Spending Cuts & Economy - Austerity Forever!

[Rob McCow]

Lend, lend, lend, borrow, borrow, borrow. Isn't that how you get into debt?

[Dirk Gently]

Lend, lend, lend, borrow, borrow, borrow. Isn't that how you get into debt?

It depends. If you lend with an interest higher than you have on your borrowings then you make money.
That's what the U.K did to Ireland. We borrowed to bail them out & charged a higher % rate.

[Perry Vale]

This put's the Fed's increase to 0.5% at the end of last year into at odds with what's going on in Asia.
Was the Feb move too pre-emptive? or is this recession only affecting the Asian markets?

I've seen some commentators suggest the 2008 financial crash was a trilogy. The first part was 'anglo-saxon' in 2008, the 'euro crisis' in 2011-12 and now the third part has arrived in emerging markets and Asia.

As for the Fed's decision, it looks like they were out of options. The markets expected (and were demanding) a rise (as the Fed had been promising for years), but the very things the Fed had been doing (QE & ZIRP) were the things stopping them from a rate rise. I'm sure we'll see a reversal in the coming months.

This from one of my favourite reads on the internet, ZeroHedge....

"Pandora's Box Is Open": Why Japan May Have Started A 'Silent Bank Run'

As extensively discussed yesterday in the aftermath of the BOJ's stunning decision to cut rates to negative for the first time in history (a decision which it appears was taken due to Davos peer pressure, a desire to prop up stock markets and to punish Yen longs, and an inability to further boost QE), there will be consequences - some good, mostly bad.

[Philipnet]

I'm not convinced of a reversal from the Fed.
To go back on the rate rise so soon would undermine any confidence in them and cause a run on USD, which would be bad for the US economy in general.

That said, the US seem to be revising their expectations downwards:ecember: 4 Hawkish Points from the FOMC Statement - http://www.babypips.com/blogs/pipono...-20151217.html


compared to:
February: FOMC Talk: Who Let the Doves Out? - http://www.babypips.com/blogs/pipono...-20160209.html

In December they had to be hawkish as they needed to sell the rate rise and the return (or at least going along the path) to a growing economy.

Now, with the crash over in Asia (which apparently is a crash https://en.wikipedia.org/wiki/2015%E...k_market_crash )
and the downbeat speech from the Governor of the Bank of England http://www.babypips.com/blogs/pipnoc...-20160119.html it's setting the scene for more middle of the road monetary policy.

I really hope George Osborn's been talking to the right people. Cutting the deficit to zero by 2020 (4 years to go!) looks like it might be a tall order!

[Perry Vale]

I'm not convinced of a reversal from the Fed.
To go back on the rate rise so soon would undermine any confidence in them and cause a run on USD, which would be bad for the US economy in general.

You think there's confidence in them to begin with?

Deutsche Bank are looking more than precarious with $60 trillion in oil derivatives, and pretty much demanding a reversal from the Fed (among other things)....

Deutsche Bank Is Scared: "What Needs To Be Done" In Its Own Words

So back to the original question WHAT NEEDS TO BE DONE. Simple?

1. Recognize the problem. It is not oil, it is not in the banks..it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with overinvestment boom you cut you don't raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.

2. Draghi shd follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.

3. China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.

4. And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there shd be deemphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.

5. how about some fiscal stimulus

6. on negative rates -- instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers.. Cash shd be charged interest -- put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.

[Perry Vale]

Yellen: Fed rate cut, negative rate possible but unlikely

Asked if the Fed had the power to go so far as reduce rates into negative territory, as the European Central Bank and the Bank of Japan have done recently, Yellen said they had studied the matter in 2010 but had not reached a conclusion.

"That remains a question.... I am not aware of anything that would prevent us from doing it," she said.

Negative rates, in the context of monetary policy, would force commercial banks to pay interest on cash they deposit with the central bank, rather than be paid interest as normally happens.

[Rob McCow]

Libraries under threat in Bracknell. Whether this means they've made a decision or not I don't know.

http://www.getreading.co.uk/news/rea...spare-10902675

Aside from the council tax increase and the garden waste price hike reviews are already being made to a selection of other council services.

Council chief executive Tim Wheadon also admitted 22 jobs were set to be cut from the council roster and said '38 individuals' were 'at risk' of losing their jobs.

The authority is also consider the future of four of its libraries.

The council is assessing adult social care packages carefully hoping to make savings of around £1.34m and a reduction in staff will save them £1m.

Two lots of cuts have been aimed at highways maintenance and networks and the council hopes to save £700,000.

Cllr Heydon said: "We have always been really proud of the roads.

