Printing Money In The UK  

The Times has a report on quantitative easing / money printing in the UK - Bank may start printing money to reverse 'deep' downturn.

The Bank of England’s Governor admitted yesterday that Britain is now in “deep recession” and signalled that it is ready to start “printing money” as soon as next month in aggressive, last-ditch moves to limit the slump.

Mervyn King indicated that the Bank is poised to move beyond relying on further interest rate cuts to combat recession. It will give a green light within weeks to a strategy of “quantitative easing”, the modern equivalent of printing money, he made clear.

The Governor’s strong hints that the Bank will shortly embark on this radical action to breathe life into the stalled economy came as he unveiled its bleakest assessment yet of Britain’s prospects.

The Bank ripped up already grim forecasts issued only last November to predict that the economy will shrink at an annual rate of as much as 4 per cent during this summer — more than twice as fast as it had expected just three months ago.

Mr King warned that the odds are now heavily tilted towards an even more brutal decline in the economy than the Bank is now factoring on. On the Bank’s new worst-case scenarios, the pace of the slump could accelerate to see GDP shrinking at an annual pace of up to a staggering 6 per cent.

“The economy is in a deep recession,” the Governor said. “But the length and depth of the recession will depend to a significant extent on developments in the rest of the world, where a severe economic downturn has taken hold.”

The Bank’s gloom-laden forecasts left the City betting that it will order quantitative easing moves to begin at its next meeting in just three weeks’ time.

As well as the startling scale of the slump in national output predicted yesterday, the Bank emphasised the case for drastic action with a forecast that Britain will flirt with sustained deflation for most of the next three years.

Jerome a Paris has a post on rising mortgage rates in the US and the great redistribution of wealth that has taken place over the past decade - pushing on a string: mortgage rates increase.

In a sense, this is not unexpected: variable mortgage rates are linked to long term Treasury rates, rather than to short term Fed rates, and Treasury rates went down to unusually low levels late last year as a massive flight to safety made investors wary of any financial assets not backed by the full credit of the US government. Now that things are stabilising somewhat in asset markets, and that people start looking at US debt on a standalone basis, and not just as a safe haven, prices are moving back to "normal."

But "normal means that:

Plans by the Treasury to raise $2,000bn in new debt over the 2009 financial year are driving yields on government bonds higher and complicating the Fed’s efforts to push mortgage rates lower.

In spite of a poor employment report last Friday, which typically would send long-term yields on Treasury bonds lower, they rose.

The rise was sparked by fears about the growing budget deficit and the continued appetite of foreign investors for US government debt.

"Normal" means worrying about the ocean of debt being issued by the US government to try to clean up the mess created by the Bush/Greenspan Bubble.

"Normal" is that we are suddenly entering a period where the talking heads are free to pontificate about the burden of public debt, and the need for balanced budgets (whatever happened to such virtues in the past 8 years? - oh right, there was a war and it was unpatriotic to do so, then).

But, pontificating aside, the reality is that we had a large scale grand robbery of the past few years. To make it simple: the Fed printed money, gave it for free to rich people, who lent it to poor people at at nice profit instead of paying them wages; reimbursement was possible only if house prices went up, and that lasted for a while. The rich made out like bandits on their assets, financial or otherwise, and the poor thought they were more or less keeping up with the Joneses (the reality was a large-scale transfer of wealth from one group to the other, no bonus points for guessing which was which). Now that it's no longer the case, the poor lose their house, stop paying their debt at some point, put the banks in a pickles, and the economy unravels. Except that the banks are being bailed out, which means, fundamentally, saving the owners of financial assets (bank bondholders specifically, and bond holders in general) at the expense of taxpayers, thus having the goverment validate and consolidate the past transfer of wealth.

Government debt is meant to try to delay the reckoning (but that can't last - as the headline story shows, the underlying problem is too much debt, and you can't force more debt on an economy that is already choking over - or rather, under - too much leverage); but more than anything, it is meant, as set up today, to validate all the counterfeit money that was given to the rich and loaned to the poor without changing the terms of that global transaction.

Instead, the debtors are going to be made to pay until they're bankrupt - and made to pay a second time as taxpayers (or, more importantly, as beneficiaries of government services or public services that are being cut for lack of money) for whatever they could not afford as borrowers.

Current policies are failing as expected, but the transfer of wealth continues unabated - and Obama will get the blame for it, eventually, unless he radically changes things, via massive tax hikes or explicitly confiscatory policies.

Because as parasites keep on gorging, the body underneath keeps on gettign weaker and the economy will keep on crashing

Naomi Klein has a column in the Nation declaring "Public Revolt Builds Against Rip-off Rescue Plans" - All of Them Must Go.

Watching the crowds in Iceland banging pots and pans until their government fell reminded me of a chant popular in anti-capitalist circles in 2002: "You are Enron. We are Argentina."

