The Coalition is really really good and the markets say so, even those buying US debt

So we read here, with a chart of the price of Gilts. The story is that the price of Gilts was rising as investors hoped for a Tory majority government, then fell when investors feared a LibLab pact, then have risen again with the wonderful economic stewardship of George Laws.

This fits the chart, but it seems rather a stretch, to put it mildly, that such thoughts could be behind the exact same rally, dip, rally in the US Treasury market shown in the chart below, with the green shading when the Hung Parliament negotiations were ongoing (I've used inversed yield, which is much the same thing as price). After all the US Treasury market is probably seven times the size of the UK gilt market (something like that) and tends to lead other bond markets, not follow.




Coming up tomorrow: Why It Is Not The Coalition's Scrapping of Individual Government Car Drivers for Ministers that Caused Crude Oil to Fall by $1/Barrel

Defence inflation is faster than normal inflation?

I have no idea why Lord Guthrie is taken as an independent expert on this, but:

"Defence inflation runs higher than normal inflation so when additional money has gone to defence over the years, the spending power of that money has reduced.

A paper here claims it is 3% higher than normal inflation. This however surely leads us to a rather unfortunate conclusion, which is that as that is higher than the long-term rate of GDP growth, the UK's military capacity can only be maintained with an ever increasing share of GDP going on defence spending.

Another paper here disputes the Kirkpatrick figures with the point that it ignores (or downplays) productivity and quality improvements. The difficulty with military equipment is the quality improvements over time tend to be because your opponents equipment is getting better as well, so there is no real advantage (think of the Dreadnought). But this paper argues there has been an increase in relative quality.

By they way I tend to instinctively disbelieve people who claim that their inflation rate is higher than the average, simply because so many people claim it for so many things they can't all be right.

Tories worsen government debt position

Apparently they're thinking of selling off state assets at a massive discount to their true value.

Letters from Economists

It's been a strange week for letters from economists.

Sunday saw a letter to the Sunday Times from lots of economists saying we need more budget cuts and quickly (I believe, obviously I didn't bother to read it). The significance of this was not in its contents, however, but in the fact that it ended a period of 29 years for British Conservatives in which every single public pronouncement by an economist they disagreed was greeted with a mention of 'that time in 1981 when 365 economists wrote the Sunday Times and then immediately afterwards ever thing in the economy got better'. Now suddenly economists writing to the Sunday Times were intellectual geniuses, skewering the false arguments of the Treasury and laying the groundwork for George Osborne to become Chancellor.

Today we have a letter to the Financial Times from lots of economists saying largely the opposite (I believe, obviously I didn't bother to read it) and now economists are back in their box as idiots.

Economists, I fear, need to rethink their strategy. If you worked for a profession notorious for giving conflicting advice, this isn't the way to proceed.

Shopkeepers in London suffered their worst January for five years...

No, it was almost certainly their best January ever - sales rose 3.5% from 2009. Furthermore:

London fared better than the rest of the UK where sales fell 0.7 per cent in January in the worst performance for 15 years.

I don't have the run of data to hand, but I expect it wasn't their worst performance for 15 years, but their second best performance for 15 years (might be 3rd best if 2008 was better too).*

* Update: Actually this is the same data as in my post of 9th February.

Shop sales 'worst for 15 years'

So is the headline on this BBC piece.

Have a guess if that's true or not? That's right, it's not. In fact shop sales were the best since records began.

The article itself is more accurate, it's the 'worst growth' for 15 years. But let's put this into perspective, the rate of growth was 1.2% (like-for-like was a fall of 0.9%, but that's irrelevant in a macro sense). I don't have the figures to hand, but if GDP in January (which would have to be estimated) was 1.2% higher than in January 2009 it would be a pretty good result. And in a recession partly caused by overstretched household budgets!!

Government and private imbalances

Martin Wolf makes the case (again, but I suppose he's hoping one day it will stick) that government deficits have been caused by private surpluses. Incidentally on this analysis you can see why Germany might have had a terrible jolt at the start of the economic crisis but one that hasn't been felt so much inside the country as you might think.

Italy and the UK

Relative economic size is one of the main topics around here, especially when measured using fluctuating market exchange rates. For example here, or here where I looked at the possibility of Italy overtaking the UK.

Well apparently according to George Osborne in the Evening Standard, that day has come (quoting this presumably). And it seems reasonable enough, given my post last December talked of it happening if the pound was worth less than 1.1 euros.

Yet one would be justified in being sceptical that the Italian economy really was larger than the UK economy. A visit to any continental European country (or look at Gap's price tags which show euro and sterling prices) makes you think the pound is probably undervalued against the euro.

In fact Italy's GDP in constant prices and local currency has performed almost identically to the UK's over the last year, so clearly we are talking about currency effects, not anything real going on. I've remarked before that one of the weird things about economic commentary in this recession has been a love of devaluation (Ambrose Evans Pritchard give the impression he believes ever country in the world can and should devalue at the same time). Well here's (one of) the drawbacks.

