The Great Debate UK
The QE billions should go direct to consumers
By Mark Hillary. The opinions expressed are his own.
In 1998, the Japanese government was ridiculed for giving away almost $6bn (at 1998 value) of shopping vouchers. The plan was that consumers would spend more of this ‘free money’ and help lift Japan out of the seemingly endless malaise it suffered in the nineties – as many other developed economies were enjoying a roaring decade.
One of the major faults in the Japanese plan was that the vouchers could easily replace the need to spend actual money. If my groceries cost me $100 then why would I still spend $100 of cash on groceries and buy a nice meal in a restaurant with my voucher, when I could just use the voucher for those groceries?
But the Japanese may have been onto something by focusing on demand rather than monetary supply, contrary to most received wisdom at present.
The Bank of England’s Monetary Policy Committee has restarted quantitative easing (QE) in the past week, much to the surprise of the markets and leading some commentators to ask what they might know that the media and financial analysts don’t.
Former MPC member David Blanchflower even used his column in the Guardian to say: “The MPC argued that tensions in the world economy ‘threaten’ the UK recovery. I am unaware of the MPC ever using this word before. Given that a lot of care goes into the exact wording of such a statement all nine members would have had to sign off on this, then things must be pretty bad.”
Perhaps I am over-simplifying the complexity of the British economy, but if the man on the street senses that the economy is not improving then he will reduce spending, luxuries are forsaken, and unsecured credit is paid down.
What message is the CDS market sending us?
By Laurence Copeland. The opinions expressed are his own.
Not many people seem to have noticed, but something almost unthinkable has happened in the Credit Default Swap (CDS) market recently. It is now one point cheaper to insure against a default by Her Majesty’s Government than by the Federal Republic of Germany. Given that only a few months ago, Markit was quoting twice as much to insure against a default on gilts as on bunds, this is a major change – but what is it telling us?
The message is unclear, but my guess is it is not quite the one which Britain’s Chancellor, quite reasonably from his point of view, would have us believe. Yes, the market has faith in our ability and willingness to repay – but that is far from the whole story.
The hint is in the fact that Japan (with its enormous government debt, even before it gets very far with post-tsunami reconstruction) and post-downgrade USA also have low CDS rates. As I have pointed out many times before in these blogs, what we have in common with Japan and America, apart from rockbottom government bond yields and associated low CDS rates, is the freedom to print our own currency. The fact that the three of us have massive debt burdens is therefore regarded as irrelevant. By contrast, this freedom is denied to euro zone countries, who are supposed to repay debt out of government revenue, which makes their creditworthiness dependent on their ability to collect tax and their prospective future growth rates which will determine the size of their tax base. Although Germany has a reasonably modest debt-to-GDP ratio, it cannot straightforwardly print money to repay its creditors. Add to that the fact that the market is finally waking up to the realisation that Germany is coming under heavy pressure to shoulder the debt of the rest of the euro zone, and its debt level suddenly seems far less modest.
It is often said that the markets can only concentrate on one thing at a time, which seems strange – but how else to interpret the current state of affairs? How else can one explain the willingness of the market to lend unlimited amounts to America even though the Fed has made it plain that it will carry on printing money until inflation revives and the dollar gets even weaker? It certainly makes sense for investors to ignore the negligible risk of a CDS-triggering default by Britain or America – but leaving aside CDS rates, even if outright default is ruled out, why would anyone want to buy five-year gilts or U.S. Treasuries at yields of barely 1 percent?
In fact, one could ask something similar about German interest rates – unless it decides to walk away from its supposed responsibility to carry the rest of the euro zone on its back, it will end up using its overwhelming influence to force the ECB to print euros so as to support its own bond markets, weakening the euro zone in the process. But again, it is hard to imagine Germany actually defaulting – why would it, when it has enough clout to control the ECB, especially as if it ever started demanding easier money, it would be pushing in the same direction as the majority of other members (ClubMed plus France, at the very least)?
