Does The UK Need More Stimulus?

Bank of England Governor Mervyn King voted 'yes', even though he was outnumbered. The topic: to print more money, to lend to the British Government. Money which is supposed to flow into the economy and rescue us all from depression.

Some commentators argue QE, quantitative easing, or pump priming, is just another way of financing the budget deficit. Since the private sector won't do it, the government has to do it itself.

This analysis fails to ask the question 'why', or to answer it.


We know why the private sector can't and won't buy gilts, but the government has not found an alternative lender. It is not borrowing from itself, it is creating currency in order to create/facilitate debt.

That is precisely what the banks did when they created a parallel currency based on collateralised debt obligations.

They created debt which expanded the money supply, which the central bank was powerless to stop. As Australian economist Steve Keen explained in February.

So the only way the BoE has managed to offset the lunacy of the banking sector is by apeing it.


The techno music loving economist Edmund Conway in The Telegraph:

Let’s try to put that total into perspective. The size of the entire conventional gilts market is currently around £400bn (though of course with the Government raising so much extra cash year by year it is growing at a rapid rate). A £200bn slug is equivalent to around 14pc of Britain’s gross domestic product. This is bigger than Japan ever tried and is far greater than anything either the Federal Reserve or the European Central Bank is doing. And all for a policy whose dividends are extremely dubious and which has arguably never been successfully employed. At least, you can’t fault King for lack of boldness.

The MPC minutes are a further surprise for the City. Two weeks ago, at the time of the decision, few traders anticipated an extension of QE; they were wrong. Last week, few expected the Bank to indicate in its Inflation Report that market expectations for a series of interest rate increases next year and the year after were too much; they were wrong. And now this.


It is not merely that the 6-3 vote represents the first time the MPC has been split on how to carry out QE since it started the unprecedented policy in March – though that landmark in and of itself is a significant one. The fact that King was on the wrong side is highly significant. For in the few times that this has happened before, hindsight has usually proven the Governor to be right with his vote – and the rest of the committee wrong.

Can't disagree with the guy's economic analysis. As for the music, I guess it sounds better in Ibiza.

UK's Endless Pump Priming

Sterling did well to lose only half a cent on the dollar after the Bank of England minutes.

The Governor wanted not only to extend the Quantitative Easing programme by another 75 billion sterling but to apply it to a wider range of government bonds.

Though he was outvoted by the rest of the band on the deck of the good ship Bank of England, who opted for an extra 50 billion, it suggests concern about the locaton of the lifeboats is growing.

In other words, "how do we get out of this?"


King’s comments suggest the BoE is being sucked into ever greater issuance. As one poster on the FT puts it, “Cornering a market is very very difficult. Once you have started you simply cannot stop. So the extremely thin/illiquid gilt market will hold up longer than we all think, but WHEN (not if) it bursts it will be brutal.”

The original idea (at least how it was sold to the politicians and public) was to pump prime the corporate debt market - accepting bank and other assets in return for printed money. Increasingly that printed money goes to support government spending.

That's right. The government borrows money (technically, issues debt) which is financed by the Bank of England (technically, creates money and buy's the government's debt).

QE is a mechanism to move to support unsustainable asset prices. That means bubble support.


• Don’t know or won’t say how much money they have lost
• Because they dare not put a value on assets

It’s not, as bank apologists will tell you, a moot point because these assets are going to rise in value. Even if banks can value their assets, they won’t reveal a figure that would affect the terms and conditions of their bailout by the taxpayer.


If assets turn out to be worth less than government estimates, then the taxpayers’ bill is dramatically higher than anticipated.
If assets turn out to be worth more than government estimates, the bank bailout is more excessive than currently appreciated.

Ok, the bankers have had a stressful year. But can't they answer the question, "Where's the money, honey?"


Who Is RHJ?

Of the companies bidding for Opel, the European arm of General Motors of the U.S., none is more mysterious than the Belgian firm RHJ International.

Beijing Automotive, Canadian car parts maker Magna, Russia’s van maker Gaz – all have an obvious interest in acquiring the troubled Opel unit.

Lazy journalists tend to pigeonhole stories. It makes them quicker to write. So anything involving a Russian bank and vehicle maker must involve mischief.


It took Internet magazine Slate to focus in on the (pretty obvious) fact that Magna’s founder Frank Stronach is an incredible success story of the motor industry.