Like George W Bush

The Conservatives have obviously decided that George W Bush bashing plays well in Brent (or perhaps nationwide). In a pretty dreadful section on the economic crisis, their (seemingly competent) candidate's latest newsletter tells us that:

The economic crisis is much worse in the UK than the rest of Europe. This is because Gordon Brown (like George W Bush in the US) failed to...

The Bank of England should have cut rates to 0%

If the Telegraph's Real Cost of Living Index is a more accurate measure than the CPI or RPI, then real interest rates are 5.3%, which is clearly too high in a recession.

Inflation

Laban said...

Paul - if the RPI is saying 0.1%, the RPI is being fiddled - just like the CPI was. I just don't trust our government any more.

Now, Laban's a big conspiracist, but this is quite a common view. Last year when the CPI was lower than the RPI the RPI was the 'true' indicator because it included more representative items and the CPI didn't, now the CPI is higher than the RPI the CPI is seen as the better measure I suspect.

One problem in this argument is that inflation figures feature in all aspect of economic statistics, as they convert nominal pounds into real pounds. I remember one commentator (don't remember the name) claiming that UK inflation had been 10% for a decade or more. If that is true then he presumably believes the GDP deflator has been that high too, and in which case our GDP per head is in fact lower than Hungary's.

But of course then the pound would be massively overvalued, so it must be the case that all countries fiddle their inflation figures, and this raises the possibility that there has been no economic growth in the last 20 years in any developed country. This might explain a few things.

VAT cut 'a tragedy'

Blimey Dave doesn't like the VAT cut, does he?

As I have pointed out for consumers (there are other issues for retailers) the fact that retail sales haven't risen (if they haven't) doesn't mean much about whether it is has worked - if it is 'costing' X billion then consumers are benefiting (or retailers). If I have spent £1,150 this month on VAT-able goods, then I have saved £25 pounds compared with earlier months.

But Tim provides some evidence that such a cut will boost retail spending. He notes the example of a store than cut its prices by 1p, and which took 70% of a competitors' sales. Of course if all stores cut by 1% they won't gain business from other stores, but the article quotes a shopper:

"I would certainly cross the road if it meant I could get a similar item a penny cheaper," Karl White, 21, said. "The more you buy for 99p, the more pennies you save. I have just bought six items, so I've saved 6p.

"

How must that man have reacted to the 2.2% cut in VAT?!

More exchange rate confusion

This is a disappointing piece making the old comparisions - I'd say modestly fleshed out on this 'blog some time ago - about how exchange rate movements have altered the relative standing of the US, Eurozone and UK over the past four years. But we all know that when discussing dollar (or any other common currency) GDP you can talk about exchange rates, but when you start talking about 'living standards' you need to make a lot more explanations. This statement is clearly nonsense:

The Oxford Economics consultancy, which only a few months ago reported that Britain’s living standards had overtaken those in the United States,

It's disappointing because David Smith knows all of this more than just about anyone else around. And see post above.

Depression update

Best story so far. L&G have some computer model of the UK economy, and they put in all the variables and asked it to come up with the optimum interest rate to balance growth and inflation, and it returned a value of MINUS 1.25%.

One gets a vision of a large 1950s style mainframe computer with smoke coming out of it as it gave the answer.

Things that make me go I'm-slightly-nervous

The Economist says it's time to buy shares:

Risky assets look more attractive now than they have in ages. Corporate-bond spreads are sufficient to compensate for the kind of default levels seen in the Depression.

World GDPs

There was quite a famous article back in the mid-1990s by Nico Colchester, of the the Economist, which explained the world economy in terms of Italys:

Think of the world economy as 26 Italys. Italy is a convenient unit of account because the size of its economy, give or take the Mafia, is $1,000bn a year of demand. One trillion dollars means nothing to anyone except Bill Gates. But an Italy can be imagined. North America is eight of those Italys [MJT - I had to include Mexico to get near this]. Western Europe is another eight. Japan is five Italys. That already makes 21.

Of the rest, the whole of east Asia, including China and the dragons, is two Italys. Latin America is one and a half. The economy of the entire former Soviet empire is just half an Italy which puts Russian super-power into perspective. The economy of the 1bn people of the Indian subcontinent amounts to spending of one third of an Italy.

In the past 12 years things have changed somewhat, and the standard, Italy, wasn't much of one. But it's also the case that many things are the same. If Colchester were alive today he would write of 2008:

Think of the world economy as 26 Italys. Italy is a convenient unit of account because the size of its economy, give or take the Mafia, is $2,400bn a year of demand. Two point four trillion dollars means nothing to anyone except Bill Gates. But an Italy can be imagined. North America is SEVEN of those Italys. Western Europe is another eight. Japan is TWO Italys. That already makes SEVENTEEN.

