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Best placed during a recession?

By Breaker (Tue Jan 20, 2009 at 02:16:59 AM EST) (all tags)

Cable rate: below US$1.40.
One pound sterling now sitting at €1.08
GTLSB "admitted yesterday that he does not know how much the second bail-out of the banks will cost."

More worryingly, rumours abound that a ratings agency may be cutting ratings on UK gilts. Not too surprising as it looks like we're gearing up to print money.

Commentators are not helping matters by stating "“I would urge you to sell any sterling you might have,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, in an interview with Bloomberg Television. “It’s finished. I hate to say it, but I would not put any money in the U.K.” . You might be interested to know that Rogers made his name working with Soros.

In the meantime, the government states that if you're not subjecting your children to a state "education", you're probably a child molester.

NuLabia: getting on with the job for hardworking British families as we are the best placed economy to deal with this global downturn which began in America, unlike the do-nothing Tories who would do nothing, the Tory do nothings.

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Best placed during a recession? | 42 comments (42 topical, 0 hidden)

Question: why are you so against 'Printing Money'? by R Mutt (4.00 / 2) #1 Tue Jan 20, 2009 at 02:39:05 AM EST

The Telegraph is working the "slippery slope to inflation" angle pretty hard. Which makes sense for them. The groups that are hurt badly by inflation are the elderly and the rich, who tend to sit on piles of money and don't like to see it shrink. And the Telegraph's demographic seems to either actually in the first, or believe that it's in the second.

But wage earners aren't particularly hurt by inflation. Their salaries just go up alongside the prices (which is what the inflationary cycle is all about.)

Debtors benefit hugely from inflation, as the value of their debt shrinks.

Now firstly, you're a wage earner who's just bought a house, presumably making you a massive net debtor. So for you personally, inflation seems like a really good idea. The value of your mortgage debt will shrink, leaving you having to work much less hard to pay it off.

Secondly, you're dead set against bank bailouts. But the economy is short of money at the moment. So what would be a good alternative to bailing out the banks? Or at a lesser extent, something that could reduce the bailout of the banks? Quantitative easing, a.k.a. "printing money".

Thirdly, you seem to be very concerned about the level of debt incurred by British taxpayers: debt that is pounds. What would be another way of diminishing the value of that debt? Well, letting inflation diminish the value of the pound.

So what exactly are the reasons you're so against 'Printing Money'? Is it purely concern for the pensioners? How about if they did the quantitative easing partly by giving out extra money to pensioners?

Supplementary questions by R Mutt (4.00 / 1) #4 Tue Jan 20, 2009 at 02:58:59 AM EST

2. If the UK is going to print money, why does it also need to go to the IMF to borrow money?

3. From which contributing nations would the money for an IMF loan to the UK come from?

[ Parent ]

Answers by Breaker (4.00 / 1) #6 Tue Jan 20, 2009 at 03:08:54 AM EST

2) Because the presses are burnt out , the currency is so far in the toilet it is near worthless and the default risk on UK gilts has put them to near junk status.
3) Why do you think GTLSB was touring the Arab nations last year? Do keep up, old chap.

[ Parent ]

Let's see by R Mutt (4.00 / 1) #11 Tue Jan 20, 2009 at 03:39:27 AM EST

Point 2.

Inflation is falling. The European Commission is predicting deflation for the UK in 2009. It really is daft to say the "presses are burnt out". The anti-inflation Telegraph articles are slippery-slope arguments arguments about the future: even they don't pretend it's happening at the moment.

I'm pretty sure that not long ago, you were complaining that UK gilts were at risk of being downgraded because the UK is borrowing too much. Now you're saying that in order to stop that happening, the UK must borrow more. Which is it? Does government borrowing increase or decrease the the default risk of gilts?

Point 3

Here's a list of nations by GDP, (in millions of dollars). Top 5:

1 United States (13,807,550)
2 Japan (4,381,576)
3 Germany (3,320,913)
4 China (3,280,224)
5 United Kingdom (2,804,437)

Highest Middle Eastern nations:

25 Saudi Arabia (381,938)
29 Iran (285,304)
38 United Arab Emirates (190,744)

How are they going to bail out the UK when their economies are so much smaller? Not to mention the way falling oil prices are hitting their revenues.