"We may well start noticing the grass verges aren't being cut as much."

The council has also agreed the old Bracknell Magistrates' Court which Mr Wheadon said is in preparation for the next phase of the council's regeneration.

He added: "In the short term we will find people to occupy it."

A report set to go before the Executive committee on Tuesday next week suggests the Magistrates' Court will not see any development in the next three years.

Mr Nash also admitted the council was delving into its £5m reserves in order to balance the budget legally for the next year.

[Stuart Wallis]

The Lads are always available to find £5 million by and fill libraries, even if it means emptying banks out and throwing people in...

[Philipnet]

The Brexit saga is continuing with the British Pound rising, and then falling against the US Dollar.

EU referendum: Pound sees biggest fall in a year on Brexit fears
Cable Tumbles As Brexit Fears Resurge After BoJo Backlash

(FYI: "Cable" is the exchanges rate between the British Pound and the US Dollar and "BoJo" is Boris Johnson )


This is going to be one to watch

[Stuart Wallis]

(FYI: "Cable" is the exchanges rate between the British Pound and the US Dollar and "BoJo" is Boris Johnson )

Just so we know that Susan Boyle hasn't pushed Vince Cable out of bed then...

[Philipnet]

Just so we know that Susan Boyle hasn't pushed Vince Cable out of bed then...

Well "Cable Tumbles" does bring an amusing mental image to mind

[Perry Vale]

Mervyn King: new financial crisis is 'certain' without reform of banks

Another financial crisis is “certain” and will come sooner rather than later, the former Bank of England governor has warned.

Mervyn King, who headed the bank between 2003 and 2013, believes the world economy will soon face another crash as regulators have failed to reform banking.

He has also claimed that the 2008 crisis was the fault of the financial system, not individual greedy bankers, in his new book, The End Of Alchemy: Money, Banking And The Future Of The Global Economy, serialised in The Telegraph.

“Without reform of the financial system, another crisis is certain, and the failure ... to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later,” Lord King wrote.

He added that global central banks were caught in a “prisoner’s dilemma” - unable to raise interest rates for fear of stifling the economic recovery, the newspaper reported.

Man paid a king's ransom by the banks to lie to you, tells different story when he's being paid by a book publisher....

[Philipnet]

So instead of the markets stabilising after the Brexit fears, it's about the US economy being downbeat

Friday here we come!

[Rob McCow]

Predicting a financial crash is like predicting that it's going to snow. It will do eventually, but probably not when you think and you can't really state the exact causes.

[Perry Vale]

Predicting a financial crash is like predicting that it's going to snow.

The latter is easy, as long as you read the Daily Express.

[Perry Vale]

A year old, but I enjoyed this article....

An economy under austerity is like a filthy restaurant kitchen

The austerity fetishists trying to do to Europe and America what the IMF and World Bank did to its third world victims in the eighties, on behalf of their masters in Wall Street, often compare an economy to a household. This household, they tell us, has lived beyond its means, by maxing out its credit card and getting into debt. What do you do when you get into debt? You pay it off! Stop shopping at Whole Foods and go to Walmart instead. Take the shiny gadgets you don’t need to a pawn shop for a bit of extra cash. Work harder.

Even ignoring the fact that the increased indebtedness of households these days is part of a structural problem rather than a moral one, the basis for the ‘economy is like an indebted household’ analogy has no relation whatsoever to economics. They would have you believe that austerity is a practical measure, where if you sell off your wasteful trinkets you will become solvent once again – all premised on the iron moral principle that Debts Must Be Paid.

This is a load of bollocks.

We want to propose instead that austerity is like a restaurant kitchen, not because we think the analogy is perfect, but because every time a Keynesian economist tries to knock down the household analogy they drone on with “households can’t print money”. Which is hardly a catchy argument to throw at the right wing pub bore. It is possible to have a little more imagination than that. Here is the Leveller’s austerity kitchen analogy, for your pub argument utility belt. Use it carefully.

[Perry Vale]

Still think Osborne is going to raise rates here...?

ECB stimulus surprise sends stock markets sliding

The ECB cut its main interest rate from 0.05% to 0% and cut its bank deposit rate, from minus 0.3% to minus 0.4%.

The bank will also expand its quantitative easing programme from €60bn to €80bn a month.

More helicopter money, yay!

[Perry Vale]

I think I've scared everyone away from this thread...

Despair Fatigue - How hopelessness grew boring

Quite a long article (from David Graeber) but really worth a read. Much about austerity in it, here's a snippet...