Like Arnold Schwartznegger, whose growly Austrian accent he shares, he’s an immigrant to the new world. And far from being a Terminator, he promises to save more jobs than rival bidders.

Stronach’s desire to become and industry baron is entirely logical. Likewise Russia’s interest in a venture which would reinvigorate its own car production.


Magna is from Canada, where GM already has huge car plants, and its Austrian founder has a business philosophy that would suit Europe like a hand in a glove compartment.

So GM’s hostility to the Magna-Sberbank bid mystifies Slate Magazine’s auto writer Matthew DeBord. However he misses a trick in his report on the Russian bid for Opel, The General’s Russian Drama.

He overlooks rival RHJ International as a “Belgian” firm, noting that it “would protect certain aspects of GM’s non-Opel related assets”. Far more mysterious than the Russian bid for Opel, is why GM appears to be favouring a “Belgian” holding company over Fiat, Beijing Automotive or the world’s biggest car parts maker Magna.


With interests in musical equipment manufacturers, recording companies, hospitality, nutrition and financial services, RHJ also has a unit that makes auto components.

RHJ, aka Ripplewood, was founded by Tim Collins, an American private equity investor. He made most of his money in Japan and presumably registered his company in Belgium for its flexible rules on corporate governance. Like most big private equity players, he has close ties to the US political elite.


According to blog The Truth About Cars, Collins is one of the few people who is open about his membership of the Bilderburg Group and was a donor to then President Obama's election campaign.

Ripplewood’s role was, according to The Truth About Cars, pure private equity – to acquire Opel along with buckets of government money, close plants, and sell a cleaned-up Opel back to GM. The problem was, Ripplewood’s plan leaked early.

The following are a few links to other people's research, easily found on the Internet.

Ripplewood made buckets of money out of Japanese telco dealings and went on to buy Denon from Hitachi and then bundle it with Marantz and some choice American brands like Boston Acoustics, Snell, MacIntosh etc. Now they’ve made more money, they have flogged it off through Bain Capital to greedy people with more money than sense who think that they can now make a bundle of dollars out of it too...

“My nasty mind says that if Ripplewood could get hold of Opel etc they would restructure and rebuild it so that they could palm it off later, perhaps even to Fiat or Magna, at a huge profit. I must admit though, I hadn’t noticed/realised the close proximity/links to and support of the Democrats, Billy Bob Clinton and token all round nice guy Barack. I suppose it is best to keep it all in the family though. Just ask The Puppet Master, Uncle Dick Cheney and his Travelling Bush Roadshow – for even more intrigue from the dark side, have a look at this.”

Europe's Heart Beats

Germany and France have seen an unexpected jump in second quarter GDP. Both economies expanded 0.3 per cent from the first quarter.

Global demand for European exports, government subsidies and low interest rates all had a positive effect.

However the press' parroting of French Finance Minister Christine Lagarde, that France and Germany are out of recession just because the first quarter was much worse than the second, is ridiculous. The GDP of both countries fell sharply compared with the same quarter a year before.

Taking this approach, Russia would be out of recession because GDP rose 7.5% from the first quarter, while it fell 10.9% compared with the second quarter last year.

German and French economies also both shrank on an annual basis.


UK Jobless Miscount

UK jobless hits 7.8%.

The UK newspapers are mystified why the numbers of those claiming benefit rose only 24,000 while the Labour Market Survey saw a jump of 220,000.

An pseudo-outraged UK Works and Pensions Secretary, Yvette Cooper, even ordered an inquiry.

The newspapers are simply wrong to say there is a clash or disparity between the jobless measures.

There are many ways to count unemployment - the US Bureau of Labour Statistics has six different measures of unemployment.


Of course politicians or newspapers can highlight whichever measure they like - as they do with the retail price inflation measures.

The point is, what do you want to measure?

1) Someone whose spouse earns a hundred grand can still be unemployed. Do they not count because the can survive on their partner's income? Are you measuring social deprivation or the loss of jobs in the economy?

2) If someone's hours have been cut to the bone, forced to work less than they want - is that a reduction in employment. You are not counted as unemployed (according to the headline measure) if you do one hour's paid work a week.

3) If someone has not actively looked for work in the past month, they are not counted as unemployed. What if they've had to move location, what if there's no transport? Too bad. You are not unemployed (according to the headline measure).

The BLS U6 measure does include all the above, excluding only those who have not worked for more than a year. According to this measure, US unemployment stands at more than 16%.

