UK Economy Crash Course (whole presentation)

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Why UK will have economic depression

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Ailing Britain's central bank turns money taps back on. Quantitative Easing 3.

Pedestrians pass The Bank of England in the City of London February 14, 2012.

Credit: Reuters/Olivia Harris

By David Milliken and Sven Egenter

LONDON | Thu Jul 5, 2012 3:54pm BST

(Reuters) - The Bank of England launched a third round of monetary stimulus on Thursday, saying it would restart its printing presses and buy 50 billion pounds of government bonds with newly created money to help the economy out of recession.

The BoE's action, coming just two months after it ended a previous asset buying programme, coincided with interest rate cuts in China and the euro zone as the trio of central banks took steps to counter a global economic slowdown.

There is no guarantee the new cash injection, which the bank linked directly to the worsening backdrop in the euro zone, will offer a major boost to an economy officially in recession since late last year.

BoE Governor Mervyn King has been adamant that gilt purchases still work as a stimulus.

But policymakers Martin Weale and deputy governor Paul Tucker as well as external economists have voiced doubts about the effectiveness of the latest round of purchases, though some in the market still forecast the four-month programme would be extended.

"We continue to have doubts over how successful extra QE will be, but seeing as the BoE has few other options we expect them to stick with it," said James Knightley at ING.

The BoE bought 125 billion pounds of gilts between October and April, calling a halt in May largely because inflation was falling more slowly than hoped towards its 2 percent target.

Since then, inflation has dropped to 2.8 percent, and the BoE said a worsening economic situation in the euro zone was the main factor behind its decision to restart purchases.

"Without additional monetary stimulus, it was more likely than not that inflation would undershoot the target in the medium term," King said in a letter to finance minister George Osborne explaining the decision.

The BoE has bought 325 billion pounds of government bonds to date, and the purchases announced on Thursday take this total to 375 billion.

Many economists had expected new programme to be spread over less than four months, and a minority had forecast the BoE would plan to buy 75 billion pounds of bonds.

Gilt futures, which had rallied in the run-up to the decision, fell by more than 30 ticks to hit a session low after the data.

"We continue to expect that QE will be expanded markedly further over time, reaching a total of about 500 billion pounds," said Citi economist Michael Saunders, who had expected an initial dose of 75 billion.

MONETARY POLICY STILL KEY

Britain's Conservative-Liberal Democrat coalition is largely reliant on the BoE to boost the economy because it has limited scope to cut taxes or raise spending while it tries to eliminate the country's big budget deficit over the next five years.

In a letter authorising Thursday's QE expansion, finance minister Osborne confirmed that monetary policy was the "primary tool" to deal with a worsening economic outlook.

However, many economists think gilt purchases are losing the effectiveness they had when they first started in March 2009.

"The BoE has been excessively optimistic about how powerful QE is," said Philip Rush, an economist at Nomura. "The latest increase is more than just a token, but it is not hugely significant for the outlook for growth and inflation."

Some BoE Monetary Policy Committee members have doubts too, and recommended at last month's meeting - when the committee split 5-4 against restarting QE - that other complementary policy measures might be better suited to reducing firms' and households' borrowing costs.

The QE stimulus follows joint measures announced by the government and BoE last month to improve the flow of credit to businesses, and to ensure banks do not suffer from a lack of ready cash if the euro zone crisis deepens.

The BoE says its purchases of government bonds help the economy by encouraging other investors to buy riskier assets instead, making it easier for large companies to raise funds through bond or share issues. But critics argue the BoE needs to do more to boost the flow of credit to smaller companies.

"The last round of QE proved ineffective, with little or no evidence it found its way to small businesses - the engine room of our economy," said Phillip Monks, chief executive of Aldermore, a recently established bank that lends to business.

"To really stimulate economic growth, the Bank of England needs to do more to ... ease credit availability for small firms."

With the possibility of interest rate cuts yet to enter the debate in Britain, both the European Central Bank and the People's Bank of China cut borrowing costs on Thursday.

http://uk.reuters.com/article/2012/07/05/uk-britain-boe-idUKBRE8630RO20120705?feedType=nl&feedName=uktopnewsmid

LONDON (Reuters) - Britain fell deeper into recession than first thought in the first quarter of this year after a sharp drop in construction output, raising the likelihood the Bank of England will need to inject more stimulus to protect the economy from the raging euro zone debt crisis.

Britain is in its second recession since the 2007-2008 financial crisis, and the prospects for a recovery are cloudy as leaders in the euro zone, Britain's biggest trading partner, are still far from resolving their debt woes.

The Bank of England has indicated it is ready to pump more money into the economy, having paused its 325 billion pound quantitative easing programme earlier this month, amid growing worries about a break-up of the currency union.

"The economy is not recovering properly and with the uncertainty over Europe hanging over the outlook as well, our suspicion is the MPC will sanction further QE at some point later on this year," said Philip Shaw, economist at Investec.

The Office for National Statistics said the economy shrank by 0.3 percent in the first quarter of this year, a downward revision from an initial estimate of a 0.2 percent decline, and confounding analysts' forecasts for an unchanged reading.

Year-on-year, the economy contracted by 0.1 percent, the first annual decline since Q4 2009.

The figures will make uncomfortable reading for British finance minister George Osborne, who has vowed to press ahead with harsh austerity measures to curb Britain's debts and has argued that the private sector can fill the gap in public spending.

Britain's economy has expanded by just 0.3 percent since the Conservative/Liberal Democrat government came to power in 2010, and Thursday's figures showed government spending made the biggest contribution to the economy between January and March.

DOWNWARD REVISION

The ONS said the downward revision to the Q1 data was the result of a sharp drop in construction output, which fell by 4.8 percent on the quarter, its steepest decline since Q1 2009.