The only interpretation I can think of is that the markets foresee Japanese-style stagnation for more or less all of us in the Western world – in other words, years of slow growth or no-growth in GDP and consumption, with consequently high unemployment, against a background of low or falling prices for equities and real estate – and, of course, near-zero interest rates and inflation, maybe even deflation.
from Breakingviews:
Japan’s widow-maker bond trade still looks lethal
By Wayne Arnold The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
TOKYO -- Bond traders have been betting against Japanese government debt for years -- and losing spectacularly. Victims of the so-called "widow-maker" trade of shorting JGBs thought the March disaster would vindicate them. Rebuilding, after all, will add to Japan's sky-high debt and, with a shrinking workforce and rising pension costs, push yields up. But the quake hasn't disrupted the self-perpetuating money machine that drives JGBs. Doomsayers still run the risk of becoming road kill.
JGBs have outperformed U.S. and German bonds over the past five years, returning over 55 percent in dollar terms, according to Merrill Lynch, despite yielding less than 2 percent. Much of this is a function of the yen's appreciation against the dollar. But short-sellers have also been flummoxed by the surprising way that a government with debt twice the size of its economy has managed not just to avoid a Greek-style blowout, but to borrow more cheaply every year.
All but 5 percent of JGBs are held by Japanese, not foreigners demanding attractive yields. Japanese who balked at low yields and invested elsewhere have been punished. At home, stocks have halved since 2005 and the yen's climb has sapped gains offshore.
Japan's pension funds accumulate long-term JGBs to match their liabilities. So, too, do insurers. Banks are the largest JGB buyers by far, a fact unlikely to change unless the economy revs up. With growth anemic and prices falling, companies are paying off loans and socking cash into bank accounts rather than investing it. With worthy borrowers scarce, banks park these deposits into JGBs.
Even if Japan's economy does miraculously revive, inflation and growth would offset higher borrowing costs by boosting tax revenue. The real concern, then, is whether demographics might derail the JGB engine. As the workforce shrinks and the ranks of retirees grow, pension funds might need to sell JGBs. The government's funding needs would then rise as income taxes decline.
Even without fiscal reforms, though, Japan isn't likely to reach this tipping point for at least years -- seemingly plenty of time to get its house in order, cut benefits, raise contributions and taxes to avert a crunch. True, Japan's politicians -- including Prime Minister Naoto Kan, who survived a no-confidence vote on Thursday -- demonstrate a paucity of leadership to tackle these problems. But that's still enough time to make a few more widows out of those betting against Japanese government debt.
from Global News Journal:
Hope and Fear at the World Bank
It was early March and Kristalina Georgieva, the European Commissioner of International Cooperation Humanitarian Aid and Crisis Response, was traveling in Asia. Her plan was to attend a 7.5 magnitude earthquake simulation that would hit Indonesia and generate a tsunami. A few things, however, changed in her itinerary: The destination turned out to be Japan, the earthquake was 9.0 and it not only generated a huge tsunami, but also a nuclear catastrophe. Plus, it was real.
“Usually our fears are bigger than reality. In this case our reality was worse than our fears,” Georgieva said recently at a World Bank panel on the climate, food and financial crises the world is facing today and the way they all intertwine. Georgieva’s strong Slavic optimism brightened the gloomy panel, but the data she threw in didn’t back up her positive view:
Hold on for a second. How can these disasters have such a devastating impact on us when cutting-edge technology, extensive knowledge and interconnectedness are here to help us mitigate them?
This question left the representatives of Uganda – who followed the event via webcast -- puzzled. So they raised the simplest but toughest question for the panel:
“We seem to know the problem and we also seem to know the answer. The question is then: Why are we not responding?”
No one on the panel disagreed with World Bank’s managing director, Ngozi Okonjo-Iewala, who wasn’t shy to name those she blamed and to evoke “the fear of God” in them:
from Reuters Investigates:
Japanese quake cost bad, but far from the worst
By Ben Berkowitz
The March 11 Great Tohoku Earthquake in Japan was a tragic disaster of historic proportions -- but from a purely financial standpoint it pales in comparison. (For a special report on insurers, click here.)
