Showing posts from February, 2012

The many shades of default

Last night, S&P downgraded Greece to "selective default". This followed on from Fitch's description of Greece last week as in "restricted default". Both passed almost unnoticed, didn't they? No twitterstorms, no flash news reports, no extended analysis. Everyone knew some form of default was going to happen, no-one is at all surprised and it doesn't change anything. Markets have already priced in default anyway. So has Germany, if recent statements from the great and the good are to be believed. There was a short, bored statement from the Greek government last night and a slightly longer and equally bored statement from the Eurogroup president. The first sovereign "selective default" in history is a total non-event. Remarkable how things can change in a few short weeks. More important is today's announcement that ISDA will decide on Wednesday whether or not Greece's retrospective insertion of Collective Action Clauses (CACs) i

Spot the difference

The UK's Bank of England is on a splurge. It is spending newly-created money like it is going out of fashion. It is buying up the UK's own gilt-edged securities, which it is putting safely in a vault with the intention of selling them again sometime, maybe, if the mice haven't eaten them first. The institutional investors it buys those gilts from then go and spend that money, or they put it in a bank deposit account, or something. Anyway, one way or another that money finds its way into bank deposit accounts, simply because all money at some point comes to rest in a bank deposit account......So banks have higher deposit balances. Does that mean they lend more? No, it doesn't. Deposits don't belong to them - they are debt. What banks need is capital (because regulators insist they need it), and they haven't got enough of that. So although they are awash with deposits, they aren't lending, because lending uses capital. UPDATE - And because, as Ann Pettifor poi

Accounting and reality

In a few posts recently , Richard Murphy argued that because the Bank of England is wholly owned by the Treasury, the government debt (gilts) that it has bought under the Quantitative Easing programme is effectively cancelled because it would be eliminated from both sides when the Bank of England's accounts were consolidated with the Treasury accounts. This is correct from an accounting point of view. It leaves a large cash liability on the Treasury's accounts which represents the additional base money now in circulation and is exactly equal to the amount of the debt purchased. But the debt itself disappears. Murphy's worked example showing how this works is here . But in the real world, things don't just disappear like that. Locked away in the Bank of England's vaults are a large number of pieces of gilt-edged paper. And tucked away in bank deposit accounts, or floating around somewhere in the financial system, is the additional money that the Bank of England c

Awful, awful.....

I've always said I won't comment on tax matters, as I am far from being an expert. But I really can't let this pass. The Tax Justice Network today produced its first podcast . It's a very jolly 15-minute broadcast, with jaunty music and a presenter who was obviously chosen for the fake cheeriness of her voice. I found it all rather patronising, rather like those awful radio adverts that the Child Tax Credits people produce from time to time - you know, the ones that make thinly-veiled threats to remove benefits if you don't tell them your circumstances have changed. But what bothers me far more is the dangerous inaccuracy of many of the statements made, and the unsupported allegations against companies, institutions (including the police) and individuals. If these allegations are true, they are dynamite. If they are false, they are also dynamite - for the Tax Justice Network. There are four claims in the podcast: 1) that Barclays only pays around 1% corpora

False dawn

As dawn broke on 21st February 2012, the leaders of the European Union announced that they had agreed terms for additional financial support to Greece to enable it to meet scheduled debt repayments on 20th March. European Union officials pronounced that "the European debt crisis is ended".  Light has dawned, the sun is shining and everything is rosy. Except it isn't.  Not one commentor on the dawn deal thinks that it solves anything. As the BBC Breakfast reporter said, all it does is "buy time". Time for what? Time will solve nothing. Even with this deal and a VERY large amount of economic luck, Greece's debt is only forecast to reduce to 120% of GDP by 2020, which for a country as poor as Greece looks unsustainable. And that assumes that Greece is able to return to growth in 2013 despite the extra cuts imposed in this deal, which are almost certain to deepen recession further. And it also assumes that Greece somehow manages to maintain a primary surplu

Thoughts on inflation

This extended post is prompted by numerous debates on whether or not Quantitative Easing (QE) is inflationary, whether or not creating new money to fund public spending is inflationary and whether inflation is really such a bad thing anyway. Note to any real economists out there. In this post I will be describing some economic concepts, such as NAIRU, in layman's terms. If I get something wrong, please correct it (gently), but remember that I am not writing for an audience of economists so am trying to keep things simple! I am old enough to remember the inflation of the 1970s . In 1975 wage-price inflation in the UK touched 25%.  This is nowhere near high enough to qualify as hyperinflation , which is defined as a monthlly inflation rate of 50% or more (Cagan 1956). The UK has never experienced hyperinflation. But the inflation of the 1970s was quite bad enough, since it destroyed people's savings and led to a vicious spiral of higher prices leading to  increased wage d