Its message was simple enough. You--politicians and CEOs huddled at some trade summit--are like the reckless scamming execs at Enron (of course, we didn't know the half of it). We--the rabble outside--are like the people of Argentina, who, in the midst of an economic crisis eerily similar to our own, took to the street banging pots and pans. They shouted, "¡Que se vayan todos!" ("All of them must go!") and forced out a procession of four presidents in less than three weeks. What made Argentina's 2001-02 uprising unique was that it wasn't directed at a particular political party or even at corruption in the abstract. The target was the dominant economic model--this was the first national revolt against contemporary deregulated capitalism.

It's taken a while, but from Iceland to Latvia, South Korea to Greece, the rest of the world is finally having its ¡Que se vayan todos! moment.

The stoic Icelandic matriarchs beating their pots flat even as their kids ransack the fridge for projectiles (eggs, sure, but yogurt?) echo the tactics made famous in Buenos Aires. So does the collective rage at elites who trashed a once thriving country and thought they could get away with it. As Gudrun Jonsdottir, a 36-year-old Icelandic office worker, put it: "I've just had enough of this whole thing. I don't trust the government, I don't trust the banks, I don't trust the political parties and I don't trust the IMF. We had a good country, and they ruined it."

Another echo: in Reykjavik, the protesters clearly won't be bought off by a mere change of face at the top (even if the new PM is a lesbian). They want aid for people, not just banks; criminal investigations into the debacle; and deep electoral reform.

Similar demands can be heard these days in Latvia, whose economy has contracted more sharply than any country in the EU, and where the government is teetering on the brink. For weeks the capital has been rocked by protests, including a full-blown, cobblestone-hurling riot on January 13. As in Iceland, Latvians are appalled by their leaders' refusal to take any responsibility for the mess. Asked by Bloomberg TV what caused the crisis, Latvia's finance minister shrugged: "Nothing special."

But Latvia's troubles are indeed special: the very policies that allowed the "Baltic Tiger" to grow at a rate of 12 percent in 2006 are also causing it to contract violently by a projected 10 percent this year: money, freed of all barriers, flows out as quickly as it flows in, with plenty being diverted to political pockets. (It is no coincidence that many of today's basket cases are yesterday's "miracles": Ireland, Estonia, Iceland, Latvia.)

Something else Argentina-esque is in the air. In 2001 Argentina's leaders responded to the crisis with a brutal International Monetary Fund-prescribed austerity package: $9 billion in spending cuts, much of it hitting health and education. This proved to be a fatal mistake. Unions staged a general strike, teachers moved their classes to the streets and the protests never stopped.

This same bottom-up refusal to bear the brunt of the crisis unites many of today's protests. In Latvia, much of the popular rage has focused on government austerity measures--mass layoffs, reduced social services and slashed public sector salaries--all to qualify for an IMF emergency loan (no, nothing has changed). In Greece, December's riots followed a police shooting of a 15-year-old. But what's kept them going, with farmers taking the lead from students, is widespread rage at the government's crisis response: banks got a $36 billion bailout while workers got their pensions cut and farmers received next to nothing. Despite the inconvenience caused by tractors blocking roads, 78 percent of Greeks say the farmers' demands are reasonable. Similarly, in France the recent general strike--triggered in part by President Sarkozy's plans to reduce the number of teachers dramatically--inspired the support of 70 percent of the population.

Perhaps the sturdiest thread connecting this global backlash is a rejection of the logic of "extraordinary politics"--the phrase coined by Polish politician Leszek Balcerowicz to describe how, in a crisis, politicians can ignore legislative rules and rush through unpopular "reforms." That trick is getting tired, as South Korea's government recently discovered. In December, the ruling party tried to use the crisis to ram through a highly controversial free trade agreement with the United States. Taking closed-door politics to new extremes, legislators locked themselves in the chamber so they could vote in private, barricading the door with desks, chairs and couches.

Opposition politicians were having none of it: with sledgehammers and an electric saw, they broke in and staged a twelve-day sit-in of Parliament. The vote was delayed, allowing for more debate--a victory for a new kind of "extraordinary politics."

Here in Canada, politics is markedly less YouTube-friendly--but it has still been surprisingly eventful. In October the Conservative Party won national elections on an unambitious platform. Six weeks later, our Tory prime minister found his inner ideologue, presenting a budget bill that stripped public sector workers of the right to strike, canceled public funding for political parties and contained no economic stimulus. Opposition parties responded by forming a historic coalition that was only prevented from taking power by an abrupt suspension of Parliament. The Tories have just come back with a revised budget: the pet right-wing policies have disappeared, and it is packed with economic stimulus.

The pattern is clear: governments that respond to a crisis created by free-market ideology with an acceleration of that same discredited agenda will not survive to tell the tale. As Italy's students have taken to shouting in the streets: "We won't pay for your crisis!"

