Should BOE commence exit strategies of the economic stimulus to manage the mounting budget deficit?

Guardian : http://www.guardian.co.uk/commentisfree/2009/nov/20/public-finances-deficit-government-borrowing presented an article entitled Public finances: Broke but not bust yet. The article portrayed the state of despair of public finance and for the past 2 years, the only predictable outcome is uncertainty. The article presses for tough fiscal choices to address decline in tax receipts, retrenchment, and rising welfare bill that firms deem they can no longer afford. I note that cheaper interest rates, access to QE “print money” are artificially creating economic activity which is unlikely to last. While I disagree with the Tory’s rhetoric of the doom state of the economy, I also believe that Labor is offering confusing strategy of continuously pumping more money into the economy. Should BOE hold the debt through to maturity, which would effectively cancel; or it could move to sell rapidly, potentially flooding the market with gilts in a way that could undermine the government's ability to raise extra funds. These views in my opinion can cause panic in the financial markets if the desire to rebalance the books takes priority.

Telegraph : http://www.telegraph.co.uk/news/newstopics/politics/6608660/Government-deficit-now-increasing-at-3bn-a-week.html notes that the Government deficit now increasing at £3bn a week in an article dated 20/11/2009. Simultaneously, Gordon Brown pledged to halve Britain's record budget deficit within four years. I find it rather contradictory when the news from Reuter confirmed on the same date that the Government is due to borrow even more this year than it forecast in the Budget. How is the desire to overcome the deficit likely to materialise in 4 years when Britain continue to borrow. Office of National Statistics(ONS) also affirmed a record £11.4billion in October 2009, questioned the wisdom of the government’s action. Referring to OECD criticism that the Fiscal Responsibility Bill from the Queen’s Speech, I believe that the Labour “soft” economic stance are weak and inadequate to solve Britain’s fiscal problems, demonstrating a lack of understanding of the need to take immediate and effective steps to balance the budget.

BBC : The Government is due to unveil its latest pre-Budget report on December 9, with Mr. Darling expected to pledge how the Fiscal Responsibility Bill will reduce budget deficit. The article also noted an interview with Gordon Brown indicating that Mr. Darling will have to announce further tax rises if the deficit is to be contained. I find it rather inconsistent in terms of the government at one hand trying to spend its way out of recession, while on the other hand, taxing the people thus, and curbing spending. Also, the desire to implement spending cuts on public spending in near terms, and in conjunction with that QE to expand money supply. George Osborne, the shadow chancellor politicized the Britain's debt issue by blaming Gordon Brown for damaging public finances noting the latter has lost the economic argument about the debt crisis. I do believe that Tory’s assertion is biased and unfounded because there has been some positives as well. However, I have not heard of any clear and coherent strategy to manage the budget deficit by both Labor and Conservatives. However, the mild good news offered by BOE that Britain should be out of recession by end of the year do support Gordon’s position. However, with elections around the corner, I would be surprised if Labor would actually do anything that suggested introducing fiscal disciplines to beat the deficit budgets such as tax rises, spending cuts, or cut on social benefits such as child tax credit.

Telegraph reported on “OECD urges governments to sort out finances as recession recedes” http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6608234/OECD-warns-Britain-risks-debt-spiral.html : Acting chief economist of OECD, Jørgen Elmeskov, was vocal in advising the UK government to do more than halving deficit to prevent debt spiral. I think his assertion is founded in that the government intervention has actually been more than necessary; no other country has injected such a sum into the economy. However, it is not desirable to “over kill” the economic stimulus by drastic fiscal measures which could push the fragile UK economy into financial doldrums. Instead, I believe that BOE should start gradually and progressively unwinding the stimulus to ease the risk of high inflation in the near terms. Furthermore, from my diverse reading, many confirm that the failure to act from now will lead not just to inflation, but also debt increases, market confidence dampening, interest rates pushed upwards drastically, and this could leads to even higher deficits. This can aggravate the situation and thus, I believe that OECD’s advice is not a pessimistic statement but one that is grounded on reality if the economic and budget imbalances are left unchecked.