[ Parent ]

Well. by Breaker (4.00 / 1) #13 Tue Jan 20, 2009 at 03:55:06 AM EST

you were complaining that UK gilts were at risk of being downgraded because the UK is borrowing too much. Now you're saying that in order to stop that happening, the UK must borrow more.

Uh, I don't recall where I'm saying the government must borrow more.

Inflation dropped as the VAT cut kicked in; a one off event (as we can't drop VAT any lower than 15% thanks to the EU). As retailers get desperate they will shave their profit margins to offload stock which will have a reductionary effect on inflation, as well as stock auctions from bankrupt businesses.

But even then that will bottom out, at which point the inflation's going to kick in, as our currency dives imports become much more expensive.

Of course, the IMF does not carry any reserves at all, does it? And of course, the IMF can't go to any country it likes and borrow a little money here, a little money there, can it?

Although you do pose an interesting question - what happens when a country goes to the IMF, and the IMF doesn't have the cash to lend them?

[ Parent ]

Maybe I misunderstood by R Mutt (4.00 / 1) #19 Tue Jan 20, 2009 at 04:33:50 AM EST

I asked why the UK needs to borrow from the IMF if it's printing money and amongst the things you said:

....and the default risk on UK gilts has put them to near junk status.

But an IMF loan constitutes further borrowing, which I thought you thought increased that default risk.

Now, you're saying

...at which point the inflation's going to kick in

But that's a prediction about the future, which is the opposite of the European Commission's prediction, and I think most mainstream predictions.

The IMF does carry some kind of reserves, but it's already been bailing out other nations affected by the crisis: Iceland, Serbia, Belarus, Latvia, Hungary, Pakistan, Turkey (upcoming) and so on. The UK is a pretty big economy. The bigger economies are all struggling themselves. I think it would be a problem for the IMF to find enough money for a UK-sized bailout.

Anyway, personally I'm leaning pretty negative about the quantitative easing idea. While the theory looks great, it's never really been tried, so there's not much empirical evidence behind it. Also, I have no debts and significant savings, so it's against my personal self-interest. So, thanks for so valiantly defending my interests at the cost of your own ;-)

[ Parent ]

You misunderstood by Breaker (4.00 / 1) #21 Tue Jan 20, 2009 at 05:21:59 AM EST

The printing of money will continue until it is impossible to carry on due to other impacts on the economy due to a devalued currency, then we will have to go to the IMF.

Here is an interesting read on the effects of Quantitive Easing, based on Japan's experience.

And yes, a lot of what I am advocating is counter to my own selfish interests. But I'd rather take a small hit now and get the country back on its feet sooner.

Instead of spraying our money willy-nilly at the banks (I may have missed it but I haven't seen a balance sheet of "this is where your billions have gone" on a per bank basis), I'd like to see
* proper auditing of the banks books to identify the toxic debt.
* transfer this toxic debt to a fully nationalised sin-bin bank
* ensure the rescued bank has a way to repay the sin-bin bank for relieving it of the debt - this could be a swap, dividend payments, bond issue, whatever.
* investigation into the banks board of directors, with prison sentences a possibility if malfeasance found

That's my back of a fag packet assessment, anyway. I haven't really given too much thought to long term reamifications so far so shred it to pieces if you like; I'm open to suggestions.

[ Parent ]

The gilts thing confused me by R Mutt (4.00 / 1) #26 Tue Jan 20, 2009 at 05:50:43 AM EST

I'm a bit skeptical about the bad bank/sin-bin bank idea. The difficult bit seems to me what you called: "ensure the rescued bank has a way to repay the sin-bin bank".

If the bank has to repay everything, then it hasn't actually been rescued. It still faces the same loss as before.

If it has to repay only a proportion of it, they you're back into moral hazard territory. The government is bailing out idiots on the lines of "the more idiotic you are, the more billions you get".