Estimates are still coming in but it seems likely the quake will end up ranking as the costliest of the last generation in insured losses, surpassing even the Northridge earthquake that struck southern California in 1994. (The one that collapsed a number of major freeways, by way of reference).
But looking back historically, it is dwarfed by two temblors in particular -- the New Madrid quake of 1812 and the San Francisco quake of 1906. If those events happened today, they would each cause nearly $100 billion in *insured* losses, to say nothing of their total economic impact.
Great Tohoku comes in fourth on that all-time list, assuming the higher end of AIR Worldwide's loss estimate.
Read the special report "Japan quake reveals cracks in insurance system" in multimedia PDF format here.
The safest form of power: Everything in moderation
By Morven McCulloch
The ongoing crisis at the Fukushima Daiichi nuclear plant in north-eastern Japan, seriously damaged by a March 11 earthquake and tsunami, has led to anti-nuclear protests in several countries and forced governments to rethink their energy policies.
The UK currently has 10 nuclear power stations, representing 18 percent of the country’s energy supply according to Energy UK. Should British Prime Minister David Cameron, like German Chancellor Angela Merkel, reverse his position on the safety of nuclear power?
Environment and climate scientist Lord Julian Hunt told Reuters in a video interview that although the situation at the Fukushima plant is an “extremely serious event,” there are risks to consider with every type of power.
Hunt says: “I think the difficulty about a public debate is to weigh up very short-term risks with longer-term risks that happen all the time.
“Take for example coal, which is still used very widely in India, China and Denmark (80 percent of Danish power comes from coal). The coal is mined… which leads to massive air, water and ground pollution. A million people die a year from air pollution, according to the World Health Organisation figures, and that’s a global figure. So there are risks associated with fossil fuels, let alone the question of climate change.
“Part of the strategy has got to be to consider how climate change itself is affecting conditions for different sorts of energy supply. Because we really can’t predict everything, and all possible interactions, it seems to me to be a strong argument for continuing to have an energy mix and to invest in new kinds of technology.”
As the demand in energy increases we should think of alternative ways to obtain energy. Renewable energy is one answer to the escalating demand of energy.
http://www.spectrumbluesteel.com/
from Reuters Investigates:
Is a 10 percent chance of disaster too high for a nuclear power station?
Kevin Krolicki has another alarming special report from Japan today challenging the assertion that the disaster facing Fukushima Daiichi nuclear plant was beyond expections.
The report quotes Tokyo Electric's own researchers who did a study in 2007 on the risk of tsunamis:
The research paper concluded that there was a roughly 10 percent chance that a tsunami could test or overrun the defenses of the Fukushima Daiichi nuclear power plant within a 50-year span based on the most conservative assumptions.
But Tokyo Electric did nothing to change its safety planning based on that study, which was presented at a nuclear engineering conference in Miami in July 2007.
Read the full special report in PDF format here.
Why should people be expected to accept the risk of deadly disaster? There is no need for the risk. No other method of electric generation can produce such great and widespread harm. Nuclear power should be outlawed.
from Breakingviews:
Four reasons to hedge against Japanese equities
What was a contrarian view right after Japan's earthquake has become consensus: confidence in a V-shaped recovery has powered a 10 percent rally in Japanese stocks since March 15. That outlook still appears likely, but questions surround the speed and strength of the recovery. Investors should hedge against the risk that politics, power shortages, and nuclear troubles prompt investors to turn tail.
Amid a drumbeat of cautiously optimistic forecasts, foreign investors pumped almost $12 billion into Japanese stocks, a surge that helped stoke an unwanted spike in the yen. Even Warren Buffett joined the chorus of support for Japanese equities. The rally also turned up some reconstruction darlings such as generator-maker Denyo <6517.T>, which has climbed 44 percent since March 15; water purification company Nihon Trim <6788.T>, up 48 percent; and lighting company Iwasaki <6924.T>, up 58 percent.