A quick edit follows of David Webster's excellent analysis

He doesn't try to put a number on the "real" figure - partly due to the deficiencies of the underlying UK jobless data.

These include:

Government Trainees

The ILO definition treats people on government training schemes for the unemployed as being employed. But if they were not unemployed, they would not be on a training scheme.

At the lowest levels of unemployment, adding those on government schemes would raise the ILO unemployment rate by under 0.5%; but at the highest level, it would add almost 1.0%.

The LFS is known to undercount the number of people on schemes, by about half. So these figures should be approximately doubled.

Discouraged workers

To count as unemployed under the ILO measure, you must have looked for work within the past four weeks – even if the only major employer in your area has collapsed.

Together, government trainees and discouraged workers would add about 0.7% to the ILO unemployment rate in low unemployment, and around 1.5% in high unemployment areas. These figures would rise to around 1.0% and 2.0% respectively when allowance is made for undercounting of government trainees. These are significant amounts.

Unemployment disguised as sickness

Most of those discouraged by the state of their local labour market are to be found in the category of sickness. The evidence that a very large number of unemployed people in Britain are disguised as sick is very strong.

The UK has the highest rate of working age sickness of all 15 European Union (EU) countries. The UK rate of 7.0% compares with only 2.1% in Germany and 0.3% in France.

At Spring 2000 just over a third (34.1%) of the 2.3m working age inactive sick in Great Britain said they wanted to work. As a proportion of the UK working age population, this is more people than are inactive sick in total in Germany or France.

If these people were counted as unemployed, they would add 2.7 percentage points to the UK ILO rate, bringing it to the same level as Germany.

Over 55s not counted as unemployed

Evidence is hard to come by but: Similar effects operate in other countries. In relation to the Netherlands, Broersma (2000) notes that "People above 57 years old are no longer included in (the ILO) figure since 1983.

Since then, these unemployed persons were no longer obliged to search actively for a job. By now, there are twice as many recipients as there are registered unemployed.

Misuse of Vacancy Data

During the last 2-3 years there has been an attempt by the government to argue that there is no shortage of jobs anywhere in Britain.

It is argued that because high levels of vacancies are found in cities alongside high levels of unemployment, the unemployment cannot be due to lack of labour demand. But for the most part these vacancies merely represent turnover among the commuter workforce.

Accurate Labour Market Statistics would cost too much

One recent estimate by a lay adviser to ONS from the business community was that an adequate suite of labour market statistics would cost an additional £50m per year.

Why are UK labour stats so deficient?

To a considerable extent we are dealing with a novel problem. There has never previously been such a large group of people claiming sickness benefits who in other respects appear to be unemployed; hence the problem of measurement is a new one.

Some of the worst misrepresentations are of recent origin, with the "workforce" statistics dating only from 1996. And it can scarcely be an accident that the misrepresentations taken together are such as to advance a particular supply-side view, namely that UK economic performance has been good, the loss of manufacturing does not matter, and worklessness is primarily due to deficiencies in the workforce or in the social security system rather than to decisions by investors or the government.

Changes in the economics profession have also played an important role. The last 40 years have seen the rise to dominance of mathematics and econometrics-based economists who are primarily interested in modelling, and the almost complete demise of the older type of "applied economist" who had a broad knowledge of business and affairs.

At the same time, the independence of university researchers has been undermined by changes in financing. They have been made much more dependent upon winning government contracts, while direct public financing has been made dependent upon the Research Assessment Exercise (RAE). This promotes publication at all costs, making it difficult for researchers to spend time on unpopular lines of inquiry in which publication may be delayed or blocked by referees’ objections, and causing the journals to fill up with mediocre material.

ILO data is not comparable

It is true is that ILO rates are estimated using the same procedure in each country. But following the same procedure in different circumstances does not necessarily produce comparable results.

A "Want Work Rate" (WWR) can be derived from the LFS. It is the sum of the ILO unemployed and the economically inactive wanting work divided by the sum of all those in work or wanting work. It has some technical problems (Webster 2001b), but is a useful summary measure of the UK’s overall worklessness from both a time series and an international perspective.

Somewhat dated TUC research reveals into the Want Work Rate suggests more than twice as many people in the UK want a job but are out of work than show up in official unemployment statistics. About 22% of the eight million inactive people in the UK want a job, compared with the European average of just under 10%.