New data on expenditure suggested the decline in overall GDP would have been steeper were it not for a 1.6 percent quarterly rise in government spending, which was the biggest increase in four years and contributed 0.4 percentage points to GDP.

Household spending, meanwhile, rose by only 0.1 percent, its smallest rise in six months and suggesting that a consumer-led recovery is not on the cards.

The figures showed that exports also suffered. The trade deficit increased to 4.4 billion pounds, with net trade shaving off 0.1 percentage point from GDP.

But separate preliminary data showed business investment posted its biggest quarterly rise in almost a year, and its largest annual increase in almost seven years.

The International Monetary Fund this week warned about the risks facing Britain and urged policymakers to boost growth by whatever means necessary.

It suggested the BoE could cut rates further from their record-low 0.5 percent and start buying private-sector assets.

And it recommended that the government should find money to invest in infrastructure and do more to boost the flow of credit to companies. The IMF said Britain may even need to consider a temporary tax cut to bolster demand.

Although the BoE is concerned that official data might be understating the strength of the economy, recent surveys have indicated that activity is tailing off, while an extra public holiday in June is also likely to depress growth in the second quarter.

In a further sign of weakness in the economy, figures published by the British Bankers' Association showed net mortgage lending rose by 715 million pounds in April, around half the increase recorded a year ago, though the number of mortgage approvals was up slightly on the year.

(Reporting by Fiona Shaikh and Olesya Dmitracova)

UK recession deepens as euro zone woes mount

Bank of England pumps up economy

Bank of England pumps up economy


The Bank of England has taken fresh emergency stimulus measures, planning to inject STG75 billion ($A120 billion) into a British economy caught up in possibly "the most serious financial crisis" ever.

After a two-day policy meeting, the BoE approved increasing its quantitative easing (QE) by STG75 billion to STG275 billion over a four-month period, sooner than had been expected by many analysts.

The Bank of England's nine-member Monetary Policy Committee (MPC) also decided to keep the main interest rate at a record-low 0.50 per cent, it said.

"This is the most serious financial crisis we've seen at least since the 1930s, if not ever," BoE governor Mervyn King told Sky News television following the policy announcements on Thursday.

"We're having to deal with very unusual circumstances and to act calmly and do the right thing. The right thing at present is to create some more money to inject into the economy."

Under QE, the bank creates new cash which is used to purchase assets such as government and corporate bonds in a bid to encourage lending and in turn boost economic activity.

The BoE injected STG200 billion into the economy between March 2009 and January 2010 but the economy has struggled and over the past nine months has virtually come to a halt.

The pound on Thursday hit a 14-month low at $US1.5272 as investors envisaged no hike to British interest rates for a very long time. The London stock market closed up 3.71 per cent, helped by EU moves to sort out the eurozone debt crisis, traders said.

Finance Minister George Osborne authorised the resumption of the emergency policy in an official letter to Bank of England governor Mervyn King.

The policy announcements came one day after official data showed the British economy had flatlined over the past nine months and that the 2008-09 recession was worse than previously thought, with a peak-to-trough contraction of 7.1 per cent, rather than the previous estimate of 6.4 per cent.

The European Central Bank meanwhile held its key interest rate at 1.5 per cent, shrugging off speculation it could cut borrowing costs to help combat the region's sovereign debt crisis.

The BoE warned that Britain's recovery was endangered by a flat world economy and the eurozone crisis that has so far resulted in EU-IMF bailouts for Greece, Ireland and Portugal.

"Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery," the central bank said.

The BoE's key interest rate has stood at 0.50 per cent since March 2009, when it decided to begin pumping new cash into the economy under QE.

Experts claim that while QE can help to kick-start an economy, it also threatens to fuel inflation, which in the long run can actually hinder growth.

With British annual inflation currently at 4.5 per cent - far above the BoE's two per cent target - the bank faces a tricky balancing act.

The economy grew by just 0.1 per cent in the three months to June.

Britain hauled itself out of a deep recession in the third quarter of 2009, but its recovery has also been severely constrained by the impact of collapsing consumer confidence and painful state austerity cuts.

Roland Jackson

Interest rates 'will have to rise sixfold in two years'

Interest rates will have to rise almost sixfold over the next two years to cope with rising inflation, business leaders have warned.

Interest rates will rise six fold in two years 

By Myra Butterworth, Personal Finance Correspondent 6:45AM GMT 20 Dec 2010

25 Comments

It will bring financial pain to seven million home owners with floating interest rates who will see a jump of almost £200 on a typical monthly mortgage payment.

Charities have already warned that repossessions are likely to rise next year and the threat of a succession of quick interest rate rises will exacerbate their fears.

The Confederation of British Industry predicts that higher than anticipated rises in the cost of living will push the Bank of England (BoE) to begin increasing interest rates in the spring.

It predicted that the Bank base rate – the interest rate at which the BoE lends to other banks – will rise more than two percentage points by the end of 2012. Mortgage rates are expected to follow closely behind.

“Many households have been benefiting (from the low interest rates) in terms of mortgage payments, but that will start to turn over the next couple of years,” said Lai Wah Co, the CBI’s head of economic analysis.

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The organisation predicts that the Consumer Prices Index, the Government’s preferred measure of inflation, will reach 3.8 per cent within the first three months of next year and that it will still be well above the Bank’s 2 per cent target two years from now. It currently stands at 3.3 per cent.

The CBI expects interest rates to climb from their record low level of just 0.5 per cent in the second quarter next year.

It forecasts rates will rise 0.25 percentage points each quarter before the pace doubles in the middle of 2012 to 0.5 point increases, taking the bank rate to 2.75 per cent by that year’s end.

Last week, the Bank of England warned in its Financial Stability Report that two thirds of borrowers are now on floating interest rate deals and the proportion is rising. At the height of the credit crisis in 2007, the proportion stood at less than half of all outstanding mortgages.