I conclude by reviewing an article in The Economist(http://www.economist.com/world/britain/ displayStory.cfm?story_id=14924465&source=hptextfeature)  that described the key elements of the Queen’s speech by Labor on the UK economy touching on empowering FSA, curbs on bank bonuses, with very little discussion about the economic direction. It seemed as if the speech was more to do with winning public votes with empty promises rather than assertive strategies on economic policies and direction to manage the economic problems and budget deficit. I find it rather amateurish as to what the Labor is aiming to accomplish. Also, while the BOE remains split about the desirability of further QE, signaling the need to focus on some form of exit strategies, the overall “blank cheque book” mentality or printing money strategies are likely to lead to unending economic vows and budget deficits for her citizens for a long time.

Is the sustainability of the UK Economic Recovery, a myth or a reality?

The announcement on the 11/11/2009 by governor of the Bank of England, Melvyn King noting that the UK economy is “only just started” recovering may have offered some comfort to the financial markets and investing communities.

 

BBC : http://news.bbc.co.uk/1/hi/business/8353931.stm In this article , BOE believe that a full recovery is anticipated by late 2011. The present inflation at 1.1%, on the back of GDP that unexpected drop by 0.2% in the quarter to September 2009. This was a far optimistic picture than those disclosed on the 23/10/2009 when GDP drop was announced. In all objectivity, when reports of such and expressions of opinion are raised, there is always a contradiction over the state of the economy. BOE and MPC continue to take a vague stance on the effectiveness of the monetary and fiscal strategies by stating things such as “open minded” about QE, further public spending at one level and desirable cuts at the next and then question the level of government debt problems the next. No doubt, the UK economic recession is unprecedented, the lack of clear messages and lead to loss of confidence by the financial community. I note a response by a former MPC member, Professor Blanchflower who raised doubts about the strength of the economy which is driven by government stimulus packages, and then look at information about the “real economy” with firms still not hiring evidenced by jobless rates, and a vast majority of established firms still posting losses apart from “budget” and “low cost, no frills” companies. The rate of business closures is still quite alarming.

The Economist :  http://www.economist.com/theworldin/displaystory.cfm?story_id=14742208. Britain's economic outlook: Still overcast, but brightening dated 12/11/2009. This article describes the sum of positives: Stronger labour market, lower Unemployment at 7.8% (compared to 10% predicted earlier), production index growing by 1.6% in September 2009 as compared to August 2009 and various surveys by purchasing managers showing growth and British Retail Consortium reporting buoyant sales. I believe that this information although bearing facts from statistics and reports, the question of sustainability remains to be seen. Why? Because a number of analysts including Melvyn King argued that there is still a downward pressure. In addition, the massive budget deficit warning by Fitch, a credit-rating agency, suggest that Britain was most at risk of losing its prized triple-A status as a sovereign borrower.  http://www.economist.com/theworldin/displaystory.cfm?story_id=14742208. These mixed messages demonstrate that the state of the economy is fragile and it is not possible to confirm recovery.

This is Money: The economy: From delusion to desolation dated 18 October 2009 presented an interesting article on how the economy is likely to increase the cost of living of her citizens over the next ten years. Of gem claimed that household energy bills could soar by up to 60% and cost of fuel to rise from 8.6% to 12% next year. The Institute for Fiscal Studies noted that the wrecked public finances, will cost each family £930 a year in taxes between now and 2018, the average household direct tax bill will rise by 8.6%.  A rather pessimistic article, which may hold some truth since both Labour and the Conservative party are proposing high income taxes. Is this the right move? With more businesses moving their UK headquarters to lower tax countries, and Britain risks seeing more people leaving the country, as evidenced from UK Border Control, the strategy of economic recovery may lead to less tax revenue for the government.

