's biggest port.

Instead of passports being scanned electronically, border guards checked that the picture matched the holder. It means they were not cross-checked to a computer database to establish if the holder was a wanted terrorist, criminal or immigration offender.

The policy was in place for four years after being introduced when Labour was in power, but never disclosed to Parliament.

It was implemented because the French complained about congestion in Calais caused by backlogs at passport control.

The crazy US housing downturn

It is only when we look at long term data on housing starts that we begin to understand the magnitude of the crash that has befallen the US housing market. Currently, new home housing starts are at the their lowest level in fifty years.

Furthermore, the downturn has been far more prolonged than any previous downturn.

The current economic crisis is unique in so many ways.

UK population projections; there will be more of us, and we will be much older

The ONS has produced an alarming population projection. With a decade or so, the UK will be home to at least 70 million people.

Over the last couple of decades, around half of the growth in the population has come from migration. Suppose, for a moment, that the UK economy continues to stagnate, while emerging market and low income countries continue to grow rapidly. What would happen if migration flows were to dry up?

Currently, there is a clamour to reduce migration. Our much beloved Home Secretary - Teresa May - finds herself in trouble on this very issue. Notwithstanding the passport chaos from this summer, it is getting harder for people to move to the UK.

The indigenous UK population tends to be much older than the new arrivals. If migrants fail to arrive, then the ratio of workers to pensioners could well be much lower than the ones suggested in this short video.

But be careful for what you wish for. If the migrants stop coming, who will do the work and pay taxes to maintain those generous state pensions?

Eurozone breakup draws closer

Who would have thought that the future of the Euro depended on a lecherous old geriatric?

Yesterday, Berlusconi resigned. Today, Italian borrowing costs soared. 10-year bond yields are now well above the 7 percent - a level at which the Italian fiscal position is unsustainable. Thus, the lesson of today was about the bankruptcy of the Italian political system. As bad as he was, Sleazy Silvio was still a better option than any other Italian politician. He was the best Italy had to offer.

While the rest of us are learning about the appalling limitations of Italian politics, that old bore - Jose Manuel Barroso - issued yet another "stern warning" about the impeding dangers of a collapsing single currency. He has been issuing press releases on this theme for at least four years. He calls for concerted action to protect the Euro, organizes a high level meeting amoun Eurozone leaders, and yet the situation just keeps getting worse.

Barroso's fear that the Eurozone will implode is now rapidly turning into a reality. According to Reuters, French and German officials are already working on an exit plan for insolvent Eurozone members.French President Nicolas Sarkozy implied that a breakup was the best course for Europe when he advocated a two-speed Europe. Northern euro zone countries would "accelerate and deepen integration", while the Southern laggards would be ejected.

Meanwhile, over in Frankfort, the ECB are desperately buying up Italian bonds. It is a forlorn attempt to stabilize financial markets and keep Italian rates down. However, it is a failing strategy. Italian bond rates keep rising; Europe slides ever closer to the abyss.

As the abyss beckons, one horrifying reality is beginning to emerge - there is nothing anyone can do to save Italy. After four years of bailouts, the world has finally produced a financial crisis that can not be resolved by a handout to financial institutions. This isn't a case of "too big to fail". There isn't enough money in the world to save Italy.

After Italy, who is next? Already, that fearful disease - financial contagion - has fingered another potential victim. French interest rates have begun to rise.

Mr. Berlusconi - as seen by the Economist magazine

So farewell then Mr Berlusconi

Mr Berlusconi seemed - in equal measure - both a repulsive and comical figure. Over the last two years, his personal life has become increasingly bizarre and shameless. Italy deserves better. It is a relief to hear that he is finally resigning. It should have happened sooner, but better now than next week, or some other long overdue moment in the future.

Nevertheless, there is a danger that one reads too much into his departure. When reporting on Italy, the mainstream media have often blended Mr Berlusconi's outrageous personal lifestyle, and his contempt for the Italian public with Italy is rapidly deteriorating economic situation. Likewise, financial markets welcomed the news of the Italian prime minister's impending resignation. The implication seems to be that Berlusconi's exit both lowers public sector default risk and increases the profitability of Italian publicly traded firms - a proposition that seems rather implausible when explicitly articulated.

The Italian economy continues to be in a parlous state and Mr Berlusconi's departure changes nothing. The public sector debt stock sits at about 120 percent of GDP. The economy has barely grown in a decade. Italy is rapidly ageing population. It has a sclerotic and overregulated private sector. Its judicial system is barely functioning. These problems did not suddenly emerge when Mr Berlusconi became Prime Minister. They will not disappear when he finally leaves office.

It takes decades of government mismanagement to build up a deficit of 120 percent of GDP. This number is a ratio comprising of nominal debt and nominal GDP. Notwithstanding the mathematics behind ratios, as a rough approximation, it would take about 24 years for a fiscal deficit of five percent per year to build up a debt stock of this magnitude.

When Berlusconi first became prime minister, the Italian debt stock was already over 100 percent of GDP. His great achievement was to stabilise the debt at roughly the level he inherited when entering office. He didn't improve things much, but neither did he make matters worse.

So farewell Mr Berlusconi, you inherited a mess when you first became prime minister, and you leave a mess for your successor.

Italy remains on the edge of a meltdown.

The one percent meets the ninety-nine percent

Lets make up some new money - it will make us happy

Jim Lacey - professor of strategic studies at the US Marine Corps War College - was recently walking through the Occupy Wall Street camp in New York. He noticed an interesting development in monetary theory.

As luck would have it, though, many of them will not have to worry about money for much longer, as several OWS occupiers had the answer to everyone’s financial problems. This innovative group, all sporting $4-bill badges, claimed to have reimagined money. Intrigued, I asked how such a reimagination worked. In short, it seems that people are to create money as they need it for their own happiness and the happiness of others.

This I liked, as I have a wonderful imagination and a deep need to use my money so as to increase my own happiness. I promptly imagined a page of my notebook into $10,000 and gave it to one of the $4 lapel-badge ladies. 

She looked at the sheet of paper and smiled at me. So far, so good. I then asked for her laptop and told her she could keep the $8,000 change I was due so as to further increase her own happiness. She quickly turned away, taking her laptop with her and leaving me short $10,000 of reimagined money.

I assume the system has some kinks that the revolution will figure out as it goes.

Before we all snicker at the naivety of the $4 demonstrators, isn't this the same idea that the Bank of England is pursuing? Aren't they printing money to try to make us happy?

UK Public Expenditure - Where Does The Money Go?

During the last fiscal year, the UK government spent £691 billion. Where did the money go? Most of it went on social benefits, health and education. Interest payments took up a sizable chunk, despite the Bank of England's attempts to keep rates low. Public investment was also a hefty number.

If Her Majesty's Government is going to make a sizable reduction in public expenditure, there is little point looking for savings among the other items.  We could abolish the foreign office (FCO), stop offering AID to poor countries and leave the EC, and the savings would quite limited.  However, we might get somewhere if we abolished Scotland, Wales and Northern Ireland.

Violent OWS Protesters Prevent Woman in Wheelchair From Leaving Event

A referendum on austerity

The Greeks will be allowed to vote on their austerity package. A curious idea; will they vote for lower social spending, public sector wage cuts and reduced pensions? Or will they go with a fantasy that Greece is richer than it really is?

How would Britain vote if such a referendum were held here?

Tasteful

Foreclosure Firm Threw Homeless-Themed Party