A 2.25 per cent rise in mortgage rates would see the monthly repayments on a typical £150,000 mortgage increase from £909 to £1096.

In another blow for home owners, economists predict that the average value of a home in Britain will lose 10 per cent of its value from their peak levels earlier this year to the end of 2011.

The house price gains seen at the beginning of this year have already been wiped out, according to Nationwide.

Britain’s biggest building society said the average price of a home dropped 0.3 per cent in November, the equivalent of almost £1,000 in a month, bringing the average price of a home to £163,398.

The CBI expects inflation as measured by the retail prices index – which includes more housing costs – will follow an even higher path than CPI, reaching 5 per cent at the start of next year.

The CBI said it had raised its quarterly forecasts to take into account the “persistent strength” of energy and commodity prices.

High inflation will put further pressure on households as people face higher prices and mortgage rates, but pay packets struggle to keep pace.

Tim Moore, an economist at research group Markit, said: “December brings to a close another difficult year for household finances. The UK economy looks to have avoided a double-dip recession in 2010, but there is little evidence that household finances have even begun to recover. People have seen their spending power gradually eroded by stubbornly high inflation throughout the year and little in the way of income growth to compensate for this.”

http://www.telegraph.co.uk/finance/personalfinance/8212723/Interest-rates-will-have-to-rise-sixfold-in-two-years.html

Euro crisis: how will it affect me?

Euro crisis: how will it affect me?
What caused the European debt crisis, how long will it last, and how worried should Britons be?

By Paul Farrow
Published: 2:26PM BST 29 May 2010

Europe is in crisis. Austerity measures have been announced in several countries including Greece and Spain, the euro is under pressure and stock markets across the globe have fallen sharply from their recent highs – and it is all due mainly to sovereign debt.

But what is sovereign debt and why has it caused a crisis? And should people in Britain be worried?

We have spoken to the experts to help answer these questions.

Q I keep hearing about sovereign debt. What is it?
National governments issue bonds as a way of borrowing to help meet their spending on education, health, defence and so on. Just like any bond, a sovereign debt bond pays investors interest over its term and the bondholder gets his money back on maturity. In Britain, these bonds are better known as gilts.

Andy Howse, investment director for fixed income at Fidelity, said: "The promise to repay is not a guarantee. The strength of the promise is a function of the size of the debt compared to the economy in question and the cost of servicing that debt. This can change over time and between nation states."

Q What has caused the debt crisis?
In a word or two, over-borrowing. Sovereign debt is fine so long as the governments have no problem repaying the debt. But several countries have borrowed beyond their means – the ramifications of the financial crisis have left them struggling to repay their debt. This is why the IMF has agreed a financial package to bail them out.

"Greece and other countries will struggle to pay off these debts. This has led to a dramatic spike in borrowing costs for these countries, exacerbating the problems further," Mr Howse added. "Investors have begun to question the future of European Economic and Monetary Union and whether the crisis may spread beyond the peripheral European countries."

Q Which countries are affected?
Before last week the main countries that had been affected were Greece, Italy and Portugal. Last week it was the turn of Spain to announce austerity measures, while Ireland has problems too, although it is trying hard to cut its deficit.

Q Will it spread to Britain?
Only Rip van Winkel would be unaware that the UK also has a huge deficit, and so there are concerns that the crisis could spread to these shores. This was why the new coalition moved swiftly by announcing £6bn worth of cuts. This has assured investors, for the time being, that Britain will be able to reduce its deficit and repay gilt investors.

"We have more flexibility and it was very important for George Osborne to reassure global markets that our deficit is being tackled," said Azad Zangana, European economist at Schroders.

Mr Howse agreed: "A weaker pound should boost the economy by making exports more competitive, and interest rates should remain very low for an extended period. But we can't ignore this debt crisis in Europe because of the effect it may have on the level of global economic activity."

Q Should I be worried?
The good news is that Britain has some advantages over the likes of Greece and Spain. The main one is that it does not belong to the euro and so is able to manipulate the pound to try to boost our economy via interest rates. "We can devalue our currency, which makes the borrowing cheaper. Greece can't do that because it belongs to the euro," said Mr Zangana.

But don't get too complacent. Britain's position is still precarious – £6bn worth of spending cuts won't be enough to clear our £156bn deficit, and remember that our economy is reliant on its trade links to Europe. "The UK is in a relatively good position. It can set its own interest rates and has its own floating currency, which are important mechanisms for managing economic growth," said Mr Howse.

"However, the UK is not insulated from debt problems and it is in our interest that the crisis is contained and managed by the EU, IMF and other central banks."

Q How big an impact could the crisis have on the UK?
Half of all of Britain's exports go to the Continent, so if Europe's economy grinds to a halt we will feel the impact. Companies could struggle to increase sales, our economic recovery could hit the buffers and, ultimately, jobs could come under pressure.

Howard Archer, an economist at Investec, said: "There is increased pressure on Britain. The FTSE has been hit already, there are concerns of a double dip, and it's bad news for exporters, which could have a knock-on effect of the wrong kind on our domestic economy.

"The June 22 Budget is key. If the measures don't work there will be a loss of confidence in UK assets and that could store up other problems such as higher interest rates."

Q What about my investments?
You won't need reminding that every time a dark cloud hangs over our economy, or the economies of our trade partners, stock market investors run for the hills, causing share prices to fall. This is what has happened over the past fortnight or so – the FTSE100 has tumbled from 5,700 to under 5,000, although this week share prices recovered despite the eurozone crisis worsening.

But, again, don't be complacent. Most experts agree that markets are likely to be jittery for a while yet.