BBC : http://news.bbc.co.uk/1/hi/business/8199970.stm I chose this article as it compared Britain and the Euro zone to appreciate the sustainability of UK economic policies. The article noted France and Germany recovery as compared to UK and provided a good commentary about why it would take longer for Britain to recover. With the UK government spending £1.5 trillion, £200 billion on QE, no other country in the Euro zone have invested so significantly. I believe that the pessimism grounded by the article is valid. Why? The UK, unlike Germany and France, is (1)very dependent on the financial sector, (2)consumers are more in debt and (3)the huge credits available meant that unlike Germany and France who saw the return of domestic demand spurring their economy,  but UK consumers are unlikely to spend their way out of the recession due to enormous debts. On a positive note, the recovery of the UK financial sector to pre-crisis levels are likely to help recovery although the underlying weakness in the real economy may make it unsustainable.

 

To sum up, I chose the article http://www.kleinwortbenson.com/content/269/investors-signal-renewed-hope-in-india to assess market perception of the recent announcement by BOE. Stock investors undecided on market recovery with only 34% believed that the rally signalled market confidence with another 39% not prepared to make confidence predictions offers a good market analysis of the state of the UK Economy. All the articles included in the analysis points out to a very early indication of recovery, a myth to be able to confirm the predictions of a recovery with all the underlying economic issues. The reality of things is that in spite of the size of government spending, there is no evidence of a sustained economic recovery.

 

Is bailing out RBS/Lloyds Bank justifiable on a public interest perspective

Is bailing out RBS/Lloyds Bank justifiable on a public interest perspective

The UK banking system was once reputed as delivering excellent corporate governance regime with proper supervision by both the FSA and BOE playing vital roles.

 

The Guardian: http://www.guardian.co.uk/business/2009/jan/19/bank-bailout-guide offered an explanation that revealed far reaching consequences for bank customers, employees, shareholders, taxpayers, the Government and the financial sector. The article noted the root of the crisis as the irresponsible bank culture of taking high risks, short term result-disproportionate bonus culture and lax control. On reflection, I can identify the various failures highlighted on the weaknesses in the way in which the FSA and BOE has been supervising the banking industry. I would have thought that the collapse of Bearings and Enron/Worldcom which raised a number of Internal Control and Corporate Governance issues in the 1990s would have highlighted these issues. Instead, we have the press over the last week revealing the 3^rd bail out of banks. It was claimed that the bail out was necessary in public interest to encourage lending to both homeowners and also, businesses. The rescue now would see the government owning 84 per cent owned by the state.

 

Telegraph : http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6496295/Bank-bail-out-every-family-shouldering-4350-tax-liability.html measured the impact of the “Bank bail-out: on every family which is anticipated to be  shouldering £4,350 tax liability from the £74 billion bail committed in total since last year. The Conservatives are right to point out the massive outlay by the government, but the real issue I believe is whether all this unimaginable sums is actually in the best interest of the public. Reviewing various press releases acknowledged mounting government debts, bail out leading to nationalisation of the banks leading to greater inefficiency and anti competition practices and a planned tax increase on the public to fund the significant risk exposure have all question the logic of the bail out in public perspective. The article, expresses Gordon Brown’s desire to recoup the full investment, Conservatives addressing their political agenda but very little concrete discussion have been made on the issue of public interest.

 

BBC : http://news.bbc.co.uk/1/hi/business/8347629.stm shared “Treasury seeks RBS lending proof” noted the claim by RBS that they have not been able to meet the £16 billion business lending targets due to poor demand for its loans. This claim seems preposterous considering that we are in a climate where most businesses are struggling. I reflected on a reading on the British Chambers of Commerce(BCC) article recently (http://www.britishchambers.org.uk/business-news/banks-lending-more-to-small-businesses-claims-bba.html) on the difficulty of SMEs and businesses as a whole to get much needed loans and confirms my thought on the matter. I believe that the government’s claim that bailed out banks, are doing more to help our businesses and economy is therefore unsubstantiated. The problem is aggravated by an article recently in The Independent : http://www.independent.co.uk/news/business/news/rbs-faces-another-year-of-losses-hester-admits-1816692.html noting, Stephen Hester, the CEO of RBS making no apology about the failure to achieve lending target noting that the banks were taking a more conservative position on lending by targeting only to those who can afford to payback. This might be a prudent stance especially when banks should be attempting to set suitable credit benchmarks but the impression given seemed to defy the government’s own directive of banks to support lending. It would appear to me that it would have been more appropriate at the hindsight, for the government to channel the funds directly through for instance, BusinessLink, rather than allowing banks to allocate resources at their discretion and promote self interest.

