Coppola Comment

"Britain nearly went bust in March, says Bank of England", reads a headline in the Guardian . In similar vein, the Telegraph's Business section reports "UK finances were close to collapse, says Governor": Eh, what? The Governor of the Bank of England says the UK nearly turned into Venezuela? Well, that's what the Telegraph seems to think:  The Bank of England was forced to save the Government from potential financial collapse as markets seized up at the height of the coronavirus crisis, Governor Andrew Bailey has said. In his most explicit comments yet on the country's precarious position in mid-March, Mr Bailey said 'serious disorder' broke out after panicking investors sold UK government bonds in a desperate hunt for cash. It left Britain at risk of failing to auction off the gilts needed to fund crucial spending - and Threadneedle Street had to pump £200bn into markets to restore a semblance of order. Reading this, you would think that the UK...

Remember Friday Night Is Downgrade Night , from the Eurozone crisis? It's back. Last night, Fitch Ratings downgraded the UK to AA-, negative outlook. Here's their rationale : The downgrade reflects a significant weakening of the UK's public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent. The downgrade also reflects the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship. The commensurate and necessary policy response to contain the COVID-19 outbreak will result in a sharp rise in general government deficit and debt ratios, leading to an acceleration in the deterioration of public finance metrics over the medium term. The Negative Outlook reflects our view that reversing the deterioration in the fiscal metrics beyond 2020 will not be a political priority for th...

The NI Fund discussed in this post covers England, Wales and Scotland only. Northern Ireland has a separate NI Fund, which is excluded from the figures given in this post. However, it works in exactly the same way as the Fund discussed here.  Sometimes the government is its own worst enemy. HM Treasury's hamfisted response to this Freedom of Information request from Trudy Baddams of the pension rights campaign group "We Paid In, You Paid Out", has caused a very silly storm. Ms Baddams asked this question: Can you confirm that the National Insurance Fund (NIF) is presently in surplus and by how much? Can you also please confirm how much has been paid from the fund into the National Insurance Investment Fund in the last 10 years? In response, HM Treasury pointed her to the NIF accounts , which are produced yearly. But then it added this paragraph (my emphasis): The latest NIF Accounts show that the balance of the NIF increased by £2,286,469,000 in 2017-18. ...

The present period of very low interest rates is widely assumed to be temporary, a consequence of the 2008 financial crisis and subsequent central bank action. Because of this, as the financial crisis fades into the mists of time, there is growing political pressure for "normalisation" of interest rates. Here, for example, is William Hague warning that central banks must start to raise rates or face losing their independence: The only way out is for the US Fed to summon the courage to lead the way to higher interest rates, and others to follow slowly but surely. If they fail to do so, the era of their much-vaunted independence will come, possibly quite dramatically, to its end. Hague gives ten reasons why low interest rates are a bad idea. His points can be summarised thus: the "reach for yield" by savers who want higher returns drives up the price of assets higher asset prices increase wealth inequality, fuelling popular anger pension funds are struggling, ...

In a new paper *, Michael Woodford has reimagined the famous “Schroedinger’s Cat” thought experiment. I suspect this is unintentional. But that’s what happens when, in an understandable quest for simplicity, you create binary decisions in a complex probability-based structure. Schroedinger imagined a cat locked in a box in which there is a phial of poison. The probability of the cat being dead when the box is opened is less than 100% (since some cats are tough). So if p is the probability of the cat being dead, 1-p is the probability of it being alive. The problem is that until the box is opened, we do not know if the cat is alive or dead. In Schroedinger’s universe of probabilities, the cat is both “alive” and “dead” until the box is opened, when one of the possible outcomes is crystallised. Now for “cat”, read assets. In Woodford’s model, when there is no crisis, the probability of asset collapse is zero. But if there is a crisis, the probability of an asset collapse is grea...

It's not going to come from people working more. Excerpt from the IMF's latest Debt Sustainability Analysis for Greece , just released: Oh dear. Quite apart from the negative contribution to growth, the prospect of unemployment taking 44 years to return to something approaching normality is simply appalling for Greece's population. I've looked in more detail at this here  (Forbes). Well, if labour isn't going to drive growth, there's always investment, yes? Er, not really. The outlook for capital investment doesn't look too good either: Yeah, about that financial sector.....Greek banks are still in crisis, it seems. The IMF thinks they will need another 10bn Euros on top of the 43bn they have already received, and even with this, they aren't going to lend. And they aren't worth anything, so can't even be sold to raise money. Greek banks are zombies, and like all zombies, they drain the lifeblood of their victims. They are a serious o...

"Best diss of the Quantity Theory of Money comes from Keynes", commented Toby Nangle on Twitter, referring to this paragraph from Keynes's Open Letter to Roosevelt   (Toby's emphasis) : The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor. But is Keynes really dissing the Quantity Theory of Money (QTM)? Well....no. He is objecting to the way in which it...

There is a huge amount of hysteria about government debt and deficits, not just in the UK but throughout much of the world. As I write, Brazil has been downgraded by Standard & Poors because of concerns about rising government debt and weakening commitment to primary fiscal surpluses in a context of political uncertainty and deepening recession. It is the latest in a long line of downgrades and investor flight over the last few years. The global economy is a very stormy place. The UK, which has halved its fiscal deficit in relation to gdp in the last five years, is embarking on another round of fiscal tightening , with the aim not only of completely eliminating the deficit but running an absolute surplus by 2020 in order to, in the words of the Chancellor , "bear down on debt". The Chancellor's plan enjoys considerable popular support due to a widespread belief that if we do not eliminate the deficit and start paying down debt, we will end up like Greece . ...