Q Is there a danger of a second banking crisis?
This is something that the markets have been speculating over during the past few weeks. Greek, Spanish and Italian bonds are widely held by governments, banks and institutions worldwide and this is why bank shares have been particularly hit in the recent turbulence.

Mr Howse said: "Central banks and governments have learned tough lessons from the financial crisis of 2008/09 and are very unlikely to let these problems go so far as to break the global banking system."

Q I bank with Santander. Should I move bank accounts?
Santander recently emphasised that its British operation is self-funding, raising cash from British savers to back loans to British borrowers, and does not require capital from its Spanish parent. Santander's British subsidiaries are regulated by the Financial Services Authority and individual savers are protected by the Financial Services Compensation Scheme.

The FSCS, a statutory safety net, can pay out 100pc of the first £50,000 lost per saver per bank or building society. Up to 90pc of pension and life assurance savings are also protected by the FSCS safety net.

A Santander spokesman said: "Customers need not be worried as both Santander and Santander UK are strong businesses focused on retail banking with no exposure to toxic financial products. Our UK business is strong and has a standalone credit rating of AA."

Q Will the crisis go on for much longer?
Most likely. The Greek bailout is over three years, which suggests there is no quick fix. "I think we will have a bumpy ride for a few years. There is a real sense of uncertainty on how this crisis will pan out," said Mr Zangana.

Mr Archer added: "It is very, very fragile and the eurozone crisis is deep-seated and so will not disappear overnight. We need the bailout package to be implemented as soon as possible and for the affected countries to get their act together."

Q I'm worried about losing money. What should I do?
Fund managers will talk about market blips throwing up buying opportunities while economists will make predictions that are wrong as often as they are right. It comes down to your attitude to risk and your financial goals.

It's your money and if you are of nervous disposition then invest in safe assets. The safest is cash, of course. Interest rates are low but ask yourself whether you would rather make 2pc or risk losing 10pc.

Review any investments and ensure that your portfolio is diversified for damage limitation reasons if markets implode.

http://www.telegraph.co.uk/finance/personalfinance/consumertips/7782558/Euro-crisis-how-will-it-affect-me.html

Bank of England's Mervyn King says UK only just started on recovery road

Bank of England projections for GDP based on market interest rate expectations and £200bn of asset purchases. The fan chart depicts the probability of various outcomes for GDP growth. Bank of England's projection for CPI inflation based on market interest rate expectations and £200bn of asset purchases. The fan chart depicts the probability of various outcomes for CPI inflation in the future.

Bank of England's Mervyn King says UK only just started on recovery road
Bank of England Governor Mervyn King said he has an open mind on whether to inject more money into the economy, as the UK has only 'just started' along the road to recovery.

Mr King said today that the Bank's Monetary Policy Committee has an 'open mind' on whether to add to the £200bn of new money pumped into the economy, as its latest quarterly Inflation Report delivered higher forecasts for growth and inflation.

"We have a completely open mind as to whether to do more," Mr King told a press conference where he outlined the new forecasts, which see the economy returning to growth by the beginning of next year and then expanding at a 3.75pc pace by the end of 2011 - faster than its projection in August.

The Bank also expects inflation to rise above its 2pc target in the next few months before heading back down to 1.6pc within two years.

The higher growth and inflation forecasts come amid signs that Britain is emerging from its deepest recession since the 1930s. The Bank said today that it expects figures from the Office for National Statistics that last month showed the economy was still mired in recession in the third quarter to be revised upwards.

Economists reckon that the Bank's new forecasts don't signal that interest rates will be raised from their record low level of 0.5pc anytime soon. The Bank slashed rates to historic lows at the depth of the financial crisis last autumn, and has also pumped in £200bn of new money into the economy in an unprecedented policy known as quantitative easing (QE).

Mr King told a press conference that commentators had been mistaken in assuming that the policy of QE is now over.

“Any monetary stimulus is likely to face headwinds," said Mr King. "That is not to say quantitative easing is not working - it is - but it means we’ve had to put more in than would have been necessary if the banking sector was stronger.”

Sterling fell almost a cent against the dollar to $1.6650 and weakned against the euro too. Prices for government bonds rose.

"In short, it’s too soon to rule out further monetary policy action," said Jonathan Loynes, an economist at Capital Economics. "At the very least, any tightening looks a long way off."


http://www.telegraph.co.uk/finance/financetopics/recession/6544674/Bank-of-Englands-Mervyn-King-says-UK-only-just-started-on-recovery-road.html

What's the commercial driver of the UK economy going to be if it's not financial services?

What's the commercial driver of the economy going to be if it's not financial services?

This is no time for modesty," wrote Lord Davies, the trade minister in The Daily Telegraph on Monday in a call for us Brits to start telling the world that we're great.

By Richard Tyler
Last Updated: 9:44AM BST 26 May 2009

Comments 17 Comment on this article

But what are we great at? The City has been demonised; large scale manufacturing is on its knees. Davies insists: "It's time for change in the way that we perceive ourselves and how we talk about the economy."

But change our perception to what? If financial services are no longer going to rule the roost as the economy is "rebalanced" (somehow) and we are all going to live in a Gordon Brown's new world order of allotment capitalism (he prefers "sustainable capitalism"), exactly what commercial activity is going to drive the economy out of recession and back to long term trend growth rates?

Large chunks of the New Forest are being sacrificed as industry and the Government examine this issue. Some of the studies' findings are intriguing. The report team led by former Ford chief technology officer Richard Parry-Jones set out the automotive industry's 20-year vision for vehicle-making in the UK earlier this month.

They compared Britain's position relative to our economic competitors and concluded that "the UK still has a competitive, yet fragile, automotive industry". Britain is reliant on foreign investment – the car industry in Britain is now largely Japanese – and the report concludes that "there is no natural choice to do the work in the UK".