The recent RBS thing makes me even more worried about moral hazard. As soon as RBS were bailed out, the first thing they did was think "cool, whatever the fuck we do we just get bailed out", and they went and acquired ABN Amro incurring even huger losses than before. Commentator were worrying about the moral hazard in years to come: they didn't even take days to screw things up further.

So, I still say the same thing as I've been saying all along. The economy needs credit, so expand the nationalized banks and lend directly from there. Originally I just said Northern Rock, but RBS seems to me to have already been nationalized in all but name.

Existing banks: let the bodies hit the floor. Savers are already insured; the banks aren't doing any useful lending at present; and moral hazard even if they're rescued, all they'll do in the future do is stumble around like brain-devouring zombies causing chaos and havoc all around.

[ Parent ]

Wasn't by Phage (4.00 / 1) #27 Tue Jan 20, 2009 at 05:57:40 AM EST

The ABN Amro purchase before the bailout ?

[ Parent ]

I thought so by Breaker (4.00 / 1) #29 Tue Jan 20, 2009 at 06:17:09 AM EST

Wasn't there some regulatory hoo-ha in the run up though?

[ Parent ]

: Not regulatory per se by Phage (4.00 / 2) #32 Tue Jan 20, 2009 at 06:28:43 AM EST

Just that it was a huge gamble. Barclays had already backed out of the deal before RBS came along.
There was alsao the issue of how RBS was going to raise the funds necessary, what did it mean for competitveness etc etc.
Of course it turned out to be the most spectacularly bad desision of the last two decades.

[ Parent ]

Hmmm, you could be right by R Mutt (4.00 / 1) #33 Tue Jan 20, 2009 at 06:29:24 AM EST

Looks like it was a few days earlier. OK, I'm now only as worried about moral hazard as I was originally. But I'm still sticking to the direct-lending plan.

[ Parent ]

: A outcome by Phage (4.00 / 2) #34 Tue Jan 20, 2009 at 06:33:51 AM EST

With medium probability I would have said. I can't see any private banks being able to lend with their current capital requirements.
Nothing wrong with that. A form of socio-capitalism.

[ Parent ]

sin bin by Breaker (4.00 / 1) #30 Tue Jan 20, 2009 at 06:21:40 AM EST

The idea being that the bank can put its crap into a long term slow repayment scheme, backed by the government, thus freeing up capital to be profitable with. Kind of like turning a huge credit card bill into a long term loan. So, it is a rescue but not a get out of jail free card.

Pretty harsh letting the other banks fall though; I am pleasantly surprised you'd let it happen. Being the cynic I am, I wonder what the motivation behind saving Royal Bank of Scotland could have been? Now that NR and RBS have been bailed, can we continue to bail out the other banks if required?

Expansion of lending via NR is a viable plan. And how about merging some branches with the Post Office, and kill 2 birds with one stone?

[ Parent ]

Sin Bin problems by Phage (4.00 / 1) #35 Tue Jan 20, 2009 at 06:35:32 AM EST

Courtesy of Robert Peston.

Is how to value the asset. Too low and you cripple the bank, too high and your coshing the taxpayer again.

[ Parent ]

: There must be a way out of that by Breaker (2.00 / 0) #37 Tue Jan 20, 2009 at 06:54:20 AM EST

A certain percentage of profit / dividend to be paid to the sin bin bank, until the debts have been paid off or defaulted? That would mean that there was no requirement to value the assets.

If the assets were transparently held then those which become more viable as market conditions fluctuate could either be sold off or held to offset the remaining bad debts. I could see a new niche market there; have bankers scour the sin-bin bank for bargains.

There's a hole in that reasoning somewhere but I can't find it at present. Debugging multithreaded c++ to finance is a bit too far a mental jump at present.

[ Parent ]

I think the existing loans are pretty long term by R Mutt (4.00 / 1) #36 Tue Jan 20, 2009 at 06:39:22 AM EST

After all, it started with sub-prime mortgages, which are presumably in decades. It also brings up the problem of how the government can place a value on all the dodgy loans and instruments.

Could maybe do something with the Post Office, revive its role as a state bank. In the long term though, I like the idea that "if it's too big to fail, it's too big to exist"... would like to start breaking them up and selling them off eventually.