 

Moneyweek: http://www.moneyweek.com/news-and-charts/economics/an-extra-39bn-for-rbs-and-lloyds-but-will-it-work-46002.aspx confirms that the bail out package may not be effective since the penalty of state aid, is for the bank to break-up to encourage competition. The value of the stakes of the government is likely to see a further erosion of profitability. Why?  Firstly, the desire of the government and within the EC framework to encourage competition compels RBS to sell some of its more profitable businesses such as its insurance arm, retail operations which are key business, meaning loss of shareholder value and possibly longer period to recoup the investment. An article in Evening Standards (30/10/2009) noted a break-even point of 122p and 50.5p respectively for RBS and Lloyds to recoup paper losses of £6.6billion or 19% of bailout investment.  Although I believe that public interest is justified by increased competition, the fact that tax payers are in essence investors’ of the bank, it does not offer economic justification at all. 

 

In conclusion, the banking crisis has given rise to loss of confidence of the UK public on the government’s handling of bail out. On one hand, bail out had prevented a major collapse of the British economy with far reaching implications on the entire banking system, but on the other hand, I believe that a lot of articles seem to show that the government is not able to hold accountable on the use of public funds and the role of the regulators (FSA/BOE) seems to be confused. 

Is Quantitative Easing(QE) the best strategy to deal with the much worst than expected GDP drop of 0.4% for the last quarter (June – September 2009)

Guardian: http://www.guardian.co.uk/business/2009/nov/01/bank-england-mpc-quantitative-easing In an article "Businesses urge bank to extend quantitative easing" noted British Chambers of Commerce supporting an immediate £25billion injection. Spending away £175 billion in the recent past and now a further £25 billion pushes the UK debt to £200 billion. This equates to the size of a few developing economies put together. It seems rather ambitious to continually carryout QE when economic indicators are adverse. In economics we appreciate that when recession hits a country, a string of economic stimulus are adopted. Why do we need to always resort to extreme measures such as QE to revitalise the economy. Of course, QE has had a positive impact on house prices, stock markets and business/consumer confidence but such drastic money supply injection will lead to massive government debts, that would translate to significant increase in future taxes and unsustainable debt levels which would take a long time to resolve.

BBC : http://news.bbc.co.uk/1/hi/business/8321970.stm Record recession for the UK economy described the frail state of the UK economy as compared to other countries. In spite of the massive QE that the BOE/MPC has implemented, the failure to see any positive progress in the UK economy as compared to the likes of Germany, France and even Japan, seriously questions the dependability of the technique. For one thing, as compared to other nations with EU, UK has taken on a more aggressive strategy, backed by mounting debts, while the other EU countries such as the 2 identified above, is managing their respective economy with a stronger foundation for the past, present and future. I note this with much concern as the "real" economy appears to be artificially propped up rather than self developing. To make matters worse, the rather optimistic view in the article by Alistair Darling indicating that the economy would recover by the end of 2009 does not seem to phantom the full extent of what lie ahead for the UK regardless of what the economic statistics may suggest.