Of the rest, the whole of east Asia, including China and the dragons, is THREE Italys. Latin America is one and a half. The economy of the entire former Soviet empire is just ONE Italy which puts Russian super-power into perspective. The economy of the 1bn people of the Indian subcontinent amounts to spending of TWO-THIRDs of an Italy.

The biggest change then is actually Japan (and Russia) which is reallly to do with exchange rate movements in the mid-1990s than economic growth rates, although they were of course poor for Japan since 1995. China, hidden in China and tigers, has risen from about 0.7 Italys to about 2.4.

Similarly the currrency movements of the last few months mean 2009 is likely to be quite different even though GDP growth is quite similar (bad in most cases). Time for a table, with a bit more accuracy.



The UK? Well that's now an Italy, as it was in 1995.

Il sorpasso or not

Apparently due to the falling pound the UK will have a smaller economy than Italy in 2009 (and France) so say the CEBR. This is not a well written article, I'm afraid to say, as it doesn't make clear the rather artificial nature of currency-movements in judging economic size. Because it doesn't make this clear, the last paragraph will seem rather odd to many readers:

Richard Snook, one of the authors of the report, said: "The UK economy is likely to be the hardest hit by the credit crunch due to its reliance on consumer borrowing and the financial sector for growth. We see the economy taking four-and-a-half years to return to the peak in the second quarter of 2008. Only the Italian economy, which is beset by structural weaknesses, is set to do worse."

Only the Italian economy will do worse? Eh? I thought it was doing better.

Using market exchange rates, with all their limitations, suggests the CEBR figures are in the right ballpark. I dont have them but using the latest World Economic Outlook as a guide (whose 2008 figures agree with CEBR's quoted in the article), and assuming zero inflation and negative 1% growth in each country, Italy will have a GDP of 1,586bn euro, and the UK 1,437bn sterling. To make Italy overtake the UK requires a euro/sterling rate of worse (for sterling) than 1.103. If the UK grows slightly more (or has higher inflation) it will be even worse for sterling.

Interest rates at 2% - why?

I don't understand the argument for not cutting rates to zero in order to keep something in reserve. I suppose it is a psychological one, in that the very act of cutting rates is meant to boost confidence, and if you can no longer do that things will decline further.

Thus...the obvious thing to do is to raise rates to about 15%, which will indeed be a psychological blow, but give 15 occasions on which rates can be cut by 1%.

Thecreditcrunch

If I can work out how to upload pictures to the web from a 2003 mobile phone, I'll bring you a picture of the Walsall Obsever, which has the best creditcrunchery yet, something like

"Credit crunch forces pets onto the street".

[update, I've found a weblink!)

On the creditcrunch, I remember that old phrase, something like 'everyone is a conservative on things that they know a lot about'. Hank Paulson must know nothing about investment banking if that's the case.

British experts, on the other hand, have of course distinguished themselves since Northern Rock was nationalised. When Bear Stearns was bought by JP Morgan we were told that thank God the US authorities realised the folly of nationalisation and found a quick private sector solution, unlike Gordon Brown and the Labour government. When Fannie and Freddie was nationalised we were told that thank God the US authorities were prepared to put practice before theory and found a quick public sector solution, unlike Gordon Brown and the Labour government. When Lehman Bros were allowed to go bust we were told that thank God the US authorities were prepared to restablish moral hazard, unlike Gordon Brown and the Labour governmen, and when AIG was bailed out to the tune of $85bn we were told thank God the US authorities had put public money up in the defence of the financial system, unlike Gordon Brown and the Labour government.

This kind of know-nothing financial market commentary [as an aside, you can really tell someone who knows absolute nothing about financial markets by when they conjure up liquid financial markets out of their arse, and the speciality of this is 'shorting', which if you believe some of the more ludicrous bloggers is a practice one can do in any market, at any time, in any quantity*] comes to a head in the ravings of Ukip members, for whom nothing, even if it happened in the early 1990s, is not the fault of the euro.

* Thinking some more, it's that they never realise that a transaction requires two parties. I can't short HBOS if no-one wants to go long it. It's as if they've read so much about the private sector they've never actually had the time (or inclination) to be part of it, and I suppose really it makes sense as think tanks are quasi-public bodies, particularly in the sense that a very rich man (the governmemnt) hands money over and you never need to actually sell anything.

IMF raises UK growth forecast

It now expects the UK economy to record growth of 1.8% in 2008, up from April's forecasst of 1.6%. It expects 2009 growth to be 1.7%, up from 1.6% in April. Q4 on Q4 growth, which might give a slightly better representation of the slowdown was 2.8% in 2007, and is forecast to fall to just 1.3% this year, then rebound to 2.2% in 2009.