One reason this could happen is that there’s been virtually no public debate on austerity itself. At no point, for example, did a major TV news outlet host a panel of economists discussing whether public debt was really the cause of the economic crisis, or debating whether European-style austerity or Obama-style fiscal stimulus would be a more appropriate response. The only questions were how much budget cutting was required and where the cuts should fall. This confident Tory narrative reigned unchallenged from the rudest hack in the Daily Mail to the most chiseled eminence of the (supposedly socialist) BBC, and all figures of public authority held to it even after the immediate effects of the cuts proved spectacularly ineffective. Even as double dip turned to triple dip and Tory chancellor George Osborne doubled down by making increasingly bizarre pledges (that all future governments would run a surplus, that Britain would completely eliminate its national debt, etc.), scarcely any major pundit, editorialist, or TV commentator broke ranks. And when, after years of abject misery, the economy, inevitably, began to stir a tiny bit, all instantly proclaimed that Osborne was vindicated.

This consensus, oddly, has next to nothing to do with the opinions of professional economists. Almost all British economists understood that the gaping deficits of 2008 and 2009 had been caused by the banking crisis, not the other way around. Likewise, anyone paying attention knew that cutbacks of public services to “save money” reduced economic activity, and hence government tax revenues, and so really had the effect of raising, not lowering deficits. Most also understood that deficits weren’t really much of a problem to begin with. But even the opinion of mainstream economists was, suddenly, excluded from public debate. By 2012, even the IMF was issuing statements urging the Tories to lay off. But you’d never learn any of this from the Times, the Observer, or the BBC.

[Rob McCow]

Well, with every school in the country to become an Academy (according to the latest rumour) it would appear that the agenda was to sell off every last scrap of public services for personal profit, regardless of how well they were performing or whether it would help the economy.

I can't even read the news any more. Either it's the Telegraph smugly saying how brilliant it all is, or the Guardian depressingly saying how awful it all is. Or the other news outlets with their clickbait and boobies.

[Dirk Gently]

The Independent (The i) is probably the only paper worth a read. But to be honest I don't read any newspaper.

[Perry Vale]

Might cause you a headache trying to fully understand it, but I found this article very interesting...

A Thought Experiment On Budget Surpluses

While conservative parties—like the USA’s Republicans, the UK’s Tories, and Australia’s Liberals,—are more emphatic on this point than their political rivals, there’s little doubt that all major political parties share the belief that the government should aim to have low government debt, to at least balance its budget, and at best to run a surplus. As the UK’s Prime Minister put it in 2013:

“Would you want a government that is not targeting a surplus in the next Parliament, that just said no, we’re going to run overdrafts all the way through the next parliament,” he told BBC political editor Nick Robinson.

As I noted, the numbers are far-fetched, but the principle is correct: a government surplus effectively destroys money. A government surplus, though it might be undertaken with the noble aim of reducing government debt, and the noble intention of helping the economy to grow, will, without countervailing forces from elsewhere in the economy, increase the government’s debt to GDP ratio, and make the economy smaller (if the rate of turnover of money—it’s so-called “velocity of circulation”—is greater than one).

This little thought experiment illustrates the logical flaw in the conventional belief that running a government surplus is “good economic management”: it ignores the relationship between government spending and the money supply. Unless the public finds some other way to compensate for the effect of a government surplus on the money supply, the surplus will reduce GDP by more than it reduces government debt.

But surely my thought experiment can’t be right, can it, because haven’t there been cases where governments have run surpluses and the economy has boomed? Yes there have been, because in the real world, the public can counter the destruction of money by a government surplus in two ways: they can borrow money from the banks, or they can run a trade surplus with the rest of the world.

Just as a government surplus destroys money, lending by banks creates it (if new loans exceed the repayment of old loans by the public).

[Philipnet]

I wondered why the dollar took a nose dive yesterday:
http://www.bbc.co.uk/news/business-35921558

With the commend that the Fed should 'proceed cautiously' with rate rises, no wonder that knocked it down.

[Perry Vale]

"We should not ignore the welcome possibility that economic conditions could turn out to be more favourable than we now expect," she said.

I really, really, really wish I had her job. Money for nothing.

[Philipnet]

Money for nothing.

And the chicks for free?

[Perry Vale]

China Firms' $1.3tn Bank Loan Risk - IMF

The International Monetary Fund (IMF) has warned that $1.3tn (£913bn) in corporate bank loans are at risk of default in China.

The fund's latest Global Financial Stability Report said the figure was recognised by the authorities in Beijing and was "manageable" given the country's rate of economic growth - currently running just below 7%.

Thank goodness, I'd hate to see it get to an unmanageable state....