King correct to warn Labour against more spending

If Tuesday's bizarre outcome on the cost of living was sustainable it might, just might, reveal that the economy was stronger than we thought and demand had not completely evaporated but was still capable of applying some upward pressure to prices.

However, RPI at zero and CPI at 3.2pc reveal as much about flawed statistical measures as any change in how the economy is behaving. The inflation figures were strong only in the same way that a fish thrashing in the bottom of a boat can be surprisingly energetic, but not something that lasts.

The main reason RPI did not fall into negative territory (or deflation) and that CPI was still more than a full percentage point above the target 2pc level, was the weakness of sterling. We face the far more gloomy outcome of a shrinking economy with falling wages cursed by rising prices fuelled by escalating import costs. The reason for our weak currency? The disastrous state of the UK's public finances and the £118bn plus Alistair Darling will have to borrow in the next financial year.

A falling pound ought to be good news for exports but even our foreign earners won't be enough to help us out given how quickly unemployment is rising.

Falling housing and energy costs are welcome and will help matters. Being cheery, the best outcome will be only a short period of deflation which will be reversed as the economy picks up. I'm sorry if this sounds like wishful thinking but it's the best I've got. Mervyn King, Governor of the Bank of England, is a bit more upbeat, suggesting the benefit of recent interest rate cuts and its quantitative easing programme are still to come.

Whether you believe him or not on this point, King was right on Tuesday to warn the Government over further public spending splurges. Given the long term damage Labour has helped cause to the economy, and sterling, we really can't take much more punishment.

Bank-bashing policy flawed

Top bankers at Barclays saw £95m wiped off their share-based pay during 2007 and 2008. Bob Diamond saw his total pay fall from £21.1m in 2007 to £250,000 in 2008.

But let's keep the celebrations brief. Yes, City pay needs reform to align rewards with long term performance but at the heart of the Government's bank-bashing policy is a flaw.

It wants banks to take less risk and therefore pay their people less. But it also wants them to lend more, and take more risk. It can't have it both ways.

Source: Damian Reece, Telegraph

Quantitative Easing - It Could Get Ugly

Quantitative Easing will it work?


March 11, 2009 is a historic day for the United Kingdom and its people! This is the day - for the first time in its history of over 300 hundred years - that the Bank of England has resorted to creating billions of pounds to pump into the system. The question on everyone`s mind now, is will this policy work or is it just one last desparate throw of the dice at a spiralling economy. One thing we do know is that QE already looks to be hurting the saver who has been feeling the pain throughout this crisis.


Gill Montia of the Banking Times:

"Pension experts are expressing alarm at the Government’s plans for quantitative easing.
They are worried about the impact of injection of up to £150 billion of newly created cash into the economy because of the impact this could have on annuities.

In return for a retiree’s pension pot, an annuity provides a regular income based on yields on government bonds or gilts.

Tomorrow, the Bank of England will hand over around £2 billion to banks and other investors in return for UK Government bonds and corporate paper.However, news of the programme immediately impacted on gilt yields which have fallen to record lows.

Nigel Callaghan, of Bristol-base pension adviser, Hargreaves Lansdown, explains that annuity rates have already been falling substantially in the last four or five months.He believes that the initial £75 billion of quantitative easing proposed will further damage prospects for those needing to purchase an annuity.

According to a BBC report, a £100,000 pension pot can currently purchase a joint-life annuity of up to £6,488 a year for a man and woman of 65 with average life expectancy.

The sum is nearly £400 lower than in 2008 and annuity rates look set to fall further as the economy falters."


Headlines

Quantitative Easing Won't Work, Debt too High: Hendry
Read Story

Quantitative Easing is based on discredited economics
Read Story

Why quantitative easing won’t work
Read Story

Quantitative Easing Has Arrived in UK

BoE Prints Creates £75 Billion

We have all heard the talk for months but now it has become a reality as the Bank of England adopts Quantitative Easing. Will it work? Only time will tell but lets hope for all of our sakes it makes some positive impact to this dire situation which we are faced with.

What is quantitative easing?
Otherwise known as 'printing money', it is where the Bank of England floods the economy with new cash in the hope of boosting spending. The Bank will not actually print new £10, £20 and £50 notes but electronically create the money, putting it into banks in the hope they will lend it to cash-starved businesses and consumers struggling to get affordable credit.

Why is it needed?
To stop the economic crisis triggering deflation. Economies with deflation deteriorate rapidly because people refuse to spend money knowing goods will fall in value. People's wages fall, so their spending power to repay debt declines.

How does it happen?
The Bank will buy assets like from commercial banks. To pay for them, it will simply increase the balance of their account held at the Bank of England. All major banks have such accounts. They can then draw on them and lend the money out.

What are the risks?
Hyperinflation. The flood of money, unless extremely carefully controlled, could drive up prices massively. This happened when Germany printed money between the First and Second World Wars and has happened in Zimbabwe under Robert Mugabe, where inflation is running at more than 100,000%.