There is also no natural choice for those car makers that are here to source components from British suppliers. Industry bosses said that UK sourcing was likely to decline further over the next five years, making suppliers less competitive to the point where the manufacturers decide they need to more abroad.

It is trends like this that can make you pessimistic about Britain's prospects. Ministers talk up the low carbon economy and promise to use public money to fund trials of the next generation of electric cars. But the chances of them being mass produced in Britain are slim.

Most depressing is the fact that the issues facing the industry identified in this report are exactly the same ones identified by previous studies commissioned by successive governments since 1975. They include currency fluctuations, exchange rates and the need for better skills and training.

"One also has to see this as a failure to address sufficiently these issues in the past, given that they are mentioned repeatedly by industry leaders," thunders the report.

This sense of lack of direction from Whitehall is echoed in the other industry reports being published. An assessment of the UK's ability to build an industrial biotechnology sector, which could produce energy, chemicals and materials from renewable resources, concluded that the country has the scientific know-how but, to quote from the report: "Unlike other countries (in particular USA and Germany), no policies are currently in place to support the bio-based materials and chemicals sector."

Cue Lord Mandelson, the Business Secretary, and his "industrial activism" strategy that, he insists, will see the Government listen and act.

This will not involve the Government returning to the discredited practices of the 1960s and 1970s of picking industrial winners, he says. The Government will simply identify industries in which Britain is and/or could become a world leader and then enable them to prosper.

So it seems the Government is finally offering what industry wants: a clear, coherent framework of support. But doubts remain. How are Whitehall officials going to pick which industries should be helped? The automotive industry seems to have a case. But then so does aerospace; composite materials; plastic electronics; life sciences and pharmaceuticals; information technology; renewable energy; professional services and engineering construction.

Another Lord, Lord Drayson, the science minister, told me that the Government has to decide which industries it will support by the end of this year at the latest. The clock is ticking. Commissioning reports is one thing. Picking the right new technology to back is quite another. Last time, the Whitehall mandarins tried they failed. Wouldn't it be better to learn to love the City again.

http://www.telegraph.co.uk/finance/yourbusiness/5383517/Whats-the-commercial-driver-of-the-economy-going-to-be-if-its-not-financial-services.html

Soros: The Recession Will Last Forever

From The TimesMarch 28, 2009

George Soros, the man who broke the Bank, sees a global meltdown

Alice Thomson and Rachel Sylvester

George Soros was 13 when the Nazis invaded his homeland of Hungary. As a Jew, he was forced to adopt a false identity and live separately from his parents in Budapest. Instead of being traumatised by the experience, though, he found the danger exhilarating. “It was high adventure,” he says, “like living through Raiders of the Lost Ark.”

Sixty-five years later, he still thrives on danger. He famously made $1 billion on Black Wednesday by shorting the pound, earning him the label of “the man who broke the Bank of England”. Last year, as the world tipped into financial chaos, Mr Soros pocketed another $1.1 billion by correctly predicting the downturn. “I’m an expert in crises,” he says.

The man who has a phobia about maths has made his name as the philosopher king of economics – his book The Crash of 2008, out in paper-back next week, has been a bestseller on both sides of the Atlantic. Since 1944 he has believed in what he calls “reflexivity” – the idea that people base their decisions on their own perception of a situation rather than on the reality.

He has applied this both to investment and to politics: his skill has been to predict moments of seismic change by identifying a disjunction between perception and reality.

When everyone else was convinced that the markets would automatically correct themselves, the 78-year-old “old fogey”, as he calls himself, was one of the few warning of recession. He put all his chips on “the Barack guy” early on when all around him were still gunning for Hillary Clinton. It’s almost as if he has been waiting for the Great Recession for the past ten years. When we ask whether he prefers booms or busts, he replies: “I have to admit that actually I flourish, I’m more stimulated by the bust.”

This recession, he explains, is a “once-in-a-lifetime event”, particularly in Britain. “This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life. On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed.”

The financial oracle does not know how long it will last. “That depends on how it’s handled. Allowing Lehman Brothers to fail was the game-changing event. That’s when the financial crisis went over the brink.” We could end up with a depression. “Unless we handle it well then I think we would. The size of the problem is actually bigger than in the 1930s.”

The problem in Britain, he believes, is in many ways worse than in America or Germany. “American memory is seared by the Depression, the German memory is seared by hyperinfla-tion but Britain has a pretty serious problem in many ways worse than America because the financial sector looms bigger and the overvaluation of real estate is bigger than in America.”

He is not worried that an auction of government bonds failed this week – “that was a blip”, he says. He would still buy British bonds – “it depends on the price” – but he agrees with Mervyn King, the Governor of the Bank of England, that debt is a real problem. It will, he says, put people off investing in Britain. “I think it will have an effect, yes. It is a matter of worry because effectively the hole in the banking system is replaced by increasing the national debt.” There has been some talk that Britain might have to go cap in hand to the International Monetary Fund. “It’s conceivable,” Mr Soros says. “You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt . . . if the banking system continued to collapse, it’s a possibility but it’s not a likelihood.”

He refuses to say whether sterling has yet hit its lowest point. Has he shorted the pound recently? “I had shorted it last year, but I’m not shorting the pound now.” Is the euro under threat? “There is stress in the euro because of the differential in the interest rate that the different countries have to pay,” he replies.

Mr Soros is critical of the tripartite regulatory system set up when the Bank of England gained independence. “I have a different view on how the market operates than the prevailing view. I believe that the authorities have the responsibility to forestall, to counter the mood of the markets . . . I think that the problem was that the Bank of England didn’t have the supervisory authority.”

He does not, however, blame Gordon Brown. “He underestimated the severity of the problem, but then so did most people. Part of the perceived role of a leader is to cheerlead, so you can’t really blame him for that.”