Economist : http://www.economist.com/world/britain/displaystory.cfm?story_id=14770191 noted that the Bank of England is engineering an elusive recovery. The article noted a MPC member, Adam Posen describing how well QE has prevented deflation, improve credit and asset market which appears to be very much wanting. Reading major financial news recently, it can be observed that businesses are complaining about the scarcity of loans, especially SME, with banks extremely conservative with their lending, charging exorbitant interest rates (although the base rate is 0.5%), are very selective and focus on building their balance sheet from the "huge bad debts portfolio". Furthermore, another article "Loose Thinking" describes how Japan the pioneer of QE during 2001-2006 did not achieve much success in combating deflation or improve economy. What I believe is that the unconventional monetary strategy of QE seems to be linked to desperate attempts of MPC/BOE to do something to build confidence but lack any clear direction. Mr Masaaki Shirakawa, governor of Bank of Japan may appear to offer advise on how QE should be practiced, with Britain and US leading the race on QE but the real question is whether Japan is a good example to follow. Japan’s contextual economic structure is very distinctive from the West, with a culture of savings, reliance of businesses primarily on banks, time horizon for results, but also, whether Japan have in fact come out of economic stagnation.

FT: http://www.ft.com/cms/s/0/1a3a4456-c273-11de-be3a-00144feab49a.html?nclick_check=1 remarked what is believed to be the other factors that need to be considered to deliver economic recovery. I chose this article as it contained a remark that I have emphasised in this paper about the need to look at the holistic perspective. Mr Adam Posen exclaimed the need to restructure the small number of large banks to enable greater competition and wider available funds. I believe that we need a mathematical and holistic approach to manage the economy which involves setting the infrastructure right, before adopting economic stimulus. For instance, QE will not work if money supply increases and yet, banks are reluctant to loan to businesses. This means, access to funds remain futile and businesses, even those with good prospects are perceived risky, continue to be forced to shut down. What is required here is a wider source of financing for companies. Also, the focus on economic regeneration activities which I believe has not been emphasised in many readings.

In conclusion, I think IMF article UK Budget Imbalance in the Global Financial Stability Report noted an interesting caption which I feel best describes how UK’s QE strategy is being deployed. IMF notes that Britain is trying to do a Ryanair by pretending to reduce costs but simultaneously borrowing to meet its obligation. With no clear economic direction, worst funding gap in the world, reactive engagement of QE and MPC’s inability to understand and measure the effectiveness of QE, the economy is likely to be heading south, with far reaching economic consequences.

Is Britain economic stimulus failing to ensure UK economic recovery?

Is Britain economic stimulus failing to ensure UK economic recovery?

The latest news suggested that Britain is in recession. All major City analysts had predicted a recovery for the quarter ending July to September 2009 of around 0.2% on the Office of National Statistics (ONS) figures but the UK economy actually contracted by 0.4%.
BBC : http://news.bbc.co.uk/1/hi/business/8321970.stm: The article confirms the prediction by City analyst who was said to be disappointed by the revelation leading to a drop in business confidence and also, the sterling against most major currencies notably the US$ and €. The article also noted that a lot had been done through the Quantitative Easing(QE), and support of spending which does not seem to show any progress at all and pushed Britain to produce record of 6 quarters in recession. Personally, I think comparing against the likeness of events that took place in 1955 is rather immature especially when the size of the economy, the impact of other contextual factors such as globalisation, technology revolution, information technology were not so prevalent during that time. Also, on reflection of some of the elements that made up the GDP, the lack of manufacturing activity today and the huge service industry contribution, makes it a weak comparison.