[ Parent ]

I know the IMF stuff is a joke, by garlic (2.00 / 1) #25 Tue Jan 20, 2009 at 05:46:56 AM EST

so why pretend it's serious, and make up shit about how it works?

[ Parent ]

: Please to be by Breaker (4.00 / 1) #31 Tue Jan 20, 2009 at 06:24:31 AM EST

Bestowing upon us your munificence, garlic.

[ Parent ]

Well then by Breaker (4.00 / 1) #5 Tue Jan 20, 2009 at 03:04:54 AM EST

Their salaries just go up alongside the prices

Ah yes, now will that be RPI or CPI that is used to calculate next years pay rise? Because I surely don't see any business giving pay rises this year. Do you? Even KPMG are down to a 4 day week.

Aside from the Read your history - Britain under the last Labour government (printing money -> IMF bailout). Zimbabwe - printing money, inflation through the stratosphere. Turkey - went from ~1500 lira to the pound to over a million - government printing money.

It is not the printing of the money that bothers me so much as the dealing with the economy once recovery begins. At that point the money supply has to be reigned back in to ensure a slower but more complete recovery once the market distortion has had its effect. And there's no way I believe anyone in NuLabia has the guts to do that, or indeed do it well. For the record I'm not particularly convinced by the Tories, either.

Perhaps it is a perception thing, in that it's only when the government prints money and mismanages the rest of the economy it makes the history books. But in any case it is a high risk strategy that requires very careful discipline and I do not trust any of the present incumbents to manage it well.

Even Will Hutton is questioning whether we're headed to the IMF.

[ Parent ]

Errr, no by Phage (4.00 / 1) #10 Tue Jan 20, 2009 at 03:35:09 AM EST

debt that is pounds
Debt is usually borrowed in the currency of the lender. QE will increase the size of the debt.

[ Parent ]

Hmmm by R Mutt (4.00 / 1) #12 Tue Jan 20, 2009 at 03:48:12 AM EST

I might need to look at that. I thought a lot of the debt was PFI and similar borrowing, and Asian tigers buying UK government bonds; and was assuming those were in pounds.

[ Parent ]

It is by Breaker (4.00 / 1) #14 Tue Jan 20, 2009 at 03:57:45 AM EST

a lot of the debt was PFI and similar borrowing
Which in itself is worrying as it's off balance sheet and foreign investors know that.

But a lot of it is also in cross currency stuff, which is why I'm so bothered about our crossrate to other currencies.

[ Parent ]

I'm *so* commercial by Phage (4.00 / 1) #15 Tue Jan 20, 2009 at 03:59:32 AM EST

Sorry. Most commercial borrowing is in the currency of the lender.

[ Parent ]

And with the currency risk by Breaker (4.00 / 1) #18 Tue Jan 20, 2009 at 04:28:18 AM EST

Uppermost in people's minds, I'd think that lenders will also insist on their currency used, putting the currency risk back on UK plc.

[ Parent ]

Exactly. by Phage (4.00 / 1) #20 Tue Jan 20, 2009 at 04:43:13 AM EST

The JPY is strong and getting stronger. Now is a good time to buy that TV / car. It will be getting very expensive soon.

Also, I remember the 80's, and the crippling interest rates that followed the recession. QE means that when they come again the rates will be even higher and more painful than they were then.

I'm currently on a tracker mortgage, so sitting pretty for the moment, but I will be looking to fix the rate around this time next year.

[ Parent ]

Trackers by Breaker (4.00 / 1) #22 Tue Jan 20, 2009 at 05:24:20 AM EST

I can see the banks beginning to collar at 4% with unlimited upside for when interest rates rise.

Bet the spread'll be pretty hefty on LIBOR if you try to fix for 5 years or more...

[ Parent ]

: Oh yes by Phage (4.00 / 2) #23 Tue Jan 20, 2009 at 05:33:28 AM EST

But I fully expect to see 15% again. Any cap lower than that will be a good thing. If you can get in early and fix at 6%...you'll be laughing.