From the day he was born, Mr Soros says, he was attracted to crisis. “It precedes me. I inherited it from my father.” His father had lived through the Russian Revolution and every day after school he would take his son swimming and talk about his experiences. “I sucked it in that way. And then when I was not yet 14, the Germans occupied Hungary, and I would have been deported to Auschwitz if my father hadn’t arranged for false papers. So that was a pretty profound crisis. I had to assume a false identity and live a different life.” He was separated from his parents. “We met occasionally in the swimming pool. But imagine you are 14 years old, you like adventure, and you have a father who seems to understand the situation better than others. It’s very exciting.”

He feels a similar thrill in an economic crisis. “On the one hand there’s tremendous human suffering, which is very distressing. On the other hand, to be able to handle the situation is exhilarating.”

He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. “I have always understood how normal rules may not apply at all times,” he says. In recent years he has been arguing against “market fundamentalism” – “the accepted theory was that markets tend to equilibrium”. He believes that the credit crunch has proved him right. “It reminds me of the collapse of the Sovi-et system, events are always exceeding people’s understanding. The situation is out of control. There’s a shortage of time to adjust to the change. Change is accelerating.”

Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. “Everybody who realised that this was unsustainable expected it to collapse much sooner,” he says. “It is so devastating exactly because it took so long.”

The urgent task now, he says, is to realise that the system that collapsed was flawed. “Therefore you can’t restore it. You have to reform it.” He worries that politicians have not yet accepted the need for fundamental change and that “a lot of bankers have their head in the sand”.

H e was cast as the villain when Britain was forced out of the exchange-rate mechanism. “I didn’t speculate against sterling to benefit the public. I did it to make money,” he says.

He tells us that he has psycho-somatic illnesses – backaches and pains – that tip him off to changes in the market. “It’s as if you’re a jungle animal, and you see another animal facing you. You have to make a decision: fight or flight? Your hair stands up and you growl and you decide, ‘Am I going to attack because I’m stronger or am I going to run away because otherwise he’s going to eat me?’ You are very tense. And that’s the tension that gives you the backache.”

The G20 summit in London next week is, he says, the last chance to avert disaster. “The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”

If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”

Life and times

Born Budapest, 1930. A Jew, he survived the Nazi occupation using a false identity. Fled communist Hungary for Britain in 1947

Education Worked as a railway porter and waiter to pay his way as a student at the London School of Economics, graduating in 1952

Career Took job with Singer and Friedlander in London before moving in 1956 to New York, where he worked as a trader and analyst. In 1970 he set up his own private investment company, the Quantum Fund. Made his fortune, on September 16, 1992, when he short-sold more than $10bn of sterling. Now chairman of Soros Fund Management and the Open Society Institute and said to be worth $11bn

Family Married and divorced twice and has five children

Quick fire

Budapest, London or New York?

Actually I'm very fond of London

English or Esperanto?

It used to be Esperanto, but now it's English. Bad English

Pound or dollar?

I really can't say

Chillies or chocolate?

Both

Boom or bust?

I have to admit that actually I flourish, I'm more stimulated by the bust

http://www.timesonline.co.uk/tol/news/uk/article5989163.ece

The return of inflation?

The return of inflation?
Posted By: Edmund Conway at Mar 24, 2009 at 11:18:26 [General]

So, after all that, we're not in deflation. To general shock and amazement throughout the City, the Retail Price Index did not creep into negative territory last month, dropping instead from 0.1pc to zero.

Consumer Prince Index inflation, the measure targeted by the Bank of England, actually rose from 3pc to 3.2pc, meaning the Governor Mervyn King has had to write another letter of explanation to the Chancellor.

All of this is a bit of a nightmare for the Bank. Having already cut interest rates to near zero and embarked on quantitative easing - the most radical means of monetary policy available to a central bank - its main alibi had been that the UK was facing the serious threat of deflation. To have then to find yourself trying to explain why inflation is still above its 2pc target is not just embarrassing but undermining. After all, part of its job is to influence peoples' decisions on financial and economic matters, and having spent months warning about the risk of falling prices, now the figures seem to have proven them wrong, in the meantime at least.

Most economists believe (and I am inclined to agree) that this month's figures were a blip, and that deflation will inevitably follow in the coming months. After all, RPI may not be in negative territory yet, but at zero it is still at the lowest level since 1960. Likewise, almost all the other evidence in the economy - everything from pay cuts to falls in commodity prices - points towards falling rather than rising prices.


Indeed, in his letter to the Chancellor, which you can find here, alongside Alistair Darling's response, King himself says: "notwithstanding the inflation outturn for February, it is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile, reflecting the reversal of the temporary change in VAT on CPI inflation."

But this increase in CPI is already prompting a few people to reconsider their positions on inflation (after all the consensus forecast was for fall to a 2.6pc). The fact is that not only did some of the volatile items' prices increase (things like petrol and food) but so did core inflation - which strips out these unpredictable items and is regarded as a more steady, reliable indication of what prices are doing. This is probably due to the weakness of the pound in recent months - sterling has depreciated by more than a quarter over the past 18 months, and this was bound at some point to feed through to higher domestic prices.

But what if - and it is a big if - the massive amount of medicine already ladelled into the UK economic system - the cut in rates from 5pc to 0.5pc, the extra cash pumped in by the Government, the fall in the pound and the Bank's decision to start creating money and buying up bonds - is starting to work already, counteracting the recession and boosting prices. What if that deflation threat so frequently mooted by the Bank and others, was far less severe than was ever the case? In that case it would have profound implications for monetary policy, meaning the Bank may have to reconsider its decision to spend up to £150bn on quantitative easing and exit this strategy even before it has properly got it underway.