RBS : http://www.rbs.com/downloads/pdf/economic_insight/cewb/19-10-2009-cewb.pdf
RBS Chief Economist, Andrew McLaughlin weekly brief on 19/10/2009 suggested that UK’s Consumer Price Index which is a measure of inflation remained positive at 1.1% as compared to the US and euro zone. This is to me an obvious indicator that the amount of government spending actually helped the economy to show some resilience in a very uncertain and dangerous financial environment. Lower interest rates and increase in money supply through QE and support for commercial loans and mortgages have proved to be successful. I think that the UK government have applied the right pressures by scientifically adopting a pro Keynesian and monetary approach to help rescue the UK economy. The brief also reported a recovery in the home market with the Royal Institute of Chartered Surveyors confirming this fact.
Guardian:http://www.guardian.co.uk/business/2009/aug/13/france-germany-welcome-economic-surprise reported that both Japan and Germany produced an economic surprise by both countries posting a 0.3% economic growth respectively in the quarter to June 09 when UK posted a contraction of 0.8%. Among the factors noted in the article was the success of both the former economies that were less dependent on the service sector, consumer debts were relatively lower than UK and business relationship with banks meant that credit lines were secured. I believe that there may be some truth in this but both France and Germany who did not seem to back significant government intervention may see their “economic surprise” short-lived. Why? I think that Alistair Darling’s interview with BBC on 24/10/2009 where he noted that German for instance started from a dip of 6.7% of National Income while Japan saw a contraction of 8.4% and thus, an indication of a quarterly rise by 0.2%-0.3% does not imply in anyway that their economies have recovered. Having reflected the actions of the various governments, I tend to think that approach of both Germany and France is fairly slow and gradual, but without the kind of “ammunition” like what Gordon Brown and Alistair has done to show consistent economic direction which has also been supported by Melvyn King of BOE and MPC, the foundation will be much stronger to grow. Many analysts now predict and concurs with Gordon Brown that UK will recover strongly during the Christmas run.

Reuter : http://uk.reuters.com/article/idUKTRE59O0UF20091025 (25/10/2009)notes the Chief Secretary to the Treasury, Liam Byrne acknowledged that a lot of money has been spent and record budget deficit failed to drag the economy out of recession and argued against cutting back on what has been done to support the economy. He when on to support a prediction of growth by the end of the year and especially for next year with phasing out of stimulus put in place. I tend to agree with his argument. Over the past couple of days, there have been quite a number of positive news from John Lewis, BSkyB, HMV, Acadia, Dabenham, retail sales of 2.8% Year-on-Year September 09, car industry decline easing and others.

BBC News: http://news.bbc.co.uk/1/hi/business/3197610.stm (16/10/2009). I discovered this very interesting article on the Office of National Statistics who denied errors in calculating vital economic data when they revised the July’s GDP from 0.3% to 0.6%. Melvyn King also argued that the statistical fog created were unhelpful to the measure of UK economic. I also noted an article produced on the 23/10/2009 by Stephanie Flanders who criticised ONS not having complete data when producing information about the UK economy and as such I question the reliability of the information for the prediction. In addition, Ben Broadbent, of Goldman Sachs also claimed that ONS was understating the UK economy. He quoted "Do today's data tell us anything about what is really going on in the economy?” I tend to agree, for the fact that ONS often revises their estimates upwards or downwards and as such the quarterly historical statistics may be unreliable. I also question how relevant these indicators are at fully comprehending the overall state of the UK economy. While ONS utilises scientific basis for calculating the economic performance, I am doubtful that they fully reflect the true state of the economy. I cannot support ONS claim that they produce information the earliest amongst bodies within the EU zone and is based on the best prediction at the time of publication. Question is, if reliable estimates are difficult to achieve through early publication, should they wait for a longer period of time, before publishing since reliance on models and statistical estimates utilising unfounded historical relationship may be worthless.

In conclusion, I am of the opinion that the UK economy is actually showing a gradual but clear route to recovery. A lot can be questioned on the negative publicity of the press and surprising how the business community react to such data. Also, there are plenty of reason for anyone to doubt ONS estimates especially with many companies and also, other economic indicators including unemployment, CBI and other reputable agencies/associations pointing to a recovery.

Is the Weaker Pound the key to UK Economic Recovery!