The Economist has an article looking at the likely reaction if 2 billion people who have recently become middle class find themselves dropping back into poverty - Two billion more bourgeois.

PEOPLE love to mock the middle class. Its narrow-mindedness, complacency and conformism are the mother lode of material for sitcom writers and novelists. But Marx thought “the bourgeoisie…has played a most revolutionary part” in history. And although The Economist rarely sees eye to eye with the father of communism, on this Marx was right.

During the past 15 years a new middle class has sprung up in emerging markets, producing a silent revolution in human affairs—a revolution of wealth-creation and new aspirations. The change has been silent because its beneficiaries have gone about transforming countries unobtrusively while enjoying the fruits of success. But that success has been a product of growth. As growth collapses, the way the new middle class reacts to the thwarting of its expectations could change history in a direction that is still impossible to foresee.

The new middle consists of people with about a third of their income left for discretionary spending after providing basic food and shelter. They are neither rich, inheriting enough to escape the struggle for existence, nor poor, living from hand to mouth, or season to season. One of their most important characteristics is variety: middle-class people vary hugely by background, profession and income. As our special report in this week’s issue argues, their numbers do not grow gently, shadowing economic growth and rising 2%, or 5%, or 10% a year. At some point, they surge. That happened in China about ten years ago. It is happening in India now. In emerging markets as a whole, it has propelled the middle class from a third of the developing world’s population in 1990 to over half today. The developing world is no longer simply poor.

As people emerge into the middle class, they do not merely create a new market. They think and behave differently. They are more open-minded, more concerned about their children’s future, more influenced by abstract values than traditional mores. In the words of David Riesman, an American sociologist, their minds work like radar, taking in signals from near and far, not like a gyroscope, pivoting on a point. Ideologically they lean towards free markets and democracy, which tend to be better than other systems at balancing out varied and conflicting interests. A poll we commissioned for our special report on the middle class in the developing world finds that such people are happier, more optimistic and more supportive of democracy than are the poor.

These attitudes transform countries and economies. The middle class is more likely to invest in new products and new technologies than the rich, who tend to defend their existing assets. It is better able than the poor to leap barriers to entry into business and can therefore set up companies big enough to generate jobs. With its aspirations and capacity for delayed gratification, the middle class is more likely to invest in education and other sources of human capital, which are vital to prosperity. For years, policymakers have tied economic success to the rich (“trickle-down economics”) and to the poor (“inclusive growth”). But it is the middle class that is the real motor of economic growth.

Now the middle class everywhere is under a great threat. Its members have flourished in places and countries that have opened up to the world economy—the eastern seaboard of China, southern India, metropolitan Brazil. They are products of globalisation, and as globalisation goes into reverse they may well be hit harder than the rich or poor. They work in export industries, so their jobs are unsafe. They have started to borrow, so are hurt by the credit crunch. They have houses and shares, so their wealth is diminished by falling asset prices.

Those at the bottom of the ladder do not have far to fall. But what happens if you have clambered up a few rungs, joined the new middle class and now face the prospect of slipping back into poverty? History suggests middle-class people can behave in radically different ways. The rising middle class of 19th-century Britain agitated peacefully for the vote; in Latin America in the 1990s the same sorts of people backed democracy. Yet the middle class also supported fascist governments in Europe in the 1930s and initially backed military juntas in Latin America in the 1980s.

Nobody can be sure what direction today’s new bourgeoisie of some 2.5 billion people will take if its aspirations are dashed. If the downturn lasts only a year or two the attitudes of such people may survive the pain of retrenchment. But a prolonged crash might well undo much of the progress the developing world has lately made towards democracy and political stability. It is hard to imagine the stakes being higher.

And to close with some financial tinfoil, there is a modern day foilhead guru called Reinhardt who is trying to pin the blame for the financial crisis on some cult for wealthy Catholic businessmen called Legatus (a variation on the usual conspiracy theorist's penchant for blaming financial crises on a particular religious group) - Legatus and Reinhardt.

I follow a lot of deeply strange information as a matter of routine. Almost none of it gets mentioned here.

I’m sufficiently weirded out by something that I’ve been watching unfold over the last couple of days and thought I’d open it up for you guys to consider, just in case… of what? I don’t know. There’s a chance that this Friday the 13th could be more interesting than usual.

Let’s put it this way: For those of you who are looking for a rabbit hole to fall into, set your sights on Legatus and Reinhardt.

Students of the Deep Catholic Church should prepare to lose a few hours, at least. And for the foilheads who are traders… Fuggetaboutit. Get your spouse to pull the plug now.

If there’s aftermath to sort through by Friday—in the market, or otherwise—I’ll move this post back to the top and we can consider it again.

I apologize to people who are looking for tangible answers on this. I don’t have them. I’m as confused as the rest of the people watching this. Maybe that’s the point.