There is a hint of this doubt in King's letter, which says: "At its next policy meeting the MPC will want to consider further the extent to which the balance of risks has changed in light of the latest inflation figure and all the other relevant data. In particular, in the context of the CPI data this month, the Committee will need to judge to what extent the main upside risk to the inflation outlook identified in the February Inflation Report - that there is greater pass-through of the exchange rate depreciation to inflation - is crystallising, or whether the inflation outturn reflects other factors."

I doubt, however, that this will change the Bank's fundamental position - that the UK is heading into a nasty recession (something that almost always goes hand in hand with falling prices), that the risk of debt deflation, the phenomenon which affected the US in the Great Depression, remains bigger than the risk of inflation being thrown up as a result of its remedies, and that it must keep rates low for some time.

King is currently appearing at the Treasury Select Committee, from which we'll have more later. As I post this, he's just blamed the fall in sterling for the increase in inflation - saying that this was "one of the upside risks" laid out in the Inflation Report last month.


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http://blogs.telegraph.co.uk/edmund_conway/blog/2009/03/24/the_return_of_inflation

The Economics of Stimulus

The Economics of Stimulus
Fiscal mismanagement during the boom years constrains the UK's ability now to spend its way out of recession. Fixing the banking sector must be the priority

With the financial crisis intensifying last autumn, Gordon Brown wrote to EU leaders to urge a “new global financial architecture”. As the host of the G20 summit of advanced and emerging economies next month, Mr Brown has apparently tempered his ambitions for reform of the international order. European leaders - notably Angela Merkel, the German Chancellor, and President Sarkozy of France - have shown a marked lack of enthusasiam to be lectured to.

There is indeed much in Mr Brown's schemes that merits scepticism. But reforms to a dysfunctional international financial system are a direct route to remedying the crisis. The recession was born in the banking sector, through imprudemt lending and a credit bubble. The most immediate way of supporting economic activity is to fix the weaknesses in the financial system by recapitalising the banks and ensuring they have sufficient reserves to resume lending.

On an international scale, it will be important to reconsider the role of the International Monetary Fund, which traditionally acts to provide financial assistance to countries that face a liquidity crisis. The IMF cannot strictly act as a lender of last resort, because unlike a central bank, it cannot create money. The G20 should consider how best the IMF can help countries facing a capital crisis, and also consider the vexed question of reforming the voting weights to reflect the shift of power to the emerging economies.

The case for co-ordinated fiscal stimulus, as advanced by President Obama's Administration and by Mr Brown, has a respectable theoretical pedigree. The aim is for governments to fill the gap left by the collapse of private spending. But there are severe practical difficulties. To be effective, stimulus needs to be co-ordinated. The realities of national politics in the G20 economies make that unlikely. The sheer scale of the Obama fiscal package in the US is an open invitation for sectional interests to appropriate public funds for purposes that may have no lasting economic benefit. The wastefulness of huge public works projects in the 1990s during Japan's long recession is not a model to be copied.

The problem is acute in the UK, because public finances are in a mess. Fiscal management was too loose during the boom years. The use of fiscal policy to boost demand is popularly thought of as a Keynesian approach. But Keynes stressed the use of monetary and fiscal policy to stabilise the economy rather than to stimulate it. That means that budget surpluses should be built up during an expansion, so that there is scope to stimulate the economy during a downturn. Since 2002, Mr Brown as Chancellor and now Prime Minister has abandoned that fiscal discipline.

The result is that public borrowing is now expanding alarmingly. The UK budget deficit for February amounted to £9 billion - eight times the level of a year earlier. This brought public-sector net borrowing to a record £75 billion for the first eleven months of the fiscal year. As the recession continues, tax receipts will fall and public borrowing will expand further. It is crucial to the UK that other countries do follow expansionary policies. There will be pressure on the exchange rate if international investors worry about the sustainability of the public finances.

The CBI believes that scope for fiscal easing is limited. The chief executive of the Audit Commission has publicly worried about an Armageddon scenario in which there will be insufficient lenders to match the scale of public borrowing. Even if the economy recovers in 2010, the scale of the UK's public debt will then require a sharp fiscal contraction. It will have to be paid for in large tax increases and cuts in public spending. It is, to adapt an unfortunate phrase of Mr Brown's, beyond any conventional notion of boom and bust.


http://www.timesonline.co.uk/tol/comment/leading_article/article5956066.ece

Britain showing signs of heading towards 1930s-style depression, says Bank

Britain showing signs of heading towards 1930s-style depression, says Bank

Britain is showing signs of sliding towards a 1930s-style depression, the Bank of England says today for the first time.

By Edmund Conway, Economics Editor
Last Updated: 8:23AM GMT 16 Mar 2009

The country is displaying early symptoms of being trapped in a so-called “debt deflation trap” where families find themselves pushed further and further into the red every month, according to a Bank report published today.

The stark warning will cause serious concerns, since it was this combination of falling prices and soaring debt burdens that plagued the US in the 1930s.


The Bank is using its Quarterly Bulletin to highlight the threat posed to the economy by deflation – where prices fall each year rather than rise.

Although inflation is currently in positive territory, it is expected to become negative in the coming months.

The Bank is worried that this may combine with high levels of indebtedness to squeeze families further.

It says that families with high debts could fall prey to the debt deflation trap. This means that the cost of their debts, which are fixed, would rise compared to average prices throughout the economy. While inflation erodes debts, deflation makes them relatively higher.

The Bank’s paper suggests that Britain is particularly at risk because there is a high proportion of families with significant levels of debt, and many of them are on fixed mortgage rate, which means they will not benefit from rate cuts.

Britons’ total personal debt – the amount owed on mortgages, loans and credit cards – is, at £1.46 trillion, more than the value of what the country produces in a year.

Total personal debt has risen by 165 per cent since 1997 and each household now owes an average of about £60,000.