FT : (http://www.ft.com/cms/s/0/b8c92972-a8ef-11de-b8bd-00144feabdc0.html?ftcamp=rss&nclick_check=1)
Currency traders took comments from Mervyn King, governor of the Bank of England that the central bank was comfortable with a weaker pound, led to a sell off for the Sterling which dropped to a fresh five-month low against the euro. Mr King commented that the sterling’s fall was “helpful” in rebalancing the UK economy since a fall in the exchange rate will support a shift of resources into net exports that compete with imports and help to reduce the trade deficit. Economics explain that if a currency such as the sterling weakens, export becomes cheaper relative to more expensive imports and thus, theoretically, more goods/services would be exported while expensive import would make consumers less excited about imports. However, Ulrich Leuchtmann at Commerzbank noted that playing down the sterling as a new tool to kick-start the economy, was dangerous as he noted that BOE was “playing with fire”. He quoted “It is usually quite easy for a central bank to weaken its own currency but much more difficult to stabilise it again,” he said. The problem was further exacerbated by the news that business confidence in Germany was recovering pushing € to greater heights against the sterling. (Germany’s Ifo index rose for a sixth consecutive month). When reading the article, one realises that the article is written very one sided. The emphasis by the author is heavily laid on the positive effects of the weak pound rather than explaining why a weak pound could be bad.


Telegraph (http://www.telegraph.co.uk/finance/currency/6234980/Weak-pound-is-permanent--economists-warn.html):
In this article, it noted that the high level of national debt, smaller financial services contribution and the efforts made to rebalance the UK economy will see a long-term weakness in sterling. Most economist believe that this weakness is here to stay for a long time including Erik Britton, Fathom Consulting, Paul Robson and currency strategist with RBS. They anticipate that the weaker pound should see it approaching parity to the € in the foreseeable future. Mr Britton said concerns over the “public finances could drive the pound down beyond the level required for a rebalancing of the economy.” What this implies is that with the underlying real economy facing tremendous pressures from high bad debts, mounting public debt, imbalances in finances, and thus the desire to spur exports are unlikely to see a balance in the UK economy in the future. Again this article is very bias, painting a very black picture, which I have found to be the most popular tone in this news paper.

Bloomberg : (http://www.hurriyetdailynews.com/n.php?n=pound-crisis-a-risk-hsbc-economist-warns-2009-10-16 ) in an article “Pound crisis a risk, HSBC” yesterday (16/10) noted by Stephen King, HSBC Holdings Chief Economist that Britain is likely to face a currency crisis after policy makers allowed the pound to become “seriously undermined, with the sterling touching a four-month low against the dollar in September 2009 after Bank of England Governor Mervyn King remark. He concurred with Erik Britton, Fathom Consulting (Telegraph article above) that a small fall can turn into a very large fall, there is definitely a danger. Bloomberg, as always very easy to read and accounting for both negative and positive effects.


To assess how the weaker pound has benefited the exports, a number of articles have been extracted from various relevant sources.
BBC(http://news.bbc.co.uk/1/hi/business/8260487.stm)
The BBC article “Growth in UK retail sales stalls” notes that despite the government efforts to increase money supply, in addition to allowing pound to weaken, consumers are extremely cautious and it cast doubt over the currency picture as well. There were signs of growth in retail (1.3%), food(0.7%) and mail order(1.2%) but all non food and household goods showed declines in August 09. The article concluded that it did not appear to suggest that the weaker sterling has improved export orders. Like the telegraph this article again is very negative towards the future outlook, despite the weak pound perhaps having a positive effect on exports.


This is Money website (http://www.thisismoney.co.uk/exchange-rates) noted 13/10/2009 in an article “Exchange rates: What next for the pound” that the weaknesses of sterling is a major issue for most businesses and households. As the pound has dropped in value against other major currencies like the dollar and euro, travelling abroad has become much more expensive. Imported goods have caused inflation on basic prices for British firms and consumers. On the other hand, UK exporters have welcomed the weaker pound as it makes their goods cheaper to foreign markets. This article for me was very helpful in grasping the whole situation, on par with Bloomberg.

Looking at all these articles in conclusion, there are diverse views from the recent decision by Melvyn King’s recent announcement about the sterling and while it does not deny the impact of this fiscal initiative, there are underlying concern whether the real economy can cope with the scale and size of the various BOE policy initiatives towards economic recovery.

Is the UK government spending its way out of recession, the correct move!

Is the UK government spending its way out of recession, the correct move!