But bad news out of Fukushima, where radiation continues to seep from crippled nuclear reactors, is nibbling at confidence. Alongside fears of worsening fallout, investors face three other worries. First, that power shortages will create a lasting dent in Japanese output. The quake took out almost a quarter of Tokyo Electric Power's <9501.T> capacity, prompting it to ration power and force key suppliers to shut down, with reverberations down the entire supply chain. If industry cannot restore its power before surging summer demand, lost production could cost Japan global market share.
The speed of reconstruction is another concern. Opposition politicians are quibbling over an emergency budget. Even when passed, destruction is so extensive that infrastructure may need not only rebuilding, but relocation. Last and perhaps most important is consumer confidence. Some fear that younger Japanese, already chastened by two decades of job insecurity, will pull their purse-strings even tighter.
Increasing prices for options to sell Nikkei futures suggest that some investors are already turning cautious. Aside from such put options, investors can consider short-selling Nikkei futures. Shorting exchange-traded funds, such as the iShares MSCI Japan Index, provides another way to offset potential losses on a portfolio of Japanese stocks.
The prognosis is not universally bleak, and Japanese equities are hardly expensive. The forward p/e multiple for the Topix index, using IBES estimates, is an unstretched 12.2. But prudence suggests investors should hedge against the risk that the Tokyo equity market lurches downwards again.
from Breakingviews:
Egypt needs a reconstruction fund too
By Hugo Dixon The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON -- Egypt needs a reconstruction fund too. Japan will be spending tens of billions of dollars on rebuilding after its tsunami. Egypt can't afford to finance an equivalent fund after its political tsunami. But foreign powers could help by showing they are not just interested in bombing neighbouring Libya.
In the long run, the most important thing is to accelerate free trade between Egypt and the industrialised world, notably the European Union. More immediately, as the country teeters on the brink of recession, foreign countries can show they really care about Egypt's transition to democracy by financing a fund to invest in physical and social infrastructure -- such as power generation, transport, housing and education.
Over the two months since the Egyptian revolution began, nothing concrete has emerged -- despite much talk. Western countries want to help but are strapped for cash. There is also an understandable desire to link help to the achievement of the milestones on the road to democracy. Meanwhile, first the Japanese earthquake and then war in Libya has distracted attention from Egypt.
But it's not too late to grab the moment. Nor is it impossible to raise cash. The main source of new money is the Gulf. Saudi Arabia, the United Arab Emirates and Qatar are bubbling with petrodollars. Even if these sheikhdoms don't obviously have an interest in fostering democracy, they certainly have an interest in good relations with the Arab world's most populous country. Meanwhile, Western countries could write off governement-to-government debt or convert it into equity in infrastructure projects. Of Egypt's $34 billion external debt at the end of June 2010 (78 percent of which was owed by the government), 31 percent was owed to European Union countries, 12 percent to Japan and 10 percent to America.
Ideally, a reconstruction fund should be run as a public-private partnership (or a series of such partnerships) at arm's length from the government. Given that it would be invested largely in infrastructure, it should then be able to raise more money through borrowing. Added to the money from donations and debt-for-equity swaps, total investments of around $20 billion -- just under 10 percent of GDP -- might be possible.
It could be argued that such a plan would do little to solve Egypt's short-term problems of rising unemployment and inflation. But this is only partly true. An external vote of confidence could encourage industry to push forward with its own investment plans; and the government would be able to direct its own limited resources to priorities such as subsidising food if it knew cash was coming in to help take care of structural problems. Investing in democracy would be money well spent.
@Alisdair I think you are entirely right. I guess that’s why Keen’s argument that private debt be wiped out, combined with a windfall for consumers, might be far more effective than any bank bailout.
Of course, you could then go on to argue that the entire capitalist system – with expectations of growth – is broken… in which case, where do we go from here because there has never been a good example of any socialist utopia.