The Conservatives claim this is the highest personal debt level in the world.

The Bank’s paper also says that consumers were suffering as banks keep the cost of borrowing high, despite Government attempts to get them lending again.

Alistair Darling, the Chancellor, and fellow finance ministers used their pre-G20 meeting this weekend to warn that more drastic action was necessary to help bring the world economy back from the brink of a possible repeat of the 1930s.

The Bank’s report puts pressure on Gordon Brown, who this weekend faced further calls to apologise for the recession, to secure agreement on an effective international rescue strategy when he hosts the G20 leaders at a summit in London at the start of April.

It comes as figures this week are expected to show the number of people unemployed will reach the two million mark.

The Bank’s report says: “This configuration of falling asset prices and depressed economic conditions in the face of an adverse demand shock is consistent with recent and prospective macroeconomic developments in the United Kingdom and internationally”.

It helps explain why it took such dramatic action earlier this month to pump extra cash into the economy.

The bank slashed interest rates to just above zero and pledged to create £150 billion worth of cash with which to buy up government and corporate debt.

This so-called quantitative easing is regarded as a radical measure to help prevent a repeat of the conditions associated with the Great Depression.

Many experts believe that the US authorities’ initial reluctance in the 1930s even to cut interest rates was partly responsible for causing the worst economic slump in Western history.

The Chancellor acknowledged at the G20 meeting that the economic situation was “grave” but pledged not to allow a repeat of the Depression years. The ministers promised to pump more cash into their economies if necessary in the next few months.

However, some have expressed concern that the meeting failed in its aspiration to reach a specific agreement on the amount of cash countries need to spend in the coming year. Others have warned that it does not set a clear enough agenda for the much-anticipated full G20 summit on April 2.

Some speculate that the Prime Minister may use the G20 as a justification for a series of further tax cuts and spending increases in the Budget next month, though many economists have warned that despite the scale of the recession faced by the UK the Treasury has little capacity to borrow more.

Mr Darling has signalled that the meeting must not be allowed to mirror a 1933 summit in London which failed to halt the Great Depression. He said failure to agree co-ordinated action then meant that the Depression continued for years when it “need not have done so”.

Writing in The Sunday Telegraph George Osborne, the Shadow Chancellor, said Mr Brown must use the G20 as “the moment to send the clearest of signals that, unlike in the 1930s, this banking crisis will not send the world spinning into a protectionist spiral.”

He said that “ministerial promises” had failed to deliver any real benefits to struggling home owners or desperate businesses.

http://www.telegraph.co.uk/finance/financetopics/recession/4996994/Britain-showing-signs-of-heading-towards-1930s-style-depression-says-Bank.html

House prices 'could fall by further 55 per cent'

House prices 'could fall by further 55 per cent'
House prices may fall by a further 55 percent and there is a "very real probability" that Britain will be bankrupted, a leading investment bank has warned in a private note to clients.

By Robert Winnett, Deputy Political Editor
Last Updated: 10:41PM GMT 11 Mar 2009

People who bought buy-to-let flats are expected to “begin panic selling” and the average home value could drop below £100,000.

The predictions in a 298-page report from Numis Securities, a City investment bank, are the bleakest yet on the deteriorating state of the British property market.


However, in the note written last month, Numis said: “Despite UK house prices already having fallen 21% from the peak, we do not believe that the correction is anywhere near over.

“Our core headline forecast is that UK property prices remain between 17% and 39% overvalued based on fair valuation. Moreover, history has shown us that when property…which has experienced a price bubble corrects, the price tends to fall below fair value for a period of time, as confidence in that market remains low. Prices could fall a further 40-55% if the over-correction was as bad as the early 1990s in our view.”

The report warns that “city centre flats” and “new executive homes” are likely to record the biggest reductions and describes investing in buy-to-let property as a “poor man’s hedge fund”.

“It is the action of these amateur investors over the next few months which we are most concerned about,” the report says. “We expect some to begin panic selling their portfolios, with the peak volume as is almost always the case with private investors, being at the market trough.”

Yesterday, Alistair Darling, the Chancellor, warned that the world is facing the most difficult economic conditions for “generations”.

However, the Numis report is scathing of Government attempts to help the economy.

“The Prime Minister and Chancellor have publicly stated that they want banks this year to lend at 2007 levels,” it said. “We think this is a crazy policy, given that too much debt was one of the prime reasons why the economy has its current problems.”

It also criticises the huge debts being run up by the Government to pump money into the economy. Yesterday, John Lewis, the retailer, said that the £12.5 billion cut in Vat has not made “any long term difference at all”.

The Numis report says: “The bankruptcy of the UK is a very real probability as the UK Government is trying to stimulate a greater debt burden in a grossly indebted economy. We believe the scale of the macro imbalances in the UK means there is no prospect of a recovery in 2009 and we expect the UK to be mired in a deep recession through all of 2010.”

Last night, the Conservatives said that the Numis analysis increased the pressure on the Prime Minister to apologise. Grant Shapps, the shadow Housing minister, said: “This is a devastating critique of the Government’s record and how Gordon Brown’s credit bubble will lead to a mountain of debt, a wave of repossessions and negative equity misery. Labour Ministers must take direct responsibility for fuelling buy-to-let speculation.

“Gordon Brown’s fingerprints are all over this economic wreckage and he should now have the decency to at least apologies for his mistakes.”

Yesterday, it emerged that the number of borrowers falling behind with their mortgage repayments has already doubled in the past year. According to Moody’s Investors Services, borrowers more than 90 days in arrears have increased to 1.5 percent of all home loans compared to 0.6 percent a year ago.


http://www.telegraph.co.uk/finance/economics/houseprices/4974499/House-prices-could-fall-by-further-55-per-cent.html


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