FT(http://www.ft.com/cms/s/0/bbb07600-b681-11de-8a28-00144feab49a.html):
In recent months, a number of key economists have produced contradicting argument about t he appropriateness of government spending to prevent the UK economy from falling into the brinks of an economic “slump”. An invective exchange between Paul Krugman (officially known as “the Nobel prize-winning Paul Krugman”) of Princeton and the New York Times, and John Cochrane of the University of Chicago have developed into two schools of toughts. The first, a pro Keynesian approach, overarching macroeconomic analysis, questioning markets efficiency and supports government intervention to help pull the world out of recession. The second, whose macroeconomic conclusions are closely rooted in microeconomics, emphasised on greater trust on the markets to correct itself.

The Guardian : http://www.guardian.co.uk/business/2009/oct/11/budget-deficit-reduce-osborne-darling-conference
Reviewing some of the politics that took place last week we see a similar debate between the Conservatives who appear to be pro-market efficiency by promoting spending cuts. George Osborne, as shadow counsellor unveiled measures claimed to save £7 billion a year by freezing the pay of five million public sector workers in 2011, while the bulk of the rest would come from that old chestnut beloved of politicians – efficiency savings in Whitehall. He further noted that the rich have to share the burden of the spending cuts and tax rises that are needed to bring the public finances – the fastest-deteriorating of any major economy – back into line such as through the 50% new tax rates planned. While these initiatives are intended to put national debt back to normal levels, the Institute for Fiscal Studies sees the national debt peaking at close to 80% of GDP by 2015 – up from 40% last year and 30% in 2000 – and not returning to 40% until 2030.

The Telegraph http://www.telegraph.co.uk/news/newstopics/politics/gordon-brown/6284662/Gordon-Brown-warns-against-new-age-of-austerity.html
The Telegraph noted an interview by Mr Brown dismissing David Cameron’s Tories as “pessimists” whose plans for the biggest cuts in public spending for 30 years are a “recipe for high unemployment”. He notes that “If you have a growth policy for Britain, get unemployment down, get the economy moving forward, then Britain can have up-growth”. Gordon further noted that the Tories’ plans for public sector cuts would prolong the recession, he says, with tens of thousands of young people unable to find work.
Cutting out the politics from the debate, it would seem that both the Labour and Tories make their case consistent with the pro Keynesian and market efficiency principles as noted above.
Telegraph : http://www.telegraph.co.uk/news/newstopics/politics/conservative/georgeosborne/6224723/Tory-public-spending-cuts-could-push-unemployment-to-5-million.html
In a recent writing reported by the Telegraph, Professor David Blanchflower, a labour market expert, who is professor of economics at Dartmouth College in the USA and served on the MPC until June this year, told the New Statesman: "Unemployment is going to continue to rise this year and may keep on rising. He attacked the economic plans of George Osborne, the shadow chancellor, claiming they would create a "lost generation" of workers. He said that any cuts in public spending could force unemployment up from its current 2.5 million to four million over the coming years. But in a message aimed directly at Mr Osborne, he warned that his plan for accelerated action to bring down the £175 billion state deficit would force joblessness up further. He also disagreed with Gordon Brown recent announcement that some cuts are inevitable once recovery is in place, by arguing that any such actions should be deferred until at least 2012. Professor Blanchflower warned that "If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn, unemployment could easily reach four million. "If large numbers of public sector workers, perhaps as many as a million, are made redundant and there are substantial cuts in public spending in 2010, as proposed by some in the Conservative Party, five million unemployed or more is not inconceivable. Professor Blanchflower referred to the mistakes of the 1930s, by assuming a recovery is taking place and then cutting spending and raising interest rates too early. This gave rise to a decade-long depression.
Thus, the debate on the appropriateness of extending and maintaining government spending appear to be clouded by political agendas of the respective parties, whether it is the Labour or Conservative.
However, there has been some level of support to the government Keynesian approach as increased spending should lead to improved consumption, increased money supply and in turn, naturally result in increased consumption. It is this consumption which is hoped to be the key driver and “multiplier” for economic growth (http://www.econ.washington.edu/user/cnelson/Chap11.pdf).