[ Parent ]

I salute Gordon Brown. by komet (4.00 / 5) #2 Tue Jan 20, 2009 at 02:44:43 AM EST

In the nineties, only the richest of men - to wit, Mr. Soros - were able to experience the fun of bringing down the Pound. Brown has put such exciting activities within the reach of the common man. Truly a Labour icon.

--
<ni> komet: You are functionally illiterate as regards trashy erotica.

Update by Breaker (4.00 / 1) #3 Tue Jan 20, 2009 at 02:46:19 AM EST

Added paragraph starting "Commentators".

You should move to Germany by Merekat (4.00 / 1) #7 Tue Jan 20, 2009 at 03:14:28 AM EST

Their more cautious economic/societal balanced approach would seem to appeal to you. You'd have to have an ID card and a lot more rules though...

Sadly MBW won't move to Chermany by Breaker (4.00 / 1) #8 Tue Jan 20, 2009 at 03:21:42 AM EST

Language barrier too much for her.

So, where else to fly to if GTLSB manages to steal an election victory?

[ Parent ]

Not many safe havens by Phage (4.00 / 1) #9 Tue Jan 20, 2009 at 03:33:10 AM EST

I'll keeep you posted.

[ Parent ]

Zeitgeist says by Merekat (4.00 / 1) #16 Tue Jan 20, 2009 at 04:12:56 AM EST

Feel the love in Obamaland.

I say swallow the German and the chokingly conservative attitudes and head for Switzerland:)

[ Parent ]

Obamaland by Breaker (4.00 / 2) #17 Tue Jan 20, 2009 at 04:26:51 AM EST

I really do think the media are putting way too much expectation on the man. Short of him revealing a weakness to Kryptonite, I can't see him (or anyone else for that matter) living up to the hype.

I thought Swiss work visas were pretty hard to get hold of?

[ Parent ]

: Only if your name ends in 'ic' by Merekat (4.00 / 2) #28 Tue Jan 20, 2009 at 06:10:20 AM EST

For old core EU member states, they don't have a quota on permits. However, you do need to find a job within 3 months or otherwise prove you can support yourself.

[ Parent ]

"Best placed" by Herring (4.00 / 3) #24 Tue Jan 20, 2009 at 05:41:07 AM EST

== an island so the population can't flee.

You can't inspire people with facts
- Small Gods

Oi Breaker... by Metatone (4.00 / 1) #38 Tue Jan 20, 2009 at 08:25:35 AM EST

Go buy this book...

http://www.amazon.co.uk/Return-Depression-Economics-Crisis-2008/dp/0393071014

Don't repeat any more gilt trader bollocks about inflation until you've read it.

I presume you have read it? by Breaker (4.00 / 1) #39 Tue Jan 20, 2009 at 08:42:48 AM EST

In which case I look forward to your illuminating insight you have gleaned from this treatise. What with the recession I can't justify plonking 35 notes for just over 200 pages used, far less over £100 for a new version.

According to his Wikipedia page, Paul Robin Krugman (born February 28, 1953) is an American economist, columnist, author and intellectual.

I'll take Jim Roger's opinion over his, any day.

[ Parent ]

Update: by Breaker (4.00 / 1) #40 Tue Jan 20, 2009 at 08:47:34 AM EST

Found it in softcover for less than a tenner.

Bought.

[ Parent ]

: Yeah... by Metatone (4.00 / 1) #41 Tue Jan 20, 2009 at 08:52:44 AM EST

It was just easier to link to the title than search out the exact page.

[ Parent ]

Having now read the book by Breaker (2.00 / 0) #42 Wed Jan 28, 2009 at 01:47:58 AM EST

Which part are you calling me out on writing bollocks on?

P47: "Governments whose financial credibility is suspect have trouble selling long term bonds"
I don't see how that's at odds with anything I've said about gilts.

In any case, thanks for the tip - it was an interesting read. Unfortunately the conclusion seems to be "piss loads of money into your economies and if you're lucky you'll suffer ~15% devaluation, if your strategy works which it might not". I was hoping he might have a magic plan for recovery.

[ Parent ]

Best placed during a recession? | 42 comments (42 topical, 0 hidden)