Bank Debt, The Economy and Excessive Quantitative Easing
by Colin Thompson
A Special report from the UK on the US, UK and World Wide Banking challenges pressuring our economies.
International trade is flowing freely after ebbing during the global downturn. Global exports have returned to 2007 levels ($3.7 trillion a quarter). Yet the imbalances that Western governments want to reverse remain. In the UK and US, trade deficits are hindering the recovery. The war of words between deficit and surplus nations is escalating. What is the `true` position globally?
The UK trade balance improved in August, but not by enough to ease concerns of a slow recovery. The deficit narrowed to £4.6bn, from £5bn in July. Exports to our main trade partner, the EU, increased by £0.1bn. But exports to the rest of the world fell by £0.5bn. These figures further dent hopes of an export led recovery, though the manufacturing sector’s recent strong performance is at least one highlight.
The British labour market is treading water. The unemployment rate edged down by 0.1% to 7.7% in the three months to August. Fiscal austerity and a lukewarm recovery means that it’s going to take a long time for the situation to improve. A stagnant job market raises the risk of persistent, long-term unemployment. The number of people out of work for longer than twelve months has shot up from 612,000 a year ago, to 821,000 now. What will 2011 bring, more unemployment, but at what level?
Quick Economic Link Fact --
Quantitative Easing and what it did to Japan...
UK inflation data have a depressingly familiar theme - still too high, and coming down more slowly than most had expected or would like. For the ninth month in a row the headline CPI rate was more than a percentage point above the 2% target, at 3.1% in September - the same as in August. The measure that excludes volatile items like energy, and which gives a better gauge of broader price movements, only fell from 2.9% to 2.8% (analysts expected a decline to 2.7%).
No doubt some readers will be thinking, “excuses, excuses” when it comes to the explanation. High inflation is the result of gyrations in global energy prices, changes in VAT and the decline in sterling (which increased the cost of imports). We continue to believe – along with most policymakers – that the UK does not have a domestic inflation problem. UK firms are reporting that they have lots of spare capacity and the unemployment rate is still high. So it’s hard to argue that demand for goods and services is running ahead of the UK economy’s ability to supply them.
There is little that the MPC could have done. If they had not cut interest rates as drastically or raised them sooner, it would have dealt a harsh blow to a fragile economy and increased the chances of deflation (falling prices) further down the line. But the combination of a sluggish recovery and high inflation is a real headache for policymakers. And it’s not about to get any easier, as there are further shocks in the pipeline that will keep inflation above target through next year. Global food prices are on the rise rapidly after a series of bad harvests and the VAT hike will throw another spanner in the works in January 2011. More challenges ahead for us all.
There was more conflicting UK housing data, but the underlying trend is down. The Department for Communities & Local Government (DCLG) reported an 8% y/y rise in prices in August, much higher than the 2.6% and 3.1% reported by Halifax and Nationwide. The DCLG's measure gives more weight to high-priced areas of London and the South East. It also lags the lenders' measures, so it is likely to soften in the coming months. Surveyors’ confidence has slipped again with 41% believing prices will fall in the next three months. However the sales to stock ratio remains stable, which may be a signal that the pace of future price falls may be relatively modest.
The bank of England could be forced to embark on a second round of `quantitative` easing worth at least £100 billion as soon as next month. Together with the UK`s economy is expected to slow over the winter. What is around the corner for the UK?
In the US, the gap between imports and exports widened. The trade deficit increased by 9% in August to $46.3bn. Import growth of 2.1% swamped a 0.2% rise in exports. Half of the trade deficit is with China, which hit its highest value of $28bn during the month. This will do nothing to allay concerns that China’s currency is too weak.
The Federal Reserve gave more indications that another effort to boost the US economy is coming. The minutes from October’s policy meeting said that unless the pace of growth strengthened or underlying inflation moved up, "they would consider it appropriate to take action soon." Fed President Ben Bernanke made the point even more clearly in a speech on Friday, saying inflation was, “too low” and unemployment was, “clearly too high”. News that the annual rise in core inflation was just 0.8% in September (the lowest since 1962), makes Fed action in November even more likely. This has signalled the imminent launch of another stimulus package to boost the fragile American recovery - which could be worth up to $1 trillion ( $625 billion). Gross Public Debt of the US will reach 97% of GDP next year and 110% by 2025. The Dollar: the only way is down!
At least Eurozone inflation is moving in the right direction (i.e. away from deflation territory). Inflation rose to 1.8% in September, up from 1.6% in August. These figures help explain why the European Central Bank is less keen on undertaking further quantitative easing than its US counterpart. What will happen in 2011?
The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland who are `all` in `deep` financial difficulty. Who will leave the euro currency first? What future as the Euro? Watch this space!
Without `continuous quantitative easing` where would the world be? Yes, there is still more to come!
Spending our way out of worldwide recession will take years to pay back--and create a lot of pain.
Governments around the world will issue an estimated $4.5 trillion in debt this year, triple the five-year average for industrial countries.
It's the Total Debt
Private banking assets tend to become public problems in a crisis. By that measure European countries are far worse off than the U.S.
The Stumble Cycle
Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are repeat offenders.
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